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NPF MICROFINANCE BANK PLC

ANNUAL REPORT 31 DECEMBER 2018

Contents

Corporate Information

Directors' Report

Corporate Governance Report

Statement of Directors' Responsibilities

Report of the Audit Committee

Independent Auditor's Report

Statement of Financial Position

Statement of Profit or Loss and Other Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

Other National Disclosures: Value Added Statement Financial Summary

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Corporate Information

Directors:

Company Secretary:

Registered Office:

Auditor:

Bankers:

Registrars:

Mr. Azubuko Joel Udah (Esq.) Mr. Akinwunmi M. Lawal Mr. Jude C. Ohanehi Mr. Francis C. Nelson Prince Jude Ifeanyi Eke Mr. Mohammed D. Saeed Mr. Jibrin G. Gane Mr. Abdulrahman Satumari Mr. Salihu Argungu Hashimu Mrs. Rakiya Edota Shehu

Mrs. Osaro J. Idemudia Aliyu Atta House 1, Ikoyi Road, Obalende Lagos

Aliyu Atta House 1, Ikoyi Road, Obalende Lagos

KPMG Professional Services KPMGTower, Bishop Aboyade Cole Street, Victoria Island, Lagos

Sterling Bank Pie First Bank ofNigeria Pie United Bank for Africa Pie Zenith Bank Pie Access Bank Pie First City Monument Bank Pie

.CardinalStone Registrars Limited 358, Herbert Macaulay Way Yaba,Lagos

Chairman Managing Director Executive Director Executive Director Non-Executive Director Non-Executive (Independent) Director Non-Executive Director Non-Executive (Independent) Director Non-Executive Director Non-Executive (Independent) Director

I I I NPF Microjinonce Bank PLC /Annua Report- 31 DECEMBER 20/8

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I NPF Miaofmance Bank PLC Annual Report- 31 DECEMBER 2018

DIRECTORS' REPORT The directors are pleased to present to members their annual report together with the financial statements ofNPF Microfinance Bank Pie for the year ended31December2018. i !

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1) LEGAL FORM AND PRINCIPAL ACTIVITIES The Bank was incorporated in Nigeria as a Private Limited Liability Company on 19 May 1993 under the provisions of the Companies and Allied Matters Act, CAP C.20, Laws of the Federation of Nigeria, 2004 with RC No. 220824. It obtained a provisional license as a Community Bank from the Central Bank of Nigeria on 12 July 1993 with License No. FC 00200 and commenced operations on 20 August 1993. It obtained a final license from the Central Bank of Nigeria on 24 January 2002. It was registered as a Public Limited Company on 13 July 2006. The Bank was given an approval-in-principle to operate as a Microfinance Bank on IO May 2007 and obtained the final license on 4 December 2007. The shares of the Bank were listed on the Nigerian Stock Exchange on 1 December 2010.

The principal activity of the Bank is the provision of banking and other permissible financial services to poor and low income households and micro enterprises with emphasis on members of the Nigerian Police Community. Such services include retail banking, loans and advances and other allied services.

The Bank currently has 28 branches nationwide from which it operates.

2) OPERATING RESULTS The profit before tax recorded by the Bank for the year ended 31 December 2018 was N287 million (31 December 2017: N820 million). Highlights of the Bank's operating results for the year ended 31 December 2018 are as follows:

,_,, Profit before tax Tax charge for the year Profit after tax

Total comprehensive income

Basic and diluted earnings per share (kobo)

31-Dec-18

287,155 (91,406)

31-Dec-17

819,819 (187,929)

In thousands of naira

195 749 631 890

193 344 631 890

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3) DIVIDENDS The Board of Directors, subsequent to the reporting date, recommended the payment ofa dividend of5 kobo (2017: 17 kobo) per share on the issued share capital of 2,286,657,766 ordinary shares, amounting to N114 million (2017: N389 million). The dividend proposed is subject to the approval of shareholders at the next Annual General Meeting (AGM). Withholding tax will be deducted at the point of payment.

4) DIRECTORS The following D~rectors served during the year under review:-

NAME Mr. Azubuko Joel Udah (Esq.) Mr. Emmanuel C. Wabali* Prince Jude Ifeanyi Eke** Mr. Mohammed D. Saeed Mr. Olusholla B.David Mr. Jibrin G. Gane Mr. Abdulrahman Satumari

DESIGNATION Chairman Non-Executive Director Non-Executive Director Non-Executive (Independent) Director Non-Executive Director Non-Executive Director Non-Executive (Independent) Director

DATE OF APPOINTMENT 23 July2015 2 January 2009 30 March 2010 15 November 2012 26 October 2017 26 October 2017 28th June, 2018 28th June, 2018 28th June, 2018 26 June 2014 26 June2014 1 August2017

Mr. Salihu Argungu Hashimu Non-Executive Director Mrs. Rakiya Edota Shehu Non-Executive (Independent) Director Mr. Akinwunmi M. Lawal Managing Director Mr. Jude C. Ohanehi Executive Director, Operations Mr. Francis C. Nelson Executive Director, Finance & Administration * Retired from the Board in January 2018 **Retiredfrom the Board on 30 March 2019

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NPF Miaoflnance Bank PLC Aimua/ Report- 3/ DECEMBER 2018

5) DIRECTORS' INTEREST IN SHARES The direct and indirect interests of Directors in the issued share capital of the Bank as recorded in the Register of members as at 31 December 2018 are as follows:

31 December 2018 31 December 2017

NAME OF DffiECTOR DIRECT INDIRECT DIRECT INDffiECT (units) (units) (units) (units)

Mr. Azubuko Joel Udah (Esa.) 4,000,000 - l 000.000 - Prince Jude Ifeanvi Eke 2 252,000 - 2,252 000 - Mr. Mohammed D. Saeed 1,580,000 - 1,580 000 - Mr. Olusholla B. David * 1,500,000 1,480,718,606 - 1,480,718,606 Mr. Jibrin. G. Gane * 108,000 " - " Mr. Abdulrahman Satumari - - - - Mr. Salihu Argungu Hashimu - - - - Mrs. Rakiya Edota Shehu - - - - Mr. Akinwunmi M. Lawal 5,025,861 - 5,025,861 - Mr. Jude C. Ohanehi 3,870,456 - 3,870,456 - Mr. Francis C. Nelson 310,796 - 160,796 -

*Mr. Olusholla B. David and Mr. Jibril G. Gane currently represent the interest of the Nigerian Police Cooperative Society Limited, which owns 1,480,718,606 (2017: 1,480,718,606) ordinary shares of 50k each in the issued share capital of the Bank.

Save as disclosed above, none ofthe directors has notified the Bank of any discloseable interest in the Bank's share capital as at 31 December 2018.

Directors' interest in shares remained the same as at the date the 2018 audited financial statements was approved by the Board of Directors.

6) DIRECTORS' INTEREST IN CONTRACTS None of the directors notified the Bank for the purpose of Section 277 of the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004 of any interest in contracts deliberated upon during the year in review.

7) RETIREMENT OF DIRECTORS

In accordance with Article 25(a) of the Articles of Association, Prince Ifeanyi Jude Eke retired from the Board on 30 March 2019, before the forth coming Annual General Meeting, having served for the maximum period ofnine (9) years.

Also in accordance with S.259 (I) & (2) of the Companies and Allied Matters Act, Mr. Mohammed D. Saeed, Mr. Azubuko Joel Udah and Mr. Jibrin Gane will retire by rotation and being eligible offer themselves for re-election. The profiles of all Directors, including the Directors to be presented for election/re-election are contained in the Annual Report.

8) CHANGES TO THE BOARD

In the year under review, following the approval of the Central Bank of Nigeria and that of members at the last Annual General Meeting, Mr. Salihu Argungu Hashimu, Mr. Abdulrahman Satumari and Mrs. Rakiya Edota Shehu were appointed to fill the vacancy created on the Board by the resignation of Mr. C. Wabali, the death of Mr. Audu Abubakar and the need for additional Independent Directors.

9) SUBSTANTIAL INTEREST IN SHARES According to the register of members as at 31 December 2018, no shareholder held more than 5% of the issued share capital of the Bank except the following:

31 December 2018 31 December 2017

Shareholder No. of Shares Shareholding No. of Shares Shareholding

(%) (%) Nigeria Police Co-operative 1,480,718,606 64.75 1,480,718,606 64.75 Society Limited

NPF Welfare Insurance Scheme 234,305,460 10.25 234,305,460 10.25

In line with the Nigeria Stock Exchnage rules on the requirement for all listed companies to maintain a free float of 20% and above, the Bank 's free float for the year under review stands at 24%.

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..._.,.- NPF Miaojinance Bank PLC Annual Repon-31 DECEMBER 2018

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10) ANALYSIS OF SHAREHOLDING The shareholding structure of the Bank is as stated below:

As at 31 December 2018 Range Holders % Units From To

1 5000 4,032 56.43 6,670,581 5001 10000 996 13.94 7,768,850 10001 50000 1,258 17.61 28,548,202 50001 100000 246 3.44 18,381,638 100001 500000 447 6.26 102,107,209 500001 1000000 71 0.99 50,673,565 1000001 50000000 92 1.29 288,665,682 50000001 2286657766 3 0.04 1,783,842,039

7,145 100 ~.2~6,6~:Z.:Z~6

As at 31 December 2017 Range Holders % Units From To

1 5000 3,913 55.50 6,622,867 5001 10000 998 14.16 7,786,819

· 10001 50000 1,264 17.93 28,810,488 50001 100000 254 3.60 19,165,546 100001 500000 455 6.45 105,295,127 500001 1000000 73 1.04 52,783,427 1000001 50000000 90 1.28 282,351,453 50000001 2286657766 3 0.04 1,783,842,039

7,050 100 ~.~B6,6~:Z,:Z66

11) SHARE CAPITAL HISTORY The following changes have taken place in the Bank's authorised and issued capital since incorporation.

AUTHORISED ISSUED & FULLY PAID NOMINAL REMARKS DATE ISSUED FROM TO FROM TO VALUE

N'OOO N'OOO N'OOO N'OOO N'OOO N'OOO 1993 500 500 - - 1.00 CASH&KIND 1996 500 30,000 - 17,976 1.00 CASH 1999 - 30,000 17,996 21,571 1.00 BONUS 1:4 2000 30,000 80,000 21,571 40,186 1.00 CASH 2001 - 80,000 40,186 58,624 1.00 CASH 2002 80,000 250,000 - 58,624 1.00 CASH 2003 - 250,000 - 58,624 1.00 CASH

2004 250,000 58,624 239,958 1.00 BONUS 1:10& - CASH

2005 250,000 500,000 239,958 239,958 1.00 - 2006 500,000 1,000,000 239,958 259,955 1.00 BONUS 1:12 2007 1,000,000 2,000,000 259,955 417,192 1.00 CASH 2008 - 2,000,000 - 417,192 1.00 - 2009 - 2,000,000 417,192 1,143,328 1.00 CASH

2010 2,000,000 1,143,328 SOK SHARE-SPLIT - - 1:2

2011 2,000,000 1,143,328 SOK SHARE-SPLIT - - 1:2 2012 - 2 000 000 1 143 328 - SOK - 2013 - 2 000 000 1 143 328 - ·SOK - 2014 2,000,000.00 3,000,000 1,143,328 - SOK - 2015 - 3,000,000 1,143,328 - SOK - 2016 - 3,000,000 1,143,328 - 50k - 2017 - 3,000,000 1,143,328 - 50k - 2018 - 3,000,000 1,143,328 - '50k -

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NPF Miaoflnan« Bank PLC Annual Report - 31 DECEMBER 2018

12) PROSPECTIVE INCREASE IN ISSUED SHARE CAPITAL In its circular dated 22 October 2018, the Central Bank of Nigeria (CBN) raised the minimum paid-up capital for national rnicrofinance banks from N2 billion to NS billion. The CBN's directive is to take effect from I April 2020. / I This requirement has been captured in the Bank's strategic plan and the Bank has a plan to have a hybrid offer (rights and public) in 2019 in order to meet up with this directive.

13) PROPERTY AND EQUIPMENT Information relating to changes in property and equipment is given in Note 19 of the financial statements.

14) DONATIONS As part of our commitment to the development of our primary community and to identify with the aspirations of various sections of the society, the Bank made contributions to charitable and non-political organisations amounting to N4,312,000 (2017: NS,805,000) during the year. This comprises contributions to educational organisations amongst others as listed below:

Nigeria Police Sport Complex, Abuja Inspector General of Police book launch St. John Anglican Church POWA International School, Abuja Tony Okpe Communications Force Education Secondary School MAO Children School, Lagos Island JoefDynamic Educational Services, Obalende Police Children Schools (Ikeja, Idimu, Obalende, Calabar, Akure, Lokoja, Latia)

N 3,000,000 1,000,000

20,000 20,000 100,000 20,000 10,000 10,000

132,000 4,312,000

15) FRAUD AND FORGERIES During the financial year, there was a case of fraud involving a middle management employee of the Sokoto Branch of the Bank. The Bank lost the sum ofN266,480,000 from the fraud. A sum ofN35,500,000 has been recovered to date while the remaining balance has been fully written off during the year. Appropriate action has been taken against the complicit employee for further recovery. In view of this incident, the Bank has strengthened the key controls and procedures surrounding its operations, including the appointment of Assistant Regional Heads and redeployment of staff, to forestall future recurrence.

16) EVENTS AFTER THE REPORTING PERIOD

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There were no post balance sheet events identified which could have a material effect on the state of affairs of the Bank as at 31 December 2018 or the profit for the year ended on that date.

17) HUMAN RESOURCES

EMPLOYMENT OF DISABLED PERSONS

The Bank operates a non-discriminatory policy on recruitment. Applications by physically challenged persons are always considered, driven by a deep conviction that even in disability, there could be immense ability. In the event of any member of staff becoming physically challenged, every effort will be made to ensure that their employment with the Bank continues and that appropriate training is arranged. It is the policy of the Bank that the training, career development and promotion of disabled persons should, as far as possible, be identical with those of other employees. At present, the Bank has one physically challenged person in its employment.

EMPLOYEE INVOLVEMENT AND TRAINING

In today's competitive business landscape, human capability has been found to be a key factor for corporate success. Thus a drive in the right direction for employees'development is imperative for sustaianable superior company perfromance, In NPF Microfinance Bank Pie, we believe strongly that we must not only enable our employees to perform in their day-to-day task, but must unlock their potentials and make it possible for them to unleash energy to achieve our business goals. Therefore, the Bank ensures that employees receive qualitative training through both in-house and external, local and international courses. Staff training plan are drawn up yearly which is hinged on grade and job function specific programmes. These trainings are also complemented by on-the-job training.

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HEALTH, SAFETY AND WELFARE OF EMPLOYEES The Bank maintains business premises designed with a view to guarantee the safety and healthy working conditions of her employees amd customers alike. Employees are adequately insured against occupational and other hazards. The Bank has in place enlightement programs/publications designed to equip staff members with basic health management tips and fire prevention tips. Also, fire prevention and fire fighting equipments are installed in strategic locations within the Bank's premises. In addition, the Bank provides medical facilities to its employees and t~eir immediate families at its expense. /

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NPF Microfinance Bank PLC Ann a/Report-31 DECEMBER2018

The Bank also operates a Group Life Assurance Scheme and a Contributory Pension Plan for the benefit of employees in line with the Pension Reform Act, 2014 (as amended) exists also for employees of the Bank. i / 18) EMPLOYEE AND DIRECTOR INFORMATION I The number and percentage of men and women employed in the Bank during the year ended 31 December 2018 and the comparative year ~ere as follows:

Number Percentage Male Female Total Male Female

Employees (2018) 145 229 374 · 39% 61% Employees (2017) 185 129 314 59% 41%

Top Management (2018) 19 7 26 73% 27% Top Management (2017) 14 4 18 78% 22%

Board Executive Directors (2018) 3 - 3 100% 0% Executive Directors (2017) 3 - 3 100% 0%

Non -Executive Directors (2018) 7 I 8 88% 13% Non -Executive Directors (2017) 6 - 6 100% 0%

19) AUDITOR Messrs. KPMG Professional Services, having satisfied the relevant corporate governance rules on their tenure in office, have indicated their willingness to continue in office as auditor to the Bank. In accordance with Section 357(2) of the Companies and Allied Matters Act of Nigeria, 2004 therefore, the auditor will be re-appointed at the next annual general meeting of the Bank without any resolution being passed.

BY ORDER OF THE BOARD

Company Secretary/Legal Adviser FRC/2013/NBA/00000002319 28 May2019

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NPF Mkrofmance Bank PLC Annual Report - 31 DECEMBER 2018

CORPORA TE GOVERNANCE REPORT

INTRODUCTION I NPF Microfinance Bank Pie ("the Bank") remains committed to institutionalising corporate governance principles. For the Bank, Corpor~te Governance is not an end in itself but an essential enabler for value creation whilst propagating a value-led culture, high behavioural standards and robust procedures as fundamental tools in the entrenchment of a strong corporate governance framework. As a Public Company quoted on the Nigeria Stock' Exchange, we remain dedicated to our duties and pledge to safeguard and increase· investor value through transparent corporate governance practices.

The Bank is governed under a framework that enables the Board to discharge its oversight functions while providing strategic directions to the Bank in balance with its responsibility to ensure regulatory compliance.

In the year under review, the Bank largely complied with the provisions of the codes of corporate governance for Central Bank of Nigeria (CBN), Nigeria Stock Exchange (NSE) and also filed submited periodic returns to the CBN, NSE, Securities and Excahnge Commission (SEC) and Nigerian Deposit Insurnace Corporation (NDIC).

GOVERNANCE STRUCTURES

THE BOARD The Board is responsible for embedding high standards of corporate governance across the Bank. The Board recognises that effective corporate governance is a key imperative to achieving the sustainable growth of the Bank.

The Board plays a central role in conjuction with Management in ensuring that the Bank is financially strong. This synergy between the Board and Manageemnt fosters interactive dialogue in setting broad policy guidelines in the running of the Bank to enhance optimal performance and ensure that associated risk are well managed.

The Board of Directors currently consists of eleven ( 11) members as stated below:

Executive Directors 3

Non-Executive Directors 8 (Inclusive of3 Independent Directors)

THE ROLE OF THE BOARD

The traditional role of the Bank's Board is to provide the Bank with leadership within a framework of prudent and effective controls which enables risk to be assessed and managed while deploying the Bank's resources to profitable use. The Board outlines the Bank's strategic and corporate aims, ensures that the necessary financial and human resources are in place for the Bank to meet its objectives and reviews management perfromance on a continous basis. The Board also sets the Bank's values and standards and ensures that its obligations to its shareholders and others are understood and met.

RESPONSIBILITIES The Board is accountable to the Shareholders and continues to play a key role in governance. It is the responsibility of the Board of Directors to endorse the Bank's organisational strategy, develop directional policy, appoint, supervise and remunerate senior executives and ensure accountability of the Bank to its stakeholders and regulatory authorities. The Board is responsible for providing stable and effective leadership for the Bank, to facilitate achievement of its corporate operating objectives.

The roles of the Chairman and Chief Executive Director are separate and no one individual combines the two positions. The Chairman's main responsibility is to lead and manage the Board to ensure that it operates effectively and fully discharges its legal and regulatory responsibilities. The Chairman facilitates the contributions of Directors and promotes effective relationships and open communications between Executive and Non-Executive Directors both inside and outside the Boardroom.

The Board has delegated the responsibility for the day to day management of the Bank to the Managing Director/Chief Executive Officer, who is supported by the Executive Management. .The Managing Director executes the powers delegated to him in accordance with guidelines approved by the Board and the Executive Management is accountable to the Board for the development and implementation of strategies and policies. REMUNERATION POLICY The Bank's remuneration policy sets out the criteria and mechanism for determining the levels of remuneration of the Directors of the Bank and also defines the process for determining Executive Directors compensations and rewards for corporate and individual performance. The policy is structured taking into account the environment in which it operates and the results it achieves at the end of each financial year. It includes:

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Remuneration class Description Entitled Directors Timing Baslc Salary Reflects the industry .. salary Executive Directors only Monthly competinve

package and the extent to which the Bank's objectives have been met for the financial luao,

Performance Incentive This is awarded based on the performance of Executive Directors only Annually the Bank and individual Directors.

Directors' fees Annual Payments approved at the Annual Non-Executive Directors only General Meeting Half yearly

Sitting allowances Allowances paid for attending board and Non-Executive Directors only Paid at every sitting at board and board committee meetings board committ~e meetings

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The Directors' fees for the year under review was fixed at N25,000,000.00 by members at the last Annual General Meeting. This elcludes sitting allowance and other allowances for meetings attended .

