annual report - consolidated bank of kenya report...annual report & financial statements 2007...

head oFFice

Consolidated Bank House, Koinange Street

P.O. Box 511 33, 00 200 Nairobi

Tel (020) 340 551

(020) 340 298

(020) 340 836

Mobile 0722 999 177

0733 435 005

Fax (020) 340 213

e-mail head-office @ consolidated-bank.com

www consolidated-bank.com aNNuaL rePorTand Financial statements

2007

contents

corPoraTe iNForMaTioN

Board of Directors .......................................................................................................................................................................................... 2 - 4

Senior Managers .......................................................................................................................................................................................... 5

Corporate Information .......................................................................................................................................................................................... 6

sTaTeMeNTs

Chairman’s Message .......................................................................................................................................................................................... 8 - 9

CEO’s Message .......................................................................................................................................................................................... 10 - 11

Statement of Corporate Governance .......................................................................................................................................................................................... 12 - 13

corPoraTe sociaL resPoNsibiLiTy

Building stronger communities .......................................................................................................................................................................................... 14 - 16

Financial Charts .......................................................................................................................................................................................... 17 - 18

sTaTeMeNTs & rePorTs

Report of the directors .......................................................................................................................................................................................... 20

Statement of the Directors’ Responsibilities .......................................................................................................................................................................................... 21

Independant Auditor’s Report .......................................................................................................................................................................................... 22

Income Statement .......................................................................................................................................................................................... 23

Balance Sheet .......................................................................................................................................................................................... 24

Statement of changes in Equity .......................................................................................................................................................................................... 25

Cashflow Statement .......................................................................................................................................................................................... 26

NoTes To The FiNaNciaL sTaTeMeNTs ......................................................................................................................... 28 - 60

aPPeNdiX

Notice of the AGM

Proxy Sheet

�Consolidated Bank of Kenya

CORPORATE INFORMATION

« « «

Carry your INSTA-CASH.Avoid embarrasing moments

� Annual Report & Financial Statements 2007


Annual Report & Financial Statements 2007 �Consolidated Bank of Kenya


MS. EuNICE KAgANECHAIRMAN

Ms. Kagane was appointed Chair of Consolidated Bank with effect from 4th January 2007. She is a holder of a Bachelor’s degree in Economics and retired from the Central Bank of Kenya after a 32-year career in central banking since 1973.

Prior to her retirement, Ms. Kagane was the Head of National Debt and Financial Markets Department, and also managed the Foreign Operations and International Payments Department. She has also held the post of Director of the Deposit Protection Fund and has been Deputy Director of various departments of Central Bank of Kenya.

Her expertise has specifically been used in the areas of Financial Market Development and Banking Sector Restructuring.

MR. D. NDEgwA wACHIRA MANAgINg DIRECTOR

Mr. Wachira joined the Bank in December 2003. As a Banker, he has wide experience in Retail and Corporate Banking, which he practised for 22 years both locally and in Tanzania and the US. He holds a Masters degree in Economics and Business Management and a Diploma in Finance and Banking. Prior to joining the Bank, Mr. Wachira had worked with the government, a local bank, a financial consultancy/venture capital firm and more recently as the Head of Credit Conformance for Barclays Africa.

He is a member of the Institute of Directors, the Kenya Institute of Bankers and the vice chair Kenya Bankers Association.

MRS. SHEllOMITH BOBOTTI DIRECTOR

Mrs. Bobotti was appointed Director of Consolidated Bank on 4th January 2007, prior to which she was alternate Director of the Bank, for the Office of the Permanent Secretary to the Treasury.

She has a Bachelors degree in Commerce and is a Certified Public Accountant. Mrs. Bobotti retired from the Ministry of Finance - Treasury in 2006, where she last served as the Accountant General. She is currently engaged in various consultancies and government assignments, and is a member of the Institute of Directors.

DR. AlOyS B. AyAKO DIRECTOR

Dr. Ayako was appointed as Director of Consolidated Bank on 4th January 2007. He holds a PhD in Economics and has worked as a Senior lecturer in Economics until 1993, as a Director/Chief Economist at the Central Bank of Kenya between 2002 and 2004, and then as a Director, Rural Finance Development Department between 2004 and 2006.

He is currently a part – time lecturer at the Catholic University of East Africa.

BOARD OF DIRECTORS

� Annual Report & Financial Statements 2007


DR. ClEOPA MAIlu

DIRECTOR

A medical doctor by profession, Dr. Mailu was appointed director on 4th January 2007. He is currently the CEO of The Nairobi Hospital. He has previously worked with UNICEF as a project officer and part-time consultant, and also as Director in the Ministry of Health under the Health Sector Programme and the Division of Family Health.

Dr. Mailu is a member of the Kenya Healthcare Federation Board, the Kenya Federation of Employers Social Welfare and Legislation Committee.

MR. JulIuS MuTuA,

AlTERNATE DIRECTOR TO

PS, TREASuRy

Mr. Mutua was appointed as an Alternate Director for the office of the Permanent Secretary to the Treasury on 13th February 2007.

An Economist in the Ministry of Finance, Mr. Mutua’s main role is to guide the Board with respect to government policies.

MR. JOSEPH KINyuA, THE PS TREASuRy, DIRECTOR

The office of the Permanent secretary to the treasury is also an Institutional Director of the Bank

MR. JAMES AKOyA,

AlTERNATE DIRECTOR TO

MANAgINg TRuSTEE, NSSF

Mr. Akoya was appointed Alternate Director to the Managing Trustee of NSSF on 9th January 2006. He has a Bachelors degree in Commerce and is a Certified Public Accountant as well as a Certified Public Secretary. He currently is the General Manager of NSSF and is a Director of Strategic Investments Company Ltd.

MRS. RACHEl luMBASyOMANAgINg TRuSTEE NSSF, DIRECTOR

The office of the Managing Trustee of the National Social Security Fund is an Institutional Director of the bank

MRS. wAKONyO IgERIA

COMPANy SECRETARy

Mrs. Igeria was appointed as Company Secretary in April 2004, and also heads the Legal Department of the Bank.

She is an Advocate of the High Court of Kenya of 17 years experience, is a Commissioner for Oaths and Notary Public and also a registered Certified Public Secretary. Mrs. Igeria is a member of the Law Society of Kenya and the Institute of Certified Public Secretaries of Kenya.

Annual Report & Financial Statements 2007 �Consolidated Bank of Kenya

STATEMENTS

5

1

2

7

3

4

6

8

9

� gACHERI MAINgI - Marketing Manager, � HENRy TANuI - Ag Head of Credit,

� ElIJAH OTEyO - ICT Manager, � ElIzABETH OMORO - Premises and Administration Manager,

� ERASTuS gACHOyA - Business Development Manager, 6 gEORgE RuTTO - Assurance Manager,

7 RAMECK NJIRu - Head of Operations, 8 JOSEPH NJuguNA - Head of Finance,

9 JAPHETH KISIlu - General Manager. Missing in the group picture: TERRy MAINA - Head of Human

Resources, D. NDEgwA wACHIRA - CEO, wAKONyO IgERIA - Company Secretary.

SENIOR MANAgERS

6 Annual Report & Financial Statements 2007

STATEMENTS

FINANCE AND CREDIT COMMITTEE

• Dr. A B Ayako Chairman• Permanent Secretary Treasury• D N Wachira• Managing Trustee NSSF• Dr. C K Mailu

TENDER COMMITTEE

• Dr. C K Mailu Chairman• Permanent Secretary Treasury• S L Bobotti• D N Wachira

Auditors

Controller and Auditor GeneralP.O. Box 30084 - 00100, Nairobi

Correspondent Banks• Citibank NA• ABSA Bank Limited• Deutsche Bank

legal Advisers

• Hamilton Harrison & Mathews Advocates• Ndungu, Njoroge & Kwach Advocates• Oraro & Company Advocates

Directors

E W Kagane ChairmanD N Wachira ManagingPermanent Secretary TreasuryManaging Trustee NSSFDr. C K MailuS L BobottiDr. A B Ayako

Company Secretary

Wakonyo Igeria CPS (K)P O Box 5113300200-Nairobi

Registered Office

Consolidated Bank House,23 Koinange StreetP O Box 5113300200-Nairobi

Board Committees

AuDIT AND RISK MANAgEMENT COMMITTEE

• S L Bobotti Chairman• Dr. A B Ayako• Dr. C K Mailu

STAFF COMMITTEE

• Dr C K Mailu Chairman• S L Bobotti Managing Trustee – NSSF• Dr. A B Ayako• D N Wachira


7Consolidated Bank of Kenya

STATEMENTS

« « «

Their future is determined

by today’s actions

Their future is determined

by today’s actions

JuNIOR SAVERSJuNIOR SAVERS


STATEMENTS

Chairman’s Message

IT IS wITH A SENSE OF PRIDE AND

ACHIEVEMENT THAT I PRESENT TO yOu

THE ANNuAl REPORT AND FINANCIAl

STATEMENTS OF yOuR BANK FOR THE

yEAR ENDED �� DECEMBER �007. THE

BANKS TuRN AROuND STRATEgy

CONTINuED TO yIElD RESulTS wITH

THE BANK RECORDINg gROwTH IN

VOluME OF BuSINESS AND IMPROVED

PROFITABIlITy. THE BOARD, TOgETHER

wITH THE MANAgEMENT OF THE

BANK PuT IN SIgNIFICANT EFFORT TO

ENSuRE THAT THE RESulTS RECORDED

AT THE END OF THE yEAR ExCEEDED

ExPECTATIONS.

Overview of the Kenyan EconomyThe economy sustained the growth momentum witnessed in 2006 on the back of improved activity in the tourism, telecommunication, horticulture, agricultural and infrastructure sectors. This growth was buoyed by relatively stable interest rates as well as increased remittances from Kenyans in the diaspora.

The interest rate regime witnessed a gradual increase during the year with the average 91-day Treasury bill rate increasing from 5.88% in January 2007 to 6.89% in December 2007. This increase is attributed to increased demand for funding from Government to finance infrastructure and the December general elections.

Overall month on month inflation while declining slightly from 14% in 2006 remained above the double digit at 12% in December 2007. The increased pressure on overall inflation was mainly as a result of higher energy costs, food prices and transport and communication costs. The shilling continued to strengthen against major currencies in 2007 on the back of major inflows from the tourism, horticulture, Kenyan diaspora and the foreign direct investments. Overall economic indicators showed positive signs with an

improved GDP growth of 7.1% in 2007 up from 6% in the previous year. The level of economic activity however slowed down towards the end of the year with focus shifting to the rigorous and intense campaigns leading to the December 2007 general elections.

Growth in 2008 is expected to be slightly lower compared to that of 2007 as a result of the disputed results for the December 2007 general elections which triggered unprecedented post election violence and loss of property in the months of January and February 2008.

Banking sector The banking sector remained stable during 2007 due to favourable macroeconomic conditions during the year. Despite intense competition the sector registered an improved asset quality, growth in deposits and profitability. The industry witnessed various strategic moves with some players strengthening their balance sheets by increasing their capital base to fund growth and improve their competitive capability.

