GAZETTE NOTICE NO. 3771

the following members: (a)The Governor, who is• the chairman: (b)The Deputy Governor, who is the deputy chairman:_ (c)Two members appointed by the Governor from among the staff: (d)Four other members who have knowledge, experience and expertise in matters relating to finance, banking and fiscal and monetary policy, appointed by the Minister for Finance. Of the two members appointed from within the Bank, one has the executive responsibility within the Bank for monetary policy analysis: ana the other has the responsibility within the Bank for monetary policy operations. The Board of Directors has two sub committees with specific responsibilities and the chaimien of these sub-committees submit regular reports to-the Board through the Seeretariats. The committees and their respective responsibilities are as follow& AUDIT COMMITTEE The Audit. Committee is chaired by Dr. William O. Ogara and has three other members who ate Non-Executive Directors having experience in Accounting. Auditing; Banking, Inforthation Technology and Financial Management The committee currently meets on "a monthly 'basis and as necess,ary. Its responsibilities are to: Keep under review the efficiency and effectiveness of. internal controls in the Batik: • • Keep under review financial information and improves the quality of financial reporting with particular attention to compliance with legal and reporting requirements • Receive and consider the Bank's Annual Budget; • Review the.efTectiveness of the Internal Audit Function and reports received there-from: • Review the External Auditors Audit scope timetables and apprOach:their performance and their findings:. • Recommend on the aPpointment of the external auditors and their fees: • • - Review the Banles'annual financial statements prior to their submission lathe Board: • Review the Banks' Risk Manarthent Policies and Procedure& HUMAN RESOURCES COMMITTEE The Committee is presently chaired by Ms. Agnes Wanjiru and membership includes three other Non-Executive Directors with the Governor and the Deputy Governor in attendance. The Committee meets regularly as and when need arises to review human resource policies and make suitable recommendations to the Board. MANAGEMENT STRUCTURE The Central Bank's Senior Management team is made up of the Governor, the Deputy Governor and the heads of the Bank's various departments as indicated on page I. The positions of Governor and Deputy Governor are set out by statute in the Central Bank of Kenya Act (Cap 491) of the Laws of Kenya. The Senior Management meets regularly to review the overall performance of the Bank. There are various other. Management Committees, which advise the Governor on specific issues in order to enable him to discharge his responsibilities as the Chief Executive Officer of the Bank. DIRECTORS' EMOLUMENTS AND LOANS The remuneration paid to the Directors for services rendered during the financial year 2007/2008 is disclosed in note 28 (iv) of the financial statements. The Non Executive Directors are paid a monthly retainer fee and a sitting allowance for every meeting attended. There were no loans to Non-Executive Directors during the year while Executive Directors are paid monthly and are eligible for the staff loans. 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 apply to the entire Bank's staff under the staff rules and regulations. INTERNAL CONTROLS The management of the Bank has put in place a series 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 and Disposal Act, 2005. In all operational areas of the Bank, workflows have been structured in a manner that allows adequate segregation of duties. - AUTHORISATIONS All the expenditure of the Bank must be authorised in accordance with a comprehensive set of Bank policies and procedures. There is a budget, which is approved by the Board before commencement of the financial year. The Board receives regular management accounts comparing actual outcomes against budget as a means of monitoring actual financial performance of the Bank. INTERNAL AUDIT The intemal audit function is performed by Internal Audit and Risk Management department which is also responsible for monitoring and providing advice on the Bank's risk management framework. All reports of the Internal Audit are available to the Audit Committee of the Board. TRANSPARENCY The Bank publishes an Annual Report, Monthly Economic Review, Weekly Releases, Statistical Bulletin and Bi-annual Monetary Policy Stateinent which explains current monetary policy and also provides the expected monetary policy stance. In addition, the Bank issues policy briefs to the Treasury on both the monetary and fiscal policies. On an annual basis, the Financial Report is published in the Kenya Gazette. REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF CENTRAL BANK OF KENYA Report on the Financial Statements We have audited the accompanying financial statements of the Central Bank of Kenya, as set out below which comprise the balance sheet as at 30th June, 2008, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors' Responsibility for the Financial Statements The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasorrableness of accounting estimates made by directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 24th October, 2008 THE KENYA GAZETTE Opinion 12.108 9,872 1.1_716) (.0161 18,392 8,856 3,156 5.243 54 (9.337) 14.023 5.083 j5.028) (5.469) A222 J11101 4,000 Interest income Interest expense Net interest income Fee and commission income Netforeign exchange gain/ (loss) Other operating income Operating expenses Profit/ (loss) for the year Dividends: Proposed dividend for the year In our opinion. the accompanying financial statements give a true and fair view of the state of financial affairs of the Bank as at 30 June 2008 and of the profit and cash flows for the year then ended in accordance with the International Financial Reporting Standards and the requirements of the Central Bank of Kenya Act. Report on other matters We also report to you, based on our audit, that: • (i) We have obtained all-the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit: (ii) In our opinion, proper books of account have been kept by the Bank, so far as appears from our examination olthose books: and, (iii)The Bank's income statement and balance sheet are in agreement with the books of account. Nairobi 29th September., 2008. INCOME STATEMENT FOR THE YEAR ENDED 38TH JUNE, 2008 2008 2007 Note KShs million KSlos million BALANCE SHEET AS AT 30TH JUNE, 2000 2008 2007 ' ASSETS Note KShs million KShs million Balances dee Reim banking institutions and Gold holdings 223.486 180.878 InternationatMonetary Fund 10 206 5 Items in thevoirse of collection 11 2.885 589 Investment shOgOvernment securities 12 8.539 4 I.oans and ORVOrices 13 3.460 3.142 Other assets 14 1.244 1.562 Retirement trillitilt asset 15 55 240 Property andeepripment 16 368 591 Prepaid operitiffig lease rentals 17 278 282 Intangible turtitts 18 18 49 Due from Government of Kenya 19 34.439 ' 35.349 TOTAL AAA 22541,4 223,491 LIAM Unlit ■ Currency in circulation 20 , 99.750 89.799 Deposits 21 131-.141 91 339 Irnernationsi Monetary Fund 10 19,697 15.740 Amounts repayable under repurchase agreements 22 1.807 15.626 Other liabilities 23 4.529 1.728 TOTAL.LIABILITIES 256.924 214.232 EQUITY AND RESERVES Share capital 24 1,500 1,500 General reserve fund 25 12,754 7,759 Proposed dividend 8 4.000 TOTAL EQUITY AND RESERVES 18.254 9.259 TOTAL LIABILITIES AND EQUITY P5 178 223.491 The financial statements were approved by the Board of Directors for issue on 25th September, 2008 and signed on its behalf by: NJUGUNA NDUNGU WILLIAM 0. OGARA Governor Director STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30TH JUNE, 2008 Year ended 30 June 2007 Share capital KShs million General reserve fund KShs million Proposed dividend KShs million Total KShs million Balance at start of the year 1,500 8,145 2,000 11,645 Loss for the year (386) (386) 