Kenya Mortgage Refinance Company PLC Annual Report 2020 1 2020 ANNUAL REPORT Unlocking Liquidity for Affordable Housing Kenya Mortgage Refinance Company PLC 2 Annual Report 2020 Kenya Mortgage Refinance Company PLC Annual Report 2020 3 CONTENTS Notice of AGM 4 Overview 5 Corporate Information 6 Vision, Mission, Core Values 7 Board of Directors 8 Chairman’s Statement 9 Management Team 11 CEO and MD’s Statement 12 Corporate Governance 15 Report of the Directors 21 Statement of Directors’ Responsibilities 26 Report of Independent Auditor 28 Financial Statements 32 Events and Outreach 63 Kenya Mortgage Refinance Company PLC 4 Annual Report 2020 (PLC-LXSM9G) NOTICE OF ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that the 2nd Annual General Meeting of KENYA MORTGAGE REFINANCE COMPANY PLC (“the Company”) will be held on 29th June 2021 at the Company’s offices at 27th Floor UAP/Old Mutual Tower, Nairobi, Kenya and through videoconferencing from 10:00am to transact the following business: 1. To table the proxies and note the presence of quorum; 2. The Chairperson to read the Notice convening the Meeting; 3. To table the Chairperson’s Statement; 4. To receive, consider and, if thought fit, adopt the audited financial statements for the year ended 31st December 2020, together with the Directors’ and Auditors’ reports thereon; 5. To approve the re-appointment of Mazars Kenya, having expressed their willingness, to continue in office as auditors of the Company in accordance with the provisions of section 721 of the Companies Act, No. 17 of 2015 and to authorise the Directors to fix their remuneration. 6. To transact any other business which may legally be transacted at an Annual General Meeting. BY ORDER OF THE BOARD GODWIN WANGONG’U Company Secretary 31st May 2021 NOTE: 1. A member entitled to attend and vote at a meeting is entitled to appoint any other person to vote instead of him. The instrument appointing the proxy must be delivered to the Secretary not less than forty-eight (48) hours before the meeting. 2. In view of the Covid-19 Pandemic and the related Public Health Regulations and directives passed by the Government of Kenya precluding inter alia public gatherings, its impracticable for KMRC PLC to hold a fully physical Annual General Meeting (AGM). KMRC has therefore convened and will conduct its 2nd AGM via a hybrid of physical and virtual/electronic means. A member may attend the meeting at such location as he/ she chooses through the video-conferencing facilities to be provided by the Company for this purpose. Access details for the video-conferencing facilities shall be provided to each member prior to the date of the meeting. The video-conference may be recorded. Kenya Mortgage Refinance Company PLC Annual Report 2020 5 Overview The Kenya Mortgage Refinance Company (KMRC) is a non-deposit taking financial institution established in 2018 under the Companies Act 2015. Its mandate is to provide long-term funds to primary mortgage lenders (PMLs) for purposes of increasing affordability and availability of mortgage loans to Kenyans. At its initial operations, KMRC is providing concessional, fixed rate, long term finance to the PMLs so that they can transfer the same benefits to wananchi, making home loans more accessible and affordable for Kenyans. A key lever in the push to increase homeownership in Kenya, KMRC is supporting the Affordable Housing Pillar of the Government’s Big 4 Agenda primarily on the demand side by increasing availability of affordable housing finance. This is based on recognition that Kenya’s mortgage market remains underpenetrated, relative to the potential demand for home ownership. A wholesale financial institution, KMRC plays a development role which includes contributing to the growth of Kenya’s capital markets through the issuance of bonds as a source of sustainable long-term finance; supporting standardization of mortgage practices in Kenya on the origination of mortgages and contributing to the growth of the mortgage market through support to PMLs. KMRC was established in the form of a Public Private Partnership (PPP) and therefore has a strong and diverse shareholding which includes Government of Kenya with 25% ownership and a mix of private sector players owning 75% of KMRC shares on aggregate. The distribution of private sector shareholders includes eight commercial banks, one microfinance bank, eleven saccos and two DFIs. The current shareholders are: 1. Government of Kenya through The National Treasury 13. Kenya Police Sacco 2. KCB Bank 14. Bingwa Sacco 3. IFC 15. Mwalimu Sacco 4. Shelter Afrique 16. Safaricom Sacco 5. The Co-operative Bank 17. Harambee Sacco 6. Stanbic Bank 18. Stima Sacco 7. NCBA 19. Imarika Sacco 8. DTB 20. Tower Sacco 9. Credit Bank 21. Imarisha Sacco 10. Absa Bank Kenya 22. Unaitas Sacco 11. HF Group 23. Ukulima Sacco 12. Kenya Women Microfinance Bank KMRC is primarily regulated by the Central Bank of Kenya (CBK) as a non-deposit taking financial institution, with the Capital Market Authority (CMA) providing oversight over its bond issuance operations. Kenya Mortgage Refinance Company PLC 6 Annual Report 2020 Corporate Information Principal place of business 27th Floor, UAP Old Mutual Tower, Upperhill Road, Upperhill, P.O. Box 15494 - 00100, Nairobi Registered office National Treasury Building, Harambee Avenue, P.O. Box 30007 - 00100, Nairobi Company Secretary Mboya Wangong'u & Waiyaki Advocates Lex chambers Maji Mazuri Rd, North P.O. Box 74041 - 00200, Nairobi Principal bankers • KCB Bank Kenya Limited, Moi Avenue, P.O Box 48400 – 00100, Nairobi • Cooperative Bank of Kenya, Moi Avenue, P.O Box 48231 – 00100, Nairobi • NCBA Bank Kenya PLC NCBA Centre, P.O. Box 44599 - 00100, Nairobi Independent Auditors MAZARS Certified Public Accountants (K) 3 Floor, The Green House, Ngong Road P.O. Box 61120 - 00200, Nairobi Kenya Mortgage Refinance Company PLC Annual Report 2020 7 VISION MISSION To be the premier housing refinance company driving To increase accessibility and affordability of development and growth of housing finance in Kenya housing loans in Kenya by providing long term financing to primary mortgage lenders CORE VALUES Collaboration - We are committed to working with primary mortgage lenders, the Government of Kenya, development finance institutions and other STRATEGIC OBJECTIVES stakeholders to develop and grow the housing • To provide liquidity financing to PMLs market. • To promote the development of improved mortgage Integrity - We are committed to adhering to high lending practices within PMLs ethical and moral principles ensuring transparency and trustworthiness in our operations. • To support developments in the housing market Innovation - We are committed to continuous • To raise long term finance efficiently and sustainably improvement in our product offerings, the way we • To develop and optimize the institutional capacity of work and the professional development of our staff. KMRC Efficiency - We are committed to striving for maximum impact by effectively minimising waste through developing dynamic and relevant policies and procedures. Kenya Mortgage Refinance Company PLC 8 Annual Report 2020 Board of Directors DR. HARON SIRIMA, OGW MS. SUSAN MAIRA Chairman, Appointed October 2020 Independent Director MR. SAMUEL MAKOME MR. ROBERT KIBAARA Member, Representing Banks Member, Representing Banks MR. ASMAN KHATOLWA MS. SARAH BONAYA Member, Representing Saccos Independent Director, Appointed February 2020 MR. JOHNSTONE OLTETIA CEO and MD Kenya Mortgage Refinance Company PLC Annual Report 2020 9 Statement from the Chairman modern practices to conduct business operations. Execution of our Strategic Plan 2020-2024 Our strategic plan outlines the Company’s priorities in the medium-term; focusing on the core mandate of providing long term funds to the participating Primary Mortgage Lenders for onward lending to the ultimate borrowers. In the past year, effort was directed towards implementing strategic actions to fully operationalize the Company. Some of the key strategic initiatives included loan portfolio reviews eligible for refinancing and sensitization of our customers – the Primary Mortgage Lenders on features and procedures for accessing our loans. The start has been slow, but we remain committed to our goal of supporting the development of the housing finance market by providing practical solutions that meet the housing needs of Kenyans while creating value to the shareholder. We re-affirm commitment to conduct business responsibly through strict alignment to our core values and adherence to policies, regulations and standards. Corporate Governance High standards of corporate governance are the cornerstone of a good sustainable business. It Dear Shareholders, encompasses the processes, practices and policies that a Company relies on to make formal decisions to We are holding this second Annual General Meeting manage its operations. Effective corporate governance of the Kenya Mortgage Refinance Company PLC (the yields trust and functional engagements between Company) at a time when the Covid-19 pandemic and internal and external stakeholders and strengthens risk the containment measures have adversely disrupted management. We pride ourselves in having a solid businesses, livelihoods and lives. It has been a very foundation in good corporate governance anchored challenging year for all corporates not only in Kenya on transparency, accountability and security in the but globally. Most corporates have reported major conduct of the business of the Company. losses that have materially eroded their balance sheets. In the past year, we constituted three (3) Board During the year, we laid strong underpinnings for the Committees to support the Board of Directors in the Company to carry out its core business of mortgage execution of their oversight responsibilities. The Credit re-financing. We were issued a license to conduct & Risk Committee has the oversight responsibility on the business by the regulator, the Central Bank of Kenya, company’s credit facilities. In addition, this committee after successful fulfillment of all the conditions precedent. has oversight responsibility over the identification, measurement, control and monitoring of all risks While the pandemic significantly slowed down the exposures to the Company. pace of business operations, the Company leveraged on the skills and experienced Board, management In line with regulatory requirement, the Audit Committee and staff to put in place a robust systems anchored on oversees the company’s reporting processes and internal Kenya Mortgage Refinance Company PLC 10 Annual Report 2020 controls. The Finance Planning and Human Resources term financing to enable Kenyans access decent and Committee robustly provides strategic, financial and affordable housing. The Company will enhance its human capital oversight for the organization. Some of visibility in the marketplace to show-case its products to the specific oversight roles for this Committee include customers. I look forward to our shareholders actively assets & liabilities management, budgeting and increasing uptake of the Company’s product. financial planning, financial reporting, human capital management and ensuring achievement of the set On behalf of the Board of Directors, I would like to goals and objectives through strategy monitoring and appreciate the shareholders and other key business reporting. partners for their support during the year. I would also like to thank my colleagues at the Board for their commitment and dedication. My gratitude to our senior Going Forward management team and staff for their devotion to the vision and mission of the Company. We anticipate a re-bound in growth in the housing sector in line with Kenya’s economic recovery trajectory. The Company will seek to leverage current financial Dr. Haron Sirima, OGW resources to scale-up availability of affordable long- Chairman “ Our strategic plan outlines the Company’s priorities in the medium-term focusing on the core mandate of providing long term funds to the participating Primary Mortgage Lenders for onward lending to the ultimate borrowers. Kenya Mortgage Refinance Company PLC Annual Report 2020 11 Management Team Front Row (L-R): Irene Koki - Internal Audit Manager, Deborah Masara- ICT Manager, Irene Kadima - Communications Officer, Florah Muthaura - Head of Risk and Compliance. Back Row (L-R): Geofrey Mwaura - Head of Credit, Erick Wambua- Finance Manager, Johnstone Oltetia - Chief Executive Officer, Elisha Nyikuli - Head of Legal Services, Daniel Saruni - Head of Human Resources and Administration, Gideon Rutto - Procurement and Logistics Manager. Kenya Mortgage Refinance Company PLC 12 Annual Report 2020 Statement from the CEO and MD Operating environment and Performance As with other countries globally, Kenya experienced a significant reduction in economic activity in 2020 as a result of the Covid-19 pandemic. The pandemic caused substantial decrease in key foreign exchange earnings and high GDP contributing sectors in Kenya namely: agriculture, manufacturing, tourism, hospitality, transportation and storage. KMRC’s partner financial institutions saw a decline in customer transactions amidst other effects as a result of the slowdown of economic activities and declining disposable incomes. The COVID-19 pandemic sickened the work environment, decimated revenues in our legacy businesses and crippled peoples’ and businesses’ ability to maintain social relationships and day to day activities that were previously the norm. Introduction The financial sector in which KMRC operates was I am delighted to present to you a review of the heavily burdened by the pandemic’s spillover effects performance and operations of KMRC for the year of stringent loan loss provisioning, demands of the ended 31st December 2020. Despite an obviously international financial reporting standard (IFRS 9) and tough year that had majority of organizations across challenging economic conditions that also forced the world redefine their culture and day to day the government to significantly downgrade growth operations, KMRC managed to continue to support its prospects for the year. stakeholders and as a result kept its operations on track. We implemented the business strategy and made some As a result of the adverse effects of the pandemic, impressive strides with regards to sustained relations banks in Kenya, per a Central Bank of Kenya report, with all our stakeholders. restructured loans amounting to KSh1.63 trillion, equivalent to 54.2% of the total banking sector loan Our mission to increase accessibility and affordability book by the end of December 2020. The effect of non- of housing loans in Kenya remains steadfast, and our performing loans rendered them ineligible for KMRC overall strategy and business model broadly remains refinancing as the mortgages are taken in as collateral. on course. We provide fixed rate, long term finance to primary lenders so that they can transfer the same Nonetheless, KMRC exhibited great resilience having benefits to individual borrowers. We also contribute to redefined its approaches to adopt the ‘new normal’ in the growth of the Kenyan capital markets through the order to better deal with the effects of the pandemic. issuance of bonds as a source of sustainable long-term funding. We adopted tech-driven practices under severe time pressure including remote working and holding all KMRC in collaboration with a number of stakeholders is meetings in tech platforms. The Company facilitated the putting in place foundations for eventual standardization Primary Mortgage Lenders’ capacity building exercises of mortgage underwriting practices in Kenya in order to online and managed to conduct trainings seamlessly. create efficiencies in participating financial institutions KMRC also carried out portfolio review exercises and, ultimately, a seamless experience for the borrower. virtually, an initiative that was necessary to determine availability of eligible mortgages for refinancing. KMRC will in part achieve this by carrying out enhanced capacity building to member institutions on Business Review the mortgage origination processes and partly through consultancies, both aimed at standardizing these The revenue for the year was Kes. 221Mn compared to practices across the sector. Kes. 326Mn recorded in 2019. The reduced income Kenya Mortgage Refinance Company PLC Annual Report 2020 13 “ Our mission to increase accessibility and affordability of housing loans in Kenya remains steadfast, and our overall strategy and business model broadly remains on course. was mainly attributed to a one-off grant of Kes. 200Mn that was received in 2019 from the National Treasury. Total expenses for the year stood at Kes. 119Mn compared to the last year’s Kes.32Mn, reflecting the effects of increased operating expenses following full Our Strategy 2020-2024 KMRC continues to implement its strategic plan 2020- 2024 which sets the purpose and business direction of the Company. The strategy also guides decisions operationalization of the Company. This resulted in a on allocating resources needed to accomplish the profit before tax of Kes. 102 million compared to last objectives. The objectives guiding company operations year’s Kes. 293 million. The net profit for the year stood include: at Kes. 76 million compared to last year’s Kes. 264 million. 