Mission – Vision StatementsTo effectively align our strategic focus, the bank changed its mission and vision statements in the year. Our new Mission is “To support our customers achieve success” and our new Vision is “To be the most pleasant and convenient bank”.

Financial performance It is worth noting that the bank has maintained the profitability trend achieved in 2006 by recording a pre-tax profit of Kshs 25.8 million in 2007. The Board and management remain committed to sustain this profitability trend and achieve better results in 2008.

Corporate Social ResponsibilityIn our continued effort to make a lasting impact and contribute to the economic development in the communities we operate in, we undertook various community development activities that addressed issues on education, health and moulding the future of our children. The initiatives included but were not limited to the following:

• Blood Drives in collaboration with Bloodlink Foundation. The aim of the drives was to sensitise staff on the benefits of blood donation as well as have the bank make its contribution towards reducing the shortfall in the availability of safe blood to meet transfusion needs in the country.

9Consolidated Bank of Kenya

STATEMENTS

• Bethlehem Children’ home Mwea. The home has benefited from thebank in terms of food stuff, clothing, shoes, books and emotional support.

• Donation of business tricycles to Association for the Physically Handicapped Kenya Association of the Physically Disabled in Kenya).

• Visited Children’s homes / hospitals to spread the Christmas cheer

• Supported two (2) children to have an orthopaedic operation in Kikuyu Hospital

• Participated in a fundraising walk with Cerebral Palsy Society of Kenya for Cerebral Palsy

• Environmental conservation - Isiolo town cleaning day

The BoardThe composition of the Board of Directors remained the same during the year. To show its commitment to the success of the bank and its customers, the Board in the company of senior management held various customer sessions throughout the bank’s network which accentuated the bank’s support to the success of our customers.

Future prospects Our main strategic focus for the last five years has centred on capacity building, recovery and turnaround of the bank from a loss making to a profitable and financially strong institution. The new strategic focus to be formalised through the strategic plan for 2009 to 2013 will now be centred on accelerated growth, expansion of branch network and innovative products to increase the volume of our business and compete effectively in the industry.

AppreciationIn conclusion, on behalf of the Board I would like to extend my appreciation to all our customers for their continued support and custom. I would also like to thank the management and staff for their hard work and consistency that has produced excellent results.

Lastly, I thank all my colleagues on the Board for their tireless efforts and their unswerving commitment to the success of the bank.

Ms. Eunice Kagane - Chairman18th March, 2008

�0 Annual Report & Financial Statements 2007

STATEMENTS

Chief Executive Officer’s Statement

I AM gREATly PRIVIlEgED TO PRESENT

THE �007 FINANCIAl RESulTS. IT HAS

BEEN A gREAT yEAR IN wHICH THE

BuSINESS wAS DRIVEN By A ROBuST

ECONOMy AND HEAVy INVESTMENT

IN STAFF AND INFORMATION

TECHNOlOgy.

This marks the third year since we launched our strategic

turnaround and I am pleased that the future looks promising.

From a loss of Kshs 11.9 million registered in 2005, our profits

grew by 236% in 2006 to stand at Kshs 16.3 million and 58% in

2007 to Kshs. 25.8 million. This profitability was achieved as a

result of growth in operating income which grew by 24% from

Kshs. 499 million to Kshs 622 million. This growth is attributed

to aggressive loan book management, investment in human

resources and information technology as well as investment in

products and services that meet the needs of our customers.

Advances to customers during the year stood at Kshs. 2.2 billion

against Kshs. 1.6 billion while customer deposits rose to Kshs. 2.8

billion up from Kshs.2.4 billion as at 31st December 2007. Net

interest income during the same period rose to Kshs 318.5 million

compared to Kshs 260 million realized in 2006 representing a

growth of 22 %. This, no doubt, is a vote of confidence in the bank

by our customers as a result of better and user friendly services

and products introduced over the last three years.

Our total asset portfolio continues on its upward growth and

now stands at Kshs. 4.1 billion up from Kshs. 3.4 billion in the

previous year.

Strategic direction

The Bank intends to focus on micro financing in addition to its

current strength in dealing with the small and medium enterprises

(SMEs). This is a result of changes in the operating environment

which has seen substantial growth in the area of micro finance

in recent years.

In view of these developments, the management of the bank

agreed to set up a strategy on micro financing to support the

growing need for working capital in this sector. A new product

under this scheme will be launched in due course.

Branch Modernisation

The Bank’s branch modernization programme that started in 2005

continued during the 2007 financial year with the renovation of

Muranga, Thika and Laare branches. Consequently we now have

bigger, brighter and more friendly banking halls that offer a more

conducive environment.

Channels and Service Delivery

During the year, the bank signed an agreement with PesaPoint

to increase accessibility for its customers who will enjoy faster

connection to over 200 ATMs countrywide. The partnership

represents a further strengthening of the bank’s strategy to

provide convenience to its customers. The InstaCash ATM

cardholders can now enjoy a wider countrywide access to cash

and other related ATM services. The Bank has strategic plans to

provide more innovative products for the retail market under the

InstaCash ATM card.

In line with our mission-vision statement to offer greater

convenience to our customers, the bank extended its banking

hours in all branches from 8:30am to 3:30pm on weekdays and

8:30am to 11:30am on Saturdays.

Products

In our endevaour to meet our customers’ expectations, we

developed and launched a product aimed at providing faster

financing to businesses for their Local Purchase Orders (LPOs).

Coined from Loans on Order Of Purchase, the Solid LOOP is

targeted at customers wishing to borrow a facility to finance

orders, procured from the Government departments, Parastatals

and other reputable firms and institutions.

��Consolidated Bank of Kenya

STATEMENTS

Our staff

We are focused on making Consolidated Bank the employer of choice

in Kenya. Initiatives aimed at strengthening and motivating our human

resources included staff training and development programmes. All

employees attended at least one skills development course during the

year in accordance with our strategic plan. The Bank also continued with

its performance management system aimed at enhancing employee

performance, determining a fair and equitable reward system and above all

embedding a high performance culture at all levels.

Taking cognizance of the importance of employee welfare in the Bank’s

performance, the Bank has a comprehensive medical insurance cover

for all employees and their dependants. The Bank will continue to invest

in programmes that provide the employees and their dependants with

a range of options to support them in achieving optimal wellness, both

mental and physical within the resources available.

Conclusion

The journey to be the most pleasant and convenient bank has now began.

This is because of the confidence Kenyans have in the Bank, commitment

by our employees, as well as the strategic changes we are undertaking to

make us the bank of choice.

In conclusion, I would like to thank all customers for their support during

the year and want to assure that you will continue to get the best from us

in the years to come. I would also like to thank our Board for their guidance

during the period of transformation.

Finally, I must thank our staff for their commitment to the business by

doing their best to ensure our customers enjoy a conducive environment

whenever they visit our branches.

D. Ndegwa wachira - Chief Executive Officer

18th March, 2008

�� Annual Report & Financial Statements 2007

STATEMENTS

Statement of Corporate governance

CORPORATE gOVERNANCE DEFINES

THE PROCESS AND STRuCTuRE uSED

TO DIRECT AND MANAgE THE BuSINESS

AFFAIRS OF THE BANK wITH THE AIM OF

ENHANCINg CORPORATE ACCOuNTINg

AND SHAREHOlDER’S lONg TERM VAluE

wHIlE TAKINg INTO ACCOuNT THE

INTERESTS OF OTHER STAKEHOlDERS.

The Board of Directors is responsible for the governance of the bank and is committed to ensuring that its business operations are conducted with integrity and in compliance with the law, internationally accepted principles and best practices of corporate governance and business ethics.

To this end the Bank has put in place processes, systems, practices and procedures which are frequently reviewed and updated embracing the changing corporate environment and world trends. In this respect, the Board confirms that the bank complies with all relevant local legislation including the provisions of the Banking Act and the prudential guidelines issued by the Central Bank of Kenya.

Board of DirectorsThe Board fulfils its fiduciary responsibility to the shareholders by maintaining control over the strategic, financial, operational and compliance issues of the bank. Whilst the Board provides direction and guidance on strategic and general policy matters and remains responsible for establishing and maintaining overall internal controls over financial, operational and compliance issues, it has delegated authority to the Managing Director to conduct the day-to-day business of the bank.

The board consists of six non-executive directors (including the Chairman) and one executive director (the Managing Director). The Board members possess extensive experience in a variety of disciplines in banking, business and financial management, all of which are applied in the overall management of the Bank.

The Board meets at least once every two months, and has a formal schedule of matters reserved for it. Attendance for 2007 was over 80% per board member. The directors are given appropriate and timely information so that they can perform their fiduciary responsibilities effectively.

The remuneration of all directors is subject to the guidelines issued by the Office of the President on terms and conditions of service for State Corporations. They are not eligible for membership of the pension scheme and do not participate in any of the company’s bonus schemes. Information on the compensation received and the dealings of the directors with the bank are included in the notes 10 and 35 to the financial statements.

The Board has set up working committees to assist in discharging its duties and responsibilities as follows:

Board Audit and Risk Management CommitteeThis committee comprises of three non-executive directors. The board is mandated to raise the standards of corporate governance by reviewing the quality and effectiveness of the internal control systems, the internal and external audit functions and the quality of financial reporting. In addition to advising the Board on best practice, the committee also monitors management’s compliance with relevant legislation, regulations and guidelines as well as the bank’s laid down policies and procedures.

The committee has direct access to the Assurance function and the Company Secretary. During the year the committee received and reviewed the findings of the internal and external audit reports and management’s action to address them.

Finance and Credit CommitteeThe committee is mandated to review and make recommendations on the Bank’s credit, Financial and accounting policies, review and make recommendations on the Bank’s Annual Budget, oversight of the overall lending policy of the bank and deliberate and consider loan applications beyond the credit discretion limits extended to management. The committee also reviews and considers all issues that may materially impact the present and future quality of the Bank’s credit risk management function as well as the


STATEMENTS

Statement of Corporate governance

NAME NuMBER OF MEETINgS ATTENDED

PERCENTAgE ATTENDED

Eunice w. Kagane (Chairman)

�� 00%

Dr. Cleopa Mailu �0 8�%

Dr. Alloys Ayako �� 9�%

S. l. Boboti �� 00%

Julius Mutua (Representative Permanent Secretary - Treasury)

�0 8�%

James Akoya (Representative Managing Trustee - NSSF)

�� 9�%

D. Ndegwa wachira (Managing Director)

�� 00%

quality of the loan portfolio and ensure adequate bad debt provisions are maintained in line with the Central Bank of Kenya prudential guidelines. The committee also reviews, approves and monitors the management’s compliance with applicable statutory provisions, Bank policies and guidelines relating to the monitoring of price, liquidity, exchange rate and interest rate risks. The committee comprises of four non-executive directors and the Managing Director.

