· 2016 | ANNUAL. REPORT. VISION | MISSION | VALUES. Vision Values. Mission. To be Zambia’s leading, preferred, admired, and innovative financial institution that

2016 | ANNUALREPORT

VISION | MISSION | VALUES

Vision

Values

Mission

To be Zambia’s leading,

preferred, admired, and

innovative financial

institution that should

provide to each of

our chosen customer

segments a fair deal as

we also strive to bank

the unbanked.

To be the leading financial institution in each of our chosen segments with a special focus on Government, Food and Agriculture, Personal and SME Banking through appropriate technology, distribution channels, and with empowered and motivated employees.

• Pride• Respect• Integrity• Excellence• Teamwork

2016 | ANNUALREPORT

CONTENTS

2016 events in photos

Brief Profile

Financial Highlights

Board of Directors

Executive Management

Chairperson’s Report

Managing Director’s Report

Directors’ Report

Statement of Corporate Governance

Corporate Social Responsibility

Statement of Responsibility for Financial Statements

Independent Auditor’s Report

Financial Statements

2

4

5

6

8

10

12

14

16

31

33

34

40

2016 | ANNUALREPORT

EVENTS IN PHOTOS

2

Towards bringing banking services closer to the people - launch of Cosmopolitan Branch in Makeni - Lusaka.

A beat of drums completed the celebration enjoyed by staff and customers.

Bringing banking services closer to the people - from Cosmopolitan branch, Lusaka -

to Chinsali Branch - Muchinga Province.

Towards environmental management for good business practice cause - we donate recycled paper to Apters, which is in turn used to make furniture for correctional purposes for children born with disabilities.

We are proud of our association with Apters.

2016 | ANNUALREPORT

EVENTS IN PHOTOS

3

Towards enhanced customer engagement - we continue to involve our customers in decision making processes that govern the way we work.Management engage customers during the 2016 Annual General Meeting.

Corporate governance and transparency are key to our business.

Supporting our customers grow through strategic

partnerships.

Zanaco and Financial Sector Deepening Zambia

sign an MOU with the objective to support the

growth of Small Medium Enterprises.

Keeping the dream alive with customers - outgoing Managing Director & CEO Mr. Bruce Dick handing over the “Instruments of power” to incoming MD & CEO Mr. Henk Mulder in the presence of Zanaco Board Chairperson Ms. Charity Lumpa.

Our esteemed customers joined in the ceremony.

2016 | ANNUALREPORT

BRIEF PROFILE

4

HistoryZambia National Commercial Bank Plc (Zanaco) was established in1969 to service the financial needs of the Zambian economy and it has since evolved into a leading Bank nationwide. In 2007, the Government of the Republic of Zambia (GRZ) sold a 49% stake in the Bank to Rabo Development B.V. a subsidiary of the Cooperatieve Centrale Raiffeisen-Boerenleen Bank (Rabobank) of the Netherlands.

Subsequently, Rabo Development sold a 3.41% stake to Lizara Investments Limited, a nominee of the Zambia National Farmers Union (ZNFU), following the Bank’s Initial Public Offering in 2008.

The Bank remains majority-owned by Zambians and is thus considered “citizen owned”. The relationship with Rabobank enables Zanaco to benefit from technical assistance and best practices in various areas of banking.

Our CustomersIn our quest to meet customer expectations, Zanaco’s strategic focus has been centred around improved service delivery. Guided by our Vision, Mission and Values, we are determined and committed to ensuring that we not only meet the expectations of our over 1 million customers who cut across the Personal, Corporate, Government, SME and Agriculture sectors, but exceed them.

Innovation and sustainability for us means doing things better and smarter, driven by the needs of our customers; it means making efficient use of our resources and empowering the customer with financial services and products that help them attain their goals and aspirations. Our PeopleOur members of staff are our number one resource. We are proud of our 1,219 dedicated, inspired and motivated staff who drive our agenda. Zanaco is the largest employer in the Zambian banking sector.

To ensure we maximise output and get the best out of our employees. We invest in training and ensure we take good care of their wellbeing.

Ownership StructureThe current ownership structure of Zanaco is as follows:

Rabo Development B.V. 45.59%

GRZ 25.00%

LuSE Free Float 18%

NAPSA 8%

LIZARA Investments Limited 3.41%as Nominees of Zambia National Farmers Union (ZNFU)

45.59%18%

8%

25.00%3.41%

100%

2016 | ANNUALREPORT

FINANCIAL HIGHLIGHTS

5

2016 | ANNUALREPORT

BOARD OF DIRECTORS

6

Gertrude M. Akapelwa

Ms. Akapelwa is the Founder, Vice Chancellor of the Victoria Falls University of Technology (VFU). Her career extends over 45 years in the Information Technology, banking and education sectors.

A recipient of the following awards: the Zambia Society for Public Administrators John Mwanakatwe Distinguished Award, the Zambia Association of University Women (ZAUW) Recognition and Honour for being the pioneer female Computer Scientist; and the IBM Systems Engineering Professional Excellence Award. She also received the Overall, Regional and Country winner Awards for Africa’s Most Influential Women in Business in 2013, 2014 and 2015. She is the owner and CEO of La Residence Guest House.

A former Board Chairperson of the Zambia Information & Communications Technology Authority (ZICTA) and was also a member of the Millennium Challenge Account Zambia Steering Committee and the Technical Committee for the Government of the Republic of Zambia Lands Information Management System. She is also a former African Develop-ment Bank manager who worked in different capacities for 23 years in both Ivory Coast and Tunisia. She is a former IBM Systems Engineer.

Ms. Akapelwa holds a Doctorate in Education/ABT from the University of Liverpool, a Masters Degree in Public Administration from Harvad University, a B.SC in Mathematics with Education from the University of Zambia and is also a certified IBM Systems Engineer.

Henk G. Mulder

Mr Mulder was until this appointment the Managing Director for Rabo Development in the Netherlands. With a career spanning over 34 years, Mr Mulder is a Law graduate of the University of Groningen in the Netherlands and has extensive experience in banking. His functional expertise are in strategic management, credit risk, treasury, investment and retail banking.

He started his career in 1982 at ABN Amro Bank where he served in various roles in the Netherlands, India, Brazil, Indo-nesia, Colombia, Romania and Saudi Arabia. He also served at PT Bank Rabobank Indonesia as CEO for five years before joining Rabo Development BV.

Hastings Mtine

Mr. Mtine is the Managing Partner of MPH Chartered Accountants. With a career spanning over 40 years as a Chartered Accountant, he serves as a member of Konkola Copper Mines Plc (KCM) Board of directors. He is also a member of the audit committees of KCM and Zambeef Plc.

Mr Mtine has previously served as the Vice Chairperson of the Bank of Zambia Board and as chairperson of the sub committee – Pensions and Audit. He also once served as the Principal International Contact Partner for Zambia - KPMG-Africa Board.

Charity Chanda Lumpa

Ms Lumpa is an accomplished executive with over 32 years work experience in telecommunications, banking, tourism and insurance. She has held the positions of Managing Director at Airtel Networks Zambia Plc and Zambia National Tourism Board, and is the founding Managing Director of Ecobank Zambia Limited which she successfully set up in 2009. As an experienced executive her functional expertise are in credit risk management, retail banking and marketing management.

Ms Lumpa is also the Chairperson of SOS Children’s Village Zambia and the Hostels Board of Management under the Ministry of Works and Supply. Her current directorships include being a director on the boards of Air Namibia (and is the Audit Committee Chairperson), and the Livingstone International University of Tourism Excellence and Business Management. She is also a panelist on the Malawi Innovation Challenge Fund - an investment portfolio of UKAID and UNDP in Malawi.

Ms Lumpa has a Bachelor of Arts Degree in Public Administration, a Masters of Business Administration (Finance) and a postgraduate diploma in Marketing Management.

2016 | ANNUALREPORT

BOARD OF DIRECTORS

7

Eric Drok

Mr. Drok’s banking career spans over 30 years. From 2002 to 2006 he served on the Board of ING Bank in The Netherlands. In 2006 he was appointed as CEO of ING Bank in Australia. He later moved to Poland as Head of Retail at ING Poland up to 2011 when he joined Rabobank.

Until 2015 he was the Chief - International Direct & Retail Banking of Rabobank International. He was also Board member of Rabobank Australia and Rabobank New Zealand and of BGZ Bank in Poland.

Now Mr Drok is Corporate advisor and non-executive director in Finance and Retail industry. He is Chairman of Flow Traders NV(Dutch listed trading company) and member of the Supervisory Board of Euro Pool Systems International BV(logistics), LievenseCSO BV(engineering), The Greenery BV(vegetables wholesaler) and Max Havelaar(Fairtrade). He is also Operating Partner of Hg-Capital in London(private equity firm). Mr Drok holds a Masters Degree in Economics and a Masters Degree in Law from Erasmus University in Rotterdam.

Guy H. Robinson

Mr Robinson is a former President of the Zambia National Farmers Union and has served as Board Chairperson of the Food Reserve Agency (FRA), Trustee of the Golden Valley Research Trust and as board member on the Parmalat Zambia Board. He is currently also serving as a board member of Tiger Feeds Zambia Limited, Musikili School and as a representative of Lizara Investments Limited and the Zambia National Farmers Union (ZNFU), on the Zanaco Board of Directors. Mr Robinson is additionally a large scale sugar cane grower, dairy farmer and beef producer.

Fred Weenig

Mr Weenig is Chief Executive Officer of FGH Bank, a subsidiary bank of Rabobank in the Netherlands. Part of his assignment is to integrate FGH Bank into Rabobank. FGH Bank is the largest commercial real estate financier in the Netherlands. Before taking up this role, Mr Weenig was Director Wholesale Clients Netherlands at Rabobank. He joined Rabobank in 2004 where he was Head of Special Asset Management Rabobank Group until July 2010. Prior to his move to Rabobank he worked for 18 years at ABN AMRO, where he held several commercial roles in both retail as well as (international) wholesale banking. He holds a masters degree in Naval Architecture from Delft University of Technology.

Ronald M. Simwinga

Dr. Simwinga was until january 2017 Permanent Secretary at the Ministry of Finance in charge of Economic Management and Finance. As a nominee by the Minister of Finance he joined the Board of Zanaco in 2014.

His research interests include Macroeconomic Theory and Policy, Monetary Theory, Financial Economics and International Finance and Economics.

2016 | ANNUALREPORT

EXECUTIVE MANAGEMENT

8

Henk G. MulderManaging Director & Chief

Executive Officer

Lucas HaraChief Financial Officer

Lishala SitumbekoChief Commercial Officer

2016 | ANNUALREPORT

EXECUTIVE MANAGEMENT

9

Hamish Chipungu Chief Risk Officer

Kaluba Gloria Kaulung’ombeBank Secretary

Manlio D’AlessandroChief Operations Officer

Mumbi MwilaChief Human Resources &

Training Officer

2016 | ANNUALREPORT

CHAIRPERSON’S REPORT

10

In a very difficult economic, financial and regulatory environment Zanaco demonstrated its resilience and declared a net operating profit, excluding transformation expenses, of ZMK248 million, underscoring the Bank’s strength and capacity to generate positive results. The Bank’s core capital adequacy stood at 15%.

Challenges of the economic environmentZanaco faced three main challenges in 2016 and these will continue to determine the economic and financial situation in the coming year:

a) Weak economic activity – particularly in the food and agri business sector, and generally in the SME/manufacturing sectors.

b) Unstable financial markets coupled with the performance of the Kwacha against major currencies plus high interest rates; and

c) Very significant regulatory measures and changes, particularly the Basel II capital and higher liquidity requirement.

Zanaco’ s response to the challengesZanaco has four management drivers that enable it, from a position of strength, to overcome these challenges and to strongly gain ground against its major competitors:

Geographic footprint and recurring nature of revenuesZanaco has achieved a geographic positioning centred on its core markets with a balance between the urban and rural branches that are supported by over 500 Agencies.

The retail bank model, which provides services to our over one million customers, has been revamped so as to deliver long term incremental value in recurring revenues.

Capital and liquidity managementOur overriding priority is to continue strengthening the balance sheet. In this regard our objective was to ensure the

Dear Valued Shareholders,

On behalf of the Board of Directors, it gives me great pleasure to present the 2016 annual report.

capital adequacy ratio remianed above the central bank’s threshold of 10%. In this regard, Zanaco achieved 5% above the regulatory requirement although 2% below the 2015 performance. As a systemically important financial institution this was a great achievement albeit the challenges of meeting the Basel II capital requirements will need to be overcome.

We maintained a comfortable liquidity position and marginally increased our deposit base without having to remunerate at market rates. In so doing we let go of expensive term deposits and introduced new current account and savings accounts (CASA) initiatives to drive deposit growth.

Meanwhile our credit portfolio was burdened with weak eligible demand for loans whilst most of our customers struggled to timely meet their repayment obligations on the back of the economic challenges. The Bank has thus continued to strengthen its credit risk management approach to ensure that the quality of the loan book is further improved.

Operational efficiencyThe Bank’s focus will continue to be to reduce its cost-to-income ratio currently at 88%. Attributable to this was the Bank’s determination to take the requisite transformation costs upfront in the bid to continue investing in the future.The Bank’s focus in 2017 will continue to be on further improving operational efficiencies to enhance overall performance.

Prudent risk managementThe Bank recognises that the risk in the credit portfolio will remain due to the micro-economic challenges. It is the Directors belief that the actions taken by Management will greatly improve the quality of the loan book.

These four management drivers are strengthened by the strong, solid and attractive Zanaco brand. With the continued transformation initiatives that seek to have a segmented approach towards our customers needs, increased focus on transactional banking plus a re-organised management structure, should make Zanaco the most attractive bank brand going forward.

2016 | ANNUALREPORT

CHAIRPERSON’S REPORT

11

Milestones 1. The Fit2Serve transformation programme that kicked off in 2015 came to a close in 2016 with a new structure and initiatives to enhance both operational efficiency and liquidity. The benefits being derived are recognising and amending processes that are bottlenecks in the efficient provision of both customer and operational services. The focus from 2017 onwards is therefore Performance for Results (P4R).

2. The staff rationalisation programme was successfully achieved under the Voluntary Separation Scheme conducted after a job evaluation exercise to enhance performance and delivery of positive results. From 1,361 staff the establishment is now at 1,219.

3. The Board had their first Board Evaluation in three years that has seen it establish a more strategy focused Board agenda. With this alignment is the inclusion of ICT to ensure the bank’s service provision is transformed.

4. The Board introduced a robust performance appraisal system for all staff including the Managing Director. This has seen the executive team, management and staff have clear key performance indicators (KPIs) with accountability. The benefits will be seen through the improved performance of the Bank against set targets and enhanced responsibility for results achieved or otherwise.

5. Most importantly however is the change of our major shareholder. The transition to move Rabobank’s shareholding to Arise BV will be concluded in the first quarter of 2017. This is a cardinal development for Zanaco as it will be availed the benefits of the experience and best practice of the companies under Arise; Arise BV will assist Zanaco to be a growth story and provide affordable credit lines and technical assistance to enhance the Bank’s performance whilst ensuring it is well run.

Future Prospects The overarching priority in 2017 is to commence the initiatives required to place Zanaco in pole position by 2020 and making it a top universal and transactional Bank.

The focus of the Bank’s initiatives have clearly been to improve operating efficiency, generate incremental profit and enhance the performance of our people. In this regard therefore, our one million customers will be placed in their appropriate segments to serve them better whilst ensuring that customer service is second to none;

The digitisation of the Bank is critical to bring our innovativeness back into the 21st century and build upon past successes that saw Zanaco pioneer ATMs and Xapit;

As a Board, with the support of the Executive management team, a new Shareholder Relationship, Management guidelines are to be implemented to effect better and improved communication not only with our esteemed shareholders but all key

stakeholders.

The Board of Directors hastens to advise that this transformation journey that has begun will ultimately see a much improved financial and people performance. There are a number of areas that we believe require further attention to realise our strategic ambition of being the universal and top transaction Bank by 2020. However, the important thing is that we have remained resolute in making the much needed investment in resolving the identified gaps for improved performance.

Executive Management ChangesI am pleased to advise that in November 2016, Mr Henk G Mulder was appointed Managing Director and Chief Executive Officer of Zanaco, taking over from Mr. Bruce Dick, who retired at the end of October 2016. The Board of Directors has every confidence in Mr Mulder’s wide and varied experience to ensure that Zanaco begins to regain its rightful place as a top, well performing bank in the financial sector and an employer of choice that will provide growing value to all shareholders.

AcknowledgementsI wish to acknowledge with gratitude the Board of Directors support to Management and all Board related activities in 2016. There was a high level of interaction with the Board by Management in reviewing the critical proposals, providing decisions quickly and effectively in driving the transformation programme.

Furthermore, and on behalf of the Board of Directors, and my own behalf, I wish to thank the Executive team, Management and staff of Zanaco for their tireless efforts, working around the clock to refresh the values of the Bank and to improve the work culture for enhanced performance necessary for the growth being sought.

I am convinced we will achieve all our goals and this will ultimately push up the share price. You can be rest assured that everyone who works for Zanaco, including Arise BV, from the Board of Directors to the 1,219 people working for the service of our over one million customers, will be working to consolidate Zanaco as a safe and profitable investment for our 3,400 investors.

Thank you very much for your support and confidence.

Charity C LumpaCHAIRPERSON

2016 | ANNUALREPORT

MANAGING DIRECTOR’S REPORT

12

Our Bank’s transformation journey gained momentum, as we relentlessly focused on our clients, how to serve them better, how to meet their needs, and simplified the way we do business. Our strategic agenda is set, and we believe it will help position Zanaco in a better place to continue to adapt and thrive in this increasingly competitive and evolving industry.

While we have seen modest improvements in some of the key indicators in our operating environment, market volatility, high cost of funding, and slower economic growth may in fact constitute the “new normal” in the medium term.

We are adapting to these operating conditions with increased investments in the new operating model so that we are able to transform and simplify the customer experience, and the way we do business. These investments will also help to enhance our growth and reduce our structural costs.

I strongly believe that building a better and sustainable Bank for the long term is the best way for us to enhance shareholder value.

Progress on the Strategic AgendaI am pleased to mention that we are making good progress on the actions we set out, and I would like to share below some of the significant progress we’ve made to date.

Organisation Structurea) We have realigned the business units from standalone Divisions with mixed responsibilities (sales, service and product management) into a single Commercial Division with a clear focus and mandate on sales and services.

b) We have created a new department responsible for product management, and as a centre of excellence for product

knowledge and support to the Bank.

c) We have clearly separated the roles in the branches between sales and service, and back office.

d) We have centralised the back office activities into one Operations Division.

Right sizing and alignmenta) We have reduced the overall staffing from 1,361 to just 1,219 through a Voluntary Separation Scheme (VSS).

b) We have transferred over 250 people across functions within the organization.

c) We have streamlined the executive team from 9 to 6.

Processes, training, and other key enablersa) We have changed a number of key processes so that they are aligned with the new ways of working which are aimed at improving the customer experience.

b) We have continued to invest in training in order to improve the way we conduct our business.

c) We have changed and continue to improve a number of Human Resources enablers as part of the overall transformation strategy.

I am happy to state that the actions and investments we have so far taken are the key cornerstones towards building the Bank of the future that aspires to continuously improve the experience of our customers, efficiency in the way we serve them, and deliver our strategic ambitions of being a universal and top transaction bank by 2020.

Although the transformation journey has not yet finished I am pleased with the early signs that I am seeing in our Bank. However, I believe that we still have to improve our customer convenience, revitalise our digital banking leadership, and start generating the

Building the Bank of the Future

While the pace of changes in the banking operating environment continued to accelerate in 2016, our Bank responded with a comprehensive set of efforts aimed at building a Bank of the future.

2016 | ANNUALREPORT

MANAGING DIRECTOR’S REPORT

13

cost efficiencies arising from the transformation actions. It is clear that we are operating in a very different environment than we were a few years ago, and therefore, let me commend the relentless effort our Board, Management team and staff have put in over the past 12 months to adapt and evolve our Bank.

Our Business PerformanceWe have continued to grow the business, with our customer base growing by 10% to over 1 million customers. However, we believe we have good opportunities to further improve our understanding of our customers through better segmentation and delivering good customer value propositions. In addition, our debit card base also grew by 20% to 1,395,000 further reinforcing the strength of the Zanaco brand and business in the country.

In order to support this growth, we have continued to grow our distribution channels and added 2 new branches, Chinsali & Cosmopolitan mall, bringing our total branch network to 68. We also continued to optimise our Zanaco Xpress Agency model which has 533 agents in order to increase focus on transaction throughput, and customer experience.

2016 Financial Performance SummaryThe underlying revenue has continued to be resilient and grew by 13.5% despite the loan book shrinking following the tough credit conditions. Key drivers for revenue growth were;

(a) 28% growth in Fees and Commission on the back of improved business growth, and improved collections.

(b) 24.9% growth in Net Interest Income driven by reduced growth in expensive wholesale deposits, and asset re-pricing. However, Operating Costs remained relatively high and grew by 14% from K784 million to K896 million, resulting in Operating Profit before Transformation Costs growing by 34% from K185 million to K248 million.

Our Profit After Tax was K30m from K 118 million in the prior year on the back of investing 14% of our annual revenues in the transformation programme.

Our PeopleIn the competitive market place we are in, the only truly unique and non-replicable source of competitive advantage is the superior skills, commitment, loyalty and professionalism of our people. We truly believe that these attributes when combined well will help deliver a consistently high-quality experience for customers, who will be encouraged not only to remain loyal but also to act as advocates among their social and business networks.

For this reason, and as part of the overall transformation programme we have continued to invest a lot of resources in training, coaching, and developing the appropriate Human Resources enablers in order to ensure that all our people

are empowered and equipped to deliver superior performance.

Thus during the year, we started to develop the true customer and sales focus that we believe, will enable us to deliver on our strategic ambitions. We are also embedding a customer-focused attitude into our corporate and retail culture and in every one of our employees.

Even though we accept, we are not there yet, we have clear and actionable plans to achieve our objectives.

Summary and Outlook for 2017In addition to the shifting competitive dynamics in our industry, we expect the challenges of economic conditions will likely persist in 2017 but will begin to recover towards the end of the year. Both of these factors will present challenges for us at times, but we believe 2017 will also be filled with opportunities for us to continue building a better, stronger Bank.

Let me also mention that the challenges emerging in the industry loan book quality will remain the biggest risk as borrowing clients will continue to struggle with loan servicing due to the current stresses in the economy. Nevertheless we will continue to focus on our customers and provide the required support to them as well as our people as we continue strengthening and leveraging the loyalty to both our brand and the Bank as a whole.

We will also continue to give back to the communities in which we live and work, and provide support towards improving financial literacy and health. We believe in strong communities, and will continue this strong tradition of giving back.