1). To provide liquidity financing to Primary Mortgage Lenders – this entails supporting development of the CBK License housing sector by bringing about a greater supply of housing finance and playing a significant role KMRC received its license from the Central Bank of in increasing affordable housing finance. Initiatives Kenya (CBK) on September 18, 2020 which provided under this objective enable primary mortgage the greenlight to commence the Company’s core lenders to address their asset-liability maturity business. The license issuance paved the way for mismatch. disbursement of funds to Primary Mortgage Lenders to on-lend to potential homeowners and make mortgages 2). To promote the development of improved mortgage affordable and accessible to all Kenyans. The receipt lending practices within the primary mortgage of the License which was eagerly awaited marked a lenders – in order to grow the housing finance historic new dawn in affordable housing finance in market, KMRC’s role will entail engaging with Kenya. Indeed, it illustrated the legal, structural and relevant stakeholders to standardize the mortgage strategic foundations that KMRC had been putting in lending procedures so as to develop efficiencies place since inception for a fit for-purpose mortgage and ensure a consistent experience for consumers. refinance company. 3). To raise long term finance efficiently and sustainably Landmark Transaction – KMRC is currently drawing down funds for lending from the credit lines facilitated by National KMRC approved a disbursement of KES. 2.75 billion Treasury. However, KMRC will need to ensure that to participating mortgage lenders on December 17 it is able to continually raise long term funding at 2020, a transaction that marked our debut lending since attractive rates, and issuance of corporate bonds inception. This transaction marked an enormous and will be one of the initiatives to meet this objective. historic beginning in affordable housing finance in Kenya which also assured the industry of a promising future. 4). To support developments in the housing market - Historically, the developments in the housing In this transaction, KCB Bank, HF Bank, Stima Sacco market have favoured the upper middle and high- and Tower Sacco will each receive KES. 2.13 billion, end markets, neglecting the middle and lower KES.514million, KES.69 million and KES.29 million income. This is a consequence of market failures respectively once the ongoing security perfection is which impeded the viability of affordable housing concluded. KMRC anticipates that this initiative will developments. This being the case, KMRC, through trigger an acceleration of applications from the rest of interactions with different stakeholders, will help the institutions. to address the challenges facing the broader Kenya Mortgage Refinance Company PLC 14 Annual Report 2020 housing market by acting as a convener of different Looking Ahead stakeholders including property developers, PMLs, donors and the GoK and promoting reforms in the 2020 was without a doubt a challenging year and sector. 2021 is equally expected to present new challenges. KMRC in the Community We are, however, confident that notwithstanding any challenges on our way, we have built a firm business KMRC recognizes that it is important to do business in foundation capable of withstanding the shocks. We a sustainable way that promotes social responsibility. will continue to work with our partners to develop We believe the long-term success of KMRC is tied in new, more collaborative business relationships and part to the health and well-being of the community in opportunities which will allow KMRC and the financial which we do business. sector to thrive and provide affordable and viable housing solutions to Kenyans. We will leverage our KMRC held its first Corporate Social Responsibility partnerships to continue building more collaborative (CSR) initiative on Friday August 14th 2020 at the networks, in addition to providing effective linkages Imani Rehabilitation Centre in Kayole, donating KES. between our stakeholders. 770,000.00 worth of baby formula, foodstuff, personal hygiene products, Personal Protective Equipment We are committed to fast-tracking the delivery of our among others. The initiative was in response to the key business targets for 2021 while being cognizant major disruptions in the communities as a result of the of potential disruptions occasioned by the unending COVID-19 Pandemic. Covid-19 pandemic. Our plan is to accelerate lending to participating financial institutions so that they can We do our best to emphasize responsible and continuously lend to Kenyans and keep the supply sustainable business operations in order to optimize chain functional. We will uphold responsible finance positive impact of the organization in the society. by contributing and giving back to our communities. Looking after the interests of those children, vulnerable as they were, was a sacrifice; doing so in the midst As you may already know, KMRC is keen on going of a pandemic such as the COVID-19 that we are to the Capital Markets to issue bonds so that the currently facing was even more remarkable. organization’ funding is sustainable. The process has already kicked off and stakeholders involved are Our People currently being engaged. Our expectation is to have concluded all preparatory requirements and roll out by Our staff are our greatest asset. We recognize that Quarter 3 2021. what people bring to work is the single most important component of our business success thus employee The key to moving forward is to deliver a transformational engagement forms an integral part of KMRC. As a mortgage refinance facility that will ultimately improve regulated entity, all members of the senior management and transform people’s lives. We have an important team were successfully vetted by CBK and passed opportunity to build a better future for wananchi and the fit and proper tests. Our team continues to live we look forward to breaking new ground in our out the KMRC core values and remain committed to transformation journey and making a positive impact adhering to high ethical and moral principles ensuring together. transparency and trustworthiness in our operations. I am grateful to the KMRC Board of Directors, Through continuous capacity building and career management and staff for the support they have development plans, KMRC encourages staff to learn relentlessly provided in growing the business and look new skills, innovate and improve their productivity, build forward to our collective effort to create a lasting impact their confidence in the organization and create a better across our communities. working environment. Development initiatives include on-the-job training, formal classroom teaching, projects’ coordination as well as peer reviews. We believe that these development and exposure opportunities will not only improve the technical capacity of our people, but Johnstone Oltetia it will also make KMRC a great place to work. CEO and MD Kenya Mortgage Refinance Company PLC Annual Report 2020 15 Corporate Governance Kenya Mortgage Refinance Company PLC 16 Annual Report 2020 Corporate Governance Introduction KMRC recognizes the critical role that good Corporate Governance plays in the success of the business and emphasizes on best practice by all stakeholders. It is important to also note that Corporate Governance has an even bigger role to play and is essential to well-functioning and vibrant organization. In order to ensure that corporate power is exercised in the best interest of the Company and its stakeholders, KMRC has incorporated the below committees to drive its Corporate Governance: Board Audit Committee The mandate of the Board Audit Committee (herein refereed to as “the BAC”) is to help the KMRC Board fulfill its oversight responsibility by providing assurance on the efficiency and effectiveness of the systems of Governance, Risk Management, and Internal Control as well as the integrity of Financial Reporting. The BAC achieves this by providing oversight over the work of the Internal and External Audit Functions. The Internal Audit function provides independent, objective assurance and consulting, designed to help the organization accomplish its objectives, improve its operations, protect its assets, reputation, and sustainability. The BAC ensures that the independence and objectivity of the Internal Audit function is maintained through a functional reporting. The integrity of financial reporting to Shareholders is protected through Board oversight and responsibility oversight from the BAC.The BAC oversees the independence and performance of the External Audit function by reviewing and approving the external audit plan and engagement and reviewing the statutory financial reports for recommendation to the Board. The BAC was constituted in the fourth quarter of 2020 and held its first meeting in January 2021. Members Asman Khatolwa Susan Maira Robert Kibaara Samuel Makome Chairperson Credit and Risk Committee The Board Credit and Risk Committee (hereinafter referred to as “the BCRC”) is tasked with the responsibility of setting and reviewing KMRC’s risk policies and all credit facilities granted by KMRC. The BCRC is also responsible for ensuring that a sound risk management program is in place for effective identification, measurement, control and monitoring of all risks affecting KMRC. Kenya Mortgage Refinance Company PLC Annual Report 2020 17 The BCRC was constituted in the fourth (4th) Quarter of 2020 and held two meetings in the year. KMRC has developed a risk framework that encompasses the scope of risks to be managed, the process/systems and procedures to manage the risks and the roles and responsibilities of individuals involved in risk management. As part of the overall management of risk, management has implemented a system of internal control. The internal control system provides the board with reasonable assurance that the business is operated consistently within: - the strategy as determined by the board. the business objectives. the policies and processes; and the laws and regulations that apply to KMRC. The system aims to prevent and detect any significant risk from materialising and to mitigate any adverse consequences thereof. The BCRC is supported by control functions within KMRC, which include the internal audit, risk management and compliance functions. The BCRC is also mandated to review and oversee the overall lending process of the Company. In the year under review, the BCRC approved the first lending limits to Primary Mortgage Lenders following a credit review. Members Susan Maira Sarah Bonaya Johnstone Oltetia Chairperson Kenya Mortgage Refinance Company PLC 18 Annual Report 2020 Finance Planning & Human Resources Committee The Board Finance, Planning and Human Resource Committee (herein referred to as “BFPHRC”) is responsible for matters relating to strategy, finance and accounting, planning, employment, equality and diversity and corporate responsibility of the members of KMRC. The BFPHRC was constituted in the 4th quarter of 2020 and held two meetings in the year under review. During the year, the BFPHRC reviewed several policies relating to Finance and Accounting, Human Resources and ICT, reviewed and made recommendations to the company’s annual budget and approved KMRCs annual procurement plan in accordance with the internal procurement policy. The BFPHRC also oversees KMRC’s system of accounting, reporting and internal control to ensure compliance with legal as well as agreed ethical requirements, in addition to providing guidance and support during strategy planning and implementation. Members Sarah Bonaya Robert Kibaara Chairperson Samuel Makome Asman Khatolwa Johnstone Oltetia Kenya Mortgage Refinance Company PLC Annual Report 2020 19 Risk Management Effective risk management is fundamental to the success of KMRC. The Company has implemented a risk management framework which identifies the types of risks that KMRC must control and assigns duties within a systematic approach. The Company also has a strong, disciplined risk management culture where risk management is a responsibility shared by all Company staff. KMRC applies the Three Lines of Defence model which provides a simple and effective way to enhance communication on risk management and control by clarifying essential roles and duties. It provides a fresh look at operations, helping to assure the ongoing success of risk management initiatives. Accordingly, the duties are distributed across multiple functions as explained below: First Line of Functions that own Business functions are where risks are created. Risk Defence and manage risks management activities are performed at this level by individuals who take risk on the Company’s behalf such as Treasury function and Credit function. Legal function is also responsible for reviewing and ensuring that legal aspects are adequately secured in favour of the Company’s objectives and its operations. Information Technology function is responsible for ensuring effective controls against technology risk, system risk, security risk and implementation risk. Second Line Functions that Generally, the risk management activities performed by of Defence oversee risks middle management or functions devoted to risk reviews fall in this category. The second line of defence includes Operations function, and Risk and Compliance function that monitors the overall risk profile of the Company and ensure compliance with policies and regulations. Third Line of Functions that The third line of defence is that of internal and external Defence provide independent auditors. The Internal Audit reports independently assurance to the Board Audit Committee. Internal Audit also independently evaluates the adequacy of overall risk management framework. Kenya Mortgage Refinance Company PLC 20 Annual Report 2020 Sustainability Report Environmental and social sustainability is a core part of KMRC’s commitment to responsible finance. The KMRC Environmental and Social Risk Management Policy stipulates guiding principles and underlying processes for effective implementation of the Company’s commitment to environmental and social sustainability. It covers the integration of Environmental and Social Risk Management (ESRM) practices in the lending activities of KMRC. Primary Mortgage Lenders are expected to conduct adequate screening against KMRC Environmental &Social Screening Criteria, which is part of the core lending requirements. Environmental and Social risks arise when refinancing is supported by mortgage collateral originated in an environmentally and socially unsustainable way. This may create credit or reputational risks to primary mortgage lenders and/or KMRC. For example, properties that are built without a proper environmental assessment, can become lost collateral if they are located in flood-prone areas. KMRC recognizes that the primary responsibility for management of E&S risks and impacts rests with the primary mortgage lenders (PMLs). In this regard, KMRC has been supporting PMLs to institutionalize, and implement adequate policies, procedures, and practical tools for environmental and social risk screening. The KMRC E&S policy is benchmarked against: i ii iii Sustainable The Environmental The Environmental Finance Initiative Management and and Social Policies Guiding Principles; Coordination Act and Guidelines of (EMCA), 1999; the World Bank Group. In 2020 KMRC undertook several E&S activities including appointing the Head of Risk as the Environmental and Social Risk Management (ESRM) Coordinator, training responsible staff of the primary lenders on the E&S requirements and engaging a Consultant who assisted the PMLs to develop E&S policy & procedures as well as templates to support the environment and social risk management system. Kenya Mortgage Refinance Company PLC Annual Report 2020 21 Report of the Directors Kenya Mortgage Refinance Company PLC 22 Annual Report 2020 Report of the Directors For the year ended 31 December 2020 The Directors submit their report and the audited financial statements for the year ended 31 December 2020, which show the state of the Company’s affairs. 