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Zambia National Commercial Bank 2010 annual financial report

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Zanaco 2010-annual report text-searchable

  1. 1. Vision, Mission, ValuesHistoryFinancial HighlightsBoard of DirectorsExecutive ManagementTeamChairmans StatementManaging Directors StatementDirectorsReportStatement on Corporate GovernanceStatement of Directors ResponsibilitiesReport of the Independent AuditorFinancial statements: Profit and loss account Balance sheet Statement of changes in equity Cash flow statement Notes
  2. 2. VISIONTo be the ·PeopIes Bank" and to be the leading finandal services firm In Zambia, providing sustainable financial returns andbenefits to all stakeholders.MISSIONTo consistently exceed stakeholder expectations in proactively designing, seiling, delivering and servicing competitivelypriced financial solutions for all key segments of the Zambian public, in rural and urban areas, throug h appropriate technologyand distribution Channels, with e mpowered and motivated staff.VALUESWhat drives us?-Proactiveness. Results oriented, PrideHow do we achieve our goals?-Team work. Accountability, CompetenceWhat guides us?-Integrity, Respect. ProfessionaHsm o
  3. 3. Zambia National Commercial Bank Pic (Zanacoi was established in 1969 to service the financial needs of the Zambian economy and ithas since evolved into a leading Bank nationwide.In 2007 the Government of the Republic of Zambia (GRZ) sold a 49% stake in the Bank to Rabo Financial Institutions Development B.Y(RFID) a subsidiary of the AAA rated Cooperative Central Raiffeisen-Boerenleenbank (Rabobank) of the Netherlands. Subsequently RFIDsold a 3.41% stake to Lizara Investments Limited (a nominee ofthe Zambia National Farmers Union (ZNFU) followed by the Banks InitialPublic Offering in 2008 and Employee Share Ownership Programme (ESOP).The Bank remains majority owned by Zambians and thus is considered ·citizen owned~The relationship with Rabobank enables Zanaco to benefit from technical assistance and best practise in various areas of banking.Our CustomersOur Customers are fully representative of Zambia as a whole; from Government to the private sector, from multinationals to SMEs, fromindustrial and mining to agriculture and from civil servants to salaried workers. Reaching out to the unbanked, Zanaco can truly beconsidered the Peoples Bank, your Bank. As a citizen owned Bank, we take pride in serving Zambians of all walks of life, with fair pricingfor our services.Our PeopleMost of our ,338 staff are also shareholders in Zanaco and together with their families have a direct interest and stake in the long termsuccess of Zanaco. They are empowered, motivated and committed to make the difference.Ownership Structure Post Initial Public OfferingThe current ownership structure of Zanaco is as follows:- Rabo Financial Institutions Development B.V (RFID) Government of the Republic of Zambia (GRZ) Public Employee Share Ownership Programme (ESOP) Lizaralnvestment Limited (a nominee of ZNFU)o
  4. 4. Cost-to-Income ratio (III) Loans and advances (Km) go 1,725,.000 r" 80 ,420,000 70 1,220,(100 ,---- 60 1,020;000 ,---- c- so 820,000 ,---- I-- I-- 40 620.000 I-- I-- I-- 30 420.000 - I-- I-- I-- 20 ~ tE - I-- I-- I-- 0 o - c- c- f-- c.,.". c.,.". 2005 2006 2007 :zooe 2009 2010 2010 2005 2006 "" 2000 2009 Total revenue (Km) Total assets (Km)600.000 .---------------------~ 4.000.000 3,soo.ooo500.000 ~------------------ 3.000.000 -~.ooo ~----------- - - 2.500,000300.000 1---------- 2,000.000 - - - ,,soo.ooo I-- - - - 2005 2006 2007 2001 2009 2010 .000.000 500.000 - 1"" I-- I-- 2006 "" - - ~ 2000 - - - - 2009 2010 - Profit (Km) Customer deposits (Km)20,000 3.000.000"0,00000.000 2,soo.ooo ",000 I-- I-- - 2.000.000 80,000 70,000 - ,,soo.ooo ,--- I-- I-- I-- .- - 60,000 .000.000 - I-- I-- I-- I-- SO,OOO - c- - 40,000 - I-- - 500.000 - I-- I-- I-- I-- 30,000 - I-- - - c..,.. c..,.. c..,..- c..,..- 20,000 ~ L..,-- ~ - ~ 2010 """ 2001 2009 2O(f1 200S 2006 2007 2008 20051 2010 "" Net Interest revenue (Km) Shareholders funds (Km) 500,000 . - - - - - - - - - - - - - - - .350,000 4SO.ooo 1------------------------ ~,ooo 1--------------------300,000 3SO,000 1--------------------250,000 300,000 1---------------200,000 250.000 1---------------50,000 200.000 1---------100,000 , so,ooo 1--= -- 100,000 SO,OOO 50.000 2005 2006 2007 2008 2009 2010 2005 20015 2007 2001 20051 2010 o
  5. 5. Performance Customer growthIt is with pleasure that I report to you on the performance ofthe Bank We aim to be leaders in our selected market segments of Retail, Foodfor the year 2010, my first report since taking over as Chairman of the & Agriculture, Small and Medium Sized Enterprises (SMEs) andBoard of Directors in March 2010. The Banks result was one of continuing Government. Simultaneously, we shall continue to expand our footprintprogress and growth both in terms of profit and customer numbers. in the Corporate and Treasury segments, commensurate with our market position and size. Zanaco has introduced innovative e-products suchThe Profit AfterTax standing at K113 billion compared to K79 billion for as XAPIT, thereby reaching a cross section of a previously unbanked2009, a 42% increase; the number of customers also increased population. These affordable products with minimum balances of assubstantially from 318,000 to 450,000 reflecting a 42% annual increase low as K30,000 have allowed us to contribute to financial inclusivenessin 2010. in the country.Financial performance indicators are positive and are approaching the On our balance sheet, we have Scheme Loans (Retail Loans) which havemedium term targets. The Banks Return on Equity improved further been accessed by more than 100,000 customers. These funds havefrom 20% in 2009 and now stands at 24%, well above both the 2010 often been used for investments in new endeavours, thereby providinginflation figure and the return on long term bonds. The Bank remains a spur to entrepreneurship and empowerment, therefore contributingvery liquid and has one of the highest prudential capital ratios in the to the Gross Domestic Product (GDP) growth.market at 18%. The Non-Performing Loans (NPLs) have continued to The SMEs and Agriculture business playa significant role in the economyshow a downward trend, reducing from 12% in 2009 to 10% in 2010, of Zambia. We intend to make a sustainable difference to the peoplewhich is well within the market average ratio. involved in these sectors by combining financial services with financial literacy education programmes. In our effort for greater financialThe Banks share price, which was under pressure in early 2009 as a inclusiveness, Zanaco banks nearly 15,000 SMEs and over 3,500 smallresult of the global crisis, rebounded strongly in 2010. It rose from 1<550 scale farmers at a special interest rate through the Lima and Emergingin 2009 to K821 in 2010, representing a 49% capital gain. With the Farmers Schemes, in conjunction with Zambia National Farmers Unionimproved performance, the Bank has continued to meet its (ZNFU).responsibilities as a good corporate citizen and contributing to thedevelopment of Zambia through the Treasury by paying its taxes. The Corporate Social Responsibilityprojected final tax for 201 0 is K60 billion reflecting an increase of 28% Our Corporate Social Responsibility is anchored around our financialover the 2009 tax figure of K47 billion. fitness training programme which remains strong and provides a bond between a successful Bank and a financially fit and empowered population. The future of the Bank requires that our products are relevantEconomic OVerview to our society; a financially literate population is a necessary pre-requisiteThe positive macro-economic environment with a year on year single for this goal. We especially intend to continue providing financialdigit inflation of 7.9% and projected preliminary Gross Domestic Product literacy training programmes to the youth the future of Zambia.