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Tropical Bank Limited

For the year ended 31 December 2015

Directors' Report and Financial statements

Tropical Bank LimitedDirectors' report and Financial StatementsFor the year ended 31 December 2015

Table of Contents Page

Corporate information 2 - 3

Chairman's statement 4 - 6

Report of the directors 7 - 18

Statement of directors' responsibilities 19

Report of the independent auditors 20 - 21

Financial statements:

Statement of comprehensive income 22

Statement of financial position 23

Statement of changes in equity 24

Statement of cash flows 25

Notes to the financial statements 26 - 63

1

Tropical Bank LimitedCorporate informationFor the year ended 31 December 2015

DIRECTORS

Names Position

Gerald M Ssendaula Chairman

Guoma Mohamed Ali Alrgibi ++ Deputy Chairman

Abduelhadi Taher Giuma ++

Seyfullah Asaad Mousa Saleem ++ Director

Christopher Mugisha Director

Omer Abdulla Maguri ++ Director

Juma Kagoro Lubega Director

++ Libyan

COMPANY AND BOARD SECRETARY Sophie. K. Nakandi

Plot 54, Lugogo Bypass( Rotary Avenue)

P.O. Box 9485

Kampala

REGISTERED OFFICE Plot 54, Lugogo Bypass( Rotary Avenue)

P.O. Box 9485

Kampala

BRANCHES Plot 27, Kampala Road Nakivubo

P.O. Box 9485 P.O. Box 9485

Kampala Kampala

Masaka Ntinda

P.O. Box 39 P.O. Box 9485

Masaka Kampala

Plot 17, Main Street Plot 5277, Ggaba road

Jinja Kansanga

P.O. Box 100 P.O. Box 9485

Jinja Kampala

Plot 3144 Kawempe Plot 1446 Katwe road

P.O. Box 9485 P.O. Box 9485

Kawempe Muganzirwassa Commercial Plaza

Kampala Kampala

Kakira Sugar works (1985) ltd Kaliro Branch

Estate P.O Box 100

P.O. Box 100 Plot 45,Zibondo Road ( Main Street)

Jinja Jinja

Oasis Mall Branch Mbale Branch

P.O Box 9485 P.O Box 9485

Plot S88-94, Yusuf Lule Road Plot 37, Cathedral Road

Kampala Mbale

Managing Director

2

Tropical Bank LimitedCorporate informationFor the year ended 31 December 2015

AUDITOR PricewaterhouseCoopers

Certified Public Accountants

10th floor, Communications House

1 Colville Street

P.O. Box 882

Kampala

LAWYERS MMAKS Advocates Namara Tumwine & Company Advocates

3rd Floor Diamond Trust Building 2nd Floor Suit 201

P.O. Box 7166 Plot 61-67 Nkuruma Road

17/19 Kampala Road P. O. Box 10707

Kampala Kampala

Lumonya, Bushara & Company Advocates JM Musisi Advocates & Legal Consultants

Plot 2 Jumbo Plaza 3rd Floor Africa House

Parliament Avenue Plot 42, Kampala Road

P.O Box 3243 P. O. Box 3288

Kampala Kampala

A.F. Mpanga Advocates & Solicitors GP Advocates

4th Floor DFCU Towers 3rd Floor Colline House, New Tower

Plot 26 Kyadondo Road, Nakasero Plot 4, Pilkington Road

P.O. Box 1520 P.O Box 6737

Kampala Kampala

Okalang Law Chambers

Advocates & Consultants

Plot 68, Gokhale Road

Jinja

3

Tropical Bank LimitedChairman's statementFor the year ended 31 December 2015

Esteemed shareholders,

On behalf of the Board of Directors of Tropical Bank Limited, I have the pleasure to present the Bank's Financial

Statements for the year 2015. This year has been by far one of the most challenging in the financial sector, caused

by depreciating shilling against international currencies, a general rise in inflation, interest rates and a slowdown in

the economy, These challenges have been externally influenced by the global economy, the uncertainty in the

emerging markets and the perceived political environment.

The economy was projected to remain growing at 5% during most of the year, 2015/2016. However, the external

economic environment, the unpredictable weather and the perceived political uncertainty could adversely affect

the anticipated targets. The effects, though strongly managed by Bank of Uganda, through its monetary policy

applications, have already had an impact on the Consumer Price Indices of the country. Headline inflation rose

from 1.8% in December 2014 to 9.3% as at 31 December 2015, attributable to higher food crop prices, the

increase in electricity tariffs and the effects of the exchange rate depreciation. Core inflation also increased from

2.7% to 7.4% during the period. The Monetary Policy Actions to raise the Central Banking Rate (CRB) from 11%

to 17% has ensured the inflationary rates are not adverse.

Performance in the financial sector

Despite the challenges in the economy, the financial sector has remained calm during most of the year, with

improved growth in total deposits, loan and assets compared to the year, 2014. Apart from the slight jittery over

the closure of Imperial Bank of Kenya Limited, the sector has continued to make considerable investments in the

electronic banking with much emphasis on Mobile Money Banking platforms.

The Uganda currency equally hit an all time low against the international currencies, depreciating by more than

31% against the US Dollar. Falling from a mid-rate of UGX 2,773 per US Dollar in December, 2014 to as low as

UGX 3,695 in September, 2015, then appreciated to UGX 3,377 by end of December, 2015, mainly due to

remittances from nationals living abroad, during the festive seasons. The period was characterised by sporadic

exchange rate volatility due to global economic conditions, perceived political uncertainty by offshore investors

and speculators who took advantage of the situation by hoarding foreign currency.

Notwithstanding, the challenges in the economy and the Bank of Uganda's monetary policy actions to stabilise the

key parameters have consequently influenced a drastic rise in interest rates during the period. Central Bank Rates

(CRB) were raised from 11.0% in 2014 to 17.0% as at 31 December 2015. Subsequently, lending average rates

increased from 20.7% to average 24.5%. Rediscount rates hiked from 14.0% to 21.0% While 91 days Treasury Bill

rates edged from 11.3% to 21.2% as at 31 October, 2015 then declined to 193.55 by end of year. These

developments greatly impacted on the cost of borrowing in the sector, which further aggravated the quality of

performing loans.

In the first nine months of the year, 2015 the entire banking sector's Total Assets grew by 17.8%, from UGX 18.9

trillion as at 2014 to UGX 22.3 trillion as at 30 September 2015. Customer deposits rose by 15%, rising from UGX

13.2 trillion to UGX 15.2 trillion by 30 September 2015. Loans on the other hand grew by 22% from UGX 9.2

trillion to UGX 11.2 trillion. The sector still possesses a great potential for growth given the many unbanked

opportunities in the country.

4


1)

2)

3)

Corporate Social Responsibility

Performance of the Bank

Following the Board evaluation of the performance of the Bank's Strategic Plan 2014-2017, the Board

resolved that M/s Deloitte be engaged to undertake a thorough review of the Bank's processes and

organisational configuration with the objective of identifying areas of weaknesses and provide assistance in

the formulation of a revised Strategic Plan for the period 2016 - 2020. The target behind the revised plan is

to reposition the Bank in the industry with a view to making Tropical Bank Limited one of the thriving

financial institutions in the sector. The plan sets out bold steps and strategies required to be undertaken to

achieve these objectives inclusive of lobbying for the Bank's recapitalisation.

As a commitment to Corporate Social Responsibility (CSR), the Bank committed a total of UGX 70 million

for the support of this cause. Funds were committed to support the several orphanages and schools, the

Muslim community and medical expenses.

During the year, the Bank made a profit after tax of UGX 1.91billion compared to UGX 4.3 billion made in

the year, 2014. Customer deposits increased from UGX 144 billion to UGX 149 billion. While gross loans

and advances rose from UGX 119 billion to UGX 125 billion and assets grew from UGX 241 billion as at

31st December 2014 to UGX 256 billion as at 31 December 2015.

Further, M/S Ipsos Uganda Limited was engaged to carry out a customer satisfaction survey to

understand the customer needs and the level of satisfaction of the Bank's services and products. The

report of the survey has greatly helped in the formulation process of our Strategic Plan, 2016 - 2020.

Key developments

The following are some of the other key developments the Bank undertook during the year, 2015.

The Bank introduced two new loan related products; Asset/Vehicle and contract Financing. These

products are meant to increase options to our customers who desired to procure assets and a bid to

grow the Bank's loan book. During the period the Bank was also able to launch MoneyGram money

transfer services.

Secondly, the Bank ran an advertising and promotional campaign code named "Jjuza Enyumba" that

ran for a period of three months. The campaigns were ran through television and radio adverts and

customers were able to win special prizes including fridges and LED televisions. The campaign created

mileage to the Bank's brand and improved performance.

As part of its objective to establish branches in strategic geographical business regions in the country, the

Bank set up a branch in Mbale town, a regional business hub for the agricultural rich districts in the region.

The branch will provide both accessibility and visibility of the Bank's brand. Secondly, the Bank relocated

its Ntinda Branch from Ntinda Shopping Center to Ntinda Complex along Ntinda Road. The new site is

conspicuous and easily accessible with ample parking space. We are happy to report that the branch's

performance has since tremendously improved.

5


Conclusion

v

Hon. Gerald M. SsendaulaCHAIRMAN

May I also record my highest consideration to my colleagues on the Board for steadily steering the Bank during this

period, to ensure progress. The management and staff too are accorded acknowledgement and gratitude for their

whole heartiness that contributed to the state of affairs.

I urge all the stake holders to vigorously work towards the improvement of the Bank's performance.

Finally, I would like to once again thank Bank of Uganda and the shareholders for the support provided to the Bank

during the period. I also wish to thank most heartily, the External auditor who have worked so hard to ensure that

the Annual Financial Statements of the Bank are ready and also for always being available to render professional

advice whenever necessary.

6


CORPORATE GOVERNANCE

a)

b)

For the year 2015, the strategic planning process began with a review of the Strategic Plan 2014 – 2017 so as to

readjust the earlier ambitious projections as rendered necessary by changed circumstances. Later during the year,

the Board resolved to procure consultancy services for a comprehensive review of the Strategic Plan and provision

of advice and recommendations on strategies and resources needed to achieve the Bank’s vision of becoming a

premier provider of customized financial services by 2020 and thereby ensure sustainable financial growth and

returns for the Bank and its shareholders. Consequently, M/S Deloitte (U) Limited was engaged and by the end of

the year, they had achieved the following:

Reviewing the background of the Strategic Plan 2014 – 2017, highlighting proposals for additional resources

required to enhance the Bank’s investment portfolio and improve capital ratios by analysing the processes

and organizational structure, identifying thematic areas that need improvement so as to enhance performance

of the Bank and ultimately facilitate achievement of all strategic plans.

Proposals for targets, goals and timelines basis for an effective strategic plan review and development of a

comprehensive Strategic Plan 2016-2020 to be undertaken during the first part of 2016.

Directors' reportFor the year ended 31 December 2015

Good corporate governance plays a vital role in enhancement of the integrity and efficiency of the banking

industry as whole and Tropical Bank in particular. It is a testimony of an institution’s commitment to values and

ethical business conduct. Effective corporate governance structures encourage value creation and provide

accountability and control systems which are proportionate to the risks involved. In turn, these attract good

business and enhance institutional growth .

At Tropical Bank, the Board of Directors (“Board”) recognises the importance of good corporate governance in

pursuing quantifiable and long term success, and value creation for shareholders and other stakeholders. The

Board is fully committed to high standards of governance designed to protect the interests of shareholders and

other stakeholders while promoting the highest standards of integrity, transparency and accountability, and strives

to ensure that the Bank’s integrity and professional conduct are beyond reproach.

An effective corporate governance structure lies at the core of the Bank’s pursuit to realise its vision to be the

premier provider of customized financial services. The structure is based on corporate governance practices and

regulations, an organisational structure with defined accountabilities and responsibilities, and appropriate internal

control and risk management mechanisms. The Board has made concerted efforts to ensure strict compliance to

regulatory requirements and that its corporate governance framework, internal processes, guidelines and systems

remain effective and relevant. Nevertheless, the Board believes there is always room for improvement and

continues to explore various avenues to further improve governance processes.

The Board also recognises that it is absolutely necessary to put great effort to the understanding and management

of stakeholders’ expectations with a view to fulfilling their evolving needs and ensuring that the Bank’s position

and reputation as a reliable provider of professional and personalized commercial banking services to various

sectors of the economy are held in good standing.

Consequently, the Board assumes the following key roles and responsibilities:

1. Strategic Planning

The Board plays an active role in reviewing the Bank’s strategies, business plans, financial objectives, major

capital and operating budgets and policies as proposed by Management. It monitors Management’s performance in

implementing the approved strategies and plans and provides relevant direction and advice where necessary so as

to ensure the achievement of the objectives.

7


CORPORATE GOVERNANCE (Continued)


The Committee comprises solely non-executive directors excluding the chairperson of the Audit committee.

The Head of Finance and Head of Human Resources Section attend the committee by invitation. No individual,

irrespective of position, is present when his or her remuneration is discussed.

The year ended with an offsite strategic review and brainstorming workshop in December at which Management

discussed both the Consultant’s and their own strategic perspectives. Thereafter, the Consultant presented the draft

Strategic plan for the Board's considertaion wherein Management's proposals for the strategy and business plan of

the Bank were discussed and annual budget for the financial year 2016 with a view to ensuring that the proposed

targets are in line with the Bank’s vision and mission, reflect competitive industry trends and internal capabilities,

and provide sufficient stretch for Management.

The Board governs the business and affairs of the Bank and exercises all such powers pursuant to its Articles of

Association, the Financial Institutions Act and the Companies Act. To ensure effectiveness in discharging its roles

and responsibilities, the Board structure includes a number of Board Committees with specific Terms of

References (“TOR”) which are reviewed and approved by the Board on a regular basis with a view to taking

into account amendments to relevant legislation and other pertinent changes in the operating environment

In 2015, the Board engaged a consultant to review the Board Structure and consequently put in place a Committee

structure that included a Credit Committee mandated to handle all credit related matters that were previously

overseen by the Asset and Liability Committee. Furthermore, the Committee is to ensure that effective

frameworks for credit governance are in place - ensuring that the Credit Committee and the Credit

Function operate according to clearly defined mandates, and providing for the adequate management,

measurement, monitoring and control of credit risk.

In addition to the other existing Committees for Audit and Risk, a new Governance & Compensation Committee

was operationalised thereby phasing out the Human Resource and Administration Committee.