BOARD MEETINGS To ensure the Board's effectiveness throughout the year, an annual meeting and task calendar is developed at the beginning of each year. T~ese calendars do not only focus on the activities of the Board but also establish benchmarks against which its performance can be evaluated at the erid of the year. l I The Board meets quarterly and additional meetings are convened as the need arises. In furtherance of its roles, the Board met eight (8) times in the year under review on 9/3, 26/4, 27/6, 30/7, 27/8, 19/10, 9/11 and 9/12. Attendance at the Board meetings during the year were as follows:

No Members Desilmation No. of Meetinas Attendance

I Mr. Azubuko Joel Udah (Esa.) Chairman 8 8

2 Prince Jude Ifeanvi Eke Non-Executive Director 8 8

3 Mr. Mohammed D. Saeed Non-Executive Director (Indep) 8 6

4 Mr. Olusholla B. David Non-Executive Director 8 6

5 Mr. Jibrin G. Gane Non-Executive Director 8 8

6 Mr. Abdulrahman Satumari • Non-Executive Director (Indep) 8 5 7 Mr. Salihu Argunu Hashimu • Non-Executive Director 8 5 8 Mrs. Rakiya Edota Shehu • Non-Executive Director (Indep) 8 5 9 Mr. Akinwunmi M. Lawal Managing Director 8 8 10 Mr. Jude C. Ohanehi Executive Director 8 8 II Mr. Francis C. Nelson Executive Director 8 8

• Appointed Directors on 28 June 2018

DIRECTORS' PERFORMANCE EVALUATION The Governance and Remuneration Committee oversees a formal evaluation process to assess the composition and perfonnance of the Board, each Committee and individual director on an annual basis. The assessment is conducted to ensure the Board, Committees and individual members are effective and productive and to identify opportunities for improvement.

As part of the process, each member completes a deatailed and thorough questionnaire and each member also participates in an oral interview/conversation session as a follow up to the completeion of the questionnaire. The Governance and Remuneration Committee reports annually to the full Board with result of the evaluation excercise. The recommendations of the perfonnance evaluation are considered by the Board and are implemented as required.

In compliance with the requirement of the Central Bank of Nigeria (CBN) Code of Corporate Governance, the Board commissioned DCSL Corporate Services Limited to carry out Board evaluation for the financial year ended 31 December 2018.

Their report has been forwarded to the CBN and will be communicated to shareholders at the Annual General Meeting.

TENURE OF DIRECTORS In pursuance of the Bank's drive to continually imbibe best Corporate Governance practices, the tenure of the Non-Executive Directors is limited to a maximum of three (3) terms of three (3) years each. This allows for the injection of fresh perspectives to the business of the Board.

INDUCTION AND CONTINOUS TRAINING The Company has in place a formal induction program for newly appointed Directors. This induction which is arranged by the Company Secretary includes presentation by Senior Management staff to assist Directors in building a detailed understanding of the Bank's operations, its strategic plan, Business environment and key issues faced by the Bank and to introduce directors to their fiduciary duties and responsibilities.

Training and Education of Directors on issues pertaining to their oversight function is a continuous process in order to update their knowledge and skills and keep them informed of new developments in the Bank's business and operating environment. These trainings are carried out through external, local and international courses.

All Directors attended at least one training course in the year under review.

BOARD COMMITTEES The responsibilities of the Board are further accomplished through four ( 4) standing Committees in addition to the Statutory Audit Committee. Through these commmittees, the Board is able to effectively deal with complex and specialised issues and fully utilise its expertise to formulate strategies for the Bank These committees have clearly defined terms of reference setting out their roles, responsibilities, functions and reporting procedures to the Board.

The Board committees in operation during the period under review were:

Board Finance and General Purpose Committee Board Risk Management Committee Board Audit Committee Board Governance and Remuneration Committee

The roles and responsibilities of these committees are discussed below:

Finance and General Purpose Committee This Committee has the responsibility for monitoring all financial aspects of the Bank. Its responsibilities also include:-.

To formulate and shape the strategy of the Bank and make recommendations to the Board Review the budget of the Bank and make recommendations to the Board for approval

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NPF Microfuranctt Bank PLC Annual Report- 31 DECEMBER 20/8

Monitor performance of the Bank against the budget Consider and approve expenses above the limits of Management and make recommendations to the Board for approvals above its limi s Consider and approve significance IT investment and expenditure to be made by the Bank Review the Assets and Liability Committee report Review the Bank's investment portfolio annually Approve all policies relating to finance for the Bank Oversee the development and maintenance of IT Strategic Plan Review and approve within its approved limits the annual manpower plan for the Bank Approve compensation policy and review compensation for all officers of the Bank (excluding Executive and Non - Executive Directors).

The Committee meets at least once in each quarter. However, additional meetings are convened as required. The Committee met five( 5) times in the 2018 financialyear on 18/1, 22/2, 6/3, 17/7 and 16/10. Membership of the Committee and attendance at its meetings during the year were as follows:

No. Members Desienatlon No. ofMeetin11:s Attendance 1 Prince Jude Ifeanvi Eke Chairman 5 5 2 Mr. Emmanuel C. Wabali* Member 5 1 3 Mr. Olusholla Babaiide David Member 5 5 4 Mr. Salihu Argungu Hashimu •• Member 5 2 5 Mr. Abdulrahman Satumari •• Member 5 2 6 Mr. Akinwunmi Lawal Member 5 5 7 Mr. Francis C. Nelson ** Member 5 2 8 Mr. Jude C. Ohanehi Member 5 5

Retired from the Board January, 2018 ** Appointed members of the Committee on 11 July 2018

Board Risk Management Committee The responsibilities of this Committee are:-

Review and recommend risk management policies including risk strategy to the full Board for approval Review the adequacy and effectiveness of risk management and controls Monitor the Bank's compliance level with applicable laws and regulatory requirements Periodic review of changes in the economic and business environment, including trends and other factors relevant for the Bank's risk profile

Review and recommend for approval of the Board risk management procedures and controls for new products and services

Approve lending, investment decisions, credit products and new processes Oversight of management's process for the identification of significant risks across the Bank and the adequate prevention, detection and reporting mechanism Review and approve the framework for the management of credit risk, market risk, liquidity risk, operational risk, reputation risk and other risk types as appropriate Review and oversee the development of loan loss provision policy and annually assess the appropriateness and application of such policy in the light of the credit risk imbedded in the overall loan portfolio Review and monitor the effectiveness and application of credit risk management policies, related standards and procedures, and control environment with respect to credit decisions and review internal audit reports with respect thereto; and Review and approve or decline credit applications submitted by the Management's Credit Committee for loans to new individual borrowers or additional requests for existing borrowers .

The Board Risk Management Committee meets quarterly, and additional meetings are convened as required. The Committee met four (4) times during the 2018 financial year on 17/1, 18/4, 1/8 and 17/10. Membership of the Committee and attendance at its meetings during the year were as follows:-

No. Members Deslsnatlon No. ef Meetlnas Attendance 1 Mr. Olusholla Babaiide David* Chairman 4 2 2 Prince Jude Ifeanyi Eke Member 4 4 3 Mr. Emmanuel C. Wabali •• Member 4 1 4 Mr. Jibrin G. Gane••• Member 4 2 5 Mr. Mohammed D. Saeed*** Member 4 1 6 Mr. Abdulrahman Satumari Member 4 2 7 Mrs. Rakiva Edota Shehu Member 4 2 8 Mr. Akinwunmi Lawal Member 4 4 9 Mr. Jude C. Ohanehi Member 4 4

• Appointed Chairman of the Committee on 11 July 2018 •• Retired from the Board January 2018 ••• Ceased being members of the Committee from 11 July 2018 due to reconstitution of Board Committee

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Board Audit Committee The Audit Committee is responsible for maintaining oversight regarding the integrity of the Bank's financial statements, ensuring compliance with legal and other regulatory requirements, assessment of qualification and independence of the external auditor, and assessment of perforinanc~ of the Bank's internal audit function as well as that of the external auditors. Its responsibilities also includes: I /

• Ensure the development of a comprehensive internal control framework for the Bank. obtain assurance and report the operating effectiveness of the Bank's internal control framework to the Board I / Review and ensure that adequate whistle-blowing procedures are in place and that a summary of issues reported are highlighted to the Board Preserve auditor independence, and set clear hiring policies for employees and /or former employees of independent auditors Consider any related-party transactions that may arise within the Bank or any of its related companies Invoke its authority to investigate any matter within its terms of reference for which purpose the Bank must make available the resources to the internal auditors with which to carry out this functions including access to external advice when necessary

This Committee consists of only Non-Executive Directors and is required to meet quarterly in a year. The Committee met four (4) times during the 2018 financial year on 31/1, 19/4, 26/7.and 18/10. Members of the Committee and attendance at its meetings during the year were as follows:-

No. Members Designation No. of Meetings Attendance I Mr. Abdulrahman Satumari* Chairman. 4 2 2 Mr. Mohammed D. Saeed Member 4 3 3 Mr. Jibrin G. Gane Member 4 4 4 Mr.Olusholla Babajide David** Member 4 2 5 Mr. Salihu Argungu Hashimu* Member 4 2

* **

Appointed members of the Committee on 11 July 2018 Ceased being a member of the Committee from 11 July 2018 due to reconstitution of Board Committees.

Board Governance and Remuneration Committee

The responsibilities of the Committeee are; Make recommendations on the appropriate compensation structure for the Managing Director and other senior Executives Make recommendations to the Board on the Bank's policy framework of Executive remuneration and its cost Review and report to the Board on the succession planning process for the positions of chairman, Chief Executive Officer/Managing Director, Executive Directors and any other key managerial position Periodically evaluate the skills, knowledge and experience required on the Board Establish the criteria for Board and Board committee membership, review candidates qualifications and any potential conflict of interest, assess the contributions of current Directors in connection with their re-connection and make recommendation to the Board Monitor the development, alignment, satisfaction and productivity of the Bank's employees with a view to competitive excellence Develop and constantly review and make recommendation to the Board on policies and procedures to maintain high standard of management by the Bank Monitor on a continuous basis and make recommendations to the Board concerning the corporate governance of the Bank Perform other oversight functions as may from time to time be expressly requested by the Board

The Board Governance and Remuneration Committee is required to meet as often as it deems necessary but not less than 3 times a year. The Committee met five (5) times in the 2018 financial year on 1/2, 20/4, 23/4, 24/7 and 8/12. Membership of the Committee and attendance at its meetings during the year were as follows:

No. Members Designation No. of Meetings Attendance I Mr. Mohammed D. Saeed Chairman 5 5 2 Prince Jude Ifeanyi Eke Member 5 5 3 Mr. Jibrin G. Gane Member 5 5 4 Mrs. Rakiya Edota Shehu* Member 5 2 * Appointed members of the Committee on 11 July 2018

Statutory Audit Committee In compliance with section 359(6) of the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004, an audit committee comprising two (2) representatives of shareholders elected annually at the Annual General Meeting (AGM) and two (2) Non-Executive Directors is in place. The responsibilities of the Committee are as conatined in the Companies and Allied Matters Act, Cap C.20 Laws of the Federation of Nigeria, 2004. The Statutory Audit Committee meets at least once in each quarter. However, additional meetings are conveyed as required. The Committee met six (6) times in 2018 financial year on 8/3, 24/4, 31/7, 24/8,15/10 and 26/10. Membership of the Committee and attendance at its meetings during the year were as follows. No. Members Desianatton No. of Meeting Attendance I Mr. Timothv Adesivan * Chairman 6 4 2 Mr. Waheed A. Adezbite ** Member 6 2 3 Alhaii Abdulquadri Sanni , Member 6 6 4 Prince Jude Ifeanvi Eke Member 6 6 5 Mr. Abdulrahman Satumari*** Member 6 4 * Appointed a member of the commlllee on 28 June 2018

** Ceased being a member of the Committee on 28 June 2018 *** Appointed a member of the Committee on 28th June 2018

10

NPF Microfu,ance Bank PLC Annual Report. JJ DECEMBER 2018

MANAGEMENT COMMITTEES

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The committees comprise senior management staff of the Bank These committees provide inputs for the respective Board committees o~/ the Bank and ensure that recommendations of the Board committees are effectively and efficiently implemented. /

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They meet as frequently as necessary to take action and decisions within the confines of their powers. The standing management committees are:- 1 :

- Assets and Liabilities Committee

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- Enterprise Risk Management Committee - Finance and Expenditure Committee - IT Steering and Business Development Committee - Staff Committee - Management Credit Committee

Assets and Liabilities Committee

The Asset and Liability Committee meets weekly or as required to analyse and make recommendations on risks arising from day to day activities of the Bank The Committee also establishes standards and policies covering the various components of market risk. It also ensures that the authority delegated by the Board and Management Risk Committees with regard to market risk is exercised effectively, and that market risk exposures are efficiently monitored and managed. The Committee is composed of all senior management staff.

Enterprise Risk Management Committee

The Committee is comprised of all senior management staff of the Bank. The Committee is responsible for the implementation of the Bank's risk management strategy. The Committee also monitors overall regulatory and economic capital adequacy. It recommends to the Board for its approval, clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks. The Committee is also saddled with the responsibility of reviewing asset quality results versus plan, portfolio management and the adequacy of the allowance for credit losses. The Committee is also composed of all senior managment staff.

Finance and Expenditure Committee

The Finance and Expenditure Committee is responsible for recommending for approval to management the purchase of assets 'for new and existing branches. It also reviews the budget expenditure performance during the financial year. The Committee is comprised of the Company Secretary/Legal Adviser, ED Finance & Administration, Head Credit, Head Information Technology, Head Internal Audit and Head Administration,'.

Staff Committee The Committee considers all staff disciplinary issues for recommendation/ implementation to the management team. It also considers issues pertaining to staff welfare and performance appraisal. The members of the Committee include the Company Secretary/Legal Adviser, ED Finance & Administration, Head Internal Audit, Head Credit, Head Administration and Head Information Technology.

IT Steering and Business Development Committee

This Committee is responsible for amongst others, development of corporate information technology (IT) strategies and projects that ensure cost effective application and management of resources throughout the organisation. The Committee also reviews for management's recommendation to the Board Risk Management committee, new and existing bank products and its features. The members of the Committee includes the Executive Director Operations, Head Information Technology, Head Credit, Head Administration, Head Internal Audit, Head Marketing and ED Finance & Admi~istration.

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Management Credit Committee

The Committee is responsible for ensuring that the Bank complies fully with the Credit Policy guidelines as laid down by the Board of Directors. The Committee also reviews and approves credit facilities not exceeding an aggregate sum to be determined by the Board from time to time. The Committee is saddled with the responsibility of ensuring that adequate monitoring and recovery of credit is carried out.

WHISTLE-BLOWING PROCESS The Bank is committed to the highest standards of openness, probity and accountability hence the need for an effective and efficient whistle blowing process as a key element of good corporate governance and risk management.

Whistle blowing process is a mechanism by which suspected breaches of the Bank's internal policies, processes, procedure and unethical activities by any stakeholder (staff, customers, suppliers and applicants) are reported for necessary actions.

It ensures a sound, clean and high degree of integrity and transparency in order to achieve efficiency and effectiveness in our operations. I

The reputation of the Bank is of utmost importance and every staff of the Bank has a responsibility to protect the Bank from any person or act that might jeopardize its reputation. Staff are encouraged to speak up when faced with information that would help protect the Bank's reputation.

An essential attribute of the process is the guarantee of confidentiality and protection of the whistle blower's identity and rights, It should be noted that the ultimate aim of this policy is to ensure efficient service to the customer, good corporate image and business continuity in an atmosphere compliant to best industry practice. The Bank has a Whistle Blowing channel via its website, dedicated telephone hotlines and e-mail address in compliance ~ith Section 6.1.12 of the Central Bank of Nigeria (CBN) post-consolidation Code of Corporate Governance for Banks in Nigeria.

The Bank's Head of Internal Audit is responsible for monitoring and reporting on whistle blowing.

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NPF Microfutance Bank PLC Annual Report. 3 I DECF.MBER 2018

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SECURITIES TRADING BY INTERESTED PARTIES I I The Bank has in place a policy on trading in the Bank's Securities on terms no less exciting than the required standard set out in the Nigeria Stock Exchange Listing Rules. The policy prevents employees, Directors and related individuals/Companies from insider dealings on the shares of NPF Microfinance Bank Pie and related parties. The essence of the policy is to prevent the abuse of confidential non-public information that may be gained during the execution ofNPF Microfinance Bank's Business.

All Directors of the Bank have complied with the listing rules of the Nigeria Stock Exchange regarding securities transactions by Directors.

SHAREHOLDERS' PARTICIPATION The Annual General Meeting of the Bank is the highest decision-making forum. Shareholders are opportuned to express their opinions on the Bank's financials and other issues affecting the Bank at such forum. The Bank encourages shareholders to partcipate in the affairs of the Bank.

PROTECTION OF SHAREHOLDERS' RIGHTS The Board ensures the protection of the statutory and general rights of shareholders at all times, particularly voting rights at General Meetings of the Bank. All are treated equally, regardless of volume of shareholding or social status. '

SHAREHOLDERS' MEETING Shareholders' meetings are duly convened and held in line with existing statutory and regulatory regime. The Bank's General Meetings are conducted in a transparent and fair manner. Shareholders have the opportunity to express their opinions on the Bank's financial results and other issues affecting the Bank. The Annual General Meetings are attended by representatives ofregulators such as the Nigerian Stock Exchange as well as representatives of Shareholders' Associations.

COMPLAINT MANAGEMENT In compliance with the Securities and Exchange Commission (SEC) rules of 2015, the Bank has in place a complaint management policy. The policy sets out the manner in which shareholders make enquiries or register their complaints and how the Bank responds/address shareholder's complaints, issues and other matters that affects their shareholding. COMPLAINT CHANNELS

To ensure an effective feedback process, the following channels have been provided for customers to enable them contact the Bank:

Email: ccare@J1pfmicrojinanceba11k.com

Toll Free Line: 08008008008

BYORDEROFTHEBOARD

Mrs. Osaro J. ldemudi:r' Company Secretary/Legal Adviser FRC/2013/NBN00000002319 28May2019

12

I NP~ Microjinance Bank PLC Annual Report - 31 DECEMBER 2018

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Statement of Directors' responsibilities in relation to the financial statements for the y1ear ended 31 December 2018 / /

The Directors accept responsibility for the preparation of the annual financial statements that give a true and fair view in accordance with International Financial Reporting Standards and in the manner required by the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004, the Financial Reporting Council of Nigeria Act, 2011, the Banks and Other Financial Institutions Act, Cap B.3, Laws of the Federation of Nigeria, 2004 and relevant Central Bank of Nigeria (CBN) guidelines and circulars.

The Directors further accept responsibility for maintaining adequate accounting records as required by the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004 and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error.

' ./ The Directors have made assessment of the Bank's ability to continue as a going concern and have no reason to believe that the Bank will not remain a going concern in the year ahead.

SIGNED ON BEHALF OF THE BOARD OF DIRECTORS BY:

Managing Director/Chief Executive Officer FRC/2014/CIBN/00000006345 28 May2019.

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/ NPF Microjinance Bank PLC Arinua/ &port- 31 DECFMBER 20/8

REPORT OF THE AUDIT COMMITTEE

I In compliance with section 359(6) of the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004, we the members of the Audit Committee of NPF Microfinance Bank Pie report as follows:

- We have reviewed the scope and planning of the audit requirements and we found them adequate.

- We have reviewed the financial statements for the year ended 31 December 2018 and are satisfied with the explanations obtained in response to our queries.

- We reviewed the external auditor's Management Letter for the year ended 31 December 2018 and management responses thereto and are satisfied that management is taking appropriate steps to address the issues raised.

We have reviewed all insider related credits as defined by Section 20(2) of the Banks and Other Financial Institutions Act, Cap B.3, Laws of the Federation of Nigeria, 2004 and confirm that the Bank disclosed all such credits and that they were reported in line with the Central Bank of Nigeria (CBN)'s guidelines. Specifically, we are satisfied that the Bank has complied with the provisions of the Central Bank of Nigeria circular BSD/1/2004 dated 18 February 2004 on "Disclosure of insider related credits in the financial statements of banks". We hereby confirm that an aggregate amount ofN115,594,000 was outstanding as at 31 December 2018 (31 December 2017: N32,086,000) of which none was non-performing (31 December 2017: Nil) (see note 26 to the financial statements).

