KENYA MORTGAGE REFINANCE COMPANY PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 Kenya Mortgage Refinance Company PLC Annual report and financial statements For the year ended 31 December 2023 Contents Page Company information 1 Directors Report 2 Corporate Governance 4 Statement of director's responsibilities 7 Report of the independent auditor 8 Financial statements: Statement of Comprehensive Income 11 Statement of Financial Position 12 Statement of Changes in Equity 13 Statement of Cash Flows 14 Notes to the Financial Statements 15 - 47 Kenya Mortgage Refinance Company PLC Company Information For the year ended 31 December 2023 Country of Incorporation Kenya Board of directors Dr. Haron Sirima, OGW - Chairman Ms. Susan Maira - Non-Executive Director, Independent Director Mrs. Annastacia Kimtai - Non-Executive Director (Appointed 2nd March 2023) Mr. Robert Kibaara - Non-Executive Director Mr. Asman Khatolwa - Non-Executive Director Mr. Imtiaz Khan - Non-Executive Director (Appointed 2nd March 2023) Mrs.Jane Mwangi - Non-Executive Director, Independent Director (Appointed 13th April 2023) Mr. Johnstone Oltetia - Executive Director (CEO and MD) Principal place of business 27th Floor, Old Mutual Tower, Upperhill Road, Upperhill, P.O. Box 15494 - 00100 Nairobi Registered office 27th Floor, Old Mutual Tower, Upperhill Road, Upperhill, P.O. Box 15494 - 00100 Nairobi Company Secretary Elisha Odeyo Nyikuli 27 Floor, Old Mutual Tower Upperhill Road, Upperhill P.O. Box 15494 - 00100 Nairobi Principal bankers Cooperative Bank of Kenya Limited, NCBA Bank Kenya PLC Moi Avenue, NCBA Centre, P.O Box 48231 - 00100 P.O Box 44599 - 00100 Nairobi Nairobi KCB Bank Kenya Limited, Absa Bank Kenya PLC Moi Avenue, Absa Towers, Loita Street P.O Box 48400 - 00100 P.O. Box 46661 - 00100 Nairobi Nairobi Independent Auditor Grant Thornton LLP Certified Public Accountant (Kenya) 5th Floor, Avocado Towers Muthithi Road, Westlands P.O. Box 46986 - 00100 Nairobi, Kenya Kenya Mortgage Refinance Company PLC Report of the Directors For the year ended 31 December 2023 The Directors submit their report and the audited financial statements for the year ended 31 December 2023, 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 1. 2 Directors The directors who held office during the year and to the date of this report are set out on page 1. 3 Principal activity The principal activity of the Company is providing secure long-term funding to primary mortgage lenders (Banks, Microfinance Banks and Saccos). 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. There have been no material changes to the nature of the company's business from the prior year. 4 Business review During the year under review, the total interest income of the company increased to KES. 2,400,727,179 from KES. 1,300,823,059 in 2022, attributable mainly to interest income on loans and advances to Primary Mortgage Lenders (PMLs) and interest income from investments in financial assets. The profit before tax increased to KES. 1,072,861,893 from KES. 429,497,210. The increase in profitability was due to the increase in the company's refinancinq business to PMLs and income from investments. KMRC continues to drive availability and affordability of home loans to Kenyans by providing low interest, fixed rate, and long-term finance to participating banks and Saccos. The Primary Lenders pass this benefit to their clients/members by providing fixed rate home loans at single digit interest rates. By the close of the year, the Company had cummulatively processed loan applications from twelve (12) PMLs and disbursed a total of KES.9.57 billion to the twelve (12) PMLs, namely, HFC Ltd, Credit Bank Ltd, Co-operative Bank of Kenya, KCB Bank Kenya Ltd, Absa Bank Kenya Plc, Stanbic Bank, NCBA, Ukulima Sacco. Tower Sacco, Stima Sacco, Unaitas Sacco & Safaricom Sacco. The number of mortgages refinanced created 7,800 direct jobs to the Kenyan economy at an average of two and a half jobs created for every mortgage generated and refinanced by KMRC. 5 Principal Risk and Uncertainties. Principal risks and uncertainties facing the Company include: a) Credit Risk The risk of PMLs defaulting on refinance loans due to a rise in non-performing loans in the banking sector poses a potential credit risk to KMRC. According to data from the Central Bank of Kenya (CBK), there was a 26% increase in the volume of bad loans held by banks by the end of October 2023, with the real estate sector identified as a major contributor to this increase. This situation presents heightened credit risk to KMRC because of the loans it extends to PMLs. To mitigate this risk, management has instituted mechanisms under the refinance agreements where if any of the refinanced loans becomes non- performing, the same is replaced by a performing loan. Further, management ensures that the loans refinanced are collateralized up to one hundred and twenty percent. Management also continuously monitors the financial health of the PMLs and their compliance with key performance indicators as part of the credit scoring and determining the thresholds for refinancing. 2 Kenya Mortgage Refinance Company PLC Report of the Directors For the year ended 31 December 2023 b) Legal and Regulatory Risk Changes in some Laws and Regulations have a potential impact on KMRC's business. Changes to the Income Tax Act for example, have a direct impact on the net disposable income of potential mortgage borrowers and in turn affect the uptake of mortgages in the country. The developments of the Affordable Housing Bill, 2023 will have an impact on the supply side of the affordable housing value chain and this has a correlation to the demand side where KMRC operates. KMRC is also regulated by the Central Bank of Kenya as well as the Capital Markets Authority and any changes in regulations have an impact on the operation of the Company. Management continuously tracks changes in policies, regulations and laws that have the potential to impact on KMRC's business and makes submissions to policy makers for consideration. c) Economic Environment Risks Macroeconomic factors such as high unemployment rates, rising inflation and depreciation of the Kenya Shilling against major foreign currencies impact on ability of potential homeowners to access home loans due to reduced disposable incomes and increased property prices due to increased costs of construction inputs. The KMRC's home loan features of fixed rates, longer terms of up to twenty-five years and single digit continues to enhance affordability of home loans to Kenyans. The high interest rate environment also negatively impacts on KMRC's ability to access funding from the Capital Markets for mortgage refinancing due to the high cost of funding. Management continues to explore alternative sources of funding with emphasis on green financing to ensure sustainability. d) Sustainability/ESG Risk Potential negative impacts and vulnerabilities that can arise from unsustainable practices, behaviors, or decisions within the business and externally because of environmental, economic, social, and cultural systems and practices. The introduction of sustainability reporting standards, the company's performance will be evaluated both in terms of the impact it creates to the environment and to its stakeholders. Management has embedded sustainability as part of the company strategy and implemented a sustainability matrix, documenting activities to be implemented to enable the company to operate sustainably and contribute towards the achievement of the Sustainable Development Goals. 6 Interest Rate Environment In 2023, the inflation rate in Kenya began the year at 9.0% and ended at 6.6% in December, with the highest rate of 9.2% reported in March 2023. The CBR, which influences other lending rates, started 2023 at 8.75% and fluctuated throughout the year due to inflationary pressures, ending the year at 12.5%. Interest rates on commercial bank loans remained high throughout 2023 thereby limiting access to affordable credit for various sectors, including mortgage seekers. The 91-day, 182-day, and 364-day Treasury bill rates moved from an average of 9.5%,9.9% and 10.4% in January 2023 to an average of 15.8%,15.9% and 15.91% respectively in December 2023. These high market interest rates continue to present an opportunity for the KMRC home loan product which offers fixed rate, long term, and single digit interest rates through the participating PMLs. 7 Key Initiatives The company continues to pursue initiatives that will spur uptake of affordbale home loans to Kenyans. These include: a) Continous engagements with stakeholders to enhance understanding of the opportunities that KMRC home loans present. b) Implementation of the a Risk Sharing Facility to encourage our Primary Mortagge Lenders (PMLs) to lend more to the section of the population which is considered risky due to low and inconsistent income streams. c) Continuously identify and pursue policy reforms that support the affordable housing sector. d) Explore posibilities of onboarding additional PMLs so as to increase the reach of KMRC product offering to Kenyans. 3 Kenya Mortgage Refinance Company PLC Report of the Directors For the year ended 31 December 2023 8 Corporate Governance Statement The company adopts high standards of corporate governance practices. It recognizes the interests of all stakeholders and ensures that the Company remains a good corporate citizen Board Composition The Board at full complement comprises five non-executive directors representing the cross-section of shareholders, two independent directors, and the Chief Executive Officer & Managing Director. Three non- executive directors were appointed by the Board in the course of the year. The Board members and meetings held in the year under review were as follows: No. Name Position Meetings attended 1 Dr. Haron Sirima, OGW Chairperson 5 2 Mr. Asman Khatolwa Member 5 3 Mr. Imtiaz Khan Member 5 4 Ms. Susan Maira Member 5 5 Ms. Annastacia Kimtai Member 3 6 Mr. Robert Kibaara Member 5 7 Mrs. Jane Mwangi Member 3 8 Mr. Johnstone Oltetia Member 5 Board Committees The Board discharges its responsibilities through Board Committees constituted from amongst its members. The established Board Committees are: i Audit Committee The mandate of the Board Audit Committee (BAC) is to support the KMRC Board to fulfil its oversight duties related to the integrity of the Company's financial statements, internal controls, the performance and independence of the external auditors, the internal audit function, and their reDortinq responsibilities. The BAC plays a crucial role in upholding high standards of corporate governance. During the year under review, the Committee oversaw the appointment of the external auditor, ensured their independence and performance of the audit engagement by reviewing and approving the audit engagement plan. Additionally, the BAC reviewed the statutory financial statements and recommended them to the Board for approval. The Committee also maintained oversight of the internal audit function, ensuring its independence and objectivity. The approved the annual risk-based internal audit plan which covered key strategic business processes with contribution from management. They reviewed the adequacy of internal controls across the Company's core and support functions, including refinancing operations, liquidity and cashflow management, compliance reporting, funding operations, information systems and supporting ICT infrastructure. The BAC members and meetings held in the year under review were as follows: No. Name Position Meetings attended 1 Mr. Asman Khatolwa Chairperson 4 2 Ms. Susan Maira Member 4 3 Ms. Annastacia Kimtai Member 4 4 Mr. Robert Kibaara Member 4 5 Mr. Imtiaz Khan Member 4 All the members of the Audit Committee are Non-Executive Directors. 