Report of the Directors

2021

KCB INTEGRATED REPORT & FINANCIAL STATEMENTS Financial Statements

For the Year Ended 31 December 2021

The National Bank of Rwanda’s loan grading assists management to determine whether objective evidence of impairment exists, based on the following criteria set out by the Bank: • Delinquency in contractual payments of principal or interest; • Cash flow difficulties experienced by the borrower; • Breach of loan covenants or conditions; • Initiation of Bank Bankruptcy proceedings; • Deterioration of the borrower’s competitive position; • Deterioration in the value of collateral.

The Bank’s policy requires the review of individual financial assets regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the impairment at reporting date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

The Bank makes available to its customers guarantees which may require the Bank to make payments on their behalf and enters into commitments to extend lines to secure their liquidity needs. Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Such commitments expose the Bank to similar risks to loans and are mitigated by the same control processes and policies.

4.1.2 Expected credit loss measurement

IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below: • A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Bank.

• If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit impaired. Please refer to note 4.1.2 for a description of how the Bank determines when a significant increase in credit risk has occurred. • If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Please refer to note 4.1.3 for a description of how the Bank defines credit-impaired and default.

• Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis. Please refer to note 4.1.4 for a description of inputs, assumptions and estimation techniques used in measuring the ECL.

• A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information. Note 4.1.5 includes an explanation of how the Bank has incorporated this in its ECL models.

• Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

Notes (Continued)

The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):

(Initial recognition)

12-month expected credit losses

Stage 2

(Significant increase in credit risk since initial recognition)

Lifetime expected credit losses

Stage 3

(Credit-impaired assets)

Lifetime expected credit losses

The key judgements and assumptions adopted by the bank in addressing the requirements of the standard are discussed below:

4.1.2.1 Significant increase in credit risk (SICR)

The Bank in determining whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition considered reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on the Bank’s historical experience, expert credit assessment and forward-looking information.

For the Year Ended 31 December 2021

The Bank identifies a significant increase in credit risk where • Exposures have a regulatory risk rating of “Watch”

• An exposure is greater than 30 days. This is in line with the IFRS 9 30 DPD rebuttable presumption; • an exposure that has been restructured in the past due to credit risk related factors or which was NPL and is now regular (subject to the regulatory cooling off period);or

• by comparing an exposures:

• credit risk quality at the date of reporting; with

• the credit risk quality on initial recognition of the exposure.

The assessment of significant deterioration is key in establishing the point of switching between the requirement to measure an allowance based on 12-month expected credit losses and one that is based on lifetime expected credit losses. The Company has not followed an overall blanket approach to the ECL impact of COVID-19 (where COVID-19 is seen as a significant increase in credit risk (SICR) trigger that will result in the entire portfolio of advances moving into their respective next staging bucket). With the Bank undertaking loan restructures on 10% of the loan book (see the section “Restructuring” below), the Bank incorporated qualitative factors to assess significant increase in credit risk on these loans as below:

• All loans whose business activity, in our assessment, was significantly lower than the pre-COVID period as at 31 December 2020, was considered to have a significant increase in credit risk and downgraded to Stage 2. • Loans in high risk industry segments (see the section “Restructuring” below) were assessed for significant increase in credit risk.

5. Financial risk management (continued)

4.1. Credit risk (continued)

Generally, restructuring is a qualitative indicator of default and credit impairment and expectations of restructuring are relevant to assessing whether there is a significant increase in credit risk. Following restructuring, a customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be in default/credit-impaired or the PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECLs.

Covid 19 impact on impairment losses on loans and advances

The Covid-19 pandemic has resulted in a significant impact on the risks that the Bank is exposed to and the output of financial models, most specifically those used to determine credit risk exposures. This high degree of uncertainty has forced the Bank to reassess assumptions, and existing methods of estimation and judgements, used in the preparation of these financial results. There remains a risk that future performance and actual results may differ from the judgements and assumptions used.

At the onset of the COVID-19 pandemic, the impact of the containment measures on the economy made it imperative for the Bank to support its customers. The Bank’s view is that the economic impacts of the pandemic will be felt for a period of three to five years before there is full recovery. The Bank therefore accommodated its customers to cushion them from the economic downturn by rescheduling their loan facilities for a period of 6 months to 36 months. The length of the period of accommodation depended on the impact of the pandemic on the industry in which the customer operates. The Bank segregated the loan book into low risk, medium risk and high risk based on the industry. For example, Agriculture was rated as low risk, Mining as medium risk and Tourism and Hospitality and Real Estate as High Risk. The Bank then accommodated for different periods depending on the level of risk. The assessment of SICR incorporates forward-looking information (refer to note 4.1.5 for further information) and is performed on a monthly basis at a portfolio level for all financial instruments held by the Bank. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the independent Credit Risk team.

The most substantial impact on the Bank relates to credit risk due to increased allowances for credit losses in the year. The increased credit risk is majorly because of:

• Declining performance in certain sectors of the economy e.g., hospitality and education sectors hence increased possibility of default. • Downward changes in credit ratings (both internal and external) • Increased time to realization of collateral for some portfolios and sectors as well as reassessment of the quality of collateral • Increased days past due for loans issued • Macroeconomic factors that have impacted the forward-looking estimates • Increased modification losses because of the restructurings. • Increased write offs of the loans that we are unlikely to recover.