- We ascertained that the accounting and reporting policies of the Bank for the year ended 31 December 2018 are in accordance with legal requirements and agreed ethical practices.

- The external auditors confirmed having received full cooperation from management in the course of their statutory audit.

Mr. Timothy Adesiyan Chairman, Audit Committee FRC/2013/lODN/00000003 745 27 May 2019

Other members of the Audit Committee: - Alhaji Abdulquadri Sanni - Mr. Abdulrahman Satumari - Prince Ifeanyi Jude Eke

Mrs. O.J. Idemudia (Company Secretary) acted as Secretary to the Committee

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KPMG Professional Services KPMGTower Bishop Aboyade Cole Street Victoria Island PMB 40014, Falomo Lagos

Telephone 234 (1) 271 8955 234 (1) 271 8599

Internet www.kpmg.com/ng

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INDEPENDENT AUDITOR'S REPORT

To the Shareholders of NPF Microfinance Bank Pie

Report on the Audit of the Financial Statements

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Opinion We have audited the financial statements of NPF Microfinance Bank Pie ("the Bank"). which comprise the statement of financial position as at 31 December 2018, 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, comprising significant accounting policies and other explanatory information, as set out on pages 20 to 68.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Bank as at 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and in the manner required by the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004, the Financial Reporting Council of Nigeria Act, 2011, the Banks and Other Financial Institutions Act, Cap 8.3, Laws of the Federation of Nigeria, 2004 and relevant Central Bank of Nigeria (CBN) Guidelines and Circulars.

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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 (IESBA Code} together with the ethical requirements that are relevant to our audit of the financial statements in Nigeria 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.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

KPMG Professional Services, a Partnership established under Nigeria law, is a member of KPMG International Cooperative ("KPMG International"), a swiss entity. All rights reserved.

Registered in Nigeria No BN 986925

Partners:

Adebisi 0. Lamikanra Adewale K. Ajayi Ayodele A. Soyinka lbitomi M. Adepoju Lawrence C. Amadi Olabimpe S. Afolabi Olumide 0. Olaymlca Oluwatoyin A. Gbagi

Adekunle A. Elebute Ajibola 0. Olomola Chibuzor N. Anyanechi ljeoma T. Emezie-Ezigbo Mohammed M. Adama O!adapo A. Okubadejo Olusegun A. Sowande Temitope A. Onitiri

Adegoke A. Oyelami Ayobami L. Salami Ehile A. Albangbee Joseph 0. Tegbe Nneka C. Eluma Oladimeji I. Salaudeen O!utoyin I. Ogunlowo Tolulope A. Odukale

Adeto!a P. Adeyemi Ayodele H. Othihiwa Goodluck C. Obi Kabir 0. Okunlola Oguntayo I. Ogungbenro Olanike I. James Oluwafemi 0. Awotoye Victor U. Onyenkpa

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Impairment allowance for loans and advances to customers

The determination of the impairment of loans and advances to customers is considered to be of significance to the audit due to the high level of subjectivity and judgment inherent in estimating . impairment allowance based on key assumptions on the recoverability of loan balances, including the application of industry knowledge and prevailing economic conditions.

During the year, the Bank adopted IFRS 9 Financial Instruments, a new and complex accounting standard which became effective on 1 January 2018. The key change arising from the adoption of IFRS 9 was that the Bank's impairment losses on financial assets are now based on an Expected Credit Loss (ECL) model which incorporates expected future losses due to macroeconomic variables rather than an incurred loss model where only past and present loss events were considered.

The determination of impairment allowance using the ECL model requires significant judgement and the application of certain financial indices which are estimated from financial data obtained within and outside the Bank.

The key judgements and assumptions made in the application of the ECL model include:

the possibility of a loan becoming past due and subsequently defaulting;

determining whether a loan has shown a significant increase in credit risk affecting its classification;

the rate of recovery on the loans that are past due and in default; and

the estimation of forward looking information such as inflation rate, unemployment rate and Gross Domestic Product (GDP) growth rates.

The level of subjectivity inherent in estimating the impairment allowance on loan balances, the inputs estimated, the complexity of the estimation process and the significant judgment involved make the impairment of loans and advances a matter of siqnificance to the audit.

How the matter was addressed during the audit

Our procedures included the following with respect to the impairment allowances as at 1 January 2018 and 31 December 2018:

• We tested the key controls over the loan impairment process relating to the monitoring of the performance of loans and advances by the Bank.

• We assessed the appropriateness of the Bank's determination of significant increase in credit risk and the resultant classification of loans into the various stages, which determines whether the expected credit loss would be recognized over a period of 12 months or over the life of the loans and advances. Specifically, we tested the accuracy of the loan staging by estimating the days past due and on that basis, the stage of each loan.

• We challenged the appropriateness of the Bank's ECL methodology by considering whether it reflects probability-weighted amounts that are determined by evaluating a range of possible outcomes, the time value of money and reasonable and supportable information at the reporting date about past events, current conditions and forecasts of future economic condition.

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I i With the assistance of our financial risk management specialists, we assessed the key data and assumptions for the data inputs into the ECL model used by the Bank. Our procedures included the following:

We challenged the appropriateness of management's forward looking assumption by using publicly available information from external sour~es such as inflatio~ rate, unemployment rate and Gross Domestic Product {GDP) growth rate m our ECL calculations.

We assessed the appropriateness of the Probability of Default {PD) used in the ECL calculations for reasonableness by checking the historical movement of the facilities between default and non-default categories. We assessed the reasonableness of the calculation of Loss Given Default {LGD) rates used by the Bank in the ECL calculations, by recomputing the LGD. We also evaluated the reasonableness of management overlay in the determination of the LGD based on the local credit environment.

We evaluated the appropriateness of the data used in determining the Exposure at Default, including the contractual cash flow and credit conversion factor, outstanding loan balance, loan contractual repayment pattern and loan tenor.

• Our financial risk management specialists re-performed the calculations of impairment allowance for loans and advances and also checked the reasonableness of the outcome.

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• We checked that the difference between previously reported impairment allowance on loans and advances and the ECL impairment allowance was recognized in the opening retained earnings as at 1 January 2018 in line with the requirements of the relevant accounting standards.

• We assessed whether disclosures in the financial statements appropriately reflect the Bank's exposure to credit risk in line with the requirements of the relevant accounting standards.

Refer to note 3(f)(v), 4(b) and 5(a) to the financial statements for the Bank's accounting policy on impairment of financial assets, credit risk disclosures and use of estimates and judgments regarding impairment respectively.

Other Information The Directors are responsible for the other information which comprises the Corporate Information; Directors' Report; Corporate Governance Report; Statement of Directors' Responsibilities; Report of the Audit Committee and Other National Disclosures {but does not include the financial statements and our audit report thereon), which we obtained prior to the date of this auditor's report. It also includes other information such as the Vision & Mission Statements; Financial Highlights; Directors, Officers & Professional Advisers; Notice of Annual General Meeting; Chairman's Statement; Managing Director's Report; Board of Directors' Profiles; Report on the Appraisal of the Board; Profiles of the Management Team; Branches and their Addresses; Proxy Form; Mandate fore-Dividend Payment; Mandate for eBonus; and Personal Data Form {together the "outstanding reports") which are expected to be made available to us after that date. ·

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 ther_e is a materi~I mi~stateme1nt ~f this other information, we are required to report that fact. We have nothing to report in this regard.. '

When we read the outstanding reports, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of the Directors for the Financial Statements The Directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs and in the manner required by the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004, the Financial Reporting Council of Nigeria Act, 2011, the Banks and Other Financial Institutions Act, Cap B.3, Laws of the Federation of Nigeria, 2004 and relevant Central Bank of Nigeria (CBN) Guidelines and Circulars, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Bank'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 the Directors either intend to liquidate the Bank or to cease operations, or have no realistic alternative but to do so.

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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 Bank's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.

• Conclude on the appropriateness of Directors' 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 Bank'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

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report. However, future events or conditions may cause the Bank 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 the Audit Committee 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.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

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Report on Other Legal and Regulatory Requirements

Compliance with the requirements of Schedule 6 of the Companies and Allied Matters Act, Cap C.20, Laws of the Federation of Nigeria, 2004

In our opinion, proper books of account have been kept by the Bank, so far as appears from our examination of those books and the Bank's statement of financial position and statement of profit or loss and other comprehensive income are in agreement with the books of account.

Compliance with Section 27 (2) of the Banks and Other Financial Institutions Act, Cap 8.3, Laws of the Federation of Nigeria, 2004 and the Central Bank of Nigeria circular BSD/1/2004

i. The Bank did not pay any penalties in respect of contravention of the Banks and Other Financial Institutions Act, Cap B.3, Laws of the Federation of Nigeria, 2004 during the year ended 31 December 2018 .

ii. Related party transactions and balances are disclosed in note 26 to the financial statements in compliance with the Central Bank of Nigeria circular BSD/1/2004.

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Ayodele H. Othihiwa, FCA FR C/2012/1 CAN/00000000425 For: KPMG Professional Services

Chartered Accountants 7 June 2019 Lagos, Nigeria

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I Jf'F Microfinance Bank PLC A1m11al Report- 31 DECEMBER 2018

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER

ASSETS Cash and cash equivalents Pledged assets Loans and advances to customers Investment securities Trade and other receivables Property and equipment

TOTAL ASSETS

2018 20b I

Note

14 4,940,352 5,752,469 15 800,787 409,674 16 10,593,635 9,008,675 17 291,081 16,681 18 301,751 172,878 19 669,946 591,964

17,597,552 15,952,341

In thousands ofnaira

LIABILITIES Deposits from customers Current tax liabilities Other liabilities Borrowings Deferred tax liabilities TOTAL LIABILITIES

20 10,465,119 9,126,494 21(b) 87,082 146,270 22 243,547 315,251 23 2,078,843 1,550,468 21(c) 76,370 61,569

12,950,961 11,200,052

CAPITAL AND RESERVES Share capital Share premium Retained earnings Fair value reserve Other reserves TOTAL EQUITY

TOTAL LIABILITIES AND EQUITY

24 1,143,328 1,143,328 25(a) 1,517,485 1,517,485 25(b) 318,690 728,276 25(c) (2,405) 25(d) - (e) 1,669,493 1,363,200

4,646,591 4,752,289

17,597,552 15,952,341

The financial statements were approved by the Board of Directors on 28 May 2019 and signed on its behalf by:

Mr. Akinwunmi Lawal Managing Director/Chief Executive Officer FRC/2014/CIBN/000000063 45

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Additionally certified by: ~: I ' F.~:

Chief Financial Officer FRC/2014/ICAN/00000006856

The accompanying notes are an integral part of these financial statements.

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NPF Microjillflnce Bank PLC I 'Annudl Report- 31 DECEMBER 2018

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER

2018 2017 In thousands o[.naira Note

_) 3,950,377 3,654,875 Gross earnings

) Interest income 7 2,960,525 2,605,413 Interest expense 8 {430,021) (318,898)

Net interest income 2,530,504 2,286,515

Fee and commission income 9 733,560 779,878

Other income 10 256,292 269,584

Net operating income 3,520,356 3,335,977

Net impairment loss on financial assets 11 (446,749) (184,927) Personnel expenses 12 (1,341,874) (1,306,773) Depreciation 19 (176,872) (122,788) Administration and general expenses 13 (1,267,706) (901,670)

Total operating expenses (3,233,201) (2,516,158)

Profit before tax 287,155 819,819

/ Tax charge for the year 21(a) (91,406) (187,929)

Profit for the year 195,749 631,890

Other comprehensive income Items that will never be reclassified to profit or loss Equity investment at fair value through OCI, net of tax (2,405)

Items that are or may be reclassified to profit or loss

Other comprehensive income for the year, net of tax {2,405}

) , TOTAL COMPREHENSIVE INCOME FOR THE YEAR 193,344 631,890

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Basic and diluted earnings per share (kobo) 32 9 28

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The accompanying notes are an integral part of these financial statements.

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NPF Mu:rofu,ance Bank PLC Annual Report-JI DECEMBER 20/8

STATEMENT OF CHANGES IN EQUITY ~j FOR THE YEAR ENDED 31 DECEMBER2018

Share Share Retained Fair Value Statutory 1 Regulatory Risk ' Capital Premium Earnings Reserve Reserve Reserve Total __J

I Balance at 1 January 2018 1,143,328 1,517,485 728,276 1,224,110 139,090 4,752,289

-..___,I Effect of retrospective restatement: - IFRS 9 transition adjustments (see note 2(b)) 89,690 89,690 - Transfer to regulatory risk reserve (90,925) 90,925 Restated balance at I January 2018 1,143,328 1,517,485 727,041 1,224,110 , 230,015 4,841,979 Profit for the year 195,749 195,749 Transfer to statutory reserve (see note 25(d)) (24,469) 24,469 · Other comprehensive income, net of tax (2,405) (2,405) Total comprehensive income 171,280 (2,405) 24,469' 193,344

I 1,143,328 1,517,485 898,321 (2,405) 1,248,579 230,015 5,035,323 ~_.,,

Contributions by and distributions to equity holders Dividend paid (388,732) (388,732) Transfer to regulatory risk reserve (190,899) 190,899

Balance as at 31 December 2018 1,143,328 1,517,485 318,690 (2,405) 1,248,579' 420,914 4,646,591

STATEMENT OF CHANGES IN EQUITY FOR THE YEARENDED31 DECEMBER2017

Share Share Retained Fair Value Statutory· Regulatory Risk Total Capital Premium Earnings Reserve Reserve Reserve

Balance at 1 January 2017 1,143,328 1,517,485 506,963 1,145,12~ 150,498 4,463,398

Profit for the year 552,904 78,986 631,890 Other comprehensive income, net of tax Total comprehensive income 552 904 78 986 631 890

1,143,328 1,517,485 1,059,867 1,224,110 150,498 5,095,288 Contributions by and distributions to equity holders Dividend paid (342,999) (342,999) Transfer to regulatory risk reserve 11,408 (11,408) .__,,

1,143,328 1,517,485 728,276 1,224,110 139,090 4,752,289 Balance at 31 December 2017 The accompanying notes are an integral part of these financial statements.

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NPf Microjinance Bank PLC Annual Report - 31 DECEMBER 2018

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-, ) STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBE~ .,,)

2018 2017 _,., In thousands o[naira Note

Cash flows from operating activities Profit for the year 195,749 631,890

~ Adjustments for: Depreciation of property and equipment 19 176,872 122,788 Net impairment loss on loans and advances to customers 11 323,924 186,251 Net impairment write-back on investments 11 (157)

- ) Net impairment loss on cash and cash equivalents 11 1,382 Net impairment allowance on pledged assets 11 367

I Net impairment loss/(write-back) on other receivables 11 121,076 (1,167) j

Net interest income 7, 8 (2,530,504) (2,286,515) Dividend income 10 (24) Profit on disposal of available-for-sale financial assets 10 (15,274) Profit on sale of property and equipment 10 (3,273) (1,228) Tax exeense 2l{a} 91,406 187,929

(1,623,001) (1,175,507)

Change in pledged assets 32(b) (391,709) 176,804 Change in loans and advances 32(c) (1,814,921) (83,122) Change in trade and other receivables 32(d) (247,776) 85,834 Change in deposits from customers 32(e) 1,331,203 2,314,066 Change in other liabilities 32{!2 25,818 {119,670}

(2,720,386) 1,198,405

Interest received 32(h) 2,946,576 2,584,357 Interest paid 32(i) (350,700) (243,045) Tax paid 21(b) (135,793) (199,571) Retirement benefit obligations eaid 22(b} {97,522} {102,432}

J Net cash from/{in} O(!erating activities {357,825) 3,237,714

~ I Cash flows from investing activities Acquisition of property and equipment 19 (254,854) (267,539)

I Proceeds from disposal of property and equipment 32(a) 3,273 53,661 J

Dividends received 10 24 ' Purchase of Treasury bill investments 32(g) (265,894) ~

Proceeds from diseosal of investments 32{g2 36,324 J Net cash used in investing activities {517,475) {177,530}

J Cash flows from financing activities Repayment of borrowings 23(b) (465,264) (454,597)

j Additions to borrowings 23(b) 921,740 1,600,000 Dividend eaid {388,732} (342,999} Net cash used in financing activities 67,744 802,404

_) Net increase in cash and cash equivalents (807,556) 3,862,588 Cash and cash eguivalents as at 1 Janua!2'. 5,752,469 1,889,881 Cash and cash eguivalents as at 31 December 14 419441913 '517521469

The accompanying notes are an integral part of these financial statements.

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NPF Mlcrojinance Bank PLC Annual Report. 31 DECEMBER 2018

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NOTES TO IBE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

1 Reporting entity NPF Microfinance Bank Pie. ("the Bank") is a public limited liability company domiciled in Nigeria. The Bank's registered offjce is1at Aliyu Atta House, I lkoyi Road, Obalende, Lagos. The Bank is engaged in the provision of banking services to members of the Police community, to poor and low income households and micro­ enterprises of the public at large. Such services include retail banking, granting ofloans, advances and allied services. The Bank currently operates from its registered office and has twenty-eight (28) branches located at Obalende, lkeja, Garki-Abuja, Wuse-Abuja, Port-Harcourt, Kano, Osogbo, Benin, Akure, Onitsha, Sokoto, Lokoja, Lafia, Bauchi, Yola, Enugu, Kaduna, Oji River, Ibadan, Abeokuta, lkorodu, Tejuosho, Asaba, Calabar, Aba, Aswani, Awka and Port Harcourt 2.

Changes in accounting policies , The Bank has consistently applied the accounting policies as set out in note 3 to all periods presented in these financial statements. There were new standards and amendments to standards that affected annual periods beginning I January 2018 adopted by the Bank as follows:

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a) IFRS 9 Financial Instruments

On 24 July 2014, the IASB issues IFRS 9 Financial Instruments, which addresses impairment, classification, measurement and hedge accounting. The Bank has adopted IFRS 9 as issued by the IASB with a date of transition of I January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The Bank did not early adopt IFRS 9 in previous periods. As permitted by the transitional provision of IFRS 9, the Bank elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities as at date of transition were recognised in the opening retained earnings and other reserves of the current period. The Bank does not currently apply hedge accounting. Based on the current assessment, the only significant impact on the Bank's balance sheet of equity is as a result of the effect of applying the impairment requirements of!FRS 9.

Classification and measurement of financial assets and financial liabilities

IFRS 9 contains three principal measurement categories for financial assets, namely: Amortised Cost, Fair Value through Other, Comprehensive Income (FVOCI), and Fair Value through Profit or Loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous !AS 39 categories of held to maturity, loans and receivables and available-for-sale financial instruments. For non-derivative financial liabilities designated at fair value through profit or loss, it requires that the credit risk and component of fair value gains and losses be separated and included in OCI rather than the income statement. The Bank does not currently have such instruments.

The following table shows the original measurement categories in accordance with !AS 39 and the new measurement categories under IFRS 9 for the Bank's financial assets and financial liabilities.

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In thousands ofnaira Financial assets

Cash and cash equivalents Pledged assets Loans and advances to Investment securities Trade and other receivables

Original classification New classification Note under IAS 39 underIFRS9

14 Loans and receivables Amortised cost

15 Loans and receivables Amortised cost

16(b) . Loans and receivables Amortised cost

17(a) FVTPL FVTPL

18 Loans and receivables Amortised cost

Original carrying New carrying amount amount under IAS 39 under IFRS 9

Financial liabilities Deposits from customers Borrowing Other liabilities

20 Other financial 23 Other financial 22 Other financial

Amortised cost Amortised cost Amortised cost

5,752,469 5,630,389 409,674 409,445

9,008,675 9,099,600 16,681 16,681 -,

55,193 57,366 15,242,692 15,213,481

9,126,494 9,126,494 1,550,468 1,550,468

99,317 99,317 10,776,279 10,776,279

Total financial assets

J Total financial liabilities

The Bank's accounting policies on the classification of financial instruments under IFRS 9 are set out in Note 3f{ii). The application of these policies resulted in the classification set out in the table above and explained below.

