SME DEVELOPMENT FINANCE CORPORATION LIMITED

SME DEVELOPMENT FINANCE

CORPORATION LIMITED

For the period from 17th January 2019 to

31st December 2019

Report No: FIN-2020-14(E) 09th June 2020

Contents

Auditor General’s Report…………………………………………………………………... 1

Statement of Comprehensive Income .................................................................................... 3

Statement of Financial Position ............................................................................................. 4

Statement of Changes in Equity ............................................................................................. 5

Statement of Cash Flows ........................................................................................................ 6

Notes to the Financial Statements .................................................................................. 7 - 36

Auditor General’s Office | Ghaazee Building | Ameer Ahmed Magu | Male’, Republic of Maldives

+960 332 3939 | [email protected] | www.audit.gov.mv

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Page 1 of 36

AUDITOR GENERAL’S REPORT

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SME DEVELOPMENT FINANCE CORPORATION LIMITED

Opinion

We have audited the financial statements of SME Development Finance Corporation Limited (“the

Corporation”) which comprise the statement of financial position as at 31st December 2019, the

statement of comprehensive income, the statement of cash flows, statement of changes in equity for the

year then ended, and the notes to the financial statements, which include a summary of significant

accounting policies and other explanatory information set out in pages 7 to 36.

In our opinion, the accompanying financial statements give a true and fair view of the financial position

of the Corporation as at 31st December 2019 and its financial performance and its cash flows for the year

then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our

responsibilities under those standards are further described in the Auditor’s responsibilities for the audit

of the financial statements section of our report. We are independent of the Corporation in accordance

with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional

Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the

IESBA Code.

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

our opinion.

Responsibilities of management and those charged with governance for the Financial Statements

Management is responsible for the preparation of the financial statements in accordance with

International Financial Reporting Standards (IFRS), and for such internal control as management

determines is necessary to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Corporation’s ability

to continue as a going concern, disclosing, as applicable, matters related to going concern and using the

going concern basis of accounting unless management either intends to liquidate the Corporation or to

cease operations, or has no realistic alternative but to do so.

The Board of Directors are responsible for overseeing the Corporation’s financial reporting process.

mailto:[email protected]

Auditor General’s Office | Ghaazee Building | Ameer Ahmed Magu | Male’, Republic of Maldives

+960 332 3939 | [email protected] | www.audit.gov.mv

Page 2 of 36

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are

free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that

includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with ISAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the

basis of these interim financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain

professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to

fraud or error, design and perform audit procedures responsive to those risks, and obtain audit

evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not

detecting a material misstatement resulting from fraud is higher than for one resulting from error,

as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override

of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Corporation’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting and,

based on the audit evidence obtained, whether a material uncertainty exists related to events or

conditions that may cast significant doubt on the Corporation’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 Corporation to

cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the

disclosures, and whether the financial statements represent the underlying transactions and events

in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned

scope and timing of the audit and significant audit findings, including any significant deficiencies in

internal control that we identify during our audit.

09th June 2020

Hassan Ziyath

Auditor General

mailto:[email protected]

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SME DEVELOPMENT FINANCE CORPORATION LIMITED

STATEMENT OF COMPREHENSIVE INCOME

For the period from17 January 2019 to 31 December 2019

(All amounts are in MVR unless otherwise indicated)

Notes

Period

17 January to

31 December

2019

Interest income 5 4,244,797

Interest expense -

Net interest income 4,244,797

Fee and commission income 6 1,731,917

Fee and commission expense -

Net fees & commission income 1,731,917

Total operating income 5,976,714

Credit impairment (charge)/reversal 8 (1,199,501)

Net operating income 4,777,213

Personnel costs 7 3,636,021

Other operating expenses 9 2,001,060

Total expenses 5,637,081

Net profit/ (loss) before tax (859,868)

Taxation -

Net profit/ (loss) for the year (859,868)

Earnings per share (0.03)

The accounting policies and notes on pages 7 to 36 are an integral part of these financial statements.

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STATEMENT OF FINANCIAL POSITON

As at 31 December 2019


Notes 2019

ASSETS

Cash and short-term funds 10 7,664,073

Financial assets at amortised cost 11 153,326,446

Loans & advances to customers 12 100,701,005

Property, plant and equipment 13 1,510,866

Intangible assets 14 20,577

Other assets 15 1,774,310

Total Assets 264,997,276

LIABILITIES

Other liabilities 16 857,144

Deferred tax liabilities -

Total liabilities 857,144

EQUITY

Share capital 17 265,000,000

Retained earnings (859,868)

Other reserves -

Total equity 264,140,132

Total equity and liabilities 264,997,276

Commitments and contingencies 21 90,775,449

The notes pages 7 to 36 are an integral part of these financial statements.

These financial statements were approved by the Board of directors and authorised for issue on 04

June 2020 and signed on its behalf by;

Ahmed Zeenad Yooshau Saeed

Managing Director Audit Committee Chairman

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STATEMENT OF CHANGES IN EQUITY



Notes

Share

Capital

Reserves

Retained

Earnings Total (MVR)

Balance as at 17 January 2019 -

-

- -

Net Profit for the year ended - - (859,868) (859,868)

Additions 17

265,000,000

-

-

265,000,000

Transfer to reserves - - - -

Balance as at 31 December 2019 265,000,000 - (859,868) 264,140,132


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STATEMENT OF CASH FLOWS



Notes

Period

17 January to

31 December

2019

Cash flows from operating activities

Profit/ (loss) before Tax (859,868)

Depreciation on property,plant and equipment 13 132,024

Amortization of intangible assets 14 7,914

Taxes paid -

Increase/ (decrease) in mandatory deposits with MMA -

Increase in other Assets (1,774,310)