2006 dividends paid (2.000) 12.000) Balance at end of the year 1,500 Year ended 30 June 2008 Balance at start of the year 1,500 7,759 9,259 Profit for the year 8,995 8,995 Proposed dividend (4.0001 4.1240 Balance at end of the year 1 500 4,0 )0 18.254 CASH FLOW STATEMENT FOR THE YEAR ENDED 30TH JUNE, 2008 Note 2008 KShs million KShs million Operating activities Net cash generated from/(absorbed by) operating activities 27 (a) 39,214 (2,826) Investing activities Receipts of government loan 1,110 Purchase of property and equipment (120) (151) Purchase of intangible assets (55) Proceeds from disposal of property and equipment 81 6 Proceeds in International Monetary Fuqrl-SDR accounts (201) Net cash from /(used in) investing activities 81Q 1 On Financing activities Dividends paid (2,000) Currency in circulation 9.951 13.592 Net cash from financing activities 9.951 11.592 Net increase ;n cash and cash equivalents 50,035 8,574 Cash and cash equivalents at start of year 175.265 166,691 Cash and cash equivalents at end of year 27 (19 225300 175,265 ACCOUNTING POLICIES FOR THE YEAR ENDED 30TH -1. •'SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in thepreparanion of these financial statements are set out below: (a) Hails of preparation of flnancial statements (i) Basis of preparation The financial statements are prepared in compliance with International Hnancial Reporting Standatds (IFRS) and. Interpretations of those Sindards, The financial statements are:presented in millions of Kenya Shillings (KShs million) and are prepared under the historical coat convention except for measurement at fair value of certain investments. •(ii) Form of presentation exceptional: circumstances, as allowed by Section 36 of the Act, the Bank- may act as the "kinder of last resort" to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole. In some cases. confidence can best be sustained if the Bank's support is disclosed only when the conditions giving rise m potential instability in the economy have improved. Although the financial effects of such operations are included in the.financial statements oldie Bank, these statements may not explicitly identify such support. (ill) Changes is anconstinipolicies The accounting policies adopted are consistent with those ofthe previous financial year except as follows: !FRS 7 Financial Instruments: 'Disclosures This standard requires disclosures that-enable users of the financial statements to evaluate he significance of the Bank's financial instruments-and the nature and extent of risks arising from those financial instruments. Thenew disclosures are 'included throughout the financial statements. While there hai been no effect on the financial position or results, comparative information has 'been revised where needed. . , • lAS .1 Presentation ofFinancial Statements This amendment requires the Bank to make new disclosures to enable users of the financial statements to evaluate the Bank's objectives, policies and processes for managing capital. • (iv) Standirds, Amendments and Interpretationi Effective In 2008 but not Relevant The following standards, amendments and interpretations are mandatory for accounting periods beginning on 1 April 2007 but are not relevant to the Bank's operations: • - ' ■ IFRIC 11, IRS 2 — Group, and Treroany Share Tmnsacticourfeffective from .1.March 2007); • IFRIC Servile Concession Agreements (effective from 1 January 2008), • IPRIC 14, lAS 19 - The limit on a defined benefit asset; minimum funding requirements and their interaction (effective from 1 January 2008) •• (v) Steldneds, Amendments aid Interpretations that be been *slid lad are not yet -Effectiviaor the Baak'8 Operations • At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue, but not yet effective for the Bank's operations: ■ IFRS 2, Amendments to IFRS 2 Share-based Payment - Vesting Conditions and Cancellations (effective froM t January 2009) • IFRS 3, Business Combinations (effective from lJuly 2009) • IFRS 8,Operating Segments (effective front 1 January 2009) • lAS 1, Presentation Of nnancill Statements amendment (effective from 1 January 2009) • lAS 23 Borrowing Costs (effective from 1-January 2009) • JAS 27, Consolidated and Separate Hmincial Statements (effective from 1 July 2009) • LAS 32, Amendments to IAS 32 Financial Instruments: Ptesentation and 1A$ 1 Presentation of Financial Statements Piittable Financial Instruments and Obligations Arising on Liquidation (effective frnm 1 January 2009) IFRIC 13, Customer Loyalty Programmes (effective from 1 July 2008) • The directors anticipate that the adoption of these standards will have no material effect on ,the financial statements of the Bank. (b) Significant accounting jodgements and estimates The preparation of financial statements in conformity with IFRS, requires the use of estimates and assumptions that affect the reported amounts of assets and liabPities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses duting the reporting period. Although these,estimates are based on the directors' best knowledge of current events and actions, actual results ultimately may differ"from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates arc recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision Affects both current, and future periods, The most significant use of judgement and estimates are as follows: (i) Impairment lows on loans and advances THE KENYA OAZETTE 2723 240 October, 2004 - The Bank reviews its loans and advances at each reporting date to assess whether an allowance for impairment should be recognised in the income stater* In particular, judgement by the directors is required in the estimation of the amount and timing of future cash 2724 THE KENYA GAZE! I E 24th October, 2008 flows when determining the level of allowance required. Such estimates are based on the assumptions about a number of factors and actual results may differ, resulting in future changes in the allowance. In addition to specific allowances against individual significant loans and advances. the Bank makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This takes into consideration such factors as any deterioration in industry, technological obsolescence. as well as identified structural weaknesses or deterioration in cash flows. (ii)Pensions The cost of the defined benefit pension plan is determined using actuarial valuation.The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. See note 15 for assumptions used. (iii)Property, equipment and intangible assets Critical estimates are made by the management in determining depreciation and amortisation rates for property, equipment and intangible assets. The rates used are set out in the accounting policy (0 and (g) below. (iv)Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the balance sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. (c) Revenue recognition Income is recognised in the period in which it is earned. (i) Interest income and expenses Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. Interest income includes coupons earned on fixed income investment and trading securities and accrued discount and premium on treasury hills and other discounted instruments. (ii)Fees and commission income Fees and commission income, which arise from financial services provided by the Bank, are recognised when the corresponding services are provided. (d) Translation in foreign currencies Transactions in foreign currencies during the year are converted into Kenya Shillings at rates ruling at the transaction dates. Assets and liabilities at the balance sheet date which are expressed in foreign currencies are translated into Kenya Shillings at rates ruling at that date. The resulting differences from conversion and translation are dealt with in the income statement in the year in which they arise. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (e) Currency printing and minting expenses Notes printing and coins minting expenses which include ordering, printing, minting, freight, insurance and handling costs are expensed upon delivery of currency stock. (f) Employee benefits. (i) Retirement benefits The Bank's employees are eligible for retirement benefits under a defined benefit plan provided through a separate fund scheme administered by Trustees and funded by the Bank. Deposit Protection Fund Board, a related party, reimburses the Bank the costs of contributions relating to staff seconded to it by the Bank. The Bank's net obligation in respect to the plan is calculated by estimating the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine the present value and the fair value of any plan assets is dedutted. The calculation is performed by a qualified actuary using the Projected Unit Credit Method. Where the calculation results in a benefit to the Bank, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reduction in future contributions to the plan. Actuarial gains and losses are charged to the income statement over the remaining working lives of the employees participating in the scheme. The Bank also makes contributions to a statutory pension scheme, the National Social Security Fund (NSSF). Contributions to the scheme are- determined by local statute and are shared between the employer and employee. The Bank's contributions in respect of retirement benefit costs are charged to the income statement in the year to which they relate. (ii) Other employee benefits The Bank provides free medical treatment to staff and their dependants. The cost is charged to the income statement. 24th October,-2008 THE KENYA GAZETTE • 2725 The estimated monetary liability for employees' accrued leave entitlement at the balance sheet date is recognised as an expense accrual. (1) Property and equipment Property and equipment anei.eited at purchase price less accumulated depreciation lesi any accumulated , impairment losses. Depreciation is computed on,the straight tine basis, over the estimated useful lives of the assets at the following rates: Building improvements 10% Motor vehicles, furniture and equipment 50%' An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any loss Dr, gain on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in other operating income in the income statement in the year the asset is derecognised The asset's residual values . useful lives and methods of depreciation are reviewed, and adjusted if appropriate at each financial year end. (h) Intangible assets - Intangible assets consist-of computer software. Intangible assets acquired separately are measured on initial recognition at cost. Following . -initial reeognition. intangible assets are carried accost less accumulated amortisation and any•accumulated impairment loss. . The useful lives of intangible assets are assessed to be finite and are amortised over the useful economic life. The useful life is reviewed at least at each financial year end. The amortisation expense on intangible assets is recognised in the income statement. Amortisation is calculated using the straight line method to write 'down the cosi of intangible assets to the residual values over the estimated useful life as folloWs: Computer software 50% (i)- Impairment of other assets • Impairment of property, plant and equipment are assessed at each balance sheet date or more frequently where any events or changes in circumstances dictate for indications-4 impairment. If significant indications are present. these assets are subject to an impairment review by estimating the recoverable amount. An impairment loss is charged bet income statement when the carrying amount of an asset exceeds the recoverable amount. PreViously recognited impairment loss of related asset may be reversed in part or in full when a change in circumstances leads increase of _recoverable amount. The carrying amount-of the fixed asset will only be increased up to the amount that it would haVe been had the original impairment not been recognised. For the purpose of measuring and accounting for impairment loss; either fair value or value in use of an asset is compared with carrying amount. (i) Financial Instrtunents A financial instrument is any contract that gives rise to both a financial' asset of one entity and a financial liability or equity instrument of another entity. (ff Date of recognition Purchases or sales of financial assets that requiredelivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, which is the date that the Bank commits to purchase or sell the asset. (ii)Recognition and initial measurement The classification` of financial instruments at initial recognition depends on the purpose.for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus. in the case of financial assets and financial liabilities not at fair value through profit or loss, any directly attributable-incremental costs of acquisition or issue. . (iii)Classification and measurement The Bank classifies its-financial assets in the folloWing categories: loans and advances and investments' that are held to maturity.The Bank determines the classification of its investments at initial recognition. (1) Loans, advanceti end receivables Loans and advances are non-dtrivatiVe financial assets with fixed or determinable payments that are not ginned in an active market. They arise when the Bank provides money or services directly to countcrparty with no intention of trading the receivable. The Bank has classified the following financial- assets as loans and reeeivables originated by the , entity: loans and . advances. amounts dues from -the Government. other assets. IMF related assets and cash and cash equivalents. After initial - measurement, loans and receivables -are carried at amortised cost using 'effective interest method, less any allowance for impairment. - As the lender (Oast resort, the Bank may grant loans or advances for fixed periods not exceeding six months to commercial banks that pledge Government securities specified by the ,Bank. ; its capacity as the fiscal agent and banker to the Government. the Bank may` make direct advaneeS to the -(iovemment the purpose of offsetting fluctuations between receipts from the budgeted revenue and the payments of the Government. The total amount of advances to the Government outstanding shell not exceed fiVe percent of the gross recurrent revenue of the Government as shown in ihe. ttpPropriation Accounts for the lateSt year for Which- those financial statements have been audited by the Coatroller and Auditor-General. The Bank also operates a staff loans scheme for its employees for the provision of facilities such as house and car loans. The Bank determines the terms and conditions for granting of the above loans with reference to the prevailing market interest rates and may determine different rates for different classes of transactions and maturities. (2)Held to maturity Investments classified as held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in 'Interest income' in the income statement. The losses arising from impairment of such investments are recognised in the income statement line 'Impairment losses on financial investments'. Were the Bank to sell other than an insignificant amount of, such assets, the entire category would be reclassified as available for sale. The Bank currently classifies Government securities, repurchase and reverse purchase instruments as held to maturity. (3)Financial liabilities Financial liabilities are measured at amortised cost except for financial liabilities desigr.ated at fair value through profit and loss. Financial liabilities are initially recognised at fair value less, in the case of liabilities carried at amortised cost (including due to banks, due to International Monetary Fund other deposits and other funds borrowed), trgnsaction costs incurred and any difference between the proceeds net ortransaction costs and the redemption amount is recognised in the income statement as interest expense over the period to maturity using the effective interest rate method. Financial