ConclusionWe believe we have a larger sense of responsibility which always comes with the recognition that if we embrace and promote change, we must also play a role in addressing its broader consequences. The digital revolution is opening up unprecedented avenues of opportunity. It is also radically altering the very nature of our work.

I would like to thank our over 1 million customers across the country for their business and just as importantly for their trust. I would also like to thank my predecessor for steering this Bank during this exciting period and setting the ground for a great future. Finally, I want to thank the Board of Directors for their support, and the Management and Staff for the work they do day-in and day-out to earn this trust and to help our customers become better off whilst seeking to enhance shareholder value. I am proud of our team and confident in the Bank’s future.

Henk G. MulderMANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER

2016 | ANNUALREPORT

DIRECTORS’ REPORT

14

The Directors present their report together with the audited financial statements for the year ended 31 December 2016.

Principal ActivitiesThe principal activity of the Bank is the provision of commercial banking and related services to the general public.

Share CapitalThere were no changes to the authorised and issued share capital during the year.

Significant Shareholding in the BankAs at 31 December 2016, substantial shareholding (5 per cent or more) in the Bank’s share capital were as follows:

2016 2015

Rabo Development 45.59% 45.59%Government of Zambia 25.00% 25.00%National Pension Scheme Authority 8.91% 8.91%

Results and DividendThe net profit for the year amounted to K30,106,000 (2015: K117,509,000). The Bank paid dividends during the year amounting to K43,313,000 in respect of the financial year ended 31 December 2015. The Board does not recommend a dividend for the year ended 31 December 2016.

DirectorsThe Directors who held office during the year and to the date of this report were:

Ms C C Lumpa Chairperson Mr H Mtine Vice Chairperson Mr E Drok Non-Executive DirectorDr R Simwinga Non-Executive DirectorMs G M Akapelwa Non-Executive DirectorMr G Robinson Non-Executive DirectorMr F Weenig Non-Executive DirectorMr B Dick Managing Director - Retired 31 October 2016Mr H G Mulder Managing Director - Appointed 1 November 2016

Number of Employees and Remuneration The total remuneration of employees during the year amounted to K400,660,000 (2015: K360, 232,000) and the average number of employees for each month of the year was as follows:

Month Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16Total Head count 1,351 1,342 1,336 1,328 1,316 1,288 1,279 1,267 1,271 1,268 1,224 1,219

Employees PoliciesThe Bank has policies and procedures to safeguard the occupational health, safety and welfare of its employees.

Gifts And DonationsDuring the year the Bank made donations of K3,129,800 (2015: K2,622,000) to charitable organisations and events.

Property, Plant and Equipment The Bank purchased property and equipment amounting to K24,838,000 (2015: K48,595,000) during the year. In the opinion of the Directors, the recoverable amount of property, plant and equipment is not less than the carrying value.

Research and DevelopmentDuring the year the Bank did not incur any Research and Development costs (2015: Nil). However, the Bank incurred K14,415,000 (2015:K5,183,000) for the development of various products.

2016 | ANNUALREPORT

DIRECTORS’ REPORT

15

Related Party TransactionsRelated party transactions are disclosed in Note 33 to the financial statements.

Directors’ Emoluments and InterestsDirectors’ emoluments and interests are disclosed in Note 33 to the financial statements.

Prohibited Borrowings or LendingThere were no prohibited borrowings or lendings as defined under Sections 72 and 73 of the Banking and Financial Services Act, 1994 (as amended).

Risk Management and Control The Bank through its normal operations is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. The Bank’s risk management objectives, policies and strategies are disclosed in Notes 2 and 37 to the financial statements.

Compliance FunctionThe Bank has a compliance function whose responsibility is to monitor compliance with regulatory requirements and the various internal control processes and procedures.

Know Your Customer (KYC) and Anti-Money Laundering (AML) PoliciesThe Bank continues to utilise and update its know-your-customer (“KYC”) and anti-money laundering (“AML”) policies and comply with current legislation in these areas.

AuditorsA resolution to consider the appointment of the Auditors of the Bank for the financial year ending 31 December 2017 and authorise the Directors to set the Auditors remuneration will be put to the Annual General Meeting.

By order of the Board.

Ms Kaluba Gloria Kaulung’ombeBank Secretary

Date: 17 February, 2017

2016 | ANNUALREPORT

STATEMENT OF CORPORATE GOVERNANCE

16

Introduction Zanaco’s vision is to be Zambia’s leading, preferred, admired and innovative financial institution that provides a fair deal to each chosen customer segment and to strive to bank the unbanked. Zanaco’s mid-term mission is now to be the top transactional bank by 2020. As such corporate governance which provides the means to fostering values of fairness, accountability, responsibility and transparency, stands at the core of the Bank’s endeavor to realise its vision and mission.

Zanaco has embedded the concept of corporate governance through the development of a clear governance framework which has increased the level of governance in the organisation and has led to increased independent scrutiny in decision-making and the alignment of the organisation to a robust legislative and ethical framework, in order to constantly improve the organization’s corporate governance culture.

The number of corporate failures in a highly competitive operating environment, continues to underscore the necessity for increased focus on corporate governance. The Bank has continued to ensure that appropriate governance frameworks are in place to ensure best practice at all times.

Compliance Status of Corporate Governance RulesA review of the Bank’s compliance with the Lusaka Stock Exchange Corporate Governance Code as at 31 December 2016, showed that the full compliance rate was at 98%. The summary of the compliance status is shown in the chart below.

Summary of areas that are not fully compliant or non-applicable Areas not applicable (i) Where share options have been granted to Non-Executive Directors, the Board must obtain the prior approval of share owners and meet the specific requirements of the Companies Act.

Category Total Applicable Non applicable Full Partial Non Rules to Zanaco to Zanaco compliance compliance compliance % N/A % FC % PC % NC General matters 15 15 - 15 - - 0% 100% 0% 0%Chairman and CEO 5 5 - 5 - - 0% 100% 0% 0%Executive and NED’s 4 4 - 4 - - 0% 100% 0% 0%Directors’ compensation 9 9 - 9 - - 0% 100% 0% 0%Share and share dealings 4 3 1 3 - - 25% 75% 0% 0%Board meetings 4 4 - 4 - - 0% 100% 0% 0%Board evaluations 1 1 - 1 - - 0% 100% 0% 0%Company Secretary 3 3 - 3 - - 0% 100% 0% 0% Board committees 10 10 - 10 - - 0% 100% 0% 0%Legal and compliance 2 2 - 2 - - 0% 100% 0% 0%External audit 6 6 - 6 - - 0% 100% 0% 0%Internal audit 12 12 - 12 - - 0% 100% 0% 0%Risk 7 7 - 7 - - 0% 100% 0% 0% Integrated sustainability reporting 7 6 1 6 - - 14% 86% 0% 0%Disclosure and stakeholder reporting 4 4 - 4 - - 0% 100% 0% 0%Organisation integrity 6 6 - 6 - - 0% 100% 0% 0% 99 97 2 97 - -

Compliant 98%

Non-Applicable 2%

2016 | ANNUALREPORT


17

Board PerformanceThe Board continued to perform its oversight role, while also providing strategic direction to Executive Management.All Board appointments are subject to a fit-and-proper test by the Central Bank, while Shareholder approval is sought for the nomination of new Directors at Annual General Meetings.

The role of the Chairperson is to ensure that there is the right balance on the Board, with the requisite industry knowledge and to lead and manage the work of the Board to ensure the Board’s efficient and effective discharge of its legal and regulatory responsibilities.

In keeping with best practice, the activities of the Board are planned and documented. These may include engagement with third parties, such as Pension Fund Managers and Organisational Development Consultants to get deeper insights into the relevant changes to legislation and market trends.

The Board agrees on its Annual Plan which includes a Strategy Session, review of the Succession Planning, Budgeting and Performance Review for Senior Executives. The Chairperson, with assistance of the Chief Executive Officer and Company Secretary, ensures that the Directors are provided with timely information to facilitate an interactive dialogue during Board sessions.

To ensure transparency, the activities of the Board are documented and planned. Although the Board has the ultimate responsibility for the success of the Bank, this is managed on a delegated basis. The Board ratifies the appointment of the Chief Executive Officer and monitors his or her performance in leading the Bank and providing operational and performance management in delivering the Strategy.

The Chief Executive Officer provides a regular report to the Board that includes information on financial performance of the Bank and the achievement of financial objectives, operational matters, the operating environment, strategic development, corporate social responsibility, human resource and stakeholder relations.

The Board promotes good behavior and demonstrates clear values and high ethical standards, being mindful of the overriding duty of each Director to act in good faith and promote the success of the bank.

The Board has a planned programme for each financial year to ensure that all necessary matters are covered and to also allow for sufficient debate and challenge.

The Board continues to guard against the risk of complacency by encouraging openness and appropriate levels of challenge. While engaging with Management both formally and informally, the Board strives to ensure that it remains sufficiently detached to maintain its independence.

The Bank has put in place a formal induction process for new Board members that takes into account the different backgrounds and

experience of each Director. New Board members are properly inducted into the Bank’s policies and procedures to ensure that they are well versed with the governance structures which have been developed over the years.

The Board CharterDuring the 2016 financial year, the Board, in compliance with the Bank of Zambia (BOZ) Directives on Corporate Governance and the

Lusaka Securities Exchange Corporate Governance Code, developed a Board Charter which sets out the following:

a) The roles, functions, responsibilities and powers of the Board;

b) The roles, functions, responsibilities and powers of individual Directors;

c) Stakeholder engagement;

d) The remuneration principles of Board of Directors;

e) The annual evaluation process for the Board and Board Committee;

f ) The powers delegated to the various Board Committees;

g) The roles, functions, responsibilities and powers of the Managing Director and Management; and

h) The roles, functions and responsibilities of the Company Secretary.

Board Training and Continuous DevelopmentThe Board has put in place a robust Corporate Governance training plan for the 2017 financial year.

2016 | ANNUALREPORT


18

Equitable Treatment of Minority ShareholdersThe corporate governance framework of the Bank continues to ensure that equitable treatment is accorded to all shareholders, including

minority shareholders, by:

a) Ensuring that the Board adopts a shareholders’ perspective when making decisions and ensuring minority interests are protected;b) Improving communication and interaction between Minority Shareholders, Board Members and Management;c) Ensuring that appointment of Directors is subjected to the final approval of all shareholders (including Minority Shareholders) at the Annual General Meeting; andd) Ensuring that Minority Shareholders are duly accorded with their three basic rights, which are the right to :

i) seek information;ii) voice an opinion; andiii) seek redress.

Management Team Our Executive Management team provided leadership and direction for the organisation. Respective members of the Executive Team participated in various industry initiatives, such as those promoted by the Bankers Association of Zambia (BAZ) and its committees, the Zambia Chamber of Commerce and Industry and the Zambia Federation of Employers. In addition, the Management Team participated in various industry initiatives which were driven by the regulators, such as the implementation of the Basel II framework. The Board, within its responsibility for succession planning for the Executive Management team, also engaged with staff at every opportunity available. In addition, the Board periodically discussed the People’s Balance sheet which is a tool for developing and managing talent within the Bank.

Risk ManagementThe Board continued to manage both risks and controls in the Bank. To further demonstrate its focus on the various risks with the potential to impact the Bank’s performance, the Board has approved governance structures, internal controls and the risk management framework, which are both prudent and effective.

The Board continues to have processes in place to ensure that it receives the right information in the right form and at the right time to enable it to effectively discharge its duties.

The Board continued to maintain rigor in reviewing the strategy for the future of the Bank. A key requirement is that the Bank has robust processes to identify, evaluate and manage risk so that Directors have visibility of the major risks. To this end, the Bank has developed a system of internal controls that encompasses policies, processes, tasks and behaviours to facilitate the effective and efficient operation of the Bank.

The Bank also developed policies and procedures to drive consistency and clarity on how risks are managed and subsequently reported.

While the Board accepts final responsibility for the risk management and internal control systems of the Bank, it is the delegated duty of Management to ensure that adequate internal financial and operational control systems are developed and maintained on an on-going basis in order to provide reasonable assurance regarding:

a) Effectiveness and efficiency of operations;b) Safeguarding of the Bank’s assets (including information);c) Compliance with applicable laws, regulations and supervisory requirements;d) Reliability of accounting records;e) Business sustainability under normal as well as adverse conditions; andf ) Responsible behavior towards all stakeholders.

The efficiency of internal control systems is dependent on their compliance with prescribed measures. There is always a risk of staff non-compliance with such measures. Consequently, even a strict and efficient internal control system can provide no more reasonable measures of assurance in respect of the above-mentioned objective.

Internal auditors evaluate and assess the adequacy of internal controls and regularly report to Senior Management and the Audit Committee of the Board on their findings and recommendations. The internal control procedures are tested periodically and it is the opinion of the Board that the internal control procedures meet the acceptable criteria.

2016 | ANNUALREPORT


19

The Internal Audit team independently reviews the risk identification procedures and control processes implemented by Management. It provides objective assurance of the operations and validity of the systems of internal control through a programme of cyclical reviews, making recommendations for business and control improvements as required.

The Board’s responsibilities include the following:

a) Providing overall strategic direction and oversight;b) Ensuring implementation of appropriate internal risk management, financial, compliance and audit controls and frameworks;c) Ensuring the establishment and implementation of corporate culture values;d) Approval of credit and investment policies, budgets and business plans; ande) Monitoring and reviewing Zanaco’s performance against strategy.

RISK COMPONENTS DEFINITION

Credit Risk The risk of loss due to the non-performance of a counterparty in respect of any financial or other obligation. Credit risk also includes concentration risk. Market Risk - Interest The sensitivity of a Bank’s financial position and earnings to unexpected, adverse movements in rate risk in banking interest rates.book Market Risk – Foreign Foreign exchange risk is the risk of losses occurring on its foreign currency denominated assets orExchange risk liabilities from movements in the foreign exchange rates.

Market Risk-Price Risk Price Risk is the risk of losses in on - and off-balance sheet positions arising from movements in market Management prices.

Liquidity/Funding Risk Funding/liquidity risk is the risk that a Bank will not be able to meet current and future cash flow and collateral requirements (expected and unexpected) without negatively affecting its reputation, daily operations and/or financial position.

Operational Risk The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes fraud and criminal activity (internal and external), project risk, legal risk, business continuity, information and IT risk, process and human resources risk. Strategic, business and reputational risks are excluded from the definition.

Regulatory Risk The risk of statutory or regulatory sanction and material financial loss or reputational damage as a result of failure to comply with any applicable laws, regulations or supervisory requirements.

Strategic Risk Strategic risk is the risk to current or prospective earnings arising from inappropriate business decisions or the improper implementation of such decisions.

Business Risk Business risk is the risk to earnings and capital from potential changes in the business environment, client behaviour and technological progress. Business risk is often associated with volume and margin risk and relates to the Bank’s ability to generate sufficient levels of revenue to offset its costs.

Reputational Risk Reputational risk is the risk of reputational damage due to compliance failures, pending litigations, under-performance or negative media coverage.

Legal Risk The violations of, non compliance with laws, rules, regulations or prescribed practices or when the legal rights and obligations of parties to a transaction are not well established.

Environmental, social Risks focus on the environmental, social and governance issues which impact the Bank’s ability and governance (ESG) to successfully govern and sustainably implement business strategy.

Risk Governance The Board has ultimate leadership authority and responsibility for identifying and controlling all risks that affect Zanaco.

2016 | ANNUALREPORT


20

The responsibility for managing and monitoring risks has been delegated to other independent bodies such as the Risk Committee and the Credit Committee.

The Risk Committee (“RC”) has overall responsibility for the development of Zanaco’s risk strategy and implementation of risk principles, frameworks, policies and limits.

The Board:

• Provides overall strategic direction and oversight;• Ensures implementation of appropriate internal risk management, financial, compliance and audit controls and frameworks;• Ensures the establishment and implementation of corporate culture values;• Approves credit and investment policies, budgets and business plans; and • Monitors and reviews Zanaco’s performance against strategy.

Responsibilities of the Board Committees

Risk CommitteeThe Risk Committee reviews and recommends risk management strategy and risk appetite to the Board and is the approval body for risk policies. The Risk Committee is also responsible for reviewing the control framework for the management of risks that the Bank is exposed to and defining the risk management roles and responsibilities across the Bank.

Audit CommitteeThe Audit Committee has a responsibility to assist the Board of Directors’ in fullfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, and the Bank’s process for monitoring compliance with laws and regulation and code of conduct.

The Committee acknowledges and embraces its role of protecting the interests of shareholders in relation to the published financial information by the Bank and the effectiveness of the audit thereof. The Committee also plays a key role in ensuring that the report and accounts are fair, balanced and understandable and contain sufficient information on the Bank’s performance, business model and strategy.

The Committee is governed by a Committee Charter, which is agreed by the Board and subject to annual review, the last being in December 2015, and include the following responsibilities:

• Consideration of the appointment, re-appointment or removal of the external auditor;• The negotiation of the audit fee;• Agreeing the nature and scope of the Bank’s financial audit;• Monitoring the integrity of the financial statements;• Considering and reporting on any significant issues in relation to the fiancial statements;• Reviewing the cost effectiveness of the audit and the independence and objectivity of the external auditor;• Reviewing the half-year and annual financial statements, and any audited accounts, before submission to the Board, and confirming to the Board of Directors their opinion that the report and accounts are fair, balanced and understandable and contain sufficient information on the Bank’s performance, business model and strategy;• Discussing with the Bank’s auditors any issues and reservations arining from the interim review an year-end audit;• Reviewing, on behalf of the Board, the Bank’s system of internal control and making recommendations to the Board;• Reviewing the requirement for an audit; and• Reviewing the Bank’s whistle-blowing procedures.

Credit CommitteeThe Credit Committee is responsible for approving all credit exposures exceeding the authority of the Management Credit Committee.

Risk Governance Framework Effective risk management also requires multiple points of control or safeguards to be consistently applied at various levels throughout the Bank.

Business Units within Zanaco are accountable for executing specific aspects of the Bank’s activities. Authority is delegated to the head of each Business Unit by the Chief Executive Officer (CEO). The head of each functional unit delegates responsibility to individual staff for carrying out specific tasks in accordance with delegated authorities and with the procedural disciplines of the Bank.

2016 | ANNUALREPORT


21

The Bank’s profit is directly derived from how successfully it manages and prices for risk. Risk management is, therefore, at the core of banking and risk awareness must be embedded in the whole organisation. Risk governance is designed according to the three ‘lines of defence’ as per best banking practice:

• The first line is the ‘business’, meaning both commercial, customer-facing staff as well as staff in back offices and operational departments. All departments are directly responsible to identify and manage all risks that will or can materialise in the course of doing business. This includes the monitoring of risk management in each policy and procedure and making sure procedures are designed to include checks and balances through internal control activities and the separation of duties as much as possible.• The second line of defence are the various departments in the risk directorate. These departments play a supporting and controlling role for the benefit of the first line of defence, ensuring necessary risk activities are executed with the necessary detail and quality. • The third line of defence is the Internal Audit function. The Internal Audit department works independently, objectively and reports to the Board Audit Committee.

Risk CultureA strong risk culture is critical to Zanaco’s success and underpins both the business strategy and risk appetite of the Bank. Zanaco’s culture is to actively take risks that are adequately rewarded and that support its objectives and vision. Shareholder value is added by creating profits measured after charging for the cost of risk or by activities that are of strategic importance and related to a wider shareholder value growth opportunity.

Risk Appetite and Financial Resource Management The Bank’s risk appetite and resource management process frames its decision-making and is integrated into the strategic objectives. The financial resource management process sets minimum targets for these resources.

Risk appetiteThe Bank’s risk appetite is defined as the amount of risk that the Bank is willing to seek or accept in pursuit of its long-term objectives. The Bank has chosen to express its risk appetite for different categories of risk, each with their own characteristics and tolerance levels.

Inherent to the banking business, risk is present in the lending and financing activities of the Bank where credit is extended in the form of loans. In addition to credit risk, Zanaco is exposed to operational and other balance sheet risks (interest rate, foreign exchange, liquidity risk and others).

The Bank has established an active risk culture within the organisation where the correct risk information is utilised across the Bank for decision making. The Bank has developed and embraced a Risk Appetite Statement which is positioned to assist it achieve the strategic plan. The Risk Appetite Statement covers Credit, Market, Capital and non- financial risks. Zanaco has a prudent risk taking culture but acknowledges that some risks need to be taken to attain strategic goals.

Zanaco has defined risk tolerance parameters to safeguard its robust financial position. In quarterly meetings, portfolio variables are compared with the risk tolerance variables. The levels of internal risk tolerance are generally stricter than the Central Bank of Zambia requirements. The Risk Appetite Statement within Zanaco is developed with reference to key metrics and limits applied throughout the Bank. It is necessarily aligned to the strategy and objectives of the Bank.

The Risk Appetite Statement is set by the Risk Committee and, ultimately, approved by the Board.

The Bank differentiates between tolerance levels for balance sheet, credit and operational risk:

• Balance sheet risks comprise of interest-rate risk, liquidity risk, market risk and other risks, and also encompass management of the regulatory ratios.• Credit risk captures the potential loss from a borrower, obligor, or counterparty which fails to honour their contracted debt obligations in a timely manner.• Operational risk is the risk resulting in a direct or indirect loss caused by human error, inadequate internal process and systems or by external calamities.

Tolerance levels for balance-sheet risk are monitored by the Asset and Liability Committee (ALCO). The tolerance variables for operational risk are currently being developed by the Operational Risk Department.

The Board assumes responsibility for ensuring that risks are adequately managed and controlled through the Board Risk Committee.Risk appetite measures and stress and scenario results are included in risk and management reports across the businesses and at Board level, and are continually refined.

2016 | ANNUALREPORT


22

Stress TestingZanaco’s stress testing objective continues to ensure that the Bank can meet its capital requirements in a forward-looking manner, under severe but plausible economic stresses specific to Zanaco’s portfolios and risk profile. The results of the entity-wide stress tests assist the Bank in ascertaining whether it has sufficient capital in periods of stress. Both stress scenarios and sensitivity analysis are considered during stress testing, with regard to credit, market, operational and liquidity risks. The Bank calculates a capital buffer based on the stress testing results, holding this capital buffer as part of its capital base to ensure that capital remains above the minimum regulatory ratio should the stresses materialise. Mitigating actions are included to provide a realistic view of the impact on the Bank’s earnings and capital under the stress scenario.

The Bank’s objective is to offer value by undertaking to deliver sustainable earnings within a desired risk profile. Stress testing is embedded in the risk management of the Bank and is a key focus area in the strategic planning processes. It is an integral part of the Bank’s Internal Capital Adequacy Assessment Process (ICAAP) and is used to assess and manage the adequacy of capital.

Through stress testing and scenario analysis, the Bank is able to assess the performance of its portfolios under potentially adverse economic conditions. It focuses on the key macroeconomic variables that impact the Balance Sheet and Income Statement.