The purpose of the Governance and Compensation Committee is to enable the Board effectively provide general

oversight of governance and compensation structures, overall employment and compensation environment, carry

out annual evaluation of the Board including the Executive Directors and members of the Senior Management

Team, appropriate remuneration and succession plans for the Board members and Senior Management .

The ultimate objective of the Committee is to maintain compensation policies which can attract and retain

the highest quality executive and senior managers and reward them for the Bank’s progress and

enhancement of the shareholder value.

As part of the Bank’s initiative to continuously improve its management of the human resource, the Board

reviewed the results of the 2014 Staff Salary Survey conducted with a view to ensuring that what is pertaining in

the market is achieved gradually and the 2015 Staff Satisfaction Survey which was also conducted to assess the

level of employee morale and satisfaction,whereby actions were devised to address areas which require

improvement.

8


CORPORATE GOVERNANCE CONTINUED

Matters such as the annual business plan and budget, declaration and distribution of dividend, business

restructuring, structure reorganization, strategic proposals, risk appetite, human capital management

policies, appointment of Senior Managers, succession planning, brand positioning as well as expenditures

above the set Management limits are reserved for the Board.

Specifically, the Board is charged with leading and governing the Bank in an effective, efficient and

responsible manner. The Directors, collectively and individually, are aware of their responsibilities to

shareholders, customers, regulators, human resource and other stakeholders and for the manner in which

the affairs of the Bank are managed. They discharge their roles and duties with integrity, honesty and

professionalism within the ambit of the law in order to serve the interest of the Bank and all stakeholders,

and are committed to ensuring that the highest corporate governance standards are adhered to.

Internal financial controls are in place to ensure the integrity of the Bank’s qualitative and quantitative

financial information, which is used by a variety of stakeholders. The Senior Manager Finance bears the

ultimate responsibility of implementing and maintaining internal financial controls.

The Board is supported by the Bank Secretary who is to ensure that it remains aware of its duties and

responsibilities and keeps Directors abreast of relevant changes in legislation and governance best


Assurance of the effectiveness of internal financial controls is achieved through management’s

confirmation that the financial governance controls and internal financial controls supporting the

assertions in the financial statements operated effectively during the year and coordinated audit work by

the internal and external auditors as part of their annual risk based audit plans.

The Audit Committee considers reports from internal audit on any weaknesses in controls that have been

identified, including financial controls, and considers corrective actions to be implemented by

Management to prevent such incidences recurring. This takes place on an ongoing basis.

As a whole, the Committees are to play an oversight role as they evaluate matters under their mandate and

make recommendations to the Board for consideration and decision. To ensure the efficient running of the

Bank’s businesses and operations, the Board also delegates certain decision making powers to the

Managing Director, Executive Director, General Manager, Deputy General Manager and some members of

Senior Management.

With particular reference to the Board Audit Committee, the composition was changed to ensure that only

independent non-executive directors are members. The Committee is to review the Bank’s financial

position and make recommendations to the Board on all financial matters, risks, internal financial controls,

fraud and IT risks relevant to financial reporting. This includes assessing the integrity and effectiveness of

accounting, financial compliance and other control systems. It has a constructive relationship with the

Chief Manager Internal Audit, who has access to Committee members as required. The Committee also

ensures effective communication between the internal and external auditors, the Board, Management and

regulators.

9



e) Review the decisions of the Senior Management in managing credit, market, liquidity, operational, legal and

other risks and review the information presented by management also taking into account reports by the Board

Audit Committee to the Board on financial, business and strategic risk issues and report to the Board on a

quarterly basis or more frequently should the need arise;

d) Assist the Board to determine the maximum mandate levels for the various Credit and ALCO decisions to be

delegated to management; and

2. Risk Management

The Board has the responsibility for risk management - identifying and monitoring the principal risks and

implementation of appropriate systems to manage and control them. In ensuring effective risk assessment and

control, the Board entrusted the Board Risk Committee (“BRC”), which comprises three Non-Executive Directors

with the responsibility of providing independent and objective oversight and governance of risks within the

Bank.

The salient Terms of Reference are as follows:

a) Provide an independent and objective oversight and governance of risks in the Bank;

b) Set out the nature, role, responsibility and authority of the risk and capital management function within the

Bank and outline the scope of the risk management function;

c) Review and assess the integrity of the risk control systems and ensure that the risk management policies,

strategies and processes are adequate and effectively managed;


The Board also requires the Managing Director to present a status report at every Board meeting including a

comprehensive summary of the Bank’s business operations and financial performance of each quarter. It also

keeps abreast of the key strategic initiatives, significant operational issues and the latest developments of the

financial services industry.

In addition, Management regularly provides the Board with a report on the Bank’s compliance with its statutory

obligations highlighting areas for improvement, non-compliances and recommending action plans to the Board.

Furthermore, where direction or decision is required expeditiously from the Board between the scheduled

meetings, the matter is handled by circular resolution or a special meeting is held.

The Board governs the business conduct, performance and operations of the Bank in close collaboration with

Management so as to ensure high performance and that execution of plans is aligned with the set objectives and

goals. At the highest executive level, the Executive Directors assume the overall responsibilities for the execution

of the Bank’s strategies and plans in line with the Board’s direction, oversee operations and drive the Bank’s

business and performance towards achieving the Bank’s vision and goals. In carrying out their tasks, the Executive

Directors are supported by the General Manager and the Senior Management Committee which comprises the

Managing Director as the Chairman, the Executive Director and other members of the Senior Management Team.

10



The Committee also reviews reports to the Board, plans for development and succession plans for the MD and

other executive officers taking into account, amongst other things, the Bank’s structure, Succession Plan and

results of the annual performance evaluation process.

During the year, Management reviewed the Bank’s Functional Structure as well as the staff salary structure and

put in place a Management Succession Plan and a performance management tool. Programmes for the

identification, competency assessment and development of talent to fill senior positions in order to continuously

strengthen the Bank’s succession plan are monitored by the Governance and Compensation committee . Salary

structures and policies, review and harmonization of benefits and retention plans for Senior Management will

continue to be matters of priority.

4. Relationship with Shareholders

The Board recognises fundamental responsibility of creating shareholder value and developing a healthy

relationship with the shareholders through regular, pertinent communication with shareholders. There is

concerted effort to ensure timely and fair dissemination of information on the Bank’s vision and strategies, overall

operations, and business and financial performance and interactive General Meetings.

The key spokespersons and representatives for investor relations of the Bank are the Executive Directors and Bank

Secretary.

Talent development and succession planning are key priorities of the Board in ensuring a high performing

workforce to ensure the Bank’s sustainability and competitiveness. The Board entrusted its Governance and

Compensation Committee with the responsibility of deliberating on Human Resource strategies, policies, systems

and development of the Bank. The Committee is also responsible for selecting, assessing and recommending to the

Board the appointment and remuneration of members of the Senior Management Team.


Following the issuance of the Bank of Uganda Risk Management Guidelines for Supervised Financial

Institutions, 2010, where the Compliance Function was delinked from the Risk Management Function,

the process of streamlining and strengthening the Compliance Function commenced. A new Manager

Compliance was appointed and later promoted to the position of Senior Manager, reporting directly to the

Chief Executive. The appointment was subject to regulatory approvals.

The Board is satisfied that the BRC has effectively and efficiently discharged its functions to support the Board in

ensuring, among others that the Bank is adequately capitalised to support the risks undertaken and meet regulatory

requirements.

3. Talent Development and Succession Planning

11



As such, promotion of Corporate Responsibility (“CR”) is part of the Bank’s strategic initiatives aimed at

promoting good corporate governance and thereby support and create value for the Bank’s businesses,

operations and brand, and ensure positive contribution to the shareholders, customers, employees and society

at large. The Bank’s CR Report for 2015 is part of this Annual Report.

The Board also promotes a culture for all Bank employees that upholds a high standard of ethical and

professional conduct in the performance of their duties and responsibilities, dealing with each other, the

shareholders, customers, suppliers, competitors and the general public. Ethical and professional conduct is

part of the terms and conditions of employment of every employee of the Bank and forms part of the Human

Resource Management Policy.

To strengthen governance practice, the Bank has in place a Whistle Blower Policy that provides employees

with an avenue to report on suspected fraud, corruption, dishonest practices or other similar circumstances.

The policy is to encourage the reporting of such matters in good faith, with the confidentiality of the reporter

being protected from reprisal, in the best possible manner.

The Policy is available on the Bank’s intranet for reference by all members of staff.

b) Promotion of Sustainability

Sustainability is defined as conducting business responsibly and ethically by factoring social, economic and

environmental considerations in the Bank’s decision making process for long term business success that in

turn contributes to the socioeconomic development of the communities in which it operates. Therefore, the

Board acknowledges that a sustainable approach to investing has a positive impact on the value of

investments and is vital for the interests of long term investors.

The Board further recognises that the Bank’s ability to grow hinges substantially upon its ability to make

business decisions that give credibility to their sense of economic, social and environmental responsibilities,

and by which its stakeholders and society can hold them accountable. Therefore, environment, social and

governance issues are of the utmost importance in the Board’s decision making in order to remain a

responsible corporate citizen.

The Board is committed to establishing a corporate culture which promotes ethical conduct that runs all the

way through the Bank. It works to enhance the standard of corporate governance and promote ethical

conduct for Directors in line with the governing laws, regulations and guidelines relating to general standard

of conduct, conflict of interest, insider lending, maintaining confidentiality, use of corporate assets and

others.


5. Internal Control System

The Board governs the adequacy and integrity of the Bank’s internal control system. With the support of the Board

Audit Committee and Internal Audit Department, the Board ensures that there is an effective and efficient

framework for reporting internal controls and regulatory compliance. Details pertaining to the Bank’s internal

control system and review of its effectiveness are set out in the Statement on Risk Management & Internal Control

in this Report.

a) Code of Ethics

12



b) Information and Advice

For the Board to function effectively, all directors have full and timely access to information that may

be relevant to the proper discharge of their duties, unrestricted access to Management and Bank

information as well as resources required to carry out their roles and responsibilities. The Directors

may seek clarification and advice and request for information on matters pertaining to the Bank’s operations

or business concerns.

The Directors also have unlimited access to the advice and services of the Bank Secretary, who

assists in providing any information or documentation they may require to facilitate the discharge of

their duties and responsibilities.

They may also seek independent professional advice at the Bank’s expense where it is deemed necessary for

the proper discharge of their duties. Provisions regulating this process are incorporated in the Bank’s

Outsourcing Policy.

The long serving Bank Secretary retired at the end of the year and a successor who had been with the

Bank was appointed in acting capacity effective January, 2016 subject to confirmation by Bank of

Uganda.

The Board is satisfied with the performance and support rendered by the Bank Secretary in the discharge of

their roles and responsibilities. In addition to acting as a custodian of the Bank’s statutory records, the Bank

Secretary serves and advises the Board on its affairs, ensures that Board meetings are properly convened and

that an accurate and proper record of the proceedings and minutes of the meetings is kept. The Bank

Secretary also assists the Chairman and Directors in the conduct of meetings and in the discharge of their

governance obligations and responsibilities. Furthermore, the Bank Secretary facilitates the communication

of key decisions and policies between the Board, Board Committees and Senior Management and updates

the Board on the follow-up or implementation of its decisions/recommendations by the Management until

their closure.


6. Corporate Governance

a) Board of Directors

The Independent Non-Executive Directors are to remain free of any conflict of interest and undertake their

roles and responsibilities in an effective manner and thereby ensure that decisions and actions are in the best

interest of the Bank.

In 2015, the total number of directors was brought up to seven against the maximum number of eight fixed

by the Annual General Meeting. The Board includes an Independent Non-Executive Director as Chairman ,

two Independent Non-Executive Directors, two Non-Independent Non-Executive Directors and two

Executive Directors. The Independent Non-Executive Directors should be in position to demonstrate such

level of independence that can enable them to exercise independent judgment at all times and contribute to

the effective functioning of the Board.

13



iii. Boardroom Diversity

The Bank acknowledges the increasing importance of boardroom diversity in pursuing business and

governance performance and it is one of the key considerations in assessing and reviewing the Board’s

composition that will be explored continuously. Currently, the factors to be considered by the Board

Governance & Compensation Committee when making recommendations for appropriate composition of the

Board are embedded in its Charter and include diversity - skill mix, industry experience, background, gender

and responsibilities of specific directors with regard to the need for adequate collective knowledge and

experience relevant to the activities of the Bank;

i. Appointment of Directors

To ensure that individuals appointed to the Board have the appropriate fitness and propriety to properly

discharge their prudential responsibilities on appointment and during the course of their appointment, the fit

and proper ideals entrenched in the Financial Institutions Act and Companies Act are observed in the

nomination and assessment of an individual for appointment.

Directors are appointed by shareholders at the Annual General Meeting (AGM) and interim appointments

may be made by the Board in between Annual General Meetings. Such interim appointees are required to

retire at the following AGM may be re-appointed by shareholders at the meeting. All directors are provided

with a service contract for a period of 3 years clearly stipulating their terms of engagement. The shareholders

can, by special resolution, extend the term of service.

ii. Board Effectiveness Evaluation

The Board recognises the critical importance of undertaking an Effective Evaluation exercise annually with

a view to assessing its effectiveness as a whole and that of the Directors individually, detect strengths and

weaknesses such that necessary actions can be taken to improve overall effectiveness and that of individual

Directors.

d) Directors’ Appointment and Assessment


c) Board Charter

The Bank has a Board and Committee Charters which set out key corporate governance principles adopted

by the Board. The responsibilities of the Board and/or its Committee as a whole, Chairman, Independent

Director and other Directors are clearly defined therein. The Charters clearly stipulate the role that each

party undertakes in ensuring checks and balances in the day to day management of the Bank’s business and

operations.

The Board reviews the Charters from time to time to keep them up to date with changes in regulations and

best practices and ensure effectiveness and relevance of the Board and Committees to set objectives. The

Board reviewed the Charters in March, 2015.

14



The Executive Directors assume the overall responsibilities for the execution of the Bank’s strategies in line

with the Board’s direction, oversee operations and drive the business and performance towards achieving

the Bank’s vision and goals. They lead the Senior Management team in the execution of strategic initiatives.

The distinct and separate roles of the Chairman and Executive Directors, with a division of responsibilities,

ensures balance of power and authority, such that no one individual has unfettered powers of decision-

making.

