Motto Empowering You - Safaricom Sacco · Hon Secretary – Maisha Bora Sacco Director – Co-operative Bank Chairman – CIC Director – ICA Africa Mr. Magomere gave the members

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 17th Annual General Meeting

16 Chairman’s Statement

19 Directors Annual Report

27 Supervisory Committee Report

30 Annual Financial Report

TABLE OF CONTENT

AGM NOTICE 2019

Notice is hereby given on 8th February 2019 to all members of Safaricom Sacco Society Limited, that the Annual General Meeting for the year ended 31st December 2018 shall be held on Saturday, 23rd February 2019 at All African Council of Churches – Desmond Tutu Hall from 10:00am to 1:00pm

The agenda shall be;1. Confirmation of the 2018 Annual General Meeting Minutes2. 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)

Connie KhayundiHon. Secretary

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SOCIETY INFORMATION

BOARD OF DIRECTORS 1. Collins Ogutu Chairman2. Josephine Ndambuki Vice Chairman3. JohnStone Kamunde Treasurer4. Connie Khayundi Hon.secretary5. Bernadette Mutune Director6. Paul Msava Director (WEF 18 February 2018)7. Felix Gakuru Director8. Alex Okoth Director (WEF 18 February 2018)9. Jack Kiche Director (up to 31 May 2018)10. David Mwangi Director (up to 17 February 201811. Samuel Karanu Director (up to 17 February 2018) SUPERVISORY COMMITTEE1. Boniface Muthoka Chairperson2. Patrick Nduati Secretary3. Pamela Nyakoah Member4. Alex Okoth Chairperson (up to 18 February 2018)

MANAGEMENT STAFF 1. Dr. George Ochiri Chief Executive Officer (up to 30 June 2018)2. Cynthia Naisisiae General Manager (joined 2 January 2018)3. Collins Odongo Finance Manager4. Jonathan Asena Business Development Manager5. James Gathuku Internal Auditor6. Tabby Karagu Human Resource Manager7. Kelvin Ebole ICT Manager8. Philbert Kasuku Credit 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.

4. Commercial Bank of Africa LimitedWestlands Branch, Nairobi.

5. UBA Kenya Bank LimitedWestlands Branch, Nairobi.

LEGAL ADVISORS David Kiptum & Company AdvocatesP.O Box 21863, 00100Nairobi

BOA

RD M

EMBE

RS

STAFF

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Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec Total1 1 1 1 1 1 1 1 1 1 1 1 121 1 1 1 1 1 1 1 1 1 1 1 121 1 1 1 1 1 1 1 1 1 1 111 1 1 1 1 1 1 1 1 1 1 1 121 1 1 1 1 1 1 1 1 1 1 1 12 1 1 1 1 1 1 1 1 1 1 1 11 1 1 1 1 1 1 1 1 81 1 1 1 1 51 1 1 1 1 1 1 1 1 1 1 111 1 1 1 1 1 61 1 1 1 1 1 1 1 1 1 1 1 121 1 21 1 2 1 1 2 1 1 1 1 1 5 1 1 1 3

1 1 1 1 1 1 1 1 1 1 1 1 12 1 1 1 1 1 1 1 1 1 1 1 111 1 1 1 1 1 1 1 1 1 1 1 121 1 1 1 1 1 1 1 1 9

1 1 1 1 1 1 1 1 1 9 1 1 1 1 1 1 1 1 1 91 1 1 1 41 1 21 1 2 1 2 1 1 2 1 2 2 1 131 1 1 2 1 1 1 2 1 2 2 2 171 1 1 2 1 1 1 2 1 2 2 2 171 1 2

1 1 2 2 1 1 2 2 1 1 1 2 171 1 2 2 1 1 2 2 1 1 1 2 17 2 2 1 1 2 2 1 1 1 2 151 1 2

1 1 1 1 2 61 1 1 1 2 61 1 1 1 2 6 1 1 1 2 5

2 1 1 1 1 1 1 82 1 1 1 1 1 7 1 1 1 1 1 1 62 2

NamesCollins OgutuJohnstone KamundeConnie KhayundiJosephine NdambukiFelix GakuruAlex OkothPaul MsavaJack KicheBernadette MutuneGeorge OchiriCynthia NaisisiaeSamuel KaranuDavid MwangiPamela NyakoahPatrick NduatiBoniface MuthokaFINANCE & ADMINISTRATION COMMITTEE

Collins OgutuJosephine NdambukiJohnstone KamundeConnie Khayundi

AUDIT & RISK COMMITTEEAlex OkothBernadette MutuneJack KicheSamuel Karanu David MwangiBUSINESS DEVELOPMENTPaul MsavaJosephine NdambukiFelix GakuruDavid Mwangi

CREDIT COMMITTEEBernadette MutuneFelix GakuruAlex OkothSamuel Karanu

NOMINATION COMMITTEEKennedy AukaPhylis MutuaJoseph MwangiTheresa Mruttu

SUPERVISORY COMMITTEEBoniface MuthokaPatrick NduatiPamela Nyakoa OsoreAlex Okoth

SAFARICOM SACCO LTD

BOARD AND COMMITTEE MEETINGS ATTENDANCE

NB: Any meeting above 12 per year is an authorized adhoc meeting to meet Sacco’s objectives

Minutes of the Safaricom Sacco 17th Annual General Meeting Held on Saturday 17th February 2018 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 Guests

Min 1/17/2/2018 Preliminaries* The meeting was called to order by the Chairman at 10.43 Hrs upon the presence of at least 25% of the total number of members or 60 members whichever is less shall constitute a quorum for the conduct of business. * Confirmation of Notice, at least 14 days* Prayer led by Josephine Ndambuki* National anthem led by Felix Akuku

Min 2/17/2/2018 Confirmation of the AgendaThe secretary read the agenda of the meeting as below:1. Confirmation of the 2017 Annual General Meeting Minutes2. Report from the Chairman3. Remarks from Chief Guest4. Report from the Treasurer5. Presentation of the year 2018-2019 Budget6. Report from the supervisory committee7. Amendment of the Bylaws8. Presentation of the 2017 Audited Financial Statements9. Disposal of Surplus for the year 201710. Appointment of Auditors11. Resolutions12. Elections 13. Any Other Business (A.O.B)The agenda was adopted as proposed by Chris Oduor and seconded by Victoria Olubi.

Min 3/17/2/2018 Review and adoption of the 2017 AGM minutesThe secretary took the members through the minutes of the previous AGM held on 18th February 2017.There were no noted corrections in the minutes.The minutes were then adopted as proposed by Michael Borino and seconded by Monica Ng’ang’aMinutes signed in by Chairman in the presence of SaccoMembers

Min 4/17/2/2018 Matters arising from previous minutesThere were no noted matters arising.Minutes adopted for filing by Charles Riani and seconded by George Ochido.

Min 5/17/2/2018 Chairman’s ReportThe Chairman Mr. Collins Ogutu welcomed the members and guest to the 17th AGM. He informed the members that Safaricom Sacco in now a tier 1 Sacco, thus we should do business and behave in line with our status.

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Minutes of 17th

Safaricom Sacco Annual Meeting

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Minutes of 17th Safaricom Sacco Annual Meeting

He also told the members that Safaricom Sacco is among the first Sacco’s to embrace transition to IFRS-9 financial reporting, which has changed the way of doing business at Safaricom Sacco.

On matters strategic plan, he said that the current plan ends in 2018, thus giving way to another strategic plan for 2019 – 2023.

He mentioned ICT risk and cited that Safaricom Sacco will benefit from current trends. He reported that in 2017 there were two attacks on the Sacco systems but the board together with the office were working to laying down strict mitigation measures.

On corporate governance – Safaricom Sacco was way ahead in compliance.

Office block – the dream is still valid but due to prevailing circumstances the Sacco will relocate to a different location which will be handled in the year 2018.

He elucidated that Safaricom Sacco and the whole country at large had challenges in the year 2017 but was quick to commend the Sacco as it was still on track regarding the strategic plan despite the many challenges.

He restated that Safaricom Sacco is still focused on becoming one of the 10 best Sacco’s in Kenya.Chairman’s report was proposed by Daniel Kioko and seconded by Safia Isaac

Reactions to the chair’s report:

Antony Odhiambo asked if the Sacco had started on new negotiations for land.

Peter Njioka wanted to understand the challenges in products.

Elizabeth Nderitu requested if elections can be done online to incorporate those members not able to come for the AGM due to other engagements.

Harry Osore was concerned about working conditions of staff and advised renting out as an option/alternative.

The chairman replied as below: -1st land already purchased.2nd piece stalled. Sellers changed their mind not to sell.

On products the chair clarified that we had done well but we ought to work on them at a higher level.

Electronic elections – approvals required from the regulator.

Space issues in the office already being handled.

Min 6/17/2/2018 Acknowledgement of and Brief Remarks by the Invited GuestThe CEO acknowledged invited guests that were present. The following Guests made brief remarks:

Edward Muturuhiu – Head of Sacco Banking - Co-operative Bank of KenyaMr. Muturuhiu restated that 2017 was a very difficult year for financial institutions in 2017 He congratu-lated Safaricom Sacco for their good performance even in the difficult circumstances. He congratu-lated the board and the secretariat for the good leadership.

He affirmed Co-operative bank support to Safaricom Sacco in upcoming projects as they are a part-ner with the Sacco.


He commended members to partner more with Safaricom Sacco and was pleased with the growth so far.

Mr. Muturuhiu encouraged the Sacco management to continue pursuing ICT as this is the future of all business now. He also the Sacco to embrace customer experience in order to retain members as the world is becoming more competitive.

He wished the board and Sacco members well.

Arnold Munene – KUSCCO Nairobi Region Head.

Arnold conveyed greetings from KUSCCO CEO – Mr. Goerge Ototo.

He praised Safaricom Sacco for being a fast-growing Sacco and was quick to confirm that the Sacco was supporting KUSCCO products. He affirmed that KUSCCO will continue supporting the Sacco as and when required to.

He commended Safaricom Sacco for having worked hard that two members of the board now sits as delegates on the board of KUSCCO.

KUSCCO has been sending other Sacco’s to benchmark with Safaricom Sacco.

Safaricom Sacco is leading in ICT. He also congratulated Safaricom Sacco for the performance in 2017. This is being backed up with a zeal in campaign to become board members. Promised to support in serving Safaricom Sacco. Safaricom Sacco has to be on top of the game.

He urged members to save wisely, borrow affordably and grow.

Japheth Magomere – Chief Guest.

Hon Secretary – Maisha Bora SaccoDirector – Co-operative BankChairman – CICDirector – ICA Africa

Mr. Magomere gave the members present a profile of his life in the Sacco movement.

All Sacco’s are bound by co-operative principles.

Mr. Magomere represented CIC group.

Many people have not appreciated insurance until something happens. Insurance is about the future.CIC and Safaricom Sacco have had a very close relationship since inception.CIC has branches across East Africa.Safaricom Sacco has patronised all products related to the Sacco.

CIC supports Sacco’s in below areas: -● Facilitation of insurance● Capacity building● Engagement in sponsorship and corporate responsibility activities.● Innovative products tailored towards various customers.● Branch networks● Investment solutions● Regional presence

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Mr. Magomere also referred to ICA global 5 pillars. The Blueprint rests on 5 Pillars where game-chang-ing strategies are necessary in order to meet the goals of the decade. These are:• Participation• Sustainability• Identity• Legal Frameworks• CapitalHe reiterated that CIC is committed to serving Safaricom Sacco. He said Safaricom Sacco will impact and empower many members now and it the future.