4 Kenya Mortgage Refinance Company PLC Report of the Directors For the year ended 31 December 2023 ii. Credit and Risk Committee The mandate of the Board Credit & Risk Committee (BCRC) is to assist the Board in effectively fulfilling its responsibilities pursuant to the Company's Credit Policy and constituent refinancing guidelines of the Company to inculcate prudent lending standards and practices and ensure that relevant regulations are complied with. 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 the Company. During the period under review, the committee diligently focused on assessing, monitoring, and mitigating all strategic, credit and operational risks to ensure the stability and sustainability of our lending activities. It also ensured intensive credit analysis procedures are done, including assessment of the PMLs creditworthiness to ensure prudency lending. The Credit and Risk Committee (CRC) members and meetings held in the year under review were as follows: No. Name Position Meetings attended 1 Mrs. Susan Maira Chairperson 5 2 Mr. Imtiaz Khan Member 5 3 Mr. Asman Khatolwa Member 5 4 Mr. Johnstone Oltetia Member 5 5 Mrs. Jane Mwangi Member 4 iii. Finance, Planning and Human Resource Committee The Finance, Planning and Human Resource Committee (FP&HRC) has oversight in matters relating to strategy, finance and accounting, planning, information technology and human resource management. During the year under review, the Committee provided oversight on implementation of key strategic initiatives that were undertaken by the Company which led to the growth in PML's net lending from Kes. 6.8 Bn in 2022 to Kes 8.4 Bn in 2023. The committee also laid ground for the preparation of the Company's next strategic plan 2024-2029 by highlighting key strategic initiatives that will form part of the new strategic plan. The Committee provided oversight on budget development and monitoring, corporate performance, and compliance with legal and regulatory requirements. The FP&HRC members and meetings held in the year under review were as follows: No. Name Position Meetings attended 1 Mr. Robert Kibaara Chairperson 4 2 Mr. Asman Khatolwa Member 4 3 Ms. Annastacia Kimtai Member 4 4 Mrs. Jane Mwangi Member 3 5 Mr. Johnstone Oltetia Member 4 9 Dividend The directors do not recommend the declaration of dividend for the year ended December 31 2023. (2022: Nil) 10 Financial statements The Directors are not aware of any circumstances which would render the values attributed to the assets in the financial statements misleading as at the date of this report. 11 Directors' benefits There directors' fees and sitting allowances were paid as shown in Note 8 and Note 30. 5 Kenya Mortgage Refinance Company PLC Report of the Directors For the year ended 31 December 2023 12 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. 13 Terms of appointment of independent auditor Grant Thornton LLP have been appointed and are willing to continue in office in accordance with the Company's Articles of Association and Section 723 of the Kenyan Companies Act, 2015 and the provisions of Central Bank of Kenya (Mortgage Refinance Companies) Regulations, 2019. The directors monitor the effectiveness, objectivity and independence of the auditor. The directors also approve the annual audit engagement contract which sets out the terms of the auditor appointment and the related fees. 14 Approval of the Financial Statements The annual financial statements set out on pages 11 to 47, which have been prepared on the going concern basis, were approved by the board of directors on _-'iA t, 2024, and were siqned on its behalf by: By order of the Board CS. ELIS 0. N LI P. O, Box - 00200 NAIROBI Nairobi ___________ 2024 6 Kenya Mortgage Refinance Company PLC Statement of Directors' Responsibilities For the year ended 31 December 2023 The Kenyan Companies Act, 2015 requires the directors to prepare annual 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 maintains proper accounting records that are sufficient to show and explain the transactions of the company and disclose, with reasonable accuracy, the financial position of the company. The directors are also responsible for safeguarding the assets of the company, and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors accept responsibility for the preparation and presentation of these annual financial statements in accordance with the International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. They also accept responsibility for: * designing, implementing and maintaining such internal controls as they determine necessary toenable the presentation of annual financial statements that are free of material misstatement, whether due to fraud or * selecting suitable accounting policies and applying them consistently; and * 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 annual financial statements does not relieve them of their responsibilities. The annual financial statements set out on pa es 11 to 47, which have been prepared on the going concern basis, were approved by the board of directors on 7 r ZAgctt 2024 and were signed on its behalf by: Director Director Name: ~Name- 6/ (1" "2 L' 1ZJ.2LN(fLPc GrantThornton Independent Auditor's Report To the Shareholders of Kenya Mortgage Refinance Company PLC Report on the Audit of the Annual Report And Financial Statements Opinion We have audited the accompanying annual report and financial statements of Kenya Mortgage Refinance Company PLC (the company) set out on pages 11-47, which comprise the statement of financial position as at 31 December 2023, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the annual report and financial statements, including a summary of significant accounting policies. In our opinion, the annual report and financial statements present fairly, in all material respects, the financial position of Kenya Mortgage Refinance Company PLC as at 31 December 2023, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, 2015. Basis for opinion We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the annual report and financial statements section of our report. We are independent of the company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing audits of annual report and financial statements in Kenya. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and in accordance with other ethical requirements applicable to performing audits in Kenya. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the annual report and financial statements of the current period. These matters were addressed in the context of our audit of the annual report and financial statements as a whole, and in forming Our opinion thereon, and we do not provide a separate opinion on these matters. We have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated and separate financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated and separate financial statements. Key Audit Matter Allowance for expected credit losses on financial assets How the matter was Addressed The expected credit losses on financial assets carried at amortised Our audit procedures included the following: costs are determined in accordance with IFRS 9: Financial Instruments. The financial assets measured at amortized cost include; ' We assessed and tested the design and operating Financial assets at amortized cost (note 19), loans and advances and effectiveness of the controls over the: (note 20), and Cash and cash equivalents (note 21). The impairment assessment of these financial assets was considered i. Data used to determine the impairment losses on loans, to be a key audit matter because significant judgement was involved in including transactional data captured at loan origination and determining the expected credit losses as disclosed in note 1 (f) to ongoing internal credit quality assessments. these Financial Statements. ii. Expected credit loss model, including model build and approval, ongoing monitoring/validation, model governance . the interpretation of the requirements to determine impairment and mathematical accuracy. under application of IFRS 9, which is reflected in the company's expected credit loss model; We assessed the modelling techniques/methodology against . the identification of exposures with a significant deterioration in the requirements of IFRS 9: Financial Instruments. credit quality; . assumptions used in the expected credit loss model such as the We assessed and tested the material modelling assumptions financial condition of the counterparty, expected future cash flows and forward-looking macroeconomic factors (e.g. inflation as well as overlays with a focus on the: rate and lending rate); and, . the need to apply additional overlays to reflect current or future i. key modelling assumptions adopted by the company; external factors that are not appropriately captured by the ii. basis for and data used to determine overlays; and iii. Sensitivity of the collective provisions to changes in The relevant disclosure in tha financial statements have been done in modelling assumptions. note 7 through profit or loss. In addition, we assessed the adequacy of the disclosures in the financial statements. 8 GrantThornton Independent Auditor's Report (Continued) Other Matter The Annual Report and Financial Statements of the company for the year ended 31 December 2022 were audited by another auditor who expressed an unmodified opinion on those statements on 03 March 2023. Other information The other information comprises the information included in the Annual Report other than the Financial Statements and our auditor's report thereon. The directors are responsible for the other information. Our opinion on the Annual Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the annual financial statements or our knowledge obtained during the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are reauired to report that fact. We have nothingq to report in this recgard. Responsibilities of the directors and those charged with governance for the Annual Report And Financial Statements The directors are responsible for the preparation and fair presentation of the annual report and financial statements in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, 2015, and for such internal control as the directors determines is necessary to enable the preparation of annual report and financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual report and financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the company's financial reporting process. Auditor's responsibilities for the audit of the Annual Report And Financial Statements Our objectives are to obtain reasonable assurance about whether the annual report and financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual report and financial statements. As part of an audit in accordance with International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's and company internal control. 