(GDP) growth of7.1 % against 6.4% growth in the prior year contributed We remain proud sponsors ofthe five times premier league footballto the stability in the financial market conditions. The growth the Bank champion of Zambia, Zanaco Football Club. In the year under review, has attained in 2010 can be attributed to the stability of the financial Zanaco Football Club reached the group stage of the Confederation ofmarket and is in alignment with the growth of the Zambian economy. African Football tournament.Positioning ConclusionAs the ·Peoples Bank~ it is imperative that we continue to respond The Banks future remains bright. In the light of positive 2011 macro - economic projections for Zambia, we look to the future withquickly to the ever changing customer landscape by delivering solutions optimism. On behalf of the Board of Directors, I wish to extend mythat are timely and affordable to our customers. We will endeavour in gratitude to Management and Staff for their consistency and2011 to respond to customer expectations by increasing our distribution perseverance in ensuring that we maintain our leading position as achannels, improving communication and service levels through effective business and within our communities. I also wish to take this opportunitytraining of staff and infrastructure investments. to thank my predecessor Mr Arnold Kuijpers for his effective guidance to the Board during the first four years post-privitisation.Improved communicationIn our efforts to continuously seek both new channels of delivery andimproving communication with our customers, we launched the MNoMatter Who You Are.... brand campaign to depict our vision as the·Peoples Bank~ For this, we were awarded the Best Brand campaign2010 by the Zambia Institute of Marketing. We will continue to enhancethe strong Zanaco brand, whilst bUilding both the human and Bruce Dickoperational capacity in the Bank. o
  6. 6. It is with great honour that I report the overview of the Banks from 53 to 57. In 2010 we opened two full fledged new branches inperformance for the year 201 0 and provide an outlook for 2011. Lusaka, in Woodlands and at the New Government Complex and oneFollowing a successful end to 2009 as the Most Profitable Bank in agency in Masala Market in Ndola. In our quest to improve customer service, refurbishments were undertaken at three major branches andZambiawe are equally pleased with our achievements at the close one agency namely Manda Hill, Cairo Road Business Centre, Lusakaof 201 0 with a Profit AfterTax of K113 billion. We delivered another Centre Branch and Ministry of Finance Agency in Lusaka at the cost ofsound performance in 2010, with all the key performance ratios well over K6 billion. Zanaco is currently represented in 35 out oftheremaining on track. This was further demonstrated by the strong 73 Zambian districts with a branch or an agency.share price development in 2010, which closed at 1<821 per share;Zanacos shares continue to be very much in demand. Our Automated Teller Machines (ATMs) have been increased from 106 to 129 in 2010 reflecting an increase of 22%. Our Point of Sale (PaS)Economic Overview representation continues to expand, located in more than 174The Zambian economy continued to show positive strides, with all outlets countrywide, offering the most secure Point Of Sale on the market through its Personal Identification Number (PIN) log-inthe fundamentals showing improvements. Real Gross Domestic security requirements.Product (GDP) continued to grow in 201 0 with preliminary projectionof 7.1 %. Growth in agriculture continued, following the bumper We have continued to form key partnerships to efficiently expandmaize harvest olthe 200912010 season. The recovery of the global our service offerings countywide. Some of these include theeconomy positively contributed to the improvements in the overall Association of Chartered Certified Accountants (ACCA) and theZambian economy. Prices generally stabilised during 201 0 and Nurses Council of Zambia (NCZ) which allows for easier paymentinflation remained in single digits, closing the year at 7.9%, down of professional fees and memberships. As part of our outreachfrom 9.9% in 2009. programme to promote financial inclusion for the unbanked, we piloted our services with 24 Zampost offices in 2010. A full roll-outInterest rates initially edged downwards during the first half of the is planned in 2011, whereby Point of Sale transactions in 111year. Yield rates on both Government bonds and Treasury bills Zampost offices will be offered. At completion, Zanaco customersdeclined before beginning to reverse the trend into the second can access their funds at 168 outlets in Zambia in 68 out of the 73 Districts. This is by far the biggest banking network in Zambia, andhalf of the year. Aggressive monetary policy aimed at maintaining meets our continued ambition to bring "banking to the unbanked~inflation in single digits and the increased financing requirementsby Government ticked interest rates upwards. Our pilot projects, Macha agency and Bank on Wheels concepts have been well received, particularly in both peri-urban and ruralWe therefore envisage that the economic landscape will continue areas. In most cases, this is the first time that such mobile financialto support growth in all business sectors as we enter the year 2011. solutions have been offered to the population; these services are thereby clearly making a positive contribution to the economicPerformance wellbeing of the people.We continued to focus on all sectors of the Zambian economy, asbefitting the "Peoples Bank~ but with a particular emphasis on the Corporate Social ResponsibilityGovernment, Retail, Food & Agriculture and the Small and Medium- Key to our promise to empower Zambians on Financial Fitness, thisSized Enterprise (SME) markets; these segments are all an integral training programme received positive attention for its outreach to 150 schools, more than 5000 students and over 750 SMEs throughpart of the Zambian people and therefore of our business. In workshops and other interactive sessions.addition, our Corporate and Treasury activities both grewsignificantly during 2010, underlining our commitment to be a Our Peopleuniversal bank with focused segment expertise, innovative products Our people remain our pride and our priority, with employeesand superior customer service. undergoing training in relevant areas ofthe business such as customer service delivery, credit risk management and operations.Our XAPIT product today draws more than sao new accounts a This is part of our vision to build capacity by developing theday and has contributed more than 200,000 customers to the Banks necessary competencies within our workforce. A portion of trainingcustomer base since 2008. Our customers represent a major portion and support has been provided in collaboration with Technicalof Zambian citizens with access to banking services and we intend Assistance (TA) programmes, both with Rabobank and with otherto remain leading in this service. partners, who commit to offering Zanaco continuous support in identified areas.Distribution The Bank achieved very extensive volume growth on loans andOur growing portfolio and corresponding need to enhance our advances to customers (up 47%). Deposits recorded a 13% growth,customer service levels, led us to increase our branches and agencies which was well above the inflation. The Banks loan to deposits