In conclusion he said that all we are doing on earth is as unto the Lord. Encouraged members to support their Sacco.

Min 7/17/2/2018 Treasurer’s ReportThe treasurer started by inviting the auditors to take members through the report.

Presentation of the 2017 audited financial statements done by Chaudhry Mohamed Asif of PKF Kenya.Financial statements proposed by Edwin Kamar and seconded by Jediel Mbogo.

Reactions to Auditors and Treasurer’s ReportJoe Alando asked to understand why there was a jump of tax from 2 M in 2016 to 23 M in 2017.

Tax – changed treatment of land income classification that affected tax charge of 30%.Samuel Ngugi wanted to understand financial impairment from 25 M to 109 M.

Impairment of loans – all delinquency loans are catered for in the provision.The treasurer told members that responsibility of taking care of NPL is both on members, office and the board.

He also explained that conditions in Kenya in 2017 on NPL’s affected the whole country.

Edwin Kamar clarified that as and when the Kes 109 M is paid by members, this will improve the Sacco’s bottom line.

Vincent Oruta – profit for the year dropped from 93 M to 67 M.

Drop in profit – reserves as required by the regulator have been taken care of in 2017.

Harry Osore wanted to know what the Sacco is doing about institutional capital ratio. The treasurer responded that there has been improvement from 2.6% to 4.2% and the board had given a commit-ment to Sasra of bringing this ratio to a close in the next 2 years.

Peter Gitonga inquired about fixed deposit interest which the CEO explained that interest on fixed deposits do not need an AGM to be paid.

Mr. Kamar to understand what components were affected by the rescheduling in IFRS-9. Books had been classified for 2016 and 2017 shown on pg 69.

Mr. Alando asked the auditor to confirm that the effects of IFRS-9 will not be backdated, thus affect-ing the Sacco in the future. This was confirmed by the auditor that reclassification will not be backdat-ed.

Treasurers reported proposed by Vincent Oruta and seconded by Kephas Ombewa.

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Minutes of 17th Safaricom Sacco Annual MeetingPresentation of the Budget 2018-2019 Treasurer presented the Budget, which included an Operating Revenue Budget of KES 801M for 2018 and KES 929M for 2019. In addition, a Capital Expenditure Budget of KES 629 M for 2018 and 305 M for 2019.Budget proposed by Collate Ongwen and seconded by Steve Mwangi.

Reactions to budget proposals: -Joe Alando – noticed that net surplus had doubled.Peter Njioka – Marketing expenses too high.Edwin Kamar requested that a comparison of previous budget lines and achievements be shared with the members.

Treasurer explained as below: -

Provisions of 103 M are related to other financial expenses.

Yearly comparison will be shared by the Sacco board separately

Marketing expenses in 2017 had been moved to other lines but brought back in the 2018 budget as the Sacco looks for a better way of handling such expenses in the future.

A jump in the appropriations was because Safaricom Sacco are prudent, thus we are prone to adhere to our KPI’s

Albert said that some budget lines are too high. The treasurer informed the meeting that budgets are supposed to stretch the members. All budgets are dependent on quotes. Actual figures to be report-ed in 2018 financial statements.

Samuel Ngugi noticed that personnel expenses were slightly too low. The treasurer reported that all staff involved in land transactions costs were passed to land transactions. Personnel expenses in 2016- 2017 comparatively almost double.

Peter Gichangi asked if the Sacco will borrow monies to take care of the office block. The treasurer clarified that as and when required, the Sacco will borrow as it is authorised to do so by members and the governing bodies.

Budget proposal reactions proposed by Mariam Leribo and seconded by Samuel Ngugi.

Min 8/17/2/2018 Supervisory Committee ReportThe Chair of the Committee Mr. Alex Okoth presented the Supervisory Committee Report for 2017 highlighting the key areas as below: -a) Corporate governanceb) Financial statementsc) Office block projectd) Staffinge) Service to members f) Member empowermentg) Membership and delinquency

He confirmed that generally all key areas had been well handled. NPL’s to be handled more stringent in 2018.

In conclusion, there were no material issues. He urged the board to set the tone from the top.

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Supervisory report proposed by Paul Msava and seconded by Raymond Bett.

Reactions to the Supervisory Committee Report: USSD only linked to Safaricom line. Other providers to be included. – Upgrade to include other service providers.

NPL – measurers of handling this in view of reducing the same in 2018. – Safaricom Sacco taking action and proposals working well to close the issue.

Membership growth. Reactivation of dormant members – office to take care of this.

A member asked to understand what Customer service charter is – a policy document to handle service to members.

Pamela Okoth was seeking clarification on why 2016 taxes are lower than 2017 – implication of the 30% corporate tax on land answered this question.

Patrick wanted to know why the supervisory committee reported that documents were not ade-quately provided, yet this was not picked by the auditors – the supervisory chair clarified that there were no contradictions

Supervisory report reactions proposed by Eillen Nasieku and seconded by Elizabeth Ochieng.

Min 9/17/2/2018 By laws Amendment* WITHDRAWAL FROM THE SOCIETY (By Laws 2016 section 15): Amend the statement: “A member may at any time withdraw from the society by giving a written notice of ninety (90) days. ” to read “A member may at any time withdraw from the society by giving a written notice of sixty (60) days.” as per Sacco Societies Act 2010 Section 22 (3)

Proposed by: Grace MwangiSeconded by: Peter Nyamai

Min 10/17/2/2018 AGM Resolutions 2018* The Board proposes dividend on share capital at 12% amounting to Kshs. 51,785,837 to be paid in March 2018 Proposed by: Kennedy KhayundiSeconded by: Dan Kodawa* The Board also proposes interest on weighted deposits at the rate of 9% of Kshs. 264,188,430 to be paid in March 2018Proposed by: Michael BorinoSeconded by: Joe Alando* Edwin Kamar asked the board that they promised to pay a double digit in 2017. The treasurer clari-fied that since the board had been tasked to take care of the Institutional capital, the double-digit payment was affected but to be seen in 2018 rebates pay-out.* The Board proposes a honorarium of Ksh 1,714,284 to be shared by members of the Board and Supervisory Committee.Proposed by: Vincent OrutaSeconded by: Athony Odhiambo* The Board proposes a staff bonus of Kshs. 3,618,094 equivalents to one month’s salary.Proposed by: Mr. ChegeSeconded by: Kennedy Khayundi* The Board proposes to maintain the maximum borrowing power of Kshs 600 MillionProposed by: Bernard Opiyo

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Seconded by: Safia Issac* The board proposes retention of Board indemnity at Kshs. 3 MillionProposed by: JacksonSeconded by: Onyango Charles* For purposes of Board Member election, the Board recommends to raise the minimum shares from Kshs 20,000 to Kshs 40,000 and deposits from Kshs 300,000 to Kshs 1,000,000. All Board members must be up to date.Proposed by John OrutwaSeconded by Rose Katunge* Peter Gichangi reiterated that for a board member to take care of such huge growth of Safar-icom Sacco, they should be up to the task.John Orutwa suggested that the same be reduced from 1 M to 500k.* Joe Alando quickly reacted that putting board member contributions requirement at 1 M was illegal. Youth should also be encouraged to join the board and 1 M might hinder them from doing so.* Mr. Karani – from the ministry of co-operatives quoted CAP490 rule No. 291 that board members are jointly and individually responsible for the Sacco monies. Thus, they should have a high stake in the Sacco. Voting was done and for 1 M – 418 and 500k – 55

Min 11/17/2/2018Staff of the year – Abraham Teigut

Min 12/17/2/2018 ElectionsElections were conducted by the nominations committee.The Three Board members below were retiring on rotation and eligible for re-election into the Board. Samuel Karanu David Mwangi Connie KhayundiSupervisory Alex OkothTheir positions in the Board were thus declared vacant.

Samuel Karanu stepped down citing commitments that would not enable him to serve the Sacco effectively.Below table shows the members that were nominated and seconded for election as Board mem-bers in each category: CandidateHuman ResourcesPeter NjiokaPaul Msava

Public RelationsAlex OkothDavid MwangiRoy Njoka

General ManagementRichard WaiganjoConnie KhayundiBeatrice MuriithiNicholas MwirigiSalome AnyangoStephen Mutua

Vote

270294

4873321

Stepped Down3891215230

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One candidate was elected from each category and the three candidates declared as winners to join the Board were:

1) Paul Msava – Human Resources2) Alex Okoth – Public Relations3) Connie Khayundi - General Management Skills

Supervisory Committee ElectionsAlex Okoth was due for retirement on rotation from the Supervisory Committee, and having been elected into the Board was not available for re-election. His position was thus vacant.

1) Pamela Osore was voted to the committee

Min 13/17/2/2018 AOBsThere was no AOB that had been received as stipulated by the by laws on AGM.

Min 14/17/2/2018 Closure

The AGM was closed by word of prayer from Josephine Ndambuki at 16.05 PM.Members and guests were then invited to a late lunch.

Signed:

Chair: _____________________________________________ Date: 23rd February 2019 Secretary: _________________________________________ Date: 23rd February 2019 Member: ___________________________________________ Date: 23rd February 2019

CandidatePamela OsoreNasieku Ellein

Votes259199

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STATEMENT BY THE CHAIRMAN, SAFARICOM SACCO LTD ON THE 18th ANNUAL GENERAL MEETING HELD AT DESMOND TUTU CONFERENCE CENTER, NAIROBI ON 23rd FEBRUARY 2019

We gather today in order to review the financial position for year 2018 and also appreciate our projection for the future. Allow me take this opportunity to share my remarks regarding the Sacco performance.

OverviewThis year’s performance demonstrated the strength of our brand as a going concern and a promising future growth through re-energized strategic pillars and adapting new tools in the work place including digitalization of management processes.

Financial PerformanceIn spite of the challenges experienced in FY2018, the society continues to show an upward trajectory as highlighted below:

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- 2,000,000,000.00 4,000,000,000.00 6,000,000,000.00

Total Assets (Shs)

Loans to members (Shs)

Total Deposits (Shs)

Deposits,Loans and Assets (Bns)

2016 2017 2018

-

100,000,000.00

200,000,000.00

300,000,000.00

400,000,000.00

500,000,000.00

600,000,000.00

700,000,000.00

800,000,000.00

2018 2017 2016

Revenue,Share Capital and PAR (Mns)

Revenue (Shs) Share Capital Provision for bad Loans (Shs)

PreambleHonourable members, invited guests, our esteemed Guest of honour, ladies and gentlemen, I take this opportunity to welcome you all to our 18th Annual General Meeting and to thank you for the continued support you have offered the society over the years.

Deposits have consistently grown by an average of 20%, loans to members by circa 20% while total assets have grown by circa 22% for the last three years

Revenue has grown by an average of 25% indicating that members are patronizing our products. We commit to keep reviewing our products to meet your expectation, and urge you to take advantage of these products in order to grow your wealth. Over the period, share capital has also grown by circa 38% on average confirming the commitments mem-bers have shown to grow our SACCOs core capital.

Compliance

The SACCO has fully adopted and implemented the International Financial Reporting Standards (IFRS) 9. In this regard, we have restated the reported numbers for FY2016 and FY 2017 in order to comply with the standard classification. This implementation has enabled the Sacco to restructure its loan book to discharge its institutional mandate while efficiently employing member resources to maximize profits. ICT Risk

Technology remains a key enabler in our continued endeavour to deliver services efficiently and conveniently to our members. To this end, the SACCO will continue making investments in ICT infrastructure to ensure enhanced growth and operations of the SACCO while availing services to members conveniently.