9 GrantThornton Independent Auditor's Report (Continued) Auditor's responsibilities for the audit of the Annual Report And Financial Statements (Continued) * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. * Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the company to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the annual report and financial statements, including the disclosures, and whether the annual report and financial statements represent the underlying transactions and events in a manner that achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the company audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the annual report and financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory matters as prescribed by the Kenya Companies Act, 2015 As required by the Kenyan Companies Act, 2015, we report to you based on our audit, that in our opinion the information given in the report of the directors on page 2 - 6 is consistent with the annual financial statements. The signing partner responsible for the audit resulting in this independent auditor's report is CPA Dipesh Shah, Practicing Certificate No.1729. Thornton LLP (f,)i Pubijc Acrountants Feand on behalf of Grant Thornton LLP Certified Public Accountants (Kenya) Nairobi K11703/1223/AUD 10 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Statement of Comprehensive Income Note 2023 2022 KES KES Revenue Revenue from interest determined using effective interest rate interest on loans and advances 5 a) 390,074,989 195,339,115 Other interest income 5 b) 2,010,652,190 1,105,483,944 Total interest income 2,400,727,179 1,300,823,059 Finance cost 6 (1,016,111,838) (634,326,070) Net interest income 1,384,615,341 666,496,989 Net movement in expected credit losses 7 (1,579,227) (1,095,321) Governance expenses 8 (18,406,752) (14,861,108) Marketing expenses 9 (23,817,007) (14,800,199) Staff costs 10 (134,622,939) (105,199,154) Administration expenses 11 (97,397,115) (55,247,332) Other operating expenses 12 (5,629,409) (19,746,931) Depreciation and amortisation expenses 13 (27,699,640) (26,049,734) Profit before tax 1,075,463,252 429,497,210 Income tax expense 14 (227,676,456) (108,136,491) Profit for the year 847,786,796 321,360,719 11 и Г и и и и Со (о и +� ш д� 00 t� 1� б� 00 00 о У со г� с� � о о � с� � и ~- й о со о о c�i со о д�- м_ амо й й �_ омо й ' (\ Г ((� Г Г � ((� М М СО СО � � N N N М `ш � и о й и и ш и �_ L Ш N ао с� м ео О й У °� ' с� � со со � сч м о ш � v со со �' г� м с� гл м и г� оо rn rn оо о_ N � Г Г � � �� ш г� гл о о г� � � у У м � � " й ш � � м й +-� и О N N N 00 О f6 � О 1� 1� 1� Lt ) М '"' СО О ОО СО С7 N и Г и Со Со � о0 �� и и rn м и и со ti v ш С > N Г С.О СО 00 � М д' у L У cv_ � � с� со со � � г-> .- ш �� й ш° � т~ о�о оC°о �т со L v_ м о г� г� г� м с� и Г д• N N f� СО V ln с`� � 1� f� � СО_ Г � т и �л и и �n � Q. 1 Г � � � Г Г � � N Г и � й й й й г'�'� м с i м � � � � N Г о м _ I ГII Г I Г с� и � � � о о г `" Е а� � ш о Г м � ш � с U � J � а �, л л С у R L L2 +' � � л N N О v- '= О О 7 N N �� � L � � z С lyJ д Ш U у � Ш � � R�•� � Ш N � Ш м �.�+ с у U N >' О U N ` О �.ы�+ (S1 д о 0 N Ш О о N � и С � N � � t. р с�1 � � L � � � Ш � с- >' Ш Ш t_6 s �ц S] �- � (ц .Q М >, М >, LA U V � С и � (6 fц •ц Ш -с 7 � С И � � R3 О � (6 � � � U � (6 � � � U � С_ а.+ � � (ц Ш � � (6 i Ш ��� � Г О � й � N �- О и о � � и т г� Е � io � о с м � � w о � м л � ш ш и ° � � ° ,., с с+✓ >- Q а Q Н Q � Q � Q 1- Q ш с ° У Q и Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Statement of Financial Position as at 31 December 2023 Note 2023 2022 Assets KES KES Property and equipment 15 31,845,355 47,333,813 Intangible assets 16 3,577,221 8,765,320 Right-of-use assets 17 16,207,426 24,311,140 Other assets 18 160,281,987 256,586,597 Current tax receivable 14 122,136,511 77,824,477 Financial assets at amortized cost 19 5,311,481,388 5,203,521,087 Loans and advances 20 8,405,522,891 6,750,347,708 Cash and cash equivalents 21 11,891,401,578 9,007,088,992 Deferred tax 22 14,630,648 7,407,202 Total Assets 25,957,085,005 21,383,186,336 Equity and Liabilities Liabilities Borrowings 23 20,662,582,125 16,820,143,424 Debt securities in issue 24 1,331,063,298 1,459,167,332 Lease liabilities 25 23,511,777 31,651,105 Other liabilities 26 417,007,220 390,254,400 22,434,164,420 18,701,216,261 Capital resources Share capital 27 1,808,375,125 1,808,375,125 Revenue reserves 1,624,216,144 792,787,685 Other reserves 31 7,098,349 13,934,635 Statutory reserve 20 83,230,967 66,872,630 Equity 3,522,920,585 2,681,970,075 Total liability and Equity 25,957,085,005 21,383,186,336 The financial statements on pages 11 to 47 were approved for issue by the board of directors on 7- kk rLA-9 2024 and were signed on its behalf by: Director Director Name: Namej. 13 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Statement of Cash Flows Note 2023 2022 KES KES Cash flows from operating activities Profit before tax 1,075,463,252 429,497,210 Adjustments for: Depreciation of property and equipment 15 14,497,377 13,782,376 Depreciation on right-of-use assets 17 8,103,714 8,103,714 Amortisation of intangible assets 16 2,762,755 2,762,755 Amortisation of treasury bonds 19 2,335,794 1,400,889 Write off of assets 16 411,220 548,700 Interest receivable on treasury bonds 19 (110,296,095) (97,833,453) Interest on debt securities in issue 24 67,707,604 59,167,332 Interest on lease liabilities 6 1,402,385 2,003,009 Income tax paid 14 (279,211,936) (168,863,275) Operating profit before working capital changes 783,176,070 250,569,257 Increase in other assets 18 96,304,610 (95,204,149) (Decrease)/increase in other liabilities 26 26,752,820 (255,101,359) Increase in loans and advances 20 (1,655,175,183) (5,463,629,710) Net cash used in operating activities (748,941,683) (5,563,365,961) Cash flows used in investing activities Purchase of property and equipment 15 (3,574,068) (1,061,400) Purchase of treasury bonds 19 - (3,552,288,907) Net cash used in investing activities (3,574,068) (3,553,350,307) Cash flows from financing activities Proceeds from borrowings 23 3,842,438,701 10,048,554,726 Net Movement issue of debt securities 24 (195,811,638) 1,400,000,000 Payments of principal portion of the lease liability 25 (9,798,726) (9,541,713) Net cash from financing activities 3,636,828,337 11,439,013,013 Increase in cash and cash equivalents 2,884,312,586 2,322,296,745 Cash and cash equivalents at start of year 9,007,088,992 6,684,792,247 Cash and cash equivalents at end of year 21 11,891,401,578 9,007,088,992 14 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 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 represent 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 The financial statements have been prepared under the historical cost convention, except as indicated otherwise below and are in accordance with International Financial Reporting Standards (IFRS). The historical cost convention is generally based on the fair value of the consideration given in exchange of assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, 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: - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date - Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly and - Level 3 inputs are unobservable inputs for the asset or liability. Transfer between levels of the fair value hierarchy are recognised by the directors at the end of the reporting period during which the change occurred. Going concern The financial performance of the company is set out in the report of the directors and in the statement of comprehensive income. The financial position of the company is set out in the statement of financial position. Disclosures in respect of principal risks and uncertainties are included within the Director's Report and disclosures in respect of risk management and capital management are set out in notes 3 and 4 respectively. Based on the financial performance and position of the company and its risk management policies, the directors are of the opinion that the company is well placed to continue in business for the foreseeable future and as a result the financial statements are prepared on a going concern basis. As highlighted in the statement of cash flows, the company generated negative operating cash flows of KES 871,532,338 (2022: KES 5,563,365,961) which maybe an indicator of risk of going concern. However, The core mandate of the business is to provide long term liquidity to the Primary Mortgage Lenders and as such in the earlier years of operation, more cashflows need to be disbursed out to Primary Mortgage Lenders. The principle and repayments of these funds to the Company are spread over the length of the loans. Based on the financial performance and position of the company and its risk management policies, the directors are of the opinion that the company is well placed to continue in business for the foreseeable future and as a result the financial statements are prepared on a going concern basis 15 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) b) New and revised standards i) Adoption of new and revised standards in the current year, the company has adopted the following standards and interpretations that are effective for the current financial year and that are relevant to its operations: Initial application of IFRS 17 and IFRS 9 - Comparative information A narrow-scope amendment to the transition requirements of IFRS 17 for entities that first apply IFRS 17 and IFRS 9 at the same time. The amendment regards financial assets for which comparative information is presented on initial application of IFRS 17 and IFRS 9, but where this information has not been restated for IFRS 9. Under the amendment, an entity is permitted to present comparative information about a financial asset as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset before. The option is available on an instrument-by-instrument basis. In applying the classification overlay to a financial asset, an entity is not required to apply the impairment requirements of IFRS 9. The effective date of the amendment is for years beginning on or after January 1, 2023. The company has adopted the amendment for the first time in the 2023 annual report and financial statements. The impact of the amendment is not material. Deferred tax related to assets and liabilities arising from a single transaction - Amendments to IAS 12 The amendment adds an additional requirement for transactions which will not give rise to the recognition of a deferred tax asset or liability on initial recognition. Previously, deferred tax would not be recognised on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit or loss. The additional requirement provides that the transaction, at the time of the transaction must not give rise to equal taxable and deductible temporary differences. The effective date of the amendment is for years beginning on or after January 1, 2023. The company has adopted the amendment for the first time in the 2023 annual report and financial statements. Disclosure of accounting policies: Amendments to IAS 1 and IFRS Practice Statement 2 IAS 1 was amended to require that only material accounting policy information shall be disclosed in the annual report and financial statements. The amendment will not result in changes to measurement or recognition of financial statement items, but management will undergo a review of accounting policies to ensure that only material accounting policy information is disclosed. The effective date of the amendment is for years beginning on or after January 1, 2023. The company has adopted the amendment for the first time in the 2023 annual report and financial statements. 