GAZETTE NOTICE NO. 7707

the following oversight responsibilities: (a) Monitor the formulation and implementation of Human Resource Policies in the Bank; (b) In relation to staff matters, they ensure the Bank’s compliance with the Kenyan Constitution, Laws of Kenya, CBK regulations and its own code of conduct; (c) Perform any other Human Resource related functions as assigned by the Board. (d) Monitor the implementation of Board resolutions relating to the HRC of the Board. The goal of the committee is to drive the HR function at the Bank to attain best in class global standards. The members of the Human Resources Committee in the year ended 30 June 2020 and their attendance of the meetings held in the year were as follows: Name Position Discipline Meetings attended Nelius Kariuki (Mrs.) Chairman Economist 6 Samson Cherutich Member Accountant 5 Rachel Dzombo (Mrs) Member Management Expert 6 Ravi Ruparel Member Financial Sector Expert 6 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3898 3898 1.5. Monetary Policy Committee (MPC) Section 4D of the Central Bank of Kenya (Amendment) Act 2008 establishes the Monetary Policy Committee (MPC). The MPC is responsible for formulating monetary policy and is required to meet at least once every two (2) months. The MPC comprises the Governor who is the Chairman, the Deputy Governor who is the Deputy Chairperson, two (2) members appointed by the Governor from the CBK, four (4) external members appointed by the Cabinet Secretary for The National Treasury, and the Principal Secretary for the National Treasury or his Representative. External members of the MPC are appointed for an initial period of three (3) years each and may be reappointed for another final term of three (3) years. The quorum for MPC meetings is five (5) members, one of whom must be the Chairman or Deputy Chairperson. During the financial year 2019/20, the MPC formulated monetary policy aimed at maintaining overall inflation within the target of 5 percent with a flexible margin of 2.5 percent on either side. The MPC adopted an accommodative monetary policy stance to support economic activity, by lowering the Central Bank Rate (CBR) from 9.00 percent in June 2019 to 8.50 percent in November 2019 and to 8.25 percent in January 2020. The economy witnessed a severe shock in the second half of the period, attributed to the adverse impact of the global COVID-19 (coronavirus) pandemic. Global financial markets witnessed significant volatility due to heightened uncertainties with regard to the pandemic. The MPC moved quickly to implement policy measures aimed at preventing the pandemic from becoming a severe economic crisis. In March 2020, the Committee augmented its accommodative policy stance by lowering the CBR to 7.25 percent. The Committee also reduced the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent during its March meeting, releasing KES.35.2 billion as additional liquidity availed to banks to directly support borrowers that were distressed as a result of the pandemic. Additionally, the MPC extended the maximum tenor of Repurchase Agreements (REPOs) from 28 to 91 days in order to provide flexibility on liquidity management facilities provided to banks by CBK, and to enable banks access longer term liquidity secured on their holdings of government securities without having to discount them. The MPC shifted to monthly meetings in order to closely monitor market developments and the impact of its previous policy decisions on the economy. In view of a worsening global economic outlook, the MPC augmented its accommodative policy stance by lowering the CBR further to 7 percent in April 2020. Overall inflation remained within the target range during the year, supported by declines in food prices due to favourable weather conditions, lower international oil prices, a reduction in the Value Added Tax (VAT) rate to 14 percent from 16 percent, and muted demand pressures. The inflation rate stood at 4.6 percent in June 2020 compared to 4.3 percent in June 2019. Non-food-non-fuel (NFNF) inflation remained stable below 5 percent over the period, indicating that demand pressures were muted. The stability of the foreign exchange market in the period minimized the threat of imported inflation. The CBK foreign exchange reserves, which stood at USD9,503.5 million (5.71 months of import cover) (2019: USD 9,108.6 million (equivalent to 5.8 months of import cover)) at the end of June 2020, continued to provide adequate cover and a buffer against short-term shocks in the foreign exchange market. The repeal of the interest rate caps on commercial bank loans in November 2019, restored the clarity of monetary policy decisions and was expected to strengthen the transmission of monetary policy. The caps had led to a significant rationing of credit, particularly to the most vulnerable. The adoption by banks of the Banking Sector Charter during the period is a commitment to entrench a responsible and disciplined banking sector which is cognisant of, and responsive to, the needs of their customers. After every MPC Meeting, the Governor held meetings with Chief Executive Officers of banks to discuss the background to the MPC decisions and to obtain feedback from the market. Additionally, the Governor held press conferences with the media to brief them on the background of the MPC decisions and developments in the financial sector and the economy. These forums continued to improve the public’s understanding of monetary policy decisions. The MPC held eight (8) meetings in the year ended 30 June 2020, and attendance was as follows: Name Position Discipline Meetings Attended Patrick Njoroge (Dr.) Chairman Economist 8 Sheila M’Mbijjewe (Ms.) Deputy Chairperson Finance/ Accountancy 8 Margaret Chemengich (Dr.) Member (External) Economist 8 Jane Kabubo-Mariara (Prof.) Member (External) Economist 7 Benson Ateng’ (Dr.) Member (External) Economist 8 Humphrey Muga Member (External) Economist 8 Musa Kathanje Representative of the Principal Secretary, The National Treasury Economist 7 William Nyagaka* Member (Internal) Finance/ Accountancy 4 David Luusa* Member (Internal) Economist 3 Raphael Otieno Member (Internal) Economist 8 *Mr. David Luusa replaced Mr. William Nyagaka as a member of the MPC in April 2020 following the appointment of Mr. Luusa as the Director of Financial Markets Department. 1.6. Management Structure The positions of Governor and Deputy Governor are set out in the CBK Act Cap 491 of the Laws of Kenya. The Governor and the Deputy Governor constitute the Central Bank’s Senior Management and meet regularly with the Heads of the Bank’s various departments indicated on the first page, to review the overall performance of the Bank. There are several other Management Committees, which advise the Governor on specific issues to enable him to discharge his responsibilities as the Chief Executive Officer of the Bank. 1.7. Code of Ethics The Bank is committed to the highest standards of integrity, behaviour and ethics. A formal code of ethics for all employees has been approved by the Board and is fully implemented. All employees of the Bank are expected to avoid activities and financial interests, which could give rise to conflict of interest with their responsibilities in the Bank. Strict rules of conduct embedded in the Staff Rules and Regulations and the Employment Act 2007 apply to the entire Bank’s staff. 1.8. Internal Controls The Management of the Bank has put in place a system of internal control mechanisms to ensure the reporting of complete and accurate accounting information. Procurement of goods and services is strictly done in accordance with the Public Procurement & Disposal Act, 2015. In all operational areas of the Bank, workflows have been structured in a manner that allows adequate segregation of duties. 2nd October, 2020 THE KENYA GAZETTE 1.9. Authorizations All the expenditure of the Bank must be authorized in accordance with a comprehensive set of the Bank policies and procedures. There is an annual Budget approved by the Board and a Procurement Plan approved by the Senior Management before commencement of the financial year. The Board of Directors receives regular management accounts comparing actual outcomes against budget as a means of monitoring actual financial performance of the Bank. 1.10. Internal Audit and Risk Management The internal audit function and risk oversight is performed by Internal Audit Department. The department is responsible for monitoring and providing advice on the Bank’s risk and audit framework. All reports of Internal Audit Department and Risk Management Unit are availed to the Audit Committee of the Board. 1.11. Transparency The Bank publishes an Annual Report, Monthly Economic Review, Weekly Releases, Statistical Bulletin and Bi-annual Monetary Policy Statements. In addition, the Bank issues policy briefs to The National Treasury on both the Monetary and Fiscal policies. On an annual basis, the Financial Statements of the Bank are published in the Kenya Gazette and placed in the Bank’s website. 2.0. Financial Performance The Bank's financial performance is affected by the Monetary Policy stance undertaken, interest rates and changes in exchange rate. The Bank's financial performance is presented on pages below of these financial statements. During financial year ended 30 June 2020, the Bank recorded a net surplus of KShs 41,530 million compared to KShs 26,138 million in financial year ended 30 June 2019. The surplus is included as part of the General Reserve Fund. During the financial year ended 30 June 2020, the Bank’s operating surplus before unrealized gains was KShs 17,055 million (2019: KShs 21,016 million). Interest income of KShs 22,308 million (2019: KShs 23,347 million) declined due to lower rates offered on foreign deposit placements and a decline in fixed income yields respectively as a result of global monetary policy easing cycles. An unrealised foreign exchange gain of KShs 24,475 million was recorded during the year ended 30 June 2020 (2019: KShs 5,122 million) due to the impact of USD strength. The Bank also recorded a fair value gain on fixed income securities of KShs 8,452 million (2019: KShs 7,005 million). The gain recorded during the year has been presented in other comprehensive income. In addition, an actuarial gain of KShs 1,949 million (2019: loss of KShs 2,928 million) was also earned. There was no revaluation gain on land and buildings recorded during the year. This valuation is performed every 3 years in line with the Bank’s Fixed assets management policy. The Bank’s assets increased to KShs 1,350,434 million (2019: KShs 1,239,158 million) mainly attributed to net inflows from development partners and changes in the value of securities maintained for monetary policy implementation. Liabilities increased to KShs 1,154,419 million (2019: KShs 1,080,683 million) as a result of an increase in deposits from banks and government largely attributed to proceeds to mitigate the impact of the COVID-19 pandemic. Central Bank of Kenya Report of the Directors for the Year Ended 30 June 2020 The Directors submit their report together with the audited financial statements for the year ended 30 June 2020, which shows performance of the Bank during the year and the state of affairs of Central Bank of Kenya (the “Bank”/” CBK”) as at the year end. 1. Incorporation The Bank is incorporated by Article 231 of the Constitution of Kenya, 2010. 2. Principal Activities The Bank is established and administered under the Constitution of Kenya, 2010 with the principal object of formulating and implementing monetary policy directed at achieving and maintaining stability in the general level of prices. It is also the responsibility of the Bank to foster liquidity, solvency and proper functioning of a stable market-based financial system. The Bank also acts as banker, advisor and fiscal agent of the Government of Kenya. 3. Results and Surplus The surplus for the year was KShs 41,530 million (2019: KShs 26,138 million) made up of KShs 17,055 million (2019: KShs 21,016 million) realized surplus and KShs 24,475 million unrealized surplus (2019: KShs 5,122 million). The surplus has been included as part of the General Reserve Fund. On 20 March 2020, the Directors approved a transfer of KShs 7,388 million to the Consolidated Fund from the General Reserve Fund. This transfer represented a one-off surplus arising from the demonetization exercise carried out by the CBK in the year. The transfer of this surplus to the Government of Kenya revenues was done to support their efforts in the COVID-19 pandemic crisis. The directors recommend a transfer of operational surplus in the year to 30 June 2020 of KShs 2,500 million (2019: KShs 4,000 million). 4. Board of Directors The members of the Board of Directors who served during the year and up to the date of this report are listed on the first page. 5. Auditor The Auditor-General is responsible for statutory audit of the Bank’s Financial Statements in accordance with Section 35 of the Public Audit Act, 2015. Section 23(1) of Act empowers the Auditor-General to appoint other auditors to carry out the audit on his behalf. Accordingly, Ernst & Young LLP were appointed to carry out audit for the year ended 30 June 2020 and report to the Auditor - General. By Order of the Board Kennedy Abuga Board Secretary Dated the 2nd September, 2020 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3900 3900 Central Bank of Kenya Statement of Directors responsibilities for the year ended 30 June 2020 The Directors are responsible for the preparation of 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 the Bank’s financial performance. The Directors also 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 Directors accept responsibility for the preparation and fair presentation of financial statements that are free from material misstatements whether due to fraud or error. They also accept responsibility for: (i) Designing, implementing and maintaining internal control necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error; (ii) Selecting and applying appropriate accounting policies; and (iii) Making accounting estimates and judgments that are reasonable in the circumstances. The Directors are of the opinion that the financial statements give a true and fair view of the state of the financial position of the Bank as at 30 June 2020 and of the Bank’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Central Bank of Kenya Act. These financial statements are prepared on a going concern basis, taking into account the legal mandate and responsibilities of the Bank, in particular is monetary policy, financial stability and payment system leadership. Approved by the Board of Directors and signed on its behalf by: Chairman, Board of Directors Governor Mohammed Nyaoga Patrick Njoroge (Dr.) Dated the 2nd September, 2020. Dated the 2nd September, 2020. REPORT OF THE AUDITOR-GENERAL ON CENTRAL BANK OF KENYA FOR THE YEAR ENDED 30 JUNE, 2020 REPORT ON THE FINANCIAL STATEMENTS Opinion The accompanying consolidated financial statements of Central Bank of Kenya set out below, which comprise the consolidated statement of financial position as at 30 June, 2020, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information have been audited on my behalf by Ernst and Young LLP auditors appointed under Section 23 of the Public Audit Act, 2015 and in accordance with the provisions of Article 229 of the Constitution of Kenya. The auditors have duly reported to me the results of their audit and on the basis of their report, I am satisfied that all the information and explanations which, to the best of my knowledge and belief, were necessary for the purpose of the audit were obtained. In my opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Central Bank of Kenya as at 30 June, 2020, and of its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards (IFRs) and comply with the Central Bank of Kenya Act, Cap 491 of the Laws of Kenya. Basis for Opinion The audit was conducted in accordance with International Standards of Supreme Audit Institutions (ISSAIs). I am independent of Central Bank of Kenya Management in accordance with ISSAI 130 on Code of Ethics. I have fulfilled other ethical responsibilities in accordance with the ISSAI and in accordance with other ethical requirements applicable to performing audits of financial statements in Kenya. I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for my opinion. Key Audit Matters Key audit matters are those matters that, in my professional judgment, are of most significance in the audit of the financial statements. There were no key audit matters to report in the year under review. Other Matter 1. Failure to Maintain the Required Number of Non-Executive Directors The Central Bank Act, Cap 491 of 2014, Part IV – Management, Section 11(1)(d) provides that there shall be eight (8) other Non-Executive Directors of the Board. During the year under review, the Bank had in place five (5) Non-Executive Directors transacting business on its behalf. 