2015 ANNUAL REPORT MicROfiNANcE ORgANizATiON credex LLc

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1 ANNUAL REPORT Microfinance Organization Credex LLC 1

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3 ANNUAL REPORT Microfinance Organization Credex LLC Contents Contents 3 Statement of Ceo 5 Events 7 Financial Data 8 Credit Portfolio 10 Credit Portfolio by Industry 10 Credit Portfolio by Gender 10 Financial Data Chart 11 Financial Ratios Chart 11 Auditor s Report 13 Statement of Profit or Loss and Other Comprehensive Income for 14 the Year Ended 31 December Statement of Financial Position as at 31 December 15 Statement of Cash Flows for the Year Ended 31 December 16 Statement of Changes in Equity for the Year Ended 31 December Background Basis of Preparation Significant accounting policies Net Interest Income Personnel Expenses Other General Administrative Expenses Taxation Cash And Cash Equivalents Loans To Customers Property, Equipment and Intangible Assets Other Assets Loans and Borrowings Equity Risk Management, Corporate Governance and Internal Control Capital Management Contingencies Related Party Transactions Financial Assets and Liabilities: Fair Values and Accounting Classifications Events after the Reporting Period 47 3

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5 ANNUAL REPORT Microfinance Organization Credex LLC Statement of CEO Notwithstanding the fact, that was financially unstable and many negative macroeconomic factors took place, such as the currency devaluation, export reduction, weakening of economies of the countries in the region, the quality of Credex s assets has not deteriorated and a high index of payments in the credit portfolio has been maintained. The above-mentioned achieved by means of a correct credit policy, by precisely evaluating the clients revenues and assets. We were able to implement all the planned projects and to ensure a stable foundation for Credex s future development. The company was able to expand once again compared to the previous year and at the same time, to improve the quality even more, in regard to service and financial index. Credex s financial stability and management based on the principles of corporate management was reflected in the trust toward the banks, which, after a multilateral research and study, increased the financing volume for Credex, in particular, the largest bank in Georgia- Bank of Georgia doubled the credit line volume and Halyk Bank and TBC Bank approved a new credit line. Additionally, important steps have been taken in regard to relations with investors and their further motivation increase. In particular, despite the fact that Credex s yearly financial audit is carried out by KPMG (a company being in the biggest four), in, Credex carried out an audit in order to identify and minimize fiscal and legal risks. For this purpose, Credex invited audit companies Nexia TA and BDO (companies being in the ten best of the world), which positively evaluated Credex s activity. During the current year, the credit products introduced during the previous year were properly implemented; additionally, we are in process of development of socially orientated credit products envisaged in organization s strategy plan and we are also planning certain events to put them into practice. From, we plan to expand the extent of money transfer services. In regard to the increase of Credex s social significance, we plan to increase the availability of financial resources for the population in regions that were the most damaged during the Russian-Georgian conflict. Additionally, we plan to further increase the number of our employees, especially women. Credex s nearest plans include opening of branches in regions and to provide individual available credit products to population working in agriculture. CEO Zurab Akhalaia 5

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7 ANNUAL REPORT Microfinance Organization Credex LLC EVENTS JANUARY FEBRUARY MARCH APRIL APRIL AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER DECEMBER On January 28,, an agreement has been signed on the assignment of loans with the Liberty Securities and Liberty Finance funds; From February, Credex s customers are able to use money transfer operations service, quickly and easily; In March, an agreement has been signed with the Bank of Georgia, on the assignment of a credit line. As for April 1,, Credex s credit portfolio exceeded GEL; In April, the audit company BDO carried out an audit in order to identify and reduce legal risks; In August, an agreement has been signed with another audit company being in the best ten of the world- Nexia TA on the provision of audit services for the identification and reduction of fiscal risks; In September, an agreement has been signed with Bank of Georgia on the increase of the credit line; In October, an agreement has been signed with Khalik Bank on the opening of the credit line; In November, the audit company KPMG started the preliminary preparatory procedures for the financial audit of, in accordance with the plan; In December, the Supervisory Board approved a decision regarding the opening of new branches during 2016, including in the regions damaged as a result of Russia s hostile activities; Up to loans have been issued on December 25,. 7