The business plan for the next three years is included in the budget and forecasting process. Scenario planning is then used to assess whether the desired profile can be delivered and whether the business stays within the constraints it has set for itself. The scenarios are based on changing macroeconomic variables, plausible event risks and regulatory and competitive changes.

Stress testing is employed in the:• Strategic planning and budgeting process;• Capital planning and management process including the setting of a capital buffer for the Bank;• Communication with internal and external stakeholders; and• Assessment of the impact of changes in the macroecomic factors on the Bank’s performance.

Financial Resources ManagementThe strategy, risk and financial resource management processes influence the capital and funding plans of the Bank. The capital position provides a buffer over and above the minimum regulatory limit against adverse business performance under extremely severe economic conditions.

The financial, treasury, capital and risk information both actual and budgeted, is used as the basis for risk, capital and financial analysis and stress testing.

Internal Capital Adequacy Assessment Process (ICAAP)ICAAP outlines the process to ensure the Bank achieves its capital management objectives. In order to achieve these objectives, the Bank needs to:

• Ensure that at least the minimum amount of regulatory capital is held at all times for the Bank of Zambia to allow the Bank to conduct business;• Hold sufficient capital that will instill confidence in the Bank’s ongoing solvency and status as a creditworthy counterparty for all stakeholders;• Allocate capital to businesses based on an understanding of the risk and reward drivers of the income streams and to ensure that appropriate returns are earned on capital deployed;• Ensure that the buffer over the minimum regulatory capital requirement is sufficient to cater for income and capital volatility and economic risk which may manifest through business disruption, regulatory intervention or credit downgrades, where applicable; and• Ensure that Zanaco’s capital adequacy ratios and other limits remain within approved thresholds during different economic and business cycles.

The optimal level and composition of capital is determined after taking into account the Bank’s organic growth plans as well as targeted capital ratios, future business plans, appropriate buffers in excess of minimum requirements, proposed regulatory changes and risk appetite.

Additionally, this requires that the Bank develops and maintains a capital plan that incorporates, among others, the following:

• Anticipated capital utilisation;• Planned issuance of capital instruments;• Stress tests and scenario analysis;• Appropriation of profits and dividend payments;• Desired level of capital, inclusive of a buffer;• Expansion and strategic initiatives; and• General contingency plan for dealing with divergences and unexpected events.

2016 | ANNUALREPORT


23

ICAAP is an integral tool in meeting the above capital management objectives and is key to the Bank’s risk and capital management processes. ICAAP allows and facilitates:

• The link between business strategy, introduced risk and capital required to support the strategy;• The establishment of frameworks, policies and procedures for the effective management of material risks;• The embedding of a responsible risk culture at all levels in the organisation;• The effective allocation and management of capital in the organisation;• The development of recognised stress tests to provide useful information which serve as early warnings/triggers, so that contingency plans can be implemented; and• The determination of the capital management strategy and how the Bank will manage its capital including during periods of stress.

Capital ManagementCapital management is a key contributor to shareholder value. The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the statement of financial position, are:

• To comply with the capital requirements set by the Banking and Financial Services Act, 1994 (as amended);• To safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;• To maintain a strong capital base to support the development of its business;• To allocate capital to businesses using a risk-based capital allocation system, to support the Bank’s strategic objectives, including optimising returns on shareholder and regulatory capital; and• Maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory expectations.

Capital adequacy and use of regulatory capital are monitored regularly by Management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis.

Capital Target SettingCapital target-setting is key to ensuring that sufficient capital resources are available to meet Zanaco’s regulatory requirements while supporting Zanaco’s ability to meet its strategic objectives and attain its desired balance sheet growth. Zanaco’s capital target-setting is linked to the results of its stress testing.

The capital targets are defined taking into account the impact of stress testing on Zanaco’s Capital Adequacy Ratios (CAR). The capital targets are based on the Bank of Zambia requirements for minimum Basel II capital adequacy at both the Tier 1 and Total Capital levels. These targets are reviewed and potentially revised based on changes in Zanaco’s capital position, portfolio structure, capital plans and risk appetite. The capital targets are also guided by regulatory developments.

Financial ReportingThe Directors accept final responsibility for the preparation of the annual financial statements which fairly present:

• The financial position of the Bank as at the end of the year under review; and• The financial results of operations as well as the cash flows for that period.

The responsibility for compiling the annual financial statements was delegated to Management. The external auditors report on whether the annual financial statements are fairly presented.

The Directors are satisfied that during the year under review:

• Adequate accounting records were maintained;• An effective system of internal controls and risk management monitored by Management was maintained;• Appropriate accounting policies supported by reasonable and prudent judgements and estimates were used consistently; and• The financial statements were compiled in accordance with International Financial Reporting Standards approved by the Zambia Institute of Chartered Accountants (ZICA), the Banking and Financial Services Act 1994 (as amended), the Zambian Companies Act 1994 (as amended), the Securities Act 1993 (as amended) and the Stock Exchange Listing Rules.

2016 | ANNUALREPORT


24

Board EngagementThe Board continued to meet on a quarterly basis. The attendance by the Directors during the year was as follows:

Director’s Name Category of February April July October December Director Ms. C C Lumpa NED √ √ √ √ √Mr. H Mtine NED √ √ √ √ √Ms. G M Akapelwa NED √ √ √ √ √Mr. G Robinson NED √ √ √ √ √Mr. F Weenig NED √ √ √ √ √Dr R Simwinga NED √ √ √ √ xMr. E D Drok NED √ √ √ √ √Mr. B Dick ED √ √ √ √ n/eMr. H G Mulder ED n/e n/e n/e n/e √

NED- Non Executive DirectorED-Executive Directorn/e-Not eligible to attend

Mr. H G Mulder was not eligible to attend as he was only appointed into the position of Managing Director of the Bank on 1st November 2016.

Mr. B Dick was not eligible to attend after 1st November 2016 as he was no longer the Managing Director of the Bank.

Directors’ CompensationThe disclosure of Directors’ fees and remunerations is made in Note 33 of the financial statements. The Directors do not have any shares in the Bank and are not entitled to share options. Directors’ fees and any amendments are approved by shareholders at the Annual General Meeting. Board Evaluation The Board carried out a self-assessment of its performance during the year through the engagement of an external third party which covered the following:

• Performance against its objectives at the beginning of the year;• Effectiveness with respect to the Bank’s strategic direction;• Responsiveness to shareholders and stakeholders’ concerns;• Maintenance and implementation of the Board’s governance principles;• Access to and review of information from Management and the quality of such information;• Review of the composition and diversity of the skills and exposure of the Board; and• Continuous professional development for Board members.

Board CommitteesTo help it discharge its executive functions, the Board has established five principal standing committees, each governed by written terms of reference defining the frequency of meetings, power and duties, and reporting obligations. These committees continuously evaluate the progress made towards meeting the Bank’s overall objectives, in addition to ensuring the efficient and effective management of the entire Bank’s core functions. A Non-Executive Director chairs each of the five committees. The committees are Audit, Risk, Credit and Human Resources and Compensation and Nominations.

It should be noted that the Audit, Credit, Human Resource and Compensation and Risk Committees were reconstituted in June 2015 and some Directors were reassigned new roles whilst the Nominations Committee was constituted in June 2016.

(a) Audit CommitteeThe Audit Committee is chaired by a Non-Executive Director and consists of three other Non-Executive Directors. The Committee meets

2016 | ANNUALREPORT


25

at least four times per year to evaluate, among other things, accounting practices, the internal control systems and the auditing and financial reporting. Its tasks include evaluating critical risk areas identified with the help of Management, as well as reporting on them to the Board.

The Committee operates under a formal charter approved by the Board and the Committee Members have unlimited access to all information. Certain members of Management are invited to attend and give feedback at Committee meetings. The Audit Committee also recommends to the Board the remuneration of the external auditors. The Committee also holds separate meetings with the Head Internal Audit and the external auditors when required, in order to ensure that matters are considered without undue influence.

The attendance by the Directors during the year was as follows:

Director’s Name Category February April July October of DirectorMr. H Mtine NED √ √ √ √Ms. C C Lumpa NED √ √ √ √Dr. R Simwinga NED √ √ √ √Mr. F Weenig NED √ √ √ √ NED - Non-Executive Director

(b) Risk CommitteeThe Risk Committee is chaired by a Non-Executive Director and consists of three other Non-Executive Directors and one Executive Director, who is also the Chief Executive Officer of the Bank. On a quarterly basis, the Committee reviews the collectability of the Bank’s lending portfolio by not only ensuring adherence to statutory and regulatory requirements, but also ensuring that lending practices and procedures are in line with the credit policy of the Bank, including on matters relating to provisions and allowances for impairment.

The attendance by Directors during the year was as follows:

Director’s Name Category February April July October of DirectorMr. F Weenig NED √ √ √ √Ms. C C Lumpa NED √ √ √ √Mr. H Mtine NED √ √ √ √Dr. R Simwinga NED √ √ √ √Mr. H G Mulder ED n/e n/e n/e n/eMr. B Dick ED √ √ √ √



(c) Credit CommitteeThe Credit Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors and one Executive Director, who is also the Chief Executive Officer of the Bank. Certain members of the Executive Management Committee attend by invitation. The Credit Committee supervises the effective implementation of credit and risk management policies and ensures the enhancement of the Bank’s credit risk management systems and processes, in line with best practices in loan rating/credits, risk modeling, loan pricing and strategic loan management, including the identification and control of the concentration of risk. The Credit Committee also approves credits with values beyond the mandate of Management.

The attendance by the Directors during the year was as follows: Director’s Name Category February April July October of DirectorMr. E D Drok NED √ √ √ √Ms. G M Akapelwa NED √ √ √ √Mr. G Robinson NED √ √ √ √Mr. B Dick ED √ √ √ √Mr. H G Mulder ED n/e n/e n/e n/e

2016 | ANNUALREPORT


26



(d) Human Resources and Compensation CommitteeThe Committee provides oversight over the remuneration and compensation for Senior Management and key personnel in the Bank, so as to retain and motivate staff to perform at the level of the quality required.

Currently, the Bank participates annually in local market surveys and those focusing on the rest of Africa in order to ensure market-related salaries are paid and that market related trends are also followed when changes are made to employee benefits. The remuneration of all managerial staff in the Bank is also linked to their individual performance.

The attendance by the Directors during the year was as follows:

Director’s Name Category February April July October of DirectorMs. G M Akapelwa NED √ √ √ √Ms. C C Lumpa NED √ √ √ √Mr. G Robinson NED √ √ √ √Mr. E D Drok NED √ √ √ √Mr. B Dick ED √ √ √ √Mr. H G Mulder ED n/e n/e n/e n/e



Mr. B Dick was no eligible to attend after 1st November 2016 as he was no longer the Managing Director of the Bank.

(e) Nominations CommitteeThe Nominations Committee is chaired by the Board Chairperson and consists of a total of four Non-Executive Directors. The Committee meets at least once a year and assists the Board in identifying and recruiting competent and qualified candidates for Board membership, chairpersons of Board, Board Committees, Committee members and members of Senior Management. The Committee operates under a formal charter approved by the Board. The Committee assesses the effectiveness of the Board, Board Birector’s attendance of Board and Board Committee meetings. The Committee further reviews the adequacy of governance principles and practices of Board Directors.

Director’s Name Category July October of DirectorMs. C C Lumpa NED √ √Ms. G M Akapelwa NED √ √Mr. G Robinson NED √ √Mr. E D Drok NED √ √

NED- Non Executive Director

Bank SecretaryThe Board appoints the Bank Secretary and all Board Members have access to the services of the Bank Secretary. Where necessary, the Board may seek independent professional advice on any matter.

The Bank Secretary ensures the following: • Annual calendar for Board meetings is circulated to all Board Members after approval;• Adequate information is provided to all the Members prior to commencement of the Board and sub-committee meetings;• Culture of Good Corporate Governance is promoted;• Serves as key liaison with Securities and Exchange Commission (SEC), the Lusaka Stock Exchange (LuSE) and Patents and Companies

2016 | ANNUALREPORT


27

Registration Agency (PACRA);• Statutory registers are maintained;• Key liaison for investors and contact point for shareholders;• Board is updated on relevant statutory amendments and developments; and• Induction and continuous training of Directors to enable the Board discharge their responsibilities.

Code of ConductThe purpose of the Code of Conduct is to regulate the required standards of corporate behaviour by which the Bank is judged in all its dealings and operations to promote and safeguard the integrity of the Bank. Therefore, the Code of Conduct stipulates the standards by which individuals within the Bank are judged.

The key areas covered under the code are:

• Integrity;• Skill, Care and Diligence;• Relations with Regulators;• Staff Interest and Gifts;• Customer Due Diligence / Know Your Customer;• Conduct of Business / Customer Relationships;• Conduct of Business / Communication with Customers;• Conduct of Business / Conflict of Interest and Duty; and• Duty to Supervise.

Members of staff, as well as agents, continue being subjected to continued training on the contents of the Code of Conduct to enable them understand and appreciate these important guidelines, which control their conduct in their daily activities as Bank employees.

In tandem with the Code of Conduct, staff received further guidelines on how to seek prior authorisation and reporting of the gifts and hospitality they give or receive in connection with their employment to the Bank, as long as such gifts are reasonable and proportionate to a specific situation. This was done to promote transparency and to avoid the risk of conflict of interest arising from gifts which could potentially lead to suggestions of impropriety by the Bank or its employees.

There is a formal procedure requesting Board Members and Management to fill out a Declaration of Interest Form on an annual basis. Directors have a continuing duty to update any changes in these interests at each Board meeting. External AuditThe external auditors are responsible for reporting on whether the financial statements are fairly presented in accordance with International Financial Reporting Standards and in the manner required by the Zambian Companies Act and the Banking and Financial Services Act.

Consultation occurs between external and internal auditors to effect an efficient audit process. The external auditors consider all the reports issued by the Internal Audit Department and which are duly supplied to them by the Bank.

Internal AuditInternal audit is an independent, objective assurance and consulting activity designed to add value to the Bank as well as to improve its operations. It helps the Bank accomplish its objectives by bringing a systematic and disciplined approach to evaluating and improving Risk Management, control and governance processes.

The Internal Audit function encompasses the examination and evaluation of the adequacy, effectiveness and efficiency of Governance, Risk Management and Control processes.

The Internal Audit Department (IAD) evaluates and makes appropriate recommendations for improving the governance process in promoting appropriate ethical values in the Bank as well as ensuring effective bank performance management and accountability.

The IAD evaluates the effectiveness and adequacy of the Risk Management Framework of the Bank and contributes to the improvement of Risk Management processes. IAD provides the Board with the objective assurance that the major business risks are being managed appropriately and the Risk Management and Internal Control Framework is operating effectively. The IAD also evaluates the risk involved in governance, operations, and information systems that relate to compliance with laws, regulations, policies, procedures, and contracts.

Internal audit plans are prepared annually by using a risk assessment model that ensures audit resources are directed towards high- risk areas that are consistent with the Bank’s strategic and operational goals. The plan is developed in consultation with Management and

2016 | ANNUALREPORT


28

the Audit Committee to ensure their input and expectations are considered in the planning process. IAD also considers proposed consulting engagements based on the engagement’s potential to improve the management of risk and Bank’s operations. The audit plan is then approved by the Audit Committee to ensure independence of the Internal Audit function. The Director Internal Audit func-tionally reports to the Audit Committee and, administratively, to the Managing Director.

The Internal Audit function is governed by an Internal Audit Charter which defines its purpose, authority and responsibility. The Internal Audit Charter is reviewed and updated to meet best international practices at least once a year.

The IAD assists the Bank in maintaining effective controls by evaluating their effectiveness and efficiency and by promoting continuous improvement. The control processes are expected to ensure, among other things, that:

• The Bank’s strategic objectives are achieved;• Financial and operational information is reliable and possesses integrity;• Operations and programs are performed efficiently and effectively;• Assets are safeguarded; and• Actions and decisions of the Bank are in compliance with laws, regulations, policies, procedures and contracts.

Compliance FunctionThe Bank has an independent Compliance Function, guided by a Compliance Charter, which defines the fundamental principles, roles and responsibilities of the Compliance Functions within the Bank, as well as its relationship with Executive Management, the Board of Directors and the business and operational functions.

The Charter is updated from time to time to reflect the legal and regulatory evolution which is communicated to all staff. The Board of Directors is responsible for formally approving the Compliance Charter. In line with the Compliance Charter, the Compliance Function independently reports to the Board Audit Committee on material compliance issues in the Bank through a Compliance Quarterly Report to enable the Board to appreciate the level of compliance risk and to solicit their timely guidance.

The objectives of the Independent Compliance Function are to:

• Identify and evaluate the compliance risks within the Bank;• Organise, co-ordinate and structure compliance related controls;• Control and monitor all measures taken to mitigate compliance risks;• Report to the Executive Management and the Board of Directors as appropriate; and• Act as the compliance advisor within the Bank.

The Compliance Function and Compliance Monitoring programme are subject to an independent review by both an internal and ex-ternal audit for the appropriateness of the policies and their implementations.

Anti-Money Laundering PolicyThe Bank has in place the Anti-Money Laundering (AML) and Watch List Management ( WLM) solutions. The two interrelated systems detect and report suspicious activities through automated screening of transactions and names of customers in line with the Bank of Zambia Anti-Money Laundering Directives, the Financial Intelligence Centre Act and the Bank’s Anti-Money Laundering Policy. The Bank, also, conducted several compliance training programmes during the year where members of staff and agents were trained on the identification and reporting of suspicious activities as well as the obligations that go with the above regulatory requirements.

WhistleblowingThe Whistleblowing Policy is a vital corporate governance tool. It is intended to make it easier for members of staff, consultants and other service providers to report irregularities in good faith without the fear of adverse consequences for them. The Whistleblowing Policy continues to be a key element in demonstrating the Bank’s commitment to the highest possible standards of transparency, integrity, probity and accountability in its operations with all stakeholders and is in line with the provisions of the Public Interest Disclosure (Pro-tection of Whistleblowers) Act. Protecting the integrity and reputation of the Bank requires the active support of all members of staff who, in most cases, are the first to notice and who are required to report incidents of suspected fraud, corruption, collusion and coer-cion and other serious infringements of the rules and policies in force at the Bank. To enhance whistleblowing reporting, the Bank has a Trusted Person, appointed by the Board, who is an outsider. Bank staff are required, under the whistleblowing Policy, to report serious concerns of possible malpractice and wrong doing concerning employees of the Bank, by opting to identify themselves or anonymous-ly, to the Trusted Person. The Trusted Person will be the entry point for all reports of malpractice for on-ward submission to the Trusted Committee for consideration and resolution. As a deliberate measure to raise awareness of the requirements of the whistleblowing Policy, the Bank issued a communique to all members of staff during the year reminding them of the existence of the whistleblowing Policy and the Trusted Person as well as their duties to report cases of malpractice they may come across.

2016 | ANNUALREPORT


29

Gender and DiversityIn an effort to improve gender awareness in the organisation, the Board approved a Gender Policy which will provide guidance in em-bedding gender equality in all Bank structures.

Environmental and Social Management PolicyCompliance with Legislation on Environmental and Social aspects of business are increasingly becoming focal measurement points for Good Governance. The Bank’s approach has been to develop and implement innovative monitoring and screening processes that adhere to both its internal guidelines and the Zambian Environmental Laws. Alongside the environmental laws, the Bank has devel-oped an Environmental and Social Management Policy (E and S) that is in full compliance with local environmental laws. In order to operationalise this policy, the Bank has also enhanced its environmental assessment screening process which is an integral part of loan origination and appraisal processes.

The E and S Policy has been refreshed to incorporate counterparty requirements and introducing an E and S Due Diligence (E500) to be used in assessing category A Customers. The policy has been disseminated to all staff and rolled out to stakeholders by way of a clinic.

Broadly, the process is categorised into three parts:

• Category A – Projects with potential significant adverse social or environmental impacts;• Category B – Projects with potential limited adverse social or environmental impacts; and• Category C – Projects with minimal or no significant social or environmental impacts.

As a good corporate citizen, Zanaco continues to actively work towards the realisation of sustainable development. Through its busi-ness activities and services, the Bank will continue to support environmental conservation efforts within its operational scope as well as those in the service supply chain in order to contribute to the realisation of sustainable development in Zambia.

The Bank remains committed to raising staff awareness on environmental issues and sustainable development and encourages staff observance of the following at the workplace:

• Preventing of pollution by reducing, reusing and recycling materials and goods purchased;• Encourage energy-saving, reduce water consumption, and promote good housekeeping practices; and• Improve and maintain the quality of the working environment within the Bank and all our branches/affiliates (internal air quality, water quality, waste management, paper use, energy use, etc).

Internal Environmental ManagementA broad-based approach has been pursued in terms of managing Environmental and Social Management Policy at the place of work. It includes the formation of a cross- function Environmental and Social Management committee made up of staff from Public Relations, Human Resources, Facilities, Credit and Procurement to spear-head internal Corporate Social Responsibility / Environmental and Social Management activities. An action plan has been devised with specifics for who, what, when status.

The Public Relations and Credit departments are responsible for the joint reporting of the Environmental and Social Management /Corporate Social Responsibility in Bank reporting such as the annual report.

Basel IIThe implementation of the International convergence of Capital Measurement and Capital Standards also known as Basel II is progress-ing well following the issuance by Bank of Zambia of draft regulations. Zanaco has structures and resources in place which will ensure full implementation and compliance of the Basel II requirements in line with guidelines issued by the Central Bank.

During the year 2015, Zanaco submitted its second Internal Capital Adequacy Assessment Process (ICAAP) document and Pillar III dis-closures to the Bank of Zambia. The Bank continued with the parallel running to assess the impact of the application of Base ll on Capital Adequacy. The Bank has sufficient capital to absorb the additional capital allocation.

Stakeholder Engagement To ensure sustained customer engagement, Zanaco held a customer cocktail in October 2016 as a way of engaging clients and intro-ducing the in-coming Managing Director and for him to be acquainted with the various businesses that are supported by the Bank. Customers across the focus customer segments were in attendance. The Board Chairperson hosted the cocktail which was also attend-ed by other Board members.

2016 | ANNUALREPORT


30

In November 2016, Zanaco also hosted a customer cocktail as part of the Customer Service Month to get feedback on the various ini-tiatives implemented to improve customer service delivery. As a valuable partner to Government in social investment, Zanaco was a part sponsor of the Netball national team which emerged victorious during the President’s Cup tournament in Malaysia. Zanaco was recognised as a key partner by the Ministry of Youth, Sport and Child Development.

An investor forum to discuss the 2015 full year results and ways of how we can work better was held in March 2016.

As part of the Bank’s strategy to be the leading finance institution in agriculture, the Bank supported the Zambia National Farmers Union (ZNFU) congress in October 2016 at which the Bank provided resources for the event.

To reaffirm its commitment towards gender equality, Zanaco co-sponsored the African Women Economic Summit with the Bank of Zambia in July 2016. The Bank was on hand to provide banking services to the delegates and financial literacy tips.

