2 Centenary Rural Development Bank Limited

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2 2 Centenary Rural Development Bank Limited

3 Centenary Rural Development Bank Limited 3

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5 Table of Contents 1Table of Contents Mission, Strategy and Ownership 6 Outlook for the FY Ownership Shareholders & Shareholding Structure 7 Board of Directors 8 Executive Management 10 Corporate Governance Report 12 Corporate Social Responsibility 16 Directors Report 18 Directors Responsibility for Financial Reporting 20 Chairman s Statement 21 Report of the Independent Auditor to Centenary Bank 24 Financial Definitions 26 Financial Objectives in Financial Performance Highlights in Operational and Financial Review 29 Financial Statements 34 Sustainability Report 76 Bank Contact Information 91 Branch Network Information 93 Centenary Rural Development Bank Limited 5

6 2Mission, Strategy and Ownership Mission Statement To provide appropriate financial services especially micro finance to all people in Uganda, particularly in rural areas, in a sustainable manner and in accordance with the law. Vision To be the best provider of Financial Services, especially Microfinance in Uganda. Objectives The main objective of the Bank is to promote and enhance development through loans to rural farmers, processors of agricultural produce, small manufacturing entrepreneurs, small traders and importers and exporters. The Bank does this through loan products and services including: Agricultural Loans, Leasing, Micro Business Loan, Investment Loans and Working Capital Loans. The Bank also endeavors to participate in the Government s poverty alleviation programme and help improve the living conditions of the rural poor through loan products such as Home Improvement Loans and Salary Loans, as well as through various savings schemes to promote savings. The Bank will continue to explore ways to serve its rural customers in a better and more efficient manner and will also continue to strive to reinforce its number one position in rural banking. With more branches spread across Uganda and with our centralized stateoftheart banking network, the Bank is determined to achieve its dream being truly the Bank for all Ugandans. Business Strategy Centenary Bank was created as a financial institution to serve the economically disadvantaged people especially in rural areas and to contribute to the overall economic development of the country. This has meant that the Bank, although licensed as a full service Commercial Bank, has always focused on the provision of microfinance. This has been and will remain the focus of Centenary Bank. However, to reduce business risks, the Bank has diversified her activities to include lending to small and medium enterprises as well as large corporations. This will enable the Bank to reach the middle and higherend markets and also provides services to sectors that are complementary to its target market and customers. Outlook for the Year 2010 and Beyond Centenary Bank will continue to carry out its business in a manner that is fully accountable to the society in which it operates in terms of the impact of its activities on its community (People) and the environment (Planet), alongside its legitimate interest in making a profit. 6 Centenary Rural Development Bank Limited

7 Mission, Strategy and Ownership Centenary Bank has been predominantly a commercial microfinance bank, with microfinance customers accounting for over 90% of its customer base. Centenary Bank will retain this focus with a diversification towards lending to the small and medium enterprise sector. The strategy is to continue to be dedicated to the further expansion of lending activities through a prudent expanded branch network, new loan products and more aggressive marketing of our products and services. Our priorities will continue to be the improvement of the Bank s market share in microfinance, diversification of the target markets to increase our involvement in the small and medium enterprise market and on a lesser scale in the corporate market. We shall strive to continue to improve on our Customer Service delivery and to improve on the efficiency of the Bank. Ownership The Catholic Dioceses of Uganda 38.5% Arua, Fort Portal, Gulu, Hoima, Jinja, Kabale, KasanaLuwero, Lugazi, Kampala, Kasese, Kotido, Lira, Masaka, Mbarara, Mityana, Moroto, Nebbi, Soroti and Tororo. The Uganda Catholic Secretariat 31.3% SIDI 11.6% Solidarite Internationale pour le Development et l Investissement STICHTING HIVOSTRIODOS FONDS. 18.3% An investment fund, specializing in investing in microfinance and trade finance, managed by Triodos Investment Management in the Netherlands. Individual shareholders 0.3% (4 Ugandan individuals) Total: 100% Centenary Rural Development Bank Limited 7

8 3Board of Directors The Directors who held office during the year were as follows: Prof. John DdumbaSsentamu Board Chairman Dr. Simon M.S. Kagugube Executive Director /Ag Managing Director Mr. John Giles Managing Director Retired June 2009 Mr. Henry Kibirige Member (Chairman Human Resources Committee) Mr. Kimanthi Mutua Member (Chairman Compensation Committee) Mt. Rev Paul Bakyenga Member (Archbishop of Mbarara Archdiocese) 8 Centenary Rural Development Bank Limited

9 Mr. Andrew Obol Member (Chairman Audit Committee) Mt. Rev Dr. Cyprian K. Lwanga Member (Archbishop of Kampala Archdiocese) Mr. Rene Ehrmann Member Ms. Beatrice Florence Ikilai Member Mr. Jacco Minnaar Member (Chairman ALCO Committee) Dr. Peter Ngategize Member (Chairman Risk Management Committee) Centenary Rural Development Bank Limited 9

10 4 Executive Management Executive Director /Ag Managing Director Dr. Simon Dr. M.S. Simon Kagugube M.S. Kagugube Tel: +256 Tel: Company Secretary/ General Manager, Legal Mrs. Peninnah Kasule Tel: Centenary Rural Development Bank Limited

11 General Manager, Internal Audit Mr. Edward Katimbo Mugwanya Tel: General Manager, Business Technology Mr. George K. Thogo Tel: General Manager, Human Resources Mrs. Jennifer Kaggwa Tel: General Manager, Finance Mr. Philip T. Irama Tel: General Manager, Credit Mr. Joseph Lutwama Tel: General Manager, Operations Mr. Joseph Kimbowa Tel: Centenary Rural Development Bank Limited 11

12 Centenary Bank views the implementation of best corporate governance practices as a fundamental characteristic of its operations. The Board of Directors is therefore committed to the consideration and implementation of initiatives to improve corporate governance for the benefit of all stakeholders. Good corporate governance seeks to protect stakeholders interests by balancing entrepreneurial leadership with transparency and control mechanisms, without compromising value creation and efficient decisionmaking. The Bank endeavors to establish and maintain leading governance and risk management systems and practices. The Bank s risk management function is responsible for identifying and understanding the different types of risks faced, internally and externally, locally and internationally and for measuring and managing them accordingly through established and emerging risk management methodologies. The Bank has a clearly identified enterprise risk management framework that emanates from the sound governance principles maintained at board level, head office and through the various functional structures. The risk objectives are integrated and aligned with the Bank s wider business development and management objectives. Codes and Regulations The Bank operates in a highly regulated industry and is committed to complying with legislation, regulation and codes of best practice and seeks to maintain the highest standards of governance, including transparency and accountability. The Bank therefore has a corporate governance manual to bolster a culture of compliance and best practice in the Bank. Board of Directors 5Corporate Governance Board Structure The Bank continues to advocate an integrated approach to corporate governance as evidenced by the governance framework. An effective and independent board provides strategic direction and has ultimate responsibility for the functioning of the Bank. The Board is accountable for all decisions taken by its Board Committees and has the responsibility to ensure that the company has effective management and that adequate succession plans are in place. The Board and its committees all operate on well defined and agreed mandates, which set out their terms of reference and are reviewed and revised regularly in order to keep pace with best practice. Risk Management The Board has ultimate responsibility for risk management, which includes evaluating key risk areas and ensuring that processes for risk management and systems of internal control are implemented. To assist in fulfilling this duty, the Board has appointed a number of committees, for example Board Audit Committee, Risk Management Committee, Asset and Liability Management Committee, Compensation Committee and Human Resource Committee 12 Centenary Rural Development Bank Limited

13 Corporate Governance Board Committees Board committees have clearly defined, written terms of reference setting out their role and function, term, responsibility, scope of authority and procedures for reporting to the Board. The Committees fulfill an essential role in assisting the Board in the performance of its duties. The Chairpersons and members of the Committees are appointed by the full Board. A. Board Audit Committee The Board Audit Committee is comprised of independent nonexecutive Directors who are suitably qualified for the committee to perform its mandate. The Managing Director attends the Audit Committee meetings by invitation only. Communication between the Board, executive management, Internal Audit and External Auditors is encouraged. The committee s key terms of reference are divided into various categories and include the following: External Auditors and External Audit Recommend to the Shareholders in General Meeting, the appointment and fee for external auditors. Review audit plans and considers areas of special concern. Review management reports and letters from external auditors concerning deviations, weakness in accounting and operational controls. Review and monitor the external auditors independence and objectivity, taking into consideration relevant professional and regulatory requirements. Financial Reporting and Financial Control Review the adequacy of capital, provisions for bad and doubtful debts and diminution in the value of any assets. Review accounting policies and practices and all proposed changes thereto and recommend such changes where appropriate. Review the effectiveness of financial management and the quality of internal accounting control systems and financial reports produced by Management. Review reports on major defalcations. Review the company s interim and audited annual financial statements, dividend declarations and all financial information for distribution. Review the basis on which the company has been determined as a going concern. Internal Audit Review reports by the Internal Audit Division and their overall effectiveness, the scope and depth of audit coverage, reports on internal control and any recommendations and confirm that appropriate action has been taken. Review coordination between the internal audit function and the external auditors. Compliance Review the Bank s compliance plan, with specific reference to the procedures for identifying regulatory risks and controlling their impact on the company. Consider reports and letters received from the regulatory authorities and management s responses. Risk Management Consider any matter of significance raised in the risk management committee meetings. Ethics Monitor the ethical conduct of the company and consider the development of ethical standards and requirements. Review complaints handling and reporting procedures. Centenary Rural Development Bank Limited 13

14 Corporate Governance B. Board Risk Management Committee This committee s main terms of reference include: Setting the Bank s credit governance structure to ensure that there is a clearly defined mandate and delegated authorities within the structure. Reviewing the Bank s credit portfolio, including trends and provisions and ensuring alignment with the Bank s credit strategy and risk appetite. Approving insider and large exposures. Reviewing of operational risk exposure in respect to IT operations, people, organizational and regulatory compliance levels, business continuity, money laundering issues, disaster recovery measures, key control standards, expansion, competition, frauds, etc... Ensuring that the level of operational risk within Centenary Bank is identified, monitored and remains within agreed risk tolerance levels approved by the Board. Review monthly operational risk assessment reports. Review operational risk associated with the launching of any new products or services. Review Business Continuity testing schedules to ensure that plans remain fit for purposes at all times. C. Asset and Liability Committee (ALCO): Ensures that market and liquidity risks are identified, measured, monitored and controlled. The major risks to which the Bank is exposed are: Market Risk: The risk of decrease in value of a portfolio as a result of an adverse movement in market variables such as prices, interest rates and currency exchange rates. Liquidity Risk: The risk that the Bank has insufficient funds or marketable assets available to fulfill its obligation to counterparty. D. Board Compensation Committee: The primary role and responsibility of the Compensation Committee is to: Provide oversight on the remuneration of Directors and Senior Management. Ensure that compensation is consistent with the institution s culture, objectives, strategy, control environment and with market and industry trends. Review the performance of the Executive Directors and Senior Staff on an annual basis and communicate this assessment to them. Report to the full Board for discussion assessment of the Board s performance following end of each financial year. E. Board Human Resource Committee: The primary role and responsibility of the Human Resource Committee is to: Ensure that the Bank s Human Resources policies are sound, effective and up to date with current trends and practices. Ensure that the Bank attracts and retains qualified and competent staff members. In liaison with Management, ensure that the welfare of employees is commensurate with market trends. In liaison with Management, ensure that a culture of merit and professionalism thrives throughout all levels of employees. F. Shareholding Review Committee: The primary role and responsibility of the Shareholding Review Committee is to: Discuss complaints from the Shareholder s/diocese s shares contributors and recommend solutions. Recommend action plans to enhance information flow from Dioceses to their shares contributors. 14 Centenary Rural Development Bank Limited

15 Corporate Governance Strategy The Board considers and approves the Bank s objectives and the strategy and plans to achieve these objectives, at an annual meeting with Management and continuously monitors performance against strategies and agreed budgets. Delegation of Authority and Effective Control The Board retains effective control over its operations and has established committees to assist in providing detailed attention to specific areas of expertise. Authority has been delegated to the Managing Director to manage the business. Board delegated authorities are reviewed regularly and directors have full access to the documentation of all Committees exercising its delegated authority. There is a clear division between the roles of Chairman of the Board and Managing Director, who is in charge of the Bank s daytoday operations and its executive management. The Chairman of the Board is an independent non executive director. The Board operates within an established structure that ensures that there are adequate processes in place to monitor operations. An assessment of how well the Board works and its contribution is vital to the achievement of the objectives of the company and is done on a regular basis. The Board in respect of the financial year conducted a selfassessment evaluation, which was divided into structure, process and effectiveness. Director s Appointments, Induction and Training The appointment of directors is made in line with the Company s Articles of Association. In terms of the Articles of Association, the Board of Directors serves for a term of three years. Each of the appointments complied with the requirements of the Ugandan Companies Act and the Financial Institutions Act During the year 2009, Dr. Simon Kagugube (Executive Director) was appointed the Acting Managing Director. The directors bring to the Board skills, knowledge and experience from their own respective fields. They receive detailed orientation on the company s operation, senior management and the business environment. Ongoing training and development is structured to cater for the needs of individual directors. In addition, the Board is continually briefed on relevant legislation and regulations, as well as changing commercial risk advice and has the services of a Company Secretary. Board Meetings The Board schedules four quarterly meetings during the year and also the same for the specialized committees as required by the Financial Institutions (Corporate Governance) Regulations. Additional meetings may be held where necessary. Going Concern The Board has again reviewed the facts and assumptions on which the Company is operated and based on these, continues to view the company as a going concern for the foreseeable future. Centenary Rural Development Bank Limited 15

16 Corporate Social Responsibility...our Bank and our Corporate Social Responsibility... Centenary Bank attaches much value to Corporate Social Responsibilty (CSR). It is embedded in our daily operations as reflected in our deliberate low charges so that everyone can save for a bright future. We live it! Centenary Bank gives back to the community in which we serve by donating and contributing to worthy causes Centenary Bank donates to Holy Innocents Children s Hospital, Mbarara Donating books to promote education in nothern Uganda Donating computers to various schools and dioceses Donating food stuffs to the hungry in Soroti 16 Centenary Rural Development Bank Limited

17 Corporate Social Responsibility Donating to the Missionaries of the poor Centenary Bank staff donating blood Donating to the Nakivubo park yard vendors following an inferno Centenary Rural Development Bank Limited 17

18 6Directors Report Principal Activities The Bank provides a range of banking and related financial services. The Bank is an approved and licensed financial institution under the Financial Institutions Act 2004 and is a member of the Uganda Banker s Association. Results The Bank s results for the year ended 31 December 2009 are shown in the profit and loss account on page 31. A general review of the business and operations as well as a financial review discussing the results of the Bank are set out on pages 29 to 33. Dividend The directors recommend payment of dividends for the year ended 31 December 2009 of Shs 3,921 million (2008: Shs3, 413 million). Share Capital During the year, no ordinary shares were issued. Directors and Directors Interest The directors who held office during the year and to the date of signing of this report are set out on pages 8 and 9. None of the directors held any beneficial interest in the ordinary share capital of the Bank as at 31 December Management by Third Parties None of the business of the Bank has been managed by a third party or a company in which a director had an interest during the financial year. Risk Management The Bank has comprehensive risk management policies and processes to control and monitor risk throughout the Bank. For effectiveness, these practices rely on regular communication, sound judgment and knowledge of products and markets by people closest to them. Managing risk is an integral part of the Bank s business. While the Board of Directors is ultimately responsible for risk management, functions have been established to manage risk through Board Committees as previously described. Corporate Social Responsibility Statement Sustainability Report Overview The annual sustainability report covers the activities of Centenary Bank in Uganda in relation to the triple bottom line of people, planet and profits. 18 Centenary Rural Development Bank Limited