8 CREDEX FINANCIAL DATA Supervised Yes Years in the Market 4 year Exchange rate USD/LARI month 12 month 12 month 12 month 31/12/ /12/ /12/ BALANCE SHEET GEL USD GEL USD GEL USD GEL USD Assets ,577 1,761,629 1,014,588 2,458,529 1,331,523 4,074,605 1,701,367 Tresury 113,530 68,528 49,898 28,738 88,413 47, ,203 Gross Loan Porfolio 388, ,284 1,408, ,372 2,156,577 1,128, ,616,629 Povission 0 0 (14,088) (8,114) (24,223) (12,998) (59,253) (24,741) Fixed Assets 35,178 21,234 31,954 18, ,665 92, ,194 Other Assets 625, , , ,188 99,097 76, ,083 Liabilities 1,162, ,577 1,761,629 1,014,588 2,458,529 1,331, ,701,367 Deposits+Savings Borrowings 167, , , ,865 1,245, , ,083,269 other liabilities 0 25,820 14,871 35,041 20, ,486 NET CAPITAL 995, ,669 1,133, ,852 1,178, , ,612 Paid-in Capital 1,000, ,610 1,000, ,937 1,000, , ,554 Accumulated Reserves/ Losses 0 32,689 17, ,039 Net Income (4,871) (2,940) 133,547 76, ,791 92, ,019 INCOME STATEMENT Interest Income Loan clients 22,031 13, , , , , , ,355 Investments income 0 Interest Expenses (923) (557) (51,651) (29,748) (109,099) (62,834) (287,368) (119,992) 0 Financial Margin 21,108 12, , , , , , ,363 0 Loan loss provission Expenses 0 0 (14,088) (8,114) (10,135) (5,837) (46,672) (19,488) Personal Expanses (27,270) (16,460) (165,428) (95,276) (189,421) (109,095) (231,916) (96,837) Administrative Expanses (13,839) (8,353) (77,183) (44,453) (133,384) (76,821) (216,700) (90,484) Operating Expanses 0 (256,699) (147,843) (332,940) (191,753) (495,288) (206,809) Operating Margin (41,109) (24,814) 87,521 50,407 (314,677) 137,536 (266,283) (111,188) 0 Net Other Income (Expenses) 15,130 9,133 68,369 39,376 18,263 10, ,005 95,622 Net income before TAx (4,871) (2,940) 155,890 89, , , , ,176 Income Tax 0 0 (22,343) (12,868) (39,523) (12,868) (63,288) (26,426) Net income after Tax (4,871) (2,940) 133,547 76, , , , ,749 OPERATING INDICATORS No. of total clients No. of active Borrowers Average loan size ,910 No. of deposits Average Deposit size N of Emploees N of loan officers N of Branches

9 ANNUAL REPORT Microfinance Organization Credex LLC External Auditor: KPMG 31/12/ /12/ /12/ /12/ FINANCIAL INDICATIONS USD USD USD USD Capital Adequacy Leverage 53.13% % % Assets/capital PROFITABILITY ROA YTD 7.58% 9.46% 9.83% ROE YTD 13.35% 18.74% 27.46% ROA Average ROE Average LIQUIDITY Treasury/Assets 2.8% 3.6% 1.8% Treasury/Gross Porfolio 3.5% 4.2% 1.9% Treasury/Deposits+savings 8.3% 7.1% 2.9% Efficiency operating expanses/total income 55.3% 47.6% 41.1% Operating expanses/avg. Gross Portofolio Personal Expenses/Operating Expenses 64.4% 56.9% 46.8% Gross Porfolio/ Branches $811, $564, $808, N of loans Outstanding/Branches Gross Porfolio/ loan officers $270, $225, $323, N of loans Outstanding/loan officers Gross Portfolio/Employees $115, $94, $146, N of loans Outstanding/Employees Asets < 1 year $973, Liabilites < 1year $555, Portfolio Quality And Provisioning Arrears > 1 days 4121 $60,964 $37,186 $158,700 Arrears > 30 days 0 $33,402 $30,303 $98,243 Arrears > 90 days 0 $3,682 $30,065 $38,243 YTD W-offs 0 0 Provission/Gross porfolio 1.0% 1.2% 1.53% Provission/Arrears>1 days 13.3% 65.1% 15.59% Provission/Arrears>30 days 24.3% 79.9% 25.18% Provission/Arrears>90 days 220.4% 80.6% 64.70% 9