Before the adoption of IFRS 9, the Bank classified its cash and bank balances, Treasury bills, loan portfolio and other receivables that are not quoted as loans and receivables. On transiting to IFRS 9, the Bank assessed its loan portfolio to have contractual terms that are consistent with basic lending !ITTangements, and to have a business model of holding to collect contractual cash flows which meets the solely payments of principal and interest (SPPI) test. Accordingly, these loans have been classified as measured at amortised cost. These loan portfolios are still presented in the statement of financial position as 'Loans and advances to customers'. ' The cash and bank balances, Treasury bills and other receivables also indicate a business model of holding to collect contractual cash flows which meets the SPPI test. Therefore, they have been classified as measured at amortised cost. :

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I NPF Microjinance Bank PLC I Annual Report - 31 DECEMBER 2018

The table below shows the reconciliation of the carrying amounts of financial assets under !AS 39 to their carrying amounts under IFRS 9.

IAS 39 carrying IFRS 9 /L~ing amount amount

31 December 2017 Reclassification Remeasurement 1 Janu;ary 2018

J

In thousands ofnaira Amortised cost Cash and cash balances Brought forward: Loans and receivables Remeasurement (3,179)

I , ~.633;568 (3,179)

5,633,568

Carried forward: Amortised 5,633,568 (3,179) 5,630,389

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Pledged assets Brought forward: Loans and receivables Remeasurement

409,674 (229)

409,674 (229)

Carried forward: Amortised 409,674 (229) 409,445

Loans and advances to customers Brought forwards: Loans and receivables Remeasurement

9,008,675 90,925

9,008,675 90,925

Carried forward: Amortised 9,008,675 90,925 9,099,600

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Trade and other receivables Brought forward: Loans and receivables Remeasurement

55,193 2,173

55,193 2,173

J Carried forward: Amortised 55,193 2,173 57,366

FVTPL Investment securities Brought forward: FVTPL Remeasurement

16,681 16,681

Carried forward: FVTPL 16,681 16,681

Total amortised cost 15,123,791 89,690 15,213,481

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Impairment of financial assets

IFRS 9 replaces the 'incurred loss' model in !AS 39 with an 'expected credit loss' (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investment in equity instruments. Under IFRS 9, credit losses are recognised earlier than under !AS 39.

The Bank applies a three-stage approach to measuring expected credit losses (ECL) on debt instruments accounted for at amortised cost, FVOCI, loan commitment and financial guarantee contracts. Assets migrate through the following three stages based on the change in credit quality since initial recognition.

(i) Stage I When a loan is originated or purchased, ECLs resulting from default events that are possible within the next 12 months are recognised (12- month ECL) and a loss allowance is established. On subsequent reporting dates, 12-month ECL also applies to existing loans with no significant increase in credit risk since their initial recognition. Interest income is calculated on the loan's gross carrying amount (that is, without deduction for ECLs). In determining whether a significant increase in credit risk has occurred since initial recognition, the Bank assesses the change, if any, in the risk of default over the expected life of the loan (that is, the change in the probability of default, as opposed to the amount ofECLs).

Stage 2 Where the credit risk has increased significantly, the financial assets are transferred to stage 2 and an impairment equal to the.lifetime expected credit losses is recognised. The calculation of interest income is the same as in stage I. Stage 3: Where the financial asset'~ credit risk increases to the point where it is considered credit-impaired, interest income is calculated based on the asset's amortised cost (that is, the gross carrying amount less the loss allowance). Lifetime ECLs are recognised, as in stage 2.

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For assets in the scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more vola ile. The following table analyses the impact of transition to IFRS 9 on retained earnings and the regulatory risk reserve. There is no in\pact bn other components of eauitv. I /

Impact of adopting · IFRS 9 at 1 January , I

In thousands ofnaira 2018 Retained earnings Closing balance under !AS 39 (31 December 2017) Recognition of expected credit losses under IFRS 9 for cash and cash balances Recognition of expected credit losses under IFRS 9 for pledged assets Recognition of expected credit losses under IFRS 9 for loans and advances Recognition of expected credit losses under IFRS 9 for investment securities Recognition of expected credit losses under IFRS 9 for other receivables

728,276 (3,179) (229)

90,925

2,173

Recognition of effect of IFRS 9 transitional adjustment under regulatory risk reserve 89,690

(90,925) Opening balance under IFRS 9 (I January 2018) 727,041

Reg11/atory risk reserve Closing balance under !AS 39 (31 December 2017) Recognition of effect of IFRS 9 transitional adjustment under regulatory risk reserve

139,090 90,925

Opening balance under IFRS 9 ( I January 2018) 230,015

b) IFRS 15 Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, effective for periods beginning on I January 2018 with early adoption permitted. IFRS 15 defines principles for recognising revenue and will be applicable to all contracts to customers. However, interest and fee income integral to financial instruments and leases will continue to fall outside the scope of IFRS 15 and will be regulated by the other applicable standards (e.g. IFRS 9 and IFRS 16 Leases).

Revenue under IFRS 15 needs to be recognised as goods and services are transferred, to the extent that the transferor anticipates entitlement to goods and services. The standard also specifies a comprehensive set of disclosure requirements regarding the nature, extent and timing as well as any uncertainty of revenue and the corresponding cash flows with customers.

The Bank has adopted IFRS 15 from I January 2018. However, the adoption of IFRS 15 did not result in any adjustments to the amounts recognised in the financial statements as the Bank's previous accounting treatment is in line with the requirements ofIFRS 15. ;

The standard did not have any significant impact on the Bank's financial statements.

3 Significant Accounting Policies The Bank has consistently applied the following accounting policies to all periods presented in these financial statements, unless otherwise stated. The principal accounting policies adopted in the preparation of these financial statements are set out below.

(a) Basis of preparation (i) Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by International Accounting Standards Board (IASB) and in the manner required by the Companies and Allied Matters Act, Cap C20, Laws of'the Federation of Nigeria, 2004, the Financial Reporting Council of Nigeria Act, 2011, the Banks and Other Financial Institutions Act, Cap0B3, Laws of the Federation of Nigeria, 2004 and relevant Central Bank of Nigeria (CBN) guidelines and circulars. The IFRS accounting policies have been consistently applied to all periods presented.

The financial statements were approved by the directors on 28 May 2019.

(ii) Basis of measurement These financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

• Investment securities measured at FVTOCI • Loans and receivables from customers measured at amortised cost • Borrowings measured at amortised cost

(iii) Functional and presentation currency These financial statements are presented in Naira, which is the Bank's functional currency. Except where indicated, financial information presented in Naira has been rounded to the nearest thousand.

(iv) Use of estimates and judgments The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and assobiated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources, Actual results

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NPF Microfinance Bank PLC Annual Report» 31 DECEMBER 2018

Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognized in the ~eriod in which the estimate is revised and in any future periods affected. I Information about significant areas of estimation uncertainties and critical judgments in applying accounting policies that liave the most significant effect on the amounts recognised in the financial statements are described in note 5. I 1

(b) Interest income and expense - Interest income and expense on financial instruments are recognised in profit or loss using the effective interest method.

The 'effective interest rate' is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

- the gross carrying amount of the financial asset; or - the amortised cost of the financial liability.

When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Bank estimates future cash flows considering all contractual terms of the financial instruments, but not ECL. For purchased or originated credit­ impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL. '

The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

The 'amortised cost' of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance '(or impairment allowance before I January 2018). The 'gross carrying amount ofa financial asset' is the amortised cost ofa financial asset before adjusting for any expected credit loss allowance. '

Interest income and expense are recognised in profit or loss using the effective interest method. The effective interest rate was the rate that exactly discounted the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimated future cash flows considering all contractual terms of the financial instrument, but not future credit losses. ·

The calculation of the effective interest rate included transaction costs and fees and points paid or received that were an integral part of the effective interest rate. Transaction costs included incremental costs that were directly attributable to the acquisition or issue of a financial asset or financial liability. '

(c) Fees and commission Fees and commission income that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate which is used in the computation of interest income.

Other fees and commission income, including loan account servicing fees, investment management fees, etc. are recognised as the related services are performed. _

(d) Other income The total sum includes income from income on salary administration, service fees and charges, profit on disposal of property and equipment and dividend income. They are recognised as the related services are performed and when the entity's right to receive payment is established.

(e) Tax expense Tax expense comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that they relate to items recognised directly in equity or in other comprehensive income.

(i) Current income tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of the previous years. The amount of the current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.

Where the Bank has tax losses that can be relieved only by carry-forward against taxable profits of future periods, a deductible temporary difference arises. Those losses carried forward are set off against deferred tax liabilities carried in the statement of financial position.

The Bank evaluates positions stated in tax returns, ensuring information disclosed are in agreement with the underlying tax liability, which has been adequately provided for in the financial statements.

(ii) Deferred tax Deferred income tax is provided in full, using the liability method, on all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred income tax is determined using tax rates enacted or substantively enacted at the reporting date and are expected to apply when the related deferred tax liability is settled.

Deferred tax is not recognised for the following temporary differences: I

- temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; / ;

- temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foresl/eable future; and

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NPF Micro.finance Bank PLC Annual Reporl - 31 DECEMBER 2018

- taxable temporary differences arising on the initial recognition of goodwill.

The measurement of deferred tax reflects the tax consequences that would follow 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. / /

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset them, and they relate to taxes levied by the same tax authority on the same taxable entity or on different tax entities, but they intend to settle deferred tax liabilities and assets on a net basi~ or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which it can be utilised. Deferred tax assets are reviewed at each reporting date and' are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(iii) Tax exposures ' In determining the amount of current and deferred tax, the Bank takes into account the impact of uncertain tax position and whether additional

taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Bank to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.

(f) Financial assets and financial liabilities (i) Recognition and initial measurement The Bank initially recognises loans andadvances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments are recognised on the trade date, which is the date the Bank becomes a party to the contractual provisions of the instruments.

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

(ii) Classification Financial assets - Policy applicable from 1 January 2018 On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL. 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.

A debt instrument is measured at FVOCI only 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 SPPI.

' On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other financial assets not classified as measured at amortised cost or FVOCI are measured at FVTPL.

In addition, on initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements t~ be measured at amortised cost or at FVOCI as at FVTPL_if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Business model assessment: policy applicable from 1 January 2018 The Bank makes an assessment of the objective of a business model in which an 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:

i) 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 income, 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 realising cash flows through the sale of the assets;

ii) how the performances of the portfolio is evaluated and reported to the Bank's management;

iii) the risks that affect the performance of the business model (and the financial assets held within that business model) as its strategy for how those risks are managed; ' iv) 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 v) 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 realised.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured 111 FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

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J NPF Microfrnance Bank PLC Annual Report. 31 DECF.MBER 20/8

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Assessment of whether contractual cash flows are solely payments of principal and interest (SPPI): policy applicable from 1 /Janurry 2018 · I 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

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).

The Bank holds a portfolio of long-term fixed-rate loans for which the Bank has the option to propose to revise the interest rate at periodic reset dates. These reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Bank has determined that the contractual cash flows of these loans are SPPI because the option varies the interest rate to take consideration of the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding. Financial assets - subsequent measurement and gains and losses: Policy applicable from 1 January 2018

Subsequent to initial measurement, financial assets are measured either at fair value or amortised cost depending on their classification, using the effective interest method.. '

Gains and losses on such financial assets are never reclassified to profit and loss and no impairment is recognised in profit or loss. Dividend are recognised in profit or loss unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in other comprehensive income rocn Cumulative gains and losses recognised in OCI are transferred to retained earnings on disposal of the asset.

Financial assets - subsequent measurement and gains and losses: Policy applicable before 1 January 2018 The Bank classified its financial assets into one of the following categories: - loans and receivables; - held-to-maturity; - available-for-sale; and - at FVTPL, and within this category as:

- held-for-trading; or - designated as at FVTPL

Subsequent to initial measurement, financial assets are measured or accounted for depending on their classification as either held-to-maturity, FVTPL or available-for-sale. All available-for-sale financial assets are measured at fair value after initial recognition. Unquoted, equity securities whose fair value cannot be measured reliably are carried at cost.

Interest income on AFS is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend.

Other fair value changes are recognised in other comprehensive income and presented in the fair value reserve within equity. When available-for­ sale investment is sold, the gain or loss accumulated in equity is reclassified to profit and loss.

Loans and receivables were initially measured at fair value plus incremental direct transaction cost, and subsequently measured at their amortised cost using effective interest method.

Financial liabilities: Classification, subsequent measurement and gain and losses

The Bank classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost or FVTPL.

After initial measurement, debt issued and other borrowed funds are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issued funds, and cost that are an integral part of the effective interest rate.

In both the current and prior period, all financial liabilities are classified and subsequently measured at amortised cost.

Derecognition i) Financial assets

The Bank derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial assets are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability in the statement of financial position. ·

On derecognition of the financial asset, the difference between the carrying amount of the asset ( or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.

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i I I NPF Microfinance Bank PLC / Annual Report - 3/ DECEMBER 2018

Financial assets transferred to external parties that do not qualify for de-recognition are reclassified in the statement of financial position to assets pledged as collateral, if the transferee has received the right to sell or re-pledge them in the event of default from agreed terms. Initial recognition of assets pledged as collateral is at fair value, whilst subsequently measured at amortized cost or fair value as appropriaje. /

ii) Financial liabilities I

The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Bank's trading activity.

iii) Reclassifications 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.

(iv) Modifications of financial assets and financial liabilities Policy applicable from 1 January 2018 Financial assets If the terms of a financial asset are modified, then the Bank evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs.

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If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Bank plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place.

If the cash flow of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss.

If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income

Financial liabilities 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.

Policy applicable before 1 January

Financial assets If the terms of a financial asset were modified because of financial difficulties of the borrower and the asset was not derecognised, then impairment of the asset was measured using the premodification interest rate.

Financial liabilities

The Bank derecognised 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.

(v) Impairment Policy applicable from 1 January 2018 The Bank recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL:

- financial assets that are debt instruments; - lease receivables; - financial guarantee contracts issued; and - loan commitments issued.

No impairment loss is recognised on equity investments.

The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month - debt investment securities that are determined to have low credit risk at the reporting date; and I . - other financial instruments (other than lease receivables) on which credit risk has not increased significantly since their initiJI recJgnition .

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NPF Mlcrofinance Bank PLC Annual Report-31 DECEMBER 20/8

Tho BW considers a debt '"''""'"" security to haw I= ""'' risk who, I• credit risk rating Is equivalent to the globally l ood definition of 'investment grade'. The Bank does not apply the low credit risk exemption to any other financial instruments. / /

12-month ECL are the portion ofECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as 'Stage I financial instruments'. / /

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Life-time ECL are the ECL that result from all possible default events over the expected life of the financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as 'Stage 2 financial instruments.

Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: - financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive);

- financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;

- undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Bank expects to receive; and ·

- financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover. Restructured financial assets

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and the ECL are measured as follows.

- If the expected restructuring will not result in derecogintion of the existing asset, then the expected cash flows arising from the modified financial assets are included in calculating the cash shortfalls from the existing asset.

- If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new assets 'is treated as the final cash flow from the existing financial asset at the time of its recognition. The amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effJctive rate of the existing financial asset.

Credit-impaired financial assets At each reporting date, the Bank assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as 'Stage 3 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.

Evidence that a financial asset is credit-impaired includes the following observable data: - 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; - it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or - the disappearance of an active market for a security because of financial difficulties.

A loan that has been renegotiated due to a deterioration in the borrower's condition is usually considered to be credit-impair~d unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired.

Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: - financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;

- loan commitments and financial guarantee contracts: generally, as a provision;

- where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the pCL 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 lo,~s allowance over the gross amount of the drawn component is presented as a provision; and

- debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve.

Write-off Loans and debt securities are written off ( either partially or in full) when there is no reasonable expectation of recovering a financial assets in its entirety or a portion thereof. This is generally 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 write-off.

Policy applicable before 1 January 2018 I '

Objective evidence of impairment . I : At each reporting date, the Bank assessed whether there was objective evidence that financial assets not carried at FVTPIJ wer~ impaired. A financial asset or a group of financial assets was 'impaired' when objective evidence demonstrated that a loss event had occu~ed after the initial recognition of the asset(s) and that the loss event had an impact on the future cash flows of the asset(s) that could be estimated! reliably.

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NPF Microjinance Bank PLC .Annual Report. 31 DECEMBER 2018

In addition, a retail loan that was overdue for 90 days or more was considered impaired.

Objective evidence that financial assets were impaired included: - significant financial difficulty of a borrower or issuer; - default or delinquency by a borrower; - the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;

- indications that a borrower or issuer would enter bankruptcy; - the disappearance of an active market for a security; or - observable data relating to a group of assets, such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlated with defaults in the group.

Individual or collective assessment

An individual measurement of impairment was based on management's best estimate ofthe present value of the cash flows that were expected to be received. In estimating these cash flows, management made judgements about a debtor's financial situation and the net realisable value of any underlying collateral. Each impaired asset was assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable were independently approved by the Credit Risk function.

The collective allowance for groups of homogeneous loans was established using statistical methods such as roll rate methodology or, for small portfolios with insufficient information, a formula approach based on historical loss rate experience. The roll rate methodology used .statistical analysis of historical data on delinquency to estimate the amount of loss. Management applied judgement to ensure that the estimate of loss arrived at on the basis of historical information was appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates were regularly benchmarked against actual loss experience.

The IBNR allowance covered credit losses inherent in portfolios of loans and advances, and held-to-maturity investment securities with similar credit risk characteristics when there was objective evidence to suggest that they contained impaired items but the individual impaired items could not yet be identified.

In assessing the need for collective loss allowance, management considered factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions were made to define how inherent losses were modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depended on the model assumptions and parameters used in determining the collective allowance '

Loans that were subject to a collective IBNR provision were not considered impaired.

Measurement of impairment Impairment losses on assets measured at amortised cost were calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. Impairment losses on available-for-sale assets were calculated as the difference between the carrying amount and the fair value.

Reversal of impairment If, in a subsequent period, the amount of the impairment loss decreased and the decrease could be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal was recognised in profit or·loss under impairment charge for credit losses.

Write-off The Bank wrote off a loan or an investment debt security, either partially or in full, and any related allowance for impairment losses, when Bank Credit determined that there was no realistic prospect of recovery.

(g) Cash and cash equivalents Cash and cash equivalents include bank notes and coins on hand, unrestricted balances held with central groups and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. The reconciliation of the opening cash and cash equivalents to the closing cash and cash equivalents in the statement of cash flows is done using the indirect method.

(h) Pledged assets Financial assets transferred to external parties that do not qualify for de-recognition are reclassified in the statement of financial position from their original class held-for-trading to assets pledged as collateral, if the transferee has received the right to sell or re-pledge them inthe event of default from agreed terms. Initial measurement of assets pledged as collateral is at fair value while subsequent measure is at amortized cost.

(i) Property and equipment

(i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of

I ' property and equipment. j :

The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposaf with: the carrying amount of the item of property and equipment and are recognized net within other income in profit or loss.

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NPF M"u:rojinance Bank PLC Annual Rtporl - 31 DECEMBER 2018

The assets' carrying values and useful lives are reviewed, and written down if appropriate, at each date of the statement of financial losition. Assets are impaired whenever events or changes in circumstances indicate that the carrying amount is less than the recoverable 11ount; see note (m) on impairment of non-financial assets.

(ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable 'that tre future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the] replaced part is derecognised. The costs of the day-to- day servicing of property and equipment are recognised in profit or loss as incurred. '

(iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis to write down the cost of each asset, to their residual values over the estimated useful lives of each part ofan item of property and equipment.

Depreciation begins when an asset is available for use and ceases at the earlier of the date that the asset is derecognised or classified as held for sale in accordance with IFRS 5. A non-current asset or disposal group is not depreciated while it is classified as held for sale.

The estimated useful lives for the current and comparative periods of significant items of property and equipment are as follows: Buildings 50 years Computer equipment Furniture, fittings and office equipment Motor vehicles

3 years 5 years 4 years

Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate.

(iv) De-recognition An item of property and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised.

(j) Impairment of non-financial assets The Bank's non-financial assets with carrying amounts other than investment property and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is· estimated. For goodwill and intangible assets that have indefinite useful lives or that are available for use, the recoverable amount is estimated each year at the same time.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset of the Bank that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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.

(k) Deposits and borrowings Deposits and borrowings are the Bank's sources of funding. When the Bank sells a financial asset and simultaneously enters into a "repo" or "lending" agreement to repurchase the asset ( or a similar asset) at a fixed price on a future date, the arrangement is accounted for as a deposit, and the underlying asset continues to be recognised in the Bank's financial statements.

Deposits and borrowings are initially measured at fair value plus or minus transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Bank chooses to carry the liabilities at fair value through profit or loss.

(I) Prepayment and other receivables Prepayments include costs paid in relation to subsequent financial periods and are measured at cost less amortization for the period. The Bank recognises prepaid expense in the accounting period in which it is paid. Other assets comprise other recoverables.