  7. 7. Financial performance Revenue 568 497 399 299 242 Expenses (362) (305) (281) (234) (183) PB tax & impairment 207 192 118 65 59 Impairment (34) (66) (32) (19) (19) Tax charge (60) (47) (34) 5 (11) PAT 113 79 52 51 29 Deposits 2,591 2,292 2,325 1,799 1,494 Loans and Advances 1,726 1,163 1,001 800 489 Capital 476 396 322 202 159 Capital adequacy (%) 19 21 19 12 15 Return on equity 24 20 16 25 18ratio increased, but with a large portion of the balance sheet still seeking value-adding services for our customers. We seek to setinvested in treasury bills and bonds, the Bank remains very liqUid. the highest standards in Corporate Governance, offer fair productExpenses grew by 18% on year to year basis mainly because of the pricing and take responsibility in our communities; this requiresincreased costs in front-office staffing, maintenance, infrastructure us to place customer service at the centre of all that we do. Weand overheads. aim to achieve this through the continuous development of our staff to ensure that each one of us strives for the highest level ofWith the revenue growth of 14% and expenses of 18%, the Bank professionalism. I strongly believe our customers, our staff and ourwas able to improve the operating profit to over 1<208 billion, a business lines have good future prospects in a growing Zambiangrowth of 8% in our Profit Before Taxes and Impairment (PBT). As economy.a result operational costs to income ratio stood at 64% (equalingthe market average), which is a distinct improvement in comparison As the new Managing Director olthe Bank, I would like to end byto 78% at privati sat ion. thanking my predecessor, Mark Wiessing, for laying a solid financial and operational foundation for the Bank. These achievements willThe impairment charge to the income statement was K34 billion not be simple to emulate, but with the support and goodwillreflecting a decline of 48% compared to 2009 charge of K66 billion. shown by the Board of Directors, Management, our staff and ourThe decline in impairment is as a result of improvement in the customers, we are poised to take Zanaco to the next level ofvalue of security used as collateral and significantly improved credit growth. I look forward to working with all of you in the comingrisk management. year to achieve our goals.Our Profit afterTax (PAT) of K1 13 billion for 2010 is also up 43%compared to K79 billion for 2009, and our Prudential Accountingresults are stable and well within regulatory requirements. ZanacosReturn on Equity is 24% for 201 o. Martyn H. SchoutenOutlook for 20112011 promises to be a very competitive and exciting year. Weremain focused on our leading positions in our chosen markets,driving sustainable profitability and a strong balance sheet whilst
  8. 8. The Directors submit their report together with the audited financial statements for the year ended 31 December 2010, which disclosethe state of affairs of the Bank.PRINCIPAL ACTIVITIESThe Bank is engaged in the business of banking and the provision of related services. The Bank has continued with its network expansionprogramme during the year.SHARE CAPITALThere were no changes in the issued share capital during the year.RESULTS AND DIVIDENDThe net profit for the year ofK112,S10 million has been added to retained earnings. The Bank paid dividend during the year amountingto K24,255 million in respect of 2009 profits (2008: K18,191 million). The Board has recommended a dividend of K 32,340 million fortheyear ended 31 December 2010.DIRECTORSThe Directors who held office during the year and to the date ofthis report were:MrBDick- Chairman (Appointed 31 March 2010)MrCYMulendema- Vice ChairmanM r M Schouten - Managing Director (Appointed 1December 201 0)Mrs G M Akapelwa-Ehueni- Non Executive DirectorMr G Robinson- Non Executive DirectorMr FWeenig- Non Executive DirectorMr M H Wiessing- Managing Director (up to 30 November 201 0)Mr A JAM Kuijpers- Chairman (retired 31 March 2010)NUMBER OF EMPLOYEES AND REMUNERATIONThe total remuneration of employees during the year amounted to K169,814 million (2009: K149,347million) and the average numberof employees was as follows: Month Number Month Number January 1,093 July 1,223 February 1,136 August 1,222 March 1,131 September 1,241 April 1,125 October 1,243 May 1,158 November 1,313 June 1,156 December 1,338
  9. 9. STAFF WELFAREThe Bank has policies and procedures to safeguard the occupational health, safety, and welfare of its employees.GIFTS AND DONATIONSDuring the year the Bank made donations of K1,988 million (2009: K730 million) to charitable organisations and events.PROPERTY AND EQUIPMENTThe Bank purchased property and equipment amounting to K46,834 million (2009: K42,555million) during the year. In the opinion ofthe directors, the carrying value of property, plant and equipment is not less than their recoverable value.RESEARCH AND DEVELOPMENTDuring the year the Bank did not conduct any research and development activities.RELATED PARTY TRANSACTIONSRelated party transactions are disclosed in Note 33 of the financial statements.DIRECTORS EMOLUMENTS AND INTERESTSDirectors emoluments and interests are disclosed in Note 33 to the financial statements.PROHIBITED BORROWINGS OR LENDINGThere were no prohibited borrowings or lending as defined under Sections 72 and 73 of the Zambia Banking and Financial Services Act,1994, (as amended).RISK MANAGEMENT AND CONTROLThe Bank through its normal operations is exposed to a number of risks, the most significant of which are credit, market, operational,interest rate and liquidity risks. The Banks risk management objectives, policies and strategies are disclosed in Note 4 of the financialstatements.COMPLIANCE FUNCTIONThe Bank has a compliance function whose responsibility is to monitor compliance with the regulatory environment and the variousinternal control processes and procedures.INTERNAL AUDIT FUNCTIONInternal audit is an independent, objective assurance and consulting activity designed to add value to the Bank and improve operations.It helps the Bank to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve risk management,control and governance processes.KNOW YOUR CUSTOMER (KYC) AND ANTI- MONEY LAUNDERING POLICIES (AML)The Bank has adopted Know Your Customer (KYC) and Anti-money laundering (AML) policies and adheres to current legislation in theseareas.AUDITORSThe Banks Auditors, PriceWaterHouseCoopers have completed the five years audit term and will retire at the Annual General Meeting. Aresolution to appoint Messrs Delloite & Touche will be proposed at the Annual General Meeting.By order of the BoardBANK SECRETARY18/03/2011
  10. 10. General basis one third ofthe Directors resign every year and, being eligible,The Bank attaches great importance to sound Corporate they can offer themselves for re-election.Governance practices because it ensures integrity and transparencyin managing the relationship that exists between the Bank and all The Chairman and Managing Director in consultation with the Bankits stakeholders. It is in that vein that the Bank ensures that it is in Secretary agree on the agenda for Board meetings, but all Boardcompliance with the requirements of various legislations which members are entitled to raise other matters. The Chairman ensuresgovern its operations including the Banking and Financial Services that all Board members are properly briefed on all issues arisingAct, Bank of Zambia corporate governance guidelines, the Zambian from the Board meetings. It is the responsibility of the executiveCompanies Act, the Securities Act and Anti-Money Laundering management to ensure that the Board is supplied with informationAct. in a timely manner in a form and of a quality appropriate to enable itto carry out its duties.Management TeamMembers of the executive team also participate in various industry The Board which comprises of five Non-Executive Directors andinitiatives, such as, the Bankers Association of Zambia (BAl) technical the Managing Director are confident that they have the knowledge,committee and committee set-up to formulate the Financial Charter talent and experience to lead a listed Bank. The Non-Executiveof the Citizens Economic Empowerment Act. Directors are independent of Management and exercise their independent judgment with their in-depth knowledge andAs a listed Bank on the Lusaka Stock Exchange, Zanaco has further experience. Refer to Directors Report for the Directors who heldcompliance requirements which include the continuing obligations office in the year under review.to comply with Lusaka Stock Exchange (LuSE listing) Rules and theLuSE Corporate Governance Code. Risk Management and Internal Control The Board accepts final responsibility for the risk