Increase in other liabilities 857,144

(Gain)/ loss on disposal of non-current assets -

Cash flows generated from operating profits before changes in operating

assets and liabilities (1,637,096)

Changes in operating assets and liabilities

(Increase)/ decrease in loans and advances 12 (100,701,005)

(Increase)/ decrease in financial assets 11 (153,326,446)

Net cash (used in)/ generated from operating activities (254,027,451)

Cash flows from investing activities

(Purchase)/ sale of property, plant and equipment 13 (1,642,890)

(Purchase)/ sale of intangible assets 14 (28,491)

Net cash (used in)/from investing activities (1,671,381)

Cash flows from financing activities

Proceeds from issue of capital 265,000,000

Net cash (used in)/from financing activities 265,000,000

Net increase/(decrease) in cash and cash equivalents 7,664,073

Cash and cash equivalents at the beginning of the period -

Cash and cash equivalents at the end of the period 7,664,073


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NOTES TO THE FINANCIAL STATEMENTS

For the period from17 January 2019 to 31 December 2019 All amounts are in MVR unless otherwise indicated

Page 7 of 36

1. Reporting entity

SME Development Finance Corporation Limited (“the Corporation”) is a government owned

limited liability company incorporated on 17th January 2019 (Reg No: C00592019) under the

Presidential Decree and domiciled in the Republic of Maldives. The registered office of the

Corporation is H. Pamelia Building, Male’, Republic of Maldives.

The Corporation is a specialized financial institution providing financial products and ancillary

services to micro, small and medium enterprises (MSMEs) and entrepreneurial start-ups with the

primary purpose of easing access to finance for MSMEs. The corporation was given financing

business licence by Maldives Monetary Authority (MMA) to conduct financing business in

Maldives on 28th February 2019 (Licence No: 01/FB/2019).

2. Basis of preparation

2.1 Statement of compliance

The financial reports of the Corporation, which comprises of the Statement of Financial Position,

Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows

and the supporting Notes to the Financial Statements have been prepared and presented in

accordance with International Financial Reporting Standards (IFRS).

2.2 Basis of measurement

The financial statements have been prepared under the historical cost convention except for the

financial instruments that are measured at fair value.

2.3 Functional and presentation currency

The financial statements are presented in Maldivian Rufiyaa, which is the Corporations’ functional

currency. Except otherwise stated, all financial information is presented in Maldivian Rufiyaa.

2.4 Materiality and aggregation

In compliance with IAS 1- Presentation of Financial Statements, each material class of similar

items is presented separately in the financial statements. Items of dissimilar nature or functions are

also presented separately unless they are immaterial.

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Financial assets and financial liabilities are offset and the net amount is reported in the statement

of financial position only when there is a legally enforceable right to offset the recognized amounts

and there is an intention to settle on a net basis, or to realize the assets and settle the liability

simultaneously. Income and expenses are not offset in the statement of comprehensive income

unless required or permitted by accounting standards.

3. Critical accounting estimates, assumptions and judgements

The preparation of financial statements requires the use of accounting estimates which, by

definition, will seldom equal the actual results. Management also needs to exercise judgement in

applying the Corporation’s accounting policies.

This note provides an overview of the areas that involve a higher degree of judgement or

complexity, and major sources of estimation uncertainty that have a significant risk of resulting in

a material adjustment within the next financial year. Detailed information about each of these

estimates and judgements is included in the related notes together with information about the basis

of calculation for each affected line item in the financial statements.

3.1 Going concern

The Board assessed the Corporation’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 Board is

not aware of any material uncertainties that may cast significant doubt upon the Corporation’s

ability to continue as a going concern and it does not intend either to liquidate or to cease operations

of the corporation. Therefore, the financial statements are prepared on the going concern basis.

3.2 Commitments and contingencies

All discernible risks are accounted for in determining the amount of all known liabilities.

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 not probable or

cannot be reliably measured. Contingent liabilities are not recognized in the Statement of Financial

Position but are disclosed unless they are remote.

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3.3 Depreciation of property, plant and equipment

The Corporation reviews the residual values, useful lives and methods of depreciation of property,

plant and equipment and intangible assets at each reporting date. Judgment of the management is

exercised in the estimation of these values, rates, methods and hence they are subject to

uncertainty.

3.4 Impairment of property, plant and equipment and intangible assets

The Corporation assesses the impairment of property, plant and equipment and intangible assets

whenever events or changes in circumstances indicate that the carrying value may not be

recoverable or otherwise as required by accounting standards.

4. Significant accounting policies

The significant accounting policies set out below are adopted in the preparation of these financial

statements

4.1 Financial assets and liabilities

Measurement methods

Ammortised cost and effective interest rate

The amortised cost is the amount at which the financial asset or financial liability is measured at

initial recognition minus the principle repayments, plus or minus the cumulative amortisation

using effective interest rate method of any difference between that initial amount and the maturity

amount and, for financial assets, adjusted for any loss allowance.

Effective interest rate is the rate that exactly discounts estimated future cash payments or receipts

through the expected life of the financial asset or financial liability to the gross carrying amount

of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised

cost of a financial liability. The calculation does not consider expected credit losses and the

immaterial transaction cost amounts such as the loan processing fees.

When the Corporation revises the estimates of future cash flows, the carrying amount of the

respective financial assets or financial liability is adjusted to reflect the new estimate discounted

using the original effective interest rate. Any changes are recognised in profit or loss.

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Interest income

Interest income is calculated by applying the effective interest rate to the gross carrying amount of

financial assets, except for the financial assets that have subsequently become credit-impaired, for

which interest revenue is calculated by applying the effective interest rate to their amortised cost.

