annual report 2006 - rural housing loan fund – rhlf · rural areas. in fact, banks were closing...

Annual Report2006

BOARD OF DIRECTORS

Totsie Memela-Khambule

Chairperson

Willem van Emmenis

Managing Director

Mokgosi Pule

Non-Executive Director

Knowles Oliver


Moray Hathorn


JH de V Botha


Pepi Silinga


CONTENTS PAGE

VISION,MISSION,VALUES 1

TESTIMONIALS 2-4

KEYHIGHLIGHTS 5-7

CHAIRPERSON’SREPORT 8-10

MANAGINGDIRECTOR’SREPORT 11-17

ANNUALFINANCIALSTATEMENTS 19-61

Annual Report l page �

VISION,MISSION,VALUES

Vision

RHLF is a world class rural housing social venture capital fund that creates new

financial arrangements and opportunities for rural families to improve their

housing, economic and living environments.

Mission

To empower people in rural areas to maximise their housing choices and improve

their living conditions with access to credit from sustainable retail lenders.

TeamValues

• We are loyal and honest to each other and practise joint accountability.

• We practise straight talk and team work.

• We are passionate about improving living conditions of the working poor.

• We believe in sustainable, responsible social and economic development.


Jeffrey Ntjana TESTIMONIALS

“My name is Jeffery Ntjana of Zone 8 Seshego Township in Polokwane, Limpopo. I am employed as a police officer by the SAPS. I live here with my wife, my child and my three sisters.

My wife is improving her professional qualifications and is currently learning to work with computers in town. Two of my sisters work but really do not earn much and I do not earn much either. As a bread winner, I thought of a way of increasing the family income.

That is when the idea of building rental accommodation came to my mind after noticing many people coming from places outside of Polokwane looking for a place to rent.

I decided that I would build a double garage with four back rooms for rental space. I then started saving money until I had accumulated about R�0,000. After construction was underway, I realised that I would need more money to get what I wanted. I had heard about Norufin. So, I applied for a loan of R7,000 from Norufin. I got the loan I wanted and completed what you see here today. I have tenants and each pays R300 per month. I therefore collect rental income of R�,�00 per month, and use part of this money to repay the loan. It was relatively affordable to build as I only used local builders to help me build the rooms, and I paid them what we had agreed on.”

Annual Report l page 3

“My name is Monde Makawula. I am an educator at Ezizityaneni Junior Secondary School in Bizana. I have been a teacher here since September �00�. I am still single and live in a household of five. My mother passed away when I was only two years old, and I was brought up by my grandmother.

I have always wanted to build my own house at home. I knew that I would not be able to get a mortgage bond since I was building on communal land. So, I started

TESTIMONIALS Monde Makawula

saving a little from what I earn until I had saved R�5,000. In �004, I started building my house using my savings. The house has � bedrooms, lounge, kitchen and a passage. I later realised that I did not have enough money to complete my house. I went to a local building merchant in our town of Bizana to ask about buying building materials on credit. There I found out that Lendcor could assist me with a housing loan to buy materials for finishing my house. Lendcor only wanted a copy of my identity document and payslip and my banking details. It was very easy to get the two loans of R4,600 and R3,000 from Lendcor. With this money, I purchased frames and materials for the roof of the house. Lendcor deducts the loan repayment from my bank account and sometimes I make extra cash payments so that I can finish paying off my loan quicker. I definitely will go back to Lendcor for more finance for plastering and painting, connecting electricity and building a proper fence. Unfortunately, we do not yet have running water in this area; I would have loved to connect water services too.

I am very happy with the service and assistance I received from Lendcor and would recommend my friends to see Lendcor for assistance if they want to build their houses. I am also happy knowing that once my house is complete and I have finished repaying Lendcor, I will not owe anyone. I will just enjoy living in my house!”


Zanele Mthethwa TESTIMONIALS

“I am Zanele Mthethwa of KwaHlomendlini, a rural area of Mandeni in KwaZulu-Natal. I work for Whirlpool in the KwaSithebe industrial area. I live here with my two children—a boy and a girl.

This site was allocated to me by iNkosi uNgcobo and it was easy for me to get the site even though I am a women and a single parent. I have now built a four-room house. I paid R�,000 to have the site levelled before building started.

I first bought blocks from my own savings of R4,000 and later used another R�,000 from my savings. When I went to Built-It at KwaSiqumbe, I learnt that Lendcor could assist me with a loan to purchase building materials and pay the shop directly instead of giving me cash. Since then I have taken three successive loans of R�,500; R5,000 and R6,000 and all this money has gone towards building this house.

A local builder helped me build the house. We agreed on the terms of payment and I have paid him three progress payments of R3,000, another R3,000 and the last payment was R�,000. The house is almost complete and we now live in it. But I still need to plaster the house, finish fencing and install the inside toilet and electricity. I have already bought some of these materials.

I still plan to add two more rooms to the house because I have a bigger extended family who visits me from time to time. I don’t want my relatives to suffer each time they visit us. I am happy that I can rely on Lendcor to help with the financing to complete the house. I am very proud of Lendcor!”


KEYHIGHLIGHTS

RHLFCurrentClientProfile RHLFGenderDistributionofEndUserLoans

ImpairmentsonAdvances CumulativeDisbursements


FiveYearHistory


StrategicPerformanceIndicators

DevelopmentImpact-April2005toMarch2006

KEYHIGHLIGHTS-continued


CHAIRPERSON’SREPORT

Totsie Memela-Khambule

This year is significant for the Rural Housing Loan Fund in many respects.

It marks a full decade of pioneering work in the rural low income housing market

since 1996, when RHLF was established by the South African Government with

a grant of R150 million from the Federal Republic of Germany. The financial

results for the year bear evidence of the success of the turnaround strategy

at RHLF that was implemented following the micro finance crisis in 2002/03.

We are also proud to report both the largest and the smallest wholesale finance

transaction of our history during the 2005/2006 fiscal year: Bayport Financial

Services, the unsecured housing lending business RHLF co-founded in 2004/2005,

has matured to the point that it was able to raise additional commercial funding

commitments of R150 million this year. At the same time, we also made our

first R500,000 facility available to a stokvel. We see great promise in stokvel

partnerships as a delivery channel for RHLF. Stokvel members are disciplined

savers and responsible borrowers who understand how to build their house as

an asset for their family.

RHLF was established very much as a pilot project, a bold bet on the part

of the Department of Housing that was willing to give the rural housing

finance market a chance, while many doubted that such a market even existed.

Ten years later, there is conclusive evidence that the rural working poor do

indeed need reliable and consistent access to finance in order to progressively

build and improve their homes. Since inception, RHLF has disbursed 95,059

loans to the cumulative value of R411.7 million. This is a great achievement

considering that in 1996, major financial services had little or no presence in

rural areas. In fact, banks were closing their rural branches - a trend that is now

in reverse as a result of the Financial Sector Charter.

Our success in sustaining a low income rural housing business model is further

evidence that market-based solutions can help address poverty and socio-

economic development needs of the working poor. This Annual Report highlights

some of our beneficiaries, who have taken repeat RHLF loans via our specialised

retail lenders and have improved their living conditions, one loan, one building

project at a time.

The business environment for rural micro-lending in South Africa remains

extremely challenging, as the budgets of the low income households we

serve are stretched to the limit in trying to keep up with basic needs. How to

efficiently reach the rural poor with small loans on terms they can afford, while

appropriately providing for risk and expenses, is the central challenge that RHLF

must find new answers to every day.


CHAIRPERSON’SREPORT-continued

In the years 2003 to 2005, we rebalanced our portfolio of retail partners and

put behind us the fall-out from the small banking crisis by emphasising cost and

risk coverage as a way to strengthen the financial viability of RHLF and its retail

intermediaries. With the financial turnaround now firmly established, RHLF

was able to redirect much of the strategic attention towards achieving more

development impact on the end-borrower front. To this end, RHLF is taking a

fresh look at:

• savings-linked housing credit and community-based loan origination,

• creating better housing value by promoting alternative building

technologies,

• working with the building material manufacturers towards lower

distribution costs in rural areas,

• and partnering with major rural employers on worker housing.

Pilot implementation under all the strategic initiatives above are well under way

and give RHLF and its retail partners a head start in adapting to the drastic changes

that will sweep the low income financial services market following the passage of

the new National Credit Act in late 2005. The regulations under the Act establish

very tight ceilings for interest and fees that may be charged to borrowers; they

curb abuses in the national debit order collection system and introduce many

new consumer protection measures that low income finance providers must

work into their procedures and systems. RHLF and its retail lending partners see

the new rules mainly as an opportunity to provide better value in housing finance

to our target market: RHLF can now also make somewhat larger unsecured

housing loans of up to R30,000 or even R40,000. The objective to us is clear:

RHLF wants more rural families to live in better and more affordable homes.

We are grateful to our development partners, the German Development Bank

(KfW) and the Development Bank of Southern Africa (DBSA) for their continued

financial and advisory support. Towards the end of the fiscal year, we were able

to draw the first tranche of a major new facility from KfW/DBSA that will take

RHLF to a whole new level of housing development impact.

The end of our fiscal year coincided with local government elections that produced

another result of historic significance. All across the country, the mandate of the

new councillors is premised on accelerating the delivery of housing and basic

municipal services.

Annual Report l page �0

Government has committed itself to integrated planning that provides better

quality houses closer to economic opportunities. RHLF is a key partner in this

effort and can serve as a powerful link in bridging the gap between the first and

second economy. Most of our strategic initiatives are devised around the goal of

enhancing government efforts of addressing second economy challenges. Many of

the borrower testimonials in this Annual Report give a sense of those challenges

and demonstrate in a very tangible way how access to affordable housing finance

can make a difference.

I would like to convey my sincere gratitude to my fellow board members for the

sterling oversight and inspiration they provide to RHLF, both on the full board

and on its committees. After a decade of most energetic service, Ms Nonhlanhla

Mjoli-Mncube resigned as chairperson and a director this year. Board members

Messrs Diet von Broembsen and Mziwonke Dlabantu also resigned after shaping

RHLF’s policies and business success for almost as many years. We are deeply

indebted to all three of them for committing their time and expertise to the

development of this unique housing finance institution.

I wish to thank the managing director and his team for their valued contribution

to the company. I know that we can rely on their experience, commitment and

dedication as we move ahead in several exciting new strategic directions.

We sincerely appreciate the

skilful and productive work of

our retail lending partners, who

carry out our mission by serving

the housing needs of the working

poor in all nine provinces.

You are the public face of the

RHLF, the value of your loan

products; your customer service

and the integrity of your staff

and management are what define

RHLF in the eyes of its target

market. Thank you for a job

well done.

Annual Report l page ��

MANAGINGDIRECTOR’SREPORT

Our business is to make small housing and home improvement loans to low

income households primarily in rural areas. Often, RHLF is the only source

of financing accessible to the rural working poor, particularly if they live on

communal lands and do not have conventional title to their property. Delivering

small-scale finance at affordable rates while covering the operational cost of

reaching out into rural areas and providing for credit risk is a complex balancing

act. RHLF’s objectives of development impact in low income housing and financial

capital preservation were further solidified in the past year with a positive net

income of R2.1 million before tax (2005: - R 839,923).

The respectable positive net income puts us about halfway towards our

goal of preserving the real inflation-adjusted value of our grant endowment.

