NOTES TO FINANCIAL STATEMENTS
FOR THE SIXTEEN MONTHS MONTHS ENDED 30 JUNE 2023
a. The board members of the company, its parent company, affiliated or sister companies and associates. b. A parent company and any subsidiary or affiliated company that is not wholly owned.
c. The Chief Executive Officer (CEO) or Managing Director, and key officers, including anyone who directly reports to the Board or the CEO.
d. Any significant shareholder having the ability to control, or exercise a significant influence on, the outcome of resolutions voted on by shareholders or directors of the company, its parent company, affiliated or associated companies.
e. The father, mother, sons, daughters, husband, or wife of any of the natural persons listed in Clauses (a, b and c).
f. Any business, and the directors, CEO and key officers of any business, in which the natural persons listed in paragraphs (a) to (e) own jointly or severally at least 20% of the voting rights.
g. Any person whose judgment or decisions could be influenced as a consequence of an arrangement or relationship between or involving themselves and any of the persons in paragraphs (a) to (f).
Insiders and related parties
The MicroBank needs to actively manage its exposures to insiders and related parties. Loans to insiders and related parties result in a capital charge for the assessment of unimpaired capital for capital adequacy assessments.
InnBucks MicroBank Limited must not grant credit to insiders and related parties on terms and conditions that are more favorable than those on which the institution, applying criteria normally applied in the deposit taking microfinance industry, would extend The following conditions must be observed for all insider loans: All loans shall be secured by property at least equal in value to the amount of the loan;
InnBucks MicroBank Limited shall not advance a loan to an insider without prior approval from the Registrar. The institution must seek prior approval of the Reserve Bank to write-off insider and related party loans. Directors or senior management with potential conflict of interest must not be involved in the approval of credits to related companies and individuals as well as to insiders. Any such conflict of interest shall be disclosed to the Board in writing.
The institution shall not acquire any director or shareholder-related loans from another bank or financial institution.
This is particularly the case if such a loan was non-performing, or if the borrowing entity was showing signs of financial distress or was a start-up.
The organization must adhere to regulatory thresholds for loans granted to insiders and related parties. These thresholds must be administered at individual and portfolio level. Limits as set from time to time are part of the limits framework of this policy
All loans to insiders and related parties must be approved by the board regardless of amount.
Such transactions must be disclosed to the public as part of the institution’s financial reporting process.
33.1 Risk management policies
The Company’s business involves taking on risks in a targeted manner and managing them appropriately. The core function of risk management is to identify all key risks for the Company, measure and manage the risks. The Company regularly reviews its risk management policies and systems to reflect changes in markets, products and best practice. The Company endeavours to keep abreast of best practice in the measurement and management of risk by utilising the latest methodologies. Risk is managed within the frameworks of the Reserve Bank of Zimbabwe (“RBZ”) guidelines and international microfinance best practices.
The Company’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Company’s financial performance.
The Company defines risk as the possibility of losses or profits foregone, which may be caused by internal and external factors. 33.2 Risk categories The risks to which the Company is exposed to include;
• Market risks;
• Interest rate risk;
• Liquidity risk;
• Credit risk;
• Operational risk; and
• Reputation risk
• Capital risk
33.2.1 Market risks
The Company takes on exposure to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Risk and Compliance Department, independent of business operations is accountable to the Board and it monitors all market risk exposures and alerts management and the Board of any evolving situations in time.
Market risk measurement techniques
The Company applies a value at risk (“VaR”) methodology to its portfolios to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The measurement techniques used to measure and control market risk include:
a) Daily Value at Risk (“DVaR”)
Value at risk is a statistically based estimate of the potential loss on the current portfolio from adverse market movements. It expresses the maximum amount the Company might lose but only to a certain level of confidence. There is therefore a statistical probability that the actual loss could be greater than the VaR estimate. The VaR model makes assumptions on the pattern of the market movements based on historical holding periods. The use of this approach does not prevent losses outside these limits. In the event of more significant market movements, DVaR is an estimate of the potential loss which might arise from unfavourable market movements, if the current positions were held unchanged for one business day and measured to a confidence of 99%.
b) Stress tests
Stress tests provide an indication of the potential size of losses that could arise in extreme situations. The stress tests carried out by the Risk and Compliance Department is on interest rate risk. Interest rate stress risk is the daily monitoring of the potential loss if there is a large interest rate movement. The results of the stress tests are reviewed by senior management and by the Board of Directors. The stress testing is tailored to the business and typically uses scenario analysis.