Initial recognition and measurement

Financial assets and financial liabilities are recognised when the Corporation becomes a party to

the contractual provisions of the instrument. The Corporation initially recognises loans and

advances on the date on which they are originated. All other financial instruments are recognised

on the trade date, which is the date on which the Corporation becomes a party to the contractual

provisions of the instrument .

At initial recognition, the Corporation measures a financial asset or financial liability at its fair

value plus or minus, in the case of a financial asset or financial liability not at fair value through

profit or loss, transaction costs that are incremental and directly attributable to the acquisition or

issue of the financial asset or financial liability, such as fees and commissions.

When the fair value of financial assets and liabilities differs from the transaction price on initial

recognition, the entity recognises the difference as follows:

(a) When the fair value is evidenced by a quoted price in an active market for an identical asset or

liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from

observable markets, the difference is recognised as a gain or loss.

(b) In all other cases, the difference is deferred and the timing of recognition of deferred day one

profit or loss is determined individually. It is either amortised over the life of the instrument,

deferred until the instrument's fair value can be determined using market observable inputs, or

realised through settlement.

Fair value measurement

'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 in the principal or in its

absence, the most advantageous market to which the corporation has access at that date. The fair

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value of a liability reflects its non-performance risk. When one is available, the Corporation

measures the fair value of an instrument using the quoted price in an active market for that

instrument. A market is regarded as active if transactions for the asset or liability take place with

sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no

quoted price in an active market, then the corporation uses valuation techniques that maximise the

use of relevant observable inputs and minimise the use of unobservable inputs. The chosen

valuation technique incorporates all the factors that market participants would take into account in

pricing a transaction.

4.1.1 Financial assets

i. Classification and subsequent measurement

From a classification and measurement perspective, the IFRS 9 - Financial Instruments, requires

all financial assets, except equity instruments and derivatives, to be assessed based on a

combination of the Corporation’s business model for managing the assets and the instruments’

contractual cash flow characteristics. The Corporation has adopted IFRS 9 - Financial Instruments,

and classifies all its debt instruments as measured at amortised cost.

The classification requirements for debt instruments are described below:

Debt instruments

Debt instruments are those instruments that meet the definition of a financial liability from the

issuer's perspective, such as loans, government and corporate bonds.

Classification and subsequent measurement of debt instruments depend on:

(a) The Corporations's business model for managing the asset; and

(b) The cash flow characteristics of the asset.

Amortised cost

A financial asset is measured at amortised cost if it meets both of the following conditions and is

not designated as at FVTPL:

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- It is held with a business model whose objective is to hold assets to collect contractual cash

flows; and

- Its contractual terms give rise on specified dates to cash flows that are solely payments of

principal and interest ('SPPI').

The carrying amount of these assets is adjusted by any expected credit loss allowance recognised

and measured as described in note 12. Interest income from these financial assets is included in

'Interest and similar income' using the effective interest rate method.

Business model assessment

The business model reflects how the Corporation manages the assets in order to generate cash

flows. The Corporation’s objective is solely to collect the contractual cash flows from the assets.

Factors considered by the Corporation in determining the business model for a group of assets

include past experience on how the cash flows for these assets were collected, how the asset's

performance is evaluated and reported to key management personnel, how risks are assessed and

managed

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

(SPPI)

Where the business model is to hold assets to collect contractual cash flows, the Corporation

assesses whether the financial instruments' cash flows represent solely payments of principal and

interest (the `SPPI test'). In making this assessment, the Corporation considers whether the

contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only

consideration for the time value of money, credit risk, other basic lending risks and a profit margin

that is consistent with a basic lending arrangement. Where the contractual terms introduce

exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related

financial asset is classified and measured at fair value through profit or loss.

The Corporation reclassifies debt investments when and only when its business model for

managing those assets changes. The reclassification takes place from the start of the first reporting

period following the change. Such changes are expected to be very infrequent and none occurred

during the period.

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ii. Impairment

Identification and measurement of imparment

The Corporation measures and recognizes the provision for financing based on guidelines given

by the Maldives Monetary Authority (MMA) Prudential Regulations on Asset Classification,

Provisioning and Suspension of Interest (Regulation No.2015/R-168), instead of IFRS 9 due to the

various challenges that the Corporation faces to determine the provision under the expected credit

loss model of IFRS 9. The Corporation however, believes that the MMA regulation of Asset

Classification, Provisoning and Suspension of Interest Policy aligns with IFRS 9 as it is also a

forward-looking policy which requires provisons to be created upon recognition of the financial

assets. This model ensures that the provision created is based on the expected credit losses instead

of historical losses. It is a unique model that serves as a stepping stone for a newly established

institution such as the Coporation, to accumulate the data required for expected credit loss

estimation. However, The Corporation inetends to adopt the expected credit loss model approach

to estimation of provisions in the next financial year and become fully compliant with IFRS 9.

General financing loss provision requirement

A general provision on the total unimpaired financing portfolio is established to conservatively

cover any unforeseen losses in the lending (financing) portfolio at the reporting date, but which

have not been specifically identified as such. As per Prudential Regulations, a general financing

loss provision not less than 0.5% based on performing advances and 3% on advances classified as

special mention is established.

De-recognistion of impairment provision

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 recognized (such as the debtor

regularizing financing repayment), the previously recognized impairment loss is reversed by

adjusting the allowance account. Amounts recovered from fully impaired financing receivable are

recognized as income on a cash basis.

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Impairment of available-for-sale investment

At each reporting date an assessment is made whether there is any objective evidence of

impairment in the value of Available-for-sale Financial Assets. Impairment losses are recognized

if and only if there is objective evidence of impairment as a result of one or more events that

occurred after initial recognition of financial asset (a loss event) and that loss event (or events) has

an impact on the estimated future cash flows of the financial asset that can be reliably measured.