management andThe Board internal control systems of the Bank. It is the responsibility ofThe Board of Directors retains full and effective control ofthe Bank management to ensure that adequate internal financial andand monitors executive management. The Board is also responsible operational control systems are developed and maintained on anfor the Banks direction, policies and strategies and all investment on-going basis to provide reasonable assurance regarding the:-and divestment decisions. It also ensures that the Bank meets itsresponsibilities to all its stakeholders and is prudently managed effectiveness and efficiency of operationsagainst the major risks inherent in general business dynamics. safeguarding of the Banks assets (including information) compliance with applicable laws, regulations andIn this respect, the Board makes key decisions to ensure that it supervisory requirementsretains proper direction and control of the Bank. The Directors reliability of accounting recordsbring in experience and expertise from their own fields of business business sustainability under normal as well as adverseto ensure that debate on matters of strategy, policy and conditions; andperformance is robust, informed and constructive. Furthermore responsible behaviour towards all stakeholdersthe role ofthe Chairman and Managing Director do not vest inone person. The efficiency of internal control system is dependent on the compliance with prescribed measures. There is always a risk of non-The Board structure is such that no one individual or group compliance with such measures by staff. Consequently, even adominates the decision making process. There is a schedule of strict and efficient internal control system can provide no morematters reserved for the full Boards approval and clear delegation reasonable measure of assurance in respect of the above mentionedof authority to the Managing Director and other senior executives objectives. Internal auditors monitor the operations of the internalwithin the Bank for specific matters. A procedure exists for the controls and report to management and audit committee ondetermination of matters arising between scheduled meetings. findings and recommendations. All critical Information TechnologyThere are established procedures in existence for planning and (IT) is backed up and the Bank has put in place well documentedcapital expenditure, for the making of investments, for business continuity and disaster tolerant procedures for all missioninformation, reporting systems for monitoring the Banks business critical operations and systems. The procedures are testedand performance. periodically and the Board is of the opinion they meetthe acceptable criteria.Newly appointed Directors are not only scrutinised and subjectedto a fit and proper test by Bank of Zambia but are also subjectedto final approval by shareholders at the Annual General Meeting.The Companys Articles of Association provides that, on a rotation•
  11. 11. Financial ReportingThe Directors accept final responsibility for preparation of the annual financial statements which fairly present: the financial position of the Bank as at the end of the year under review; the financial results of operations; as well as the cash fiows for that period.The responsibility for compiling the annual financial statements was delegated to management. The external auditors report on whetherthe annual financial statements are fairly presented.The Directors are satisfied that during the year under review: adequate accounting records were maintained an effective system of internal control and risk management, monitored by management, was maintained appropriate accounting policies supported by reasonable and prudent judgments and estimates, were used consistently and the financial statements were compiled in accordance with International Financial Reporting Standards approved by ZICA, the Banking and Financial Services Act and the Zambian Companies Act Complied with the Lusaka Stock Exchange (LuSE) Act and the Securities ActThe Directors are also satisfied that no material event has occurred between the financial year-end and the date ofthis report.The Board met on a quarterly basis throughout the year.The attendance by the Directors during the year was as follows: Directors Name 2010~M.!rch_ _ _M~Sepremb~Novemb~ Mr AJ M KUI pers NED Mr B Dick - NED - " " " " " Mr CY Mulendema Mr M H Wiessino - NED -ED " " " " " " Mrs G M Akaoelwa-Ehueni - NED " " " " " " Mr G.Robinson Mr FWeenig - NED - NED " " " " - "*NED - Non Executive Director, *ED - Executive DirectorDirectors CompensationThe disclosure of Directors fees and remunerations are made in the annual report (refer to note 33). The Directors do not have any sharesin the Bank and are not entitled to share options. Directorsfees or any amendments are approved by shareholders at the Annual GeneralMeeting.
  12. 12. Board EvaluationThe Board recognises that self evaluation is a best practice benchmark of assessing the levels of performance of the Board. On an on-going basis, the Board carries out self evaluation of its performance and that of its sub-committees. The review seeks to identify specificareas in need of improvement or strengthening and the result on any actions to be taken are discussed by the full Board.The review and evaluation include among other things, assessments ofthe Board:- Performances against its objectives at the beginning of the year Effectiveness in the Banks strategic direction Responsiveness to shareholders and stakeholders concerns Maintenance and implementation of the Boards governance principles Access to and review of information from management and the quality of such information Review of composition and diversity of skills and exposure of the Board.Board CommitteesTo enable it discharge its executive functions, the Board has established four principal standing committees, each governed by writtenterms of reference, defining the frequency of meetings, power and duties and reporting obligation. These committees continuouslyevaluate progress towards meeting the Banks overall objectives in addition to ensuring efficient and effective management of the entireBanks core functions. A non-executive director chairs each of the four committees. The said committees are Audit, Loans Review, Creditand the Human Resources and Compensation.Audit and Risk CommitteeThe Audit and Risk Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors and the ChiefExecutive Officer in attendance. The committee meets at least four times per year to evaluate, amongst others accounting practices,internal control systems and auditing and financial reporting. Its task includes evaluating critical risk areas identified with the help ofmanagement and to report on these to the Board.The committee operates under a formal charter approved by the board and committee members have unlimited access to all information.Certain members of management are invited to attend and give feedback at committee meetings. The Audit Committee also recommendsto the board the remuneration of the external auditors. The Committee also holds separate meetings with the Director of Internal Auditdepartment and the external auditors when required to ensure matters are considered without undue influence.The attendance by the Directors during the year was as follows: Directors Name 2010 Mr C Y Mulendema - NED .., March .., Ma .., Se tember .., November Mr B Dick Mr A.J M Kuijpers Mrs G M Akaoelwa-Ehueni - - - NED NED NED - .., " " .., - " .., - - .., -Loans Review CommitteeThe Loans Review Committee is chaired by a Non-Executive Director and consists of two Non-Executive Directors and one ExecutiveDirector who is the Chief Executive Officer of the Bank. On a quarterly basis the committee reviews the collectability of the Banks lendingportfolio by ensuring adherence to not only statutory and regulatory requirements but also that lending practice and procedures are inline with credit policy of the Bank, including on matters relating to provisions and allowances for impairment.