16 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Definition of accounting estimates: Amendments to IAS 8 The definition of accounting estimates was amended so that accounting estimates are now defined as "monetary amounts in annual report and financial statements that are subject to measurement uncertainty." The effective date of the amendment is for years beginning on or after January 1, 2023. The company has adopted the amendment for the first time in the 2023 annual report and financial statements. The impact of the amendment is not material. Classification of Liabilities as Current or Non-Current - Amendment to lAS 1 The amendment changes the requirements to classify a liability as current or non-current. If an entity has the right at the end of the reporting period, to defer settlement of a liability for at least twelve months after the reporting period, then the liability is classified as non-current. If this right is subject to conditions imposed on the entity, then the right only exists, if, at the end of the reporting period, the entity has complied with those conditions, In addition, the classification is not affected by the likelihood that the entity will exercise its right to defer settlement. Therefore, if the right exists, the liability is classified as non-current even if management intends or expects to settle the liability within twelve months of the reporting period. Additional disclosures would be required in such circumstances. The effective date of the amendment is for years beginning on or after January 1, 2023. The company has adopted the amendment for the first time in the 2023 annual report and financial statements. The impact of the amendment is not material. ii) New and revised standards that have been issued but are not yet effective The company has chosen not to early adopt the following standards and interpretations, which have been published and are mandatory for the company's accounting periods beginning on or after January 1, 2024 or later periods Supplier finance arrangements - amendments to IAS 7 and IFRS 7 The amendment applies to circumstances where supplier finance arrangements exist. These are arrangements whereby finance providers pay the suppliers of the entity, thus providing the entity with extended payment terms or the suppliers with early payment terms. The entity then pays the finance providers based on their specific terms and conditions. The amendment requires the disclosure of information about supplier finance arrangements that enable users of financial statements to assess the effects of those arrangements on the entity's liabilities and cash flows as well as on the entity's exposure to liquidity risk. The effective date of the amendment is for years beginning on or after January 1, 2024. The company expects to adopt the amendment for the first time in the 2024 annual report and financial statements. It is unlikely that the amendment will have a material impact on the company's annual report and financial statements. 17 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Non-current liabilities with covenants - amendments to IAS 1 The amendment applies to the classification of liabilities with loan covenants as current or non-current. If an entity has the right to defer settlement of a liability for at least twelve months after the reporting period, but subject to conditions, then the timing of the required conditions impacts whether the entity has a right to defer settlement. If the conditions must be complied with at or before the reporting date, then they affect whether the rights to defer settlement exists at reporting date. However, if the entity is only required to comply with the conditions after the reporting period, then the conditions do not affect whether the right to defer settlement exists at reporting date. If an entity classifies a liability as non-current when the conditions are only required to be met after the reporting period, then additional disclosures are required to enable the users of financial statements to understand the risk that the liabilities could become repayable within twelve months after the reporting period. The effective date of the amendment is for years beginning on or after January 1, 2024. 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 (KES), which is the Company's presentation currency. d) Revenue recognition The Company recognises revenue from interest on long term loans to financial institutions secured against mortgages and financial instruments. The Company recognises revenue as and when it satisfies a performance obligation by transferring control of a product or service to a customer. The amount of revenue recognised is the amount the Company expects to receive in accordance with the terms of the contract, and excludes amounts collected on behalf of third parties, such as Value Added Tax. i) Interest income Interest income for all interest bearing financial instruments are recognised within the statement of comprehensive income on accrual basis using the effective interest method. 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. The company calculates interest income by applying the EIR to the gross carrying amount of financial assets other than credit-impaired assets. When a financial asset becomes credit-impaired and is, therefore, regarded as 'Stage 3', the company calculates interest income by applying the effective interest rate to the net amortised cost of the financial asset. If the financial assets cures and is no longer credit-impaired, the company reverts to calculating interest income on a gross basis. Previously unrecognised interest revenue of a cured credit impaired financial asset are recognised as a reversal of an impairment loss. 18 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) ii) Interest expenses Interest expense for all interest bearing financial instruments are recognised within the statement of comprehensive income on accrual basis using the effective interest method. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Fair value changes on other derivatives held for risk management purposes, and other financial assets and liabilities carried at fair value through profit or loss, are presented in net income on other financial instruments carried at fair value in the profit or loss. Once a financial asset or a portfolio of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cash flows for purposes of measuring the allowance for impairment. e) Reserves Loan loss reserve Where impairment losses required by legislation or regulation exceed those calculated under International Financial Reporting Standards, the excess is recognised as a regulatory credit risk and accounted for as an appropriation of retained profits. This reserve is not distributable. Other reserve Other reserve relates to capital grants received from the National Treasury. f) 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 minus the cumulative amortisation using the effective interest method of any difference between that initial amount and, for financial assets, adjusted for any loss allowances. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation 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. 19 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f) Financial instruments (Continued) Financial assets and liabilities (Continued) Measurement methods (Continued) Interest income Interest income and interest expense on interest bearing financial instruments is calculated by applying the effective interest rate to the gross carrying amount, except for: (a) Purchased or originated credit impaired (POCI) financial assets, for which the original credit- adjusted effective interest rate is applied to the amortised cost of the financial asset, and (b) Financial assets that are not Purchased or originated credit impaired "POCl" 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 expected credit loss provision) in subsequent reporting periods. Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual 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 asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not 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 as fees and commissions. Transaction costs of financial assets and financial liabilities are carried at fair value through profit or loss are expensed in profit 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 results in an accounting loss being recognised in the statement of comprehensive income when an asset is newly originated. When the fair value of financial assets and liabilities differs from the transaction price on initial recognition, the entity recognises the difference as follows: (a) When the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss. (b) In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument's fair value can be determined using market observable inputs, or realised through settlement. Financial assets (i) Classification and subsequent measurement The Company classified its financial assets in the following measurement categories: - Fair value through profit or loss (FVPL) - Fair value through other comprehensive income (FVOCI) - Amortised cost 20 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f) Financial instruments (Continued) Financial assets (Continued) (i) Classification and subsequent measurement (continued) Debt instruments Debt instruments are those instruments that meet the definition of a financial liability from the issuer's perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse. Classification and subsequent measurement of debt instruments depend on: (a) the Company's business model for managing the asset; and (b) the cash flow characteristics of the asset. Based on these factors, the Company classifies its debt instruments into one of the following three measurement categories: Amortised cost: assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (SPPI), and that are not designated at fair value through profit or loss (FVPL), are measured at amortised cost. The carrying amount of these assets are adjusted by any expected credit loss allowance. Interest income from financial assets is included in "interest and similar income" using the effective interest rate method. Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that are not designated at fair value through profit or loss (FVPL), are measured through other comprehensive income (FVOCI). Movements in the carrying amount are taken through other comprehensive income (OCI), except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on instrument's amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income (OCI) is reclassified from equity to profit or loss and recognised in "Net investment income" using the effective interest rate method. Fair value through the profit or loss: Assets that do not meet the criteria for amortised cost or fair value through other comprehensive income (FVOCI) are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented within "Net trading income" in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they are presented separately in "Net investment income". Interest income from these financial assets is included in "interest income" using the effective interest rate method. 21 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f) Financial instruments (Continued) Financial assets (Continued) (i) Classification and subsequent measurement (continued) Business model: The business model reflects how the Company manages the assets in order to generate cash flows. That is, whether the Company's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of "other" business model and measured at fair value through profit or loss (FVPL). Factors considered by the Company in determining the business model for a class of assets include past experience on how cash flows for these assets were collected, how the asset's performance is evaluated and reported by key management personnel, how risks are assessed and managed and how managers are compensated. For example, the liquidity portfolio of assets is held by the Company as part of liquidity 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 represents solely payments of principal and interest (the "SPPI test"). In making this assessment, the Company considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest. The Company reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. The changes are expected to be very infrequent and none occurred during the year. Equity Instruments Equity instruments are instruments that meet the definition of equity from the issuer's perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer's net assets. Examples of equity instruments include basic ordinary shares. 