FINANCIAL STATEMENTS
FINANCIAL STATEMENTS CONTENTS Pages Directors report 1-4 Independent auditor s report 5-6 Balance sheet 7 Income statement 8 Statement of changes in equity 9 Cash flow statement 10 Notes to the financial statements 11-47 APPENDIX: Notes on compliance with the Central Bank s Prakas * i - viii * The Appendix does not form part of the audited financial statements.
ITEMS OF AN UNUSUAL NATURE There were no items, transactions or events of a material and unusual nature that, in the opinion of the Directors, materially affected the financial performance of the Company for the year ended 31 December 2014. There has not arisen in the interval between the end of the year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Company for the current year. THE BOARD OF DIRECTORS The members of the Board of Directors during the year and as at the date of this report are: Mr. Timothy Mark Amstutz, Chairman Mr. Ong Teong Hoon, Member Mr. Tan Teck Keong Michael, Member Ms. Srey Hem Roberts, Member Ms. Ing Varony, Member Ms. Tea Chansotheary, Member Mr. Fong Kum Choy, Member RESPONSIBILITIES OF THE BOARD OF DIRECTORS IN RESPECT OF THE FINANCIAL STATEMENTS The Directors are responsible for ensuring that the financial statements are properly drawn up so as to present fairly, in all material respects, the financial position of the Company as at 31 December 2014 and its financial performance and cash flows for the year then ended. In preparing these financial statements, the Directors are required to: i) adopt appropriate accounting policies that are supported by reasonable and prudent judgements and estimates, and then apply them consistently; ii) iii) iv) comply with the disclosure requirements and the guidelines issued by the National Bank of Cambodia and Cambodian Accounting Standards or, if there has been any departure from such standards in the interest of fair presentation, ensure that this has been appropriately disclosed, explained and quantified in the financial statements; maintain adequate accounting records and an effective system of internal controls; prepare the financial statements on a going-concern basis unless it is inappropriate to assume that the Company will continue operations in the foreseeable future; and v) effectively control and direct the Company and be involved in all material decisions affecting its operations and performance and ascertain that such matters have been properly reflected in the financial statements. The Directors confirm that the Company has complied with the above requirements in preparing the financial statements. 3
BALANCE SHEET AS AT 31 DECEMBER 2014 Note ASSETS Cash on hand 4 5,523,566 22,508,531 3,215,051 12,844,129 Balances with the Central Bank 5 7,027,698 28,637,869 4,493,034 17,949,671 Balances with banks 6 3,575,400 14,569,755 2,384,730 9,526,996 Loans to customers 7 100,170,902 408,196,426 76,402,060 305,226,230 Other assets 8 2,556,474 10,417,632 1,661,092 6,636,063 Property and equipment 9 1,615,230 6,582,062 928,649 3,709,953 Intangible assets 10 1,039,673 4,236,667 1,110,050 4,434,650 Investment in Credit Bureau Cambodia 17,500 71,313 17,500 69,913 Deferred tax assets 11 - - 82,827 330,894 Total assets 121,526,443 495,220,255 90,294,993 360,728,499 LIABILITIES AND EQUITY LIABILITIES Deposits from banks and customers 12 35,592,441 145,039,197 16,356,457 65,344,046 Borrowings 13 59,145,970 241,019,828 53,226,664 212,640,523 Deferred grants 14 127,689 520,333 92,649 370,133 Current income tax liabilities 27 518,893 2,114,488 544,179 2,173,995 Other liabilities 15 2,982,874 12,155,212 2,712,371 10,835,922 Deferred tax liabilities 11 4,500 18,337 - - Total liabilities 98,372,367 400,867,395 72,932,320 291,364,619 EQUITY Share capital 16 5,193,000 21,161,475 5,193,000 20,746,035 Share premium 1,487,485 6,061,501 1,487,485 5,942,503 Donated capital 1,194,900 4,869,218 1,194,900 4,773,626 Subordinated debts 17 5,050,000 20,578,750 2,050,000 8,189,750 Reserves 1,383,189 5,636,495 941,863 3,762,743 Retained earnings 8,845,502 36,045,421 6,495,425 25,949,223 Total equity 23,154,076 94,352,860 17,362,673 69,363,880 Total liabilities and equity 121,526,443 495,220,255 90,294,993 360,728,499 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 7
INCOME STATEMENT Note 31 December 2014 31 December 2013 US$ KHR 000 US$ KHR 000 Interest incomes 18 22,412,436 91,330,677 16,777,678 67,026,822 Interest expenses 19 (7,221,478) (29,427,523) (5,008,060) (20,007,200) Net interest income 15,190,958 61,903,154 11,769,618 47,019,622 Fee and commission income 20 543,015 2,212,786 230,859 922,283 Fee and commission expenses (180,134) (734,046) (137,374) (548,809) Net fee and commission income 362,881 1,478,740 93,485 373,474 Other operating incomes 21 148,757 606,185 119,200 476,204 Total operating income 15,702,596 63,988,079 11,982,303 47,869,300 Personnel expenses 22 (7,533,199) (30,697,786) (5,730,277) (22,892,457) Depreciation and amortisation expenses 23 (544,013) (2,216,853) (347,686) (1,389,006) General and administrative expenses 24 (3,632,176) (14,801,117) (2,628,509) (10,500,893) Other loss/gain-net 25 (108,762) (443,205) (5,977) (23,874) (11,818,150) (48,158,961) (8,712,449) (34,806,230) Grant incomes 26 372,724 1,518,850 244,699 977,572 Profit before provision for loan losses 4,257,170 17,347,968 3,514,553 14,040,642 Loan impairment charges (146,182) (595,692) (162,679) (649,904) Profit before income tax 4,110,988 16,752,276 3,351,874 13,390,738 Income tax expenses 27 (824,664) (3,360,506) (659,398) (2,634,295) Net profit for the year 3,286,324 13,391,770 2,692,476 10,756,443 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 8