The surplus is the result of maintaining a tight lid on operating expenses, which

came in roughly R1.6 million under budget, and the healthy growth of our wholesale

exposures to our retail partners. Given the high credit risk in our target market,

we value the retail housing loan portfolios conservatively and hold commensurate

impairment reserves against the exposures to our retail lenders. As at

31 March 2006, the total loan loss provision on advances amounted to

R20.5 million or 18% (2005: R13 million or 14%) of gross advances.

We achieved scale through our proven wholesale model and were able to make

26,648 new loans this year (2005: 15,202) through our network of RHLF retail

lenders. Along with the efficient volume delivery, the cost of credit to the end

user has been coming down. Rates may come down even further in the current

business year. With our help, the RHLF retail partners have been honing their

distribution models and underwriting standards such that they will be among the

first to comply with the 36.5% interest rate cap that will be introduced under

the National Credit Act.

AnnualSurplus/(Deficit)

Willem van Emmenis


NewStrategicInitiatives

One of the defining themes of the past business year was the debate over the

future strategic direction of RHLF. Management engaged the board and staff,

the retail partners and our funders at DBSA and KfW in shaping the strategic

initiatives that will maximise the impact of our activities on low income housing,

drive down the end borrower cost of credit while ensuring RHLF’s long-term

financial viability.

On September 22, 2005, the RHLF board adopted a Growth Strategy that

builds on a portfolio of strategic innovations and operational enhancements that

should put RHLF on track for solid business expansion and improved housing

impact. We are currently in the midst of working through pilot implementations

under all of the new strategic directions. The common denominator of these

new approaches is a stronger emphasis on community involvement and a

savings culture as a way to improve “ownership” of the RHLF offering by the

communities we serve and as a means to encourage prudent financial planning

and thriftiness among our target clients. The benefit of better financial discipline

and lower default rates is then reinvested back into the community via lower

credit charges.

Our co-operation with the Kuyasa Social and Investment Club sums up the spirit

of the community-based lending idea. Kuyasa is a stokvel of 80 mostly rural

members with ties to the National Emergent Red Meat Producer Organisation

(NERPO) based in Pretoria. Kuyasa took a small “wholesale” facility from RHLF

and administers its own portfolio of housing loans to members and related

individuals who are endorsed and guaranteed for by a member. Some of the

collective savings of the stokvel are pledged to RHLF as collateral. Since the

stokvel handles the individual applications, the loan administration and the

collections on a volunteer basis, it can profitably advance housing loans at rates

of 20% p.a. and below. The initial uptake and performance of these loans are

very encouraging and we hope to replicate this model several more times.


MANAGINGDIRECTOR’SREPORT-continued

BusinessEnvironment

From the perspective of the regulatory and business environment for low income

lending, the year under review was another year of anticipation and preparation.

Unfortunately, the critical breakthroughs in terms of implementing the National

Credit Act, improving access and fairness in the National Payment System for

non-bank lenders and resolving the gridlock in delivery under the Financial Sector

Charter did not materialise during the past year. At last, however, all indications

are that 2007 will be the year that it happens: reckless predatory lending to the

most vulnerable low income earners will be outlawed and aggressively prosecuted.

Preferential debit order collections that make a business out of unfairly getting to

the borrower’s salary ahead of any other legitimate deduction will also be phased

out. And finally, as the 2008 deadline looms, the large banks are clearly signalling

that the time has come to become creative in partnering and exploring new

delivery channels into the low income housing market if they want to achieve the

R42 billion targets for entry level housing finance.

These developments represent a great opportunity for RHLF. We see the

Financial Sector Charter not as a threat to our low income lending franchise but

as additional leverage in partnering with the commercial banking sector.

Together with the major banks, we can position RHLF’s network as a distribution

channel for small bank mortgages and push deeper and broader into unsecured

small housing loans on communal lands, where traditional mortgage bonds

are ineffective. The end of the “debit order arms race” and the introduction

of a randomised debit submission sequence under the new AEDOS system

will be celebrated as a major breakthrough by RHLF and our retail lenders.

This seemingly small technical adjustment should have a substantial positive effect

on the reliability of collections and financial viability of our retail lenders and will

provide room to bring interest rates down even further.


AnnualDisbursements

LendingActivitiesandFinancialResults

In 2006, the loan portfolio grew by 20% (2005: 61%) to R115 million with facility

disbursements of R82 million. This continued expansion is evidence of our

reinvigorated growth strategy and the two-pronged approach of going deeper

into community-based delivery while at the same time honing our high volume

distribution via the more conventional wholesale distribution model. This positions

RHLF well to absorb the new 12.5 million Euros senior debt funding provided by

DBSA under a back-to-back refinancing agreement with the German development

bank KfW. The continued commitment of our German funders is a vote of

confidence in our ability to achieve impact in the low income housing market.

Ahead of the large new KfW-DBSA facility, RHLF drew down its first ever

debt funding of R25 million as a bridging loan from DBSA in order to fund the

portfolio expansion and maintain the liquidity at the mandatory level of three

months average operating expenses and disbursements. The bridging loan was

settled against the first R50 million advance under the new long-term facility in

March 2006. Adding substantial debt funding to a balance sheet funded strictly by

equity to date, drastically changes the income dynamics for RHLF. Net interest

margin now becomes the leading variable in our financial function. RHLF’s debt

funding cost currently stands at a reasonable 8.73% but should drop to an

indicative preferential 6.5% p.a. once the full benefit of the KfW back-to-back

funding is passed on to us. With an average portfolio yield of 13.0% p.a. and

interest revenue of R17.8 million in 2006, our net interest margin appears tight

but viable, if we continue our efforts to hold down operating expenses.



InterestIncomevsOperatingCosts

Operating as a social venture capital fund, for the second year in a row we

recorded a positive earnings contribution from associated companies of R936,038

(2005: R1.6 million). The revaluation of our investments, R821,846 (2005: Nil)

included in the statement of net assets further strengthens RHLF’s financial position.

HousingImpact

RHLF’s housing impact monitoring reports submitted monthly by participating

intermediaries clearly confirms the development impact and targeting of loans

to the rural working poor. 62% of loans have been granted to borrowers earning

less than R3 500 per month and 49% of all borrowers are women, some, who for

the very first time, have been able to access credit in their own names.

RHLF and its intermediaries heeded the President’s call to the private sector

to assist with the development of the rural nodes. 2,900 loans totalling almost

R8 million have been granted to borrowers in the twelve months under

review primarily through building material suppliers for home extension and

improvements. Households living in the nodes of the three poorest and most

rural provinces, Eastern Cape and KwaZulu-Natal each received 30% of the loans

granted while Limpopo households received 20%.

The testimonials are evidence of the tremendous improvement in the housing and

living environment of rural households. The average loan size to end users for the

period under review is R3,000 (R4,200 since inception). The implementation of

the National Credit Act will pave the way to flexibly respond to the demand for

larger, longer-dated and less expensive loans than the R10,000 over the maximum

36 months under current legislation.


RHLFDevelopmentImpactonISRDS

April 2005 to March 2006 (annualised)

Loans in 13 Rural Nodes and 4 other District Municipalities

Number of loans 2,881

Value of loans disbursed R7.9 m



HumanResources

RHLF is a very small organisation of just 11 full-time staff members (2005: 11).

In this small but highly qualified team of professionals, every individual’s

contribution counts. We can only succeed in our commitment to clients and

stakeholders, if each staff member continues to grow and develop personally

and professionally. During the past year, every single member of our team has

benefited from professional training relevant to their job responsibilities and the

majority of our staff are actively honing their skills by pursuing advanced academic

credentials.

Last year, the entire team committed to an efficiency drive that would further

refine the performance management system and enhance our responsiveness

towards problem-solving and adding value to our retail partner operations.

This initiative is visibly bearing fruit and is borne out in the multitude of new

initiatives that we pursue under our strategic departures mentioned above.

On behalf of the board and our retail partners, I would like to thank all RHLF staff

for their tireless efforts and skilful contribution towards our mission to improve

the living conditions of the rural poor. RHLF’s success is your success.

We are much indebted to the Department of Housing, the owners of RHLF,

under the leadership of Minister of Housing, Ms. Lindiwe Sisulu. We thank our

partners at DBSA and KfW for their unwavering support both as funders and

trusted advisers with a wealth of experience in development finance. We are

committed to delivering sustainable shelter to the rural working poor.


ANNUALFINANCIALSTATEMENTS 31MARCH2006

CONTENTS PAGE

DIRECTORS’RESPONSIBILITYSTATEMENT 19

FORTHEANNUALFINANCIALSTATEMENTS

CORPORATEGOVERNANCESTATEMENT 20-21

BOARDANDSUBCOMMITTEEMEETINGS 22

REPORTOFTHEAUDITCOMMITTEE 23-24

REPORTOFTHEINDEPENDENTAUDITORS 25-26

REPORTOFTHEDIRECTORS 27-28

STATEMENTOFFINANCIALPOSITION 29

STATEMENTOFFINANCIALPERFORMANCE 30

STATEMENTOFNETASSETS 31

CASHFLOwSTATEMENT 32

NOTESTOTHEANNUALFINANCIALSTATEMENTS 33-58

ANNEXURETOTHEANNUALFINANCIALSTATEMENTS 59-61


DIRECTORS’RESPONSIBILITYSTATEMENTFORTHEANNUALFINANCIALSTATEMENTS

The directors are responsible for monitoring and reviewing the preparation, integrity and reliability of the financial statements,

accounting policies and related information.

The financial statements have been prepared in accordance with South African Statements of Generally Accepted Accounting

Practice as applicable to the financial industry. They are based on appropriate accounting policies, consistently applied and

supported by reasonable and prudent judgements and estimates.

The directors are satisfied that the information contained in the financial statements fairly present the results of the operations

for the year and the financial position of the company at year end.

The financial statements set out on pages 19 to 61 were approved by the board of Directors on 26 July 2006 and are signed on

its behalf by:

T Memela-Khambule W van Emmenis

Chairperson Managing Director

CertificationbyCompanySecretary

It is hereby certified in terms of Section 268(G) of the Companies Act 1973, as amended, that for the year ended

31 March 2006, the company has lodged with the Registrar of Companies all such returns as are required of a company

incorporated under s21 of the Companies Act, in terms of this Act and that all such returns are true, correct and up to date.

Andrew Jager

Company Secretary



CORPORATEGOVERNANCESTATEMENT 31MARCH2006

FinancialStatements

It is the directors’ responsibility to prepare annual financial statements that fairly present the state of affairs of the company as at

the end of the financial year and the results of its operations. The external auditors are responsible for independently reviewing

and reporting on these financial statements.

The financial statements set out in this report have been prepared by management in accordance with South African Statements

of Generally Accepted Accounting Practice, and in compliance with the Companies Act, 1973 as amended and the Public Finance

Managements Act, 1 of 1999, as amended. They are based on appropriate accounting policies that are supported by reasonable

and prudent judgements and estimates.

BoardofDirectors

The composition of the board of directors provides for a majority of non-executive directors, including a non-executive

chairperson.

The board of directors retains full and effective control over the company, monitors management and ensures that decisions on

material matters are in the hands of the board.

Details of the non-executive chairperson and directors are provided in the Directors’ report.

All directors have access to the advice and services of the company secretary and are entitled to seek independent professional

advice about the company’s affairs at the company’s expense.