The Bank also has a remuneration package for Senior Management which will be improved gradually to a

competitive level within the market and rewarding in line with corporate and individual performance

contribution to the organisation. The Executive Directors are neither paid a Director’s retention fee nor are

they entitled to receive any meeting attendance allowance for any of the Board and Board Committee

meetings that they attend. Their remuneration, which includes among others salary, allowances and benefits

in-kind, is solely derived from the Bank.

v. Assessment of Independence

The independence of the Non-executive Directors is reviewed on an annual basis using the annual

performance evaluation. The Governance & Compensation Committee assesses the independence of NEDs

taking into account the individual Director’s ability to exercise independent judgment at all times and

contribution to the effective functioning of the Board, and benchmark it against best practices and

regulatory provisions.

e) Role of the Chairman and Executive Directors

The Independent Non-Executive Chairman manages the affairs of the Board with a view to ensuring that it

functions effectively and meets its obligations and responsibilities, and leads the Board in the execution of

its responsibilities to the shareholders, regulators and other stakeholders. He ensures that meetings are

conducted efficiently and in accordance with the requirements of applicable laws.


iv. Remuneration Strategies

The Board is mindful that fair remuneration is critical to attraction, retention and motivation of the Directors

with the relevant experience and expertise required for the stewardship of the Bank. In this context, in 2015,

the Board recognised the need to remunerate members of Board Committees and the decision will be tabled

at the next Annual General Meeting for consideration and ratification.

The general principles regarding remuneration of Non-Executive Directors in ensuring that the remuneration

levels are commensurate with the responsibilities, risks and time commitment of Board/Board Committees

and practices within the industry are considered in order to align it with the market.

15




f) Fostering Commitment

(i) Time Commitment

In ensuring that Directors’ commitment, resources and time are more focused to enable them discharge their

duties effectively and in accordance with the law, no Director is on the Board of any other financial

institution in Uganda. In addition, the Directors are required to notify the Board on changes of their other

directorships as and when they occur.

An annual schedule for meetings of the Board and its Committees as well as the Annual General Meeting is

prepared and circulated to the Directors before the beginning of every year for planning purposes. The Board

scheduled four quarterly meetings during the year and also the specialised committees as required by

Financial Institutions (Corporate Governance Regulations). In additional one special Board meeting was also

held during the year.

In 2016, the Bank is to embark on the use of iPADs and eBooks at Board/Board Committee Meetings,

whereby encrypted Board and Board Committee papers will be circulated electronically. This initiative will

significantly enhance mobility, movement of the documents, cost and time savings, greater convenience,

better security.

(ii) Training

The Board appreciates the importance of continuing education and training for its Directors to ensure that

they are kept abreast of the latest development in business, corporate strategy, financial overview, risk

management strategy, legal requirements, duties, responsibilities and rights from the legal point of view,

moral and ethical obligations as well as good corporate governance in the ever-changing economic climate to

meet the challenges of the Board. The Bank Secretary has the responsibility of facilitating the organisation

of internal training programmes and Directors’ attendance of external programmes, and keep a record of

such training received.

Induction programmes for newly appointed Directors as well as the ongoing education of directorsorganised by Management to provide them with in-depth information of the industry as well as an overview

of the business operations of the Bank. The Bank Secretary has the responsibility of overseeing

execution of the programmes.

Each new Director receives copies of relevant laws, Bank policies and the Strategic Plan to assist them in

building a detailed understanding of the Bank’s operations, the longer term direction and the statutory

obligations.

16



(ii) Internal Audit

h) Recognising and Managing Risks

(i) Risk Management Framework

The Board recognises the importance of a sound system of risk management and internal control to ensure

good corporate governance and safeguard shareholders’ investments as well as the Bank’s assets. The Board

Risk Committee oversees the risk framework, reviews Management’s risk management policies and

activities formulated for recommendation to the Board for approval. In addition to the monthly updates on

matters that have been deliberated at Committee meetings, a Risk Management Report is also presented to

the Board.

The Bank continues to maintain and review its internal control procedures to ensure, as far as possible, the

protection of its assets and liabilities. The Board considers that the risk management framework and internal

control system maintained by Management, and which was in place throughout the financial year and up to

and as of the date of this report, are operating adequately and effectively enough to safeguard the

shareholders’ investment, customer deposits and the Bank’s assets.

The Internal Audit Department, led by the Chief Manager Internal Audit, reports directly to the Board Audit

Committee. With guidance from Internal Audit Charter, the department performs regular reviews and reports

on the adequacy and effectiveness of the Bank's risk management framework, internal control and

governance processes. The audit results are reported to the Board Audit Committee. The follow-up actions

and the review of the status of actions taken as per the auditors’ recommendations carried out are included

in the Internal Audit and Compliance reports to the Board. The internal auditors also work closely with the

external auditors to resolve any control issues as raised by them with a view to ensuring that all issues are

duly acted upon by Management.

The Internal Audit Function also undertakes an independent assessment of the internal control systems throughout

the Bank based on the annual audit plan approved by the Board for assurance that deficiencies or issues will be

promptly resolved by Management.


g) Upholding Integrity in Financial Reporting

The Board ensures provision of a clear, balanced and meaningful assessment of the Bank’s financial performance,

position and its future prospects through the Annual Audited Financial Statements and reports on significant

events affecting the Bank.

The Board Audit Committee with the assistance of both external and internal auditors, reviews the integrity and

reliability of the Bank’s financial statements prior to recommending the same for Board approval and issuance to

stakeholders. During the reviews, the External Auditors provide assurance to the Board Audit Committee that

adequate processes and controls for an effective and efficient financial statement close process are in place, that

appropriate accounting policies have been adopted and applied consistently and that the relevant financial

statements give a true and fair view of the state of affairs of the Bank in compliance with Financial Reporting

Standards and the Companies Act, 2012.

17


PRINCIPAL ACTIVITIES

RESULTS AND DIVIDEND

2015 2014

Ushs '000 Ushs '000

Profit before tax 274,407 3,947,627

Income tax credit 1,635,682 382,134

Profit for the year 1,910,089 4,329,761

DIRECTORS

AUDITOR

29 April 2016

By order of the Board

Secretary

The current membership of the Board is shown on page 2.


Sophie K Nakandi

The directors present their report together with the audited financial statements for the year ended 31

December 2015, which disclose the state of affairs of Tropical Bank Limited. (the "Bank'').

The Bank is engaged in the business of banking and the provision of related services and is licenced under

the Financial Institutions Act 2004.

The net profit for the year of Shs 1.91 billion (2014: Ushs.4.3 billion) has been taken to retained earnings.

The Directors did not recommend a dividend for the year ended 31 December 2015 (2014: Ushs.700

million).

The Bank's auditor, PricewaterhouseCoopers was appointed during the year and continues in office in

accordance with the provisions of Section 167(2) of the Companies Act and Section 62 (3) of the

Financial Institutions Act.

18

Tropical Bank LimitedStatement of Directors' responsibilities

Chairman Director

Director

29 April 2016


Nothing has come to the attention of the directors to indicate that the Bank will not remain a going concern

for at least twelve months from the date of this statement.

The directors accept responsibility for the annual financial statements, which have been prepared using

appropriate accounting policies supported by reasonable estimates, in conformity with International

Financial Reporting Standards and the requirements of the Ugandan Companies Act, and the Financial

Institutions 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 profit in accordance with International Financial

Reporting Standards and with the requirements of the Ugandan Companies Act and the Financial

Institutions Act. The directors further accept responsibility for the maintenance of accounting records that

may be relied upon in the preparation of financial statements and for such internal control as the directors

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

misstatement, whether due to fraud or error.

The Ugandan Companies Act, requires the directors to prepare financial statements for each financial year

that give a true and fair view of the state of affairs of the Bank as at the end of the financial year and of its

profit or loss. It also requires the directors to ensure that the Bank keeps proper accounting records that

disclose, with reasonable accuracy, the financial position of the Bank. They are also responsible for

safeguarding the assets of the Bank.

19

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF

TROPICAL BANK LIMITED

Directors’ responsibility for the financial statements

Report on the financial statements

We have audited the accompanying financial statements of Tropical Bank Limited (“the Bank”), set out

on pages 22 to 63. These financial statements comprise the statement of financial position at 31

December 2015 and the statement of comprehensive income, statement of changes in equity and

statement of cash flows for the year then ended, and a summary of significant accounting policies and

other explanatory notes.

Auditors' responsibility

The directors are responsible for the preparation of financial statements that give a true and fair view

in accordance with International Financial Reporting Standards and in the manner required by the

Ugandan Companies Act and the Financial Institutions Act, and for such internal control as the

directors determine is necessary to enable the preparation of financial statements that are free from

material misstatement, whether due to fraud or error.

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

We conducted our audit in accordance with International Standards on Auditing. Those standards

require that we comply with ethical requirements and plan and perform our audit to obtain reasonable

assurance about whether the financial statements are free from material misstatement.

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

Bank’s financial affairs at 31 December 2015 and of its profit and cash flows for the year then ended in

accordance with International Financial Reporting Standards, the Ugandan Companies Act and the

Financial Institutions Act .

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

our opinion.

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 judgement, including the

assessment of the risks of material misstatement of the financial statements, whether due to fraud or

error. In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation of financial statements that give a true and fair view in order to design audit procedures

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

effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by the directors, as well

as evaluating the overall presentation of the financial statements.

Opinion

20

REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OFTROPICAL BANK LIMITED (CONTINUED)

Report on other legal and regulatory requirements

i)

ii)

iii)

The Ugandan Companies Act requires that in carrying out our audit we consider and report to you on the

following matters. We confirm that:

we have obtained all the information and explanations which to the best of our knowledge and belief were

necessary for the purposes of our audit;

in our opinion proper books of account have been kept by the company, so far as appears from our

examination of those books; and

the Bank’s statement of financial position and statement of comprehensive income are in agreement with

the books of account.

Certified Public Accountants

Kampala

29 April 2016

21

Tropical Bank LimitedFinancial StatementsFor the year ended 31 December 2015

Statement of comprehensive income

2015 2014

Note Ushs'000 Ushs'000

Interest income 5 28,182,584 26,941,359

Interest expense 6 (3,861,045) (3,461,700)

NET INTEREST INCOME 24,321,539 23,479,659

Impairment losses on Loans and advances 16 (b) (5,270,023) (5,471,591)

Net interest income after loan impairment charges 19,051,516 18,008,068

Fees and commissions income 7 (a) 5,307,774 4,855,390

Fees and commissions expense 8 (282,533) (202,969)

Net gains on foreign exchange dealings 9 234,455 399,991

Other operating income 7 (b) 3,931,634 2,921,050

Grant income 24 116,361 48,393

NET OPERATING INCOME 28,359,207 26,029,923

Operating expenses 10 (13,388,058) (11,445,060)

Employee benefits expense 11 (14,696,742) (10,637,236)

PROFIT BEFORE INCOME TAX 274,407 3,947,627

Income tax credit 12 1,635,682 382,134

PROFIT FOR THE YEAR 1,910,089 4,329,761

Other comprehensive income, net of tax - -

YEAR 1,910,089 4,329,761

22


2015 2014Note Ushs'000 Ushs'000

ASSETSCash and balances with Bank of Uganda 13 20,670,292 27,569,145

Deposits and balances due from banking institutions 14 50,839,606 37,692,826Deposits due from the group companies 30 (a) 5,563,330 14,415,579Government securities 15 45,248,469 33,756,890Loans and advances to customers 16 120,429,418 115,831,098Other assets 17 3,170,561 3,515,654Current income tax recoverable 281,718 -Property and equipment 18 (b) 7,089,003 6,194,008Capital work-in-progress 18 (a) 20,009 327,002Operating lease prepayments 19 268,057 272,238Intangible assets 20 379,203 767,855Deferred income tax asset 25 2,809,158 1,317,623

TOTAL ASSETS 256,768,824 241,659,918

EQUITY AND LIABILITIES

LIABILITIES

Customer deposits 21 149,607,739 141,904,578Deposits and balances due to banking institutions - 2,326,414Subordinated shareholders loan 22 (b) 37,510,936 30,685,328Administered funds 22 (a) 1,540,757 2,097,045Grants 24 146,667 48,394Current income tax payable 12 - 977,063Other liabilities 23 (a) 10,734,712 8,303,172

TOTAL LIABILITIES 199,540,811 186,341,994

EQUITY

Share capital 26 30,000,000 30,000,000Retained earnings / (losses) 10,080,296 9,624,804Capital reserve 32 6,683,451 6,205,929General reserve 32 5,810,043 5,332,521Revaluation reserve 33 2,235,438 2,252,516Regulatory credit reserve 16 (c) 2,418,785 1,902,154

TOTAL EQUITY 57,228,013 55,317,924

TOTAL EQUITY AND LIABILITIES 256,768,824 241,659,918

_____________________________________ _____________________________________Director Director

_____________________________________ _____________________________________Director Secretary

Statement of financial position

23


Issued Retained Proposed Capital General Revaluation Regulatory

Notes capital earnings dividends reserve reserve reserve credit reserve Total

Ushs'000 Ushs'000 Ushs '000 Ushs'000 Ushs'000 Ushs'000 Ushs'000 Ushs'000(Note 26) (Note 32) (Note 32) (Note 33) (Note 16)

Year ended 31 December 2014

At 1 January 2014 30,000,000 (3,005,971) - 5,123,489 4,250,081 2,269,594 13,050,970 51,688,163

Comprehensive income:

Profit for the year - 4,329,761 - - - - - 4,329,761

Other comprehensive income - - - - - - - -

Total comprehensive income - 4,329,761 - - - - - 4,329,761

Transactions with owners: -

Transfer to capital reserve and General Reserves - (2,164,880) - 1,082,440 1,082,440 - - -

Transfer of excess depreciation - 24,397 - - - (24,397) - -

Deferred income tax on excess depreciation - (7,319) - - - 7,319 - -

Transfer from regulatory reserve 16 (c) - 11,148,816 - - - - (11,148,816) -

Proposed dividend - (700,000) 700,000 - - - - -

Dividends paid - - (700,000) - - - - (700,000)

At end of year 30,000,000 9,624,804 - 6,205,929 5,332,521 2,252,516 1,902,154 55,317,924

Year ended 31 December 2015

At 1 January 2015 30,000,000 9,624,804 - 6,205,929 5,332,521 2,252,516 1,902,154 55,317,924

Comprehensive income:

Profit for the year - 1,910,089 - - - - - 1,910,089

Other comprehensive income - - - - - - - -

Total comprehensive income - 1,910,089 - - - - - 1,910,089

Transactions with owners:

Transfer to Capital/ General reserves - (955,044) - 477,522 477,522 - - -

Transfer of excess depreciation - 24,397 - - - (24,397) - -

Deferred income tax on excess depreciation - (7,319) - - - 7,319 -

Transfer to regulatory reserve - (516,631) - - - - 516,631 -

At end of year 30,000,000 10,080,296 - 6,683,451 5,810,043 2,235,438 2,418,785 57,228,013

Statement of changes in equity

24


Statements of Cash Flows2015 2014

Note Ushs'000 Ushs'000

OPERATING ACTIVITIES

Profit before income tax 274,407 3,947,626

Adjustments for:Amortisation 392,834 320,316Depreciation 18 (b) 1,397,346 1,109,536Unrealised foreign exchange losses 22 (b) 6,765,000 2,640,000Profit on disposal of fixed assets (5,077) -Grant income 25 (116,361) (48,393)Interest expense 22 (b) 467,424 352,822Interest paid 22 (b) (406,816) (351,830)

Profit before working capital changes 8,768,757 7,970,077

Decrease/(Increase) in balances with Bank of Uganda (cash

reserve requirement) 13 10,418,443 (2,313,298)

Increase in loans and advances to customers 16 (4,598,320) (519,811)

Decrease/(increase) in other assets 17 345,094 (1,639,621)

Increase in customer deposits 21 5,376,747 3,857,090

Decrease in administered funds 22 (a) (556,288) (477,955)

Increase in Government securities (maturing after 90 days) 15 (11,491,580) (27,617,634)

Increase in other liabilities 23 (a) 2,431,540 122,159

Tax paid 12 (1,114,634) (422,526)

Net cash flows generated/(used in) from operating activities 9,579,759 (21,041,520)

INVESTING ACTIVITIES

Proceeds from sale of assets 16,035 -

Additions to capital work in progress 18 (a) (20,009) (275,753)

Purchase of intangible assets 20 - (213,841)

Purchase of property and equipment 18 (1,976,297) (1,451,771)

Net cash flows used in investing activities (1,980,270) (1,941,365)

FINANCING ACTIVITIES

Total Liabilities

Grant income receipts 24 214,634 -

Dividends paid - (700,000)

Net cash flows generated from/(used in) financing activities 214,634 (700,000)

Net increase in cash and cash equivalents 7,814,123 (23,682,885)

Cash and cash equivalents at 1 January 60,074,678 83,757,563

Cash and cash equivalents at 31 December 29 67,888,801 60,074,678

25


Financial StatementsFor the year ended 31 December 2015

Notes

1 General Information:

2

(a)

(i) New and amended standards adopted by the Bank

The preparation of financial statements in conformity with IFRS requires the use of estimates and

assumptions. It also requires management to exercise its judgement in the process of applying the Bank's

accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions

and estimates are significant to the financial statements are disclosed in note 3.

Summary of significant accounting policies

The following standards/amendments have been adopted by the Bank for the first time for the financial year

beginning on 1 January 2015 but have no impact on the Bank.

Changes in accounting policy and disclosures

For the Ugandan Companies Act reporting purposes, the balance sheet is represented by the statement of

financial position and the profit and loss account by the statement of comprehensive income in these

financial statements.

The principal accounting policies adopted in the preparation of these financial statements are set out below.

The Financial statements are prepared in compliance with International Financial Reporting Standards

(IFRS). The measurement basis applied is the historical cost Basis, except where otherwise stated in the

accounting policies below. The financial statements are presented in Uganda Shillings, rounded to the nearest

thousands (shs 000).

The Bank is incorporated in Uganda under the Ugandan Companies Act as a limited liability company, and is

domiciled in Uganda. The address of its registered office is:

Tropical Bank Ltd

Lugogo Office Park

Basis of preparation.

Plot 54, Lugogo Bypass (Rotary Avenue)

P.O Box 9485, Kampala.

Amendment to IAS 32, ‘Financial instruments: Presentation’ on offsetting financial assets and financial

liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must

also be legally enforceable for all counterparties in the normal course of business, as well as in the event of

default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment

did not have a significant effect on the bank’s financial statements.

Amendments to IAS 36, ‘Impairment of assets’, on the recoverable amount disclosures for non-financial

assets. This amendment removed certain disclosures of the recoverable amount of CGUs which had been

included in IAS 36 by the issue of IFRS 13.

Amendment to IAS 39, ‘Financial instruments: Recognition and measurement’ on the novation of derivatives

and the continuation of hedge accounting. This amendment considers legislative changes to ‘over-the-

counter’ derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to

central counterparties would result in discontinuance of hedge accounting. The amendment provides relief

from discontinuing hedge accounting when novation of a hedging instrument meets specified criteria. The

Bank has applied the amendment and there has been no significant impact on the bank’s financial statements

as a result.

26



Notes (continued)

2 Summary of Significant accounting policies (continued)

(b) Foreign currency translation

(i) Functional and presentation currency

(i) New and amended standards adopted by the Bank

(ii) New standards and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods

beginning after 1 January 2015, and have not been applied in preparing these financial statements. None of

these is expected to have a significant effect on the financial statements of the Bank, except the following set

out below:

IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets

and financial liabilities. The complete version of IFRS 9 was issued in July 2015. It replaces the guidance in

IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies

the mixed measurement model and establishes three primary measurement categories for financial assets:

amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the

entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity

instruments are required to be measured at fair value through profit or loss with the irrevocable option at

inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model

that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes

to classification and measurement except for the recognition of changes in own credit risk in other

comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the

requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an

economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the

same as the one management actually use for risk management purposes. Contemporaneous documentation is

still required but is different to that currently prepared under IAS 39. The standard is effective for accounting

periods beginning on or after 1 January 2018. Early adoption is permitted. The bank is yet to assess IFRS 9’s

full impact.

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

environment in which the entity operates ( the '' functional currency). The financial statements are presented in

Uganda Shillings (''shs'') which is the Bank's functional currency.

IFRIC 21, ‘Levies’, sets out the accounting for an obligation to pay a levy if that liability is within the scope of

IAS 37 ‘Provisions’. The interpretation addresses what the obligating event is that gives rise to pay a levy and

when a liability should be recognised. The Bank is not currently subjected to significant levies so the impact on

the Bank is not material.

Other standards, amendments and interpretations which are effective for the financial year beginning on 1

January 2015 are not material to the bank.

IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for

reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of

revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a

customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits

from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and

related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and

earlier application is permitted. The bank is assessing the impact of IFRS 15.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a

material impact on the Bank.

27


Notes (continued)

2 Summary of Significant accounting policies (continued)

(b) Foreign currency translation (continued)

(ii) Transactions and balances

(c) Interest income and expense.

(d) Fees and commission income

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial

liability and of allocating the interest income and interest expense over the relevant period. The effective

interest is the rate that exactly discounts estimated future cash payments or receipts through the expected life

of the financial instrument or, when appropriate , a shorter period to the net carrying amount of the financial

asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows

considering all contractual terms of the financial instrument (for example prepayments options) but does not

consider future credit losses. The calculation includes all fees paid or received between parties to the contract

that are an integral part of the effective interest rate , transaction costs and all other premiums or discounts.

The calculation of the effective interest rate includes all fees 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 commissions are generally recognised on an accrual basis when the service has been provided. Loan

commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs)

and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised

as revenue when the syndication has been completed and the Bank has retained no part of the loan package for

itself or has retained a part at the same effective interest rate as the other participants. Commission and fees

arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the

arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses – are

recognised on completion of the underlying transaction.

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

the dates of the transactions. Foreign gains and losses resulting from the settlement of such transactions and

from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign

currencies are recognised in the Statement of comprehensive income. Translation differences on non-

monetary financial assets and liabilities,such as equities held at fair value through profit and loss, are

recognised in profit or loss as part of the fair value gain or loss. Translation differences on non- monetary

financial assets,such as equities classified as available for -sale financial assets, are included in the available

for sale reserve in equity.

Interest income and expense for all interest bearing financial instruments, except for those classified as held

for trading or designated at fair value through profit or loss, are recognised within'interest income ' or interest

expense' respectively in the statement of comprehensive income using the effective interest method.

Once a financial asset or group of similar asset has been written down as result of an impairment loss, interest

income is recognised using the rate of interest that is was used to discount the future cash flows for the

purpose of measuring the impairment loss.

28


Notes (continued)

2 Summary of significant accounting policies (continued)

(e) Financial Assets

0

(iv) Available - for - sale financial assets

The Bank classifies its financial assets into the following categories: financial assets at fair value through

profit or loss; loans and advances; held- to - maturity financial assets and available for sale financial assets.

Management determines the classification of its financial assets at initial recognition. Currently the Bank

does not have financial assets at fair value through profit or loss.

● those for which the holder may not recover substantially all its initial investment, other than because of

credit deterioration.

Held -to - Maturity financial assets are non- derivative financial assets with a fixed or determinable

payments and fixed maturities the management has the positive intention and ability to hold to maturity.

Where the Bank wishes to sell more than significant amount of held to maturity assets, the entire category

would have to be reclassified as available for sale.

Available -for sale assets are non- derivative that are either designated in this category or not classified in

any categories.

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 as held for trading if acquired principally for the purpose of selling in the

short term. Derivatives are also categorised as held for trading. Financial assets are designated at fair value

through profit or loss when;

● they form part of a group of financial assets that is managed and evaluated on a fair value basis in

accordance with a documented risk management or investment strategy and reported to key management

personnel on that basis.

Loans and advances are non- derivative financial assets with fixed or determinable payments that are not

quoted in an active market, other than;

● Those classified as held for trading and those that the Bank on initial recognition designates as at fair

value through profit or loss

(i) Financial assets at fair value through profit or loss

● doing so significantly reduces or eliminates a measurement inconsistency; or

(ii) Loans and advances

● those that the Bank upon initial recognition designates as available -for- sale or;

(iii) Held -to - Maturity financial assets

29


Notes (continued)


Recognition and measurement.

(f) Sale and repurchase agreements

(g) Off-setting

(h) Impairment of financial assets

Regular purchases and sales of financial assets are recognised on the trade date, which is the date on which

the Bank commits to purchase or sell the asset. Financial assets are initially recognised at fair value, plus

transaction costs for all financial assets not carried at fair value through profit or loss.Financial assets

carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are

expensed in the statement of comprehensive income. Financial assets are derecognised when the rights to

receive cash flows from the financial assets have expired or have been transferred substantially all risks and

rewards of ownership. Available- for- sale financial assets and financial assets at fair value through profit

or loss are subsequently carried at amortised cost using the effective method.

Securities sold subject to repurchase agreements (repos) are classified in the financial statements as

pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; the

counterparty liability is included in amounts due to other banks, deposits from banks, other deposits or

deposits due to customers, as appropriate. The difference between sale and repurchase price is treated as

interest and accrued over the life of the agreements using the effective interest method. Securities lent to

counterparties are also retained in the financial statements.

The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a

group of financial assets is impaired. A financial asset or a group of financial assets is impaired and

impairment losses are incurred only if there is objective evidence of impairment as a result of one or more

events that occured after initial recognition of the asset(a'loss event) and that loss event ( or events) has an

impact on the estimated future cash flows of the financial; asset or group of financial assets that can be

reliably estimated.

Financial assets and liabilities are off set and the net amount reported in the balance sheet when there is a

legally enforceable right to set off the recognised amounts and there is an intention to settle on a net

basis,or realise the asset and settle the liability simultaneously.

Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss'

category are included in the statement of comprehensive income in the period in which they arise. Changes

in the fair value of monetary and non-monetary securities classified as available for -sale are recognised in

other comprehensive income. When securities classified as available for- sale are sold or impaired, the

accumulated fair value adjustments are included in the statement of comprehensive income as 'gains and

losses from investment securities'.

The fair values of quoted investments are based on current bid prices. If the market of a financial asset is

not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These

include the use of recent arm's length transactions, reference to other instruments that are substantially the

same, discounted cash flow analysis and option pricing models refined to reflect the issuer's specific

circumstances.

30


Notes (continued)


(h) Impairment of financial assets (continued)

● national or local economic conditions that correlate with defaults on the assets in the portfolio.

The estimated period between a loss occuring and its identification is determined by management for each

identified portfolio. In general, the periods used vary between 3 months and six months.

(i) Assets carried at amortised cost.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are

individually significant, and individually or collectively for financial assets that are not individualy significant. If

the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset,

whether significant or not, it includes the asset in a group of financial assets with similar characteristics and

collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an

impairment provision loss is or continues to be recognised are not included in a collective impairment.

The amount of the loss is measured as the difference between the asset's carrying amount and the present value of

estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial

instrument's original effective interest rates . The carrying amount of the asset is reduced through the use of an

allowance account and the amount of the loss variable interest rate, the discount rate for measuring any impairment

loss is the current effective interest rate determined under the contract.

The calculation of the present value of estimated future cash flows of a collateralised financial asset reflects the

cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not

foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit

risk characteristics (i.e on the basis of the Bank's grading process that considers asset type,industry, geographical

location,collateral type, past dues status and other relevant factors). Those characteristics are relevant to the

estimation of future cash flows for groups of such assets by being indicative of the debtor's ability to pay all

amounts due according to the contractual terms of the assets being evaluated.

The criteria that the Bank uses to determine that there is objective evidence of impairment loss include:

● the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the

borrower a concession that the lender would not otherwise consider;

● it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;(e) the

disappearance of an active market for that financial asset because of financial difficulties; or

● observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio

of financial assets since the initial recognition of those assets although the decrease cannot yet be identified with the

individual financial assets in the portfolio, including ;

● adverse changes in the payment status of borrowers in the portfolio; and

● significant financial difficulty of the issuer or obligor

● a breach of contract, such as a default or delinquency in the interest or principal payments.

31


Notes (continued)


(h) Impairment of financial assets (continued)

(ii) Assets carried at fair Value

(i) Assets carried at amortised cost (continued)

In the case of equity investments classified as available fo sale, a significant or prolonged decline in the fair value of

the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for

available- for -sale financial assets, the cummulative loss measured as the difference between the acquisition cost and

the current fair value, less any impairment loss on that financial assets previously recognised in profit or loss- is

removed from equity and recognised in the statement of comprehensive income.