  13. 13. The attendance by the Directors during the year was as follows:--- Directors Name--- March~ M~Septemb~ Novemb-- ~ ~ Mr FWeenlg ~ Mr C Y Mulendema Mr M H Wiessing .~. ~ NED NED ED 2010Credit CommitteeThe Credit Committee is chaired by a Non-Executive Director and consists of two Non-Executive Directors and one Executive Directorwho is also the Chief Executive Officer of the Bank. Certain members of the Executive Management Committee attend by invitation. TheCredit Committee supervises the effective implementation of credit and risk management policies and ensures enhancement of theBanks credit risk management systems and processes in line with best practice in loan rating/credit risk modelling, loan pricing, andstrategic loan management, including identification and control of concentration of risk. The Credit Committee also approves credit withvalues beyond the mandate of Management.The attendance by the Directors during the year was as follows: Directors Name 2010~ arch~ ay_ _ September~ ovember_ _ Mr A.J. M. Kuijpers - NED - - - Mr D Bruce - NED - ~ ~ ~ Mr M. H. Wiessing - NED ~ ~ ~ ~ Mrs G M Akapelwa-Ehueni Mr G. Robinson - NED - NEDHuman Resources and Compensation Committee " " " " " " " "The Human Resources and Compensation Committee which is chaired by a Non-Executive Director, became operational in May 201 O.The committee provides oversight over remuneration and compensation for Senior Management and key personnel in the Bank so asto retain and motivate staff of the quality required. Matters related to remuneration and compensation were previously addressed by themain Board of Directors.Currently, the Bank participates annually in local market surveys and those focusing on the rest of Africa to ensure market related salariesare paid and market related trends followed in changes to benefits. Remuneration of all managerial staff in the bank is also linked to theirindividual performance. The attendance by the Directors during the year was as follows: Directors Name 2010 rn:m:iI rnJoJ . . . . ... . . . Mrs G M Akapelwa-Ehueni Mr G Robinson - NED - NED " " " " " " " " " " " " Mr C Y Mulendema - NED Mr M H WiessinoCode of conduct - ED " " " "The purpose of the code of conduct is to regulate required standards of corporate behaviour by which the Bank is judged in both retailand corporate operations. Therefore, the code of conduct stipulates the standards by which individuals within the Bank are judged.The objectives of the code are:• Integrity • Skill, care and diligence• Staff interest and gifts • Customer due diligence/ know your customer• Conduct of business/ communication with customers • Conduct of business/ conflict of interest• Duty to supervise
  14. 14. Company SecretaryThe Board appoints the Bank Secretary and all board members have access to the services of the company secretary. Where necessarythe Board may seek independent professional advice on some matters. The Company Secretary ensures the following: Annual calendar for board meetings is circulated to all board members after approval Adequate information is provided to all the members prior to commencement of the board and sub-committee meetings Culture of good corporate governance is promoted Liaison with Securities and Exchange Commission (SEC), the Lusaka Stock Exchange (LuSE) and Patents and Companies Registration Agency (PACRA) Maintaining the statutory registers Key liaison for investorsExternal AuditThe external auditors are responsible for reporting on whether the financial statements are fairly presented in accordance with InternationalFinancial Reporting Standards and in the manner required by the Zambian Companies Act and the Banking and Financial Services Act.Consultation occurs between external and internal auditors to effect an efficient audit process. The external auditors are supplied withand also consider all reports issued by the Internal Audit Department.Internal AuditInternal audit is an independent, objective assurance and consulting activity designed to add value to the Bank and improve operations.It helps the Bank accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve risk management,control and governance processes.Internal audit plans cover matters identified in risk management assessments, as well as, issues highlighted by the Board, the Audit andRisk Committee, Executive Directors and Senior Management.The Director of Internal Audit Department administratively reports to the Managing Director on day-to-day matters, but reports directlyto the Chairman ofthe Audit Committee on a regular basis. The purpose, authority and responsibility ofthe independent internal auditactivity are formally defined in an internal audit charter which is updated regularly and approved by the Audit Committee. Significantaudit findings are reported to the Audit Committee. Steps are taken to address shortcomings in control and other opportunities for improving the system, whenever they are identified. All significant business operations are subject to internal audit.Compliance FunctionThe Bank has set up an independent Compliance Function guided by the Compliance Charter which defines the fundamental principles,roles and responsibilities of the Compliance Functions within the Bank, as well as, its relationship with Executive Management, the Boardof Directors, the business and operational functions.The Charter will be updated from time to time to reflect legal and regulatory evolution and shall be communicated to all staff.The Board of Directors is responsible for formally approving the compliance policy set by the Executive Management. Efficiency andimplementation of the policy will be evaluated on a quarterly basis by means of a status report provided by Executive Management tothe Board.The objectives of the Independent Compliance Function are:- to identify and evaluate the compliance risks within the Bank organise, co-ordinate and structure compliance related controls control and monitor all measures taken to mitigate compliance risks report accordingly to the Executive Management and the Board of Directors as appropriate act as advisor of compliance within the Bank.The Compliance Function and Compliance Monitoring programme are subject to independent review by both internal and external auditfor appropriateness of the policies and implementation .•
  15. 15. Anti-Money Laundering PolicyThe Bank has enhanced its Anti-Money Laundering procedures by gaining access to an internationally reported database for people andentities who are reported to be involved in money laundering activities.Following the introduction of Anti-Money Laundering directives in 2009 by the Securities and Exchange Commission, the Bank has furtherendeavoured that all the requirements of the directives are met. Training of staff on Anti-Money laundering matters is an on going criticalactivity of the Bank designed to transfer sufficient knowledge to all members of staff.Whistle BlowingThe Whistle Blowing Policy is intended to make it easier for members of staff, consultants and other service providers to report irregularitiesin good faith without having to fear that their actions may have adverse consequences on them,The Whistle Blowing Policy is a key element in demonstrating the Banks commitment to the highest possible standard of transparency,integrity, probity and accountability in its operation with all stakeholders.Protecting the integrity and reputation of the Bank requires the active support of all members of staff who in most cases are the first tonotice and are required to report incidents of suspected fraud, corruption, collusion