A number of board committees, which are discussed below, have been established by the board; these committees have the

necessary delegated authority for them to deal effectively with the management of the company, and to support the board in

discharging its responsibilities.

AuditCommittee

The external and internal auditors have free access to this committee. The committee meets periodically with management and

the external and internal auditors to review the financial statements and accounting policies, the effectiveness of management

information and other systems of internal control, quarterly financial reports, and to discuss the auditors’ findings. The auditors

are appointed each year based on the recommendations of the audit committee.



CORPORATEGOVERNANCESTATEMENT-continued

CreditCommittee

The credit committee meets regularly to approve the granting of new facilities to clients, to approve changes to existing facilities

and to monitor credit and related risks in terms of the Risk Management Policy.

DevelopmentCommittee

The development committee is charged with the responsibility of managing the implementation of the marketing and promotion

strategy and the approval of matching development grants to qualifying applicants for marketing and operational adjustments

to their businesses.

HumanResources,EthicsandRemunerationCommittee

The human resources, ethics and remuneration committee is charged with the management of human resources, the provision

of guidance and monitoring with regard to ethical issues and the review of employee remuneration.

Management

Management has carried out the following functions:

To fulfil its responsibilities, the management developed and maintained systems of internal control and adequate accounting

records.

InternalAuditing

The internal audit function is an independent appraisal function to examine and evaluate the company’s activities, including the

management of the company. Its objective is to assist members of executive management in the effective discharge of their

responsibilities. The scope of the internal audit function is to review the reliability and integrity of financial and management

information, the systems of internal control, the safeguarding of assets, the efficient management of the company’s resources,

and the effective conduct of its operations. The head of Internal Audit has unrestricted access to the Chair of the Audit

Committee and the Chair of the board.

GoingConcern

The directors have no reason to believe that the business will not be a going concern in the year ahead.



BOARDANDSUBCOMMITTEEMEETINGS



REPORTOFTHEAUDITCOMMITTEE

In terms of Treasury regulations 27.1.7 and 27.1.10 (b) and (c) as required by the Public Finance Management Act of 1999,

as amended by Act 29 of 1999, we are pleased to present our report for the financial year ended 31 March 2006.

AuditCommitteeMembersandAttendance

The audit committee consists of the members listed hereunder and meets not less than two times per annum as per its approved

terms of reference. During the current year, two meetings were held.

NameofMember NumberofMeetingsAttended

K Oliver 3

M Pule 1

P Silinga 2

M Dlabantu * (alternate to D von Broembsen) 0

A representative from the Department of Housing attended all three meetings on behalf of Mr Dlabantu.

AuditCommitteeResponsibility

The audit committee reports that it has adopted appropriate formal terms of reference as its audit committee charter, has

regulated its affairs in compliance with this charter and has discharged all its responsibilities as contained therein.

EffectivenessofInternalControl

The system of internal control was effective for the year under review and no breakdown in the functioning of these controls

occurred.

RiskAreas

The main source of risk identified in the scope for internal audit for the period under review was the migration to a new debtors’

management system. The main sources of risk in the scope for external audit for the period under review were the deferred

tax asset, impairment of advances and future funding of the organisation.

InternalAudit

The internal audit function focused their attention on the internal controls and procedures with regard to the organisations

migration to a new debtors’ management system. The migration was complete and accurate with data integrity remaining intact.



REPORTOFTHEAUDITCOMMITTEE-continued

Adequacy,ReliabilityandAccuracyofFinancialInformation

Financial information provided to management and other users was reliable, accurate and adequate.

LegalCompliance

The organisation has complied with all legislative and regulatory provisions.

EvaluationofAnnualFinancialStatements

The Audit Committee has:

• Reviewed and discussed the audited annual financial statements included in the annual report with the external

auditor and the accounting authority.

• Reviewed the external auditors’ management letter and management’s response thereto.

The Audit Committee concurs with and accepts the external auditors’ conclusions on the company’s annual financial statements

be accepted and read together with the report of the external auditors. The Audit Committee notes the external auditors’

conclusions on the group annual financial statements and refers users to the directors’ report, note 24 and Annexure 1 with

regard to the technical nature of the qualification of these financial statements.

Chairperson of the Audit Committee

Date 26 July 2006



REPORTOFTHEINDEPENDENTAUDITORSTOTHEMINISTEROFHOUSINGOFTHERURALHOUSINGLOANFUND31MARCH2006

We have audited the annual financial statements of the Rural Housing Loan Fund (RHLF) as of 31 March 2006 set out on

pages 27 to 61 for the year then ended. These financial statements are the responsibility of the RHLF’s accounting authority.

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

The audit was also planned and performed to obtain reasonable assurance that our duties in terms of section 25 and 28 of

the Public Audit Act, 25 of 2004, have been complied with. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that

our audit provides a reasonable basis for our opinion.

UnqualifiedOpinion-Company

In our opinion, the financial statements present fairly in all material respects the financial position of the company as of

31 March 2006, and of the results of its operations and its cash flows for the year then ended in accordance with South African

Statements of Generally Accepted Accounting Practice and in the manner required by the Companies Act and the Public Finance

Management Act in South Africa.

Qualification-Group

RHLF has not consolidated Norufin Housing (Pty) Ltd in which the company holds 49% of the ordinary share capital in the

group annual financial statements. In accordance with AC 132 Consolidated and Separate Financial Statements, an entity takes

into account any options convertible into ordinary shares that are currently exercisable in determining whether control exists.

At 31 March 2006, RHLF owned redeemable preference shares that are convertible into ordinary shares at the option of RHLF

and are currently exercisable, as such Norufin would need to have been consolidated. In our opinion, the non-consolidation of

Norufin is not in accordance with AC 132 Consolidated and Separate Financial Statements. The financial effect on the balance

sheet and income statement of consolidating Norufin has been disclosed in note 24 to the annual financial statements.

AdverseOpinion-Group

In our opinion, because of the effects of the matters discussed in the preceding paragraph, the group financial statements do not

present fairly the financial position of RHLF as of 31 March 2006, and of the results of its operations and its cash flows for the

year then ended in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner

required by the Companies Act and the Public Finance Management Act in South Africa.



Without further qualifying our opinion expressed above attention is drawn to the following matter:

Section 55(1)(b) of the PFMA requires that the accounting authority prepares annual financial statements that are in

compliance with SA Statements of GAAP. As noted above in the qualification paragraph, management of RHLF has taken

a decision not to comply with SA Statements of GAAP, AC 132 Consolidated and Separate Financial Statements and

consequently AC 101 Presentation of Financial Statements.

In accordance with our responsibilities in terms of Section 44(2) and 44(3) of the Auditing Profession Act, we report that we

have identified non-compliance with Section 55(1)(b) of the Public Finance Management Act as noted above. This constitutes

a reportable irregularity in terms of the Auditing Profession Act, and we have reported such matters to the Independent

Regulatory board for Auditors.

Ernst &Young

Registered Auditors and Accountants

Johannesburg

26 July 2006




REPORTOFTHEDIRECTORS 31MARCH2006

The directors have pleasure in presenting their report on the activities of the company for the year ended 31 March 2006.

NatureofActivities

The Rural Housing Loan Fund was incorporated in terms of Section 21 of the Companies Act on 19 August 1996, as an

association not for gain.

The company continues to act as a wholesale lender of funds to retail lending intermediaries which provide finance to low

income persons living in rural areas, for purposes of providing or improving housing. The funds may also be applied to making

Market Development grants designed to facilitate preparatory studies by intermediary institutions for developing new loan

products or delivery mechanisms to fund rural housing.

ResultsofOperations

The financial results of the company for the year, and its financial position at year-end are set out on pages 29 to 61.

During the year under review, loan and equity disbursements totalling R81,549,000 (2005: R69,145,515) were made, whilst no

payments were made available in terms of the Market Development Fund Programme (2005: R100,000). At year-end, client

facilities amounting to R42,319,146 (2005: R55,980,051) had been approved, but not yet disbursed.

Directors’Emoluments Directors’ Fees Basic Salary Short Term Medical Aid Provident Fund Benefits Contributions ContributionsExecutiveW van Emmenis - 611,112 143,839 41,901 114,777NonExecutivesK Oliver 60,000M Pule 16,000T Memela-Khambule 4,000P Silinga 24,000N Mjoli-Mncube 24,000J H de V Botha 36,000M Hathorn 48,000 212,000 611,112 143,839 41,901 114,777Keymanagementpersonnel - 916,358 188,756 40,392 144,487 212,000 1,527,470 332,595 82,293 259,264The following non-executive directors’ fees were paid to the directors’ employers:

M Hathorn R48,000J H de V Botha R32,000

ControllingEntity

The membership of the company consists of nominees of the Department of Housing of the South African Government.



Non-consolidationofDeemedSubsidiaryinGroupAnnualFinancialStatements

The directors have not consolidated Norufin Housing (Pty) Ltd. This associate company has been deemed to be a subsidiary per

AC132 (IAS27) as a result of preference dividends in arrears. The directors have concluded that compliance with this accounting

statement would not result in a fair presentation of the entity’s financial position, financial performance and cash flows.

The company has accordingly followed the requirement of paragraph 17 of AC101 (IAS1).

A detailed explanation of this omission to consolidate is included per Annexure 1 on page 60. The effect of not consolidating is

fully disclosed per Note 24 of the annual financial statements.

The directors note the external auditors unqualified opinion of the company annual financial statements. The directors do not,

however, agree with the qualification of the group annual financial statements and continue to assert that the presented group

annual financial statements are a true and fair representation of the financial position and performance of the entity.

AdditionalFunding

In anticipation of receiving the soft loan funding from KfW via DBSA, the company concluded a loan facility of R50 million with

the DBSA for a term not exceeding 12 months and drew down these funds on 31 March 2006. This loan will be rolled into the

soft loan once KfW makes payment to DBSA. The new facility was necessary as a result of delays in the payment of the soft loan

from KfW to DBSA. The previous bridging facility of R25 million from DBSA was repaid on 30 March 2006.

The company also has use of an Accompanying Measure granted in terms of a bilateral agreement between the governments of

South Africa and Germany. The initial allocation of €1.533 million and an additional allocation of €0.500 million, has been utilised

for research, market development and technical advice, to the extent that at balance sheet date €0.965 million remains.