22 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f Financial instruments (Continued) Financial assets (Continued) (i) Classification and subsequent measurement (continued) 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 income (FVOCI) when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognised in other comprehensive income (OCI) and are subsequently reclassified to profit or loss, including on disposal. Impairment losses (and reversals of impairment losses) are not reported separately from other changes in fair values. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the Company's right to receive payment is established. Gains and losses on equity investments at fair value through profit or loss (FVPL) are included in the "Net trading income" line in the statement of profit or loss. (ii) Impairment The Company assesses on a forward-looking basis the expected credit losses ("ECL") associated with its debt instrument assets carried at amortised cost and fair value through other comprehensive income (FVOCI) and with the exposure arising from loan commitments and financial guarantee contracts. The Company recognises a loss allowance for such losses at each reporting date. The measurement of expected credit losses (ECL) reflects: - An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes - The time value of money; and - Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. (ii) Modification of loans The Company sometimes renegotiates or otherwise 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 oriqinal terms. The Companv does this by considerinq. amonq others, the followinq 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 - Change in the currency of the loan - Insertion of collateral, other security or credit enhancement that significantly affect the credit risk associated with the loan. If the terms are substantially different, the Company derecognises the original financial asset and recognises a "new" asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. 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. 23 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f) Financial instruments (Continued) Financial assets (Continued) (ii) Modification of loans (continued) 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. (iii) Derecognition other than on a modification Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Company transfers substantially all the risks and rewards of ownership, or (ii)the Company neither transfers nor retains substantially all the risks and rewards of ownership and the Company has not retained control. The Company enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as "pass through" transfers that result in derecognition if the Company: (a) Has no obligation to make payments unless it collects equivalent amounts from the assets (b) Is prohibited from selling or pledging the assets; and (c) Has an obligation to remit any cash it collects from assets without material delays Collateral (shares and bonds) furnished by the Company under standard repurchase agreements and securities lending and borrowings transactions are not derecognised because the Company retains substantially all the risks and rewards on the basis of predetermined repurchase price, and the criteria for derecognition are therefore not met. This also applies to certain securitisation transactions in which the Company retains a subordinated residual interest. Financial liabilities (i) Classification and subsequent measurement In both the current period and prior period, financial liabilities are classified as subsequently measured at amortised cost, except for: - Financial liabilities at fair value through profit or loss such as derivatives, financial liabilities held for trading (e.g. short positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair values of the financial liability that is attributable to changes in the credit risk of that liability) and partially profit or loss (the remaining amount of change in the fair value of the liability); 24 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) f) Financial instruments (Continued) Financial liabilities (Continued) (i) Classification and subsequent measurement (continued) - Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Company recognises any expense incurred on the financial liability; and - Financial guarantee contracts and loan commitments. (ii) Derecognition Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). The exchange between the Company and its original 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. If the exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange of modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. - their risks and economic characteristics are not closely related to those of the host contract; - a separate instrument with the same terms would meet the definition of a derivative; and - the hybrid contract is not measured at fair value through profit or loss. g) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with Banks and other short-term highly liquid investments with original maturities of three months or less from the date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, net of bank overdrafts. Funds restricted for a period of more than three months on origination and cash reserve deposits with the Central Bank of Kenya are excluded from cash and cash equivalents. In the balance sheet, HFC mortgage scheme deposit are included as other receivables under assets and bank overdrafts if any are included as borrowings under liabilities. Cash and cash equivalents are carried at amortised cost. 25 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) h) Property and equipment All categories of property, plant and equipment are initially recognised at cost and subsequently carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure directly attributable to the acquisition of the assets. Computer software, including the operating system, that is an integral part of the related hardware is capitalised as part of the computer equipment. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that it will increase the future economic benefits associated with the item that will flow to the Company over those originally assessed and the cost of the item can be measured reliably. Repairs and maintenance expenses are charged to the profit and loss account in the year in which they are incurred. Increases in the carrying amount arising on revaluation are recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Decreases that offset previous increases of the same asset are recognised in other comprehensive income. All other decreases are charged to the profit and loss account. Annually, the difference between the depreciation charge based on the revalued carrying amount of the asset charged to the statement of comprehensive income and depreciation based on the asset's original cost (excess depreciation) is transferred from the revaluation surplus reserve to retained earnings. Depreciation is calculated using the straight line method to write down the cost or the revalued amount of each asset to its residual value over its estimated useful life. The annual depreciation rates used are as follows: Rate -% Motor vehicles 25% Computers 25% Office equipments 20% Furniture and fittings 10% Leasehold improvements Over the period of the lease Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item, is depreciated separately. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. On disposal of revalued assets, amounts in the revaluation surplus reserve relating to that asset are transferred to retained earnings. 26 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) i) Intangible assets Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company are recognised as intangible assets when the following criteria are met: - it is technically feasible to complete the software product so that it will be available for use; - management intends to complete the software product and use or sell it; - there is an ability to use or sell the software product; - it can be demonstrated how the software product will generate probable future economic benefits; - adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and - the expenditure attributable to the software product during its development can be reliably measured. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Computer software development costs recognised as assets are amortised over their estimated useful lives, which does not exceed three years. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years. j) Impairment of non-financial assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The impairment test also can be performed on a single asset when the fair value less cost to sell or the value in use can be determined reliably. Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. k) Income tax The tax expense for the period comprises current and deferred income tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity respectively. 27 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) k) Income tax (Continued) Current income tax The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the reporting date. The directors periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. They establish provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same entity or different taxable entities where there is an intention to settle the balances on a net basis. 1) Leases Leases under which the Company is the lessee On the commencement date of each lease (excluding leases with a term, on commencement, of 12 months or less and leases for which the underlying asset is of low value) the company recognises a right-of-use asset and a lease liability. The lease liability is measured at the present value of the lease payments that are not paid on that date. The lease payments include fixed payments, variable payments that depend on an index or a rate, amounts expected to be payable under residual value guarantees, and the exercise price of a purchase option if the company is reasonably certain to exercise that option. The lease payments are discounted at the interest rate implicit in the lease. If that rate cannot be readily determined, the company's incremental borrowing rate is used. For leases that contain ron-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 liability, any lease payments made on or before the commencement date, any initial direct costs incurred, and an estimate of the costs of restoring the underlying asset to the condition required under the terms of the lease. 