We note the rising cases of cybercrime in the country and particularly the financial sector. The SACCO has faced imminent threats, with real attempts to compromise our channels. These attempts were quickly intercepted by our service provider, thanks to our investment in 24/7 monitoring services through Safaricom PLC to safeguard and monitor our ICT channels and systems.

STATEMENT BY THE CHAIRMANSAFARICOM SACCO LIMITED

Statement by The Chairman

Office Block

The office block project was initiated to provide a home for our SACCO as well as provide an investment channel to our members. However, the prospect of realising office premises at our current location continues to face challeng-es due to unfavourable investment climate in the real estate space and partly due to the orientation of our current piece of land. The board has continuously ensured that the members’ investments remain profitable despite the delay on the office space construction.

In 2018, we felt the need to seek members’ view regarding this investment in view of the underlying challenges. A survey was done and based on the feedback coupled with the strategic plan of the SACCO, the Board of Directors have mapped out the options available with regards to those shares.

Corporate Governance

In adherence to corporate governance principals, the board undertook a board evaluation to assess individual and collective performance towards the strategic growth of the SACCO. The Nominations Committee supervised the activity. I am glad to report that this activity opened our eyes to the future and helped us to map up various areas to target in the coming years.

Strategic Plan 2019-2023

As we begin a new year, we are pleased report the end of a successful 2014-2018 strategy and usher in an exciting and equally challenging journey to the new 2019-2023 Strategic plan. The new strategy is a result of an extensive exercise that involved you our members, champions, staff and the board looking inwards as well as outwards to allow us focus on building excellent customer experience, competitive products and services, best in class technolo-gy to support out operations and competitive HR operations to manage our Sacco. The continued support of mem-bers and stakeholders will enable the SACCO achieve and surpass our ambitious targets as set out in our strategy.

Conclusion

As I conclude, I wish to give you a view of our 2019-2023 strategic pillars in the below table.I take this opportunity to extend our appreciation to all our members, our partners, service providers, SASRA, Ministry of Industry, Trade and Cooperatives, KUSCCO and our Host.I also want to thank and appreciate the Board and Management for working tirelessly in the year to achieve what has been presented here today.

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Collins OgutuChairman

Areas of Focus

People ♠ Quality membership ♠ Competent employees

Service Delivery

♠ Improvement of customer service ♠ Provision of relevant services & products ♠ Member engagement

Finance ♠ Growth on all financial parameters

Technology ♠ Automation of key processes ♠ Deployment of available technologies &

media

Risk Management

♠ Quality Decisions ♠ Quality loan book ♠ Adequate KYC procedures &policies

Stakeholder Engagement

♠ Compliance with regulations

Strategic Themes 2019-2023

Overview

We ushered the Year 2018 with a mixed basket of opportunities and uncertainties due to the global economic imbalances, in addition to the election process and introduction of the new state laws and international account-ing rules.

During the year, the Tax Authority increased taxation in the sector while new International Financial Reporting Standards (IFRSs) came into play. Of important mention is the IFRS 9 (Financial Instruments) whose effect has had and will continue to have a wide ranging impact in the treatment of various elements in the SACCO financials. The IFRS requirements have changed the whole model assessing portfolio risk and hence-forth treatment of loan collat-erals including the old time-tested guarantors’ model which will be under intense testing and scrutiny as many observers portend that the Guarantorship model hardly reduces the risk of doing business in the lending market.

Early in the year 2018 we witnessed the introduction of The Statute Law (Miscellaneous Amendments (No2) Bill) 2018 in parliament that was meant to change the way the SACCOs function. It included proposals to amend the Co-op-erative Societies Act, Cap 490 and the SACCO Societies Act, Cap 490B, and introduce a new, privileged class of SACCO members called Social Impact Members who were supposed to be outsiders –without savings in any SACCO. They were to be allowed to vote only on matters that affect them. They were also not required to attend all meetings like other ordinary members. SACCOs lobbied through the Co-operative Alliance of Kenya and the Kenya Union of Savings and Credit Co-operatives (KUSCCO) citing that the proposals in the Bill posed threats to the survival of SACCOs and that it would distort corporate governance and create a second center of power beyond reproach within the sector.

Policy makers locally and globally have been embracing financial inclusion as an important development priority. It forms a critical enabler for wealth creation, poverty reduction and inclusive growth. It helps households improve their lives and spurs economic activity. It has also been identified as an enabler for 7 of the 17 Sustainable Develop-ment Goals. In Kenya, financial inclusion has grown by 50% in the last ten years. About 75.3% of Kenyans are now formally included, up from 66.8% in 2013, (The 2016 Fin Access Household Survey). It is therefore in this regard that we as Safaricom SACCO take seriously our role of advancing financial inclusion pillar in Kenya and in support and alignment to the SDGs, by offering banking service to all our members and their ecosystems. With the ongoing economic recovery that has led to improved demand for credit from sectors affected by the economic slump witnessed in 2017 due to political uncertainty and severe drought, increased credit appetite from various sectors such as agriculture, real estate, manufacturing and trading has presented interest income growth opportunities to the SACCO industry. Safaricom SACCO has remained well placed to take advantage of the improved economic environment displaying steady growth on products developed to serve our members in the different sectors of the economy.

Governance

To drive the SACCO in achieving its mandate to the membership, Safaricom SACCO is guided by a well-document-ed corporate governance structure. The board believes that effective corporate governance is critical for the stability of the Sacco, the sector and the economy as a whole. It brings discipline in the area of authority, responsibili-ty, accountability, stewardship, leadership, direction and control with a primary objective of safeguarding share-holder interests in conformity with other stakeholder interests. Safaricom SACCO board is committed to ensuring this in the management of the SACCO by ensuring that the members' interests are adequately safeguarded while remaining in compliance with the SACCO by-laws, policies and regulatory guidelines and requirements.

We have an elaborate Board Charter that dictates the role of the Board and the Board’s relationship with manage-ment in running the organization.

The board is headed by the Board Chairman has four sub-committees namely the Finance and Administration, the Credit, the Business Development and the Audit and Risk Sub-committees that give strategic directions regarding operations in the allocated departments and receive operational reports directly from management in those areas for presentation in the monthly board meetings. These key sub-committees have been instrumental in assisting the board in fulfilling its oversight responsibilities and working towards achieving the strategic plan.

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Directors’ Annual Report

19

Directors’ Annual ReportGender Equality and Board Remuneration

The board has further strived to achieve the1/3 rule on gender balance in the composition of the Board of Directors as they execute their mandate. This to ensure quality discussions and views that cater for both genders when discuss-ing policy and operational matters.The Non-executive directors are paid a sitting allowance based on the attendance to the required board and com-mittee meetings. Expenses incurred with respect to travel, accommodation and other expense incurred while carry-ing out SACCO duties as a Director are reimbursed at cost. Directors are however not eligible for pension, medical or statutory benefits. The details of allowances and reimbursements are available under note 3 (b).

Appointment to Board.

In 2015, the Board established a Nominations Committee in order to strengthen the process of governance in the SACCO. One of their roles is to help in Board appointments and Board evaluation. Every year Vacancies to the Board are filled through a competitive nomination process handled by the Nominations Committee. Members apply for nomination in Q3 of the year prior to the next AGM. The committee short lists the members in accordance with the existing SACCO needs and presents the vetted and cleared applicants to the members to contest for the vacant positions in the main Board and in the Supervisory Committee through a democratic election during the AGM.

The successful candidates go through a rigorous induction program conducted by the cooperative University of Kenya. Furthermore, a well-structured orientation programme by the GM on the office matters is arranged within the first month of taking office.

During the year, the Board approved at least one Board evaluation session per year effective 2018. The Nomination Committee conducted the first board evaluation on 18th of December 2018. This exercise focuses on deepening governance practices and helping the Directors to ensure continuous improvement within the Sacco and also capacity building on individual Board members.

The Board recognizes that in some instances, they will require external advice from experts in the industry from time to time to facilitate appropriate decision making in order to safeguard on the SACCO affairs. Below are some of the highlights of 2018 subcommittee’s achievements;

BUSINESS DEVELOPMENT

The committee is mandated with the responsibility of overseeing member Training, the ICT, Marketing and Customer Service arms of the SACCO.

Safaricom Sacco has been in the frontline of implementing innovations within the Savings and Credits movement in Kenya. The adoption and utilization of Information and Communication Technology (ICT) has been fundamental to providing competitive services to meet the current and future needs of the membership. In the year ended, the SACCO successfully upgraded and improved the Web Portal, and implemented a new robust interactive website. This was necessitated by the need for creating convenience to the member wherever they are and giving the Sacco a competitive edge over the competition in service delivery. The Sacco also, after an extensive and inten-sive search, contracted a partner to provide an advanced core banking system to help address the future needs of our SACCO. This coming year of 2019, will see the SACCO adopt a new Core SACCO System that will be more robust and dynamic, mainly focusing on Customer Service, Data Integrity and Reliability.

In line with the spirit of cooperation among cooperators, Safaricom SACCO participated in several activities such as the Ushirika day and hosted benchmarking sessions with several Sacco’s in Kenya including Motswedi SACCO from Botswana. We continue engaging with the different stakeholders as we grow in the movement. Our medium term focus in line with our 2019 - 2023 strategic plan is to attain top 10 DT SACCO status by investing in the below areas;• Expanding and evolving our member and partner relationshipsfrom management in those areas for presentation in the monthly board meetings. These key sub-committees have been instrumental in assisting the board in fulfilling its oversight responsibilities and working towards achieving the strategic plan. • Clear and Distinguished customer segmentation• A focus on Innovation and product development• Creation, Restoration and maintaining revenue streams• Containment of cost in line with organizational growth and capacity

20

Directors’ Annual ReportAs part of member training and awareness on the Sacco products and services, Safaricom SACCO regularly hosts Open day sessions that seek to educate our members as well as bring services closer to their places of conve-nience, the Sacco held Open Day’s that took place in three regions namely: Safaricom PLC Jambo Contact Centre -JCC, HQ 1 & 2 and Nokia. These Open Day’s enable members enjoy various offers ranging from financial clinic, free Car-Checks, discounted rates on phones among many others from our accredited suppliers and partners.

We also conduct a very elaborate member education drive across the major regions in the country where our mem-bers are located. This year’s activity received very good feedback from our members. We continue to engage Champions who are our ambassadors and are closer to our membership in keeping in touch with our members. We appreciate their good work and the support they gave the leadership team throughout the year.

Our Top Savers Forum has become a source of inspiration for members to save. This year’s breakfast forum focused on enlightening members on how to leverage the SACCO as they seek investment opportunities in line with the BIG 4 agenda. We acknowledge the growth of millionaire savers amongst our members and challenge all of us to strive to be among the millionaires club by cultivating an accelerated savings discipline and patronizing our products.

Being a top Sacco, we have deliberately chosen to encourage "Chamas" to find a home at Safaricom SACCO. This bold step is aimed at both providing financial inclusion to this informal segment in our community by providing formal banking services and also helping the members to grow their wealth by reinventing the existing Chama prod-uct to meet the needs of modern day Chama’s enabling them access development loans as a result of their pooled savings.

With growth in membership numbers, the Sacco deliberately opened a Service desk at the recently opened Safar-icom PLC Call Center in Eldoret to enable us serve and reach more of our members.

With evolving member needs, the Sacco has put an effort in keeping its product offering lean and in line with mem-ber’s current and future needs. The introduction of a Micro-Mortgage product is under way and will be rolled out this coming year. This will actualize the dream of our many members who have wanted to become home owners. The Maximum loan facility will be 30M to be serviced over a period of 12 Years, at an interest rate of 13% p.a. This product will be available to members during the first half of 2019. The Sacco has also partnered with motor vehicle importers and dealers to allow members import quality second hand vehicles from source, at reasonable rates, delivered to Nairobi, creating a hassle free experience our members.