DirectorsandSecretary

The directors in office as at the date of this report are:

Chair DateAppointed DateResigned

Ms N Mjoli-Mncube 19 August 1996 16 November 2005

Ms T Memela-Khambule 27 May 1998

ExecutiveDirector

Mr W J van Emmenis (Managing Director) 9 October 2001

Non-executiveDirectors

Mr M Hathorn 27 May 1998

Mr M Pule 27 May 1998

Mr M Silinga 27 May 1998

Mr D von Broembsen 27 May 1998 23 March 2006

Mr K Oliver 23 February 2000

Mr M Dlabantu (alternate) 22 October 2001 14 June 2006

Mr J H de V Botha 24 February 2004

CompanySecretary

A J Jager 13 March 2002

Businessaddress:

2nd Floor,

Liberty Gardens

10 South Boulevard

BRUMA

2198

Postaladdress:

PO Box 645

BRUMA

2026


RURALHOUSINGLOANFUND(AssociationnotforgainincorporatedunderSection21)

STATEMENTOFFINANCIALPOSITIONASAT31MARCH2006

Group Group Company Company

NOTES 2006 2005 2006 2005 R R R R

ASSETS

Non-currentassets 110,888,844 96,828,163 107,822,043 95,800,376

Advances 3 94,916,195 83,165,176 94,916,195 83,165,176Investments in associates 4 3,957,500 1,828,687 890,699 800,900Property, plant and equipment 5 482,799 665,463 482,799 665,463Intangible assets 5 162,333 277,935 162,333 277,935Available for sale financial assets 6 1,171,861 350,015 1,171,861 350,015Held to maturity financial assets 7 7,460 149,985 7,460 149,985Deferred tax asset 15.3 10,190,696 10,390,902 10,190,696 10,390,902

Currentassets 77,370,968 37,202,967 77,370,968 37,202,967

Other receivables - 92,765 - 92,765Prepayments 9,938 64,699 9,938 64,699Taxation receivable 401,942 401,942 401,942 401,942Cash and cash equivalents 8 76,959,088 36,643,561 76,959,088 36,643,561

TOTALASSETS 188,259,812 134,031,130 185,193,011 133,003,343

EQUITYANDLIABILITIES

Capitalandreserves 135,484,651 132,678,888 132,417,851 131,651,101

Grant capital 2 154,762,590 154,762,590 154,762,590 154,762,590 Accumulated deficit (19,980,617) (22,083,702) (23,047,418) (23,111,489)Other reserves 702,678 - 702,678 -

Currentliabilities 52,775,161 1,352,242 52,775,161 1,352,242

Short term liabilities 9 50,011,986 - 50,011,986 - Trade and other payables 10 2,763,174 1,352,242 2,763,174 1,352,242

TOTALEQUITYANDLIABILITIES 188,259,812 134,031,130 185,193,011 133,003,343



STATEMENTOFFINANCIALPERFORMANCEFORTHEYEARENDED31MARCH2006

Group Group Company Company 2006 2005 2006 2005 NOTES R R R R

REVENUE 11 17,725,030 14,307,612 17,725,030 14,307,612

Finance costs 12 (1,100,496) - (1,100,496) -Net impairment of advances 14 (7,118,580) (8,224,649) (7,118,580) (8,224,649) INTERESTMARGINNETIMPAIRMENTS 9,505,955 6,082,963 9,505,955 6,082,963 Non interest income 14 830,450 1,048,065 (272,526) 1,507,864 SURPLUSFROMOPERATIONS 10,336,404 7,131,028 9,233,429 7,590,827 Operating expenses (9,088,319) (9,545,618) (9,088,319) (9,545,618)Depreciation and amortisation 14 (319,984) (278,935) (319,984) (278,935)Employee costs 14 (4,642,728) (3,807,349) (4,642,728) (3,807,349)General administration costs (4,125,607) (5,459,334) (4,125,607) (5,459,334)

NETSURPLUS/(DEFICIT)FROMOPERATIONS 1,248,086 (2,414,590) 145,110 (1,954,791)

Share of earnings from associate companies 4 936,038 1,574,667 - -

NETSURPLUS/(DEFICIT)BEFORETAXATION 2,184,124 (839,923) 145,110 (1,954,791)

Taxation 15 (81,039) 568,311 (81,039) 568,311

SURPLUS/(DEFICIT)FORTHEYEAR 2,103,085 (271,612) 64,071 1,386,480



Annual Report l page 3�


RURALHOUSINGLOANFUNDSTATEMENTOFNETASSETSFORTHEYEARENDED31MARCH2006

Group Company

Grant Accumulated Other Total Grant Accumulated Other Total deficit reserves capital deficit reserves R R R R R R R R

Balance at 31 March 2004 154,762,590 (21,812,090) - 132,950,500 154,762,590 (21,725,009) - 133,037,581Deficit for the year - (271,612) - (271,612) - (1,686,480) - (1,686,480)

Balance at 31 March 2005 154,762,590 (22,083,702) - 132,678,888 154,762,590 (23,411,489) - 131,351,101

Surplus for the year - 2,103,085 2,103,085 - 64,071 - 64,071

Revaluation of available for sale assets - - 821,846 821,846 - - 821,846 821,846

Deferred tax on revaluation of assets - - (119,168) (119,168) - - (119,168) (119,168)

Balance at31 March 2006 154,762,590 (19,980,617) 702,678 135,484,651 154,762,590 (23,347,418) 702,678 132,117,850



CASHFLOwSTATEMENTFORTHEYEARENDED31MARCH2006

Group Group Company Company 2006 2005 2006 2005 NOTES R R R R

CASHFLOwSFROMOPERATINGACTIVITIES (8,575,894) (34,587,716) (8,575,894) (34,587,716)

Cash utilised in operations 17 (11,208,092) (38,876,710) (11,208,092) (38,876,710)Loan advance interest received 14,896,548 10,018,618 14,896,548 10,018,618 Cash paid to employees and suppliers (7,227,304) (9,000,488) (7,227,304) (9,000,488)Net loan advances disbursed (18,877,336) (39,894,840) (18,877,336) (39,894,840)Investment interest received 2,632,198 4,288,994 2,632,198 4,288,994 Taxation paid 18 - - - -

CASHFLOwSFROMINVESTINGACTIVITIES (20,069) (321,943) (20,069) (321,943)

Acquisition of property, plant and equipment 5 (27,535) (438,325) (27,535) (438,325)Acquisition of intangible assets (4,560) (244,464) (4,560) (244,464)Proceeds on disposal of property, plant and equipment 12,026 260,846 12,026 260,846Acquisition of available for sale investments - (500,000) - (500,000) Proceeds on disposal of available for sale investments - 600,000 - 600,000

CASHFLOwSFROMFINANCINGACTIVITIES 48,911,490 - 48,911,490 -

Proceeds from borrowings 75,000,000 - 75,000,000 -Repayment of borrowings (25,000,000) - (25,000,000) -Interest paid (1,088,510) - (1,088,510) -

Netincrease/(decrease)incashandcashequivalents 40,315,527 (34,909,659) 40,315,527 (34,909,659)

Cash and cash equivalents at beginning of period 36,643,561 71,553,220 36,643,561 71,553,220 Cashandcashequivalentsatendofperiod 8 76,959,088 36,643,561 76,959,088 36,643,561




1.AccountingPolicies

The principle accounting policies adopted in the preparation of these financial statements are set out below:

1.1.Basisofpreparation

The financial statements have been prepared in accordance with South African Statements of General Accepted Accounting

Practice, the going concern principle, and using the historical cost basis, except where otherwise indicated.

The accounting policies adopted and applied are consistent, in all material respects, with those of the previous financial year.

The financial statements have been prepared in Rands.

1.2.Financialinstruments

General

Financial instruments are contracts that give rise to both a financial asset to one entity and a financial liability or equity

instrument to another.

Financial instruments carried on the balance sheet include cash and cash equivalents, advances, other receivables and trade and

other payables.

Financial instruments are recognised on the balance sheet when the group becomes party to the contractual provisions of the

instrument.

The ‘regular way’ purchase or sale of financial assets is recognised using trade accounting date.

Financial assets are derecognised when, and only when, the group loses control of the contractual rights that comprise the

financial asset through realisation, expiration or surrender. Financial liabilities are derecognised when, and only when, the

liability is extinguished, either through settlement, cancellation or expiration. Gains or losses on derecognition are recognised

as part of net profit at the date of derecognition.

Cashandcashequivalents

Cash and cash equivalents consist of cash on hand and in banks. Cash and cash equivalents are initially and subsequent to initial

recognition measured at its fair value.

Otherreceivables

Other receivables are classified as originated by the company. These are initially measured at the fair value of the cash given to originate

the receivable, including any transaction costs. Other receivables are subsequent to initial recognition measured at amortised cost.

NOTESTOTHEANNUALFINANCIALSTATEMENTSFORTHEYEARENDED31MARCH2006



Financialliabilities

Significant financial liabilities include trade and other payables. These are initially measured at the fair value of the cash received to

originate the receivable, including any transaction costs. Subsequent to initial recognition these are measured at amortised cost.

Advances

Originatedadvances

The company classifies the advances as originated where it provides money directly to a borrower or to an intermediary

at drawdown.

Originated advances are initially recognised at the fair value of the cash given to originate the advance, including any transaction

costs, and subsequently measured at amortised cost using the effective interest rate method. Fees relating to advance originations

are deferred and amortised to interest income over the estimated duration of the advance.

Preferenceshares

Advances made in the form of preference shares are recognised as held to maturity financial assets. They are initially recognised

at the fair value of the cash given to originate the advance and thereafter are carried at amortised cost less allowances for

impairment. The carrying amount of such advances is adjusted for the premium receivable on redemption over the period to

redemption date.

Availableforsaleinvestments

All investments are initially recognised at fair value of the consideration given and including acquisition charges associated with

the investment. After initial recognition, investments, which are classified as available-for-sale, are measured at fair value. Gains

or losses on available-for-sale investments are recognised on the statement of net assets.

For investments where there is no quoted market price, fair value is determined by applying recognised valuation techniques.

Standard methods applied include reference to the discounted expected cash flows of the underlying net asset base of the

investment and recent transactional price data of trades within the instrument.

1.3.Impairment

General

A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount.

Impairmentofadvancesandpreferenceshareadvances

Advances are stated net of specific impairments. An impairment of advances is made if there is objective evidence that the

company will be unable to collect all amounts due on a claim according to the original contractual terms. Advances are subjected

to regular evaluations that take cognisance of, inter alia, past experience, the customer’s overall risk profile and payment record

and the realisable value of any collateral.




Impairment is measured and allowances for credit losses are established for the difference between the carrying amount and

advances and its estimated recoverable amount. The estimated recoverable amount is the present value of expected future cash

flows excluding those which may result from restructuring, liquidation or collateral held.

All impaired advances are reviewed on a regular basis and any changes to the amount and timing of the expected future cash flows

compared with previous estimates can result in a change to the charge for impairment of advances in the income statement.

Impairmentofotherfinancialassetscarriedatamortisedcost

The company calculates the impairment loss for assets carried at amortised cost as the difference between the asset’s carrying

amount and the present value of expected future cash flows discounted at the financial instrument’s original effective interest

rate. Impairment loss is recognised in the income statement.

Impairmentofotherassets

The carrying amount of the company’s assets are reviewed at each balance sheet date to determine whether there is any

indication of impairment. An impairment loss is recognised in the income statement whenever the carrying amount of an asset

exceeds its recoverable amount.

A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates

used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been

determined (net of depreciation) had no impairment loss been recognised in prior years.

1.4.Investmentinassociates

Group

An associate is an entity in which the company has significant influence and which is neither a subsidiary nor a joint venture.

Significant influence is normally evidenced by ownership of 20% or more of the company’s voting rights. The financial statements

of the associate are used by the company to apply the equity method. If the most recent available financial statements are for

an accounting period which ended more than six months prior to the company’s year-end, then the most recently available

management accounting results have been brought into account.

The investments in associates are carried in the balance sheet at cost plus post acquisition changes in the company’s share of

net assets of the associates, less any impairment value. The income statement reflects the share of the results of operations of

the associates.

Where the company’s share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at

nil. Additional losses are only recognised to the extent that the company has incurred obligations or made payments on behalf

of the associate.