STATEMENT OF CHANGES IN EQUITY Currency Share translation Share Donated Subordinated Legal Reserve for capital Retained capital reserve premium capital debt reserve strengthening earnings Total US$ US$ US$ US$ US$ US$ US$ US$ US$ Balance as at 1 January 2013 (Unaudited) 3,868,200 - - 1,137,162 1,250,000 283,723-4,721,457 11,260,542 CBIRD merging 222,300-89,985 50,000 5,301-140,539 508,125 Transfer to donated capital - - - 57,738 - - - - 57,738 Share conversion of donated capital 1,102,500-1,397,500 - (1,250,000) - - - 1,250,000 Subordinated debts - - - - 2,000,000 - - - 2,000,000 Transfer to reserves - - - - - 86,176 563,534 (649,710) - Currency translation difference - 3,129 - - - - - 3,129 Dividend paid - - - - - - - (409,337) (409,337) Profit for the year - - - - - - - 2,692,476 2,692,476 Balance as at 31 December 2013 (Unaudited) 5,193,000 3,129 1,487,485 1,194,900 2,050,000 375,200 563,534 6,495,425 17,362,673 Equivalent in KHR 000 19,857,947 12,500 5,583,013 4,773,629 7,990,000 1,477,747 2,251,318 25,074,841 67,020,995 Balance as at 1 January 2014 5,193,000 3,129 1,487,485 1,194,900 2,050,000 375,200 563,534 6,495,425 17,362,673 Subordinated debts - - - - 3,000,000 - - - 3,000,000 Transfer to reserves - - - - - 102,530 346,696 (449,226) - Currency translation difference - (7,900) - - - - - - (7,900) Dividend paid - - - - - - - (487,021) (487,021) Profit for the year - - - - - - - 3,286,324 3,286,324 Balance as at 31 December 2014 5,193,000 (4,771) 1,487,485 1,194,900 5,050,000 477,730 910,230 8,845,502 23,154,076 Equivalent in KHR 000 21,161,475 (19,442) 6,061,501 4,869,218 20,578,750 1,946,750 3,709,187 36,045,421 94,352,860 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 9
CASH FLOW STATEMENT Note Cash flows from operating activities Profit before income tax 4,110,988 16,752,276 3,351,874 13,390,737 Adjustments for: Depreciation and amortisation 23 544,013 2,216,853 347,686 1,389,006 Deferred grant income 14 (372,724) (1,518,850) (244,699) (977,572) Property and equipment write-off 9 69,167 281,856 2,567 10,255 Allowance for bad and doubtful loans 7 146,182 595,692 162,679 649,903 Net gain on disposals of property and equipment (9,522) (38,802) (2,375) (9,488) Net interest income and expenses (15,407,658) (62,786,206) (11,271,292) (45,028,812) (10,919,554) (44,497,181) (7,653,560) (30,575,971) Changes in working capital Balances with banks 1,000,000 4,075,000 (1,031,900) (4,122,441) Balances with the Central bank (1,415,082) (5,766,459) (573,657) (2,291,760) Statutory deposit 20,871 85,049 - - Loans to customers (23,915,024) (97,453,723) (21,339,002) (85,249,313) Other assets (618,891) (2,521,981) (129,495) (517,333) Deposits from banks and customers 19,235,984 78,386,635 7,288,172 29,116,247 Other liabilities 864,856 3,524,288 455,759 1,820,758 Net cash used in operations (15,746,840) (64,168,372) (22,983,683) (91,819,813) Interest income received 22,678,960 92,416,762 15,938,115 63,672,769 Interest expense paid (6,795,622) (27,692,160) (4,368,209) (17,450,995) Income tax paid (845,451) (3,445,213) (393,329) (1,571,349) Grant received 14 407,764 1,661,638 310,212 1,239,297 Net cash used in operating activities (301,189) (1,227,345) (11,496,894) (45,930,091) Cash flows from investing activities Purchases of property and equipment 9 (1,242,557) (5,063,420) (528,330) (2,110,678) Purchases of intangible assets 10 - - (1,110,193) (4,435,221) Proceed from disposals of property and Equipment 17,227 70,200 21,264 84,950 Net cash used in investing activities (1,225,330) (4,993,220) (1,617,259) (6,460,949) Cash flows from financing activities Proceeds from borrowings 24,726,927 100,762,228 28,659,056 114,492,929 Repayments of borrowings (20,065,849) (81,768,335) (18,124,265) (72,406,439) Proceeds from subordinated debts 17 3,000,000 12,225,000 2,000,000 7,990,000 Currency translation reserve (7,900) (32,193) 3,130 12,503 Dividend paid out (487,021) (1,984,611) (409,338) (1,635,305) Net cash from financing activities 7,166,157 29,202,089 12,128,583 48,453,688 Net increase/(decrease) in cash and cash equivalents 5,639,638 22,981,524 (985,570) (3,937,352) Cash and cash equivalents at the beginning of the year 7,291,716 29,130,406 8,277,286 33,067,758 Currency translation differences - 583,338 - - Cash and cash equivalents at the end of the year 28 12,931,354 52,695,268 7,291,716 29,130,406 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 10
1. BACKGROUND INFORMATION KREDIT Microfinance Institution Plc., formerly known as CREDIT Limited ( the Company ) was registered as a limited liability company on 13 June 2003 with the Ministry of Commerce and granted a 99-year business licence, and the assets transfer was made from the World Relief Cambodia CREDIT Program to the Company on 1 January 2004. The National Bank of Cambodia ( the Central Bank ) granted KREDIT Microfinance Institution Plc. a permanent licence to conduct business as a micro-finance institution on 17 April 2007. On 29 December 2010, the Company received a licence from the Central Bank to conduct a deposit-taking business. On 26 May 2014, the National Bank of Cambodia approved to merge CBIRD Microfinance Co., Ltd into the Company. CBIRD Microfinance Co., Ltd was de-registerred with the National Bank of Cambodia. The Company s Central office is at House No. 71, St. 163, Sangkat Toul Svay Prey I, Khan Chamkarmorn, Phnom Penh, the Kingdom of Cambodia. The Company has eighteen branch offices across the country. The financial statements were authorised for issue by the Board of Directors on 31 March 2015. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements have been prepared in accordance with the guidelines issued by the Central Bank and Cambodian Accounting Standards ( CAS ). The accounting principles applied may differ from generally accepted accounting principles adopted in other countries and jurisdictions. The accompanying financial statements are therefore not intended to present the financial position and results of operations and cash flows in accordance with jurisdictions other than Cambodia. Consequently, these financial statements are addressed only to those who are informed about Cambodia accounting principles, procedures and practices. The financial statements are prepared using the historical cost convention. The preparation of financial statements in accordance with CAS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current event and actions, actual results ultimately may differ from those estimates. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3 to the financial statements. 11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued). 2.2 New accounting standards and interpretations On 28 August 2009, the National Accounting Council of the Ministry of Economy and Finance announced the adoption of Cambodian International Financial Reporting Standards ( CIFRS ) which are based on all standards published by International Accounting Standard Board including other interpretations and amendments that may occur in any circumstances to each standard by adding Cambodian. Public accountable entities shall prepare their financial statements in accordance with CIFRS for accounting period beginning on or after 1 January 2012. The National Accounting Council of the Ministry of Economy and Finance through Circular No. 086 MoEF.NAC dated 30 July 2012 approves banks and financial institutions to delay adoption of CIFRS until the periods beginning on or after 1 January 2016. The first financial statements of the Company which will be prepared under CIFRS is the year ending 31 December 2016. CAS, the current accounting standard used, is different to CIFRS in many areas. Hence, the adoption of CIFRS will have significant impact on the financial statements of the Company. 2.3 Business combination Business acquisition under common control On 31 August 2013, the Board of Directors approved for the merging between KREDIT Microfinance Institution Plc. and CBIRD Microfinance Co., Ltd. The shareholding of Phillip MFI Pte Ltd in KREDIT Microfinance Institute Plc. has increased by US$ 222,300. The predecessor method of accounting is used to account for the merger. The results and financial position of CBIRD Microfinance Co., Ltd are incorporated as if both companies had always been combined. The corresponding amounts for the previous year reflect the combined results and financial position of both companies, even though the transactions did not occur until the current year. 12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued). 2.4 Foreign currencies (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The financial statements are presented in US$, which is the Company s functional and presentation currency. For the sole regulatory purpose of complying with the Prakas No. B7-07-164 dated 13 December 2007 of the Central Bank, a translation to Khmer Riel ( KHR ) is provided for the balance sheet, income statement, statement of changes in equity, cash flow statement and notes to the financial statements as of and for the financial period ended 31 December 2014 using the official rate of exchange regulated by the Central Bank as at the reporting date, which was US$ 1 to KHR 4,075 (31 December 2013: US$ 1 to KHR 3,995). Such translation amounts are unaudited and should not be construed as representations that the US$ amounts represent, or have been or could be, converted into KHR at that or any other rate. (b) Transactions and balances Transactions in currencies other than US$, the functional and presentation currency, are translated into US$ at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in currencies other than US$ are recognised in the income statement. 2.5 Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, the non-restricted balances with the Central Bank, and balances with banks, with original maturities of three months or less from the date of acquisition. 2.6 Loans to customers Loans to customers are stated in the balance sheet at the amount of the principal outstanding less any amounts written off and provision for bad and doubtful loans. Loans are written off when there is no realistic prospect of recovery. Recovery of previously written-off loans to customers is recognised in the income statement. 13
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Provision for bad and doubtful loans The Company follows the mandatory credit classification and provisioning as required by the Prakas No. B7-02-186 dated 13 September 2002. The Prakas requires microfinance institutions to classify their loan portfolio into the following four classes and ensure that the minimum mandatory level of specific provisioning is provided: Classification Number of days past due Provision Short-term loans (less than one year) Standard Less than 30 days 0% Sub-standard Equal to or more than 30 days 10% Doubtful Equal to or more than 60 days 30% Loss Equal to or more than 90 days 100% Long-term loans (more than one year) Standard Less than 30 days 0% Sub-standard Equal to or more than 30 days 10% Doubtful Equal to or more than 180 days 30% Loss Equal to or more than 360 days 100% In addition to the above provision, an additional provision for loan losses is made based on the Company s experience and industry prospects mainly focusing on Risk Coverage Ratio. Every month, the Risk Coverage Ratio must be equal to 100%. Risk Coverage Ratio is calculated by taking the provision for bad and doubtful loans (including specific provision) divided by non-performing loans, as approved by the Board of Directors. 2.8 Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is possible that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repair and maintenance are charged to the income statement during the financial year in which they are incurred. Depreciation of property and equipment is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets as follows: Computers Motor vehicles Office furniture and equipment 3 years 3-5 years 3-8 years An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. 14
