ss annual report 2019 - safaricom sacco...ranked by sasra among the best 30 sacco’s in kenya. the...

ANNUAL REPORT

2019

Motto Empowering You

To be the financial services partner of choiceVision

To transform our members’ lives through provision of affordable,

innovative and accessible financial services.

Mission

Core Values

Customer Focus, Integrity, Reliability; Innovation

3 Notice of Annual General Meeting

5 Safaricom Sacco Board

6 Safaricom Sacco Staff

8 Minutes of 18th Annual General Meeting

14 Chairman’s Statement

16 Treasurer’s Annual Report

20 Committees Annual Reports

28 Supervisory Committee Report

30 Annual Financial Report

Table of Content

AGM NOTICE 2020

Notice is hereby given on 14th February 2020 to all members of Safaricom Sacco Society Limited, that the Annual General Meeting for the year ended 31st December 2019 shall be held on Saturday, 29th February 2020 at All African Council of Churches – Desmond Tutu Hall from 8:00am to 1:00pm

The agenda shall be;1. Confirmation of the 2019 Annual General Meeting Minutes2. Report from the Chairman3. Remarks from Chief Guest4. Report from the Supervisory committee5. Presentation of the 2019 Audited Financial Statements6. Presentation of the year 2020-2021 Budget7. Appointment of Auditors8. Disposal of Surplus for the year 20199. Resolutions10. Elections11. Any Other Business (A.O.B)

Alex OkothHon. Secretary

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SOCIETY INFORMATION

BOARD OF DIRECTORS 1 Paul Msava Chairperson 2 Bernadette Mutune Vice Chair Person 3 Johnstone Kamunde Treasurer 4 Alex Okoth Hon. Secretary 5 Connie Khayudi Director 6 Collins Ogutu Director 7 George Hunja Director From 23rd Feb 20198 Geoffrey Gekonge Director From 23rd Feb 20199 Peter Chege Director From 23rd Feb 201910 Felix Gakuru Director Upto 23rd Feb 201911 Josephine Ndambuki Director Upto 23rd Feb 2019

SUPERVISORY COMMITTEE1 Patrick Nduati Chairman2 Pamela Nyakoah Secretary3 Boniface Muthoka Director

MANAGEMENT STAFF 1 Joseph Njoroge Chief Executive Officer Joined 11th Nov 20192 Cynthia Naisisiae General Manager Upto 30th July 20193 Pauline Gichuki Finance Manager Joined 17th Oct 20194 Collins Odongo Finance Manager Upto 30th July 20195 Jonathan Mtange Business Development Manager Upto 19th Nov 20196 Willis Julah Credit Manager Joined 5th Nov 20197 Philbert Kasuku Credit Manager Upto 8th Nov 20198 Tabby Karagu Human Resource Manager 9 Kelvin Ebole ICT Manager 10 James Gathuku Audit Manager

REGISTERED OFFICE Safaricom Care Centre HouseWaiyaki WayP.O. BOX 2392-00606Nairobi

AUDITOR PKF KenyaCertified Public AccountantsP.O. Box 14077, 00800NAIROBI

PRINCIPAL BANKERS 1. Co-operative Bank of Kenya LimitedWestlands Branch, Nairobi.

2. NIC Bank LimitedWestlands Branch, Nairobi.

3. Commercial Bank of Africa LimitedWestlands Branch, Nairobi.

LEGAL ADVISORS Mwaniki Gachoka & Co. AdvocatesP.O Box 13439-00800Nairobi

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Picture Board Members

Board Mem

bers

Staf

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SAFARICOM SACCO LTDBOARD AND COMMITTEE MEETINGS ATTENDANCE

Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec Total1 1 1 1 1 1 2 1 2 1 1 1 141 1 1 1 1 1 2 1 2 1 1 1 141 1 1 1 1 1 2 1 2 1 1 1 141 1 1 1 1 1 2 1 2 1 1 1 141 1 1 1 1 1 2 1 2 1 1 1 141 1 1 1 1 1 2 1 2 1 1 1 14 1 1 1 1 2 1 2 1 1 12 1 1 1 1 2 1 2 1 1 1 12 1 1 1 1 2 1 2 1 1 1 121 1 21 1 2 1 1 21 1 1 1 1 1 6 1 1 1 1 1 5

1 1 1 1 4 1 1 1 1 4 1 1 1 1 4

1 1 1 1 1 1 1 1 1 1 101 1 1 1 1 1 1 1 1 1 10

1 1 1 1 1 1 1 1 1 1 1 1 121 1 1 1 1 1 1 1 1 1 10

1 1 21 1 21 1 2 1 1 1 1 1 1 1 1 1 1 10 1 1 1 1 1 1 1 1 1 1 101 1 1 1 1 1 1 1 1 1 1 1 12 1 1 1 1 1 1 1 1 1 1 10 1 1 1 1 1 1 1 1 1 1 10 1 1 1 1 1 1 1 1 1 1 10 1 1 1 1 1 1 1 1 1 1 101 1 21 1 21 1 2

1 1 1 1 1 1 1 1 1 1 101 1 1 1 1 1 1 1 1 1 101 1 1 1 1 1 1 1 1 1 10

1 1 21 1 21 1 2

1 1 2 4 1 1 2 4 1 1 1 1 2 4 1 1

1 1 1 1 1 5 1 1 1 1 1 5 1 1 1 1 1 5

NamesPaul MsavaBernadette MutuneJohnstone KamundeAlex OkothConnie KhayundiCollins OgutuGeorge HunjaGeoffrey GekongePeter ChegeFelix GakuruJosephine NdambukiJoseph NjorogeCynthia NaisisiaeTabby KaraguPatrick NduatiPamela NyakoahBoniface Muthoka

Paul MsavaBernadette MutuneJohnstone KamundeAlex OkothConnie KhayudiCollins OgutuJosephine NdambukiAUDIT & RISK COMMITTEEGeoffrey GekongePeter ChegeAlex OkothBernadette MutuneBUSINESS DEVELOPMENTBernadette MutuneCollins OgutuGeorge HunjaPaul MsavaFelix GakuruJosephine NdambukiCREDIT COMMITTEECollins OgutuConnie KhayundiGeorge HunjaAlex OkothBernadette MutuneFelix GakuruNOMINATION COMMITTEEKennedy AukaPhylis MutuaJoseph MwangiTheresa MruttuHesbon KiuraSUPERVISORY COMMITTEEBoniface MuthokaPatrick NduatiPamela Nyakoa Osore

Finance & Admin Committee

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Minutes of the Safaricom Sacco 18th Annual General Meeting Held on Saturday 23rd February 2019 At All Africa Conference of Churches (Desmond Tutu Conference Centre) Waiyaki Way, Westlands.

Attendance:1. Sacco members2. Sacco regional champions3. Sacco Board 4. Supervisory Committee5. Nominations Committee6. Sacco Auditors for Year 20177. Invited GuestsMaster of Ceremonies – Joseph Alando

Min 1/23/2/2019: Preliminaries• The Chairman called the meeting to order at 11:03 am. upon confirming the presence of at least 25% of the total number of members or 60 members-whichever is less- as required by the by-laws to constitute a quorum for the conduct of business in an AGM. • Confirmation of Notice of the AGM was shared at least 14 days before the AGM date.• The opening prayer was offered by Collate Ong’wen.• The Kenya National Anthem was led by the entertainment team.

Min 2/23/2/2019 Confirmation of the AgendaThe secretary read the agenda of the meeting as below:1. Confirmation of the 2018 Annual General Meeting Minutes and matters arising2. Report from the Chairman3. 2019-2023 Strategic plan4. Remarks from Chief Guest5. Report from the supervisory committee6. Presentation of the 2018 Audited Financial Statements7. Presentation of the year 2019-2020 Budget8. Appointment of Auditors9. Disposal of Surplus for the year 201810. Resolutions11. Elections 12. Any Other Business (A.O.B)The agenda was adopted as proposed by Michael Borino and seconded by Eunice Ayiro.

Min 3/23/2/2019 Review and adoption of the 2018 AGM minutesThe Board secretary took the members through the minutes of the previous AGM held on 17th Feb 2018 and after page-by-page corrections, the minutes were adopted as proposed by Chris Oduor and seconded by Yusto Omondi.

Min 4/23/2/2019 Matters arising from previous minutesThe following matters were cited by various members as needing clarification from the previous year’s AGM;

• The status of the electronic registration and voting• Report of the Review of the 2014 – 2018 strategic plan• Staff welfare in view of the limited office space• Ramifications of IFRS9 • Double-digit rebate promise• Board members’ compliance with eligibility requirements

The Chairman’s feedback was as below: -• On electronic voting; the chairman explained that the project was still alive and being addressed through the Business Development Committee.• Strategic Planning – a conclusive report to be shared with the members once the review is completed. The Chairman noted that the SACCO membership target had been surpassed confirming that Safaricom Sacco was ranked by SASRA among the best 30 Sacco’s in Kenya. The Sacco also won several trophies during the Ushirika Day awards but the chairman also admitted that the Sacco did not meet its targets on revenue and product growth.• Staff office space; the issue is well captured in the 2019 – 2023 strategic plan and plans are underway to buy, build or rent the same as soon as is practically possible.• Board compliance; all Board members had met the requirements of Kes. 1 Million in deposits and Kes. 40,000.00 in Share capital.• IFRS9 – Clean-ups and reinstatements were done to meet SASRA requirements.Minutes adopted after proposal by Judy Runo and seconded by Joseph Ochieng.

Min 5/23/2/2019: Chairman’s ReportThe Chairman noted that the 2018 performance was very good evidenced by overall growth in all the Key Indicators such as revenue, loan book, deposits, membership, liquidity ratio, as well as the total asset base which hit the Kes 6 billion mark

18th Annual General Meeting Minutes

to put the SACCO firmly within the tier 1 Sacco’s in Kenya. He however noted that as the loan book grew, so did the Portfo-lio at Risk which had necessitated adoption of more stringent measures aimed at effective collection of the defaulted loans including on-boarding of external debt collectors.The Chairman observed that the dream of building the office block had not been achieved due to inability to secure the adjacent plot next to our current piece which would have enabled us to progress the project.

With respect to Shares Drive, it was the considered opinion of the Board that members be allowed to decide on disposal of their excess shares since the timelines for completing the project had not been met as promised. Consequently, a Share capital survey had been commissioned, the results of which were shared in the AGM where majority preferred to get back their cash in FOSA at [47%]. Other members opted to;• Retain on share capital -18%• Payment of loans – 16%• Increase contributions- 19%

ICT: The SACCO experienced a Cyber-attack on 27th October 2018 alongside 40 others under the auspices of Coretec leading the Board to decide on on-boarding a new Core Banking system vendor, Craft Silicon. Integration and migration of data have commenced and will be completed in the course of the year. The SACCO is also working with the umbrella bodies to get an insurance company that could offer insurance on fraud.

The General Manager was commended for the good work she had done and was being groomed for the CEO’s office which would be filled in the next strategic plan. The chair reported that the former CEO, George Ochiri, had resigned on his own volition, as did the Human Resource and Business Development Managers.

Additionally, the new Strategic Plan would involve:• Launching of new products• Customer Service• Office SpaceThe Chairman concluded by noting that 2018 had been a tough year but urged members to have a progressive and growth mindset.Motion to Adopt the Chairman’s Report was proposed by: Collate Ong’wen and seconded by Karumba Kinyua.

Reactions to Chairman’s ReportMembers noted that conversations regarding the office block had spanned for long and urged the Board to purchase a readily available building or rent one for use as the office block. They sought clarification on whether the Sacco was part of the government project that brought together Government, Sacco’s and Private developers under an incentive cham-pioned through the Kenya Mortgage Refinancing Corporation Ltd Company and urged the Sacco to take part in the project. They were alarmed at the worsening trend of defaulted loans and advised the Board to take every possible step to reverse it with clear and achievable targets and that dormant members had increased considerably in 2018 while active members had reduced.The members were unanimous that Customer service was still poor and asked for a clear roadmap in addressing the issue as well as assurance on the plans for mitigating future cyber-attacks.

The Chairman’s response to reactions;Office Block; he explained that the Board was looking at various options including partnering with other organizations to develop the plot or buying readymade office apartments. He also informed the meeting that our SACCO was one of the other 11 that had joined Kenya Mortgage Refinancing Corporation [KMRC] with a share capital of Kes 10 Million.• Share capital survey results were shared with the members with more than Kes 40,000 shares and they deliberated and unanimously agreed to be refunded by April 2019.• Non-Performing Loans was still a headache and the Board was keen to arrest the situation with extraordinary measures including onboarding more effective external debt collectors, chopping deposits and recovery from guarantors.• On the concern that loans far outstripped deposits, the members were assured that Fixed deposits would take care of any deficiencies and the interest on the same is usually reviewed on a quarterly basis.• Regarding ICT, a project team had been working to close the new banking system which will lead to enhanced service delivery.• The Chairman informed the meeting that our liquidity ratio had continued to be very healthy at over 90% against the SASRA threshold of 15% and members advised the Board to seek viable investment avenues to channel the cash.• The Board was advised to have stringent recruitment rules to curb onboarding of members who end up defaulting on loans.

Min 6/23/2/2019: Remarks by the Principal GuestsMr. Vincent Marangu – Director, Co-operative Bank.Vincent delivered greetings from the Co-operative bank, congratulated Safaricom Sacco on its 18th AGM and noted that member turnout was very good. He praised the level of member engagement pointing out that members were right to ask the hard questions.

He commended Safaricom Sacco for good performance during the tough economic times pointing out that cost manage-ment had been done very well. He further opined that having a high ratio of Non-Performing Loans was risky and estimated that Kenya’s Average NPL stood at 10%, while that of Safaricom Sacco was at 6%. He challenged the board to bring it down further.

Vincent also advised the board to work on a share capital promotion matrix advising that the Sacco needed a strong capital base. He insisted that compliance was necessary recommending a follow up of the sources of funds from the Sacco members.

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Dolphine Aremo – Representing Mrs. Mary Mungai (Ministry)She noted that Co-operatives were a devolved function of the government.On the matter of performance, she informed the AGM that 3,000 co-operatives were active out of which 50 were Billionaire co-operatives.The Big 5 cooperatives include;1. Mwalimu Sacco – Strongest – 46 Billion total Assets2. Stima Sacco – 32 Billion3. Police Sacco – 28 Billon4. Harambee Sacco – Books not published5. Afya Sacco – 16 BillionShe reiterated that Deposit Taking SACCOs are supervised by SASRA and had been directed by the regulator to adopt IFRS 9 without fail and encouraged Safaricom Sacco to comply adding that SASRA renewed licenses annually and if a Sacco didn’t comply, then they would lose the same. Dolphine also explained that Sacco’s are at the forefront of realizing the Government’s Big 4 agenda.

She highlighted that the highest saver for Safaricom Sacco was at Kes. 20 million while countrywide it was at Kes. 80 million.

Senior Regional Head – KUSCCO – Arnold MuneneHe appreciated support from Safaricom Sacco and applauded them for holding their AGM yearly.He noted the following issues as affecting Sacco’s:• Portfolio at Risk- he noted that Safaricom Sacco was not way off the mark but could do even better by effecting strict KYC requirements.• Compliance to IFRS9 – he disclosed that some Saccos have had their books rejected by SASRA for non-compliance and commended Safaricom Sacco for complying. • Governance – He observed that Safaricom Sacco is doing very well.• Cyber Security – He stated the Finance sector lost Kes 21.2 Billion as many Sacco’s were hit by the cyber-attack.He informed the AGM that stakeholders were having a consultative meeting to make sure that cyber-crime was prevented in the Sacco’s. In this regard KUSCCO was taking the lead on the matter.

He referenced the 4th KUSCCO convention, noting how Saccos’ will benefit from the Big4 agendas as follows:

• 20.5 % - Trade• 46.4% - Housing• 14.5% - Consumption• 12 % - Education• 6.6% - AgricultureHe advised partnership with the government to drive the Big4 agenda. Members were called upon to encourage the board to give credit at an affordable cost.

Dr. David Kahuthu – SASRADr. David confirmed that Safaricom Sacco had complied with all ratios except institutional capital.He informed the AGM that SASRA used to go to Sacco’s’ with issues. However, they changed their approach and did a random picking; as a result of which they picked Safaricom Sacco.While making reference to the Degeneration theory, he noted that Sacco’s started as cooperatives but have grown into big financial institutions. He urged the members to brainstorm on the best avenues to grow the Sacco noting that the Sacco’s that are growing should seek to answer the degeneration theory. Vincent also advised the board to work on a share capital promotion matrix advising that the Sacco needed a strong capital base. He insisted that Compliance was necessary recommending a follow up of the sources of funds from the Sacco members.

Min 7/23/2/2019: Supervisory Committee ReportThe committee reported on:1. Financial and management reporting2. Credit management3. Corporate governance4. Compliance and regulations5. ICT6. Human Resource ManagementThe committee thanked the members for the role they gave them to supervise the board.The supervisory report was proposed by Francis Bondo and seconded by Antony Mureithi.

Reactions to Supervisory Committee ReportMembers raised concerns regarding lack of a performance management report, Cyber-crime, hacking, checks on the new system and ICT capacity in the board. They also wanted an assurance on the office block and board attendance.

Responses to reactions to Supervisory Committee ReportConcerning Cybersecurity; Safaricom Sacco entered into a managed security services contract with Safaricom PLC. Further, a new banking solution was being implemented that would improve controls and reduce cyber risks.

It was also reported that the HR department is doing extensive due diligence before on boarding new staff through externally contracted partners. Staff’s history was being investigated before they got on-boarded.

It was communicated that the Board’s Capacity was adequate.


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18th Annual General Meeting MinutesWith regard to the SACCO Westlands Office Block, it was explained that the land was now an asset in the SACCO’s books of accounts and can only be sold at market value or developed for the benefit of the SACCO members. No individuals would be able to circumvent the asset disposal process to benefit themselves without the knowledge of the members, as the asset value is significant and would quickly upset the statement of financial position.