Company

The investment in associates in the separate financial statements are carried at cost less any associated impairment.

1.5.Goodwillandnegativegoodwill

Goodwill is an excess of the cost of an acquisition over the entity’s interest in the fair value of the net identifiable assets and

liabilities acquired.

Goodwill is carried at cost, less accumulated amortisation and accumulated impairment losses. In accordance with AC140, the

amortisation of goodwill ceased with effect from 1 April 2004. Previously goodwill was amortised using the straight line method

over the estimated useful life. The carrying amount of goodwill is reviewed annually for indications of impairment or changes in

estimated future benefits. A writedown is made if the carrying amount exceeds the recoverable amount.


Negative goodwill arising on an acquisition represents any excess of the fair value of the group’s share of the net identifiable

assets acquired over the cost of the acquisition. To the extent that negative goodwill relates to an expectation of future losses

and expenses that are identified in the plan of acquisition and can be measured reliably, but which do not represent identifiable

liabilities at the date of acquisition, is recognised in the income statement when the future losses and expenses are recognised.

Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets acquired, is recognised in the income

statement over the weighted average useful life of those assets. The balance of negative goodwill in excess of the fair values of

the non-monetary assets acquired is recognised immediately in the income statement.

1.6.Property,plantandequipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value.

Depreciation is calculated on historical cost using the straight-line basis over the expected economic life, using the following

depreciation rates:

Computer hardware 33.33% Leasehold improvements 33.33%

Furniture and fittings 16.67% Motor vehicles 20.00%

The residual values and useful lives of the assets are reassessed annually for any changes. The impact thereof is recognised in

the income statement.

The carrying values of plant and equipment are reviewed for impairment either annually, or when events or changes in

circumstances indicate that the carrying value may not be recoverable (whichever is earlier). If any such indications exist and

where the carrying values exceed the estimated recoverable amount, the assets are written down to the recoverable amount.

The recoverable amount is the greater of the net selling price and value in use. In assessing the value in use, the estimated future

cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the

time value of money and the risks specific to the assets. Impairment losses are recognised in the income statement.




An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to

arise from the continued use of the asset. Any gain or loss on derecognition of the asset (calculated as the difference between

the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is

derecognised.

1.7.Intangibleassets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a

business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost

less any accumulated amortisation and any accumulated impairment losses.

Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is charged

against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be definite or

indefinite. Intangible assets with finite lives are amortised over the use for economic life and assessed for impairment whenever

there is an indication that the intangible assets may be impaired. The amortisation period and the amortisation method for an

intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in the expected useful life reflect

the expected pattern of consumption of future economic benefits embodied in the asset and are accounted for by changing the

amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on

intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of

the intangible assets.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating

unit level. Such intangibles are not amortised. The useful life of intangible assets with an indefinite life are reviewed annually to

determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from

indefinite to finite is made on a prospective basis.

1.8.Provisions

Provisions are recognised when the company has a present obligation, either legal or constructive, as a result of a past event,

for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a

reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are

determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time

value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in provision

due to the passage of time is recognised as a finance cost.



1.9.Revenuerecognition

Revenue comprises interest received on advances and investment income. Revenue is recognised to the extent that it is probable

that the economic benefits will flow to the company and the revenue can be reliably measured.

The following specific criteria must also be made before revenue is recognised:

- Interest is recognised on the time proportion basis, taking account of the principal outstanding and the effective rate over

the period to maturity. In terms of AC133/(IAS39), interest is also accrued in respect of impaired advances, based on the

original effective interest rate used to determine the recoverable amount.

- Dividends are recognised when the right to receive payment is established.

The company’s turnover relates mainly to its lending and investing activities, and comprises interest received

from funds invested.

1.10.Foreigncurrencytransactions

Transactions in foreign currencies are recorded at the rate of exchange ruling at the transaction date. Monetary assets and

liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Gains and

losses arising on translation are credited to or charged against income. The functional currency and presentation currency of

the company is the Rand (R).

1.11.Leases

The company classifies leases of assets where the lessor effectively retains the risks and rewards associated with ownership as

operating leases. Operating lease payments are recognised as expenses in the income statement on a straight line basis over the

lease term. Minimal rentals due after year end are reflected under commitments.

1.12.Tax

Currenttaxation

The charge for current tax is based on the results as adjusted for items which are not taxable or disallowed. It is calculated using

tax rates that have been enacted at the balance sheet date.

Deferredtaxation

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the

tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.





Deferred income tax liabilities are recognised for all taxable temporary differences:

• the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the

transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint

ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that

the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and

unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary

differences, and the carry-forward of unused tax assets and unused tax losses can be utilised:

• except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition

of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither

the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint

ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse

in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that

it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset

to be utilised.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset

is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the

balance sheet date.

Income tax relating to items recognised directly in equity are recognised in equity and not in the income statement.

1.13.Irregular,fruitlessandwastefulexpenditure

Irregular expenditure means expenditure incurred in contravention of, or not in accordance with, a requirement of any applicable

legislation.

Fruitless and wasteful expenditure means expenditure that was made in vain and would have been avoided had reasonable care

been exercised.

All irregular and fruitless and wasteful expenditure is charged against income in the period in which they are incurred.

No instances of fruitless wasteful expenditure have occurred during the period.



1.14.Retirementbenefits

Contributions to the defined contribution fund are charged as an expense in the period in which they are incurred.

1.15.Relatedpartytransactions

All related party transactions are at arm’s length and in the ordinary course of business.

1.16.Newaccountingstandards

The following applicable accounting standards that have been issued or amended will require future implementation.

These accounting standards are:

IAS1/AC101 Presentation of Financial Statements - Capital disclosures.

There will be no financial impact on future financial statements but will require additional disclosures on the entity’s

capital to assist the users in evaluating the objectives, policies and processes for managing capital.

IFRS7/AC144 Financial Instruments: Disclosures.

There will be no financial impact on future financial statements but additional disclosure is required in respect of risks

relating to certain financial instruments.

IFRS9/AC442 Reassessment of embedded derivatives.

The standard will be considered on future contracts that the company enters into.

IAS39/AC133- Financial instruments - Cash flow hedge Accounting of Forecast Intragroup Transactions.


IAS39/AC133- Financial instruments - The fair value option.





Group Group Company Company 2006 2005 2006 2005 R R R R

2.GrantCapital 154,762,590 154,762,590 154,762,590 154,762,590 The agreement with the Kreditanstalt für Wiederaufbau (KfW) provides for the company to use the financial contributions exclusively for purposes qualifying in terms of the agreement. Upon utilisation of such funds for payment qualifying under the financial agreement, a transfer is made to Grant Capital.



3.Advances

3.1.Grossadvances

Opening balance 96,492,524 56,799,785 96,492,524 56,799,785 Disbursements 81,549,000 68,600,000 81,549,000 68,600,000 Interest accrued 14,896,548 10,018,618 14,896,548 10,018,618 Reinstated advances - 797,899 - 797,899 Receipts (77,568,213) (38,723,778) (77,568,213) (38,723,778)Amounts written off - (1,000,000) - (1,000,000)Closing balance 115,369,859 96,492,524 115,369,859 96,492,524

Less: Impairment provision Opening balance 13,327,348 5,000,936 13,327,348 5,000,936 Impairments raised 7,126,316 9,326,412 7,126,316 9,326,412 Impairments utilised - (1,000,000) - (1,000,000)Closing balance 20,453,664 13,327,348 20,453,664 13,327,348

Netadvances 94,916,195 83,165,176 94,916,195 83,165,176

3.2.Incomestatementcharges

Loanadvances

Impairments raised 7,126,316 9,326,412 7,126,316 9,326,412 Bad debts recovered (7,737) (304,720) (7,737) (304,720)Reinstated advances - (797,043) - (797,043) 7,118,579 8,224,649 7,118,579 8,224,649

3.3.Maturityanalysisofloanadvances GroupandCompany Within 1 year 1 - 2 years Beyond 2 years TotalRepayment profile 79,388,704 31,112,150 4,869,005 115,369,859

3.4.Termsandconditionsofadvances

Loan advances are made to clients to fund end-user loans. The repayment terms of loan advances are linked to the repayment terms of the underlying end user loans. Interest rates are determined by the BESA yield curve for the same maturity plus a risk margin.




Group

Lendcor Norufin Indlu ProteaFSG Total (Pty)Ltd Housing Finance (Pty)Ltd* (Pty)Ltd (Pty)Ltd R R R R R

4.InvestmentinAssociates

4.1.Carryingamountofassociates

2006

Carryingamountanalysis Carrying amount at the beginning of the year 1,601,898 - 226,789 - 1,828,687Share of earnings from associates 593,780 120,833 221,425 - 936,038 Impairment of investment - 1,640,989 (448,214) - 1,192,775 Carryingamountattheendoftheyear 2,195,678 1,761,822 - - 3,957,500

Shareofaggregatepostacquisitionreserves/(deficits)ofassociates:2006 1,694,778 (208,178) 148,214 (40,578) 1,594,236

Summarisedbalancesheetasat31March2006

Current assets 10,710,204 6,928,865 370,860 - 18,009,929Non-current assets 322,339 4,636,152 4,817,705 - 9,776,196Current liabilities (7,005,981) (6,806,120) (10,042) - (13,822,143)Non-current liabilities (2,389,048) (4,369,098) (4,523,424) - (11,281,570)Netassetvalue 1,637,514 389,799 655,099 - 2,682,412

The reversal of the Norufin Housing (Pty) Ltd impairment arose as a result of that company reporting substantial profits in the current year.

2005

Carrying amount at the beginning of the year - - 213,441 49,750 263,191 Disposal of investment - - - (4,937) (4,937) Refund received on investment - - (4,234) (4,234) Share of earnings from associates 1,601,898 - 13,348 (40,579) 1,574,667 Carryingamountattheendoftheyear 1,601,898 - 226,789 - 1,828,687

Summarisedbalancesheetasat31March2005

Current assets 10,265,022 7,933,943 217,174 - 18,416,139Non-current assets 262,053 2,624,742 2,528,578 - 5,415,373Current liabilities (5,795,357) (8,581,878) (30,154) - (14,407,389)Non-current liabilities (3,896,159) (3,113,645) (2,275,840) - (9,285,644)Netassetvalue 835,559 (1,136,838) 439,758 - 138,479

Shareofaggregatepostacquisitionreserves/(deficits)ofassociates:2005 1,100,998 (1,970,000) (73,211) (40,578) (982,791)

* Protea FSG (Pty) Ltd’s summarised financial information with regard to assets and liabilities has not been disclosed as it is not considered sufficiently reliable.