Impairment losses recognised in the statement of comprehensive income on equity instruments are not reversed through

the statement of comprehensive income. If, in a subsequent period the fair value of the debt instrument classified as

available - for - sale increases and the increase can be objectively related to an event occuring after the impairment loss

was recognised in the profit or loss,the impairmrnt losss is reversed through the statement of comprehensive income.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis

of the contractual cash flows of assets and historical loss experience for assets with credit risk characteristics similar to

those in the Bank. Historical loss experience is adusted on the basis of the current observable data to reflect the effects

of current conditions that did not affect the period on which the historical loss experience is based and to remove the

effects of conditions in the historical period that do not exist currently.

When a loan is uncollectible, it is written off against the related provision for the loan impairment. Such loans are

written off after all the necessary procedures have been completed and the amount of the loss has been determined.

Impairment charges relating to loans and advances to customers are classified in loan impairment charges whilst

impairment charges relating to investment securities are classified in Net gains/(losses) on investment securities.'

Subsequest recoveries of amounts previously written off decrease the amount of the provision for the provision for loan

impairment in the statement of comprehensive income.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be ralated objectively to

an event occuring after the impairment was recognised ( such as an improvement in the debtors credit rating), the

previously recognised impairment loss is reversed by adjusting the allowance account. The amount of reversal is

recognised int the statement of comprehensive income.

In the event that provisions computed in accordance with the Financial Institutions Act exceed amounts determined in

accordance with IFRS, the excess is accounted for as an appropriation of retained earnings.Otherwise no further

accounting entries are made.

In addition to the measurement of the impairment losses on loans and advances in accordance with IFRS as set out

above, the Bank is required by the Financial Institutions Act to estimate losses on loans and advances as follows:

1) Specific provision for loans and advances considered non- perfoming (Impaired) based on the criteria, and

classification of such loans and advances established by the Financial Institutions Act, as follows:

a) Substandard loans with arrears period from 90 to 179 days: 20%

b) Doubtful loans and advances with arrears period from 180 -364 days: 50%; and

c) loss with arrears period exceeding 364 days: 100% provision.

2) General provision of 1% of credit facilities less provisions and suspended interest.

32


Notes (continued)

2 Summary of significant accounting policies(continued)

(i)

Motor vehicles 25%

33.33%

12.5%

12.5%

4%

33.33%

(j) Intangible Assets

● adequate technical, financial and other resources to complete the development and to use or sell the software

rrrrrproduct are available and;

● the expenditure attributable to the software product during its development can be reliably measured.

Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer

Software development costs recognised as assets are amortised over their estimated useful lives (not exceeding 3 years).

Property and Equipment

Land and buildings comprise mainly branches and offices. Buildings are shown at market value based on valuations by

external independent valuers, less subsequent depreciation. Increases in the current amount arising on revaluation are

recognised in other comprehensive income and credited to a revaluation reserve. Decrease that offset previous increase of

the same asset are charged against the revaluation reserve; all other decreases are charged to profit or loss. Each year the

difference in depreciation based on the revalued carrying amount of the asset ( the depreciation charge to profit or loss)

and depreciation based on the assets' original cost is transferred from the revaluation reserve to retained earnings net of the

related deferred tax effect.All other property and equipment is stated at historical cost less depreciation. Historical cost

includes expenditure that is directly attributable to the acquisition of these assets.

Subsequent expenditures are included in the assets carrying amount or are recognised as a separate asset, as appropriate,

only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the

item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repair and maintenance

costs are charged to ' operating expenses' during the period in which they are incurred.

Machinery and equipment - Computers, ATM

hardware, telecom equipment

Machinery and equipment

Furniture

Buildings

Free hold Land is not depreciated. Depreciation on other assets is calculated on the straight line basis to allocate their cost

less their residual values over their estimated useful lives as follows:

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

The Bank assesses at each balance sheet date whether there is any indication of that any item of property and equipment is

impaired. If any such indication exists, the Bank estimates the recoverable amounts of the relevant assets. An impairment

loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable

amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment,

assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash-Generating -Units).

Fixtures and fittings

Gains and losses on disposal are determined by comparing proceeds with the carrying amount. These are included ''other

income'' in the statement of comprehensive income.

Acquired Computer Software lincences are capitalised on the basis of the costs incurred to acquire and bring to use the

specific software.These costs are amortised over their estimated useful lives (3 years)

Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development

costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the

Bank are recognised as Intangible assets when the following criteria are met:

● it is technically feasible to complete the software product so that it will be available for use;

● management intends to complete the software product and use or sell it;

● there is ability to use or sell the software product;

● it can be demonstrated how the software product will generate probable future economic benefit;

33


Notes (continued)

2

(k)

(l)

(m)

(n)

Income tax

Summary of significant accounting policies (continued)

The Bank operates a defined contribution retirement benefit scheme for all its permanent confirmed employees. The Bank

and all its employees also contribute to the National Social Security Fund, which is a defined contribution scheme. A

defined contribution plan is a retirement benefit plan under which the Bank pays fixed contributions into a separate entity.

The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to

pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a

retirement benefit plan that is not a defined contribution plan and defines an amount of pension benefit that an employee

will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation.The

assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the

Bank and employees.The Bank’s contributions to the defined contribution schemes are charged to the Statement of

comprehensive income in the year in which they fall due.

Income tax expense for the period comprises current and deferred income tax. Income tax is recognised in the statement of

comprehensive income except to the extent that it relates to items recognised in other comprehensive income or directly in

equity. In this case the tax is also recognised in other comprehensive or directly in equity respectively.

Current income tax is the amount of income tax payable on the taxable profit for the year determined in accordance with

the Ugandan Income tax Act. The current income tax charge is calculated on the basis of the tax enacted or substantively

enacted at the balance sheet date.

Deffered income tax is recognised, using the liability method, on temporary differences arising between the tax base of

assets and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it

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

of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax rates(and laws) that have been

enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax

liability is settled or the related deferred income tax asset is realised.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profits will be available

against which the temporary differences can be utilised.

Cash and cash equivalents includes cash at hand, deposits held at call with Banks, other short term highly liquid

investments with original maturities of three months or less,including:cash and non-restricted balances with the Central

Bank, treasury and other eligible bills, and amounts due from other Banks. Cash and cash equivalents includes the cash

reserve requirement held with the Central Bank.

(i) Retirement benefits

Employee benefits

Cash and cash equivalents

(ii) Other Benefits

The estimated monetary liability for employees' accrued annual leave entitlement at the balance sheet date is recognised as

an expense.

Customer Deposits

Deposits from customers are measured at amortised cost using the effective interest rate method.

Staff Gratuity

The Bank's terms and conditions of employment also provide for the gratuity to seconded expatriate staff and other staff

employed on contract and permanent by the Bank. Annual gratuity is based on month's gross pay for each year served.

This is a defined contribution plan and the Bank has no further obligation beyond the amounts required to be contributed.

A provision is made in the financial statements to take account of the service rendered by the seconded staff, staff on

contract and permanent up to the reporting date.

Leave pay

34


Notes (continued)


(o)

(p)

(q)

(r)

(s)

(t)

The corresponding rental obligations, net of finance charges are included in deposits from banks or deposits

from customers depending on the counter party. The interest element of the finance cost is charged to the

statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest

on the remaining balance of the liability for each period. The investment properties acquired under finance

leases are measured subsequently at their fair value.

To date the Bank has not leased out any assets as lessor.

Acceptances and letters of credit are accounted for as off- balance sheet transactions and disclosed as

contingent liabilities.

Grants include assistance offered by government, government agencies and similar bodies whether local,

national, or international in form of transfers of resources in a return for past, of future compliance with

certain conditions relating to the operation of the Bank. Grants related to assets are those whose primary

condition is that they should purchase long term assets.Grants are recognised when there is reasonable

assurance that the Bank will comply with the conditions attached to the grant and that the grant will be

received.

Grants are awarded towards the purchase of assets are netted off against the total purchase price in arriving at

the carrying value of the asset. The grant is then recognised as income through profit or loss over the life of the

asset by way of reduction in the depreciation charge of the asset.

Borrowings

Dividends

Accounting for leases

(i) With the Bank as lessee

(ii) With the Bank as lessor

Share capital.

Borrowings are recognised initially at fair value, being their issue proceeds(fair value of consideration

received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; and

difference between proceeds net of transaction costs and the redemption value is recognised in the statement of

comprehensive income over the period of the borrowing using the effective interest method.

Ordinary shares are classified as 'share capital' in equity and measured at the fair value of consideration

receivable without subsequent re-measurement. Any premium received over and above the par value of the

shares is classified as 'share premium' in equity.

Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed

dividends are shown as separate component of equity until declared.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are

classified as operating leases. All other leases are classified as finance leases.

To date, all leases entered into by the Bank are operating leases. Payments paid under operating leases are

charged to the statement of comprehensive income on the straight line basis over the period of the lease .

Acceptances and letters of credit

Grants

Leases of assets where the Bank has substantially all the risks and rewards of ownership are classified as

finance leases. Finance leases are capitalised at the lease's commencement at the lower of the fair value of the

leased property and the present value of the minimum lease payments. Each lease payment is allocated

between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding.

35


Notes (continued)

3

(a)

(b)

(c)

(d)

Credit accounting estimates and judgements in applying accounting policies

The bank makes estimates and assumptions concerning the future. 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 circumstamces. The resulting accounting estimates will, by definition,seldom equal the related actual results. The

estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year are addressed below.

In 2015, the Bank recognised tax asset of Ushs.2.81 billion in respect of accumulated tax losses based on managements'

projections that sufficient taxable profits will be generated in 2015 against which the deferred tax asset will be utilised. The

deferred tax has been maintained in the balance sheet with an assumption that 2015 will be profitable based on the projected

decrease in cost of funds and cost to income ratio and increase in customer deposits.

Impairment losses on loans and advances

The fair value of financial instruments

The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. In

these cases the fair values are estimated from observable data in respect of similar financial instruments or using models.

Where valuation techniques (for example models) are used to determine fair values,they are validated and periodically

reviewed by qualified personel independent of the area that created them. All models are certified before they are used and

models are calibrated to ensure that output reflect actual data and comparative market prices. To the extent practicable,

models use only observable data, however areas such as credit risk, (both own and counter party), volatilities and correlations

require management to make estimates, changes in assumptions about these factors could affect the reported fair value of

financial instruments.

Deferred income tax assets

The Bank follows the guidance of IAS 39 on classifying non- derivative financial assets with fixed or determined payments

and fixed maturity as held - to-maturity. This classification requires significant judgement. In making this judgement, the

bBank evaluates its intention and ability to hold such assets to maturity. If the Bank fails to keep these assets to maturity

other than the specific circumstances - for example , selling and insignificant amount close to maturity- it will be required to

classify the entire class as available -for- sale. The assets would therefore be measured at fair value not amortised cost.

Held to maturity financial assets.

The 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 Bank. As at 31st

December 2015, an IAS 39 provision was computed for unidentified and identified impairment. For facilities which account

for 8% of the total loan portfolio, impairment loss was measured on the basis of the present value of estimated future cash

flows discounted at the original effective interest rate. Future expected cash flows were determined based on the value of the

collateral held for which the bank's interest was registered.

For all loans not identified as individually impaired and for those identified as being impaired but classified as insignificant

and impairment provision was computed using the Bank historical loss experience to arrive at the credit loss ratio. A loss

ratio of 2.9% was obtained using bank data over a period 4 years.

The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment

loss should be recorded in the statement of comprehensive income, the bank makes judgements as to whether there is any

observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans

before the decrease can be identified with an individual loan in that portfolio.

36


Notes (continued)

4 FINANCIAL RISK MANAGEMENT (CONTINUED)

(a)

2015 2014Ushs'000 Ushs'000

Trade and commerce 21,765,546 16,061,561Manufacturing 7,834,253 4,423,202Agriculture 23,385,336 23,367,734Transport, communication, electricity and water 12,154,075 9,177,059Others 61,103,317 66,268,676

126,242,528 119,298,232

The weighted average effective interest rates on loans and advances as at 31 December 2015 was

17.17% (2014: 19.33%).

Credit risk

The Bank's activities expose it to a variety of financial risks: market risk (including currency risk, fair value

interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. Those activities

involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks.

Taking risk is core to the Bank's business and the financial risks are inevitable consequence of being in

business. The Bank's aim is therefore to achive an appropriate balance between risk and return and minimise

potential adverse effects on its financial performance.

Risk management is carried out by the Risk department under policies approved by the Board of Directors.

Risk department identifies, evaluates and hedges financial risk in close co-operation with the operating units.

The Board provides written principles for overall risk management, as well as written policies covering

specific areas such as foreign exchange risk, interest rate risk, credit risk, use of derivatives and non-

derivative financial instruments.

The Bank takes on exposure to credit risk, which is a risk that a counterparty will cause a financial loss to the

Bank by failing to pay amounts in full when due. Credit risk is the most important risk for the Bank,s business;

management therefore carefully manages the exposure to credit risk. Credit exposures arise principally in

lending and investment activities.There is also credit risk in off- balance sheet financial instruments, such as

loan commitments. Credit risk management and control is centralised in the credit risk management team in

the Risk department, which reports regularly to the Board of Directors.

The Bank monitors concentration of risk by economic sector in line with set limits per sector. The limits are

reviewed by the board on the need by need basis depending on the performance of the sectors during the

period. An analysis of concentrations within the gross loan and advances to customers are as follows:

Economic risk concentration within gross loans and advances portfolio is as follows:

37


Notes (continued)


Credit Risk (continued)

(i)

12 Watch3 Substandard4 Doubtful5 Loss

(ii)

(a)

Credit risk measurement

Loans and advances (including commitments and guarantees)

The estimation of credit exposure is complex and requires the use of models, as the value of a product varies with

changes in the market variables,expected cash flows and the passage of time. The assessment of credit risk of a

portfolio on assets entails further estimations as to the likely hood of defaults occurring, of the associated loss ratios

and of default correlations between counterparties.

The Bank has developed models to support the quantification of the credit risk. These rating and scoring models are

in use for all key credit portfolios and form the basis for measuring default risks.The models are reviewed regulary to

monitor their robustness relative to actual performance and amended as necessary to optimise their effectiveness.

Standard

Risk limit control and mitigation policies

The Bank structures the level of credit risk it undertakes by pressing limits on the amount of risk accepted in relation

to one borrower or groups of borrowers and to industry segments. Such risks are monitored on a revolving basis and

subject to annual or more frequent review. Limits on the level of credit risk by product, industry sector and by country

are approved quarterly by the Board of Directors.