Lucy Kimani from the ministry explained that when a board member was elected and they resigned, then it was not meant to be discussed in an AGM. That when a member resigns voluntarily then the ministry accepts and another is co-opted to fill the vacancy.

The Supervisory Committee confirmed that the books were correctly tabled as a true and fair representation of the society as at 31 December 2018.

Min 8/23/2/2019: Treasurer’s and Auditor’s ReportThe Treasurer reaffirmed that he stood by his values as an honest and diligent professional who will always present the results as they are without hiding any items or “cooking the books” to please any stakeholder as it has repercussions in the future. He emphasized that the future of the society is more important than the immediate needs. He agreed that a return of 6% was not good enough and emphasized that Safaricom Sacco had fully transitioned from -IAS 39 - financial instruments recognition and measurement to IFRS 9 -Financial Instruments becoming among the first Sacco in the country to do so.

He explained that the main change was in the way the Sacco’s risks were captured as defined under the provisions per SASRA requirements compared to the expected credit loss model under IFRS 9. He also explained that as part of the alignment of the books for compliance, this caused the accounts to be restated for 2016 and 2017. The reclassification led to an effect on the retained earnings of the society, a position that would improve in subsequent years. He observed that based on the restatements, dividends were not supposed to have been paid in 2017. He emphasized that the earlier the Sacco complied, the better to guarantee future benefits

In conclusion, the treasurer assured the members that Safaricom Sacco was in a good place, and that the society’s financial position was strong enough to prosper as a going concern.

Audited AccountsMr. Chaudhry, Asif from PKF took members through the audited accounts.The audited accounts and the treasurer’s report were proposed for adoption by Jadiel Mbogo and seconded by Moses Lukose.

Reactions to Treasurer's Report and Audited AccountsMembers observed that some loans were taken outside the policy which should be restricted and the strategic direction of Sacco in regard to rebates payment, what guided the decision in opening an account with UBA despite negative retained earnings and an explanation of the administration cost, governance expense increase and where receivables of Kes.34 Million was.

Additionally, they sought to know how the Sacco planned to invest funds from a Net increase in loans and cash account, why they used a higher cost to get a low return, a clarification if cash loss reduced rebates pay-out and why assets were reported at fair market value.

Finally, On Loans and advances impairment they sought to know whether the bands and reclassifications were valid and recommended that with regards to insider lending there should be a list of the directors and how much they had in depos-its and their loans and members’ money held in land needed to be cleared.

Responses to ReactionsConcerning IFRS 9; The treasurer explained that better collection history leads to a lower IFRS 9 provision. In the case of the SACCO history trends was not good enough which give rise to higher expected credit loss factors in all categoriesThe impact of the restated account reported as a credit at the beginning of the year is a genuine gain.IFRS 9 Affected all the other receivables; checkoff receivables, therefore, were supposed to be booked as receivables.With regards to cash losses, the treasurer explained that this item is treated as operational costs and such losses if not recov-ered from the insurance or the culprits are charged to the Profit and loss account and the relevant general ledger accounts.

On the matter of Insider lending; an insider lending report is shared with the regulator monthly as part of the mandatory returns. furthermore, insider lending schedule is an audit item and the auditors usually review the schedule and give a report on the same.

Regarding the value of the shares as was appearing in the financials, it was observed that KUSCCO and CIC shares were not quoted on the NSE and therefore the reporting was based on the initial purchase value.

On Membership, the board was to evaluate how they handled new members by segmenting Sacco members. Some of the defaulters were ex-common bond members.

On Governance, it was observed that detailed information was available on request and in future more details would be added to supplement the numbers published.

Regarding the deposit put in UBA, it was explained that due diligence had been done before placing the deposit and that investing in the lower banks was more beneficial. The investment was for a maximum of 3 months and the board will contin-ue monitoring performance of the bank to ensure safety of principal amount.

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18th Annual General Meeting MinutesOn Cash management, the treasurer explained that investment of cash in the Sacco businesses was a bit complex since borrowing is the core business of the Sacco and therefore cash must always be available for disbursement. Balancing was therefore done during the year to ensure optimal cash holding. The directors would however review the investment in money market model to achieve optimal returns.

With respect to Administration costs – this would be addressed in the future budgets and the new strategic plan 2019 –2023.The treasurer highlighted that compliance to the institutional capital ratio stood at 3% against the 8% requirement by the regulator..It was also reported that the Board had agreed with SASRA that institutional capital must grow at 2% yearly for the next three years to meet the compliance requirement.

On maximum loan allowable for insider lending, it was explained that:• All directors and staff went through the same process as ordinary members.• Board members could not publish their information because it was confidential data just like any other member but this was accessible in the office on request.

Reactions to 2019 – 2020 BudgetMembers stated that Interest on Rebates for 2019 was budgeted at Kes. 403, 203,969 and asked the Board to confirm if they would meet their target, if upon budget approval, they were going to pay the budgeted rebates and staff bonuses and a follow up on the budget to be done.

An inquiry was made on the provision of dissolving the Board.

Recommendations were made that: -new blood join the Sacco, a scoring system for loans to be employed, to organize training for new members on products and processes and that the Sacco grows revenues at 38% and expenses at 30%.

Responses to reactionsExpenses: It was explained that there was no plan to grow expenses faster than the revenue. The overall expenditure was expected not to grow beyond 30%. The Treasurer committed to achieving expenses of 30% and below.

The Treasurer advised that he was not able to put a hard figure on rebates but promised that the board would continue to work hard to deliver as per the budgeted numbers in 2019 and at the same time grow the institutional capital at the rate agreed with SASRA annually.

The Treasurer’s and Auditor’s Report was adopted as proposed by Chris Oduor and seconded by George Ouma.

Min 9/23/2/2019: AGM Resolutions 2018

1.Dividends on Share Capital to be paid at 12%. Members shares drive funds to be refunded 100% in cash from April 2019.Proposed by: Rebecca AchiaSeconded by: Victoria Mumbi

2.Interest on members’ deposits to be paid at 6% Proposed by: Carolyne MbuguaSeconded by: Jackson Mwanzia

3. Staff BonusTo pay staff bonus equivalent to one month’s salary based on their individual performance in the year.Proposed by: Edwin KamauSeconded by: Vincent Opiyo

4.Proposal for payment of Honoraria to the Board of Directors.

To Pay honoraria to members of the Board and Supervisory Committee.Proposal to pay at 100% Proposed by: Joseph OchiengSeconded by: Calvin MatunduraOther members proposed the honoraria to be paid at 50% due to the Sacco’s performance.Proposed by: Rebecca AchiaSeconded by: Maxwell Thumi

Resolution: Board members to receive 50% of the proposed Honoraria

5. Increase Indemnity.To increase Board Indemnity from Kes. 3,000,000 to Kes.4,000,000Proposed by: David MwangiSeconded by: Safia Isak

6. PKF to be retained as the auditor.Proposed by: Judy RunoSeconded by: Jackson Mwanzia


7. Borrowing PowersTo maintain the borrowing powers of the board at Kes 600M for the year 2019Proposed by: Eunice KaranjaSeconded by: Jack Kiche

Min 10/23/2/2019: Staff of the yearMembers were informed that the staff of the year was Nelson Chebii.

Min 11/23/2/2019: ElectionsThe following were retiring from the Board and were eligible for re-election:• Collins Ogutu• Josephine Ndambuki• Felix Gakuru

The following candidates had been cleared by the nomination committee for elections to the board:• Collins Ogutu• Josephine Ndambuki • Felix Gakuru• Peter Chege• Geoffrey Gekonge• George Hunja

The Candidates were proposed and seconded as follows:

It was agreed that the individual who would come in in the 4th position would replace Jack Kiche.

The following were re-elected for a 3-year term:• Geoffrey Gekonge• George Hunja• Peter Chege

Mr. Collins Ogutu was re-elected for a 1-year term to fill the vacancy left by Jack Kiche who had resigned from the board in the year 2018.

Supervisory Committee ElectionsBoniface MuthokaProposed by: Alexander KairuSeconded by: Tete Kisenya

Min 12/23/2/2019: AOBsThere was no AOB that had been received as stipulated by the bylaws on AGM.

Min 13/23/2/2019: ClosureThe AGM was closed by word of prayer from Connie Khayundi at 1829Hrs.Members and guests were then invited to late lunch.

Signed:Secretary:

Confirmed Chairman: Date: 29.02.2020 Member: Date: 29.02.2020

Vincent Opiyo1.Felix Gakuru2.Josephine Ndambuki3.Collins Ogutu4.Geoffrey Gekonge5.Peter Chege6.George Hunja

Mustafa MumiaJoseph OchiengEvans KwambaiAntony MureithiBernard Kiragu

Christopher OlooIsaac OwuorLinda IllahFelix AkukuGideon OkeweEdward Kariuki

Proposed by: Seconded by:

179Geoffrey GekongeGeorge HunjaPeter ChegeCollins Ogutu

Josephine NdambukiFelix Gakuru

15412310710190

123456

VOTES POSITIONCANDIDATE

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STATEMENT BY THE CHAIRMAN, SAFARICOM SACCO LTD ON THE 19th ANNUAL GENERAL MEETING HELD AT DESMOND TUTU CONFERENCE CENTER, NAIROBI ON 29th FEBRUARY 2020

Preamble

Our Chief Guest, Invited guests, honorable members, ladies and gentlemen. It’s my pleasure on behalf of the Board of Directors to welcome you all to our 19th Annual General Meeting and thank you for the continued support you have offered the society throughout the year.

Financial Performance

The year 2019 was characterized by a calm political environment contributing to an economic growth of 5.7% placing Kenya as one of the fastest growing economies in Sub-Saharan Africa. The recent economic expansion has been boost-ed by a stable macroeconomic environment, positive investor confidence and a resilient services sector.

MembershipMembers Deposits

(withdrawable & non withdrawable)

Gross Loans & AdvancesTotal Assets

Core CapitalInstitutional Capital

Turnover

2019(kes.)12,621

5,516,385,8345,801,872,5356,692,680,496772,213,032314,822,122698,988,489

2018(kes.)13,476

4,739,912,7675,170,258,3605,890,773,792843,232,219175,347,857647,167,066

% change-6%

15.4%12.2%15.5%-8.4%79.5%

8%

ComplianceThe Sacco is licensed and regulated by SASRA and as such has to comply with the provisions of the Sacco Societies Act No. 14 of 2008 and the Sacco Societies Regulations 2010 in regard to Capital Adequacy. The Sacco is required to maintain an Institutional Capital to Total Assets of 8%. However, the Sacco has not achieved this since it was licensed in 2011. During the registration of 2018 accounts, the regulator gave the Sacco a period of three years to fully comply with the Capital requirements. In this regard, the Sacco has set asides Kes. 216.8 million as reserves to achieve an Institutional Capital of 5%.

Dear Members, failure to comply with Regulatory requirements comes with severe sanctions as per Section 51 of the Sacco Act which include;1. Restrict, suspend or prohibit payment of dividends.2. Restrict the rate of interest on deposits payable by the society to such rates as the Authority shall determine.3. Suspension of lending and investment.4. Prohibition from accepting further deposits or other lines of credit.

The Board is committed to ensure that the Sacco attains full compliance by end of 2020 and calls for co-operation from all members.

Review of Interest Capping LawDuring the year, parliament amended Section 33B of the Banking Act to pave way for removal of interest capping by Commercial Banks which are expected to adjust the loan interest rates according to the prevailing market rates. This will raise the cost of credit and affordability to MSMEs. IMF in the Finance Access Survey 2019 showed that this sector contrib-utes 40% to the Kenyan GDP. Despite their huge role they face a challenge of accessing adequate, affordable and timely credit.

This provides SACCOs with a comparative advantage in regards to credit affordability and accessibility for this group. We will therefore consider the opportunities available to develop and re-engineer our products that will fill into the gaps.

Fraud

During the year, the Sacco noted suspicious transactions that involved the General Manager and Finance Manager where bankers’ cheques were being used to pay suppliers contrary to the laid down procedures.

The disciplinary process as stipulated in Safaricom Sacco Human Resource Policy Manual was followed where the two were given several hearings to clear their names. They were later suspended from employment to give room for further investigation and pave way for a disciplinary hearing. A decision was made to dismiss the two from employment effective 30/07/2019.

The matter was reported to the DCI and investigations are ongoing. We have further engaged the services of a Forensic Auditor to review all payments made between 1st January 2016 and 30th June 2019 to ensure they were done as per laid down procedures. We are pursuing our insurer for compensation for losses under the Fidelity Guarantee.

Chairman’s Statement

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Chairman’s StatementImplementation of New SystemsThe year 2019 experienced major milestones in the ICT docket in line with our objective of innovating and leveraging on ICT for service delivery. We embarked on a journey to move to a new system – Bankers Realm powered by Craft Silicon. We finally went live on 1st November 2019.

The Project dubbed Project CIRI, abbreviation to our Core Values which are Customer Focus, Innovations, Reliability and Integrity has empowered our Sacco members to transact 24/7 from our platforms SafCIRI App, USSD (*345#) & Internet Banking. The system has other additional modules such as Business Intelligence, Document Management system, Human Resource Management Information System, API Integration for Sacco Link and Pesalink and Bank Integrations.

Kenya Mortgage Refinance Company /Mortgage LoansDuring the year, the Sacco launched a Mortgage Product to enable members purchase ready houses. Members can access up to Kes. 10 million repayable in 12 years at an interest rate of 13%. However, the uptake of the product has been slow. The Sacco is in the process of reviewing this product to allow construction mortgages. On boarding of suitable construction partners with experience in this line of business is ongoing.

Safaricom Sacco is among the 11 Sacco’s that were selected to buy shares at KMRC. KMRC, an initiative of the National Treasury and World Bank will support the affordable housing agenda by providing secure, long-term funding to the mortgage lenders, thereby increasing the availability and affordability of mortgage loans to Kenyans. KMRC have already done their assessment and confirmed that the Sacco qualifies and is eligible for funding. This move may lower the mortgage interest rate and enable a majority of our members own their dream houses.

Data Protection PolicyThe Data Protection Act, 2019 was enacted on 11th November 2019. The Act gives effect to Articles 31(c) and (d) of the Constitution of Kenya which guarantee the right of every person not to have “information relating to their family or private affairs unnecessarily required or revealed” and the right not to have “the privacy of their communications infringed”. The new legislation sets out the rights of data subjects and obligations of data controllers, data processors and third parties who handle personal data.

Overall, the Act will usher in a robust legal and institutional mechanism for the protection of personal data, which will have far-reaching implications on how personal data is handled and introduces stiff penalties for breach of its provisions. The Sacco is in the process of developing a Data Protection Policy to comply with the legislation. I urge all members to be extra careful on how they handle and disseminate their personal information and those relating to other members.

Way forwardThe Board’s strategy for the year 2020 will be;1. Fixing the People pillar – The SACCO Board and Management will be keen to enhance the welfare of staff by address-ing office space and having the optimum staffing levels. We shall revise the organogram and also review the remuneration structure to match the market.2. Improve on customer service - The Board and Management is keen to both quick and permanent fixes in improving customer service in both the short-run and long run. All members have a right to be served, and therefore the SACCO should be institutionalized and not personalized. 3. Enhance the internal controls by reviewing the policies and procedures and also strengthening the Internal Audit function.4. Improve our collections to reduce the PAR – The Sacco has been registering a Portfolio at risk beyond the prescribed limits. This affects the net surplus as the Sacco has to provide for probable loan losses as per regulations and IFRS 9. Most of our loans are secured by guarantors and in case of default, it becomes difficult to recover from the guarantors since they have their own loans. The Sacco has engaged the services of Debt Collectors to assist in following up problematic loan accounts. We shall be reviewing the agreements with debt collectors and also involve auctioneers in recovery of default-er’s assets.5. Revamp our products to spur growth and loans uptake; only 50% of membership have loans in the Sacco. We are going to review our loan products in view of making them affordable and attractive to members.

ConclusionI take this opportunity to extend our appreciation to all members, our partners, and service providers, SASRA, Ministry of Industry, Trade and Cooperatives, KUSCCO for the invaluable support during the year.I would like to sincerely thank the outgoing members of the board for their visionary leadership and performing their duties with dedication and tenacity. They have been integral to the growth we have achieved and we look forward to welcom-ing the new team.I also want to thank and appreciate the Board, Management and Staff for working tirelessly in the year to achieve what has been presented here today.

PAUL MSAVACHAIRMAN

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The Chairman of the board, Our chief guest and distinguished members. It brings me great pleasure to present to you the financial performance of Safaricom Sacco Limited DT for the year ended 31st December 2019 and a summary of the under-lying regulatory and economic environment that we operated under in the last 12 months.

Over the last several years, we have continued, in pursuit of our strategic targets, to present to you our ambitions and our achievements year on year. Last year, we presented to you the SACCO’s new 5-year strategic plan and these results are our first output in line with the new plan.

As we will demonstrate to you in this report, the Society has continued to register growth both in financial performance and membership fronts. From a financial angle, we can proudly inform members that Safaricom Sacco is strongly anchored on the pedestal of the league of giants in the industry, sound in management and well capitalized to weather any turmoil in the micro and macro-economic environments. These financial reports will demonstrate to you that over the last 8 years we have grown in all fronts of the SACCO KPIs.

OPERATING ENVIRONMENT OVERVIEW

Macro-economic environment

It is worth noting we are announcing these results on the back drop of a challenging year, particularly in the country’s economic environment across all industries with suppressed growth in the economy and struggling business performance. As we may be aware, 17 companies had issued profit warnings by December 2019 (at least 10 of which were listed compa-nies - 8 in 2018 - Source: Cytonn Investments Weekly Report, December 23, 2019), while others were forced to either down-size or close operations to keep their businesses afloat.