2. Lack of the Second Deputy Governor In addition, the Central Bank of Kenya Act, Cap 491 Section 13B(1) states, “There shall be two Deputy Governors who shall be appointed by the President through a transparent and competitive process and with the approval of Parliament”. During the year under review, only one Deputy Governor was in office. Other Information The Directors are responsible for the other information, which comprises the statement of Corporate Governance, Directors’ report and the statement of Directors’ responsibilities. The other information does not include the financial statements and my auditor’s report thereon. My opinion on the consolidated financial statements does not cover the other information and I do not express any form of assurance or conclusion thereon. REPORT ON LAWFULNESS AND EFFECTIVENESS IN USE OF PUBLIC RESOURCES Conclusion As required by Article 229(6) of the Constitution, I confirm that, nothing has come to my attention to cause me to believe that public money has not been applied lawfully and in an effective way. 2nd October, 2020 THE KENYA GAZETTE Basis for Conclusion The audit was conducted in accordance with ISSAI 4000. The standard requires that I comply with ethical requirements and plan and perform the audit to obtain assurance about whether the activities, financial transactions and information reflected in the financial statements are in compliance, in all material respects, with the authorities that govern them. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my conclusion. REPORT ON EFFECTIVENESS OF INTERNAL CONTROLS, RISK MANAGEMENT AND GOVERNANCE Conclusion As required by Section 7 (1) (a) of the Public Audit Act, 2015, I confirm that nothing has come to my attention to cause me to believe that internal controls, risk management and overall governance were not operating in an effective way. Basis for Conclusion The audit was conducted in accordance with ISSAI 2315 and ISSAI 2330. The standards require that I plan and perform the audit to obtain assurance about whether effective processes and systems of internal control, risk management and governance were operating effectively. In all material respects, I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my conclusion. Responsibilities of Management and those charged with Governance Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs), and for maintaining effective internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error and for its assessment of the effectiveness of internal control. In preparing the consolidated financial statements, Management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management is aware of the intention to liquidate the Bank or to cease operations. Management is also responsible for submission of the financial statements to the Auditor-General in accordance with the provisions of Section 47 of the Public Audit Act, 2015. In addition to the responsibility for the preparation and presentation of the financial statements described above, Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them, and that public resources are applied in an effective manner. Those charged with governance are responsible for overseeing the financial reporting process, reviewing the effectiveness of how the bank monitors compliance with relevant legislative and regulatory requirements, ensuring that effective processes and systems are in place to address key roles and responsibilities in relation to governance and risk management, and ensuring the adequacy and effectiveness of the control environment. Auditor-General’s Responsibilities for the Audit The audit objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion in accordance with the provisions of Section 48 of the Public Audit Act, 2015 and submit the audit report in compliance with Article 229(7) of the Constitution. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAIs will always detect a material misstatement and weakness when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. In addition to the audit of the financial statements, a compliance audit is planned and performed to express a conclusion about whether, in all material respects, the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities that govern them in accordance with the provisions of Article 229(6) of the constitution and submit the audit report in compliance with Article 229(7) of the constitution. Further, in planning and performing the audit of the financial statements and audit of compliance, I consider internal control in order to give an assurance on the effectiveness of internal controls, risk management and governance processes and systems in accordance with the provisions of Section 7(1) (a) of the Public Audit Act, 2015 and submit the audit report in compliance with Article 229(7) of the Constitution. My consideration of the internal control would not necessarily disclose all matters in internal control that might be material weaknesses under the ISSAIs. A material weakness is a condition in which the design or operation of one or more of the internal control components, does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of its inherent limitations, internal control may not prevent or detect misstatements and instances of non-compliance. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. As part of an audit conducted in accordance with ISSAls, I exercise professional judgment and maintain professional scepticism throughout the audit. I also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management. • Conclude on the appropriateness of the management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in the auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my audit report. However, future events or conditions may cause the Bank to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3902 3902 • Obtain sufficient appropriate audit evidence regarding the financial information and business activities of the Bank to express an opinion on the financial statements. • Perform such other procedures as I consider necessary in the circumstances. I communicate with the Management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that are identified during the audit. I also provide Management with statement that I have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on my independence, and where applicable, related safeguards. Nancy Gathungu, AUDITOR GENERAL, Nairobi 22nd September, 2020. Consolidated Statement of Comprehensive Income for the Year Ended 30th June, 2020 2020 2019 Notes KShs' million KShs' million Interest income 4 22,308 23,347 Interest expense 5 (4,618) (1,492) Net interest income 17,690 21,855 Fees and commission income 6(a) 3,000 3,000 Net trading income 6(b) 11,753 10,099 Other income 7(a) 982 1,371 Demonetization of old currency 7(b) 7,388 - Operating income 40,813 36,325 Credit loss expense on financial assets 8 (8,627) (2,365) Operating expenses 9(a) (15,131) (12,944) Operating surplus before unrealized gains 17,055 21,016 Unrealised gains: Foreign exchange gain 24,475 5,122 Surplus for the year 41,530 26,138 Other comprehensive income Other comprehensive income that will be reclassified to profit or loss: Debt instruments at fair value through other comprehensive income: Net change in fair value during the year 10(a) 8,452 7,005 Reclassification to income statement 10(b) (3,020) - Changes in allowance for expected credit losses 8 17 2 Net gains on debt instruments at fair value through other comprehensive income 5,449 7,007 Total items that will be reclassified to profit or loss 5,449 7,007 Other comprehensive income that will not be reclassified to profit or loss: Actuarial gain/(loss) in retirement benefit asset 20 1,949 (2,928) Total items that will not be reclassified to profit or loss 1,949 (2,928) Other comprehensive income for the year 7,398 4,079 Total comprehensive income for the year 48,928 30,217 Consolidated Statement of Financial Position as at 30th June, 2020 2020 2019 Notes KShs' million KShs' million Assets Balances due from banking institutions 11 369,505 542,849 Funds held with International Monetary Fund (IMF) 12(a) 3,255 1,008 Securities and advances to banks 13 55,561 66,909 Loans and advances 14 3,274 3,363 Debt instruments at fair value through other comprehensive income 15 724,892 504,533 Equity instruments at fair value through other comprehensive income 16 10 9 Other assets 17(a) 5,595 5,684 Gold holdings 17(b) 106 81 Right-of-use assets 18(a) 222 - Property and equipment 18(b) 31,618 30,001 Intangible assets 19 1,224 837 Retirement benefit asset 20 6,537 4,328 IMF On-Lent to GOK 21(a) 79,702 - Due from Government of Kenya 21(b) 68,933 79,556 Total Assets 1,350,434 1,239,158 Liabilities Currency in circulation 22 257,792 249,509 Investment by banks 23 6,997 - Deposits from Banks and Government 24 732,187 741,000 Due to IMF 12(b) 151,841 83,653 2nd October, 2020 THE KENYA GAZETTE 2020 2019 Notes KShs' million KShs' million Other liabilities 25 5,602 6,521 Total Liabilities 1,154,419 1,080,683 Equity Share capital 26(a) 35,000 20,000 General reserve fund 26(b) 128,199 109,608 Fair value reserve 26(c) 12,515 7,066 Revaluation reserve 26(d) 17,801 17,801 Consolidated fund 26(e) 2,500 4,000 Total Equity 196,015 158,475 Total Liabilities and Equity 1,350,434 1,239,158 The financial statements were authorised for issue by the Board of Directors on 2nd September, 2020. and signed on its behalf by: Chairman of the Board Governor Mohammed Nyaoga Patrick Njoroge (Dr.) Consolidated Statement of Changes in Equity for the Year Ended 30th June, 2020 Share General Revaluation Fair value Consolidated Capital reserve reserve reserve fund Total Year ended 30 June 2020 Notes KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million At 1 July 2019 20,000 109,608 17,801 7,066 4,000 158,475 Surplus for the year - 41,530 - - - 41,530 Net change in fair value of debt instrument at FVOCI - - - 8,452 - 8,452 Net amount reclassified to the income statement on sale and maturity of debt instruments at FVOCI - - - (3,020) - (3,020) Net change in allowance for expected credit losses on debt instruments at FVOCI - - - 17 - 17 Actuarial gain on retirement benefit asset 20 - 1,949 - - - 1,949 Total comprehensive income for the year - 43,479 - 5,449 - 48,928 Additional share capital 26(a) 15,000 (15,000) - - - - Transactions with owners -Transfer to consolidated fund 26(e) - (9,888) - - 9,888 - -Payments out of consolidated fund 26(e) - - - - (11,388) (11,388) At 30 June 2020 35,000 128,199 17,801 12,515 2,500 196,015 Share General Revaluation Fair value Consolidated Capital reserve reserve reserve fund Total Year ended 30 June 2019 Notes KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million At 1 July 2018 - As previously stated 5,000 106,162 17,801 - 800 129,763 - Impact of adopting IFRS 9 - (764) - 59 - (705) Restated opening balance under IFRS 9 5,000 105,398 17,801 59 800 129,058 Surplus for the year - 26,138 - - - 26,138 Net change in fair value of debt instrument at FVOCI - - - 7,005 - 7,005 Net change in allowance for expected credit losses on debt instruments at FVOCI - - - 2 - 2 Actuarial loss on retirement benefit asset 20 - (2,928) - - - (2,928) Total comprehensive income for the year - 23,210 - 7,007 - 30,217 Additional share capital 26(a) 15,000 (15,000) - - - - Transactions with owners -Transfer to consolidated fund 26(e) - (4,000) - - 4,000 - -Payments out of consolidated fund 26(e) - - - - (800) (800) At 30 June 2019 20,000 109,608 17,801 7,066 4,000 158,475 Consolidated Statement of Cash Flows for the Year Ended 30th June, 2020 2020 2019 Notes KShs’ million KShs’ million Operating Activities Cash (used in)/ generated from operating activities 27 (43,555) 146,941 Interest received 22,308 23,347 Interest paid (4,618) (1,492) Interest paid on lease liabilities 18(a) (7) - 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3904 3904 2020 2019 Notes KShs’ million KShs’ million Cash (used in)/ generated from operating activities (25,872) 168,796 Investing Activities Purchase of property and equipment 18(b) (3,394) (4,098) Purchase of intangible assets 19 (546) (806) Proceeds from disposal of property and equipment 64 14 Net change in debt instruments at fair value through other comprehensive income (181,615) (93,786) Net change in securities and advances to Banks (31,979) (2,263) Net change in funds held with International Monetary Fund (IMF) (2,247) 1,004 Net cash used in investing activities (219,717) (99,935) Financing Activities Payment of principal portion of lease liabilities 18(a) (158) - Receipts during the year 28(b) 79,702 - Repayments to the International Monetary Fund (IMF) 28(b) (11,634) (16,615) Net cash generated from/(used in) financing activities 67,910 (16,615) Net (decrease)/ increase in cash and cash equivalents (177,679) 52,246 Cash and cash equivalents at the beginning of the year 628,833 577,327 Effect of IFRS 9 on cash and cash equivalents balances - (740) Cash and Cash Equivalents at the end of the year 28(a) 451,154 628,833 Notes to the Financial Statements for the year ended 30th June, 2020 1. General Information Central Bank of Kenya (the “Bank”/” CBK”) is established under Article 231 of the Constitution of Kenya. The Central Bank of Kenya is responsible for formulating monetary policy, promoting price stability, issuing currency and performing other functions conferred on it by the Act of Parliament. The Bank is wholly owned by the Government of Kenya and is domiciled in Kenya. The Bank acts as banker, advisor and agent of the Government of Kenya. 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 measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The financial statements are presented in Kenya Shillings (KShs), rounded to the nearest million. (b) Changes in accounting policies and disclosures New and amended standards and interpretations The following new standards and amendments became effective as of 1 January 2019: • IFRS 16 Leases • IFRIC Interpretation 23 Uncertainty over Income Tax Treatments • Prepayment Features with Negative Compensation – Amendments to IFRS 9 • Long-term Interests in Associates and Joint Ventures – Amendments to IAS 28 • Amendments to IAS 19: Plan Amendment, Curtailment or Settlement • AIP IFRS 3 Business Combinations – Previously held Interests in a joint operation • AIP IFRS 11 Joint Arrangements – Previously held Interests in a joint operation • AIP IAS 12 Income Taxes – Income tax consequences of payments on financial instruments classified as equity • AIP IAS 23 Borrowing Costs – Borrowing costs eligible for capitalization Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the financial statements of the Bank. The Bank has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective IFRS 16 Leases The Bank applied IFRS 16 Leases for the first time. The nature and effect of the changes as a result of adoption of this new accounting standard is described below. 2nd October, 2020 THE KENYA GAZETTE IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the balance sheet. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where the Bank is the lessor. The Bank adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 July 2019. Under this method, the right-of-use asset was measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application. The Bank reassessed whether a contract is or contains a lease on the date of initial application as defined under IFRS 16. The Bank has lease contracts for various items of buildings and equipment. Before the adoption of IFRS 16, the Bank classified each of its leases (as lessee) at the inception date as operating leases. Refer to Note 2 (q) Leases for the accounting policy prior to 1 July 2019. Upon adoption of IFRS 16, the Bank applied a single recognition and measurement approach for all leases except for short-term leases and leases of low-value assets. Refer to Note 2 (q) Leases for the accounting policy beginning 1 July 2019. The standard provides specific transition requirements and practical expedients, which have been applied by the Bank. Leases previously accounted for as operating leases The Bank recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for all leases were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. The Bank also applied the available practical expedients wherein it: • Measured the right-of-use asset at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application • Used a single discount rate to a portfolio of leases with reasonably similar characteristics • Applied the short-term leases exemptions to leases with lease term that ends within 12 months of the date of initial application • Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application • Used hindsight in determining the lease term where the contract contained options to extend or terminate the lease Based on the above, as at 1 July 2019: • Right-of-use assets of KShs 352 million were recognised and presented separately in the statement of financial position. • Additional lease liabilities of KShs 350 million (included in Other liabilities) were recognised. • Prepayments of KShs 2 million related to previous operating leases were derecognised. The lease liabilities as at 1 July 2019 can be reconciled to the operating lease commitments as of 30 June 2019, as follows: KShs 'million Assets Operating lease commitments as at 30 June 2019 186 Weighted average incremental borrowing rate as at 1 July 2019 9% Discounted operating lease commitments as at 1 July 2019 154 Less: Contracts reassessed as non-lease contracts (59) Add: Contract reassessed as lease contracts (adjustment as result of newly identified leases) 255 Lease liabilities as at 1 July 2019 350 Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are listed below. Effective for annual periods beginning on or after 1 January 2020 • Definition of a Business - Amendments to IFRS 3 • Definition of Material - Amendments to IAS 1 and IAS 8 • The Conceptual Framework for Financial Reporting • Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 Effective for annual periods beginning on or after 1 Jun 2020 • COVID-19-Related Rent Concessions – Amendment to IFRS 16 Effective for annual periods beginning on or after 1 January 2022 • Classification of Liabilities as Current or Non-current - Amendments to IAS 1 • Reference to the Conceptual Framework – Amendments to IFRS 3 • Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16 • Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37 • AIP IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first- time adopter 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3906 3906 • AIP IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities • AIP IAS 41 Agriculture – Taxation in fair value measurements Effective for annual periods beginning on or after 1 January 2023 • IFRS 17 Insurance Contracts Effective date postponed indefinitely • Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture None of the standards and interpretations listed above are expected to have a significant impact on the Bank’s financial statements when they become effective. (c) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiary, Kenya School of Monetary Studies, as at 30 June 2020. Kenya School of Monetary Studies is a subsidiary of the Bank. The Bank has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. The Bank uses the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. The excess of the aggregate of the consideration transferred and the amount of any non-controlling interest in the acquiree and the acquisition- date fair value of any previous equity interest in the acquiree over the fair value of the Bank’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss. Inter-company transactions, balances and unrealised gains on transactions between group entities are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Bank. (d) Functional currency and translation of foreign currencies (i) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates (the “Functional Currency”). The financial statements are presented in Kenya Shillings (“KShs”) which is the Bank’s functional currency. (ii ) Transactions and balances Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. All foreign exchange gains and losses are presented in profit or loss within ‘foreign exchange gains/(losses)’. (e) Deferred currency expenses The Bank’s inventory is comprised of new currency notes issued. Inventories are stated at the sum of the production costs. Cost is determined using the first-in, first-out (FIFO) method. Bank notes printing expenses and coin minting costs for each denomination which include ordering, printing, minting, freight, insurance and handling costs are initially deferred. Based on the currency issued into circulation, the respective proportional actual costs incurred are released to profit or loss from the deferred costs account. The deferred amount is recognised as ‘deferred currency expenses’ in other assets and represents un- issued bank notes and coins stock. (f) Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Bank’s business model for managing them. The Bank initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. In order for a financial asset to be classified and measured at amortised cost or debt instruments at fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Bank’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the settlement date, i.e., the date that the Bank receives the asset on purchase or delivers the asset on sale. 2nd October, 2020 THE KENYA GAZETTE Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: • Financial assets at amortised cost (debt instruments) • Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments) • Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) • Financial assets at fair value through profit or loss Financial assets at amortised cost (debt instruments) This category is the most relevant to the Bank. The Bank measures financial assets at amortised cost if both of the following conditions are met: • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; And • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Bank’s financial assets at amortised cost includes balances due from banking institutions, funds held with IMF, securities and advances to banks, loans and advances, other assets (sundry debtors), IMF On-Lent to GOK and due from Government of Kenya. Financial assets at fair value through OCI (debt instruments) The Bank measures debt instruments at fair value through OCI if both of the following conditions are met: • The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; And • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in profit or loss and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss. The Bank’s debt instruments at fair value through OCI includes investments in fixed income securities. Fixed income securities comprise Government debt securities issued by sovereign governments, Municipal bonds and bonds issued by international financial institutions. Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the Bank can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in profit or loss when the right of payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. The Bank elected to classify irrevocably its non-listed equity investments under this category as it intends to hold these investments for the foreseeable future. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in profit or loss. The Bank does not have any financial assets classified under this category. Classes of financial instruments Category (as defined by IFRS 9) Class (as determined by the Bank) 2020 2019 KShs’ million KShs’ million Financial assets Financial assets at amortized cost Securities and advances to banks 55,561 66,909 Funds held with IMF 3,255 1,008 Net advances to staff and banks under liquidation 3,274 3,363 Other assets (classified as financial assets) 500 330 Due from Government Government term loan 21,783 22,229 IMF On-Lent to GOK 79,702 - GOK Overdraft facility 47,150 57,327 Balances due from banking institutions Foreign currency denominated term deposits and current account 369,505 542,849 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3908 3908 balances Financial assets at Fair value through other comprehensive income Fixed income securities World Bank managed and internally managed fixed income portfolios 724,892 504,533 Equity Investment securities 10 9 Financial liabilities Financial liabilities at amortised cost Deposits from banks Cash reserve ratio and current account deposits 450,764 403,551 Due to IMF 151,841 83,653 Investments by banks 6,997 - Other liabilities 5,343 6,324 Deposits from Government institutions 281,423 337,449 Impairment of financial assets Overview of Expected Credit Loss (ECL) principles The Bank recognizes loss allowances for expected credit losses “ECL” for financial assets that are debt instruments and are not measured at FVTPL. The Bank measures loss allowances at an amount equal to lifetime ECL except for the following for which they are measured as 12-month ECL: • Fixed income securities that are determined to have low credit risk at the reporting date; and • other financial instruments for which credit risk has not increased significantly since initial recognition. The Bank considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment-grade’. 12-month ECL is the portion of ECL that represents the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as ‘Stage 1 financial instruments’. Life-time ECL are the ECLs that result from all possible default events over the expected life of the financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as ‘Stage 2 financial instruments’. Financial instruments are considered credit – impaired are referred to as ‘Stage 3 financial instruments’. The Bank records an allowance for the lifetime ECL. Measurement of ECL ECL are a probability-weighted estimate of credit losses and are measured as follows: • financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the Bank in accordance with the contract and the cash flows that the Bank expects to receive); • financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; Credit impaired financial assets At each reporting date, the Bank assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI are credit- impaired (referred to as ‘Stage 3 financial assets’). A financial asset is ‘credit impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data: • significant financial difficulty of the borrower or issuer; • a breach of contract such as a default or past due event; • the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise; • it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; and, • the disappearance of an active market for a security because of financial difficulties. In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors: • The market’s assessment of creditworthiness as reflected in the bond yields; • The rating agencies’ assessments of creditworthiness; • The country’s ability to access the capital markets for new debt issuance; • The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness; and, • The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: • financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; • debt instruments measured at FVOCI: no loss allowance is recognized in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognized in the fair value reserve with a corresponding charge to profit or loss. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Bank’s consolidated statement of financial position) when: • The rights to receive cash flows from the asset have expired 2nd October, 2020 THE KENYA GAZETTE Or • The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Bank has transferred substantially all the risks and rewards of the asset, or (b) the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Bank continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Write-offs Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included in ‘impairment losses on financial instruments’ in profit or loss. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Bank’s financial liabilities include investment by banks, deposits from bank and government, due to IMF and other liabilities. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognised in profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Bank has not designated any financial liability as at fair value through profit or loss. Loans and borrowings This is the category most relevant to the Bank. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in profit or loss. This category generally applies to deposits from bank and government, due to IMF, investment by banks and other liabilities. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in profit or loss. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (g) Sale and repurchase agreements Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included in investments by banks. Securities purchased under agreements to resell (‘reverse repos’) are recorded as advances to banks. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. The Bank from time to time mops up money from the financial market (‘repos’) or injects money into the market (‘reverse repos’) with maturities of 4 - 7 days. The Bank engages in these transactions with commercial banks only. These have been disclosed in the financial statements as advances to banks. (h) Cash and cash equivalents 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3910 3910 Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of balances due from banking institutions, fixed income securities and securities and advances to banks with maturities of less than three months. (i) Property and equipment Land and buildings comprise mainly branches and offices. All equipment used by the Bank is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Work in progress is stated at cost net of accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Land and buildings are measured at fair value less accumulated depreciation and impairment losses recognised after the date of revaluation. Valuations are performed with sufficient frequency to ensure that the carrying amount of a revalued asset does not differ materially from its fair value. Valuations are carried out every three years. A revaluation surplus is recorded in OCI and credited to the asset revaluation surplus in equity. However, to the extent that it reverses a revaluation deficit of the same asset previously recognised in the profit or loss, the increase is recognised in profit and loss. A revaluation deficit is recognised in profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation surplus. Subsequent expenditures are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is de-recognised. All other repair and maintenance costs are charged to profit or loss during the financial period in which they are incurred. Freehold land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Asset classification Useful life Depreciation rate Leasehold land Over the period of the lease Buildings 20 years 5% Motor vehicles 4 years 25% Furniture and equipment 5 - 10 years 10-20% Computers 4 years 25% No depreciation is charged on work in progress and assets held in clearing accounts. Depreciation of property and equipment is made from date of placement to use and it ceases when the asset is obsolete, classified as held for sale, fully depreciated or derecognized as per policy. An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss when the asset is derecognised. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. (j) Intangible assets Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognised as intangible assets when the following criteria are met: (i) It is technically feasible to complete the software product so that it will be available for use; (ii) Management intends to complete the software product and use or sell it; • there is an ability to use or sell the software product; • it can be demonstrated how the software product will generate probable future economic benefits; • adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and, (iii) The expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Computer software development costs recognised as assets are amortised over their estimated useful lives, which does not exceed three years. Computer software under installation and not yet placed in use is held in software clearing account and not amortized until commissioned. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years. (k) Impairment of non-financial assets Assets 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 of disposal and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The impairment test also can be performed on a single asset when the fair value less cost of disposal or the value in use can be determined reliably. Non- financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses of continuing operations are recognised in profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognised in OCI up to the amount of 2nd October, 2020 THE KENYA GAZETTE any previous revaluation. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount or exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. An impairment loss recognised for goodwill is not reversed in a subsequent period. (l) Employee benefits The Bank operates a defined benefit scheme and a defined contribution pension scheme. The schemes are funded through payments to trustee- administered funds on a monthly basis. On the defined contribution scheme, the Bank pays fixed contributions to the scheme. The payments are charged to the profit or loss in the year to which they relate. The Bank has no further payment obligation once the contributions have been paid. The defined benefit plan defines an amount of pension benefit that an employee will receive on retirement, dependent on age, years of service and compensation. The assets of the scheme are held by the Bank in an independent trustee administered fund. The asset recognised in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Past-service costs are recognised immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. The Bank and all its employees contribute to the National Social Security Fund, which is a defined contribution scheme. A defined contribution plan is a retirement benefit plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations 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 Bank’s contributions to the defined contribution schemes are charged to profit or loss account in the year in which they fall due. The estimated monetary liability for employees’ accrued annual leave entitlement at the reporting date is recognised as an expense accrual. (m) Income tax Section 7 of the Income Tax Act exempts the Bank from any taxation imposed by law in respect of income or profits. This exemption includes stamp duty in respect of instruments executed by or on behalf of the Bank. (n) Provisions Provisions are recognised when: The Bank 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. Provisions are not recognised for future operating losses. Where 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. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation at a 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 passage of time is recognised as interest expense. (o) Surplus funds The Central Bank of Kenya Act (Cap 491) allows the Bank to retain at least 10% or any other amounts as the board, in consultation with the minister, may determine, of the net annual profit (surplus) of the bank after allowing for the expenses of operations and after provision has been made for bad and doubtful debts, depreciation in assets, contributions to staff benefit funds, and such other contingencies and accounting provisions as the Bank deems appropriate. (p) Share capital Ordinary shares are classified as ‘share capital’ in equity. (q) Leases Policy before 1 July 2019 The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly specified in an arrangement. Bank as lessee The leases entered into by the Bank are primarily operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Bank as lessor The Bank leases certain property, plant and equipment where it does not transfer substantially all the risks and benefits of ownership of the assets. The operating leases generate rental income which is recorded in profit or loss on a straight-line basis over the period of the lease. 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3912 3912 Policy after 1 July 2019 The Bank assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Bank as a lessee The Bank applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Bank recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Bank recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of- use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lease term as follows: Lease asset classification Lease term Buildings 1 to 5 years Equipment 1 to 5 years The right-of-use assets are also subject to impairment. Refer to the accounting policies in Note 2(k) Impairment of non-financial assets. Lease liabilities At the commencement date of the lease, the Bank recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments. In calculating the present value of lease payments, the Bank uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change in the lease payments. The Bank’s lease liabilities are included in Other liabilities (see Note 25). Short-term leases and leases of low-value assets The Bank applies the short-term lease recognition exemption to its short-term leases of buildings and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of equipments that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. Bank as a lessor Leases in which the Bank does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. (r) Interest income and expense Interest income and expense for all interest-bearing financial instruments are recognised in profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or 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 to the net carrying amount of the financial asset or liability on initial recognition. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument, and any revisions to these estimates are recognised in profit or loss. The calculation includes amounts paid or received that are an integral part of the effective interest rate of a financial instrument, including transaction costs and all other premiums or discounts. If a financial asset is measured at FVOCI or FVTPL, the amounts that are recognised in profit or loss are the same as the amounts that would have been recognised in profit or loss if the financial asset had been measured at amortised cost. The Bank calculates interest income on financial assets, other than those considered credit-impaired, by applying the EIR to the gross carrying amount of the financial asset. When a financial asset becomes credit-impaired (and is therefore regarded as ‘Stage 3’), the Bank calculates interest income by applying the EIR to the net amortised cost of the financial asset. If the financial asset cures and is no longer credit-impaired, the Bank reverts to calculating interest income on a gross basis. (s) Fee and commission income The Bank earns from the Government of Kenya a commission of 1.5% of amounts raised through its agency role in the issuance of Treasury bills and bonds. The annual commission income is limited to KShs 3 billion as per the agreement between the Bank and The National Treasury effective 1 July 2007. In addition, the Bank earns commissions from other debt instruments issued to meet funding requirements of State Corporations. Fees and commissions are generally recognised on an accrual basis when the service has been provided. Fees and commission income are recognised at an amount that reflects the consideration to which the Bank expects to be entitled in exchange for providing the services. The performance obligations, as well as the timing of their satisfaction, are identified, and determined, at the inception of the contract. The Bank has generally concluded that it is the principal in its revenue arrangements because it typically controls the services before transferring them to the customer. (t) Commitments on behalf of the Kenya Government and National Treasury The Bank issues Treasury bills and bonds on behalf of the National Treasury. Commitments arising on such transactions on behalf of Kenya Government and the National Treasury are not included in these financial statements as the Bank is involved in such transactions only as an agent. (u) Currency in circulation 2nd October, 2020 THE KENYA GAZETTE Notes and coins in circulation are measured at fair value. Currency in circulation represents the nominal value of all bank notes and coins held by the public and commercial banks. The Bank demonetises currency denominations that it considers no longer suitable for circulation through a Gazette Notice. (v) Loan due from the Government of Kenya The loan due from the Government of Kenya arose from overdrawn accounts which were converted to a loan with effect from 1 July 1997 after an amendment to the Central Bank of Kenya Act to limit the Bank’s lending to Government of Kenya to 5% of Government of Kenya audited revenue. On 24 July 2007, a deed of guarantee was signed between the Government of Kenya and Central Bank of Kenya in which the government agreed to repay the loan at KShs 1.11 billion per annum over 32 years at 3% interest per annum. The security held is lien over cash balances, stock, treasury bonds and such other government securities as are specified in Section 46 (5) of the Central Bank of Kenya Act. The loan due from the Government of Kenya is categorised as a debt instrument at amortised cost. (w) Funds held at/due to International Monetary Fund (IMF) Kenya has been a member of the International Monetary Fund (IMF) since 1966. The Bank is the designated depository for the IMF’s holdings of Kenya’s currency. IMF currency holdings are held in the No. 1 and No. 2 Accounts, which are deposit accounts of the IMF with the Bank. Borrowings from and repayments to the IMF are denominated in Special Drawing Rights (SDRs). The SDR balances in IMF accounts are translated into Shillings at the prevailing exchange rates and any unrealized gains or losses are accounted for in accordance with accounting policy on foreign currencies. On a custodial basis, the Bank holds a non-negotiable, non-interest bearing and encash able on demand promissory notes issued by the Treasury in favour of the IMF in its capacity as the IMF’s depository. The security issued is in part payment of Kenya’s quota of IMF. (x) Fair value measurement The Bank measures financial instruments such as debt instruments at fair value through other comprehensive income, and non-financial assets such as land and buildings and gold holdings, at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability Or • In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible by the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. External valuers are involved for valuation of land and buildings. Involvement of external valuers is determined after every three years. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. Valuers are normally rotated every three years. For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above. Fair-value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarised in the following notes: • Disclosures for valuation methods, significant estimates and assumptions Notes 3, 15, 17(b), 18(b) and 31 • Quantitative disclosures of fair value measurement hierarchy Note 31 • Debt instruments at fair value through other comprehensive income Note 15 • Gold holdings Note 17(b) • Land and buildings Note 18(b) 3. Critical Accounting Estimates and Judgements in Applying Accounting Policies 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3914 3914 The preparation of the Bank’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Bank’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments may change due to circumstances beyond the Bank’s control and are reflected in the assumptions if and when they occur. Items with the most significant effect on the amounts recognised in the consolidated financial statements with substantial management judgement and/or estimates are collated below with respect to judgements/estimates involved. Impairment losses on financial assets The measurement of impairment losses under IFRS 9 across all categories of financial assets in scope requires judgement, particularly, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: • The Bank’s internal credit grading model, which assigns PDs to the individual grades. • The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a Lifetime ECL basis and the qualitative assessment. • The segmentation of financial assets when their ECL is assessed on a collective basis. • Development of ECL models, including the various formulas and the choice of inputs. • Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs (Explanation of the terms: PDs, EADs and LDGs are included in Note 30(i)). • Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models. It has been the Bank’s policy to regularly review its models in the context of actual loss experience and adjust when necessary. Further details about the ECLs are provided in Notes 8, 11, 13, 14, 17 and 30 (i). Post-retirement benefits Post-retirement benefits are long term liabilities whose value can only be estimated using assumptions about developments over a long period. The Bank has employed actuarial advice in arriving at the figures in the financial statements (Note 20 which includes assumptions). The Board of Directors considers the assumptions used by the actuary in their calculations to be appropriate for this purpose. Fair value of financial assets The fair value of financial instruments that are not traded in an active market and off market loans are determined by using valuation techniques. See Note 31 for additional disclosures. Property and equipment Land and buildings are carried at fair value; representing open market value determined periodically by internal professional valuers. See Notes 18(b) and 31 for additional disclosures. Policy applicable after 1 July 2019 Leases - Estimating the incremental borrowing rate The Bank cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Bank would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Bank ‘would have to pay’. The Bank estimates the IBR using observable inputs i.e. market interest rates. Determining the lease term of contracts with renewal and termination options – Bank as lessee The Bank determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. 2020 2019 4. Interest Income KShs’ million KShs’ million Interest income calculated using the effective interest method Financial assets – debt instruments at amortised cost 11,587 15,768 Financial assets at fair value through other comprehensive income 10,721 7,579 22,308 23,347 Interest income from debt instruments at amortised cost Interest on term deposits 4,856 8,048 Interest on Government of Kenya loan 666 695 Interest on Government of Kenya overdraft 3,245 2,523 Interest on staff loans and advances 104 104 Interest on advances to banks 2,142 3,373 Other interest income* 574 1,025 11,587 15,768 2nd October, 2020 THE KENYA GAZETTE Interest income from debt instruments at fair value through other comprehensive income comprises: Internally managed portfolio 10,093 6,938 Externally managed portfolio – RAMP 628 641 10,721 7,579 *Other interest income mainly comprises interest from overnight lending to banks. Interest from debt instruments at fair value through other comprehensive income went up by KShs 3,142 million and interest on term deposit went down by KShs 3,192 million due to an alignment of securities given market operating conditions. Overall, total interest income declined by KShs 1,039 million due to drop in interest rates offered on term deposits, lower volume of term deposits and lower rates of interest on fixed income securities as a consequence of COVID-19 global disruptions. 2020 2019 5. Interest Expense KShs’ million KShs’ million Interest expense calculated using the effective interest method Interest on monetary policy issues – investments by banks 4,355 1,089 Interest expense – IMF 263 403 4,618 1,492 6. (a) Fees And Commission Income 3,000 3,000 Fees and commission relate to income the Bank earns from the Government of Kenya through its agency role in the issuance of Treasury bills and bonds. 2020 2019 (b) Net Trading Income KShs’ million KShs’ million Net gain on sale of foreign exchange currencies 7,437 8,933 Net gain on disposal of financial assets at fair value through other comprehensive income 4,316 1,166 11,753 10,099 Net trading income increased by KShs 1,654 million to KShs 11,753 million (2019: Increased by KShs 5,854 million to KShs 10,099 million) following sale and maturity of debt instruments at fair value through other comprehensive income. 2020 2019 7. (a) Other Income KShs’ million KShs’ million Licence fees from commercial banks and foreign exchange bureaus 291 281 Penalties from commercial banks and foreign exchange bureaus 36 420 Rental income 57 2 Kenya School of Monetary Studies operating income - hospitality services and tuition fee 271 371 Gain on disposal of property and equipment - 10 KEPSS Billing revenue 301 280 Miscellaneous income 26 7 982 1,371 (b) Demonetization of Old Currency 7,388 - This amount relates to 7,388,000 pieces of older series of KShs 1,000 note that were not returned on conclusion of demonetisation exercise on 30 September 2019. 2020 2019 8. Credit Loss Expense on Financial Assets KShs’ million KShs’ million The table below shows the ECL charges on financial instruments: Impairment losses on staff loans (Note 14) 3 12 Impairment losses on balances due from banking institutions (Note 11) 87 (49) Impairment losses on securities and advances to banks (Note 13) (8,700) (2,326) Impairment losses on debt instruments at fair value through other comprehensive income (17) (2) (8,627) (2,365) 2020 2019 9. (a) Operating Expenses KShs’ million KShs’ million Employee benefits (Note 9(b)) 5,121 4,570 Currency production expenses 3,047 2,214 Property maintenance and utility expenses 1,910 1,602 Depreciation of property and equipment (Note 18(b)) 1,695 1,246 Amortisation of intangible assets (Note 19) 159 134 Amortization of right -of -use asset (Note 18(a) 133 - Interest on leases liabilities 21 - Provision for impairment loss on other assets (Note 17(a)) 17 16 Auditor’s remuneration 11 11 Transport and travelling 197 229 Office expenses 216 303 Postal service expense 208 214 Legal and professional fees 500 517 Loss on disposal of property and equipment 18 - Other administrative expenses 1,878 1,888 15,131 12,944 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3916 3916 (b) Employee Benefits Wages and salaries 4,181 4,036 Pension costs – Defined contribution plan 421 388 Medical expenses 342 330 Other staff costs 291 313 Directors’ emoluments (Note 29(ii)) 60 79 Net income relating to the retirement benefit asset (Note 20) (174) (576) 5,121 4,570 10. (a) Changes in Fair Value of Investments Fair value changes on debt instruments at fair value through other comprehensive income: Internally managed portfolio 8,183 6,468 Externally managed portfolio – RAMP 269 537 8,452 7,005 (b) Reclassification to the Income Statement Net amount reclassified to the income statement on sale and maturity of debt instruments at FVOCI: Internally managed portfolio 2,680 - Externally managed portfolio – RAMP 340 - 3,020 - This amount relates to reclassification on sale or maturity of debt instruments. 