19 Directors Report A lot of sustainability issues are addressed in the entire annual report and the reader is referred to the relevant parts of the sustainability report prepared according to the guidelines of the Global Reporting Initiative (GRI) included on pages The aim of this report is to demonstrate our commitment to sustainable development by sharing information and statistics with our stakeholders about what we are doing and our plans to ensure our future sustainability. Corporate Social Responsibility The company is focused on achieving strong sustainable financial returns while promoting a more decent, dignified and kinder society through the promotion of the triple bottom line of people, planet and profits. We have embraced the ideals of the Global Reporting Initiative (GRI) and our aim is to be transparent about our goals and achievements in the area of sustainable banking. We have decided to develop indicators for measuring and reporting on our performance and impacts on the society and the environment. We have included in the Annual Report an appendix where we compare our performance against the guidelines of the Global Reporting Initiative. Retirement Benefits The Bank contributes to a retirement benefits scheme covering all of its employees. On attaining the retirement age or honorably leaving the service of the Bank, all permanent staff are eligible for terminal benefits applicable to them. By order of the Board: Mrs. Peninnah T Kasule COMPANY SECRETARY Centenary Rural Development Bank Limited 19

20 Directors Responsibility 7for Financial Reporting The Ugandan Companies Act requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Bank as at the end of the financial year and of its profit or loss. It also requires the directors to ensure that the Bank keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Bank. They are also responsible for safeguarding the assets of the Bank. The director s responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of these financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. They are also responsible for safe guarding the assets of the company. Under the Ugandan companies act, the directors are required to prepare financial statements for each year that give a true and fair view of the state of affairs of the company as at the end of the financial year and of the operating results of the company for that year. It also requires the directors to ensure the company keeps proper accounting records that disclose with reasonable accuracy the financial position of the company. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards and the requirements of the Ugandan Companies Act and the Financial Institutions Act The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Bank and of its profit or loss in accordance with International Financial Reporting Standards. The directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, as well as designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement. Nothing has come to the attention of the directors to indicate that the Bank will not remain a going concern for at least twelve months from the date of this statement. Approval of the financial statements The financial statements were approved by the Board of Directors on 26 February 2010 and were signed on its behalf by: Prof. John DdumbaSsentamu Chairman, Board of Directors Dr. Peter Ngategize Director Dr. Simon Kagugube Executive Director/Ag Managing Director Mrs. Peninnah T Kasule Company Secretary 20 Centenary Rural Development Bank Limited

21 I am delighted to report, on behalf of the Board, that the year ended 31 December 2009 was another year of outstanding performance and achievements for Centenary Bank. As part of our strategy, we continued with the expansion program of the Bank in terms of branch network and the construction of the Bank s New Headquarters. The Operating Environment During the year 2009 the cost of borrowing in Uganda remained high and this had a direct impact on our business. Inflation rates, though maintaining a downward trend throughout the year, remained high, at 10.9 percent in the final quarter of The major drivers for the inflation were identified as increases in prices of fuel, beverages, tobacco, rent, utilities and food. Food prices remained high due to the increased demand for food products within the Eastern African region coupled with reduced supplies due to unfavorable weather conditions. 8Chairman s Statement The impact of the global recession on the Ugandan economy was mostly evident in the significant decline in inward remittances of donor funds and of remittances from Ugandans working abroad. This too had a direct impact on our business. The coming in of new players in the Ugandan banking sector in recent years has increased competition to levels never experienced before in Uganda. This has necessitated the Bank to prioritize strategies for both customer and staff retention. Bank Performance The focus on microfinance particularly in rural areas, while serving all the segments of the Ugandan economy, distinguished Centenary Bank. Serving more than 800,000 customers through 36 branches, Centenary Bank Centenary Rural Development Bank Limited 21

22 Chairman s Statement remained a leader in financial services aimed particularly at the market segment that has difficulty in accessing financial services. Thus, 78% of our customers are located in rural areas. Pursuing our outreach strategy, we opened and four new branches during the year, namely Masindi, Bwaise, Jinja and Mubende bringing the total number of branches to 36, and 71 automatic teller machines (Centepoints) nationwide. With these developments I am pleased to report that the financial results represent impressive returns to the shareholders with profit after tax up 15 percent to UGX 23.5 billion from UGX 20.4 billion recorded in New branches and increased customer numbers led to an increase in customer deposits of 28.7 percent to UGX billion from UGX billion in Customer advances also grew significantly, up 19.4 percent to UGX 343 billion from UGX 287 billion in Operating income for the year was UGX billion, an increase of 20 percent while costs increased by 23 percent due to the increased cost of living during the year Corporate Social Responsibility Centenary Bank has always acted in a socially responsible manner, carefully evaluating the effects of its operations, to ensure that its business is done in accordance with the law and this is clearly spelt out in the Bank s mission statement. Centenary Bank is committed to develop the quality of life of its customers, staff and communities in which the Bank serves. The bank focuses on the provision of microfinance to the rural poor who are conventionally unbanked; which is a significant contribution to society. The Bank has carried out a number of community interventions aimed at making the bank a good corporate citizen while at the same time supporting the social mission of the church in the areas of education, health and supporting the destitute. During the year Centenary Bank was involved in the donation of food to the people of Soroti who had experienced a famine; the donation of building materials to the Nakivubo Parkyard vendors whose market had been destroyed by fire; and in the blood donation drive organized by the Uganda Red Cross. Centenary Bank considers the provision of employment as an important contribution to society. The Bank, therefore, promotes fair employment practices and optimum working conditions, while paying much attention to the training and personal development needs of its employees. Corporate Governance I am happy to report that the Board has continued to provide the strategic direction for the Bank s operations. None of the members of the Board had any conflict of interest in the matters of the Bank on which they were required to provide guidance and direction. Outlook In light of the progressive recovery from the global economic slowdown of both local and global economies, Centenary Bank will continue with the expansion program, putting in place adequate structures to serve our customers better. 22 Centenary Rural Development Bank Limited

23 Chairman s Statement The Bank s mediumterm objectives will be focused on the consolidation of the head office operations at Mapeera House, improve the quality of customer service, the efficiency of the Bank s operations, while consolidating our position as the leading microfinance provider in Uganda. Appreciation I, alongside my colleagues on the Board, register our appreciation to management and staff members of the Bank for their dedicated services in the year 2009, and look forward to their continued cooperation in the Bank s efforts to scale new heights in business performance and customer service. I thank all our shareholders, collaborators and customers for their trust and support. I have no doubt that your trust, encouragement and patronage will continue to motivate and guide the Bank in all the days to come. Professor John DdumbaSsentamu Chairman of the Board Centenary Rural Development Bank Limited 23

24 Report of the Independent Auditor to Centenary Rural 9Development Bank Limited Report on the Financial Statements We have audited the accompanying financial statements of Centenary Rural Development Bank Limited set out on pages 27 to 75. These financial statements comprise the balance sheet at 31 December 2009, and the profit and loss account, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the financial statements The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and with the requirements of the Ugandan Companies Act and the Financial Institutions Act This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform our audit to obtain reasonable assurance that 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 company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion the accompanying financial statements give a true and fair view of the state of the company s financial affairs at 31 December 2009 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards, the Ugandan Companies Act and the Financial Institutions Act Centenary Rural Development Bank Limited

25 Report of the Independent Auditor to Centenary Rural Development Bank Limited Report on other legal requirements The Ugandan Companies Act requires that in carrying out our audit we consider and report to you on the following matters. 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) in our opinion proper books of account have been kept by the company, so far as appears from our examination of those books; and iii) the company s balance sheet and profit and loss account are in agreement with the books of account. KPMG Certified Public Accountants PO Box 3509 Kampala, Uganda Centenary Rural Development Bank Limited 25

26 10Financial Definitions Profit for the year (Shs) Earnings per share (cents) Return on Equity (%) Return on Assets (%) Net interest margin (%) Credit loss ratio (%) Percentage change in the impairment charge (%) Percentage change in credit loss ratio (%) Balance sheet credit impairment as a % of gross loans and advances (%) Non performing loans [NPL] (Shs) Credit loss impairment [Balance Sheet] (Shs) Credit impairment charge (Shs) Costtoincome ratio (%) Effective tax rate (%) Dividend per share ( Shs) Dividend cover (times) Price earnings ratio (%) Dividend Yield (%) Core capital Supplementary capital Total Capital Total Capital Adequacy Annual income statement profit attributable to ordinary shareholders and preference shareholders Earnings attributable to ordinary shareholders divided by the weighted average number of ordinary shares. Closing share price divided by headline earnings per share. Earnings as a percentage of average total assets Net interest income as a percentage of average total assets Provision for credit losses per the income statement as a percentage of average net loans. Ratio of change in the rate of impairment change between time periods. Ratio of change in the rate of Credit loss impairment between time periods. Ratio of Balance sheet credit impairment to gross loans and advances. Loans whose servicing is due but the borrower has no money on the account from which to recover the installment(s) The amount by which Gross loans in the balance sheet are written down to cater for non performing loans. The amount by which the period profits are reduced to cater for the effect of non performing loans for the period. Operating expenses as a percentage of total income before deducting the provision for credit losses. The income tax charge as a percentage of income before tax excluding income from associates. Total ordinary dividends declared per share with respect to the year. Earnings per share divided by ordinary dividend per share. Closing share price divided by headline earnings per share. Dividend per share as a percentage of closing share price. Permanent shareholders equity in the form of issued and fully paidup shares plus all disclosed reserves less goodwill or any intangible assets. General provisions which are held against future and current unidentified losses that are freely available to meet losses which subsequently materialize, and revaluation reserves on banking premises, and any other form of capital as may be determined from time to time. The sum of core capital and supplementary capital. Total capital divided by the sum of total risk weighted assets and total risk weighted contingent claims. 26 Centenary Rural Development Bank Limited

27 11Financial Objectives in 2009 Performance Against Financial Objectives in 2009 Return on Equity (ROE) Objective: Return of 26.8%. Performance: ROE of 26.1% was achieved. Earnings Objective: Earnings to increase to exceed inflation by 12.4%. Performance: The average inflation rate for 2009 was 12.9%. Earnings increased by 15.0% which is above CPIX by 2.1%. Return on Total Assets (ROA) Objective: ROA of 4.0% Performance: ROA of 4.0% was achieved. Cost to Income Ratio Objective: Continuous improvement in the ratio over time Performance: A ratio of 74.8% was achieved. The Bank s efficiency ratio has slightly declined due to high inflation rate in Provision for Credit Losses Objective: Provision to approximate 1.0% of the loan portfolio. Performance: income statement charge of 1.9% of Loans and advances was recorded. (2008: 1%) Loan Deposit Ratio Objective: A ratio of 77.4% Performance: A ratio of 77.4% was achieved. Lending during the year Increased significantly. Rate of growth in loans was lower than the rate of growth in deposits. Centenary Rural Development Bank Limited 27

28 Financial Performance 12Highlights in 2009 Extracts from the Financial Statements 2009 Shs Shs 000 % +/ Total assets Shareholders funds Total deposits Net loans and advances Total income Total expenses Profit before income tax Profit after income tax Key Performance Indicators Cost to income ratio After tax return on assets After tax return on equity Lending ratio Total expenses to loan ratio Capital adequacy ratio (Tier 2) 582,688, ,681, % 90,096,423 70,023, % 443,443, ,544, % 343,148, ,356, % 110,527,235 91,928, % 82,632,089 67,077, % 27,895,146 24,850, % 23,483,178 20,423, % 74.8% 73.0% 1.8% 4.0% 4.6% 0.6% 26.1% 29.2% 3.1% 77.4% 83.4% +6.0% 24.1% 23.3% 0.7% 21.3% 20.5% 0.8% 28 Centenary Rural Development Bank Limited

29 13Operational and Financial Review Centenary Bank recorded a strong financial performance for the year ended 31 December 2009 amidst continued global financial market turmoil. Our strong capitalization and healthy liquidity profile has put us in position to take advantage of business opportunities that are unfolding in our chosen growth markets. The 2009 period was characterized by continued turbulences in financial markets worldwide and cyclically high inflation on the back of escalating energy and food prices in Uganda. Against this backdrop, the Bank s total assets grew by 31.3%, shareholders funds went up by 28.7% to Shs.90.0billion, up from Shs.70.0billion and achieved a return on Assets of 4.0%. Profit and Loss Account Analysis The Bank s total income is comprised of interest income, income from commissions and fees and other non operating income. Operating income went up by Shs 18.6 billion in 2009 representing a growth of 20.2% when compared to Net Interest Income: Net interest income, which is the margin between interest income and interest expense, remained the main source of income for the Bank. Net interest income for the year 2009 was Shs 82.7billion (2008: Shs 66.6billion) and represents 74.8% of operating income. Growth in Net Interest Income Net Interest Margin Net interest income growth of 24.3% was achieved. Income benefited from strong growth in assets of 31.3%. The Bank s net interest margin decreased by 70 basis points to close at 20.4%. This is mainly attributed to increased interest expense % 2008 % Centenary Rural Development Bank Limited 29

30 Operational and Financial Review Noninterest Income: The Bank s noninterest income arises from trade financing activities such as letters of credit, transactional activities including Bank drafts, funds transfers, trading income and revaluation of currency positions and exchange income on foreign transactions with customers. Non interest income: Growth in non interest income Noninterest income as % of total income % 2008 % Noninterest income rose to Shs 27.8 billion (2008: Shs 25.3 billion): following growth in fee and commission income of 20.5%, trading income by 12.4% other income 20.9%. This growth was mainly driven by higher transaction volumes initiated through customer interactions with the branches and ATM network. Trading income declined, due to the shilling volatility, decreased trading values and market share losses. Credit Impairment Charges: Provisions for credit losses for the year 2009 (excluding interest in suspense) totaled Shs 6.7 billion (2008: 4.8 billion). The provisions charged to the income statement as a percentage of loans and advances increased to 1.8% (2008: 0.9%). Credit impairment charges: Percentage change in the impairment charge (1.7) Percentage change in credit loss ratio Balance sheet credit impairment as % of gross loans and advances Non performing loans (NPL) Shs millions 14,443 6,515 Credit loss impairment (Balance Sheet ) Shs millions 11,485 6,535 Credit impairment charge Shs millions 6,461 2, Centenary Rural Development Bank Limited

31 Operational and Financial Review Credit impairment charges increased by 134.7% due to an increase in Non performing Assets Operating Expenses: % % Growth in total operating expense Growth in Costtoincome ratio Operating expense grew by 23.2% against income growth of 20.2%. The gap of 3.0% increased the Bank s costtoincome ratio from 73.0% to 74.8%. The staff costs were 17.9% higher and other operating expenses were 17.9% higher when compared to These increases were due to the continued expansion and consolidation of the Bank s business. Operating expenses are mainly comprised of employee compensation and benefits, depreciation charges, premises costs, training costs, business information costs, communication expenses and other expenses related to marketing and advertising, insurance, security and consumables. Balance Sheet Analysis The Bank s total assets during the year under review grew by 31.3% due to increase in its distribution channel to 36 branches, growth in loans and advances both in micro loans, consumer and commercial loans portfolio. Net loans and advances account for 58.9% of total assets and registered a 19.4% growth to close at Shs 343.1billion up from Shs.287.3billion driven by the aggressive marketing of various loan products and increased lending opportunities in the market. This success was achieved inspite of increased competition in the banking industry. Centenary Rural Development Bank Limited 31