1. Incorporation The Kenya Mortgage Refinance Company PLC was incorporated on 19 April 2018 under the Companies Act 2015. It is a public limited liability Company domiciled in Kenya. The address of the registered office is as set out on page 6. 2. Directors The Directors who held office during the year and to the date are listed on page 8. 3. Principal activity The principal activity of the Company is providing secure long-term funding to primary mortgage lenders (Banks, Microfinance Banks and Sacco’s). The Company is regulated by the Central Bank of Kenya as a non-deposit taking financial institution, with the Capital Markets Authority (CMA) providing oversight over its bond issuance operations. 4. Business review During the year 2020, the total revenue of the company decreased from Kshs. 325,664,018 to Kshs. 221,094,696. This was mainly attributed to a one-off grant of Kshs 200 million that was received in 2019 from the National Treasury. The profit before tax decreased from Kshs. 293,260,225 to Kshs. 101,615,001 reflecting the effects of increased operating expenses following full operationalization of the company. Established in April 2018 as a Public-Private Partnership (PPP), under the supervision of the Central Bank of Kenya (CBK), Kenya Mortgage Refinance Company’s role is to provide long-term funds to primary mortgage lenders (Banks, Microfinance Banks and Saccos) in order to increase the availability and affordability of home loans to Kenyans by providing low interest, fixed rate, long term finance to mortgage financiers so that they can transfer the same benefits to individual borrowers, making home loans more accessible and affordable for Kenyans. A wholesale institution, KMRC’s objectives include contributing to the growth of Kenyan capital markets through the issuance of KMRC bonds as a source of sustainable long-term fund, assisting in the standardization of mortgage practices in Kenya through enhanced capacity building to member institutions on the origination of mortgages and contributing to the growth of the mortgage market in Kenya through support to Primary Mortgage Lenders. KMRC has since its inception consistently engaged with stakeholders on different levels and made progress with regards to increasing affordability and accessibility to affordable home loans to Kenyans. Through tailored trainings, KMRC has been working very closely with all the participating institutions, guiding them on the process and requirements for accessing refinancing in order to build an effective pipeline that will enable continuous disbursement of funds. During the year, the Company achieved key milestones including receiving a license from the Central Bank of Kenya on September 18 2020. The license provided a greenlight for the commencement of core business of providing fixed long-term financing to participating banks, microfinance banks and Saccos for onward lending to borrowers Kenya Mortgage Refinance Company PLC Annual Report 2020 23 seeking long-term home loans at affordable rates. This paved way for disbursement of funds by the World Bank and continental DFI (Development Finance Institution) African Development Bank (AfDB). The license was preceded by other pertinent processes that were a pre-requisite for the issuance including setting up internal policies and procedures, onboarding a highly competent management team, implementing a robust ICT system and securing physical premises from where to run day to day operations. The entire management team also successfully underwent a CBK fit and proper assessment. KMRC also concluded the establishment of Governance structures by operationalizing three board Committees: Credit and Risk Committee, Finance, Planning and Human Resource Committee and the Audit Committee. The implementation of the ERP, the Mortgage Refinance System, is now in place and fully operational. While the COVID-19 global pandemic continues to dominate global economic sentiment, KMRC has managed to work collaboratively with its partners and enabled them support affordable housing development in Kenya. On December 17 2020, KMRC approved loans amounting to Kshs 2.75 billion to four participating financial institutions after successfully demonstrating a refinanceable mortgage portfolio of 1400 mortgages, which will act as the collateral for the funding. 515 MILLION 69 MILLION 30 MILLION 2.135 BILLION HFC STIMA SACCO TOWER SACCO KCB In the medium term, it is envisioned that the Company will contribute to lowering of overall transaction costs by pooling issuance of bonds as compared to financial institutions accessing the market individually and spur development of the mortgage market. The Company will be a regular issuer of long-term, high quality investments needed by institutions with long term liabilities thus crowding in pension funds, social security funds and insurance companies. 5. Company’s operations during COVID-19 global pandemic season Just like other financial institutions across the world, KMRC has had to contend with the effects of the COVID-19 pandemic on its business. It was expected that demand for financial services would be negatively impacted as a result of the slowdown of economic activities and declining disposable income of individuals. Most potential home buyers put their purchase plans on hold due to uncertainties in the market. However, the crisis can be seen as a blessing in disguise for lower income households as limited access to mortgages has had an unforeseen positive benefit to them; that they were unable to access mortgages means they do not need to pay them back. Property Kenya Mortgage Refinance Company PLC 24 Annual Report 2020 developers also compressed their construction activities in order to preserve their money at a time when liquidity in the market was shrinking. Actual construction work was also disrupted by the social distancing requirements, hence slowing down the development of houses, and as a result limiting affordable housing supply to borrowers. Banks also constricted their lending and were offering fewer new home loans, further increasing the drop in mortgage uptake by consumers. A lot of individuals, due to loss of income and businesses or reduction in salaries, ended up defaulting on their mortgages. This decline in mortgage uptake by consumers significantly affected the extensiveness of refinancing by KMRC. The pandemic also affected the performance of the existing mortgage loans as financial institutions had to make provisions for the Non-Performing loans in their portfolio. According to data from the CBK, Kenyan banks restructured loans amounting to Kshs. 1.63 trillion, equivalent to 54.2% of the total banking sector loan book by the end of December 2020. This was in line with the emergency measures announced by CBK in March 2020, to provide relief to borrowers affected by the pandemic. Arising from the provisioning, the available portfolio for refinancing reduced significantly as the restructured loans are ineligible for refinancing by KMRC. Loan restructuring resulted to change in the terms of the credit facilities, including one or a combination of suspending interest, principal, change of collateral or extension of the tenor. These measures have continued to provide the intended relief to borrowers but with a negative effect on the quality of the portfolio eligible for KMRC refinancing. Further, KMRC’s portfolio review exercise at the PML’s sites was slowed since most institutions were reluctant to allow physical visits to their offices in a bid to contain spread of the virus. In- person capacity building for PMLs could also not be done. KMRC mitigated the effects of COVID 19 by embracing technology through the online examination of portfolios for those institutions that completely discouraged site visits. Capacity training for PMLs by KMRC was also conducted virtually as physical gatherings had been disallowed by the government. KMRC also enhanced its media campaigns by embracing social media to inform the stakeholders on the available services. KMRC’s support to the financial institutions is expected to help them manage liquidity crunch and enable their continuity in lending to their customers. KMRC’s lending model (long term and fixed rate) will make it possible for borrowers to take up home loans and still manage to provide for their families with their available income. Looking forward post the COVID-19 crisis, KMRC remains optimistic that the housing market will rebound. However, it is critical that we explore longer term measures to support mortgage lending going forward. The crisis presented a perfect opportunity for shifting mortgage lending attention to lower income segments of our population since lower value properties mean a decrease in the potential loss given default, while spreading the credit risk across a wider base of consumers. This means the greater focus for KMRC is targeting new home loans at low-income earners who have been largely overlooked by mortgage lenders. KMRC will also focus its support on Small and Medium Enterprises interested in buying homes but who have historically been frustrated by the lenders who consider them high risk. The SME sector has been a great contributor of Kenya’s GDP through its robust activities and extensive job creation and supporting their home ownership desire is critical. Besides, one of KMRC’s objectives is pushing for inclusivity in the housing finance. The Covid-19 pandemic demonstrates just how important decent and affordable housing is. To support broader recovery in mortgage lending post Covid-19 crisis, KMRC and indeed all housing stakeholders will need to put in place critical interventions to support mortgage market development in Kenya. The pandemic has also proved to the world that concerted efforts to better the housing sector is critical. KMRC intends to forge effective working relationships between stakeholders in the housing sector both on the demand and supply sides to see to it that end Kenya Mortgage Refinance Company PLC Annual Report 2020 25 customers’ pain points are significantly and efficiently addressed so that their journey to home ownership is a great experience. 6. Dividend The directors do not recommend a dividend for the year. 7. Financial Statements At the date of this report, the Directors were not aware of any circumstances which would have rendered the values attributed to the assets in the financial statements misleading. 8. Directors’ Benefits The Company was incorporated on 19 April 2018. There were directors’ sitting allowances paid as shown in Note 24. 9. Statement as to disclosure to the Company auditor Each of the persons, who was a director at the time the report was approved confirms that: a) there is, so far as the person is aware, no relevant audit information of which the Company’s auditor is unaware; b) the person has taken all the steps that the person ought to have taken as a director so as to be aware of any relevant audit information to establish that the Company’s auditor is aware of that information. 10. Auditor The directors approve the annual audit engagement contract which sets out the terms of the auditor’s appointment and the related fees. The agreed auditor’s remuneration has been charged to profit or loss in the year. The Company’s auditor Mazars, Certified Public Accountants (K) has indicated its willingness to continue in office in accordance with Section 717 of the Kenyan Companies Act No. 17 of 2015. By order of the Board Company Secretary Nairobi 18th March, 2021 Kenya Mortgage Refinance Company PLC 26 Annual Report 2020 Statement of Directors’ Responsibilities Kenya Mortgage Refinance Company PLC Annual Report 2020 27 The Kenyan Companies Act, 2015 requires the directors to prepare financial statements for each financial year that give a true and fair view of the financial position of the Company as at the end of the financial year and of its profit or loss for that year. It also requires the directors to ensure that the Company keeps proper accounting records that: (a) show and explain the transactions of the Company; (b) disclose, with reasonable accuracy, the financial position of the Company; and (c) enable the directors to ensure that every financial statement required to be prepared complies with the requirements of the Companies Act, 2015. The directors accept responsibility for the preparation and presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. They also accept responsibility for: i. designing, implementing and maintaining such internal control as they deter- mine necessary to enable the presentation of financial statements that are free from material misstatement, whether due to fraud or error; ii. selecting suitable accounting policies and applying them consistently; and iii. making accounting estimates and judgements that are reasonable in the circumstances. Having made an assessment of the Company’s ability to continue as a going concern, the directors are not aware of any material uncertainties related to events or conditions that may cast doubt upon the Company’s ability to continue as a going concern. The directors acknowledge that the independent audit of the financial statements does not relieve them of their responsibilities. Approved by the board of directors on 18th March, 2021 and signed on its behalf by: Director Director Dr. Haron Sirima, OGW Johnstone Oltetia Kenya Mortgage Refinance Company PLC 28 Annual Report 2020 Report of the Independent Auditor Kenya Mortgage Refinance Company PLC Annual Report 2020 29 Report of the Independent Auditor Opinion (i) Shareholders’ Funds The company is required to annually ensure that the We have audited the accompanying financial shareholders shall not, whether directly or indirectly, statements of Kenya Mortgage Refinance Company hold more than twenty-five per centum of the shares PLC (the Company), set out on pages 33 to 62, which of the Company unless it is a public entity or a comprise the statement of financial position as at 31 multilateral development bank, as per note 20 and December 2020, the statements of comprehensive 21. These shareholders funds were significant to our income, changes in equity and cash flows for the audit because the balance of Kshs. 1,291,000,100 year then ended, and notes, including a summary of as of 31 December 2020 is material to the financial significant accounting policies. statements. In addition, management’s assessment process is based on their due diligence processes In our opinion, the accompanying financial statements and a successful capital mobilisation drive. give a true and fair view of the financial position of the company as at 31 December 2020 and of its financial Our audit procedures included, among others, performance and cash flows for the year then ended obtaining company search report (CR12) and annual in accordance with International Financial Reporting return filed with registrar of companies to assist us in Standards and the Kenyan Companies Act, 2015. evaluating the shareholders funds capitalised and their ownership fractions. We also focused on the Basis of our opinion adequacy of the company’s disclosures about those We conducted our audit in accordance with International shareholders funds. Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s The Company’s disclosures about shareholders funds Responsibilities for the Audit of the Financial Statements are included in Note 20 and 21, which specifically section of our report. We are independent of the explains that the capitalised amounts and the capital Company in accordance with the International Ethics mobilisation drive may lead to rise in share capital Standards Board for Accountants’ Code of Ethics for and dilution of shareholding for some financial Professional Accountants (IESBA Code) together with institutions and government balance in the future. the ethical requirements that are relevant to our audit of the financial statements in Kenya, and we have fulfilled (ii) Investment on fixed deposit our ethical responsibilities in accordance with these We focused on this area because the Company requirements and the IESBA Code. We believe that invested amounts received from shareholders in short the audit evidence we have obtained is sufficient and term bank deposits and interest income earned from appropriate to provide a basis for our opinion. the same could be misstated. Key audit matters We obtained balance confirmations and fixed Key audit matters are those matters that, in our deposit receipt from respective banks, checked professional judgement, were of most significance placement period and interest earned periodically. in our audit of the financial statements of the current In addition, we obtained withholding certificates on period. These matters were addressed in the context of interest income deducted. our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a The direct tests that we carried out gave us sufficient separate opinion on these matters. evidence on correct statement of interest earned and investment amount on short term deposit. Kenya Mortgage Refinance Company PLC 30 Annual Report 2020 Other information conducted in accordance with ISAs will always detect a material misstatement when it exists. The directors are responsible for the other information. Other information comprises the information included Misstatements can arise from fraud or error and are in the Annual Report but does not include the financial considered material if, individually or in the aggregate, statements and our auditor’s report thereon. they could reasonably be expected to influence the economic decisions of users taken on the basis of these Our opinion on the financial statements does not cover financial statements. the other information and we do not express any form of assurance conclusion thereon. Auditor’s Responsibilities for the Audit of the Financial Statements In connection with our audit of the financial statements, our responsibility is to read the other information and, As part of an audit in accordance with ISAs, we exercise in doing so, consider whether the other information professional judgment and maintain professional is materially inconsistent with the financial statements scepticism throughout the audit. We also: or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the • Identify and assess the risks of material misstatement work we have performed, we conclude that there is a of the financial statements, whether due to fraud material misstatement of this other information, we are or error, design and perform audit procedures required to report that fact. We have nothing to report responsive to those risks, and obtain audit evidence in this regard. that is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Directors for the Financial Statements The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting The Directors are responsible for the preparation and fair from error, as fraud may involve collusion, forgery, presentation of the financial statements in accordance intentional omissions, misrepresentations, or the with the International Financial Reporting Standards and override of internal control. the requirements of the Kenyan Companies Act, 2015, and for such internal controls as the directors determine • Obtain an understanding of internal control relevant is necessary to enable the preparation of financial to the audit in order to design audit procedures statements that are free from material misstatement, thatare appropriate in the circumstances, but not whether due to fraud or error. for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. In preparing the financial statements, the directors are responsible for assessing the Company’s ability to • Evaluate the appropriateness of accounting policies continue as a going concern, disclosing, as applicable, used and the reasonableness of accounting estimates matters related to going concern and using the going and related disclosures made by management. concern basis of accounting unless the directors either intend to liquidate the Company’s or to cease Conclude on the appropriateness of management’s operations, or have no realistic alternative but to do so. use of the going concern basis of accounting and, based on the audit evidence obtained, whether Auditor’s Responsibilities for the Audit of the a material uncertainty exists related to events or Financial Statements conditions that may cast significant doubt on the Company’s ability to continue as a going concern. Our objectives are to obtain reasonable assurance If we conclude that a material uncertainty exists, we about whether the financial statements as a whole are are required to draw attention in our auditor’s report free from material misstatement, whether due to fraud to the related disclosures in the financial statements or error, and to issue an auditor’s report that includes or, if such disclosures are inadequate, to modify our our opinion. Reasonable assurance is a high level opinion. Our conclusions are based on the audit of assurance, but is not a guarantee that an audit Kenya Mortgage Refinance Company PLC Annual Report 2020 31 evidence obtained up to the date of our auditor’s not be communicated in our report because the report. However, future events or conditions may adverse consequences of doing so would reasonably cause the Company to cease to continue as a going be expected to outweigh the public interest benefits of concern. such communication. • Evaluate the overall presentation, structure and content of the financial statements, including the Report on other matters prescribed by the disclosures, and whether the financial statements Kenyan Companies Act, 2015 represent the underlying transactions and events in a manner that achieves fair presentation. In our opinion the information given in the report of the directors on pages 22 - 25 is consistent with the • Obtain sufficient appropriate audit evidence financial statements. regarding the financial information of the entities or business activities within the Company to express an As required by the Kenyan Companies Act we report to opinion on the Company financial statements. We you, based on our audit, that: are responsible for the direction, supervision and performance of the Company’s audit. We remain solely responsible for our audit opinion. i i) explanations, we have obtained all the information and which to the best of our knowledge and belief were necessary for the purpose of the We communicate with those charged with governance audit; iiii) in regarding, among other matters, the planned scope our opinion proper books of accounts have been and timing of the audit and significant audit findings, kept by the Company, so far as appears from our including any significant deficiencies in internal control examination of those books; and that we identify during our audit. We also provide the directors with a statement that iiiiii statement the Company’s statement of financial position and of comprehensive income are in agreement we have complied with relevant ethical requirements with the books of accounts. regarding independence, and to communicate with them all relationships and other matters that may The signing partner responsible for the independent reasonably be thought to bear on our independence, audit was FCPA Charles Gathuto, Practising Certificate and where applicable, related safeguards. No. 1231. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the MAZARS key audit matters. We describe these matters in our Certified Public Accountant (K) auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely 19th March, 2021 rare circumstances, we determine that a matter should Kenya Mortgage Refinance Company PLC 32 Annual Report 2020 Financial Statements Kenya Mortgage Refinance Company PLC Annual Report 2020 33 Statement of Comprehensive Income Note 2020 2019 Revenue Kshs Kshs Interest income 5 221,094,696 125,664,018 Other operating income 6 - 200,000,000 221,094,696 325,664,018 Interest expense 7 (25,389,655) - Gross income 195,705,041 325,664,018 Expenses Administration and operating expenses 8 (78,141,996) (32,200,892) Depreciation and amortisation expenses 9 (15,948,044) (202,901) (94,090,040) (32,403,793) Net profit before income tax 101,615,001 293,260,225 Income tax expense 10 (24,397,662) (28,789,041) Total comprehensive income for the year 77,217,339 264,471,184 Kenya Mortgage Refinance Company PLC 34 Annual Report 2020 Statement of Financial Position Note 2020 2019 Assets Kshs Kshs Property and equipment 11 55,756,316 5,129,843 Intangible assets 12 6,403,265 - Right-of-use assets 13 40,518,568 - Other receivables 14 142,113,344 497,926 Cash and cash equivalents 15 6,062,907,771 2,269,227,540 Deferred tax asset 18 2,102,827 - Total Assets 6,309,802,091 2,274,855,309 Liabilities and Equity Liabilities Borrowings 16 3,725,173,478 - Lease liabilities 17 46,172,905 - Deferred tax liability 18 - 956,758 Trade and other payables 19 14,110,827 25,444,686 Current tax 10 7,656,358 8,982,681 3,793,113,568 35,384,125 Capital resources Share capital 20 1,291,000,100 1,291,000,100 Contribution pending allotment 21 883,999,900 683,999,900 Revenue reserves 341,688,523 264,471,184 2,516,688,523 2,239,471,184 Total liability and Equity 6,309,802,091 2,274,855,309 The financial statements on pages 33 to 62 were approved for issue by the board of directors on 18th March 2021 and were signed on its behalf by: Director Director Dr. Haron Sirima, OGW Johnstone Oltetia Kenya Mortgage Refinance Company PLC Annual Report 2020 35 Statement of Changes in Equity Contribution Share Revenue pending Capital reserves allotment Total Note Kshs Kshs Kshs Kshs Year ended 31 December 2020 As at 1 January 2019 - - - - Profit for the year - 264,471,184 264,471,184 Transactions with owners: Issue of ordinary share capital 20 1,291,000,100 - - 1,291,000,100 Contributions pending allotment 21 - - 683,999,900 683,999,900 1,291,000,100 264,471,184 683,999,900 2,239,471,184 At 31 December 2019 Year ended 31 December 2020 As at 1 January 2020 1,291,000,100 264,471,184 683,999,900 2,239,471,184 Profit for the year - 77,217,339 - 77,217,339 Transactions with owners: Contributions pending allotment 21 - - 200,000,000 200,000,000 At 31 December 2020 1,291,000,100 341,688,523 883,999,900 2,516,688,523 Kenya Mortgage Refinance Company PLC 36 Annual Report 2020 Statement of Cash Flows Note 2020 2019 Cash flows from operating activities Kshs Kshs Total comprehensive income for the year 101,615,001 293,260,225 Adjustments for: Depreciation of property and equipment 11 7,043,922 202,901 Depreciation on right-of-use assets 13 8,103,714 - Amortisation of intangible assets 12 800,408 - Interest on lease liabilities 10 3,020,657 - Income tax paid (28,783,570) (18,849,602) 91,800,132 274,613,524 Operating profit before working capital changes Increase in other receivables 14 (141,615,418) (497,926) (Decease)/increase in other payables 19 (11,333,859) 25,444,686 (61,149,145) 299,560,284 Net cash (used in)/from operating activities Cash flows used investing activities Purchase of property and equipment 11 (57,670,395) (5,332,744) Purchase of intangible asset 12 (7,203,673) - (64,874,068) (5,332,744) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary shares 20 - 1,291,000,100 Proceeds of contribution pending allotment 21 200,000,000 683,999,900 Proceeds from borrowings 16 3,725,173,478 - Payments of principal portion of the lease liability 17 (5,470,034) - Net cash from financing activities 3,919,703,444 1,975,000,000 Increase in cash and cash equivalents 3,793,680,231 2,269,227,540 Cash and cash equivalents at start of year 2,269,227,540 - Cash and cash equivalents at end of year 15 6,062,907,771 2,269,227,540 Kenya Mortgage Refinance Company PLC Annual Report 2020 37 Notes to the Financial Statements 1. 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 the years presented, unless otherwise stated. These financial statements comply with the requirements of the Kenyan Companies Act, 2015. The statement of comprehensive income represents the profit and loss account referred to in the Act. The statement of financial position represents the balance sheet referred to in the Act. a) Basis of preparation • Level 2 inputs are inputs, other than quoted prices The financial statements have been prepared under the included within Level 1, that are observable for the historical cost convention, except as indicated otherwise asset or liability, either directly or indirectly; and below and are in accordance with International • Level 3 inputs are unobservable inputs for the asset Financial Reporting Standards (IFRS). The historical cost or liability. convention is generally based on the fair value of the consideration given in exchange of assets. Fair value is Transfer between levels of the fair value hierarchy are the price that would be received to sell an asset or paid recognised by the directors at the end of the reporting to transfer a liability in an orderly transaction between period during which the change occurred. market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the company takes into account the characteristics of the asset or liability if market participants would take those characteristics into when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for measurements that have some similarities to fair value but are not fair value. In addition, for financial reporting purposes, fair value measurements are categorised into level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Going concern The financial performance of the company is set out • Level 1 inputs are quoted prices (unadjusted) in in the report of the directors and in the statement of active markets for identical assets or liabilities that comprehensive income. The financial position of the the entity can access at the measurement date; company is set out in the statement of financial position. Kenya Mortgage Refinance Company PLC 38 Annual Report 2020 Disclosures in respect of principal risks and uncertainties have a significant impact on the Company’s financial are included within the Director’s Report and disclosures statements in the period of initial application. in respect of risk management and capital management are set out in notes 3 and 4 respectively. Amendments to IFRS 16 titled Covid-19 Related Rent Concessions (issued in May Based on the financial performance and position of 2020) the company and its risk management policies, the directors are of the opinion that the company is well The amendments, applicable to annual periods placed to continue in business for the foreseeable future beginning on or after 1 June 2020, permit lessees, as and as a result the financial statements are prepared on a practical expedient, not to assess whether particular a going concern basis. rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and b) New and revised standards instead to account for those rent concessions as if they are not