Staff CommitteeThe committee is comprised of four non-executive directors and the Managing Director. The committee is mandated to formulate staff policies and procedures and ensure an adequately staffed and professionally managed human resource. The committee assists the Board in discharging its corporate governance role by reviewing staffing needs of the bank, appoints senior management staff, reviews training needs and undertake disciplinary measures as per the staff policies.

Tender committeeThe committee comprises three non-executive directors and the Managing Director. The committee is mandated to formulate and review procurement policies and approve the annual

procurement plan in accordance with the Public Procurement and Disposal Act 2005.

Board meeting attendance During the year under review, the Board held twelve meetings excluding the working committee meetings. The Board members attendance for 2007 is as follows;

CSR STATEMENTS


«

STATEMENTS

« «

ASSET & TRADE FINANCEBig is small with a little help from us.


CSR STATEMENTS

BuIlDINg STRONgER COMMuNITIES

AT CONSOlIDATED BANK, wE HAVE

BuIlT A STRONg HERITAgE OF gIVINg

AND MAKINg A DIFFERENCE IN THE

COMMuNITIES wHERE wE lIVE AND

wORK.

We understand that our business has an impact on local communities. We aim to ensure that this impact is always positive and we pursue this through a carefully planned blend of local and national initiatives.

It is our policy that all our 11 branches are able to support causes which are relevant to their local communities.

During the year, corporate donations has been used to support a number of worthy causes including children homes, the disabled, health and environmental.

MAyAt Consolidated Bank we have a passion for children. We believe we must invest in our children, who are our future. During the month, we visited and made donations to various children homes including: Mwea Children Home, Meru School for the mentally handicapped, Rongai Children’s Home-Nairobi and Tuuru Children’s Home-Maua.

JulyConsolidated Bank also works for the upliftment of children and aim to fulfill the wishes of children living with life-threatening diseases. The bank Participated in a walk for Cerebral Palsy Society of Kenya; Supported two (2) children have an orthopaedic operation in Kikuyu Hospital and donated to Operation Smile Mission.

Other initiatives undertaken by the bank included: Adopting Bethlehem Children’ home in Mwea, donations and visit- Imani rehabilitation agency and Pwani School for the mentally handicapped and cash donation to Kenya Red Cross.

Corporate Social Responsibility

CSR STATEMENTS


AuguSTThe Company encourages the physically challenged to explore their talent in business. In the spirit of supporting the develop-ment of Small and Medium Sized Enterprises, the bank donated 10 business tricycles to Association for the Physically Handi-capped of Kenya.

The bank is also committed to the conservation of the environ-ment. We sponsored the environmental conservation clean up of Isiolo town.

SEPTEMBERConsolidated bank actively and closely supports activities of the Blood link foundation. Whenever there has been a disaster, Con-solidated Bank has always risen to the occasion. We supported a blood drive in conjunction with Blood link foundation at the head office. We also played our part in improving educational standards at Wabera primary school Isiolo through purchase of desks for the school.

DECEMBERThe Company encourages the youth to explore their talent in various sporting disciplines by sponsoring such events and help-ing them to give their best. As part of Jamhuri day celebrations, we partnered with the Association for the Jamhuri Day football games in Isiolo to promote soccer. With teams participating from all over Isiolo, it gave participants a chance to showcase their tal-ent, and compete in the spirit of the game. The bank also held another Blood drive in conjunction with Blood link foundation. The bank also supported destitute children in Mbeere and Mwiki Karura Children Centre located at Kasarani.

OuR COMMITMENT

Our commitment to social responsibility is as strong today as it was when our bank was founded. We are proud of our progress and will continue to commit our time and resource to make a difference in the environment we operate in.

�7Consolidated Bank of Kenya

Fees and commissions �0%

Other incomes �6%

Interest income ��%

DISTRIBuTION OF INCOME

SHAREHOlDERS’ EQuITyTOTAl ASSETS

Financial Performance Charts

Foreign exchange trading income �%

2003 2004 2005

YEAR

2006 2007

635,842

564,821

706,095 722,235747,924.00

100

0

200

300

800

700

600

500

400

500,000

2003 2004 2005

YEAR

2006 2007

2,442,416

2,753,390 2,915,576

3,437,096

4,108,815.06

0

1,000,000

1,500,000

4,500,000

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000


Intangible assets �%

Property and equipment ��%

Loans and advances to customers ��%

Other assets �%

Cash(both local and foreign �%Balances due from Central Bank of Kenya �%

Kenya Government securitie ��%

Deposits and balances due from banking institutions �0%

DISTRIBuTION OF ASSETS

NET lOANS & ADVANCES DEPOSITS

2003 2004 2005

YEAR

2006 2007

1,105,057 1,115,375

1,289,223

1,642,214

2,245,386

0

2,500,000

2,000,000

1,500,000

1,000,000

500,000

2003 2004 2005

YEAR

2006 2007

1,616,621

1,967,911 1,950,253

2,462,796

2,850,629.00

0

500,000

3,00,000

2,500,000

2,000,000

1,500,000

1,000,000


»»

– let your Business flourish– let your Business flourish

BuSINESS SuPPORT

lOAN

BuSINESS SuPPORT

lOAN


DIVIDEND

The directors do not recommend the payment of a dividend for the year.

DIRECTORS

The present members of the board of directors are shown on page 3 & 4.

THE DIRECTORS HAVE PlEASuRE IN

PRESENTINg THEIR REPORT TOgETHER

wITH THE AuDITED FINANCIAl

STATEMENTS FOR THE yEAR ENDED ��

DECEMBER �007.

ACTIVITIES

The principal activities of the bank, which is licensed under the banking Act, are the provision of banking, financial and related services.

AuDITORS

The Controller & Auditor General is responsible for the statu-tory audit of the company’s books of account in accordance with section 14 and section 39(i) of the Public Audit Act, 2004 which empowers the Controller & Auditor General to nominate other auditors to carry out the audit on her behalf.

Deloitte & Touche, who were nominated by the Controller & Au-ditor General, carried out the audit of the financial statements for the year ended 31 December 2007.

By ORDER OF THE BOARD

SecretaryNairobi, 18 March 2008

Report of the Directors

SH ’000

Profit before tax 25,821

Taxation -

Profit for the year transferred to accumulated losses

��,8��


Statement of Directors’ Responsibilities

Director18th March, 2008

Director18th March, 2008

The Companies Act requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the bank as at the end of the financial year and of the operating results of the bank for that year. It also requires the directors to ensure that the bank keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the bank. They are also responsible for safeguarding the assets of the bank.

The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.

The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, in conformity with International Financial Reporting Standards and in the manner required by the Companies Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the bank and of its operating results. The directors further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control.

Nothing has come to the attention of the directors to indicate that the bank will not remain a going concern for at least the next twelve months from the date of this statement.


Independent auditor’s report of the controller and auditor general on Consolidated Bank of Kenya limited

The financial statements of Consolidated Bank of Kenya Limited set out on pages 23-60 which comprise the balance sheet as at 31 December 2007 and the income statement, statement of changes in equity and cash flow statement for the year then ended, together with a summary of significant accounting policies and other explanatory notes have been audited on my behalf by Deloitte & Touche, auditors appointed under section 39 of the Public Audit Act, 2003. The auditors have duly reported to me the results of their audit and on the basis of their report, I am satisfied that all the information and explanations which, to the best of my knowledge and belief, were necessary for the purpose of the audit were obtained.

Director’s Responsibility for the Financial StatementThe Directors were responsible for the perception of financial statements which give a true and fair view of the bank’s state of affairs and its operating results in accordance with the International Financial reporting Standards. This responsibility included; designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Responsibility of the Controller and Auditor general My responsibility is to express an independent opinion on the financial statements based on the audit. The audit was conducted in accordance with the international Standards on Auditing. These standards require compliance with ethical requirements and that the audit be planned and performed with a view to obtaining

reasonable assurance that the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgments, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making these risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the bank’s internal controls. An audit also includes evaluation the appropriateness of accounting policies used and the reasonableness of accounting estimate made by the directors, as well as evaluating the overall presentation of the financinal statements. I believe the audit provides a reasonable basis for my opinion.

OpinionIn my opinion, proper books of account have been kept by the bank and the accompanying financial statements give a true and fair view of the state of affairs of the bank as at 31 December 2007 and of its profit and cash flows for the year ended in accordance with International Financial Reporting Standards and the Kenyan Companies Act, Cap 486 of the Laws of Kenya.

P. N. KOMORA, CBS.CONTROllER AND AuDITOR gENERAl


Income Statement For the year ended �� December �007

NOTE�007

SH’000�006

SH’ 000

Interest Income 5 369,511 297,692

Interest Expense 6 (51,020) (37,437)

NET INTEREST INCOME ��8,�9� �60,��

Fees and commission incomeForeign exchange trading incomeOther operating income

789

186,03118,80499,475

148,39114,67075,749

OPERATINg INCOME 6��,80� �99,06�

Operating expensesNet provision for impairment chargeon loans and advances

1019

(497,216)(99,764)

(429,850)(52,952)

PROFIT BEFORE TAxATION ��,8�� 6,�6�

Taxation Credit 12 - -

ProfiT for The year 25,821 16,263

Earnings per share

Basic and diluted 13 Sh 1.30 Sh 0.82


Balance SheetAs at �� December �007

The financial statements on pages 23 to 60 were approved by the board of directors on 18 March, 2008 and were signed on its behalf by:

NOTE�007

SH’000�006

SH’000

ASSETS

Cash and balances with Central bank of Kenya

Government securities held to maturity

Balances due from banking institutions

Other assets

Loans and advances to customers

Quoted investment

Intangible assets

Property and equipment

Prepaid operating lease rentals

14

15

16

17

18

20

21

22

23

433,748

538,991

66,289

107,217

2,245,386

797

95,072

612,805

8,509

367,039

536,886

22,864

152,160

1,642,214

929

110,778

595,547

8,679

TOTAl ASSETS �,�08,8�� ,��7,096

lIABIlITIES AND SHAREHOlDERS’ FuNDS

lIABIlITIES

Deposits and balances due to

banking institutions

Customer deposits

Other liabilities

16

25

26

347,419

2,850,629

162,842

70,830

2,462,796

181,235

TOTAl lIABIlITIES �,�60,890 �,7��,86�

SHAREHOlDERS’ FuNDS

Share capital

Revaluation surplus

Accumulated losses

Statutory reserve

Fair value (deficit)/reserve

27

28

29

30

31

1,119,530

188,210

(576,975)

17,230

(71)

1,119,530

194,324

(603,303)

11,623

61

TOTAl SHAREHOlDERS’ FuNDS 7�7,9�� 7��,��

TOTAl lIABIlITIES AND SHAREHOlDERS’ FuNDS �,�08,8�� ,��7,096

Directors Secretary


Statement of changes in EquityFor the year ended �� December �007

At 1 January 2006

Excess depreciation transfer

Gain on revaluation of available

for sale investment

Loss for the year

Transfer to statutory reserve

28

31

30

1,119,530

-

-

-

-

200,438

(6,114)

-

-

-

(620,718)

6,114

-

16,263

(4,962)

6,661

-

-

-

4,962

184

-

(123)