32 Operational and Financial Review Customer deposits, which consist of Current accounts, Savings accounts and Time deposits, make up the Bank s main sources of funding. These deposits grew by 28.7% to Shs.443.4billion up from Shs.344.5billion. This is attributed to increased marketing efforts and an increase in the Bank s distribution channels. Deposit Composition The number of depositors increased to 875,408 in 2009 (2008: 729,378) and this was accompanied by an increase in the average amount per account. Current account average balance per account in 2009 increased to Shs. 2.9 million (2008: Shs.2.7 million); Savings accounts average balance per account in 2009 remained relatively flat at Shs. 0.3million when compared to 2008 and Time Deposits average balance per account in 2009 increased to Shs. 29.3million (2008: Shs. 14 million). The funding mix has remained rather stable in terms of value. Savings Accounts represent 45.8% of balance sheet compared to 50.9% in The Bank has been able to maintain a stable deposit mix in 2009 due to an increase in its loyal customer base. Current Accounts account for 14.7% of total balance sheet compared to 17.0% for the same period last year. Time Deposits constituted 15.6% of total balance sheet up from 9.7% for Shareholders equity represents 15.5% of total balance sheet compared to 15.8% for 2008, a slight drop of 300 basis points. 32 Centenary Rural Development Bank Limited

33 Operational and Financial Review Shareholders Equity Shareholders equity, which comprises share capital, share premium and retained earnings finances 15.5% (2008:15.8%) of the balance sheet. The level of shareholders equity is a function of fresh capital injection, earnings which are distributed as dividends and amount of earnings which are ploughed back into the business. The Bank s policy is to maintain a sustainable dividend growth which satisfies shareholders. Capital Adequacy The Bank monitors its Capital adequacy using ratios established by the Bank for International Settlement (BIS) as approved by the Bank of Uganda, as the regulator. The ratios measure capital adequacy by comparing the Bank s eligible capital with its balance sheet assets, off balance sheet commitments and market and other risk positions at weighted amounts to reflect their relative risk. At 31 December 2009, the Bank had a regulatory total capital base of 21.3% (2008: 20.5%) of riskweighted assets. This compares favourably with the regulatory requirement of 12.0%. Centenary Rural Development Bank Limited 33

34 14 Note Profit and Loss Account 2009 Shs Shs 000 Interest income 6 95,929,962 73,202,765 Interest expense 7 (13,217,029) (6,645,926) Net interest income 82,712,933 66,556,839 Fee and commission income 8 21,685,733 17,993,981 Net interest, fee and commission income 104,398,666 84,550,820 Foreign exchange income 9 3,034,526 3,464,649 Other operating income 10 3,094,043 3,912,830 Operating income 110,527,235 91,928,299 Employee benefits 11 (39,322,102) (33,350,984) Impairment losses on loans and advances 12 (6,460,503) (2,752,697) Depreciation 23 (5,278,313) (4,189,402) Other operating expenses 13 (31,571,171) (26,784,391) Profit before income tax 27,895,146 24,850,825 Income tax expense 14 (4,411,968) (4,427,142) Profit for the year 23,483,178 20,423,683 Comprehensive income net of income tax: Profit and loss 23,483,178 20,423,683 Total comprehensive income: 23,483,178 20,423,693 Earnings per ordinary share (Shillings per share) 31 5,835 5,074 Proposed Dividends: Dividend per ordinary share (Shillings per share) Proposed total dividends for the year 33 3,921,086 3,412, Centenary Rural Development Bank Limited

35 Balance Sheet Note Shs 000 Shs 000 ASSETS Cash and balances with Bank of Uganda 15 76,857,192 47,521,884 Placements with other Banks 16 35,990,082 15,019,513 Government securities held to maturity 17 51,011,922 43,929,533 Government securities held for Trading 17 15,996,048 6,675,010 Loans and advances to customers ,148, ,356,595 Other assets 19 6,538,548 8,485,897 Tax recoverable ,358 Deferred income tax , ,937 Deferred expenses 21 2,039,380 3,481,998 Prepaid lease rental 22 2,438, ,109 Property and equipment 23 47,987,141 30,272,621 Total assets 582,688, ,681,097 LIABILITIES Customer deposits ,443, ,544,229 Deposits from other banks 25 4,864,644 4,384,232 Interbank borrowing 26 7,000,596 Borrowed funds 27 23,624,857 9,602,355 Tax Payable ,005 Deferred grants , ,160 Other liabilities 28 13,347,548 14,620,757 Total liabilities 492,592, ,657,738 SHAREHOLDERS EQUITY Ordinary Share capital 31 4,020,561 4,020,561 Preference share capital , ,817 Share premium 32 1,138,927 1,138,927 Regulatory reserve 34 1,501, ,997 Proposed dividends 33 3,921,086 3,412,694 Retained earnings 79,400,276 60,609,363 Total shareholders equity 90,096,423 70,023,359 Total equity and liabilities 582,688, ,681,097 Off balance sheet financial instruments ,027,503 4,771,268 The financial statements on pages 27 to 75 were approved by the Board of Directors on the 26 February 2010 and signed on its behalf by: Prof. John DdumbaSsentamu Chairman, Board Of Directors Dr. Peter Ngategize Director Dr. Simon Kagugube Executive Director/Ag Managing Director Mrs. Peninnah T Kasule Company Secretary Centenary Rural Development Bank Limited 35

36 Statement of Changes in Equity Notes Ordinary Shares Shs000 Preference Shares Shs000 Share premium Shs000 Regulatory Reserve Shs000 Retained Profits Shs000 Proposed Dividends Shs000 TOTAL Shs000 Year ended 31 December 2008 At start of year 4,020, ,854 1,138,927 78,251 44,250,120 2,743,540 52,339,253 Total comprehensive income for the year Net profit for the year 20,423,683 20,423,683 Transfer to regulatory reserve ,746 (651,746) Transactions related to owners Dividend paid 33 (2,743,540) (2,743,540) Proposed dividends 33 (3,412,694) 3,412,694 Shares paid up 32 3,963 3,963 At end of year 4,020, ,817 1,138, ,997 60,609,363 3,412,694 70,023,359 Year ended 31 December 2009 At start of year 4,020, ,817 1,138, ,997 60,609,363 3,412,694 70,023,359 Total comprehensive income for the year Net profit for the year 23,483,178 23,483,178 Transfer to regulatory reserve ,179 (771,179) Transactions related to owners Dividend paid 33 (3,412,694) (3,412,694) Proposed dividends 33 (3.921,086) 3,921,086 Shares paid up 32 2,580 2,580 At end of year 4,020, ,397 1,138,927 1,501,176 79,400,276 3,921,086 90, Centenary Rural Development Bank Limited

37 Cash Flow Statement Notes Shs 000 Shs 000 Cash flows from operating activities: Interest receipts 93,460,327 71,469,027 Interest payments (10,545,971) (5,586,909) Fee and commission income 21,685,733 17,993,981 Other income received 5,250,125 5,589,893 Recoveries from loans previously written off 598,192 1,735,545 Payments to employees (36,940,255) (32,230,887) Payments to suppliers and other payments (27,339,818) (27,965,215) Income tax paid 14 (4,619,943) (4,322,545) Cash flows from operating activities before changes in operating assets and liabilities 41,548,390 26,682,890 Changes in operating assets and liabilities: Decrease/ (increase) in investments (27,953,446) 23,119,776 Increase in loans and advances to customers (59,782,396) (94,485,819) Decrease/(increase) in other assets 3,372,714 (922,818) Increase in customer deposits 98,899,697 79,986,738 Increase in deposits and borrowings from other banks 7,481, ,350 Increase in managed/borrowed funds 14,022,502 8,921,016 Decrease in other liabilities (10,535,788) (4,616,249) 25,504,290 12,952,994 Net cash from operating activities 67,052,679 39,635,884 Cash flows from investing activities Purchase of property and equipment 23 (25,183,607) (16,737,994) Proceeds from sale of property and equipment 175,816 52,041 Net cash used in investing activities (25,007,791) (16,685,953) Cash flows from financing activities Dividends paid (3,412,694) (2,743,540) Grants received 121, ,206 Share capital paid up 2,580 3,963 Net cash used in investing activities (3,289,032) (2,510,371) Net increase in cash and cash equivalents 38,755,856 20,439,560 Cash and cash equivalents at beginning 95,936,680 75,497,116 Cash and cash equivalents at end ,692,536 95,936,680 Centenary Rural Development Bank Limited 37

38 Notes 1. General Information The Bank is incorporated in Uganda under the Companies Act and is domiciled in Uganda. The address of its registered office is: Talenta House Plot 7 Entebbe Road P. O. Box 1892, Kampala. 2. Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. a. Basis of Preparation The financial statements are prepared in compliance with International Financial Reporting Standards (IFRS). The financial statements are presented in the functional currency, Uganda Shillings (Shs), rounded to the nearest thousand, and prepared under the historical cost convention, except where otherwise stated in the accounting policies below. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions. It also requires management to exercise its judgment in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgment or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. Adoption of New and Revised Standards IFRS 8, Operating Segments (effective 1 January 2009): This standard requires an entity to adopt the management approach when reporting on the financial performance of its operating segments. The reporting would be based on the information that management uses internally for evaluating segment performance and when deciding how to allocate resources to operating segments. The amendment has no impact on the results of the Bank because this is mandatory only for listed entities. IAS 23 (Amendment), Borrowing costs (effective from 1 January 2009). It requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Bank has adopted IAS 23 (amended) from 1 January 2009 but is currently not applicable to the Bank as there are no qualifying assets. IAS 1, Presentation of financial statements (effective1 January 2009). The standard requires that all nonowner changes in equity are presented in either a single statement of comprehensive income which includes income statement line items or in a separate statement of comprehensive income. In addition, a statement of financial position, which is the preferred term for the balance sheet, has to be presented at the beginning of the comparative period when the entity restates the comparatives as a result of a change in accounting policy, the correction of an error or the reclassification of items in the financial statements. The revised IAS 1 has had no impact on the results of the Bank. IAS 28, Investments in associates (effective 1 January 2009). The amendment clarifies that an investment in an associate shall be treated as a single asset for impairment testing. Therefore an impairment loss recorded by an investor after applying the equity method is not allocated against any goodwill included in the equity accounted investment balance. Such an impairment loss should be reversed in a subsequent period to the extent that the recoverable amount of the associate increases. The amendment has not had any impact on the results of the Bank. 38 Centenary Rural Development Bank Limited

39 Notes (continued) The Bank has chosen not to early adopt the following standard and interpretations that were issued but not yet effective for accounting periods beginning on 1 January 2009: IAS 27 Consolidated and separate financial statements (amended in 2008) supersedes IAS 27 (revised in 2003). The amended IAS 27 is required to be applied effective 1 July 2009 but is not expected to have a significant impact on the activities of the bank. IAS 28 Investment in Associates: Consequential amendments arising from amendments to IFRS 3 This interpretation is effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank. IAS 31 Investment in Joint Ventures: Consequential amendments arising from amendments to IFRS 3 This interpretation is effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank. IAS 39: Financial Instruments: Recognition and Measurement: An amendment for eligible hedged items effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank IAS 32: Financial Instruments: Presentation: Amendments relating to puttable instruments and obligations arising on liquidation effective for accounting periods beginning on or after 1 July 2009 but are not expected to have a significant impact on the activities of the bank IFRS 3: Business combinations comprehension revision on applying the acquisition method This interpretation is effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank. IFRS 1: First time adoption of international financial Reporting Standards Amendments relating to cost of an investment on first time adoption. This interpretation is effective for accounting periods beginning on or after 1 January 2009 but is not expected to have a significant impact on the activities of the bank. IFRIC 17: Distribution of NonCash assets to owners. This interpretation is effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank. IFRIC 18: Transfer of assets from customers This interpretation is effective for accounting periods beginning on or after 1 July 2009 but is not expected to have a significant impact on the activities of the bank. b. Interest Income and Expense Interest income and expense are for all interest bearing instruments are recognised in the profit and loss account except for those classified as held for trading, using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Centenary Rural Development Bank Limited 39

40 Notes (continued) 2 Summary of Significant Accounting Policies (continued) Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized based on 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 Income Fees and commissions are generally recognized on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate on the loan. d. Translation of Foreign Currencies The accounting records are maintained in the currency of the primary economic environment in which the Bank operates, Uganda Shillings ( the functional currency ). Transactions in foreign currencies during the year are converted into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the profit and loss account. e. Financial Assets The Bank classifies its financial assets into the following categories: loans and advances and receivables heldtomaturity investments and held for trading investments. Management determines the appropriate classification of its investments at initial recognition. Loans, Advances and Receivables Loans, advances and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: a) Those classified as held for trading and those that the Bank on initial recognition designates as at fair value through profit and loss; b) Those that the Bank upon initial recognition designates as availableforsale; and c) Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. i) Heldto Maturity Heldtomaturity investments are nonderivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. Where the Bank to sell more than an insignificant amount of heldtomaturity assets, the entire category would have to be reclassified as available for sale. Purchases and sales of financial assets are recognized on tradedate the date on which the Bank commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Loans, advances receivables and heldtomaturity investments are carried at amortised cost using the effective interest method. ii) Held for Trading A financial asset is classified as held for trading if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading. 40 Centenary Rural Development Bank Limited

41 2 Summary of Significant Accounting Policies (continued) Notes (continued) Regular way purchases and sales of financial assets at fair value through profit or loss, heldtomaturity and held for trading are recognized on tradedate the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus, for all financial assets except those carried at fair value through profit or loss, transaction costs. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. f. Impairment of Financial Assets The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about the following loss events: The estimated period between a loss occurring and its identification is determined by management for each identified portfolio. In general, the periods used vary between 3 month and 6 months. significant financial difficulty of the borrower a breach of contract, such as default or delinquency in interest or principal repayments; the granting to the borrower, for economic or legal reasons relating to the borrower s financia difficulty, a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganization; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the payment status of borrowers in the group; or National or local economic conditions that correlate with defaults on the assets in the group. Assets carried at amortized cost The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans or heldtomaturity investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future Centenary Rural Development Bank Limited 41

42 Notes (continued) 2 Summary of Significant Accounting Policies (continued) credit losses that have not been incurred) discounted at the financial instrument s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the profit and loss account. If a loan or heldtomaturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Provisions for impairment on assets assessed individually are referred to as specific provisions, whilst provisions for such losses on assets assessed collectively are referred to as general provisions. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statements. f. Impairment of Financial Assets (continued) In addition to the measurement of impairment losses on loans and advances in accordance with IFRS as set out above, the Bank is required by the Financial Institutions Act 2004 to estimate losses on loans and advances as follows: 1) Specific provision for the loans and advances considered to be nonperforming(impaired) based on the criteria, and classification of such loans and advances established by the Bank of Uganda, as follows: a) Substandard loans with arrears period between 91 to 180 days 20% b) Doubtful loans with arrears period between 180 to 365 days 50% and c) Loss with arrears period exceeding 365 days 100% provision 2) General provision of 1% of credit facilities less specific provision and suspended interest. In the event that provisions computed in accordance with the Financial Institution Act 2004 materially exceed provisions determined in accordance with IFRS, the excess is accounted for as an appropriation of retained earnings. g. Property and Equipment All property and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of these assets. 42 Centenary Rural Development Bank Limited