liabilities which are repayable on demand are recorded at nominal value. Financial liabilities are derecognised when they are extinguished. Deposits irpresent reserve deposits of depository institutions' participants and current accounts of the Bank. The Bank has classified the following financial instruments as financial liabilities: currency in circulation, deposits, IMF Related liabilities and other liabilities. (iv)Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all of the risks and rewards of ownership. , The gains and losses on investments held to maturity and loans and receivables are recognized in the income statement when the investments are derecognized. (v)Gains and losses on subsequent measurement Gains and losses on amortisation of premiums or discounts of financial instruments carried at amortised cost are recognised in the income statement of the period in which they arise. Gains and losses due to impairment are recognised as stated in the paragraph dealing with impairment. (vii)Offsetting Financial assets and financial liabilities are offset and the net amount reported on the balance sheet where there is a legally enforceable right to set off the recognised amount and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously. (viii)Impairment of financial assets Loans are stated at outstanding amount less provision for impairment. A review for impairment is carried out at each financial year-end. A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. Specific provisions for loan impairment are made in respect of advances. The provisions ase based on periodic evaluations of advances and take account of past loss experience, economic conditions and the estimated value of any underlying collateral, and are charged to the income statement. If there is objective evidence that an impairment loss on assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (which is the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss shall be recognised in the income statement If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Any subsequent reversal of an impairment loss is recognized in the income statement. (k) Amounts Repayable under Repurchase Agreements (REPOs) REPO is an arrangement involving the sale for cash, of security at a specified price with a commitment to repurchase the same or similar securities at a fixed price either at a specific future date or at maturity. (i) The Bank treats REPOs as collateralized loans for accounting purposes. In this case, a Repo is recorded as a secured advance and is shown separately as REPO Agreement. '(ii) REPOs continue to be recognised in the balance sheet and are measured in accordance with policies for non-trading investment. (iii) The difference between sales and repurchase price is treated as interest expenditure and is recognised in the income statement. (ii) Bank asa keine INTEREST INCOME Foreign investments earnings !zeal hivestmentrinimings Other inte[estcarmmp It minims 10.431 liSite million 8,440 1,343 2.62a (I) Currency in cireniedon Currency issued by theBink represenis a claim on the Bank in favour of the-holder: The liability for currency in cheulation is recorded at face value in these financial statements. Currency in circulation represents the face value of notes and coins in circulation. Notes and 'coins _ held by the Bank as cash is main vault, intermediary vault, and cashier at the end of financial year are netted off against the liability for notes and coins in circulation because they do not represent currency in circulation. (m) Dividends Dividends are recognised as a liability in the period in which they are declared. Proposed dividends are disclosed as a separate component of equity when they are (led:red. (n)Proviions Provisions are recognised when the Bank has a present obligation/ (legal or constructive) as s result of past eventsvand it is probable that an outflow of resources embodying economic benefits will be requited to settle the obligation and a reliable estimate can be made of the amount of the obligation. — The calculated monetary liability for :employees' accrued annual lea've entitlement at the balante sheet date. is recognised as an expense accrual: (0) Offsetthy of financisi assets and liabilities Rnancial assets and liabilities are offset and the net amount reported on the balance 'sheet when there is at legally enforceable right to set-off the recognised amount and-there is an intention to settle on a net basis, or to realise the asset and settle the liability simultancoesly, (p) Lea The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whetherthe fulfilment conk arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a tight to use the asset. (1)• _ Bank as a lessee nnance leases, which transfer to the Bank substantially all the risks and.benefits incidental ownership of the- leased item, are capitalisedat the inception of the lease at the fair value of theleased property Or, if lower, at the present value of the minimum lease payments anti inchided in 'Property and equipment' with the corresponding liability to the lessor included in 'Other liabilities.' Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Rnance charges are charged directly against income in Intereit Ind similar expense.' Capitalised-leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Operating lease payments are not recognised in the balance sheet. Any rentals payable are accounted for on a straight-line basis over the lease term and included in 'Other operating expenses'. - teases where the Bank does not transfer slibstatidally theriek and benefits of-ownership Of h AssererielaiSifieil is operating leases. The Bank leases out all of its invisnuent properties as operating leases, thus generating rental income. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease tern► on the same basis as rental imam. Contingent rents are recognised "AS revenue in the period is which they are earned. (q), ' Other assets Other assets are stated at fair value and subsequently at amortised cost using effective interest rate method less allowance fcit impairment Due to their short term nature, thelominal value oncost are considered to approximate the fair value and as such stated at cost less any impairment loss. (r)Other liabilities Other liabilities are stated at their nominal valuekost. which approximates fair value due tothe short:term, nature thereof. (s)Cub sad cash equivalents Cash and cash equivalents comprises of cash bariuutes, bank deposits, current accounts, gold holding, government securities with maturity of up to 3 months from the date of ism.Dold holdingsis measured at the closing market price at the end of the year. • INTEREST EXPENSE Interest on monetary policy issues Interest paid to IMF 1.640 968 _4a 4 FEES AND COMMISSION INCOME Commission on sale of government securities 3,152 5,236 Special projects agency fees S NET FOREIGN EXCHANGE GAIN/(LOSS) Gains on sale of foreign exchange 1,319 508 Foreign exchange translation loss (1.265) (9.8451 (9 3371 6 OTHER OPERATING INCOME Rent received 16 17 Proceeds from disposal of property and equipment 81 6 Tuition fees and other charges 33 43 , Hospitality services 159 156 . Miscellaneous income 132 . 99 421 321 7 OPERATING EXPENSES Currency printing expenses 403 1,248 Depredation on property and equipment 144 254 Property maintenance expenses 519 388 Auditors' remuneration 4 4, Banking expenses . 4 4 Operating lease rentals 3 3 Amortisation on in,ingible assets - 31 19 Staff costs 3,261 2,956 Other expenses 659 123 28 5.469 8 DIVIDENDS The Board of Directors recommend payment of a dividend of KSh. 4 billion for the year ended 30th June, 2008. (2007: Nil). 9 BALANCES DUE FROM BANKING INSTITUTIONS AND GOLD HOLDINGS KShs million KShs million Current accounts 4,423 2,333 Term deposits 210,866 171,262 Domestic forex currency chequrclearing 1,438 1,641 Forex travellers cheques _...........