33.2.2 Interest rate risk
Interest rate risk generally stems from assets and liabilities maturing and/or being re-priced at different times and rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. Liabilities may mature before assets leading to the rollover of such liabilities pending sufficient quantity of assets maturing to repay the liabilities. In a rising market, expensive liabilities may be used to replace cheaper liabilities and/ or fund lower yielding assets. Assets may mature before liabilities do and have to be reinvested. In a falling market this may be made at lower rates than the original and/or lower than the rates for liabilities to be retired.
33.2.3 Liquidity risk management
Liquidity risk arises from a mismatch of asset and liability cash flows and/or different maturity profiles. Liquidity obligations arise from requirements to advance loans and advances, repay loans and borrowings, other liabilities and make interest and other expenses payments. Refer to note 26 for the gap analysis. The Company determines ideal weights for maturity buckets which are used to benchmark the actual maturity profile. Maturity mismatches across the time buckets are managed through the profile of loans and borrowings.
33.2.4 Credit risk
Credit risk is the risk of suffering financial loss, should any of the Company’s clients or market counterparties fail to fulfil their contractual obligations to the Company. Credit risk arises mainly from commercial and consumer loans and advances, balances with banks and cash and other assets. Credit risk is the single largest risk for the Company’s business management therefore carefully manages its exposures to credit risk.
Management of credit risk
The Board of Directors has delegated responsibility for the management of credit risk to its Management Credit Committee (“MCC”).
Impaired loans and advances
Impaired loans and advances are loans and advances for which the Company determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/ securities agreement(s).
Past due but not impaired loans
These are loans and advances where contractual interest or principal payments are past due but the Company believes that impairment is not appropriate on the basis of the level of security or collateral available and or the stage of collection of amounts owed to the Company.
Loans with renegotiated terms
Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position or where the Company has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring.
Allowances for impairment
The Company establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for group of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.
Write-off policy
The Company writes off a loan and advances balance (less any related allowances for impairment losses) when the Board determines that the loan or advance is uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower’s or issuer’s financial position such that the borrower or issuer can
no longer pay the obligations, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller loans, write off decisions generally are based on internal limits set from time to time by Risk and Compliance Department.
Security held against advances
The Company holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired.
33.2.5 Settlement risk
Settlement risk arises in any situation where settlement in cash or securities is made in the expectation of a corresponding receipt in cash or securities. Daily settlement limits are established for each counter party to cover the aggregate of all settlement risk arising from the Company’s market transactions on any single day.
33.2.6 Operational risk
Operational risk arises from human error or fraud, inadequate or failed internal processes and systems, non adherence to procedures or other external sources that result in losses.
The Company continues to develop and expand its guidelines, standards, methodologies and systems in order to enhance the management of operational risk.
To manage operational risk, the Company has established sound practices, including: • independent functions; Risk and Compliance Department that facilitates correct and consistent practices and processes across the Company.
These proactively identify, mitigate risks, measure control effectiveness and losses, as well as report on operational risk; • policies and procedures to sustain effective risk management practices; • tools to support effective management of operational risk. • a centralized loss event database (incident reports) to record material operational risk incidents and actual losses; • use of risk indicators to provide management with early warning signals on potential operational risk exposures in order to initiate preventative action; • ongoing assessment of the effects of changes in the regulatory environment and acquisition of skills and knowledge of best practice to ensure the Company’s own endeavours are most appropriate for the environment.
Risk information generated from these processes is used to assist business units to optimise controls and avoid or mitigate losses. It also provides support for business decisions through a balanced focus on risk and return in decision making and through ongoing staff awareness.