(m) Provisions Provisions for restructuring costs and legal claims are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The Bank recognises no provisions for future operating losses.

(n) Expenditure Expenses are recognised in the profit or loss as they are incurred unless they create an asset from which future economic benefits will flow to the Bank An expected loss on a contract is recognised immediately in profit or loss.

(o) Employee benefits (i) Defined contribution p.Jan A defined contribution plan is a post-employment benefits plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised.as personnel expenses in profit or loss in the period during which related services are rendered. Prepaid contributions are recognised as an asset' to the extent that a cash refund or a reduction in the future payments is available.

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NPF Microfinance Bank PLC Annual Report - 3/ DECEMBER 20/8

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(ii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provide . A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal br coristructive obligation to pay this amount as a result of past service provided by the employees and the obligation can be estimated reliably. I I

(p) Share capital and reserves (i) Share issue costs Incremental costs directly attributable to the issue ofan equity instrument are deducted from the initial measurement of the equity instrument.

(ii) Dividend on the Bank's ordinary shares Dividends on ordinary shares are recognised in equity in the period in ~hich they are approved by the Bank's shareholders. Di~dends for the year that are declared after the date of the statement of financial position are dealt with in the subsequent events note. Dividends proposed by the Directors but not yet approved by members are disclosed in the financial statements in accordance with the requirements of the Companies and Allied Matters Act of Nigeria.

(q) Earnings per share The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(r) Segment reportlng Segment information is provided on the basis of operating and reportable segments in the manner the Bank manages its business. 1 The financial statements of the Bank reflect the management structure of the Bank and the way in which the Bank's management reviews business performance. Invariably, management considers its retail banking operations, whose results are shown in the statement of financial position and statement of comprehensive income, as its only operating segment.

(s) New standards and interpretations not yet adopted A number of new Standards, Amendments to Standards, and Interpretations are effective for annual periods beginning on or, after 1 January 2019 and early application is permitted; however, the Bank has not applied the new or amended standards in preparing these financial

Those Standards, Amendments to Standards, and Interpretations which may be relevant to the Bank are set out below:

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Standard not yet effective Summary of the requirements and impact assessment Effective date

IFRS 16 Leases This standard sets out the principles for the recognition, measurement, presentation 1 January 2019 Early and disclosure ofleases for both parties to a contract, i.e. the customer ('lessee') and adoption is permitted. the supplier ('lessor'). IFRS 16 eliminates the classification of leases as required by IAS 17 and introduces a single lease accounting model.

Applying that model, a lessee is required to recognise: - assets and liabilities 'for leases with a term of more than 12 months, unless the underlying assets is oflow value; - depreciation of lease assets separately from interest on lease liabilities in profit or loss. For the lessor, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases or finance leases, and to account for these two types of leasers differently. The standard is not expected to have any significant impact on the Bank.

IFRIC 23 Uncertainty over These amendments provide clarity on the accounting for income tax treatments that I January 2019 Early income tax treatments have yet to be accepted by the tax authorities. adoption is permitted.

The amendment clarifies that the key test for determining the amounts to be recognised in the financial statements is whether it is probable that the tax authority will accept the chosen tax treatment; this could result in an increase in

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the tax liability or a recognition of an asset depending on the current practice of the Bank.

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The following new Standards and Amendments are not expected to have a significant impact on the Bank's financial statements:

Effective date Standard/Amendment With early adoption permitted, periods beginning on or after

I January 2019 Prepayment Features with Negative Compensation (Amendments to IFRS 9) Plan Amendment, Curtailment or Settlement (Amendments to !AS 19) Annual Improvements to IFRS Standards 2015/2017 Cycle various standards

1 January 2020 Definition of Material (Amendments to !AS 1 and !AS 8) Amendments to References to Conceptual Framework in IFRS Standards

I January 2019 Long-term interests in associates and joint ventures (Amendment to !AS 28) I January 2020 Definition of a Business (Amendments to IFRS 3) 1 January 2022 IFRS 17 Insurance Contracts No effective date; indefinitely Sale or Contribution of Assets between an Investor and its Associate or Joint deferred Venture (Amendments to IFRS JO and !AS 28)

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NPF Mlcrojinance Bank PLC Annual Reporl - 3/ DECEMBER 20/8

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NPF Microfmance Bani PLC Annua/R~porl • JI DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER2018

4 Financial risk management (a) Introduction and overview

The Board of Directors has overall responsibility for the establishment and oversight of the Bank's risk management framework The Bank's risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect the changes in market conditions and the Bank's activities. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Board also oversees how management monitors compliance with the risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Bank. The Board is assisted in its oversight role by the Board Risk Management Committee, which undertakes both regular and ad-hoc reviews ofrisk management controls and procedures. The risk management framework of the Bank identifies risk culture as the foundation upon which the pillars of risk and control processes and extreme events management lie.

The general organisational structure can be seen below:

Head of ERM --- Market Risk and ALM

The Bank's risk management governance structure is as shown below:

Board Audit Committee

Board Risk Management Board

Internal Audit (Risk Based) - Enterprise Risk

Management ALCO

- Credit and Investmen Risk Management

Operational Risk

Marketing and ALM Risk Management

The Board of Directors are responsible for developing and monitoring the Bank's risk management policies.

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NPF Microfmance Bank PLC Annua/Report-3/ DECEAIB_F.R. 20/8

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(i) The Bank's approach to risk The Bank addresses the challenge of risks comprehensively through an enterprise-wide risk management framework by applying leading practices that is supported by a governance structure consisting of the board and executive management committees. The Board drives the risk goverrlance and compliance process through management. The audit committee provides oversight on the systems of internal control, financial reporting and compliance, The Board also sets the risk philosophy, policies and strategies as well as provides guidance on the various risk elements and their management. i Executive management drives the management of the financial risks (market, liquidity and credit risk}, operational risks as well as strategic and reputational risks.

The key features of the Bank's risk management framework are: • The Board of Directors provide overall risk management direction and oversight. • The Bank's risk appetite is approved by the Board of Directors. • Risk management is embedded in the Bank as an intrinsic process and is a core competency ofall its employees. • The Bank manages its credit, market, operational and liquidity risks in a co-ordinated manner within the organization. • The Bank's risk management function is independent of the business divisions. • The Bank's internal audit function reports to the Board; providing independent validation of the business units' compliance with risk policies and procedures and the adequacy and effectiveness of the risk management framework on an enterprise-wide basis.

The Board of Directors is committed to managing compliance with a framework to enforce compliance with applicable laws, rules and standards issued by the industry regulators and other law enforcement agencies, market conventions, codes of practices promoted by industry associations and internal policies. The compliance function, under the leadership of the Head oflnternal audit of the Bank has put in place a compliance framework, which includes: • Comprehensive compliance manual, the manual details the roles and responsibilities ofall stakeholders in the compliance process, • Review and analysis ofall relevant laws and regulations, which are adopted into policy statements to ensure business is conducted professionally.

(ii) Risk Appetite The Bank's risk appetite is reviewed by the Board of Directors annually, at a level that minimizes erosion of earnings or capital due to avoidable losses or from frauds and operational inefficiencies. This reflects the conservative nature of the Bank as far as risk taking is concerned.

(iii) Risk Management Philosophy, Culture and Objectives The Bank considers effective risk management to be the foundation ofa long lasting institution. -The Bank continues to adopt a holistic and integrated approach to risk management and therefore, brings all risks together under one or a limited number of oversight functions. • Risk management is a shared responsibility. Therefore the Bank aims to build a shared perspective on risks that is grounded in consensus. -There is clear segregation of duties between market facing business units and risk management functions. • Risk Management is governed by well defined policies ·which are clearly communicated within the Bank. • Risk related issues are taken into consideration in all business decisions. The Bank shall continually strive to maintain a conservative balance between risk and revenue consideration.

The Bank has exposure to the following risks from its financial instruments: - Credit risk - Liquidity risk - Market risk

(b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Bank's loans and receivables from customers.

The Bank has exposure to credit risk as it routinely executes transactions with counterparties which comprise mainly of public service employers and employees as well as private sector employees.

(i) Credit risk limits The Bank applies credit risk limits, among other techniques in managing credit risk. This is the practice of stipulating a maximum amount that the individual or counterparty can obtain as loan. Internal and regulatory limits are strictly adhered to. Through this, the Bank not only protects itself, but also in a sense, protects the counterparty from borrowing more than they are capable of paying.

The Bank continues to focus on its concentration and intrinsic risks and further manage them to a more comfortable level. This is very important due to the serious risk implications that intrinsic and concentration risk pose to the Bank. A thorough analysis of economic factors, market forecasting and prediction based on historical evidence is used to mitigate the crystallization of these risks.

The Bank has in place various portfolio concentration limits (which is subject to periodic review). These limits are closely monitored and reported on from time to time.

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NPF Microfinance Bank PLC Annua/Reporl-3/ DECEMBER 2018

The Bank's internal credit approval limits for the various authority levels are as indicated below.

Annroval Limit RANK MICRO MACRO Officer NI00,000 N200.000 Assistant Manager N200 000 N300.000 Deoutv Manager N200 000 N400000 Manager N200 000 NS00,000 Senior Manager N200 000 N650 000 AGM/GM N200 000 NIOOO 000 Regional Head N500 000 NI 500000 Executive Director N700.000 N2 000 000 Managing Director (MD) Nl,000,000 N2,500,000

NIL Above N2.5 million to NI 0 Board Risk Committee million Full Board NIL Above NIO million

_; These internal approval limits are set and approved by the Bank's Board and are reviewed regularly as the state of affairs of the Bank and the wider financial environment demands. However, approval of Micro credits resides with Regional Heads and Head Office.

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 probability of default (PD) as at the reporting date; with - the remaining lifetime PD for the point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes

in prepayment expectations).

Credit risk grades

The Bank allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower.

Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades I and 2 is smaller than the difference between credit risk grades 2 and 3.

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Each exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to on­ going monitoring, which may result in an exposure being moved to a different credit risk grade.

Corporate exposures - Information obtained during periodic review of customer files - e.g. audited financial statements, management accounts, budgets and projections.

Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service coverage, compliance with covenants, quality of management, senior management changes;

- data from reference agencies, pre_ss articles, changes in external credit ratings; - actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities.

Retail exposures

- Internally collected data on customer behaviour - e.g. utilisation of credit card and facilities; - external data from credit reference agencies, including industry-standard credit scores,

All exposures

- payment record - this includes overdue status as well as a range of variables about payment ratios; - utilisation of the granted limit; - requests for and granting of forbearance; and - existing and forecast changes in business, financial and economic conditions.

Generating the term structure of PD

Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Bank collects performance and default information about its credit risk exposures analysed by jurisdiction or region and by type of product and borrower as well as by credit risk grading. For some portfolios, information purchased from external credit reference agencies is also used.

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The Bank employs statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.

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AnnualReport-31 DEC!fMBER 1018

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Determination of whether credit risk has increased significantly

The Bank assesses whether credit risk has increased significantly since initial recognition at each reporting date. Determining whether an increase in credit risk is significant depends on the characteristics of the financial instrument and the borrower, and the geographical region. 1

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The credit risk may also be deemed to have increased significantly since initial recognition based on qualitative factors linked to the Bank's credit risk management processes that may not otherwise be fully reflected in its quantitative analysis on a timely basis. This will be the case for exposures that meet certain heightened risk criteria, such as placement on a watch list. Such qualitative factors are based on its expert judgment and relevant historical experiences.

If there is evidence that there is no longer a significant increase in credit risk relative to initial recognition, then the loss allowance on an instrument returns to being measured as 12-month ECL. Some qualitative indicators ofan increase in credit risk, such as delinquency or forbearance, may be indicative ofan increased risk of default that persists after the indicator itself has ceased to exist. In these cases, the Bank determines a probation period during which the financial asset is required to demonstrate good behaviour to provide evidence that its credit risk has declined sufficiently. When contractual terms of a loan have been modified, evidence that the criteria for recognising lifetime ECL are no longer met includes a history of up-to-date payment performance against the modified contractual terms.

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The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that:

- the criteria are capable of identifying significant increases in credit risk before an exposure is in default; - the criteria do not align with the point in time when an asset becomes 30 days past due; - the average time between the identification ofa significant increase in credit risk and default appears reasonable; - exposures are not generally transferred directly from 12-month ECL measurement to credit-impaired; and - there is no unwarranted volatility in loss allowance from transfers between 12-month PD (Stage l) and lifetime PD (Stage 2).

Definition of default

The Bank considers a financial asset to be in default when: - the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is

- the borrower is more than 90 days past due on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised ofa limit smaller than the current amount outstanding; or

- it is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower's inability to pay its credit obligations.

In assessing whether a borrower is in default, the Bank considers indicators that are: - qualitative: e.g. breaches of contract; - quantitative: e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and - based on data developed internally and obtained from external sources.

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Bank for regulatory capital purposes.

Measurement of ECL - Explanation of input, assumption and estimation techniques

The Expected Credit Loss (ECL) is measured on either a 12-month or lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Expected credit losses are the discounted product of the Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD), defined as follows:

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- The PD represents the likelihood of a borrower defaulting on its financial obligation either over the next 12 months ( 12M PD), or over the remaining lifetime (Lifetime PD) of the obligation.

- EAD is based on the amounts the Bank expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Bank includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.

- Loss Given Default (LGD) represents the Bank's expectation of the extent ofloss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage ofloss expected to be made if the default occurs over the remaining expected lifetime of the loan.

The ECL is determined by projecting the PD, LGD and EAD for each future month and for each individual exposure or collective segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). This effectively calculates an ECL for each future month, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof

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 .

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39

NPF Miaofmance Bank PLC Annua/R~por1-JJ DECEJ.1BER20J8

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The 12-month and lifetime EADs are determined based on the expected payment profile, which varies by product type. - For amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower o er a 12 month or lifetime

basis. This will also be adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions aie also incorporated into the ~~ I/ - For revolving products, the exposure at default is predicted by taking current drawn balance and adding a "credit conversion fadtor'' which allows for

the expected drawdown of the remaining limit by the time of default. These assumptions vary by product type and current limit utili~ation band, based on analysis of the Bank's recent default data.

The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by product type. - For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed.

- For unsecured products, LGD's are typically set at product level due to the limited differentiation in recoveries achieved across different borrowers. These LGD's are influenced by collection strategies, including contracted debt sales and price.

Forward-looking economic information is also included in determining the 12-month and lifetime PD, EAD and LGD. These assumptions vary by product type.

(ii) Exposure to credit risk The Bank's exposure to credit risk is influenced mainly by the characteristics of the counterparties. Management considers the default risk of the industry in which the counterparty' operates based on economic factors as this may have an influence on credit risk.

The Bank is exposed to credit risk on its loans and receivables balances due from its customers in the public and private sectors .

The Bank has credit standards, policies and procedures to control and monitor intrinsic and concentration risks through all credit levels of selection, underwriting, administration and control. This include:

• Utilization of the services of portfolio managers whom are educated on the risk appetite of the Bank and thus ensure that all investments are in low risk grade securities.

• Ensuring that all investments entered are of a low to medium duration and thus minimising the risk of default. • All treasury investments undergo a formal credit analysis process that would ensure the proper appraisal of the facility. • The consequences for non-compliance with the credit policy and credit indiscipline are communicated to all staff and implemented. • All conflict of interest situations must be avoided.

(iii) Investment securities designated at FVTOCI The Bank via its portfolio managers limits its exposure to credit risk by investing only in highly liquid money market instruments with counterparties that have a good credit rating. The portfolio managers actively monitors credit ratings and ensures that the Bank has only made investments in line with the Bank's investment policy as approved by Board which approves investments in equities, placements with local banks and Federal Government Treasury Bills.

(iv) Cash and cash equivalents The Bank held cash and cash equivalents with maturity profile of less than or equal to 3 months, held with local banks and assessed to have good credit ratings based on the Bank's policy.

(v) Loans and advances to customers and other receivables

The Bank has classified loans and advances to customers and other receivables warehoused in other assets as loans and receivables. These are evaluated periodically for impairment in line with its accounting policy as disclosed in note 3(f)(v). Impairment losses have been recognized in profit or loss and reflected in an allowance account against loans and receivables. The total impairment allowance during the year ended 31 December 2018 was- approximately N531 million (31 December 2017: N342 million). These figures are inclusive of impairment allowance on other receivables.

Collateral security All financial assets held by the Bank are normally unsecured. Our comfort on the Treasury Bills is the issuer's credit rating, which is the Federal Government of Nigeria, while for the loans and advances, we obtain comfort from the fact that the loans are mostly backed by the salary accounts of serving officers domiciled with the Bank. Staff loans are also recovered through salary deductions and staff mortgage loans are secured against the property purchased.

Write-off policy The Bank writes off a loan balance when the Bank's Credit Department determines that the loan is uncollectible and had been declared delinquent and subsequently classified as lost. The write-off process is a critical component of the Bank's credit management activities. The policy requires a periodic review and identification of classified loans deemed to be uncollectible with long outstanding balances of principal and interest. The determination is made after considering information such as the continuous deterioration in the customer's financial position, such that the customer can no longer pay the obligation, or that the proceeds from the collateral will not be sufficient to pay back the entire exposure. Board approval is required for such write-off. The loan recovery department continues with its recovery efforts and any loan subsequently recovered is treated as other income.

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NPF Microjinance Bank PLC Annual Report -JI DECEMBER 2018

(viii) Maximum exposure to credit risk The carrying amount of the Bank's financial assets, which represents the maximum exposure to credit risk at the reporting date was as follows:

I I In thousands ofnaira • Note 311-Dec-18 31-Dec-17

Cash and cash equivalents Pledged assets Loans and advances to customers Investment securities

Trade and other receivables ( excluding prepayments and other assets

14 IS

16

17

. I 4,940,352 800(787

10,593,635

291,081

5,752,469 409,674

9,008,675

16,681

18 162,035 55,193

16 787 890 IS 242 692

(vii) Geographical Sectors

The following table breaks down the Bank's main credit exposure at their gross amounts (Loans and advances to customers and due from banks) as categorised by geographical region. "Due from banks" here represents current account balances with other banks, money market placements and investments in treasury bills. For this table, the Bank has allocated exposures to regions based on the region of domicile of the Bank's counterparties.

31 December 2018 31 December 2017

Due from Loans and Due from Loans and

Banks advances to Total Banks advances to Total

In thousands ofnaira customers customers

South South 354,173 1,015,668 1,369,841 305,404 815,756 1,121,160 South West 2,501,164 I 4,478,231 6,979,395 3,832,734 3,811,745 7,644,479 South East 334,833 627,932 962,765 73,807 496,705 570,512 North Central 1,184,993 3,044,596 4,229,589 1,048,465 2,505,268 3,553,733 North West 326,251 1,381,735 1,707,986 288,662 1,249,387 1,538,049 North East 146,941 576,685 723,626 84,496 432,568 517,064

4,848,355 11,124,847 15,973,202 S,633,568 9,311,429 14,944,997

(viii) Credit Quality The following table breaks down the Bank's main credit exposure at their gross amounts, as categorised by performance as at 31 December 2018 and 31 December 2017 respectively.