and coercion and other serious infringements of therules and policies in force at the Bank.By creating an environment of trust and maximum protection of the members of staff through this policy, the Bank wants to encouragethem to co-operate in full. The policy has put in place arrangements that ensure that members of staff who report irregularities in goodfaith are afforded the utmost confidentiality and the greatest degree of protection against any retaliation or reprisals whether actual orthreatened as a result of whistle blowing. Our whistle blowing policy comply with public interest disclosure (protection of whistle blowers)Act No.4 of 201 O.Insider TradingThe Bank has an Insider Dealing policy which complies with the requirements of the Securities Act Chapter 354 of the Laws of Zambia. ThePolicy sets out rules and guidelines for all staff in the Bank who come into contact with price sensitive information. The penalties for infringementare clearly outlined in the policy. The policy has defined a closed period prior to the publication of its mid-year and year-end financial resultsduring which employees and Directors may not deal in Zanaco shares. This is also extended to periods when Zanaco is trading under a cautionaryannouncement or when employees or Directors are in possession of unpublished price-sensitive information, The Bank Secretary announcesthe periods in which employees and Directors can trade in the shares of the Bank each of which lasts for 30 days only.Internal CommunicationMembers of staff at all levels are kept fully informed of developments within the Bank using a range of communication mechanisms.These include newsletters, website, circulars as well as regular discussions at different management levels, The emphasis is on two-waycommunication to develop a workforce which understands and supports the business philosophy and ethics of the Bank.Environment and Social Management PolicyThe Management and Board of Directors of Zanaco recognise that environmental management is the responsibility of all public andprivate institutions. As a good corporate citizen, Zanaco intends to fulfil this responsibility by actively working towards the realisation ofsustainable development. Through our business activities and services, the Bank will support environmental conservation efforts withinits operational scope, as well as, those in the service supply chain in order to contribute to the realisation of sustainable developmentin Zambia.The Banks Environmental and Social Management Policy includes specific objectives such as:a. Environmental Management at the Workplace - i.e. Training Staff in Environmental Management and improving the quality of the working environment within the Bank.b. Environmental Management in the Supply Chain-Taking into account the potential environmental impact of clients activities, the Bank will assist clients in environmental mainstreaming, which entails strategically addressing the environmental and social issues of their businesses, as a cross cutting dimension of development.Basel IIThe Basel II Framework is defined by the Bank of International Settlements (BIS) and aims to incentivise banks, through more efficientcapital allocations, to improve their risk management processes. BankofZambia is currently still consulting on the roll out of the BaselII Framework and Zanaco partiCipates in industry consultations.
  16. 16. Financial Fitness ProgrammeZanacos vision include providing sustainable financial returns and benefits to our stakeholders and we will primarily deploy ourcorporate social responsibility initiatives in support of our broad mission by enhancing the access, usage and understanding of financialservices, in both rural and urban areas with specific emphasis on the unbanked. By providing financial literacy, we will aim at changingbehaviours with a view to improving the well being of individuals in a sustainable way.Under the financial fitness programme we are targeting three major groups which include; children through special educativeprogrammes aimed at introducing the financial literacy basics early in life to help them build strong financial foundations, the generaladult population and entrepreneurs, through media sensitisation and interactive programmes aimed at strengthening their financialknowledge/ skills to help them make better informed decisions on the current and future use oftheir financial resources.As a result of implementation of the Financial Literacy programme:- over 00 schools have been adopted through our branch network and provided with financial education material to implement the programme over 5,000 pupils have been introduced to Financial Literacy basics that will help them make informed decisions on savings, debt and other personal financial aspects, 32 Financial Fitness publications have been made in the Education Post introducing Financial Literacy concepts to children and youth across the country the mostly unbanked and rural population of Zambia was availed financial education information through radio the Bank availed the Zambian public financial education information through the national and local television (ZNBC and MuviTV) 750 SMEs have received Financial Literacy training to promote sustainable business management practices in their day to day business operations and management.Zanaco is committed to helping citizens become financially fit.Learner,hip ProgrammeThrough this programme, the Bank had 49 students from various training colleges in the country on temporaly assignments under theLearnership Programme with the Technical and Vocational Entrepreneurship Training Authority (TEVETA). This programme is intended toprovide practical workplace experience for students in various business disciplines.This programme provides a flexible and cost effective pipeline of human resources in response to the changing nature ofbanking while providing an opportunity for students in various disciplines to gain valuable practical banking experience.The objectives of this programme include:- To provide a mechanism for flexible management of human resources at peak business period To provide an easily continuously accessible potential talent pool to feed the ranks ofthe Bank in future To provide service to the community through the community school responsibility programmeEmployee WeUness ProgrammeThe Bank undertakes a series of health and well ness initiatives to ensure a productive workforce and has a contributory medical schemeand a comprehensive HIV/AIDS workplace programme.The aim of these health and wellness initiatives include:- To improve employee health To reduce health care costs such as absenteeism and injury To improve productivity, including enhanced teamwork, morale and communication and To reduce staff turnover
  17. 17. Employee Share Ownership Programme (ESOP)Following the successful Initial Public Offer (IPO) in 2008, the employee share option plan enabled employees to become shareholdersin the Bank, through an agreed deferred payment plan. This in turn enabled the Bank, to maximise the value of employees share ownership,through the generation of loyalty, pride, knowledge and empowerment.Zanaco Football ClubZanaco Football Club, sponsored by Zambia National Commercial Bank Pic, is a well respected club among the top tier of the Football Associationof Zambia (FAZ) premier league and has over the years supplied the National Team with key players. Zanaco Football Club has so farheld title of the Zambian Premier League Championship five times and has also partiCipated in the Orange CAF Confederation Cup.