Despite the Societies favorable interest rates statistics shows that many of our members prefer borrowing from banks where they felt it was easier to acquire loans without having to look for guarantors slowing down our lending business. As stewards of the members’ finances, we maintained our lending rates stable across all the products despite lower revenue projec-tions to safeguard our members from the impact of the financial shifts. It has always been our view that our core objective is to ensure members are able to create wealth through borrowing at predictable rates which helps them to plan their projects and projected cash outflows and not necessarily to focus on rebates and dividends which are a by-product of our activities.

The country’s GDP growth slowed to 5.1% in the third quarter of 2019, down from the second quarter’s 5.6% marking the lowest reading since Q3 2017, according to Kenya’s Statistical Institute (KNBS). The third-quarter moderation largely reflect-ed a broad-based slowdown in activity across all sectors.

Growth is expected to quicken this year (2020) on the back of a pick-up in domestic demand. Upbeat household consump-tion is seen underpinning the expansion, while healthy government spending ought to further support growth. The Sacco will be focusing on products targeting these areas for sustainable growth. Adverse weather conditions and a wide fiscal deficit remain downside risks to the outlook. However, Focus Economics Analysts project GDP growth of 5.8% in 2020.

Annual average inflation rose to 5.2% as at December 2019. Focus Economics Consensus panelists expect inflation to average 5.3% in 2020. Purchasing Managers’ index dropped further to 49.7 in January 2020 from 53.3 in December 2019, thus dropping below the 50-threshold that indicates a deterioration in business conditions in the private sector for the first time since April 2019. January’s drop largely reflected falling output and slowing new order growth. This is an indicator that the year may also face suppressed performance.

In the last two years’, commercial banks savings rates remained within the range of 4.58% - 6.97% and the average deposit rate was 6.98% - 8.26%. Financial institutions were reluctant to take deposits at higher interest rates due to interest capping on their assets which then implied that if the society has high liquidity and members are not borrowing, the excess funds could only yield very low returns. As a society, we must reverse this trend because as we increase our deposits without commensurate increase in loans, we dilute our rebates in equal measure. Members should therefore expect suppressed returns year on year even with high contributions, partially because of taking loans with other financial institutions at even

Treasurer’s Report

STATEMENT BY THE TREASURER, SAFARICOM SACCO LTD ON THE 19th ANNUAL GENERAL MEETING HELD AT DESMOND TUTU CONFERENCE CENTER, NAIROBI ON 29th FEBRUARY 2020

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The SACCO’s DemographicsSaccos as Co-operative enterprises are first and foremost member owned institutions and secondly, as socio-economic enterprises, they are member-owned and member-managed business enterprises. Because of this, the operations of a SACCO are not entirely as a profit-based entity hence the Socio-economic element consideration of the various owners come into play. Our Sacco membership was composed of the below basic demographic measures as at 31 December 2019.

Based on the above data, our members seem to be conservative in loan uptake or/and do not fully patronize our own SACCO but borrow from other financiers hence denying ourselves return on investment and pushing the same to other private investors in other financial institutions.

Financial Performance Highlights

Last Year, members requested the board to halt land facilitations because of various challenges in the previous transac-tions’ and due to the high inventory of land that was in the books as at end of FY18. To cushion this, the board introduced the mortgage product with the hope that with good uptake the gap would be filled. However, the uptake was not as desired and as a result, the SACCO was not able to generate a large portion of income that had been budgeted for which further weakened the top line.

With the entry of Kenya Mortgage Refinancing Company where the Society is a shareholder, we see an opportunity to revitalize the mortgage product in future by defining safe ways to continue with this business line without breaking the existing regulations to provide affordable housing products in the buy and build model. This is more so in line with the government’s big four agenda to achieve low cost housing for the society. We believe these roles can be complimentary.

All in all, we had a successful year, with a mixed basket of challenges and fairly improved financial results as shown in the reports that follow.

1. Revenues and Expenses

Total interest income for the year 2019 was Kes. 634.7 Million compared to Kes. 596.5 Million representing a 6.4% growth while other income grew to Kes. 64.2 Million up from Kes. 50.6 Million. Our main revenue drivers to this performance were from Development, Super Premium and Miradi loans. During the year, the SACCCO did not facilitate any new land transac-tions which negatively affected the budgeted income. Meanwhile, the Society increased investments in cash which led to an increase in other income from Kes. 3.3 Million to Kes. 35.9 Million. (To note this figure is already included in other incomes).

To finance the growth in the year, the total expenses for the year rose to Kes. 483.3 Million compared to Kes. 336.4 Million in the previous year. The expenses include a negative impact from the provisions on expected credit loss under the IFRS 9 of Kes. 69.4 Million up from a recovery of Kes. 78.6 Million in 2018. This impact is as a result of both the growth in our assets (loans and receivables) as well as quality of loan book. Governance expenses during the year dropped by 23.3% while Administra-tive expenses dropped by 42% as a result of non land transactions.

2.Operational Performance

Below chart represents an 8-year trend on key metrics of operational performance.

Treasurer’s Annual Report

Membership

Non-Withdrawable Deposits

Loans issued; Numbers

Gross Loans Issued; Amounts

Loans defaulted (Numbers)

Loans defaulted (Amount)

Male

7,599

3,281,177,798

12,304

3,965,877,560

1145

679,556,348

Female

5,022

1,828,976,420

7,077

1,835,994,975

379

199,457,594

Measure

3. Institutional capital performance

4. Membership Both Withdrawable and Non-Withdrawable Deposit, Loan book and Total Assets

Membership and Member Deposits

Since the focus has been on retaining existing members while recruiting new quality members, there was a marginal drop on membership to close the members register with 12,621 down from 13,476 members in 2018 after a cleanup exercise of dormant members. This however did not affect growth in member deposit which grew by 15.4% and loans that grew by 12%.

Share Capital

The share capital dropped by 31.6% to close the year at Kes.457 Million down from Kes. 668 Million the previous year. This was due to the refund of the office block fund after members approved the same in the 18th Annual General Meeting due to the delayed start of the project. As a result, our core capital has dropped from 14% to 12% slightly above 10%. The board has recommended various changes in management of share capital under the resolutions. We urge members to consider investing in the Sacco through meeting the minimum shares to grow our Sacco.

Members Rebates, Honorarium and Staff Bonus

This year, the proposed interest on members’ deposit is Kes. 315.1 Million up from Kes. 237.8 Million in 2018 (an increase of 32.5% on distributable interest). This represents 45.09% of the total revenue and likewise, the proposed dividend on shares is Kes. 57.7 Million down from Kes. 68.9 Million as a result of the office block fund refunds.

In conclusion: -• The board proposes dividend payment on share capital at 12%. This will be paid out in cash within two weeks after the AGM.

Treasurer’s Annual Report

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314

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Treasure’s Annual Report• The Board also proposes interest distribution to members in form of rebates on weighted deposits at the rate of 7.5%. This will be paid out in cash within two weeks after the AGM.• In recognition of the board’s contribution during the year, we request members to approve an honorarium of Kes. 2.2 million to be shared by members of the Board and Supervisory Committee.• In addition, the Finance and administration committee requests members to approve a staff bonus of Kes. 4.17 Million to be distributed to the Sacco staff based on their performance in the year.

These are tabled before members for consideration and approval.

Regulatory Financial Soundness

The SACCO through your leadership team has ensured that adherence to the regulatory requirements remains a key focus. Over the last 3 years, we have made tremendous strides in achieving key regulatory ratios per SASRA rules. However, Institu-tional Capital ratio has remained a big gaping risk. We are currently at 5% while the statutory minimum is 8%. This is a clear demonstration that the board is walking the talk to meet the 8% minimum requirement by end of year 2021 as agreed with the regulator. This will continue to affect the rebates and dividends payout since our asset base is also growing.

Borrowing Powers

Members had approved the maximum borrowing power of Kes. 600 Million. We wish to maintain the same level of borrow-ing power in the financial year 2020.

Mortgage product available to membersfor residential and Commercial Apartments

Interest Rate : 13% p.a on reducing balanceTenure : 12 Years (144 months)Security : Title Deed or Sub-leaseNo Guarantors RequiredMinimum Value - Ksh. 3MMaximum Value - Ksh. 10M

Property Insurance : 100% of Mortgage ValueAcces : One(1) mortgage productat a timeFinancing : 90% of mortgage valueLoan Issued : 5 times of member depositsTerms : Member must have saved with SACCO for one year Consistently

APPLY TODAYTerms and conditions apply

A HOME OF MY OWN

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NOMINATIONS COMMITTEE ANNUAL REPORTMandateThe Nominations Committee draws its mandate from the corporate governance charter of the Board. The objective is to ensure that there is a formal and transparent procedure in the appointment of Directors of the Board. The Nominations Committee regularly reviews the structure, size and composition of the Board and Committees to ensure that there is an appropriate balance of skills, expertise, knowledge and independence, bearing in mind the leadership needs of the Sacco and with a view to ensuring continued ability of the Sacco Society to compete effectively in the market place. Recommendations are made to the Board and the final approval of candidates is determined by the Board before they are presented to the members for final appointment through an election process.

As the Sacco grows, instituting sustainable good governance practices becomes critical. The Sacco Societies Act 2008 and the regulations made thereunder as read together with the Co-operatives Act (CAP 490) and its rules and regulations, provide for an elaborate governance structure for a deposit-taking organization. It is against this background that Safaricom Sacco Board developed a board of Directors governance charter that established the Nominations Committee to oversee implementation of good governance practices. On an annual basis, the committee reviews the required skills mix and expertise that the directors bring to the Board and ensure that disclosure of the same is made on the Sacco’s Annual Report and website.

CompositionDuring the year ended 31 December 2019, the following members served in the Nominations Committee;

1. Mr. Kennedy Auka (Chairman) Institute of Certified Secretaries2. Mr. James K. Mwangi (Member) Ministry of Trade, Industry and Cooperatives (Retired Aug 2019)3. Mrs. Phyllis Mutua (Member) Institute of Certified Public Accountants of Kenya4. Mr. Hesbon Kiura (Member) Ministry of Trade, Industry and Cooperatives (w.e.f Nov 2019)5. Ms. Theresa Mruttu (Secretary) Safaricom Limited (Legal Department)6. CEO Secretariat Safaricom Sacco Limited 7. Internal Auditor Secretariat Safaricom Sacco Limited

Vacancies at the Board The Nominations Committee analyzed and identified the skill gaps in the current board leadership. Consequently, Sacco members were invited to apply for various board positions, based on the skill gaps identified by the nominations commit-tee. There were four categories, three at the board and one at the supervisory board setting pace for the nomination exercise. These categories were:

Board of Directors1. Human Resources skills at the expert level to assist address high staff turnover. 2. Finance and Accounting skills to meet the minimum requirement of at least two accountants (treasurer and audit committee).3. Gender (Lady) In line with the constitution of Kenya that requires minimum representation of 1/3 by either gender.

Supervisory1. Accountant in line with the act where at least one member of the supervisory committee must understand accounts. The Nomination of candidates for Elections in the 19th AGM to be held on 29th February 2020 was conducted as per the nomination policy and guideline, where the vacancy advertisement was sent to the general membership on 14th October 2019 with the closing of receiving applications set as 8th November 2019. By close of the period, the committee had received a total of 17 applications, which were then assessed in line with the minimum qualifications set by the Sacco nominations policy and guidelines. Thereafter, the candidates were invited for interviews and at the end of the process, the Committee cleared 11 nominees, later two candidates withdrew from the race leaving 9 candidates that were forwarded for voting at the AGM.as follows;

Summary of applicants Skills and Requirements

Committees Annual Reports

Category Skills No of applicants Cleared

Board

Supervisory

Lady 1/3 Rule Gender adherenceAccountant

Human Resources

Accountant

Seven

Five

Three

Two

Four

Three

One

One


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Annual Board EvaluationThe Nominations Committee conducted the annual board evaluation and assisted the Supervisory Committee to conduct its first annual performance evaluation. The reports have been shared with both the Board and Supervisory Committee.

Conclusion Effective succession planning is very important for the long-term success of the Sacco. There is a clear and notable link between succession planning, strategy and the culture of the company in aiding effective implementation and sustainabili-ty, and the nominations committee plays a vital role in ensuring achievement of all these. On this backdrop, we intend to enhance good governance by maintaining a diverse range of skills and experiences that are able to provide constructive contribution to the management. Finally, we are looking forward to maintaining a good working relationship with the Board and entire Sacco fraternity.

BUSINESS DEVELOPMENT COMMITTEE ANNUAL REPORT

The Business development committee is one of the key pillars mandated to grow the business, bring forth new Products and Services, Marketing, Customer Service and ICT.

Project CIRIIn the spirit of always being ahead in the digital front and innovation within the Savings and Credits movement in Kenya, Safaricom Sacco embarked in a journey to transform the way we do our operations. This Project dubbed Project CIRI, abbreviation to our Core Values which are Customer Focus, Innovations, Reliability and Integrity, was officially flagged off on the 22nd of February 2019. . With this move Safaricom Sacco embarked on an long but fulfilling journey to transform the digital space within the SACCO Society.

Project CIRI saw an overhaul of the previous System to allow implementation of:

1. A Robust Core Banking Software – BR.NetThis is a modern and proven enterprise platform that meets the needs of next generation banking. The robust architecture in this banking software has allowed Safaricom Sacco to operate in full capability as modern banks while still providing the avenues for third party integrations.

2. Mobile Banking (Mobile Application & USSD) – SafCIRIBased on the need for anywhere anytime banking, with focus on the needs of you as our members, we successfully launched SafCIRI on USSD (*345#), on Android and iOS with much more unique features. In addition to Cash withdrawal services, Mobile Loans, Internal Funds Transfer and Statement Requests, we also provided for External Funds transfers allow-ing members to transact from FOSA accounts to any of our local banks. This is primarily guided by our endeavor to always empower you.

3. Internet BankingWith the diverse membership that Safaricom Sacco enjoys, there was a need to provide a platform that would allow Safaricom Sacco and member interactions on various touchpoints. Internet Banking as a virtual banking solution sought to address this and now members, despite of their physical location, can seamlessly transact, apply for short term loans and query their statements via our intuitive Internet banking solution available on https://iconnect.safaricomsacco.com/Ac-count/Login .This platform is also available to all our members in the diaspora.

4. Business IntelligenceOver the years since Safaricom Sacco Limited was founded in 2001, we have seen our membership grow to 16,000. With this, there is always a need to understand the demographics in relation to our members, this aligned with Safaricom Sacco’s need to always provide competitive products to our members. Business Intelligence then comes in to utilize strate-gies and technologies that will allow the Sacco to carry deep analysis of such member data and providing historical, current and predictive views of business operations. With this, you can be assured of tailor made products to suit each individual and need.

5. Document Management SystemDocument Management has always been a recurring issue in various organizations. With the migration, we have seen a seamless integration with our Core Banking application where member and vendor documents are captured, digitized, serialized for easy management and retrieval.


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6. Human Resource Management Information System (HRMIS) & PayrollTransformation of Safaricom Sacco’s Human Resources department to allow for management to respond better and faster to HR business needs.

7. API Integration on SaccolinkThe digital transformation has also realized better integration with our partner banks on Saccolink for ATM, POSand VISA transactions. This new integration has seen less downtimes on this platform. We have also integrated to the Pesalink payment through Co-operative Bank where members can be able to transfer funds from their FOSA accounts to any Commercial Bank

8. Banking IntegrationsFurther to the enhancements we are making on the digital front, we have also established partnerships with 4 banks to allow for Bank to Sacco Integrations, thus providing multiple avenues to which members can interact with the Sacco.With all the developments and transformation Safaricom Sacco has and will be making on the digital front, much emphasis has been put on security. We still maintain 24/7 monitoring on all our hardware and applications in partnership with our Digital Security partner Safaricom PLC.We still strive and shall endeavor to provide what is best for Safaricom Sacco and the growing membership on the digital front.

Mortgage FacilityWe launched our mortgage product this year for ready houses, which we partnered with Safaricom Pension Scheme - Crystal Rivers & Safaricom Investment Cooperative (SIC) being our first partners for ready houses as we seek more partners in real estate development. We are also exploring by Quarter 2 of 2020 construction mortgages to enable all members who are already landlords develop their property.

Ushirika Day Celebrations As a Sacco, we cooperate among other cooperators by taking part in Ushirika Day – World Day of Cooperatives where we had more than 1,000 members participate. We also participated in the Charity run and invited interested members to support the same.

Member Education & Training We are happy to lead the members’ education agenda. An educated member is a better investor; therefore, our focus is to ensure that all members are aware of the opportunities to grow themselves in partnership with the Sacco. We also engaged opinion leaders and the Sacco fraternity on the nature and benefits of co-operative movement. During the Year 2019, the committee engaged in the below activities geared towards educating our members and potential members on the importance of the Sacco and the different product offering at their disposal.

1. Regional Training & Customer Service Week Our training programs were extended to our corporate bonds based in Nairobi, Turkana-Tullow Oil, Mombasa, Nyali, Diani, Nyeri, Kisumu, Kiboswa, Nakuru, and Kisii. We also celebrated with members’ customer service week to appreciate their service. This included all Safaricom Divisions, JCC, ECC, SCC as well as other common bonds including Huawei, Nokia, General Electric, Tullow, Pergamon, M-KOPA, Adrian, Tracom Services & Instarect Ltd.

2. Benchmarking In the spirit of cooperation among cooperatives, we hosted Board members of Sacco’s from different regions in Kenya and internationally. Their visits were important to the Sacco because we learned from each other.

Corporate Social ResponsibilityWe are glad to empower other people’s lives and we visited Kenyatta National Hospital on 20 December 2019 where we discharged and settled bills for some needy patients’ in order for them to celebrate Christmas as well as donating equip-ment to KNH that will go a long way in changing lives.

Digital & Tech Awards We received an award for Best Sacco in the use of mobile solutions awarded by Digital Tech Excellence awards. We hope to continue bringing these awards home.