€ _____ Cash and cash equivalents 216,733 175,241 Accrued interest on foreign investments 2.274 1.132 Total own resources 219,007 176.373 Special project accounts 4.451 4.485 223,458 180,858 Gold holdings 223,486 190,879 The Gold Holdings held amounted to 474 volume in Troy Ounces (2007- 474). 10 INTERNATIONAL MONETARY FUND Special Drawing Rights (SDR) is an internal reserve_asset credited by the IMF and allocated to member countries in order to increase international liquidity. The SDR is defined in terms of a basket of currency and its value is determined as the weighted sum of exchange rates of few currencies such as US dollars, Sterling Pound, Euro and the Yen. 11.812 (83521 8,337 8,259 2,422 2312 1:4/0 12.023 03.281) 3.742 (8,281) (8,281) (78) (2) --2 Advances to banks under liquidation Government overdraft account (see below and Note 28) Advances to employees (Note 28) IMF funds on-lent to the Government (Note 28) Ptriviiittn for loan iMPitirittent Net advances as at 30 June Movement in the provision for loan impairMentis as follows: At start of the year Additional provisionsmade in the year Recoveries in the year . 24 whet_ THE CA bAirrtg Kenya has been a member of the International Monetary Fund (IMF) since 1966. The Bank is thedeiannmetilleposilory,for Our INIFs 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. Hank. jT SDR 000' KShs MilliOn AGSM million IMF balances (SpRAC4011r4) - am; Jak —A International Monetary Fund Account No. 1 20 2,134 20 2,042 , International Monetary Fund Account Ho. 2 International Monetary Fund—PRGF Account 122 16,510 122, .12,287 International Monetary Fund • On-lent to Government of Kenya asi 1.411 —14 1.414 1LA22 On a custodial basis, the Bank holds a non-negotiable, non: interest bearing and encashable on demand security issued by the Treasury in favour of the IMF in its capacity as the IMF's depository. Security at 30 June 11 ITEMS IN THE COURSE OF COLLECTION 2007 Mit mignen -KShii *Wien Items in the course of collection The balance represents—talues of clearing instruments which are held by the Bank-White swatting dearth, ity respective Commercial banks. 12 . INVESTMENT IN GOVSZNMEN1' SECURITIES Reverse REPOS Treasury Bonds Treasury Bills and Treasury Bonds-discounted Mt million 7,042 All the government securities held have a maturity date of within 90 days from the date of acquisition. 13 LOANS AND ADVANCES 2008 - KSIss million •At end of the year (3,352) Section 46(3) of the Central Bank of Kenya:Act sets the limit of -the Government of Kenya's overdraft facilitY at 5% of the Grois Recurrent Revenue as reported in the latest audited .financial statements. The limit stands at KShs 14,818.521.441 based on the -:--.Government financiistatements for 20092006 which are the [atilt audited financial statements at the dateof "approval of these financial statements. The limit for the previous year was KShs 13,268,817,798 based on the Government financial statements for 2004/2005. 14 , OTHER ASSETS 2008 2007 KShs million KSheinillion Prepayments 966 1,290 Advances _221 .171 1,244 1.562 1185a .1.1.111 15 RETIREMENT BENEFIT ASSET The Bank's employees are eligible for retirement benefits under a defined benefit plan provided through a separate fund. The defined benefit plan is funded by the Bank and the Deposit Protection Fund Board, a related party. The retirement benefit asset is wholly recognised in the financial statements of the Bank while the Deposit Protection Fund Board recognises contributions to the fund as if it were a defined contribution scheme. The amounts recognised in the balance sheet are determined on the basis of an actuarial review carried out by Alexander Forbes Financial Services as at 30 June 2008. 2008 2007 KShs million Present value of funded obligations (10,496) (9,416) Fair value of plan assets 12.116 11774 Present value of net asset 1,640 1,358 Unrecognised actuarial gain (1.5851 iL11.8) Asset in the balance sheet 142 The amounts recognised in the income statement are as follows: Current service costs 532 498 Interest costs 847 738 Expected return on plan assets (955) (845) Net actuarial gains recognised in the year Total expenses included in operating expenses 112 121 Movements in the net asset recognised in the balance sheet are as follows: Net expense recognised in the income statement 419 391 Employer contributions Mil Movement in the asset recognised in the balance sheet Actual return on plan assets The principal actuarial assumptions at the balance sheet date were: 2008 2007 Discount rate (p.a) 9% 9% Salary increase (p.a) 7% 7% Expected return on plan assets (p.a) 9% 9% Future pension increases 0% 0% 16 PROPERTY AND EQUIPMENT 30 JUNE 2008 Cost At start of year Additions [and and buildings KShs million 1,004 vehieks KShs million 54 Furniture and equipment KShs maids 3,065 Total KShs milion 4,253 Disposals 1121 all ___LII _(.41) At end of the year 2$2 /Li 3;134 2 Depreciation At start of the year 942 157 2,563 3,662 Charge for the year 9 34 100 143 Eliminated on disposal _5121 1231 ___Lll _(4l) At end of the year -234 la LW 3-2.64 Net book value At 30 June 2008 la 2 OA lia 30 JUNE 2007 Cost At start of year 1,004 205 2,824 4,033 Additions 151 151 Adjustments 90 90 Disposals all - _1211 At end of the year .L12(14 184 3.065 4.253 TH4-furvit 2731 At start of the year 141 2,277 - 3.339 - Charge tor the year 37 254 Adjustments 90. Eliminated on disposal At end of the 'year Net book value At M Jane 2007 - fta 211 In 2007, the Bank carried out a physical verification of its property and equipment. As a result computer equipment previously written off front the books were reinstated in the general ledger. These amounted to KShs 90 million and had been fully depreciated. 17 PREPAID OPERATING LEASE RENTALS Operating lease rentals are carried at historical cost less amortisation over the period of the lease. The breakdown is as follows: 2100 2007 , K.Shs million KShs Nation Cost At 30 June 300 300 • Amortisation At 1 July 2007 and 206• 15 Amortisation for the year —1 At end Of die year Net carrying value at end of the year 18 INTANGIBLE ASSETS Cast At 1 July 2007 and 2006 . 179 125 Additions At end of the year 180 180 AinorthratiOn • At 1 July 2007 and 2006 131 112 Amortisation for the year At end of the year 1.41 121 Net carrying value at end of the year 19 DUE FROM GOVERNMENT OF KENYA Loins dire fromthe Government At start of the year 35.549 35,549 Receipts during the year (LI WI At end of the year 1/1.112 The loan due from the Government of Kenya arose from overdrawn accounts which were convened to.a loan with effect from 1 July 1997 after an amendment to the Central Bank of Kenya Act. On 24 July 2007, a deed of guarantee was signed between the Government of Kenya and the Bank in which the Government agreed to repay 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 ate specified in Section 46(5) of the Central Bank of Kenya Act. CURRENCY IN CIRCULATION 200 2007 KShs mash KShs million Kenya notes 95,993 86.310 Kenya coins 3,752 3,484 Commemorative coins 22= t2.74 21 DEPOSITS Banks -Kenya 53.868 39,441 -External 21 25 Local Banks forex settlement accounts I .239 1,444 Non-bank financial institutions -- 119 Other public entities and project accounts Government of Kenya 8,506 9,244 67307 41.066 22 AMOUNTS REPAYABLE UNDER REPURCHASE AGREEMENTS These are securities issued and utilised by the Bank for monetary policy purposes and are shown as a liability to the buyers. 23 OTHER LIABILITIES Impersonal accounts Sundry creditors Refundable deposits Development deposits 2008 2007 KShs million KShs million 3,467 991 728 513 234 187 1011 —12 4,529 1,728 24 SHARE CAPITAL Authorised share capital Issued and fully paid 1_500 Subsequent to the year end, the Board in consultation with the Minister for Finance has approved to increase the paid up capital to KShs 5 billion by capitalising KShs 3.5 billion from the general reserve fund. 25 GENERAL RESERVE FUND The general reserve fund is a fund where at least 10% of the net annual profits of the Bank is transferred at the end of each financial year. This is after allowing for expenses for operation and after provision has been made for bad and doubtful debts, depreciation in assets, contribution to staff benefit fund, and such other contingencies and accounting provisions as the Bank deems appropriate. 