Members of staff also had an opportunity to meet Board members in December 2016 as a form of fostering interaction.

Employee WellnessThe Bank continues to promote wellness by participating and initiating work-place programmes that can be implemented and operated in a way that creates sustainable value to both the organisation and employees. The HIV prevalence and Knowledge Attitude and Practices (KAP) survey conducted in the previous year helped the bank concentrate its efforts in developing solutions and tools to help employees targeted health and wellness activities.

Apart from this, the Bank changed to a different medical scheme health administrator and sensitization programmes were conducted across the branch network and Head Office.

In 2016 a number of wellness activities were conducted:

• Eye checkup, Blood Pressure and Diabetes checkups for all members of staff in Branches and Head Office ( approximately 400 staff were attended to) by Tokyo Opticians, Star Opticians and Dr. Agarwal’s Eye Hospital during the course of the year; • Annual Employee Fitness event by Defined Style Fitness were 50 members of staff participated. This also included health checkup, health talks; and • 20 members of staff participated in the Wellness day and Aerobics day by the Cathedral of the Holy Cross.

2016 | ANNUALREPORT

CORPORATE SOCIAL RESPONSIBILITY

31

A. IntroductionZanaco’s Corporate Social Responsibility (CSR) takes into account the Bank’s economic, social and environmental impact and obligation to society and the environment. Zanaco’s CSR commits to taking into account the interest of stakeholders, the community and environment in the delivery of commercial objectives. The Bank operates in a manner that strives to help improve the lives of our customers, employees and the community while minimising the detrimental impact on society and the environment.

The Bank’s CSR areas of focus include: Financial education for various target groups under the programme dubbed Financial Fitness, environ-mental support and water/sanitation.

B. Financial Fitness Zanaco remains committed to helping citizens manage their finances better through financial education. The Bank believes this is one way of promoting wealth creation among citizens thereby driving economic growth. In addition to innovative products and distribution channels to support financial inclusion, the Bank focuses on promoting financial literacy and general entrepreneurship. Financial education is conducted through direct training/ sensitisation and use of other media to reach diverse segments of the population. The programme targets three major groups: children/youth, adults and business groups. There is a very high and positive appreciation among all target groups. During the year under review about 214,238 people were reached of which 14,240 was through direct trainining and sensitisation for children, youth, farmers and SMEs. About 200,000 people were reached through general sensitisations and campaigns including use of the electronic media, print media, literature, SMS, sensitisation talks and other avenues deemed fit. General sensitisation included country wide commemorations such as the Financial Literacy Week and world savings day.

Financial fitness programmes for special needs groups such as Social Cash Transfer (SCT) beneficiaries were implemented. Training of trainers sessions for District Social Welfare Assistance Committee (DSWAC) members were conducted in collaboration with the Ministry of Commu-nity Develeopment and Social Welfare. Apart from providing the pre paid card solution for SCT beneficiaries, financial literacy training around product use and personal financial management was included to help beneficiaries become aware of: product terms and conditions; safety responsibilities such as PIN management; complaints handling and how to make the best of the resources received from Government.

The Bank is closely collaborating and supporting the Ministry of Education in the development of financial education supplementary materi-als. During the period under review, the Bank contributed technical assistance in the development of the scope and sequence writing guide for financial education. The Bank believes that one of the most effective and sustainable ways of financial education delivery is through the education system.

Corporate Social Responsibility Sponsorship was made towards Nyamuka Zambia Business Plan Competition as contribution to the promo-tion of entrepreneurship and fostering Micro Small Medium Enterprises (MSME) development in the country.

AwardsZanaco’s Financial Fitness programme continues to receive wide recognition as evidenced from awards received.

• Financial Literacy Legacy Award - 2016 BOZ Governor’s award;• Individual Contribution to Financial Education Award -2016 BOZ Governor’s award;• Pioneer for financial literacy in Zambia - 2015 BOZ Governor’s award;• Financial Literacy Week - Outstanding Theme Messaging - 2015 BOZ Governor’s award;•1st Position Excellency in Financial Education – Bankers Association of Zambia.

2016 | ANNUALREPORT

CORPORATE SOCIAL RESPONSIBILITY

D. Environmental ManagementThe Bank made a commitment to contribute to environmental improvements. The focus is on both internal and external areas of support that include areas such as waste disposal and energy conservation.

Waste paper donation: Zanaco initiated the donation of used paper to APTERS Zambia (Appropriate Paper Technology) to help make lives of children with disabilities better through production and provision of assistive devices using waste paper. Coupled with financial support for the production of assistive devices, donation of used paper promotes environmental protection while meeting the needs of children with disabilities. The Bank remains amazed at how what is deemed waste can change the lives of children and their families. While visiting APTERS, Mr Bruce Dick, the Managing Director then had this to say: “In my entire stay in Zambia I have never had such a special experience like this. To see what APTERS is doing is touching”.

Completion of works on Mugurameno Solar Micro Grid: The Solar Micro Grid funded in part-nership with Empowered by Light Foundation is now fully operational in Mugurameno community, located in the Lower Zambezi. Power connections to Mugurameno Primary School and 31 houses and business were made. Positive changes include: Emergence of new businesses and improvement of existing ones using power appliances, introduction of evening adult literacy classes at the school, life-style improvement through use of electrical appli-ances such as refrigerators, and motivation to civil servants working in the community.

C. Water & SanitationZanaco recognises the importance of health to society in general. As the People’s Bank, the Bank has a role to play in supplementing government effort in providing water and sanitation that contribute to good health. During the year, Nyanje Hospital Maternity Waiting Home in Sinda District, Eastern Province was completed.

The project was implemented through previous funding to Churches Health Association of Zambia. The structure accommodates 27 women at a time translating to about 1000 annually, providing better shelter and sanitary conditions as they wait to deliver their babies. The Community contributed local building materials showing true partnership and commitment.

32

2016 | ANNUALREPORT

STATEMENT OF RESPONSIBILITY FOR ANNUAL FINANCIAL STATEMENTS

Section 164(6) of the Companies Act, 1994 (as amended) requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Bank and of the profit or loss for that period. The Directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements and related information. The independent external auditors, Messrs Deloitte & Touche, have audited the annual financial state-ments and their report is shown on pages 34 - 39. The Directors are also responsible for the systems of internal control. These are designed to provide reasonable, but not absolute assurance as to the reliability of the financial statements and to adequately safeguard, verify and maintain accountability for assets and to prevent and detect material misstatements. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authority and duties. Nothing has come to the attention of the Directors to indicate that any material breakdown in the functioning of these controls, procedures and systems has occurred during the year under review. The annual financial statements are prepared on a going concern basis. Nothing has come to the attention of the Directors to indicate that the Bank will not remain a going concern in the foreseeable future. In the opinion of the Directors: • The statement of profit or loss is drawn up so as to give a true and fair view of the profit of the Bank for the financial year ended 31 December 2016;

• The statement of financial position is drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 2016;

• There are reasonable grounds to believe that the Bank will be able to pay its debts as and when they fall due; and

• The financial statements have been prepared in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 1994 (as amended), Securities Act, 1993 and the Banking and Financial Services Act,1994 (as amended).

Signed on behalf

_______________________ _______________________Director Director _______________________ _______________________Director Secretary

33

INDEPENDENT AUDITOR’S REPORT

To the members ofZambia National Commercial Bank Plc

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

OpinionWe have audited the financial statements of Zambia National Commercial Bank Plc (the “Bank”) set out on pages 40 to 98, which comprise the statement of financial position as at 31 December 2016, and the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2016, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”), and in the manner required by the Banking and Financial Services Act, 1994 (as amended), the Companies Act, 1994 (as amended), and the Securities Act, 1993.

Basis of opinionWe 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 financial statements in Zambia. We have fulfilled our 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 MattersKey audit matters are those matters that, in our professional judgement, 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.

34

Key audit matter

Credit impairment

Due to the complex and subjective judgements made in the assumptions by the Directors over the timing of recognition and estimation of the credit impairment, this was considered a key audit matter.

The Directors are required to apply judgments relating to the key assumptions and judgments that underlie the inputs into the impairment model. Key assumptions and judgments include the emergence period used for unidentified impairment, the probability of default calculation and the loss given default calculation.

The Directors are also required to consider the completeness of the customer accounts that are included in the impairment calculation, including how unidentified impairment (customers that have had a loss event that has not yet manifested itself in a missed payment or other indicator) and forbearance are taken account of.

In addition, the Directors also considered the liquidity challenges being faced in the economy and the resulting impact on the loan book.

Note 16 to the financial statements shows that loans amounting to K410.3 million were estimated to have been impaired as at 31 December 2016 representing 11% of the loan book.

See Notes 37 to the financial statements on the Banks financial risk management policies.

How our audit addressed the key audit matter

In considering the reasonableness of the impairment provision, the audit team performed various procedures, including but not limited to the following:

• Assessing the design and implementation of the controls around the determination of the impairment provision with focus on compliance with the requirements of IAS 39: “Financial Instruments- Recognition and Measurements”.

• Assessing the appropriateness of the principles used in the Bank’s valuation model. We challenged all the key assumptions used by the model and checked consistency of the application of the model year on year. Further, we compared the model to industry norms.

• Tested the operation of valuation models, including, where required, building our own independent assessment and comparing our results to those of the Directors.

• We assessed the completeness of the loans considered for impairment by reconciling the total loans to the audited loan book.

• Tested, on sample basis, the recoverability of loans and advances through circularisation, testing of current year and subsequent receipts and corroborative enquiry of management.

• Reviewed the security for selected advances and assessed whether it adequately covered the advances.

• Reviewed the documentation evidencing the existence of credit assessment in accordance with the Bank’s policies and applicable laws.

P O Box 30030 Deloitte & ToucheLusaka Abacus SquareZambia Plot No. 2374/B Thabo Mbeki Road Tel: +260 211228677 Dir +260 211232313 Fax:+260 211 226915 www.deloitte.com

2016 | ANNUALREPORT


35

Key audit matter

Credit impairment (Continued)

Completeness of provision for legal matters

The Bank is involved in a number of legal claims. It is not unusual for claims to remain outstanding for a number of years. In addition, the business environment is becoming increasingly complex and focused on the social impact of the Bank’s activities.

Due to the nature of these legal claims as disclosed in note 35 in the financial statements that we identified and the subjective judgements made in the assumptions by the Directors over the timing of recognition and estimation of the outcome of the various pending cases, this was considered a key audit matter.

The Bank makes use of both internal and external legal experts in determining the probable outcome of each case brought against the Bank.

We performed the following audit procedures with a focus on the areas of actual and potential liabilities specifically relating to:

• We assessed the appropriateness of the competence and objectivity of both the internal and external legal experts involved in the determination of the possible outcomes of the various legal cases.

• We assessed the reasonableness of the key assumptions and judgments made by the Bank’s experts, the legal advisors that underlie the determination of whether the related case should be provided for or not.

• We assessed the completeness of the legal claims that are included in the legal register.

• We held discussions with management and the legal counsel to determine the status of legal cases and whether they are aware of any other litigations apart from those in the legal register.

• We reviewed legal reports and solicitors confirmations for the period. In addition, we considered the outcome of similar legal claims in the past and the resulting impact on the current ongoing legal claims.

• We reviewed minutes of Board meetings and the Audit and Risk committees to confirm no other cases where in existence. Further, we reviewed the quarterly claims updates reports provided to the Board by the legal department.

• We reviewed the bankers’ confirmations for existence of any contingent liabilities with the various banks.

Following various discussions with the Directors, management, the legal experts and the review of supporting documentation, the Director’s provided for the legal claims where constructive and legal obligations existed whilst others have been assessed as contingent liabilities.

We also noted no significant litigations which could result in action to wind up the Bank.

We also assessed the adequacy of the disclosures in relation to the probable outcomes of the legal claims and we concurred with this treatment and disclosures in the financial statements.

• Matched the loan tenures to the loan applications and assessed consistency with the tenure included in the impairment model.

We assessed the appropriateness of the disclosures made in the financial statements for the loans and advances and the respective impairment provisions.

Based on our procedures, we noted no significant exceptions and consider the Director’s key assumptions used in the valuation model to be within a reasonable range and the disclosures to be appropriate.


2016 | ANNUALREPORT


36

Management of suspense accounts

Suspense accounts by their nature are susceptible to fraud and error. Long outstanding items in these accounts if not resolved timely could be indicative of fraud or might be as a result of errors.

In the recent past the Banking Sector as a whole has experienced challenges in reconciling items between banks resulting from the Cheque Truncation System. This has resulted in several unreconciled long outstanding balances.

IAS 39 “Financial Instruments- Recognition and Measurements” requires the Director’s to assess the recoverability of the carrying value of assets. Significant judgement is required to assess the recoverability of amounts in suspense accounts.

Due to the existence of long outstanding amounts in suspense accounts and the significant judgement to assess the recoverability, the impairment test of these assets was considered to be a key audit matter.

Actuarial valuation of pension obligations

Defined benefit plans are a pension plan under which the Bank settled the liability under the final salary principles. The Bank has legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

The Bank uses an external Expert to carry out the actuarial liabilities calculations.

We identified this audit area as a key audit matter because of the significant assumptions and judgements which are included to arrive at the pension obligation by the Expert. Key assumptions that are involved in the calculation of the defined benefit obligation as per note 24 to the financial statements are:

• Discount rate;• Expected rate of salary increment; and• Average longevity at retirement age for the current employees.

We focussed more of our testing on suspense accounts which represented an asset to the Bank. Our audit procedures included but were not limited to:

• We assessed the design and implementation of the controls that the Directors have put in place to ensure that items in suspense are reconciled and investigated on a timely basis.

• Our testing was done on all suspense accounts on a sample basis with a focus on material items.

• We verified the aging of suspense accounts using data analytics to ensure that items are being correctly aged. Further, we identified relevant manual interventions which may result in a material impact on the financial statements and tested the appropriateness of said intervention.

• Performed detailed testing on selected high risk account reconciliations which included obtaining an understanding of the purpose of the selected account, understanding acceptable aging of items included on the reconciliation and testing a sample of reconciling items as at reporting date.

• We investigated any long outstanding suspense items.

• Tested subsequent clearance of suspense items by reviewing post year end clearance of suspense items existing as at 31 December 2016.

Following various discussions with the Directors, Management and the review of supporting documentation, and controls around the management of suspence accounts, we found the judgements to assess the recoverability of these assets to be reasonable.

In considering the actuarial valuation of pension obligation, we performed the following procedures on the 31 December 2016 actuarial report:

• Ensured the Independent Actuaries who carried out the valuation were appropriately qualified, competent and independent.

• Ensured that the valuation met IAS 19: Employee benefits requirements.

• Reviewed key inputs used within the report as well as challenged key assumptions made. We assessed the assumptions for reasonableness.

• Performed a retrospective review where we compared the input factors, the calculated obligations for the current period and the previous two years to assess consistency and reasonableness of the obligations.

• Corroborated the inflation rates used to inflation projections and tested for reasonableness.

• Traced discount rates being used to the Government bond yield rates for 15 a year bond.

Key audit matter How our audit addressed the key audit matter

2016 | ANNUALREPORT


37

• Held discussions with the actuary on the source of the mortality rates and compared those rates to the central statistics office in Zambia.

We found that the assumptions used by the Expert were appropriate and the discount rates were comparable to the market. Further, the disclosures in the financial statements were found to be appropriate.

IT systems and controls over financial reporting

We identified IT systems and controls over financial reporting as a key audit matter as the Bank’s financial accounting and reporting systems are heavily dependent on the systems and there is a risk that automated accounting procedures and related IT dependent manual controls are “not designed and operating effectively”.

Potential shortcomings in the operation of any of these controls, in isolation and even more so, in combination expose the Bank to significant risk. As a result, this is viewed as a key audit matter.

We performed the following procedures around IT systems and controls over financial reporting:

• We assessed and tested the design and operating effectiveness of the controls over the continued integrity of the IT systems that are relevant to financial reporting.

• Considered the governance structure over the Bank’s IT organisation and assessed the appropriateness.

• Considered the controls implemented by management to review incompatible user access rights across applications and evaluated whether it was suitable.

• We assessed and tested the design and operating effectiveness of the controls over the continued integrity of the IT systems that are relevant to financial reporting.

• We considered the controls implemented by management to review incompatible user access rights across applications and evaluated whether it was suitable.

• We identified IT controls that are relevant to financial reporting and assessed the design and operating effectiveness of those controls. We tested access controls (on a physical, operating system, application and database level), and business continuity controls (disaster recovery and backup procedures).

• We examined the controls over program development and changes, access to programs and data and IT operations, including compensating controls where required.

• We assessed the controls around logical access management and segregation of duties.

• We also checked the appropriateness of the integration of the various systems.

• Where necessary we also carried out direct tests of certain aspects of the security of the Bank’s IT systems including access management and segregation of duties.

The combination of the tests of the controls and the direct tests that we carried out gave us sufficient comfort on the continued and proper operation of the Bank’s IT systems for the purposes of our audit.

Key audit matter

Actuarial valuation of pension obligations (continued)


2016 | ANNUALREPORT

38


Other informationThe Directors are responsible for the other information. The other information comprises the Directors’ Report as required by the Companies Act, 1994 (as amended) and the annual report, which we obtained prior to the date of this auditors’ report. The other information does not include the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance or 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 on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the financial statementsThe Directors are responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act, 1994 (as amended), and for such internal control as the Directors determine is necessary to enable the preparation of the 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.

Auditor’s responsibilities for the audit of the financial statementsOur 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 judgement and maintain professional scepticism 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 the 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 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 Directors 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 Directors 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.

2016 | ANNUALREPORT

39


From the matters communicated with the Directors, 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.

Report on Other Legal and Regulatory RequirementsThe Companies Act, 1994 (as amended) requires that in carrying out our audit, we consider and report to you on the following matter: we confirm that the accounting and other records and registers have been properly kept in accordance with the Act.

In accordance with section 64(2) of the Banking and Financial Services Act, 1994 (as amended), we report that:

• Included in the loans and advances balance of K3,649 million shown in the statement of financial position are total amounts of K402.94 million relating to loans that are more than 5% of regulatory capital as per section 64(2)(d)(ii) for which impairment has been recorded. Our audit opinion is not qualified in respect of this matter as adequate loan provisions have been recorded for these non-performing loans;

• We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;

• We are not aware of any transaction that has not been within the powers of the Bank or which was contrary to the Act;

• The Bank has complied with the provisions of this Act and the regulations, guidelines and prescriptions under this Act, and

• No transactions or conditions affecting the wellbeing of the Bank have come to our attention that in our opinion are not satisfactory and require rectification.

In accordance with requirements of the Schedule IV, Rule 18 of The Securities Act 1993, Cap 254 of the Laws of Zambia we confirm that:

• The annual financial statements of the Zambia National Commercial Bank Plc (the “licensee”) have been properly prepared in accordance with the Act;

• The licensee has, throughout the financial year, kept proper accounting records in accordance with the requirements of the Securities and Exchange Commission Rules;

• The statement of financial position and statement of profit or loss and other comprehensive income are in agreement with the licensee’s accounting records; and

• We have obtained all the information and explanations which, to the best of our knowledge and belief, are necessary for the purposes of our audit.

In accordance with Section 8 (63) of the Lusaka Stock Exchange Listing rules, we report that the Bank has complied with the requirements of section 8.63 (b) – (I) and (n).

Deloitte & Touche Chartered Accountants

Alice Jere TemboAudit PartnerPC NO.: AUD/F000433

Date: 28 February 2017

2016 | ANNUALREPORT

2016 | ANNUALREPORT

FINANCIAL STATEMENTS

STATEMENT OF PROFIT OR LOSSfor the year ended 31 December 2016

Interest incomeInterest expense

Net interest income

Net fee and commission income

Other operating income

Total Operating income

Credit loss expense

Net operating income

Operating expenses

Transformation costs

Profit before income tax

Income tax expense

Profit for the year

Basic and diluted earnings per share (Kwacha)

NOTES

45

6

7

16

8

8

9

10

12

2016 K’ 000

1,024,236 (227,527)

796,709

392,863

21,219

1,210,791

(67,256)

1,143,535

(895,723)

(166,160)

81,652

(51,546)

30,106

0.021

2015 K’ 000

864,342 (226,342)

638,000

306,101

122,645

1,066,746

(97,949)

968,797

(783,944)

-

184,853

(67,344)

117,509

0.081

40

2016 | ANNUALREPORT


STATEMENT OF OTHER COMPREHENSIVE INCOMEfor the year ended 31 December 2016

Profit for the year

Other comprehensive income, net of income tax

Items that may be reclassified subsequently to profit or loss

Net loss on available-for-sale financial assets

Net reclassification adjustment for realised net losses on available-for-sale financial assets

Net gains on change in fair value

Items that will not be reclassified subsequently to profit or loss

Movement of surplus/(deficit) defined benefit plan

Deferred tax relating to items that will not be reclassified to profit or loss

Other comprehensive income for the year, net of income tax

Total comprehensive income for the year

NOTES

30

30

15

23

30

2016 K’ 000

30,106

(6,159)

8,799

2,640

50,834

512

51,346

53,986

84,092

2015 K’ 000

117,509

(8,799)

23,797

14,998

(50,560)

544

(50,016)

(35,018)

82,491

41

2016 | ANNUALREPORT


STATEMENT OF FINANCIAL POSITIONat 31 December 2016

ASSETSCash and balances with Bank of ZambiaBalances with other banksFinancial Investments - available for saleLoans and advances to customersWithholding tax recoverableCurrent taxDeferred taxOther assets Property and equipment

Total assets

LIABILITIESCustomer depositsDeposits from other banksDeferred tax liabilitiesOther liabilitiesProvisions for liabilities and chargesBorrowings

Total liabilities

EQUITYShare capitalShare premiumStatutory reservesGeneral reservesRevaluation reservesRetained earnings

Total equity

Total equity and liabilities

NOTES

131415161010221718

202122242526

2727282930

The financial statements on pages 40 to 99 were approved for issue by the Board of Directors on 17 February 2017 and signed on its behalf by:

Director Director Director Secretary

2016 K’ 000

2,541,635 838,507 769,742

3,392,559 3,622

15,98714,539

361,026237,868

8,175,485

6,256,182 3,033

- 181,747 92,804

560,656

7,094,422

86,625 2,622

86,625 401,049

52,776 451,366

1,081,063

8,175,485

2015 K’ 000

1,626,5391,167,7841,134,3383,446,554

3,17913,528

-283,795270,055

7,945,772

6,033,0841

10,206198,349

410663,438

6,905,488

86,6252,622

86,625299,409

51,314513,689

1,040,284

7,945,772

42

2016 | ANNUALREPORT


STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2016

At 1 January 2015

Profit for the year

Other comprehensive income, net of taxes:Net gain on available-for-sale financial assets (Note 30)Reversal of excess depreciation (Note 30)Deferred tax on excess depreciation Deferred tax on revalued propertiesNet reclassification adjustment for realised net loss on available-for-sale financial assets (Note 30)Deficit on employee retirement benefit plan (Note 23)Total comprehensive incomeGeneral reserves transferTransactions with owners: Dividend paid (Note 11)