Conclusion

2019 was a challenging yet exciting year for the committee. We believe that with the work we did, we were able to lay ground for even bigger growth in 2020. The Committee would like to take this opportunity to sincerely thank the entire mem-bership and Stakeholders for giving us an opportunity to serve you. We look forward to greater growth and a better relation-ship as we strive to grow digitally in 2020!

Month 2017 2018 2019 NO. OF APPLICATIONS 2017 2018 2019

January 261,196,023.00 247,426,142 282,551,918.00 1,023 1,121 1,924

February 202,542,664.52 246,803,094 239,553,046.00 708 909 1,207

March 238,103,748.00 228,939,698 335,483,290.00 773 991 1,198

April 230,954,072.00 369,763,614 282,312,862.00 927 1,505 1,580

May 228,748,585.00 304,535,930 284,396,702.00 795 1,185 1,276

June 290,141,143.00 314,517,836 688,943,317.00 843 1,134 1,099

July 331,568,732.80 434,142,929 687,926,416.00 963 1,370 958

August 751,144,884.00 488,547,609 471,005,359.00 1,427 1,640 1,350

September 589,827,414.00 375,537,694 330,301,999.00 1,323 1,359 1,164

October 268,212,403.00 424,124,737 360,426,978.00 843 1,189 1,058

November 206,896,925.00 349,810,763 223,589,177.64 954 1,375 470

December 312,078,335.00 271,217,832 261,599,905.00 1,413 1,113 1,365

TOTAL 3,911,414,929.32 4,055,367,878 4,448,090,969.64 11,992 14,891 14,649

Table 1. Loans Monthly disbursement schedule: 2017 – 2019

CREDIT COMMITTEE REPORT

The Credit committee is mandated to provide oversight over the Sacco’s Credit Policies and management of Credit Risk through identification, assessment and monitoring of risks.

The Committee takes this opportunity to thank and congratulate the entire membership for their continued patronization of our credit products and services during the year 2019. Our report covers loan disbursement within the year in comparison with the previous two years and loan default management.

Loans Disbursement

During the year under review, a total of 14,649 loans worth Kes. 4,448,090,969 were disbursed. This was an improvement from Kes. 4,055,367,878 disbursed in the year 2018 and Kes. 3,911,414,929 in the year 2017. Our Gross loan portfolio grew from Kes. 5.17 Billion in 2018 to Kes. 5.8 Billion.

Delinquency ManagementThe amount in default as at 31st December 2019 amounted to Kes. 418,438,006 which is 7.2% of the total portfolio. We continue to remind our dear members to pay their deposits and loans promptly to minimize cases of default.

Measures put in placeWe monitor loan delinquency on a daily basis and are in constant communication with the defaulters together with their guarantors. We have allowed loan restructuring of defaulted loans where members have resumed regular payments. Debt Collection services have been enhanced and we are in the process of on boarding more debt collectors and auctioneers to assist in default collection.

ConclusionThe committee would like to take this opportunity to thank you, the entire membership, for giving us an opportunity to serve you. We look forward to an enhanced partnership throughout 2020.

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FINANCE AND ADMINISTRATION COMMITTEE ANNUAL REPORT

The Committee’s key objective is to maintain the society’s financial stability through sound management practices. They also give an oversite role while ensuring operations are run within approved budgets and as per the strategic plan. Addition-ally, the committee is responsible for implementing prudent human resource practices as provided by the law.

Human resource and AdministrationThe human capital is an important asset in any growing organization, the committee is therefore mandated with attracting and retaining a skilled workforce. During the year, several new staff joined the Sacco and others exited for various reasons. The Board of Directors through a competitive process approved and participated in the recruitment of the senior staff and ensured all the vacant positions have been filled.

Staff DevelopmentStaff training and development in the Sacco is meant to equip the staff with relevant skills to enable them improve on performance and service delivery. The Committee has maintained a continuous training and development culture creat-ing an all-rounded and better skilled workforce.

Reward and RecognitionEmployee outstanding performance, innovation and individual contributions in the Sacco attracts not only job satisfaction but also reward and recognition. During the year several awards on different categories were given. This include staff of the year and staff of the quarter awards among others.

Staff WelfareTo improve the social wellbeing of the staff, several welfare programs have been maintained in the Sacco. This include among others; an enhanced medical cover, pension scheme and a group life cover. Other staff events that were facilitat-ed include; team building, celebrating staff birthdays, new born visits, end of year party and staff wellness activity. These activities promoted staff productivity and boosted the team spirit.

The committee wishes the Board of Directors and Staff a blessed year 2020.

AUDIT AND RISK COMMITTEE ANNUAL REPORT

BackgroundThe Audit and Risk committees mandate is to ensure that our Sacco is managed effectively, particularly financial informa-tion provided and effectiveness of internal controls as guided by policies and the regulatory framework. This is achieved by having an independent Internal Audit function; the Audit and Risk committee supports the function and takes an indepen-dent view of all the processes and policy violation or improvements as recommended.


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The committee contributed to the system changeover by playing an oversight role as a checker, pre and post implementa-tion. Any issues noted by the committee were verified in the office before sign off was done.

2019 was however not a year without challenges, by virtue of being a financial institution one of our biggest risks relate to fraud. Our focus as a committee has been primarily on putting in place measures to mitigate fraud, improve the internal control environment, champion a culture of compliance to not only the laws and regulations but also to internal policies.

In this day of cybercrime and financial fraud, more and more resources are needed for oversight to ensure integrity of data, integrity of financial assets and security of investments that members have made.

Risk ManagementThe Board of Directors (BoD) understands that having a risk management framework is fundamental for the healthy control and prevention of the accumulation of unacceptable levels of risk at Safaricom SACCO. Thus, in an effort to improve risk management practices of the SACCO, the BoD has adopted an Enterprise-wide Risk Management (ERM) framework.

This framework aims to facilitate the anchoring of the risk management function of the SACCO in a control environment of three lines of defense. It defines the risk management philosophy and risk appetite directly on the basis of the SACCO’s mission statement and reiterates the commitment of the SACCO to contribute to the development of its target clientele through the provision of affordable, innovative & accessible financial services in Kenya.

Risk Assessment

Conclusion.As a committee we are expected to ensure that we are ahead of the curve with regards to ensuring that we have insights into what could go wrong (risk), what we need to do to prevent the risk from crystalizing and proactively guiding the entire Board of Directors on how to go about putting in place measures to safeguard the SACCO.

As a committee we are championing a culture of compliance to processes and policies; proactively engaging on process improvement opportunities that will ensure that risks that could negatively impact the Sacco are mitigated.


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Risk Description / Nature Responses Regulatory • Lifting of the interest rate capping law .

• None compliance with minimum institutional capital requirement

• Positive impact expected. • Steps set by the board and

management on how to achieve this.

Reputation • Effect of suspected fraud from the top management of the Sacco.

• System down time after the systemover.

•

•

Delinquency • Increase in non-performing loans

reducing disposable income. • Proper vetting when advancing

loans and deployment of different recovery mechanisms.

Institutional memories

• High rate of staff turnover, increasing training cost and affecting institutional

memories.

• Staff motivation programs and review in line with the industry are underway.

Cyber Security.

• Exposure after system change • Parameter assessment of our ITinfrastructure to be done.

Swift action taken on the staff, engagement of law enforcement agencies and claim made with the insurance.SLA with the vendor to minimize down time.

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26

ACTUAL APPROVEDREVENUE YEAR 2019 YEAR 2019 YEAR 2020 YEAR 2021

KSHS KSHS KSHS KSHS

Interest on loans and advances 634,770,813 929,484,503 801,278,090 1,029,380,449 Other interest income 40,404,798 12,901,538 91,470,477 118,911,620

Total interest 675,175,611 942,386,041 892,748,567 1,148,292,069

Less: Interest Expenses 324,427,872 439,467,565 380,103,351 418,113,686

Net Interest income 350,747,739 502,918,475 512,645,217 730,178,383 Other operating income 23,812,878 14,228,940 10,441,357 13,573,765

23,812,878 14,228,940 10,441,357 13,573,765 Total Income 374,560,617 517,147,415 523,086,574 743,752,148

EXPENSESFinancial expenses 137,321,846 113,440,120 126,087,979 150,805,177 Administration expenses 31,292,891 34,097,838 53,320,295 60,924,278 Personnel expenses 48,367,260 71,107,813 89,970,730 101,627,010 Governance expenses 13,503,479 16,305,699 23,958,200 27,551,930 Marketing expenses 1,280,079 14,982,238 13,005,500 14,956,325 Depreciation and Amortization 6,575,862 18,688,046 10,427,492 11,991,616

Total expenses 238,341,416 268,621,753 316,770,196 367,856,336

Net operating surplus 136,219,200 248,525,662 206,316,379 375,895,813

Less Tax Expenses 7,355,407 4,543,675 2,845,382 3,698,996

Net operating surplus 128,863,793 243,981,987 203,470,997 372,196,816

CS/9510 SAFARICOM SACCO SOCIETY LTD

PROPOSED

OPERATING BUDGET YEAR 2019/2020

CS/9510 SAFARICOM SACCO LTDBUDGET YEAR 2019/2020

BUDGET

27

Description

Qty

Unit cost A

pproved 2019Proposed 2020

Projected 2021Justification Particulars

Office Facelift

1

2,000,000

2,000,000

2,000,000

-

Office reorganisation

Computers-Laptops

585,000

425,000

425,000

425,000

A

dditional new staff to be recruited &

replacements

Portable Projector1

75,000

75,000

75,000

-

Field presentations.M

icrosoft Dynam

ics CRM1

3,000,000

3,000,000

3,000,000

-

Intergrated CRM, custom

er serviceO

ffsite Disaster Recovery

13,000,000

3,000,000

3,000,000

-

A

ctive Offsite D

isaster Recovery and availabilityO

ffsite Disater Recovery Im

plementation Cost

1135,150

135,150

135,150

-

A

ctive Offsite D

isaster Recovery One off Im

plementation Cost

Computer Softw

are1

500,000

500,000

500,000

500,000

Additional softw

are supporting normal processes

IDEA

Audit Softw

are License1

100,000

-

100,000

-

Audit Softw

areO

nline Voting System1

145,000

-

145,000

-

Online voting system

during the AGM

Total633,805,790

9,380,150

925,000

CA

PITAL EX

PEND

ITURE B

UDG

ET FOR

YEAR

2019 IN K

SHS.

Approved By.

Chairm

anTreasurer

Hon Secretary

Da

te_____________________________D

ate___________________________

Da

te_________________________________19/02/2020

19/02/202019/02/2020

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28

PreambleWe commend you members for the continued commitment to the mission and vision of the Sacco since the Society began its operations. The Supervisory Committee also commends the Board for their commitment in directing the business of the Sacco during the year 2019.

MandateThe Role of the Supervisory Committee as envisioned by the Co-operatives Society Act Rule 28 (3) is to verify all the transac-tions of the Society, write periodic reports of its findings to be tabled at Board meetings, submit its reports to the Commission-er and present its report to the annual general meeting of the Society. The goal is to ensure that the Board serves the interest of the members and safeguards the resources entrusted to them.

In this report we give informative emphasis to key audit issues and make recommendations for the mutual benefit of all stakeholders. Our main objective as we carry out our function is to help the Board reduce risks and ensure that their focus remains central on the interest of members.

Supervisory Committee Report

Area Focus Summary findings and recommendations

The Committee reviewed Internals controls of the Sacco in the following areas

Bank and Cash controls

Payments process

It’s also during the year that the Sacco experienced fraud incidents involving senior and junior staff which pointed to weak internal controls.

After noting that bank reconciliations were not done and reviewed, the Committee recommended these preparations and reviews should be done as per the SLA set out in the Finance policy.

The payment process was not adequately setup especially in supplier payments and benevolent reimbursements and we recommended that a new process should be effected. In fact, this issue led to the fraud cases reported.

We urge the board to follow up with the law enforcement agencies to ensure prosecution of the staff involved in fraud cases.

We also advised the board to have a standard way of passing resolutions and key decisions and to put a proper communication channel to the respective implementation functions as well as oversight functions for easy reference and follow up.

AGM process was evaluated, and the committee also confirmed resolutions were implemented as passed by members during the AGM.

The Committee confirmed with satisfaction that Rebates, Dividends, Staff Bonus and Honoraria were paid as per resolutions passed.

However, we raised concerns relating to the registration process and recommended for tighter registration process as well as electronic voting in the next AGM. The board acknowledged the changes required and assured the committee that they would be implemented.

29

Conclusion.There have been positive interactions between the Board and Supervisory Committee of the Society guided by the objec-tive of upholding the mission of the SACCO and ultimately the interests of the members. The Supervisory Committee contin-ues to support the Board in delivering the vision and mission of Safaricom Sacco.

Our audit in credit management focused on loan appraisals.

We re-emphasized on having CRB reports attached to the loan applications as part of the loan assessment process.

We recommended that our Sacco should register with the three available credit reference bureaus to minimize the risk of issuing bad loans.

We reviewed the Sacco Membership after noticing the high rate of withdrawals and inactivity.

We demanded that all new members who were dormant should be activated after follow-ups were done.

We also noted low marketing activities as revealed by low marketing expenditure from financial and urged the board the increase its marketing and member education activities

In our Financial review, we covered the half-year performance and bench marked with other Saccos who were of the same tier as the Safaricom Sacco.

We noted the missed target evidenced by lower interest revenues despite having cost savings. The committee tasked the board to come up with various ways of boosting revenue. We noted some growth in the 3rd quarter but later slowed down towards the end of the year due to the system change over.

From our benchmarking review, we noted that whereas our Sacco had a strong liquidity , it was trailing other Saccos in some key ratios such as institutional capital and PAR. We urge the board to prioritize statutory compliance and inform the members of the implication of non-compliance

The committee raised issues of customer service that had been repeatedly raised in many forums such as the AGM and Champions’ forums among others. The issue of unanswered calls had also featured in many occasions.

Our recommendation was that the Sacco should hire temporary staff to cater for the increasing demands. We also tasked the board to benchmark with other Saccos to get optimal staff per member ratio.

In its response, the board assured the committee that the new system in place would address all the issues raised and give our customers better experiences. The system has not been fully implemented and we therefore still urge the board to look for temporary measures to improve the customer experience.

The governance audit covered more on human resources issues and Board of Directors compliance.

Our human resources audit revealed several gaps in organizational structure, pay structure and training needs. We also noted high attrition of staff from the Sacco during the year where some staff left for greener pastures and others due to fraud.

The board promised to have the issues resolved this coming year as it focuses on People as one of its key strategic pillars after the successful implementation of the system.

During the year, The Sacco introduced a new system dubbed SafCIRI. The committee reviewed the following areas

Data migration Data integrity Financial reports System functionality

and performance

The committee noted some gaps in the data migration process and established the need to have a document that is signed off by management and approved by the board detailing all the variances and explanations for the same.

Our audit revealed data integrity issues where key figures were not accurate in the platform within the system. We recommended for a complete system review.

We also noted the system did not have adequate reports to support financial reporting.

The system went live on 1st November 2019 without some key functionalities and the vendor was behind schedule delivering the same.

The board assured the committee that the vendor will be tasked to deliver all what was contracted, and payment milestones are strictly being followed.

Supervisory Committee Report

SAFARICOM SAVINGS AND CREDIT CO-OPERATIVE SOCIETY LIMITED - CS/9510

ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019

30

REPORT OF THE DIRECTORS

The directors submit their annual report together with the audited financial statements for the year ended 31 December 2019 which show the society's state of affairs.

INCORPORATION

The society is incorporated in Kenya under the Co-operative Societies Act, Cap 490 and is domiciled in Kenya. It was registered as a Sacco under the Sacco Societies Act with effect from12 March 2001.

PRINCIPAL ACTIVITIES

The principal activity of the society continues to be receiving savings from and provision of loans and advances to its mem-bers.

INVESTMENT SHARES

The issued and paid up share capital of the society was decreased during the year fromShs. 667,884,362 to Shs. 457,390,910 through refund of shares as disclosed in note 17 to the financial statements

DIVIDENDS AND INTEREST

The directors recommends payment of 12% per share (2018: 12% per share) as dividend on investments shares and 7.5% (2018:6%) interest on Sacco deposits.

BOARD OF DIRECTORS

The directors who held office during the year and to the date of this report are shown on page 4.

INDEPENDENT AUDITOR

The society’s auditor, PKF Kenya, has indicated willingness to continue in office in accordance with Sacco Societies Act No. 14 of 2008

BY ORDER OF THE BOARD

Signature……………………………… date 19th February 2020

Secretary

*Refer to note 22

RESULTS

Profit before tax

Income Tax expense

Profit for the Year

Interest on Member’s Deposits

2019 (Kshs.)

215,593,116

(7,335,407)

208,237,709

315,163,836

2018 (Kshs.)

310,691,096

(1,449,618)

309,241,477

237,822,335

31

FINANCIAL AND STATISTICAL INFORMATION

As at 31 December 2019 2018 Numbers Numbers

Membership Active 9,368 9,583 Dormant 3,253 3,893

Total 12,621 13,476

2019 2018Financial Shs Shs

Total assets 6,692,680,496 5,890,773,491Total members deposits 5,516,358,834 4,739,912,767Loans and advance to members 5,342,149,579 4,779,956,551Investments 179,826,643 96,765,396Core capital 772,213,032 843,232,218Investment shares 457,390,910 667,884,362Institutional capital 314,822,122 175,347,856Total revenue 698,988,489 647,167,066 Total interest income 675,175,611 602,545,556Interest on members deposit 315,163,836 237,822,335Total expenses 483,395,373 336,475,971Statutory reserve 129,737,606 88,090,064Appropriation account 112,858,238 4,037,143

Key ratios: 2019 2018 % %Capital adequacy ratios

Core capital/Total assets 12% 14% Minimum ratio 10% 10%Core capital/Total deposits 14% 18% Minimum ratio 8% 8% Institutional capital/Total assets 5% 3% Minimum ratio 8% 8%Liquidity ratioLiquid assets/Total deposits & Short-term liabilities 116% 114% Minimum ratio 15% 15%

Operating efficiency/loan quality ratios

Administrative expenses /Total revenue 13% 18% Total expenses /Total revenue 69% 52% Interest to members deposits/Total revenue 43% 41%Interest rate on members' deposits 7.5% 6% Dividend rate on members share capital 12% 11% Total delinquent loans/Gross loan portfolio 7% 6%

32

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Sacco Societies Act No. 14 of 2008 requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the society as at the end of the financial year and of its profit or loss for that year. It also requires the directors to ensure that the society keeps proper accounting records that are sufficient to show and explain the transactions of the society; that disclose, with reasonable accuracy, the financial position of the society and that enable them to prepare financial statements of the society that comply with the International Financial Reporting Standards and the requirements of the Sacco Societies Act. The directors are also responsible for safeguarding the assets of the society and for taking reasonable steps for the prevention and detec-tion of fraud and other irregularities.