Member Education Day at NyeriMember Education day at Kisumu

Members during the 2018 Top Savers

21

Directors ‘Annual ReportAs a Sacco we deliberately work towards creating tangible wealth for our members. This has been made possible for the members through the access of loans to purchase land projects facilitated by the Sacco. 2018 saw 169 mem-bers acquire land in Joska and Limuru.

Corporate Social Responsibility: In line with the need to participate in the society and also within the Social, Econom-ic and Environmental pillar of our strategy, Safaricom Sacco staff made a visit to the Kenyatta National Hospital Cancer children’s wing. Other than donating Wheel chairs, crutches and an assortment of Christmas gifts, it was a day of play and laughter for both the children and the Sacco staff. It is such events that create a sense of purpose and fulfillment to everyone and remind us of our core responsibilities to society. In the past 3 years we have consis-tently supported organizations that directly support the less privileged in the society. We have continuously printed our calendars though Ahmadiyya Raqeem Press Ltd who in turn support the community in terms of Education promotion.

CREDIT

The Credit subcommittee is mandated to provide oversight of SACCO policies and activities relating to the identifi-cation, assessment, measurement, monitoring and management of the Sacco’s Credit risk and lending business. In the year 2018, efforts were geared towards implementation of key actions towards compliance and ensuring a healthy and manageable loan book. These activities included;

• Review of the credit policy and introduction of collateral based loans including collateral charging.• Engagement of guarantors in the process of tracking loans performance including transfer of defaulted loans to respective guarantors. • The SACCO revamped the debt collection process by on-boarding two external debt collection firms in order to accelerate recoveries with the overall objective of reducing Portfolio at Risk.• Improved SLA’s for loan processing with an average of as low as one-hour loan processing turnaround time for short term loans and 3 days processing of development loansBy the close of 2018, the performance of Miradi Loan product improved significantly from Kes 250.5M in 2017 to Kes

KNH Staff receiving Safaricom Staff during 2018 CSR at KNH

Safaricom Sacco Staff sharing Christmas goodies with Patients at KNH

22


412.9M in 2018, allowing members to complete various projects since the process of security perfection has been streamlined to ensure efficiency in cases where members are using collateral.

FINANCE AND ADMINISTRATION

The Finance and Administration (F&A) subcommittee is mandated with the formulation, review and advise on policies and procedures in all matters relating to finance, business, Human Capital and administration. It is also the implementation enforcement arm of the board as it is directly responsible for staff matters. The committee also ensures that the tracking of key performance indicators is in line with annual budget and strategic plan pillars is harmonized across the organization. The committee is also the custodian of the organization’s signing mandates where any three of the members in the sub-committee can approve by signing any of the contractual documents that commit the organization into the future including approvals of payments, contracts and letters of staff engage-ment. The committee is also responsible for ensuring that the SACCO has a good relationship with other Key stake-holders including regulators, the Nominations Committee, and the parent company among others. Additionally, the Committee is the custodian of the organization strategy since the chairman of the board sits in the committee.

In 2018 the Sacco performance was considerably improved compared to 2017 as shown below;

• Total Assets increase (Billion) by 19% from KES 4,953 to KES 5,909 • Total Loans to members (Billion) by 12% from KES 4,274 to KES 4,779• Increase in Revenue (Million) by 11% from KES 585 to KES 647• Share Capital increase (Million) by 31% from KES 509 to KES 667

However, the above growth was dampened due to the inevitable result of the Implementation of IFRS 9 (Financial standards), that led to wide reclassifications of various loan accounts resulting in our Portfolio at Risk increasing from Kes 373M in the year 2017 (8%) to Kes 390M in the year 2018, 6% of the total loan book. The effect of the new loan provisioning was heavily realized in 2018 as a result of absorption of the previous year’s (2017) restatement.

Through the committee, the HR Policy was revised in line with the 2019/2023 Strategic plan and the SACCO has also aligned its organogram in order to bring in talent that will steer it to achieve the 2023 strategic plan.

Towards staff motivation, the Committee has designed a structure to reward employees whose performance is outstanding either individually or through teams that contribute to the overall objective of the Sacco.

In order to improve the social wellbeing of the staff, several welfare programs have been maintained in the Sacco. These include among others; an enhanced medical cover, pension scheme and a group life cover. Other staff events that are facilitated through the year include; team buildings, emphasis on family through celebrating staff birthdays, newborn visits, hand of comfort and end of year party. These activities are aimed at building all round human capital and go a long way in promoting staff morale and increasing overall productivity in the office.

AUDIT AND RISK

The Audit and Risk subcommittee is one of the key operating committees of the SACCO and its primary purpose is to provide board oversight on the financial reporting process, the audit process, the company's system of internal controls and compliance with laws and regulations. The board remains committed to strong risk management prac-tices being an integral part of good management, while being responsive to the ever-changing environment that the SACCO operates in.

In carrying out its responsibilities, the Audit Committee has set out flexible policies and procedures and encourages the organization to remain flexible enough to be able to adopt the demands of the financial environment. This ensures quick and timely responses are taken in regard to risk mitigation and assures the Board of Directors and shareholders that the corporate accounting and reporting practices of the Sacco are efficient.

The committee directly supervises the internal auditor and also ensures that the services of the external auditor are shielded from interference by the Board or Management in order to assure independent reporting. The committee also ensures that various recommendations by the supervisory committee and the regulators are followed and implemented. During the year, the committee reviewed and reported on most of the policies and processes existing in the organization and provided recommendations on various gaps identified through numerous detailed monthly audit reports presented to the Board.

Empowering You!0722 004 0650722 002 685

Safaricom Sacco Ltd safaricomsacco

Best SACCO Mobile Banking

APP (Winner)

SACCO Assurance

Award (Winner)

Best SACCO Adoption of

Digital Solutions (Winner)

Highest KUSCCO Rebates

2017 (Winner)

Most Improved SACCO Tier1 (Position 2)


The thematic areas covered and reported on included governance, policies and procedures, routine functional and system audits, risk management, regulatory and compliance audits.

Internal and External Auditors’ Oversight Responsibilities

The Audit and Risk Committee is responsible for monitoring and reviewing the integrity of the financial statements, while overseeing the relationship with the external auditors; including their independence and management’s response to any major external audit recommendations. The Internal audit function complements this role by ensur-ing all operational recommendations are implemented.

The External Auditors complement the governance process by identifying and assessing the risks of material misstatement of the financial statements, and evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. They then report their findings to the Society through the laid down governance and regulatory structures for implementation.

Conclusion

To affirm the effectiveness of this governance structure, in the year 2018 we received several awards cited below arising from sound leadership.

We take this opportunity to thank all the Sacco members and Stake holders for giving us an opportunity to serve you. We look forward to serve you better in 2019 as we grow and elevate the Sacco to be a top 10 Tier1 Deposit Taking Sacco.

23

CS/9510 SAFARICOM SACCO OPERATING BUDGET YEAR 2019/2020

25

BUDGET

ACTUAL APPROVEDREVENUE YEAR 2018 YEAR 2018 YEAR 2019 YEAR 2020

KSHS KSHS KSHS KSHS

Interest on loans and advances 603,584,452 801,279,744 814,839,010 1,096,833,174 Other interest income 6,012,157 9,401,538 23,916,697 29,271,705

Total interest 609,596,609 810,681,282 838,755,707 1,126,104,879

Less: Interest Expenses 265,429,910 399,515,969 403,203,969 524,165,159

Net Interest income 344,166,699 411,165,313 435,551,738 601,939,720 Other operating income 12,244,135 12,935,400 15,468,109 20,108,542

12,244,135 12,935,400 15,468,109 20,108,542 Total Income 356,410,834 424,100,713 451,019,848 622,048,262

EXPENSESFinancial expenses (78,627,021) 34,720,000 61,900,000 80,470,000 Administration expenses 50,085,260 32,549,432 41,631,940 49,701,522 Personnel expenses 47,807,650 59,874,391 53,447,107 69,481,239 Governance expenses 14,163,078 16,473,525 22,596,124 29,374,961 Marketing expenses 4,658,788 12,473,033 12,655,362 16,451,971 Depreciation and Amortization 7,631,983 13,989,132 5,702,590 7,413,367

Total expenses 45,719,738 170,079,513 197,933,123 252,893,059

Net operating surplus 310,691,096 254,021,200 253,086,725 369,155,203

Less Tax Expenses 1,449,618 3,985,680 4,075,160 5,297,708

Net operating surplus 309,241,478 250,035,520 249,011,565 363,857,495

Proposed Final Dividend for the year 68,961,025 68,407,382 88,929,596.29 115,608,475

BUDGETPROPOSED

CS/9510 SAFARICOM SACCO OPERATING BUDGET YEAR 2019/2020

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ANNUAL STATEMENT BY THE SUPERVISORY COMMITTEE ON THE 23rd FEBRUARY 2019 AGM HELD AT ALL AFRICAN CHURCHESS –DESMOND TUTU HALL.

To the guest of honor, State department of co-operatives, Fellow cooperators, Ladies and Gentlemen, on behalf of the supervisory committee, I thank you all for finding time out of your busy schedule to attend this important occasion of the Safaricom Sacco AGM. Mandate

The supervisory committee makes internal audits that ensure corporate records are prepared accurately, internal controls, policies and procedures are maintained and followed and makes periodic reports and findings to the board. The ultimate goal is to ensure that the board serves the interest of the society, members as well as safeguards the resources entrusted to them.

1. Financial and management reporting

The committee audited and examined the financial and management accounts on a regular basis. Areas covered and presented to the board included financial statements, financial performance review, liquidity position, cash and bank reconciliation statements among others. It’s in the opinion of the committee that the financial statements presented by the board are a true and fair reflection of the financial position of the Sacco. However, the committee recommended that the Sacco needed to have a cash and liquidity policy to offer guidance relating to optimization of cash and investment. In addition, there should be adequate provisioning of expenditure on a monthly basis to ensure the management accounts presented are accurate to assist in decision making.

2. Credit Management

The committee audited various areas in credit and debt management and noted concerns in some areas which were communicated to the board and management and action points agreed thereon. These areas include CRB listing for defaulters, loan appraisals and loan recoveries. The committee evaluated the credit policy and recommended changes to be effected on it. The committee also reviewed the exposure the Sacco had in regards to assets held as collateral and recommended for full monitoring and reporting of guarantees and loan securities in monthly financial reports.

27

Supervisory Committee

Supervisory Committee Report

3. Corporate governance

The committee noted that the board has continued to conduct Sacco affairs in the best practice. The board proactively reviewed the 2014-2018 strategic review and also committed to have the 2019-2023 strategic plan prepared and implemented. In response to an issue raised in 2017, we observed that the board carried out its own performance evaluation in the year 2018. The board should put in place clear guidelines and policies in relation to co-opting of a board member in case a vacancy comes up.

In relation to management of members, it was the desire of the committee to see recruitment of quality mem-bers to reduce high number of dormant members. In addition, the board should set up proper mechanisms to ensure only bona fide members participate in the AGM and any other Sacco activity.

4. Compliance and Regulations

The committee reviewed compliances in various areas including adherences to IFRS9 and SASRA regulations. The committee applauds the board for the efforts put in this area to comply with the regulations such as loan provisioning. However, we strongly advise the board to fully comply with institutional capital as per SASRA requirement among other regulatory requirements.