2020 2019 11. Balances Due From Banking Institutions KShs’ million KShs’ million 39,341 67,162 Foreign currency denominated term deposits 243,473 354,329 Accrued interest on term deposits 60 743 Special project accounts 57,520 95,282 Domestic foreign currency cheque clearing 28,426 25,107 Repss clearing and regional central banks 713 341 369,533 542,964 Allowance for impairment losses (28) (115) 369,505 542,849 An analysis of changes in the impairment allowance of balances due from banking institutions is as follows: 2020 2019 KShs’ million KShs’ million At the beginning of the year 115 - IFRS 9 adjustment on 1 July 2018 - 66 Charge to the profit or loss (Note 8) (87) 49 At 30 June 28 115 A reconciliation from the opening balance to the closing balance of the loss allowance based on year end stage classification is disclosed in Note 30 (i). Special project accounts relate to amounts received by the Government of Kenya (or its ministries) for specific projects or purposes. An equal and corresponding liability is recorded and disclosed under “Deposits from banks and government” (Note 24). 12. Funds Held At/Due to International Monetary Fund (IMF) 2020 2020 2019 2019 SDR million KShs’ million SDR million KShs’ million (a) Assets IMF balances (SDR asset account) 22 3,255 8 1,008 (b) Liabilities International Monetary Fund Account No. 1 20 2,886 20 2,766 International Monetary Fund Account No. 2 - 4 - 12 International Monetary Fund – PRGF Account 212 31,124 310 43,990 Rapid Credit Facility 543 79,702 - - IMF - SDR Allocation account 260 38,125 260 36,885 1,035 151,841 590 83,653 The Bank received SDR 542.8 Million from the Fund for direct budget support of the Government of Kenya initiatives towards COVID-19 pandemic. These funds were released to the Bank under Rapid Credit facility (RCF) and represent a debt due from the Government of Kenya to the IMF. This debt is recognised in the books of the CBK, but on-lent to the government through the National Treasury. Kenya's quota in IMF of SDR 542.8 million (2019: SDR 542.8 million) is not included in the financial statements of the Bank as these are booked in the National Treasury who are the Government of Kenya’s Fiscal Agent. Allocations of SDR 260 million (2019: SDR 260 million) are included in the financial statements of the Bank as the custodian of the Government of Kenya. The repayment of IMF facilities is currently bi-annual and Poverty Reduction Growth Facility (PRGF) attracts nil interest until advised by IMF. The Rapid Credit Facility will be paid within a period of ten years from November 2025 to May 2030. 13. Securities And Advances To Banks 2020 2019 KShs’ million KShs’ million Treasury bonds discounted 7,513 8,454 2nd October, 2020 THE KENYA GAZETTE Treasury bills discounted 116 2,524 Accrued interest bonds discounted 241 257 Repo treasury bills (Injection) 21,041 20,100 Accrued interest repo 214 46 Liquidity support framework 36,949 37,110 Due from commercial banks 1,187 1,418 67,261 69,909 Allowance for impairment losses (11,700) (3,000) 55,561 66,909 An analysis of changes in the impairment allowance of securities and advances to banks is as follows: 2020 2019 KShs’ million KShs’ million At 1 July 3,000 - IFRS 9 adjustment on 1 July 2018 - 674 Charge to profit or loss (Note 8) 8,700 2,326 At 30 June 11,700 3,000 A reconciliation from the opening balance to the closing balance of the loss allowance based on year end stage classification is disclosed in Note 30 (i). The carrying amount of securities and advances to banks has reduced by KShs 11,348 million due to liquidity needs in the market. Year ended 30 June 2020 Maturity period 1-3 months 4-12 months Over 1 year Total KShs’ million KShs’ million KShs’ million KShs’ million Treasury bills discounted 46 70 - 116 Treasury bonds discounted - 281 7,232 7,513 Accrued interest bonds discounted 39 202 - 241 Repo treasury bills & bonds (Injection) 21,041 - - 21,041 Accrued interest repo 214 - - 214 Due from commercial banks 1,187 - - 1,187 Liquidity support framework - - 25,249 25,249 22,527 553 32,481 55,561 Year ended 30 June 2019 Maturity period 1-3 months 4-12 months Over 1 year Total KShs’ million KShs’ million KShs’ million KShs’ million Treasury bills discounted 569 1,955 - 2,524 Treasury bonds discounted 911 100 7,433 8,454 Accrued interest bonds discounted - 257 - 257 Repo treasury bills & bonds (Injection) 20,100 - - 20,100 Accrued interest repo 46 - - 46 Due from commercial banks 1,418 - - 1,418 Liquidity support framework 34,110 - - 34,110 57,154 2,312 7,443 66,909 14. Loans and Advances 2020 2019 KShs’ million KShs’ million Due from banks under liquidation 3,400 3,400 Advances to employees 3,327 3,419 6,727 6,819 Allowance for impairment losses (3,453) (3,456) Net advances 3,274 3,363 The movement in the allowance for impairment losses is as follows: At 1 July 3,456 3,503 Reversal of impairment losses on adoption of IFRS 9 on 1 July 2018 - (35) Reversal of impairment allowance (Note 8) (3) (12) At 30 June 3,453 3,456 15. Debt Instruments Measured at Fair Value Through other Comprehensive Income 2020 2019 KShs’ million KShs’ million Fixed income securities – Internally managed portfolio 690,431 471,929 Fixed income securities under World Bank RAMP 34,461 32,604 724,892 504,533 Maturity analysis Maturity period 0-3 months 4-12 months Over 1 year Total 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3918 3918 Year ended 30 June 2020 KShs’ million KShs’ million KShs’ million KShs’ million Fixed income securities – Internally managed Portfolio 57,638 375,418 257,375 690,431 Fixed income securities under World Bank RAMP 1,484 10,104 22,873 34,461 59,122 385,522 280,248 724,892 Maturity analysis Maturity period 0-3 months 4-12 months Over 1 year Total At 30 June 2019 KShs’ million KShs’ million KShs’ million KShs’ million Fixed income securities – Internally managed Portfolio 27,453 130,798 313,678 471,929 Fixed income securities under World Bank RAMP 1,377 8,982 22,245 32,604 28,830 139,780 335,923 504,533 Fixed income securities increased by KShs 220,359 million to KShs 724,892 million (2019: KShs 504,533 million) mainly due to a shift in investment strategy from money markets to fixed income securities during the year under review. 16. Unlisted Equity Investments 2020 2019 KShs’ million KShs’ million Unquoted equity securities at fair value through other comprehensive income 10 9 “Unlisted equity securities” relate to the Bank’s investment in shares of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) which is a member-owned co-operative with its headquarters in Belgium. The Bank held 24 (2019: 24) SWIFT shares at 30 June 2020. 2020 2019 17. (a) Other Assets KShs’ million KShs’ million Prepayments 1,930 2,686 Deferred currency expenses 2,933 2,165 Sundry debtors 5,462 5,275 Items in the course of collection 211 467 Uncleared effects 21 36 10,557 10,629 Allowance for impairment losses (4,962) (4,945) 5,595 5,684 All other assets balances are recoverable within one year. The movement in the allowance for impairment losses is as follows: At 1 July 4,945 4,929 Increase in impairment allowance (Note 9(a)) 17 16 At 30 June 4,962 4,945 (b) Gold Holdings Gold holdings 106 81 Movements in gold holdings are due to mark to market movements. 18(a) Right of use Assets Leases relating to buildings Leases relating to equipment Total Year ended 30 June 2020 KShs’ million KShs’ million KShs’ million COST Effect of adoption of IFRS 16 on 1 July 2019 (Note 2(b)) 148 204 352 Additions 3 - 3 At 30 June 2020 151 204 355 Acccumulated Depreciation At 1 July 2019 - - - Charge for the year 62 71 133 At 30 June 2020 62 71 133 Net Carrying Amount At 30 June 2020 89 133 222 Set out below are the carrying amounts of lease liabilities (included under ‘Other liabilities’ in Note 25) and the movements during the period: KShs ‘million At 1 July 2019 – effect of adoption of IFRS 16 (Note 2(b)) 350 Additions 3 Accretion of interest 21 Payment of principal (158) Payment of interest (7) At 30 June 2020 209 The maturity analysis of lease liabilities is disclosed in Note 30. The following are the amounts recognised in profit or loss: KShs ‘million Depreciation expense for right-of-use assets 133 Interest expense on lease liabilities 21 2nd October, 2020 THE KENYA GAZETTE Expense relating to short-term leases (included in Other administrative expenses) 5 Total amount recognised in profit or loss 159 The Bank had total cash outflows for leases of KShs. 165 million during the year. No impairment loss or reversals of impairment loss has been recognized in profit or loss during the period 18 (b). Property and Equipment Freehold Leasehold land and land and Work in Motor Furniture and Year ended 30 June 2020 Buildings buildings progress vehicles equipment Total KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million At Cost Or Valuation At 1 July 2019 12,820 4,913 8,579 459 8,381 35,152 Additions - 497 846 5 2,046 3,394 Capitalization of work in progress 6,462 - (6,462) - - - Disposal - - - (33) (1,287) (1,320) At 30 June 2020 19,282 5,410 2,963 431 9,140 37,226 Depreciation At 1 July 2019 451 114 - 390 4,196 5,151 Charge for the year 477 113 - 28 1,077 1,695 Disposals - - - (33) (1,205) (1,238) At 30 June 2020 928 227 - 385 4,068 5,608 Net Carrying Amount At 30 June 2020 18,354 5,183 2,963 46 5,072 31,618 Work in progress relates to integrated security management system and office modernisation Phase III at Head Office. Land and building were revalued in 31 May 2018 by Lloyd Masika Limited, registered valuers, who has experience in valuing similar properties. Land was revalued on the basis of open market value, while building was valued on the basis of depreciated replacement cost. The directors believe the carrying values reflect the fair value as at 30 June 2020, after considering the actual market state and circumstances as of the reporting date. Work in progress relates to buildings under construction at Kenya School of Monetary Studies, integrated security management system and office modernisation Phase III at Head Office. Land and building were revalued in 31 May 2018 by Lloyd Masika Limited, registered valuers, who has experience in valuing similar properties. Land was revalued on the basis of open market value, while building was valued on the basis of depreciated replacement cost. The directors believe the carrying values reflect the fair value as at 30 June 2019, after considering the actual market state and circumstances as of the reporting date. Land and buildings are included in the level 3 of the fair valuation hierarchy (that is, the fair value is not based on observable market data (unobservable inputs)). The methods and significant assumptions applied in arriving at the revalued amounts are as follows: • The Bank’s residential properties are all owner-occupied. In carrying out the valuation, the Bank has assumed that the prospective rental income to be generated by the property is based on the going rentals for similar properties within the same location. • The Bank has taken into account comparable values of similar properties (plot, construction standards, design, lay out, size, location, current sale prices of vacant plots and those developed) to derive the market prices. These were obtained from market transactions of comparable properties. The Bank is in possession of all titles deeds and occupies all the properties. 19. INTANGIBLE ASSETS Software Work in progress Total KShs’ million KShs’ million KShs’ million Year ended 30 June 2020 COST Freehold Leasehold Land And Land And Work In Motor Furniture And Year Ended 30 June Buildings Buildings Progress Vehicles Equipment Total Kshs’ Million Kshs’ Million Kshs’ Million Kshs’ Million Kshs’ Million Kshs’ Million At Cost Or Valuation At 1 July 2018 12,337 4,006 8,227 498 6,039 31,107 Additions 427 907 420 - 2,344 4,098 Capitalization Of Work In Progress 56 - (68) - 12 - Disposals - - - (39) (14) (53) At 30 June 2019 12,820 4,913 8,579 459 8,381 35,152 Depreciation At 1 July 2018 63 15 - 388 3,488 3,954 Charge For The Year 388 99 - 37 722 1,246 Disposals - - - (35) (14) (49) At 30 June 2019 451 114 - 390 4,196 5,151 Net Carrying Amount At 30 June 2019 12,369 4,799 8,579 69 4,185 30,001 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3920 3920 At 1 July 2019 2,415 208 2,623 Additions 13 533 546 At 30 June 2020 2,428 741 3,169 ACCUMULATED AMORTISATION At 1 July 2019 1,786 - 1,786 Charge for the year 159 - 159 At 30 June 2020 1,945 - 1,945 NET CARRYING AMOUNT At 30 June 2020 483 741 1,224 Year ended 30 June 2019 COST At 1 July 2018 1,817 - 1,817 Additions 598 208 806 At 30 June 2019 2,415 208 2,623 ACCUMULATED AMORTISATION At 1 July 2018 1,652 - 1,652 Charge for the year 134 - 134 At 30 June 2019 1,786 - 1,786 NET CARRYING AMOUNT At 30 June 2019 629 208 837 Work in progress relates to implementation of enterprise data warehouse (EDW). 2020 2019 20. Retirement Benefit Asset KShs’ million KShs’ million Present value of funded obligations 17,910 16,423 Fair value of plan assets (30,270) (30,640) Net overfunding in funded plan (12,360) (14,217) Limit on defined benefit asset 5,823 9,889 Asset in the statement of financial position (6,537) (4,328) Movements in the net defined benefit asset recognised are as follows: At 1 July 4,328 6,584 Net income recognised in profit or loss (Note 9(b)) 174 576 Net expense recognized in other comprehensive income (OCI) 1,949 (2,928) Employer contributions 86 96 At 30 June 6,537 4,328 Movements in the plan assets are as follows: At 1 July 30,640 30,279 Interest income on plan assets 3,847 3,950 Employer contributions 86 96 Employee contributions 43 48 Benefits expenses paid (1,601) (1,299) Return on plan assets excluding amount in interest income (2,659) (2,434) Prior year adjustments (86) - At 30 June 30,270 30,640 Movements in the plan benefit obligation are as follows: At 1 July 16,423 14,551 Current service cost net of employees' contributions 275 274 Interest cost 2,036 1,884 Employee contributions 43 48 Actuarial loss due to demographic assumptions 11 - Actuarial (gain)/loss due to participants’ movement (1,004) 381 Actuarial loss due to change in financial assumptions 1,727 584 Benefits paid (1,601) (1,299) At 30 June 17,910 16,423 The principal actuarial assumptions at the reporting date were: 2020 2019 Discount rate (p.a.) 11.50% 12.90% Salary increase (p.a.) 7.00% 7.00% Future pension increases 3.00% 3.00% 2020 2019 2018 2017 2016 Five-year summary KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million Fair value of plan assets 30,270 30,640 30,279 28,464 27,161 Present value of funded obligations (17,910) (16,423) (14,551) (13,440) (17,623) Adjustment to retirement benefit asset (5,823) (9,889) (9,144) (6,827) (1,762) Net retirement benefit asset 6,537 4,328 6,584 8,197 7,776 2nd October, 2020 THE KENYA GAZETTE Plan assets are distributed as follows: 2020 2019 KShs’ million % KShs’ million % Quoted shares 5,684 18.8% 6,992 22.8% Investment properties 8,358 27.6% 7,573 24.7% Government of Kenya treasury bills and bonds 14,667 48.5% 13,670 44.6% Commercial paper and corporate bonds 219 0.7% 874 2.9% Offshore investments 133 0.4% 109 0.4% Fixed and term deposits 1,114 3.7% 1,107 3.6% Fixed assets 1 - 1 - Net current assets 94 0.3% 314 1.0% 30,270 100% 30,640 100% Sensitivity of principal actuarial assumptions: If the discount rate is 1% lower (higher), the present value of funded obligations would be KShs 19,361 million (increase by KShs 1,451 million). This sensitivity analysis has been determined based on reasonably possible changes of the assumption occurring at the end of 30 June 2020, while holding all other assumptions constant. The other principal actuarial assumptions, that is salary increase and future pension increase are not expected to change materially because they are within the control of management and are approved in the Human Resource Policy on employee benefits. Additionally, any change is not expected to be material based on historical trends and may not have a linear impact on the present value of the fund obligation. The Bank does not have any asset-liability matching strategies used to manage risk. The retirement benefit scheme is funded and hence the assets under the scheme are used to meet benefit payments as and when they arise. The timing of the benefit payments from the scheme are unknown as the fund comprises active members, pensioners and deferred pensioners. The scheme is funded by contributions from employer and employees. The average duration of the defined benefit plan obligation at the end of the reporting period is 7.0 years (2019: 9.9 years). The Bank expects to pay KShs 133 million to its defined benefit plan in financial year ended 30 June 2021. 2020 2019 21. (a) IMF On-Lent to GOK KShs’ million KShs’ million 79,702 - The balance as at 30 June 2020 relates to IMF on-lent funds disbursed to the Government of Kenya by the International Monetary Fund (IMF) amounting SDR 542.8 million under Rapid Credit Facility to mitigate the impact of COVID-19 pandemic. The On-Lent to GOK will be paid half- yearly within a period of ten years from November 2025 to May 2030. 