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Intangible assets Intangible assets consist of computer software and are stated at cost less accumulated amortisation and accumulated impairment losses. Acquired computer software is capitalised on the basis of the cost incurred to acquire the specific software and bring it into use. Intangible assets are amortised over their estimated useful lives of four years using the straight-line method. 2.10 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identified cash flows (cash-generating units). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. 2.11 Borrowings Borrowings are stated at the amount of the principal outstanding. Fees paid on the establishment of borrowing facilities are capitalised and amortised over the period of the borrowings using the straight-line method. 2.12 Subordinated debts Subordinated debts are treated as financial liabilities when there are contractual obligations to deliver cash or financial assets to the other entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Company; if otherwise, it is treated as equity. The subordinated debts which are approved by the Central Bank are included as a Tier II line item in the calculation of the Company s net worth in accordance with the guidelines of the Central Bank. 2.13 Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 15
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.13 Provisions (continued) Provisions are re-measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense. 2.14 Provident fund The Company provides its employees with benefits under the provident fund policy. A monthly provision equal to 1/12 of each employee s salary for those who work for five years or less; and 1.3/12 of each employee s salary for those who work more than five years is accrued for this provident fund. This provident fund will be fully paid to employees upon their retirement or resignation of employment. The Company accrues the liability annually under a provident fund liability account and transfers this provident fund to individual staff s saving account in the following year. The employee s saving account earns interest at 5% per annum. 2.15 Reserves (i) Legal reserve Reserve is calculated at 5% of the Company s profit for the year in accordance with the Memorandum and Articles of Association. This transfer shall cease when the reserve fund equals 10% of the Company s registered capital. (ii) Reserve for capital strengthening According to the loan agreement between Instituto De Crédito Oficial (ICO) of the Kingdom of Spain and the Company, the Company is required, during the life of the loan, to transfer annually the retained earnings to reserve capital strengthening at 3.5% of outstanding principal of the loan from ICO, under the Spanish Microfinance Program. The reserve is for Institutional Strengthening, and still retained in the reserve account of the life of the loan, except otherwise agreed by ICO. 2.16 Investment in unquoted equity instruments For investment in unquoted equity instruments without significant influence, the Company recognises and measures the investment in unquoted shares at cost, less any impairment. 16
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.17 Donation and grants Grants received to subsidise the Company s operating and administrative expenses are released to the income statement as grant income over the periods in which they are expected to be utilised for intended purposes as stipulated in their respective grant agreements. The remaining grants as of and for the year ended are shown in the balance sheet as differed grant income. Grant received to be used by the Company for funding its loan disbursements are treated as donated capital as part of shareholders equity in the balance sheet. However, if the donors advise clearly in the grant agreement that it should be the Company s income, it will be treated as grant income in the income statement. 2.18 Interest income and expense Interest income on loans to customers, balances with the Central Bank and balances with banks are recognised on an accrual basis. Where a loan becomes non-performing, the recording of interest income on loans to customers is suspended until it is realised on a cash basis. Interest expenses on deposits from customers, borrowings and subordinated debts are recognised on an accrual basis. 2.19 Loan processing fee income The loan processing fee is immediately recognised in the income statement upon the loan disbursement. 2.20 Leases Leases in which a significant portion of risks and rewards of ownership of assets are retained by the leaser are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the leases. 17