-

-

706,095

-

(123)

16,263

-

At 31 December 2006 �,��9,��0 �9�,�� (60�,�0�) ��,6�� 6� 7��,��

At 1 January 2007

Excess depreciation transfer

Loss on revaluation of available

for sale investment

Profit for the year

Transfer to statutory reserve

28

31

30

1,119,530

-

-

-

-

194,324

(6,114)

-

-

-

(603,303)

6,114

-

25,821

(5,607)

11,623

-

-

-

5,607

61

-

(132)

-

-

722,235

-

(132)

25,821

-

At 31 December 2007 �,��9,��0 �88,��0 (�76,97�) �7,��0 (7�) 7�7,9��

SH

AR

E C

AP

ITA

lS

H ‘0

00

NO

TE

TO

TA

l

RE

VA

lu

AT

ION

Su

RP

lu

SS

H‘0

00

AC

Cu

Mu

lA

TE

D l

OS

SE

SS

H ‘0

00

ST

AT

uT

ORy

RE

SE

RV

ES

H ‘0

00

FAIR

VA

lu

E R

ES

ER

VE

(d

efici

t) S

H‘0

00


Cashflow statementFor the year ended �� December �007

NOTE �007

SH ‘000 �006

SH ’000

OPERATINg ACTIVITIES

Net cash (used in)/generated from operations

��(a) (116,169) 111,030

INVESTINg ACTIVITIES

Acquisition of property and equipmentAcquisition of leasehold landAcquisition of intangible assetsProceeds on sale of property and equipment

Net cash used in investing activities

��

(72,730)-

(9,385)385

(81,730)

(81,010)(7,700)

- 559

(88,151)

Net (Decrease)/Increase in Cash and Cash Equivalents (�97,899) ��,879

Cash and cash equivalents at � January 7�9,70� 696,8��

Cash and cash equivalents at �� December ��(b) ��,80� 7�9,70�


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Notes to the financial statements

For the year ended �� December �007

� ACCOuNTINg POlICIES

STATEMENT OF COMPlIANCEThe financial statements have been prepared in accordance with International Financial Reporting Standards. The principal accounting policies adopted, remain unchanged from the previous year except for the adoption of IFRS 7 on financial instrument disclosures and IAS 1 Amendment on capital disclosure as set out below:

ADOPTION OF NEw AND REVISED INTERNATIONAl FINANCIAl REPORTINg STANDARDS.In 2007, the following new and revised standards and interpretations became effective for the first time and have been adopted by the bank, where relevant to its operations. The comparative figures have been restated as required.

• IFRS 7 On Financial Instruments Disclosures – IFRS 7 introduces new disclosures relating to financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. The standard does not have any impact on the classification or measurement of the bank’s financial instruments.

• IAS � Amendment, Capital Disclosure. The amendment to IAS 1 introduces disclosures about the level of the bank’s capital and how it manages capital. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:

• IFRS 8 on Operating Segments• IFRIC 8 on Scope of IFRS 2 • IFRIC 9 on Reassessment of Embedded Derivatives • IFRIC �0 on Interim Financial Reporting and Impairment

The adoption of these standards and interpretations, when effective, will have no material impact on the financial statements of the bank.

BASIS OF ACCOuNTINgThe financial statements are prepared under the historical cost basis of accounting modified to include the revaluation of freehold land and building and the statement of quoted investment at fair value.

CONSOlIDATIONThe financial statements of the dormant subsidiaries listed in note 32 have not been consolidated as the amounts involved are not material and would, therefore, be of no real value.

INTEREST INCOME AND ExPENSE Interest income and expense for all interest bearing financial instruments, except those classified as held for trading or designated at fair value through profit or loss are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to the carrying amount of the financial asset or liability.

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

FEES AND COMMISSIONFees and commission are generally recognised on accrual basis when the service has been provided.


INTANgIBlE ASSETS - COMPuTER SOFTwARE COSTSCosts incurred on computer software are initially accounted for at cost and subsequently at cost less any accumulated amortisation and accumulated impairment losses.Amortisation is calculated on a straight line basis over the estimated useful lives not exceeding a period of 10 years.

STATuTORy RESERVEIAS 39 requires the group to recognise an impairment loss when there is objective evidence that loans and advances are impaired. However, Central bank of Kenya prudential guidelines require the bank to set aside amounts for impairment losses on loans and advances in addition to those losses that have been recognised under IAS 39. Any such amounts set aside represent appropriations of retained earnings and not expenses in determining profit or loss. These amounts are dealt with in the statutory reserve.

PROPERTy AND EQuIPMENTProperty and equipment are stated at cost or as professionally revalued from time to time less accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated on a straight-line basis at annual rates estimated to write off the cost of each asset or the revalued amounts, to its residual values over its estimated useful life as follows:

Fixtures, fittings and equipment 8 yearsMotor vehicles 4 yearsBuildings 40 years or land lease period if shorter

Freehold land is not depreciated as it is deemed to have an indefinite life.The depreciation charge to the income statement is based on the carrying amounts of the property and equipment. The excess of this charge over that based on the historical cost of the property and equipment is released each year from the revaluation surplus to retained earnings.

lEASHOlD lANDPayments to acquire interests in leasehold land are treated as prepaid operating rentals. They are stated at historical cost and are amortised over the term of the related lease.

IMPAIRMENTAt each balance sheet date, the bank reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated and an impairment loss is recognized in the income statement whenever the carrying amount of the asset exceeds its recoverable amount.

FOREIgN CuRRENCIESAssets and liabilities in foreign currencies are expressed in Kenya Shillings at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies during the year are translated at the rates ruling at the time of the transactions. The resulting gains or losses are dealt with in the income statement.

TAxATIONIncome tax expense represents the sum of the current tax payable and the deferred taxation.

Current taxation is provided on the basis of the results for the year, as shown in the financial statements, adjusted in accordance with tax legislation. Deferred taxation is provided using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred taxation.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the unused tax credits can be utilised.

FINANCIAl INSTRuMENTSa) Classification The bank classifies its financial assets into the following categories: Financial assets at fair value through profit or loss; loans, advances and receivables; held- to- maturity investments; and available-for-sale assets. Management determines the appropriate classification of its investments at initial recognition.

Financial assets at fair value through profit or loss This category has two sub-categories: Financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading.

Notes to the financial statements - continued

Accounting policies-continued


Loans and advances Loans, advances and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market; a) other than those classified as held for trading and those that the bank upon initial recognition designates as at fair through profit or loss; or b) those that the bank upon initial recognition designates as available for sale.

Held to maturityHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the bank has the positive intention and ability to hold to maturity. Where a sale occurs other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and classified as available for sale.

Available-for-sale financial assetsAvailable for sale assets are those that are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rate or equity prices.

Cash and cash equivalentsCash and cash equivalents include notes and coins on hand, unrestricted balances held with the central bank and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the balance sheet.

b) Recognition & derecognition Financial assets are initially recognised at fair value plus, for all financial assets except those carried at fair value through profit and loss, transactional costs. Financial assets are derecognised when the rights to receive cashflows from the financial assets have expired or where the company has transferred substantially all risks and rewards of ownership. Loans, advances and receivables and held to maturity financial assets are carried at amortised cost using the effective interest rate method. Available for sale financial assets and financial assets at fair value through profit or loss are carried at fair value. Gains and losses arising from changes in fair values of ‘financial assets at fair value through profit or loss’ are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available for sale financial assets are recognised directly in equity until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity are recognised in the income statement.

c) Impairment and uncollectability of financial assetsAt each balance sheet date, all financial assets are subject to

review for impairment.

If it is probable that the bank will not be able to collect all amounts due (principal and interest) according to the contractual terms of loans, receivables, or held-to-maturity investments carried at amortised cost, an impairment or bad debt loss has occurred. The amount of the loss is 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 (recoverable amount). The carrying amount of the asset is reduced to its estimated recoverable amount through use of the provision for bad and doubtful debts account. The amount of the loss incurred is included in the income statement for the period.

Assets carried at Amortised costThe bank assesses whether objective evidence of impairment exist individually for assets that are individually significant and collectively for assets that are not individually significant. If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the financial instruments effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and amount of the loss is recognised through the income statement.

When a loan is uncollectible it is written off against the related provisions for loan impairment. Such loans are written off after all the necessary recovery procedures have been completed and the amount of loan has been determined. Subsequent recoveries of amounts previously written off are recognised as gains in the income statement.

Assets carried at fair value In the case of investment classified as available for sale, significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the asset is impaired. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to profit or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profit or loss.

However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income.

Renegotiated loans that are subject to collective impairment or individually significant and whose terms have been renegotiated




are no longer to be past due but are reclassified as performing loans. In subsequent years, the renegotiated terms apply in determining whether the asset is considered past due.

FINANCIAl lIABIlITIESAfter initial recognition, the bank measures all financial liabilities including customer deposits other than liabilities held for trading at amortised cost. Liabilities held for trading (financial liabilities acquired principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin) are subsequently measured at their fair values.

PROVISIONSA provision is recognised if, as a result of a past event, the bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. 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.

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

The bank as lessorRental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

The bank as lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

CONTINgENT lIABIlITIESLetters of credit, acceptances, guarantees and performance bonds are generally written by the bank to support performance by a customer to third parties. The bank will only be required to meet these obligations in the event of the customer’s default. These obligations are accounted for as off balance sheet transactions and disclosed as contingent liabilities.

FIDuCIARy ACTIVITIESAssets and income arising thereon together with related undertakings to return such assets to customers are excluded from these financial statements where the bank acts in a fiduciary capacity such as nominee, trustee or agent.

EMPlOyEE BENEFIT COSTSThe bank operates a defined contribution retirement benefit

scheme for all its employees. The scheme is funded by contributions from both the bank and employees. The bank also contributes to the statutory National Social Security Fund. This is a defined contribution scheme registered under the National Social Security Act. The obligations under the scheme are limited to specific contributions legislated from time to time. These are presently a maximum of Sh 200 per month for each employee.

The bank’s contributions in respect of retirement benefit costs are charged to the income statement in the year to which they relate.

Employee entitlement to leave not taken is charged to the income statement as it accrues.

COMPARATIVESWhere necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. In particular, comparative figures have been restated to recognise the effect of adoption of IFRS 7 on financial instruments disclosures.




� CRITICAl JuDgEMENTS IN APPlyINg THE ENTITy’S ACCOuNTINg POlICIES

In the process of applying the entity’s accounting policies, management has made estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. These are dealt with below:

Impairment losses on loans and advancesThe bank reviews its loan portfolios to assess impairment regularly. In determining whether an impairment loss should be recorded in the income statement, the bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cashflows from a portfolio of loans, before a decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Held -to-maturity investmentsThe bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the bank evaluates its intention and ability to hold such investments to maturity. If the bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost.

Property, plant and equipmentCritical estimates are made by the directors in determining depreciation rates for property, plant and equipment.