At 31 December 2015

At 1 January 2016

Profit for the year

Other comprehensive income, net of taxes:Net loss on available-for-sale financial assets (Note 30)Deferred tax on revalued propertiesNet reclassification adjustment for realised net Gain on available-for-sale financial assets (Note 30)Reversal of excess depreciation (Note 30)Deferred tax on excess depreciation Excess on employee retirement benefit plan (Note 23)Total comprehensive incomeGeneral reserves transfer (Note 29)Transactions with owners:Dividend paid (Note 11)

At 31 December 2016

Share capital

K’000

86,625

-

- - - -

- - - -

- -

86,625

86,625

-

- -

- - - - - -

-

-

86,625

Share premium

K’000

2,622

-

- - - -

- - - -

- -

2,622

2,622

-

- -

- - - - - -

-

-

2,622

Statutory reserve

K’000

86,625

-

- - - -

- - - -

- -

86,625

86,625

-

- -

- - - - - -

-

-

86,625

Revaluation reserves

K’000

37,458

-

(8,799) (2,594)

908 544

23,797 -

13,856 -

- 13,856

51,314

51,314

-

(6,159) 512

8,799 (2,599)

909 -

1,462 -

-

1,462

52,776

General reserves

K’000

188,479

-

- - - -

- - -

110,930

- 110,930

299,409

299,409

-

- -

- - - - -

101,640

-

101,640

401,049

Retained earnings

K’000

599,297

117,509

- 2,594 (908)

-

- (50,560)

68,635 (110,930)

(43,313) (85,608)

513,689

513,689

30,106

- -

- 2,599 (909)

50,834 82,630

(101,640)

(43,313)

(62,323)

451,366

Total K’000

1,001,106

117,509

(8,799) - -

544

23,797 (50,560)

82,491 -

(43,313) 39,178

1,040,284

1,040,284

30,106

(6,159) 512

8,799 - -

50,834 84,092

-

(43,313)

40,779

1,081,063

43

2016 | ANNUALREPORT


Cash flows from operating activitiesProfit before income taxAdjustments for:Amortisation of staff loan benefitImpairment loss recognised on loans and advancesImpairment loss recognised on other assetsNet exchange (losses)/gains on borrowingsGain on sale of propertyDepreciation expense

Cash flows from operating activities before changes in operating assets and liabilities

Changes in operating assets and liabilities:- loans and advances to customers- statutory deposits- other assets- corporate bond- customer deposits- other liabilities- financial investment - available for sale

Cash generated from operations

Withholding tax sufferedTax paid during the year

Net cash generated from operating activities

Cash flows from investing activitiesPurchase of property and equipmentProceeds from sale of property and equipment

Net cash used in investing activities

Cash flows from financing activities:Proceeds from borrowingsRepayment of borrowingsDividends paid

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

NOTES

17161726

18

1010

18

262611

32

2016 K’ 000

81,652

42,271 67,256 11,094

(61,053) (545)

56,948

197,623

(13,260)(32,768) (79,762)(11,985) 223,098 75,790

404,223

565,336

(33,908) (44,773)

(78,681)

486,655

(24,838) 622

(24,216)

298,500 (340,229)

(43,313)

(85,042)

575,021

1,750,141

2,325,162

2015 K’ 000

184,853

30,179 97,949 40,198

222,850 (19)

53,167

629,177

(405,994) (342,608) (201,712)

- 979,364 62,798

190,405

282,253

(12,633) (35,345)

(47,978)

234,275

(48,595) 27

(48,568)

126,050 (143,732)

(43,313)

(60,995)

753,889

996,252

1,750,141

STATEMENT OF CASH FLOWSfor the year ended 31 December 2016

44

2016 | ANNUALREPORT


1. CORPORATE INFORMATION The Zambia National Commercial Bank Plc ( the “Bank”) is incorporated and domiciled in Zambia under the Companies Act, 1994 (as amend-ed) as a limited liability company. The address of its registered office is: Plot 2118 - 2121 Cairo Road Lusaka The Bank’s principal activities are the provision of commercial banking and related services to the general public. The financial statements for the year ended 31 December 2016 were authorised for issue in accordance with a resolution of the directors on 17 February 2017.

2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 2.1 Statement of compliance The financial statements are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”). 2.2 Basis of preparation and presentation of financial statements The financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below: Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. The financial statements are presented in Zambian Kwacha (K) and all values are rounded to the nearest thousand Kwacha, except when otherwise indicated. The Bank presents its statement of financial position in order of liquidity.

NOTES TO THE FINANCIAL STATEMENTS

45

2016 | ANNUALREPORT


NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES 2.2 Basis of preparation and presentation of financial statements (continued) Financial assets and financial liabilities are generally reported gross in the statement of financial position. They are only offset and reported net when, in addition to having an unconditional legally enforceable right to offset the recognised amounts without being contingent on a future event, the parties also intend to settle on a net basis in all of the following circumstances: • The normal course of business • The event of default • The event of insolvency or bankruptcy of the Bank and/or its counterparties Positions recognised on a net basis primarily include balances with exchanges, clearing houses and brokers. Derivative assets and liabilities with master netting arrangements are only presented net when they satisfy the eligibility of netting for all of the above criteria and not just in the event of default. The principal accounting policies are set out below: 2.3 Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within ‘interest income’ or ‘interest expense’ in profit or loss using the effective interest method. Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Bank and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. Effective interest rate The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The calculation of the effective interest rate includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss. 2.4 Fees and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party - such as the arrangement of the acquisition of shares or other securities, or the purchase or sale of business - are recognised on completion of the underlying transaction. 2.5 Translation of foreign currencies (i) Functional and presentation Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates (the “functional currency”). The financial statements are presented in Zambian Kwacha (“K”) which is the Bank’s functional currency.

46

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

2.5 Translation of foreign currencies (continued) (ii) Transaction and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit or loss account. Monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items denominated in foreign currency are not retranslated. Exchange differences are recognised in profit or loss in the year in which they arise.

2.6 Financial assets Financial assets are recognised when the Bank becomes a party to the contractual provisions of the instruments. Financial assets are initially measured at fair value. Transaction costs that are directly attributed to acquisition or issue of financial assets (other than financial assets at fair value through profit or loss) are added to or deducted from the fair value of the financial assets as appropriate, on initial recognition. Transaction costs directly attributed to the acquisition of financial assets at fair value through profit and loss (FVTPL) are recognised immediately in the profit or loss. The Bank classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans, advances and receivables; held-to-maturity financial assets; and available-for-sale assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Management determines the appropriate classification of its financial assets at initial recognition. (i) Loans, advances and receivables Loans, advances and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including bank balances and cash) are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial. (ii) Held-to maturity Held-to-maturity assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. Where the Bank sells more than an insignificant amount of held-to-maturity assets, the entire category would have to be reclassified as available- for-sale. Subsequent to initial recognition, held to maturity investments are measured at amortised cost using the effective interest rate method less any impairment. (iii) Available-for-sale Available-for-Sale (“AFS”) financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. The Bank also has investments in unlisted shares that are not traded in an active market but that are also classified as AFS financial assets and stated at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates (see above), interest income calculated using the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. Dividends on AFS equity instruments are recognised in profit or loss when the Bank’s right to receive the dividends is established.

47

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial assets (continued) AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period. Impairment of financial assets The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: (a) Significant financial difficulty of the issuer or obligor; (b) A breach of contract, such as a default or delinquency in interest or principal payments; (c) The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; (d) It becomes probable that the borrower will enter bankruptcy or other financial reorganisation; (e) The disappearance of an active market for that financial asset because of financial difficulties; or (f ) Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: i) adverse changes in the payment status of borrowers in the portfolio; and ii) national or local economic conditions that correlate with defaults on the assets in the portfolio. The estimated period between a loss occurring and its identification is determined by management for each identified portfolio. In general, the periods used vary between 3 months and 6 months. Assets carried at amortised cost The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial instrument’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. If a loan or held-to-maturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

48

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial assets (continued) Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (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 is recognised in profit or loss. Assets carried at fair value In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss account. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss account.

Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the renegotiated terms apply in determining whether the asset is considered to be past due. 2.7 Derecognition of financial assets The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. On derecognition of a financial asset other than in its entirety (e.g. when the Bank retains an option to repurchase part of a transferred asset), the Bank allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.

49

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Property and equipment (i) Recognition and measurements All property and equipment except buildings is stated at historical cost. Items of property and equipment are subsequently measured at cost less accumulated depreciation and accumulated impairment losses and property is subsequently measured at fair value less accumulated depreciation. Buildings are stated in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent impairment losses. It is the Bank’s policy to perform revaluations with regularity such that the carrying amounts do not differ materially from those that would be determined using fair values every three years. The revaluation differences are credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease previously recognized as an expense, in which case it should be recognized as income. A decrease as a result of a revaluation is recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. When a revalued asset is disposed off, any revaluation surplus is transferred directly to retained earnings. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost includes the cost of materials and direct labour and any other costs directly attributable to bringing the assets to a working condition for their intended use. Purchased software that is integral to the functionality of the related equipment is capitalized as party of that equipment. When parts of an item of property and equipment have different useful lives, they are componentized as separate items of property and equipment. Capital work in progress relates to items of property and equipment that are under construction and are yet to be commissioned for use. Work in progress is measured at the cost incurred in relation to the construction up to the reporting date. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property and equipment, and is recognized net within other operating income in the statement of profit or loss. (ii) Subsequent costs The cost of replacing a component of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced component is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. (iii) Depreciation Depreciation is based on the cost of the asset less its residual value. Components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately. Capital work in progress is not depreciated. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property and equipment. The estimated useful lives are as follows: • Leasehold buildings 50 years • Fixtures, fittings and equipment 5 years • Motor vehicles 5 years• IT equipment 5 years

50

2016 | ANNUALREPORT




2.8 Property and equipment (continued) (iv) Other matters The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. The Bank assesses at each reporting date whether there is any indication that any item of property and equipment is impaired. If any such indication exists, the Bank estimates the recoverable amount of the relevant assets. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are assessed at the lowest levels for which there are separately identifiable cash flows (cash-generating units). A reversal of an impairment loss is recognised immediately in the statement of comprehensive income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 2.9 Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. (i) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted by the reporting date. (ii) Deferred tax Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Bank intends to settle its current tax assets and liabilities on a net basis. 2.10 Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated to remaining assets and liabilities. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurements are recognized in profit or loss.

51

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.11 Employee benefits (i) Retirement benefit obligations Defined contribution plan The Bank and all its employees contribute to the National Pension Scheme, which is a defined contribution scheme. A defined contribution plan is a retirement benefit plan under which the Bank pays fixed contributions into a separate entity. The Bank’s contributions to the defined contribution schemes are charged to profit or loss in the year in which they fall due. Defined benefit plan The assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the Bank and employees. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the statement of financial position with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurement recognised in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorised as follows: • Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements).• Net interest expense or income.• Remeasurement. The Bank presents the first two components of defined benefit costs in profit or loss in the line item employee benefits expense. Curtailment gains and losses are accounted for as past service costs. The retirement benefit obligation recognised in the statement of financial position represents the actual deficit or surplus in the Bank’s defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. (ii) Short-term and other long-term employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the period the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service. Liabilities recognised in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service. Liabilities recognised in respect of other long-term employee benefits are measured at the present value of the estimated future cash outflows expected to be made by the Group in respect of services provided by employees up to the reporting date.

52

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.11 Employee benefits (continued) (iii) Contributions from employees or third parties to defined benefit plans Discretionary contributions made by employees or third parties reduce service cost upon payment of these contributions to the plan. When the formal terms of the plans specify that there will be contributions from employees or third parties, the accounting depends on whether the contributions are linked to service, as follows: • If the contributions are not linked to services (e.g. contributions are required to reduce a deficit arising from losses on plan assets or from actuarial losses), they are reflected in the remeasurement of the net defined benefit liability (asset). • If contributions are linked to services, they reduce service costs. For the amount of contribution that is dependent on the number of years of service, the entity reduces service cost by attributing the contributions to periods of service using the attribution method the entity reduces service cost in the period in which the related service is rendered / reduces service cost by attributing contributions to the employees’ periods of service in accordance with IAS 19 paragraph 70. 2.12 Borrowings Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. 2.13 Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the year in which they are incurred. 2.14 Financial liabilities and equity Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual agreement. Financial liabilities Financial liabilities are classified as borrowed funds, other payables, other liabilities and amounts due to related parties. Borrowed funds, other payables and other liabilities are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Bank after deducting all of its liabilities. Equity instruments are recorded at proceeds received, net of direct issue costs.

53

2016 | ANNUALREPORT



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.14 Financial liabilities and equity (continued) Derecognition of financial liabilities The Bank derecognises financial liabilities when, and only when, the Bank’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

2.15 Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.16 Sale and repurchase agreements Securities sold subject to repurchase agreements (‘repos’) are classified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. 2.17 Share capital Ordinary shares are classified as ‘share capital’ in equity. Any premium received over and above the par value of the shares is classified as ‘share premium’ in equity. 2.18 Dividends payable Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are not recognised as a liability until declared. 2.19 Fiduciary activities The Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Bank. 2.20 Acceptances and letters of credit Acceptances and letters of credit are accounted for as off-statement of financial position transactions and disclosed as contingent liabilities. 2.21 Provisions Provisions 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 amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote. The Bank recognises no provisions for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

54

2016 | ANNUALREPORT




2.21 Provisions (continued)

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. 2.22 Segment reporting Operating segments are reported in a manner consistent with the internal reporting to the Executive Management Committee. The Executive Management Committee allocates resources to and assesses the performance of the operating segments of the entity. The Executive Management Committee is the Bank’s key management making body. All transactions between business segments are conducted on an arm’s length basis, with intra-segment revenue and cost being eliminated in head office. Income and expenses directly associated with each segment are included in determining business segment performance.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Bank’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Bank’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments may change due to circumstances beyond the Bank’s control and are reflected in the assumptions if and when they occur. Items with the most significant effect on the amounts recognised in the financial statements with substantial management judgement and/or estimates are collated below with respect to judgements/estimates involved. (a) Going concern The Bank’s Directors have made an assessment of the Bank’s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt on the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. (b) Impairment losses on loans and advances The Bank reviews its individually significant loans and advances at least qyarterly and at each reporting date to assess whether an impairment loss should be recorded in the income statement. The Bank’s impairment methodology for assets carried at amortised cost results in the recording of provisions for: • Specific impairment losses on individually significant or specifically identified exposures; • Collective impairment of: - Individually not significant exposures - Incurred but not yet identified losses (IBNI)

All categories include an element of management’s judgement, in particular for the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses. These estimates are driven by a number of factors, the changing of which can result in different levels of allowances. Additionally, judgements around the inputs and calibration of the collective and IBNI models include the criteria for the identification of smaller homogenous portfolios, the effect of concentrations of risks and economic data (including levels of unemployment, repayment trends, collateral values such as real estate prices indices for residential mortgages, country risk and the performance of different individual groups, and bankruptcy trends), and for determination of the emergence period. The methodology and assumptions are reviewed regularly in the context of actual loss experience.

55

2016 | ANNUALREPORT



3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED)

(c) Fair value of financial instruments The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. Judgements and estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), funding value adjustments, correlation and volatility. (d) Discount rate used to determine the carrying amount of the Bank’s defined benefit obligation The Bank’s defined benefit obligation is discounted at a rate set by reference to market yields at the end of the reporting period on high quality government bonds (Refer to note 24.2 for discount rate used). Significant judgement is required when setting the criteria for bonds to be included in the population from which the yield curve is derived. The most significant criteria considered for the selection of bonds include the issue size of the government bonds, quality of the bonds and the identification of outliers which are excluded. (e) Revaluation of property The Bank reviews the fair value of its property at the end of each reporting period. An independent valuation of the Bank’s properties to determine fair value is carried out by independent valuers. Revaluations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date. (f) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; • Charges over financial instruments such as debt instruments; • Cash cover; and • Longer-term finance and lending to corporate entities are generally secured. Certain personal credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset backed securities and similar instruments, which are secured by portfolios of financial instruments. (g) Effective Interest Rate (EIR) method The Bank’s EIR methodology, as explained in Note 2.3, recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected behavioural life of loans and deposits and recognises the effect of potentially different interest rates charged at various stages and other characteristics of the product life cycle (including prepayments and penalty interest and charges). This estimation, by nature, requires an element of judgement regarding the expected behaviour and life-cycle of the instruments, as well expected changes to the Bank’s base rate and other fee income/expense that are integral parts of the instrument.

56

2016 | ANNUALREPORT




(h) Impairment of available for sale investments The Bank reviews its debt securities classified as available-for-sale investments at each reporting date to assess whether they are impaired. This assessment, including estimated future cash flows and other inputs in to the discounted cash flow model and in the case of equity instruments, the interpretation of what is ‘significant’ or ‘prolonged’ requires judgement. In making this judgement, the Bank evaluates, among other factors, historical share price movements, and the duration and extent to which the fair value of an investment is less than its cost. (i) Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available against which the losses can be utilised. The Bank’s tax losses can be utilised within 5 years from when the tax the losses were incurred. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax-planning strategies (j) Provisions and other contingent liabilities The Bank operates in a regulatory and legal environment that, by nature, has a heightened element of litigation risk inherent to its operations. As a result, it is involved in various litigation, arbitration and regulatory investigations and proceedings both in Zambia and in other jurisdictions, arising in the ordinary course of the Bank’s business. When the Bank can reliably measure the outflow of economic benefits in relation to a specific case and considers such outflows to be probable, the Bank records a provision against the case. Where the probability of outflow is considered to be remote, or probable, but a reliable estimate cannot be made, a contingent liability is disclosed. However, when the Bank is of the opinion that disclosing these estimates on a case-by-case basis would prejudice their outcome, then the Bank does not include detailed, case-specific disclosers in its financial statements. Given the subjectivity and uncertainty of determining the probability and amount of losses, the Bank takes into account a number of factors including legal advice, the stage of the matter and historical evidence from similar incidents. Significant judgement is required to conclude on these estimates.

The Bank operates in a regulatory and legal environment that, by nature, has a heightened element of litigation risk inherent in its operations. As a result, the Bank is involved in various litigation, arbitration and regulatory proceedings, both in Zambia and in other jurisdictions in the ordinary course of its business. The Bank has formal controls and policies for managing legal claims. Based on professional legal advice, the Bank provides and/or discloses amounts in accordance with its accounting policies.

During the ordinary course of business the Bank is subject to threatened or actual legal proceedings. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Bank incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to the Director’s best estimate of the amount required to settle the obligation at the relevant reporting date.

57

2016 | ANNUALREPORT



4 INTEREST INCOME Arising from: Loans and advances Government and other securities Other banks Cash and short term funds 5 INTEREST EXPENSE Arising on: Customer deposits Borrowings 6 NET FEE AND COMMISSION INCOME Fee and commission income: ATM issuer fees Account maintenance fees Sundry Balance inquiry Payflex Arrangement and commitment fees Xapit management fees Airtime purchase OTC cash withdrawal Xapit Money Transfer Bill Muster Letters of credit commissions Cash management Excess cash withdrawal Zanaco Xpress Below required minimum balance POS discount Commission on encashment of salary cheques

Net fee and commission income

2016 K’ 000

829,754172,626

21,188668

1,024,236

194,92832,599

227,527

100,77987,348 31,601 21,146 20,656 20,266 16,308 14,064 12,266

9,855 9,831 9,508 8,666 8,0147,203 6,8384,479 4,035

392,863

2015 K’ 000

605,482239,641

17,6841,535

864,342

201,60724,735

226,342

75,827 65,354

26,548 12,407

19,134 16,270 12,202 13,267

9,643 5,680 8,696

11,080 4,879 8,2613,060

6,5583,462

3,773

306,101

7 OTHER OPERATING INCOME Sundry operating income Net exchange gain

6,074 15,145

21,219

6,220 116,425

122,645

58

2016 | ANNUALREPORT



8 OPERATING EXPENSES The following items are included within operating expenses:

Employee benefits expense Information technology expenses Others Depreciation of property and equipment (Note 18) Legal Stationery Rents paid Profession fees Cash in transit Security property Soccer expenses Bank of Zambia supervisory fees Visa expenses Travelling expenses Scheme loan administrative charges Subscriptions Bank of Zambia charges Advertising expenses Donations Directors’ remuneration - as Directors of the Bank Auditors’ remuneration Transformation costs (i)

Employee benefits expense: The following items are included within employee benefits expense: Post-employment benefits: Defined contribution plans (Note 23) Defined benefit plans (Note 23)

Termination benefits Other employee benefits (ii)

2016 K’ 000

400,660 130,935

87,54156,948 55,548 24,43117,535 15,760 14,724 14,35112,822 11,600 10,552

9,5387,0996,7905,1624,544 3,130 5,044 1,009

895,723

166,1601,061,883

10,00619,05429,060

3,725367,875371,600

400,660

2015 K’ 000

360,232 91,138

110,850 53,167

7,849 13,25012,317 33,374 13,248 16,435

8,909 9,841

10,077 9,0066,2485,1137,3659,4802,622

2,553 870

783,944

-783,944

17,093 18,468 35,561

4,817 319,854 324,671

360,232

(i) Transformation costs include voluntary separation scheme payment in line with the Fit2Serve programme and related consultancy costs. (ii) Other employee benefits mainly relate to Basic Salary, Housing Allowance, Annual Leave Pay, Car Allowance, Upkeep, Fuel Alloance, and Medical Scheme cost.

21,18815,145

56,94832,59929,060

5,0443,130

17,684116,425

53,16724,73535,561

2,5532,622

Interest receivable from other banks Exchange gains and after charging: Depreciation interest payable to other banks Pension costs Directors emoluments - fees and expenses Donations

9 PROFIT BEFORE INCOME TAX 81,652 184,853

59

Profit before tax is stated after crediting:

2016 | ANNUALREPORT



(3,179) 33,465

(33,908)(3,622)

(13,528) 54,928

(44,773) 20,851

(33,465)(15,987)

81,652

28,579

20,8512,116

51,546

43,313

30,106

1,443,750

0.021

(19,530) 28,984

(12,633)(3,179)

(20,397) 89,034

(35,345) (17,836) (28,984)(13,528)

184,853

64,698

- 2,646

67,344

43,313

117,509

1,443,750

0.081

At beginning of year Recoveries offset against tax liability Withholding tax suffered during the year At end of year The movement during the year in the current tax balance is as follows: Tax recoverable at beginning of year Payable in respect of the year Tax paid during the year Tax under/ (credit) from prior year Withholding tax recoveries in respect of current year Tax recoverable at end of year The tax on the Bank’s profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate as follows: Profit before income tax Tax calculated at the statutory income tax rate of 35% (2015: 35%) Tax effect of: Under provision from prior year Expenses not deductible for tax purposes Income tax expense

The dividend paid in the year 2016 was in respect of the year ended 31 December 2015 representing K0.03 per share. The Board did not recommend a dividend for the year ended 31 December 2016. Payment of dividends is subject to withholding tax (WHT) at the rate of 15% for resident and non-resident shareholders. However, where there is a double tax treaty, the WHT will be subject to the rates in the treaty. Furthermore the WHT is taxed at zero percent for individuals because the Bank is listed on the Lusaka Stock Exchange.