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.21 Current and deferred income tax The current income tax charge is calculated on the basis of the tax law enacted or substantively enacted at the reporting date in Cambodia where the Company operates and generates taxable income. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates expected to be applied to temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 3. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS The Company makes estimates, assumptions and judgements that affect the reported amounts of assets and liabilities. Estimates, assumptions 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. (a) Impairment losses on loans to customers The Company is required to follow the mandatory credit classification and provisioning in accordance with the Prakas No. B7-02-186 dated 13 September 2002 on the classification and provisioning for bad and doubtful debts. The Central Bank requires microfinance institutions to classify their loan portfolios into four classes and ensure that the minimum mandatory level of specific provision is made depending on the classification concerned and regardless of the assets (except for cash) pledged as collateral. For the purpose of loan classification, the Company is required to take into account the borrower s historical payment experience and financial condition. In addition to the required provision, an additional provision for loan losses is made based on the Company s experience and industry prospects mainly focusing on Risk Coverage Ratio every month, the Risk Coverage Ratio must be equal to 100%. Risk Coverage Ratio is calculated by taking the provision for bad and doubtful loans (including specific provision) divided by non-performing loans, as approved by the Board of Directors. 18
3. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS (continued) (b) Taxes Taxes are calculated on the basis of current interpretations of the tax regulations. However, these regulations are subject to periodic variation and the ultimate determination of tax expenses will be made following inspection by the tax authorities. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 4. CASH ON HAND Head office 299,801 1,221,689 128,070 511,640 Branches 5,223,765 21,286,842 3,086,981 12,332,489 5,523,566 22,508,531 3,215,051 12,844,129 5. BALANCES WITH THE CENTRAL BANK Statutory capital deposit 487,921 1,988,278 508,792 2,032,624 Reserve requirement deposit 2,675,489 10,902,618 1,260,407 5,035,324 Current accounts 3,864,288 15,746,973 2,723,835 10,881,723 (i) Statutory capital deposit 7,027,698 28,637,869 4,493,034 17,949,671 In compliance with Prakas B7-07-163 dated 13 December 2007 on the Licensing of Deposit- Taking Microfinance Institutions, the Company is required to maintain a statutory capital deposit with the Central Bank at 5% of the registered capital. This deposit is refundable should the Company voluntarily liquidate. (ii) Reserve requirement deposit The reserve deposit represents the minimum reserve requirement, which is calculated at 8% of the total deposits from customers, as required by the Prakas B7-07-163 on the Licensing of Deposit-Taking Microfinance Institutions. 19
5. BALANCES WITH THE CENTRAL BANK (continued) (iii) Interest rates Reserve requirement deposit and current accounts are non-interest bearing. The statutory capital deposit in US$ earns interest ranging from 0.28% to 0.68%. The interest payment is settled semi-annually. 6. BALANCES WITH BANKS Current accounts 220,350 897,927 26,698 106,658 Fixed accounts 31,900 129,993 1,031,900 4,122,441 Savings accounts 3,323,150 13,541,835 1,326,132 5,297,897 3,575,400 14,569,755 2,384,730 9,526,996 Current accounts are non-interest bearing. Annual interest rates on savings accounts and fixed accounts are at the rate ranging 0.05% to 0.4% and 4.50% respectively. 7. LOANS TO CUSTOMERS Solidarity loans 12,287,802 50,072,793 6,215,748 24,831,913 Individual loans 88,194,749 359,393,602 70,428,950 281,363,655 100,482,551 409,466,395 76,644,698 306,195,568 Mandatory provision (137,313) (559,550) (79,792) (318,769) General provision (174,336) (710,419) (162,846) (650,569) Provision for bad and doubtful loans (311,649) (1,269,969) (242,638) (969,338) 100,170,902 408,196,426 76,402,060 305,226,230 20
7. LOANS TO CUSTOMERS (continued) (a) Provision for bad and doubtful loans The movements in provision for bad and doubtful loans to customers are as follows: At beginning of the year 242,638 988,750 155,697 622,010 Provision during the year 146,182 595,692 162,679 649,903 Bad debts written-off (63,830) (260,108) (65,457) (261,501) Currency translation differences (13,341) (54,365) (10,281) (41,074) At end of the year 311,649 1,269,969 242,638 969,338 (b) By maturity Less than 1 month 4,813,662 19,615,673 3,409,814 13,622,207 1 month and less than 3 months 12,957,517 52,801,882 10,468,722 41,822,544 3 months and less than 12 months 51,652,765 210,485,017 41,864,278 167,247,790 1 year and less than 5 years 30,837,273 125,661,887 20,841,883 83,263,323 Over 5 years 221,334 901,936 60,001 239,704 (c) By currency 100,482,551 409,466,395 76,644,698 306,195,568 US Dollars 77,958,552 317,681,098 60,137,584 240,249,647 Khmer Riel 21,918,233 89,316,800 16,078,438 64,233,360 Thai Baht 605,766 2,468,497 428,676 1,712,561 100,482,551 409,466,395 76,644,698 306,195,568 21
7. LOANS TO CUSTOMERS (continued) (d) By economic sector Agriculture 31,563,834 128,622,624 24,742,454 98,846,103 Services 15,561,425 63,412,807 11,819,561 47,219,146 Trade and commerce 32,460,640 132,277,108 25,569,794 102,151,327 Other categories 20,896,652 85,153,856 14,512,889 57,978,992 (e) By relationship 100,482,551 409,466,395 76,644,698 306,195,568 External customers 99,510,741 405,506,271 76,053,699 303,834,528 Staff loans 971,810 3,960,124 590,999 2,361,040 (f) By location 100,482,551 409,466,395 76,644,698 306,195,568 Kampong Cham 13,402,753 54,616,218 10,805,335 43,167,313 Tbong Khmom 10,726,751 43,711,510 8,422,896 33,649,470 Phnom Penh 9,799,385 39,932,494 7,722,939 30,853,141 Peam Ror 9,132,173 37,213,605 7,749,589 30,959,608 Siem Reap 8,722,568 35,544,465 6,455,499 25,789,719 Kampong Chhnang 7,791,515 31,750,424 6,582,983 26,299,017 Takeo 7,745,414 31,562,562 5,693,384 22,745,069 Battambang 6,741,054 27,469,795 7,384,814 29,502,332 Prey Veng 6,341,918 25,843,316 5,095,300 20,355,724 Kandal 5,495,391 22,393,718 4,251,169 16,983,420 Svay Rieng 2,908,456 11,851,958 1,667,704 6,662,477 Kratie 2,861,748 11,661,623 1,762,922 7,042,873 Banteay Meanchey 2,755,278 11,227,758 477,032 1,905,743 Kampot 2,383,547 9,712,954 1,113,960 4,450,270 Pursat 1,934,346 7,882,460 - - Head Office 1,119,856 4,563,413 821,695 3,282,672 Pailin 620,398 2,528,122 637,477 2,546,720 100,482,551 409,466,395 76,644,698 306,195,568 22