The corporation treats available for sale investments as impaired when there has been a significant

and prolonged decline in the fair value below its cost or where other objective evidence of

impairment exists. The determination of what is significant or prolonged requires considerable

judgment. The corporation determines significant generally as 20% or more and prolonged greater

than six months. If the available-for-sale financial asset is impaired, the difference between the

financial asset is acquisition cost (net of any principle repayment and amortization) and the current

fair value, less any previous impairment loss recognized in Statement of Comprehensive Income

is removed from other comprehensive income and recognized in the Statement of Comprehensive

Income.

Specific financing loss provision requirement

Specific provision for impairment of financing is recognized in accordance with Prudential

Regulations No.2015/R-168 by the Maldives Monetary Authority and provisions are made based

on the grading of the financing receivable exposure which is determined on the repayment history

of the individual loans.

LOAN CLASSIFICATION MATRIX

Repayment History

Financial Condition Strong Fair Unsatisfactory

Strong Pass Special Mention Substandard

Satisfactory Special Mention Substandard Substandard

Fair Substandard Substandard Doubtful

Marginal Substandard Doubtful Loss

Unsatisfactory Doubtful Loss Loss

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Specific financing loss provision is made on the basis of continuous review of all advances to

customers, in accordance with the Prudential Regulation No.2015/R-168 on Asset Classification,

Provisioning and Suspension of Profit issued by the Maldives Monetary Authority on aged

classification of advances as follows:

MMA Minimum

Asset classification or grading Secured Portion Unsecured Portion

Pass or Acceptable 0.5% 0.5%

Special Mention 3% 3%

Substandard (90-179 days) 20% 20%

Doubtful (180-359 days) 25% 50%

Loss (360-719 days) 50% 100%

Loss (720 or more days) 100% 100%

Suspence of interest

(a) Transfer to non-accrual status

A loan or advance is placed on non-accrual if;

i) It is maintained on a cash basis due to deterioration in financial condition or the ability of

the borrower to repay the debt

ii) Full payment of principle and interest is not expected; or

iii) It is non performing unless it is both well secured and in the process of collection.

(b) Write-off of accrued interest

All interest which is accrued but not collected and still carried on the books are written off by the

end of the calendar quarter in which the loan is placed on non-accrual status.

Interest which has already been taken into income and capitalized by increasing the principal

amount of the loan is reversed and written off from the time the loan is placed on non-accrual

status.

(c) Cash basis of income recognition

If a loan is on non-accrual and timely collection of full principals is in doubt, then any cash

payments received are applied only to reduce the principal. However, if the balance left on the

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books after a partial write off of principal is considered full collectible, then cash payments are

shown as interest income.

In order to assert that a loan is fully recoverable, it is to be supported by a properly documented

credit analysis, including an evaluation of the borrower’s historical repayment performance and

any other relevant factors.

(d) Restoration to accrual status

A loan which is on non-accrual status may only be restored to accrual status when;

i) No portion of principal or interest that is due remains unpaid (no arrears) and full repayment

of all remaining contractual principal and interest is expected

ii) When the loan becomes both well secured and in the process of collection

iii. Modification of loans

The Corporation sometimes renegotiates or otherwise modifies the contractual cash flows of loans

to customers. When this happens, the Corporation assesses whether or not the new terms are

substantially different to the original terms. The Corporation does this by considering, among

others, the following factors:

a) If the borrower is in financial difficulty, whether the modification merely reduces the

contractual cash flows to amounts the borrower is expected to be able to pay.

b) Significant extension of loan term when the borrower is not in financial difficulty.

c) Significant change in the interest rate.

d) Insertation of collateral, other security or credit enhancements that significantly affect the

credit risk associated with the loan.

If the terms are substantially different, The Corporation derecognises the original financial asset

and recognises a 'new' asset at fair value and recalculates a new effective interest rate for the asset.

The date of renegotiation is consequently considered to be the date of initial recognition for

impairment calculation purposes, including for the purpose of determining whether a significant

increase in credit risk has occurred. However, The Corporation also assesses whether the new

financial asset recognised is deemed to be credit-impaired at initial recognition, especially in

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circumstances where the renegotiation was driven by the debtor being unable to make the

originally agreed payments. Differences in the carrying amount are also recognised in profit or

loss as a gain or loss on derecognition.

If the terms are not substantially different, the renegotiation or modification does not result in

derecognition, and the Corporation recalculates the gross carrying amount based on the revised

cash flows of the financial asset and recognises a modification gain or loss in profit or loss. The

new gross carrying amount is recalculated by discounting the modified cash flows at the original

effective interest rate.

iv. Derecognition other than on a modification

Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the

cash flows from the assets have expired, or when they have been transferred and either

(i) The Corporation transfers substantially all the risks and rewards of the ownership, or

(ii) The Corporation neither transfers nor retains substantially all the risk and rewards of

ownership and the Corporation has not retained the control.

v. Write-off

Financing and debt securities are written off (either partially or in full) when there is no reasonable

expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the

case when the Corporation determines that the borrower does not have assets or sources of income

that could generate sufficient cash flows to repay the amounts subject to the write-off. This

assessment is carried out at the individual asset level. Recoveries of amounts previously written

off are included in 'impairment losses on financial instruments' in the statement of Comprehensive

Income. Financial assets that are written off could still be subject to enforcement activities in order

to comply with the Corporation's procedures for recovery of amounts due.

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4.1.2 Financial liabilities

i. Classifiation and subsequent measurement

Financial liabilities are classified and subsequently measured at amortised cost.

ii. Derecognition

Financial liabilities are derecognised when they are extinguished (i.e. when the obligation

specified in the contract is discharged, cancelled or expired). The exchange between the

Corporation and its original lenders of debt instruments with substantially different terms, as well

as substantial modification of the terms of existing financial liabilities, are accounted for as an

extinguishment of the original financial liability and the recognition of a new financial liability.