5. I.C.T

During the year 2018, the Sacco was faced with a cyber-attack on its mobile banking platform. The board quick-ly put up measures to prevent further attacks. However, the board needs to speed up the set up the new software and consider developing our own mobile banking platform as a backup from the one provided by the vendor. In addition, measures should be setup to mitigate losses which may occur from such attacks. A mecha-nism to track all incidents that occur should be setup and follow up with the vendor done for the resolution of the same to guarantee better customer experience to the members.

6. Human Resources Management

The committee examined the recruitment and payroll process and noted with satisfaction that the Sacco has maintained desirable payroll system. The committee advised the board to setup a comprehensive pre-employ-ment screening process such as background checks for all new employees joining the Sacco. This has prevent-ed the Sacco from recruiting unscrupulous individuals. It’s also in the year under review that evidenced three senior personnel leaving the Sacco. The committee sought for an explanation from the board and satisfactory response in this regard was given. The board also gave assurance that they would recruit highly skilled and competent personnel to replace the staff who had left.

Conclusion

We thank you all members for the mandate you gave us to oversee Safaricom Sacco, board and management operations. We commit to continue serving you better by following up on the Strategic plan implementation, adherence to the regulator, setup of the new ICT system and the building of the office block which will see the Sacco grow beyond your expectation. Thank you all.

SUPERVISORY COMMITTEE REPORT

28

29

30

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

ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

Annual Financial Report2018

31

REPORT OF THE DIRECTORS

The directors submit their annual report together with the audited financial statements for the year ended 31 December 2018 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 members.

INVESTMENT SHARES

The issued and paid up share capital of the society was increased during the year fromShs. 509,794,751 to Shs. 667,884,362.

DIVIDENDS AND INTEREST

The directors recommends payment of 12% per share (2017: 12% per share) ammounting to a total of Kshs 68,961,025 (2017: Kshs 51,785,837)

BOARD OF DIRECTORS

The directors who held office during the year and to the date of this report are shown on page 1. In accordance with society’s Articles of Association, the directors; Felix Gakuru, Josephine Kamanthe and Collins Ogutu retire by rotation and being eligible, offer themselves for re-election.

INDEPENDANT 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 18th February 2019

Secretary

*Refer to note 22

RESULTS

Profit before tax

Income Tax expense

Profit for the Year

Interest on Member’s Deposits

2018 (Kshs.)

310,691,096

(1,449,618)

309,241,478

237,822,335

2017 (Kshs.)

153,877,880

(22,669,034)

131,208,846

264,188,430

*

Annual Financial Report

FINANCIAL AND STATISTICAL INFORMATION

As at 31 December 2018 2017 Numbers Numbers

Membership Active 9,583 9,655 Dormant 3,893 1,578

Total 13,476 11,233

2018 2017Financial Shs Shs

Total assets 5,890,773,792 4,953,348,140Total members deposits 4,739,912,767 4,093,135,515External borrowing - 4,595,984Loans and advance to members 4,779,956,551 4,274,081,829Investments 96,765,396 82,523,180Core capital 843,232,219 523,248,161Investment shares 667,884,362 509,794,751Institutional capital 175,347,857 13,453,410Total revenue 621,840,744 585,120,432Total interest income 602,545,556 485,614,220Interest on members deposit 237,822,335 264,188,430Total expenses 311,149,648 431,242,552Statutory reserve 88,090,065 26,241,769Appropriation account 4,037,143 (94,877,295)Loan loss reserve - 16,043,475

Key ratios: 2018 2017 % %Capital adequacy ratios

Core capital/Total assets 14% 11% Minimum ratio 10% 10%Core capital/Total deposits 18% 13% Minimum ratio 8% 8% Institutional capital/Total assets 3% 0% Minimum ratio 8% 8%Liquidity ratioLiquid assets/Total deposits & Short-term liabilities 114% 33% Minimum ratio 15% 15%

Operating efficiency/loan quality ratios

Administrative expenses /Total revenue 8% 34% Total expenses /Total revenue 50% 74% Interest to members deposits/Total revenue 43% 45%Interest rate on members' deposits 6% 9% Dividend rate on members share capital 12% 12% Total delinquent loans/Gross loan portfolio 6% 8%

32


* Refer to note 22

*As restated

33

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 detection of fraud and other irregularities.

The directors accept responsibility for the preparation and fair presentation of these financial statements in accordance 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.

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 2018 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 18th February 2019 and signed on its behalf by:

__________________________________________Chairman

___________________________________________Treasurer

___________________________________________Board member

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

To the guest of honor, State department of co-operatives, Fellow cooperators, Ladies and Gentlemen, on behalf of the supervisory committee, I thank you all for finding time out of your busy schedule to attend this important occasion of the Safaricom Sacco AGM. Opinion

We have audited the financial statements of Safaricom Savings and Credit Co-operative Society Limited (the society) set out on pages 9 to 50, which comprise the statement of financial position as at 31 December 2018, 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 2018, 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 state-ments 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.

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 respective 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 collater-al 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

Report of Independant Auditor

35

Information technology control environment

The society is highly dependent on information systems and controls over access rights to such systems are critical and therefore 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, supervisory 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 knowledge 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 material 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 material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

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

Report of Independant Auditor

36

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the society’s internal control.• 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 finan-cial statements or, if such disclosures are inadequate,to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the 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 requirements 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 significance 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.

CPA Chaudhry Mohamed Asif, P/No. 2059

Certified Public Accountants Nairobi

Signing partner responsible for the independent audit


37

38

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

2018 2017 Notes Shs ShsRevenue *As restated Interest income:Interest on loans and advances 2 (a) 596,533,399 479,592,517

Other interest income 2 (b) 6,012,157 6,021,703

Total interest income 602,545,556 485,614,220

Interest expenses 2 (c) (265,429,910) (295,798,241)

Net interest income 337,115,646 189,815,979

Net income from member land transactions 2 (d) 7,051,053 89,126,175

Other operating income 2 (e) 12,244,135 10,380,037

Impairment charge on loans and advances 3 (a) 78,627,021 (45,920,343) Governance expenses 3 (b) (14,163,078) (14,115,954) Personnel expenses 3 (c) (47,807,650) (43,750,955) Administrative expenses 3 (d) (50,085,260) (20,855,321) Other operating expense 3 (e) (7,631,983) (8,468,283) Marketing expenses 3 (f ) (4,658,788) (2,333,455) Profit before tax 310,691,096 153,877,880Income tax expense 4 (a) (1,449,618) (22,669,034)

Profit for the year 309,241,478 131,208,846

Other comprehensive income:

Items that may be reclassified subsequently to profit or loss:- Fair value gain on available for sale financialassets 8 - 488,865

Total comprehensive income 309,241,478 131,697,711

Dividend:

Proposed final dividend for the year 18 (v) 68,961,025 51,785,837

The notes on pages 43 to 69 form an integral part of these financial statements.

Report of the independent auditor - pages 34 to 36.

* Refer to note 22


39


STATEMENT OF FINANCIAL POSITION As at 31 December 2018 2017 2016

ASSETS Notes Shs Shs Shs *As restated *As restated Cash and bank balances 5 728,367,467 228,465,522 274,481,945Receivables and prepayments 6 62,070,523 67,949,400 46,599,356Loans and advances to members 7 4,779,956,551 4,274,081,829 3,257,369,998Financial assets 8 96,765,396 82,523,180 67,397,637Inventory 9 21,447,236 108,806,170 47,023,801Property and equipment 10 183,305,004 188,715,204 194,705,251Intangible assets 11 1,609,040 2,806,835 4,123,234Tax recoverable 4(b) 17,252,275 - -

Total assets 5,890,773,492 4,953,348,140 3,891,701,222

LIABILITIESOther payables 12 39,492,331 48,742,216 38,007,370Deposit for land 13 30,313,840 - -Interest due to members 4 237,822,335 264,188,430 204,908,503Withdrawable deposits 14 379,666,283 499,376,853 455,508,270Member deposits 15 4,360,246,484 3,593,758,662 2,840,623,149Borrowings 16 - 4,595,984 9,066,666Tax payable 4(b) - 19,437,834 638,119

5,047,541,273 4,430,099,979 3,548,752,077

FINANCED BYInvestment shares 17 667,884,362 509,794,751 419,221,147Statutory reserve 18(i) 88,090,065 26,241,769 -Fair value reserve 18(ii) 14,259,624 14,259,624 13,770,759Appropriation account 18(iii) 4,037,143 (94,877,295) (148,524,879) Loan loss reserve 18(iv) - 16,043,475 16,509,819Dividend account 18(v) 68,961,025 51,785,837 41,972,300

843,232,219 523,248,161 342,949,145

Total liabilities and capital 5,890,773,492 4,953,348,140 3,891,701,222

The financial statements on pages 38 to 69 were approved and authorised for issue by the board of directors on 18th February 2019 and were signed on its behalf by:

_______________________________________CHAIRMAN

_______________________________________BOARD MEMBER

_______________________________________BOARD MEMBER

The notes on pages 43 to 69 form an integral part of these financial statements. Report of the independent auditor - pages 34 to 36.

*Refer to Note 22.

40

STA

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41

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* Re

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2


42

STATEMENT OF CASH FLOWS

2018 2017 Notes Shs ShsCash Flows from operating activities

Interest income 2 (a) 596,533,399 479,592,517Other interest income 2 (b) 6,012,157 6,021,703Other operating income 2 (d) 12,244,135 10,380,037Revenue from land contracts with members 2 (e) 191,810,153 244,161,340Interest payments (291,796,005) (236,518,313) Payment to employees and suppliers (217,085,632) (248,573,064)

Net cash from operating activities 297,78,207 255,064,220

(Decrease) in operating assetsLoans and advances to members 7 (522,808,895) (1,123,044,186)

Increase in operating liabilitiesDeposit for land 30,313,840 - Members savings 15 646,777,252 797,004,096

Net cash (used in)/from operating activitiesbefore income taxes 452,000,404 (70,975,870) Income tax paid 4 (b) (38,139,727) (3,869,319)Net cash from/(used in)operating activities 413,860,677 (74,845,189) Cash paid for purchase of property and equipment 10 (1,424,306) (740,329)Cash paid for purchase of intangible assets 11 - 75,151Purchase of investments and securities 8 (14,242,216) (34,636,678) Proceeds from disposals of financial assets 8 - 20,000,000

Net cash used in investing activities (15,666,522) (15,301,856)

Financing activities

Proceeds from shares issue 17 158,089,611 90,573,604Repayments of borrowings 16 (4,595,984) (4,470,682) Dividend paid 18(v) (51,785,837) (41,972,300)

Net cash from financing activities 101,707,790 44,130,622

Movement in cash and cash equivalentsIncrease/(decrease) in cash and cash equivalents 499,901,645 (46,016,423) Cash and cash equivalents at start of year 228,465,522 274,481,945

Cash and cash equivalents as at end of the year 5 728,367,467 228,465,522

The notes on pages 43 t0 69 form an integral part of these financial statements. Report of the independent auditor - pages 34 to 36.


43

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 other-wise 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 liabilityat 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 measurement 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 disclo-sures set out in note 21 with regards to minimum capital requirements, the directors are of the opinion that the society is well placed to continue 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 revised standards and interpretations that have become effective for the first time in the financial year beginning 1 January 2018 have been adopted by the society. Of those, the following has had an effect on the society’s financial statement

International Financial Reporting Standards 9 (IFRS 9): Financial Instruments

The society has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1January 2018, which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The society did not early adopt IFRS 9 in previous periods.

As permitted by the transitional provisions of IFRS 9, the society elected not to restate comparative figures. There-fore the adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in opening retained earnings.