43 2 Summary of Significant Accounting Policies (continued) Notes (continued) Freehold land is not depreciated. Depreciation on other assets is calculated on the straight line basis to write down their cost to their residual values over their estimated useful lives, as follows: Leasehold buildings Furniture, fixture and equipment Motor vehicles Computer software and equipment Over the shorter period of lease or 25 years 5 8 years 4 years 3 5 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The Bank assesses at each reporting date whether there is any indication that any item of property, plant and equipment is impaired. If any such indication exists, the Bank estimates the recoverable amount of the relevant assets. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cashgenerating units). Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. h. Intangible Assets Acquired computer software licenses are recognized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives (three to five years) Costs associated with developing or maintaining computer software programmes are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognized as assets are amortized over their estimated useful lives (not exceeding three years). i. Income Tax Income tax expense is the aggregate of the charge to the profit and loss account in respect of current income tax and deferred income tax. Current income tax is the amount of income tax payable on the taxable profit for the year determined in accordance with the Ugandan Income Tax Act. Deferred income tax is provided in full, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. However, if the deferred income tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using Centenary Rural Development Bank Limited 43

44 Notes (continued) 2 Summary of Significant Accounting Policies (continued) tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilized. j. Accounting for Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. All other leases are classified as finance leases. To date, all leases entered into by the company are operating leases. Payments made under operating leases are charged to the profit and loss account on a straightline basis over the period of the lease. k. Employee Benefits The Bank and all its employees contribute to the National Social Security Fund, which is a defined contribution scheme. The Bank also operates a defined contribution benefits scheme for its employees. The Bank has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The assets of the scheme are held in separate trustee administered funds, which are funded by contributions from both the Bank and employees. The Bank s contributions to the defined contributions schemes are charged to the profit and loss account in the year in which they relate. The estimated monetary liability for employees accrued annual leave entitlement at the balance sheet date is recognized as an expense accrual. l. Contingent Liabilities and Commitments Contingent liabilities and commitments comprised of letters of credit, acceptances, guarantees and commitments to extend credit are not included in assets and liabilities in note 36. They are accounted for as offbalance sheet transactions and are disclosed as contingent liabilities and commitments. m. Borrowings Borrowings are recognized initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. n. Share Capital Ordinary shares are classified as share capital in equity. Any premium received over and above the par value of the shares is classified as share premium in equity. Preference Shares (irredeemable) classified as share capital in equity, dividend is payable at 20% (2008: 20%). 44 Centenary Rural Development Bank Limited

45 2 Summary of Significant Accounting Policies (continued) Notes (continued) o. Dividends Payable Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are shown as a separate component of equity until declared. p. Cash and Cash Equivalents Cash and cash equivalents include cash at hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, including: cash and nonrestricted balances with the Bank of Uganda, Treasury and other eligible bills, and amounts due from other banks. Cash and cash equivalents include the cash reserve requirement held with the Bank of Uganda. q. Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. 3 Critical Accounting Estimates and Judgments in Applying Accounting Policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. i. Impairment Losses on Loans and Advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the profit and loss account, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. ii. Heldtomaturity Investments The Bank follows the guidance of IAS 39 on classifying nonderivative financial assets with fixed or determinable payments and fixed maturing as heldtomaturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances for example, selling an insignificant amount close to maturity it will be required to classify the entire class as availableforsale. The investments would therefore be measured at fair value not amortized cost. Centenary Rural Development Bank Limited 45

46 Notes (continued) 4 Financial Risk Management The Bank s activities expose it to variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the Bank s business, and the operational risks are inevitable consequences of being in business. The effective management of risk is critical to earnings and balance sheet growth within Centenary Bank where the culture encourages sound commercial decision making, which adequately balances risk and reward. The identification and management of risk remains a high priority and underpins all business activities. The Bank s approach to risk management is based on a well established governance process and relies both on individual responsibility and collective oversight supported by comprehensive reporting. This approach balances strong corporate oversight at Head Office level with risk management structures within the business units. The Bank has governance standards for all major risk types. All standards are applied consistently across the Bank and are approved by the Board through either Bank s Board Risk Management Committee or Board ALCO Committee. The standards form an integral point of the Bank s governance infrastructure reflecting the expectations and requirement of the Board in respect of key areas control across the Bank. The standards ensure alignment and consistency in the manner major risk types across the Bank are identified, measured, managed, controlled and are reported. The standards underpin the Bank s governance principles, which are: Shareholder value: The Bank s primary objective is to protect and enhance shareholder value. As such the risks to this objective drive the Bank s system of internal control. Embedded: The Bank s culture reflects its appetite for risk. Risk management is achieved at all levels of the business through a suitable organizational structure, policies, and procedure, and appropriate staff training. Responsibility for risk resides at all levels of management from the Board down through the organization to individuals in office. Each business manager is accountable for managing risk in his or her business area, assisted and supported, where appropriately. Supported and Assured: The system of governance and internal control provide management and Board with assurance that risks are being managed appropriately. The designated executives and Board Committees regularly receive and review reports on governance and control process. Reviewed: The Board of Directors considers the effectiveness of the internal control system and risk management processes, at least annually. The major risks to which the Bank is exposed, including non financial risks are: Credit risk Liquidity risk Market risk Operational risk Compliance risk Taxation risk Reputation risk Business risk 46 Centenary Rural Development Bank Limited

47 Notes (continued) 4 Financial Risk Management (continued) A combination of these risks occurring concurrently would be the most likely cause of significant loss. The Bank s approach to managing risk on a holistic basis therefore ensures that risk types are not managed in isolation. Risk Responsibilities and Governance Structure: Due to the nature complexity and risk inherent in the Bank s activities, a robust risk management structure is critical and in place to ensure adequate oversight. The principal responsibilities set out below extend throughout the Bank: The Board of Directors reviews the risk profile appropriate to the Bank s growth strategy and requires that management maintains an appropriate system of internal control to ensure that these risks are managed within agreed parameters. The Board delegates risk related responsibilities to three committees: the risk management committee; the audit committee; and the ALCO committee. These committees receive regular and comprehensive risk reports from management. The key outcomes of all three committees are reported to the full Board. Business heads are responsible for identification and management of risk in their business units. The Risk Department Head and Managing Director are responsible for setting a framework that ensures effective risk management and control for all risk types. Internal audit independently audits the adequacy and effectiveness of the Bank s risk management, control and governance processes. The General Manager Internal Audit reports to the Board Audit Committee and has unrestricted access to the Managing Director, the Chairman of Audit Committee and the Chairman of the Board. Risk Governance Structure Centenary Bank Board Board Oversight Board Audit Committee Board Risk Management Committee Board ALCO Committee Management Responsibility Managing Director/ Executive Committee Operational Risk Committee Management Credit Risk Committee Management ALCO Committee Assurance Internal Audit Centenary Rural Development Bank Limited 47

48 Notes (continued) 4 Financial Risk Management (continued) Risk Appetite and Risk Tolerance: Risk appetite is the quantum of risk the Bank is willing to accept in the normal course of business in pursuit of its strategic and financial objectives. Risk taken within appetite may give rise to expected losses, but these should be sufficiently exceeded by expected earnings. Risk tolerance is an assessment of the maximum risk the Bank is willing to sustain for short periods of time. It emphasizes the downside of the risk distribution and the Bank s capacity to absorb unexpected losses. The capacity for unexpected losses is dependant upon having sufficient capital and liquidity available to avoid insolvency. Risk tolerance typically provides an upper boundary for the Bank s risk appetite. The Bank s approach of quantifying its risk appetite and risk tolerance takes into account: Capital structure The level of earnings volatility it is prepared to accept around its budgeted earnings. In this context the risk profile is derived from the target risk appetite across the various risk categories such as market risk, credit risk and operational risk. Important ingredient/inputs include: External: Internal: Shareholders expectations Regulatory constraints Regulatory ratings (analyst views) Market data Providers of funding and (or) liquidity Economic environment Bank s objective and strategic plan growth targets Growth targets Capital management The amount of risk the Bank is prepared to accept will be linked to its financial and strategic objectives as detailed in its overall business plan and budget. This will drive congruency between: Budgeted earnings (which take into account maturation effects and forecast changes in the economic environment). Earnings volatility around the budget Risk limits, and Capital 48 Centenary Rural Development Bank Limited

49 Notes (continued) 4 Financial Risk Management (continued) a) Credit Risk Comprehensive resources, expertise and control are in place to ensure efficient and effective management of credit risk. In lending transactions, credit risk arises through nonperformance by counterparty for facilities used. These facilities are typically loans and advances, including the advancement of securities and contracts to support customer obligations (such as letters of credit and guarantees). Approach to Managing Credit Risk: Credit risk is managed by means of a governance structure with clearly defined mandates and delegated authorities. The Board risk committee delegates authority to the management credit risk committee for the approval of credit proposals. The management further delegates authority within its limits, primarily on a risk adjusted basis. Board Risk Committee Management Credit Risk HO Credit Committee Branches Credit Committee Credit Risk Measurement; Internal Risk Ratings The Bank assesses the credit quality and assigns watch and standard for performing loans and substandard, doubtful and loss for nonperforming borrowers. Standard and Current: Watch List: Substandard1 Doubtful1 Loss1 Items that are fully current and the full repayment of the contractual principal and interest amounts are expected. Items for which the borrower is experiencing difficulties. Ultimate loss is not expected but could occur if adverse conditions persist. Items that show underlying well defined weaknesses that could lead to probable loss if not corrected. The risk that these items may be impaired is probable and the Bank relies to a large extent on the available security. Items that are considered to be impaired, but are not yet considered final losses because of pending factors, which may strengthen the quality of the items. Items that are considered to be uncollectible and where the realization of collateral and institution of legal proceedings have been unsuccessful. These items are considered of such little value that they should no longer be included in the net asset of the Bank. 1 Classified as impaired for accounting purposes. Centenary Rural Development Bank Limited 49

50 Notes (continued) 4 Financial Risk Management (continued) Industry Analysis The Bank analyses its customers per industry using various portfolio segmentation techniques. These include the use of Bank of Uganda categories as well as International Standard Classification (SIC) codes whilst ensuring compliance with regulatory requirements. Agriculture Manufacturing Trade and Commerce Transport and Utilities Building and Construction Other Services The Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full as and when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments. Such risks are monitored on a revolving basis and are subject to an annual or more frequent review. Limits on the level of credit risk by product, and industry sector are approved by the Board of Directors. The exposure to any one borrower including banks and brokers is further restricted by sublimits covering on and offbalance sheet exposures and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees, but a significant portion is personal lending where no such security/undertaking can be obtained. Maximum Exposure to Credit Risk before Collateral Held Shs million 2008 Shs million Credit risk exposure relating to onbalance sheet items: Balances with Bank of Uganda (Note 15) Placements with other banks (Note 16) Loans and advances (Note 18) Investment securities held to maturity (Note 17) Investment securities held for trading (Note 17) Other assets (Note 19) Credit risk exposures relating to off balance sheet items: Guarantee and Performance Bonds (Note 36.1) Commitment to extend credit (Note 36.1) Total 39,989 35, ,633 51,012 15,996 6,539 2,110 1, ,186 20,049 15, ,892 43,930 6,675 8,486 2,259 2, ,824 The above table represents a worse case scenario of credit risk exposure to the Bank at 31 December 2009 and 2008; without taking into account any collateral held or other credit enhancements attached. For onbalance sheet assets, the exposures set out above are based on carrying amounts as reported in the balance sheet. 50 Centenary Rural Development Bank Limited

51 Notes (continued) 4 Financial Risk Management (continued) As shown above, 84.7% of the total maximum exposure is derived from loans and advances to banks and customers (2008: 83.7%) 13.2% represents investment in debt securities (2008: 12.9%). Loans and advances to customers, are secured mainly by collateral in the form of charges over land and buildings and/or plant and machinery or corporate guarantees. Micro loans can also be secured by chattels. Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the company resulting from both its loans and advance portfolio and debt securities based on the following: The Bank exercises stringent controls over granting new loans. 89.0% of the loans and advances portfolio are neither past due nor impaired % of the investments in debt securities are government securities. Loans and advances are summarised as follows: 2009 Shs Shs 000 Neither past due nor impaired Past due but not impaired Impaired Gross loans and advances Less: Allowance for impairment Net loans and advances 315,749,301 24,440,185 14,443, ,632,693 (11,484,570) 343,148, ,133,854 17,242,246 6,515, ,891,508 (6,534,913) 287,356,595 Loans and Advances neither past due nor impaired. The quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank, as follows: 2009 Shs Shs 000 Standard Watch Total 313,714,035 2,035, ,749, ,089,257 2,044, ,133,854 Loans and Advances past due but not impaired Micro loans that are less than 30 days overdue and other loans that are less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross amounts of loans and advances that were past due but not impaired were as follows: Centenary Rural Development Bank Limited 51

52 Notes (continued) 4 Financial Risk Management (continued) 2009 Shs Shs 000 Past due up to 30 days Past due 3160 days Past due 6190 days Total 16,706,432 6,487,958 1,245,795 24,440,185 10,489,689 5,690,098 1,062,459 17,242,246 Of the total gross amount of impaired loans, the following amounts have been individually assessed for impairment: Loans individually assessed for impairment 2009 Shs Shs 000 Commercial loans Micro loans Home improvement loans Agricultural loans Salary loans Overdrafts Total 4,399,134 4,516,214 1,451,806 1,324,352 2,751,701 14,443,207 1,376,108 2,054, ,245 1,054, , ,386 6,515,408 Gross loans and advances 2009 Shs Shs 000 Commercial loans Micro loans Home improvement loans Agricultural loans Salary loans Overdrafts Staff loans Gross loans and advances 81,915,308 76,360,412 45,334,835 43,009,786 87,565,579 9,489,706 10,957, ,632,693 67,504,491 65,400,977 43,545,625 27,441,287 75,597,174 5,998,534 8,403, ,891,508 Less: Provision for impairment of loans and advances Individually assessed Collectively assessed Net Loans (9,459,294) (2,025,276) 343,148,123 (4,298,550) (2,236,363) 287,356, Centenary Rural Development Bank Limited

53 Notes (continued) Notes (continued) Movement in provisions for impairment of loans and advances in balance sheet are as follows: Nonperforming loans Identified loss: At 1 January ,693 4,179,050 4,807 4,298,550 Impaired accounts written off (1,478,701) (32,145) (1,510,846) Additional identified impairment 41,752 7,487,045 44,131 7,572,928 Impairments released due to improved Overdraft Shs 000 Commercial and Microfinance Loans Shs 000 status (156,445) (738,308) Leasing Portfolio Shs 000 Staff loans Shs 000 Total Shs 000 (6,585) (901,338) At 31 December ,449,086 10,208 9,459,294 Performing loans Unidentified loss: At 1 January ,371 2,116,992 2,236,363 Net provisions raised (105,991) (106,376) 1,280 (211,087) At 31 December ,380 2,010,616 1,280 2,025,276 Total 13,380 11,459,702 1,280 10,208 11,484,570 Overdraft Commercial Leasing Staff loans Total Shs 000 and Microfinance Portfolio Shs 000 Shs 000 Loans Shs 000 Shs 000 Nonperforming loans Identified loss: At 1 January ,175 3,230,594 45,068 3,533,837 Impaired accounts written of (1,637,351) (38,994) (1,676,345) Additional identified impairment 213,439 3,172,844 99,906 3,486,189 Impairments released due to improved status (356,921) (587,037) (101,173) (1,045,131) At 31 December ,693 4,179,050 4,807 4,298,550 Performing loans Unidentified loss: At 1 January ,241 1,807,483 1,924,724 Net provisions raised 2, , ,639 At 31 December ,371 2,116,992 2,236,363 Total 234,064 6,296,042 4,807 6,534,913 Centenary Rural Development Bank Limited 53