7. LOANS TO CUSTOMERS (continued) (g) Analysis by security on performing and non-performing loans Standard loans: Secured 100,170,903 408,196,430 76,423,732 305,312,809 Unsecured - - - - Sub-standard loans: - Secured 149,193 607,961 45,509 181,808 Unsecured - - - - Doubtful loans: - Secured 57,232 233,220 132,848 530,728 Unsecured - - - - Loans loss: - Secured 105,223 428,784 42,609 170,223 Unsecured - - - - 100,482,551 409,466,395 76,644,698 306,195,568 (h) Interest rate The annual interest rates during the year are as follows: Unaudited Loan in US$ 9%-36% 9%-36% Loan in Riel 26% 23%-36% Staff loans 9%-12% 12% 8. OTHER ASSETS Accrued interest receivable 1,294,653 5,275,711 1,018,162 4,067,558 Prepayments and deposits 1,192,306 4,858,647 561,228 2,242,106 Others 69,515 283,274 81,702 326,399 2,556,474 10,417,632 1,661,092 6,636,063 23
9. PROPERTY AND EQUIPMENT Office furniture Motor and Buildings Computers vehicles equipment Total US$ US$ US$ US$ US$ Year ended 31 December 2013 (Unaudited) Opening net book value 74,848 109,066 323,343 249,969 757,226 Additions - 65,557 176,240 286,533 528,330 Write off - net - - - (2,567) (2,567) Disposals - net - - (13,184) (5,704) (18,888) Depreciation charge (note 23) (4,428) (71,511) (161,891) (97,622) (335,452) Closing net book value (Unaudited) 70,420 103,112 324,508 430,609 928,649 At 31 December 2013 (Unaudited) Cost 94,500 354,654 990,207 695,548 2,134,909 Accumulated depreciation (24,080) (251,542) (665,699) (264,939) (1,206,260) Net book value 70,420 103,112 324,508 430,609 928,649 Equivalent in KHR 000 (Unaudited) 281,328 411,932 1,296,409 1,720,284 3,709,953 Year ended 31 December 2014 Opening net book value 70,420 103,112 324,508 430,609 928,649 Additions - 536,125 238,736 467,696 1,242,557 Write off - net (67,880) - - (1,287) (69,167) Disposals - net - - (4,590) (3,114) (7,704) Depreciation charge (note 23) (2,540) (128,731) (177,449) (170,385) (479,105) Closing net book value - 510,506 381,205 723,519 1,615,230 At 31 December 2014 Cost 26,620 890,779 1,224,353 1,158,843 3,300,595 Accumulated depreciation (26,620) (380,273) (843,148) (435,324) (1,685,365) Net book value - 510,506 381,205 723,519 1,615,230 Equivalent in KHR 000-2,080,312 1,553,410 2,948,340 6,582,062 24
10. INTANGIBLE ASSETS Computer software US$ Year ended 31 December 2013 (Unaudited) Opening net book value 12,091 Additions 1,110,193 Amortisation charge (note 23) (12,234) Closing net book value 1,110,050 At 31 December 2013 (Unaudited) Cost 1,121,284 Accumulated amortisation (11,234) Net book value 1,110,050 Equivalent in KHR 000 (Unaudited) 4,434,650 Year ended 31 December 2014 Opening net book value 1,110,050 Disposals net (5,469) Amortisation charge (note 23) (64,908) Closing net book value 1,039,673 At 31 December 2014 Cost 1,115,815 Accumulated amortisation (76,142) Net book value 1,039,673 Equivalent in KHR 000 4,236,667 25
11. DEFERRED TAX ASSET/ (LIABITLITY) Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same tax authority. Deferred tax is calculated on the temporary differences under the liability method using the tax rate of 20% (2013: 20%) The following amounts, determined after appropriate offsetting, are shown in the balance sheet: Deferred tax assets 122,878 500,728 104,186 416,223 Deferred tax liabilities (127,378) (519,065) (21,359) (85,329) (4,500) (18,337) 82,827 330,894 Deferred tax assets and liabilities mainly arise from the temporary differences resulting from provision for staff provident fund, provision for 13 th month salary and staff retreat and unrealised loss on foreign exchange and depreciable assets respectively. The movements of net deferred tax assets/liability are as follows: Balance at beginning of year 82,827 337,520 59,514 237,759 Charged/(Credited) to the income statement (87,327) (355,857) 23,313 93,135 (4,500) (18,337) 82,827 330,894 26
11. DEFERRED TAX ASSETS/(LIABILITY) (continued) Provident fund obligation Provision Total Deferred tax assets US$ US$ US$ At 1 January 2013 (Unaudited) 39,948 42,363 82,311 Credited/(Charged) to the income statement 21,097 778 21,875 At 31 December 2013 (Unaudited) 61,045 43,141 104,186 Equivalent in KHR 000 (Unaudited) 243,875 172,348 416,223 Credited to the income statement 13,117 5,575 18,692 At 31 December 2014 74,162 48,716 122,878 Equivalent in KHR 000 302,210 198,518 500,728 Accelerated Unrealised tax exchange depreciation gain Total Deferred tax liabilities US$ US$ US$ At 1 January 2013 (Unaudited) (9,943) (12,854) (22,797) Credited to the income statement (6778) 8,216 1,438 At 31 December 2013 (Unaudited) (16,721) (4,638) (21,359) Equivalent in KHR 000 (Unaudited) (66,800) (18,529) (85,329) Credited to the income statement (134,315) 28,296 (106,019) At 31 December 2014 (151,036) 23,658 (127,378) Equivalent in KHR 000 (615,472) 96,407 (519,065) 27