lease modifications. i) Adoption of new and revised standards Amendments to IAS 37 titled Onerous Three Amendments to standards became effective for Contracts - Cost of Fulfilling a Contract the first time in the financial year beginning 1st January (issued in May 2020) 2020 and have been adopted by the Company. None of the Amendments has had an effect on the The amendments clarify that for the purpose of assessing Company’s financial statements. whether a contract is onerous, the cost of fulfilling the contract includes both the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts. They are effective for contracts for which an entity has not yet fulfilled all its obligations on or after 1 January 2022. Amendments to IAS 16 titled Property, Plant and Equipment: Proceeds before Intended Use (issued in May 2020) The amendments, applicable to annual periods beginning on or after 1 January 2022, prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing an asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss. Amendment to IFRS 9 titled Fees in the ‘10 ii) New and revised standards that have been issued per cent’ Test for Derecognition of Financial but are not yet effective Liabilities (issued in May 2020 as part of the Annual Improvements to IFRS Standards The Company has not applied any of the new or revised 2018-2020) Standards and Interpretations that have been published but are not yet effective for the year beginning 1st The amendment, applicable to annual periods January 2020, and the Directors do not plan to apply beginning on or after 1 January 2022, to IFRS 9 any of them until they become effective. Below is the list clarifies the fees that a company includes when of all such new or revised standards and interpretations, assessing whether the terms of a new or modified with their effective dates, none of which is expected to financial liability are substantially different from the Kenya Mortgage Refinance Company PLC Annual Report 2020 39 terms of the original financial liability. and excludes amounts collected on behalf of third parties, such as Value Added Tax. Amendments to IAS 1 titled Classification of Liabilities as Current or Non-current (issued i) Interest income and expenses in January 2020) Interest income and expense for all interest-bearing The amendments, applicable to annual periods financial instruments are recognised within the statement beginning on or after 1 January 2023, clarify a of comprehensive income on accrual basis using the criterion in IAS 1 for classifying a liability as non-current: effective interest method. the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period. c) Foreign currency translation Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in Kenya shillings, which is the Company’s presentation currency. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial instruments (or, where appropriate, a shorter period) to the carrying amount of the financial instruments. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly d) Revenue recognition attributable to the acquisition, issue or disposal of a financial asset or liability. Fair value changes on other The Company recognises revenue from interest derivatives held for risk management purposes, and on long term loans to financial institutions secured other financial assets and liabilities carried at fair value against mortgages and financial instruments. The through profit or loss, are presented in net income on Company recognises revenue as and when it satisfies other financial instruments carried at fair value in the a performance obligation by transferring control of a profit or loss. Once a financial asset or a portfolio of product or service to a customer. The amount of revenue similar financial assets has been written down as a result recognised is the amount the Company expects to of an impairment loss, interest income is recognised receive in accordance with the terms of the contract, using the rate of interest that was used to discount Kenya Mortgage Refinance Company PLC 40 Annual Report 2020 the future cash flows for purposes of measuring the minus the cumulative amortisation using the effective allowance for impairment. interest method of any difference between that initial amount and, for financial assets, adjusted for any loss ii) Fees and commission income allowances. Fees and commissions are generally recognised on The effective interest rate is the rate that exactly discounts an accrual basis when the service has been provided. estimated future cash payments or receipts through the Loan commitment fees for loans that are likely to be expected life of the financial asset or financial liability drawn down are deferred (together with related direct to the gross carrying amount of a financial asset (i.e. its costs) and recognised as an adjustment to the effective amortised cost before any impairment allowance) or to interest rate on the loan. Commission and fees arising the amortised cost of a financial liability. The calculation from negotiating, or participating in the negotiation of, does not consider expected credit losses and includes transaction costs, premiums or discounts and fees paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired financial assets – assets that are credit- impaired at initial recognition, the Company calculates the credit- adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows. When the Company revises the estimates of future cash flows, the carrying amount of the respective financial asset or financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in the statement of comprehensive income. a transaction for a third party – such as the arrangement Interest income of the acquisition of shares or other securities, or the purchase or sale of businesses – are recognised Interest income and interest expense on interest bearing on completion of the underlying transaction. Portfolio financial instruments is calculated by applying the and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-apportionate basis. Performance- linked fees or fee components are recognised when the performance criteria are fulfilled. e) Financial instruments Financial assets and liabilities Measurement methods Amortised cost and effective interest rate The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or Kenya Mortgage Refinance Company PLC Annual Report 2020 41 effective interest rate to the gross carrying amount, difference is recognised as a gain or loss. except for: b) In all other cases, the difference is deferred and the timing of recognition of deferred day one (a) profit or loss is determined individually. It is either Purchased or originated credit impaired (POCI) amortised over the life of the instrument, deferred financial assets, for which the original credit- adjusted effective interest rate is applied to the amortised cost of the financial asset; until the instrument’s fair value can be determined and using market observable inputs, or realised through settlement. (b) Financial assets Financial assets that are not Purchased or originated credit impaired “POCI” but have subsequently become credit-impaired, for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e.net of the (i) Classification and subsequent measurement expected credit loss provision) in subsequent reporting periods. The Company classified its financial assets in the following measurement categories: Initial recognition and measurement 01 Financial assets and financial liabilities are recognised Fair value through when the entity becomes a party to the contractual profit or loss (FVPL) provisions of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date which the Company commits to purchase or sell the asset. At initial recognition, the Company measures a financial 02 Fair value through other asset or financial liability at its fair value plus or minus, comprehensive income in the case of a financial asset or financial liability not (FVOCI) at fair value through the profit or loss, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability, such fees and commissions. Transaction costs of financial assets and financial liabilities are carried at 03 fair value through profit or loss are expensed in profit Amortised cost or loss. Immediately after the initial recognition, an expected credit loss allowance (ECL) is recognised for the financial assets measured at amortised cost and investments in debt instruments measured at fair value through other comprehensive income (FVOCI), which Debt instruments results in an accounting loss being recognised in the Debt instruments are those instruments that meet statement of comprehensive income when an asset is the definition of a financial liability from the issuer’s newly originated. perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in When the fair value of financial assets and liabilities factoring arrangements without recourse. Classification differs from the transaction price on initial recognition, and subsequent measurement of debt instruments the entity recognises the difference as follows: depend on: a) When the fair value is evidenced by a quoted price (i) the Company’s business model for managing the in an active market for an identical asset or liability asset; and (i.e. Level 1 input) or based on a valuation technique (ii) the cash flow characteristics of the asset that uses only data from observable markets, the Based on these factors, the Company classifies its debt Kenya Mortgage Refinance Company PLC 42 Annual Report 2020 instruments into one of the following three measurement not meet the criteria for amortised cost or fair value categories: through other comprehensive income (FVOCI) are measured at fair value through profit or loss. A gain • Amortised cost: assets that are held for collection or loss on a debt investment that is subsequently of contractual cash flows where those cash measured at fair value through profit or loss and flows represent solely payments of principal and is not part of a hedging relationship is recognised interest (SPPI), and that are not designated at fair in profit or loss and presented within “Net trading value through profit or loss (FVPL), are measured income” in the period in which it arises, unless it at amortised cost. The carrying amount of these arises from debt instruments that were designated assets are adjusted by any expected credit loss at fair value or which are not held for trading, in allowance. Interest income from financial assets is which case they are presented separately in “Net included in “interest and similar income” using the investment income”. Interest income from these effective interest rate method. financial assets is included in “interest income” using the effective interest rate method. • Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection Business model: The business model reflects how the of contractual cash flows and for selling the assets, Company manages the assets in order to generate where the assets’ cash flows represent solely cash flows. That is, whether the Company’s payments of principal and interest, and that are objective is solely to collect the contractual cash not designated at fair value through profit or loss flows from the assets or is to collect both the (FVPL), are measured through other comprehensive contractual cash flows and cash flows arising from income (FVOCI). Movements in the carrying sale of assets. If neither of these is applicable (e.g. amount are taken through other comprehensive financial assets are held for trading purposes), then income (OCI), except for the recognition of the financial assets are classified as part of “other” impairment gains or losses, interest revenue and business model and measured at fair value through foreign exchange gains and losses on instrument’s profit or loss (FVPL). Factors considered by the amortised cost which are recognised in profit or Company in determining the business model for loss. When the financial asset is derecognised, the a class of assets include past experience on how cumulative gain or loss previously recognised in cash flows for these assets were collected, how other comprehensive income (OCI) is reclassified the asset’s performance is evaluated and reported from equity to profit or loss and recognised in “Net by key management personnel, how risks are investment income” using the effective interest rate assessed and managed and how managers are method. compensated. For example, the liquidity portfolio of assets is held by the Company as part of liquidity • Fair value through the profit or loss: Assets that do management and is generally classified with the hold to collect and sell business model. Securities held for trading are held principally for the purpose of selling in the near term or are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. These securities are classified in the “other” business model and measured at fair value through profit or loss (FVPL). Solely payments of principal and interest (SPPI): Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Company assesses whether the financial instruments’ cash flows represent solely payments of principal and interest (the “SPPI test”). In making this assessment, the Kenya Mortgage Refinance Company PLC Annual Report 2020 43 Company considers whether the contractual cash flows income (FVOCI) when those investments are held for are consistent with a basic lending arrangement i.e. purposes other than to generate investment returns. interest includes only consideration for the time value of money, credit risk and a profit margin that is consistent When this election is used, fair value gains and losses with a basic lending arrangement. Where the are recognised in other comprehensive income (OCI) contractual terms introduce exposure to risk or volatility and are subsequently reclassified to profit or loss, that are inconsistent with a basic lending arrangement, including on disposal. Impairment losses (and reversals the related financial asset is classified and measured at of impairment losses) are not reported separately fair value through profit or loss. from other changes in fair values. Dividends, when representing a return on such investments, continue to Financial assets with embedded derivatives are be recognised in profit or loss as other income when considered in their entirety when determining whether the Company’s right to receive payment is established. their cash flows are solely payment of principal and interest. Gains and losses on equity investments at fair value through profit or loss (FVPL) are included in the “Net The Company reclassifies debt investments when and trading income” line in the statement of profit or loss. only when its business model for managing those assets changes. The reclassification takes place from the start (ii) Modification of loans of the first reporting period following the change. The changes are expected to be very infrequent and none The Company sometimes renegotiates or otherwise occurred during the year. modifies the contractual cash flows of loans to customers. When this happens, the Company assesses whether or not the new terms are substantially different to the original terms. The Company does this by considering, among others, the following factors: • If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. • Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan. • Significant extension of the loan term when the borrower is not in financial difficulty. • Significant change is interest rate Equity Instruments • Change in the currency of the loan Equity instruments are instruments that meet the • Insertion of collateral, other security or credit definition of equity from the issuer’s perspective; that is, enhancement that significantly affect the credit risk instruments that do not contain a contractual obligation associated with the loan. to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares. The Company subsequently measures all equity investments at fair value through profit or loss, except where the Company’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Company’s policy is to designate equity