54 Notes (continued) Movement in provisions for impairment of loans and advances in income statement are as follows: Provision for impairment losses Additional identified impairment Additional unidentified impairment Reduction due to improved status Identified impairment Unidentified impairment 2009 Shs 000 7,572, ,064 8,016,992 (901,338) (655,151) (1,556,489) 2008 Shs 000 3,486, ,639 3,797,828 (1,045,131) (1,045,131) Provisions for the year Reductions in provision for impairment Total profit and loss movement 8,016,992 (1,556,489) 6,460,503 3,797,828 (1,045,131) 2,752,697 b) Concentration of Risk Movement in provisions for impairment of loans and advances in income statement are as follows: Shs 000 % Shs 000 Credit commitments Sector analysis by industry Agriculture 54,831, ,277 Manufacturing 4,551, ,830 Trade and commerce 89,394, ,337,191 Transport and utilities 12,208, ,000 Building and construction 67,227, ,083,246 Other services 126,420, ,315, ,632, ,027, Shs 000 Sector analysis by industry Agriculture 39,987, ,784 Manufacturing 2,722, ,526 Trade and commerce 75,563, ,359,591 Transport and utilities 10,427, ,000 Building and construction 51,880, ,131,695 Other services 113,310, ,408, ,891, ,771,268 As at 31 December 2009, the Bank had no loans and advances to a single borrower or group of related borrowers exceeding 25.0% of core capital. 54 Centenary Rural Development Bank Limited

55 Notes (continued) 4 Financial Risk Management (continued) c) Credit Related Commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligation to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of the customer authorizing a third party to draw drafts up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term of maturity of credit commitments because longerterm commitments generally have a greater degree of credit risk than shorterterm commitments. d) Market Risk Market risk arises from decrease in the market value of portfolio of financial instruments caused by adverse move in the market variables such as currency exchange rates, interest rates, credit spreads and implied volatilities on all the above. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while optimizing the return on risk. The Board grants the general authority to take on market risk exposures to the Board Asset and Liability Committee (ALCO). The ALCO sets market risk standards and policies to ensure that the measurement, reporting, monitoring and management of market risk is maintained. The day to day implementation of these policies rests with the Treasury Department. The Bank manages risk through a range of market risk and capital risk limits. Stress testing and basic risk management measures (permissible instruments, concentration of exposures, gap limits and maximum tenor) are used to facilitate this process. Interest Rate Risk The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Asset and Liability Committee sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored monthly. Methods of Measuring and Managing the Interest Rate Risk: There are a good number of techniques and tools available for measuring and managing interest rate risk ranging from simple calculation to highly complex simulations and modeling. The technique that Centenary Bank utilizes is explained below: Centenary Rural Development Bank Limited 55

56 Notes (continued) 4 Financial Risk Management (continued) Gap Analysis: Under this, interest sensitive assets and liabilities are classified into various time bands according to their maturity in the case of fixed interest rates, and residual maturity towards next repricing date in the case of floating interest rates. The size of the gap in a given time band is analyzed to study the interest rate exposure and the possible effects on the Bank s earnings. Items in assets and liabilities are captured into various buckets, using judgmental factors by studying behavioral patterns, customer segmentation, and roll over history, etc, on a continuous basis which eventually leads to a dynamic gap analysis. In order to evaluate the earnings exposure, interest Rate Sensitive Assets (RSA) in each time band are netted off against the interest Rate Sensitive Liabilities (RSL) to produce a repricing Gap for that time band. A positive gap indicates that the Bank has more RSA than RSL. A positive or asset sensitive gap means that an increase in market interest rates could cause an increase in the net interest margin and vice versa. Conversely, a negative or liability sensitive gap implies that the Bank s net interest margin could decline as a result of increase in market rates and vice versa. The positive or negative gap is multiplied by the assumed interest rate changes to derive the Earnings at Risk (EaR). The EaR method helps to estimate how much the earnings might be impacted by an adverse movement in interest rates. The assumed changes in interest rate are estimated on basis of past trends, forecasting of interest rates, etc. The off balance sheet items are excluded from the gap report because the Bank does not bear any interest rate risk on these items. The table below summaries the Bank s exposure to interest rate risks. Included in the table are the Bank s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates. The carrying amounts of derivative financial instruments which are principally used to reduce the exposure to interest rate movements are included in Other Assets and Other Liabilities under the heading Noninterest Bearing. The offbalance sheet gap represents the net notional amounts of all interest sensitive derivative financial instruments. 56 Centenary Rural Development Bank Limited

57 Notes (continued) 4 Financial Risk Management (continued) Interest Rate Risk Exposure 31 December 2009 Assets Cash and shortterm funds <1 mth Shs M 112 mth Shs Years Shs 000 Over 5 Nonint TOTAL Years Shs 000 Shs 000 Shs ,857,192 76,857,192 Due from other banks 35,990,082 35,990,082 Investments 17,069,087 49,938,883 Loans and advances to customers 343,148,123 67,007, ,148,123 Total assets 396,207,292 49,938,883 Liabilities Due to customers and 76,857, ,003,367 other banks 288,911,515 74,250, ,316 91,180, ,309,166 Managed /Borrowed Funds 23,624,857 23,624,857 Total liabilities 288,911,515 74,250, ,316 23,624,857 91,180, ,934,023 Net onbalance sheet gap 107,295,777 (24,312,043) ( 966,316) (23,624,857) (14,323,217) 44,069,344 Net offbalance sheet gap 0 0 Total interest sensitivity gap 107,295,777 (24,312,043) (966,316) (23,624,857) (14,323,217) 44,069, December 2008 Assets Cash and shortterm funds <1 mth Shs M 112 mth Shs 000 Due from other banks 15,019, Years Shs 000 Investments 4,126,965 46,477,578 Loans and advances to Over 5 Years Shs 000 customers 287,356,595 Total assets 306,503,073 46,477,578 Liabilities Due to customers and Nonint Shs 000 TOTAL Shs ,521,884 47,521,884 15,019,513 50,604, ,356,595 47,521, ,502,535 other banks 260,643,430 36,941, ,201 50,788, ,928,461 Managed /Borrowed Funds 9,602,355 9,602,355 Total liabilities 260,643,430 36,941, ,201 9,602,355 50,788, ,530,816 Net onbalance sheet gap 45,859,643 9,535,762 ( 555,201) (9,602,355) (3,266,130) 41,971,719 Net offbalance sheet gap 382,542 2,026,933 2,409,475 Total interest sensitivity gap 45,859,643 9,918,304 (555,201) (9,602,355) Centenary Rural Development Bank Limited 57

58 Notes (continued) 4 Financial Risk Management (continued) The repricing gaps for the Bank s portfolios are shown below. Positions are managed by currency to take account of the fact that interest rates are unlikely to move together. All assets and liabilities are sited in gap intervals based on their repricing characteristics. Assets and liabilities, for which no specific contractual repricing or maturity dates exist are placed in gap intervals based on management judgment, where appropriate, based on the most likely repricing behavior. >3 months >6 months Within 3 After 12 but within 6 but within 12 months months months months Shs million Shs million Shs million Shs million 2009 Interest rate sensitivity gap 112,072 (45,423) 15,368 (23,625) Cumulative interest rate sensitivity gap 112,072 66,649 82,017 58,393 Cumulative interest rate sensitivity gap as a percentage of total assets 21% 13% 16% 11% Within 3 months Shs million >3 months but within 6 months Shs million >6 months but within 12 months Shs million After 12 months Shs million 86,694 6,136 (8,398) (10,158) 86,694 92,829 84,432 74, % 20.9% 19.0% 16.7% The table below shows the increase / (decline) in 12month earnings for upward and downward instantaneous parallel rate shocks bps rate shock 500 bps rate shock bps rate shock 100 bps rate shock 2009 Shs million 4,136 (4,136) 827 (827) 2008 Shs million 3,328 (3,328) 666 (666) 58 Centenary Rural Development Bank Limited

59 Notes (continued) 4 Financial Risk Management (continued) Interest Rate Risk (continued) Assuming no management intervention, a parallel 500bps increase in all yield curves would increase the forecast net interest income for the next financial year by Shs 3,328 million. A parallel decreases in all yield curves would decrease the forecast net interest income for the next financial year by Shs 3,328 million. Whilst a parallel 100bps increase in all yield curves would increase the forecast net interest income for the next financial year by Shs 666 million. A parallel decreases in all yield curves would decrease the forecast net interest income for the next financial year by Shs 666 million. Currency Risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Asset and Liability Committee sets limits on the level of exposure by currency and in total for both overnight and intraday positions, which are monitored daily. The table below summaries the Bank s exposure to foreign currency exchange rate risk at 31 December 2009 and Included in the table are the Bank s assets and liabilities at carrying amounts, categorized by currency. 31 December 2009 Assets GBP Shs 000 USD Shs 000 OTHERS Shs 000 TOTAL Shs 000 Cash and balances at the Central Bank 283,068 2,488, ,992 3,590,538 Due from other banks 830,840 17,294,347 1,198,643 19,323,830 Investments 1,164,015 1,164,015 Loans and advances to customers 1,201,048 1,201,048 Total assets 1,113,907 20,983,873 3,181,650 25,279,430 Liabilities Customer deposits and balances due to other Banks 346,284 8,056,933 2,016,103 10,419,321 Net onbalance sheet position 767,623 12,926,940 1,165,546 14,860,110 Net offbalance sheet position Overall net position 767,623 12,926,940 1,165,546 14,860, December GBP USD OTHERS TOTAL 2008 Shs 000 Shs 000 Shs 000 Shs 000 Total assets 595,462 6,980, ,995 7,928,206 Total liabilities 229,101 5,976,541 1,864,003 8,069,645 Net onbalance sheet position 366,361 1,004,208 (1,512,008) (141,439) Net offbalance sheet position 382, ,542 Overall net position 366,361 1,386,750 (1,512,008) 241,103 Centenary Rural Development Bank Limited 59

60 Notes (continued) 4 Financial Risk Management (continued) The tables below shows the increase (decline) in 12 month earnings for upward (appreciation) and downward (depreciation) of the shilling on all foreign currencies on instantaneous parallel rate changes over the next 12 months. Parallel Rate Shocks +500bps exchange rate charge 500bps exchange rate charge +100bps exchange rate charge 100bps exchange rate charge 2009 Shs million 743 (743) 149 (149) 2008 Shs million 12 (12) 2 (2) Assuming no management intervention a parallel appreciation of the shilling by 500bps on all foreign currencies would increase the forecast earnings by Shs.12 million whilst a fall or depreciation shall reduce forecast earnings by Shs.12 million. A 100bps appreciation of the shilling on all currencies would increase the forecast earnings for the next financial year by Shs.2 million whilst a full or depreciation shall reduce forecast earnings by Shs.2 million. Liquidity Risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash settled contingencies. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Bank of Uganda requires that the Bank maintain a cash reserve ratio. In addition, the Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdraws at unexpected levels of demand. The Treasury Department monitors liquidity ratios on a daily basis. The Bank incorporates the following elements as part of a cohesive liquidity management process: Short term and long term cash flow managements Maintaining a structurally sound balance sheet. Foreign currency liquidity management. Preserving a diversified funding base. Undertaking regular liquidity stress testing. Maintaining adequate liquidity contingency plan. The table below presents the cash flow payable by the Bank under financial liabilities by remaining contractual maturities at the balance sheet date. 60 Centenary Rural Development Bank Limited

61 Notes (continued) 4 Financial Risk Management (continued) 31 December 2009 <1 months Shs months Shs Years Shs 000 Over 5 Years Shs 000 Total Shs 000 Financial liabilities Due to customers and other banks 380,091,924 74,250, , ,309,166 Managed/ Borrowed funds 23,624,857 23,624,857 Total liabilities 380,091,924 74,250, ,316 23,624, ,934,023 Financial assets Cash and shortterm funds 76,857,192 76,857,192 Due from other banks 35,990,082 35,990,082 Investments 17,069,087 49,938,883 67,007,970 Loans and advances to customers 12,063, ,068, ,015, ,148,122 Total assets 141,979, ,007, ,015, ,003,366 Net liquidity gap (238,112,031) 116,756, ,049,529 (23,624,857) 44,069, December 2008 Total assets 75,886, ,787, ,828, ,502,535 Total liabilities 311,431,444 36,941, ,201 9,602, ,530,816 Net liquidity gap (235,544,666) 122,845, ,273,411 (9,602,355) 41,971,719 Capital Management The Bank monitors the adequacy of its capital using ratios established by Bank of Uganda, which ratios are broadly in line with those for the Bank for International Settlements (BIS). These ratios measure capital adequacy by comparing the Bank s eligible capital with its balance sheet assets, offbalancesheet commitments and market and other risk positions at weighted amounts to reflect their relative risk. The market risk approach covers the general market risk and the risk of open positions in currencies and debt and equity securities. Assets are weighted according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash and money market instruments have a zero risk weighting which means that no capital is required to support the holding of these assets. Property and equipment carries a 100% risk weighting, meaning that it must be supported by capital equal to 12% of the carrying amount. Certain asset categories have intermediate weightings. Offbalancesheet credit related commitments and forwards are taken into account by applying different categories of credit conversion factors, designed to convert these items into balance sheet equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for balance sheet assets. The Bank s objectives when managing capital, which is broader than the equity on the face of balance sheets, are: To comply with the capital requirement set by Bank of Uganda To safe guard the Bank s ability to continue as a going concern so that it can continue to provide returns to the shareholders and To maintain a strong capital base to support the development of the Bank s business. Centenary Rural Development Bank Limited 61

62 Notes (continued) 4 Financial Risk Management (continued) Capital adequacy and the use of regulatory capital are monitored monthly by management, employing techniques based on guidelines developed by Basel committee as implemented by Bank of Uganda, for supervisory purposes. The required information is filled with Bank of Uganda on a quarterly basis. Bank of Uganda requires each bank to: a) Hold the minimum level of the regulatory capital of UGX 4,000,000,000 (Four Billion); b) Maintain a ratio of total regulatory capital to the risk weighted assets of not less that 12.0%; and c) Maintain core capital of not less than 8.0% of risk weighted assets. The Bank s regulatory capital is divided into two tiers: Tier 1 capital (core capital): Share Capital: share capital, share premium, and retained earnings and reserves created by appropriations of retained earnings. The book value of goodwill, current year losses, prohibited loans to insiders, investments in unconsolidated financial statements, deficiencies in provisions for losses, other deductions determined by BOU are deducted in arriving at tier 1 capital Tier 2 capital (Supplementary Capital): Revaluation reserves, unidentified impairment allowance, statutory regulatory reserves (reserves created by appropriations of retained earnings), subordinated debt and hybrid capital instruments. The table below summaries the composition of regulatory capital and the ratios of the Bank, for the years ended 31 December. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject. Core Capital (Tier 1) Permanent shareholders equity Share premium Prior years retained profits Proposed dividends Unrealized gains Net aftertax profits current yeartodate Tier 1 Capital 2009 Shs 000 4,134,958 1,138,927 59,838,184 (3,921,086) (428,236) 23,483,178 84,245, Shs 000 4,132,378 1,138,927 43,598,374 (3,412,694) 20,423,683 65,880,668 Supplementary Capital (Tier 2) Unencumbered general provisions for losses Regulatory reserve Tier 2 Capital Total Capital (Tier 1+Tier 2) 2,025,276 1,501,176 3,526,452 87,772,377 2,236, ,997 2,966,360 68,847,028 The increase of the regulatory capital in the year 2009 is mainly due to the contribution of the currentyear profit. The risk weighted assets are measured by means of hierarchy of five risk weights classified according to the nature of portfolio holding and reflecting an estimate of credit and market risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for offbalance sheet exposure, with some adjustments to reflect the more contingent nature of potential losses. 62 Centenary Rural Development Bank Limited