2020 2019 (b) DUE FROM GOVERNMENT OF KENYA KShs’ million KShs’ million Overdraft 47,150 57,327 Government loan 21,783 22,229 68,933 79,556 Movement in the government loan is as follows: At 1 July 22,229 23,339 Principal repayment (555) (1,110) Interest charged 666 665 Interest paid (557) (665) At 30 June 21,783 22,229 Section 46(3) of the Central Bank of Kenya Act sets the limit of the Government of Kenya’s overdraft facility at the Bank at 5% of the Gross Recurrent Revenue as reported in the latest Government of Kenya audited financial statements. The limit for the year ending 30 June 2020 is KShs 68,495 million (2019: KShs 65,716 million) based on the gross recurrent revenue for the year ended 30 June 2018, which are the latest audited financial statements at the date of approval of these financial statements. Interest is charged at the Central Bank Rate, currently at 7%. The Bank converted the Government of Kenya overdraft facility that exceeded statutory limit in 1997 into a loan at 3% interest repayable by 2039 and is guaranteed by a deed executed by the Cabinet Secretary, The National Treasury. Principal repayments of KShs 555 million are paid half yearly while interests accruing are paid monthly. 2020 2019 22. Currency in Circulation KShs’ million KShs’ million Kenya bank notes 248,373 240,264 Kenya coins 9,419 9,245 257,792 249,509 Movement in the account was as follows: At 1 July 249,509 262,439 Deposits by commercial banks (571,022) (548,258) Withdrawals by commercial banks 586,732 535,349 (Deposits)/withdrawals by CBK (39) (21) Demonetization of old currency (7,388) - At 30 June 257,792 249,509 2020 2019 23. Investment by Banks KShs’ million KShs’ million REPO securities sold to banks 6,997 - 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3922 3922 The balance on 30 June 2020 relates to repurchase agreements contracted by the Bank to address excess liquidity and matures within a short period of between 7 to 14 days. 2020 2019 24. Deposits from Banks and Government KShs’ million KShs’ million Local commercial banks clearing accounts and cash ratio reserve 352,490 270,262 Local banks foreign exchange settlement accounts 25,824 24,511 External banks foreign exchange settlement accounts 2,620 183 Other public entities and project accounts 69,830 108,595 Government of Kenya 281,423 337,449 732,187 741,000 25. Other Liabilities Impersonal accounts 1,412 2,587 Sundry creditors 3,489 3,513 Lease liability (Note 18(a)) 209 - Refundable deposits 233 224 Leave accrual 235 177 Gratuity to staff members 24 20 5,602 6,521 Impersonal accounts hold amounts due to ministries and departments of Government of Kenya. 2020 2019 26. (a) Share Capital KShs’ million KShs’ million Authorised share capital: At 1 July 50,000 5,000 Additional share capital - 45,000 At 30 June 50,000 50,000 Paid up share capital: At 1 July 20,000 5,000 Additional share capital 15,000 15,000 At 30 June 35,000 20,000 Ownership of the entire share capital is vested in the Principal Secretary to the National Treasury. During the year, the board of directors approved the increase of paid up share capital from KShs 20 billion to KShs 35 billion. The increase was paid up from the general reserve fund. (b) General Reserve Fund The general reserve fund represents accumulated surpluses arising from normal operations of the Bank and unrealized gains on exchange rate fluctuations. (c) Fair Value Reserve The fair value reserve represents cumulative gains and losses arising from revaluation of debt instruments from cost to fair value based on the market values at the end of the reporting date. (d) Revaluation Reserve The revaluation reserve relates to unrealized gains on valuation of land and buildings that will not be recycled into profit or loss. The reserve is non- distributable. (e) Consolidated Fund The Consolidated Fund represents amounts proposed for distribution to the Government of Kenya from the General Reserve Fund. Movement in the consolidated fund is as follows: 2020 2019 KShs’ million KShs’ million At 1 July 4,000 800 Transfer from General reserve 9,888 4,000 Payments out of consolidated fund (11,388) (800) At 30 June 2,500 4,000 2020 2019 27. Cash (Used In)/Generated From Operations KShs’ million KShs’ million Surplus for the year 41,530 26,138 Adjustments for: Depreciation of property and equipment (Note 18(b)) 1,695 1,246 Amortisation of intangible assets (Note 19) 159 134 Amortisation of right-of-use assets (Note 18(a)) 133 - Gain on disposal of property and equipment (Note 7) - (10) Loss on disposal of property and equipment (Note 9(a)) 18 Credit loss expense on financial assets 8,714 2,082 Net interest income (17,690) (21,855) Interest on lease liability (Note 9(a)) 21 - Provision for impairment loss on other assets (Note 9(a)) 17 16 Net credit relating to the retirement benefit asset (Note 20) (174) (576) Employer contributions on defined benefit asset (Note 20) (86) (96) Demonetization of old currency (Note 7(b)) (7,388) - Reclassification from fair value reserve (Note 10(b)) (3,020) - Unrealised foreign exchange loss/(gain) on due to IMF 120 (16) 2nd October, 2020 THE KENYA GAZETTE Operating surplus before working capital changes 24,049 7,063 Changes in working capital: Loans and advances 92 (731) Other assets 70 (2,398) Due from Government of Kenya 10,623 632 Currency in circulation 15,671 (12,930) Deposits (8,813) 156,713 Investment by banks 6,997 - IMF on lend (79,702) - Gold holdings (25) (10) Consolidated fund (Note 26(e)) (11,388) (800) Other liabilities (1,129) (598) Net cash (used in)/generated from operations (43,555) 146,941 28. Cash And Cash Equivalents (a) For the purpose of the statement of cash flows, cash and cash equivalents include: 2020 2019 KShs’ million KShs’ million Balances due from banking institutions (Note 11) 369,505 542,849 Financial assets – FVOCI (Note 15) 59,122 28,830 Securities discounted by banks and other advances (Note 13) 22,527 57,154 451,154 628,833 (b) Changes in liabilities arising from financing activities At 1 July 83,653 100,284 Cash flow items: Repayments to IMF (11,634) (16,615) Receipts during the year 79,702 - Foreign exchange changes 120 (16) At 30 June 151,841 83,653 29. Related Party Transactions In the course of its operations, the Bank enters into transactions with related parties, which include the Government of Kenya (the ultimate owner of the Bank). The main transactions are ordinary banking facilities to government ministries included in Note 24 and lending to the Government of Kenya included in Note 21. (i) Loans The Bank extends loan facilities to the key management staff. The advances are at preferential rates of interest determined by the Bank. The repayment terms and collateral used are similar to those of loans and advances to other staff. Provisions on loans and advances to staff are arrived at using collective assessment approach. Provisions at 30 June 2020 are disclosed in Note 14. Collateral information is disclosed in Note 30. The repayment terms of the loans are between 2 years and 20 years. 2020 2019 Loans to key senior staff KShs’ million KShs’ million At 1 July 50 75 Loans advanced during the year 23 12 Loan repayments (21) (37) At 30 June 52 50 (ii) Directors’ emoluments: Fees to non-executive directors 18 22 Directors’ travelling expenses 8 24 Other remuneration to executive directors 34 33 60 79 (iii) Remuneration to senior staff 240 185 (iv) Post–employment pension to senior management 4 4 (v) Government of Kenya Due from Government of Kenya (Note 21(b)) 68,933 79,556 Government of Kenya Deposits (Note 24) 281,423 337,449 IMF On-lent to GOK (Note 21(a)) 79,702 - Interest earned from Government of Kenya – Loan (Note 4) 666 695 Interest earned from Government of Kenya - Overdraft (Note 4) 3,245 2,523 Fees and commission income (Note 6(a)) 3,000 3,000 Loan principal repayment (Note 21(b)) 555 1,110 Transactions entered into with the Government include: • Banking services; • Management of issue and redemption of securities at a commission and; • Foreign currency denominated debt settlement and other remittances at a fee. (vi) Kenya School of Monetary Studies (KSMS) 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3924 3924 The Kenya School of Monetary Studies (the “School”) is a subsidiary of the Bank. It is primarily owned and managed by CBK and its financial statements have been consolidated in these financial statements. The permanent staff working at KSMS are employees of CBK. Fixed assets are also wholly owned by the Bank and a letter of support is issued annually to the external auditor of the School as part of the commitment of the Bank for going concern purposes. During the year under review, the school’s physical developments projects were significantly completed. 2020 2019 KShs’ million KShs’ million CBK-KSMS related transactions and balances Grants from CBK 468 471 Buildings 8,780 2,317 Land 4,250 4,250 Receivable from KSMS 59 59 Accumulated deficit 62 62 (vii) Central Bank of Kenya Pension Fund and Banki Kuu Pension Scheme 2012 The pension schemes (that is, the defined benefit and defined contribution schemes) are managed and administered by the Secretariat appointed by the sponsor. The costs of their operations are fully reimbursed to the Bank on a regular basis. 30. Financial Risk Management Objectives And Policies The Bank’s activities expose it to a variety of financial risks, including credit risk and the effects of changes in debt and equity market prices, foreign currency exchange rates and interest rates. The Bank’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance. Risk management is carried out by the Internal Audit and Risk Management Department under policies approved by the Board of Directors. Other organs that monitor the assessment and management of risks within the Bank include: Board Audit Committee. (a) Strategy in using financial instruments The Bank holds foreign exchange reserves for the purposes of servicing official foreign debt, paying non-debt government and Central Bank of Kenya expenditures abroad, and occasional intervention in the foreign exchange market to smoothen exchange rate volatilities. The Bank can only intervene in the foreign exchange market when there are sharp exchange rate movements which are likely to destabilize the financial market. Governed by the Bank’s reserve management policy of safe investment, liquidity and return, respectively, the Bank, with a prudent approach, subjects its foreign exchange reserves to investments in international markets. In this framework, almost all the financial risks to which the Bank is exposed arise while fulfilling its duties of managing foreign exchange reserves and rendering certain banking services to the banking sector and the Government of the Republic of Kenya. The Bank is exposed to credit, market and liquidity risks due to the aforementioned operations. The financial risks that arise during the management of foreign exchange reserves are the outcome of an investment choice. Nevertheless, the Bank endeavours to minimize such risks by managing them with a conservative approach. Foreign exchange reserves are managed by observing the investment criteria defined in the Bank’s Guidelines on Foreign Exchange Reserves Management. (b) Risks facing the Bank The following are the main types of risks that the Bank is exposed to in the course of executing its operations: Financial risks include: • Credit risk • Market risk • Liquidity risk Non-financial risks include: • Operational risk • Human resource risk • Legal risk • Reputation risk (i) Credit risk Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits. Credit risk arises from balances due from banking institutions, funds held with IMF, securities and advances to banks, IMF On-Lent to GOK, loans and advances, debt instruments at fair value through other comprehensive income, other assets (sundry debtors) and due from Government of Kenya. Management of credit risk is carried out through the choice of counterparties. The Bank’s choice of counterparties is confined to top international banks that meet the set eligibility criteria of financial soundness on long-term credit rating (A- or equivalent rating from Standard & Poor’s, Moody’s and Fitch), short-term credit rating (F1 or equivalent by the three internationally recognised credit rating agencies) and capital adequacy (8% and above by BIS). The following table sets out the carrying amounts of the financial assets that are exposed to credit risk as at 30 June 2020 and 30 June 2019: 2020 2019 2nd October, 2020 THE KENYA GAZETTE KShs' million KShs' million Balances due from banking institutions 369,505 542,849 Funds held with International Monetary Fund (IMF) 3,255 1,008 Securities and advances to banks 55,561 66,909 IMF On-Lent to GOK 79,702 - Loans and advances 3,274 3,363 Debt instruments at fair value through other comprehensive income 724,892 504,533 Other assets – sundry debtors 500 330 Due from Government of Kenya 68,933 79,556 1,305,622 1,198,548 The Bank assesses the credit quality of these assets. None of the balances have had their terms renegotiated as a result of non-performance. Management monitors the credit exposure of staff on a continuous basis, taking into account their financial position, past experience and other factors. Credit quality analysis The following tables set out information about the credit quality of financial assets measured at amortised cost and debt instruments at FVOCI. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. Explanation of the terms: ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ are included in Note 2(f). The credit ratings show the best-two rating amongst Standard & Poor’s, Moody’s and Fitch. Year ended 30 June 2020 Stage 1 Stage 2 Stage 3 Total KShs' million KShs' million KShs' million KShs' million Balance due from banking institutions Rated AAA 36,248 - - 36,248 Rated AA- to AA+ 146,509 - - 146,509 Rated A- to A+ 109,007 - - 109,007 Rated BBB – BB 807 - - 807 Unrated 76,962 - - 76,962 Gross carrying amount 369,533 - - 369,533 Impairment allowance (28) - - (28) Net carrying amount 369,505 - - 369,505 Debt instruments at fair value through OCI Rated AAA 715,417 - - 715,417 Rated AA- to AA+ 9,475 - - 9,475 Carrying amount 724,892 - - 724,892 Due from Government of Kenya Unrated 68,933 - - 68,933 Funds with IMF Unrated 3,255 - - 3,255 IMF On-Lent to GOK Unrated 79,702 - - 79,702 Securities and advances to banks Unrated 65,114 - 2,147 67,261 Gross carrying amount 65,114 2,147 67,261 Impairment allowance (9,553) - (2,147) (11,700) Net carrying amount 55,561 - - 55,561 Loans and advances Unrated 3,166 11 3,550 6,727 Gross carrying amount 3,166 11 3,550 6,727 Impairment allowance (3) - (3,450) (3,453) Net carrying amount 3,163 11 100 3,274 Other assets Unrated - - 5,462 5,462 Gross carrying amount - - 5,462 5,462 Impairment allowance - - (4,962) (4,962) Net carrying amount - - 500 500 Year ended 30 June 2019 Stage 1 Stage 2 Stage 3 Total KShs’ million KShs’ million KShs’ million KShs’ million Balance due from financial institutions Rated AAA 2 - - 2 Rated AA- to AA+ 248,830 - - 248,830 Rated A- to A+ 175,335 - - 175,335 No Rating 118,797 - - 118,797 Gross carrying amount 542,964 - - 542,964 Impairment allowance (115) - - (115) Net carrying amount 542,849 - - 542,849 Debt instruments at fair value through OCI Rated AAA 496,925 - - 496,925 Rated AA- to AA+ 7,608 - - 7,608 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3926 3926 Carrying amount 504,533 - - 504,533 Due from Government of Kenya Unrated 79,556 - - 79,556 Funds with IMF Unrated 1,008 - - 1,008 Securities and advances to banks Unrated 68,698 - 1,211 69,909 Gross carrying amount 68,698 - 1,211 69,909 Impairment allowance (2,092) - (908) (3,000) Net carrying amount 66,606 - 303 66,909 Loans and advances Unrated 3,237 25 3,557 6,819 Gross carrying amount 3,237 25 3,557 6,819 Impairment allowance (7) - (3,449) (3,456) Net carrying amount 3,230 25 108 3,363 Other assets Unrated - - 5,275 5,275 Gross carrying amount - - 5,275 5,275 Impairment allowance - - (4,945) (4,945) Net carrying amount - - 330 330 Collateral and other credit enhancements The Bank holds collateral and other credit enhancements against certain credit exposures. The following table sets out the principal types of collateral held against different types of financial assets. Notes Percentage of exposure that is subject to collateral requirements 30 June 2020 30 June 2019 Principal type of collateral held Advances to banks – Reverse repurchase arrangements and due from commercial banks 13 100 100 Kenya Government debt securities Loans and advances – Loans to staff 14 100 100 Land and buildings, government securities, motor vehicles At 30 June 2020, the Bank held advances to banks of KShs 22,228 million (2019: KShs 21,518 million), for which no loss allowance is recognised because of full collateral coverage. The fair value of the collateral held for Advances to banks was KShs 26,137 million (2019: KShs 26,268 million). These have been determined based on market