28 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) 1) Leases (Continued) Leases under which the Company is the lessee (Continued) Subsequently the lease liability is measured at amortised cost, subject to remeasurement to reflect any reassessment, lease modifications, or revised fixed lease payments. All other right-of-use assets are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses, adjusted for any remeasurement of the lease liability. Depreciation is calculated using the straight-line method to write down the cost of each asset to its residual value over its estimated useful life. If ownership of the underlying asset is not expected to pass to the company at the end of the lease term, the estimated useful life would not exceed the lease term. increases in the carrying amount arising on revaluation are recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Decreases that offset previous increases of the same asset are recognised in other comprehensive income. All other decreases are recognised in profit or loss. Annually, the difference between the depreciation charge based on the revalued carrying amount of the asset recognised in profit or loss and depreciation 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 substantiaily 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 under operating leases are recognised as income in the profit or loss on a straight-line basis over the lease term. m) Provisions for liabilities Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 29 Kenya Mortgage Refinance Company PLC Annual Financial Statements for the year ended 31 December 2023 Notes to the Financial Statements Notes to the Financial Statements (Continued) 1 Summary of significant accounting policies (Continued) n) Post-employment benefit obligations The liability for post-employment benefit obligations relates to terminal gratuities. The Company does not fund this obligation in advance. The Company's obligations, both vested and unvested, to pay terminal gratuities to employees are recognised based on employees' service up to the reporting date and their salaries at that date. The net change in the obligation is recognised in profit or loss. The Company operates a defined contribution retirement benefits plan for its employees, the assets of which are held in a separate trustee administered scheme managed by an insurance company. A defined contribution plan is a plan under which the Company pays fixed contributions into a separate fund, and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current 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. o) 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 of general borrowings, based on a weighted average cost. Capitalisation of borrowing costs ceases when all activities necessary to prepare the asset for its intended use or sale are complete. All other borrowing costs are recognised in profit or loss. p) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 30 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (continued) 2 Significant judgements and key sources of estimation uncertainty In the process of applying the accounting policies adopted by the Company, the directors make certain 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 policies The judgements made by the directors in the process of applying the Company's accounting policies that have the most significant effect on the amounts recognised in the financial statements include: i) Classification of financial assets: whether the business model in which financial assets are held has as its objective the holding of such assets to 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; ii) whether credit risk on financial assets has increased significantly since initial recognition; and iii) how to determine the incremental borrowing rate used in the discounting of lease liabilities. b) Key sources of estimation uncertainty Key assumptions made about the future and other sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year include: i) Impairment losses Estimates made in determining the expected credit losses on financial assets. Such estimates include the determination of probabilities of default including the use of forward looking information, and of losses given default. ii) Useful lives and residual values of property and equipment and intangible assets Management reviews the useful lives and residual values of the items of property and equipment, intangible assets and right-of-use assets on a regular basis. During the financial year, the directors determined no significant changes in the useful lives and residual values. iii) Accounting for leases under IFRS 16 Management has made various judgements and estimates under IFRS 16 as detailed below: Incremental borrowing rate: To determine the 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. 31 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (continued) 2 Significant judgements and key sources of estimation uncertainty (Continued) b) Key sources of estimation uncertainty (Continued) 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 options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). For leases of offices, the following factors are normally the most relevant: - If there are significant penalties to terminate (or not extend), the company is typically reasonably certain to extend (or not terminate). - If any leasehold improvements are expected to have a significant remaining value, the company is typically reasonably certain to extend (or not terminate). - Otherwise, the company considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset. Most extension options in offices and vehicles leases have not been included in the lease liability, because the company could replace the assets without significant cost or business disruption. The lease term is reassessed if an option is actually exercised (or not exercised) or the company becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee. 3 Financial risk management The company's business involves taking on risks in a targeted manner and managing them professionally. The core functions of the company risk management are to identify all key risks for the company, measure these risks, manage the risk positions and determine capital allocations to each operating entity. The company regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice. The company's risk management objective is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the company's financial performance. The company defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors. Financial risk management is carried out by the management under policies approved by the Board of Directors. The management function identifies and evaluates financial risks in close co-operation with the individual Company's operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as interest rate risk, credit risk and non derivative financial instruments. In addition, internal audit is responsible for the independent review of risk management and the control environment. 3.1 Credit risk and expected credit losses Credit risk is the risk of suffering financial loss, should any of the Company's customers, clients or market counterparties fail to fulfil their contractual obligations. Credit risk arises mainly from loans and advances and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, financial guarantees, letters of credit, endorsements and acceptances. The Company is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities ('trading exposures'), including non-equity trading portfolio assets. 32 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (continued) 3 Financial risk management (Continued) 3.1 Credit risk and expected credit losses (Continued) Credit risk is the single largest risk for the company's business; the directors therefore carefully manage the exposure to credit risk. The credit risk management and control are centralised in a credit risk management team, which reports to the Board of Directors and head of each business unit regularly. Credit risk on financial assets with banking institutions is managed by dealing with institutions with good credit ratings and placing limits on deposits that can be held with each institution. The Company carries out its own assessment of credit risk before investing, and updates such assessments at each reporting date. In assessing whether the credit risk on a financial asset has increased significantly, the Company compares the risk of default occurring on the financial asset as at the reporting date with the risk of default occurring on that financial asset as at the date of initial recognition. In doing so, the Company considers reasonable and supportable information that is indicative of significant increases in credit risk since initial recognition and that is available without undue cost or effort. There is a rebuttable assumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. For these purposes default is defined as having occurred if the debtor is in breach of contractual obligations, or if information is available internally or externally that suggests that the debtor is unlikely to be able to meet its obligations. However, there is a rebuttable assumption that default does not occur later than when a financial asset is 90 days past due. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit impaired include observable data about the following events: - significant financial difficulty of the debtor - a breach of contract - it is probable that the debtor will enter bankruptcy - the disappearance of an active market for the financial asset because of financial difficulties. 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 expected credit (see note below) losses (a) (b) (c) Total KES KES KES KES KES At 31st December 2023 Loans and advances 8,407,168,385 - - - 8,407,168,385 Short-term bank deposits 7,013,073,987 - - - 7,013,073,987 Cash at bank 2,572,924,102 - - - 2,572,924,102 Exposure to credit risk 17,993,166,474 - - - 17,993,166,474 At 31st December 2022 Loans and advances 6,751,152,485 - - - 6,751,152,485 Short-term bank deposits 4,431,340,158 - - - 4,431,340,158 Cash at bank 3,493,560,577 - - - 3,493,560,577 Exposure to credit risk 14,676,053,220 - - - 14,676,053,220 33 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (continued) 3 Financial risk management (Continued) 3.1 Credit risk and expected credit losses (Continued) Financial assets for which the loss allowance has been measured at an amount equal to lifetime expected credit losses have been analysed above based on their credit risk ratings as follows: (a) financial assets for which credit risk has increased significantly since initial recognition but that are not credit impaired; (b) financial assets that are credit impaired at the balance sheet date; (c) trade receivables, contract assets and lease receivables for which the loss allowance is always measured at an amount equal to lifetime expected credit losses, based, as a practical expedient, on provision matrices. 3.2 Liquidity risk The company is exposed to the risk that it will encounter difficulty in raising funds to meet commitments associated with customer requirements. Liquidity risk is addressed through the following measures: (i) Management of 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 Finance 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 bank facilities ensure that sufficient liquidity is maintained within the company as a whole. (ii) Source of funding The Company successfully concluded a capital mobilization drive which resulted in the Government of Kenya, eight (8) commercial banks, one (1) micro finance bank, eleven (11) SACCOs and two (2) Development Finance Institutions injecting equity funds. The company also has a window to borrow funds from the Government of Kenya to be utilised as a line of credit to provide mortgage refinancing to the eligible participating financial institutions and offer technical assistance to support project implementation. The company also raised additional funding from the capital market through issuance of bonds. 