� SEgMENTAl REPORTINg

The major part of the business of the bank falls under the category of retail and corporate banking with other income comprising less than 6% of total income. Also, the bank operates wholly within Kenya. Segmental reporting is, therefore, not considered of any useful value.

� FINANCIAl RISK MANAgEMENT

(a) Introduction and overviewThe bank has exposure to the following risks from its use of financial instruments:

• Credit risk• liquidity risk• Market risks• Operational risks.

This note presents information about the bank’s exposure to each of the above risks, the bank’s objectives, policies and processes for measuring and managing risk, and the bank’s management of capital.

RISK MANAgEMENT FRAMEwORKThe Board of Directors has overall responsibility for the establishment and oversight of the bank’s risk management framework. The Board has established an Audit and Risk Management Committee comprising of three non Executives Directors to assist in the discharge of this responsibility. The Board has also established the bank Asset and Liability (ALCO), Credit and Operational Risk committees, which are responsible for developing and monitoring risk management policies in their specified areas. These committees comprise of executive members and report regularly to the Board of Directors on their activities.

The bank’s risk management policies are established to identify and analyse the risks faced by the bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.



The bank Audit and Risk Management Committee is responsible for monitoring compliance with the bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the bank. This Committee is assisted in these functions by the Assurance function. The Assurance function undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Committee.

(b) Credit riskCredit risk is the risk of financial loss to the bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the bank’s loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the bank considers and consolidates all elements of credit risk exposure.

For risk management purposes, credit risk arising on trading securities is managed independently, but reported as a component of market risk exposure.

MANAgEMENT OF CREDIT RISKThe Board of Directors has delegated responsibility for the oversight of credit risk to its Finance and Credit Committee comprising of three non executive directors. The Credit Committee comprising of executive management is vested with the responsibility of implementing the bank’s Credit risk policies and monitoring of the portfolio to ensure that credit risks are managed within acceptable standards. The Credit Committee assisted by the Credit Department is responsible for the management of the banks credit risk including:

• Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

• Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are delegated to the Head of Credit and the Credit Committee while larger facilities require approval by the Board of Directors.

• Limiting concentrations of exposure to counterparties, geographies and industries for loans and advances.

• Developing and maintaining the bank’s risk gradings in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks.

The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The current risk grading framework consists of eight grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. Risk grades are subject to regular reviews by Credit Department.

• Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided to bank Credit on the credit quality of local portfolios and appropriate corrective action is taken.

• Providing advice, guidance and specialist skills to branches to promote best practice throughout the bank in the management of credit risk.

The bank structures the level of credit risk it undertakes by placing limits on amounts of risk accepted in relation to one borrower or a group of borrowers. Such risks are monitored on a revolving basis and are subject to annual or more frequent review.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate guarantees.

The bank has no significant concentration of credit risk, with exposure spread over a diversity of personal and commercial customers as set out in note 36.


Financial risk management-continued


loans and advances to customers

�007Sh’000

�006Sh’000

INDIVIDuAlly IMPAIRED

Grade 6: Impaired (substandard)

Grade 7: Impaired (doubtful)

Grade 8: Impaired (loss)

47,618

328,273

247,214

56,412

461,826

134,541

Gross amount

Allowance for impairment

623,105

(328,630)

652,779

(341,467)

Carrying amount �9�,�7� ��,��

COllECTIVEly IMPAIRED

Grade 4-5: Watch list

Allowance for impairment

234,916

(7,048)

175,895

(7,296)

Carrying amount ��7,868 �68,�99

NEITHER IMPAIRED NOR PAST DuE

Grade 1-3: Normal 1,723,043 1,162,303

Total carrying amount �,��,�86 �,6��,��

ExPOSuRE TO CREDIT RISK

IMPAIRED lOANS Impaired loans are loans for which the bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loans agreement(s). These loans are graded 6 to 8 in the bank’s internal credit risk grading system.

PAST DuE BuT NOT IMPAIRED lOANSLoans where contractual interest or principal payments are past due but the bank believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the bank.

lOANS wITH RENEgOTIATED TERMSLoans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial

position and where the bank has made concessions that it would not otherwise consider. Loans whose terms have been renegotiated are no longer treated as past due but are reclassified as performing loans. In subsequent years, the renegotiated terms apply in determining whether the asset is considered past due.

AllOwANCES FOR IMPAIRMENTThe bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.



CARRyINg AMOuNT


lOANS AND ADVANCES TO CuSTOMERS

�007Sh’000

�006Sh’000

Against individually impaired PropertyAgainst collectively impaired Property

870,838

3,222,386

507,845

2,255,670

TOTAl �,09�,�� ,76�,��

wRITE-OFF POlICyWhen a loan is uncollectible it is written off against the related provisions for loan impairment. Such loans are written off after all the necessary recovery procedures have been completed and the amount of loan has been determined. Subsequent recoveries of amounts previously written off are recognised as gains in the income statement.

The bank holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity.

An estimate of the fair value of collateral and other security enhancements held against financial assets is shown below:

CONCENTRATION OF RISKThe bank monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk at the reporting date is shown on note 36.

SETTlEMENT RISKThe bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed.Settlement limits form part of the credit approval / limit monitoring process described earlier. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from bank Risk.

(c) liquidity riskLiquidity risk is the risk that the bank will encounter difficulty in meeting obligations from its financial liabilities.

MANAgEMENT OF lIQuIDITy RISKThe bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the bank’s reputation.

liquidity risk is addressed through the following measures:

• The bank enters into lending contracts subject to availability of funds.

• The bank has an aggressive strategy aimed at increasing the customer deposit base.

• The bank borrows from the market through inter bank transactions with other banks and Central bank for short term liquidity requirements.

• The bank invests in short term liquid instruments which can easily be sold in the market when the need arises.

• Investments in property and equipment are properly budgeted for and done when the bank has sufficient cash flows.

The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Board. Daily reports covering the liquidity position of the bank are regularly submitted to ALCO.




�007 �006

At 31 December ��% 33%

Average for the period ��% 33%

Maximum for the period �7% 40%

Minimum for the period ��% 29%

The table below analyses financial assets and financial liabilities into relevant maturity groupings based on the remaining period at 31 December 2007 to the contractual maturity date.

(c) liquidity riskThe previous table shows the undiscounted cash flows on the bank’s financial liabilities and unrecognised loan commitments on the basis of their earliest possible contractual maturity. The bank’s expected cash flows on these instruments vary significantly from

this analysis. For example, demand deposits from customers are expected to maintain a stable or increasing balance; and unrecog-nised loan commitments are not all expected to be drawn down immediately.



ExPOSuRE TO lIQuIDITy RISKThe key measure used by the bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities issued, other borrowings and commitments maturing within the next month. Details of the reported bank ratio of net liquid assets to deposits and customers at the reporting date and during the reporting period were as follows:

�7Consolidated Bank of Kenya �7

The Gross nominal inflow / (outflow) disclosed in the previous table is the contractual, undiscounted cash flow on the financial liability or commitment. The disclosure for derivatives shows a net amount for derivatives that are net settled, but a gross in-flow and outflow amount for derivatives that have simultaneous gross settlement (e.g., forward exchange contracts and currency swaps).

(d) Market risksMarket risk is the risk that changes in market prices, which in-clude interest rate, equity prices, foreign exchange rates and credit spreads will affect the bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

MANAgEMENT OF MARKET RISKSOverall responsibility of managing market risk rests with the As-

set Liability Committee (ALCO). The Treasury department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation.

ExPOSuRE TO INTEREST RATE RISK The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The ALCO is the monitoring body for compliance with these limits and is assisted by Treasury Department in its day-to-day monitoring activities.

The table below summarises the bank’s exposures to interest rate risks. Included in the table are the bank’s assets and liabilities at carrying amounts, categorised by the earlier of the contrac-tual repricing or maturity dates. The bank does not bear an inter-est rate risk on off balance sheet items.




KSHSH ’000

uSDSH ’000

gBPSH ’000

EuROSH ’000

OTHERSSH ’000

TOTAlSH ’000

FINANCIAl ASSETS

Cash and balances with Central bank of Kenya Government securitiesDeposits and balances due from banking institutionsOther assetsLoans and advances to customersQuoted investments

433,748

538,991

18,557

107,217

2,210,809

797

-

-

25,388

-

34,328

-

-

-

4,438

-

165

-

-

-

16,950

-

84

-

-

-

956

-

-

-

433,748

538,991

66,289

107,217

2,245,386

797

Total financial assets �,��0,��9 �9,7�6 �,60� �7,0�� 9�6 �,�9�.��8

FINANCIAl lIABIlITIES

Deposits and balances due to banking institutionsCustomer depositsOther liabilities

322,900

2,790,863

162,842

-

44,079

-

-

7,297

-

4,691

8,309

-

19,828

-

-

347,419

2,850,629

162,842

Total financial liabilities

NET ON BAlANCE SHEET POSITION

OFF BAlANCE SHEET POSITION

�,�76,60�

��,��

��,�6�

��,079

��,6�7

-

7,�97

(�,69�)

-

��,08�

�,9��

-

�9,8�8`

(�8,87�)

-

�,�60,890

��,��8

��,�6�

AS AT �� DECEMBER �006

Total financial assetsTotal financial liabilities



�,68�,�0��,67�,��8

8,�87

�6�,90�

��,��9,��6

(6,�0�)

-

96��,0��

(�,0��)

-

6,�8��8�

�,998

-

�0�-

�0�

-

�,7��,09��,7��,86�

7,��

�6�,90�

CuRRENCy RISKThe bank takes on exposure to the effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows. The board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions

which are monitored daily. The table below summarises the bank’s exposure to foreign exchange rate risk as at 31 December. Included in the table are the bank’s financial instruments categorised by currency.




KSHSH ’000

uSDSH ’000

gBPSH ’000

EuROSH ’000

OTHERSSH ’000

TOTAlSH ’000

FINANCIAl ASSETS

Cash and balances with Central bank of Kenya Government securitiesDeposits and balances due from banking institutionsOther assetsLoans and advances to customersQuoted investments

433,748

538,991

18,557

107,217

2,210,809

797

-

-

25,388

-

34,328

-

-

-

4,438

-

165

-

-

-

16,950

-

84

-

-

-

956

-

-

-

433,748

538,991

66,289

107,217

2,245,386

797

Total financial assets �,��0,��9 �9,7�6 �,60� �7,0�� 9�6 �,�9�.��8

FINANCIAl lIABIlITIES

Deposits and balances due to banking institutionsCustomer depositsOther liabilities

322,900

2,790,863

162,842

-

44,079

-

-

7,297

-

4,691

8,309

-

19,828

-

-

347,419

2,850,629

162,842

Total financial liabilities



�,�76,60�

��,��

��,�6�

��,079

��,6�7

-

7,�97

(�,69�)

-

��,08�

�,9��

-

�9,8�8`

(�8,87�)

-

�,�60,890

��,��8

��,�6�

AS AT �� DECEMBER �006

Total financial assetsTotal financial liabilities



�,68�,�0��,67�,��8

8,�87

�6�,90�

��,��9,��6

(6,�0�)

-

96��,0��

(�,0��)

-

6,�8��8�

�,998

-

�0�-

�0�

-

�,7��,09��,7��,86�

7,��

�6�,90�

AMOuNT��-DEC-07

SH’000

SCENARIO ��0% APPRECIATION

SH’000

SCENARIO ��0% DEPRECIATION

SH’000

Profit (loss) Before Tax 25,821 57,646 22,614

Adjusted Core Capital 542,555 574,380 539,348

Adjusted Total Capital 606,838 638,663 603,631

Risk weighted Assets (RwA) 3.216,308 3.216,308 3.216,308

Adjusted Core Capital to RwA 16.85% 17.47% 16.41%

Adjusted total Capital to RwA 18.85% 19.43% 18.36%

MARKET RISKS - SENSITIVITy ANAlySIS The objective of Consolidated bank’s market risk management is to manage and control market risk exposures in order to optimize return on risk while maintaining a market profile consistent with the bank’s mission.