10 CREDEX credit portfolio by industry $120, Trading $431, Service $629, $15, Agriculture $9, $368, family, for car ) credit portfolio by gender Male Amount Female Amount 10

11 Financial data chart ANNUAL REPORT Microfinance Organization Credex LLC ,074, ,129 2,458,529 2,156,577 1,761,629 1,408,785 1,133,547 1,178, Assets Gross Loan Porfolio NET CAPITAL Net Income ,139 (4,871) 133, , /12/ /12/ /12/ Financial ratios chart % % % % % 31/12/ /12/ /12/ 50.00% 0.00% Leverage Assets/capital ROA YTDR ROE YTD 11

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13 ANNUAL REPORT Microfinance Organization Credex LLC KPMG Georgia LLC 4, Besiki Street, Tbilisi, 0108, Georgia Phone: +995 (32) , Fax: +995 (32) AUDITOR S REPORT To the Supervisory Board Microfinance Organization Credex LLC We have audited the accompanying financial statements of Microfinance Organization Credex LLC (the Company ), which comprise the statement of financial position as at 31 December, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to 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. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG Georgia LLC Tbilisi, Georgia April 18, 2016 KPMG Georgia LLC, a Company incorporated under the Laws of Georgia, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 13

14 CREDEX Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December GEL Notes 2014 Interest income 4 1,054, ,441 Interest expense 4 (288,054) (109,100) Net interest income 4 766, ,341 Impairment losses 9 (44,633) (10,135) Net interest income after provision for loan impairment 722, ,206 Fee and commission income - 53,675 Net foreign exchange gain 122,650 18,264 Other operating income 1,823 58,120 Other operating expenses (4,985) (1,468) Personnel expenses 5 (231,916) (189,422) Other general administrative expenses 6 (158,153) (114,942) Depreciation and amortization expenses 10 (30,388) (17,227) Profit before income tax 421, ,206 Income tax expense 7 (62,545) (39,523) Profit and total comprehensive income for the year 358, ,683 The financial statements as set out on pages 5 to 35 were approved by management on April 18, 2016 and were signed on its behalf by: Zurab Akhalaia Chief Executive Officer Nino Tavdishvili Chief Accountant The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 14

15 ANNUAL REPORT Microfinance Organization Credex LLC Statement of Financial Position as at 31 December GEL Notes 2014 ASSETS Cash and cash equivalents 8 74,728 88,414 Loans to customers 9 3,812,411 2,132,353 Property, equipment and intangible assets , ,665 Deferred tax assets 7 3,956 - Other assets 11 72,880 99,097 Total assets 4,074,605 2,458,529 LIABILITIES Loans and borrowings 12 2,594,322 1,245,008 Current tax liability 33,266 13,401 Deferred tax liability 7-2,886 Other liabilities 13,402 18,754 Total liabilities 2,640,990 1,280,049 EQUITY Charter capital 13 1,000,000 1,000,000 Retained earnings , ,480 Total equity 1,433,615 1,178,480 Total liabilities and equity 4,074,605 2,458,529 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 15

16 CREDEX Statement of Cash Flows for the year ended 31 December GEL Note 2014 CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax 421, ,206 Adjustments for: Depreciation and amortization 30,388 17,227 Interest income Interest expenses Foreign exchange gain from revaluation Changes in: (1,052,385) (568,441) 288, ,100 (115,393) (18,264) (428,156) (204,172) Increase in loans to customers (1,131,410) (644,523) Decrease in other assets 6,608 (42,546) Decrease in other liabilities (7,436) 15,612 Cash used in operating activities (1,560,394) (875,629) Interest received 1,037, ,490 Interest paid (282,715) (105,329) Income tax paid (50,900) (45,579) Cash used in operations (856,457) (469,047) CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of property and equipment (2,353) (105,610) Purchases of intangible assets - (18,663) Cash flows used in investing activities (2,353) (124,273) CASH FLOWS FROM FINANCING ACTIVITIES Capital contributed from shareholders 19, ,214 Receipts from loans and borrowings 1,904,521 1,152,435 Repayment of loans and borrowings (989,834) (586,645) Dividends paid (103,500) (171,750) Cash flows from financing activities 830, ,254 Net decrease in cash and cash equivalents 34,934 (28,032) Effect of changes in exchange rates on cash and cash 14,346 3,582 equivalents Cash and cash equivalents as at the beginning of the year 88,414 49,898 Cash and cash equivalents as at the end of the year 8 74,728 88,414 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 16