34 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (continued) 3 Financial risk management (Continued) 3.2 Liquidity risk (Continued) (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 Finance 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 KES KES KES KES At 31st December 2023 Other liabilities 9,508,022 94,518,672 4,225,469 376,462,661 Borrowings - - - 20,662,582,125 Debt securities in issue - 153,724,844 1,177,338,454 Lease liabilities - - 11,545,473 23,511,777 9,508,022 94,518,672 169,495,786 22,239,895,017 At 31st December 2022 Other iiabiiities 6,907,926 70,568,270 8,022,487 363,923,049 Borrowings - - 16,820,143,424 Debt securities in issue - - 136,644,306 1,263,355,694 Lease liabilities - 10,583,350 21,067,755 6,907,926 70,568,270 155,250,143 18,468,489,922 The company manages the inherent liquidity risk based on expected undiscounted cash inflows. 3.3 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. The company does not engage in activities that may lead it to incur foreign exchange, commodity or equity, or use financial derivatives except as hedging instruments. 35 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) For the year ended 31 December 2023 3 Financial risk management (Continued) 3.3 Market risk (Continued) Interest rate risk The company's exposure to interest rate risk arises from Short-term bank deposits. Borrowings, Loan and advances and other financial assets are fixed interest securities and therefore not susceptible to market interest rate changes. Financial assets and liabilities advanced and obtained at different rates expose the company to interest rate risk. Financial assets and liabilities obtained at fixed rates expose the company to fair value interest rate risk, except where the instruments are carried at amortised cost. The company maintains adequate ratios of borrowings when compared to total borrowings in fixed interest rates. The table below summarises the effect on post-tax profit had interest and equity rates been 1 percentage point higher, with all other variables held constant. If the interest rates were lower by 1 percentage point, the effect would have been the opposite. 2023 2022 KES KES Effect on profit (decrease)/increase 70,130,740 44,313,402 Effect on equity (decrease)/increase 49,091,518 31,019,381 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 Regulator from time to time. 36 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) For the year ended 31 December 2023 4 Capital Risk Management (Continued) The Company has complied with all externally imposed capital requirements. The table below summarises the composition of regulatory capital and the ratios of the Company for the year ended 31 December 2023. During the year, the Company complied with all of the externally imposed capital requirements to which they are subject. Capital 2023 2022 KES KES Share capital 1,808,375,125 1,808,375,125 Retained profit 1,624.216,144 792,787,685 3,432,591,269 2,601,162,810 Core capital (Tier 1) 3,421,687,751 2,592,330,253 Supplementary capital (Tier 2) 6,708,599,297 5,831,726,813 Total Capital 10,130,287,048 8,424,057,066 Total risk - weighted assets 6,395,169,866 5,267,199,750 Capital ratios * Total regulatory capital expressed as a percentage of total risk 158.4% 159.9% * Minimum total Capital to Risk Weighted Assets Requirement 14.5% 14.5% Excess 143.9% 145.4% * Total regulatory core capital to Total Risk Weighted assets ratio 53.5% 49.2% Minimum Core capital to Total Risk Weighted assets ratio 10.5% 10.5% Excess 43.0% 38.7% 5 Revenue from interest determined using effective interest rate a) Interest income on loans and advances: Primary Mortgage Lenders: - Mortgage lending 390,074,989 195,339,115 b) Other interest income Interest income: - financial assets at amortised cost 2,010,652,190 1,105,483,944 2,010,652.190 1,105,483,944 6 Finance cost Interest expense: - Subordinated debt and credit lines GOK/IBRD 8958-KE (Note Number 23) 478,253,715 265,591,257 GOK/AfDB 2000200004101 (Note Number 23) 361,455,735 220,019,472 - debt securities in issue (Note Number 24) 175,000,003 146,712,332 - Lease liabilities 1,402,385 2,003,009 1,016,111,838 634,326,070 Total interest expense for financial liabilities measured at amortised cost. 2023 2022 7 Net movement in expected credit losses KES KES Loans and advances (Note Number 20) 840,717 675,480 Short-term bank deposits 392,192 249,809 Cash at bank 121,647 170,032 Financial Assets at ammortized costs 224,671 - 1,579,227 1,095,321 37 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) For the year ended 31 December 2023 2023 2022 8 Governance expenses KES KES Directors remuneration 9,576,000 8,286,000 Sitting allowance 7,695,000 6,237,000 Annual General Meeting expenses 787,752 338,108 Board evaluation 348,000 - 18,406,752 14,861,108 2023 2022 9 Marketing expenses KES KES Public relations and advertisements 23,817,007 14,800,199 This balance relates to publicity and marketing and includes costs relating to branding, stakeholder engagements, CSR and the affordable housing conference 2023 2022 10 Staff costs KES KES Salaries and wages 105,078,925 85,103,071 Pension costs: - defined contribution scheme 5,880,801 4,977,817 - National Social Security Fund company contribution 234,761 44,000 - Other post-employment benefits 12,734,422 9,144,140 Medical insurance 8,128,090 4,851,730 Other staff costs 2,565,940 1,078,396 134,622,939 105,199,154 2023 2022 11 Administration expenses KES KES Conferences, Seminars and workshops 42,634,840 33,401,238 Licenses and permits 2,385,443 757,142 ICT expenses 22,436,026 4,736,386 Telephone, postage and internet 2,369,442 2,397,663 Office running expenses 6,931,879 3,730,738 Consultancy fees 8,761,505 1,444,454 Insurance costs 6,093,338 2,721,563 Audit fees 1,429,700 700,000 Bank charges 545,542 451,366 Subscriptions 2,082,240 2,942,931 Corporate Social Responsibility 396,900 1,122,023 Motor vehicle running expenses 1,330,260 841,828 97,397,115 55,247,332 ICT expenses increased significantly in the year as a result of implementation of several systems including Network Access Control Solution, Microsoft Mobile Device Management and Device Encryption, Multifactor Authentication solution as well as a Performance and availability Management. 2023 2022 12 Other operating expenses KES KES Short term lease rentals 3,777,996 3,760,921 Electricity 962,613 855,840 Bond issuance costs 888,800 15,130,170 5,629,409 19,746,931 38 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) For the year ended 31 December 2023 2023 2022 13 Depreciation and amortisation expenses KES KES Depreciation of property and equipment (Note Number 15) 14,497,377 13,782,376 Depreciation on right-of-use assets (Note Number 17) 8,103,714 8,103,714 Amortisation of intangible assets (Note Number 16) 2,762,755 2,762,755 Amortisation of financial asset at amortised cost (Note Number 19) 2,335,794 1,400,889 27,699,640 26,049,734 2023 2022 14 Income tax KES KES (a) Income tax expense Current income tax 234,899,902 109,493,589 Deferred tax (income)/expense relating to the origination and reversal of temporary differences (Note 22) (7,223,446) (1,357,098) Under provision in prior years on: - current tax . . Income tax expense 227,676,456 108,136,491 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 30% (2022: 30%) as follows: Profit before tax 1,075,463,252 429.497,210 Tax calculated at the statutory tax rate of 30% (2022: 30%) 322,638,976 128,849,163 Tax effect of: Expenses not deductible for tax purposes 14,681,604 6,608,856 Income not subject to tax (49,471,199) (27,378,582) Under/(Over)-provision in prior years (60,172,925) 57,054 income tax expense 227,676,456 108,136,491 (b) Statement of financial position At 1 January (77,824,477) (18,454,791) Current tax charge 234,899,902 109,493,589 Tax paid during the year - Balance of tax - - - Installment tax - Withholding tax (279,211,936) (168,863,275) At 31 December (122,136,511) (77,824,477) 39 г� и г� о � ti оо о и г� � v� v со о и м со '-' Ш �о �r �сос� rn Г.- м Мо � и Г � � У а0 д' N N О N О с- М � � М (� М СО (и �Г и rnv.- N Nм и и.- со и М N и СО с- �- 1� �-- рр � о М М и М V М I� м о v v и v� и оо �- о о со � ео м со О �- �-- Г м v �t и М �' � М N с- 1� � б) о о б) N с-- � V с- СО М � '� +и-� и О О� Г Г М� 1� (� и N о � р с Ш оо м � � � ш v о о v и оо М r шУ с� Г Г Г ии и ии о о и � Е м м о о о rn г� � г� r� и и с� и у и г� со т оо ао и ео оо и т и и сс > м v со со оо �t и о о и cfl �- � � о " м г� г� г� й� v v� оо oi г� J Q м � (V (V N Г Г Г Г С �� ш о о о и и cfl с� оо оо со ш М с� � с о о о со оо с� w о о v и М rn ,., У о о о оо � со о оо rn и о rn и о � с� о о о и и с� и � �- сч М и со � t«- г� ti г� и N N ао Г �- rn Q N_ и 7-с б) б� б) N N_ 1� Г �_ о Г с-_ О � с Г Г Г (V Г Г (V (V Г �' м о fб г Г с- Г О Ш � С �-' и ш с о rn и rn rn г� со М м ш и о со о � ш v м ti � г� и ti М М � о г� v а й У г� �.- со оо � ао ео и v_ д� и о со v_ с г� Q, о М N N N О� V д' � ct о) М М Ш [r V 1� N N N Г V СО СО �t О Г и У О �, г� v_ с� с� с� v о �t v_ о и г� г�_ о � � Г М и и и Г Г (и N Г м Г (� � у и с� � � и О л � и N i и м о М м и о си си v со со о со со � � и о с� Ш ао о ао оо г� с� � о и и и со с� с� 1- М v � У rn v � М м Г с� М и М со со �- о М_ и � � Q с0 Г О О�' с- М М(� О О Г N б) ,�] r О СО 1� f� Г с- 1� и с- 1� 1� 1� � М о О СО Е � о_ � г� М_ v ш о_ �_ �_ � с� о ш и с.�_ J N Г I N N М"I о г� шI мI м r�I N иII ГI � �rI � �_ и и v д� � �r и�- о о � г� г� � � °' �Ш/ v v v �r со со м М г� о м Г _� V 1 М � � М М � � М � о � � di � Г Г s й й й й шс� о ой со й й и ш г� г� г� г� о� и и v rn г� с� с > и и и и N ш ео со и м Г ti с� `- ео ао со со cfl v о о v й М � � О Г Г �-- .-- г- Г .- о � � �а � v � о ш � � U С Ш J i� �р 0. с � л О М с V о и � и с� ш а }, `' й с � � о � � � U Е }' � � а; ш aci V�� � N М N М М N �р �С U% � � О О � О О О О Ш С г. � N N М N N� N М� N N N � :� ,� м � N и N N� ` N� L N G7 О С � О � О >' � О >` � � � � > � С Т1 -с N О � N S] N Ф S] N Ш .f] � S] S] � Ш � й = i N � i' � р ` � � ` у � � � � О � .� с � (й U Ш (ц С � 'ь� (й � (0 �- Ш > Ш N � г3 L1- Ш А С и� � � и Ш � с_С � О � С О с� У U с� С.У] ` Ш Ш Ш �� г6 N (0 О й 0 (6 О� � v(ц � 0 сС6 Ш Q р р 0 Ш р : а� Q. .... � �.--. пS Г � �,... �� �. � --� т _ � rn Г � �- Г z И Г'О U м Г�{2 м с- Г(6 М Г ПТ М а+ м М � � � � ° о � ш � � а� � � п, �, л и � д U Q Q� Q Q Q- Q � Q U Q Q U Q Z Q Q Н С +-�+ L. YZuo.. � Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 2023 2022 16 Intangible assets KES KES Software costs Cost At 1st January 16,365,435 16,914,135 Write off - - (548,700) At 31 st December 16,365.435 16,365,435 Amortisation At 1 st January 7,600,115 2.412,015 Charge for the year 5,188,099 5,188,100 At 31st December 12,788,214 7,600,115 Net book amount At 31st December 3,577,221 8,765,320 The above software cost relates to an Enterprise Resource Planning (ERP) currently in use by the company. 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. The Net book value of the software relating to the grant from the National Treasury was KES 2,426,072 2023 2022 17 Right-of-use-asset KES KES Cost at start of year 48.622.282 48,622.282 Accummulated Depreciation (24,311,142) (16,207,428) Depreciation charge for the year (8,103,714) (8,103,714) At end of year 16,207,426 24,311,140 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 25. 2023 2022 18 Other assets KES KES Prepayments 4.796,805 8,930,712 Accrued income - 143,399,891 Other receivables 1,128,763 1.058,250 HFC mortgage scheme deposit (see below) Free funds account 61,836,885 62,110,883 Back up account 84,698,748 41,086,861 Car Loan Scheme Account 7.820,786 - 160,281,987 256,586,59 - 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 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. 