Consequently, for notes and disclosures, the consequential amendments to IFRS 7 disclosures have also only been applied to the current period. The comparative period notes and disclosures repeat those disclosures made in the prior year.


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The adoption of IFRS 9 has resulted in changes in the accounting policies for recognition, classification and mea-surement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 'Financial Instruments: Diclosures'.

Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the society. Further details of the specific IFRS 9 accounting policies applied in the current period are described in more detail in note 1 (f) and note 20.

i) Classification and measurement of financial instruments

The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 January 2018 are compared as follows:

There was no significant impact on the carrying amounts between IAS 39 and IFRS 9 on other financial instruments i.e cash and cash equivalent and unquoted share .

(ii) Reconciliation of statement of financial position balances from IAS 39 to IFRS 9

The society performed a detailed analysis of its business models for managing financial assets and analysis of their cash flow characteristics. For more detailed information regarding the new classification requirements of IFRS 9, refer to note 1 (f). The following table reconciles the carrying amounts of financial assets, from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 January 2018:

Loans and advances 4.274,081,829 Amortised cost 4,178,520,638

IAS 39 Carrying amount

31-Dec-17Shs.

IFRS 9 Carrying amount

01-Jan-18Shs.

RemeasurementShs.LOANS AND ADVANCES

Balance under IAS 39 31 Dec 2017

Remeasurement: ECL allownce

Balance under IFRS 9 Carrying amount

4,274,081,829 4,274,081,829

(95,561,194) (95,561,194)

4,274,081,829 (95,561,194) 4,178,520,635

(iii) Significant and material impacts

• Total provision for impairment of loans and advances increased by Shs. 95,561,194 from Shs.373,367,636 as at 31 December 2017 to Shs. 468,928,830 as at 1 January 2018;

• The loan loss reserve of Shs. 16,509,819 as at 31 December 2017 has been released to retained earnings on account of the additional IFRS 9 provisions for impairment;

• Overall decrease in equity due to adoption of IFRS 9 is Shs. 95,561,194.

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:

IAS 39Measurement

categoryShs

Carryingamount

31 December 2018Shs

IFRS 9Measurement

categoryShs

Carryingamount

1 Jan 2018ShsFinancial Assets

Loans and advances


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Annual Financial Report • Amendments to IAS 12 'Income Taxes' effective for annual periods beginning on or after 1 January2019 clarifying on the recognition of income tax consequences of dividends.

• Amendments to IAS 19 'Employee Benefits' effective for annual periods beginning on or after 1January 2019 clarifying the effects of a retirement benefit plan amendment, curtailment or settlement.

• Amendments to IAS 23 'Borrowing Costs' effective for annual periods beginning on or after 1January 2019 clarifying that specific borrowings remaining unpaid at the time the related asset is ready for its intended use or sale will comprise general borrowings.

• Amendments to IAS 28 'Investments in Associates and Joint Ventures' effective for annual periods beginning on or after 1 January 2019 clarifying that IFRS 9 is only applicable to investments to which the equity method is not applied.

• Amendments to IFRS 3 'Business Combinations' and IFRS 11 'Joint Arrangements' effective for annual periods beginning on or after 1 January 2019 in relation to remeasurement of previously held interests on a joint operation on obtaining control.

• Amendments to IFRS 9 'Financial Instruments' effective for annual periods beginning on or after 1January 2019 clarifying that the existence of prepayment features with negative compensation will not in itself cause the instrument to fail the amostised cost classification.

• IFRS 16 ‘Leases’ (issued in January 2017) effective for annual periods beginning on or after 1January 2019, replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an Arrangement Contains a Lease’ and their interpretations (SIC-15 and SIC-27). IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions.• IFRS 17 ‘Insurance Contracts’ (issued May 2017) effective for annual periods beginning on or after 1January 2021 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts.

• IFRIC 23 'Uncertainty over Income Tax Treatments' (issued June 2017) effective for annual periods beginning on or after 1 January 2019 clarifies the accounting for uncertainties in income taxes.

The directors expect that the future adoption of IFRS 16 may have a material impact on the amounts reported. However, it is not practicable to provide a reliable estimate of the effects of the above until a detailed review has been completed. The directors do not expect that adoption of the other 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 associated 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;

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• 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 associated 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 of Default (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 recognition.

• Stage 1 - If, at the reporting date, the credit risk of non-impaired financial instruments has not increased signifi-cantly 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 recogni-tion, 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 allow-ance 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 presump-tions 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 avail-able 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 avail-able. Where level 1 inputs are not available, the society makes use of financial models or engages third party qualified values to perform the valuation and provide inputs to the model.

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 regu-lar basis. During the financial year, the directors determined no significant changes in the useful lives and residual values.

C) Revenue recognition

i) interest income and expense

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liabili-ty 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 finan-cial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial


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liability. When calculating the effective interest rate, the society estimates cash flows considering all contractual terms of the financial instrument but does not consider 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.

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

iii) Other income

• 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.

• The Sacco facilitates land buying from third parties by members through helping in negotiations and issuance of loans. Revenue from such facilitation is recognised when the transaction is substantially complete with all risks and rewards having passed from the seller 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.

Freehold land is not depreciated.

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 (%)Land 2.5Motor vehicles 25Furniture and fittings 12.5Office equipment 12.5Computers 30

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

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

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 revalua-tion 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 reducing basis over their 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.

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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 value and 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 repre-sent 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 recognition 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 criteria for 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 arrange-ment 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.

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).


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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 reclassified 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 instru-ment 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 instru-ment. (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 contractual 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.

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


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• 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 renegotiated or otherwise modified between initial recognition and maturityof the financial asset. A modification affects the amount and/or timing of the contractual cash flows either imme-diately 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 immedi-ately 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 contractual 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 exten-sion of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repay-ment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to cove-nants. 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 accor-dance 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 substantial 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 modification. The society moni-tors 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 derecogni-tion, the society determines if the financial asset’s credit risk has increased significantly since initial recognition by comparing:

• 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 experience 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


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significantly higher than what was expected at initial recognition 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 expected 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 collateralised 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-offLoans 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 constitutes 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. Any resultant 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 valuation 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. The society's financial liabilities which include creditors and accrual and borrowing and grants fall into the following categories:

Financial liabilitiesThe society's financial liabilities which include creditors and accrual and borrowing and grants fall into the following categories:

Financial liabilities measured at amortised cost : These include borrowings, other payables member deposits and other creditor and accruals. These are initially measured at fair value and subsequently measured at amortised cost, using the effective interest rate method.


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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 account-ed for as prepayments under trade and other receivables and amortised over the period of the facility.All other borrowing costs are recognised in profit or loss in the year in which they are incurred. All financial liabilities are classified as current liabilities unless the society has an unconditionalright 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 determined by the first-in-first-out (FIFO) basis and comprises all costs attributable to acquiring the proper-ties. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of com-pletion 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 circumstanc-es indicate that the carrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset’s carrying amount exceedsits recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are sepa-rately 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

Employee entitlements to gratuity are recognised when they accrue to employees. A gratuity payment of 10% of the basic annual salary is accrued to employees at the end of each successfully completed year period of service.

The society and its employees contribute to the National Social Security Fund (NSSF), a statutory defined contribu-tion 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-mem-bers 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.


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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 invest-ments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

l) Investment shares

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

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

m) Reserves

Statutory reserve

Transfers 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 reserve

Where impairment losses required by legislation or regulation exceed those calculated under International Finan-cial 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.

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.

n) Comparatives

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year as disclosed in note 22.


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2018 2017 2. Revenue Shs Shs

a) Interest income on member loans and advances 596,533,399 479,592,517 b) Other interest incomeDividend income (KUSCCO and CIC Insurance) 391,730 1,820,002Entrance and transfer fees 2,285,154 1,562,601Interest from CIC units 33,736 9,752Interest from KUSCCO 3,301,537 2,629,348 6,012,157 6,021,703Total interest income 602,545,556 485,614,220 c) Interest expensesInterest on member deposits 237,822,335 264,188,430Interest on fixed deposits 27,607,575 31,394,102Borrowing costs - 215,709Total interest expense 265,429,910 295,798,241Net interest income 337,115,646 189,815,979

d) Member land transactionsProceed from transfer of land to members 191,810,153 244,161,340Direct costs (184,759,100) (155,035,165)Net income from member land transactions 7,051,053 89,126,175

e) Other operating income 12,244,135 10,380,037

3. Expensesa) Impairment charge on loans and advances (Note 7) (78,627,021) 45,920,343 b) Governance expensesCommittee training 1,217,600 787,200Honoraria 1,714,284 1,714,284Sitting allowances 3,093,622 2,730,693Committee travelling 349,572 378,518AGM expenses 3,683,390 2,966,400Education & training expenses 3,884,610 1,800,948Open day and ushirika celebrations 220,000 3,737,911 14,163,078 14,115,954c) Staff costs

Salaries and wages 28,508,772 26,441,042Other staff cost 16,992,245 15,004,246Pension contribution 2,240,233 2,244,067National Social Security Fund 66,400 61,600 47,807,650 43,750,955 d) Other administrative expensesSoftware maintenance 5,067,503 4,305,397SASRA FOSA licence fees 4,360,164 2,740,277Bad debt - receivables - 282,225Strategic plan review 3,499,760 1,798,850Printing and stationary 1,455,511 976,357General Insurance 382,157 676,293Postage 683,035 642,609General office expenses 941,835 588,047Legal fee 355,000 60,000Loss on disposal of assets 103,113 - Travelling expense 813,761 222,220Consultancy fees 743,944 183,960Audit fees 810,550 758,640Security on C.I.T 514,462 154,747Bulk SMS 957,146 60,000Cash loss 1,425,146 -Loan insurance 5,926,128 5,764,386


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2018 2017 Shs Shs

Impairment of other receivables 19,177,782 -Bank charges 1,380,338 1,549,824Telephone - 91,489Rent and rates 1,487,925 - 50,085,260 20,855,321 e) Other operating expensesDepreciation on property and equipment 6,098,716 6,789,212Amortisation of intangible assets 1,197,795 1,316,400Credit reference expenses 335,472 362,671 7,631,983 8,468,283 f) Marketing expensesAdvertisement and marketing expenses 4,562,703 2,283,455Corporate social responsibility 96,085 50,000 4,658,788 2,333,4554. a) Tax Current tax 1,449,618 22,669,034

1,449,618 22,669,034

The 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 310,691,096 153,877,880

Tax calculated at a tax rate of 30% 93,207,329 46,163,364Tax effects of:Expenses not deductible for tax purposes 87,789,802 144,027,968Income not subject to tax (187,145,410) (167,522,298)

Tax charge (6,148,279) 22,669,034b) Tax payableAt start of year (19,437,834) (638,119)Income tax expense (1,449,618) (22,669,034) Tax paid 38,139,727 3,869,319

At end of year 17,252,275 (19,437,834)

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) 728,367,467 228,465,522

Cash in hand 5,900,143 3,864,763Co-operative Bank of Kenya Limited 240,022,537 68,273,680Commercial Bank of Africa Limited 132,593,417 21,462,415NIC Bank Limited 202,722,716 113,752,735Equatorial Commercial Bank Limited - 4,098,780United Bank of Africa 102,109,589 -M-PESA acccount 2,000,000 1,500,000M-Pesa Accounts 43,046,533 15,513,149

728,367,467 228,465,522

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2018Shs

2017Shs


2018Shs

2017Shs

For the purpose of the statement cash flows, the year end cash and cash equivalents comprise the following:

The society's cash and bank balances are held with a major Kenyan financial institution and, in so far as the directors are able to measure any credit risk to these assets, it is deemed to be limited.