26 CAPITAL MANAGEMENT Capital includes the share capital and the general reserve fund. 2008 2007 KShs million KShs million Share capital 1,500 1,500 General reserve fund 16.754 7.759 18,254 Movements in equity capital during the year are explained in the Statement of Changes in Equity above. The Bank is not subject to any regulatory requirements concerning the level of capital it must maintain, although the Central Bank Act sets out how the statutory annual net profit for the year shall be allocated. The principal source of capital increase is through retention of the undistributed element of the profit. The Bank is not a not-for-profit organization, nor does it seek profit maximization. Instead it seeks to make a profit commensurate with normal market returns in areas where it conducts normal commercial operations. Cap:' 1 is not actively managed and the relatively low risk nature of most of the Bank's activities means that it is not capital intensive. Its pu. ?ose to cover unexpected losses. The most significant unexpected losses are likely to arise out of support operations and the Bank's role as lender of last resort or from losses on the foreign exchange reserves should the Kenya shilling appreciate significantly against ( world currencies. 27 NOTES TO THE CASH FLOW STATEMENT (a) Cashflows from operating activities KShs million KShs million Net profit /(loss) for the year 8,995 (386) Adjustments for: Depreciation of property and equipment 143 254 Amortisation of prepaid operating leases 4 3 Amortisation of intangible assets 31 19 Decrease in defined benefit scheme asset 185 154 Gain on disposal of property and equipment (81) (61 Operating profit before working capital changes 9,277 38 Net decrease in loans and advances 282 5,541 Decrease in amounts repayable under repurchase agreements (13,819) (7,716) Increase/(decrease) in deposits 39,802 (9,479) Increase in balance with International Monetary Fund 3,957 2,152 Increase in project accounts 34 899 Increase in accrued interest on balances due from banking institutions (1,142) (222) 24th October, 2908 Ttig iSENArA „GAMTE RiMuneration to senior management (vi) Government of Km! Transactions entered into with the Government include: Bingni fer'Oces; -- (b) 1Ytanrngn mFnt of issue and rederinptj92 or securities at a commission and Poieign currency denominated debt tintOement and otherrnmittances at a fee.. •f". At it IBC closeof bintinern on 30 June, thelollowing balances* which are included is wation.balsoc. sheet categories. ware-outstanding: KSlis 2001 - Idlis million :2007 34,43 Due from Gottenattitat of KetiYitiNote I9Y • Overdraft account (Note 13) 1,053 IMF funds.on-jent to the Government (Note 10) 'Government of Kenya deposits (Note 21) 67,507 11.22 Investments in GOK Securities (Note 12) Increase in items in the course of collection Decrease in other assets Increase in other liabilities „ Noteashigenetentadtreatffsheorbed by) *pennies. (b) Cash and cash equivalents KSlis million 171,262 2,333 1,641 _2Q- -175,261 17.5.16ff 28 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, and The. Deposit Protection Fund Board. (I) Leine The Bank extends loan facilities to its members of staff, the Governor and the Deputy Governor. Loans and advances :(Nete 13) include advances to employees that as at 30 June 2008 amounted to KShs 2,422 million (2007: T1e advances are at referendal rates of interest determined by the Bank. .-Lonneinsfleennivailirectent = At matt of year Loontiadvanced-during the year Loan repayments At end of the year (iii) Loans to key management personnel ' At stair oethe Year - leans advanced during the year Loan MarilentA, 'At i'nd ad,* year (lv ) Feesto non executive directori Other remuneration to executive directors kilis-a pion 14 (2,296) Cash and cash equivalents included in the cash flow statement comprise the following: Term deposits Current accounts Domestic forex cheques clearing TravallarsChequee Gold holdings - Investment in Government securities ICUs million 210.866 4,423 1,438 6 ' 21041' .4699 35,549 1,410 41,066 SLIBIZSA (vii)Deposit Protection Fund Board The Bank has a close working relationship with The Deposit Pn3tection Fund Board, an entity incorporated under the Banking Act, and provides it with staff and office accommodation. Certain costs incurred on behalf of The Deposit Protection Fund Board are fully reimbursed to the Bank. The balance outstanding from The Deposit Protection Fund Board and included in other assets as at year end was KShs 15 million (2007: KShs 23 million). (viii)Kenya School of Monetary Studies The Kenya School of Monetary Studies is a registered legal entity wholly owned by the Bank. The School is operated as a department and !vaults of its operations are incorporated in the financial statements of the Bank. 2! RISK MANAGEMENT (i) Structure and Reporting The Board of Directors is responsible for the overall risk management approach and for approving the risk management policy and strategies. There are other organs that monitor the assessment and management of risks within the Bank including; (a)Audit Comrnittee of the Board The Audit Committee assists the Board in the fulfilment of its oversight responsibilities. Regarding risk management, the Committee oversees the process of risk management by receiving and discussing risk management reports and guiding and monitoring the implementation of recommended mitigating controls/ initiatives. . Bank Risk Management Committee The purpose of the Bank Risk Management Committee is to identify the nature of risks affecting the Bank and the processes by which these risks are to be managed. The Committee monitors external developments relating to all financial, business and strategic risks associated with the operations of the Bank. The Committee is further, charged with the responsibility of reviewing the adequacy and overall effectiveness of the Bank's risk management and business continuity management frameworks and oversees the inculcation of. a risk philosophy and implementation of a risk strategy and policy across the Bank. In executing its mandate, the Committee receives and considers risk assessment reports from Internal Audit and Risk Management Department. (b)Internal Audit and Risk Management Department (IARM) The Internal Audit arm of IARM Department employs risk-based audit approach in planning and carrying out its audit engagements. The Risk Management function facilitates risk assessments by individual departments where risks are identified, analyzed and mitigating measures agreed upon. The business processes are assessed with regard to business continuity procedures, physical safety, system safety, conformity to legal requirements and regulations, sufficiency of human resources and information safety. In addition, the financial risks and reputation risks are also determined. Controls that are designed to reduce these risks to acceptable levels are assessed in terms of sufficiency and effectiveness; additional controls are recommended in brder to increase effectiveness. Following the risk assessments, the major risks and recommendations are used to update the Bank's risk register and regularly reported to the Bank Risk Management Committee and the Audit Committee. Action plans that are taken to reduce the risks to acceptable levels are monitored. (ii) 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 movements. 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. In view of the Bank's reserve management policy of safe investment/ liquidity and retum, 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. (iii) 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: I) Credit risk 2) Market risk - Interest risk - Foreign currency exchange risk 2.453 4314141 - - lid KENYA GAkETTE 7735 3)Ldquidity risk Non financial Risks include: 4), Ointadosal risk 5)Waimea resource risk 6)teest risk 7)RePutationth risk rimetela Risk (a)Credit skit During lut financial operideets. the:Bak is exposer!