31 December 2018 31 December 2017

Due from Loans and Due from Loans and

Banks advances to Total Banks advances to Total

-, In thousands of naira customers customers

12 months ECL 4,848,355 10,593,635 15,441,990 5,633,568 9,008,675 14,642,243 Lifetime ECL not credit impaired 153,252 153,252 97,253 97,253 Lifetime ECL credit imeaired 377,960 377,960 205,501 205,501 Gross amount 4,848,355 11,124,847 15,973,202 5,633,568 9,311,429 14,944,997

ECL imeairment (4,5612 (531,2122 (535,7732 (302,7542 (302,7542 Carrying amount . 4,843,794 10,593,635 15,437,429 5,633,568 9,008,675 14,642,243

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NPF Microjinonu Bank PLC Annua/Reporl-31 DECEMBER 10/8 -,

(ix) Credit risk exposure

The following table sets out information about the credit quality of financial assets measured at amortised cost. Unless, specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. I / External rating grade (S&Pl ' ,

2018 2017 In thousands of N aira Stage 1 Stage 2 Stage3 Total Cash and cash equivalents AAA-A BBB-B 4,944,913 4,944,913 5,633,568 BelowB Unrated Gross carrying amount 4,944,913 4,944,913 5,633,568 Loss allowance (4,561) (4,561) Car!l!ng amount 4,940,352 4,940,352 5,633,568

2018 2017 In thousands of Naira Stage 1 Stage 2 Stage3 Total Pledged assets AAA-A BBB-B 801,383 801,383 409,674 BelowB Unrated Gross carrying amount 801,383 801,383 409,674 Loss allowance (596) (596) Car!l!ng amount 800,787 800,787 409,674

2018 2017 In thousands of N aira Stage 1 Stage 2 Stage3 Total Loans and advances AAA-A BBB-B BelowB Unrated 9 861 763 298 462 964 622 11124 847 9 311429 Gross carrying amount 9,861,763 298,462 964,622 11,124,847 9,311,429 Loss allowance (153,252) (3,785) (374,175) (531,212) (302,754)

J Car!l!ng amount 9,708,511 294,677 590,447 10,593,635 9,008,675

2018 2017 In thousands ofNaira Stage 1 Stage 2 Stage3 Total Trade and other receivables AAA-A t.J BBB-B f BelowB Unrated 162 035 162 035 55 193 Gross carrying amount 162,035 162,035 55,193 Loss allowance (158,498) (158,498) (39,595) Car!l!ng amount 3,537 3,537 ' 15,598

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NPF M',crofmanu Bank PLC

Annual Report - 31 DECEMBER 2018

(x) Loss allowance Measurement basis under IFRS 9 The following tables show reconciliation from the opening to the closing balance of the loss allowance of financial instrument. Comparative amount for 2017 represent allowance account for credit losses and reflect measurement basis under IAS 39.

31 December 2018 31 December 2017

Lifetime ECL not

credit impaired

Cash and cash equivalent Lifetime

ECLcredit impaired

Specific Collective Total Impairment Impairment 3,179

1,382

12-month ECL 3,179

1,382

Total Balance at I January Net measurement on loss allowance (see note 11) Write-offs during the year Balance at 31 December 4,561 4 561

31 December 2018 31 December 2017

Pledged assets Lifetime ECL not

credit impaired

Lifetime ECL credit impaired

Specific Collective Impairment Impairment 12-month ECL

229

367

Total 229

367

Total Balance at I January Net measurement on loss allowance (see note 11) Write-offs during the year Balance at 31 December 596 596

31 December 2018 31 December 2017

Loan and advances to customers

Lifetime ECL not

credit impaired

5,002

(1,217)

Lifetime ECLcredit impaired 78,503

Specific Collective Total Impairment Impairment Total

211,829 43,510 74,808 118,318

323,924 163,806 22,445 186,251 (4,541) (1,815) (1,815)

531,212 205 501 97 253 302,754

31 December2017

12-month ECL 128,324

24,928

Balance at I January Net measurement on loss allowance (see note 11) Write-offs during the year Balance at 31 December

300,213 (4,541)

153 252 3 785 374,175

31 December 2018

Lifetime ECL not

credit impaired

Trade and other receivables Lifetime

ECL credit impaired 37,422

121,076

Specific Collective Total Impairment Impairment 37,422

121,076

12-month ECL Total Balance at I January Net measurement on loss allowance (see note 11) Write-offs during the year Balance at 31 December 158 498 158 498

(c) Liquidity risk Liquidity risk is the potential loss arising from the Bank's inability to meet its obligations as they full due or to fund increases in assets without incurring unacceptable cost or losses. Liquidity risk is not viewed in isolation, because financial risks are not mutually exclusive and liquidity risk is often triggered by consequences of other Bank's risks such as credit, market and operational risks.

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NPF Microftnance Bank PLC Annual Report - 31 DECEMBER 10/8

(i) Liquidity risk management process j

The Bank has a sound and robust liquidity risk management framework that ensures that sufficient liquidity, including a cushion of unencumbered and high quality liquid assets, are maintained at all times to enable the Bank withstand a range of stress events, including thosJ that/might involve loss or impairment of funding sources. I

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The Bank's liquidity risk exposure is monitored and managed by senior management on a regular basis. This process includes: - Projecting cash flows and considering the level ofliquid assets necessary in relation thereto - Monitoring balance sheet liquidity ratios against internal and regulatory requirements; - Managing the concentration and profile of debt maturities; - Maintaining liquidity and funding contingency plans. These plans identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises while minimizing any adverse long-term implications for the business.

· - Regular conduct of stress testing, coupled with testing of contingency funding plans from time to time.

The Bank maintains adequate liquid assets sufficient to manage any liquidity stress situation. The liquidity ratio remains one of the best among its peer companies.

(ii) Maturity analysis/or financial liabilities The following are the remaining maturities of financial liabilities at the reporting date. These are the carrying amounts which includes interest payments and exclude the impact ofnetting agreements.

31 December 2018 Exl!ected cash flows

Carrying Upto3 6 months- I In thousands o[. naira Note amount Total months 3-6 months year Over 1 year Non-derivative financial liabilities

Deposits from customers 20 10,465,119 (11,260,803) (9,161,811) (1,064,582) (1,034,410) Other liabilities (excluding accounts payable, sundry creditors, accruals, other 22 16,001 (19,484) (3,518) (3,518) {3,247) {9,201) payables, unearned income & productivity bonus)

Borrowinss 23 2,078,843 (2,386,855) {1,957,516) (60,000) (45,205) (324,134) 12,559,963 (13,667,142) 01,122,845) 0,128,100) 0,082,862) (333,335)

31 December 2017 Exl!ected cash flows

Carrying Upto3 6 months -1 In thousands o[.naira Note amount Total months 3-6 months year Over 1 year Non-derivative financial liabilities Deposits from customers 20 9,126,494 (9,176,959) (9,000,678) (150,930) (25,351) Other liabilities (excluding accounts payable, sundry creditors, accruals, other 22 99,317 (128,010) (23,113) (23,113) (21,335) (60,449) payables, pension payable & productivity bonus)

Borrowinss 23 1,550,468 (1,565,115) (1,135,776) (60,000) (45,205) (324,134) 10,776,279 00,870,084) 00,159,567) (234,043) (91,891) (384,583)

The above analysis is based on the Bank's expected cash flows on the financial liabilities, which do not vary significantly from the contractual cash flows.

As part of the management of its liquidity risk, the Bank holds liquid assets comprising cash and cash equivalents and other financial assets to meet its liquidity requirements.

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(iii Exposure to liquidity risk I The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. Fior this purpose, 'net liquid assets' includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market Jbss any deposits from banks, debt securities issued, other borrowings and commitments maturing within the next month. ! /

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Details of the reported ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows:

NPF Microfmanu Bank PLC Annua/Reporl-31 DECEMBER. 20/8

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In thousands ofnaira 2018 2017 At 31 December 50% 63% Average for the period 56% 48% Maximum for the period 66% 63% Minimum for the period 47% 28%

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(d) Market risk Market risk is the risk that changes in market prices such as foreign exchange rates and interest rate will affect the Bank's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing returns.

The Bank's portfolio managers assess, monitor, manage and report on market risk taking activities within the Bank. The Bank has continued to develop its market risk management framework. The operations of the fund managers in connection with the management of market risk is guided by the Bank's culture ofreducing the risk oflosses associated with market risk-taking activities, and optimizing risk-reward trade-off."

The Bank's market risk objectives, policies and processes are aimed at instituting a model that objectively identifies, measures and manages market risks in the Bank and ensure that: The individuals who take or manage risk clearly understand it. The Bank's risk exposure is within established limits. Risk taking decisions are in line with business strategy and objectives set by the Board of Directors. The expected payoffs compensate for the risks taken. Sufficient capital, as a buffer, is available to take risk. Our market risks exposures are broadly categorised into: (i) Trading market risks - These are risks that arise primarily through trading activities and market making activities. These include position taking in fixed income securities (Bonds and Treasury Bills). (ii) Non trading market risks - These are risks that arise from assets and liabilities that are usually on our books for a longer period of time, but where the intrinsic value is a function of the movement of financial market parameters.

(i) Measurement of market risk The Bank currently adopts non-VAR (Value At Risk) approach for quantitative measurement and control of market risks in both trading and non trading books. The measurements includes: Duration and Stress Testing. The measured risks using these two methods are monitored against the pre-set limits on a monthly and weekly basis respectively. All exceptions are investigated and reported in line with the Bank's internal policies and.guidelines.

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Limits are sets to reflect the risk appetite that is approved by the Board of Directors. These limits are reviewed at least annually or at a more frequent intervals. Some of the limits include: Aggregate Control Limits (for Securities); Management Action Trigger (MAT) and Duration.

(ii) Exposure to foreign exchange risk Foreign Exchange risk is the exposure of the Bank's financial condition to adverse movements in exchange rates. The Bank can be exposed to foreign exchange risk through any asset, investment and bank balance domiciled in foreign currency. Currently, the Bank does not have transactions in any other currency except the Bank's reporting currency i.e. Naira. Hence, it is not exposed to foreign exchange risk.

(iii) Exposure to interest rate risk The Bank is exposed to a considerable level of interest rate risk (i.e. the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates). Similar to the last financial year, interest rate was fairly volatile. These changes could have a negative impact on the net interest income, if not properly managed. The Bank however, has a significant portion of its loans and advances to customers in non-rate sensitive assets. This greatly assists it in managing its exposure to interest rate risks. Sensitivity analyses are carried out from time to time to evaluate the impact of rate changes on the net interest income. The assessed impact has not been significant on the capital or earnings of the Bank.

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The table below summarizes the Bank's interest rate gap position:

31 December 2018

_) In thousands ofnaira Assets Cash and cash equivalents Pledged assets Loans and advances to customers

_)

Note Total Up to 3 6 months - 1 months 3 - 6 months year

Contractual cash flows

NPF Microftnance Bank PLC Annual Report- 31 DECEMBER 2018

Carrying amount

i I I , Over 1 year

14 15

16

4,940,352 800,787

10,593,635

5,374,540 623,586

14,402,260

5,374,540 623,586

3,286,503 2,067,479 3,485,777 5,562,501

16,334,774 20,400,386 9,284,629 2,067,479 3,485,777 5,562,501

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Liabilities Deposits from customers Other liabilities (excluding accounts payable, sundry creditors, accruals, other payables, unearned income & productivity bonus) Borrowings

20 (10,465,119) (11,260,803) (9,161,811)

22 (16,001) (19,484) (3,518)

23 (2,078,843) (2,386,855) (1,957,516)

(1,064,582) (1,034,410)

(3,518) (3,247)

(60,000) (45,205)

(9,201)

(324,134)

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(333,335) (12,559,963) (13,667,142) (11,122,845) (1,128,100) (1,082,862)

3,774,811

31 December 2017

6,733,244 (1,838,216) , __ )

In thousands ofnaira Note

939,379 2,402,915 5,229,166

Carrying amount

Contractual cash flows

Total Up to 3 6 months - 1 months 3 - 6 months year Over 1 year

Assets Cash and cash equivalents Pledged assets Loans and advances to customers

14 15

16

5,752,469 409,674

9,008,675

5,758,587 413,470

10,771,094

5,758,587 413,470

1,918,315 1,403,597 2,524,037 4,925,145

15,170,818 16,943,151 8,090,372 1,403,597 2,524,037 4,925,145

J

Liabilities Deposits from customers Other liabilities ( excluding accounts payable, sundry creditors, accruals, other payables, unearned income & productivity bonus) Borrowings

20

22

23

(9,126,494)

(99,317)

(1,550,468)

(9,176,959) (9,000,678)

(128,010) (23,113)

(1,565,115) (1,135,776)

(150,930) (25,351)

(60,449)

(324,134) ( 10, 776;279) (10,870,084) (10,159,567)

(23,113) (21,335)

(384,583) (60,000) (45,205)

4,394,539 6,073,067 (2,069,195)

(234,043) (91,891)

4,540,562 1,169,554 2,432,146

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank's financial assets and liabilities to various standard and non standard interest rate scenarios. Standard scenarios that are considered on a monthly basis include a 200 basis point (BP) parallel full or rise in all yield curves. An analysis of the Bank's sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a constant financial position, is as follows.

The Bank's sensitivity to an increase or decrease in interest rates by 200 basis points:

31-Dec-18 31-Dec-17

.__)

In thousands ofnaira Increase in interest rate by 200 basis points (+2%) Decrease in interest rate by 200 basis point (-2%)

73,513 (73,513)

79,970 (79,970)

Interest rate movement affects reported income by causing an increase or decrease in net interest income and fair value changes ..

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46

NPF Microjmanu BanA PLC Annua/R~port-JJ DECEMBER 2018

Capital management The strategy for assessing and managing the impact of our business plans on present and future regulatory capital forms an integral part of the Bank's strategic plan. Specifically, the Bank considers how the present and future capital requirements will be managed and met against projected capital requirements. This is based on the Bank's assessment and against the supervisory/regulatory capital requirements taking account of the Bank business strategy and value creation to all its stakeholders. ' /

In its circular dated 22 October 2018, the Central Bank of Nigeria (CBN) raised the minimum paid-up capital for national microfinance banks from N2 billion to NS billion. The CBN's directive is to take effect from I April 2020. This requirement has been captured in the Bank's strategic plan and the Bank has a plan to have a hybrid offer (rights and public) in 2019 in order to meet up with this directive.

Capital adequacy The Capital Adequacy Ratio is the quotient of the capital base of the Bank and the Bank's risk weighted asset base. In accordance with Central Bank of Nigeria regulations, the regulatory capital of a national Microfinance Bank is NS billion, while a minimum ratio of I 0% is to be maintained.

(i) The Bank strives to maintain a Capital Adequacy Ratio above the regulatory minimum of 10%. Capital levels are determined either based on internal assessments or regulatory requirements.

(ii) The capital adequacy of the Bank is reviewed regularly to meet regulatory requirements and standard of international best practices in order to adopt and implement the decisions necessary to maintain the capital at a level that ensures the realization of the business plan with a certain safety margin.

(iii) The Bank undertakes a regular monitoring of capital adequacy. The Bank has consistently met and surpassed the minimum capital adequacy requirements applicable in all areas of operations.

(iv) The Bank's capital plan is linked to its business expansion strategy which anticipates the need for growth and expansion in its branch network and IT infrastructure. The capital plan sufficiently meets regulatory requirements as well as providing adequate cover for the Bank's risk profile. The Bank's capital adequacy remains strong and the capacity to generate and retain reserves continues to grow.

"'- In thousands of naira Note

Tier 1 capital Ordinary share capital 24 Share premium 25 Retained earnings 25 Regulatory risk reserves 25 Statutory reserves 25

Tier 2 capital Collective impairment 16(c)

31-Dec-18 31-Dec-17

1,143,328 1,143,328 1,517,485 1,517,485 318,690 728,276 420,914 139,090

1,248,579 1,224,110

4,648,996 4,752,289

3,785 97,253 3,785 97,253

4,652,781 4,849,542

12,016,570 9,872,133

39% 49% · 39% 48%

Total regulatory capital (Tier 1)

Total tier 2 capital

Total regulatory capital

Risk-weighted assets

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Capital ratios Total regulatory capital expressed as a percentage of total risk-weighted assets Total tier I capital as a percentage of total risk-weighted assets

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, NPF Microfinance Bank PLC !Anm1a Report- 31 DECEMBER 2018 I

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 5 Use of estimates and judgments

The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses, Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Management discusses the development, selection and disclosure of the Bank's critical accounting policies and their application and assumptions made relating to major estimation uncertainties with the Bank Audit Committee. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year and about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is disclosed below.

These disclosures supplement the commentary on financial risk management (see note 4). Key sources of estimation uncertainty

(a) Impairment IFRS 9 impairment requirements are based on an expected credit loss model (ECL), replacing the incurred loss model under IAS 39. Key changes in the Bank's accounting policies for impairment of financial assets are listed below. The Bank applies a three-stage approach to measuring expected credit losses (ECL) on debt instruments accounted for at amortised cost, FVOCI, loan commitment and financial guarantee contracts. Assets migrate through the following three stages based on the change in credit quality since initial recognition.

i) Stage 1: 12-month ECL For exposures where there has not been a significant increase in credit risk since initial recognition and that are not credit-impaired upon origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognised. Interest income is calculated by applying the effective interest rate to the gross carrying amount.

ii) Stage 2: Lifetime ECL - not credit-impaired For credit exposures where there has been a significant increase in credit risk since initial recognition but are not credit-impaired, a lifetime ECL is recognised. Interest income is calculated by applying the effective interest rate to the gross carrying amount.

iii) Stage 3: Lifetime ECL- credit-impaired Financial assets are assessed as credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that asset have occurred. As this uses the same criteria as under IAS 39, the Bank's methodology for specific provision remains unchanged. For financial assets that have become credit-impaired, a lifetime ECL is recognised and interest income is calculated by applying the effective interest rate to the amortised cost rather than the gross carrying amount.

At each reporting date, the Bank assesses whether there has been a significant increase in credit risk for financial assets since initial recognition by comparing the risk of default occurring over the expected life between the reporting date and the date of initial recognition. In determining whether credit risk has increased significantly since initial recognition, the Bank uses its internal credit risk grading system, external risk ratings and forecast information to assess deterioration in credit quality of a financial asset.

The Bank assesses whether the credit risk on a financial asset has increased significantly on an individual or collective basis. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of shared credit risk characteristics, taking into account instrument type, credit risk ratings, date of initial recognition, remaining term to maturity, geographical location of the borrower and other relevant factors.

The amount of ECL is measured as the probability-weighted present value of all cash shortfalls over the expected life of the financial asset discounted at its original effective interest rate. The cash shortfall is the difference between all contractual cash flows that are due to the Bank and all the cash flows that the Bank expects to receive. The amount of the loss is recognised using an allowance for credit losses account.

The Bank considers its historical loss experience and adjusts this for current observable data. In addition, the Bank uses reasonable and supportable forecasts of future. economic conditions including experience judgement to estimate the amount of an expected impairment loss. IFRS 9 introduces the use of macroeconomic factors which include, but not limited to, unemployment, interest rates, gross domestic product, inflation, and requires an evaluation of both the current and forecast direction of the economic cycle. Incorporating forward looking information increases the level of judgement as to how changes in these macroeconomip factors will affect ECL. The methodology and assumptions including any forecasts of future economic conditions are reviewed regularly,

I 48

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I I NPF Microfinance Bank PLC ~nnua/ Report - 31 DECEMBER 2018

I

oo~~ I The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factorJ, pricing assumptions and other risks affecting the specific instrument. I

The Bank's accounting policy on fair value measurement is discussed in Note 3 (f)(vi).

The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the requirements.

- Level 1: Quoted market price in an active market for an identical instrument. 1

- Level 2: Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

- Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instruments valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair value using valuation techniques.

Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, Black-Scholes and polynomial option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date, that would have been determined by market participants acting at arm's length.

Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

Valuation models that employ significant unobservable inputs require a higher degree of management judgment and estimation in the determination of fair value. Management judgment and estimation are usually required for selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of probability of counterparty default and prepayments and selection of appropriate discount rates .

The following table shows the carrying amounts and fair values of financial assets and financial liabilities carried at fair value, including their levels in the fair value hierarchy.

In thousands of naira Note Level 1 Level2 Level3 Total

2018 ASSETS Investment securities 17 3,787 10,489 14,276

3 787 10 489 14 276

2017 ASSETS Investment securities 17 5,281 11,400 16,681

5 281 11 400 16 681

There was no financial instrument measured in Level 3 of the fair value hierarchy, hence there is no table to show a reconciliation from the beginning balance to the ending balances for fair value measurements in level 3 of the fair value hierarchy.