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 19,051,537 17,742,904December check off receivables 34,553,485 39,484,101Other debtors 4,985,439 4,200,969KUSCCO claims 3,480,062 6,521,426

62,070,523 67,949,400

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

Impairments of Shs.19,177,782 (2017: Nil) have been recognised on receivable and prepayments.

The carrying amounts of the society's trade and other receivables are denominated in KenyaShillings (Shs.).

7. Loans and advances

At the start of the year 4,647,449,465 3,524,405,279Net increase during the year 522,808,895 1,123,044,186Impairment provisions (390,301,809) (373,367,636)

At year end 4,779,956,551 4,274,081,829

Movement in provisions for impairment of loans

At start of year 170,157,680 60,412,013Prior year adjustmentsImpairment of provisions 203,209,956 267,035,280

*As restated 373,367,636 327,447,293Changes on initial application of IFRS 9 95,561,194 - 468,928,830 327,447,293

Impairment provisions for the year (Note 3) (78,627,021) 45,920,343

At end of year 390,301,809 373,367,636

(i) Loans and advances to customers at amortised cost

Gross ECL Carrying amount allowance amountDevelopment Loans 3,211,334,688 304,132,863 2,907,201,825Land loans (Property loan) 260,866,539 - 260,866,539Emergency loans (Advances) 44,880,659 255,105 44,625,554Enterprise and project cashflow loan 857,948,027 85,913,840 772,034,188Other loans 795,228,446 - 795,228,446 5,170,258,360 390,301,809 4,779,956,551

Development Loans 2,723,187,933 256,907,942 2,466,279,990Land loans (Property loan) 226,488,773 11,039,331 215,449,442Emergency loans (Advances) 51,609,834 2,258,495 49,351,339Enterprise and project cashflow loan 612,307,954 48,279,019 564,028,935Other loans 1,033,854,971 54,882,849 978,972,122Total 4,647,449,465 373,367,636 4,274,081,829

The provisions for impairment of loans include the following:-

Year end 31 December 2018Loan and advances 336,883,245 390,301,809 - -

Year end 31 December 2017Loan and advances 389,411,111 373,367,636 16,043,475 (466,344)

Provision as per statutory regulations 0 Days (Performing - 1%) 24,335,027 18,911,5541- 30 Days (Watch -5%) 3,326,432 18,340,78031 - 180 Days (Substandard- 25%) 77,052,767 89,150,753181- 360 Days (Doubtful - 50%) 41,520,006 44,593,998Over 361 Days (Loss - 100%) 190,649,013 218,414,026 336,883,245 389,411,111

(ii) IFRS 9 provisionsReconciliation from opening to closing balance of loss allowance for loans and advances to customers at amortised cost for 2018 is shown below; comparative amounts for 2017 represent allowance account for credit losses and reflect measurement basis under IAS 39.

At start of year - - 373,367,636 373,367,636 373,367,636Measurement ofIFRS 9 Provision 169,260,806 41,467,354 (115,166,965) 95,561,195 - Net transfer stage 1,2 and 3 35,585,637 (19,544,467) (16,041,170 - -Net reameasurementof impairment provision - (78,627,022) (78,627,022) - - 204,846,443 21,922,887 163,532,479 390,301,809 373,367,636

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Provision asper statutoryregulations

Stage 112-month ECL

Shs

Stage 2Lifetime ECL

Shs

TotalShs

2017Shs

Impairmentprovision asper IFRS 9

Statutory loanloss reserve

transfer toStatutory loanloss reserve

Stage 3Lifetime ECL

Shs

2018

2017Loss ProvisionGross Amount Carrying Amount

2018Shs

2017Shs


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Level 1Shs

Level 1Shs

Level 1Shs

Level 1Shs

Annual Financial Report 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

2018 2017 Shs ShsTotal loans advanced during the year 82,591,583 108,700,763

Total loans outstanding at the end of the year:

Loans to key management 8,692,016 17,506,392Loans to directors 52,897,536 68,616,954Loans to supervisory committee members 6,865,823 4,877,780Loans to other employees 14,136,208 17,699,637 The effective interest rate on loans is 12% (2017: 12%) 82,591,583 108,700,763

8. Financial assets

At start of year 82,523,180 67,397,637Additions 14,242,216 34,636,678Disposals - (20,000,000) Fair value gain - 488,865

At end of year 96,765,396 82,523,180

UnquotedKUSCCO Limited - ordinary shares 22,677,697 22,451,444KUSCCO Limited - special deposits 23,088,000 20,800,000KUSCCO Limited - vijana savings 6,944,215 6,377,548KUSCCO Limited - central finance programme 24,101,206 12,994,363CIC unit trusts 367,990 334,254African Alliance 342,371 321,599

Total unquoted investments 77,521,479 63,279,208

Quoted - available for saleSafaricom PLC 11,341,613 11,341,668Co-operative Insurance Society Limited 7,902,304 7,902,304

19,243,917 19,243,972

Income from available for sale financial assets 3,727,003 4,459,102The 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 2018Fair value through other comprehensive income 19,243,917 7,902,304 77,521,479 104,667,700

Year ended 31 December 2017Fair value through other comprehensive income 11,341,668 7,902,304 63,279,208 82,523,180

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

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.

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LandShs

Furnitureand fittings

Shs

Officeequipment

Shs

Computersand

accessoriesShs

TotalShsCost

Cost Software2017Shs

2018Shs

Annual Financial Report None of the financial assets are considered to be impaired and are dominated in Kenya Shillings. 2018 2017 9. Inventory Shs Shs

Land - Kisumu 2,311,935 20,500,234Land - Naivasha 16,151,241 68,481,261Land - Katani - 1,046,267Land - Joska 1 and 2 2,984,060 18,778,408 21,447,236 108,806,170Inventory of land is held in respect of pending member land transactions.

10. Property and equipment Year ended 31 December 2018 At start of year 204,306,361 1,044,384 1,896,020 3,478,423 210,725,188Additions - - 97,590 1,318,091 1,424,306Disposals - - - (190,240) (190,240)At end of year 204,306,361 1,053,009 1,993,610 4,606,274 211,959,254

DepreciationAt 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 28,654,250

Net book values 179,911,510 315,649 787,084 2,290,761 183,305,004

Year ended 31 December 2017CostAt start of year 204,306,361 1,044,384 1,896,020 2,738,094 209,984,859Additions - - - 740,329 740,329

At end of year 204,306,361 1,044,384 1,896,020 3,478,423 210,725,188

Depreciation

At start of year 12,197,394 625,517 994,208 1,462,489 15,279,608Charge for the year 6,098,741 8,421 113,818 459,396 6,730,376At end of year 18,296,135 683,938 1,108,026 1,921,885 22,009,984

Net book values 186,010,226 360,446 787,994 1,556,538 188,715,204

11. Intangible assets

At start of year 9,095,149 9,019,998Additions - 75,151 9,095,149 9,095,149Amortisation

At start of year 6,288,314 4,896,764Amortization charge 1,197,795 1,391,550At end of year 7,486,109 6,288,314

Net book value 1,609,040 2,806,835

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2017Shs

2018Shs

2017Shs

2018Shs

2017Shs

2018Shs

2018 2017 12. Other Payables Shs Shs

Sundry creditors 26,826,345 32,029,902Other payables 1,181,952 8,643,988Accrual 5,594,051 5,759,629Benevolent fund 5,889,983 2,308,697

Total payables 39,492,331 48,742,216

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 KenyaShillings (Shs).

13. Deposit for land

Limuru land 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 264,188,430 204,908,502Provisions for the year 237,822,335 264,188,430Payments during the year (264,188,430) (204,908,502)

At end of year 237,822,335 264,188,430

15. Deposits

a) Member depositsAt start of year 3,593,758,662 2,840,623,149Net additional deposits during the year 766,487,822 753,135,513Total 4,360,246,484 3,593,758,662 b) WithdrawableAt start of year 499,376,853 455,508,270Net additional deposits during the year (119,710,570) 43,868,583

379,666,283 499,376,853

Total member savings 4,739,912,767 4,093,135,515

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

16. Borrowings:

Borrowings: Bank loans - 4,595,984

The borrowings are repayable as follows:

On demand and within one year - 4,595,984

Weighted average effective interest rates at the year end were: 2018 2017 % % Bank loan 0% 9.96

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2018 2017 Shs Shs

Reconciliation of liabilities arising from financing activities: Borrowings Total Year ended 31 December 2018 Shs Shs

At start of year 4,595,984 9,066,666Interest charged to profit or loss 215,709Borrowing costs capitalised during the yearCash flows:- Operating activities (interest paid) - (215,709)- Repayments of long-term borrowings (4,595,984) (4,470,682) At end of year - 4,595,984

The interest rates on the bank loans and bank overdrafts are reviewed periodically by the banks in line with market rates and thus expose the society to cash flow interest rate risk.

In the opinion of the directors, it is impracticable to assign fair values to the society's liabilities due to inability to forecast interest rate and foreign exchange rate changes.

17. Investment shares

At start of year 509,794,751 419,221,147Contribution during the year 158,089,611 90,573,604

At end of year 667,884,362 509,794,751

18. Reserves

Included in the members balances are the following reserves which are as a result of statutory requirements:-i) Statutory reserve 88,090,065 26,241,769 ii) Fair value reserve 14,259,624 (94,877,295) iii) Appropriation account 4,037,143 14,259,624 iv) Loan loss reserve - 68,961,025 v) Dividends account 68,961,025 843,232,219

During the year, proposed dividend for 2017 of 12% of investment shares (2016: 12%) amounting to a total of Shs. 51,785,837 (2016: Shs. 41,972,300) was paid.

The total proposed dividend for the year is 12% of investment shares (2017:12 %) amounting to a total of Shs. 68,961,025(2017: Shs. 51,785,837).

18. Related party transactions

i) Insider deposits

Total deposits and savings outstanding at end of year:

Due to key management 2,796,356 5,129,289Due to supervisory committee members 4,786,781 2,555,969Due to directors 22,071,883 26,077,567Due to other employees 5,056,738 5,855,105

Total deposits and savings 34,711,758 39,617,930 ii) Key management personnel remunerationPost employment benefits 815,520 1,418,509Refer to Note 7 for loans to insiders.

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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-committee 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 members 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. Financial 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.

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.

Effect on profit decrease 33,353 24,234

- 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.

Index

NSE 962,196 962,199

(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;

2017 Shs

2018 Shs

2017 Shs

2018 Shs

Impact on other comprehensive income


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• 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 supervisory 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 significant 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.

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. Expo-sure 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 approval roles are segregated.

To aid credit managers in portfolio management, regular internal risk management reports contain information on key environmental 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 undertakes 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 installment is outstanding for less than 30 days. Such loans are also classified as stage 1 for purposes of the ECL calculation;


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(3) Substandard loan, being loans not adequately protected by the current repayment capacity and the princi-pal or interest have remained un-paid between thirty-one to one eighty days or where two to six installments have remained outstanding. Under this category, loans past due between 31 - 90 days (or 2-3 pending installments) 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 installments 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 recogni-tion as receivable 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 installments 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 contractual payments are more than 30 days past due unless the society has reasonable and supportable information that demonstrates 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.