Group Lendcor Norufin Indlu ProteaFSG Total (Pty)Ltd Housing Finance (Pty)Ltd (Pty)Ltd (Pty)Ltd R R R R R

4.InvestmentinAssociates-continued

4.2.Grosscarryingamountofadvancesmadetoassociates

2006Interestbearingadvances 21,461,878 22,725,611 13,130,710 22,394,682 79,712,881

2005Interestbearingadvances 17,042,826 22,886,713 6,919,007 18,042,826 64,891,372

4.3.Listofsignificantunlistedassociates

2006GroupCarrying amount 2,195,678 1,761,822 - - 3,957,500 Effective holding 39.9% 49.0% 30.0% 41.10% - Number of shares held 1,000 1,970,000 300,000 41,100 - Directors’ valuation 2,195,678 1,761,822 - - 3,957,500 CompanyCost 500,900 1,970,000 300,000 41,100 2,812,000Less: Impairment - (1,580,201) (300,000) (41,100) (1,921,301) Carrying amount 500,900 389,799 - - 890,699 Directors’ valuation 500,900 389,799 - - 890,699

2005Group Carrying amount 1,601,898 - 226,789 - 1,828,687 Effective holding 49.9% 49.0% 30.0% 41.10% - Number of shares held 1,000 1,970,000 300,000 41,100 - Directors’ valuation 1,601,898 - 226,789 - 1,828,687 CompanyCost 500,900 1,970,000 300,000 41,100 2,812,000 Less: Impairment - (1,970,000) - (41,100) (2,011,100) Carrying amount 500,900 - 300,000 - 800,900 Directors’ valuation 500,900 - 300,000 - 800,900

The nature of the business of all associates is to provide finance to the low income market in respect of low cost housing. Indlu Finance (Pty) Ltd has an August year-end. All other associates have a February year-end.

The results of the companies were accounted for until their respective year-ends except for Indlu Finance (Pty) Ltdwhere management accounts were utilised for 6 months to report their current position.





5.Property,PlantEquipmentandIntangibleAssets


Group

Cost Accumulated 2006 2005 Depreciation Carrying Carrying Value Value R R R R

Computer hardware 221,556 97,246 124,310 192,508Office equipment 22,759 6,896 15,863 12,856Furniture and fittings 533,757 310,488 223,269 307,433Leasehold improvements 167,691 167,691 - -Motor vehicles 166,545 47,188 119,357 52,666 1,112,308 629,509 482,799 665,463

MOVEMENT Computer Office Furniture Leasehold Motor Total Hardware Equipment &Fittings Improvements Vehicles

31March2006 R R R R R R

Opening balance 192,508 12,856 307,433 - 152,666 665,463 Transfer - - - - - -Additions 16,296 6,359 4,880 - - 27,535 Disposals (10,377) - - - - (10,377)Impairment - - - - - - Depreciation (74,117) (3,352) (89,044) - (33,309) (199,822) 124,310 15,863 223,269 - 119,357 482,799

31March2005 R R R R R ROpening balance 47,498 3,611 377,011 51,239 - 479,359 Additions 197,627 11,200 62,953 - 166,545 438,325 Disposals (16,935) - (33,690) - - (50,625Impairment - - - - - -Depreciation (35,682) (1,955) (98,841) (51,239) 13,879) (201,596) 192,508 12,856 307,433 - 152,666 665,463




5.Property,PlantEquipmentandIntangibleAssets-continued


Group Cost Accumulated 2006 2005 Amortisation Carrying Carrying Value Value R R R R

Computer software 463,261 300,928 162,333 91,179Work in progress - - - 186,756 463,261 300,928 162,333 277,935

MOVEMENT Computer work Total Software inprogress31March2006 R R R

Opening balance 91,179 186,756 277,935 Transfer 186,756 (186,756) -Additions 4,560 - 4,560 Disposals - - - Impairment - - - Amortisation (120,162) - (120,162) 162,333 - 162,333

31March2005

Opening balance 110,810 - 110,810 Additions 57,708 186,756 244,464 Disposals - - -Impairment - - - Amortisation (77,339) - (77,339) 91,179 186,756 277,935





Company

Cost Accumulated 2006 2005 Depreciation Carrying Carrying Value Value R R R R

Computer hardware 221,556 97,246 124,310 192,508Office equipment 22,759 6,896 15,863 12,856Furniture and fittings 533,757 310,488 223,269 307,433Leasehold improvements 167,691 167,691 - -Motor vehicles 166,545 47,188 119,357 152,666 1,112,308 629,509 482,799 665,463

MOVEMENT Computer Office Furniture Leasehold Motor Total Hardware Equipment &Fittings Improvements Vehicles31March2006 R R R R R R

Opening balance 192,508 12,856 307,433 - 152,666 665,463Transfer - - - - - -Additions 16,296 6,359 4,880 - - 27,535Disposals (10,377) - - - - (10,377)Impairment - - - - - - Depreciation (74,117) (3,352) (89,044) - (33,309) (199,822) 124,310 15,863 223,269 - 119,357 482,799

31March2005 R R R R R ROpening balance 47,498 3,611 377,011 51,239 - 479,359Additions 197,627 11,200 62,953 - 166,545 438,325Disposals (16,935) - (33,690) - - (50,625Impairment - - - - - -Depreciation (35,682) (1,955) (98,841) (51,239) 13,879) (201,596) 192,508 12,856 307,433 - 152,666 665,463






Company

Cost Accumulated 2006 2005 Amortisation Carrying Carrying Value Value R R R R

Computer software 463,261 300,928 162,333 91,179Work in progress - - - 186,756 463,261 300,928 162,333 277,935

MOVEMENT Computer work Total Software inprogress31March2006 R R R

Opening balance 91,179 186,756 277,935Transfer 186,756 (186,756) -Additions 4,560 - 4,560Disposals - - -Impairment - - - Amortisation (120,162) - (120,162) 162,333 - 162,333

31March2005

Opening balance 110,810 - 110,810Additions 57,708 186,756 244,464Disposals - - -Impairment - - -Amortisation (77,339) - (77,339) 91,179 186,756 277,935





6.AvailableforSaleFinancialAssets

Unlisted investments Carrying amount 1,171,861 350,015 1,171,861 350,015

2006 Classof Number Effective Carrying Directors’ Carrying Directors’Name Investment ofshares Holding Amount Valuation Amount ValuationBayport FinancialServices (Pty) Ltd Ordinary 1500 15.79% 442,380 442,380 442,380 442,380 Izwe Loans (Pty) Ltd Ordinary 15 15.00% 729,481 729,481 729,481 729,481 1,171,861 1,171,861 1,171,861 1,171,861

2005 Classof Number Effective Carrying Directors’ Carrying Directors’Name Investment ofshares Holding Amount Valuation Amount ValuationBayport Financial Services (Pty) Ltd Ordinary 1500 15.79% 350,000 350,000 350,000 350,000Izwe Loans (Pty) Ltd Ordinary 15 15.00% 15 15 15 15 350,015 350,015 350,015 350,015

The fair value for Bayport Financial Services (Pty) Ltd was determined by reference to the most recent sale price in this instrument. The fair value for Izwe Loans (Pty) Ltd was determined by utilising a discounted cash flow valuation technique. Forecasts were adjusted to take into account recent performance history, a discount rate of 35% was utilised and cash flows were estimated for 5 years into the future. The nature of the entity’s investments are of a venture capital nature and typically the returns required by similar funds are between 30% and 40% per annum.

7.HeldtoMaturityFinancialAssets

Preference sharesOpening balance 2,838,000 2,742,000 2,838,000 2,742,000Preference dividends accrued 196,284 - 196,284 -Share premium accrued 42,000 96,000 42,000 96,000 Closingbalance 3,076,284 2,838,000 3,076,284 2,838,000

Shareholders’ loans 149,985 149,985 149,985 149,985

Grossheldtomaturityassets 3,226,269 2,987,985 3,226,269 2,987,985 Less: Impairment provision Opening balance 2,838,000 2,742,000 2,838,000 2,742,000 Impairments raised 380,809 96,000 380,809 96,000 Impairments utilised - - - - Closingbalance 3,218,809 2,838,000 3,218,809 2,838,000

Netheldtomaturityfinancialassets 7,460 149,985 7,460 149,985

The shareholder’s loan was reclassified from fair value to amortised cost as the intention is to hold this investment to maturity.




7.HeldtoMaturityFinancialAssets-continued

7.1.Termsandconditionsofpreferenceshares

Preference share advances are made in instruments that are cumulative, convertible and redeemable. The dividend is linked to 75% of the prevailing prime bank interest rate from time to time and redemption commences after five years from investment at a premium of 20%. The preference shares include an option exercisable by the holder to convert to ordinary shares in the event of a default by the issuer. The current redemption date is 28 February 2007, however, this has been renegotiated and will only commence in March 2011.

Estimatedtimingoffuturecashreceipts

RPaymentdate EstimatedcashflowSep 06 / Mar 07 196,284Sep 07 / Mar 08 196,284Sep 08 / Mar 09 196,284Sep 09 / Mar 10 196,284Sep 10 / Mar 11 916,284Sep 11 / Mar 12 867,213Sep 12 / Mar 13 818,142Sep 13 / Mar 14 769,071

7.2.Termsandconditionsoftheshareholder’sloan

The shareholder’s loan bears no interest and is repayable as agreed by the shareholder from time to time. It is estimated that this loan will be repaid in 10 years’ time.


8.CashandCashEquivalents

Cash on hand 2,036 4,100 2,036 4,100Investec Bank - South Africa 7,087,677 24,515,782 7,087,677 24,515,782 Standard Bank - Jersey 13,174,291 10,984,465 13,174,291 10,984,465 Standard Bank - South Africa 56,695,084 1,139,214 56,695,084 1,139,214 76,959,088 36,643,561 76,959,088 36,643,561

Foreign balances were translated at a rate of R7.47 (2005: R8.07). An amount of R93,300 (2005: R172,802) is ceded as security for a guarantee issued for the same amount as required by the terms of the building lease.

9.ShortTermLiabilities

Development Bank of Southern Africa 50,011,986 - 50,011,986 -

This liability bears interest at 3 month SAFEX JIBAR plus 160 basis points (8,69%) and is repayable within 12 months by the drawdown of new funding from an additional facility from the Development Bank of Southern Africa following its own drawdown in a back to back agreement with Kreditanstalt für Wierderaufbau.





10.TradeandOtherPayables

Other payables 1,809,022 1,128,436 1,809,022 1,128,436Leave accrual 226,748 190,060 226,748 190,060Bonus accrual 727,404 33,746 727,404 33,746 2,763,174 1,352,242 2,763,174 1,352,242

Leaveaccrual Opening balance 196,060 226,499 196,060 226,499Leave raised 214,230 109,607 214,230 109,607Leave utilised (126,827) (123,982) (126,827) (123,982)Leave paid out (56,713) (16,064) (56,713) (16,064)Closing balance 226,750 196,060 226,750 196,060

Bonusaccrual Opening balance 33,746 41,869 33,746 41,869 Bonus raised 842,451 160,669 842,451 160,669Bonus paid out (148,793) (168,792) (148,793) (168,792)Closing balance 727,404 33,746 727,404 33,746

11.Revenue

Interest on advances 14,896,548 10,018,618 14,896,548 10,018,618Investment interest 2,828,483 4,288,994 2,828,483 4,288,994

Included within investment interest in the current year is an amount of R196,284 in respect of preference dividends received. 17,725,030 14,307,612 17,725,030 14,307,612

12.FinanceCosts

Interest paid on borrowings 1,100,496 - 1,100,496 -

13.Directors’Emoluments

Directors’EmolumentsFees for services as directors 212,000 209,000 212,000 209,000For other services 911,629 858,193 811,602 858,193 1,123,629 1,067,193 1,023,602 1,067,193

Basic Salary 611,112 548,424 581,469 548,424Expense allowances 143,839 183,921 103,509 183,921Medical aid contributions 41,901 43,479 39,408 43,479Provident fund contributions 114,777 82,369 87,216 82,369 911,629 858,193 811,602 58,193

Mr W van Emmenis is the only executive director and he has no service contract.