investments as fair value through other comprehensive Kenya Mortgage Refinance Company PLC 44 Annual Report 2020 If the terms are substantially different, the Company (ii) Is prohibited from selling or pledging the assets; derecognises the original financial asset and and recognises a “new” asset at fair value and recalculates (iii) Has an obligation to remit any cash it collects from a new effective interest rate for the asset. The date of assets without material delays renegotiation is consequently considered to be the date of initial recognition for impairment calculation Collateral (shares and bonds) furnished by the purposes, including for the purpose of determining Company under standard repurchase agreements whether a significant increase in credit risk has occurred. and securities lending and borrowings transactions are not derecognised because the Company retains However, the Company also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Company recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate of credit-adjusted effective interest rate for purchased or originated credit impaired (POCI) financial assets. substantially all the risks and rewards on the basis of predetermined repurchase price, and the criteria for (iv) Derecognition other than on a modification derecognition are therefore not met. This also applies to certain securitisation transactions in which the Company Financial assets, or a portion thereof, are derecognised retains a subordinated residual interest. when the contractual rights to receive the cash flows from the assets have expired, or when they have been Financial liabilities transferred and either (i) the Company transfers substantially all the risks and rewards of ownership, (i) Classification and subsequent measurement or (ii) the Company neither transfers nor retains substantially all the risks and rewards of ownership In both the current period and prior period, financial and the Company has not retained control. liabilities are classified as subsequently measured at amortised cost, except for: The Company enters into transactions where it retains • Financial liabilities at fair value through profit or the contractual rights to receive cash flows from assets loss such as derivatives, financial liabilities held for but assumes a contractual obligation to pay those cash trading (e.g. short positions in the trading booking) flows to other entities and transfers substantially all of the and other financial liabilities designated as such risks and rewards. These transactions are accounted for at initial recognition. Gains or losses on financial as “pass through” transfers that result in derecognition liabilities designated at fair value through profit or if the Company: loss are presented partially in other comprehensive income (the amount of change in the fair values of (i) Has no obligation to make payments unless it the financial liability that is attributable to changes collects equivalent amounts from the assets in the credit risk of that liability) and partially profit Kenya Mortgage Refinance Company PLC Annual Report 2020 45 or amount reported in the statement of financial position • loss (the remaining amount of change in the fair when there is a legally enforceable right to offset value of the liability); the recognised amounts and there is an intention to • Financial liabilities arising from the transfer settle on a net basis or realise the asset and settle the of financial assets which did not qualify for liability simultaneously. derecognition, • their risks and economic characteristics are not • whereby a financial liability is recognised for closely related to those of the host contract; the consideration received for the transfer. In • a separate instrument with the same terms would subsequent periods, the Company recognises any meet the definition of a derivative; and expense incurred on the financial liability; and • the hybrid contract is not measured at fair value • Financial guarantee contracts and loan through profit or loss. commitments. f) Cash and cash equivalents (ii) Derecognition Cash and cash equivalents include cash in hand, Financial liabilities are derecognised when they are deposits held at call with Banks and other short-term extinguished (i.e. when the obligation specified in the highly liquid investments with original maturities of contract is discharged, cancelled or expires). three months or less from the date of acquisition that are readily convertible to known amounts of cash and The exchange between the Company and its original which are subject to an insignificant risk of changes lenders of debt instruments with substantially different terms, as well as substantial modification of the terms of the existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. in value, net of bank overdrafts. Funds restricted for a If the exchange of debt instruments or modification period of more than three months on origination and of terms is accounted for as an extinguishment, any cash reserve deposits with the Central Bank of Kenya costs or fees incurred are recognised as part of the are excluded from cash and cash equivalents. In the gain or loss on the extinguishment. If the exchange of balance sheet, HFC mortgage scheme deposit are modification is not accounted for as an extinguishment, included as other receivables under assets and bank any costs or fees incurred adjust the carrying amount of overdrafts if any are included as borrowings under the liability and are amortised over the remaining term liabilities. Cash and cash equivalents are carried at of the modified liability. amortised cost. Offsetting financial assets and financial g) Property and equipment liabilities All categories of property, plant and equipment are Financial assets and liabilities are offset and the net initially recognised at cost and subsequently carried at Kenya Mortgage Refinance Company PLC 46 Annual Report 2020 cost less accumulated depreciation and accumulated Each part of an item of property, plant and equipment impairment losses. Cost includes expenditure directly with a cost that is significant in relation to the total cost attributable to the acquisition of the assets. Computer of the item, is depreciated separately. software, including the operating system, that is an integral part of the related hardware is capitalised as The assets’ residual values and useful lives are reviewed, part of the computer equipment. and adjusted if appropriate, at each balance sheet date. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as Gains and losses on disposal of property and equipment appropriate, only when it is probable that it will are determined by reference to their carrying amount increase the future economic benefits associated with and are taken into account in determining operating the item that will flow to the Company over those profit. On disposal of revalued assets, amounts in the originally assessed and the cost of the item can be revaluation surplus reserve relating to that asset are measured reliably. Repairs and maintenance expenses transferred to retained earnings. are charged to the profit and loss account in the year in which they are incurred. h) Intangible assets Increases in the carrying amount arising on revaluation Costs associated with maintaining computer software are recognised in other comprehensive income and programmes are recognised as an expense as incurred. accumulated in equity under the heading of revaluation Development costs that are directly attributable to the surplus. Decreases that offset previous increases of the design and testing of identifiable and unique software same asset are recognised in other comprehensive products controlled by the Company are recognised as income. All other decreases are charged to the profit intangible assets when the following criteria are met: and loss account. Annually, the difference between the • it is technically feasible to complete the software depreciation charge based on the revalued carrying product so that it will be available for use; amount of the asset charged to the statement of • management intends to complete the software comprehensive income and depreciation based on the product and use or sell it; asset’s original cost (excess depreciation) is transferred • there is an ability to use or sell the software product; from the revaluation surplus reserve to retained earnings. • it can be demonstrated how the software product will generate probable future economic benefits; Depreciation is calculated using the straight line method • adequate technical, financial and other resources to write down the cost or the revalued amount of each to complete the development and to use or sell the asset to its residual value over its estimated useful life. software product are available; and Depreciation on property and equipment is calculated • the expenditure attributable to the software product on the reducing balance at the following annual rates: during its development can be reliably measured. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Rate - % Development costs previously recognised as an expense Software 33.3% are not recognised as an asset in a subsequent period. Motor vehicles 25% Computer software development costs recognised as assets are amortised over their estimated useful lives, Computers 25% which does not exceed three years. Acquired computer software licences are capitalised Office equipment 20% on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised Furniture and fittings 10% on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years. Leasehold Over the improvements Period of the lease Kenya Mortgage Refinance Company PLC Annual Report 2020 47 i) Impairment of non-financial assets amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the Assets are reviewed for impairment whenever events initial recognition of goodwill; deferred income tax is or changes in circumstances indicate that the carrying not accounted for if it arises from initial recognition amount may not be recoverable. An impairment loss of an asset or liability in a transaction other than a is recognised for the amount by which the asset’s business combination that at the time of the transaction carrying amount exceeds its recoverable amount. The affects neither accounting nor taxable profit or loss. recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of Deferred income tax is determined using tax rates (and assessing impairment, assets are grouped at the lowest laws) that have been enacted or substantially enacted levels for which there are separately identifiable cash by the reporting date and are expected to apply when flows (cash-generating units). The impairment test also the related deferred income tax asset is realised or the can be performed on a single asset when the fair value deferred income tax liability is settled. less cost to sell or the value in use can be determined reliably. Non-financial assets that suffered impairment Deferred income tax assets and liabilities are offset are reviewed for possible reversal of the impairment at when there is a legally enforceable right to offset each reporting date. current income tax assets against current income tax liabilities and when the deferred income taxes assets j) Income tax and liabilities relate to income taxes levied by the same taxation authority on either the same entity or different The tax expense for the period comprises current and taxable entities where there is an intention to settle the deferred income tax. Tax is recognised in profit or loss, balances on a net basis. except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this k) Leases case, the tax is also recognised in other comprehensive income or directly in equity respectively. Leases under which the Company is the lessee Current income tax On the commencement date of each lease (excluding leases with a term, on commencement, of 12 months The current income tax charge is calculated on the or less and leases for which the underlying asset is of basis of tax laws enacted or substantively enacted low value) the company recognises a right- of-use asset at the reporting date. The directors periodically and a lease liability. evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject The lease liability is measured at the present value of the to interpretation. They establish provisions where lease payments that are not paid on that date. The lease appropriate on the basis of amounts expected to be payments include fixed payments, variable payments paid to the tax authorities. that depend on an index or a rate, amounts expected to be payable under residual value guarantees, and Deferred income tax the exercise price of a purchase option if the company is reasonably certain to exercise that option. The lease Deferred income tax is recognised, using the liability payments are discounted at the interest rate implicit in method, on temporary differences arising between the the lease. If that rate cannot be readily determined, the tax bases of assets and liabilities and their carrying company’s incremental borrowing rate is used. For leases that contain non-lease components, the company allocates the consideration payable to the lease and non-lease components based on their relative stand-alone components. The right-of-use asset is initially measured at cost comprising the initial measurement of the lease Kenya Mortgage Refinance Company PLC 48 Annual Report 2020 based on the asset’s original cost (excess depreciation) is transferred from the retained earnings to revaluation surplus reserve. For leases with a term, on commencement, of 12 months or less and leases for which the underlying asset is of low value, the total lease payments are recognised in profit or loss on a straight-line basis over the lease period. The above accounting policy has been applied from 1 January 2020. Leases under which the Company is the lessor Leases that transfer substantially all the risks and rewards of ownership of the underlying asset to the lessee are classified as finance leases. All other leases are classified as operating leases. Payments received liability, any lease payments made on or before the under operating leases are recognised as income in commencement date, any initial direct costs incurred, the profit or loss on a straight-line basis over the lease and an estimate of the costs of restoring the underlying term. asset to the condition required under the terms of the lease. l) Provisions for liabilities Subsequently the lease liability is measured at Provisions are recognised when the Company has a amortised cost, subject to remeasurement to reflect present legal or constructive obligation as a result of any reassessment, lease modifications, or revised fixed past events, it is probable that an outflow of resources lease payments. embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of All other right-of-use assets are subsequently measured the obligation can be made. at cost less accumulated depreciation and any accumulated impairment losses, adjusted for any m) Post-employment benefit obligations remeasurement of the lease liability. Depreciation is calculated using the straight-line method to write down The liability for post-employment benefit obligations the cost of each asset to its residual value over its relates to terminal gratuities. The Company does not estimated useful life. fund this obligation in advance. If ownership of the underlying asset is not expected to The Company’s obligations, both vested and unvested, pass to the company at the end of the lease term, the to pay terminal gratuities to employees are recognised estimated useful life would not exceed the lease term. based on employees’ service up to the reporting date and their salaries at that date. The net change in the Increases in the carrying amount arising on revaluation obligation is recognised in profit or loss. are recognised in other comprehensive income and accumulated in equity under the heading of revaluation The Company operates a defined contribution surplus. Decreases that offset previous increases of the retirement