The directors accept responsibility for the preparation and fair presentation of these financial statements in accor-dance with the International Financial Reporting Standards and in the manner required by the Sacco Societies Act No. 14 of 2008. They also accept responsibility for:

i. Designing, implementing and maintaining such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error;ii. Selecting and applying appropriate accounting policies; andiii. Making accounting estimates and judgements that are reasonable in the circumstances.4

The directors are of the opinion that the financial statements give a true and fair view of the financial position of the society as at 31 December 2019 and of the society's financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Sacco Societies Act No. 14 of 2008.

In preparing these financial statements the directors have assessed the society's ability to continue as a going concern. Nothing has come to the attention of the directors to indicate that the society will not remain a going concern for at least the next twelve months from the date of this statement.

The directors acknowledge that the independent audit of the financial statements does not relieve them of their responsibilities.

So far as each of the directors is aware, there is no relevant audit information which the auditor is unaware of and each of the directors has taken all the steps that ought to have been taken in order to become aware of any relevant audit information and to establish that the auditor is aware of that information.

Approved by the board of directors on 19th February 2020 and signed on its behalf by:

__________________________________________Chairman

___________________________________________Treasurer

___________________________________________Board member

L

33

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF SAFARICOM SAVINGS AND CREDIT CO-OPERATIVE SOCIETY LIMITED

Opinion

We have audited the financial statements of Safaricom Savings and Credit Co-operative Society Limited (the society) set out on pages 9 to 48, which comprise the statement of financial position as at 31 December 2019, and the statement of profit or loss and other comprehensive income,statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements give a true and fair view of the society’s financial position as at 31 December 2019, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and the Sacco Societies Act.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the society in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kenya, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of matter

Without modifying our opinion, we draw attention to Note 1(b) and Note 17 to the financial statements which disclose that the society reduced its share capital during the year and that the directors have made significant judgement in determining the most appropriate accounting policy in this respect.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Loan impairment provisions

The directors exercise significant judgement in classification of loans and advances to customers into the various credit grades/stage as described in note 1(b) and note 20 to the financial statements as well as the level of expected credit loss necessary for each grade/stage of loan which is based on the society’s past experience and reference to the regulatory guidelines and industry standards and relevant consideration of forward looking factors. Because of the significance of these judgements and the quantum of loans and advances, the audit of loan impairment provisions is a key auditmatter. Further details of the loans and advances balances and impairment provisions are included in note 7 to the financial statements.

Our audit procedures included testing the model used by the directors in classifying loans and advances into their respec-tive credit grades and stages of performance which included understanding the classification criteria and reviewing this for consistency with the society and industry experience. We tested a sample of loans and advances (including loans that had not been identified by management as impaired) to form our own assessment as to whether the loan classification and staging was reliable. For a sample of impaired loans we tested the extraction of data used in the models, the assessment of probability of default and the estimation of the future expected cash flows from the members based on historic experience including realisation of collateral held which primarily represented current deposits which we tested against records of member deposits which are key inputs into the loss given default assumption.

34

PKF KENYACertified Public Accountants

Information technology control environment

The society is highly dependent on information systems and controls over access rights to such systems are critical and there-fore represent a key audit matter.

We tested the design and implementation of the society’s controls around the information technology environment and operating effectiveness for controls that were critical to databases within the scope of our audit and the financial reporting process. Where our procedures identified deficiencies, we assessed the design and implementation of any controls that mitigated the identified risks and extended the scope of our tests of operating effectiveness of controls and/or substantive audit procedures.

Other Information

The directors are responsible for the other information. The other information comprises the report of the directors and financial and statistical information which we obtained prior to the date of this auditor’s report, and chairman's report, super-visory committee report and overview report which are expected to be made available to us after that date.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowl-edge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

When we read the supervisory committee report, chairman's report and overview report, if we conclude that there is a mate-rial misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of directors for the financial statements

The directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with IFRSs and the requirements of the Sacco Societies 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.

In preparing the financial statements, the directors are responsible for assessing the society’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the society or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from materi-al misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appro-priate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the society7’s internal control.

35

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF SAFARICOM SAVINGS AND CREDIT CO-OPERATIVE SOCIETY LIMITED (CONTINUED)

Auditor’s responsibilities for the audit of the financial statements

- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.- Conclude on the appropriateness of the director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the society’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inade-quate,to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the society to cease to continue as a going concern.- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical require-ments regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most signifi-cance in the audit of the financial statements for the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Certified Public Accountants Nairobi CPA Chaudhry Mohamed Asif, Practicing certificate P/No. 2059Signing partner responsible for the independent audit

36

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REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF SAFARICOM SAVINGS AND CREDIT CO-OPERATIVE SOCIETY LIMITED (CONTINUED)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

2019 2018 Notes Shs ShsRevenue Interest income:Interest on loans and advances 2 (a) 634,770,813 595,533,399

Other interest income 2 (b) 40,404,798 6,012,157

Total interest income 675,175,116 602,545,556

Interest expenses 2 (c) (302,474,392) (265,429,910)

Net interest income 372,701,219 337,115,646

Net income from member land transactions 2 (d) 13,131,925 32,377,375

Other operating income 2 (e) 10,680,953 12,244,135

Impairment charge on loans and advances 3 (a) (69,421,147) 78,627,021 Governance expenses 3 (b) (13,503,479) (17,662,839) Personnel expenses 3 (c) (48,367,260) (47,807,650) Administrative expenses 3 (d) (41,773,155) (71,911,822) Other operating expense 3 (e) (6,575,862) (7,631,983) Marketing expenses 3 (f) (1,280,079) (4,658,788)

Profit before tax 215,593,116 310,691,095Income tax expense 4 (a) (7,355,407) (1,449,618)

Profit for the year 208,237,709 309,241,447

Other comprehensive income:

Items that may be reclassified subsequently to profit or loss:- Fair value gain on available for sale financialassets 8 197,582 -

Total comprehensive income 208,435,291 309,241,477

Dividend:

Proposed final dividend for the year 18 (v) 57,769,072 68,961,025

The notes on pages 44 to 69 form an integral part of these financial statements.

Report of the independent auditor - pages 34 to 36.

39

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019 2018

ASSETS Notes Shs Shs Cash and bank balances 5 864,358,200 728,367,467Receivables and prepayments 6 70,859,560 62,070,523 Loans and advances to members 7 5,342,149,579 4,779,956,551 Financial assets 8 179,826,643 96,765,396Inventory 9 25,482,310 21,447,236Property and equipment 10 179,704,168 183,305,004Intangible assets 11 19,605,819 1,609,040Tax recoverable 4(b) 10,694,217 17,252,274

Total assets 6,692,680,496 5,890,773,491

LIABILITIESOther payables 12 83,180,954 39,492,331Deposit for land 13 5,763,840 30,313,840 Interest due to members 14 315,163,836 237,822,335Withdrawable deposits 15(b) 406,204,616 379,666,283Member deposits 15(a) 5,110,154,218 4,360,246,484

5,920,467,464 5,047,541,273

FINANCED BYInvestment shares 17 457,390,910 667,884,362Statutory reserve 18(i) 129,737,606 88,090,064Fair value reserve 18(ii) 14,457,206 14,259,624Appropriation account 18(iii) 112,858,238 4,037,143Dividend account 18(v) 57,769,072 68,961,025 772,213,032 843,232,218

Total liabilities and capital 6,692,680,496 5,890,773,491

The financial statements on pages 9 to 50 were approved and authorised for issue by the board of directors on 19th February 2020 and were signed on its behalf by:

_______________________________________CHAIRMAN

_______________________________________BOARD MEMBER

_______________________________________BOARD MEMBER

The notes on pages 44 to 69 form an integral part of these financial statements. Report of the independent auditor - pages 34 to 36.

40

41

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42

STATEMENT OF CASH FLOWS

2019 2018 Notes Shs ShsCash Flows from operating activities Interest income 2 (a) 634,770,813 596,533,399Other interest income 2 (b) 40,404,798 6,012,157Receipt from land contracts with members 2 (d) 26,990,160 191,810,153Other operating income 2 (e) 10,680,953 12,244,135Interest payments (225,132,891) (291,796,005) Payment to employees and suppliers (132,236,636) (217,085,633)

Net cash from operating activities 355,477,197 297,718,206

(Decrease) in operating assetsLoans and advances to members 7 (631,614,175) (522,808,895)

Increase in operating liabilitiesDeposit for land 5,763,840 30,313,840Members savings 15 776,446,067 646,777,252

Net cash (used in)/from operating activities before income taxes 506,072,929 452,000,403Income tax paid 4 (b) (797,350) (38,139,726)

Net cash from/(used in)operating activities 505,275,579 413,860,677

Cash paid for purchase of property and equipment 10 (848,255) (1,424,306) Cash paid for purchase of intangible assets (6,118,449) - Purchase of investments and securities 8 (112,108,871) (14,242,216) Proceeds from disposals of financial assets 8 29,245,206 -

Net cash used in investing activities (89,830,369) (15,666,522)

Financing activities

Proceeds from issue of investment shares 17 77,372,203 158,089,611Refund of share capital 17 (287,865,655 ) - Repayments of borrowings - (4,595,984) Dividend paid 18(v) (68,961,025) (51,785,837)

Net cash from financing activities (279,454,477) 101,707,790

Movement in cash and cash equivalentsIncrease in cash and cash equivalents 135,990,733 499,901,945Cash and cash equivalents at start of year 728,367,467 228,465,522

Cash and cash equivalents as at end of the year 5 864,358,200 728,367,467

The notes on pages 44 to 69 form an integral part of these financial statements. Report of the indepen-dent auditor - pages 34 to 36.

43

NOTES

1. Significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

a) Basis of preparation

The financial statements have been prepared under the historical cost convention, except as indicated otherwise below and are in accordance with International Financial Reporting Standards (IFRS). The historical cost convention is generally based on the fair value of the consideration given in exchange of assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the society takes into account the characteristics of the asset or liability if market participants would take those characteristics into when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.

In addition, for financial reporting purposes, fair value measurements are categorised into level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measure-ment in its entirety, which are described as follows:

- Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;- Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and- Level 3 inputs are unobservable inputs for the asset or liability.

Going concern

The financial performance of the society is set out in the director's report and in the statement of profit or loss and the other comprehensive income. The financial position of the society is set out in the statement of financial position. Disclosures in respect of risk management are set out in note 20 and capital management disclosures are set out in note 21.

Based on the financial performance and position of the society and its risk management policies and the disclosures set out in note 21 with regards to minimum capital requirements, the directors are of the opinion that the society is well placed to contin-ue in business for the foreseeable future and as a result the financial statements are prepared on a going concern basis.

New and amended standards adopted by the society

All new and amended standards and interpretations that have become effective for the first time in the financial year begin-ning 1 January 2019 have been adopted by the society. None of these standards had a material effect on the society's financial statements.

New standards, amendments and interpretations issued but not effective

At the date of authorisation of these financial statements the following standards and interpretations, which have not been applied in these financial statements, were in issue but not yet effective for the year presented:

-Amendments to IFRS 10 and IAS 28 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture' (issued in September 2014) applicable from a date yet to be determined, address a current conflict between the two standards and clarify that a gain or loss should be recognized fully when the transaction involves a business, and partially if it involves assets that donot constitute a business.

- IFRS 17 ‘Insurance Contracts’ (issued in May 2017) effective for annual periods beginning on or after1 January 2021 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued. The objective is to ensure that entities provide relevant information in a way that faithfully represents those contracts. The society does not issue insurance contracts.

- Amendments to IFRS 3 'Definition of a Business' (issued in October 2018) applicable to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period, clarify the definition of a business, with the objec-tive of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.

44

NOTES

1. Significant accounting policies (CONTINUED)

- Amendments to IAS 1 and IAS 8 'Definition of Material' (issued in October 2018) applicable to annual periods beginning on or after 1 January 2020, clarify the definition of material and how it should be applied by including in the definition guidance that previously featured elsewhere in IFRS.

The directors do not expect that adoption of these standards and interpretations will have a material impact on the financial statements in future periods. The society plans to apply the changes above from their effective dates.

b) Critical accounting estimates and judgement

In the application of the accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associat-ed assumptions are based on historical experience and other relevant factors. Such estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

The directors have made the following assumptions that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

- Measurement of expected credit losses (ECL):

The measurement of the expected credit loss allowance for financial assets measured at amortised cost and FVTOCI is an area that requires the use of complex models and significant assumption about future economic conditions and credit behaviour.

A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: - Determining criteria for significant increase in credit risk;- Choosing appropriate models and assumptions for the measurement of ECL;- Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and associat-ed ECL; and- Establishing groups of similar financial assets for the purposes of measuring ECL

ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the financial instrument.

The measurement of ECLs are based primarily on the product of the instrument’s Probability ofDefault (PD), Loss Given Default (LGD), and Exposure At Default (EAD).

The ECL model contains a three-stage approach that is based on the change in the credit quality of assets since initial recogni-tion.

- Stage 1 - If, at the reporting date, the credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1, and a loss allowance that is measured, at each reporting date, at an amount equalto 12-month expected credit losses is recorded.

- Stage 2 - When there is a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and a loss allowance that is measured, at each reporting date, at an amount equal to lifetime expected credit losses is recorded. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, theECL model requires reverting to recognition of 12-month expected credit losses.

- When one or more events that have a detrimental impact on the estimated future cash flows of a financial asset have occurred, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance equal to lifetime expected losses continues to be recorded or the financial asset is written off.

Assessment of significant increase in credit risk: The determination of a significant increase in credit risk takes into account many different factors including a comparison of a financial instruments credit risk or PD at the reporting date and the credit or PD at the date of initial recognition. IFRS 9 however includes rebuttable presumptions that contractual payments are overdue by more than 30 days will represent a significant increase in credit risk (stage 2) and contractual payments that are more than 90 days overdue will represent credit impairment (stage3). The society uses these guidelines in determining the staging of its assets unless there is persuasive evidence available to rebut these presumptions

Fair value of financial instruments

In estimating the fair value of an asset or a liability, the society uses market-observable data to the extent it is available. Where level 1 inputs are not available, the society makes use offinancial models or engages third party qualified values to perform the valuation and provide inputs to the model.

45

NOTES (CONTINUED)

1. Significant accounting policies (continued)

b) Critical accounting estimates and judgement (continued) -Measurement of expected credit losses (ECL): (continued)

The valuation of financial instruments is described in more detail in Note 9

- Useful lives of property and equipment and intangible assets

Management reviews the useful lives and residual values of the items of property, plant and equipment on a regular basis. During the financial year, the directors determined no significant changes in the useful lives and residual values.

Reduction of investment shares

In respect of the capital reduction disclosed in note 17 to the financial statements and given the lack of any specific legal or regulatory guidance on this matter, the directors have determined the most appropriate accounting policy as being a direct reduction of the investment shares with no resulting impact on the reserves of the society.

c) Revenue recognition

Interest income and expense

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropri-ate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the society estimates cash flows considering all contractual terms of the financial instrument but does not consid-er future credit losses. The calculation includes all fees and points 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.

Fee and commission income

Fees and commission income, including account servicing fees and custody fees are generally recognised on an accrual basis when the service has been provided.

Other income

i) Dividend is recognised when the right to receive income is established. Dividend are reflected as a component of other operating income based on the underlying classification of the equity instrument.ii) Revenue from member land contracts is recognised when the transaction is substantially complete with all risks and rewards having passed from the company to the buyer. This generally occurs on issuance of documents passing rights of occupation when the only pending matters are formal issue of title by the lands offices of the country.

d) Property and equipment

All property and equipment is initially recorded at cost and thereafter stated at historical cost less depreciation. Historical cost comprises expenditure initially incurred to bring the asset to its location and condition ready for its intended use.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost can be reliably measured. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial year in which they are incurred.

Leasehold land is depreciated over the remaining period of the lease.

Depreciation is calculated using the reducing balance method to write down the cost of each asset to its residual value over its estimated useful life. The annual depreciation rates in use are:

Asset Rate (%) Motor vehicles 25 Furniture and fittings 12.5 Office equipment 12.5 Computers 30

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

46

NOTES (CONTINUED)


d) Property and equipment (continued)

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’scarrying amount is greater than its estimated recoverable amount.

Gains or losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. On disposal of a revalued asset, the amount in the revaluation reserve relating to that asset is transferred to retained earnings.

e) Intangible assets

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight line basis over the estimated useful lives of 8 years. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.

Computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the reducing balance method to write down the cost of each asset to its residual value over its estimated useful life.

f) Financial instruments

Financial assets and financial liabilities are recognised when the society becomes a party to the contractual provisions of the instrument. Management determines all classification of financial instruments at initial recognition.

Financial assetsFinancial 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 value18and transaction costs are expensed in profit or loss. The society's financial assets fall into the following categories:

Amortised cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent Solely Payments of Principal and Interest (SPPI), and that the are not designated at Fair Value Through Profit or Loss (FVTPL), are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured. Interest income from these financial assets is included in 'interest and similar income' using the effective interest rate method.