41 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 2023 2022 19 Financial assets at amortised cost (Government securities) KES KES At start of year 5.203,521,087 1,554,799,616 Additions - 3,552,288,907 Amortisation (2,335,794) (1,400,889) Interest 6,735,849 97,833,453 Accrued Interest 103,784,917 - Expected credit losses on Government securities (224,671) At end of year 5,311,481.388 5,203,521,087 Financial assets at amortised cost can be analysed as follows: Maturing within 5 years 1.000,000,000 1,000,000,000 Maturing after 10 years 1,500,000,000 1,500,000,000 Maturing after 15 years 2,811,481,388 2,703,521,087 Treasury bonds are debt securities issued by the Government of the Republic of Kenya. The bonds are categorized as financial assets at amortized cost. The weighted average effective interest rates on Government securities as at 31 December 2023 was 13.04% (2022: 13.04%). The fair values of the financial assets are categorised under Level 1 based on the information set out in accounting policy 1(a). Credit risk primarily arises from the changes in the market value and the financial stability of issuers of commercial bonds and investment funds. Management monitors the credit quality of financial assets by: - discussion at the management and board meetings; - reference to external historical information available; The maximum exposure to credit risk as at reporting date is the carrying amounts of the financial assets as disclosed above. 2023 2022 20 Loans and advances KES KES Gross Loans and advances to PMLs at amortised cost (i) 8,407,168,385 6,751,152,485 Less: Expected credit loss (ii) (1,645,494) (804,777) Net Total loans and advances to customers 8.405.522,891 6,750,347,708 (i) Loans and advances to customers at amortised cost 2023 2022 Gross ECL Carrying Gross ECL Carrying amount provision amount amount provision amount KES KES KES KES KES KES Primary Mortgage Lenders Mortgage lending 8,407,168,385 (1,645,494) 8,405,522,891 6,751,152,485 (804,777) 6,750,347,708 The impairment provision includes the following:- Transfer Provisions as per tol(from) statutory ECL provisions statutory loan regulations as per IFRS 9 reserves Loans and advances to Primary Mortgage Lenders: Mortgages 84,071,684 840,717 83,230,967 42 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 20 Loans and advances (continued) Statutory provisions are analysed as follows: 2023 2022 KES KES 0 - 30 Days (Normal - 1%) 84,071,684 67,511.525 31 - 90 Days (Watch - 5%) - - 91 - 180 Days (Substandard - 25%) 181- 360 Days (Doubtful - 75%) Over 361 Days or 12 Instalments over due (Loss Account - 100%) - - 84,071,684 67,511,525 All loans are at stage 1 The weighted average effective interest rate on loans and advances at 31 December 2023 was 5.6% (2022: 5.6%). (ii) IFRS 9 provisions Reconciliation from opening to closing balance of loss allowance for loans and advances to customers at amortised cost for 2023 is shown below; comparative amounts for 2022 represent total allowance account for credit losses under stages 1, 2 and 3. 2023 2022 Stage I Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total KES KES KES KES KES At start of the year 804,777 - - 804,777 129.297 - Changes in the gross carrying amount: - Transfer to stage 1 - - - - Net remeasurement of 840.717 - - 840,717 675,480 impairment provisions - New financial assets - - - originated or purchased At end of year 1,645,494- 1,645,494 804,777 In the opinion of the directors, the carrying amounts of loans and advances to customers approximate their fair value. 2023 2022 21 Cash and cash equivalents KES KES Short-term bank deposits held with the following institutions; - KCB Bank Kenya Limited 4,389,022,010 3,820,657,858 - HFC Limited 471,352,668 328,682,300 - Absa Bank Kenya PLC 2,152,699,309 282,000,000 - NCBA Bank Kenya PLC 1,081,772,410 - Cooperative Bank of Kenya Limited 1,000,000,000 1,000,000,000 Cash at bank and in hand 2,675,209,723 3,576,480,192 Accrued Interest 122,590,655 Expected credit losses on bank balances and short term deposits (1,245,197) (731,358) 11,891,401,578 9,007.088,992 For the purpose of the statement of cash flows, cash and cash equivalents comprise as shown above: 43 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 2023 2022 21 Cash and cash equivalents (continued) KES KES Impairment provision At start of the year 731,358 311,517 Changes short-term bank deposits 392,192 249,809 Changes relating to bank balances 121,647 170,032 At end of the year 1,245,197 731.358 The weighted average effective interest rate on short-term bank deposits at year-end was 15.09% (2022: 9.9%) 22 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 (2022: 30% and 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: Credited/ (charged) to At 31st At 1st January profit or loss December KES KES KES Year ended 31st December 2023 Property and equipment - on historical cost basis 1,774,836 7,459.562 9,234,398 Software (806.845) 1,556,430 749,585 Right-of-use assets - accelerated tax depreciation 7,293,343 (4,278,177) 3,015,166 Lease liabilities (5,115,207) (2,441.799) (7,557,006) Financial asset at amortised cost - 700,738 700,738 Provision for liabilities 4,261,075 4,226,692 8,487.767 Net deferred tax asset 7,407,202 7,223,446 14,630,648 Year ended 31st December 2022 Property and equipment - on historical cost basis 607,046 1,167,790 1,774,836 Software (950,162) 143,317 (806,845) Right-of-use assets - accelerated tax depreciation 4,862,228 2,431,115 7.293,343 Lease liabilities (2,853,596) (2,261.611) (5,115,207) Financial asset at amortised cost 52,915 (52,915) - Provision for liabilities 4331,673 (70,598) 4,261,075 Net deferred tax (liability) 6,050,104 1,357,098 7,407.202 Repayment 2023 2022 23 Borrowings Interest rate Start date End date KES KES GOK/IBRD 8958-KE 4.5% 30/03/2024 30/03/2044 - Subordinated debt 4,374,165,520 4.374.165,520 - Credit line 6,407,925,431 5,931,959,191 GOK/AfDB 2000200004101 4.5% 30/03/2027 30/03/2044 - Subordinated debt 1,803,754,800 1,202,144,400 - Subsidiary loan 6,484,732,442 4,559,579,831 Accrued interest 1,592,003,932 752,294,482 20,662,582,125 16,820,143,424 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 (IBRD) herein after called "the World Bank" on 5th December 2020. The Government of Kenya also entered into another Loan Agreement for a line of credit for an amount of Euros 90,000,000 with the African Development Bank (AfDB) on 2nd April 2020. Both loans were 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 exchange rate risk is born by the Government of Kenya. 44 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) The Government agreed under the Loan Agreement dated 5th December 2020 and 12 October 2020 to on-lend to the Company an amount of Euros 201,400,000 and Euros 90,000,000 from the proceeds of the two loans for the implementation of the Project as explained above. The borrowings from the Government to KMRC are done in KES. Borrowings from the government as at 31 December 2023 amounted to KES. 19,0780,578,193 (2022: KES. 16,067,848,942). Interest payable of KES. 1,592,003,932 (2022: Kshs. 752,294,482) remained unpaid as at 31 December 2023. These amounts shall be accrued over the grace period/disbursement period and will be capitalised on the first principal repayment date and the management expects to meet all contractual obligations in the future. The fair values of current borrowings equal to their carrying amount, as the impact of discounting is not significant. At the year-end, the Company had undrawn facilities which it may utilise to fund its obligations as shown below. AfDB World Bank TOTAL EUR EUR EUR Loan 90,000,000 201,400,000 291,400,000 Sub-debt drawn down 13,500,000 35,000,000 48,500,000 Credit line drawn down 50,400,000 50,086,731 100.486,731 Total Drawn Down 63,900,000 85,086,731 148,986,731 Undrawn Facilities 26,100,000 116,313,269 142,413,269 2023 2022 24 Debt securities in issue KES KES At start of year 1,459,167.332 1,400,000,000 Additions (Repayments) (195,811,638) - Accrued Interest payable 67,707,604 59,167,332 At end of year 1,331,063.298 1,459,167.332 Debt securities in issue comprise: - KES 1.263,355,694 (2022: KES 1.400,000,000) Medium Term Note issued in the year 2022 and has a maturity date of 23rd February 2029. - Maturity analysis of principal amount Within one year 153.724,844 136,644,306 Later than one year but within three years 586,376,213 521.223.300 Later than three years but within five years 523,254,637 742.132,394 2023 2022 25 Lease liabilities KES KES At 31 December 23.511,777 31,651,105 The total cash outflow for leases in the year was: Payments of principal portion of the lease liability 10,583,350 10,495,884 Maturity analysis Within one year 11,545,473 10,583,350 Later than one year but within three years 10,583,350 22,128,823 For more information on the nature of the leases entered into and the related right-of-use assets, see Note 17. 45 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 2023 2022 26 Other Liabilities KES KES Trade payables 3,506,883 7.284,915 Accrued Liabilities 26,811,068 11,400,938 Payroll liabilities 9,508,022 6.907,926 Other liabilities 718,586 737.572 Post-employment benefit obligation (Note 29) 30,644,561 17,910,139 Due to shareholders (Note 28) 345,818,100 346,012,910 417,007,220 390,254,400 27 Share capital Issued and fully paid up capital: At 1 January 1,808.375,125 1,808,375,125 Issue for cash At 31 December 1.808,375.125 1,808,375,125 The total number of authorised ordinary shares is 50,000,000 (2022:50,000,000) with a par value of KES. 100 each. 28 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: 2023 2022 KES KES At January 01 17.910,139 8.765,999 Additional provision made during the year, charged to profit or loss 12,734,422 9,144,140 Benefits paid during the year _ . At December 31 30,644.561 17.910,139 29 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: 2023 2022 KES KES Within one year 11.545.473 10,583,350 Later than one year but within five years 10,583.350 22,128.823 22,128.823 32,712,173 46 Kenya Mortgage Refinance Company PLC Notes to the Financial Statements (Continued) 30 Related party transactions The National Treasury with the support of the World Bank established the Kenya Mortgage Refinance Company PLC (KVIRC), a private company that will refinance housing loans issued by eligible financial institutions in Kenya. The Company is related to eligible financial institutions through common shareholding and directorship. The following transactions were carried out with related parties. 2023 2022 i) Loans and advances KES KES Mortgages to Primary Mortgage Lenders ABSA Bank 2,811,565,001 3,021,588,583 Cooperative Bank 389,781.503 467,438,886 Credit Bank 46,733,810 49.256,433 HFC Bank 928,923,523 1,061,565,604 KCB Bank 1,515,465,073 1,708,002,356 NCBA Bank 860,096.965 - Safaricom Sacco 55,854,342 - Stanbic Bank 936,630,689 - Stima Sacco 474,552,066 284,009,204 Tower Sacco 21,137,703 25,061,605 Ukulima Sacco 138,475.312 54,959,145 Unaitas Sacco 227,952.398 79,270,669 Less: Expected credit loss (1,645,494) (804,777) TOTAL 8,405,522,891 6,750.347,708 ii) Due to related parties (Note 26) At 1st January 346,012,910 580,324,875 Amounts capitalised during the year (194,810) (234,311,965) At 31st December 345.818.100 346,012,910 The amounts due to shareholders are unsecured, interest free and have no fixed repayment period. iii) Key management compensation Salaries and other employment benefits 93,150,378 64,351,033 Post-employment benefits 35,927,940 20,927,948 129,078,318 85.278,961 iv) Directors' benefits and other remuneration fees 9,576,000 8,286,000 - allowances 7,695,000 6,237,000 17,271,000 14,523,000 31 Other reserve At start of year 13,934,635 20,770,920 Amortisation (6,836,286) (6,836,285) At end of year ,U2,349 13,934,635 Other reserve relates to capital grants received from the National Treasury. 47