12. DEPOSITS FROM BANKS AND CUSTOMERS Voluntary savings Savings deposits 5,868,601 23,914,549 3,107,965 12,416,320 Term deposits 29,723,840 121,124,648 13,248,492 52,927,726 Deposits from banks and customer are breakdown as follows: 35,592,441 145,039,197 16,356,457 65,344,046 US$ KHR 000 US$ KHR 000 Deposits from banks 1,780,220 7,254,396 1,250,654 4,996,363 Deposits from customers 33,812,221 137,784,801 15,105,803 60,347,683 The saving deposits bear interest from 2.25% to 7% per annum. The term deposits bear interest at the following annual rates: 35,592,441 145,039,197 16,356,457 65,344,046 US$ Riel US$ Riel One-month term - - 4.75% 5.25% Three-month term 5.63% 6.63% 5.75% 6.75% Six-month term 6.38% 7.75% 6.50% 8% 12-month term 7.88% 9.75% 8% 10% 24-month term 8.38% 10.25% 8.5% 10.50% 36-month term 8.38% 11.50% 8.5% 12% 28
13. BORROWINGS Related parties: Phillip MFI Pte 50,000 203,750 100,000 399,500 50,000 203,750 100,000 399,500 Responsibility 11,675,000 47,575,625 8,991,666 35,921,706 ICO-Spain 9,905,600 40,365,320 9,905,600 39,572,872 Incofin Investment Management 5,972,393 24,337,501 5,001,877 19,982,499 Oikocredit 5,428,834 22,122,499 4,934,668 19,713,999 BlueOrchard Finance S.A 5,125,000 20,884,375 3,500,000 13,982,500 Symbiotic Pte. Ltd 4,214,417 17,173,749 5,618,773 22,446,998 Developing World Market 3,845,970 15,672,328 5,010,964 20,018,801 BIB-Germany 3,500,000 14,262,500 2,000,000 7,990,000 ConCap 2,750,000 11,206,250 1,500,000 5,992,500 Etimos Fund (Consorzio Etimos s.c) 1,500,000 6,112,500 450,843 1,801,118 Phillip Bank Plc 1,145,000 4,665,875 1295000 5,173,525 Maruhan Japan Bank 1,075,000 4,380,625 1,575,000 6,292,125 ABA Bank 833,333 3,395,832 - - Micro Credit Enterprise 750,000 3,056,250 1,250,000 4,993,750 KIVA 375,802 1,531,393 222,947 890,673 LMDF 350,000 1,426,250 550000 2,197,250 Individual lender 264,621 1,078,331 369,196 1,474,938 Partner for Development (PFD) 200,000 815,000 200,000 799,000 Habitat for Humanity 185,000 753,875 50000 199,750 World Hope International - - 27,153 108,476 Rural Development Bank - - 550,000 2,197,250 IFAD - - 31,332 125,171 ABC Microfinance - - 91,645 366,122 59,095,970 240,816,078 53,126,664 212,241,023 59,145,970 241,019,828 53,226,664 212,640,523 The borrowings mature between 11 February 2015 and 15 September 2023 and bear interest rates ranging from 5% to 12.50% per annum (2013: 4.75% to 13.15%). All borrowings are unsecured. The Company has not had any defaults of principal, interest or redemption amounts during the year on its borrowings (2013: nil). 29
14. DEFERRED GRANTS Balance at beginning of year 92,649 377,545 84,874 339,072 Grants received during the year 407,764 1,661,638 310,212 1,239,297 Transfers to donated capital - - (57,738) (230,664) Grants recognised as income during the year (Note 26) (372,724) (1,518,850) (244,699) (977,572) Balance at the end of the year 127,689 520,333 92,649 370,133 15. OTHER LIABILITIES Accrued interest payable 1,898,128 7,734,872 1,292,140 5,162,099 Staff benefits payable 851,885 3,471,432 571,751 2,284,145 Accrued other tax payable 112,040 456,563 83,985 335,520 Other liabilities 120,821 492,345 459,265 1,834,764 Provident fund payable - - 305,230 1,219,394 2,982,874 12,155,212 2,712,371 10,835,922 16. SHARE CAPITAL Phillip MFIs Pte Ltd 3,574,000 14,564,050 3,574,000 14,278,130 World Relief Corporation 1,619,000 6,597,425 1,619,000 6,467,905 5,193,000 21,161,475 5,193,000 20,746,035 30
16. SHARE CAPITAL (continued) Ownership and number of shares are presented as below: Ownership Shares Ownership Shares Phillip MFIs Pte Ltd 67.43% 70,032 67.43% 67,034 World Relief Corporation 32.57% 33,828 32.57% 32,380 100% 103,860 100% 99,414 17. SUBORDINATED DEBTS Phillip MFIs Pte Ltd 5,000,000 20,375,000 2,000,000 7,990,000 Poem Pte Ltd 50,000 203,750 50,000 199,750 The movement subordinated debt is as follows: 5,050,000 20,578,750 2,050,000 8,189,750 Balance as at 1 January 2,050,000 8,353,750 1,300,000 5,193,500 Converted into capital - - (1,250,000) (4,993,750) Additions 3,000,000 12,225,000 2,000,000 7,990,000 5,050,000 20,578,750 2,050,000 8,189,750 18. INTEREST INCOME Solidarity loans 3,324,461 13,547,177 1,584,326 6,329,382 Individual loans 19,062,483 77,679,618 15,165,835 60,587,510 Balances with the Central Bank and banks 25,492 103,882 27,517 109,930 22,412,436 91,330,677 16,777,678 67,026,822 31
19. INTEREST EXPENSES Long-term borrowings 5,118,169 20,856,539 3,972,289 15,869,295 Short-term borrowings 243,595 992,650 58,294 232,885 Deposits from customers 1,859,714 7,578,334 977,477 3,905,020 7,221,478 29,427,523 5,008,060 20,007,200 20. FEE AND COMMISION INCOME Loan commission fees 27,246 111,027 3,482 13,911 Others 515,769 2,101,759 227,377 908,372 543,015 2,212,786 230,859 922,283 21. OTHER OPERATING INCOME Bad loan recoveries 66,588 271,347 64,801 258,880 Others 82,169 334,838 54,399 217,324 148,757 606,185 119,200 476,204 32
22. PERSONNEL EXPENSES Salaries and wages 6,435,114 26,223,091 4,946,451 19,761,071 Employee provident fund 394,568 1,607,865 309,314 1,235,711 Business meals and entertainment 112,962 460,320 78,298 312,802 Employee trainings 264,939 1,079,626 159,087 635,552 Board of directors' fees 50,112 204,206 26,133 104,400 Medical care 95,273 388,237 79,970 319,480 Other employees benefits 180,231 734,441 131,024 523,441 7,533,199 30,697,786 5,730,277 22,892,457 23. DEPRECIATION AND AMORTISATION CHARGES Depreciation charge 479,105 1,952,353 335,452 1,340,131 Amortisation charge 64,908 264,500 12,234 48,875 544,013 2,216,853 347,686 1,389,006 24. GENERAL AND ADMINISTRATION EXPENSES Professional fees 901,010 3,671,614 380,571 1,520,381 Rental expenses 716,536 2,919,887 623,158 2,489,517 Vehicle and gasoline expense 522,855 2,130,636 471,357 1,883,071 Marketing and advertising expenses 459,802 1,873,693 226,115 903,329 Office Supplies and stationery expenses 291,400 1,187,453 225,639 901,428 Communication expense 201,117 819,551 142,073 567,582 Utility expenses 159,919 651,668 138,789 554,462 Transportation costs 107,051 436,235 60,139 240,253 Insurance expense 94,417 384,745 76,514 305,672 Security expenses 68,485 279,077 181,143 723,665 Repairs and maintenance expenses 49,330 201,019 31,118 124,316 Correspondent bank charges 48,911 199,316 38,735 154,751 Miscellaneous expenses 8,563 34,896 23,469 93,758 Commission expenses 2,780 11,327 9,689 38,708 3,632,176 14,801,117 2,628,509 10,500,893 33