Fair Value Through Other Comprehensive Income (FVTOCI): Financial assets that are held for collection of contractual cash flows where these cash flows comprise SPPI and also for liquidating the assets depending on liquidity needs and that are not designated at FVTPL, are measured at FVTOCI. Movements in the carrying amount are taken through OCI, except for recogni-tion of impairment gain or losses, interest revenue and foreign exchange gain and losses. Gains and losses previously recognised in OCI are reclassified from equity to profit or loss on disposal of such instruments. Gains and losses related to equity instruments are not reclassified.

Fair Value Through Profit or Loss (FVTPL): Financial assets that do not meet the criteriafor amortised cost or FVTOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measure at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement.

For the purpose of SPPI the test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI assessment is made in the currency in which the financial asset is denominated.

Contractual cash flows that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement will not comprise SPPI.

An assessment of business models for managing financial assets is fundamental to the classification of a financial asset. The society determines the business models at a level that reflects how societies financial assets are managed together to achieve a particular business objective. The society’s business model does not depend on management’s intentions for an individual instrument, therefore the business model assessment is performed at a higher level of aggregation rather than on an instrument-by-instrument basis.

47

NOTES (CONTINUED)


f) Financial instruments (continued)

The society has more than one business model for managing its financial instruments which reflect how the society manages its financial assets in order to generate cash flows. The society’s business models determine whether cash flows will result from collecting contractual cash flows, selling financial assets or both.

The society considers all relevant information available when making the business model assessment. However, this assessment is not performed on the basis of scenarios that the society does not reasonably expect to occur, such as so-called ‘worst case’ or ‘stress case’ scenarios. The society takes into account all relevant evidence available such as:

- how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;

- the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed; and

- how managers of the business are compensated (e.g. whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected).

At initial recognition of a financial asset, the society determines whether newly recognised financial assets are part of an existing business model or whether they reflect the commencement of a new business model. The society reassess its business models each reporting period to determine whether the business models have changed since the preceding period. For the current and prior reporting period the society has not identified a change in its business models.

When a debt instrument measured at FVTOCI is derecognised, the cumulative gain/loss previously recognised in OCI is reclassi-fied from equity to profit or loss. In contrast, for an equity investment designated as measured at FVTOCI, the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss but transferred within equity.

Financial instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment.

Impairment

The society recognises loss allowances for ECLs on the following financial instruments that are not measured at FVTPL:- Cash and cash equivalents- Loans and advances- Other financial assets

No impairment loss is recognised on investments measured at FVTPL.

ECLs are required to be measured through a loss allowance at an amount equal to:

- 12-month expected credit loss (ECL), i.e. lifetime ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or

- full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument. (referred to as Stage 2 and Stage 3).

A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the12-month ECL. More details on the determination of a significant increase in credit risk are provided in note 27.

ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the society under the contract and the cash flows that the society expects to receive arising from the weighting of multiple future economic scenarios, discounted at the asset’s EIR.

For undrawn loan commitments, the ECL is the difference between the present value of the difference between the contractu-al cash flows that are due to the society if the holder of the commitment draws down the loan and the cash flows that the society expects to receive if the loan is drawn down.

For financial guarantee contracts, the ECL is the difference between the expected payments to reimburse the holder of the guaranteed debt instrument less any amounts that the society expects to receive from the holder, the debtor or any other party.

The society measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic risk characteristics. The measurement of the loss allowance isbased on the present value of the asset’s expected cash flows using the asset’s original effective interest rate (EIR), regardless of whether it is measured on an individual basis or a collective basis.

48

NOTES (CONTINUED)


f) Financial instruments (continued) -Financial Assets (continued)

More information on measurement of ECLs is provided in note 20 (b), including details on how instruments are grouped when they are assessed on a collective basis.

A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events:

- contractual payments that are more than 90 days overdue;- significant financial difficulty of the borrower or issuer;- a breach of contract such as a default or past due event;- the lender of the borrower, for economic or contractual reasons relating to the borrower’s- financial difficulty, having granted to the borrower a concession that the lender would not otherwise consider;- the disappearance of an active market for a security because of financial difficulties; or- the purchase of a financial asset at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event, instead, the combined effect of several events may have caused financial assets to become credit-impaired. The society assesses whether all new and revised standards and interpretations that have become effective for the first time credit-impaired at each reporting date. To assess if sovereign and corporate debt instruments are credit impaired, the society considers factors such as bond yields, credit ratings and the ability of the borrower to raise funding .

Modification and derecognition of financial assets

A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renego-tiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date. In addition, the introduction or adjustment of existing covenants of an existing loan would constitute a modification even if these new or adjusted covenants do not yet affect the cash flows immediately but may affect the cash flows depending on whether the covenant is or is not met (e.g. a change to the increase in the interest rate that arises when covenants are breached).

The society renegotiates loans to customers in financial difficulty to maximise collection and minimise the risk of default. A loan forbearance is granted in cases where although the borrower made all reasonable efforts to pay under the original contractu-al terms, there is a high risk of default or default has already happened and the borrower is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to covenants. The society has an established forbearance policy which applies for corporate and retail lending.

When a financial asset is modified, the society assesses whether this modification results in derecognition. In accordance with the society’s policy a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms the society considers the following:

- Qualitative factors, such as contractual cash flows after modification are no longer SPPI, change in currency or change of counterparty, the extent of change in interest rates, maturity, covenants. If these do not clearly indicate a substan-tial modification, then; - A quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, both amounts discounted at the original effective interest.

If the difference in present value is greater than 10% the society deems the arrangement is substantially different leading to derecognition.

In the case where the financial asset is derecognised, the loss allowance for ECL is remeasured at the date of derecognition to determine the net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on 12-month ECL except in the rare occasions where the new loan is considered to be originated - credit impaired. This applies only in the case where the fair value of the new loan is recognised at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modifica-tion. The society monitors credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the borrower is in past due status under the new terms.

When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the society determines if the financial asset’s credit risk has increased significantly since initial recognition by comparing:

49

NOTES (CONTINUED)


f) Financial instruments (continued) -Financial Assets (continued)

- the remaining lifetime PD estimated based on data at initial recognition and the original contractual terms; with - the remaining lifetime PD at the reporting date based on the modified terms.For financial assets modified as part of the society’s forbearance policy, where modification did not result in derecognition, the estimate of PD reflects the society’s ability to collect the modified cash flows taking into account the society’s previous experi-ence of similar forbearance action, as well as various behavioural indicators, including the borrower’s payment performance against the modified contractual terms. If the credit risk remains significantly higher than what was expected at initial recogni-tion the loss allowance will continue to be measured at an amount equal to lifetime ECL. The loss allowance on forborne loans will generally only be measured based on 12-month ECL when there is evidence of the borrower’s improved repayment behaviour following modification leading to a reversal of the previous significant increase in credit risk.

Where a modification does not lead to derecognition the society calculates the modification gain/loss comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Then the society measures ECL for the modified asset, where the expected cash flows arising from the modified financial asset are included in calculating the expect-ed cash shortfalls from the original asset.

The society derecognises a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the society neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the society recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the society retains substantially all the risks and rewards of ownership of a transferred financial asset, the society continues to recognise the financial asset and also recognises a collater-alised borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain/loss that had been recognised in OCI and accumulated in equity is recognised in profit or loss, with the exception of equity investment designated as measured at FVTOCI, where the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss.

On derecognition of a financial asset other than in its entirety (e.g. when the society retains an option to repurchase part of a transferred asset), the society allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain/loss allocated to it that had been recognised in OCI is recognised in profit or loss. A cumulative gain/loss that had been recognised in OCI is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. This does not apply for equity investments designated as measured at FVTOCI, as the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss.

Write-off

Loans and debt securities are written off when the society has no reasonable expectations of recovering the financial asset (either in its entirety or a portion of it). This is the case when the society determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write-off consti-tutes a derecognition event. The society may apply enforcement activities to financial assets written off. Recoveries resulting from the society’s enforcement activities will result in impairment gains.

Gains and losses on disposal of assets whose changes in fair value were initially recognised in profit or loss are determined by reference to their carrying amount and are taken into account in determining operating profit/(loss). On disposal of assets whose changes in fair value were initially recognised in equity, the gains/losses are recycled to the statement of profit or loss. Anyresultant surplus/deficit after the transfer of the gains/losses are transferred to retained earnings. Management classifies financial assets as follows:Quoted investments, managed funds, unit trust and unquoted shares are classified as'available-for-sale' financial instruments. The fair values of quoted investments are based on current bid prices at the reporting date. Where fair values cannot be reliably measured (unquoted investments), the society establishes fair value by using valua-tion techniques or carries these investments at cost less provision for impairment.Cash in hand and balances with financial institutions, loan and advances, other receivables and tax recoverable are classified as loans and receivables and are carried at amortised cost.

-Financial liabilities

The society's financial liabilities which include creditors and accrual and borrowing and grants fall into the following catego-ries:

50

NOTES (CONTINUED)


Any difference between the proceeds (net of transaction costs) and the redemption value is recognised as interest expense in profit or loss under finance costs under the effective interest rate method.

Borrowings are initially recognised at fair value, net of transaction costs incurred and are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised as interest expense in profit or loss under finance costs.

Fees associated with the acquisition of borrowing facilities are recognised as transaction costs of the borrowing to the extent that it is probable that some or all of the facilities will be acquired. In this case the fees are deferred until the drawn down occurs. If it is not probable that some or all of the facilities will be acquired the fees are accounted for as prepayments under trade and other receivables and amortised over the period24of the facility.

- Financial liabilities

All other borrowing costs are recognised in profit or loss in the year in which they are incurred. All financial liabilities are classi-fied as current liabilities unless the society has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

Financial liabilities are derecognised when, and only when, the society's obligations are discharged, cancelled or expired.

- Offsetting financial instruments

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when there is a legally enforceable right to offset the amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

g) Inventories

Inventories comprise land held for transfer to members and is stated at the lower of cost and net realisable value. Cost is deter-mined by the first-in-first-out (FIFO) basis and comprises all costs attributable to acquiring the properties. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of completion and selling expenses.

h) Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested for impairment annually. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.An 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 impair-ment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

i) Retirement benefit obligations

The society operates a defined contribution staff retirement benefit scheme for its permanent and pensionable employees. The scheme is administered by an insurance society. The society's contributions to the defined contribution staff retirement benefit scheme are charged to profit or loss in the year to which they relate. The company has no further payment obligations once the contributions have been paid.

The society and its employees contribute to the National Social Security Fund (NSSF), a statutory defined contribution scheme registered under the NSSF Act. The society’s contributions to the defined contribution scheme are charged to the statement of comprehensive income in the year to which they relate.

j) Taxation

Current tax is provided on the basis of the results for the year, as shown in the financial statements, adjusted in accordance with tax legislation applicable to the society.

In particular under section 19A (4) of the Income Tax Act, the society being a designated society that carries on business as a Credit and Savings Co-operative Society, income tax only arises on interest income from non-members and any other income not arising from activities relating to advances or deposits from members.

Deferred income tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability. Currently enacted tax rates are used to determine deferred income tax.

51

NOTES (CONTINUED)


Deferred income tax assets are recognized only to the extent that it is probable that the future taxable Surplus will be available against which temporary differences can be utilized.

k) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

l) Accounting for leases

The society as lessee

On the commencement date of each lease (excluding leases with a term, on commencement, of 12 months or less and leases for which the underlying asset is of low value) the society recognises a right-of-use asset and a lease liability.

The lease liability is measured at the present value of the lease payments that are not paid on that date. The lease payments include fixed payments, variable payments that depend on an index ora rate, amounts expected to be payable under residual value guarantees, and the exercise price of a purchase option if the society is reasonably certain to exercise that option. The lease payments are discounted at the interest rate implicit in the lease. If that rate cannot be readily determined,the society’s incremental borrowing rate is used.

For leases that contain non-lease components, the society allocates the consideration payable to the lease and non-lease components based on their relative stand-alone components.

The right-of-use asset is initially measured at cost comprising the initial measurement of the lease liability, any lease payments made on or before the commencement date, any initial direct costs incurred, and an estimate of the costs of restoring the underlying asset to the condition required under the terms of the lease.

All other right-of-use assets are subsequently measured at cost less accumulated depreciation and any accumulated impair-ment losses, adjusted for any remeasurement of the lease liability. Depreciation is calculated using the straight-line method to write down the cost of each asset toits residual value over its estimated useful life. If ownership of the underlying asset is not expected to pass to the society at the end of the lease term, the estimated useful life would not exceed the lease term.

Subsequently the lease liability is measured at amortised cost, subject to remeasurement to reflect any reassessment, lease modifications, or revised fixed lease payments.

m) Investment shares

Member interest are classified as equity where the entity has an unconditional right to refuse redemption of the members’ shares.

Provisions in the Act, regulations or the Sacco by-laws impose unconditional prohibitions on the redemption of members’ shares at the option of the members.

Where the directors propose a reduction of investment shares and subject to the approval thereof by the members in a gener-al meeting, such refund is accounted for as a direct reduction of investmnet shares with no impact on distirbutable reserves.

n) Reserves

- Statutory reserveTransfers are made to the statutory reserve fund at a rate of 20 % of net operating surplus after tax in compliance with the provision of section 47 (1& 2) of the Co-operative Societies Act, Cap490. This reserve is not distributable.

- Loan loss reserveWhere impairment losses required by legislation or regulation exceed those calculated under International Financial Reporting Standards (IFRSs), the excess is recognised as a regulatory credit risk and accounted for as an appropriation of retained profits. This reserve is not distributable.

52

- Fair value reserve

The fair value reserve arises on the revaluation of available-for-sale financial assets. Where a revalued financial asset is sold, the portion of the reserve that relates to that financial asset, and is effectively realised, is recognised in profit or loss. Where a revalue financial asset is impaired, the portion of the reserve that relates to that financial asset is recognised in profit or loss.

Gains and losses transferred from equity into statement of comprehensive income during the period are included in other gains and losses. The amounts in this reserve is not distributable.

- Appropriation account

This comprises retained earnings and is distributable.

- Dividends account

Dividend is recognised as a liability by transferring funds from retained earnings to dividend account. Proposed dividends are disclosed as a separate component of equity. This reserve is distributable.

o) Comparatives

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

NOTES

2. Revenue 2019 2018 Shs Shs

a) Interest income on member loans and advances 634,770,813 596,533,399 b) Other interest income Dividend income (KUSCCO and CIC Insurance) 2,977,363 391,730Entrance and transfer fees 1,523,103 2,285,154Interest from fixed deposits 23,316,000 -Interest from CIC units 4,012,974 33,736Interest from KUSCCO 8,575,358 3,301,537 40,404,798 6,012,157

Total interest income 675,175,611 602,545,556 c) Interest expenses Interest on member deposits 293,210,357 237,822,335Interest on fixed deposits 9,264,035 27,607,575

Total interest expense 302,474,392 265,429,910

Net interest income 372,701,219 337,115,646d)Member land transactionsRevenue from land contracts with members 57,304,000 191,810,153Direct costs (44,172,075) ( 159,432,778)

Net income from member land transactions 13,131,925 32,377,375

e)Other operating income 10,680,953 12,244,135

3. Expenses

a) Impairment charge/(credit) on loans and advances (Note 7) 69,421,147 (78,627,021)b) Governance expenses Committee training and Strategic Development 2,457,559 4,717,361Honoraria 2,200,000 1,714,284Sitting allowances 2,241,550 3,093,622Committee travelling 234,070 349,572AGM expenses 3,782,270 3,683,390Education & training expenses 499,830 2,865,840Open day and ushirika celebrations 2,088,200 1,238,770

13,503,479 17,662,83953

2019 2018 Shs Shsc) Staff costs Salaries and wages 29,933,011 28,508,772 Other staff cost 16,356,509 16,992,245 Pension contribution 2,016,940 2,240,233 National Social Security Fund 60,800 66,400 48,367,260 47,807,650

d) Other administrative expenses Software maintenance 4,046,854 5,067,503 SASRA FOSA licence fees 6,429,703 4,360,164 Printing and stationary 1,195,869 1,455,511 General insurance 170,023 382,157 Postage 558,350 683,035 General office expenses 461,394 941,835 Legal fee 993,000 1,187,060 Loss on disposal of assets - 103,113 Travelling and entertainment expense 1,382,282 813,761 Consultancy fees 4,075,200 612,775 Audit fees 2,504,845 941,719 Security on cash in transit 732,966 514,462 Bulk SMS 3,035,000 957,146 Cash loss 174,704 1,425,146 Loan insurance 7,348,600 5,926,128 Impairment of other receivables 5,360,331 43,672,044 Bank charges 1,799,474 1,380,338 Land rent and rates 172,370 1,487,925 Debt collection fees 1,332,190 - 41,773,155 71,911,822e) Other operating expenses Depreciation on property and equipment 4,449,091 6,098,716 Amortisation of intangible assets 1,143,221 1,197,795 Credit reference expenses 983,550 335,472 6,575,862 7,631,983f) Marketing expenses Advertisement and marketing expenses 934,553 4,562,703 Corporate social responsibility 345,526 96,085 1,280,079 4,658,7885) Tax Current tax 7,355,407 1,449,618 7,355,407 1,449,618The tax on the society's operating profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:

Reconciliation of the expenseProfit before tax 215,593,116 310,691,095 Tax calculated at a tax rate of 30% 64,677,935 93,207,329Tax effects of:Expenses not deductible for tax purposes 138,797,885 95,387,700Income not subject to tax (196,120,412) (187,145,410)

Tax charge 7,355,407 1,449,618

54

NOTES (CONTINUED)Expenses (continued)

2019 2018 Shs Shsb) Tax payable At start of year 17,252,274 (19,437,834) Income tax expense (7,355,407) (1,449,618) Tax paid 797,350 38,139,726

At end of year 10,694,217 17,252,274

5. Cash and cash equivalents Cash and cash equivalents at the end of the year comprise:-

Cash at bank and in hand (as detailed below) 864,358,200 728,367,467

Cash in hand 11,129,175 5,900,143 Co-operative Bank of Kenya Limited 269,288,549 240,022,537 Commercial Bank of Africa Limited 35,768,069 132,593,417 NIC Bank Limited 97,783,676 202,695,248 United Bank of Africa (Kenya) - 102,109,589 M-pesa float account 1,500,000 2,000,000 M-Pesa Accounts 37,493,297 43,046,533 Fixed deposit Commercial Bank Africa Limited 411,395,434 -

864,358,200 728,367,467

For the purpose of the statement cash flows, the year end cash and cash equivalents is as the above.