If an exchange of debt instruments or modification of term is accounted for as an extinguishment,

any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the

exchange or modification is not accounted for as an extinguishment, any costs or fees incurred

adjust the carrying amount of the liability and are amortised over the remaining term of the

modified liability.

4.2 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary

economic environment in which the entity operates ('the functional currency'). These financial

statements are presented in (MVR) Maldivian Rufiyaa, which is the Corporation's functional and

presentation currency.

(b) Transaction and balances

Foreign currency transactions are translated into functional currency using the exchange rates

prevailing at the date 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 income statement.

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4.3 Cash and cash equivalents

Cash and cash equivalents are items which are readily convertible to known amounts of cash and

which are subject to an insignificant risk of changes in value. Cash and cash equivalents include

all bank placements with original maturities of less than three months. Funds restricted for a period

of more than three months on origination are excluded from cash and cash equivalents. Cash and

cash equivalents are carried at amortised cost.

4.4 Offsetting and financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the statements of

financial position if, and only if, there is currently enforceable legal right to offset the recognized

amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability

simultaneously. The legally enforceable right must not be contingent on the future events and must

be enforceable in the normal course of business and in the event of default, insolvency or

bankruptcy of the Corporation or the counter party.

4.5 Property, plant and equipment

All property, plant and equipment are stated at historical cost less depreciation. Historical cost

includes expenditure that is directly attributable to the acquisition of the items

Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset,

as appropriate, only when it is probable that future economic benefits associated with the item will

flow to the Corporation and the cost of the item can be measured reliably. All other repairs and

maintenance are charged to other operating expenses during the financial year in which they are

incurred.

Depreciation is calculated using the straight-line method to allocate their cost to their residual

values over their estimated useful lives, as follows:

Machinery and other equipment - 5 Years

Computer equipment - 5 Years

Furniture and fixtures - 10 Years

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The charge for the depreciation commences from the date on which the assets are available for

use. The Corporation recognizes a full month of depreciation expense for an asset in the month of

acquisition, while no depreciation expense will be recorded in the month of the asset's disposal.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each

reporting date. Assets that are subject to amortisation are reviewed for impairment whenever

events or changes in circumstances indicate that the carrying amount may not be recoverable. An

asset’s carrying amount is written down immediately to its recoverable amount, if the asset’s

carrying amount is greater than its estimated recoverable amount. The recoverable amount is the

higher of the asset’s fair value less costs to sell and value in use.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These

are included in other operating income or other operating expenses, in the income statement.

4.6 Intangible assets

Costs associated with software are capitalised and amortised using the straight-line method over

estimated useful life of 3 years. The carrying amount of intangible asset is reviewed annually and

adjusted for permanent impairment where it is considered necessary.

The estimated useful life for the current period is as follow:

Softwares - 3 Years

4.7 Provision for liabilities and charges

Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount.

They are accrued when the Corporation has a present legal or constructive obligation as a result of

past events, it is probable that an outflow of resources embodying economic benefits will be

required to settle the obligation, and a reliable estimate of the amount of the obligation can be

made.

4.8 Leases

The Corporation adopted IFRS 16 – Leases, which introduces a single, on-balance sheet lease

accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use

the underlying asset and a lease liability representing its obligation to make lease payments. There

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are recognition exemptions for short-term leases and leases of low-value items. However, similar

to the previous standard lessors can continue to classify leases as finance or operating leases.

Lease liabilities are measured at the present value of the remaining lease payments. Right-of-use

assets are measured at an amount equivalent to the lease liability, adjusted by the amount of any

prepaid or accrued lease payments, and is presented as a separate line item in the statement of

financial position.

At the reporting date, there are no such leases to be classified and reported in the financial

statements.

4.9 Trade and other payables

Trade payables are accrued when the counterparty has performed its obligations under the contract

and are carried at amortised cost.

4.10 Share capital

Ordinary shares are classified as equity

4.11 Dividends

Dividends on ordinary shares are recognised in equity in the period in which they are approved by

the Corporation's shareholders.

4.12 Current and deferred business profit tax

The tax expenses for the period comprises current and deferred tax. Tax is recognised in the income

statement, except to the extent that it relates to items recognised directly in equity.

The current business profit tax charge is calculated on the basis of the tax laws enacted or

substantively enacted at the balance sheet date. Management periodically evaluates positions taken

in tax computation with respect to situations in which applicable tax regulation is subject to

interpretation. It establishes provisions where appropriate on the basis of amounts expected to be

paid to the tax authorities.

The provisions for business profit tax is based on the elements of income and expenditure as

reported in the Financial Statements and computed in accordance with the provisions of the

Business Profit Tax Act.

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The Corporation is liable to business profit tax at rate of 15%, if the taxable profit of the year

exceeds MVR 500,000.

Deferred business profit tax is recognised, using the liability method, on temporary differences

arising between the tax bases of assets and liabilities and their carrying amounts in the financial

statements. However deferred business profit tax is not accounted for if it arises from initial

recognition of an asset or liability in a transaction other than a business combination that at the

time of the transaction affects neither accounting nor taxable profit or loss. Deferred business profit

tax is determined using tax rates that have been enacted or substantially enacted by the balance

sheet date and are expected to apply when the related deferred business profit tax asset is realised

or the deferred business profit tax liability is settled.

Deferred business profit tax assets are recognised only to the extent that it is probable that future

taxable profit will be available against which the temporary difference can be utilised.