  18. 18. Section 164(6) of the Companies Act, 1994 requires the Directors to prepare financial statements for each financial year which give a true andfair view of the affairs of the Bank and of the profit or loss. The Directors are responsible for the maintenance of adequate accounting recordsand the preparation and integrity of the annual financial statements and related information.The Directors are also responsible for the systems of internal control. These are designed to provide reasonable, but not absolute assurance asto the reliability of the financial statements and to adequately safeguard, verify and maintain accountability for assets and to prevent and detectmaterial misstatements. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authorityand duties. Nothing has come to the attention of the Directors to indicate that any material breakdown in the functioning of these controls,procedures and systems has occurred during the year under review.In the opinion of the Directors;• the profit and loss account is drawn up so as to give a true and fair view of the profit of the Bank for the financial year ended 31 December 2010• the balance sheet is drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 201 0• the Financial Statements have been prepared using appropriate accounting estimates and conform with IFRS and the requirements of the Companies Act and the Banking and Financial Services Act (BFSA).• There are reasonable grounds to believe that the Bank will remain a going concern for at least twelve months from the date of this statement.18/03/2011
  19. 19. pwcReport of the Independent Auditors to the Members ofZambia National Commercial Bank PicReport on the financial statementsWe have audited the accompanying financial statements of Zambia National Commercial Bank Pic set out on pages 28 to 65. Thesefinancial statements comprise the balance sheet as at 31 December 2010 and the profit and loss account, statements of comprehensiveincome, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatoryinformation.Directors responsibility for the financial statementsThe directors are responsible for the preparation of financial statements that give a true and fair view in accordance with InternationalFinancial Reporting Standards and with the requirements of the Zambian Companies Act and the Zambian Banking and Financial ServicesAct and for such internal control as management determines is necessary to enable the preparation offinancial statements that are freefrom material misstatement, whether due to fraud or error.Auditors responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance withInternational Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance about whether the financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entityspreparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluatingthe appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.OpinionIn our opinion the financial statements give a true and fair view of the financial position of Zambia National Commercial Bank Pic at 31December 2010, and of its financial performance and its cash flows for the year then ended in accordance with International FinancialReporting Standards and with the requirements of the Zambian Companies Act and the Zambian Banking and Financial Services Act.
  20. 20. pwcReport on other legal requirementsThe Zambia Companies Act requires that in carrying out our audit we consider whether the company has kept proper accounting records andother registers required by this Act.In our opinion the company has kept proper accounting records and other records and registers required by the Zambia Companies Act.In accordance with the requirements of the Zambia Banking and Financial Services Act, we confirm that:i) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;ii) no transactions or conditions affecting the well being of the bank have come to our attention that in our opinion are not satisfactory and require rectification;iii) we are not aware of any transaction that has not been within the powers of the bank or which was contrary to the Zambia Banking and Financial Services Act;iv) there is no non-performing or restructured loan owing to the bank whose principal amount exceeds 5% of the regulatory capital of the bank;v) the company has complied with the provisions of the Zambia Banking and Financial Services Act and the regulations, guidelines and prescriptions issued under the Act. ~~. 23 March 2011 Lusaka~ ,/ MarkLi ken · Partne signing on behalf of the firm
  21. 21. Profit and loss account 31 December 31 December 2010 2009 Kmlilion KmlilionInterest Income 5 368,023 363,553Interest expense 6 (43,828) (38,053)Net Interest Income 324,195 325,500Impairment losses on loans & advances 16 (34,364) (65,620)Net interest income after loans impairment charges 289,831 259,880Fee and commission income 7 186,548 143,779Net fee and commission income 186,548 143,779Gains less losses from dealing in foreign currencies 27,304 23,105Other operating income 8 30,236 4,282 57,540 27,387Total income 533,919 431,046Operating expenses 9 (361,624) (305,038)Profit before income tax 172,295 126,008Tax charge 11 (59,785) (46,664)Profit for the year 112,510 79,344Dividend proposed/paid 12 (32,340) (24,255)Proposedl paid dividend per share (Kwacha) 28.00 21.00Basic! Diluted earnings as per share (Kwacha) 35 97.41 68.70Statement of Comprehensive IncomeYear ended 31 December 2010 2009 Kmlilion KmlilionProfit for the year 112,510 79,344Other comprehensive incomeNet (losses) /gains on available-fur-sale financial assets (1,276) 6,146Net reclassification adjustment for realised net (gain)/loss AFS (6,278) 1,703Income tax relating to components of other comprehensive incomeDeferred tax on disposals 4,394Total other comprehensive income for the year, net of tax (7,554) 12,243Total comprehensive income for the year 104,956 91,587
  22. 22. Balance Sheet Notes At31 At31 December December 2010 2009 Kmillion KmillionASSETSCash and balances with Bank of Zambia 13 404,031 624,840balances with other banks 14 122,034 218,656Withholding tax recoverable 49,946 19,381Investment securities- available-far-sale 15 343,460 410,844- held-to-maturity 15 612,792 411,849Loans and advances to customers 16 1,725,504 1,162,564Property and equipment 17 169,938 139,581Investment properties 18 11,812Other assets 20 92,315 39,928Total assets 3,520,020 3,039,455LIABILITIESCustomer deposits 21 2,591,242 2,292,358Deposits from other banks 22 24,278 3,642Deferred income tax 19 28,071 27,699Other liabilities 24 193,335 131,781Provisions for liabilities and charges 25 44,822 23,428Barrowed funds 26 161,894 164,870Total liabilities 3,043,642 2,643,778EQUITYShare capital 27 11,550 11,550Share premium 27 77,697 77,697Statutory reserve 30 11,550 11,550General banking reserve 28 75,584 50,543Revaluation reserve 29 39,452 49,352Retained earnings 260,545 194,985Total equity 476,378 395,677Total equity and liabilities 3,520,020 3,039,455The financial state ts on pages 28 to 65 were approved far issue by the Board of Directors on 18 March 2011 and signed onits behalf by: Director Director ~ Director Secretary
  23. 23. Statement of changes in equity Banking Share Statutory Revaluation genera. Retained Share capital reserve reserves reserve earnings premium Total Kmlliion Kmillion K million Kmillion K million Kmlliion KmillionBalance at 1 January 2009As previously reported 11,550 11,550 49,058 36,438 135,988 77,697 322,281Comprehensive incomeProfit for the year 79,344 79,344Net gain on available - for- sale 6,146 6,146Net reclassification adjustment for reasliedNet loss on AFS financial instrument 1,703 1,703Transfer of excess depreciation (1,606) 1,606Transfer of revaluation after Disposal (6,591) 6,591Deferred tax on disposals 4,394 4,394Deferred tax on excess depreciation 642 (642)Total comprehensive Income 294 91,293 91,587General reserve transfer 14,105 (14,105)Transactions with OwnersDividend paid (18,191) (18,191)At 31 December 2009 11,550 11,550 49,352 50,543 194,985 77,697 395,677Balance at 1 January 201 0 11,550 11,550 49,352 50,543 194,985 77,697 395,677Comprehensive incomeProfit for the year 112,510 112,510Net loss on available -for-sale (1,276) (1,276)Net reclassification adjustment for reasliedNet gain on AFS financial instrument (6,278) (6,278)Transfer of excess depreciation (1,523) 1,523Deferred tax on excess depreciation 609 (609)Transfer of revaluation after Disposal (1,432) 1,432Total comprehensive income (9,900) 114,856 104,956General reserve transfer 25,041 (25,041)Transactions with OwnersDividend paid (24,255) (24,255)At31 December 2010 11,550 11,550 39,452 75,584 260,545 77,697 476,378