Incorporation of forward�looking information

The society uses forward-looking information that is available without undue cost or effort in its 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 documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using a statistical analysis of historical 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 2018 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 deter-mined 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 ECLThe key inputs used for measuring ECL are:


65

• 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 histori-cal 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 calcula-tion is based on statistical rating models, and assessed using rating tools tailored to the various categories of counter-parties and exposures. These statistical models are based on market data (where available), as well as internal data comprising both quantitative and qualitative factors. PDs are estimated considering the contractual maturities of exposures and estimated prepayment 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-perform-ing 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 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 repay-ment structure and have a short contractual cancellation period. However, the society does not enforce in the normal day-to-day management the contractual right to cancel these financial instruments. This is because these financial instruments are managed on a collective basis and are canceled 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 from 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 characteristicsWhen ECL are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics, such as:1. instrument type;2. credit risk grade;3. collateral type;4. remaining term to maturity;5. industry/economic sector; and6. geographic location of the borrower.The groupings are reviewed on a regular basis to ensure that each group is comprised of homogenous exposures.

Credit qualityThe 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 provided by the SASRA as follow;


66

Deve

lopm

ent

Loan

sSh

s

Land

Loa

ns(P

rope

rtyLo

an)

Shs

Indi

vidu

al

Inco

me

base

dLo

ans

Shs

Ente

rpris

e an

d pr

ojec

tca

shflo

w L

oan

Shs


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)

2,3

92,5

23,4

28

177

,704

,173

2

0,47

9,73

4

462,

704,

516

55

9,16

0,91

1

3,6

12,5

72,7

621-

30

Day

s (W

atch

, sta

ge 1

)

3

56,1

43,0

08

47

,143

,551

6,2

25,9

43

139

,142

,896

1

77,3

42,3

17

725,

997,

715

31 -

180

Day

s (Su

bsta

ndar

d, s

tage

2)

2

37,8

34,2

69

24

,098

,316

1

5,56

7,92

9

142,

326,

592

7

4,73

6,79

6

4

94,5

63,9

0218

1- 3

60 D

ays (

Dou

btfu

l, st

age

3)

63,1

98,3

75

8

,237

,249

1,5

37,5

91

39,

923,

096

1

0,41

5,37

2

1

23,3

11,6

83O

ver 3

61 D

ays (

Loss

Acc

ount

, sta

ge 3

)

1

59,9

38,2

78

3

,683

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1,0

69,4

62

11

,131

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37,9

89,9

62

213,

812,

298

3,

209,

637,

358

26

0,86

6,53

9

44,

880,

659

795

,228

,446

8

59,6

45,3

58

5,

170,

258,

360

Year

end

ed 3

1 De

cem

ber 2

017

Loan

s an

d ad

vanc

es to

cus

tom

ers

0 D

ays (

Perfo

rmin

g, st

age

1)

1,71

1,67

5,44

9

152,

621,

693

2

3,24

3,41

0

692,

365,

350

294

,470

,622

2,8

74,3

76,5

241-

30

Day

s (W

atch

, sta

ge 1

)

3

09,4

57,0

66

32

,251

,814

12,8

67,5

31

131,

941,

396

130

,370

,619

6

16,8

88,4

2631

- 18

0 D

ays (

Subs

tand

ard

, sta

ge 2

)

298,

790,

659

2

9,74

5,92

2

8

,498

,051

17

4,91

7,83

7

1

05,1

69,5

64

617

,122

,033

181-

360

Day

s (D

oubt

ful,

stag

e 3)

82,

388,

140

6,8

31,0

18

4

,338

,250

23,9

11,0

02

26,

048,

272

14

3,51

6,68

2O

ver 3

61 D

ays (

Loss

Acc

ount

, sta

ge 3

)

32

0,87

6,61

8

5

,038

,327

2,6

62,5

91

11,

689,

376

5

5,27

8,88

7

395,

545,

799

2

,723

,187

,932

22

6,48

8,77

4

51,

609,

833

1,0

34,8

24,9

61

6

11,3

37,9

64

4

,647

,449

,464

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

cr

edit

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

e re

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

e re

pres

ent t

he a

mou

nts c

omm

itted

or g

uara

ntee

d, r

espe

ctiv

ely.

Loan

s an

d ad

vanc

es to

cus

tom

er a

t am

ortis

ed c

ost

Year

end

ed 3

1 De

cem

ber 2

018

D

evel

opm

ent L

oans

2,74

8,66

6,43

6

95,1

33,7

08

365

,837

,215

3,2

09,6

37,3

59La

nd lo

ans (

Prop

erty

loan

)

224,

847,

724

9,63

9,32

6

26,

379,

489

26

0,86

6,53

9Em

erge

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loan

s (A

dva

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)

2

6,70

5,67

7

6,

227,

171

1

1,94

7,81

0

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880,

659

Ind

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6

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56

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13

6,45

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7

795,

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446

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an

736

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29,8

94,7

18

93,

247,

410

85

9,64

5,35

6

4

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1

97,8

25,5

61

633,

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321

5,17

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8,36

0

Impa

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(204

,846

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(2

1,92

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7)

(1

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32,4

79)

(

390,

301,

809)

N

et c

red

it ex

posu

re

4

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17

5,90

2,67

4

470,

329,

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4,7

79,9

56,5

51

Emer

genc

yLo

an(A

dvan

ces)

Shs

Tota

lSh

s

Stag

e 1

12 M

onth

sEC

LSh

s

Stag

e 2

Lifet

ime

ECL

Shs

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e 3

Lifet

ime

ECL

Shs

Tota

lSh

s

67


Loan

s an

d ad

vanc

es to

cus

tom

er a

t am

ortis

ed c

ost

Year

end

ed 3

1 De

cem

ber 2

017

D

evel

opm

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2

,020

,162

,524

1

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16,2

64

582,

539,

154

2,72

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7,94

2La

nd lo

ans (

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1

84,8

73,5

07

11

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2

9,71

6,89

8

226,

488,

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3

6,11

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1

3

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1

2,09

9,67

2

51,

609,

834

Ind

ivid

ual in

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sed

loan

824

,306

,746

69,9

67,1

35

140

,551

,081

1,03

4,82

4,96

2En

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and

pro

ject

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4

24,8

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41

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98,8

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3

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2

46,8

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Impa

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(258

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sure

3,

321,

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154

205

,381

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6

52,1

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21

4,

178,

520,

634

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

nd a

dva

nces

to m

embe

rs in

the

form

of c

ash,

resid

entia

l, co

mm

erci

al a

nd in

dus

trial

pro

perty

, fixe

d a

sset

s suc

h m

otor

ve

hicl

e, c

hatte

ls an

d o

ther

mem

bers

gua

rant

ees.

The

soci

ety

has d

evel

oped

spec

ific

polic

ies a

nd g

uid

elin

es fo

r the

acc

epta

nce

of d

iffer

ent c

lass

es o

f col

late

ral.

Estim

ates

of t

he c

olla

tera

l’s fa

ir va

lues

are

bas

ed o

n th

e va

lue

of c

olla

tera

l ind

epen

den

tly a

nd p

rofe

ssio

nally

ass

esse

d a

t the

tim

e of

bor

row

ing,

and

re-v

alue

d w

ith

a fre

quen

cy c

omm

ensu

rate

with

nat

ure

and

type

of t

he c

olla

tera

l and

cre

dit

adva

nced

. Col

late

ral s

truct

ures

and

cov

enan

ts a

re su

bjec

ted

to re

gula

r rev

iew

to

ensu

re th

ey c

ontin

ue to

fulfi

ll the

inte

nded

pur

pose

. Col

late

ral is

gen

eral

ly n

ot h

eld

in re

spec

t of d

epos

its a

nd b

alan

ces d

ue fr

om b

anki

ng in

stitu

tions

, ite

ms i

n th

e co

urse

of c

olle

ctio

n an

d G

over

nmen

t sec

uriti

es.

(c)

Liq

uidi

ty ri

sk

Cas

h flo

w fo

reca

stin

g is

perfo

rmed

by

the

finan

ce d

epar

tmen

t mon

thly

by

mon

itorin

g th

e so

ciet

y’s l

iqui

dity

requ

irem

ents

to e

nsur

e it

has s

uffic

ient

cas

h to

mee

t op

erat

iona

l nee

ds w

hile

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

ety

doe

s not

bre

ach

borro

win

g lim

its o

n an

y of

its b

orro

win

g fa

cilit

ies.

Prud

ent l

iqui

dity

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

018

- O

ther

pay

able

s

39,

492,

331

-

3

9,49

2,33

1-

Inte

rest

due

to m

embe

rs

2

37,8

22,3

35

-

237,

822,

335

- D

epos

it fo

r lan

d

30

,313

,840

-

3

0,31

3,84

0-

Mem

ber d

epos

its

3

79,6

66,2

83

4,

360,

246,

484

4,7

39,9

12,7

67

816

,903

,483

3

,593

,758

,662

4,4

10,6

62,1

45

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

Cur

rent

to 1

yea

rSh

s1

to 5

Yea

rsSh

sTo

tal

Shs

68

2017Shs

2018Shs

2017Shs

2018Shs

Current to 1 yearShs

1 to 5 YearsShs

TotalShs


Year ended 31 December 2017

- Other payables 48,742,216 - 48,742,216- Interest due to members 264,188,430 - 264,188,430- Member deposits 499,376,853 3,593,758,662 499,376,853- Borrowings 4,595,984 - 4,595,984 816,903,483 3,593,758,662 4,410,662,145

21. Capital management

Internally imposed capital requirements

The 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-annual 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 2017.

The debt-to-capital ratios at 31 December 2018 and 2017 were as follows:

Total borrowings (Note 15) - 4,595,984Total members deposits 4,739,912,767 4,093,135,515 4,739,912,767 4,097,731,499Total cash and bank balances 728,367,467 228,465,522

Net debt 4,011,545,300 3,869,265,977

Total equity 843,232,219 523,248,161

Gearing ratio 4.8:1 7.4:1

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 2018 and 2017 were as follows

Core capital of not less that Shs. 10 million

As per statement of financial position 843,232,219 523,248,161

2018 2017b) Core capital of not less than 10% of total assets % % As per statement of financial position 14% 11%

c) Institutional capital not less than 8% As per statement of financial position 3% 0%

69

The primary restatements were as follows:

Impairment of loan and advances 203,209,956 267,035,280Appropriation account (147,320,397) (204,328,047) Loan loss reserve (23,021,994) (17,074,603) Statutory reserve (32,867,565) (45,632,630)

The restatements above decrease appropriation account for the year ended 31 December 2017 by an amount of Shs. 147,320,397, decreased the loan loss reserve by Shs. 23,021,944, decreased statutory reserve by Shs. 32,867,565.

24. Incorporation

Safaricom Savings and Credit Co-operative Society Limited is registered in Kenya under the SaccoSocieties 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.)

2017Shs

2018Shs

d) core capital of not less than 8% of total deposits As per statement of financial position 18% 13%

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

As per statement of financial position 114% 33%

The society is compliant with all the capital and ratio requirements with the exception of the institutional capital. The shortfall in this ratio for 2018 is on account of loan loss provisions under IFRS 9 and previously IAS 39. The directors having discussed this shortfall with the Sacco Societies Regulatory Authority (SASRA) and are of the opinion that the society will be fully compliant with this requirement within the next 12 - 36 months and that over this period no adverse licensing decision will be taken by SASRA.

22. Prior year adjustments

Comparative amounts relating to the financial year ended 31 December 2017 have been restated to reflect changes in classification and retrospective changes to accounting policies in compliance with International Finan-cial Reporting Standards. Specifically the society under took a comprehensive review of its loans and advances which resulted in additional provision for loans classified as non performing.

2017Shs

2018Shs


Motto Empowering You - Safaricom Sacco · Hon Secretary – Maisha Bora Sacco Director – Co-operative Bank Chairman – CIC Director – ICA Africa Mr. Magomere gave the members

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