Deferred business profit tax assets and liabilities are offset when there is a legally enforceable right

to offset current tax assets against current tax liabilities and when the deferred business profit tax

assets and liabilities relate to business profit tax levied by the same taxation authority. Current tax

assets and tax liabilities are offset where the Corporation has a legally enforceable right to offset

and intend either to settle on a net basis, or to reduce the asset and settle the liability

simultaneously.

4.13 Fees, commissions and other income and expenses

Fees, commissions and other income and expenses items are generally recorded on an accrual basis

by reference to completion of the specific transaction assessed on the basis of the actual service

provided as a proportion of the total services to be provided.

4.14 Staff costs and related contributions

Wages, salaries, contributions to the Maldives Government pension funds, paid annual leave and

sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated

services are rendered by the employees of the Corporation. The Corporation has no legal or

constructive obligation to make pension or similar benefit payments beyond the payments to the

statutory defined contribution scheme.

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4.15 Segment reporting

The corporation operated under one segment and offered only conventional loan products during

the reporting period.

5. Net interest income

Interest income

Period 17

January to 31

December

2019

Loans and advances to customers 1,770,531

Financial assets at ammortised cost (Note 5.1) 2,474,266

Funds placed in banks -

4,244,797

Interest Expenses

Other borrowed funds -

Net Interest Income 4,244,797

5.1 Interest Income – Financial assets at ammortised cost

Period 17

January to 31

December

2019

Interest income from investment in government securities 2,474,266

2,474,266

The interest income from investment in government securities include interest income from

treasury bills.

6. Fees and commission income

Period 17

January to 31

December

2019

Loan processing fees 1,731,917

Other fees -

1,731,917

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7. Personnel costs

Period 17

January to 31

December

2019

Staff salaries and allowances 2,395,517

Ramadan allowance and bonuses 35,800

Board remunerations and fees 922,010

Employee pension contributions 282,695

3,636,021

8. Credit impairment of loans and receivables

Period 17

January to 31

December

2019

Credit impairment charge for the year (Note 12) 1,199,501

1,199,501

9. Other operating expenses

Period 17

January to 31

December

2019

Depreciation (Note 13) 139,938

Marketing and promotion expense 197,547

Repairs and maintenance expense 192,921

Printing and stationery 189,616

Rent expense 540,000

Annual license & registration fees 142,739

Staff training and development 26,497

Travel expenses 24,457

Sundry expenses 51,339

Utilities 160,198

CIB fees 241,650

Bank charges and fines 4,158

Management consultancy fees 90,000

2,001,060

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10. Cash and short-term funds

2019

Cash on hand 961

Balances at bank 7,663,112

7,664,073

As at the year ended 31 December 2019, the corporation maintained all its bank balances at Bank

of Maldives.

11. Financial assets at amortised cost

2019

Investment in in treasury bills 153,326,446

153,326,446

As at the year ended 31 December 2019, a total of MVR 84,772,392 and MVR 68,554,054 were

invested in Treasury bills which will mature on 06 January 2020 and 13 April 2020 and carry an

interest rate of 3.5% and 4.23% respectively.

12. Loans and advances to customers

2019

Loans to customers 101,900,506

Loans and advances before allowance 101,900,506

Less: Provisions for credit impairment (Note 12.1) (1,199,501)

Loans and advances net of allowance 100,701,005

12.1 Movement in provisions for credit impairment is as follows:

2019

Balance at the begining of the period -

Credit impairment charge for the year 1,199,501

Balance at the end of the period 1,199,501

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13. Property, plant and equipment

Cost Machinery

and Equip

Computer

Equipment

Furniture

and Fittings 2019

Balance at the begining of the period - - - -

Additions during the period 52,096 1,020,211 570,583 1,642,890

Disposals during the period - - - -

Balance at the end of the period 52,096 1,020,211 570,583 1,642,890

Accumulated Depreciation 2019

Balance at beginning of the period - - - -

Depreciation charge for the period 6,342 97,060 28,621 132,024

Depreciation on disposals - - - -

Balance at the end of the period 6,342 97,060 28,621 132,024

Net Book Value at the end of the period 45,754 923,151 541,961 1,510,866

The Corporation did not dispose of any assets as at the reporting date.

14. Intangible assets

Software 2019

Opening Net book value -

Additions during the period 28,491

Disposals during the period -

Balance at the end of the period 28,491

Accumulated depreciation

Balance at beginning of the period -

Depreciation for the period 7,914

Depreciation on disposals -

Balance at the end of the period 7,914

Net Book Value at the end of the period 20,577

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15. Other assets

2019

Deposits receivable 181,330

Prepaid expenses 90,000

Discount receivables on Gov. T-bills 798,526

Other receivables 704,454

1,774,310

16. Other liabilities

2019

Deposits from customers 157,815

Corporate credit card 5,365

Accrued and account payables 340,506

Ministry of fisheries and agriculture fund 353,458

857,144

Deposits from customers

Deposits from customers are held as a contingency during the grace period to mitigate the risk of

default. As at the reporting date, no policy has been implemented to award an interest over the

deposits.

Ministry of fisheries and agriculture fund

The Corporation was appointed to manage, inspect and administer a loan Scheme fund of an

amount of Three Million Rufiyaa for financing the “Kan’dufalhuge Nafa” (A.Dh. Mahibadhoo Ice

Plant) Loan Program, the purpose of which is to promote and facilitate Fisheries development

isheries communities. The Corporation receives an administrative fee of 1% of the outstanding

principle of the loan balance payable on an annual basis.

The Corporation did not seek any additional debt funding as at the reporting date.

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17. Share capital

Number of Shares Ordinary

Shares

As at 31 December 2019 26,500,000 265,000,000

26,500,000 265,000,000

Authorised share capital comprises of MVR 1,000,000,000 (100 million shares @ 10/share).