49

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I l I NPF Microfinance Bank PLC ~nnua Report - 31 DECEMBER 2018 I

Financial instruments not measured at fair value I

The table below sets out the fair value of financial instruments not measured at fair value and analysed by level in the value hierarchy into which each fair value measurement is categorised. / /

31 December 2018 Total fair Total carrying

In thousands oL naira Note Level 1 Level2 Levell value amount ASSETS Cash and cash equivalents 14 340,463 4,603,870 4,944,333 4,940,352 Pledged assets 15 466,139 357,149 823,288 800,787 Loans and advances to customers 16 11,770,932 11,770,932 10,593,635 Investment securities at amortised cost 17 242,938 242,938 276,805

Trade and other receivables (excluding 18 162,035 162,035 162,035 prepayments and other assets)

1,049,540 4,961,019 11,932,967 17,943,526 16,773,614 LIABILITIES Deposits from customers 20 10,465,119 10,465,119 10,465,119

Other liabilities 22 16,001 16,001 16,001

Borrowings 23 2,386,855 2,386,855 2,078,843 12,867,975 12,867,975 12,559,963

31 December 2017 Total fair carrying

In thousands of naira Note Level 1 Level2 Levell value amount ASSETS Cash and cash equivalents 14 539,595 5,216,146 5,755,741 5,752,469 Pledged assets 15 51,135 358,391 409,526 409,674 Loans and advances to customers 16 10,080,985 10,080,985 9,008,675

Trade and other receivables (excluding 18 55,193 55,193 55,193

prepayments and other assets)

590,730 5,574,537 10,136,178 16,301,445 15,226,011 LIABILITIES Deposits from customers 20 9,126,494 9,126,494 9,126,494 Other liabilities 22 99,317 99,317 99,317 Borrowings 23 1,290,622 1,290,622 1,550,468

10,516,433 10,516,433 10,776,279

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(c) Determination ofimpairment of property and equipment, and other non-financial assets Management is required to make judgements concerning the cause, timing and amount of impairment. In the identification of impairment indicators, management considers the impact of changes in current competitive conditions, cost of capital, availability of funding, technological obsolescence, discontinuance of services and other circumstances that could indicate that impairment exists. The Bank applies the impairment assessment to its separate cash generating units. This requires management to make significant judgements and estimates concerning the existence of impairment indicators, separate cash generating units, remaining useful lives of assets, projected cash flows and net realisable values. Management's judgement is also required when assessing whether a previously recognised impairment loss should be reversed.

(d) Income taxes Significant estimates are required in determining the Bank wide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Bank recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

For recognition of deferred tax assets, judgment is exercised to assess the availability of future taxable profit 'against which tax losses carried forward can be used / :

'--)

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I I I

I I NPF Microfinance Bank PLC /Annual Repon - 31 DECEMBER 2018

(e) Determination of regulatory risk reserves / J Provisions under prudential guidelines are determined using the time based provisioning regime prescribed by the Centr Bank of Nigeria's (CBN) Amended Regulatory and Supervisory Guidelines for Microfinance Banks. This is at variance wifu the/ expected credit loss model required by IFRS 9. As a result of the differences in the methodology/provision regime, there will be variances in the impairments allowances required under the two methodologies.

Paragraph 12:4 of the revised Prudential Guidelines for Deposit Money Banks in Nigeria stipulates that Banks would be required to make provisions for loans as prescribed in the relevant IFRS Standards when IFRS is adopted. However, Banks would be required to comply with the following:

(i) Provisions for loans recognised in the profit and loss account should be determined based on the requirements ofIFRS. However, the IFRS provision should be compared with provisions determined under prudential guidelines and the expected impact/changes in general reserves should be treated as follows:

• where Prudential provisions is greater than IFRS provisions: the excess provision resulting should be transferred from the retained reserve account to a non-distributable "regulatory risk reserve".

• where Prudential impairment provisions is less than IFRS provisions: the excess charges resulting should be transferred from the Regulatory Risk Reserve account to the Retained Earnings to the extent of the non-distributable reserve previously recognised.

(ii) The non-distributable reserve should be classified under Tier 1 as part of the core capital.

The Bank has complied with the requirements of the guidelines as follows:

Prudential adjustments for the year ended 31 December 2018

In thousands ofnaira Note Impairment assessment under IFRS Loan and advances: Stage 1 Stage 2 Stage 3 Total impairment allowances on loans (a)

16 (c) 16 (c) 16 (c)

153,252 3,785

374,175 531,212

Total impairment allowances (a) 531,212

Total regulatory impairment based on prudential guidelines (b) 952,126

Required balance in regulatory risk reserves (c = b - a) 420,914

Balance, 1 January 2018 230,015

Transfer from retained earnings 190,899

Balance, 31 December 2018 420,914

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Prudential adjustments for the year ended 31 December 2017 In thousands ofnaira Note Loans & advances: Specific impairment allowances on loans to customers Collective impairment allowances on loans to customers Total impairment allowances on loans (a)

16 (c) 16 (c)

Total regulatory impairment based on prudential guidelines (b)

Required balance in regulatory risk reserves (c = b - a)

Balance, 1 January 2017

Transfer to retained earnings

Balance, 31 December 2017

1 NPF Microjinance Bank PLC /Annual Report. JI DECEMBER 2018 i

205,501 97,253

302,754

441,844

· 139 090

150,498

(11,408)

139,090

52

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I J NPF Microjinance Bank PLC nnua/ Report - JI DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS FOR 1HE YEAR ENDED 31 DECEMBER 2018

6 Financial assets and financial liabilities Accounting classification measurement basis and fair values The table below sets out the carrying amounts classification and fair values of the Bank's financial assets and financial liabilities:

31 December 2018

Fair value through profit or Fair value through Total carrying

In thousands olnaira Note loss OCI Amortised cost ainount Fair value

Cash and cash equivalents 14 4,940,352 4,940,352 4,944,333 Pledged assets IS 800,787 800,787 823,288 Loans and advances to customers 16 10,593,635 10,593,635 11,770,932 Investment securities 17 14,276 276,805 291,081 257,214 Trade and other receivables (excluding

18 162,035 162,035 162,035 prepayments and other assets) 14,276 16 773,614 16,787,890 17 957 802

Deposits from customers 20 10,465,119 10,465,119 10,465,119 Other liabilities (excluding accounts payable, sundry creditors, accruals, other 22 243,547 243,547 243,547 payables, unearned income and productivity bonus)

Borrowinliis . 23 2,078,843 2,078,843 2,386,855 12,787,509 12,787,509 13,095,521

31 December 2017

Loans and Available-for-sale Other financial Total carrying In thousands ol naira Note receivables financial assets liabilities amount Fair value

Cash and cash equivalents 14 5,752,469 5,752,469 5,755,741 Pledged assets 15 409,674 409,674 409,526 Loans and advances to customers 16 9,008,675 9,008,675 10,080,985 Investment securities 17 16,681 16,681 16,681 Trade and other receivables (excluding 18 55,193 55,193 55,193 prepayments and other assets)

15,226,011 16,681 15,242,692 16,318,126

Deposits from customers 20 9,126,494 9,126,494 9,126,494 Other liabilities (excluding accounts payable, sundry creditors, accruals, other 22 215,185 215,185 215,185 payables, unearned income and productivity bonus) Borrowinliis 23 1,550,468 1,550,468 1,290,622

10,892,147 10,892,147 10,632,301

Financial instruments at fair value are either priced with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using a valuation model, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. The expected cash flows for each contract are determined either directly by reference to actual cash flows implicit in observable market prices or through modelling cash flows using appropriate financial markets pricing models. Wherever possible, these models are used as the basis of observable market prices and rates including, for example, interest rate, yield curves, equities and prices.

53

NPF Microjinance Bank PLC A111111al Report-JI DECEMBER 20/8

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

In thousands of naira 2018 2017

7 Interest income Loans and advances Bankers acceptances Placements with local banks

2,455,061 127,642 377,822

2,125,018 58,500

421,895 2,960,525 2,605,413

Included in the interest income above is a N34.9 million with respect to impaired financial assets for the year ended 31 December 2018 (2017: N16 million). Total interest income reported above relates to financial assets measured at amortised cost using the applicable effective interest rates.

8 Interest expense Term deposits 329,305 243,510 Current deposits 11,041 8,704 Savings deposits 17,776 10,803 Borrowings 71,899 55,881

430,021 318,898

Total interest expense reported above relates to financial liabilities measured at amortised cost using the applicable effective interest rates.

9 Fees and commission income Credit-related fees and commission Deposit-related fees and commission

587,253 635,198 146,307 144,680 733,560 779,878

217,015 202,469 15,274

36,004 50,589 3,273 1,228

24 256,292 269,584

r:

10 Other income Income on salary administration Profit on disposal ofavailable-for-sale financial assets Service fees and charges Profit on disposal of property and equipment Dividend income

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11 Net impairment loss on financial assets Impairment loss on loans and advances to customers:

Specific impairment (see 16(c)) Collective impairment (see 16(c))

300,213 163,806 23,711 22,445

323,924 186,251 (157)

121,076 (1,167) 1,382 367

446,749 184,927

1,114,978 1,146,948

59,882 46,967 167,014 112,858

1,341,874 1,306,773

Impairment Ioss/(write-back) on investments (see note 17(b)) Impairment loss/(write-back) on other receivables (see note 18(a)) Impairment loss on cash and cash equivalent (see note 14(b)) Impairment loss on pledged assets (see note lS(b))

12 Personnel expenses Short-term employee benefits Post-employment benefits:

Defined contribution plan - pension cost Other staff cost

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NPF Microfinance Bank PLC Annual Report· 31 DECEMBER 20/8

. ·- } r-·. NOTES TO THE FINANCIAL STATEMENTS } ,_,

FOR THE YEAR ENDED 31 DECEMBER 2018

I In thousands ofnaira 2018 2017

13 Administration and general expenses \._ ./' Repairs and maintenance cost 71,091 90,547

Vehicle and generator running cost 89,330 80,192 \ _) Office expenses 113,843 92,192

Computer expenses 76,094 59,209 Travel expenses 53,460 39,643 AGM and year-end expenses 54,459 48,538 Directors' remuneration 140,453 116,563

\./ Bank charges 38,312 35,524 Marketing/publicity expenses 112,564 113,287

',. Professional fees 30,498 21,315 Subscription fees 4,278 3,525

, ~- Charges and levies 43,185 31,751 \._,I Insurance cost 39,151 26,575

NDIC premium 42,347 30,374 Rent and rates 26,391 31,784 Auditor's remuneration 18,500 17,000 ,~ Tax expense l Fraud, forgery and theft 231,390 25th year anniversary expense 30,252 Other expenses (see note a) 52,108 63,651

1,267,706 901,670 (a) Other expenses includes the following:

Corporate social responsibility 4,283 6,642 Donations 4,312 5,805 Electricity expenses 12,813 16,790 Recruitment expenses 4,987 3,486 Damaged ATM cards 3 38 Loan recovery expenses 93 618 Fines 105 Stamp duties 154 Legal expenses 11,280 5,723 SMS alerts 11,827 15,557 Bad debts written off 3 763 Share listing expenses 2,143 1,985 WHTexpense 4,219 Miscellaneous expenses 105 2,025

52,108 63,651 (

\.,. , 14 Cash and cash equivalents (a) Cash and cash equivalent comprise:

Cash-in-hand: \ Cash-in-hand 96,558 118,901 ~-- 96,558 118,901 •-./ Due from banks:

Current account balances with other banks 1,172,711 1,635,073

,_/ Money market placements 3,334,601 3,462,172 Treasury Bills 341,043 536,323

4,848,355 5,633,568

Cash and cash equivalents for cash flow purposes: 4,944,913 5,752,469 Impairment allowance (see note (b) below) (4,561) Cash and cash equivalents 4,940,352 5,752,469

'--' (b) Movement in impairment allowance:

Balance at I January IFRS 9 transition adjustment 13,179 Impairment allowance (see note 11) ' I : 1,382

14,561

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NPF Mlcrofinance Bank PLC Annual Report· 3/ DECEMBER 20/8

Cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash-in-hand, deposits held at call with other banks, other short-term highly liquid investments with original maturities less than three months. The current balances with other banks also includes A1M working capital accounts and the suspense accounts used to manage settlement of A1M transactions ~th Sterling Bank to be refunded to the Head office by branches. For financial reporting purposes, the balances in the A1M related accounts 'were ~ombined in order to have a net position.

15 Pledged assets I Pledged assets, initially recognised at fair value and ·subsequently measured at amortised cost, represent placements and Treasury Bills with banks that serve as collateral for the Bank's borrowings, use ofNIBSS platform and A1M transactions as analysed below:

Underlying transaction BO! concessionary loan BO! concessionary loan DBN concessionary loan NIBSS Platform A1M Transactions

Counterparty Sterling Bank Pie Sterling Bank Pie Development Bank of Nigeria First Bank of Nigeria Pie Sterling Bank Pie

Asset description Treasury Bills Fixed placement Treasury Bills Fixed placement Call placement

Impairment allowance (see note (b) below)

239,103 51,284 262,116 263,408 205,131 75,033 74,982 20,000 20,000

801,383 409,674

(596)

800,787 409,674

800,787 409,674

800,787 409,674

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Current Non-current

(b) Movement in impairment allowance:

Balance at I January IFRS 9 transition adjustment Impairment allowance (see note I I)

229 367 596

16 Loans and advances to customers (a) Loans and advances to customers comprise:

Loan and advances to customers at amortised cost

(b) Loans and advances to customers at amortised cost:

10,593,635 9,008,675 10,593,635 9,008,675

1,753,876 3,162,726 8,839,759 5,845,949 10,593,635 9,008,675

2018 2017 Gross ECL Carrying Gross Impairment Carrying

Amount Allowance Amount Amount Allowance Amount 10,257,934 (458,590) 9,799,344 8,894,640 (187,047) 8,707,593

866,913 (72,622) 794,291 416,789 (115,707) 301,082

11,124,847 (531,212) 10,593,635 9,311,429 (302,754) 9,008,675

Current Non-current

Term loans Overdrafts

(c) Movement in allowances for impairment

31 December 2018 31 December 2017

Lifetime ECL Lifetime ECL 12-month not credit credit Specific Collective

ECL impaired impaired Total Impairment Impairment Total Balance at I January 128,324 5,002 78,503 211,829 43,510 74,808 118,318

'-~ Charge during the year ( see note 1 I) 24,928 (1,217) 300,213 323,924 163,806 22,445, 186,251 Write-offs during the year (4,54Q (4,5412 (1,8152 (1,8152 Balance at 31 December 153,252 3,785 374,175 531,212 205,501 97,253: 302,754

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I I NPF Mlcronnance Bank PLC ,lnnua/ Reparl - 3/ DECEMBER 20/8

2018 2017 17 Investment securities

Investment securities comprise:

Investment securities measured at FVTOCI: Equity securities: Listed equities Unlisted equities

Investment securities at amortised cost Treasury bills Total investment securities

3,787 5,281 10,489 11,400 14,276 16,681

276,805 291,081 16,681

291,081 16,681

291,081 16,681

Current Non-current

' ,_/

18 Trade and other receivables

Prepayments Other assets (see note (a) below) Other receivables (see note (b) below)

Impairment allowance (see note ( c ) below)

265,181 33,033 162,035

133,477 23,803 55,193

460,249 (158,498)

212,473 (39,595)

301,751 172,878

Current Non-current

96,875 204,876

85,165 87,713

301,751 172,878

(a) Other assets comprise inventories such as stock of debit cards, stock of credit cards, stock of cheques, books/journals/CDs, stock of office stationeries, stock of micr cheques and non micr cheques.

(b) Other receivables includes staff cash advances, sundry debtors and asset suspense accounts.

(c) Movement in impairment allowances:

Balance at 1 January

Impact of adoption ofIFRS 9 (Note 2(ii)) (Write-back)/charge during the year (see note 11) Balance at 31 December

39,595

(2,173) 121,076

40,762

(1,167) 158,498 39,595

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I I / NPF Microfinance Bank PLC 'Annual Report- 31 DECEMBER 2018

) .../

- _) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

_)

_) In thousands of naira

19 Property and Equipment

\ Computer

J Furniture Motor and Office Buildings and Fittings Vehicles Equipment Total

~ ) Cost: Balance as at I January 2017 262,923 89,075 235,893 278,858 866,749 Additions during the year 3,205 12,675 117,497 134,162 267,539

~) Disposals {41,762) (75,116) (158,831) (275,709)

Balance at 31 December 2017 266,128 59,988 278,274 254,189 858,579 I

'-' Balance as at I January 2018 266,128 59,988 278,274 254,189 858,579

~ Additions during the year 13,921 11,927 144,995 84,011 254,854 Disposals {677) · (677) Balance at 31 December 2018 280,049 71,238 423,269 338,200 I 112 756

Accumulated Depreciation: Balance at 1 January 2017 29,894 60,512 135,427 141,270 367,103 Charge for the year 5,833 10,720 49,060 57,175 122,788

'-· Disposals (3,278) (42,171) (73,915) (103,912) . (223,276)

Balance at 31 December 2017 32,449 29,061 110,572 94,533 266,615

"-..· Balance at I January 2018 32,449 29,061 110,572 94,533 266,615 Charge for the year 6,380 10,579 84,875 75,038 176,872 Disposals {677) (677

Balance at 31 December 2018 38,829 38,963 195,447 169,571 442 810

Net Book Value: 31 December 2017 Net Book Value: 31 December 2018

233,679 30,927 167,702 159,656 591,964 241,220 32,275 227,822 168,629 669,946

___)

- There were no capitalised borrowing costs related to the acquisition of property and equipment during the year (2017: Nil). - There were no impairment losses on any class of property and equipment during the year (2017: Nil). - There were no property and equipment pledged as securities for liabilities (2017: Nil). - There were no contractual commitments for the acquisition of property and equipment (2017: Nil).

I . .__, 31 December 31 December

2018 2017 Current I -

..J Non-current 669,946 591,964 669,946 591,964

.___,,I

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I I ' ) I i NPF Mlcrofinance Bank PLC Annua Report - 31 DECEMBER 2018

I :

NOTES TO THE FINANCIAL STATEMENTS ) FOR THE YEAR ENDED 31 DECEMBER20I8

)

) In thousands of naira 2018 2017

)

)

20 Deposits from customers Current deposits Savings deposits Term deposits Sundry deposits

3,439,928 3,266,736 2,252,357 2,090,106 4,478,357 3,470,848 294,477 298,804

10,465,119 9,126,494

10,465,119 9,126,494

10,465,119 9,126,494

j

) Current Non-current

21 Income taxes (a) Amounts recognized in profit or loss

Current tax expense Company income tax Education tax National Information Technology Development Agency (NITDA) levy

64,451 125,019 9,311 13,134 2,843 8,117

76,605 146,270

14,801 41,659 14,801 41,659

91406 187 929

Deferred tax expense Origination and reversal of temporary differences - Charge/(Credit)

Tax expense

) The Bank believes that its accrual for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax laws and prior experience .

Balance at I January 146,270 76,605

(135,793)

199,571 146,270 (199,571)

./

j Income tax expense (see note (a) above) Tax.paid Balance at 31 December ) 87 082 146 270

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59

NPF Microjinance Bank PLC Annual Report - 31 DECEMBER 2018

J

-,

J NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER2018

In thousands ofnaira

(c) Movement in deferred tax balances

2018

__) Recognized in

Balance at 1 profit or loss Recognized in Balance at 31 January (see (a)) OCI December

104,384 19,097 123,481 (29,176) (17,935) (47,111) (13,639) 13,639 61 569 14 801 76 370

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Property and equipment Loans and advances Employee benefits Deferred tax (assets)/liabilities

2017

Recognized in Balance at 1 profit or loss Recognized in Balance at 31

January (see (a)) OCI December

86,721 17,663 104,384 (22,443) (6,733) (29,176) (44,368) 30,729 (13,639) 19 910 41 659 61569

Property and equipment Loans and advances Employee benefits Deferred tax (assets)/liabilities

--J (d) Reconciliation of effective tax rate In thousands ofnaira

Profit before tax Tax using the Company's domestic tax rate Non-deductible expenses Tax-exempt items Tertiary Education Tax NITDALevy

2018 2017

287,155 819,819 30.00% 86,147 30.00% 245,946 47.05% 135,100 7.80% 63,957 -49.45% (141,995) -17.47% (143,225) 3.24% 9,311 1.60% 13,134 0.99% 2,843 0.99% 8,117

31.83% 91406 22.92% 187 929

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NPF Mlcroflnance Bank PLC Annual Report. JI DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS FOR TIIE YEAR ENDED 31 DECEMBER2018

In thousands olnaira 2018 2017

22 Other liabilities Accounts payable 7,935 5,202 Productivity bonus (see note (a) below) 29,299 100,066 Sundry creditors 82,066 53,838 Staffbenefits payable (see note (b) below) 16,001 99,317 Accruals 81,338 54,023 Other payables 23,432 411 Unearned income 3,476 2,394

243,547 315,251

Current 243,547 315,251 Non-current

243,547 315,251

(a) This amounts represents provision made at the end of the year for payment of productivity bonus to employees of the Bank. It is linked to the performance of the Bank. ·

(b) Staff benefits payable comprise the outstanding liabilities on the staff defined benefits plan discontinued on 30 June 2015 and reclassified from retirement benefit obligations. It is repayable at I 0% interest rate per annum over three years.