The exposure to any one borrower including Banks is further restricted by sub-limits covering on and off balance

sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts.

Actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the ability of the borrowers and potential borrowers to

meet interest and capital repayment obligations and changing lending limits where appropriate.

Probability of default

Bank's internal rating scale

Bank's rating Description of the grade

The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the

various categories of counterparty.They have been developed internally and combine statistical analysis with credit

offer judgement. There are validated where appropriate, by comparison with externally available data. Clients of the

Bank are segmented into four rating classes.

For regulatory purposes and for internal monitoring of the quality of the loan portfolio, customers are segmented into

Five (5) rating classes as shown below:

● Charges over financial instruments such as debt securities and equities.

Longer -term finance and lending to corporate entities are generally secured and revolving individual credit facilities

are generally unsecured.

Collateral held as security for financial assets other than loans and advances depends on the nature of the

instrument.Debt securities, treasury and other eligible bills are generally unsecured with an exception of asset -backed

securities and similar instruments which are secured by portfolios of financial instruments.

Collateral

Some other specific controls and mitigation measures are outlined below:

The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking

of security for funds advanced which is common practice. The Bank implements guidelines on the acceptability of

specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are;

● Mortgage over a residential properties.

● Charges over communal and/or business assets such as premises, inventory and accounts receivable.

38


Notes (continued)


(b)

2015 2014Credit exposures Ushs '000 Ushs '000On-statement of financial position items

Deposits and balances due frombanking institutions ( Note 14) 45,276,276 37,692,825Amounts due from group companies ( Note 31(a)) 5,563,330 14,415,579Loans and advances to customers ( Note 16(a)) 126,242,528 119,298,232Government securities (Note 15(a)) 45,248,469 33,756,890Other assets ( Note 17) 3,170,561 3,515,654

225,501,164 208,679,179

-Credit risk exposures relating to Off-statement of financial position itemsLetters of credit 14,149,666 9,766,360Guarantee and performance bonds 4,827,150 4,634,116Commitments to lend 4,843,677 9,473,653

23,820,493 23,874,129

Total Exposure 249,321,657 232,553,308

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to the customer as required. Guarantees and

standby letters of credit which represent irrevocable assurances that the Bank will make payments in the event that a

customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial

letter of credit, which are written undertakings by the Bank on behalf of the customer authorising the third party to draw

drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying

shipments of goods to which they relate and therefore carry less risk than the direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees

or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in

an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused

commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

The Bank monitors the term to maturity of credit commitments because longer- term commitments generally have a

greater degree of credit risk that shorter-term commitments.

(iii) Maximum exposure to credit risk before collateral held or other credit enhancements.

Credit risk exposures relating to on- balance sheets are as follows:

The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2015 without taking

account of any collateral held or any credit enhancements attached. For on- balance sheet asset, the exposures set out

above are based on carrying amounts as reported in the balance sheet.

As shown above, 55% of the total maximum exposure is delivered from loans and advances to Banks and customers

whilst 20% represents investments in debt securities.

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank

resulting from both its loan and advances portfolio and debt securities based on the following,

●the Bank exercises stringent controls over the granting of new loans

●59% of the loans and advances portfolio are neither past due nor impaired

●96% of the loans and advances portfolio is not impaired

39


Notes (continued)


(iv) Loans and Advances 2015 2014Ushs.'000 Ushs.'000

Neither past due nor impaired (0 days) 74,430,376 99,934,397Past due but not impaired (1-89 days) 38,528,145 11,120,080Past due but not impaired (90 days and above) 8,774,699 6,336,781Impaired 4,509,307 1,906,974

126,242,527 119,298,232

(5,813,110) (3,467,134)

120,429,417 115,831,098

2015 2014Ushs.'000 Ushs.'000

Standard and watch 74,430,376 99,934,397

2015 2014Ushs.'000 Ushs.'000

Past due over 90 days 8,774,699 6,336,781

Individually impaired:

Indivudually assessed impaired loans 2015 2014Ushs.'000 Ushs.'000

Impaired loans 4,509,307 1,906,974

Fair value of collateral held 1,172,285 2,640,999

During 2015, the Bank did not re-possess any collateral held as security. The Bank's policy is to dispose of repossessed properties

as soon as practicable, with the proceeds used to reduce the outstanding indebtedness. Repossessed property not sold by year endis recognised in the balance sheet within "other assets".

Of the total gross amount of impaired loans and advances, the following amounts have been individually and collectivelyassessed:

Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate thecontrally. Loans and advances greater than 90 days are not considered impaired if there is sufficient collateral to cover the facility.The gross amounts of loans and advances that were past due but not impaired were as follows:

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference tothe internal rating system adopted by the Bank:

Gross

Net amount

Loans and advances neither past due nor impaired

Renegotiated loans

Repossessed collateral

Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral

of payments, restructuring policies and practices are based on indicators or criteria that, in the judgement of localmanagement,indicate that payment will most likely continue. These policies are kept under contineous review, restructuring is

most commonly applied to term loans- in particular customer finance loans. Renegotiated loans that would otherwise be past dueor impaired totaled shs.1.5 billion (2014: 3.03 billion).

Less: allowance for impairment (Note 16 (a))

40


Notes (continued)


(b) Liquidity risk

At 31 December 2015Weighted Less than 1-3 3-12 1-5

average 1 Month Months months Years Totaleffective Ushs'000 Ushs'000 Ushs'000 Ushs'000 Ushs'000

interest rate

Assets 16.80%

Cash and bank balances with Central Bank 20,670,292 - - - 20,670,292

Deposits and balances due from Banking institutions 50,839,606 - - - 50,839,606

Amounts due from group companies 5,563,330 - - - 5,563,330

Government securities 7,975,043 9,237,465 28,035,961 45,248,469

Loans and advances 14,075,506 5,667,894 45,393,461 55,292,556 120,429,417

Property and equipment - - - 7,089,003 7,089,003

Current income tax recoverable - - - 281,718 281,718

Operating lease prepayments - - - 268,057 268,057

Intangible assets - - - 379,203 379,203

Deffered income tax asset - - - 2,809,158 2,809,158

Other assets - - - 3,190,570 3,190,570

Total Assets 99,123,777 14,905,359 73,429,422 69,310,265 256,768,823

( expected maturity dates)Liabilities and equity

Customer deposits 137,398,288 4,433,880 7,775,571 - 149,607,739Administerd funds - - - 1,540,757 1,540,757Other borrowed funds - - - 37,510,936 37,510,936Grants 48,394 - - 98,273 146,667Other liabilities - - - 10,734,712 10,734,712

Total Equity and Liabilities

(Contractual maturity dates) 137,446,682 4,433,880 7,775,571 49,884,678 199,540,812

Net on Balance sheet position (38,322,905) 10,471,478 65,653,851 19,425,587 57,228,012

Net liquidity gap

Off statement of financial position itemsCommitments 4,843,677 - - - 4,843,677Guarantees & bonds 3,478,119 699,285 649,746 - 4,827,150Letters of credit 451,794 251,030 13,446,842 - 14,149,666Cash Margin (559,777) (141,759) (489,964) - (1,191,500)

Net off balance sheet position 8,213,813 808,556 13,606,624 - 22,628,993

Overall open position (30,109,092) 11,280,034 79,260,475 19,425,587 79,857,005

At 31 December 2014 (42,926,295) (4,565,315) 15,475,912 63,459,494 31,443,796

Liquidity risk is a risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace

funds when they are withdrawn.

The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash

settled contigencies.The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of

reinvestment of maturing funds can be predicted with a high level of certainty. The Bank of Uganda requires that the Bank maintains a cash reserve

ratio. In addition, the board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of

interbank and other borrowing facilities that should be in place to cover withdrawals at an expected levels of demand. The treasury department

monitors liquidity ratios on the daily basis. Sources of liquidity are regularly reviewed by a separate team in the treasury department to maintain a

wide diversification by provider, product and term.

In addition, the board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank

and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.

The table presents the undiscounted cash flows payable by the Bank under non- derivative financial liabilities by remaining contractual maturities

at the statement of financial position date and from financial assets by expected maturity dates.

Liquidity risk management

41


Notes (continued)


c) Market risk (Continued)

Currency risk

US$ GBP EUR Other Ushs Total

At 31 December 2015 Ushs '000 Ushs '000 Ushs '000 Ushs '000 Ushs '000 Ushs '000

Financial assets

Cash at hand and balances withCentral Bank 3,616,492 43,897 197,525 5,987 16,806,392 20,670,292

Deposits and balances due -

from banking institutions 45,934,596 51,482 849,823 17,228 3,986,478 50,839,606

Amounts due from group 5,563,330 5,563,330

Government securities - - - - 45,248,469 45,248,469

Loans and advances to 27,742,910 - 1,201 - 92,685,307 120,429,418

Other assets 8,000 14,009,709 14,017,709

Total financial assets 82,865,328 95,379 1,048,548 23,215 172,736,355 256,768,8240

Financial liabilities

Customer deposits 37,472,949 27,446 1,115,098 - 110,992,246 149,607,739

Amounts due to group -

Subordinated loan from 37,510,936 - - - - 37,510,936

Administered funds - - - - 1,540,757 1,540,757

Other financial liabilies 2,464,182 510 193,187 8,223,500 10,881,379

Total liabilities 77,448,067 27,956 1,308,285 - 120,756,503 199,540,812

Net on Balance sheet position 5,417,261 67,422 (259,737) 23,215 51,979,852 57,228,013

As at 31 December 2014 1,827,194 135,671 464,425 19,666 52,870,968 55,317,924

The Bank takes on exposures to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial positionand 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.

At 31 December 2015, if the functional currency had strengthened/weakened by 10% against the foreign currencies with all othervariables held constant, the pretax profit for the year would have been Shs.310 million (2014: shs.163.7 million) higher/lower, mainlyas a result of foreign exchange gains/losses on translation of foreign currency denominated financial assets and liabilities.

Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fairvalue or future cash flows of a financial instrument. Market risk arises from open positions in interest rates,foreign currences andequity products, all of which are exposed to general and specific market movements and changes in the level of volatility. Theobjective of market risk management is to manage and control market risk exposures within acceptable limits, while optimising thereturn on risk. Overall responsibility for managing market risks rests with the assets and liability committee (ALCO). The Treasurydepartment is responsible for the development of detailed risk manangement policies (subject to review and approval by the ALCO)and for the day to day implementation of those policies.

The table below summarises the Bank's exposure to foreign currency exchange rate risk at 31 December 2015 and 2014. Included inthe table are the Bank's financial instruments , categorised by currency.

42



Notes (continued)


d) Interest rate risk

Gap Analysis

31 December 2015

Up to 1

month 1-3 months 3-12 months Over 1 year

Non interest

bearing TotalUshs'000 Ushs'000 Ushs'000 Ushs'000 Ushs'000 Ushs'000

Financial AssetsCash at hand - - - 11,485,864 11,485,864Balances with Bank of Uganda - - - 9,184,428 9,184,428Deposits and balances due from -banking institutions 44,536,124 11,866,813 - - - 56,402,936Government securities 7,975,043 9,237,465 28,035,961 - - 45,248,469

Loans and advances to customers 14,075,506 5,667,894 44,806,211 55,292,556 587,250 120,429,417Property and equipment - - - - 7,089,003 7,089,003Current tax Recoverable - - - - 281,718 281,718Operating lease prepayments - - - - 268,057 268,057Intangible assets - - - - 379,203 379,203Deferred tax asset - - - - 2,809,158 2,809,158other assets - - - - 3,190,570 3,190,570

Total assets 66,586,673 26,772,172 72,842,172 55,292,556 35,275,251 256,768,823

Financial LiabilitiesCustomer deposits 37,448,080 4,303,160 7,285,607 - 100,570,893 149,607,739Administered funds - - - - 1,540,757 1,540,757Other borrowered funds - - - - 37,510,936 37,510,936Grants - - - - 146,667 146,667Other liabilities - - - - 10,734,712 10,734,712

Total liabilities 37,448,080 4,303,160 7,285,607 - 150,503,965 199,540,812

Share capital - - - - 30,000,000 30,000,000Retained earnings - - - - 10,080,296 10,080,296Capital reserve - - - - 6,683,451 6,683,451General reserve - - - - 5,810,043 5,810,043Revaluation reserve - - - - 2,235,438 2,235,438Regulatory credit reserve - - - - 2,418,785 2,418,785

-Equity and reserves - - - - 57,228,013 57,228,013

Total Liabilities and Equity 37,448,080 4,303,160 7,285,607 - 207,731,978 256,768,825

Interest repricing gap 29,138,593 22,469,012 65,556,565 55,292,556 (172,456,727) (2)

Off- statement of financial Position items 17,785,317 17,785,317

At 31 December 2014

Interest sensitive gap 38,670,796 61,461,300 27,582,535 - (127,714,631) -

Off- statement of financial Position items 13,312,452 13,312,452

The table below summarises the Bank's exposure to interest rate risk. Included in the table are the Bank's assets and liabilities at carrying

amounts, categorised by contractual re-pricing.

The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow

risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise.

The Board of Directors sets limits on the level of mismatch interest rate repricing that may be undertaken, which is monitored monthly. The

Bank is managing interest rate risk by gap analysis.

Under this, interest sensitive assets and liabilities are classified into various time bands according to their maturity in the case of fixed rates,

and residual maturity towards next pricing date in the case of floating exchange rates. The size of the gap in a given time band is analysed to

study the interest rate exposure and the possible effects on the Bank's earnings.

In order to evaluate the earning exposure, interest rate sensitive assets (RSA) in each time band are netted off against the interest rate

sensitive liabilities (RSL) to produce a pricing gap for that time band. A positive gap indicates that the Bank has more RSA and RSL. A

positive of asset gap means that an increase in market interest rates could cause an increase in the net interest margin and vice versa.

Conversely, a negative or a liability gap implies that the Bank's net interest margin could decline as a result of an increase in market rates and

vice versa.

At 31 December 2015, if the interest rates on interest bearing assets and liabilities had been 100 basis points higher /lower with all other

variables held constant, the pre tax profit or loss for the year would have been Shs190million (2014: Shs 180 million) higher/lower.