Basic earnings per share is calculated by dividing the profit after tax attributed to equity holders of the Bank by weighted average number of shares in issue during the year. Profit attributable to equity holders Weighted number of ordinary shares in issue (thousands) Basic and diluted earnings per share (Kwacha)

12 EARNINGS PER SHARE

10 INCOME TAX EXPENSE Current tax Under provision of tax in prior year Deferred tax (Note 22)

2016 K’ 000

54,92820,851

(24,233)

51,546

2015 K’ 000

89,034 -

(21,690)

67,344

11 DIVIDEND PAID

35%

25%3%

63%

There are no potentially dilutive shares, hence diluted earnings per share is the same as the basic earnings per share.

The movement during the year in Withholding tax (WHT) balances is as follows:

35%

-1%

36%

60

% %

2016 | ANNUALREPORT



2016 K’ 000

353,999 2,202,985

2,556,984(15,349)

2,541,635

- 60,273

- 60,273

778,234 838,507

58,115

621,498 679,613

90,129

90,129

769,742

224,010 545,732

769,742

Government BondsK’ 000

575,921 -

(518,495)10,687

68,113

68,113 53,445

(35,654)4,225

90,129

2015 K’ 000

359,856 1,266,683

1,626,539 -

1,626,539

6,80348,288

342,000 397,091 770,693

1,167,784

21,128 1,045,097 1,066,225

68,113

68,113

1,134,338

90,055 1,044,283

1,134,338

Total

K’ 000

1,397,052 1,061,914

(1,339,626) 14,998

1,134,338

1,134,338 734,643

(1,101,879) 2,640

769,742

Treasury Bills K’ 000

821,131

1,061,914 (821,131)

4,311 1,066,225

1,066,225 681,198

(1,066,225) (1,585)

679,613

13 CASH AND BALANCES WITH BANK OF ZAMBIA Cash in hand Balances with Bank of Zambia Provision

The provision relates to long outstanding items on Bank of Zambia account under investigation. 14 BALANCES WITH OTHER BANKS Items in course of collection Loans to financial institutions Placements with other banks Current balances with other banks Balances with banks abroad 15 FINANCIAL INVESTMENTS - AVAILABLE FOR SALE Available-for-sale-Treasury Bills Government securities–at fair value - Maturing within 90 days of the date of acquisition (Note 32) - Maturing after 90 days of the date of acquisition Total available-for-sale Treasury Bills Available-for-sale Bonds Government securities at Fair Value - Maturing after 90 days of the date of acquisition Total available -for-sale Bonds Total investment securities Current Non-current

The movement in Government Bonds and Treasury Bills available-for-sale investments may be summarised as follows:

At 1 January 2015 Additions Disposals (redemption) Loss from changes in fair value At 31 December 2015 At 1 January 2016 Additions Disposals (redemption) (Loss)/ Gain from changes in fair value At 31 December 2016

61

2016 | ANNUALREPORT



2016 K’000

1,606,960 882,197 874,016 273,871

12,132

3,649,176

(250,639) (5,978)

(256,617) 3,392,559

2015 K’000

1,656,145 833,669 862,757 253,721

31,988

3,638,280

(187,664)(4,062)

(191,726) 3,446,554

15 FINANCIAL INVESTMENTS - AVAILABLE FOR SALE (CONTINUED)

Personal loansK’000

43,233

(2,185)

- -

(2,185)

41,048

(2,185)

41,048

10,009 -

51,057

10,009

Commercial overdraft

K’000

22,171

17,774 -

-

17,774

39,945

17,774

39,945

13,197 -

53,142

13,197

Personal overdrafts

K’000

24,504

12,963

(21,785) -

(8,822)

15,682

12,963

15,682

13,169 (2,365)

26,486

13,169

16 LOANS AND ADVANCES TO CUSTOMERS Commercial loans Personal loans Overdrafts Mortgages Others Gross loans and advances Less: Provision for impairment of loans and advances - Individually assessed - Collectively assessed Net loans and advances Current Non-current

Movements in provisions for impairment of loans and advances are as follows:

Total K’000

120,947

97,949

(21,785) (5,385)

70,779

191,726

97,949

191,726

67,256 (2,365)

256,617

67,256

Commercial loansK’000

31,039

69,397 -

(5,385)

64,012

95,051

69,397

95,051

30,881 -

125,932

30,881

All impaired loans have been written down to their estimated recoverable amount. The aggregate carrying amount of impaired loans at 31 December 2016 was K410.3 million (2015: K295.6 million).

At 1 January 2015

Charge/ (write-back) for the yearReclassification non-credit Impairment to operational lossAmounts written off

At 31 December 2015

Net impairment charge

At 1 January 2016

Charge for the yearWrite offs

At 31 December 2016

Net impairment charge

516,613 2,875,946 3,392,559

1,297,260 2,149,294 3,446,554

Interest on the Treasury bills is receivable on maturity and at varying rates between 20.5% and 28%. The treasury bills mature on various dates between January 2017 and December 2017. Interest on Government bonds are received semi-annually at varying rates between 9% and 15%. The bonds mature on various dates between February 2017 and May 2027.

62

2016 | ANNUALREPORT



2016 K’000

124,317 (53,170)

71,147

200,760 30,629 58,183

307 361,026

42,076 11,094

53,170

2015 K’000

87,456 (42,076)

45,380

142,703 88,056

7,349 307

283,795

1,878 40,198

42,076

17 OTHER ASSETS Prepayments and other receivables Allowance for doubtful debts - (i) Staff loans marked to market - (ii) Visa transactions Defined benefit asset (Note 23) Investment in Zambia Electronic Clearing House Limited - (iii) (i) Movement in the allowance for doubtful debts Balance at beginning of year Charge for the year Balance at end of the year

The increase in the movement of allowance for doubtful debts in the previous year was due to an unreconciled suspense amounts.

(ii) Reconciliation of staff loans marked to market

At beginning of year Current year fair value adjustment

Amortisation to profit or loss

142,703 100,328

243,031

(42,271) 200,760

89,816 83,066

172,882

(30,179) 142,703

Employee loans and advances are offered on concessionary rates. House, Car and personal development loans are enhanced by collateral of landed property and in the case of car loans, the vehicle registration certificate is endorsed with the Bank as absolute owner.

Personal loan Personal Development loan House Car loan Interest income earned on staff loans and advances

2016%

1212

88

28,522

2015%

1212

88

26,518

The Bank adjusted the interest received on staff loans by the market rate of 34.0%

(iii) Zambia Electronic Clearing House Limited

The investment in Zambia Electronic Clearing House Limited (“ZECHL”) represents the Bank’s contribution to the set up costs for the establishment of the National Switch to enhance ZECHL functionality, more specifically to support electronic point of sale transactions to help minimise cash based transactions and their attendant costs and risks. The principal activity of ZECHL is the electronic clearing of cheques and direct debits and credits in Zambia for its member banks. The ZECHL is funded by contributions from member banks. As there is no reliable measure of the fair value of this investment, it is carried at cost, and regularly reviewed for impairment at each reporting date.

Where staff loans are issued to members of staff at concessionary rates, fair value is calculated based on market rates. This will result in the long term staff loans benefit as shown above. The concessionary rates applied in the year were as follows:

63

2016 | ANNUALREPORT



Capital work in

progressK’000

17,113 14,175

- -

31,288 (25,469)

-

5,819

- - -

- - - -

5,819

31,288

TotalK’000

510,432 48,595

- (83)

558,944 24,838 (1,502)

582,280

235,797 53,167

(75)

288,890 56,948 (1,425)

344,412

237,868

270,055

Cost or valuationBalance at 1 January 2015AdditionsReclassificationWrite-offs Balance at 31 December 2015AdditionsDisposals

Balance at 31 December 2016 Accumulated depreciation and impairment Balance at 1 January 2015Charge for yearDisposal

Balance at 31 December 2015Charge for yearDisposalsBalance at 31 December 2016

Carrying amount

At 31 December 2016 At 31 December 2015

Motor Vehicles

K’000

13,690 1,003

- (83)

14,610 4,712

(1,502)

17,820

10,768 1,402

(75)

12,095 1,782

(1,425) 12,452

5,368

2,515

Fixture, fittings

and equipment

K’000

338,062 32,089

890 -

371,041 39,809

-

410,850

224,919 48,806

-

273,725 52,161

- 325,886

84,964

97,316

Leasehold buildings

K’000

141,567 1,328 (890)

-

142,005 5,786

-

147,791

110 2,959

-

3,069 3,005

- 6,074

141,717

138,936

An independent valuation of the Bank’s Leasehold buildings was carried out by Messer’s Sherwood Greene Consulting to determine the fair value of the buildings as at 31 December 2014. The valuation conforms to Royal Institute of Chartered Surveyor’s Appraisal and Valuation Manual valuation standards as determined by reference to IAS 16: – Property, Plant and Equipment. Had the buildings been measured on historical cost basis, their carrying amount would be as follows:

2016 K’000

59,742 (5,386)

54,356

2015 K’000

53,955 (4,265)

49,690

Cost Accumulated depreciation Carrying amount

In accordance with section 193 of the Companies Act (as amended), 1994 the Register of Land and Buildings is available for inspection by members and their duly authorised agents at the Registered Records Office of the Bank.

18 PROPERTY AND EQUIPMENT

64

Included under fixtures, fittings and equipment is IT software which is an intangible asset with a net book value of K19,434,000 (2015:K29,152,000).

2016 | ANNUALREPORT



3,943,7541,384,032

928,3966,256,182

5,891,204364,978

6,256,182

3,033

3,857,5941,390,503

784,9876,033,084

6,033,0804

6,033,084

1

20 CUSTOMER DEPOSITS Current and demand deposits Savings accounts Fixed deposit accounts Current Non-current 21 DEPOSITS FROM OTHER BANKS Items in course of collection

2016K’000

(10,206) 512

24,233 14,539

Creditedto equity

K’ 000

544

544 -

544

-

512

512

2015K’000

(32,440) 544

21,690 (10,206)

At endof yearK’ 000

(30,906)

(30,906)20,700

(10,206)

(30,906)

45,445

14,539

22 DEFERRED TAX Deferred tax is calculated using the enacted income tax rate of 35% (2015: 35%). The movement on the deferred tax is as follows:

At beginning of year Deferred tax on revaluation (Note 30) Temporal timing differences (Note 10) At end of year

2015 Deferred tax liability Property and equipment Deferred tax liability Other temporary differences

Net deferred tax liability 2016 Deferred tax liability Property and equipment Deferred tax asset Other temporary differences

Net deferred tax (liability)/asset

At beginningof year

K’000

(31,166)

(31,166) (1,274)

(32,440)

(30,906)

20,700

(10,206)

Charged (credited) to profit or loss

K’ 000

(284)

(284)21,974

21,690

-

24,233

24,233

65

19 CAPITAL COMMITMENTS Authorised and contracted for: The commitments will be met from internally generated funds and borrowings.

2016 K’ 000

1,547

2015 K’ 000

5,736

2016 | ANNUALREPORT



Defined contribution plans Defined contribution plans are a pension plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Bank’s contributions to the defined contribution schemes are charged to profit or loss in the year to which they relate. The Bank has no further obligation once contributions have been paid. The total expense recognised in profit or loss of K10,006,000 (2015: K17,093,000) (Note 8) represents contributions payable to these plans by the Bank at rates specified in the rules of the plans. National Pension Scheme The Bank and all its employees contribute to the National Pension Scheme (“NAPSA”), which is a statutory defined contribution plan. Zambia State Insurance Corporation Limited Certain employees of the Bank are also members of a defined retirement contribution plan operated by Zambia State Insurance Corporation Limited. The Bank is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits.

Defined benefit plans The Bank sponsors funded defined benefit plans for qualifying employees. The defined benefit plans are administered by a separate Fund that is legally separated from the Bank. The Board of the pension fund is composed of an equal number of representatives from both employers and (former) employees. The Board of the pension fund is required by law and by its articles of association to act in the interest of the fund and of all relevant stakeholders in the scheme, i.e. active employees, inactive employees, retirees, employers. The Board of the pension fund is responsible for the investment policy with regard to the assets of the fund.

The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan asset is below this rate, it will create a plan deficit. Currently the plan has a relatively balanced investment in equity securities, debt instruments and real estates. Due to the long-term nature of the plan liabilities, the Board of the pension fund considers it appropriate that a reasonable portion of the plan assets should be invested in equity securities and in real estate to leverage the return generated by the fund.

A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments. The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.

Investment risk

Interest risk

Longevityrisk

Salaryrisk

The risk relating to benefits to be paid to the dependants of plan members (widow and orphan benefits) is re-insured by an external insurance company. No other post-retirement benefits are provided to these employees.

23 RETIREMENT BENEFIT OBLIGATIONS

66

2016 | ANNUALREPORT



Defined benefit plans (Continued) The most recent actuarial valuation of the plan assets and the present value of the defined benefit obligation were carried out as at 31 December 2016 by Independent Actuarial Consultancy of Johannesburg, South Africa. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method. The principal assumptions used for the purposes of the actuarial valuations were as follows:

23 RETIREMENT BENEFIT OBLIGATIONS (CONTINUED)

2016

22 17.1

21 25

2,015

20 15.3

21 25

Discount rate % Expected rate of salary increase % Average longevity at retirement age for current employees (future pensioners) in years Males Females

Amounts recognised in comprehensive income in respect of these defined benefit plans are as follows:

2016 K’ 000

8,210 1,603

9,813

2,974 (24,563)

(21,589)

(21,589)

2015 K’ 000

9,270 1,771

11,041

(57,559) (4,361)

(61,920)

(61,920)

Service cost: Current service cost Net interest expense Components of defined benefit costs recognised in profit or loss Remeasurement on the net defined benefit liability: Actuarial losses arising from changes in financial assumptions Actuarial losses arising from experience adjustments Components of defined benefit costs recognised in other comprehensive income Total

The current service cost and the net interest expense for the year are included in the employee benefits expense in profit or loss. Of the expense for the year, an amount of K19,054,000 (2015: K18,468,000) has been included in profit or loss as an expense (Note 8). The amount included in the statement of financial position arising from the entity’s obligation in respect of its defined benefit plans is as follows:

31 December 2015

K’ 000

(186,605) 193,954

7,349

7,349

31 December 2014

K’ 000

(114,215) 172,124

57,909

57,909

Present value of funded defined benefit obligation Fair value of plan assets Funded status Net assets arising from defined benefit obligation

31 December 2016

K’ 000

(127,180) 185,363

58,183

58,183

67

2016 | ANNUALREPORT



Defined benefit plans (Continued) Reconciled as follows: At 1 January At 31 December Movement in defined benefit obligation Movements in the present value of the defined benefit obligation in the current year were as follows: Opening defined benefit obligation Age adjustment Current service cost Interest cost Remeasurement (gains)/losses: Actuarial gains arising from changes in financial assumptions Actuarial losses arising from experience adjustments Benefits paid Closing defined benefit obligation Movements in the fair value of the plan assets in the current year were as follows: Opening fair value of plan assets Remeasurement gain/(loss): Return on plan assets (excluding amounts included in net interest expense) Others (funded expenses) Contributions from the employer Contributions from plan participants Benefits paid Closing fair value of plan assets The fair value of the plan assets at the end of the reporting period for each category, are as follows: Cash and cash equivalents Equity investments categorised by industry type: – Consumer industry – Manufacturing industry – Energy and utilities – Financial institutions – ICT and telecom Sub total


2016 K’ 000

7,349 58,183

50,834

186,606

(49,936)8,210

22,245

(2,974) 24,563

(61,534)

127,180

193,954

35,739 (12,357)

19,707 9,854

(61,534)

185,363

36,943

9,40112,771

3,84719,251

89

82,302

2015 K’ 000

57,909 7,349

(50,560)

114,215 -

9,270 20,765

57,559 4,361

(19,564)

186,606

172,124

32,703 (19,007)

18,465 9,233

(19,564)

193,954

18,838

459 9,036 2,033 5,347

115

35,828

68

2016 | ANNUALREPORT



Defined benefit plans (Continued) Debt investments categorised by issuers’ credit rating: – AAA – BBB and lower – not rated Subtotal Properties categorised by nature and location: – Retail shops – Commercial properties – Residential properties Subtotal Total


2016 K’ 000

2,73422,89816,542

42,174

1,583 20,580 38,724

60,887

185,363

2015 K’ 000

3,449 33,878 59,912 97,239

1,583 20,580 38,724

60,887

193,954

The fair values of the above equity and debt instruments are determined based on quoted market prices in active markets whereas the fair values of properties and derivatives are not based on quoted market prices in active markets. It is the policy of the fund to use interest rate swaps to hedge its exposure to interest rate risk. This policy has been implemented during the current and prior years. Foreign currency exposures are fully hedged by the use of the forward foreign exchange contracts. The actual return on plan assets was 19% (2015: 22%). Significant actuarial assumptions for the determination of the defined obligation are discount rate, expected salary increase and mortality. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. • If the discount rate is 100 basis points higher/(lower), the defined benefit obligation would decrease by K15,626 (increase by K13,493). • If the expected salary growth increases/(decreases) by 1%, the defined benefit obligation would increase by K13,585 (decrease by K15,849). • If the life expectancy increases/(decreases) by one year for both men and women, the defined benefit obligation would decrease by K1,910 (increase by K1,892). The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the statement of financial position. There was no change in the methods and assumptions used in preparing the sensitivity analysis from prior years. Each year an Asset-Liability-Matching study is performed in which the consequences of the strategic investment policies are analysed in terms of risk-and-return profiles. Investment and contribution policies are integrated within this study. Main strategic choices that are formulated in the actuarial and technical policy document of the Fund are: • Asset mix based on 40% equity instruments and 60% debt instruments. • Interest rate sensitivity caused by the duration of the defined benefit obligation should be reduced by 40% by the use of debt instruments in combination with interest rate swaps. • Maintaining an equity buffer that gives a 85% assurance that assets are sufficient within the next 12 months.

There has been no change in the process used by the Bank to manage its risks from prior periods.

69

2016 | ANNUALREPORT



Defined benefit plans (Continued) The Bank funds the cost of the entitlements expected to be earned on a yearly basis. Employees pay a fixed 10% of pensionable salary. The residual contribution (including back service payments) is paid by the Bank. The funding requirements are based on the local actuarial measurement framework. In this framework the discount rate is set on a risk free rate. Furthermore, premiums are determined on a current salary base. Additional liabilities stemming from past service due to salary increases (back-service liabilities) are paid immediately to the Fund. The average duration of the benefit obligation at 31 December 2016 is 11.6 years (2015: 12.6 years). This number can be analysed as follows: • active members: 11.6 years (2015: 13.19 years); • deferred members: 0 years (2015: 0 years); and • retired members: 9.3 years (2015: 8.5 years). The Bank expects to make a contribution of K19,504,000 (2015: K18,568,000) to the defined benefit plans during the next financial year.


Reconciliation of funded status: Present value of obligations Fair value of plan assets Surplus Unrecognised losses Prepaid pension cost Asset ceiling restriction Prepaid pension cost after asset ceiling restriction

2016 K’ 000

(127,180) 185,363

58,183 -

58,183 -

58,183

2015 K’ 000

(186,605) 193,954

7,349 -

7,349 -

7,349

70

43,234 40,087 76,020 10,858 12,541 15,609

198,349

Total K’ 000

12,038 (11,628)

410

410 92,804

(410) 92,804

2016 | ANNUALREPORT



24 OTHER LIABILITIES

67,766 35,843 40,198 13,411 13,037 11,492

181,747

Provision for legal claims

K’ 000

11,414 (11,414)

-

- - - -

Accrued expenses Sundry payables VISA transactions payable Deferred arrangement fees Bills payable Statutory payments

25 PROVISIONS FOR LIABILITIES AND CHARGES

At 1 January 2015 Payment At 31 December 2015 At 1 January 2016 Provision Payment At 31 December 2016

Retirement benefits obligations

K’ 000

624 (214)

410

410 92,804

(410) 92,804

(i) Retirement benefits obligations represents contributions payable to members of staff that are going to voluntary separation scheme.

2016K’ 000

173,250148,500148,500

49,50040,906

-

560,656

663,438 (340,229)

298,500 (61,053)

560,656

2015K’ 000

247,50068,75068,750

110,00058,438

110,000

663,438

458,270

(143,732) 126,050 222,850

663,438

26 BORROWINGS Payable to: Deutsche Investitions undentwicklungsgesellschaft mbh (DEG) Nederlandse financierings-Maatschappij Voor Ontwikkelingslanden N.V (FMO) Pour LA Cooperation Economique (PROPARCO) International Financing Corporation African Development Bank Societe De Promotion ET DE Participation Rabo Bank The movement during the year was as follows: At beginning of year Repayments during the year Proceeds from borrowings Net exchange (losses)/Gains At end of year Repayable as follows:

1 - 12 months 1 - 3 years 3 - 5 years After 5 years

160,187 295,625 104,844

- 560,656

370,487 190,973

67,986 33,992

663,438

2016K’ 000

2015K’ 000

71

2016 | ANNUALREPORT


26 BORROWINGS (CONTINUED)


The Bank obtained a foreign currency facility of US$10 million from Afican Development in 2010 and US25 million International Fiannace Coproration in 2011. The Bank further secured a US$25 million and US$60 million from Deutsche investitutions-Undi Entwiciclungsgellschaft mbh (DEG) and Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V (FMO) and Societe de Promotion et de Participation pour la Cooperation Economique (PROPARCO) in 2014 and 2015 respectively. The purpose of the loan was for onward lenidng to the customers. Under the terms of the FMO and PROPARCO loan, the Bank is required to observe inter alia, the following financial covenants:

Covenants- Capital adequacy ratio: minimum 12%- Open loan exposure ratio: not to exceed 25%- Single loan exposure: not to exceed 25%- Net Stable fundling Ratio: minimum 100%- Government Ratio: not to exceed 42%- Cost to income ratio: not to exceed 70% The only financial covenant to be observed under the terms of the ADB loan is as follow: - Capital adequacy ratio: minimum 10%

The only financial covenant to be observed under the terms of the DEG loan is as follow: - Capital adequacy ratio: minimum 12%- Open loan exposure ratio: not to exceed 25%- Related party lending ratio: not to exceed 20%- Net interest margin: minimum 2%- Cost to income ratio: not to exceed 70% - Market Risk 25%- Liquidity ratio <300- Single group exposure 25

72

2016 | ANNUALREPORT


The Bank has not complied with the Cost to Income ratio and the Agriculture, forestry, fishing and hunting sector ratio under the Single Industry Exposure category. The Bank is currently under discussion with the Lender. Under the terms of the IFC loan, the Bank is required to observe inter-alia, the following covenants: Covenants - Capital adequacy ratio: minimum 12%- Equity to asset ratio not less than 5%- Economic Group exposure ratio not more than 25%- Aggregate large exposure ratio of not more than 400%- Related party exposure ratio of not more than 15%- Open credit exposure ratio of not more than 25%- Fixed assets plus equity investment ratio of not more than 35%- Aggregate foreign exchange exposure of not more than 25%- Single Currency Foreign Exchange Risk Ratio of not more 10%- Interest rate risk ratio of not more than 10%- Aggregate interest rate risk ratio of not more than 20%- Foreign Currency Maturity Gap of at least (150%)- Aggregate negative maturity gap ratio of not less than (300%)- Single industry exposure ratio of not more than 30% The Bank has not complied with the Agriculture, forestry, fishing and hunting sector ratio under Single Industry Exposure category.However, a waiver was granted by the lender and therefore, the impact of non compliance with covenant has not been disclosed as this is not applicable following the waiver.