The total paid up number of ordinary shares as at 31 December 2019 was 26,500,000 with a par

value of MVR 10 per share.

The Corporation is owned by the Government of Maldives with a majority shareholding of 85%

and shares of the three City Councils, i.e. Male’ City, Fuvahmulah City and Addu City with each

council holding 5% shareholding respectively

18. Risk management

Risk management is an ongoing process of identification, measurement and monitoring, and is

subject to risk limits and internal controls as outlined in the Corporation’s risk management policy.

The Corporation’s most significant risk exposures are considered to be in the areas of credit risk,

liquidity risk, market risk and operational risk. The impact of other risks such as reputational risk,

compliance risk and legal risk are also monitored carefully along with external risks such as

changes in the political, regulatory and economic environment. During the year, the Corporation

has exposure to the following risks from its use of financial instruments:

a. Credit risk

b. Liquidity risk

c. Market risk

d. Operational risk

Risk management objectives, policies and process

The primary objective or risk management is to forecast and assess the future uncertainty of the

future in order to make the best possible decision in the present, in order to protect the

Corporation’s stability and financial strength. The Corporation’s risk management policies are

established to identify and analyze risks facing the corporation, to set appropriate risk limits and

controls, and to monitor adherence to these limits and controls. All risk management policies are

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reviewed regularly to address and reflect, changes in market conditions, portfolio or products and

services offered by the Corporation as well as prevailing regulatory requirements.

The Corporation's Board of Directors has overall responsibility for the establishment and oversight

of the Corporation's risk management framework. The Corporation's risk management policies are

established to identify and analyze the risks faced by the Corporation, to set appropriate risk limits

and controls, and to monitor risks and adherence to limits. The risk management policies and

systems are reviewed regularly to reflect changes in market conditions and the Corporation's

activities. The Corporation, through its training and management standards and procedures, aims

to develop a disciplined and constructive control environment in which all employees understand

their roles and obligations.

The Audit Committee oversees how management monitors compliance with the Corporation's risk

management policies and procedures and reviews the adequacy of the risk management

framework in relation to the risks faced by the Corporation. The corporations Audit Committee is

assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc

reviews of risk management controls and procedures, the results of which are reported to the Audit

Committee.

Board audit committee

During the year, the board risk management committee was not established, however this function

was absorbed into the duties of the Board Audit Committee. The Board Audit committee reviews

the effectiveness of the Corporation’s risk management framework related to the identification,

measurement, monitoring and controlling of risks. The committee also reviews and monitors the

integrity of the Corporation’s financial statements and financial reporting process and its systems

of internal accounting and financial controls. In addition, the committee reviews and challenges

where necessary the consistency of, and any changes to, accounting policies. The committee

reviews the compliance of the Corporation with legal and regulatory requirements including its

disclosure requirements, controls and procedures. Furthermore, the committee reviews the

engagement of the external auditors and the evaluation of the independence, objectivity and

performance of the external auditors.

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Board credit committee

The Board of Directors has delegated the responsibility for the oversight of credit risk to the Board

Credit Committee up to a specific level and the Committee's responsibilities include reviewing

and approving credit proposals in line with the Corporation's approved authority thresholds.

Asset and liability management committee

The Asset and Liability Management Committee is responsible for ensuring the Corporation

manages its liquidity in the most productive and prudent manner in compliance with the its Risk

Management Policy. The Committee reviews key risks such as liquidity risk, interest rate risk,

currency risk and market risk.

Management credit committee

The Management Credit Committee is a credit approving committee with responsibilities

delegated up to a specific level and the Committee's responsibilities include reviewing and

approving credit proposals in line with the Corporations's approved authority thresholds.

Credit risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial

instrument fails to meet its contractual obligations and arises principally from the Corporation’s

financing to customers and investment in securities. For risk management reporting purposes, the

Corporation considers and consolidates all elements of credit risk exposure (such as individual

obligor default risk, country and sector risk).

The market risk in respect of changes in value in trading assets arising from changes in market

prices applied to securities and specific assets included in trading assets is managed as a

component of market risk. The Corporation’s exposure to credit risk is influenced mainly by the

individual characteristics of each customer. There is no concentration of credit risk geographically.

The Corporation’s credit risk management process broadly encompasses the following:

(a) Loan origination and risk appraisal comprising initial screening and credit appraisal are

conducted for all loan proposals.

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(b) Clear guidelines and policies have been established for loan approvals within delegated credit

approval authorities.

(c) Loan Administration department ensures that the origination and disbursement of credit is

made only after stipulated conditions have been met and relevant security documents obtained

in order to protect the Corporation's rights as lender.

(d) Timely portfolio reviews are performed pertaining to inherent and evolving risk. Additionally,

responsibilities for monitoring and tracking any early warning signals pertaining to a

deterioration in the financial health of borrowers have been assigned to the respective business

units who are also responsible for identifying and managing any customers who need special

attention or close monitoring.

(e) Non-performing loans and receivables are managed effectively by monitoring the value of the

applicable collateral and liaising with the customer until all legal recovery matters are

finalized.

Concentration of credit risk

The Corporation reviews the on regular basis its concentration of credit granted in each of the

products offered. The diversification was made to ensure that an acceptable level of risk in line

with the risk appetite of the Corporation is maintained. The diversification decision is made at the

Asset and Liability Management Committee, where it sets targets and present strategies to the

Management and optimising the diversification. All departments of the Corporation are advised

on the strategic decisions taken in diversification of the portfolio and to report to Asset and

Liability Management Committee the trends of applications for credit facilities accordingly. The

Corporation monitors concentration of credit risk by industry and by whether the customer is a

business customer or an individual customer. An analysis of concentrations of credit risk from

financing and advances to customers and financing commitments and financial guarantees issued

are shown below:

Sector Gross Financing

Agriculture 2,400,000 2%

Commerce 39,140,363 38%

Construction 7,834,396 8%

Fishing 8,800,620 9%

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Information technology 695,178 1%

Manufacturing 5,304,696 5%

Tourism 30,577,935 30%

Transport 7,147,317 7%

Grand Total 101,900,506

Liquidity risk

Liquidity risk is defined as the risk that the Corporation will encounter difficulty in meeting

obligations associated with financial liabilities that are settled by delivering cash or another

financial asset. Liquidity risk arises because of the possibility that the corporation might be unable

to meet its payment obligations when they fall due under both normal and stress circumstances.