benefits plan for its employees, the assets same asset are recognised in other comprehensive of which are held in a separate trustee administered income. All other decreases are recognised in profit or scheme managed by an insurance company. A defined loss. Annually, the difference between the depreciation contribution plan is a plan under which the Company charge based on the revalued carrying amount of the pays fixed contributions into a separate fund and asset recognised in profit or loss and depreciation has no legal or constructive obligation to pay further Kenya Mortgage Refinance Company PLC Annual Report 2020 49 contributions if the fund does not hold sufficient assets 2. Significant judgements and key sources to pay all employees the benefits relating to employee of estimation uncertainty service in the current or prior periods. The Company’s contributions are charged to the profit and loss account in the year to which they relate. The Company and its employees also contribute to the National Social Security Fund (NSSF), a national defined contribution scheme. Contributions are determined by local statute and the Company’s contributions are charged to the profit and loss account in the year to which they relate. n) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the asset based either on actual cost on specific borrowings or, in the case In the process of applying the accounting policies of general borrowings, based on a weighted average adopted by the Company, the directors make certain cost. judgements and estimates that may affect the amounts recognised in the financial statements. Such judgements and estimates are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the current circumstances. However, actual results may differ from those estimates. The judgements and estimates are reviewed at each financial reporting date to ensure that they are still reasonable under the prevailing circumstances based on the information available, and any revisions to such judgements and estimates are recognised in the year in which the revision is made. a). Significant judgements made in applying the Company’s accounting Capitalisation of borrowing costs ceases when all policies activities necessary to prepare the asset for its intended The judgements made by the directors in the process of use or sale are complete. All other borrowing costs are applying the Company’s accounting policies that have recognised in profit or loss. the most significant effect on the amounts recognised in the financial statements include: o) Comparatives i) Classification of financial assets: whether the Where necessary, comparative figures have been business model in which financial assets are held adjusted to conform with changes in presentation in the has as its objective the holding of such assets to current year. collect contractual cash flows or to both collect contractual cash flows and sell the assets; and whether the contractual terms of financial assets give rise on specified dates to cash flows that are solely payments of principal and interest; Kenya Mortgage Refinance Company PLC 50 Annual Report 2020 ii) whether credit risk on financial assets has increased options (or periods after termination options) are only significantly since initial recognition; and included in the lease term if the lease is reasonably certain to be extended (or not terminated). iii) how to determine the incremental borrowing rate used in the discounting of lease liabilities. For leases of offices, the following factors are normally the most relevant: b). Key sources of estimation uncertainty • If there are significant penalties to terminate (or Key assumptions made about the future and other not extend), the company is typically reasonably sources of estimation uncertainty that have a significant certain to extend (or not terminate). risk of causing a material adjustment to the carrying • If any leasehold improvements are expected to amount of assets and liabilities within the next financial have a significant remaining value, the company year include: is typically reasonably certain to extend (or not terminate). i) Impairment losses • Otherwise, the company considers other factors including historical lease durations and the costs Estimates made in determining the expected credit and business disruption required to replace the losses on financial assets. Such estimates include the leased asset. determination of probabilities of default including the use of forward looking information, and of losses given Most extension options in offices and vehicles leases default. have not been included in the lease liability, because the company could replace the assets without significant ii) Useful lives and residual values of property and cost or business disruption. equipment and intangible assets Management reviews the useful lives and residual values The lease term is reassessed if an option is actually of the items of property and equipment, intangible assets exercised (or not exercised) or the company becomes and right-of-use assets on a regular basis. During the obliged to exercise (or not exercise) it. The assessment financial year, the directors determined no significant of reasonable certainty is only revised if a significant changes in the useful lives and residual values. event or a significant change in circumstances occurs, which affects this assessment, and that is within the iii Accounting for leases under IFRS 16 control of the lessee. Management has made various judgements and 3. Financial risk management estimates under IFRS 16 as detailed below: The company’s business involves taking on risks in a Incremental borrowing rate: To determine the targeted manner and managing them professionally. incremental borrowing rate, the company: • where possible, uses recent third-party financing received as a starting point, adjusted to reflect changes in financing conditions since third party financing was received; • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk, which does not have recent third party financing; and • makes adjustments specific to the lease, e.g. term, country, currency and security. Lease term/period: In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension Kenya Mortgage Refinance Company PLC Annual Report 2020 51 The core functions of the company risk management of each business unit regularly. are to identify all key risks for the company, measure these risks, manage the risk positions and determine Credit risk on financial assets with banking institutions is capital allocations to each operating entity. The managed by dealing with institutions with good credit company regularly reviews its risk management policies ratings and placing limits on deposits that can be held and systems to reflect changes in markets, products and with each institution. The Company carries out its own best market practice. assessment of credit risk before investing, and updates such assessments at each reporting date. The company’s risk management objective is to achieve an appropriate balance between risk and return and In assessing whether the credit risk on a financial asset minimise potential adverse effects on the company’s has increased significantly, the Company compares the financial performance. risk of default occurring on the financial asset as at the reporting date with the risk of default occurring on The company defines risk as the possibility of losses or that financial asset as at the date of initial recognition. profits foregone, which may be caused by internal or In doing so, the Company considers reasonable and external factors. supportable information that is indicative of significant increases in credit risk since initial recognition and Financial risk management is carried out by the that is available without undue cost or effort. There management under policies approved by the Board is a rebuttable assumption that the credit risk on a of Directors. The management function identifies and financial asset has increased significantly since initial evaluates financial risks in close co-operation with recognition when contractual payments are more than the individual Company’s operating units. The Board 30 days past due. provides written principles for overall risk management, as well as written policies covering specific areas, such For these purposes default is defined as having occurred as interest rate risk, credit risk and non derivative financial if the debtor is in breach of contractual obligations, or instruments. In addition, internal audit is responsible for if information is available internally or externally that the independent review of risk management and the suggests that the debtor is unlikely to be able to meet its control environment. obligations. However, there is a rebuttable assumption that default does not occur later than when a financial 3.1 Credit risk and expected credit losses asset is 90 days past due. Credit risk is the risk of suffering financial loss, should A financial asset is credit-impaired when one or more any of the Company’s customers, clients or market events that have a detrimental impact on the estimated counterparties fail to fulfil their contractual obligations. future cash flows of the financial asset have occurred. Credit risk arises mainly from loans and advances and loan commitments arising from such lending activities, Evidence that a financial asset is credit impaired include but can also arise from credit enhancement provided, observable data about the following events: financial guarantees, letters of credit, endorsements and acceptances. 01 significant financial difficulty of the debtor The Company is also exposed to other credit risks arising a breach of contract from investments in debt securities and other exposures arising from its trading activities (‘trading exposures’), 02 it is probable that the including non-equity trading portfolio assets. debtor will enter bankruptcy Credit risk is the single largest risk for the company’s business; the directors therefore carefully manage the the disappearance of exposure to credit risk. The credit risk management and control are centralised in a credit risk management an active market for the financial asset because of financial difficulties. 03 team, which reports to the Board of Directors and head Kenya Mortgage Refinance Company PLC 52 Annual Report 2020 The gross carrying amount of financial assets with exposure to credit risk at the balance sheet date was as follows: Basis for measurement of loss allowance 12-month Lifetime expected credit losses (see expected credit note below) losses (a) (b) (c) Total Kshs Kshs Kshs Kshs Kshs At 31st December 2020 Other receivables 2,840,353 - - - 2,840,353 Cash at bank 6,062,907,771 - - - 6,062,907,771 Exposure to credit risk 6,065,748,124 - - - 6,065,748,124 At 31st December 2019 Other receivables 497,926 - - - 497,926 Cash at bank 2,269,227,540 - - - 2,269,227,540 Exposure to credit risk 2,269,725,466 - - - 2,269,725,466 company’s reputation. The Risk Committee, is tasked Financial assets for which the loss allowance has been with the responsibility of ensuring that all foreseeable measured at an amount equal to lifetime expected funding commitments and deposits withdrawals can be credit losses have been analysed above based on their met when due and that no difficulties meeting financial credit risk ratings as follows: liabilities as they fall due is encountered. (a) financial assets for which credit risk has increased A portfolio of short-term liquid assets largely made up of significantly since initial recognition but that are short-term liquid investment securities and bank facilities not credit impaired; ensure that sufficient liquidity is maintained within the (b) financial assets that are credit impaired at the company as a whole. balance sheet date; (c) trade receivables, contract assets and lease (ii) Source of funding receivables for which the loss allowance is always measured at an amount equal to lifetime expected The Company successfully concluded a capital credit losses, based, as a practical expedient, on mobilization drive which resulted in the Government provision matrices. of Kenya, eight (8) commercial banks, one (1) micro finance bank, and eleven (11) SACCOs injecting equity 3.2 Liquidity risk funds. In addition, two development finance institutions, Shelter Afrique & IFC are in the final stages of investing The company is exposed to the risk that it will encounter equity in the Company, with Shelter Afrique having difficulty in raising funds to meet commitments disbursed their equity contribution, pending allotment associated with customer requirements. Liquidity risk is after successful vetting by the regulator CBK and with addressed through the following measures: KMRC having fulfilled all conditions precedent for the disbursement of the equity contribution by IFC. (i) Management of liquidity risk The company’s approach to managing liquidity is The company also has a window to borrow funds from to ensure, as far as possible, that it will always have the Government of Kenya to be utilised as a line of sufficient liquidity to meet its liabilities when due, credit to provide mortgage refinancing to the eligible under both normal and stressed conditions, without participating financial institutions and offer technical incurring unacceptable losses or risking damage to the assistance to support project implementation. Kenya Mortgage Refinance Company PLC Annual Report 2020 53 The company also has plans to raise additional funding from the capital market through issuance of bonds. (iii) Exposure to liquidity risk The company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company’s reputation. The Risk Committee, is tasked with the responsibility of ensuring that all foreseeable funding commitments and deposits withdrawals can be met when due and that no difficulties meeting financial liabilities as they fall due is encountered. A portfolio of short-term liquid assets largely made up of short-term liquid investment securities and Company facilities ensure that sufficient liquidity is maintained within the company as a whole. A mortgage refinance company shall maintain such leverage ratio as may be specified by the Central Bank of Kenya by notice in the Gazette. The table below represents the cash flows payable by the company under non - derivative financial liabilities by remaining contractual maturities at the end of the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than Between Between Over one month 1-3 months 3-12 months 1 year Kshs Kshs Kshs Kshs 31st December 2020 Trade and other payables - 7,583,319 - - Borrowings - - - 3,725,173,478 - 7,583,319 - 3,725,173,478 31st December 2019 Trade and other payables - 25,444,686 - - Borrowings - 25,444,686 - - The company manages the inherent liquidity risk based on expected undiscounted cash inflows. 3. Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market price and comprises three types of risks: currency risk, interest rate risk and other price risk. Currency risk The company operates wholly within Kenya and its assets and liabilities are reported in the local currency. As at the end of trading period it had no currency risk pertaining to its operations. Interest rate risk The Company is exposed to cash flow interest rate risk resulting from changes in interest rates on its simple rate borrowings which shall not be lower than the interest rate charged by the World Bank to the Government. The Company manages this exposure by maintaining a high interest cover ratio, which is the extent to which profits are available to service borrowing costs. Management consider that a change in interest rates of 1 percentage points in the year ending 31st December 2021 is reasonably possible. If the interest rates on the Company’s borrowings at the year-end were to increase/decrease by this number of percentage points, with all other factors remaining constant, the post tax profit and equity would be lower/higher by Kshs. 25,919,631 (2019: Kshs. nil) respectively. Kenya Mortgage Refinance Company PLC 54 Annual Report 2020 Other price risk Other price risk arises on financial instruments because of changes in the price of a financial instrument. The Company is not exposed to other price risk because it has no investments in instruments like quoted shares as at the end of the year. 4. Capital Risk Management The Company’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position, are: (i) To comply with the capital requirements set by the Central Bank of Kenya; (ii) To safeguard the Company’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and (iii) To maintain a strong capital base to support the development of its business. The institution’s aim is to build 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 the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. In implementing current capital requirements, the Central Bank of Kenya requires each Mortgage Refinance Company’s Institution to maintain; • A core capital of not less than one billion shillings. • A core capital of not less than 10.5 per centum of total risk weighted assets plus risk weighted assets and off- balance sheet items. • A total capital of not less than 14.5 per centum of its total risk weighted assets plus risk weighted assets and off-balance sheet items. • The computation of risk weighted assets and off-balance sheet items shall be computed as may be determined by the Company from time to time. The Company has complied with all regulatory imposed capital requirements. The table below summarises the composition of regulatory capital and the ratios of the Company for the year ended 31 December 2020. During the year, the Company complied with all of the regulatory imposed capital requirements to which they are subject. Capital 2020 2019 Kshs Kshs Share capital 1,291,000,100 1,291,000,100 Retained profit 341,688,523 264,471,184 Contribution pending allotment 883,999,900 683,999,900 2,516,688,523 2,239,471,184 Core capital 2,513,836,768 2,240,427,942 Total risk - weighted assets 1,164,318,865 450,667,259 Borrowings 3,725,173,478 - Gearing 148% 0% Capital ratios • Total regulatory capital expressed as a percentage of total risk 216.2% 496.9% • Minimum total Capital to Risk Weighted Assets Requirement 14.5% 14.5% Excess 201.7% 482.4% Kenya Mortgage Refinance Company PLC Annual Report 2020 55 5. Interest income 2020 2019 Kshs Kshs Interest on investments 221,094,696 125,664,018 6. Other operating income 2020 2019 Kshs Kshs Grant - The National Treasury - 200,000,000 7. Interest expense 2020 2019 Kshs Kshs Interest expense: - The National Treasury 22,368,998 - - Lease liabilities 3,020,657 - 25,389,655 - Total interest expense for financial liabilities measured at amortised cost. 8. Administration and operating expenses 2020 2019 Kshs Kshs Staff costs 34,148,069 10,485,771 Directors’ remuneration 15,251,000 3,608,000 Provision for post-employment benefits 2,578,235 - Office rent and service charge 3,075,403 220,873 Conferences, Seminars and workshops 2,538,873 2,595,628 Licenses and permits 334,104 407,127 Appraisal fees - 1,567,500 ICT expenses 131,049 191,400 Telephone, postage and internet 868,524 35,360 Marketing and advertisement 2,544,791 525,502 Office running expenses 1,590,520 720,116 Consultancy fees 9,305,104 10,874,140 Insurance costs 2,580,393 14,620 Audit fees 700,000 700,000 Bank charges 182,970 27,459 Subscriptions 333,074 227,396 Corporate Social Responsibility 783,545 - Motor vehicle running expenses 176,761 - Electricity 300,967 - Fines and penalties 718,614 - 78,141,996 32,200,892 9. Depreciation and amortisation expenses 2020 2019 Kshs Kshs Depreciation of property and equipment 7,043,922 202,901 Depreciation on right-of-use assets 8,103,714 - Amortisation of intangible assets 800,408 - 15,948,044 202,901 Kenya Mortgage Refinance Company PLC 56 Annual Report 2020 10. Income tax 2020 2019 Kshs Kshs (a) Income tax expense Current income tax 27,457,247 27,832,283 Deferred tax (income)/expense relating to the origination and reversal of temporary differences (Note 18) (3,434,354) 956,758 Deferred tax expense relating to change in tax rate (Note 18) 374,769 - Income tax expense 24,397,662 28,789,041 The tax on the Company’s profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate of 25% (2019: 30%) as follows: Net profit before income tax 101,615,001 293,260,225 Tax calculated at the statutory tax rate of 25% (2019: 30%) 25,403,750 87,978,068 Tax effect of: Expenses not deductible for tax purposes 179,654 810,973 Income not subject to tax - (60,000,000) Effect of change in statutory tax rate on deferred tax (see below) (374,769) - Over-provision in prior year (810,973) - Income tax expense 24,397,662 28,789,041 The statutory tax rate was reduced from 30% to 25% for the year of income 2020 by the Tax Laws (Amendment) Act, 2020. The Tax Laws (Amendment) (No.2) Act, 2020 increased the rate back to 30% with effect from 1st January 2021. (b) Statement of financial position 2020 2019 Kshs Kshs At 1 January 8,982,681 - Current tax charge 27,457,247 27,832,283 Tax paid during the year - Balance of tax (8,982,681) - - Withholding tax (19,800,889) (18,849,602) At 31 December 7,656,358 8,982,681 11 Property and equipment Office Furniture and Leasehold Motor vehicles Computers equipment fittings improvements Total Kshs Kshs Kshs Kshs Kshs Kshs Cost At 1 January 2019 - - - - - - Additions 4,703,244 629,500 - - - 5,332,744 At 31 December 2019 4,703,244 629,500 - - - 5,332,744 At 1 January 2020 4,703,244 629,500 - - - 5,332,744 Additions 13,872,600 3,765,018 744,740 11,970,000 27,318,037 57,670,395 At 31 December 2020 18,575,844 4,394,518 744,740 11,970,000 27,318,037 63,003,139 Depreciation At 1 January 2019 - - - - - - Charge for the year 97,984 104,917 - - 202,901 At 31 December 2019 97,984 104,917 - - - 202,901 At 1 January 2020 97,984 104,917 - - - 202,901 Charge for the year 1,464,824 481,537 12,412 532,143 4,553,006 7,043,922 Annual Report 2020 At 31 December 2020 1,562,808 586,454 12,412 532,143 4,553,006 7,246,823 Net book value At 31 December 2020 17,013,036 3,808,064 732,328 11,437,857 22,765,031 55,756,316 At 31 December 2019 4,605,260 524,583 - - - 5,129,843 Kenya Mortgage Refinance Company PLC 57 Kenya Mortgage Refinance Company PLC 58 Annual Report 2020 12. Intangible assets 2020 2019 Kshs Kshs Income tax expense Cost At 1st January - - Additions 7,203,673 - At 31st December 7,203,673 - Amortisation At 1st January - - Charge for the year 800,408 - At 31st December 800,408 - Net book amount At 31st December 6,403,265 - The company obtained an Enterprise Resource Planning (ERP) Software during the year which went live in September 2020. The management made a call based on best practice as well as the estimated useful life of the software, to amortize the software over a period of three years beyond which the company does not anticipate to derive benefits from use of the system. An amortization rate of 33.33% has therefore been applied in regard to the ERP. 13. Right-of-use-asset 2020 2019 Kshs Kshs Year ended 31 December 2019 At start of year 48,622,282 - Depreciation charge for the year (8,103,714) - At end of year 40,518,568 - Under the previous accounting policy prepaid operating lease rentals were recognised at historical cost and subsequently amortised over the lease period. The company leases one office. The leases of the office is typically for periods of between 3 and 6 years, with options to renew. None of the leases contains any restrictions or covenants other than the protective rights of the lessor or carries a residual value guarantee. For information on the related lease liabilities, see Note 17. Kenya Mortgage Refinance Company PLC Annual Report 2020 59 14. Other receivables 2020 2019 Kshs Kshs Prepayments 2,840,353 497,926 Accrued income 89,088,771 - HFC mortgage scheme deposit 50,184,220 - 142,113,344 497,926 The Company has entered into an agreement with HFC Limited to operate a staff Housing mortgage scheme. The company is required to deposit funds with HFC Limited for purposes of the scheme which will be held in the back up account, free funds account and any investment account. Backup account is the company’s account that hold funds designated as committed for loans disbursed to eligible applicants from the company. This has been classified as a receivable in the balance sheet with the exception of other accounts explained above classified as cash and cash equivalents. Upon expiry of the agreement for the staff mortgage scheme, HFC Limited shall retain the funds in the Backup account untill the loans are settled in full. 15. Cash and cash equivalents 2020 2019 Kshs Kshs Short-term bank deposits 3,360,854,025 2,067,075,360 - KCB Bank Kenya Limited 100,000,000 - - HFC Limited 1,371,392,000 158,122,088 - Co-operative Bank of Kenya Limited 1,230,661,746 44,030,092 Cash at bank and in hand 6,062,907,771 2,269,227,540 For the purpose of the statement of cash flows, cash and cash equivalents comprise as shown above: 16. Borrowings 2020 2019 Kshs Kshs The National Treasury 3,702,804,480 - Accrued interest 22,368,998 - 3,725,173,478 - The Government of Kenya entered into a Loan Agreement for a line of credit for an amount of Euros 219,000,000 with the International Bank for Reconstruction and Development (herein after called “the World Bank”) on 5th December 2019 to undertake a project consisting of the support for establishment, capitalization and operationalization of the Kenya Mortgage Refinance Company; provision of financing by Government to the Company to be utilized as a line credit for providing the mortgage refinancing to the eligible participating financial institutions; and Technical Assistance. The Government agreed under the Loan Agreement dated 5th December 2019 to on-lend to the Company an amount of Euros 166,400,000 (equivalent to Kshs. 18,819,640,320) from the proceeds of the Loan for the implementation of the Project as explained above. The Government charges interest on the principal amount of the Subsidiary Loan Facility at a simple interest rate of 4.5% per annum. Borrowings from the government amounted to Kshs. 3,702,804,480 (2019: Kshs. nil) as at the reporting date. Interest payable of Kshs. 22,368,998 (2019: Kshs. nil) remained unpaid as at 31 December 2020. These amounts Kenya Mortgage Refinance Company PLC 60 Annual Report 2020 shall be accrued over the grace period/disbursement period will be capitalised on the first principal repayment date and the management expects to meet all contractual obligations in the future. The company shall repay to the Government the principal amount of the loan in 40 equal semi-annual installments each year commencing on 30 March 2024 and ending 30 September 2043. At the year-end, the Company had Kshs. 15,116,835,840 (2019: Kshs. nil) of undrawn facilities which it may utilise to fund its obligations. The fair values of current borrowings equal to their carrying amount, as the impact of discounting is not significant. 17. Lease liabilities 2020 2019 Kshs Kshs At 31 December 46,172,905 - The total cash outflow for leases in the year was: Payments of principal portion of the lease liability 5,470,034 - For more information on the nature of the leases entered into and the related right-of-use assets, see Note 13. 18. Deferred income tax Deferred income tax is calculated using the enacted tax rate of 30%, which is the enacted rate applying from 1st January 2021, except for capital gains, for which the enacted tax rate of 5% is used (2019: 30% and 5%). However, the statutory tax rate for the year ended 31st December 2020 was 25% (see Note 10), except for capital gains, which remained as 5%. Deferred tax assets/(liabilities), and the deferred tax charge/(credit) in the profit and loss account and in other comprehensive income are attributable to the following items: Effect of Credited/ At 31st At 1st Change of (Charged) to December January tax rate profit or loss Kshs Kshs Kshs Kshs Year ended 31st December 2020 Property, plant and equipment (956,758) 4,844 777,067 (174,847) - on historical cost basis Software - 32,016 (224,114) (192,098) Right-of-use assets - accelerated tax depreciation - (405,186) 2,836,300 2,431,114 Lease liabilities - 122,469 (857,282) 734,813) Post-employment benefit obligation - (128,912) 902,383 773,471 Net deferred tax (liability)/ (956,758) (374,769) 3,434,354 2,102,827 asset Year ended 31st December 2019 Property, plant and equipment on historical cost basis - - (956,758) (956,758) Net deferred tax (liability) - - (956,758) 956,758) Kenya Mortgage Refinance Company PLC Annual Report 2020 61 19. Trade and other payables 2020 2019 Kshs Kshs Trade payables 365,484 - Accruals 7,583,319 25,444,686 Payroll liabilities 2,684,405 - Other payables 899,384 - Post-employment benefit obligation (Note 22) 2,578,235 - 14,110,827 25,444,686 20. Share capital Number of Issued and fully ordinary paid up capital shares Kshs At 1 January 1,291,000,100 - Issue for cash - 1,291,000,100 At 31 December 1,291,000,100 1,291,000,100 The total number of authorised ordinary shares is 50,000,000 with a par value of Kshs. 100 each. 21. Contribution pending allotment 2020 2019 Kshs Kshs At 1 January 683,999,900 - Addition during the year 200,000,000 683,999,900 At 31 December 2020 883,999,900 683,999,900 22. Post-Employment Benefit Obligation The Company’s obligation to pay terminal gratuities, based on employees’ years of service and salaries at the balance sheet date is as follows: 2020 2019 Kshs Kshs At start of year - - Additional provision made during the year, charged to profit or loss 2,578,235 - Benefits paid during the year - - At end of year 2,578,235 23. Commitments under operating leases The Company rents an office under operating lease. The lease is for an average period of six years, with variable rentals over the same period. At year-end, the Company has outstanding commitments for minimum lease payments under non- cancellable operating leases that fall due as follows: 2020 2019 Kshs Kshs Within one year 9,621,227 - Later than one year but within five years 43,208,058 - 52,829,285 - Kenya Mortgage Refinance Company PLC 62 Annual Report 2020 24. Related party transactions 2020 2019 Kshs Kshs The following transactions were carried out with related parties. i) Key management compensation Salaries and other employment benefits 31,469,466 10,069,715 ii) Directors’ benefits and other remuneration - fees 9,743,000 2,150,000 - allowances 5,508,000 1,458,000 15,251,000 3,608,000 Kenya Mortgage Refinance Company PLC Annual Report 2020 63 Events and Outreach (L-R): CEO Johnstone Oltetia with Board Members- Sarah Bonaya, Dr. Haron Sirima (Chairman), Susan Maira, Asman Khatolwa and interim Company Secretary CG Mbugua soon after the company Annual General Meeting on June 30th, 2020 at the KMRC offices. Kenya Mortgage Refinance Company PLC 64 Annual Report 2020 (R-L): KMRC CEO Johnstone Oltetia, KMRC Board members Susan Maira, Sarah Bonaya and Asman Khatolwa present a dummy cheque to Gillian Njeru- Manager at Imani Rehabilitation Agency on August 14th, 2020 during KMRC’s CSR initiative. KMRC donated KES. 770,000.00 worth of baby formula, foodstuff, personal hygiene products and COVID-19 Personal Protective Equipment. CEO Johnstone Oltetia (left) with Board Chair Dr. Haron Sirima examine the 2019 Annual Report on June 30th 2020 at the KMRC offices. The company’s first AGM was held (virtually) on the same day. Kenya Mortgage Refinance Company PLC Annual Report 2020 65 CEO Johnstone Oltetia addresses attendees during the Sacco CEO breakfast forum at the Crowne Plaza Hotel in Upperhill, Nairobi on February 4th, 2021. The breakfast was hosted to reinforce the PMLs’ understanding of KMRC’s operationalization and address their concerns. Kenya Mortgage Refinance Company PLC 66 Annual Report 2020 Notes Kenya Mortgage Refinance Company PLC Annual Report 2020 67 Notes Kenya Mortgage Refinance Company PLC 68 Annual Report 2020 Notes Kenya Mortgage Refinance Company PLC Annual Report 2020 69 Kenya Mortgage Refinance Company PLC 70 Annual Report 2020 UAP/Old Mutual Tower 27th Floor Upperhill, Upperhill Road P.O. Box 15494, 00100 Nairobi | Kenya Telephone: +254 111 022 400 Email: info@kmrc.co.ke, communications@kmrc.co.ke Website: www.kmrc.co.ke