17 ANNUAL REPORT Microfinance Organization Credex LLC Statement of Changes in Equity for the year ended 31 December Charter capital Retained earnings Total Balance as at 1 January ,000, ,547 1,133,547 Total comprehensive income for the period Profit and other comprehensive income for the period Transactions with owners, recorded directly in equity - 216, ,683 Dividends declared - (171,750) (171,750) Balance as at 31 December ,000, ,480 1,178,480 Balance as at 1 January 1,000, ,480 1,178,480 Total comprehensive income for the period Profit and other comprehensive income for the year Transactions with owners, recorded directly in equity - 358, ,635 Dividends declared - (103,500) (103,500) Balance as at 31 December 1,000, ,615 1,433,615 These financial statements were approved by management on April 18, 2016 and were signed on its behalf by: Zurab Akhalaia Chief Executive Officer Nino Tavdishvili Chief Accountant The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 17

18 CREDEX 1. Background (a) Organization and operations Microfinance Organization Credex LLC ( the Company ) was established on 23 August 2012 to provide sustainable lending services to those individual entrepreneurs who are not able to access credit facilities through the conventional banking system. The Company provides credit facilities to very small entrepreneurs to grow their businesses and improve their economic situation. The legal address of the Company is 7 Chabukiani Street, Tbilisi, Georgia. The supreme governing body of the Company is the Shareholders Board. The supervision of the Company s operations is conducted by the Supervisory Board, members of which are appointed by the Shareholder s Board. Daily management of the Company is carried out by the Chief Executive Officer appointed by the Supervisory Board. The Company was founded by Georgian citizens Vakhtang Bartaia, Mikheil Tsogoshvili and Zurab Akhalaia with 70%, 20% and 10% shares, respectively, in the Company s charter capital. In 2013, Vakhtang Bartaia s shares were transferred to Sophio Devdariani (40%) and Natalia Kekelidze (30%). The Company had the following shareholders as at 31 December and 2014: Sophio Devdariani 40%; Natalia Kekelidze 30%; Mikheil Tsogoshvili 20%; Zurab Akhalaia 10%. As at 31 December 34% of funding the Company received from these shareholders (2014: 55%). The shareholders have the power to direct the transactions of the Company at their own discretion and for their own benefit. They also have a number of other business interests outside the Company. Related party transactions are disclosed in note 17. (b) Georgian business environment The zcompany s operations are located in Georgia. Consequently, the Company is exposed to the economic and financial markets of Georgia, which display emerging-market characteristics. Legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in Georgia. The financial statements reflect management s assessment of the impact of the Georgian business environment on the operations and financial position of the Company. The future business environment may differ from management s assessment. 2. Basis of preparation (a) Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). 18

19 ANNUAL REPORT Microfinance Organization Credex LLC (b) Basis of measurement The financial statements are prepared on the historical cost basis. (c)functional and presentation currency The functional currency of the Company is the Georgian Lari (GEL) as, being the national currency of Georgia, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The GEL is also the presentation currency for the purposes of these financial statements. All financial information presented in GEL is rounded to the nearest currency unit. (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the note 9 (b) relating to loan impairment estimates. 3. Significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these financial statements. (a) Foreign currency Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. (b) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand and unrestricted current accounts held with banks with original maturities of less than three months. Cash and cash equivalents are carried at amortised cost in the statement of financial position. 19