14.NetSurplus/(Deficit)fromOperations

Net surplus from operations includes amongst other:

Noninterestincome/(expense) Accrued share premium 42,000 96,000 42,000 96,000 Impairment of investments 811,967 (96,000) (291,009) 363,800 Gain / (loss) on foreign exchange differences (28,164) 242,780 (28,164) 242,780 Directors’ fees received 3,000 - 3,000 -Profit on disposal of investment - 595,063 - 595,063Profit on disposal of property, plant and equipment 1,648 210,221 1,648 210,221 830,450 1,048,064 (272,526) 1,507,864 Expenses Auditor’s remuneration 389,700 353,647 449,250 353,647 - Current year 326,040 262,480 326,040 262,480 - Underprovision prior year 63,660 91,167 123,210 91,167

Fees for services- Consulting and advisory fees 53,763 285,429 53,763 285,429

Advances impairments 7,118,580 8,224,650 7,118,580 8,224,650 - Movement in impairment provision 7,126,316 8,325,556 7,126,316 8,325,556 - Bad debts recovered (7,737) (1,100,906) (7,737) (1,100,906)- Amounts written off - 1,000,000 - 1,000,000

Market development fund grants - - - - - Amounts disbursed - 100,000 - 100,000 - Recoveries from accompanying measure - (100,000) - (100,000)

Directors’ fees 212,000 209,000 212,000 209,000

Depreciation and amortisation 319,984 278,935 319,984 278,935 Staff costs 4,642,728 3,807,349 4,642,728 3,807,349

The company has 11 employees. (2004: 11 employees) Operating lease rentals - equipment 28,483 583,111 28,483 583,111 - buildings 491,566 476,441 491,566 476,441




Group Group Company Company 2006 2005 2006 2005

R R R R

15.Taxation

15.1.Taxchargefortheyear

South African Normal Taxation - - - -- Current - - - -- Prior - - - -

- Deferred Taxation 81,039 (568,311) 81,039 (568,311)- Current 81,039 (568,311) 81,039 (568,311)- Prior - - - - 81,039 (568,311) 81,039 568,311)

15.2.Taxratereconciliation

Taxation has not been provided for as the company has an estimated tax loss of R20,211 005 (2005: R25,835,186). The applicable tax rate is 29% (2005: 30%).

Effective tax rate 3.7% (67.7%) 55.8% (29.1%)Permanent difference arising from non-deductible expenses 15.6% 80.9% 48.0% 10.6%Permanent difference arising from non-taxable income 9.7% 4.0% (74.8%) 5.8%Impact of decrease in tax rate - 12.8% - 42.7%Statutory rate 29.0% 30.0% 29.0% 30.0%

15.3Deferredtaxasset

The deferred tax balance consists of the following temporary differences: - Advances impairment 4,448,672 2,898,698 4,448,672 2,898,698 - Deferred capital gains (119,168) - (119,168) - - Tax loss 5,861,192 7,492,204 5,861,192 7,492,204 10,190,696 10,390,902 10,190,696 10,390,902

The company has received revised assessments for 2003 and 2004 reinstating previous assessed losses that had not been recognised. The same error, however, has been repeated for the 2005 assessment. The correction of this assessment is currently being pursued.

16.Commitments

16.1.Facilities

The Rural Housing Loan Fund has approved a total of R410,189 million (2005: R363,189 million) in loan facilities as at 31 March 2006, of which R42,319 million (2005: R55,980 million) has not yet been drawn by clients.




16.2Futureminimumleasepaymentsundernon-cancellableoperatingleases.

March2007 March2008 March2009

Future lease commitments are:Buildings 409,898 406,523 -

The lease for buildings was renewed on 13 December 2004 with a commencement date of 01 March 2005 and expires on 29 February 2008. The lease escalates at 9% per annum. Group Group Company Company 2006 2005 2006 2005 R R R R

17.ReconciliationofNetSurplus/(Deficit)BeforeTaxationtoCashUtilisedinOperations

Netdeficitbeforetaxation 2,184,124 (839,923) 145,110 (1,954,791)

Adjustments for: Net movement in impairment of advances provision 7,168,316 9,421,556 7,168,316 9,421,556 - Increase in impairment of advances provision 7,126,316 9,325,556 7,126,316 9,325,556 - Increase in impairment 42,000 96,000 42,000 96,000 provision for equity investmentsImpairments of investments (853,967) - 249,010 (459,799)Interest accrued on borrowings 1,100,496 - 1,100,496 - Reinstatement of advance - (797,043) - (797,043)Refund of investment - 4,235 - 4,235 Profit on disposal of investments - (595,064) - (595,064)Profit on disposal of property, plant and equipment (1,648) (210,221) (1,648) (210,221)Post-acquisition share of profit in associates (936,038) (1,574,667) - -Accrued share premium (42,000) (96,000) (42,000) (96,000)Depreciation and amortisation 319,984 278,935 319,984 278,935 Interest income (17,725,030) (14,307,612) (17,725,030) (14,307,612)Operating loss before working capital changes (8,785,763) (8,715,804) (8,785,762) (8,715,804)

Working capital changes: (2,422,329) (30,160,906) (2,422,330) (30,160,906)Decrease in accounts receivable 147,526 154,515 147,526 154,515 Increase in advances (3,980,788) (29,876,222) (3,980,788) (29,876,222)Increase / (decrease) in accounts payable 1,410,933 (439,199) 1,410,932 (439,199)

Cash generated utilised in operations (11,208,092) (38,876,710) (11,208,092) (38,876,710)

18.TaxationPaid

Amount receivable at beginning of year (401,942) (401,942) (401,942) (401,942)Current tax charge per income statement - - - - Amount receivable at end of year 401,942 401,942 401,942 401,942 Taxation paid - - - -




19.FinancialInstruments

Creditrisk

Financial assets, which potentially subject the company to concentrations of credit risk, consist principally of advances, short-term deposits and cash. The company’s cash equivalents and short-term deposits are placed with high credit quality financial institutions rated as at least A1 or better in terms of short-term credit ratings by at least two recognised rating agencies. Advances are presented net of impairments. Credit risk with regard to advances is limited in terms of credit policy, which provides for prudent counter-party limits in respect of client exposures as a percentage of the total advances portfolio. The advances as at year-end reflect that the company has exposures within approved counter-party limits.

The company’s advances book comprises both loans and preference shares with fixed rates of interest and loans which have an underlying reviewable margin above a fixed rate. The rates applicable to the loans with a reviewable margin are adjusted when such a review deems this necessary. The rates applicable to fixed interest rate loans are based on agreed market rates at the date of the disbursements and remain fixed for the full term of the loan.

Group Group Company CompanyThecompositionoftheyearend 2006 2005 2006 2005advancesandpreferencesharesisasfollows: R R R R

Fixed rate advances 5,813,593 21,616,861 5,813,593 21,616,861 Variable rate advances 112,640,011 77,713,663 112,640,011 77,713,663 Less: Impairments (23,529,948) (16,165,348) (23,529,948) (16,165,348)Net advances per balance sheet 94,923,656 83,165,176 94,923,656 83,165,176

Interestraterisk

The company is exposed to interest rate price risk on facilities with a fixed interest rate, and to interest rate cash flow risk on those with a floating interest rate. The Fund is exposed to interest rate risk on the following assets:

Group Company FixedRate Floating Total FixedRate Floating Total Rate Rate R R R R R R

2006 Gross advances 5,813,593 112,640,011 118,453,604 21,616,861 77,713,663 99,330,524 Notice deposits - 91,899 91,899 - 91,899 91,899 Bank balances - 76,867,189 76,867,189 - 36,551,662 36,551,662

2005Gross advances 21,616,861 77,713,663 99,330,524 21,616,861 77,713,663 99,330,524 Notice deposits - 172,802 172,802 - 172,802 172,802 Bank balances - 36,470,759 36,470,759 - 36,470,759 36,470,759




19.FinancialInstruments-continued

Fairvalues

At 31 March 2006, the carrying amounts of cash and cash equivalents, trade and other payable and accrued expenses approximated their fair values due to the short maturity of these assets and liabilities. The net fair values of the company’s unlisted financial assets at balance sheet date are:

2006 2005 Carrying Fair Carrying Fair Amount Value Amount Value R R R R

Advances 94,923,656 94,916,196 83,165,176 74,195,780

Liquidityrisk

Liquidity risk is the risk of failure to fund a cash shortfall as and when required, without incurring financial loss. It therefore encompasses both the risk of failing to obtain sufficient funds at favourable market rates, and the risk of failing to liquidate an asset in a timely manner, and without significant deviation from the prevailing market price. Liquidity risk at the Fund is managed within the framework of a conservative policy, which requires that the Fund at all times retain liquid assets equivalent to the sum of three months operating expenditure and three months disbursements. Integral to the Funds’s asset-liability management, liquidity risk management is performed by the Management Committee. The liquidity is held primarily in the form of call deposits and notice deposits. In addition to ensuring that an adequate level of liquidity is maintained, the Fund further seeks to ensure a diverse range of funding sources.

Additional methodologies used to assess and monitor the Fund’s liquidity requirements and risk levels include cash flow forecasts and cumulative maturity gap analyses.

20.RetirementBenefits

The company contributes to a defined contribution fund on behalf of all employees. The amount contributed in the current year was R529,236 (2005: R344,600).

21.RelatedParties

Related party relationships exist with associates listed in Note 4.2. Interest bearing loans have been extended to these entities and these loans are disclosed in the same note.

22.MaterialityFramework

The company has adopted a materiality framework which defines limits on levels of authorisation on significant transactions which require executive authority approval. The framework excludes disbursement transactions germaine to the business of the company as these transactions are in terms of the mandate approved by the executive authority.




23.PerformanceagainstBudget

The summarised performance for the current year against budget, as required by GRAP 1, is presented below.

Actual Budget Variance

Finance revenue 17,725,030 19,698,834 (1,973,804)Interest margin net impairments 9,505,955 11,998,834 (2,492,880)Surplus / (deficit) from operations 10,336,404 11,998,834 (1,662,430)Expenditure (9,088,319) (10,669,355) 1,581,036 Net surplus / (deficit) from operations 1,248,086 1,329,479 (81,393)Net surplus / (deficit) before taxation 2,184,124 1,329,479 854,645 Surplus / (deficit) for the year 2,103,085 930,636 1,172,449

24.Non-ConsolidationofDeemedSubsidiary

Management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows. Compliance with all applicable standards and interpretations has been made with the exception of compliance to paragraph 14 of AC132 (IAS 27) which requires the consolidation of entities where potential voting rights may be exercised. This departure was made to achieve a fair presentation as consolidation would result in a material misstatement of the financial performance of the entity and thereby misleading users of these financial statements. It would also not provide a proper view of the stewardship of management as the reported performance would not be reflective of management action.