63 Notes (continued) 4 Financial Risk Management (continued) The table below summarizes the composition of the risk weighted assets of the Bank for the years ended 31 December 2008 and 31 December Balance sheet assets Notes,coins & other cash assets 36,868,116 27,472,227 0% Balances with Bank of Uganda 39,989,076 20,049,657 0% Due from commercial banks in Uganda 20,540,891 14,063,469 20% 4,108,178 2,812,694 Due from commercial banks outside Uganda Balance sheet Nominal amounts 2009 Shs Shs000 15,449, ,044 20% 3,089, ,209 Investment securities 67,007,970 50,604,543 0% Risk weighted amounts 2009 Shs Shs000 Loans and advances to customers 343,148, ,356, % 343,148, ,356,595 Other accounts receivable 11,317,933 12,905, % 11,317,933 12,905,941 Property, plant and equipment 47,987,141 30,272, % 47,987,141 30,272,621 Offbalance sheet items Contingencies secured by cash collateral 387,667 76,040 0% Performance bonds 1,722,379 2,182,597 50% 861,190 1,091,299 Other commitments 1,917,458 2,512,631 50% 958,729 1,256,316 Total riskweighted assets 586,335, ,452, ,471, ,886,676 Capital Ratios 2009 Shs 000 Ratio 2008 Shs000 Ratio Tier 1 Capital (Core) 84,245, % 65,880, % Tier 1 + Tier 2 Capital (Total) 87,772, % 68,847, % FIA 2004 min ratio capital requirement Core capital 8.0% 8.0% Total capital 12.0% 12.0% Centenary Rural Development Bank Limited 63

64 Notes (continued) 4. Financial Risk Management (continued) Capital Management (continued) The Bank s total capital adequacy ratio improved from 20.5% to 21.3% at December 2009 and Tier 1 capital increased from 19.6% to 20.5% at December Despite significant growth in earnings, the capital base growth was slower than the robust growth in riskweighted assets. However the Bank is still significantly above the minimum regulatory requirement. Trend in riskweighted assets Shs million Total assets 221, , , , ,688 Riskweighted assets 119, , , , ,471 5 Turnover The Bank s turnover is derived substantially from the business of banking and related activities and comprises net interest income, fees and commission income, trading income and other income. These revenues are shown in the profit and loss account and accompanying notes and represent the most appropriate equivalent of turnover compared with other forms of business enterprise. 64 Centenary Rural Development Bank Limited

65 Notes (continued) Interest income Interest on loans Interest on treasury bills Interest on Government bonds Interest on interbank placements Interest expense Savings accounts Current Accounts Fixed deposit accounts Managed funds Interbank borrowings Fee and commission income Trade related fees and commitment Ledger fees Other commissions and fees Foreign exchange income Foreign trade commission Foreign exchange gain Other operating income Income from bank property Income from written off loans Other income Employee benefits expense Staff salaries/bonuses NSSF contributions Retirement plan contributions 2009 Shs ,786,174 5,758,919 1,232,897 1,151,972 95,929,962 4,663,191 1,045 6,637,962 1,380, ,517 13,217,029 7,047,391 7,223,372 7,414,970 21,685,733 1,385,218 1,649,308 3,034,526 28, ,192 2,467,187 3,094,043 33,935,078 2,972,357 2,414,667 39,322, Shs ,743,916 7,460,072 20, ,121 73,202,765 3,808,960 2,564,378 34, ,620 6,645,926 5,538,035 6,066,217 6,389,729 17,993,981 1,326,201 2,138,448 3,464,649 38,495 1,579,416 2,294,919 3,912,830 28,406,209 2,764,994 2,179,781 33,350, Impairment losses P&L Credit losses impairmentidentified Credit losses impairmentunidentified 6,671,590 (211,087) 6,460,503 2,441, ,639 2,752,697 Centenary Rural Development Bank Limited 65

66 Notes (continued) 13 Operating expenses 2009 Shs Shs000 Auditors remuneration and expenses 221, ,613 Software costs 1,629, ,445 Premises cost 4,720,541 4,873,119 Insurance 2,371,207 1,809,857 Security 1,021, ,523 Office expense 3,042,516 2,564,138 Equipment lease expenses 674, ,546 Motor Vehicle expenses 2,957,923 2,431,362 Telephone, Telex and Postage 2,428,486 1,995,501 Donation 202, ,565 Advertising and Marketing 2,028,100 1,817,342 Directors emoluments and other expenses 1,303, ,043 Consultancy and legal fees 418, ,828 Recruitment and training 1,639,120 1,120,457 Staff transfer 642, ,363 Seminars & Conferences 163, ,603 Subscription 145, ,609 Stationery 2,072,599 1,806,806 Transport & Travel 2,471,109 2,285,027 Bank Charges 206, ,466 Longterm rental amortisation 37,152 24,170 Irrecoverable losses 840,764 1,053,162 Other operating expenses 330, , Income tax expense 31,571,171 26,784,391 Current income tax 4,044,766 4,419,216 Deferred income tax (Note 20) 378,476 7,926 Prior year over provision (11,274) 4,411,968 4,427,142 Profit before income tax 27,895,146 24,850,825 Prima facie tax calculated at 30.0% (2008: 30.0%) 8,368,543 7,455,247 Tax effect of: Expenses not deductible for tax 629, ,240 Income not subject to tax (3,570,511) (2,255,236) Adjustment to current tax opening balances (11,274) Adjustment to deferred tax opening balances 15% final tax on Treasury Bills (1,004,024) (1,122,109) Income tax expense 4,411,968 4,427, Centenary Rural Development Bank Limited

67 Notes (continued) Shs Shs 000 Shs Shs 000 Movement in current tax (recoverable)/payable is as follows: At start of year Prior year adjustment Current tax Current income tax expense Tax paid during year At end of year 212,005 (17,186) 4,044,766 (4,619,943) (380,358) 115,334 4,419,216 (4,322,545) 212, Further information on deferred income tax is presented in Note 20. Further information on deferred income me tax is pre Cash and balances at Bank of Uganda Cash in hand Balances with Bank of Uganda Placement with other banks Balances with local banks Balances with foreign banks Interbank placements (Short term deposits) 2009 Shs ,868,116 39,989,076 76,857,192 7,874,342 15,449,191 12,666,549 35,990, Shs ,472,227 20,049,657 47,521,884 4,921, ,044 9,141,653 15,019,513 The weighted average effective interest rate on on placements with oother banks with was other 3.2% banks (2008: was 2008: 6.5%) 6.5%) 17 Government securities (a) Government securities held to maturity Government treasury bills 2009 Shs ,011,922 51,011, Shs ,929,533 43,929,533 Maturity analysis of Government securities Short Term (13 Months) Medium Term (36 Months) Long Term (Over 6 Months) aturity 5,849,215 28,827,982 16,334,725 51,011,922 26,720,269 11,103,144 6,106,120 43,929,533 (b) Government securities held for trading Government treasury bills Government bonds 952,539 15,043,509 15,996,048 5,768, ,093 6,675,010 Centenary Rural Development Bank Limited 67

68 Notes (continued) 18 Loans and advances to customers Shs 000 Shs 000 Overdrafts 9,489,706 5,998,533 Commercial and micro finance loans 333,277, ,489,553 Leasing portfolio 908,139 Staff loans plus off market 10,957,067 8,403,422 Gross loans and advances 354,632, ,891,508 Provision for loan impairment identified losses (9,459,294) (4,298,550) Provision for loan impairment unidentified losses (2,025,276) (2,236,363) Net loans and advances 343,148, ,356,595 Maturity analysis of loans and advances Short Term (13 Months) 34,801,526 23,708,932 Medium Term (36 Months) 28,119,337 23,548,044 Long Term (Over 6 Months) 291,711, ,634, ,632, ,891, Other assets Cheques in transit 370, ,109 Staff advances 524, ,449 Accrued late fee payment 625, ,083 Accounts receivable 346, ,964 Prepaid expenses 2,620,300 2,155,111 Western Union suspense 145, ,318 Outward clearing 375,502 1,023,796 Other accounts receivable 1,529,449 3,668,067 6,538,548 8,485,897 The weighted average effective interest rate on loans and advances was 25.6 %( 2008:22.5%) 20 Deferred income tax Deferred income taxes are calculated on all temporary differences under the liability method at the applicable rate of.(2008: 30.0%). The movement on the deferred income tax account is as follows: At start of year Adjustment to opening balance Credit/ (charge) to profit and loss account (Note 14) At end of year 2009 Shs ,937 5, ,476 (301,549) 2008 Shs ,863 (7,926) 685, Centenary Rural Development Bank Limited

69 Notes (continued) 20 Deferred income tax (continued) Deferred income tax liability Accelerated tax depreciation Deferred income tax assets Impairment provisions Deferred fees and commission Deferred income tax asset Net deferred income tax asset 1 January 2009 Shs 000 Charge/ (Credit) to P&L Shs Dec 2009 Shs 000 1,461,818 (670,910) 524,972 63,325 1,986,790 (607,585) (1,476,845) (2,147,755) (203,911) (140,586) (1,680,756) (2,288,341) (685,937) 384,386 (301,551) Deferred income tax liability Accelerated tax depreciation Deferred income tax assets Impairment provisions Deferred fees and commission Deferred income tax liability Net deferred income tax asset 850, ,474 1,461,818 (576,068) (94,841) (670,910) (968,139) (508,706) (1,476,845) (1,544,207) (603,547) (2,147,755) (693,863) 7,927 (685,937) Deferred expenses At start of year Net additions/transfers At end of year Prepaid lease rental Cost At 1st January Additions Reclassification At 31st December 2009 Shs Shs 000 3,481,998 4,925,919 (1,442,618) (1,443,921) 2,039,380 3,481, , , ,248 54,400 54,400 2,169,095 2,169,095 2,527,743 2,527, ,248 Amortisation At 1st January For the year At 31st December 52,140 52,140 27,970 37,152 37,152 24,170 89,292 89,292 52,140 Carrying Value At 31st December 2,438,451 2,438, ,109 Centenary Rural Development Bank Limited 69

70 Notes (continued) 23. Property and Equipment COST Land and Buildings Ushs. 000 Motor Vehicles & Cycles Ushs. 000 Computer Equipment & Accessories Ushs. 000 Computer Software Ushs. 000 Furniture Fixtures & Equipment Ushs. 000 Work In Progress Ushs. 000 Total Ushs. 000 At 1 January ,793,117 3,427,208 13,474,110 2,728,579 10,036,580 15,639,455 49,099,049 Additions 1,009,276 3,835, ,117 5,056,472 14,955,649 25,183,607 Disposals (57,831) (73,506) (48,302) (179,639) Transfer (leasehold land) (2,169,095) (2,169,095) At 31 December ,566,191 4,362,978 17,309,203 3,055,696 15,044,750 30,595,104 71,933,922 DEPRECIATION At 1 January ,084 2,531,458 8,857,306 2,234,579 4,970,000 18,826,427 Charge for the year 22, ,119 2,747, ,122 1,636,936 5,278,313 On Disposals (40,867) (73,503) (43,589) (157,959) At 31 December ,424 3,031,074 11,605,235 2,532,701 6,563,347 23,946,781 NET BOOK VALUE At 31 December ,351,767 1,331,904 5,703, ,995 8,481,403 30,595,104 47,987,141 At 31 December ,560, ,750 4,616, ,000 5,066,580 15,639,455 30,272,622 COST At 1 January 2008 Leasehold Land and Buildings Ushs ,624,022 Additions 2,169,095 Motor Vehicles & Cycles Ushs ,153,584 Computer Equipment& Accessories Ushs ,127,093 Computer Software Ushs ,286, ,259 3,347, ,183 Furniture Fixtures & Equipment Ushs ,802,846 Work In Progress Ushs ,604,849 2,235,834 8,034,606 Total Ushs ,598,790 16,737,994 Disposals (235,635) (2,100) (237,735) At 31 December ,793,117 3,427,208 13,474,110 2,728,579 10,036,580 15,639,455 49,099,049 DEPRECIATION At 1 January ,033 2,220,054 6,447,786 1,977,946 4,021,940 Charge for the year 26, ,039 2,409, , ,160 14,874,759 4,189,403 On Disposals (235,635) (2,100) (237,735) At 31 December ,084 2,531,458 8,857,306 2,234,579 4,970,000 18,826,427 NET BOOK VALUE At 31 December ,560, ,750 4,616, ,000 5,066,580 15,639,455 18,826,427 At 31 December ,416, ,530 3,679, ,450 3,780,905 7,604,849 17,724, Centenary Rural Development Bank Limited

71 Notes (continued) Shs 000 Shs Customer deposits Current accounts 85,914,763 75,439,192 Savings accounts 266,348, ,898,699 Time deposits 91,180,409 43,206, ,443, ,544,229 The weighted average effective interest rate on customer deposits was 2.6% (2008:1.8%) 25 Deposits and balances due to Banks and other financial institutions Balances from local banks 3,614,431 2,871,781 Other finance institutions 1,250,213 1,512,451 4,864,644 4,384,232 The weighted average effective interest rate on deposits and balances due to banks and other financial institutions was 4.5% (2008: 5.4%) 26 Interbank borrowing Borrowings from banks 7,000,596 Borrowings from other financial institutions 7,000, Borrowed funds Danida 668,335 ASPS Agriculture Business 499, ,000 Triodos 18,480,047 8,434,020 European investment bank 4,644,879 23,624,857 9,602, Other liabilities Bills payable 1,099,638 1,589,112 Clearing suspense 194, ,804 Unearned fees on late payments 554, ,320 Deferred fee income 5,602,520 4,922,820 Guarantees Cash Collateral 129,540 49,461 Contract staff (Terminal benefits) 370, ,982 Provisions (Note 29) 230, ,690 Accrued Expenses 1,406,361 1,025,164 Suspense Accounts 2,424,668 1,621,856 Other liabilities 1,333,869 4,299,548 13,347,548 14,620,757 Centenary Rural Development Bank Limited 71

72 Notes (continued) Provisions Legal cases Shs ,542 Shs ,700 Defalcations and expected losses 3, , , Deferred grants At start of year 294, ,680 Additions 121, ,206 Transfers to profit and loss (104,436) (60,726) At end of year 310, , Earning per ordinary share Basic earnings per share are calculated by dividing the profit attributable to the ordinary equity holders of the bank by the weighted average number of ordinary shares in issue during the year Net income Dividends to preference shareholders Net income attributable to ordinary shareholders Weighted average number of ordinary shares (No.) Basic earnings per ordinary share (shillings) 23,483,178 (22,879) 23,460,299 4,020,561 5,835 20,423,683 (22,363) 20,401,320 4,020,561 5, There were no potentially dilutive shares outstanding at 31 December 2009 or 2008 Diluted earning per share are therefore the same as basic earnings per share Share capital Authorized and issued 4,700,000 ordinary shares of Shs 1,000 each 150,000 preference shares of Shs 1,000 each 4,700, ,000 4,850,000 4,700, ,000 4,850,000 Issued and fully paid 4,020,561 ordinary shares of Shs 1,000 each 114,397 preference shares of Shs 1,000 each 4,020, ,397 4,134,958 4,020, ,817 4,132,378 The issued number of shares as at year end was 4,020,561 ordinary shares and 114,397 preference shares (2008: 4,020, 561 ordinary shares and 111,817 preference shares). All issued shares are fully paid. 72 Centenary Rural Development Bank Limited