The society's cash and bank balances are held with a major Kenyan financial institution and, in so far as the direc-tors are able to measure any credit risk to these assets, it is deemed to be immaterial. Therefore no expected credit losses have been recognised in respect of the above balances.

The carrying amounts of the society's cash and cash equivalents are denominated in Kenya shilling.

6. Receivables and prepayments

Interest due on loans and advances 2,854,512 19,051,537 Check off receivables 63,155,140 26,202,418 Other debtors 467,728 5,991,506 Land debtors 1,925,000 7,345,000 KUSCCO claims 2,457,180 3,480,062 70,859,560 62,070,523

In the opinion of the directors, the carrying amounts of receivables and prepayment approximate to their fair value.

Impairments of Shs. 8,738,786 (2018: Nil) have been recognised on receivable and prepayments. The carrying amounts of the society's receivables and prepayments are denominated in Kenya Shillings (Shs.).

7. Loans and advances At the start of the year 5,170,258,360 4,647,449,465 Net increase during the year 631,614,175 522,808,895 Impairment provisions (459,722,956) (390,301,809) At year end 5,342,149,579 4,779,956,551

Movement in impairment of loss for loans and advances

At start of year 390,301,809 468,928,830 Impairment provision charge/(credit) for the year (Note 3) 69,421,147 (78,627,021) At end of year 459,722,956 390,301,80955

NOTES (CONTINUED)Tax (continued)

56

(i) Loans and advances to customers at amortised cost

Gross ECL Carrying For the year ended 31 December 2019 amount allowance amount

Development Loans 3,301,720,806 (301,200,101) 3,000,520,705Land loans (Property loan) 184,782,365 (723,757) 184,058,607Emergency loans (Advances) 29,109,098 (6,424,419) 22,684,679Enterprise and project cash flow loan 963,727,415 (64,512,716) 899,214,699Individual income based loan 1,314,532,852 (86,861,963) 1,227,670,888Mortgage loan 8,000,000 - 8,000,000 5,801,872,342 (459,722,956) 5,342,149,579For the year ended 31 December 2018 Loans and advancesDevelopment Loans 3,211,334,688 304,132,863 3,515,467,552Land loans (property loan) 260,866,539 - 260,866,539Emergency loans (advances) 44,880,659 255,105 45,135,765Enterprise and project cashflow loan 857,948,027 85,913,840 943,861,867Individual income based loan 795,228,446 - 795,228,446 5,170,258,360 390,301,809 5,560,560,169

The provisions for impairment of loans include the following:-

Year end 31 December 2019Loan and advances 443,116,104 459,722,956 - -Year end 31 December 2018Loan and advances 336,883,245 390,301,809

Provision as per statutory regulations

0 Days (Performing - 1%) 10,660,914 24,335,0271- 30 Days (Watch -5%) 31,094,827 3,326,43231 - 180 Days (Substandard- 25%) 114,070,093 77,052,767181- 360 Days (Doubtful - 50%) 34,964,463 41,520,006Over 361 Days (Loss - 100%) 252,325,808 190,649,013

443,116,104 336,883,245

(ii) IFRS 9 provisions

Reconciliation from opening to closing balance of loss allowance for loans and advances to customers at amortised cost for 2019 is shown below;

Changes in the loss allowance:

At start of year 204,846,443 21,922,887 163,532,479 390,301,809 468,928,830- (Decrease)/increase in loss allowance (34,814,645) (5,593,253) 109,829,046 69,421,148 (78,627,021)

At end of year 170,031,798 16,329,634 273,361,525 459,722,956 390,301,809

2018

Provision asper statutoryregulations

Stage 112-month ECL

Shs

Stage 2Lifetime ECL

ShsTotalShs

2018Shs

Impairmentprovision asper IFRS 9

Statutory loanloss reserve

transfer toStatutory loanloss reserve

Stage 3Lifetime ECL

Shs

2017 Loss ProvisionGross Amount Carrying Amount

2019Shs

2018Shs

2019

NOTES (CONTINUED)7. Loans and advances (continued)

57

Level 1Shs

Level 1Shs

Level 1Shs

Level 1Shs

Loans to insiders

Insiders are deemed to be employees, members of supervisory committees and directors of the society. The following loans were granted to insiders

2019 2018 Shs ShsTotal loans advanced during the year 68,746,560 60,689,583Total loans outstanding at the end of the year:

Loans to key management 4,288,187 8,692,016Loans to directors 71,546,682 52,897,536Loans to supervisory committee members 4,505,164 6,865,823Loans to other employees 12,476,107 14,136,208 The effective interest rate on loans is 12% (2018: 12%) 92,816,140 82,591,583

8. Financial assets At start of year 96,765,396 82,523,180Additions 112,108,871 14,242,216Disposals (29,245,206) -Fair value gain 197,582 -

At end of year 179,826,643 96,765,396

UnquotedKUSCCO Limited - ordinary shares 22,677,697 22,677,697KUSCCO Limited - special deposits 71,764,751 23,088,000KUSCCO Limited - vijana savings - 6,944,215KUSCCO Limited - central finance programme 1,800,000 24,101,206CIC unit trusts 54,103,868 367,990African Alliance Asset Management 342,371 342,371Kenya Mortage Refinancing Company 9,696,512 -

Total unquoted investments 160,385,199 77,521,479

Quoted - available for saleSafaricom PLC 13,390,540 11,341,668Co-operative Insurance Society Limited 6,050,904 7,902,304

Total quoted shares 19,441,444 19,243,972Total investements 179,826,643 96,765,451Income from available for sale financial assets 15,565,695 3,727,003

The fair values of financial assets are categorised as follows based on the information set out on accounting policy (a). There were no reclassification between the classes.

Year ended 31 December 2019

Fair value through other comprehensive income 13,390,540 6,050,904 160,385,199 179,826,643

Year ended 31 December 2018 Fair value through other comprehensive income 11,341,668 7,902,304 77,521,479 96,765,451

The carrying value of the invetsment in Kuscco ordinary share is based on cost as a reasonable estimate of the fair value as KUSSCO adopts a signifcant dividend distributable policy with the effect that the market value of the share is at any time not expected to materially differ from cost.

Market risk primarily arises from the changes in the market value and the financial stability of the respective quoted companies.

NOTES (CONTINUED)

Management monitors the quality of financial assets by:- discussion at the management and board meetings;- reference to external historical information available; and- discussions with the society's investment advisors.

None of the financial assets are considered to be impaired and are dominated in Kenya Shillings. 2019 2018 9. Inventory Shs Shs

Land - Kisumu 2,311,936 2,311,935Land - Naivasha 4,522,348 16,151,241Land - Joska 1 and 2 2,984,060 2,984,060Land - Limuru 15,663,966 -

25,482,310 21,447,236 Inventory is land held for resale to members of the society.

10. Property and equipment Year ended 31 December 2019 At start of year 204,306,361 1,053,009 1,993,610 4,606,274 211,959,254Additions - - 648,672 199,583 848,255

At end of year 204,306,361 1,053,009 2,642,282 4,805,857 212,807,509

DepreciationAt start of year 24,394,851 737,360 1,206,526 2,315,513 28,654,250Charge for the year 3,838,361 37,274 92,593 480,863 4,449,091

At end of year 28,233,212 774,634 1,299,119 2,796,376 33,103,341

Net book value 176,073,149 278,375 1,343,163 2,009,481 179,704,168

Year ended 31 December 2018Cost

At start of year 204,306,361 1,044,384 1,896,020 3,478,423 210,725,188Additions - - - 1,318,091 1,424,306Disposals - - - (190,240) (190,240)At end of year 204,306,361 1,053,009 1,993,610 4,606,274 211,959,254Depreciation At start of year 18,296,135 683,938 1,108,026 1,921,885 22,009,984Charge for the year 6,098,716 53,422 98,500 480,755 6,731,393Disposal - - - (87,127) (87,127)At end of year 24,394,851 737,360 1,206,526 2,315,513 28,654,250Net book value 179,911,510 315,649 787,084 2,290,761 183,305,004

11. Intangible assets

At start of year 9,095,149 9,095,149Additions 19,140,000 - 28,235,149 9,095,149Amortisation

At start of year 7,486,109 6,288,314Amortization charge 1,143,221 1,197,795

At end of year 8,629,330 7,486,109

Net book value 19,605,819 1,609,04058

Right of use Assets

Shs

Furnitureand fittings

Shs

Officeequipment

Shs

Computersand

accessoriesShs

TotalShs

Cost

Software2018Shs

2019Shs

NOTES (CONTINUED)

59

12. Other Payables

Sundry creditors 17,064,845 26,826,345Other payables 26,470,547 1,181,952Accrual 26,090,408 5,594,051Benevolent fund 13,555,154 5,889,983

Total payables 83,180,954 39,492,331

In the opinion of the directors, the carrying amounts of trade and other payables approximate to their fair value.

The carrying amounts of the society's cash and cash equivalents are denominated in Kenya Shillings (Shs).

13. Deposit for land Limuru land 3,013,840 30,313,840Naivasha land 2,750,000 -

5,763,840 30,313,840

The balance relates to payments made by customers on sale of land and awaiting issue of the title documents.

14. Interest due to members

At the start of the year 237,822,335 264,188,430Provisions for the year 315,163,836 237,822,335Over provision in prior year (21,953,479) -Payments during the year (215,868,856) (264,188,430)

At end of year 315,163,836 237,822,335

15. Deposits

a) Member depositsAt start of year 4,360,246,484 3,593,758,662Net additional deposits during the year 749,907,734 766,487,822

Total 5,110,154,218 4,360,246,484 b) WithdrawableAt start of year 379,666,283 499,376,853

Net additional deposits during the year 26,538,333 (119,710,57)

406,204,616 379,666,283

Total member savings 5,516,358,834 4,739,912,767

There are no members holding more than 25% of total members deposits.

17. Investment sharesAt start of year 667,884,362 509,794,751Investment shares issued during the year 77,372,203 158,089,611Reduction of investment shares (287,865,655) -

At end of year 457,390,910 667,884,362

Further to member resolutions in the year 2019 Annual General Meeting, the society reduced its investment shares through a cash repayment of Shs. 287,865,655. This repayment was on an amount of capital previously raised for the now aborted property development project.18. ReservesIncluded in the members balances are the following reserves which are as a result of statutory requirements:-

2018Shs

2019Shs

NOTES (CONTINUED)

60

2019 2018 Shs Shs

i) Statutory reserve 129,737,606 88,090,064ii) Fair value reserve 14,457,206 14,259,624iii) Appropriation account 112,858,238 4,037,143iv) Dividends account 57,769,072 68,961,025

During the year, proposed dividend for 2018 of 12% of investment shares (2017: 12%) amounting to a total of Shs. 68,961,025 (2017: Shs. 511,785,837) was paid.The total proposed dividend for the year is 12% of investment shares (2018:12 %) amounting to a total of Shs. 57,769,072 (2018: Shs. 68,961,025).

19. Related party transactions

i) Insider deposits

Total deposits and savings outstanding at end of year:

Due to key management 2,150,291 2,796,356Due to supervisory committee members 4,402,041 4,786,781Due to directors 29,871,609 22,071,883Due to other employees 4,591,343 5,056,738

Total deposits and savings 41,015,284 34,711,758ii) Key management personnel remuneration Short term employee benefits 29,933,011 27,655,023Post employment benefits 2,016,940 815,520 31,949,951 28,470,543Refer to Note 7 for loans to insiders.

20. Risk management objectives and policies

Financial risk management

The society's activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk), credit risk and liquidity risk.

The society's overall risk management programme focuses on the unpredictability of financial marketsand seeks to minimise potential adverse effects on the society’s financial performance.

Risk management is carried out by the risk sub-committees under policies approved by the directors. The risk sub-com-mittee identifies, evaluates and manage financial risks in close co-operation with various departmental heads. The directors provides written principles for overall risk management, as well as written policies covering specific areas, such as liquidity risk, interest rate risk, credit risk, and investment of excess liquidity.

The sub-committee reports to the directors on all aspects of risks including nature of risks, measures instituted to mitigate risk exposures etc.

(a) Market risk

- Interest rate risk

The society's exposure to interest rate risk arises from borrowings and financial assets. Loan and advances and mem-bers deposits are fixed interest securities and therefore not susceptible to market interest rate changes.

Financial assets and liabilities advanced and obtained at different rates expose the society to interest rate risk. Finan-cial assets and liabilities obtained at fixed rates expose the society to fair valueinterest rate risk, except where the instruments are carried at amortised costs. The society maintains adequate ratios of borrowings when compared to total borrowings in fixed interest rates.

NOTES (CONTINUED)

61

The table below summarises the effect on post - profit had interest rates been 1 percentage point higher, with all other variables held constant. If the interest rates were lower by 1 percentage point, the effect would have been the opposite. 2019 2018 Shs Shs

Effect on profit decrease 359,043 33,353

- Price riskThe society is exposed to equity price risks arising from equity investments. Equity investments are held for strategic rather than trading purposes. The society does not actively trade these investments.

The society’s investments in equity of other entities are publicly traded and included in the NairobiStock Exchange (NSE).

The table below summarises the impact of increases of the NSE on the society’s profit for the year. The analysis is based on the assumption that the equity indexes had increased by 5% with all other variables held constant and all the society’s equity instruments moved according to the historical correlation with the index. Impact on other comprehensive incomeIndex 2019 2018 Shs Shs

NSE 972,072 962,199

(b) Credit risk

Credit risk is the risk that a customer or counterparty will default on its contractual obligation resulting in financial loss to the society. The society's main income generating activity is lending to customers and therefore credit risk is a principal risk. Credit risk mainly arises from loans and advances to customers and other financial institutions and investment in debt securities. The society considers all elements of credit risk exposure such as counterparty default risk, geographical risk and sector risk for risk management purposes.

Credit risk management

The society's credit committee is responsible for managing the society's credit risk by;- Ensuring that the society has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the society's stated policies and procedures, IFRSs and relevant supervi-sory guidance.- Identifying, assessing and measuring credit risk across the society, from an individual instrument to a portfolio level.- Creating credit policies to protect the society against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposure against internal risk limit.- Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities.- Developing and maintaining the society's risk grading to categories exposure according to the degree of risk of default. Risk grades are subject to regular reviews. - Developing and maintaining the society's risk processes for measuring Expected Credit Loss including monitoring of credit risk, incorporating forward looking information and the method used to measure ECL.- Ensuring the society has policies and procedures in place to appropriately maintain and validate models used to assess and measure ECL.- Establishing a sound credit risk accounting assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk to account for ECL. Providing advice, guidance and special skills business units to promote best practice in the management of credit risk.

The internal audit function performs regular audit to make sure that the established controls and procedures are adequately designed and implemented.

Significant increase in credit risk

The society monitors all financial assets that are subject to impairment requirements to assess whether there has been a signifi-cant increase in credit risk since initial recognition. If there has been an increase in significant risk the society will measure the loss allowance based on the lifetime rather that 12 - months ECL.

NOTES (CONTINUED)

62

NOTES (CONTINUED)

Internal credit risk rating

The Society takes on exposure to credit risk which is the risk of financial loss to the Society if a member or counterparty to a financial instrument fails to meet its contractual obligations.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral against loans and advances in the form of registered securities over assets and guarantees from members. Credit risk in the society, is also managed through a framework of policies and procedures. Origination and approv-al roles are segregated.

To aid credit managers in portfolio management, regular internal risk management reports contain information on key environ-mental and economic trends across major portfolios, portfolio delinquency and loan impairment performance as well as information on migration across credit grades and other trends. Expected loss is the long-run average credit loss across a range of typical economic conditions. It is used in the delegation of credit approval authority and must be calculated for every transaction to determine the appropriate level of approval. To assist risk officers in monitoring the portfolio, various internal risk management reports are available on a regular basis, providing individual counterparty, counterparty society and portfolio exposure information, the status of accounts showing signs of weakness or financial deterioration and updates on credit markets.

The society’ grading systems is based on the basic principles issued by the regulatory authority SASRA on the basis that the periods are largely consistent with the IFRS presumptions on stages of credit products. In addition to nominal aggregate exposure, expected loss is used in the assessment of individual exposures and for portfolio analysis.

The credit grades within society are based on a probability of default. The society structures the levels of credit risk it under-takes by placing limits on the amount of risk accepted in relation to the nature and type of loans. The society grades its loans into five categories on the basis of the following criteria:

(1) Performing loans, being loans which are well documented and performing according to contractual terms. Such loans are considered under stage 1 - no significant increase in credit risk for purposes of the ECL calculation;(2) Watch loans, being loans whose principal or interest have remained un-paid for one day to thirty days or where one instalment is outstanding for less than 30 days. Such loans are also classified as stage 1 for purposes of the ECL calculation;(3) Substandard loan, being loans not adequately protected by the current repayment capacityand the principal or interest have remained un-paid between thirty-one to one eighty days or where two to six instalments have remained outstanding. Under this category, loans past due between 31 and 46 days continues to be classified as Stage 1, loan past due between 46 - 90 days (or 2-3 pending instalments) are classified under stage 2 - significant increase in credit risk for purposes of the ECL calculation. Loans aged beyond 90 days are classified as stage 3 - credit impaired;(4) Doubtful loans, being loans not adequately protected by the current repayment capacity and the principal or interest have remained un-paid between one hundred and eighty one to three hundred and sixty days or where seven to twelve instalments have remained outstanding. Such loans are classified as stage 3 for purposes of the ECL calculation; and(5) Loss loans, being loans which are considered uncollectible or of such little value that their continued recognition as receiv-able assets is not warranted, not adequately protected and have remained un-paid for more than three hundred and sixty days or where more than twelve instalments have remained outstanding. Such loans are also classified as stage 3 for purposes if the ECL calculation.