The financial impact of this departure is disclosed below:

STATEMENTOFFINANCIALPERFORMANCEFORTHEYEARENDED31MARCH2006

Adjusted Net Adjusted Net Group Group Impact Group Group Impact 2006 2006 2006 2005 2005 2005 R R R R R R

Revenue 17,725,030 31,546,342 13,821,312 14,307,612 24,124,699 9,817,087Finance costs (1,100,496) (1,104,394) (3,898) - (5,453) (5,453)Impairment of advances (7,118,580) (11,382,430) (4,263,850) (8,224,649) (13,366,882) (5,142,233)Interest margin net impairments 9,505,954 19,059,518 9,553,564 6,082,963 10,752,364 4,669,401Non-interest income 830,450 1,034,060 203,610 1,048,065 3,139,293 2,091,228Surplus / (deficit)

from operations 10,336,404 20,093,578 9,757,174 7,131,028 13,891,657 6,760,629Operating expenses (9,088,319) (17,122,896) (8,034,577) (9,545,618) (16,722,022) (7,176,404)Net surplus /

(deficit) from operations 1,248,085 2,970,682 1,722,597 (2,414,590) (2,830,365) (415,775)Share of earnings

from associate companies 936,038 815,155 (120,883) 1,574,667 1,574,667 -Net surplus /

(deficit) before taxation 2,184,123 3,785,837 1,601,714 (839,923) (1,255,698) (415,775)Taxation (81,039) (329,039) (248,000) 568,311 (326,333) (894,644) Surplus / (deficit)

before minority interest 2,103,084 3,456,798 1,353,714 (271,612) (1,582,031) (1,310,419)Minority interest - (342,991) (342,991) - - -

Surplus / (deficit) after minority interest 2,103,084 3,113,807 1,010,723 (271,612) (1,582,031) (1,310,419)




24.Non-ConsolidationofDeemedSubsidiary-continued

STATEMENTOFFINANCIALPOSITIONASAT31MARCH2006


Assets

Non-current assets 110,888,844 96,056,206 (14,832,639) 96,828,163 78,642,512 (18,185,651)Advances 94,916,195 79,330,235 (15,585,960) 83,165,176 62,212,902 (20,952,274) Investments in associates 3,957,500 2,195,628 (1,761,872) 1,828,687 1,828,687 - Property, plant

equipment & intangibles 645,132 947,560 302,428 943,398 1,249,255 305,857Available for sale financial assets 1,171,861 1,171,861 - 350,015 350,015 -Held to maturity financial assets 7,460 (2,872,540) (2,880,000) 149,985 (2,688,015) (2,838,000)Impairments raised and preference shares - 2,880,000 2,880,000 - 2,838,000 2,838,000Deferred tax assets 10,190,696 12,403,462 2,212,764 10,390,902 12,851,668 2,460,766

Current assets 77,370,968 91,511,509 14,140,541 37,202,967 53,394,688 16,191,721Other receivables - 12,467,826 12,467,826 92,765 13,343,157 13,250,392Prepayments 9,938 9,938 - 64,699 64,699 -Taxation receivables 401,942 401,942 - 401,942 401,942 -Cash and cash equivalents 76,959,088 78,631,803 1,672,715 36,643,561 39,584,890 2,941,329

TotalAssets 188,259,812 187,567,715 (692,097) 134,031,130 132,037,200 (1,993,930)


Capitalandreserves (135,484,651) (134,175,299) 1,309,352 (132,678,888) (130,358,812) 2,320,076Grant capital (154,762,590) (154,762,590) - (154,762,590) (154,762,590)Accumulated deficit 19,277,939 20,587,291 1,309,352 22,083,702 24,403,778 2,320,076

Non-currentliabilities - (342,991) (342,991) - (40) (40)Subordinated loan - - - - - - Minority shareholders - (342,991) (342,991) - - -Borrowings - - - - (40) (40)Currentliabilities (52,775,161) (53,049,425) (274,266) (1,352,242) (1,678,348) (326,106)Short term liabilities (50,011,986) (50,030,484) (18,498) - (295,763) (295,763)Trade and other payables (2,763,174) (3,018,941) (255,767) (1,352,242) (1,382,585) (30,343) TotalEquityandLiabilities (188,259,812) (187,567,715) 692,097(134,031,130) (132,037,200) 1,993,930




24.Non-ConsolidationofDeemedSubsidiary-continued

STATEMENTOFNETASSETSFORTHEYEARENDED31MARCH2006

Group2005 Grant Accumulated Minority Other Capital Deficit Shareholders Reserves Total R R R R R

Balance at 31 March 2004 154,762,590 (21,812,090) - - 132,950,500Deficit for the year (271,612) - - - (271,612)Balance at 31 March 2005 154,762,590 (22,083,702) - - 132,678,888

AdjustedGroup2005

Balance at 31 March 2004 154,762,590 (22,821,747) - - 131,940,843Deficit for the year - (1,582,031) - - (1,582,031)Balance at 31 March 2005 154,762,590 (24,403,778) - - 130,358,812

Variance2005 - (2,320,076) - - (2,320,076)

Group2006 Grant Accumulated Minority Other Capital Deficit Shareholders Reserves Total R R R R R

Balance at 31 March 2005 154,762,590 (22,083,702) - - 132,678,888Surplus for the year - 2,103,085 - - 2,103,085Revaluation of available for sale assets - - - 821,846 821,846 Deferred tax on revaluation of assets - - - (119,168) (119,168)Balance at 31 March 2006 154,762,590 (19,980,617) - 702,678 135,484,651

AdjustedGroup2006

Balance at 31 March 2005 154,762,590 (24,403,778) - - 130,358,812Surplus for the year - 3,113,807 342,991 - 3,456,798 Revaluation of available for sale assets - - - 821,846 821,846Deferred tax on revaluation of assets - - - (119,168) (119,168)Balance at 31 March 2006 154,762,590 (21,289,971) 342,991 702,678 134,518,288 Variance2006 - (1,309,354) 342,991 - (966,363)


ANNEXURETOTHEANNUALFINANCIALSTATEMENTS

ANNEXURE1

Non-ConsolidationofDeemedSubsidiary

The Rural Housing Loan Fund has an investment of preference shares in Norufin Housing (Pty) Ltd amounting to R2.8 million.

These preference shares have convertible rights attached to them allowing the holder to convert preference shares into ordinary

shares in the event of a default in terms of these preference shares. Certain dividends on these preference shares have been in

arrears for several years and consequently the ability to exercise the conversion rights is available to the Rural Housing Loan Fund.

This client was insolvent in 2004, and consequently the Rural Housing Loan Fund restructured its exposure to assist in

bringing about the solvency of this client. This restructuring was performed to allow the Rural Housing Loan Fund to continue

its intermediation function of lending funds to clients for the onward lending to borrowers for developmental purposes within

rural areas.

AC132(IAS27)ConsolidatedandSeparateFinancialStatementsstatesper:

Paragraph 14

An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or

other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another

party’s voting power over the financial and operating policies of another entity (potential voting rights). The existence and

effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another

entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another

entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or

converted until a future date or until the occurrence of a future event.

Paragraph 15

In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including

the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or

in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or

convert.

The consequence of these paragraphs as interpreted by our auditors is that the Rural Housing Loan Fund consolidates

Norufin Housing (Pty) Ltd as a subsidiary within the group accounts. Management has concluded that compliance with the state-

ment would not result in a fair presentation of the entity’s financial position, financial performance and cash flows.

Management has accordingly relied on the provisions of another accounting statement regarding presentation

of financial statements.


AC101(IAS1)PresentationofFinancialStatementsstatesper:

Paragraph 17

In the extremely rare circumstances in which management concludes that compliance with the requirements in a standard

or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the

framework, the entity shall depart from that requirement in the manner set out in paragraph 18 if the relevant regulatory

framework requires, or otherwise does not prohibit, such a departure.

The framework for the preparation and presentation of financial statements states that the objective of financial statements is per:

Paragraph 12

The objective of financial statements is to provide information about the financial position, performance and changes in

financial position of an entity that is useful to a wide range of users in making economic decisions.

Paragraph 13

Financial statements prepared for this purpose meet the common need of most users. However, financial statements do not

provide all the information that users may need to make economic decisions since they largely portray the financial effects of

past events and do not necessarily provide non-financial information.

Paragraph 14

Financial statements also show the results of the stewardship of management, or the accountability of management for the

resources entrusted to it. Those users who wish to assist the stewardship or accountability of management do so in order that

they may make economic decisions; these decisions may include, for example, whether to hold or sell the investment in the

entity or whether to reappoint or replace the management.

The directors believe that consolidation of Norufin Housing (Pty) Ltd would conflict with the objective of financial statements.

Firstly, the financial statements would not be useful to users in making economic decisions as the reported financial perform-

ance would increase revenue by 78%, increase expenditure by 88% and increase the reported surplus by 48% for the current

year. This temporary ability to control Norufin Housing (Pty) Ltd will reverse in the next financial year and as such comparisons

with prior periods are rendered meaningless. Secondly, the financial statements will not show the results of the stewardship of

management. Management was not involved in the day-to-day operations of Norufin Housing (Pty) Ltd and consequently should

not be evaluated on the significantly positive aspects that the consolidation would bring to the financial statements.

The Rural Housing Loan Fund has therefore departed from the requirements of AC132 (IAS 27) and followed the disclosure

required by paragraph 18 of AC101 (IAS 1) to achieve fair presentation. The effect of the omission to consolidate

Norufin Housing (Pty) Ltd has been disclosed in the financial statements under note 24. This treatment is in terms of South

African Statements of Generally Accepted Accounting Practice and consequently is in compliance with S55 (1)(b) the Public

Finance Management Act, 1 of 1999 which requires financial statements to be prepared in accordance with generally accepted

accounting practice.



AuditingProfessionAct

The directors also note the auditors notification of the reportable irregularity made to the Independent Regulatory Board for

Auditors. A reportable irregularity is defined per the Auditing Profession Act as follows:

“reportable irregularity” means any unlawful act or omission committed by any person responsible for the management of an

entity, which –

(a) has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder,

creditor or investor of the entity in respect of his, her or its dealings with that entity; or

(b) is fraudulent or amounts to theft; or

(c) represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member,

shareholder, creditor or investor of the entity and any law applying to the entity or the conduct or

management thereof

The directors believe that the omission to consolidate Norufin Housing (Pty) Ltd is permitted under AC101 (IAS1) paragraph

17 as previously discussed, and consequently cannot be a reportable irregularity. Additionally, a reportable irregularity only

occurs when one of the components has been satisfied. There has been no financial loss nor is one likely to occur as a result

of the omission to consolidate. No fraud or theft has occurred nor has any been alleged. The directors have not acted in any

manner which allows them to obtain advantage from the position of their office other than by way of directors’ remuneration.

No powers have been exceeded and the directors have considered the affairs of the company in an objective manner.

Consequently, no substance exists for a reportable irregularity when tests of the components are applied.

The directors therefore disagree that a reportable irregularity has occurred.


STAFF MEMBERS

Makgalaborwa Maila

Risk Manager

Jabulani Fakazi

Business Relations Manager

Tsaliko Ntoampe-Mahlelebe

Client Executive

William Malatji

Risk Analyst

Andrew Jager

Chief Financial Officer

Myriam Kheza

Programme Administrator

Rhona Mokhele

Office Assistant

Xoliswa Bebula

Client Executive

Katleho Nchapha

Client Executive

Porche Knauf

Financial Assistant

Postal Address: PO Box 645, Bruma, 2026

Telephone: +27 11 621 2500 Facsimile: +27 11 621 2520

Website: www.rhlf.co.za

Aids Helpline0800 512 522

annual report 2006 - rural housing loan fund – rhlf · rural areas. in fact, banks were closing...

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