43


Notes (continued)


c) Market risk (Continued)

(d) Fair Value of financial assets and liabilities

Fair Value hierarchy

Level 1 Level 2 Level 3 TotalShs '000 Shs '000 Shs '000 Shs '000

At 31 December 2015

Assets measured at fair value

- - 50,839,606 50,839,606

Amounts due from group companies - - 5,563,330 5,563,330

Loans and advances - - 126,242,528 126,242,528

Government Securities - Held to maturity - 45,248,469 - 45,248,469

- 45,248,469 182,645,464 227,893,933

At 31 December 2014

- - 37,692,826 37,692,826

Amounts due from group companies - - 14,415,579 14,415,579

Loans and advances - - 119,298,232 119,298,232

Government Securities - Held to maturity - 33,756,890 - 33,756,890

- 33,756,890 171,406,637 205,163,527

Deposits and Balances due from Banking

institutions

Deposits and Balances due from Banking

● Level 3-Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level

includes equity investments and debt instruments with significant unobservable components. The Bank considers relevant

and observable market prices in its valuations where possible.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the

management of the Bank. It is unusual for Banks ever to be completely matched since business transacted is often of

uncertain terms and of different types. An unmatched position potentially enhances profitability, but can also increase the

risk of losses.

The fair value of held to maturity investment securities and other financial assets and liabilities approximate the respective

carrying amounts, due to the generally short periods to contractual repricing or maturity dates as set out above. Fair values

are based on discounted cash flows using a discount rate based upon the borrowing rate that the directors expect would be

available to the Bank at the balance sheet date.

IFRS 7 specifies a hierarachy of valuation techniques based on whether the inputs to those valuation techniques are

observable or unobservable. Observable inputs reflect market data obtained from independent sources ; unobservable inputs

reflect the Bank market assumptions. These two types of inputs have created the following fair value hierarchy:

● Level 1- Quoted prices (unadjusted ) in active markets for identical assets or liabilities. This level includes listed equity

securities and debt instruments on exchanges and exchanges traded derivatives like futures.

● Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either

directly (that is, as prices) or indirectly (that is, derived from prices). The sources of input parameters like LIBOR yield

curve.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest -bearing liabilities as they

mature are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange

rates.

The table below shows items not measured at fairvalue for which fair value is disclosed

44



Notes (continued)


e) Financial instruments by category

Loans and

receivables

Held to

maturity TotalShs '000' Shs '000' Shs '000'

At 31 December 2015Deposits and Balances due from Banking institutions 50,839,606 - 50,839,606

Amounts due from group companies 5,563,330 - 5,563,330

Loans and advances 126,242,528 - 126,242,528

Government Securities - Held to maturity - 45,248,469 45,248,469

Total 182,645,464 45,248,469 227,893,933

At 31 December 2014

Deposits and Balances due from Banking institutions 37,692,826 - 37,692,826

Amounts due from group companies 14,415,579 - 14,415,579

Loans and advances 119,298,232 - 119,298,232

Government Securities - Held to maturity - 33,756,890 33,756,890

-Total 171,406,637 33,756,890 205,163,527

2015 2014

Shs.000 Shs.000Liabilities as per statement of financial position - at amortised cost

Customer deposits 149,607,739 144,230,992Other borrowed funds 39,051,693 32,782,373

Total 188,659,433 177,013,366

45


Notes (continued)


f) Capital management

a)

b)

c)

The Bank's total capital is comprised of Tier 1 capital (core capital): share capital, share premium, capital

reserves and general reserves plus retained earnings (Note 4(f))

The Bank monitors the adequacy of its capital using ratios established by the Bank for International Settlement

(BIS) and Bank of Uganda. These ratios measure capital adequacy by comparing the Bank's eligible capital

with its balance sheet assets, off balance sheet commitments and market risk positions at weighed amounts to

The market risk approach covers the general market risk and the risk of open positions in currencies and debt,

equity securities. Assets are weighted according to the amount of capital deemed necessary to support them.

Four categories of risk weights (0%, 20%, 50% and 100%) are applied, for example cash and money market

instruments have zero risk weighting which means that no capital is required to support the holding of these

assets. A placement with a parent or related group Bank or Main correspondent bank which has a minimum of

long term rating by internationally recognised agencies of AAA to AA- will be subject to a risk weight of

20%. A rating of A+ to A-, will attract a risk weight of 50%. Property and equipment carries 100% risk

weighting, meaning that it must be supported by capital equal to 12% of the carrying amount. Other asset

catergories have intermediate weightings.

The bank's objectives when managing capital, which is a broader concept then the 'equity' on the balance

sheet, are:

shareholders and benefits for other stakeholders;

● to maintain a strong capital base to support the development of its business.

Off-statement of Financial position related commitments are taken into account by applying different

categories of credit conversion factors,designed to convert these items into statements of financial position

equivalents. The resulting credit equivalent amounts are weighted for credit risk using the same percentages as

for the statement of financial position assets.

Tier 2 capital (supplementary capital) is comprised of revaluation reserves, unencumbered general provision

for bad debts and eligible subordinated debt.

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

2015 determined in accordance with the Financial Institutions (Capital Adequancy Requirements) regulations,

2005;

at or above the required minimum of 8%; andmaintain a ratio of core capital to the risk-weighted assets plus risk-weighted off-balance sheet assets

maintain total capital of not less than 12% of risk-weighted assets plus risk-weighted off-balance sheet

Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques

based on the guidelines developed by Basel committee, as implemented by the Central Bank for supervisory

purposes. The required information is filed with the central bank on a monthly basis.

The Central Bank requires each bank to:

hold the minimum level of regulatory capital of Shs 25 billion;

● to comply with the capital requiremnets set by the central bank;

● to safe guard the bank's ability to continue as a going concern, so that it can continue to provide returns for

46


Notes (continued)



2015 2014Shs '000' Shs '000'

Core Capital (Tier 1)

Shareholder's equity 30,000,000 30,000,000Retained earnings 10,080,296 9,624,804Capital reserve 6,683,451 6,205,929General reserves 5,810,043 5,332,521Less:

Intangible assets (379,203) (767,855)Defered income tax assets (2,809,158) (1,317,623)Unrealised foreign exchange gains (233,183) (399,201)

Total core capital 49,152,245 48,678,575

Supplementary Capital (Tier 2)Revaluation reserve on fixed assets 2,235,438 2,252,516General provision 1,175,871 1,139,403Subordinated debt 22,374,000 24,339,288

Tier 2 Capital 25,785,309 27,731,207

Total Capital (Tier 1 and Tier 2) 74,937,554 76,409,782

The risk weighted assets are measured by means of a hierarchy of four risk catergories classified according to the nature of

the assets and reflecting an estimate of the credit risk associated with each asset and counterparty, taking into account any

eligible collateral or guarantees.

A similar treatment is adopted for off balance sheet exposure, with some adjustments to reflect the more contingent nature

of the potential losses.

47


Notes (continued)



Balance sheet Riskamount weight

2015 2014 2015 2014Shs '000 Shs '000 Shs '000 Shs '000

Balance sheet assets (net provisions)

Cash and balances with Bank of Uganda 20,670,292 27,569,145 0% - -Amounts due from commercial banks in Uganda 21,416,620 31,835,265 20% 4,283,324 6,367,053Amount due from other banks:Rated AAA TO AA(-) - - - -Rated A(+) to A(-) - 4,464,808 50% - 2,232,404Rated A(-) and non rated 29,422,986 1,392,753 100% 29,422,986 1,392,753Amounts due from group companies 5,563,330 14,415,579 100% 5,563,330 14,415,579Loans and advances to customers - FIA basis 116,455,825 113,803,964 100% 116,455,825 113,803,964Investment securities held to maturity 45,248,469 33,756,890 0% - -Current income tax recoverable 281,718 - 100% 281,718 -Property and equipment 7,089,003 6,194,008 100% 7,089,003 6,194,008Operating lease prepayments 268,057 272,238 100% 268,057 272,238Work in progress 20,009 327,002 100% 20,009 327,002Other assets 3,170,561 3,515,654 100% 3,170,561 3,515,654

On balance sheet assets 249,606,870 237,547,306 166,554,813 148,520,655

Off-statement of financial position

Contingents secured by cash collateralLetters of guarantees 2,221,419 2,379,436 100% 2,221,419 2,379,436Performance bonds 1,414,232 9,743,360 50% 707,116 4,871,680Letters of credit and acceptances 14,149,666 1,189,656 20% 2,829,933 237,931Commitments to lend 4,843,677 9,473,653 50% 2,421,839 4,736,827

Total off -statement of financial position 22,628,994 22,786,105 8,180,307 12,225,874

Total risk-weighted assets 272,235,864 260,333,411 174,735,120 160,746,529

Capital ratios per Financial Institutions Act (FIA) 2015 2014Shs 000 Shs 000

Core capital 49,152,245 48,678,575Total Capital 74,937,554 76,409,782

FIA Capital ratiosCore capital 28.13% 30.28%Total Capital 42.89% 47.53%

g) Loans and advances - FIA BasisGross loans (Note 16a) 126,242,528 119,298,232Less:Specific provision (6,725,269) (4,046,775)Interest in suspense (1,930,180) (1,311,198)Loans secured by Cash (1,131,254) (136,295)

Net Loans 116,455,825 113,803,964

The table below summarises the composition of the risk weighted assets of the Bank at 31 December 2015:

Risk weightedamount

48


Notes (continued)

2015 2014

Ushs '000 Ushs '000

5 Interest Income

Loans and advances 21,675,730 23,056,772

Government securities 5,573,172 2,112,632

Short term placements 933,682 1,771,955

28,182,584 26,941,359

6 Interest expense

Customer deposits 2,642,246 2,676,633

Deposit by other banking institutions 779,244 454,163

Borrowed funds 439,555 330,904

3,861,045 3,461,700

7 (a) Fee and commission income

Fee and commission income 3,310,815 3,018,005

Credit related fee and commission income 1,996,959 1,837,385

5,307,774 4,855,390

(b) Other operating income

Recoveries from bad debts 3,142,026 2,565,999Sale of cheque books 110,720 109,308Stationery 70,197 47,815Other income 608,691 197,928

3,931,634 2,921,050

8 Fee and Commission expense

Transactional fees and commission expense 282,533 202,969

9 Net gains on foreign exchange dealings

Unrealised foreign exchange gains 233,183 399,201

Realised foreign exchange gains 1,272 790

234,455 399,991

49


Notes (continued)2015 2014

Ushs '000 Ushs '000

10 Operating Expense

Depreciation of property and equipment (Note 18 (b)) 1,397,346 1,109,536

Amortisation of intangible assets (Note 20) 388,653 316,135

4,181 4,181

Auditors’ remuneration 111,870 70,000

Legal Fees 103,744 276,061

Other professional fees 408,819 148,482

Rent and Rates 1,452,877 1,015,497

Advertising and promotion 598,289 631,166

Comminication and technology 1,779,821 1,187,157

Other 7,424,991 6,889,816

13,670,591 11,648,029

11 Employee benefit expense

Salaries and wages 8,744,487 5,060,896

National Social Security Fund contributions 1,039,052 716,974

Other staff costs 4,913,203 4,859,366

14,696,742 10,637,236

12 Income tax credit

Current income tax charge (Credit)/charge (1,258,781) 1,756,660

Withholding tax as final tax 1,114,634 422,526

Deferred income tax credit (Note 25) (1,491,535) (2,561,321)

(1,635,682) (382,135)

274,407 3,947,627

82,322 1,184,288

Income not subject to tax (1,671,952) (1,849,523)

Tax effect of non-deductible items 98,094 -

Effect of leasehold reclassification - (139,425)Interest on government securities taxed at 20% 1,114,634 422,526

Prior year deferred income tax (under)/over provision (1,258,781) -

(1,635,682) (382,134)

Income tax receivable/(payable) was as follows:

At start of year (977,063) 779,597Current income tax credit/(charge) 1,258,781 (1,756,660)

At end of year 281,718 (977,063)

13

11,485,864 7,966,274

9,184,428 19,602,871

20,670,292 27,569,145

Balances with Bank of Uganda are non interest bearing.

Amortisation of operating lease prepayments (Note 19)

Profit before income tax

Cash on hand

The tax on the Bank's profit before iincome tax differs from the theoretical amount that would arise using the statutory

income tax rate as follows

Balances with Bank of Uganda

Income tax calculated at the statutory income tax rate of 30% (2014: 30%)

Tax effect of:

Income tax credit

Cash and balances with Bank of Uganda

50


Notes (continued)

2015 2014Ushs'000 Ushs'000

14 Placements and deposits with other banks

Balances due from other banking institutions - Outside Uganda 29,422,986 20,273,140Deposits with other banking institutions- Inside Uganda 21,416,620 31,835,264

50,839,606 52,108,404

15

(a) Held to maturity investments - at amortised cost

Treasury bills 2015 2014Face Value Ushs'000 Ushs'000

Maturing within 90 days - -Maturing after 90 days 48,753,100 29,563,500

48,753,100 29,563,500

Unearned interest (3,504,631) (1,389,966)

Amortised cost 45,248,469 28,173,534

Treasury bondsMaturing within 90 days - -Maturing after 90 days - 5,578,300

- 5,578,300

Unearned interest - 5,056

Amortised cost - 5,583,356

Government Securities

51


Notes (continued)

16 Loans and advances to customers

a) Analysis of loan advances to customers by category:2015 2014

Ushs'000 Ushs'000Term loans 92,468,215 84,859,873Overdrafts 33,774,313 34,438,359

Gross loans and advances 126,242,528 119,298,232Less:

- Provision for impairment -individually assessed (3,774,846) (2,359,174)- Provision for impairment -Collectively assessed (1,707,509) (924,850)- Discount on staff loans (330,755) (183,110)

120,429,418 115,831,098

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

Individually Collectively TotalAssessed Assessed

Ushs'000' Ushs'000 Ushs'000

Year ended 31 December 2015At 1 January 2,359,174 924,850 3,284,024Provision for loan impairment 2,885,880 782,659 3,668,539Amounts recovered during the year (501,411) - (501,411)Transfers - - -Loans written off during the year as uncollectible (968,797) - (968,797)

At 31 December 3,774,846 1,707,509 5,482,355

Year ended 31 December 2014At 1 January 1,756,991 497,493 2,254,484Provision for loan impairment 1,820,634 427,357 2,247,991Amounts recovered during the year (770,772) - (770,772)Transfers - - -Loans written off during the year as uncollectible (447,679) - (447,679)

At 31 December 2,359,174 924,850 3,284,024

52


Notes (continued)