26 BORROWINGS (CONTINUED)


Balance at 31 December 2015 Balance at 31 December 2016

Share premiumK’ 000

2,622

2,622

Number of shares

1,443,750

1,443,750

Ordinary sharesK’ 000

86,625

86,625

The total authorised number of ordinary shares is 10,000 million (2015: 10,000 million) with a par value of 6 Ngwee per share. The shares issued and fully paid are 1,443,750 (2015: 1,443,750). During the year, the Bank maintained its paid up share capital at K86,625,000 in compliance with the Bank of Zambia minimum capital requirements announced on 30 January 2012.

Below is the shareholding structure:Rabo International Advisory Services (RIAS)Government of ZambiaNational Pension Scheme AuthorityLizara Investments Limited (as nominees for Zambia National Farmers Union)Africa Life Financial Services Limited managed fundsPublic Service Pension FundMukuba Pension Trust FundOther

Total

2016 %

45.59 25.00

8.91 3.41 3.04 2.76 2.27 9.02

100.00

2015%

45.5925.00

8.913.413.042.762.279.02

100.00

27 SHARE CAPITAL

73

2016 | ANNUALREPORT


28 STATUTORY RESERVES


2016 K’000

86,625

299,409 101,640

401,049

2015 K’000

86,625

188,479110,930

299,409

29 GENERAL RESERVES At beginning of year Transfer from retained earnings At end of year

At beginning and end of year

The regulatory reserve represents an appropriation from retained earnings to comply with SI No.182 of 1995.

The balance in the General Banking Reserves represent the excess of impairment provisions determined in accordance with the Bank of Zambia prudential regulations over the impairment provisions recognised in accordance with IFRS. Where the IFRS impairment exceeds the Bank of Zambia provisioning, a reversal is done from General Banking Reserves to Revenue Reserves.

30 REVALUATION RESERVES 2016 K’ 000

60,113 (2,599)

512 909

58,935

(8,799) 8,799

(6,159) (6,159)

58,935 (6,159)

52,776

2015 K’ 000

61,255

(2,594) 544 908

60,113

(23,797) 23,797 (8,799) (8,799)

60,113 (8,799)

51,314

Property and equipmentAt beginning of yearTransfer of excess depreciationDeferred tax on revaluation (Note 22)Deferred tax on excess depreciationAt end of year Available-for-sale financial assetsAt beginning of yearNet gain/(loss) from changes in fair valueNet gain transferred to other comprehensive incomeAt end of year

Total revaluation reserves

Property and equipmentAvailable-for-sale-investment

At end of year

74

32 ANALYSIS OF CASH AND CASH EQUIVALENTS AS SHOWN IN THE STATEMENT CASH FLOWS STATEMENT

2016 | ANNUALREPORT


31 OFF STATEMENT OF FINANCIAL POSITION, FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS


2016 K’ 000

194,431 50,335

244,766

2015 K’ 000

572,080 64,443

636,523

In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties.

Nature of contingent liabilities An acceptance is an undertaking by a bank to pay a bill of exchange drawn on a customer. The Bank expects most acceptances to be presented, and reimbursement by the customer is normally immediate. Letters of credit commit the Bank to make payments to third parties, on production of documents, which are subsequently reimbursed by customers. Guarantees are generally written by a bank to support performance by a customer to third parties. The Bank will only be required to meet these obligations in the event of the customer’s default.

Contingent liabilities

Acceptances and letters of creditGuarantees and performance bonds

2016 K’ 000

210,792

2015 K’ 000

229,190

Other commitments

Undrawn stand-by facilities, credit lines and other commitments to lend

Nature of commitments

Commitments to lend are agreements to lend to a customer in future subject to certain conditions.. Such commitments are normally made for a fixed period. The Bank may withdraw from its contractual obligation for the undrawn portion of agreed overdraft limits by giving reasonable notice to the customer.

2015 K’000

1,626,539 (1,017,021)

21,128

630,646

1,119,496(1)

1,750,141

In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties.

Cash and balances with Bank of Zambia (Note 13)Less: Statutory deposits requirement (see below)Government and other securities (Note 15)

Balances with other banks (Note 14)Amounts due to Banking Institutions (Note 21)

2016 K’000

2,541,635 (1,049,789)

58,115

1,549,961

778,234(3,033)

2,325,162

75

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with the Bank of Zambia, Treasury Bills and other eligible bills, and amounts due from other banks. Cash and cash equivalents exclude the cash reserve requirement held with the Bank of Zambia. Banks are required to maintain a prescribed minimum cash balance with the Bank of Zambia that is not available to finance the bank’s day-to-day activities. The amount is determined as 18% of the average outstanding customer deposits over a cash reserve cycle period of one week.

The Bank’s major shareholder is Rabo International Advisory Services (RIAS) BV a subsidiary of Cooperation Raiffeisen – Boerenleenbank CV (Rabobank) incorporated in The Netherlands. There are no other companies which are related to Zambia National Commercial Bank Plc, listed on the Lusaka Stock Exchange. Government of the Republic of Zambia hold a 25% interest in the Bank. In the normal course of business, current accounts are operated and placings of foreign currencies are made with Rabobank at market rates (arms length).

2016 2015 K’000 K’000 (a) Loans to Directors Loans and advances issued at arm’s length to companies controlled by Directors 13,568 17,121

(b) Directors’ interests in the Bank As at 31 December 2016, no Directors held an interest in the Bank, as recorded in the register and on the Lusaka Stock Exchange.

2016 | ANNUALREPORT



32 ANALYSIS OF CASH AND CASH EQUIVALENTS AS SHOWN IN THE STATEMENT CASH FLOWS STATEMENT (CONTINUED)

2016 K’000

30,934

10,307

2015 K’000

32,545

15,115

(c) Shareholder’s guarantee During the year, the Government had guaranteed outstanding letters of credit and a loan in respect of two public sector entities all amounting to K228,086,000 (2015: K347,528,000).

(d) Key management personnel compensation

Salaries and other short-term employment benefits

The Chief Executive Officer and one other senior management official are seconded from Rabo development B.V., a significant shareholder of the Bank.

(e) Management fees paid to Rabo International Advisory Services (RIAS)

Fees are computed on the basis of the Management contract.

(f) Other reportable items(i) There were no loans with Rabobank;(ii) There were no deposits with the directors;(iii) There were no provisions made on loans granted to related parties.

33 RELATED PARTY TRANSACTIONS

76

2016 | ANNUALREPORT


33 RELATED PARTY TRANSACTIONS (CONTINUED)


2016 K’000

5,044

994 794 476 284 846 340 695 408207

5,044

1,669,603

2015 K’000

2,553

360 257 223 399 534 150 437 193

- 2,553

1,678,905

(g) Non Executive Directors’ remuneration

- in connection with the management of the Bank as directors of the Bank

Analysis is as follows:

Director’s fees:Ms. C LumpaMr. H MtineMr. E DrokDr. R SimwingaMs. G AkapelwaMr. F WeenigMr. G RobinsonMr. B DickMr. H. Mulder

(h) Shareholder deposits

Deposits

34 SEGMENT REPORTING

Following the management’s approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the Executive Management Committee (the chief operating decision-maker), which is responsible for allocating resources to the reportable segments and assesses its performance. All operating segments used by the Bank meet the definition of a reportable segment under IFRS 8. The Bank has two main business segments: Retail banking: - incorporating private banking services, private customer current accounts, savings, deposits, investment savings products, safe custody, credit and debit cards, consumer loans and mortgages. Corporate banking: - incorporating direct debit facilities, current accounts, deposits, overdrafts, loans and other credit facilities and foreign currency. Other Bank operations comprise Treasury management, Credit and computer services, none of which constitute a separate reportable segment and business activities. As the Bank segment operations are all financial with a majority of revenues deriving from interest and the Executive Management Committee relies primarily on net interest revenues to assess the performance of the segment, the total interest income for all reportable segments is presented on a net basis. The Banks management reporting is based on a measure of operating profit comprising net interest income, loan impairment charge, net fee and commission income and other income. The information provided about each segment is based on the internal reports about segment profit or loss, which are regularly reviewed by the Executive Management Committee. Business segments: • Corporate Banking • Retail Banking • Treasury

77

2016 | ANNUALREPORT


34 SEGMENT REPORTING (CONTINUED)


Corporate banking

K’ 000

285,903 106,528

392,431

(155,784) (43,185)

(198,969)

193,462

196,318 83,065

279,383

Business segments as at 31 December 2016

Net interest incomeNon-funded income

Total income

Operational expensesImpairmentTotal operating expenses

Profit before tax


Net interest incomeNon-funded income

Total income

Retail banking

K’ 000

331,956 287,034

618,990

(279,208) (24,071)

(303,279)

315,711

279,369 223,990

503,359

TreasuryK’ 000

178,850 14,446

193,296

(210,490) -

(210,490)

(17,194)

55,609 115,483

171,092

OthersK’ 000

- 6,074

6,074

(416,401) -

(416,401)

(410,327)

106,704

6,208

112,912

TotalK’ 000

796,709 414,082

1,210,791

(1,061,883) (67,256)

(1,129,139)

81,652

638,000 428,746

1,066,746

(200,294) (85,080)

(285,374)

(5,991)

4,908,081

4,908,081

3,884,892

4,798,786

Operational expensesImpairmentTotal Operating expenses

Profit before tax


Total assets for reportable segments

Total liabilities for reportable segments


Total assets for reportable segments

Total liabilities for reportable segments

(204,014) (12,869)

(216,883)

286,476

1,925,583

1,925,583

2,370,960

2,101,318

(58,518) -

(58,518)

112,574

23,349

23,349

1,689,920

5,384

(321,118) -

(321,118)

(208,206)

1,318,072

237,009

216,333

-

(783,944) (97,949)

(881,893)

184,853

8,175,485

7,094,422

7,945,772

6,905,488

Management have considered the requirement of IFRS 8: Operating Segment paragraph 21 which requires an entity to disclose reported segment profit or loss, segment assets and segment liabilities. On the basis of information available to Management, it is not practical to disclose profit or loss for each reportable segment.

78

2016 | ANNUALREPORT



The Bank currently has two significant legal claims from two groups of ex-employees against the Bank for additional separation benefits. The matter of the first group was litigated in previous years in the Industrial Relations Court and appealed to the Supreme Court by the Bank where judgement was entered against the Bank. However, no judgement sum was awarded and the matter was referred back to the Industrial Relations Court for assessment. The Bank sought an interpretation of the Supreme Court judgement from its external Legal Counsel and on the basis of this interpretation, proceeded to re-compute the separation benefits which resulted in a payment of a sum of K40 million to the claimants. The matter of the second group was litigated in the current year and is yet to be heard.

On the strength of the legal advice obtained, the Directors are reasonably of the view that the final assessment by the Industrial relations Court will not be significantly in excess of this amount already paid to the claimants, if any. However, in view of the inherent difficulty of ascertaining the outcome of the assessment, as the claimants were employed on different conditions of service, an estimate of the additional liability, if any, could not be made with any reasonable certainty. Accordingly, no additional liabilities have been raised in these financial statements in this respect.

35 LEGAL CLAIMS

79

2016 | ANNUALREPORT


37. FINANCIAL RISK MANAGEMENT


There were no material significant events after the reporting date up to the date of approval of these Annual Financial Statements, that require disclosure in or adjustment to the financial statements for the year ended 31 December 2016.

The Bank’s activities expose it to a variety of financial risks which include market risk, currency risk, interest rate risk, credit risk and liquidity risk. Those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the Bank’s business, and the financial risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on its financial performance. Risk management is carried out by the Risk Directorate under policies approved by the Executive Management Committee and Board of Directors. Risk Directorate identifies, evaluates and hedges financial risks in close cooperation with the operating units. In carrying out these functions, Risk Directorate is guided by policies contained in the Credit policy document, Business lending standards, Environmental and Social policy, Scheme loans policy and Premier loans policies. The Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the Bank by failing to pay amounts in full when due. Credit risk is the most important risk for the Bank’s business: Management therefore carefully manages the exposure to credit risk. Credit exposures arise principally in lending and investment activities. There is also credit risk in off-statement of financial position financial instruments, such as loan commitments and guarantees. Credit risk management and control are centralised in the Risk Directorate which reports regularly to the Board of Directors. (i) Credit risk measurement (a) Loans and advances (including commitments and guarantees) The estimation of credit exposure is complex and requires the use of processes and procedures that will limit the likelihood of default on the loans in the Bank’s portfolio. The assessment of credit risk of a portfolio of assets entails analysis of various risk aspects and a decision made on whether the risk is bankable. The risks assessed include business, financial, market, management, security, structural and industry. The Loan Portfolio of the Bank is segregated into seven rating classes: 2 - Loan has no arrears 3 - Loan has arrears over 1 day but less than 29 days 4 - Loan has arrears over 30 days but less than 59 days 5 - Loan has arrears over 60 days but less than 89 days 50 - Loan has arrears over 90 days but less than 119 days 51 - Loan has arrears over 120 days but less than 179 days 52 - Loan has arrears over 180 days (b) Risk limit and mitigation policies The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower and to industry segments. Such risks are monitored on a revolving basis and subject to annual or more frequent review. The exposure to any one borrower including other banks is further restricted by sub-limits covering on and off-statement of financial position exposures. For example: 1) There is a single name credit exposure limit of 25% of the regulatory capital; and 2) Clean and secured counterparty limits apply for money market operations conducted by the Treasury Division.

37.1 Credit risk

36. EVENTS AFTER THE REPORTING DATE

80

2016 | ANNUALREPORT


37. FINANCIAL RISK MANAGEMENT (CONTINUED)


(i) Credit risk measurement (continued) (c ) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; • Charges over financial instruments such as debt instruments; • Cash cover; and • Longer-term finance and lending to corporate entities are generally secured. Certain personal credit facilities are generally unsecured. (d) Lending limit Credit risk exposure is managed as part of overall lending limits with customers, together with potential exposures from market movements. Settlement risk arises in any situation where a payment in cash or securities is made in the expectation of a corresponding receipt in cash or securities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank’s market transactions on any single day. (e) Credit related commitments: The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. The Bank holds collateral and other credit enhancements against certain of its credit exposures. The table below sets out the principal types of collateral held against different types of financial assets.

37.1 Credit risk (continued)

Type of credit exposure Loans and advances to banks Securities borrowing Loans and advances to retail customers Mortgage lending Personal loans Others Loans and advances to corporate customers Corporate loans Other

2016

100

8%24%0%

6%57%

2015

100

7%31%4%

5%53%

Marketable securities Residential property None None

Guarantees Property and equipment

Percentage of exposure that is subject to collateral requirements

Type of collateral held

81

2016 | ANNUALREPORT





Detail of financial and non-financial assets obtained by the Bank during the year covered by collateral held as security against loans and advances as well calls made on credit enhancements and held at the year end are shown below.

2016 K’000

849,031

14,669 12,208

Property Guarantees Other (Debentures)

2015 K’000

525,641 154,385

54,746

(ii) Impairment and provisioning policies The impairment allowance shown in the statement of financial position at year end is derived from each of the seven internal rating grades. The table below shows the percentage of the Bank’s on-statement of financial position credit related obligations.

Rating 2 Standard3 Satisfactory risk4 Watch risk5 Unacceptable50 Sub-standard51 Doubtful52 Loss

Credit exposure %

342812

4--

22100

Impairment allowance %

4-----

96100

Credit exposure %

51 22 13

1 - -

13100

Impairment allowance %

1 1- - 1 1

96 100

Maximum exposure to credit risk before collateral held:

Loans and advances to customers Loans to other banks Investment securities Credit risk exposures relating to off-statement of financial position items: - Acceptances and letters of credit - Guarantee and performance bonds - Commitments to lend

2016K’ 000

3,392,559 60,273

769,742

303,82450,335

210,792

4,787,525

2015K’ 000

3,446,554390,288

1,134,338

572,08064,443

127,581

5,735,284

The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2016 and 2015, without taking account of any collateral held or other credit enhancements attached. For on-statement of financial position assets, the exposures set out above are based on carrying amounts as reported in the statement of financial position. As shown above, 72% of the total maximum exposure is derived from loans and advances to banks and customers (2015: 65%).

2016 2015

82

2016 | ANNUALREPORT





Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and debt securities based on the following: • the Bank exercises stringent controls over the granting of new loans; • 55% (2015: 51%) of the loans and advances portfolio are neither past due nor impaired; • 68% (2015: 68%) of the loans and advances portfolio are backed by collateral; and • 100% (2014:100%) of the investments in securities are government securities.

(ii) Impairment and provisioning policies (continued)

2016 K’000

1,239,959 1,998,846

410,371

3,649,176(256,617)

3,392,559

1,239,959

1,006,241435,061132,352425,192

1,998,846

2,370,667

314,163 96,208

410,371

164,151

2015 K’000

1,850,162 1,492,251

295,867

3,638,280(191,726)

3,446,554

1,850,160

768,705475,083

29,910218,553

1,492,251

1,455,631

201,055 94,812

295,867

107,018

Financial assets that are past due or impaired Loans and advances are summarised as follows: Neither past due nor impaired Past due but not impaired Individually impaired Gross Less: allowance for impairment (Note 15) Net No other financial assets are either past due or impaired. Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank: Standard Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross amounts of loans and advances that were past due but not impaired were as follows: Past due up to 30 days Past due 31 – 60 days Past due 61 – 90 days Over 90 days Total Fair value of collateral held

Loans and advances individually impaired Of the total gross amount of impaired loans, the following amounts have been individually assessed: Individually assessed impaired loans and advances - Corporate - Retail

Fair value of collateral held

83

2016 | ANNUALREPORT




Loans and advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modifications and deferral of payments. Restructuring policies and practices are based on indicators or criteria that, in the judgement of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans – in particular, customer finance loans. In majority cases restructuring results in the asset continuing to be impaired. Renegotiated loans that would otherwise be past due or impaired totaled K149,102 million (2015: K30,142 million).

Industry sector risk concentration were as follows for on-and off-statement of financial position. Credit risk relating to on-statement of financial statement position items:

37.2 Concentration of risk

2016

Loans and advances customersInvestment securities: - available-for-saleOther assets

At 31 December 2016

% of Total

2015Loans and advanceInvestment securities: - available-for-saleOther assets

At 31 December 2015

% of Total

2016Acceptances and letters of creditGuarantee and performance bondsUndrawn stand-by facilities, credit lines and commitments to lend

At 31 December 2016

Acceptances and letters of creditGuarantee and performance bondsUndrawn stand-by facilities, credit lines and commitments to lend

At 31 December 2015

Manufactur-ing

K’000

458,913

- -

458,913

100%

433,035

- -

433,035

100%

- 1,668

72,388 74,056

532,969

- -

42,904 42,904

475,939

FinancialsK’000

31,615

769,742361,026

1,162,383

2.7%

2,402

1,134,338283,795

1,420,535

0.2%

316 3,138

2,070 5,524

1,167,907

- -

34 -

1,468,857

Transport & communica-

tion K’000

165,643

- -

165,643

100%

258,013

- -

258,013

100%

33,050 9,803

1,090

43,943

209,586

40,372 530

22,230 63,132

321,145

Wholesale and retail

tradeK’000

133,769

- -

133,769

100%

119,908

- -

119,908

100%

- -

18,592 18,592

152,361

34,709 56,031

17,742

108,482228,390

Other indus-tries

K’000

344,410

- -

344,410

100%

231,832

- -

231,832

100%

161,065 30,459

26,266 217,791

562,200

496,999 7,097

7,416

511,512743,344

Agricul-ture

K’000

1,139,826

- -

1,139,826

100%

1,164,268

- -

1,164,268

100%

- 5,266

90,386 95,652

1,235,478

- 785

127,614 128,399

1,292,667

Individ-uals

K’000

1,118,383

- -

1,118,383

100%

1,237,096

- -

1,237,096

100%

- - - -

1,118,383

- -

11,250 11,250

1,248,346

Total K’000

3,392,559

769,742361,026

4,523,327

74.6%

3,446,554

1,134,338283,795

4,864,687

70.2%

194,431 50,334

210,792 455,557

4,978,885

572,080 64,443

229,190 865,713

5,730,400

84

2016 | ANNUALREPORT




At 31 December 2016

LiabilitiesCustomer depositsDeposits from other banksOther liabilitiesBorrowings

Total financial liabilities

AssetsCash and Balances with Bank of Zambia Balances with other BanksLoans and advances tocustomersInvestment in securitiesOther assets

Total financial assets

Liquidity gap

Up to 1 months

K’000

5,349,164-

170,255 -

5,519,419

2,541,635778,234

328,050104,094

82,568

3,834,581

(1,684,838)

Weighted average

effectiveinterest

rate%

4.50%

27%14%

1-3months

K’000

542,040 -

- 67,719

609,759

- -

188,563119,917

-

308,480

(301,279)

3-6months

K’000

84,274 - -

24,750

109,024

- -

118,737409,406

-

528,143

419,119

1-3yearsK’000

- -

- 295,625

295,625

- 60,273

748,51659,610

-

868,399

572,774

6-12months

K’000

280,704 -

- 67,719

348,423

- -

379,06676,144

-

455,210

106,787

3-5 yearsK’000

- -

- 104,844

104,844

- -

904,276243

-

904,519

799,675

Over 5 yearsK’000

- - - -

-

- -

725,351328

-

725,679

726,418

Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash settled contingencies. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank of Zambia requires that the Bank maintains a cash reserve ratio. In addition, the Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The Treasury department monitors liquidity ratios on a daily basis. The table below presents the undiscounted cash flows payable by the Bank under financial liabilities by the remaining contractual maturities at the reporting date and from financial assets by expected maturity dates.