-th credit risk defined as the probability of a complete or partial Ware of corstherruty to AIM its -obiiptione'thisingfran-a financial ninsattirtei: The credit risk bakaii3Orightitee fian the inveatinethe made of deposit placements if on their maturity the depository bank is unable to pay.: " ' • . . The management of the reedit dot that the Batik is exposed 16' &wing the Attar exchnge ieserve irmagermth Is based on the piinc. iplq, of minimizing default probabilities of the aounterpatties and the linineial loss in care of default. The choice of depoithery tank. for deposit placements is a crucial consideration-in credit and "sovereign risk manageinent. Currendy. the Bank's choice of depository banks is confined to the top 200 international beaks that meet the set eligibility criteria of financial soundness on long-tens credit rating. short-term credit .rating. composite rating and capital adequacy. The current active animated depository banks holding the Bank's deposits number twenty one .(21) and their petfonnance is .reviewed periodically, based on petformanas ratings provided by international rating agency, Steh 1BCA. Deposit Placement limits are allocated ID individual banks based or their financial strength, and no individual bank holds more than 10% of the entire depositportfolio. To minimise the sovereign risk exposure, the eligible banks are distributed among 10 comities under the following set criteria; long-term credit rating of A+. short-arm credit rating of Fl. composite rating of B and MS capital adequacy ratio of 8%. The Bank undertakes its °potations in the Republic of Keriya. An analysis of the Bank's assets and liabilities by geographical area is given below: ' Aamis 290912807 1151ts Minim 21101120114 151st Maims Republic of Kenya 51,612 43.047 United Kingdom.. 124.291 112,097 Rest of Europe 95.413 65,474 United States of America 33314 2.857 Rest of the World • =LB 22142/ Lfibilides Republic of Kenya (b)Interest risk EWA This table show; the extent to which the floak's intend rate exposures on assets and liabilities are matched. hems are allocated to time bands by reference to the **diet of the next contractual inkiest rate repricing date and maturity date. -3 mosothe or lies Between 3-12 menthe ()vier 1 year New. interest bearing Tend Ulu minion %SU ICSke maim, XSks mains rush, sow, Assets Britancer due froM baking institutions - 219,035 and gold hOldingi ' lormntationsi Monetary Fund (SDR 206 Account) hems in the course of collection - Investment in government secluities Lbant and Within Meth Wets Properly plant and equipment Prepaid leaseholdlund • Intangible assets Retirement benefit asset. Due fian GovernmentOaria Tat lathsts 1.40101‘41 and - Cunene* in circulation Deposits Interadional Monetary Fund Amounts repayable undeentpurchase agreements *het liabilities ElnitY,And reserves T091110114111101 and egad hiciest seaddfdly 1p 2881 8.539 4A31 • 223.486 • 2.1185 2,885 8.539 3.460 1.244 1.244 580 568 278 278 48 " 18 55 55 34.432 2.492 ____ 99,7511. - 99,750 131.141, 19.697 „. 19.697 1407, 4.529 4.529 142224 2=21 Total Assets Total liabilities and equity Interest sensitivity gap 2007 (c)Market risk 176,476 106.971 2,044 37,173 7,798 116.520 223,491 223A91 49,505 UM (108.7221 Market risk signifies the probability of incurring a loss stemming from adverse market movements, usually in interest rates, currency exchange rates and asset prices. For the purpose of managing market risk, the Bank holds a diversified portfolio that spreads over the major world currencies with the following features; stability, widely traded, international acceptability and offering the best range of investment instruments. Guided by these features and the need to minimize transaction costs in external payments, the Bank invests its reserves in four key international currencies, namely, US dollar (USD), British pound (GBP), Euro (EUR) and the Swiss Franc (CHF). The distribution of these currencies in the portfolio is subject to review from time to time. However, to allow for flexibility in portfolio management, the mix benchmarks are allowed+ 5% within the following ranges: USD: 30 - 40% GDP: 45 - 55% EUR.: 10 - 20% CHF: 0 - 5% The net foreign currency position of the Bank as of 30 June 2008 and 2007 is summarized below. The table presented below provides the Bank's -assets, and liabilities, at carrying amounts, categorized by currency: The various currencies to which the Bank is exposed at 30th June, 2008 are summarised below (all expressed in KSh. million): Assets USD GBP EURO SDR GOLD OTHER TOTAL Balances due from banking institutions 73,789 108,802 40,326 - - 541 223,458 Special Drawing Rights - 206 - 206 Gold holdings __a Total assets 73.789 108.802 40326 29..6 223.692 Liabilities Balances due to IMF 19,697 19,697 Commissions for EEC Development Fund - 100 100 Forex bureaux deposits 1..112 _122 _161 _. 1396 Total liabilities .1.112 _222 16.1 19.697 21.193 Net balance sheet position 2008 MaZ 108,579 4Q,165 (19,491) 28 541 202,499 As at 30 June 2007 Total assets 90,458 69,003 21,365 5 20 32 180,883 Total liabilities 1.227 14.1 290 15.740 - 17.402 Net balance sheet position 2007 21.025 (15,7351 20 _32 163,481 (d)Liquidity risk Liquidity risk is defined as having difficulty in finding sufficient cash to meet the commitments that are due or being compelled to convert assets into cash at a price lower than their fair value. The choice of the types of instruments to invest the reserves in is part of liquidity risk management. The available instruments are governed by Section 26 of the Central Bank of Kenya Act which specifies the eligible instruments in which the Bank can invest its reserves including; gold, demand or time deposits and convertible and marketable securities of or, guaranteed by foreign governments or international financial institutions. In order to manage liquidity risk, the Bank invests its surplus reserves in time deposits with maturities concentrated in short-term maturity span of one to three months. The portfolio is structured in such a manner that a mix of deposits matures every week to ensure availability of funds to meet scheduled government and the Bank's obligations. The table below analyses assets and liabilities into relevant maturity groupings based on the remaining period at 30th June, 2008 to the contractual maturity date. On Due within Due between demand 3 months 3-12 months Due between 1-5yrs Due after 5 years Total ASSETS KShsmrAion KShs miAion KShs million KShs million KShs million KShs million Balances due from banking institutions and gold holdings • 12,798 210,660 28 223,486 International Monetary Fund(SDR 206 - 206 Account) Loans and advances 41 118 701 .. 