16 Loans and Advances to Customers

(b) Impairment Losses charged to profit or loss 2015 2014Ushs '000 Ushs '000

Provision for loan impairment (note 16 (a)) 3,668,539 2,247,991Amount written off during the year (note 16 (a)) 1,601,484 3,223,600

5,270,023 5,471,591

(c) Regulatory reserve

Analysis as per Bank of Uganda guidelines

Total provision as per IFRSIdentified Impairment loss 3,774,846 2,359,174Unidentified impairment loss 1,707,509 924,850

5,482,355 3,284,024

Total Provision as per BOU guidelinesSpecific provisions 6,725,269 4,046,775General Provisions 1,175,871 1,139,403

7,901,140 5,186,178

Regulatory reserveAt January 1,902,154 13,050,970Transfer to/(From) the regulatory reserve 516,631 (11,148,816)

At 31 December 2,418,785 1,902,154

d) Analysis of interest in suspense

At January 1,311,198 1,581,388Interest on non-perfoming advances for the year 1,848,034 856,378Reversals due to recovery (108,772) (135,574)Write-offs (1,120,280) (990,994)

At 31 December 1,930,180 1,311,198

53


Notes (continued)

2015 2014

Ushs '000 Ushs '000

17 Other assets

Accounts receivable and prepayments 1,675,445 2,238,665

Items in transit 965,093 935,198

Stationery stocks 173,689 157,406

Deferred staff expenses 330,755 183,110Other 25,580 1,275

3,170,561 3,515,654

18 (a) Capital work in progress

At 1 January 327,002 806,358

Additions 20,009 275,753

Transfer to property and equipment (327,002) (289,650)Transfer to intangible assets - (465,459)

At 31 December 20,009 327,002

54

Tropical Bank LimitedFinancial Statements


Notes (continued)

18 (b) Property and equipment

Buildings Machinery Motor Fixtures Total& Equipment Furniture Vehicles fittings and

equipmentUshs'000' Ushs'000' Ushs'000' Ushs'000 Ushs'000 Ushs'000

Year ended 31 December 2014Opening net book amount 3,756,665 807,173 353,134 186,590 923,310 6,026,872Additions - 737,696 120,442 222,248 371,385 1,451,771Disposals - - - - -Transfer from WIP - 289,650 - - - 289,650Write-offs - - - - - -Reclassification-cost - - - - (945,611) (945,611)Depreciable charge (224,353) (368,516) (132,512) (162,106) (222,049) (1,109,536)Depreciation on disposal - - - - - -Depreciation on write offs - - - - - -Reclassification-depreciation - - - - 480,862 480,862

Closing net book amount 3,532,312 1,466,003 341,064 246,732 607,897 6,194,008

Cost 4,429,724 5,574,336 1,397,095 1,219,596 2,017,209 14,637,960Accumulated depreciation (897,411) (4,108,333) (1,056,031) (972,864) (1,409,312) (8,443,951)-

3,532,313 1,466,003 341,064 246,732 607,896 6,194,008Net book amountYear ended 31 December 2015Opening net book amount 3,532,313 1,466,003 341,064 246,732 607,896 6,194,009Additions - 660,128 101,161 57,816 1,157,192 1,976,297Disposals - - (35,231) (2,850) (162,816) (200,896)Transfer from WIP - - - - 327,002 327,002Write-offs - - - - - -Depreciable charge (224,353) (564,303) (138,096) (90,261) (380,334) (1,397,346)Depreciation on disposal - - 25,757 1,366 162,816 189,938Depreciation on write offs - - - - - -

Closing net book amount 3,307,961 1,561,829 294,655 212,803 1,711,757 7,089,004

Cost 4,429,724 6,234,467 1,463,025 1,274,561 3,624,714 17,026,491Accumulated depreciation (1,121,763) (4,672,636) (1,168,371) (1,061,760) (1,912,957) (9,937,488)

Net book amount 3,307,961 1,561,831 294,654 212,801 1,711,757 7,089,003

55


Notes (continued)2015 2014

19 Operating Lease prepayments Ushs '000 Ushs '000

CostAt 1 January 327,241 327,241Additions - -

At 31 December 327,241 327,241

AmortisationAt 1 January 55,003 50,822

Charge for the Year 4,181 4,181

At 31 December 59,184 55,003

Net book valueAt 31 December 268,057 272,238

20 Intangible assets

Net book amount at 1 January 767,855 404,690Additions: Computer Software - 213,841Transfer from work in progress (note 18) - 465,459

Amortisation 388,653 316,135

Net book amounts at 31 December 379,203 767,855

Cost 2,349,833 2,349,833

Accumulated depreciation (1,970,630) (1,581,978)

Net book amount 379,203 767,855

2015 201421 Customer deposits Ushs '000 Ushs '000

Current and demand deposits 100,570,893 101,454,154Savings accounts 34,507,634 28,896,662

Fixed deposits accounts 14,529,213 13,880,177

149,607,739 144,230,992

The intangible assets relate to computer software acquired to support the Bank's operations.This software

is not an integral part of the related computer hardware and has therefore been presented as an intangible

asset in accordance with IAS 38, Intangible assets.

56


Notes (continued)

22 Borrowings

(a) Administered funds

2015 2014Ushs '000' Ushs '000'

At January 2,097,045 2,575,000Received during the year - 75,000Less Payments during the year (556,288) (552,955)

1,540,757 2,097,045

(b) Subordinated debt

2015 2014Ushs '000' Ushs '000'

Balance at 1 January 30,685,328 28,044,336Unrealised exchange losses/gains 6,765,000 2,640,000Accrued Interest 467,424 352,822Interest paid (406,816) (351,830)

37,510,936 30,685,328

The Bank of Uganda (BOU) Agricultural Credit Facility relates to a partnership between the Government of

Uganda and commercial banks to facilitate farmers in acquisition of agricultural and agro-processing

machinery and equipment.

Subordinated debt from Libyan Foreign Bank represents amounts approved as subordinated loan of USD

16,000,000 at an interest rate based on six months libor plus a margin of 0.8%. The subordinated debt is for

the period of five (5) year term effective 16 July 2013 to 15th July 2018. The accrued interest as at 31st

December 2015 was Ushs 221 million (2014: Ushs160 million) and the unrealised foreign exchange loss

was Ushs 7 billion (2014: Ushs 2.8 billion) due to the depreciation of Uganda shilling against the US

Dollar.

57


Notes (continued)

2015 2014

23 Other Liabilities Ushs '000 Ushs '000

Bills payable 2,187,048 1,798,986

Provision for staff gratuity 2,648,075 1,690,131Creditors 462,380 316,759

Cash Margin 1,191,499 1,088,023

Deffered fee and commission income 838,109 645,597

Accruals 3,407,604 2,763,675

10,734,715 8,303,172

24 Grants

Gross

At January and 31 December 387,145 387,145Additions 214,634 -

At 31 December 601,779 387,145

Amortisation

At 1 January 338,751 290,358

Credit to comprehensive income 116,361 48,393At 31 December 455,112 338,751

Deferred grantAt 31 December 146,667 48,394

25 Deferred income tax asset

2015 2014

Ushs '000 Ushs '000

Accelerated capital allowances 187,416 241,549

Tax losses brought forward (2,922,522) -

Provision for loan impairment 372,874 228,825

Other provisions (516,881) (215,592)

Unrealised translation differences 69,955 (1,572,405)

Net deferred income tax assets (2,809,158) (1,317,623)

The movement on the deferred income tax asset account is as follows:

At start of year (1,317,623) 1,243,698

Income statement credit - current year (note 12) (1,491,535) (2,561,321)

At end of year (2,809,158) (1,317,623)

Deferred income taxes are calculated on all temporary differences under the liability method using the

applicable tax rate of 30%. The net deferred tax asset comprises:

58


Notes (continued)

26 Share Capital

Number

of shares

issued and

Ordinary

share capital Total

Ushs '000 Ushs '000

As at January 2015 and December 2015 & 2014 300,000 30,000,000 30,000,000

27 Bank shareholding

Country

Shareholders Shareholding of holding incorporation

Libyan Foreign Bank (Ultimate parent) 99.83% Libya

Government of Uganda 0.17% Uganda

Total 100%

28 Dividends

The total authorised number of ordinary shares is 300,000 (2014: 300,000) with a par value of Shs 100,000

per share.

Libyan Foreign Bank is the immediate and ultimate parent company holding 99.83% (2014: 99.83%) of the

issued share capital and total voting rights of the Bank. The other shares are held by the Government of

Uganda.

No dividend has been proposed for the year ended 31 December 2015 (2014: Ushs 700 million).The

payment of dividend is subject to withholding tax at rates depending on the tax status of the recipient.

The Bank's shareholders are as follows:

59



Notes (continued)

2015 2014

Ushs '000 Ushs '000

29 Analysis of cash and cash equivalents

Cash and balances with bank of Uganda ( Note 13) 20,670,292 27,569,145

Less: Cash requirement (see below) (9,184,428) (19,602,871)

Placement with other banks( Note 14) 50,839,606 37,692,825

Amounts due from group companies ( Note 32 (a)) 5,563,330 14,415,579

67,888,801 60,074,678

30 Related parties

Nature of 2015 2014

(a) Amounts due from group companies relationship Ushs '000 Ushs '000

Libyan Foreign Bank Tripoli Parent company 713,353 1,151,546

British Arab Commercial Bank Limited Common ownership 4,371,767 10,655,384

Arab Bank for Investment and Foreign Trade Common ownership - 162,469

Suez Canal Bank - Cairo USD Common ownership 41,685 175,569

Arab Turkish Bank - Istanbul Common ownership 436,525 2,270,611

Total 5,563,330 14,415,579

For the purpose of cash flow statement, cash and cash equivalents comprise balances with less than 90 days

maturity from the date of acquisition including: Cash and balances with Central Bank , treasury bills and

other eligible bills, and amounts due from other Banks.

Cash and cash equivalents exclude the cash reserve requirement held with the Bank of Uganda. Banks are

required to maintain a prescribed minimum cash balance with Bank of Uganda hence not available to

finance the Bank's day- to- day activities. The amount is determined as 8% of the average outstanding

customer deposits over a cash reserve cycle period of two weeks.

The ultimate parent company of the Bank is Libyan Foreign Bank, a Company incorporated in the Libya.

There are other companies which are related to Tropical Bank Limited through common directorship or

shareholdings. The following transactions were carried out with related parties:

60



Notes (continued)

(b) Related party deposits and advances 2015 2014

Ushs '000 Ushs '000

Deposits from directors and shareholders 351,836 97,458

Loans to directors (111,519) (92,303)

Advances to staff (2,219,018) (1,755,046)

(1,978,700) (1,749,891)

(c) Related Party transactions

Interest:

Interest paid to related parties / directors (406,816) (351,830)

Interest earned from related parties / directors 25,861 21,530

Net interest expense (380,955) (330,300)

Directors Remuneration

Directors' fees 1,088,604 1,097,851

Other emoluments 274,215 78,285

Total 1,362,819 1,176,136

Key management compensation

6,286,700 3,886,790

Terminal benefits 194,864 152,861

Total 6,481,564 4,039,651

Salaries and short-term benefits (including

directors remuneration above)

61



Notes (continued)

31 Off - Balance sheet financial instruments, contingent liabilities and commitments

Gross Margin Net

Ushs'000 Ushs'000 Ushs'000

As at 31 December 2015

Guarantees 2,809,321 (587,902) 2,221,419

Letters of credit 14,149,666 - 14,149,666

Performance bonds 2,017,829 (603,597) 1,414,232

18,976,816 (1,191,499) 17,785,317

As at 31 December 2014

Guarantees 2,662,393 (282,957) 2,379,436

Letters of credit 9,766,360 (23,000) 9,743,360

Performance bonds 1,971,723 (782,067) 1,189,656

14,400,476 (1,088,024) 13,312,452

Other commitments

2015 2014

Ushs '000 Ushs '000

Approved advances not utilised 4,843,677 9,473,653

Commitments to lend are agreements to lend to customers in future subject to certain conditions. Such commitments are

Letters of credit are commitments by the Bank to make payments to third parties, on production of documents, on

behalf of customers and are reimbursed by customers. Letters of guarantee and performance bonds are issued by

the Bank, on behalf of customers, to guarantee performance by customers to third parties. The Bank will only be

required to meet these obligations in the event of default by the customers.

The Bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities.

The majority of these facilities are offset by corresponding obligations of third parties. In addition, there are other off-

balance sheet financial instruments including forward contracts for purchase and sale of foreign currencies, the nominal

amounts of which are not reflected in the balance sheet.

The following are commitments outstanding at the year end:

62


Notes (continued)

31 Off - Balance sheet financial instruments, contingent liabilities and commitments (continued)

Non-trade contingent liabilities

32 GENERAL AND CAPITAL RESERVES

General Reserve

Capital Reserve

33 REVALUATION RESERVE

34 REGULATORY CREDIT RESERVE

The regulatory credit reserve relates to excess of general and specific provisions for loans and advances

done in accordance with the requirements of the Financial Institutions Act as compared to those per IFRS.

Bank of Uganda regulations require that the excess is appropriated from retained earnings to a regulatory

reserve. The regulatory reserve is not distributable to members.

The revaluation reserve relates to the increase in the carrying value of buildings that were revalued in

2010. The revaluation reserve is not distributable to members.

The capital reserve is built up by setting aside 25% of annual net profits after tax to enable the Bank to

accumulate financial reserves up to 50% of paid up share capital for the purpose of meeting future

increase in paid up capital.

There were outstanding legal proceedings against the Bank as at 31 December 2015 which arise from

normal day to day banking operations. In the opinion of the directors, after taking professional legal

advice, the estimated potential liability to the Bank from these proceedings is Shs 2,080 million (2014:

Nil).

Based on Article 27 (c) of the Bank's Articles of Association that empowers the Board to set aside out of

profits such sums as it may think proper as reserves which shall be applicable for any lawful purpose, the

general and capital reserve are set aside based on the results of the years begining from 2007 to the

reporting date. These reserves are distributable to the members upon the discretion of the directors and are

set up as follows:

The general reserve which should be built up to at least 100% of paid up capital (by setting aside 25% of

annual net profits after tax after covering any cumulative losses from previous periods and any Bank of

Uganda regulatory reserves) to cover possible losses not yet specifically identified, finance activities that

shareholders may not be in a position to fund and provide for unforeseen expenditure.

63

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