20 CREDEX (c) Financial instruments (i) Classification Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Company: - intends to sell immediately or in the near term - upon initial recognition designates as at fair value through profit or loss - upon initial recognition designates as available-for-sale or, - may not recover substantially all of its initial investment, other than because of credit deterioration Management determines the appropriate classification of financial instruments at the time of the initial recognition. (ii) Recognition Financial assets and liabilities are recognized in the statement of financial position when the Company becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on their sale or other disposal, except for: - loans and receivables which are measured at amortized cost using the effective interest method. All financial liabilities are measured at amortized cost. (iv) Amortized cost The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. (v) Fair value measurement principles 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 in the principal, or in its absence, the most advantageous market to which the Company has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 20

21 ANNUAL REPORT Microfinance Organization Credex LLC When there is no quoted price in an active market, the Company uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Company determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. (vi) Gains and losses on subsequent measurement For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. (vii) Derecognition The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Company neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Company is recognized as a separate asset or liability in the statement of financial position. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. The Company writes off assets deemed to be uncollectible. (viii) Derivative financial instruments Derivative financial instruments include foreign currency contracts. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in profit or loss. (ix) Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. (d) Property and equipment and intangible assets (x) Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. 21

22 CREDEX Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. (xi) Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. The estimated useful lives are as follows: - computers and hardware 3 years; - office equipment 5 years; - leasehold improvements 5 years; - other 7 years. Leasehold improvements are depreciated over the shorter of the lease term and their useful lives. Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (xii) Intangible assets Acquired intangible assets are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful life is 10 years. (e) Impairment The Company assesses at the end of each reporting period whether there is any objective evidence that a financial asset or Company of financial assets is impaired. If any such evidence exists, the Company determines the amount of any impairment loss. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of financial asset or Company of financial assets that the Company would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data related to a Company of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. (xiii) Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans to customers as presented in Note 9 and other receivables as presented in note 11. The Company reviews its loans and receivables to assess impairment on a regular basis. 22

23 ANNUAL REPORT Microfinance Organization Credex LLC The Company first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan or receivable in a Company of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data related to similar borrowers. In such cases, the Company uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Company writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. (xiv) Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognized. (f) Charter capital (xv) Charter capital Charter capital comprises the capital of the Company authorized by shareholders at the Company s incorporation. Charter capital is classified as equity. 23

24 CREDEX (xvi) Dividends The ability of the Company to declare and pay dividends is subject to the rules and regulations of the Georgian legislation. Dividends are reflected as an appropriation of retained earnings in the period when they are declared. (g) Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are not recognised for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (h) Income and expense recognition Interest income and expense are recognized in profit or loss using the effective interest method. Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest income over the estimated life of the financial instrument using the effective interest method. Other fees, commissions and other income and expense items are recognized in profit or loss when the corresponding service is provided. (i) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December, and are not applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Company plans to adopt these pronouncements when they become effective. 24

25 ANNUAL REPORT Microfinance Organization Credex LLC IFRS 9 Financial Instruments is to be issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October The third phase of IFRS 9 was issued in November 2013 and relates to general hedge accounting. The standard was finalized and published in July The final phase relates to a new expected credit loss model for calculating impairment. The Company recognizes that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the financial statements. The Company has not analyzed the impact of these changes yet. The Company does not intend to adopt this standard early. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions. Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January The Company has not yet analyzed the likely impact of the improvements on its financial position or performance. 4. Net interest income GEL 2014 Interest income Loans to customers 1,054, ,441 1,054, ,441 Interest expense Loans and borrowings (288,054) (109,100) 766, , Personnel expenses GEL 2014 Employee compensation 231, ,422 25

26 CREDEX 6. Other general administrative expenses GEL 2014 Operating lease expense 57,000 36,000 Professional services 46,561 19,724 Office supplies 22,897 20,279 Advertising and marketing 7,320 5,331 Security 4,920 2,965 Communications and information services 4,447 3,231 Commission and fee expense - 14,833 Other 15,008 12, , , Taxation GEL 2014 Current year tax expense 69,387 36,302 Movement in deferred tax assets and liabilities due to origination and reversal of temporary differences (6,842) 3,221 Total income tax expense 62,545 39,523 In the applicable tax rate for current and deferred tax is 15% (2014: 15%). Reconciliation of effective tax rate for the year ended 31 December: GEL % 2014 % Profit before tax 421, , Income tax at the applicable tax rate 63, , (Non-taxable income) non-deductible costs (632) - 1,092-62, ,