  24. 24. Statement of cashflow Notes 31 December 31 December 2010 2009 Kmillion K millionCash flows from operating activitiesInterest receipts 5 368,023 363,553Interest payments 6 (43,828) (38,053)Net fee and commission receipts 186,548 143,779Foreign currency dealings and other income 57,540 27,387(Loss)/profit on sale affixed assets 1,065 (3,026)Impairment loss on investment properties 18 2,668Payments to employees and suppliers (395,988) (370,658)Income tax paid (67,937) (29,508)Depreciation 17 22,522 19,493Cash flows from operating activities beforechanges In operating assets and liabilities 127,945 115,635Changes in operating assets and liabilities:-loans and advances (562,940) (161,611)-statutory deposits (46,510) (1,989)- other assets (52,387) (12,389)- customer deposits 298,884 (32,845)- other liabilities 60,777 26,692- government securities (153,384) (213,233)Net cash used in operating activities (455,560) (395,375)Cash flows from investing activitiesPurchase of property and equipment 17 (46,834) (42,555)Proceeds from sale of property and equipment 4,700 14,656Net cash used in investing activities (42,134) (27,899)Cash flows from financing activitiesBorrowed funds (2,976) 44,861Dividends paid (24,255) (18,191)Net cash from financing activities (27,231) 26,670Net decrease in cash and cash equivalents (396,980) (280,%9)Cash and cash equivalents at start of year 32 761,867 1,042,836Cash and cash equivalents at end of year 364,887 761,867
  25. 25. Notes1 General informationThe Bank is incorporated in Zambia under the Companies Act as a limited liability company, and is domiciled in Zambia. The address ofits registered office is:Plot 21 18-2121P.O Box 336"Cairo RoadLusaka2 Summary of significant accounting policiesThe principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have beenconsistently applied to all years presented, unless otherwise stated.(a) Basis of preparationThe financial statements are prepared in compliance with International Financial Reporting Standards (IFRS). The measurement basisapplied is the historical cost basis, except where indicated in the accounting policies below. The financial statements are presented inZambian Kwacha (K), rounded to the nearest million, except where indicated.The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions, It also requires directorsto exercise their judgement in the process of applying the Banks accounting policies. The areas involving a higher degree of judgementor complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 3.Changes In accounting policy and disclosures(a) New and amended standards adopted by the bankIFRS 8, Operating segments. Replaced lAS 14, Segment reporting: The new standard requires a management approach~ under which segmentinformation is presented on the same basis as that used for internal reporting purposes. Segment information for 2009 has been restated toconform to the requirements of IFRS 8. Following the management approach of IFRS 8, operating segments are reported in accordance withthe internal reporting provided to the Executive Management Committee (the chief operating deCiSion-maker), which is responsible for allocatingresources to the reportable segments and assesses its performance. All operating segments used by the Bank meet the definition of a reportablesegment under IFRS 8.Amendment to lAS 1 - Presentation of Financial Statements. As part of its improvements project in 2007, the IASB considered the classificationof the liability component of a convertible instrument as current or non-current.Amendment to lAS 7 - Statement of Cash Flows. lAS 7.16 was amended to state explicitly that only an expenditure that results in a recognisedasset can be classified as a cash flow from investing activities.(b) Amendments to existing standards effective in 20 10 but not relevantAmendment to IFRS 2 - Group cash-settled share-based payment transactions (effective as from 1 January 201 0). In addition to incorporatingIFRIC 8, Scope of IFRS 2~ and IFRIC 11, IFRS 2 - Group and treasury share transactions: the amendments expand on the guidance in IFRIC 11 toaddress the classification of group arrangements that were not covered by that interpretation.Amendments to IFRIC 9 and lAS 39 -Embedded derivatives (effective for annual periods ended on or after 30 June 2(09). An entity should assesswhether an embedded derivative is to be separated from a host contract when the entity reclassifies a hybrid financial asset out ofthe fair valuethrough profit or loss category. The assessment is made on the basis of the circumstances that existed atthe later of: (a) the date when the entityfirst became a party to the contract, and (b) the date of a change in the terms of the contract that significantly modifies the cash fiows thatotherwise would have been required under the contract.Amendment to lAS 17- Leases (effective as from 1 January 201 0). The Board noted that the lessee in leases involving both land and buildingwill typically be in a position economically similar to an entity that purchased the land and buildings. The present value of the residual value ofthe property in a lease with a term of several decades would be negligible.IASB concluded that the accounting for the land element as a financelease in such circumstances would be consistent with the economic position of the lessee.
  26. 26. NotesAmendment to lAS 36 -Impairment of assets (effective as from 1 January 201 0). The amendment states that the required unit for goodwillimpairment is not larger than the operating segment level as defined in IFRS 8.5 before the permitted aggregation.(e) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the BankIFRS 9 - Financial instruments part 1: Classification and measurement. IFRS 9 replaces those parts of lAS 39 relating to classification andmeasurement offinancial assets. Financial assets are required to be classified into two measurement categories: those to be measured subsequentlyat fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classificationdepends on the entitys business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.Effective date: annual periods beginning on or after 1 January 201 3Amendment to lAS 32 - Classification of rights issue (effective as from 1 February 201 0)A number of amendments to existing standards and new interpretations have been published and will be effective for the Banks accountingperiods beginning on or after 1 January 201 0, but the Bank has not early adopted any of them.(b) Interest income and expenseInterest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designatedat fair value through profit or loss, are recognised within interest income or interest expense in the profit and loss account using theeffective interest method.The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocatingthe interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimatedfuture cash payments or receipts through the expected life ofthe financial instrument or, when appropriate, a shorter period to the netcarrying amount of the financial asset or financial liability. The calculation of the effective interest rate includes all fees paid or receivedbetween parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income isrecognised using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss.(c) Fees and commission incomeFees and commissions are generally recognised on an accrual basis when the service has been provided, Loan commitment fees for loansthat are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interestrate on the loan.(d) Translation of foreign currencies(I) Functional and presentationItems included in the financial statements are measured using the currency of the primary economic environment in which the entityoperates (the functional currency). The financial statements are presented in Kwacha (K) which is the Banks functional currency.(ii) Transaction and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing atthe dates of the transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currenciesare recognised in the profit and loss account.(e) Financial assetsThe Bank classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans, advances andreceivables; held-to-maturity financial assets; and available-for-sale assets. Management determines the appropriate classification of itsfinancial assets at initial recognition,(I) Loans, advances and receivablesLoans, advances and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an activemarket, other than: (a) those classified as held for trading and those that the Bank on initial recognition designates as at fair value throughprofit and loss; (b) those that the Bank upon initial recognition deSignates as available-for-sale; or (c) those for which the holder may notrecover substantially all of its initial investment, other than because of credit deterioration of instruments fair value using an observablemarket price.

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