33.2.7 Reputational risk management
Reputational risk is a threat or danger to the good name or standing of the Company. The Company manages reputation risk through its evaluation and control of the major risk types as set out above. In addition, there is an open communication culture that allows for all issues to be appropriately dealt with in a timely manner.
33.2.8 Strategic risk
Strategic risk is a possible source of loss that might arise from the pursuit of an unsuccessful business plan. The roles of the Chairman and Chief Executive Officer are not vested in the same person. The executive team formulates the strategy under the guidance of the Board which approves it. The Chief Executive Officer and senior management bear the responsibility to execute the approved strategy. The Board reviews the performance and suitability of the strategy at least quarterly.
33.2.9 Legal and compliance
The Board ensures that the management and operations of the Company’s business is done within the governance and regulatory control framework established by the Company and other regulatory bodies. The Risk and Compliance Department is in place to monitor legal compliance requirements and ensures that they are met on a daily basis.
33.2.9.1 Compliance risk
Compliance risk emanates from violations of or non conformance with laws, rules, regulations, prescribed practices, internal policies and procedures or ethical standards. Compliance management is effected through Risk and Compliance Department and assists management to identify and comply with, all statutory, regulatory and supervisory requirements.
33.2.10 Foreign currency risk
InnBucks takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign Exchange risk arises from having transactions and balances denominated in currencies that are not the functional and presentation currency, the ‘ZWL Dollar’. InnBucks does not use hedge instruments to manage foreign currency exchange risk.
33.2.10 Capital risk management
Capital risk refers to the risk of InnBucks own capital resources being adversely affected by unfavourable external developments
InnBucks capital resources should therefore be adequate to absorb losses such as operating losses, and capital losse on investments.
InnBucks policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and InnBucks recognises the need to maintain a balance between higher returns that might be possible with greater gearing and the advantages and security accorded by a sound capital position.
Capital adequacy and the use of regulatory capital is monitored daily by InnBucks management and the directors employing techniques based on guidelines developed by the Basel Committee as implemented by the Reserve Bank of Zimbabwe for supervisory purposes.
The Company’s regulatory capital is managed by management and comprises three tiers;
• Tier 1 Capital: comprises contributed capital, accumulated profits, capital reserves (comprising share premium and share allocation reserves)
• Tier 2 Capital: comprises impairment allowance
• Tier 3 Capital:
Included in the Total capital base is an investment of US$5 million with the Reserve Bank of Zimbabwe relating to twenty-year zero-coupon bonds. These investment securities have been carried at their face value (ZWL28 698 980 500) in the statement of financial position in non-compliance with IFRS 9, Financial Instruments, paragraphs 5.1 and 5.2.1 which require that such financial instruments be measured at their fair value at initial and subsequent measurement. The estimated fair value of the investment securities is ZWL11 772 918 740. Had the investment securities been carried at fair value, the profit or loss for the period and retained earnings would have been reduced by ZWL16,926,061,760, thereby reducing the regulatory capital of the Microbank to ZWL14,840,934,250. Accordingly, the investment securities, profit or loss for the period, retained earnings and the capital of the Microbank are overstated. This is due to lack of observable market information for the investment securities. This has resulted in the capital position of the MicroBank being overstated.
Consequently the MicroBank’s capital position of ZWL14.8 Billion which translates to US$2 585 620 is below the minimum required position of US$5Million. The Board and Management have put in place a plant address the capital position in line with the Reserve Bank of Zimbabwe’s guidelines.
34EVENTS AFTER REPORTING DATE
34.1 The Microbank entered into an agreement with Satfin Limited for an offshore facility amounting to US$10 Million on 30 August 2023. This facility is available upon drawdown which is payable to the lender at the end of 90 days. 1% is charged as facility fee on drawdown. Interest is charged at an annual rate of SOFR plus 6% per annum.
34.2 The MicroBank managed to open US$ investment Accounts and South African Rand (ZAR) transactional accounts with Access Bank South Africa and Bidvest Bank South Afriica. This is part of the MicroBank’s strategy towards its international banking and foreign exchange offerings.