73 Notes (continued) 32. Share Capital (continued) Movements in capital during the year were as follows: Share Premium Preference Ordinary At 1 January ,138, ,817 4,020,561 Shares paid up 2,580 At 31 December ,138, ,397 4,020,561 Movements in capital during 2008 were as follows: At 1 January 2008 Shares paid up At 31 December 2008 Share Premium Preference Ordinary 1,138, ,854 4,020,561 3,963 1,138, ,817 4,020,561 The holders of ordinary shares are entitled to receive dividend from time to time and are entitled to one vote per share at meeting of the Bank. Holders of preference shares receive a noncumulative coupon of 20% and they do not carry the right to vote. All shares rank equally with regards to the Bank s residual assets except that the preference share holders have priority over ordinary shareholders but participate only to the extent of the face value of the shares. 33 Dividends Preference 20.0% (2008: 15.0%) Ordinary Final 16.6% of NPAT (2008: 16.6%) Dividend per ordinary share (Shs) 2009 Shs Shs ,879 22,363 3,898,207 3,390,331 3,921,086 3,412, The directors recommend the payment of a dividend of Shs.970 per share (2008:843 per share) totaling Shs.3, 921,086/= (2008: Shs.3, 412,694/=). Dividends are subject to withholding tax at rates which vary depending on the tax residence status of the recipient Regulatory reserve Shs 000 Shs 000 At start of year 729,997 78,251 Transfer from retained earnings during the year 771, ,746 At end of year 1,501, ,997 The regulatory reserve represents amounts by which provisions for impairment of loans and advances determined in accordance with the Financial Institutions Act 2004 exceed those determined in accordance with International Financial Reporting Standards. These amounts are appropriated from retained earnings in accordance with accounting policy. Centenary Rural Development Bank Limited 73

74 35 36 Notes (continued) Cash and cash equivalents Cash and balances with Bank of Uganda (Note 15) Balances with other financial institutions (Note 16) Treasury bills and other eligible bills < 91 days Government securities held for trading (Note 17) 2009 Shs ,857,192 35,990,082 5,849,214 15,996, ,692,536 Off balance sheet financial instruments and commitments 36.1 Off balance sheet financial instruments and commitments Bid Securities/bonds Commitment to extend credit 36.2 Capital Commitments Capital expenditure authorized but not yet contracted The expenditure will be funded from the Bank s internal resources Shs 000 2,110,045 1,917,458 4,027,503 26,821,150 26,821, Shs ,521,884 15,019,513 26,720,269 6,675,010 95,936, Shs 000 2,258,637 2,512,631 4,771,268 10,442,299 10,442,299 In 2007, the Bank committed to construction of its proposed new headquarters on Plot 4446 Kampala Road. The construction cost of phase one is estimated to be USD 29.9 million. During the year 2009, total payments of USD 6.2 million (2008: USD 6m, 2007: USD 4.3m) (Note 22) were made to the construction contractor, supplier and consultants. There are no third party claims on this project and payments are only made on certified works. It is estimated that the remaining USD 13.4 million under this project will fall due for payment during the period Outstanding legal cases The bank is a litigant in several cases which arise from normal day to day banking activities. The directors and management believe the bank has strong grounds for success in majority of them and are confident that they should get a ruling in their favour and none of the cases individually or in aggregate would have a significant impact on the banks operations. Management have carried out an assessment of all the cases outstanding as at 31 December 2009 and where considered necessary has been provided for and disclosed in note 29 (i) Key management compensation Salaries and other short term employment benefits Terminal benefits (ii) Directors remuneration Fees for services as a director (NED) Other emoluments (included in 37(i)) (iii) Loans and advances At start of year Advanced during the year Repaid during the year At end of year 74 Centenary Rural Development Bank Limited 2009 Shs 000 2,175, ,450 2,562, , ,887 1,303,758 3,290,151 1,877,072 (1,017,819) 4,149, Shs 000 1,714, ,816 2,132, , , ,043 2,193,859 2,189,500 (1,093,209) 3,290,150

75 37 Related parties Notes (continued) At 31 December 2008 loans and advances to employees amounted to Shs 8.8 billion. (2007:6.9 billion) 2009 Shs Shs 000 (i) Key management compensation Salaries and other short term employment benefits Terminal benefits (ii) Directors remuneration 2,175, ,450 2,562,648 1,714, ,816 2,132,673 Fees for services as a director (NED) Other emoluments (included in 37(i)) (iii) Loans and advances 467, ,887 1,303, , , ,043 At start of year Advanced during the year Repaid during the year At end of year (iv) Deposits due to directors At start of year Net movement (received/paid) for the year At end of year 3,290,151 1,877,072 (1,017,819) 4,149, ,946 17, ,060 2,193,859 2,189,500 (1,093,209) 3,290, , , ,946 (v) Substantial shareholders (>5% of shareholding) Shareholders name Catholic Archdiocese of Kampala Uganda Catholic Secretariat SIDI (France) Stiching Hivos Triodos % % (vi) Loans to shareholders and guarantees by shareholders Shareholder Catholic Diocese of Soroti Catholic Diocese of Kabale Catholic Archdiocese of Kampala Catholic Diocese of Lugazi Catholic Diocese of Hoima Catholic Diocese of Arua Catholic Archdiocese of Lira Catholic Diocese of Masaka Catholic Archdiocese of Tororo Catholic Diocese of Fort portal Catholic Archdiocese of Mbarara Total Shs 000 Shs ,192 1,673,815 1,206, ,343 15,744 36, ,925 18, ,223 97,541 4,149, Shs , ,733 1,621, ,000 79,096 16, ,372 11,743 59,136 3,290,151 Centenary Rural Development Bank Limited 75

76 15Sustainability Report Introduction Centenary Bank is committed to achieving strong, sustainable financial returns, while respecting the environment and community within which we live. The Bank subscribes to the ideal of the triple bottom line of people, planet, and profit. The annual report contains a lot of information about the Bank s performance on issues of sustainability. The Bank endeavours to be transparent about these issues and has adopted the reporting guidelines defined by the Global Reporting Initiative (GRI) and indexed at the back of this report. 2. Performance Indicators 2.1 The Value Added Statement The Value Added Statement shows the social value added that the Bank makes through its activities. Value added is calculated as the company s performance minus payments such as cost of materials, depreciation and amortisation. The resulting amount is distributed to the stakeholders who include employees, shareholders and the Government. For the Year Ended 31st December 2009 Interest Income Commission, fee income Other revenue Total Income Interest paid to depositors Cost of other services Wealth Created Distribution of Wealth Salaries, wages and other benefits Government Shareholders (dividends) Retention to support future business growth Wealth Distributed % Shs 000 Shs 000 % 95,929, % 73,202, % 21,685, % 17,993, % 6,128, % 7,377, % 123,774,264 98,574,225 13,217,029 6,645,926 33,212,318 23,676,432 77,314, % 68,251, % % 44,141, % 39,211, % 4,411, % 4,427, % 3,921, % 3,412, % 24,840, % 21,200, % 19,562,092 17,010,989 5,278,313 4,189,402 77,314, % 68,251, % 76 Centenary Rural Development Bank Limited

77 Sustainability Report 2009 As illustrated by the Value Added Statement, the Bank is a material contributor in a financial sense to various stakeholders. Of the total wealth created in 2009; UGX44.1 billion (57.1%) was distributed to employees as remuneration and benefits. UGX4.4 billion (5.7%) was allocated to Government in form of direct and indirect taxes, including charges in deferred taxation assets and liabilities. UGX24.8 billion (32.1%) was retained for investment in business in order to ensure its profitability contentment into the future. UGX3.9billion (5.1%) was distributed to shareholders as dividends Shareholders Shareholders are entitled to a fair return after all the stakeholders have been settled. Shareholders contribute the longterm operating capital, which together with borrowings, provide the financial resources necessary for the Bank to operate and invest for the future growth. We understand and recognize the importance of the fact that creating and protecting shareholder value over the longterm is contingent on honouring the interest of all stakeholders. In recognition of this responsibility to our shareholders, the Bank operates in an open governance environment in which we do not only meet our legal obligations but also subscribe to the best practices in corporate governance. Considerable attention is paid to the governance process so as to ensure that it is operating both effectively and efficiently throughout the Bank. The Bank proactively engages the shareholders in continuous communication of strategies and financial performance. Presentations of results, shareholders conference, oneonone meetings, annual general meetings, and the annual report are some of the ways in which contacts are maintained The Customers The Bank is the fastest growing financial institution in Uganda following its mission of providing appropriate financial services to all Ugandans. This is a direct contribution to the economic development of the country Understanding and responding to our customers needs is the key to Centenary Bank s success. The importance of service delivery is fundamental and a nonnegotiable components of our attitude towards customers. Our customers are key to ensuring that we remain a profitable and sustainable organization. How customers are treated, where we choose to operate, who we provide financial support to and our response to customer needs all have great impact on our reputation and financial success. Centenary Rural Development Bank Limited 77

78 Sustainability Report 2009 Notes (continued) The Bank maintains customer contacts through various means including: Automatic Teller Machines (ATMs) points; Branch network; Customer call centers; Customer seminars/forum, and product research; Dedicated Sales Staff for lending and deposit mobilisation; Electronic, mobile and telephone communication; Marketing and advertising Employees The Bank offered direct employment to a total of 1,393 Ugandans hence impacting positively to the livelihoods of households of these people. A total of 233 staff were recruited during the year 2009 compared to 252 staff recruited in Environmental Performance Waste To reduce on paper usage, the Bank in 2009 initiated an internal campaign discouraging unnecessary printing of messages and attachments by incorporating a campaign slogan print only if you must, otherwise conserve the environment in all out going mails. Biodiversity In order to promote activities that protect the biodiversity, the Bank in 2009 made donations to some environmental oriented appeals. These included a contribution of UShs. 2.6 million towards the Iteso Cultural Union tree planting initiative. 2.3 Social Sustainability Performance Centenary Bank s corporate culture is built on respect for society in which we operate and a commitment to the development of the society Competition and Pricing In line with the Banks mission of providing appropriate financial services especially microfinance to all people in Uganda, particularly in rural areas, in a sustainable manner and in accordance with the law, the Bank in 2009 ensured that its pricing for financial services is affordable and far below that of close competitors, thus giving back to the community in a unique way. Expanding Outreach In order to increase access to the Bank s financial products and services, the Bank opened four new branches during the year 2009 including Bwaise, Jinja, Masindi and Mubende. With the opening of these new branches, the Bank s network grew to 36 full service networked branches supported by 71 Automatic Teller Machines (Centepoints). Bribery and Corruption The Bank practices zero tolerance to corruption; and has clearly indicated to its customers not to give any favours to staff in return for exceptional services. Donations In 2009, the Bank made donation to several worthy causes of society for the betterment of communities in which the Bank operates. Donations benefiting hospitals, schools, sports, the destitute and church related development activities, flood victims, orphaned or abandoned children, internally displaced people and inferno victims were made over the year. 78 Centenary Rural Development Bank Limited

79 Sustainability Report 2009 Financial contributions for various projects in 5 Primary Schools, 17 Secondary Schools, 5 Universities and 6 vocational training institutions. For example, a Science laboratory at Our Lady of Consolata SS, financial contribution to Uganda Christian University towards the construction of a new library, an underground water tank at St. Kizito SS, financial contribution towards the purchase of a school bus for Kigezi High School, a dormitory at Mulago School of the deaf, a basket ball court at Bishops SS Mukono, to mention but a few. Some of the health related activities included donation of blood by the staff, mosquito nets to young mothers and children of Teso, hospital beds & mattresses to St. Michael Community Dispensary Mpigi, replacement of ceiling at Nsambya babies home, solar panels & washing machines to Bakateyamba home for the disabled & elderly, a surgical cancer camp at Arua hospital and construction of a maternity waiting shed at Mityana hospital. Customers with Disability The Bank recognizes the plight of people with disability in accessing services in Uganda and ensures that all entrances to the Bank s business premises, the branches and ATMs have special provision to ease entry by the disabled. Non political alignments Centenary Bank as a matter of principle does not ally itself to any particular political parties or grouping in Uganda but seeks to corporate and work in harmony with all people in Uganda in accordance with the law. In 2009, there was no recorded incident of alignment to any political individual or organizations in all the Bank s activities, external meetings and forums participated in. Customer Confidentiality The Bank demands the highest standard in carrying out its business activities. As an integral point of their activities, banks accumulate sensitive information regarding customers and their personal affairs. Centenary Bank, like other banks in the country, has always been subject to the common law principle of bank client confidentially. In addition to this, Centenary Bank subscribes to the Code of Banking Practice that requires banks to treat all customers personal information as private and confidential. The Bank s Operational Guidelines and Staff Rules and Regulations govern the conduct and duties of Bank employees, further emphasizing the importance of customer privacy and detailing the procedures that must be observed in matters regarding confidential information. In handling such information, we have made a commitment that we will: Ensure that it is accurate, up to date, neither biased nor misleading. Only use it for the purposes for which it was given; Keep it only for as long as is necessary; Keep it securely; Keep only relevant and required information, and Distribute it within the Bank only on a need to know basis. The Bank upholds privacy of its customers by ensuring that all the staff of the Bank swear an oath of secrecy never to divulge any banking information to third parties. In 2009, all the Banks 233 newly recruited staff were made to swear the oath of secrecy in addition to their acceptance of the job offer. Money Laundering Money laundering is the process by which banks are used to disguise or launder the proceeds of criminal activity. Such activities undermine a bank s integrity, damage its reputation, deter honest customers and expose a bank to severe sanctions. Centenary Rural Development Bank Limited 79

80 Sustainability Report 2009 We fully support the international drive against serious crime and are committed to assisting the authorities in preventing money laundering. We have adopted policies and procedures designed to protect ourselves from doing business with customers involved in criminal activity. Our employees must adhere to the following key principles: Customer Identification the identity of every customer must be established from reliable identifying documents. Know Your Customer our staff must know enough about their customers to be able to identify transactions which are inconsistent with their business or personal status, or which do not match the normal pattern of account activity Reporting of Suspicious Transactions all such transactions are to be reported to the proper authorities immediately Fair Treatment of Customers Financial products and services are becoming increasingly sophisticated tools. Selling them calls for knowledge, skill and judgment. For our employees, the basic rules are: Do not sell an unsuitable product to a customer that is, a product that does not meet his or her needs. Know enough about the Bank s products and about the customer s risk appetite, objectives, finances and personal circumstances to judge the effect which the products will have and whether the products will meet his or her needs Make every effort to ensure that the customer understands more complex products and their risks properly Explain product features and fees/charges clearly both facetoface and in any marketing literature and software. Appropriate Product and Services The Bank endeavours to offer appropriate financial products and services, on a commercially viable basis, in both rural and urban areas; with the social objective of serving the economically disadvantaged people thus contributing to the overall economic development of the country. Transparency in Advertising The Bank strictly enforced truth and transparency in its advertising programmes when developing and promoting the new CenteEducation loan and CenteLease products and other existing products and services. Detailed information was provided to customers through product brochures, tariff guides, the website and other promotional materials. 80 Centenary Rural Development Bank Limited