27 ANNUAL REPORT Microfinance Organization Credex LLC (a) Deferred tax assets and liabilities Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax assets as at 31 December and Movements in temporary differences during the years ended 31 December and 2014 are presented as follows. GEL 1 January Recognized in profit or loss 31 December Loans to customers 1,182 4,098 5,280 Property, equipment and intangible assets (5,170) 1,737 (3,433) Loans and borrowings 1,102 1,007 2,109 (2,886) 6,842 3, GEL 1 January 2014 Recognized in profit or loss 31 December 2014 Loans to customers 2,113 (931) 1,182 Property, equipment and intangible assets (2,263) (2,907) (5,170) Loans and borrowings , (3,221) (2,886) (b) Recognized deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: GEL Assets Liabilities Net Loans to customers 5,280 1, ,280 1,182 Property, equipment and intangibles - - (3,433) (5,170) (3,433) (5,170) Loans and borrowings 2,109 1, ,109 1,102 Net tax assets (liabilities) 7,389 2,284 (3,433) (5,170) 3,956 (2,886) The management believes that recognition of deferred tax assets is appropriate as management considers it probable that future taxable profits would be available against which the deferred tax assets can be utilised. The deductible temporary differences do not expire under current tax legislation. 27

28 CREDEX 8. Cash and cash equivalents GEL 2014 Cash on hand 17,491 48,345 Bank balances 57,237 40,069 Total cash and cash equivalents 74,728 88,414 No cash and cash equivalents are impaired or past due. All of the Company s bank balances are with the bank rated by Fitch as BB-. As at 31 December and 2014 the Company has no bank whose balances exceed 10% of equity. 9. Loans to customers GEL 2014 Loans to individuals Loans collateralized by real estate 3,773,330 2,085,357 Other consumer loans 98,334 71,219 Total loans to customers 3,871,664 2,156,576 Gross loans to customers 3,871,664 2,156,576 Impairment allowance (59,253) (24,223) Net loans to customers 3,812,411 2,132,353 Movements in the loan impairment allowance for the year ended 31 December are as follows: GEL 2014 Balance at the beginning of the period 24,223 14,088 Written off loans (9,603) - Net charge 44,633 10,135 Balance at the end of the period 59,253 24,223 28

29 ANNUAL REPORT Microfinance Organization Credex LLC (a) Credit quality of loans to customers The following table provides information on the credit quality of loans to customers as at 31 December : GEL Gross loans Impairment allowance Net loans Impairment allowance to gross loans, % Loans collateralized by real estate - not overdue 3,349,522 (18,038) 3,331, % - overdue less than 30 days 127,207 (633) 126, % - overdue days 185,226 (21,716) 163, % - overdue days 111,375 (18,318) 93, % Total loans collateralized by real estate 3,773,330 (58,705) 3,714, % Other consumer loans - not overdue 98,022 (527) 97, % - overdue less than 30 days 312 (21) % Total other consumer loans 98,334 (548) 97, % Total loans to customers 3,871,664 (59,253) 3,812, % The following table provides information on the credit quality of the loans to customers as at 31 December 2014: GEL Gross loans Impairment allowance Net loans Impairment allowance to gross loans, % Loans collateralized by real estate - not overdue 2,003,066 (10,016) 1,993, % - overdue less than 30 days 5,675 (114) 5, % - overdue days 3,594 (359) 3, % - overdue days 73,022 (8,846) 64, % Total loans collateralized by real estate 2,085,357 (19,335) 2,066, % Other consumer loans - not overdue 55,184 (828) 54, % - overdue less than 30 days 7,455 (373) 7, % - overdue days 444 (44) % - overdue days 2,801 (280) 2, % 29