Liquidity risk management

The Corporation's management reviews the asset and liability position of the Corporation on a

regular basis to ensure that there is no mismatch of assets and liabilities. The Corporation’s

approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient

liquidity to meet its liabilities when they are due, under both normal and stressed conditions,

without incurring unacceptable losses or risking damage to the Corporation’s reputation.

Monitoring and reporting take the form of cash flow measurement and projections on a regular

basis. The starting point for projections is an analysis of the contractual maturity of the financial

liabilities and the expected collection date of the financial assets.

Less than 3

months

3 to 12

months 1 to 5 years

Over 5

years Total

(MVR ‘000)

Financial assets

Cash 1 1

Balances at depository

Institutions 7,655 7,655

Debt securities 153,335 153,335

Accrued interest

Receivable 203 203

Loans and receivables to

customers 1,993 35,490 64,444 101,927

Other assets 555 181 736

Non-financial assets 1,604

161,749 1,993 35,671 64,444 265,461

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Financial liabilities

Accounts payables 19 19

Miscellaneous liability

Items 63 152 353 568

Provision for losses 1,209

Accumulated

Depreciation 138

82 - 152 353 1,934

Maturity Gap 161,667 1,993 35,519 64,091 263,527

Cumulative Maturity Gap 161,667 163,660 199,179 263,270

Market risk

Market risk relates to the impact of fluctuations in market rates on the Corporation’s assets and

liabilities, or the risk that the fair value or future cash flows of financial instruments will fluctuate

due to changes in market variables such as interest rates, foreign exchange rates and equity prices.

The Corporation does not have a trading portfolio or quoted equity investments. Therefore, the

Corporation is not open to any equity price risk.

Operational risk

Operational risk is the loss resulting from inadequate or failed internal processes, people and

systems or from external events. The Corporation manages and controls operational risk by

identifying and controlling risks in all activities according to a set of pre-determined parameters

by applying appropriate management policies and procedures.

19. Capital management

The Corporation’s objectives when managing capital are:

To comply with the capital requirements under the Maldives Monetary Authority (MMA)

Prudential Regulation on Capital Adequacy

To safeguard the Corporation’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.

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The regulatory capital is divided into two tiers:

Tier 1 Capital: Share capital, retained earnings and reserves created by appropriations of

retained earnings; and

Tier 2 Capital: Current year earnings, general provision and qualifying subordinated loan

capital.

Risk-weighted assets reflect an estimate of credit, market and other risks associated with each

asset and counterparty, considering any eligible collateral or guarantees as per Maldives Monetary

Authority Prudential Regulation on Capital Adequacy. A similar treatment is adopted for off-

balance sheet exposures, with some adjustments to reflect the more contingent nature of the

potential losses.

The table below summarizes the composition of regulatory capital and the capital adequacy ratios

of the Corporation for the year ended 31 December 2019.

2019

Tier 1 Capital

Share capital 265,000,000

Reserves -

Retained earnings -

Total qualifying Tier 1 capital 265,000,000

Tier 2 Capital

Current earnings (859,868)

General provision 1,014,488

Total qualifying Tier 2 capital 154,620

Total regulatory capital 265,154,620

Risk Weighted Assets

Loans and advances 100,701,005

Balances at banks 1,532,815

Non-financial assets net of depreciation 1,531,442

Other assets 1,774,310

On-balance sheet 105,539,572

Off-balance sheet 90,775,449

Total risk weighted assets 196,315,021

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Tier 1 Capital Adequacy Ratio 134.99%

Total Capital Adequacy Ratio 135.07%

The Corporation complied with all Maldives Monetary Authority regulatory capital requirements

during the year.

20. Reserves

The Corporation did not maintain any reserves as at the reporting date.

21. Commitments

2019

Loan commitments

Undisbursed loans 90,775,449

90,775,449

22. Related party transactions

The Corporation has identified and disclosed personnel having authority and responsibility for

planning, directing and conrolling the activities of the Corporation as ''key management personnel''

in accordance with IAS 24 - Related party disclosure. Accordingly, the Board of Directors and

Managing Director have been identified as ''key management personnel''.

During the year end 31 December 2019, total remuneration paid to Directors including Managing

Director was MVR 922,010.

23. Events after the reporting period

No events have occurred since the reporting date which would require adjustment to figures in the

financial statement. However, Since the reporting date, there has been a global pandemic caused

by the spread of Covid-19 which is expected to significantly affect both the local and global

economies.

In response to Covid-19, the Corporation has decided to issue a moratorium on the outstanding

portfolio of the Corporation. The moratorium is applied to all loans disbursed up to and during the

moratorium period (The moratorium is applied to all sectors and customer segments). However,

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all customers will have option to opt for payment. The moratorium period is effective from 1st

March 2020 for six months till 31st August 2020. The Interest rate of all disbursed loans is reduced

to 4% during the moratorium period. Further, the interest during the period will not be capitalized

in to loan amount outstanding.

No other circumstances have arisen since the reporting date which would require adjustments to,

or disclosure in, the financial statements.

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Documents

SME DEVELOPMENT FINANCE CORPORATION LIMITED