Market risk is the risk that movements in market risk factors, including foreign exchange rates and interest rates will reduce Consolidated bank’s income or capital

A principal part of Consolidated bank’s management of market risk is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modelling) and the sensitivity of future earnings and capital to varying foreign exchange rates. Consolidated bank aims, through its management of market risk, to mitigate the impact of prospective interest rate movements and foreign exchange fluctuations which could reduce future earnings and capital.

For simulation modelling, Consolidated bank uses a combination of scenarios relevant to local businesses and local markets. These scenarios are used to illustrate the effect on the bank’s earnings and capital.

INTEREST RATE RISKS – INCREASE / DECREASE OF �0% IN NET INTEREST MARgINThe Interest Rate Risks sensitivity analysis is based on the following assumptions.

• Changes in the market interest rates affect the interest income or expenses of variable interest financial instruments.

• Changes in Market interest rates only affect interest income or expenses in relation to financial instruments with fixed interest rates if these are recognized at their fair value.

• The interest rate changes will have a significant effect on interest sensitive assets and liabilities and hence simulation modelling is applied to Net interest margins.

• The interest rates of all maturities move by the same amount and, therefore, do not reflect the potential impact on net interest income of some rates changing while others remain unchanged.

• The projections make other assumptions including that all positions run to maturity.

The table below sets out the impact on future net interest income of an incremental 10% parallel fall or rise in all yield curves at the beginning of each quarter during the 12 months from 1 January 2008.

Assuming no management actions, a series of such appreciation would increase earnings for 2008 by Shs 31,825,000, while a series of such falls would decrease net interest income for 2008 by Shs 3,207,000,000.




Assuming no management actions, a series of such appreciation would increase earnings for 2008 by Shs 1,880,000, while a series of such falls would decrease net interest income for 2008 by Shs 1,880,000.

Also a series of such rises would increase the adjusted core capital to RWA and Adjusted total capital to RWA by 0.05% and 0.05% respectively, while a series of such falls would decrease the adjusted core capital to RWA and Adjusted total capital to RWA by 0.05% and 0.05% respectively. Both the revised capital rations are well above the minimum capital requirement of 8% and 12% respectively.

AMOuNT��-DEC-07

SH’000

SCENARIO ��0% APPRECIATION

SH’000

SCENARIO ��0% DEPRECIATION

SH’000

Profit Before Tax 25,821 27,701 23,941

Adjusted Core Capital 542,555 544,435 540,675

Adjusted Total Capital 606,838 608,718 604,958

Risk weighted Assets (RwA) 3.216,308 3.217,428 3.215,188

Adjusted Core Capital to RwA 16.87% 16.92% 16.82%

Adjusted total Capital to RwA 18.87% 18.92% 18.82%

Market Risk Sensitivity Analysis (continued)Also a series of such rises would increase the adjusted core capital to RWA and Adjusted total capital to RWA by 0.62% and 0.58% respectively, while a series of such falls would decrease the adjusted core capital to RWA and Adjusted total capital to RWA by 0.44% and 0.49% respectively. Both the revised capital rations are well above the minimum capital requirement of 8% and 12% respectively.

FOREIgN ExCHANgE RISKS – APPRECIATION/DEPRECIATION OF KSHS AgAINST OTHER CuRRENCIES By �0% The Foreign Exchange Risks sensitivity analysis is based on the following assumptions;• Foreign exchange exposures represent net currency positions of all currencies other than Kenya Shillings.

• The Currency Risk sensitivity analysis is based on the assumption that all net currency positions are highly effective.• The Base currency in which Consolidated bank’s business is transacted is Kenya Shillings.

The table below sets out the impact on future earnings of an incremental 10% parallel fall or rise in all foreign currencies at the beginning of each quarter during the 12 months from 1 January 2008.

Assuming no management actions, a series of such rise and fall would impact the future earnings and capital as illustrated in the table below;




(e) Operational risks Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the bank’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the bank’s operations.

The bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the bank’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall bank standards for the management of operational risk in the following areas:

• Requirements for appropriate segregation of duties, including the independent authorisation of transactions

• Requirements for the reconciliation and monitoring of transactions

• Compliance with regulatory and other legal requirements

• Documentation of controls and procedures

• Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified

• Structured process to report control failures as well as escalate material events and incidences which may expose the bank to risks and proposed remedial action

• Development of contingency plans

• Training and professional development

• Ethical and business standards

• Risk mitigation, including insurance where this is effective.

Compliance with bank standards is supported by a programme of periodic reviews undertaken by the Assurance Department. The results of Assurance reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the bank.

(f) Capital management

REgulATORy CAPITAl

The banks objectives when managing capital are:

• To safeguard the banks ability to continue as a going concern so that it can continue to provide returns for the share-holders and benefits for the other stakeholders.

• To maintain a strong capital base to support the current and future development needs of the business.

• To comply with the capital requirements set by the Central bank of Kenya.

Capital adequacy and use of regulatory capital are monitored by management employing techniques based on the guidelines developed by the Central bank of Kenya for supervisory purposes. The required information is filed with the Central bank of Kenya on a monthly basis.

The Central bank of Kenya requires each bank to:

a) Hold the minimum level of regulatory capital of Kshs 250m;

b) Maintain a ratio of total regulatory capital; to risk weighted assets plus risk weighted off balance assets at above the required minimum of 8%;

c) Maintain a core capital of not less than 8% of total deposit liabilities and

d) Maintain total capital of not less than 12% of risk weighted assets plus risk weighted off balance sheet items.

The bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The bank and its individually regulated operations have complied with all externally imposed capital requirements throughout the period.




�007SH’000

�006SH’000

TIER � CAPITAl

Ordinary share capitalRetained earningsNon cumulative irredeemable shares

398,400(576,975)721,130

398,400(603,303)721,130

TOTAl ��,�� 6,��7

TIER � CAPITAl

Revaluation reserves (25%)General loan loss provision (statutory reserve)

47,05317,230

48,58111,623

TOTAl

Total regulatory capital

6�,�8�

606,8�8

60,�0�

�76,��

Risk-weighted assets 3,216,308 2,685,155

Total risk weighted assets �,��6,�08 �,68�,��

CAPITAl RATIOS

Total regulatory capital expressed as a percentage of total risk-weighted assets (CBK minimum ��%)

�9.0% ��.0%

Total tier�capital expressed as a percentage of risk-weighted assets (CBK minimum 8%)

�7 .0% �9.0%

The bank’s regulatory capital is analysed into two tiers:

• Tier � capital, which includes ordinary share capital, noncumulative irredeemable non convertible preference shares, disclosed reserves such as share premiums, retained earnings, and 50% un-audited after tax profit less investment in subsidiaries conducting banking business, investments in equity of other institutions, intangible assets (excluding computer software ) and goodwill

• Tier � capital, which includes 25% revaluation surplus which have received prior CBK approval, subordinated debt, hybrid capital instruments or any other capital instruments approved by CBK.

The bank’s regulatory capital position at 31 December 2007 was as follows:




�007SH’000

�006SH’000

� INTEREST INCOME

Interest on loans and advancesInterest on bank placementsInterest on Government securities held to maturity

317,3169,011

43,184

263,3083,462

30,922

�69,�� 97,69�

6 INTEREST ExPENSE

Interest on customer depositsInterest on inter-bank borrowings

36,83814,182

32,8274,610

��,0�0 �7,��7

7 FEES AND COMMISSION INCOME

Ledger related fees and commissionsCredit related fees and commissionsTransaction related fees

55,20038,94491,887

54,72833,34560,318

�86,0�� 8,�9�

8 gAINS ON FOREIgN ExCHANgE DEAlINgS

Gains on foreign currency dealings arose from trading in foreign currency transactions and also on the translation of foreign currency assets and liabilities.

9 OTHER OPERATINg INCOME

Rental incomeGain on sale of motor vehicleRecoveries of advances previously written offOther

36,235385

38,45224,403

34,036559

26,05715,097

99,�7� 7�,7�9

�0 OPERATINg ExPENSES

Staff costs (note 11)Directors’ emoluments - Fees - OtherContribution to Deposit Protection FundAmortisation of intangible assets (note 21)Depreciation (note 22)Amortisation of operating lease (note 23)Adjustment for previous years over amortisation (note 23)Auditors’ remuneration – current year

204,6583,649

18,4733,689

25,09152,946

170-

2,425

168,2357,275

18,3332,721

24,15348,170

170(830)

2,310



�007SH’000

�006SH’000

�0 OPERATINg ExPENSES (continued)

prior yearOther operating expensesLoss on write off of equipment

(479)184,068

2,526

-159,313

-

�97,��6 ��9,8�0

�� STAFF COSTS

Salaries and wagesMedical expensesPension contributionsNSSF contributionsLeave pay write backTraining, recruitment and staff welfare costsGratuity provision/(write back)

170,5639,027

12,674380

(1,996)13,474

536

145,2097,8467,201

365(3,160)10,774(4,195)

�0�,6�8 �68,��

�� TAxATION

No tax is payable on the results for the year as the bank has accumulated tax losses. As at 31 December 2007 the bank had tax losses amounting to Sh 529,790,000 (2006 – Sh 591,507,000) available for carrying forward and set off against future taxable profits.

a Taxation expense

Current tax based on the taxable loss for the year at 30%

- -

bReconciliation of expected tax based on accounting profit to tax expense:

Profit before taxation 25,821 16,263

Tax calculated at a tax rate of 30% 7,746 4,879

Tax effect of:Income not subject to taxExpenses not deductible for tax purposesDeferred tax credit not recognised (note 24)

(50)4,072

(11,768)

(147)6,458

(11,190)

- -


�007SH’000

�006SH’000


�007SH’000

�006SH’000

�� EARNINgS PER SHARE

Earnings per share is calculated by dividing the net profit attributable to shareholders by the number of ordinary shares in issue during the year.

Profit (Sh ‘000) ��,8�� 16,263

Number of ordinary shares (thousands) �9,9�0 19,920

Earnings per share Basic and diluted (Sh)

�.�0 0.82

There were no potential dilutive shares outstanding at 31 December 2007 and 31 December 2006.