The society analyses all data collected using statistical models and estimates the remaining lifetime PD of exposures and how these are expected to change over time. The factors taken into account in this process include macro-economic data such as GDP growth, unemployment, benchmark interest rates and house prices. The society generates a ‘base case’ scenario of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. The society then uses these forecasts, which are probability-weighted, to adjust its estimates of PDs.

The society presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractu-al payments are more than 30 days past due unless the society has reasonable and supportable information that demon-strates otherwise.

The society has monitoring procedures in place to make sure that the criteria used to identify significant increases in credit are effective, meaning that significant increase in credit risk is identified before the exposure is defaulted or when the asset becomes 30 days past due. The society performs periodic back-testing of its ratings to consider whether the drivers of credit risk that led to default were accurately reflected in the rating in a timely manner.

63

Incorporation of forward looking information

The society uses forward-looking information that is available without undue cost or effort inits assessment of significant increase of credit risk as well as in its measurement of ECL. The society's employs experts who use external and internal information to generate a ‘base case’ scenario of future forecast of relevant economic variables along with a representative range of other possible forecast scenarios. The external information used includes economic data and forecasts published by governmental bodies and monetary authorities.

The society applies probabilities to the forecast scenarios identified. The base case scenario is the single most-likely outcome and consists of information used by the society for strategic planning and budgeting. The society has identified and document-ed key drivers of credit risk and credit losses for each portfolio of financial instruments and, using a statistical analysis of histori-cal data, has estimated relationships between macro-economic variables and credit risk and credit losses. The society has not made changes in the estimation techniques or significant assumptions made during the reporting period.

The principal macroeconomic indicators included in the economic scenarios used at 31December 2019 for Kenya are as follows:

- GDP Growth- Unemployment rates- Inflation

Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 3 years. The society has determined that over this historical period, there has been minimal correlation between the macroeconomic factors and the experienced credit losses.

Therefore these factors do not have a material impact on the ECL.

Measurement of ECL

The key inputs used for measuring ECL are:

• probability of default (PD);• loss given default (LGD); and• exposure at default (EAD).

As explained above these figures are generally derived from internally developed statistical models and other historical data and they are adjusted to reflect probability-weighted forward-looking information where it may have a material impact on the ECL.

PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. The calculation is based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on market data (where available), as well as internal data comprising both quan-titative and qualitative factors. PDs are estimated considering the contractual maturities of exposures and estimated prepay-ment rates. The estimation is based on current conditions, adjusted to take into account estimates of future conditions that will impact PD.

LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. The LGD models for secured assets consider forecasts of future collateral valuation taking into account sale discounts, time to realisation of collateral,cross-collateralisation and seniority of claim, cost of realisation of collateral and cure rates (i.e. exit from non-performing status). LGD models for unsecured assets consider time of recovery, recovery rates and the calculation is on a discounted cash flow basis, where the cash flows are discounted by the original EIR of the loan.

EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities. The society’s modelling approach for EAD reflects expected changes in the balance outstanding over the lifetime of the loan exposure that are permitted by the current contractual terms, such as amortisation profiles, early repayment or overpayment, changes in utilisation of undrawn commitments and credit mitigation actions taken before default. The society uses EAD models that reflect the characteristics of the portfolios.

The society measures ECL considering the risk of default over the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if contract extension or renewal is common business practice. However, for financial instruments such as revolving credit facilities and overdraft facilities that include both a loan and an undrawn commitment component, the society’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the society’s exposure to credit losses to the contractual notice period. For such financial instruments the society measures ECL over the

NOTES (CONTINUED)

64

period that it is exposed to credit risk and ECL would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. These financial instruments do not have a fixed term or repayment structure and have a short contractual cancellation period. However, the society does not enforce in the normal day-to-day manage-ment the contractual right to cancel these financial instruments. This is because these financial instruments are managed on a collective basis and are cancelled only when the society becomes aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that the society expects to take to mitigate ECL, e.g. reduction in limits or cancellation of the loan commitment.

The ECL calculation for accounting purposes is different to the provisions calculation for regulatory purposes. The society has ensured that the appropriate methodology is used when calculating ECL for both accounting purposes. The main differences between the methodologies used to measure ECL in accordance with IFRS 9 versus the ones applied for regulatory purposes are as disclosed on Note 8 of the financial statements. Any excess in regulatory provisions over IFRS 9 ECLs are accounted for as an appropriation from retained earnings into a loan loss reserve.

Groupings based on shared risks characteristics

When ECL are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics, such as:

- instrument type;- credit risk grade;- collateral type;- remaining term to maturity;- industry/economic sector; and- geographic location of the borrower.

The groupings are reviewed on a regular basis to ensure that each group is comprised of homogenous exposures.

Credit quality

The credit quality of the portfolio of loans and advances (excluding commitments and guarantees) that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Sacco based on the guidelines provid-ed by the SASRA as follow;

NOTES (CONTINUED)

65

NO

TES

(CO

NTIN

UED)

Year

end

ed 3

1 De

cem

ber 2

019

Loan

s an

d ad

vanc

es to

cus

tom

ers

0 D

ays (

Perfo

rmin

g, st

age

1)

2,

661,

002,

431

129,

770,

209

15,

749,

532

671,

226,

026

940,

153,

252

8

,000

,000

4,

425,

901,

450

1- 3

0 D

ays (

Wat

ch, s

tage

1)

224

,140

,173

2

1,65

8,28

7

2,1

96,3

20

96,

012,

522

152,

949,

647

-

49

6,95

6,94

931

- 18

0 D

ays (

Subs

tand

ard

, sta

ge 2

)

197

,746

,719

1

9,50

9,33

8

2,8

82,7

87

119,

613,

780

120,

823,

311

-

46

0,57

5,93

618

1- 3

60 D

ays (

Dou

btfu

l, st

age

3)

6

0,73

9,96

2

5,5

54,9

88

1

,287

,803

1

8,94

4,82

6 3

6,05

2,59

2

-

122,

580,

170

Ove

r 361

Day

s (Lo

ss A

ccou

nt, s

tage

3)

158

,091

,326

8,28

9,54

2

6,9

92,6

56

57,

930,

262

64,

554,

050

-

29

5,85

7,83

6

3

,301

,720

,612

18

4,78

2,36

5

29,1

09,0

98

963,

727,

415

1,

314,

532,

852

8

,000

,000

5,

801,

872,

342

Year

end

ed 3

1 De

cem

ber 2

018

Loan

s an

d ad

vanc

es to

cus

tom

ers

0 D

ays (

Perfo

rmin

g, st

age

1)

2,

392,

523,

428

177,

704,

173

20,

479,

734

462,

704,

516

559,

160,

911

3,61

2,57

2,76

21-

30

Day

s (W

atch

, sta

ge 1

)

3

56,1

43,0

08

47,

143,

551

6

,225

,943

13

9,14

2,89

6 17

7,34

2,31

7

725,

997,

715

31 -

180

Day

s (Su

bsta

ndar

d, s

tage

2)

2

37,8

34,2

69

24,

098,

316

15,

567,

929

142,

326,

592

74,

736,

796

49

4,56

3,90

218

1- 3

60 D

ays (

Dou

btfu

l, st

age

3)

63,1

98,3

75

8,

237,

249

1

,537

,591

3

9,92

3,09

6 1

0,41

5,37

2

123,

311,

683

Ove

r 361

Day

s (Lo

ss A

ccou

nt, s

tage

3)

159

,938

,278

3,68

3,25

0

1,0

69,4

62

11,

131,

346

37,

989,

962

21

3,81

2,29

8

3,2

09,6

37,3

58

260,

866,

539

44,

880,

659

795,

228,

446

859,

645,

358

5,17

0,25

8,36

0

Ana

lysis

of t

he so

ciet

y’s c

red

it ris

k ex

posu

re p

er c

lass

of fi

nanc

ial a

sset

, int

erna

l rat

ing

and

“st

age”

with

out t

akin

g in

to a

ccou

nt th

e ef

fect

s of a

ny c

olla

tera

l or o

ther

cre

dit

enha

ncem

ents

is p

rovi

ded

in th

e fo

llow

ing

tabl

es. U

nles

s spe

cific

ally

ind

icat

ed, f

or fi

nanc

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sset

s, th

e am

ount

s in

the

tabl

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pres

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ross

car

ryin

g am

ount

s. Fo

r loa

n co

mm

itmen

ts a

nd fi

nanc

ial g

uara

ntee

con

tract

s, th

e am

ount

s in

the

tabl

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pres

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he a

mou

nts c

omm

itted

or g

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espe

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Loan

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es to

cus

tom

er a

t am

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ed c

ost

Year

end

ed 3

1 De

cem

ber 2

019

Dev

elop

men

t Loa

ns

2,88

5,14

2,79

8 79

,098

,688

33

7,47

9,32

0 3

,301

,720

,806

Land

loan

s (Pr

oper

ty lo

an)

151,

428,

496

7,8

03,7

35

25,

550,

133

1

84,7

82,3

65Em

erge

ncy

loan

s (A

dva

nces

)

7

,945

,852

1

,153

,115

1

0,01

0,13

1

2

9,10

9,09

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div

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l inco

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base

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an

76

7,23

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5

963

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ashfl

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1,

093,

102,

899

48,3

29,3

24

173,

100,

628

1,3

14,5

32,8

52M

ortg

age

loan

8,00

0,00

0

-

-

8

,000

,000

4

,922

,858

,593

1

84,2

30,3

74

694,

783,

568

5,8

01,8

72,5

36

Expe

cted

cre

dit

loss

pro

visio

n

(170

,031

,798

)

(

16,3

29,6

34)

(2

73,3

61,5

25)

(459

,722

,956

)N

et c

red

it ex

posu

re

4,75

2,82

6,79

6

167

,900

,741

42

1,42

2,04

3 5

,342

,149

,579

Stag

e 1

12 M

onth

sEC

LSh

s

Stag

e 2

Lifet

ime

ECL

Shs

Stag

e 3

Lifet

ime

ECL

Shs

Tota

lSh

s

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lopm

ent

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66

Cur

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to 1

yea

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to 5

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cus

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Year

end

ed 3

1 De

cem

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018

D

evel

opm

ent L

oans

2

,748

,666

,436

95

,133

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36

5,83

7,21

5 3,

209,

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Land

loan

s (Pr

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ty lo

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224

,847

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9

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2

6,37

9,48

9

260,

866,

539

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genc

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ans (

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vanc

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2

6,70

5,67

7 6

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,171

1

1,94

7,81

0

44,

880,

659

Ind

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com

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sed

loan

601

,847

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56

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13

6,45

0,39

7

795,

228,

446

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e an

d p

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736

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29

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9

3,24

7,41

0

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645,

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4

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,570

,478

19

7,82

5,56

1 63

3,86

2,32

1 5,

170,

258,

360

Impa

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ent p

rovi

sion

(20

4,84

6,44

3)

(21,

922,

887)

(1

63,5

32,4

79)

(390

,301

,809

)N

et c

red

it ex

posu

re

4

,133

,724

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17

5,90

2,67

4 47

0,32

9,84

2 4,

779,

956,

551

Col

late

ral h

eld

as s

ecur

ity

The

soci

ety

hold

s col

late

ral a

gain

st a

ll loa

ns a

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dva

nces

to m

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the

form

of c

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resid

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dus

trial

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perty

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d a

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s suc

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ls an

d o

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mem

bers

gua

rant

ees.

The

soci

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has d

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oped

spec

ific

polic

ies a

nd g

uid

elin

es fo

r the

acc

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nce

of d

iffer

ent c

lass

es o

f col

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Estim

ates

of t

he c

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tera

l’s fa

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lues

are

bas

ed o

n th

e va

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of c

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epen

den

tly a

nd p

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ssio

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ass

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t the

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and

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a fre

quen

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rate

with

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and

type

of t

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dit

adva

nced

. Col

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truct

ures

and

cov

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re su

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to re

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to

ensu

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fulfi

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inte

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pur

pose

. Col

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gen

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ly n

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in re

spec

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its a

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om b

anki

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stitu

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ms i

n th

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of c

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d G

over

nmen

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(c)

Liq

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sk

Cas

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w fo

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perfo

rmed

by

the

finan

ce d

epar

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t mon

thly

by

mon

itorin

g th

e so

ciet

y’s l

iqui

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requ

irem

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to e

nsur

e it

has s

uffic

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cas

h to

mee

t op

erat

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ds w

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mai

ntai

ning

suffi

cien

t hea

dro

om o

n its

und

raw

n co

mm

itted

bor

row

ing

faci

litie

s at a

ll tim

es so

that

the

soci

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doe

s not

bre

ach

borro

win

g lim

its o

n an

y of

its4

6bor

row

ing

faci

litie

s.

Prud

ent l

iqui

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risk

man

agem

ent i

mpl

ies m

aint

aini

ng su

ffici

ent c

ash

and

mar

keta

ble

secu

ritie

s, th

e av

aila

bilit

y of

fund

ing

thro

ugh

an a

deq

uate

am

ount

of c

om-

mitt

ed c

red

it fa

cilit

ies a

nd th

e ab

ility

to c

lose

out

mar

ket p

ositi

ons.

Due

to th

e d

ynam

ic n

atur

e of

the

und

erly

ing

busin

esse

s, th

e so

ciet

y's m

anag

emen

t mai

ntai

ns

flexib

ility

in fu

ndin

g by

mai

ntai

ning

ava

ilabi

lity

und

er c

omm

itted

cre

dit

lines

Year

end

ed 3

1 De

cem

ber 2

019

- O

ther

pay

able

s

83,

180,

954

-

83,

180,

954

- In

tere

st d

ue to

mem

bers

315

,163

,836

-

31

5,16

3,83

6-

Dep

osit

for l

and

5,

763,

840

5

,763

,840

- M

embe

r dep

osits

406

,204

,616

5,11

0,15

4,21

8 5,

516,

358,

834

81

6,90

3,48

3

3,59

3,75

8,66

2 4,

410,

662,

145

Stag

e 1

12 M

onth

sEC

LSh

s

Stag

e 2

Lifet

ime

ECL

Shs

Stag

e 3

Lifet

ime

ECL

Shs

Tota

lSh

s

67

2018Shs

2019Shs

2018Shs

2019Shs

Current to 1 yearShs

1 to 5 YearsShs

TotalShs

Year ended 31 December 2018

- Other payables 39,492,331 - 39,492,331- Interest due to members 237,822,335 - 237,822,335- Member deposits 379,666,283 4,360,246,484 4,739,912,767- Borrowings 30,313,840 - 30,313,840

687,294,789 4,360,246,484 5,047,541,273

21. Capital management

Internally imposed capital requirementsThe society manages its capital to ensure that it will be able to continue as a going concern while maximising the return to members through the optimisation of the debt and equity balance. The capital structure of the society consists of net debt calculated as sum of total borrowings and member’s deposit (as shown in the statement of financial position) less cash and cash equivalents and equity (comprising investment shares, reserves and appropriation account). The directors reviews the capital structure on a semi-an-nual basis. As part of this review, the committee considers the cost of capital and the risks associated with each class of capital. In order to maintain the capital structure, the society may adjust the amounts of dividends paid to members or sell assets to reduce debt. The society’s overall strategy remain unchanged from 2018.

The debt-to-capital ratios at 31 December 2019 and 2018 were as follows:

Total members deposits 5,516,358,834 4,739,912,767 5,516,358,834 4,739,912,767Total cash and bank balances 864,358,200 728,367,467

Net debt 4,652,000,634 4,011,545,300

Total equity 722,213,032 843,232,218

Gearing ratio 6:1 4.8:1

Externally imposed capital requirementsThe Sacco Societies Act No. 14 of 2008 has established certain guidelines for the management of capital and working capital for deposit taking Sacco's.

- core capital of not less than ten million shillings;- core capital of not less than ten percent of total assets;- institutional capital of not less than eight percent of total assets; and- core capital of not less than eight percent of total deposits.- maintain fifteen percent of its savings deposits and short term liabilities in liquid assets

The ratios at 31 December 2019 and 2018 were as follows

Core capital of not less that Shs. 10 million

As per statement of financial position 772,213,032 843,232,218

2019 2018b) Core capital of not less than 10% of total assets % % As per statement of financial position 12% 14%

c) Institutional capital not less than 8% As per statement of financial position 5% 3%

68

2017Shs

2018Shs

d) core capital of not less than 8% of total deposits As per statement of financial position 14% 18%

e) Liquidity ration 15% of its savings deposits and short term liabilities in liquid assets.

As per statement of financial position 116% 114%

The society is compliant with all the capital and ratio requirements with the exception of the institutional capital. The directors having discussed this shortfall with the Sacco Societies Regulatory Authority (SASRA) during the year in 2019 were provided with a period of up to 36 months from 31 December 2018 to comply with this requirement. The directors are of the opinion that the increase in this ratio from 3% in 2018 to 5% in 2019 is indication of the society being able to meet this requirement on or before 31 December 2021 and therefore no adverse licensing decision will be taken by SASRA over this period.

24. Incorporation

Safaricom Savings and Credit Co-operative Society Limited is registered in Kenya under theSacco Societies Act as Savings and Credit Co-operative Society and is domiciled in Kenya.

25. Presentation currency

The financial statements are presented in Kenya Shillings (Shs.)

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