Liquidity risk maturity analysis

TotalK’000

6,256,182-

170,255560,656

6,987,093

2,541,635838,507

3,392,559769,742

82,568

7,625,011

637,918

37.3 Liquidity risk

85

2016 | ANNUALREPORT


At 31 December 2015 Liabilities Customer deposits Deposits from banks Other liabilitiesBorrowings Total financial liabilities Assets Cash and Balances with Bank of Zambia Balances with other Banks Loans and advances to customers Investment in securities Other assets Total financial assets Liquidity gap

1-3months

K’000

415,526 - -

75,244

490,770

- -

173,521 325,648

-

499,169

8,399

Up to 1 months

K’000

5,200,7821

198,349 -

5,399,132

1,626,5391,167,784

618,179130,448283,795

3,826,745

(1,572,387)

3-6months

K’000

195,087 - -

137,500

332,587

- -

129,677 392,589

-

522,266

189,679

6-12months

K’000

221,685 - -

157,743

379,428

- -

375,883 243,885

-

619,768

240,340

3-5 yearsK’000

- - -

67,986

67,986

- -

934,2165,765

-

939,981

871,995

1-3yearsK’000

4 - -

190,973

190,977

- -

516,70635,648

-

552,354

361,377

Over 5 yearsK’000

- - -

33,992

33,992

- -

698,372355

-

698,727

664,735

Total K’000

6,033,0841

198,349663,438

6,894,872

1,626,5391,167,7843,446,5541,134,338

283,795

7,659,010

764,138




37.3 Liquidity risk (continued)

Liquidity risk maturity analysis (continued)

The amounts in the table have been compiled as follows:

Type of financial instruments Basis on which amounts are compiled

Non-derivative financial liabilities and financial Undiscounted cash flows, which include estimated interest payments. assets Issued financial guarantee contracts, and Earliest possible contractual maturity. For issued financial guarantee contracts,unrecognised loan commitments the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

The Bank’s expected cash flows on some financial assets and financial liabilities vary significantly form the contractual cash flows. The principal differences are as follows: • Demand deposits from customers are expected to remain stable or increase; and • Unrecognised loan commitments are not all expected to be drawn down immediately. As part of the management of liquidity risk arising from financial liabilities, the Bank holds liquid assets comprising cash and cash equivalents and debt securities which can be readily sold to meet liquidity requirements. In addition, the Bank maintains agreed lines of credit with other banks and holds unencumbered assets eligible for use as collateral with central banks (these amounts are referred to as the Group’s liquidity reserves.

86

2016 | ANNUALREPORT


Balances with central banksCash and cash equivalentsTreasury bills

Total liquidity reserves



37.3 Liquidity risk (continued)

Liquidity risk maturity analysis (continued)

Liquidity reserves The table below sets out the components of the Bank’s liquidity reserves: K’000 2016

Carrying amount

1,153,162 307,557 732,692

2,193,411

2016Fair Value

1,153,162 307,557 679,613

2,140,332

2015Carrying amount

249,662 359,856

1,142,703

1,752,221

2015Fair Value

249,662 359,856

1,066,225

1,675,743

At 31 December Average for the periodMaximum for the periodMinimum for the period

Exposure to liquidity risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, ‘net liquid assets’ includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities issues, other borrowings and commitments maturing within the next month. Details of the reported Bank ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows:

2016

58.441.758.418.6

2015

58.252.373.438.4

37.4 Market risk Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the Assets and Liabilities Committee (ALCO).

The table below sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios:

31 December 2016 Assets subject to market risk: Cash Balances with other Banks Loans and advances to customers Investment in securities Other assets

Carrying amount

K’000

46,442978,958

3,392,559769,742

4,566

5,192,267

Non-trading portfolio

K’000

46,442978,958

3,392,559769,742

4,566

5,192,267

Market risk measure

87

2016 | ANNUALREPORT




37.4 Market risk (continued)

Liabilities subject to market risk:

Customer deposits Borrowings Other liabilities

Carrying amount

K’000

6,256,182 560,656

56,991

6,873,829


K’000

6,256,182 560,656

56,991

6,873,829

Market risk measure

31 December 2015 Assets subject to market risk: Cash and cash equivalents Balances with other Banks Loans and advances to customers Investment in securities Other assets

Carrying amount

96,129 1,266,916 3,446,554 1,182,626

45,979

6,038,204


96,129 1,266,916 3,446,554 1,182,626

45,979

6,038,204

Market risk measure

31 December 2015 Assets subject to market risk: Customer deposits Borrowings Other liabilities

Carrying amount

6,033,084 663,438

31,445

6,727,967


6,033,084 663,438

31,445

6,727,967

Market risk measure

The Bank did not have a trading portfolio. The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December 2016. Included in the table are the Bank’s financial instruments, categorised by currency.

37.5 Currency risk

At 31 December 2016

AssetsCash and balances with Bank of ZambiaLoans and advances to customersOther financial assets


USDK’000

899,058 701,708

3,804

1,604,570

GBP K’000

2,416 -

757

3,173

Euro K’000

63,653 -

5

63,658

TotalK’000

965,127 701,708

4,567

1,671,401

88

2016 | ANNUALREPORT




37.5 Currency risk (continued)

Liabilities

Customer depositsBorrowingsOther liabilities

Total financial liabilities

Net position

At 31 December 2015Financial assetsFinancial liabilities

Net position

USDK’000

1,018,861560,656

50,463

1,629,980

(25,410)

1,907,4391,879,653

27,786

GBP K’000

2,925 -

602

3,527

(354)

15,8905,699

10,191

Euro K’000

60,203 -

5,926

66,129

(2,471)

40,00830,960

9,048

TotalK’000

1,081,989560,656

56,991

1,699,636

(28,235)

1,963,3371,916,312

47,025

37.6 Interest rate risk

At 31 December 2016

AssetsLoans and advances to customersInvestment in securities


LiabilitiesCustomer depositsBorrowingsTotal financial liabilities

Total interest re-pricing gap

1-3months

K’000

188,563119,917

308,480

542,040 67,719

609,759

(301,279)

Up to 1 months

K’000

328,050104,094

432,144

5,349,164 -

5,349,164

(4,917,020)

3-6months

K’000

118,737409,406

528,143

84,274 24,750

109,024

419,119

6-12months

K’000

379,06676,144

455,210

280,704 67,719

348,423

106,787

3-5YearsK’000

904,276243

904,519

- 104,843 104,843

799,676

1-3yearsK’000

748,51659,610

808,126

- 295,625 295,625

512,501

Over 5yearsK’000

725,351328

725,679

- - -

725,679

TotalK’000

3,392,559769,742

4,162,301

6,256,182560,656

6,816,838

(2,654,537)

The table above summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. The Bank does not bear any interest rate risk on off statement of financial position items. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.

89

2016 | ANNUALREPORT




37.6 Interest rate risk (continued)

At 31 December 2015

AssetsLoans and advances to customersInvestment in securities


LiabilitiesDeposits from customersBorrowingsTotal financial liabilities

Interest re-pricing gap

1-3months

K’000

173,521325,648

499,169

415,52675,244

490,770

8,399

Up to 1 months

K’000

618,179130,448

748,627

5,200,782 -

5,200,782

(4,452,155)

3-6months

K’000

129,677392,589

522,266

195,087137,500332,587

189,617

6-12months

K’000

375,883243,885

619,768

221,685157,743379,428

240,340

3-5YearsK’000

934,2165,765

939,981

- 67,98667,986

871,995

1-3yearsK’000

516,70635,648

552,354

4190,973190,977

361,377

Over 5yearsK’000

698,372355

698,727

- 33,99233,992

664,735

TotalK’000

3,446,554 1,134,338

4,580,892

6,033,084663,438

6,696,522

(2,115,630)

The fair value of held-to-maturity investment securities at 31 December 2016 is estimated Nil (2015: Nil). The fair values of the Bank’s other financial assets and liabilities approximate the respective carrying amounts, due to the generally short periods to contractual re-pricing or maturity dates as set out above. Fair values are based on discounted cash flows using discount rates based upon the yield rates on similar financial assets at the reporting date. Fair value hierarchy

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuations techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank market assumptions. The two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on stock exchanges (for example, Lusaka Stock Exchange). • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

• Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible. (i) Fair value of the Bank’s financial assets and financial liabilities that are measured at fair value on a recurring basis

38. FAIR VALUES MEASUREMENT

90

2016 | ANNUALREPORT


38. FAIR VALUES MEASUREMENT (CONTINUED)


Fair value hierarchy

Financial assets/financial liabilities

Available for sale financial assets

Fair value as at 31 December

Fair value hierarchy

-

Valuation technique(s) and key input(s)

Quoted bid prices in an active market

Significantunobservableinput (s)

-

Financial assets/financial liabilities

Available for sale financial assets

2016K’ 000

769,742

2015K’ 000

1,134,338

There were no transfers between Level 1 and 2 in the period. (ii) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required)

Carrying amount

K’000

3,649,175 3,649,175

775,904 679,064

96,840

6,816,838 560,656

6,256,182

Level 1K’000

-

-

-

-

-

Fair valueK’000

3,522,316 3,522,316

769,742 679,613

90,129

6,816,838 560,656

6,256,182

Level 2K’000

-

-

-

-

-

Carrying amount

K’000

4,044,984 4,044,984

1,221,557 1,142,703

78,854

6,696,522 663,438

6,033,084

Level 3K’000

3,392,559

679,613 90,129

4,162,301

5,192,074

5,192,074

Fair valueK’000

3,446,554 3,446,554

1,134,338 1,066,225

68,113

6,696,522 663,438

6,033,084

TotalK’000

3,392,559

679,613 90,129

4,162,301

5,192,074

5,192,074

2016 2015Financial assets

Loans and receivables - Loans and advances to customers Fair value of investment – Treasury Bills – Government bonds Fair values of financial assets and liabilities Financial liabilities held at amortised cost: – loans from other entities – customer deposits

Fair value hierarchy as at 31 December 2016

Financial assets Loans and receivables: - Loans and advances to customers Fair value of investment – Treasury Bills – Government bonds Total financial assets Financial liabilities – customer deposits Total financials liabilities

The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties.

91

2016 | ANNUALREPORT



Capital management is a key contributor to shareholder value. The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the statement of financial positions, are: • To comply with the capital requirements set by the Banking and Financial Services Act, 1994 (as amended); • To safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;

• To maintain a strong capital base to support the development of its business; • To allocate capital to businesses using risk-based capital allocation, to support the Bank’s strategic objectives, including optimising returns on shareholder and regulatory capital; and • Maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory expectations. Capital adequacy and use of regulatory capital are monitored regularly by Management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis. Regulatory capital The Bank manages its capital base to achieve a prudent balance between maintaining capital levels to support business growth, maintaining depositor and creditor confidence, and providing competitive returns to shareholders.

39. CAPITAL MANAGEMENT

92

2016 | ANNUALREPORT


39. CAPITAL MANAGEMENT (CONTINUED)


Regulatory capital (continued)

The Bank of Zambia requires local banks to: (i) Hold the minimum level of regulatory capital of K104 million; (ii) Maintain a ratio of total regulatory capital to the risk-weighted assets plus risk-weighted off-statement of financial position assets (the ‘Basel ratio’) at or above the required minimum of 10%; (iii) Maintain primary or tier 1 capital of not less than 5% of total risk weighted assets; and (iv) Maintain total capital of not less than 10% of risk-weighted assets plus risk-weighted off-statement of financial position items. Regulatory capital adequacy is measured through risk-based ratio: • Tier 1 capital (primary capital): common shareholders’ equity, qualifying preferred shares and minority interests in the equity of subsidiaries that are less than wholly owned. • Tier 2 capital (secondary capital): qualifying preferred shares, 40% of revaluation reserves, subordinated term debt or loan stock with a minimum original term of maturity of over five years (subject to a straight-line amortisation during the last five years leaving no more than 20% of the original amount outstanding in the final year before redemption) and other capital instruments which the Bank of Zambia may allow. The maximum amount of secondary capital is limited to 100% of primary capital. Risk-weighted assets are determined on a granular basis by using risk weights calculated from internally derived risk parameters within the regulatory requirements. The risk weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of – and reflecting an estimate of the credit risk associated with – each asset and counterparty. A similar treatment is adopted for off-Statement of financial position exposure, with some adjustments to reflect the more contingent nature of the potential losses.

The table below summarises the composition of regulatory capital and the ratios of the Bank as at 31 December:

2016K’000

546,139578,334

3,726,854135,286

3,862,140

14.1%15.0%

86,625 -

2,622 464,621

2015K’000

721,097753,292

3,998,733306,843

4,305,576

17%17%

Tier 1 capital Tier 1 + Tier 2 capital Risk-weighted assets On-balance sheet Off-balance sheet Total risk-weighted assets Regulatory ratios Tier 1 (Regulatory minimum – 5%) Tier 1 + Tier 2 (Regulatory minimum – 10%) Computation of regulatory capital ( under the Banking and Financial Services Act 1994, as amended) I Primary (tier 1) capital (a) Paid up common shares (b) Eligible preferred shares (c) Contributed surplus (d) Retained earnings

93

2016 | ANNUALREPORT




Regulatory capital (continued) 2016K’000

- 86,625

- -

640,493

- 307

- - - -

-

94,047

94,354

546,139

- - -

32,195 -

32,195

32,195

578,334

372,685 13,529

386,214 262,845

15.014.1

(e) General reserves (f ) Statutory reserves (g) Minority interests (common shareholders’ equity) (h) Shareholders’ loan capital (i) Sub-total Less (j) Goodwill and other intangible assets (k) Investments in unconsolidated subsidiaries and associates (l) Lending of a capital nature to subsidiaries and associates (m) Holding of other bank’s or financial institutions’ capital instruments (n) Assets pledged to secure liabilities Sub-total (A) (items i to m) Other adjustments Provisions Assets of little or no realisable value - specify details or use separate list if necessary. Other adjustments (prepaid expenses) (o) Sub-total (B) (Sub-total A above + other adjustments) (p) Total primary capital (h - n) II Secondary (tier 2) (a) Eligible preferred shares (regulations 13 and 17) (b) Eligible subordinated term debt (regulation 17 (b) (c) Eligible loan stock/capital (regulation 17(b) (d) Revaluation reserves (regulation 17 (a) (maximum is 40% of reserves ratio) (e) Other (regulation 17) (f) Total secondary capital

III Eligible secondary capital (the maximum amount of secondary capital is limited to 100% of primary capital) IV Eligible total capital (i) (o) (Regulatory capital) V Minimum capital requirement: (10% of total on and off balance sheet risk-weighted assets as established in the first schedule, or K2,000 thousand, whichever is the higher) On-balance sheetOff-balance sheet

VI Excess (deficiency) – (IV minus V) Regulatory capital as % risk weighted assets Primary capital as % of risk weighted assets

94

2016 | ANNUALREPORT





RiskWeight

%

00

00

20100

20100

5020

020

100

100

050

50100100100

- 20

100100100100100

200

Part 1 - Calculation of risk weighted assets Assets Notes and coins - Zambian notes and coins - Other notes and coins Balances held with the Bank of Zambia - Statutory reserves - Other balances Balances with commercial banks in Zambia - With residual maturity of up to 12 months - With residual maturity of more than 12 months Balances with commercial banks abroad - With residual maturity of up to 12 months - With residual maturity of more than 12 months Assets in transit - From other commercial banks - From branches to reporting bank Investment in debt securities - Treasury bills - Other government securities - private securities - Issued by local government units Bills of exchange Loans and advances - Portion secured by cash or treasury bills - Loans to or guaranteed by the government of Zambia - Loans repayable in instalments and secured by a mortgage on owner-occupied residential property - Loans to or guaranteed by local government units - Loans to parastatals - Other Inter-bank advances and loans/advances - Guaranteed by other banks - With a residual maturity of 12 months - With residual maturity of more than 12 months Bank premises Acceptances Other assets Investment in equity of other companies Total risk-weighted assets (on balance sheet)

Part 2 - Off balance sheet obligations (Under first schedule - regulations 21 and 24) Letters of credit - Sight import letters of credit - Portion secured by cash/treasury bills

Balance (netof allowance

for losses)K’000

307,55746,442

1,034,4391,153,194

0

778,234-

0 -

627,62191,66158,288

-

10,54475,781

283,84225,403

149,9692,646,730

- - -

141,917 -

350,450 307

7,782,379

41,643 -

Risk- weighted

assets (1 x 2) K’000

- - - -

0 -

155,647 -

- -

- 18,332 58,288

-

- 37,890

141,921 25,403

149,969 2,646,730

- - -

141,917 -

350,450 307

3,726,854

8,329 -

95

2016 | ANNUALREPORT





RiskWeight

%

1000

100

1000

50100

Part 2 - Off balance sheet obligations Assets - Standby letters of credit - Portion secured by cash/treasury bills - Export letters of credit confirmed - Guarantees and Indemnities - Guarantees for loans, trade and securities - Portion secured by cash/treasury bills - Performance bonds - Securities purchased under resale agreement - Other contingent liabilities - Net open position in foreign currencies Total risk-weighted assets (off balance sheet) Total risk-weighted assets (on and off balance sheet)

Balance (netof allowance

for losses)K’000

41,643

- 465

50,3350

152,31400 -

244,757

8,027,136

Risk- weighted

assets (1 x 2) K’000

8,329

- 465

50,335 -

76,157 - - -

135,286

3,862,140

40. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) 40.1 Amendments to IFRSs that are mandatorily effective for the current year

In the current year, the Bank has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2016: Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception The Bank has applied these amendments for the first time in the current year. The amendments clarify that the exemption from preparing consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all its subsidiaries at fair value in accordance with IFRS 10. The amendments also clarify that the requirement for an investment entity to consolidate a subsidiary providing services related to the former’s investment activities applies only to subsidiaries that are not investment entities themselves. The application of these amendments has had no impact on the Bank’s financial statements as the Bank is not an investment entity and does not have any holding company, subsidiary, associate or joint venture that qualifies as an investment entity. Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations The Bank has applied these amendments for the first time in the current year. The amendments provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 Business Combinations. Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The same requirements should be applied to the formation of a joint operation if and only if an existing business is contributed to the joint operation by one of the parties that participate in the joint operation. A joint operation is also required to disclose the relevant information required by IFRS 3 and other standards for business combinations. The application of these amendments has had no impact on the Bank’s financial statements as the Bank did not have any such transactions in the current year.

96

2016 | ANNUALREPORT



40. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (CONTINUED) 40.1 Amendments to IFRSs that are mandatorily effective for the current year

IAS 7 Disclosure Initiative – Amendments to IAS 7 The amendments to IAS 7 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. On initial application of the amendment, entities are not required to provide comparative information for preceding periods.

The Directors anticipate that the application of the amendments will have a material impact on the Bank as this will result in additional disclosures as mandated by the amendments.

IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12 The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.

The amendments apply retrospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted. The Directors of the Bank do not anticipate that the application of these amendments will have a material impact on the Bank’s financial statements.

IFRS 2 Classification and Measurement of Share-based Payment Transactions — Amendments to IFRS 2The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled.

The Directors anticipate that this standard will have no material effect on the operations of the Bank.

IFRS 9 Financial Instruments

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

The Directors anticipate that the application of IFRS 9 in the future may have a material impact on amounts reported in respect of the Bank’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until the Bank undertakes a detailed review.

Effective date

1 January 2017

1 January 2017

1 January 2018

1 January 2018

40.2 New and revised IFRSs in issue but not yet effective

Standard, Amendment or Interpretation

97

2016 | ANNUALREPORT



40. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (CONTINUED) 40.2 New and revised IFRSs in issue but not yet effective

Effective date

1 January 2018

1 January 2018

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework:

• Identify the contract(s) with a customer;• Identify the performance obligations in the contract;• Determine the transaction price;• Allocate the transaction price to the performance obligations in the contract; and• Recognise revenue when (or as) the entity satisfies a performance obligation. The Directors of the Bank anticipate that the application of IFRS 15 in the future may have a material impact on the amounts reported and disclosures made in the Bank’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until the Bank performs a detailed review.

IFRS 16 Leases

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

The Directors anticipate that this standard will not have a material impact on the operations of the Bank as the Bank has very limited leases.

IFRS 15 Revenue from Contracts with Customers

Standard, Amendment or Interpretation

98

2016 | ANNUALREPORT

5 YEAR FINANCIAL TRENDS

STATEMENT OF PROFIT OR LOSS

Interest incomeInterest expensesNet interest incomeCommission and othersOperating incomeOperating expnsesTransformation costImpairmentProfit before sale of bonds and before taxLoss on disposal of GRZ bondsProfit before taxTax chargeProfit for the year

2015 K’000

864,342 (226,342)

638,000 428,746

1,066,746 (783,944)

-(97,949)184,853

-184,853

(67,344)117,508

2016 K’000

1,024,236 (227,527)

796,709 414,082

1,210,792 (895,724) (166,160)

(67,256)81,652

-81,652

(51,546)30,106

2014 K’000

779,442(133,969)

645,473326,643972,116

(605,520)-

(48,545)318,051

(104,494)213,557(70,631)142,926

2013 K’000

673,552

(120,169) 553,383 284,192 837,575

(542,175)-

(31,136) 264,264

- 264,264 (77,950) 186,314

2012 K’000

550,876 (88,926) 461,950 252,617 714,324

(476,044)-

(243) 238,280

- 238,280 (82,192) 156,088

STATEMENT OF FINANCIAL POSITION

Cash and balances with Bank of ZambiaBalances with other banksInvestment in securities Loans and advances to customersProperty and equipmentOther assets Total assets

LIABILITIESCustomer depositsDeposits from other banksBorrowed fundsOther liabilitiesTotal liabilities

EquityShare capitalReserves

Total liabilities and shareholders’ funds

2015 K’000

1,626,539 1,167,784 1,134,338

3,446,554 270,055 300,502

7,945,772

6,033,084 1

663,438 208,965

6,905,488

86,625 953,659

1,040,284 7,945,772

2016 K’000

2,541,635 838,507 769,742

3,392,559 237,868 395,174

8,175,485

6,256,182

3,033 560,656 274,551

7,094,422

86,625 994,438

1,081,063 8,175,485

2014 K’000

1,163,202399,170

1,445,3403,138,509

274,635242,947

6,663,803

5,053,720142

458,270150,565

5,662,697

86,625914,481

1,001,106 6,663,803

2013 K’000

909,543 284,303

2,341,501 2,987,685

303,411 145,512

6,971,955

5,514,878 7,209

373,221 209,027

6,104,335

86,625 780,995 867,620

6,971,955

2012 K’000

470,772 364,860

1,944,275 2,639,161

242,365 150,622

5,812,055

4,314,918 22,347

494,065 267,342

5,098,672

86,625 626,758 713,383

5,812,055

99

100

2016 | ANNUALREPORT

NOTES

Documents

· 2016 | ANNUAL. REPORT. VISION | MISSION | VALUES. Vision Values. Mission. To be Zambia’s leading, preferred, admired, and innovative financial institution that