30 CREDEX GEL Gross loans Impairment allowance Net loans Impairment allowance to gross loans, % - overdue more than 365 days 5,335 (3,363) 1, % Total other consumer loans 71,219 (4,888) 66, % Total loans to customers 2,156,576 (24,223) 2,132, % Key assumptions and judgments for estimating loan impairment (i) Loans to customers Loan impairment results from one or more events that occurred after the initial recognition of the loan and that have an impact on the estimated future cash flows associated with the loan, and that can be reliably estimated. Loans without individual signs of impairment do not have objective evidence of impairment that can be directly attributed to them. The objective indicators of loan impairment include the following: overdue payments under the loan agreement significant difficulties in the financial conditions of the borrower The Company estimates loan impairment for loans to customers based on an analysis of the future cash flows for impaired loans and based on its past loss experience for portfolios of loans for which no indications of impairment has been identified. The significant assumptions used by management in determining the impairment losses for loans to customers include: Loans collateralised by real estate: 0.5% collective provision considering the economic environment and market loss experience for not overdue loans; for loans with individual signs of impairment a delay of more than 12 months in obtaining proceeds from the foreclosure of collateral and a discount of between 30% and 50% to the originally appraised value if the property pledged is sold. Changes in these estimates could affect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus three percent, the impairment allowance on loans to customers as at 31 December would be GEL 114,372 (2014: GEL 63,971) lower/higher. (b) (i) Analysis of collateral and other credit enhancements Loans to customers The following table provides the analysis of the collateral as at 31 December : 30

31 ANNUAL REPORT Microfinance Organization Credex LLC GEL Loans to customer, carrying amount Fair value of collateral for collateral assessed as of loan inception date Fair value of collateral not determined Loans without individual signs of impairment Real estate 3,331,486 3,331,486 - Precious metals 2,795 2,795 - Third party guarantee 42,212-42,212 Loans without collateral 52,486-52,486 Total loans without individual signs of impairment 3,428,979 3,334,281 94,698 Overdue or impaired loans Real estate 383, ,141 - Third party guarantee Total overdue or impaired loans 383, ,432 - Total loans to customers 3,812,411 3,717,713 94,698 The following table provides the analysis of the collateral as at 31 December 2014: Fair value of collateral GEL Loans to customer, carrying amount for collateral assessed as of loan inception date Fair value of collateral not determined Real estate 1,993,050 1,993,050 - Motor vehicles Precious metals 2,536 2,536 - Third party guarantee 41,506-41,506 Loans without collateral 9,323-9,323 Total loans without individual signs of impairment 2,047,406 1,996,577 50,829 Overdue or impaired loans Real estate 72,972 72,972 - Precious metals Third party guarantee 9,781-9,781 Loans without collateral 1,268-1,268 Total overdue or impaired loans 84,947 73,898 11,049 Total loans to customers 2,132,353 2,070,475 61,878 The tables above are presented on the basis of excluding overcollateralization. 31

32 CREDEX Loans with collateral are mainly secured by real estate and sureties. The recoverability of loans which are neither past due nor impaired is primarily dependent on the creditworthiness of the borrowers rather than the value of collateral, and the Company does not necessarily update the valuation of collateral as at each reporting date. The Company s policy is to issue loans collateralised by real estate with a loan-to-value ratio at the date of loan issuance to be maximum 50%. Due to the low loan-to-value ratio, the management does not expect any negative movements in market prices to have a significant impact on recoverability of the loans. Loans collateralised by real estate comprise more than 97% of the total portfolio as at 31 December (2014: 97%). Sureties and/or third party guarantees received from individuals are not considered for impairment assessment purposes. Accordingly, such loans are presented as loans without collateral as other consumer loans. (ii) Repossessed collateral During the year ended 31 December, the Company obtained certain assets by taking possession of collateral for loans to customers with a net carrying amount of GEL 44,942 (2014: 33,500). As at 31 December the repossessed assets GEL 44,942 are presented in other assets (see note 11). The Company s policy is to sell these assets as soon as it is practicable. (c) Industry and geographical analysis of the loan portfolio Loans to customers were issued primarily to customers located in Tbilisi, Georgia who operate in the following economic sectors: GEL 2014 Loans to individuals Consumer loans 1,432,537 1,122,677 Retail trade 1,222, ,486 Services 735, ,049 Manufacturing 40,015 21,019 Agriculture 22,532 16,943 Transportation 7,929 28,883 Others 350,824 44,296 Total loans to customers 3,812,411 2,132,353 (d) Significant credit exposures As at 31 December no individual loan balances or groups of connected borrowers balances exceed 10% of equity (2014: nil). (e) Loan maturities The maturity of the loan portfolio is presented in note 14(d), which shows the remaining period from the reporting date to the contractual maturity of the loans. 32