81 Sustainability Report Products And Services CreditProducts: Micro Business Loan Shortterm business loan designed for micro business enterprises to finance working capital, operational expenses or asset acquisition requirements. Security includes Chattels, Land titles, Kibanja agreement and Car logbooks. Home Improvement Loan (HIL) Shortterm consumer loan designed for regular income earners to finance home improvement project, purchase land, construction, renovation and installation of energy, water and purchase of furniture and recreational equipments/accessories. Salary Loan Loan designed for salaried employees of organizations or companies whose monthly salary payments are remitted through Centenary Bank. Agriculture Loan Shortterm loan designed primarily to finance productive business activities in the agricultural sector. The loan term and mode of repayment are dependent on the nature and the seasonal cycles of the business activity. SME/Commercial/Corporate Loans Loans and/or overdraft facilities extended to SMEs and Corporates engaged in business. Veterinary Loan Loan to finance startup veterinary projects promoted by registered members of the Veterinary Association of Uganda. The overall aim of the loan product is to expand the veterinary practices. Animal Traction Loan Loan for smallholder rural farmers to expand their farming activity by financing purchase of drought animals (oxen) and traction implements (oxploughs, yoke and chains). CenteEducation Loan This is a loan designed for parents, guardians and students for payment of school/tuition fees, purchase of uniforms, scholastic materials, text books, personal computers or laptops, study kits for professional courses. The Loan applies to all levels of education right from nursery, primary, secondary to tertiary or university. CenteLease A short to medium term lease product for individuals and /or organizations actively engaged in agricultural production, processing & marketing and other business activities like transportation, trade & commerce, education services, health services, etc for the purpose of acquiring business assets/equipment. Bank Overdraft Very short term credit facility designed to meet the business customers urgent daytoday cash requirements. Letters of Credit It is a credit instrument issued at the request of the customer to facilitate payments for imports and exports mostly used in international trade. DANIDA Investment Loan Investment loan designed to provide partial finance for the procurement of equipment or fixed assets for productive purpose. Examples include milk coolers, construction of cattle dips, poultry pens and others. Only available in Rakai District. Centenary Rural Development Bank Limited 81

82 Sustainability Report Deposit Products: Current Account A flexible account for businesses, Individuals or Organizations which is cheque operated. Account holders are issued with cheque books and ATM Cards (CenteCards). Account can be in local currency or foreign currency. Savings Account Interest earning account designed for regular savers. ATM Cards (CenteCards) and Cash deposit books are issued on request. Unrestricted withdrawals. Account can be opened in Local or foreign Currency. Fixed Deposit Account Designed for individuals, companies or organizations who want to earn a higher interest on their deposits within a specified period of time Electronic Banking Products: ATM (CentePoint) 24hour roundtheclock electronic cashier where our customers can check their account balances, view their mini account statements, deposit and draw cash by use of their CenteCards. SMS (CenteLine) Banking Service that enables the Bank customers with mobile phones who have an MTN or ZAIN line to check their account balances, view mini account statements, transfer money and load airtime wherever they are. PC Banking 24hour service that enables our customers to access their accounts information online at their offices or in the comfort of their homes Money Transfer Services: InterBranch Money Transfers For customers who want to transfer money from one account to another account across the Bank s branch network Electronic Funds Transfer (EFT) The Bank handles transfer of customers funds from one account to another account(s) in other financial institutions within the shortest possible time. Telegraphic Money Transfer(SWIFT) Instant outward and inward international money transfer with a worldwide coverage Western Union Services The fastest way of sending and receiving money locally and worldwide. There is no requirement for the sender or receiver to have an account with the Bank. Real Time Gross Settlement (RTGS) The Bank handles payment transfers on behalf of its customers for any amount through the Real Time Gross Settlement Other Services: Safe Custody Services For customers who need a safe place to keep their non bulky valuable items such as land titles, agreements, precious metal ornaments, receipts, academic certificates, transcripts. Checkpoint Bulk Salary Processing The Bank handles bulk salary processing through instantly crediting salary schedules from private companies and organizations to their individual employees salary accounts held at the Bank. 82 Centenary Rural Development Bank Limited

83 Sustainability Report 2009 Standing Orders Convenient method designed for the Bank s existing customers to facilitate servicing bills and settling obligations through issue of standing instructions for their accounts to be debited with a specified amount(s) on a specific date(s) for a specified period(s). Bank Guarantees The Bank offers guarantees on performance and advance payment of its customers engaged in execution of contracts and/or tenders with Government, international organizations and private institutions. Processing of Foreign Currency Cheques Bank clears foreign currency cheques through international correspondent banks and deposits of travelers cheques for credit to customer accounts. Foreign currency buying and selling Buying and selling of foreign currencies at rates commensurate with the market: USD, GBP, Euro and Kenya Shillings. National Water and Sewerage Corporation In collaboration with National Water and Sewerage Corporation (NW&SC), Centenary Bank customers and non customers can pay their water bills through Direct Debit Agreement or by deposit across the counter at any of the Bank branches. Treasury Bills/Bonds Dealership Services Centenary Bank is a registered Primary Dealer for Treasury Bills/Bonds. It transacts directly with Bank of Uganda on behalf of it customers and the investing public. 3. People/Employees People make the difference. We are committed and continue to work hard to create a healthy, safe and diverse workplace environment in which employees enjoy a positive and productive atmosphere. A place in which employees can grow as individuals while adding value to the bank s operations. A place where employees contribute significantly to the bank s competitive advantage. In our Employee Management System, we aim to attract, recruit, develop and retain talented people, providing skills and resources across our market. People Management We offer our employees opportunities to enhance their skills and develop their careers through various technical skills development programmes, inhouse training programmes, management development programmes, and customer service training. Training and Development Programs for the Year 2009 Rationale: The Bank realizes that People are a basis for competitive advantage in the highly competitive banking industry. In view of this, the Bank continues to offer a variety of training programs as one of its interventions to solve performance gaps, develop human capital and management potential as a means to a systematic employee capacity building strategy. The overall strategic objective for the 2009 Corporate Training plan was to build and enhance staff capacity with a view to improve and enhance performance through multiskilling, improved performance management, management development and customer service delivery. Centenary Rural Development Bank Limited 83

84 Sustainability Report 2009 Training Objectives: The four main objectives of the Training Plan 2009 were: Enhancement of technical skills especially in Agricultural lending; and the development of all round bankers through the implementation of a structured training programme and job rotation; Improvement of customer care/service in the Bank Designing, implementing and institutionalizing a management development programme Development of a succession planning strategy for the Bank s competitive advantage Training Budget A total of UGX 1,571,757,616/= was approved to implement the Bank s corporate training program for the year 2009, indicating an increase of 46% from 2008 budget of UGX 846,179,300/=. This budget was also supplemented by sponsorship from DANIDA to the tune of UGX291, 635,300/=. Budget Allocation 75% of the total budget was allocated to technical training in the core functions of the Bank s operations; namely, Banking Operations, Credit, Western Union Operations Ebanking; Sales and Marketing, Agricultural Lending Methodologies and others. 25% of the budget was allocated to Management Development Programmes, Customer Care Programmes and other support functions of the Bank s operations. As at December 2009, 125 events had been successfully implemented to benefit 3028 participants, compared to (90) in the previous year 2008 which benefited 1919 participants. Developing and Implementing the Competence Based Performance Management and Appraisal System in Centenary Bank 2009 The Bank is committed to building a culture of performance and accountability for individual and organisational results. During the year 2009, management and staff have been sensitized about the system and how it would affect them as individuals and the Bank as a whole. This has been done mainly through workshops that have targeted different categories of staff and through branch visits. Focus has been put on developing and implementing practical performance indicators to guide performance and results as well as objectivity in setting targets and in evaluating performance. The system has been implemented successfully. The purpose of the new competence based performance management and appraisal system is: To create job clarity and define performance expectations for all jobs. To match the achievements of staff with the expected results based on set targets through performance monitoring. To identify learning and development needs. To support and promote a culture of holding staff accountable for their performance and the performance of their units. To align individual goals with Unit /Bank objectives. To create a culture of accountability for performance and results in the Bank. Staff Welfare Issues A number of projects were accomplished in the year 2009 in line with the agreed work plan. Sports activities for Bank staff were organised, where the Bank registered a number of successes and received trophies. The HIV/AID s awareness campaign continued. Peer educators were trained. As a team building activity and as a holistic approach to work, Staff end of year parties were organized in December 2009 at regional level and at Head Office. Several merit, sports, long service and best performing staff awards were given to various deserving staff. This year the awards took into account best performing staff in customer service and teamwork as well. The three best performing branches (Namely Mukono, Nateete and Kyotera) were given Gold, Silver and Bronze Medals in that order. 84 Centenary Rural Development Bank Limited

85 Sustainability Report 2009 Medical Care The Bank utilises services of two Medical Insurance providers namely UgaMed Medical Insurance Ltd and AAR Medical Services. These were approved by the Board and contracted by the Bank to provide medical services to Bank staff and their eligible dependants. Staffing as at 31st December 2009 As at 31st December 2009, total head count stood at 1393 against an annual staff budget of 1417 reflecting 98% budget performance;(2008=1255 staff) 233 staff were recruited during the year, compared to 252 new entrants as at 31st December Majority of the new recruits were Banking and Loans Officers trainee, fresh graduates from Universities. The annual staff turnover ratio rose slightly to 6.5% from 5% in staff left during the period, compared to 64 as at end of The variation can be attributed to the influx and opening of several new Banks in Uganda that have offered some senior staff career opportunities at higher levels in the hierarchy. 84% staff possess at least one university degree (honours) and above. The average period of service across the board as at 31st December 2009, was 4.7 years which was the same as that in the previous year. The average age for bank staff across the board as at 31st December 2009, was 32 years, compared 31.8 years as at 31st December Of the 1393 staff as at 31st December 2009, 829 (59.5%) were male and 564 (40.5%) female, compared to 59% male and 41% female in Senior Management Staff Diversity Category Male Female Male Female Male Female 1. Executive Directors 2. General Managers 3. Chief Managers 4. Head Office Managers 5. Regional Managers 6. Branch Managers 7 Total Gender Mix 76% 24% 80% 20% 77% 23% Centenary Rural Development Bank Limited 85

86 Sustainability Report 2009 Human Resource Information System Project (HRIS) The HRIS project implementation is ongoing; its various modules being tested by Human Resource Department in liaison with Business Technology and the Vendor. Major User and administrator training was carried out. Customization issues were consistently followed up and addressed by the Vendors. Seven key modules out of 10 were fully implemented by end of The other three user acceptance tests were to be signed off by end of January The HRIS to a large extent was fully operational. 86 Centenary Rural Development Bank Limited

87 The index below comprises indicators from the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. The index has been abridged to relate it to the Bank s disclosure status. PERFORMANCE INDICATORS Mission, Strategy, Ownership Name of reporting organisation Major products or services, including brands if appropriate Operational structure of the organisation Description of major divisions, operating companies, subsidiaries and joint ventures Countries in which the organisation s located 67 PROFILE 24 Mission Strategy Statement, Ownership structure Centenary Rural Development Bank Limited 8183 Product and Services 47 Risk Governance Structure 87 Principal Place of business and registered office 2.6 Nature of ownership 67 Mission, strategy and Ownership Nature of markets served Scale of the reporting organisation s: Number of employees Products produced/ services offered VISION AND STRATEGY 8183 Products and services 78 Employees 8183 Products and Services Net sales 34 Profit and Loss Account Total capitalisation 35 Balance sheet 2.9 List stakeholders 7684 Sustainability Report 2.10 Contact details 91 and 93 Bank Contact information 2.11 Reporting Period 24 Report of the Independent Auditor 2.12 TOPIC Date of most recent previous report DISCLOSURE PAGES List of the GRI Indicators 31 December 2008 DESCRIPTION Centenary Rural Development Bank Limited 87

88 List of the GRI Indicators PERFORMANCE INDICATORS 2.13 Report Scope 24 Report of the Independent Auditor 2.14 Significant changes in size, structure, ownership, products/ services 2123 Chairman s Statement 2.15 Basis for reporting 3845 Summary of Significant accounting policies TOPIC Restatements of information Decision not to apply GRI principles Accounting Criteria/ definitions Significant changes in measurement methods Independent assurance Information availability 3845 Summary of Significant accounting policies Applied on a limited scale 26 Financial Definitions 3845 Summary of Significant accounting policies 24 Report of the Independent Auditor 91 and 93 Bank contact information GOVERNANCE STRUCTURE AND MANAGEMENT SYSTEMS Governance structure of the organisation, including major committees under the board of directors that are responsible for strategy and oversight DISCLOSURE PAGES 1215 Corporate governance ECONOMIC PERFORMANCE INDICATORS DESCRIPTION EC1 Net sales 34 Profit and Loss Account EC2 EC3 EC4 Geographic breakdown of markets Cost of all goods and services purchased Percentage of contracts paid in accordance with agreed terms 86 Branch Network 76 Value added statement 88 Centenary Rural Development Bank Limited

89 List of the GRI Indicators PERFORMANCE INDICATORS EC5 EC7 EC8 TOPIC Total employee remuneration Increase in retained earnings Total taxes of all types paid DISCLOSURE PAGES 76 Value added statement DESCRIPTION 36 Statement of changes in Equity 76 Value Added Statement EC10 Donations by type 1617 Corporate Social Responsibility LA1 LA2 Breakdown of workforce Net employment creation and average turnover 85 Staffing as at 31st December, Staffing as at 31st December, 2009 LA3 Union representation Not applicable LA4 LA5 LA6 LA7 LA8 LA9 Policies/procedures on negotiations with employees over changes in operations Occupational accidents and diseases Health and safety committees Injury, lost days and absentee rates and workrelated fatalities Policies and programmes on HIV/ AIDS Average hours of training per employee Medical Care Training and Development programs for the year Staff welfare issues 83 Training and Development Programmes for the year 2009 LA10 Transformation policies and procedures LA11 Composition of senior management and Corporate Governance bodies 85 Senior Mangement Staff Diversity Centenary Rural Development Bank Limited 89

90 List of the GRI Indicators PERFORMANCE INDICATORS TOPIC DISCLOSURE PAGES DESCRIPTION HUMAN RIGHTS HR1 Policies and guidelines dealing with human rights HR2 Consideration of human rights impacts in making business decisions HR3 Policies/procedures to evaluate human rights performance within supply chain HR4 HR5 HR6 HR7 Global policy/ procedures preventing discrimination of any form Policy on freedom of association independent of local laws Policy excluding child labour Description of policy to prevent forced and compulsory labour Human rights are recognised and embedded Ugandan s Constitution. No evidence of transgressions but Bank s Policies not formally codified. SO4 Awards received for social, environmental and ethical performance Corporate governance/ Shareholders/ Customers. Employees/Regulators PR1 PR2 Policy for preserving customer health and safety Product information and labelling policies/ procedures PRODUCT RESPONSIBILITY Customers/Environment Customers 90 Centenary Rural Development Bank Limited

91 Centenary Bank s new Headquarters at Plot 4446 Kampala under construction 16Road Bank Contact Information Principal place of business and registered office Talenta House Plot 7, Entebbe Road P.O. Box 1892 Kampala Tel: /7 Fax: /4 info@centenarybank.co.ug Website: Secretary Peninnah Tibagwa Kasule Talenta House Plot 7 Entebbe Road P.O. Box 1892 Kampala Auditors KPMG PEAT MARWICK Rwenzori Courts Plot 2/4A Nakasero Road P. O. Box 3509 Kampala Uganda Correspondent Banks National Westminister Bank Plc UK Citibank NA New York USA Citibank NA Kenya Sparkasse Aachen Germany Standard Chartered Bank Uganda Stanbic Bank Uganda Centenary Rural Development Bank Limited 91