price quotations at the reporting date. Inputs, assumptions and techniques used for estimating impairment Significant increase in credit risk When determining whether the risk of default of the invested amount on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and credit risk specialist’s assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing: • the remaining lifetime probability of default (PD) as at the reporting date; with • the remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). Credit risk grades/ratings For assessing the risk of default, at initial recognition, the Bank assigns to each exposure in foreign currency the credit rating that shows the best- two rating amongst Standard & Poor’s, Moody’s and Fitch for that particular counterparty. The Bank, at initial recognition, allocates each exposure to banks a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applies experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade/rating. The monitoring typically involves use of the following data. Foreign currency exposures Domestic currency exposures Other assets Data from credit rating agencies, press articles, changes in external credit ratings Quoted bond prices for the counterparty, where available Actual and expected significant changes in the political, regulatory and technological environment of the counterparty or in its business activities Internally collected data on banks and supervisory indicators Existing and forecast changes in business, financial and economic conditions Repayment history – this includes overdue status and financial situation of the borrower. Existing and forecast changes in financial and economic conditions PD estimation process Credit risk grades/ratings are a primary input into the determination of the term structure of PD for exposures. The Bank collects performance and default information about its credit risk exposures analysed by counterparty as well as by credit risk grading/ratings. The Bank employs 2nd October, 2020 THE KENYA GAZETTE statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time. The methodology for determining PDs for domestic commercial banks is based on the risk assessment techniques used for supervisory purposes. Factors considered by these techniques include the capital adequacy, credit risk, liquidity and profitability of the counterparty. The PDs are calculated as the average weighted PDs for each factor, where the weights are determined based on the importance of the factor. For the assets denominated in foreign currency, the Bank uses 12-month PDs for sovereign and non-sovereign issuances, estimated based on Bloomberg’s probability of default model which indicate a possibility of bankruptcy over 12 months for issuers per each respective rating category. The Bloomberg PD includes the estimates of forward-looking parameters such as GDP, forex rates, and interest rates. For exposures to the Kenyan Government in domestic currency, the estimated PD considers the short-term maturity of such exposures, the absence of historical defaults and detailed assessments of the ability of the Kenyan Government to fulfil its contractual cash flow obligations in the short-term which consider also the macroeconomic indicators over the assessment period. Determining whether credit risk has increased significantly The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in PDs and qualitative factors, including a backstop based on delinquency. The credit risk of a particular exposure in foreign currency is deemed to have increased significantly since initial recognition if: • the credit rating from all the three rating agencies (Standard & Poor’s, Moody’s and Fitch) falls below A- (or its equivalent); or • the credit rating from one of the above agencies is downgraded to A-; or • there is a delay in the repayment of an obligation to the Bank by more than or equal to 2 days. In this case, the credit risk will be deemed to have significantly increased for all exposures to that issuer. The credit risk of a particular exposure in domestic currency for commercial banks is deemed to have increased significantly since initial recognition if one of the following criteria is met: • Internal rating of the borrower indicating default or near-default • Borrower requesting emergency funding from the Bank, the borrower having past due liabilities to public creditors or employees • Material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral • A material decreases in the borrower’s turnover or the loss of a major customer • A covenant breach not waived by the Bank • The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection • Debtor’s listed debt or equity suspended at the primary exchange because of facts about financial difficulties • The borrower having past due liabilities to public creditors or employees Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that the criteria are capable of identifying significant increases in credit risk before an exposure is in default. Definition of default The Bank considers a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realizing security (if any is held); or • the borrower is past due more than 90 days on any material credit obligation to the Bank. In assessing whether a borrower is in default, the Bank considers indicators that are: • qualitative – e.g. breaches of covenants; • quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and • based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and its significance may vary over time to reflect changes in circumstances. Incorporation of forward-looking information In its ECL models, the Bank relies on Bloomberg credit risk model for provision of probabilities of default values for the both the investment counterparties and the sovereigns. The bank also relies on credit rating agencies (Standard & Poor’s (S&P), Moody’s, Fitch Group) for credit rating information. Credit ratings are a tool, among others, that investors can use when making decisions about purchasing bonds and other fixed income investments. They express independent opinions on creditworthiness, using a common terminology that may help investors make more informed investment decisions. As part of their ratings analysis, the external credit agencies as well as the Bloomberg credit risk model evaluate current and historical information and assess the potential impact of a broad range of forward-looking information, such as: • Industry specific risk and broad economic factors that may affect the business cycle. The market data category includes two inputs: share price/ market cap and price volatility. • Key performance indicators such as effective short-term debt, long-term debt, T12M interest expense and for financial firms, interest coverage fields are replaced with factors that are meaningful for that type of firm, for instance, non-performing loans and loan loss reserves for banks. 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3928 3928 • Economic, regulatory and geopolitical influences, management and corporate governance attributes as well as income and economic structure. Additionally, for Sovereign or national government, the analysis may take into consideration: • Deficit levels, foreign currency reserves, non-performing bank loans, GDP growth and a political risk indicator. Country financials are obtained from the World Bank, Eurostat and the IMF. • Fiscal and Economic performance such as GDP growth, Revenue as a percentage of GDP, • Monetary Stability which reflects the price behaviour in the business cycles. • EIU Political risk score which addresses the sovereign’s willingness to repay debt. Willingness to pay is a qualitative issue that distinguishes sovereigns from most other types of issuers. Measurement of ECL The key inputs into the measurement of ECL are the term structure of the following variables: • Probability of default (PD); • Loss given default (LGD); • Exposure at default (EAD). These parameters are derived from internally developed statistical models, globally recognized external developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above. Probability of default (PD); PD estimates are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally and externally compiled data comprising both quantitative and qualitative factors. Transition matrixes data are used to derive the PD for foreign counterparties. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD. Loss given default (LGD); LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of recovery rates, or parameters calculated by rating agencies and regulatory institutions such as BIS Basel, of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. Exposure at default (EAD); EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. EAD estimates are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor. As described above, and subject to using a maximum of a 12-month PD for financial assets for which credit risk has not significantly increased, the Bank measures ECL considering the risk of default over the maximum contractual period over which it is exposed to credit risk, even if, for risk management purposes, the Bank considers a longer period. The maximum contractual period extends to the date at which the Bank has the right to require repayment of an advance. Where modelling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics that include: instrument type, credit risk grading; collateral type; date of initial recognition; remaining term to maturity; industry; and, geographic location of the borrower The groupings are subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous. For portfolios in respect of which the Bank has limited historical data, external benchmark information is used to supplement the internally available data. The portfolios for which external benchmark information represents a significant input into measurement of ECL comprise financial assets in foreign currency as follows: Exposure External benchmarks used KShs’ million PD LGD Balances due from banking institutions 369,533 Bloomberg PD rating model Basel II recovery studies Debt instruments at fair value through other comprehensive income 724,892 Bloomberg PD rating model Basel II recovery studies An analysis of changes in the gross carrying amount and the corresponding ECL allowances in relation to the relevant financial assets is as follows: Year ended 30 June 2020 Stage 1 Stage 2 Stage3 Total Gross Gross Gross Gross carrying carrying carrying carrying amount ECL amount ECL amount ECL amount ECL Debt instruments at fair value through other comprehensive income KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million At 1 July 2019 504,533 61 - - - - 504,533 61 New assets originated or purchased 556,932 45 - - - - 556,932 45 Asset derecognized or repaid (365,842) (17) - - - - (365,842) (17) Accrued interest 775 - - - - - 775 - Realised gains 1,296 - - - - - 1,296 - Foreign exchange 18,746 - - - - - 18,746 - 2nd October, 2020 THE KENYA GAZETTE adjustments Changes in risk parameters - (11) - - - - - (11) Fair value changes 8,452 - - - - - 8,452 - At 30 June 2020 724,892 78 - - - - 724,892 78 Balances due from banking institutions At 1 July 2019 542,964 115 - 542,964 115 Net movement during the year (173,431) (87) - - - - (173,431) (87) At 30 June 2020 369,533 28 - - - - 369,533 28 Securities and advances to banks At 1 July 2019 68,698 2,092 - - 1,211 908 69,909 3,000 New assets originated or purchased 199,313 - - - - - 199,313 - Asset derecognized or repaid (202,113) - - - - - (202,113) - Accrued interest 152 - - - - - 152 - Transfer to Stage 3 (936) - - - 936 - - - Change in risk parameters - 7,461 - - - 1,239 - 8,700 At 30 June 2020 65,114 9,553 - - 2,147 2,147 67,261 11,700 Other assets At 1 July 2019 322 - - - 4,953 4,945 5,275 4,945 New assets originated or purchased 427 - - - - 427 - Asset derecognized or repaid (240) - - - - - (240) - Transfer to Stage 3 (17) - - - 17 17 - 17 At 30 June 2020 492 - - - 4,970 4,962 5,462 4,962 Loans and advances At 1 July 2019 3,237 7 25 - 3,557 3,449 6,819 3,456 New assets originated or purchased 812 1 - - - - 812 1 Asset derecognized or repaid (858) (2) (8) - (38) - (904) (2) Transfer to Stages (19) - (6) - 25 - - - Changes in risk parameters - (2) - - - - - (2) At 30 June 2020 3,172 4 11 - 3,544 3,449 6,727 3,453 An analysis of changes in the gross carrying amount and the corresponding ECL allowances in relation to the relevant financial assets is as follows: Year ended 30 June 2019 Stage 1 Stage 2 Stage3 Total Gross carrying Gross carrying Gross carrying Gross carrying amount ECL amount ECL amount ECL amount ECL Debt instruments at fair value through other comprehensive income KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million At 1 July 2018 400,333 59 - - - - 400,333 59 New assets originated or purchased 418,501 45 - - - - 418,501 45 Asset derecognized or repaid (328,580) (36) - - - - (328,580) (36) Accrued interest 778 - - - - - 778 - Realised gains 1,166 - - - - - 1,166 - Foreign exchange adjustments 5,330 - - - - - 5,330 - Changes in risk parameters - (7) - - - - - (7) Fair value changes 7,005 - - - - - 7,005 - At 30 June 2019 504,533 61 - - - - 504,533 61 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3930 3930 Balances due from banking institutions At 1 July 2018 522,987 66 - - - - 522,987 66 Net movement during the year 19,977 49 - - - - 19,977 49 At 30 June 2019 542,964 115 - - - - 542,964 115 Securities and advances to banks At 1 July 2018 37,609 3 - - 894 671 38,503 674 New assets originated or purchased 529,744 2,326 - - - - 529,744 2,326 Asset derecognized or repaid (497,961) - - - (360) - (498,321) - Accrued interest (17) - - - - - (17) - Transfer to Stage 3 (677) (237) - - 677 237 - - At 30 June 2019 68,698 2,092 - - 1,211 908 69,909 3,000 Other assets At 1 July 2018 960 - - - 4,937 4,929 5,897 4,929 New assets originated or purchased 46 - - - - - 46 - Asset derecognized or repaid (668) - - - - - (668) - Transfer to Stage 3 (16) - - - 16 16 - 16 At 30 June 2019 322 - - - 4,953 4,945 5,275 4,945 Loans and advances At 1 July 2018 2,490 6 11 - 3,587 3,462 6,088 3,468 New assets originated or purchased 1,219 7 - - - - 1,219 7 Asset derecognized or repaid (455) (6) (3) - (30) (13) (488) (19) Transfer to Stages (17) - 17 - - - - - At 30 June 2019 3,237 7 25 - 3,557 3,449 6,819 3,456 Concentrations of credit risk The Bank monitors concentrations of credit risk by geographic location and by counterparty type. An analysis of concentrations of credit risk is shown below. Concentration by geographical location is based on the country of domicile of the issuer of the security. Concentration by counterparty type is based on the nature of the institution such as foreign governments, central banks and supranational institutions. A segregation of the financial assets by geography is set out below: Year ended 30 June 2020 United States United of America Germany Kingdom Singapore Canada Kenya Others Total KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million Balances due from banking institutions 49,793 54,072 55,934 28,616 14,274 17,227 149,617 369,533 Funds held with IMF 3,255 - - - - - - 3,255 IMF On-Lent to GOK - - - - - 79,702 - 79,702 Securities and advances to banks - - - - - 67,261 - 67,261 Loans and advances - - - - - 6,727 - 6,727 Debt instruments at fair value through OCI 604,561 21,573 - - 3,320 - 95,438 724,892 Other assets - Sundry debtors - - - - - 5,462 - 5,462 Due from Government of Kenya - - - - - 68,933 - 68,933 Total financial assets 657,609 75,645 55,934 28,616 17,594 245,312 245,055 1,325,765 Year ended 30 June 2019 United States of America Germany United Kingdom Singapore Canada Kenya Others Total KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million Balances due from banking 163,493 59,155 14,206 74,180 29,914 6,137 195,879 542,964 2nd October, 2020 THE KENYA GAZETTE institutions Funds held with IMF 1,008 - - - - - - 1,008 Securities and advances to banks - - - - - 69,909 - 69,909 Loans and advances - - - - - 6,819 - 6,819 Debt instruments at fair value through OCI 352,824 53,335 - - 2,665 - 95,709 504,533 Other assets - Sundry debtors - - - - - 5,275 - 5,275 Due from Government of Kenya - - - - - 79,556 - 79,556 Total financial assets 517,325 112,490 14,206 74,180 32,579 167,696 291,588 1,210,064 A segregation of the financial assets by counterparty type is set out below: Year ended 30 June 2020 Balances due from financial institutions Securities and advances Fund held with IMF IMF-On Lent to GoK Loans and advances Fixed Income securities Due from GOK Other assets Total KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million Central Banks 37,054 - - - - - - - 37,054 Foreign Governments - - - - - 614,959 - - 614,959 Supranational Institutions 54,484 - 3,255 - - 79,352 - - 137,091 Commercial Banks 277,995 59,392 - - 3,400 - - - 340,787 Foreign Agencies - - - - - 30,581 - - 30,581 Government of Kenya - 7,869 - 79,702 - - 68,933 - 156,504 Others - - - - 3,327 - - 5,462 8,789 369,533 67,261 3,255 79,702 6,727 724,892 68,933 5,462 1,325,765 A segregation of the financial assets by counterparty type is set out below: Year ended 30 June 2019 Balances due from financial institutions Securities and advances Fund held with IMF Loans and Advances Fixed income securities Due from GOK Other assets Total KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million KShs' million Central Banks 63,778 - - - - - - 63,778 Foreign Governments - - - - 354,585 - - 354,585 Supranational Institutions 54,137 - 1,008 - 89,492 - - 144,637 Commercial Banks 425,049 58,674 - 3,400 - - - 487,123 Foreign Agencies - - - - 60,456 - - 60,456 Government of Kenya - 11,235 - - - 79,556 - 90,791 Others - - - 3,419 - - 5,275 8,694 542,964 69,909 1,008 6,819 504,533 79,556 5,275 1,210,064 (ii) Market risk The Bank takes on exposure to market risk, which is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk arises from open positions in interest rate, currency and equity, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, foreign exchange rates and equity prices. The Bank separates exposure to market risk into either trading or non-trading portfolios. Market risk arising from trading and non-trading activities are concentrated in Bank Treasury and are monitored by management with oversight from the Monetary Policy Committee. Trading portfolios include those positions arising from market-making transactions where the Bank acts as principal with commercial banks or the market. Non-trading portfolios primarily arise from the interest rate management of the Bank’s investment and monetary policy assets and liabilities. Non- trading portfolios also consist of foreign exchange and equity risks arising from the Bank’s internally managed debt instruments at amortised cost and World Bank RAMP financial assets. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Bank’s interest rate risk arises from balances due from banking institutions, securities and advances to banks, debt instruments at FVOCI, loans and advances, due from the Government of Kenya and deposits from bank and Government. Borrowings issued at variable rates expose the Bank to cash flow interest rate risk which is partially offset by cash held at variable rates. Borrowings issued at fixed rates expose the Bank to fair value interest rate risk. The tables below summarise the Bank’s financial assets and liabilities and analyses them into the earlier of contractual maturity or re-pricing. At 30 June 2020 1 – 3 months 4-12 months 1 - 5 years Over 5 years Non-interest bearing Total KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million Assets 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3932 3932 Balances due from banking institutions 369,533 - - - - 369,533 Securities and advances to banks 59,477 552 2,471 4,761 - 67,261 Debt instruments at FVOCI 59,122 385,521 280,249 - - 724,892 Funds held with International Monetary Fund (IMF) - - - - 3,255 3,255 Loans and advances 163 428 1,741 995 3,400 6,727 Other assets - - - - 5,462 5,462 IMF On-lent to GOK - - - - 79,702 79,702 Due from Government of Kenya 47,259 1,110 4,440 16,124 - 68,933 Total financial assets 535,554 387,611 288,901 21,880 91,819 1,325,765 Liabilities Deposits from banks and government 176,494 - - - 555,693 732,187 Other liabilities - - - - 5,343 5,343 Investment by banks 6,997 - - - - 6,997 Due to International Monetary Fund (IMF) - - - - 151,841 151,841 Total financial liabilities 183,491 - - - 712,877 896,368 Interest sensitivity gap 352,063 387,611 288,091 21,880 (621,058) 429,397 As at 30 June 2020, increase of 10 basis points would have resulted in a decrease/increase in profit of KShs 429 million (2019: KShs 379 million). At 30 June 2019 1 – 3 months 4-12 months 1 - 5 years Over 5 years Non-interest bearing Total KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million Assets Balances due from banking institutions 447,682 - - - 95,282 542,964 Securities and advances to banks 60,154 2,312 7,443 - - 69,909 Debt instruments at FVOCI 28,830 139,780 335,923 - - 504,533 Funds held with International Monetary Fund (IMF) - - - - 1,008 1,008 Loans and advances 225 387 1,626 1,181 3,400 6,819 Other assets - - - - 5,275 5,275 Due from Government of Kenya - 58,437 4,440 16,679 - 79,556 Total financial assets 536,891 200,916 349,432 17,860 104,965 1,210,064 Liabilities Deposits from banks and government - - - - 741,000 741,000 Other liabilities - - - - 6,324 6,324 Due to International Monetary Fund (IMF) - - - - 83,653 83,653 Total financial liabilities - - - - 830,977 830,977 Interest sensitivity gap 536,891 200,916 349,432 17,860 (726,012) 379,087 As at 30 June 2019, increase of 10 basis points would have resulted in a decrease/increase in profit of KShs 379 million (2018: KShs 365 million). Foreign exchange risk The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Monetary Policy Committee sets limits on the level of exposure by currency which is monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk as at 30 June 2020. Included in the table are the Bank’s financial instruments categorised by currency: USD GBP EUR SDR Others Total At 30 June 2020 KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million Assets Balances due from banking institutions 150,714 24,093 33,791 - 160,935 369,533 Debt instruments at FVOCI 724,892 - - - - 724,892 Funds held with International Monetary Fund (IMF) - - - 3,255 - 3,255 Total financial assets 875,606 24,093 33,791 3,255 160,935 1,097,680 Liabilities Due to International Monetary Fund (IMF) - - - 151,841 - 151,841 Deposits from banks and government 43,431 2,354 10,641 - 319 56,745 Total financial liabilities 43,431 2,354 10,641 151,841 319 208,586 Net position 832,175 21,739 23,150 (148,586) 160,616 889,094 USD GBP EUR SDR Others Total At 30 June 2019 KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million Assets Balances due from banking institutions 332,164 25,362 13,560 - 171,878 542,964 Debt Instruments at FVOCI 504,533 - - - - 504,533 Funds held with International Monetary Fund (IMF) - - - 1,008 - 1,008 Total financial assets 836,697 25,362 13,560 1,008 171,878 1,048,505 Liabilities Due to International Monetary Fund (IMF) - - - 83,653 - 83,653 Deposits from banks and government 15,906 2,310 6,295 - 128 24,639 Total financial liabilities 15,906 2,310 6,295 83,653 128 108,292 Net position 820,791 23,052 7,265 (82,645) 171,750 940,213 2nd October, 2020 THE KENYA GAZETTE As at 30 June 2020, if the shilling had weakened/strengthened by 5% against the major currencies with all other variables held constant, the impact on the Bank’s surplus and equity would have been: • USD KShs 41,609 million (2019: KShs 41,040 million) • British Pound KShs 1,087 million (2019: KShs 1,153 million) • Euro KShs 1,158 million (2019: KShs 363 million) • SDR KShs 7,429million (2019: KShs 4,132million). (iii) Liquidity risk Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, and the availability of funding from an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, Treasury maintains flexibility in funding by maintaining availability under committed credit lines. Management monitors rolling forecasts of the Bank’s liquidity reserve on the basis of expected cash flows. The table below analyses the Bank’s financial liabilities that will be settled on a net basis into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts, as the impact of discounting is not significant. On demand 0 – 3 months 4-12 months 1 - 5 years Over 5 years Total KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million KShs’ million At 30 June 2020 Investment by banks - 6,997 - - - 6,997 Deposits from banks and government 555,693 176,494 - - - 732,187 Due to International Monetary Fund (IMF) - 963 15,661 16,879 118,338 151,841 Lease liability - 25 162 32 - 219 Other liabilities - - 5,343 - - 5,343 Total financial liabilities 555,693 184,479 21,166 16,911 118,338 896,587 At 30 June 2019 Deposits from banks and government 632,405 - 108,595 - - 741,000 Due to International Monetary Fund (IMF) - 1,542 15,158 66,953 83,653 Other liabilities - - 6,324 - - 6,324 Total financial liabilities 632,405 1,542 130,077 66,953 - 830,977 31. Fair Value Of Assets And Liabilities (a) Comparison by class of the carrying amount and fair values of the financial instruments The fair values of fixed income securities, equity investments and securities and advances to banks (rediscounted treasury bonds) are based on price quotations at the reporting date. Management assessed that the fair value of balances due from banking institutions, funds held with International Monetary Fund, securities and advances to banks (Treasury bills discounted, accrued interest bonds discounted, repo treasury bills & bonds, accrued interest repo, liquidity support framework and due from commercial banks), other assets (sundry debtors), deposits from government and banks and other liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. Fair values of the Bank’s staff loans and due from Government of Kenya and due to International Monetary Fund are determined by using Discounting Cash Flows (DCF) method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. This is shown in the table below: 2020 2019 Carrying Fair Carrying Fair Amount Value amount Value KShs' million KShs' million KShs' million KShs' million Financial assets Securities and advances to banks (rediscounted treasury bonds) 7,513 8,137 8,454 9,158 Loans and advances 3,274 2,218 3,363 2,377 Due from Government of Kenya 68,933 62,992 79,556 71,419 Financial liabilities Due to International Monetary Fund 151,841 45,338 83,653 65,996 (b) Fair value hierarchy The table below shows an analysis of all assets and liabilities measured at fair value in the financial statements or for which fair values are disclosed in the financial statements by level of the fair value hierarchy. These are grouped into levels 1 to 3 based on the degree to which the fair value is observable. • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes equity securities and debt instruments on exchanges (for example, Bloomberg). • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The sources of input parameters like LIBOR yield curve or counterparty credit risk are Bloomberg. • Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. Level 1 Level 2 Level 3 Year ended 30 June 2020 KShs' million KShs' million KShs' million Assets measured at fair value: Property and equipment Land and buildings - - 23,537 Debt instruments at fair value through other comprehensive income 724,892 - - 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3934 3934 Equity instruments at fair value through other comprehensive income - - 10 Gold holdings 106 - - Assets for which fair values are disclosed: Securities and advances to banks (rediscounted treasury bonds) 8,137 - - Loans and advances - 2,218 - Due from Government of Kenya - 62,992 - Liabilities for which fair values are disclosed: Due to International Monetary Fund - 45,338 - Level 1 Level 2 Level 3 Year ended 30 June 2019 KShs' million KShs' million KShs' million Assets measured at fair value: Property and equipment -Land and buildings - - 17,168 Debt instruments at fair value through other comprehensive income 504,533 - - Equity instruments at fair value through other comprehensive income - - 9 Gold holdings 81 - - Assets for which fair values are disclosed: Securities and advances to banks (rediscounted treasury bonds) 9,158 - - Loans and advances - 2,377 - Due from Government of Kenya - 71,419 - Liabilities for which fair values are disclosed: Due to International Monetary Fund - 65,996 - There were no transfers between levels 1, 2 and 3 in the year. The Bank’s land and buildings were last revalued in the year ended 30 June 2018. The valuations were based on market value as follows: Comparable method for valuation of land and buildings Fair value of the land and buildings was determined by using market comparable method. This means that valuations performed by the valuer are based on active market prices, significantly adjusted for difference in the nature, location or condition of the specific property. Description of valuation techniques used and key inputs to valuation of assets and liabilities LEVEL 2 Valuation technique Significant observable inputs Range (weighted average) Interest rate Loans and advances DCF Interest rate 12% Due from Government of Kenya DCF Interest rate 7% Due to IMF DCF Interest rate 0.14% LEVEL 3 Valuation technique Significant unobservable inputs Range (weighted average) Land and buildings Market comparable approach and Depreciated replacement cost Comparable sales of similar properties in the neighbourhood - Reconciliation of the opening balances to the closing balances of the fair values of property and equipment: - Opening balance Additions Depreciation charge to profit or loss Closing balance KShs' million KShs' million KShs' million KShs' million Freehold land and buildings 12,369 6,462 (477) 18,354 Leasehold land and buildings 4,799 497 (113) 5,183 17,168 6,959 (590) 23,537 The significant unobservable inputs used in the fair value measurement of the Bank's land and buildings are price per acre and estimated rental value per sqm per month. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. 32. Contingent Liabilities And Commitments The Bank is party to various legal proceedings. Based on legal advice, the directors believe that no loss will arise from these legal proceedings. At 30 June 2020, the Bank had capital commitments of KShs 5,610 million (2019: KShs 7,833 million) in respect of property and equipment purchases. Operating lease commitments – Bank as lessee KShs’ million Not later than 1 year 122 Later than 1 year and not later than 5 years 64 2nd October, 2020 THE KENYA GAZETTE All the commitments relate to future rent payable for various premises based on the existing contracts and projected renewals. The lease agreements are between the Bank and the landlords and have no provisions relating to contingent rent payable. The terms of renewal vary from one lease to another and may include a written notice to the lessors before the expiration of the leases and the lessors will grant to the lessee new leases of the said premises/properties for a further term as may be mutually agreed by the parties. The escalation rate varies from property to property and is factored into the operating lease commitment values presented above. Operating leases - Bank as a lessor The Bank has entered into operating leases on its land and buildings consisting of certain office buildings. These leases have terms of between one and 30 years. All leases include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. The lessee is also required to provide a residual value guarantee on the properties. Rental income recognised by the Bank during the year is KShs 41 million (2019: KShs 2 million). Future minimum rentals receivable under non-cancellable operating leases as at 30 June are as follows: 2020 2019 KShs ‘million KShs ‘million Within one year 68 2 After one year but not more than five years 35 3 More than five years - - 103 5 33. Maturity Analysis Of Assets And Liabilities The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled. Within 12 months After 12 months Total Year ended 30 June 2020 KShs’ million KShs’ million KShs’ million ASSETS Balances due from banking institutions 369,505 - 369,505 Funds held with International Monetary Fund (IMF) 3,255 - 3,255 IMF Funds on – lent to GOK - 79,702 79,702 Securities and advances to banks 23,080 32,481 55,561 Loans and advances 591 2,683 3,274 Debt instruments at fair value through other comprehensive income 444,643 280,249 724,892 Equity instruments at fair value through other comprehensive income - 10 10 Other assets 5,595 - 5,595 Gold holdings - 106 106 Right-of-use asset – leases - 222 222 Property and equipment - 31,618 31,618 Intangible assets - 1,224 1,224 Retirement benefit assets - 6,537 6,537 Due from Government of Kenya 48,369 20,564 68,933 TOTAL ASSETS 895,038 455,396 1,350,434 LIABILITIES Currency in circulation - 257,792 257,792 Investments by banks 6,997 - 6,997 Deposits from Banks and Government 732,187 - 732,187 Due to IMF 16,624 135,217 151,841 Other liabilities 5,570 32 5,602 TOTAL LIABILITIES 761,378 393,041 1,154,419 NET ASSETS 133,660 62,355 196,015 10:59 AM THE KENYA GAZETTE 2nd October, 2020 3936 3936 Within 12 months After 12 months Total Year ended 30 June 2019 KShs’ million KShs’ million KShs’ million ASSETS Balances due from banking institutions 542,849 - 542,849 Funds held with International Monetary Fund (IMF) 1,008 - 1,008 Securities and advances to banks 59,466 7,443 66,909 Loans and advances 612 2,751 3,363 Debt instruments at fair value through other comprehensive income 168,610 335,923 504,533 Equity instruments at fair value through other comprehensive income - 9 9 Other assets 5,684 - 5,684 Gold holdings - 81 81 Property and equipment - 30,001 30,001 Intangible assets - 837 837 Retirement benefit assets - 4,328 4,328 Due from Government of Kenya 57,327 22,229 79,556 TOTAL ASSETS 835,556 403,602 1,239,158 LIABILITIES Currency in circulation - 249,509 249,509 Deposits from Banks and Government 741,000 741,000 Due to IMF 16,700 66,953 83,653 Other liabilities 6,521 - 6,521 TOTAL LIABILITIES 764,221 316,462 1,080,683 NET ASSETS 71,335 87,140 158,475