�� CASH AND BAlANCES wITH CENTRAl BANK OF KENyA

Cash on handBalances with Central bank of Kenya:- Cash ratio reserve- Other balances (available for bank’s use)

207,980

169,80755,961

203,743

136,25827,038

��,7�8 �67,0�9

The cash ratio reserve is non-interest earning and is based on the value of customer deposits as adjusted by the Central bank of Kenya requirements. As at 31 December 2007 the cash ratio reserve requirement was 6% (2006 – 6%) of all customer deposits held by the bank. These funds are not available to finance the bank’s day to day operations.

�� gOVERNMENT SECuRITIES - HElD TO MATuRITy

Treasury billsMaturing within 90 days of the balance sheet dateRedemption valueLess: unearned interest

543,000(4,009)

545,550(8,664)

��8,99� ��6,886

The weighted average effective interest rate on treasury bills was 6.8% (2006 – 8.11%).

At 31 December 2007 treasury bills amounting to Nil (2006 – Sh 50 million) were pledged to Central bank to secure any overnight borrowing that the bank may require from time to time.



�007SH’000

�006SH’000

�6 DEPOSITS AND BAlANCES DuE FROM/DuE TO BANKINg INSTITuTIONS

Balances due from banking institutions maturing within 90 days:Balances with correspondent banksDeposits with local banks

55,98810,301

22,864-

66,�89 ��,86�

Balances due to banking institutions maturing within 90 days:Balances with correspondent banksDeposits from local banks

24,519322,900

17,83053,000

��7,��9 70,8�0

Deposits with/from local banks as at 31 December 2007 represent overnight lending. The effective interest rate on deposits due from and due to banking institutions at 31 December 2007 was 6.3% (2006 – 6.2 %) and 6% (2006 - 6%) for balances with correspondent banks.

�7 OTHER ASSETS

Uncleared effectsPrepaymentsRent receivableOther

56,15410,61811,51828,927

97,38911,75312,96830,050

�07,��7 ��,�60



�007SH’000

�006SH’000

�8 lOANS AND ADVANCES TO CuSTOMERS

Commercial loans OverdraftsStaff loans

1,809,325585,772185,967

1,286,618643,97660,383

2,581,064 1,990,977

less: Impairment losses on loans and advances (note 19)

(335,678) (348,763)

loans and advances to customers (net) �,��,�86 �,6��,��

The weighted average effective interest rate on advances to customers as at 31 December 2007 was 16.09 % (2006 – 17.08 %). Included in gross advances of Sh 2,581,064,000 (2006 – Sh 1,990,977,000) are non performing loans and advances amounting to Sh 623,871,000 (2006 – Sh 607,010,000). These are included in the balance sheet net of specific provisions at Sh 328,630,000 (2006 – Sh 287,035,000).

Analysis of gross loans and advances by maturity

Maturing:Within 1 yearBetween 1 and 3 yearsAfter 3 years

693,986769,800

1,117,278

737,553476,382777,042

loans and advances to customers �,�8�,06� �,990,977

The related party transactions and balances are covered under note 35 and concentration of advances to customers is covered under note 36.

�9 IMPAIRMENT lOSSES ON lOANS AND ADVANCES

At 1 JanuaryNew provisionsReversals during the year

��8,76�144,850(45,086)

420,49852,952

-

Net provisions charged 99,764 52,952

Written off (112,849) (124,687)

At 31 December ��,678 ��8,76�


a

b


�007SH’000

�006SH’000

�0 QuOTED INVESTMENT

Available for sale:Listed equity securities-at fair value, beginning of the yearLoss in market value of investment

929

(132)

1,052

(123)

listed equity securities- at fair value, end of the year 797 9�9

The investment is in the name of Jimba Credit Corporation Limited, a dormant subsidiary company.

�� INTANgIBlE ASSETS

COST

At 1 JanuaryAdditions

241,5249,385

241,524-

At 31 December 250,909 241,524

AMORTISATION

At 1 JanuaryCharge for the year

130,74625,091

106,59324,153

At 31 December 155,837 130,746

NET BOOK VAluE

At 31 December 9�,07� 110,778



�007SH’000

�006SH’000

�� PROPERTy AND EQuIPMENT (Continued)

Freehold land and buildings were last revalued as at 02 December 2005, by Prudential valuers limited, independent valuers. Valuations were made on the basis of the open market value. The book values of the properties were adjusted to the revalued amounts and the resultant surplus was credited to the revaluation surplus.

Motor vehicles, fixtures fittings and equipment with a cost of Sh 28,039,166 ( 2006- Sh 53,677,000) were fully depreciated as at 31 December 2007. The nominal annual depreciation charge on these assets would have been Sh 4,509,000 (2006- Sh 8,732,000).

The write off during the year related to equipment that was no longer in use.

If the land and building were stated on the historical cost basis, the carrying amounts would be as follows:

At 1 JanuaryDepreciation charge

176,328(4,521)

180,849(4,521)

At 31 December �7�,807 176,328

�� PREPAID OPERATINg lEASE RENTAlS (lEASEHOlD lAND)

COST

At 1 JanuaryAdditions

45,298-

37,5987,700

At 31 December ��,�98 45,298

AMORTISATION

At 1 JanuaryCharge for the yearAdjustments for previous years over amortisation

36,619170

-

37,279170(830)

At 31 December 36,789 36,619

CARRyINg VAluE

At 31 December 8,�09 8,679



�007SH’000

�006SH’000

�� DEFERRED TAx ASSET

The deferred tax asset computed at the enacted rate of 30% is attributed to the following items:

Deferred tax assets:Tax losses available for future set offProvision for leave payProvision for gratuity

158,9371,290

998

177,4521,888

837

161,225 180,177

Deferred tax liabilities:Revaluation surplusAccelerated capital allowances

(69,697)(40,571)

(71,531)(25,459)

(110,268) (96,990)

Net deferred tax assetNet deferred tax asset not recognised

50,957(50,957)

83,187(83,187)

- -

Deferred tax credit not recognised (note 12) ��,768 ��,�90

The directors at the moment are not able to forecast taxable profits with certainty for the next five years and have there-fore not recognised the deferred tax asset as at 31 December 2007. The directors will review the position again at 31 December 2008.

�� CuSTOMER DEPOSITS

Current and demand accountsSavings accounts Fixed deposit accounts

1,641,214724,754484,661

1,141,568696,793624,435

�,8�0,6�9 �,�6�,796

MATuRITy ANAlySIS OF CuSTOMER DEPOSITS

Repayable:On demandWithin one year

2,365,968484,661

1,838,472624,324

�,8�0,6�9 �,�6�,796

The weighted average effective interest rate on interest bearing customer deposits at 31 December 2007 was 3.25% (2006 – 3%).The related party transactions and balances are covered under note 35 and concentration of customers deposits is covered under note 36.



�007SH’000

�006SH’000

�6 OTHER lIABIlITIES

Accrued expensesGratuity provisionLeave pay provisionTenants depositsCheques for collectionSundry payables

2,3473,3274,2987,207

70,86774,796

7,9772,7916,2946,922

61,10196,150

�6�,8�� 8�,��

�7 SHARE CAPITAl

Authorised:20,000,000 ordinary shares of Sh 20 each80,000,000 4% non-cumulative irredeemablenon convertible preference shares of Sh 20 each

400,000

1,600,000

400,000

1,600,000

�,000,000 �,000,000

Issued and fully paid:19,920,000 ordinary shares of Sh 20 each36,056,500 4% non-cumulative irredeemable non convertible preference shares of Sh 20 each

398,400721,130

398,400721,130

�,��9,��0 �,��9,��0

�8 REVAluATION SuRPluS

At 1 JanuaryTransfer of excess depreciation

194,324(6,114)

200,438(6,114)

At 31 December �88,��0 194,324

The properties revaluation surplus arises on the revaluation of freehold land and buildings. Where revalued land or build-ings are sold, the portion of the properties revaluation surplus that relates to that asset, and is effectively realised, is trans-ferred directly to retained profits. The revaluation surpluses are non-distributable.

�9 ACCuMulATED lOSSES

At 1 JanuaryProfit for the yearTransfer of excess depreciationTransfer to statutory reserve

(603,303)25,8216,114

(5,607)

(620,718)16,2636,114

(4,962)

At 31 December (�76,97�) (603,303)



�007SH’000

�006SH’000

�0 STATuTORy RESERVE

At 1 JanuaryTransfer from revenue reserves

11,6235,607

6,6614,962

At 31 December �7,��0 11,623

Central bank of Kenya prudential guidelines require the bank to make an appropriation to a statutory reserve for unfore-seeable risks and future losses.

The amount transferred is the excess of loan provision computed in accordance with the Central bank of Kenya prudential guidelines over the impairment of loan and advances arrived at in accordance with IAS 39.

�� FAIR VAluE RESERVE

At 1 JanuaryLoss in market value of investment

61(132)

184(123)

At 31 December (7�) 61

The fair value reserve arises on the revaluation of available-for-sale quoted investments.



�007SH’000

�006SH’000

�� NOTES TO THE CASH FlOw STATEMENT

a Reconciliation of profit before taxation to cash (used in)/generated from operations

Profit before taxation

Adjustments for :Depreciation (note 22)Amortisation of intangible assets(note 21)Amortisation of leasehold land (note 23)Adjustment for previous years over amorti-sation (note 23)Loss on write-off of property and equipmentGain on disposal of motor vehicle (note 9)

25,821

52,94625,091

170-

2,526

(385)

16,263

48,17024,153

170(830)

-

(559)

Profit before working capital changesIncrease in cash ratio reserve(Decrease)/increase in other assetsIncrease in loans and advances to customersIncrease in customer depositsDecrease in other liabilities

106,169(33,549)44,943

(603,172)387,833(18,393)

87,367

(30,983)(26,911)

(352,991)512,543(77,995)

Cash (used in)/generated from operations (��6,�69) ��,0�0

b Analysis of the balances of cash and cash equivalents as shown in the balance sheet and notes

Cash in handBalances with Central bank of KenyaTreasury billsBalances with other banking institutionsDeposits and balances from other banking institutions

207,98055,961

538,99166,289

(347,419)

203,74327,038

536,88622,864

(70,830)

��,80� 7�9,70�

For the purposes of the cash flow statement, cash equivalents include short term liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when ac-quired.



�� CONTINgENCIES AND COMMITMENTS INCluDINg OFF BAlANCE SHEET ITEMS

a CONTINgENT lIABIlITIES

In common with other financial institutions, the bank conducts business involving acceptances, guarantees, per-formance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties.

Acceptances and letters of creditGuarantees

11,683121,581

4,374165,901

��,�6� �70,�7�

Litigations against the bank ��,670 �0,68�

�007SH’000

�006SH’000

�� INVESTMENTS IN SuBSIDIARIES

The subsidiary companies of Consolidated bank of Kenya Limited are:

Jimba Credit Corporation limitedKenya Savings & Mortgages limitedCitizen Building SocietyEstate Building SocietyEstate Finance Company of Kenya limitedBusiness Finance Company limitedHome Savings and Mortgages limitedunion bank of Kenya limitedNationwide Finance Company limited

All the subsidiaries are dormant and are wholly owned by the bank.The operations of the above companies were vested in the bank in July 2002. Because of the insignificance of the amounts involved, the directors are of the opinion that consolidation of these subsidiaries would be of no real value.