25. OTHER GAIN-NET Gain/(loss) on foreign exchange (118,285) (482,011) (8,352) (33,362) Gain from disposals of property and equipment 9,523 38,806 2,375 9,488 (108,762) (443,205) (5,977) (23,874) 26. GRANT INCOME Erikjshapen12-14 323,338 1,317,602 215,321 860,207 Kiva-EDU 37,795 154,016 16,175 64,619 Erikjshapen 5,583 22,751 6,748 26,958 Handicap 5,480 22,331 - - Vittana 528 2,150 - - TearfundNetherland-MIS - - 6,455 25,788 372,724 1,518,850 244,699 977,572 27. INCOME TAX EXPENSES Current tax 820,164 3,342,168 682,711 2,727,430 Deferred tax 4,500 18,338 (23,313) (93,135) 824,664 3,360,506 659,398 2,634,295 (i) Provision for income tax Balance at the beginning of the year 544,179 2,217,529 254,797 1,017,914 Current income tax expense 820,164 3,342,168 682,711 2,727,430 Income tax paid (845,450) (3,445,209) (393,329) (1,571,349) 518,893 2,114,488 544,179 2,173,995 34
27. INCOME TAX EXPENSES (continued) (ii) Reconciliation between accounting profit and income tax expense The reconciliation of income tax expense computed at the statutory tax rate to the income tax expense shown in the income statement is as follows: Profit before income tax 4,110,989 16,752,280 3,351,872 13,390,730 Tax calculated at a rate of 20% 822,198 3,350,456 670,374 2,678,146 Expenses not deductible for tax purposes/(other tax effect) 2,466 10,050 (10,976) (43,851) 824,664 3,360,506 659,398 2,634,295 In accordance with Cambodian tax laws, the Company has an obligation to pay corporate income tax in the form of either Tax on Profit at the rate of 20% of taxable profit or 1% minimum tax, whichever is higher. iii) Other tax matters The Company s tax returns are subject to periodic examination by the General Department of Taxation. Some areas of tax law and regulations may be open to different interpretation; therefore, the tax amounts reported in the financial statements could be changed at a later date upon final determination by the General Department of Taxation. 28. CASH AND CASH EQUIVALENTS Cash on hand 5,523,566 22,508,531 3,215,051 12,844,129 Balances with the Central Bank 3,864,288 15,746,974 2,723,835 10,881,721 Balances with banks 3,543,500 14,439,763 1,352,830 5,404,556 12,931,354 52,695,268 7,291,716 29,130,406 35
29. RELATED PARTY TRANSACTIONS AND BALANCES The Company entered into a number of transactions with related parties in the normal course of business. The volumes of related-party transactions, outstanding balances at the year end, and related expense and income for the year are as follows: (a) Related-party transactions Board of directors Fees and related expenses 50,112 204,205 38,593 154,178 Interest expense 79,155 322,556 64,475 257,578 Shareholders Interest expense 166,131 676,983 27,178 108,576 Key Management Management remuneration 117,468 478,683 117,672 470,100 412,866 1,682,427 247,918 990,432 (b) Loans to and deposits from Directors and key management personnel Directors and key management Loans 140,079 559,616 95,593 381,894 Deposits 463,076 1,849,990 325,038 1,298,527 Short-term borrowings from Board of Directors 264,621 1,057,161 384,885 1,537,616 Shareholders Borrowings from Phillip MFIs Pte Ltd 50,000 199,750 10,000 39,950 Subordinated debts from Phillip MFIs Ptd Ltd 5,050,000 20,174,750 2,000,000 7,990,000 (c) Provident fund expenses 5,967,776 23,841,267 2,815,516 11,247,987 Provident fund 38,760 157,947 32,983 134,406 36
30. COMMITMENTS (i) Operating lease commitments These operating leases mainly relate to the office rental, which is renewable upon mutual agreement. Where the Company is the lessee, the future minimum lease payments under noncancellable operating leases are as follows: No later than 1 year 27,462 111,908 505,842 2,020,840 Later than 1 year and no later than 5 years 1,057,440 4,309,068 840,235 3,356,739 Later than 5 years 745,556 3,038,141 109,400 437,053 1,830,458 7,459,117 1,455,477 5,814,632 (ii) Loan commitments As at 31 December 2014, the Company has loan commitment of US$203,888 which had been approved before year-end and disbursed after year-end. 31. FINANCIAL RISK MANAGEMENT The Company s activities expose it to a variety of financial risks: credit risk, market risk (including currency risk, interest rate risk and price risk), and liquidity risk. Taking risks is core to the financial business, and the operational risks are an inevitable consequence of being in business. 31.1 Credit risk The Company takes on exposure to credit risk, which is the risk that counterparties will cause a financial loss to the Company by failing to discharge an obligation. Credit risk is the most important risk for the Company s business. Credit exposure arises principally in lending activities that lead to loans to customers. There is also credit risk in off-balance sheet financial instruments, such as loan commitments. The credit risk management is carried out by the Company s credit committee. The lending activities are guided by the Company s credit policy to ensure that the overall objectives in the area of lending are achieved; i.e., that the loan portfolio is strong and healthy and credit risks are well diversified. The credit policy documents the lending policy, collateral policy, and credit approval processes and procedures implemented to ensure compliance with Central Bank guidelines. 37