1,772 828 3,460 Ihvestments in government securities 8,539 - - 8,539 ItemS in the course of collection 2,885 - 2,885 Other assets 1,244 - 1,244 Property, plant and equipment 148 366 568 24th October,2008 TUE IKENY4 GAZETTE 2737 Prep aid leasehold land Intangible assets Retirement benefit asset .Due from Govemnient of Kenya TOTAL ASSETS LIABILITIES Currency in circulation- Deposits 131,141' -International Monetary Fund 413 Amounts repayable under repurchase agreements 1,807 ' Other liabilities 4,529 Equity and reserves is TOTAL LIABILITIES AND EQUITY Liquidity gap 2008 21412112 1.71i Total assets 10,246 173,103 1,096 ' Total liabilities and equity 21:345 113911 412 Liquidity gap as at 30 June 2007 LOAM ULM SI Non Financial Risk 14 260 278 55 55' 7148112 34.432 275.173 99,750 99,750 131,14i 1,535 17,749 19,697 1,807 4;529 _1112.51 22,1.1211 Linell 7,429 31,617 223,491 LSI 111.85D 223.491. LEM LUAU (e)Operational risk Operational risk is the risk of loss due to human or system errors, incompatibility or failure of internal business processes, or external events. The Bank seeks to minimize lossei from operational risk by establishing effective internal control systems which prevent or detect all errors and situations whiCh might cause loss through failure of people or processes in such a way that losses are avoided or reduced to the minimum possible extent. The Bank has assigned the responsibility for managing operational risks to.the-management of the departments. The assessment of risks in 'terms of their effects and probabilities of occurrence and the adequacy, effectiveness and efficiency of the controls established to mitigate the risks is done vide audits and risk assessments conducted by the Internal Audit and Risk Management DePartment(IARM). (f)Human Resource Risk The particularnaturn of the activities-of the Bank necessitates specialized knowledge in many areas. The Bank ensures that theft is adequate knowledge base for all specialized job niquirements' by investing signifiCandy in human resource development in terms of capacity building and practical _exposure. The Bank also organizes workshops, seminars, conferences and job attachments to its staff -as an effort to improve its human resource requieMents. - (g)Legal Risk Legal risks arise from any uncertainty of enforceability, whether through legal or, judicial processes, of the obligations of the Bank's clients and coustierr. parties. These are- the risks that the Bank may not be complying fully with the relevant laws and legislations. The Bank aims at minimizing such uncertainties through continuous consultations with all relevant-parties. In mitigating these types of the risks, the Bank ensures that all business agreements are subjected to extensive legal reviews before contracting. (h)Iteputational Risk The concern 'about reputation flows from the Tact that the Bank is a public institution with important respoinsibilities for stability in the value of money, the soundness and efficiency of the financial syitem and the issue of currency (notes and coins). All of these matters have direct impact well citizens an&theeindib' ilky and the reputation tithe Bank is an important factor in the successful fulfilment of these responsibilities. - managing this risk, the Bank adheres to the best practicer; and applies principle of sound cotporate governance. It also ensures that all relevant staff have a clear understanding of the appropriate processes in respect of the best practice and principles of goad corporate governance. The Bank therefore, sets out policies and guidelines that govern sound functional operations within the Bank. The performance of these policies and guidelines are periodically reported to different levels of the Bank's Management for Control and Compliance Monitoring. SENSITIVITY ANALYSIS The Bank uses models to assess the impact of possible Changes in market risks. These risks include interest rate risk and foreign exchange risk. The . Board is yet to establish limits on exposure gaps; these limits will be utilised to ensure risk positions are effectively managed. The limits will provide possible alternative assumptions to be applied as well as professional judgement to an analysis of the data available to support each assumption. (i)Interest rate risk • • Interest rate risk is die risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Bank bases its analysis on the interest sensitivity gap (Note 29). The sensitivity computations assume that financial asset Maintain a Constant rate of return from one year to the next. The effect on profit due to reasonable possible changes in interest rates, with all other variables held constant, is as follows: 2008 2007 KS& million KShs million Effect on profit before tax of a +13% change in interest rates 1,339 Effect on profit before tax of a -13%change in interest rates (1,339) (ii) Currency risk Currency risk is the risk of loss resulting from changes in exchange rates. The Bank bases its analysis on the interest sensitivity gap (Note 29). The Bank has assets and liabilities in various currencies; however, the most significant exposure arises from assets denominatid in the US dollar, GBP and Euro currencies. The following table demonstrates the sensitivity to reasonably possible change in the KShs/ US dollar exchange rate, with all other variables held constant, of the Bank's profit earned. 2008 2007 KSIts million KShs million Effect on profit before tax of a +7% change in exchange rates 488 410 Effect on profit before tax of a -7% change in exchange rates (488) . (410) 31 FAIR VALUES AND EFFECTIVE INTEREST RATES OF FINANCIAL ASSETS AND LIABILITIES In the opinion of the directors, the fair values of the Bank's financial assets and liabilities approximate their respective carrying amounts. Fair values are based on discounted cash flows using a discount rate based on the borrowing rate that directors expect would be available to the Bank at the balance sheet date. The effective interest rates for the principal financial assets and liabilities at 30 June 2008 and 2007 were in the following ranges: Assets 2008 2007 Government securities 6.64% 6.64% Deposits with overseas correspondent banks - current accounts 0.0% 0.0% - term deposits (USD) 3.22% 5.29% - term deposits (Pounds Sterling) 5.68% 5.65% - term deposits (Euro) 4.54% 4.10% Loans and advances - Commercial banks 8.50% 8.50% - Government of Kenya 8.50% 8.50% - Employees 3.0% 3.0% Due from Government of Kenya 3.0% 3.0% Liabilities -Customer deposits 0% 0% 32 CONTINGENCIES Pending legal suits The Bank is party to various legal proceedings with potential liability of KShs 2.427 billion at 30 June 2008. Having regard to the legal advice received, and in all circumstances, the directors are of the opinion that these legal proceedings will not give rise to liabilities. 33 EVENTS AFTER BALANCE SHEET DATE In 1993, the Bank created a charge for KShs 2.5 billion over the Grand Regency Hotel, a property owned by Uhuru Highway Development Limited, to secure a debt owing from Exchange Bank Ltd. The debt arose out of inter-bank transactions between Exchange Bank Ltd and the Bank during the period 1992 and 1993. During the year, the Bank sold its security for US$ 45 million in satisfaction of the KShs 2.5 billion debt. The sale was completed in July 2008. To address public interest and anxiety in the matter, in July, 2008 H. E. the President appointed a Commission of Inquiry to, inter alia, investigate the circumstances surrounding the sale of the Hotel. The Commission was yet to complete its work and submit a report of its findings to the President by the time the audit of the Bank's financial statements for year 2007a008 was completed. Owing to these uncertainties, the down payment (10% or $4.5 million) of the sale price received during the year has been treated as part of the balances due from banking institutions in Note 9 and other liabilities in Note 23. The balance (90% or $40.5 million) that was received in July 2008 has been imilarly treated in the Bank's books subsequent to year end. COMMITMENTS 2008 2007 KSh. million KSh. million Contracted for _10 Capital commitments contracted for in the previous year relates to currency disintegration and briquetting system for Kisumu and Eldoret bank • notes and sorting system. OPERATING LEASE COMMITMENTS AS LESSEE: The total future minimum lease payments due to third parties under non-cancellable operating leases are as follows: KShs million KShs million One year 12 11 Between two and five years 7 7 Over five years .1.22 .1.94 158 158 Lease commitments relate to lease rentals for NAIROBI L.R No. 209/11441. 37 comnititrt* Where necessary, competitive figureshave been adjusted or excluded to conform to No provision for tax is made as Section .7 of the Income TO Act exempts the Bank from any taxation imposed by law in respect of income or profits. This exemption includes stamndiny in respect of instruments executed by or on behalf of the:Bank. 24t# October THE KENYA,GAMTE 35 ENVLOYERS, The meta& number of employees during the year was 1,230 (2007: 1,255). 36 TAXATION