�007SH’000

�006SH’000

�� CONTINgENCIES AND COMMITMENTS INCluDINg OFF BAlANCE SHEET ITEMS (CONT)

Nature of contingent liabilities:

An acceptance is an undertaking by a bank to pay a bill of exchange drawn on a customer. The bank expects most acceptances to be presented, but reimbursement by the customer is normally immediate.

Letters of credit commit the bank to make payments to third parties on production of documents, which are subsequently reimbursed by customers.

Guarantees are generally written by a bank to support performance by customers to third parties. The bank will only be required to meet these obligations in the event of the customer’s default.Concentrations of contingent liabilities are covered under note 36.

Litigations against the bank relate to civil suits lodged against the bank by customers and employees in the normal course of business. The likely outcome of these suits cannot be determined as at the date of signing these financial statements. The directors, however, do not anticipate that any liability will accrue from the pending suits.

b COMMITMENTS TO ExTEND CREDIT

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

�07,78� ��,�9�

Commitments to extend credit are agreements to lend to a customer in future subject to certain conditions. Such commitments are normally made for a fixed period. The bank may withdraw from its contractual obligation to extend credit by giving reasonable notice to the customer.



�007SH’000

�006SH’000

�� CONTINgENCIES AND COMMITMENTS INCluDINg OFF BAlANCE SHEET ITEMS (CONT)

c CAPITAl COMMITMENTS

Authorised but not contracted for ��6,�79 �00,��0

d OPERATINg lEASE COMMITMENTS

Rental income earned during the year was Sh 36,235,000 (2006 – Sh 36,036,000). At the balance sheet date, the bank had contracted with tenants for the following minimum future lease receivables:

The bank as a lessor:

Within one yearIn the second to fifth year inclusiveAfter five years

18261,09632,614

30,49932,224

-

9�,890 6�,7��

Leases are negotiated for an average term of 6 years and rentals are reviewed every two years. The leases are cancellable with a penalty when the tenants do not give three months notice to vacate the premises.

The bank as a lessee

At the balance sheet date, the bank had outstanding commitments under operating leases which fall due as fol-lows:

Within one yearIn the second to fifth year inclusiveAfter five years

4,8776,635

300

4,87711,273

500

��,8�� 6,6�0

Operating lease payments represent rentals payable by the bank for its office premises.



�� RElATED PARTy TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

Placings are made in the bank by directors, their associates and companies associated to directors. Advances to customers at 31 December 2007 include advances and loans to companies associated with the directors. Contingent liabilities at 31 December 2007 include guarantees and letters of credit for companies associated with the directors.

All transactions with related parties are at arm’s length in the normal course of business, and on terms and conditions similar to those applicable to other customers.

Movement in related party balances was as follows:

DIRECTORS

�007SH’000

�006SH’000

loans and advances:

At 1 JanuaryAdvanced during the yearInterest earnedRepaid during the year

26,02611,2501,535

(14,075)

17,31717,400

990(9,681)

At 31 December ��,7�6 26,026

The loans and advances are performing and adequately secured.

Customer deposits:

At 1 JanuaryPlaced during the yearNet interest applied Withdrawals

15,0005,422(254)

(17,925)

1,26615,000

(249)(1,017)

At 31 December �,�� 15,000



�007SH’000

�006SH’000

�� RElATED PARTy TRANSACTIONS

KEy MANAgEMENT COMPENSATION

The remuneration of directors and other members of key management during the year were as follows:

Salaries and other benefitsFees for services as directors

46,3503,649

43,3387,275

�9,999 �0,6��

�6 CONCENTRATIONS OF ASSETS, lIABIlITIES AND OFF BAlANCE SHEET ITEMS

Details of significant concentrations of the bank’s assets, liabilities and off balance sheet items by industry groups are as de-tailed below:

�007SH’000 %

�006SH’000 %

a ADVANCES TO CuSTOMERS

ManufacturingWholesale and retailTransport and communicationAgriculturalBusiness servicesOther

358,044759,41049,551

134,450764,347179,584

15.9533.822.215.98

34.048.00

297,546623,68871,23258,501

457,822133,425

18.1237.974.343.56

27.888.13

�,��,�86 �00.00 �,6��,�� 00.00

b CuSTOMER DEPOSITS

Central and local GovernmentNon financial public enterprisesCo-operative societiesInsurance companiesPrivate enterprises and individualsNon profit institutions

343,5463,013

54,9421,550

1,531,625915,953

12.070.111.930.05

53.6532.19

206,5592,402

105,525550

1,061,2031,086,557

8.330.104.260.02

43.4643.83

�,8�0,6�9 �00.00 �,�6�,796 �00.00



�6 CONCENTRATIONS OF ASSETS, lIABIlITIES AND OFF BAlANCE SHEET ITEMS (CONT)

�7 ASSETS PlEDgED AS SECuRITy

At 31 December 2007 treasury bills amounting to Nil (2006 – Sh 50 million) were pledged to Central bank to secure any overnight borrowing that the bank may require from time to time.

�8 FAIR VAluE

The directors consider that there is no material difference between the fair value and carrying value of the company’s financial assets and liabilities where fair value details have not been presented.

�9 INCORPORATION

The bank is domiciled and incorporated in Kenya under the Companies Act.

�0 CuRRENCy

These financial statements are prepared in Kenya shillings thousands (Sh’000).


c OFF BALANCE SHEET ITEMS(Letters of credit and guarantees)

2007 % 2006 % SH’000 SH’000

Manufacturing 50,320 37.76 68,298 40.11Wholesale and retail 37,794 28.36 28,091 16.50Transport and communication 11,994 9.00 24,694 14.50Business services 22,335 16.76 37,682 22.13Other 10,821 8.12 11,510 6.76

133,264 100.00 170,275 100.00

6�Consolidated Bank of Kenya

NOTICE IS HEREBy gIVEN THAT THE SEVENTEENTH ANNuAl gENERAl MEETINg OF THE

COMPANy wIll BE HElD AT THE gRAND REgENCy HOTEl ON THuRSDAy, �9TH MAy �008

AT ��.�0 P.M

By ORDER OF THE BOARD

wakonyo IgeriaCompany Secretary

NOTICE OF THE AgM

AgENDA

� To read the notice convening the meeting.

�To confirm the minutes of the Sixteenth Annual General Meeting held on 31st May 2007.

�To consider and, if approved, adopt the audited balance sheet and Accounts of the Company for the year ended 31st December 2007, together with the Directors’ and Auditors’ report thereon.

� To approve the remuneration of the Directors.

�To elect Directors: Mr. David Wachira and the Managing trustee N.S.S.F retire from the Board under the terms of Article 35 of the Articles of Association, and being eligible, offer themselves for re-election.

6To re-appoint Deloitte & Touche, as auditors of the Company, and to authorize the Directors to fix their remuneration.

7To transact any other business which may be transacted at the Annual General Meeting.

NB In accordance with Section 136(2) of the Companies Act (Cap 486), every member entitled to attend and vote at the above meeting is entitled to appoint a proxy to attend and vote on his behalf. A proxy need not be a member. A form of proxy is enclosed in the Annual Report and should be returned to the Company Secretary, at P O Box 51133-00200 Nairobi, to arrive not later than 24 hours before the meeting.

To: Mrs . wakonyo Igeria Company secretary Consolidated Bank of Kenya Limited PO Box 511 33 – 00 200 NairobiTel: 020 340 922 / 340 551

6� Annual Report & Financial Statements 2007

6�Consolidated Bank of Kenya

PROxy FORM

NOTE

� In the case of a corporation, the proxy MUST be under the Common Seal

� The proxy form should be completed and returned to the Company Secretary not later than 24 hours before the meeting.

we ..................................................................................................................................................................................................................................................................................................................................................................................................

of (address) ..................................................................................................................................................................................................................................................................................................................................................................................................

being members of CONSOlIDATED BANK OF KENyA lIMITED

hereby appoint ..................................................................................................................................................................................................................................................................................................................................................................................................

of ..................................................................................................................................................................................................................................................................................................................................................................................................

or failing him/her ..................................................................................................................................................................................................................................................................................................................................................................................................

of ..................................................................................................................................................................................................................................................................................................................................................................................................

as my/our proxy to vote for me/us on my/our behalf at the Annual general Meeting of the Company to be held on

�9th May �008 and at any adjournment thereof.

Signed/Sealed this ..................................................................................................................... day of �008 ....................................................................................................................

..................................................................................................................... ..................................................................................................................... ..................................................................................................................... .....................................................................................................................

6� Annual Report & Financial Statements 2007

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contents

Nairobi

Harambee Avenue, P.O. Box 348 23, Nairobi

Tel (020) 228 705 /6 /7

(020) 221 866

Fax (020) 229 382

e-mail harambee @ consolidated-bank.com

Koinange Street, P.O. Box 671 24, Nairobi

Tel (020) 222 051

(020) 220 175

Fax (020) 340 864

e-mail koinange @ consolidated-bank.com

MoMbasa

Nkrumah Road, P.O. Box 823 42, Mombasa

Tel (041) 2222 943 /4

(041) 313 664

Fax (041) 2222 942

e-mail nkrumah @ consolidated-bank.com

Maua

Nkrumah Road, P.O. Box 142, Maua

Tel (064) 214 53 /4

Fax (064) 214 56

e-mail maua @ consolidated-bank.com

Laare

P.O. Box 142, Laare

Tel (041) 222 943 /4

Fax (041) 222 942

e-mail laare @ consolidated-bank.com

Meru

P.O. Box 11 17, Meru

Tel (064) 311 81

Fax (064) 214 56

e-mail meru @ consolidated-bank.com

Thika

P.O. Box 211, Thika

Tel (067) 221 32 /3

Fax (067) 221 67

e-mail thika @ consolidated-bank.com

MuraNg’a

P.O. Box 583, Murang’a

Tel (060) 304 61

Fax (060) 304 60

e-mail murang’a @ consolidated-bank.com

Nyeri

P.O. Box 935, Nyeri

Tel (061) 203 08 11

Fax (061) 307 55

e-mail nyeri @ consolidated-bank.com

eMbu

P.O. Box 1377, Embu

Tel (064) 309 22

Fax (064) 206 77

e-mail embu @ consolidated-bank.com

isioLo

P.O. Box 102, Isiolo

Tel (064) 525 85

Fax (020) 525 88

e-mail isiolo @ consolidated-bank.com

head oFFice

Consolidated Bank House, Koinange Street

P.O. Box 511 33, 00 200 Nairobi

Tel (020) 340 551

(020) 340 298

(020) 340 836

Mobile 0722 999 177

0733 435 005

Fax (020) 340 213

e-mail head-office @ consolidated-bank.com

www consolidated-bank.com

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