The movement in the staff benefits payable during the year was as follows:

Balance, beginning of year Addition during the period Interest accrued during the period Liability repayment during the period Interest repayment during the period Balance, end of year

2018 2017

99,317 180,208

16,001 32,003 (97,522) (102,432) (1,795) (10,462) 16,001 99,317

23 Borrowings (a) Borrowings comprise:

BOI concessionary loan (see note (i) below) CBN concessionary (see note (ii) below)

DBN concessionary loan (see note (iii) below) CBN housing microfinance loan (see note (iv) below)

230,606 456,040 983,562 1,000,242

779,369 94,186

85,306

2,078,843 1,550,468

2,078,843 1,550,468 2,078,843 1,550,468

Current Non-current

(i) The Bank oflndustry (BOI) loan was availed the Bank on IO March 2017. The amount availed was NSOO million at a rate of 12% per annum for a duration of 3 years. This loan is for on-lending to the Bank's customers. It is for the benefit of small and medium sized enterprises to grow their businesses and to become financially independent.

(ii) The Central Bank of Nigeria (CBN) Micro Small and Medium sized Enterprises Development Fund (MSMEDF) loan of NI billion was granted to the Bank on 22 December 2017 at a rate of 2% per annum. The loan tenor is 2 years and it is for on-lending to the Bank's customers for the benefit of small and medium sized enterprises to help grow their businesses and become financially independent.

(iii) The Development Bank of Nigeria (DBN) loan ofN830 million was granted to the Bank on 12 October 2018. The loan is for a duration of2 years at an interest rate of 13.79% per annum. The loan is for on-lending to micro, small and medium enterprises to grow their businesses.]

The facility is callable, cancellable and renewable and is to be reviewed twelve (12) months after the first draw down and every six (6) months subsequently.

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NPF Mlcroflnance Bank PLC A nua/Report-31 DECEMBER2018

(iv) The Central Bank of Nigeria (CBN) housing microfinance loan ofN91.74 million was granted to the Bank on 18 May 2018 at an 1erest rate of 15.99% per annum. The loan tenor is 5 years and it is for on-lending to the Bank's customers to take care of their housing needs. I

(b) The movement in borrowings during the year was as follows: I 2018 2017

I _,,

J

Balance, beginning of year Additions during the year Interest accrued during the year Repayment during the year Balance, end of year

1,550,468 921,740 71,899

(465,264)

349,249 1,600,000

55,816 (454,597)

2,078,843 1,550,468

24 Share capital

Authorised:

6,000,000,000 units of ordinary shares of 50 kobo each

Issued and fully paid:

2,286,657,766 units ofordinary shares of SO kobo each

3,000,000 3,000,000

1,143,329 1,143,329

25 Share premium and reserves The nature and purpose of the share premium and reserve accounts in equity are as follows:

(a) Share premium The share premium warehouses the excess paid by shareholders over the nominal value for their shares. Premiums from the issue of shares are reported in share premium.

(b) Retained earnings Retained earnings comprise the undistributed profits from previous years, which have not been reclassified to the other reserves noted below.

(c) Fair value reserve Fair value reserve comprise the cumulative net change in the fair value of equity securities designated at fair value through other comprehensive income (2017: available-for-sale).

( d) Statutory reserve The Nigerian banking regulations require the Bank to make an annual appropriation to a statutory reserve. As stipulated by S.8.1.7 of the Amended Regulatory and Supervisory Guidelines °for Microfinance Banks issued by the Central Bank of Nigeria (CBN), an appropriation of 50% of profit after tax is made if the statutory reserve is less than 50% of its paid-up share capital, 25% of profit after tax if the statutory reserve is greater than . 50% but less than 100% of its paid-up share capital and 12.5% of profit after tax if the statutory reserve is greater than the paid up share capital.

In line with the CBN requirement, the Bank transferred 12.5% of its profit after tax to statutory reserves as at year-end.

Balance at I January Transfer to statutory reserve during the year Balance at 31 December

2018

1,224,110 24,469

2017

1,145,124 78,986

1,248,579 1,224,110

(e) Regulatory risk reserve The regulatory risk reserve warehouses the excess of the impairment allowance on loans and advances computed based on the Central Bank of Nigeria prudential guidelines over that computed based on the expected credit loss (ECL) model under IFRS.

62

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NPF Microfmance Bank PLC !Annual Report- 31 DECEMBER 20/8

NOTES TO THE FINANCIAL STATEMENTS FOR THE MONTI-I ENDED 3 I DECEMBER 20 I 8

26 Related party transactions

NPF Microfinance Bank Pie neither has a parent company nor subsidiaries,

(a) Transactions with key management personnel (i) Key management compensation for the year comprised:

In thousands ofnaira 2018 2017

Salaries and other short-term benefits Retirement benefits

71,001 21,790

71,001 25,350

92,791 96,351

(ii) Loans and advances In addition to their salaries, the Bank also provides non-cash benefits to its executive directors, Loans to key management personnel include housing loans and other personal loans which are given under terms that are no more favourable than those given to other staff. The housing loans are secured by property of the respective borrowers, All other loans are unsecured and interest rates charged on the related parties are at arm's length ,

The movement in the loans and receivables to key management personnel during the year was: At start of the year Granted during the year Repayment during the year At end of the year

32,086 24,236 122,909 15,846 (39,401) (7,996) 115 594 32 086

2012 716 Interest earned

All loans granted to key management personnel were performing as at 31 December 2018 (2017: Performing),

Loans and advances outstanding: The amounts granted and their balances as at 31 December 20 I 8 were as follows:

In thousands ofnaira

Amount Name Relationship Facility type granted 31 Dec. 2018 31 Dec. 2017 Status Security

Mr, Akinwunmi Lawal Managing Director Housing loan 36,735 31,634 6,834 Performing Certificate of occupancy

Mr, Jude Ohanehi Executive Director Housing loan 43,013 39,429 8,114 Performing Certificate of occupancy

Mr. Akinwunmi Lawal Managing Director Vehicle loan 8,500 1,653 Mr, Jude Ohanehi Executive Director Vehicle loan 7,500 417 1,667 Performing Unsecured Mr, Jude Ohanehi Executive Director Personal loan 2,300 958 Performing Unsecured

Mr. Francis Nelson Executive Director Housing loan 42,027 36,190 7, 173 Performing Certificate of occupancy

Mr, Francis Nelson Executive Director Vehicle loan 8,900 1,731 Mr. Francis Nelson Executive Director Personal loan 1,500 563 1,312 Performing Unsecured

Prince Eke Ifeanyi Non-Executive Overdraft 7,300 7,361 2,644 Performing Unsecured Director 157,775 115,594 32,086

63

__ ) NPF Miaof111once Bonk PLC

Annual Repon» 3/ DECEMBER 20/8

I _,

(iii Deposits (a) The following directors had deposits with the Bank as at year ended:

In thousands ofnaira

Name Relatlonshlp Type of deposit 31 December 31 December 2018 2017

Mr Joel Udah Chairman Current deposit 129 1,135 Mrs Gimba Dorothy Non-Executive Current deposit 241 Mr Wabali Emmanuel Non-Executive Current deposit 250 1,898 Mr Daramola Joseph Non-Executive Current deposit 970 Prince Eke Ifeanyi Non-Executive Current deposit Mr Abubakar Audu Non-Executive Current deposit 2,351 Mr Saeed Dantsoho Non-Executive Current deposit 28,770 5,990 Mr Saeed Dantsoho Non-Executive Term deposit 400,986 Mr Ohanehi Jude Executive Director Current deposit 28 6,783 Mr Lawal Akinwunmi Managing Director Current deposit 1,943 7,040 Mr Francis Nelson Executive Director Current deposit 22 4,072 Mr Jibrin G. Gane Non-Executive Current deposit 3,258 1,147 Mr Olusholla B. David Non-Executive Current deposit 9,902 3,785 Mr Hashimu Argungu Non-Executive Current deposit 518 Mr Abdurahman Satumari Non-Executive Current deposit 5,164 Mrs Rakiya Edota Shehu Non-Executive Current deposit 5,396

456,366 35,412

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(b) Deposits of other related parties Included in deposits is an amount ofN0.092 billion (31 December 2017: Nl.91 billion), representing deposits from major shareholders. The balances as at 31 December 2018 were as follows:

In thousands ofnaira

Name of Relationsllip Type of deposit company/individual

NPF Cooperative Society Major shareholder Current deposit Limited \

NPF Cooperative Society ...J Major shareholder Term deposit Limited ~, ' NPF Welfare Insurance Major shareholder Current deposit -· Scheme

NPF Welfare Insurance Major shareholder Term deposit Scheme

~·

31 December 2018

651

31 December 2017

2,873

90,852

1,311,093

45,345

551,697

91,503 1,911,008

(iv) Transaction with related parties The Chairman, Mr. Udah owns the property in Aha leased by the Bank for use as a branch. The leased property was inspected and found suitable for the proposed branch and the offer price was also competitive. The property was leased to the Bank in 2016 for a 3-year duration at a cost ofN5,610,000.

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NPF Microjinance Bank PLC Annual Report - 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

27 EMPLOYEES AND DIRECTORS EMPLOYEES

(a) The average number of persons employed during the year by category: Executive Directors Management Non-management

2018 2017

3 51

320

3 43

268 374 314

(b) The number of employees of the Bank, including executive directors, who received emoluments in the following ranges were:

__ 1

Less than N500,000 N500,001 - Nl,000,000 15 11 Nl,000,001 - N2,500,000 202 213 N2,500,001 - N3,500,000 91 40 N3,500,001 - N4,500,001 27 13 N4,500,0001 - N5,500,000 13 20 N5,500,001 and above 26 17

374 314

(c) Diversity in Employment

i). A total of229 women were employed by the Bank during the year ended 31 December 2018 (2017: 129), which represents 61% of the total workforce (2017: 41%).

ii). A total of7 women were in top management positions as at the year ended 31 December 2018 (2017: 4), which represents 30% of the total top management workforce (2017: 22%). There was no woman on the Board of Directors as executive director. See note (iii) below.

iii). The analysis by grade is as shown below:

~' I

December 2018 December 2017 GRADE LEVEL Male Female Total Male Female Total

Manager (M) II 5 16 7 2 9 Senior Manager (SM) 2 - 2 I - 1 Assistant General Manager (AGM) 3 - 3 3 - 3 Deputy General Manager (DGM) 3 I 4 3 1 4 General Manager (GM) - I I - 1 1 TOTAL 19 7 26 14 4 18

iv). The Bank is committed to maintaining a positive work environment and to conduct business in a positive, professional manner and will ensure equal employment opportunity.

(d) DIRECTORS Analysis of Directors by gender: December 2018 December 2017

Male Female Total Male Female Total Managing Director 1 - I 1 - 1 Executive Directors 2 - 2 2 - 2 Non - Executive Directors 7 I 8 6 - 6 TOTAL IOI 1 11 9 - 9

The remuneration paid to the Directors of the Bank (excluding pension and certain allowances) was:

In thousands ofnaira

Fees and sitting allowances Other Directors' expenses Total Non-executive Directors' remuneration (see note 13) Executive compensation (see note 26(a)(i))

2018 2017

74,532 46,658 65,921 69,905 140,453 116,563 71,001 71,001

211,454 187,564

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! I / NPF Microjinance Bank PLC

Annual Report-JI DECEMBER 2018

The Directors' remuneration shown above includes:

The Chairman 12 510 12 510

Highest paid Director 26 977 26 977

The number of Directors who received fees and other emoluments (excluding pension contributions and reimbursable expenses) in the following ranges were:

Below Nl,000,000 Nl,000,001 - N5,000,000 N5,000,001 - Nl0,000,000 Nl0,000,001 and above

7

3 6 3

11 10

28 Compliance with banking and other regulations

During the year, the Bank did not pay any penalties (31 December 2017: Nil).

29 Events after the reporting period

There were no events which could have a material effect on the financial position of the Bank as at 31 December 2018 or the profit for the year then ended on that date, that have not been adequately provided for or disclosed in the financial statements.

30 Litigations and claims

The Bank in its ordinary course of business was involved in 7 cases as at 31 December 2018 (31 December 2017: 12) as a co-defendant. The Directors of the Bank are of the opinion that none of the aforementioned cases is likely to have material adverse effect on the Bank and are not aware of any other pending and/or threatened claims or litigations which may be material to the financial statements. However, the total amount that may be claimed against the Bank is estimated at N581 million (2017: N636 million).

31 Earnings per share

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

Net profit attributable to shareholders (in thousands ofnaira) Number of shares in issue (in thousands) Weighted average number of shares in issue (in thousands) Basic earnings per share (kobo)

2018 2017

195,749 631,890 2,286,658: 2,286,658 2,286,658 2,286,658

9 28

The Bank did not have potential dilutive shares as at 31 December 2018 (31 December 2017: Nil).

32 Statement of cash flows notes

2018 2017

(a) Proceeds from disposal of property and equipment

Cost of property and equipment disposed during the year (see note 19) Accumulated depreciation on property and equipment disposed (see note 19) Net book value of property and equipment disposed Profit on sales of property and equipment (see note 10)

Proceeds from disposal of property and equipment

677 275,709 (677) (223,276)

52,433 3,273 1,228

3 273 53 661

(b) Changes in pledged asset

Closing balance in pledged asset at 31 December 2017 (see note 15) Closing balance in pledged assets at 31 December 2018 (see note 15) Impairment allowance (see note 15(b)) Interest receivable on pledged assets

409,674 (800,787)

(596)

581,425 (409,674)

5,053 (391,709) · 176,804

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(c) Changes in loans and advances

Closing balance in loans and advances at 31 December 2017 (see note 16(b)) Closing balance in loans and advances at 31 December 2018 (see note 16(b))

Interest receivable on loans and advances Write off during the year (see note 16( c))

(d) Changes in trade and other receivables

Closing balance in trade and other receivables at 31 December 2017 (see note 18) Closing balance in trade and other receivables at 31 December 2018 (see note 18)

(e) Changes in deposit from customers

Closing balance in deposit from customers at 31 December 2018 (see note 20) Closing balance in deposit from customers at 31 December 2017 (see note 20)

Interest payable on deposits

(I) Change in other liabilities

Closing balance in other liabilities at 31 December 2018 (see note 22) Closing balance in other liabilities at 31 December 2017 (see note 22)

Retirement benefit obligations paid (see note 22(b))

(g) Investment securities

Closing balance on investment securities at 31 December 2017 (see note 17) Closing balance on investment securities at 31 December 2018 (see note 17)

'-.../'

Explained by: Profit on disposal of available-for-sale financial assets (see note 10) Impairment (loss)/write-back on investments (see note 11) Fair value I oss Proceeds from disposal of investments Purchase of Treasury bill investments Unwinding of discount on treasury bill investments

(h) Interest received

Interest income (see note 7) Interest receivable on pledged assets Interest receivable on loans Unwinding of discount on treasury bill investments (see note 32( c)) Interest received

(i) Interest paid

Interest expense (see note 8) Interest payable on borrowings (see note 23(b)) Interest payable on deposits Interest paid

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9,311,129 (11,124,847) ,

NPF Microjinance Bank PLC A11n11a/ Report-31 DECEMBER 2018

9,214,119 (9,311,429)

(1,813,418) 3,038 (4,541)

(97,310) 16,003 (1,815)

(1,814,921) (83,122)

212,473 (460,249)

298,307 (212,473) 85,834 (247,776)

10,465,119 (9,126,494)

9,126,494 (6,792,391) 2,334,103 (20,037)

1,338,625 (7,422)

1,331,203 2,314,066

243,547 (315,251)

315,251 (537,353)

(71,704) 97,522

(222,102) 102,432

25,818 (119,670)

16,681 (291,081)

37,574 (16,681)

(274,400)

2,405

(265,894) (10,911)

20,893

(15,274) (157)

36,324

(274,400) 20,893

2,960,525 2,605,413 (5,053)

(3,038) (16,003) (10,911)

2,946,576 2,584,357

(430,021) 71,899 7,422

(318,898) 55,816 20,037

(350,700) (243,045)

' ' .:> NPF Microjinance Bank PLC A1111ual Report-JI DECEMBER 2018

33 Unclaimed dividends Unclaimed dividends summed up to N83,350,022.60 as at 31 December 2018 (2017: N63,896,IOl.91). This amount is made up of N77,700,681.77 (2017: N59,079,612.93) invested with Stanbic IBTC Asset Management Limited in fixed incoihe niutuat funds and NS,649,340.83 (2017: N4,816,488.98) in the custody ofCardinalStone Registrars Limited. / /

I

The investment balance ofN77,700,681.77 is analysed below:

Net investible balance 1 October - 31 December 2018 Net income earned

N'OOO

75,768 1,933

N'OOO

57,646 1,433

77,701 59,079

~) 34 Fees for non-audit services KPMG Professional Services rendered the following non-audit services to the Bank:

Service description Fee amount Fee amount N'OOO N'OOO ,_,

Tax consultancy - Recurring 1,200 1,210 Tax consultancy - V AIDS filing 3,500 IT system post-implementation review 6,000

10,700 1,210

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OTHER NATIONAL DISCLOSURES

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flPF Microjinance Bank PLC Annual ieport-31 DECEMBER 2018

OTHER NATIONAL DISCLOSURES: VALUE ADDED STATEMENT FOR THE YEAR ENDED 31 DECEMBER

I I ) 2018 2017 '-'

N'OOO % N'OOO % ~J Gross earnings 3,950,377 3,654,875

Bought-in-materials and services - local (1,714,455) (1,086,597) -- Value added 2,235,922 100 2,568,278 100

Distribution of value added: To employees - As salaries and other benefits 1,341,874 60 1,306,773 51

To providers of finance - As interests 430,021 19 318,898 12

To the Government -As taxes 91,406 4 187,929 7

Retained in the business - Asset replacement (depreciation) 176,872 8 122,788 5 - Profit to augment reserves 195,749 9 631,890 25

',

l Value added 2,235,922 100 2,568,278 100

This statement represents the distribution of the wealth created with the Bank's assets through its own, and its employees' efforts.

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/ NPF Microfinance Bank PLC An~ua/ Report - 31 DECEMBER 2018

i

/; OTHER NATIONAL DISCLOSURES: I FINANCIAL SUMMARY AS AT 31 DECEMBER

2018 2017 2016 2015 2014 In thousands of naira

STATEMENT OF FINANCIAL POSITION

ASSETS Cash and cash equivalents 4,940,352 5,752,469 1,889,881 3,054,860 3,054,787 Pledged assets 800,787 409,674 581,425 ~83,038 635,090 Loans and advances to customers 10,593,635 9,008,675 9,095,801 7,881,519 6,527,210 Investment securities 291,081 16,681 37,574 '38,1'54 47,265 Trade and other receivables 301,751 172,878 257,545 346,969 194,773 Property and equipment 669,946 591,964 499,646 394,070 371,331 Deferred tax assets 35,411 34,733

TOTAL ASSETS 17,597,552 15,952,341 12,361,872 12,334,021 10,865,189

LIABILITIES Deposits from customers 10,465,119 9,126,494 6,792,391 6,610,113 4,803,374 Current tax liabilities 87,082 146,270 199,571 188,983 213,434 Retirement benefit obligations 282,010 Borrowings 2,078,843 1,550,468 349,249 630,795 672,976 Deferred tax liabilities 76,370 61,569 19,910 Other liabilities 243,547 315,251 537,353 652,637 813,502

TOTAL LIABILITIES 12,950,961 11,200,052 7,898,474 8,082,528 6,785,296

CAPITAL AND RESERVES Share capita! 1,143,328 1,143,328 1,143,328 1;143,328 1,143,328 Share premium 1,517,485 1,517,485 1,517,485 1,517,485 1,517,485 Retained earnings 318,690 728,276 506,963 476,216 407,801 Fair value reserve (2,405) Other reserves 1,669,493 1,363,200 1,295,622 1,114,464 1,011,279

TOTAL EQUITY 4,646,591 4,752,289 4,463,398 4,251,493 4,079,893

TOTAL LIABILITIES AND EQUITY 17,597,552 15,952,341 12,361,872 12,334,021 10,865,189

STATEMENT OF COMPREHENSIVE INCOME

Gross income 3,950,377 3,654,875 2,925,229 2,592,694 2,134,692 Profit before taxation 287,155 819,819 803,440 688,899 617,507 Profit after taxation 195,749 631,890 554,903 514,598 477,816 Dividend 388,732 342,999 342,998 342,998 342,998

~-'

Basic and diluted earnings per share (kobo) 9 28 24 23 21 Dividend per share (kobo) 17 15 15 15 15 Net assets per share (kobo) 203 208 195 186 178

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