CONTENTS PAGE CORPORATE INFORMATION 2 REPORT OF THE DIRECTORS 3 STATEMENT OF DIRECTORS' RESPONSIBILITIES 4 REPORT OF THE INDEPENDENT AUDITOR 5 FINANCIAL STATEMENTS: INCOME STATEMENT 6 BALANCE SHEET 7 STATEMENT OF CHANGES IN CAPITAL FUNDS 8 CASHFLOW STATEMENT 9 NOTES TO THE FINANCIAL STATEMENTS 10 -17
ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 CORPORATE INFORMATION DIRECTORS: Ms. Miriam Cherogony: Chairperson Mr. Austin T. Menya: Vice- Chairperson Mr. Stephen M. Mirero : Treasurer Mrs. Gladys N. Tarayia Mr. John S. Kimathi Mrs. Mwanjuma A. Abok Dr. Roselyne Gakure Mr. Henry Ikatukhu Ms. Lillian A Owiti REGISTERED OFFICE: Ngong Lane, off Ngong Road, P.O. Box 76622-00508, NAIROBI Phone: +254-20-3870280, 3864901 Fax: + 254-20-3871531 Cell: +254-722-200083, 736-175004 Email: sisdo@sisdo.org Website: http\\:www.sisdo.org AUDITORS: Wachira Irungu & Associates Dominion House, Westlands P.O. Box 46671 - 00100 Nairobi, Kenya BANKERS: Co-operative Bank of Kenya Co-operative Bank of Kenya Nairobi Business Centre, P.O. Box 1250-90100, P.O. Box 19555-00202. MACHAKOS. NAIROBI. Co-operative Bank of Kenya Kenya Commercial Bank P.O. Box 12253-10100, P.O. Box 7014, NYERI. CHUKA. Co-operative Bank of Kenya National Bank of Kenya P.O. Box 101-60400, P.O. Box 240 CHUKA. LIMURU. Kenya Commercial Bank P.O. Box 65659-00400, MILIMANI, NAIROBI.
2 ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 REPORT OF THE DIRECTORS 1 FINANCIAL STATEMENTS The directors have the pleasure in presenting their report together with the audited Financial Statements for the year ended 31st December 2007. 2 PRINCIPAL ACTIVITY The principal activity of the organisation is lending to small-income earners two major types of loans, namely business and agriculture loans both of which are based on the group lending methodology. Existing borrowers are entitled to add-on loans to cover school fees, emergencies and asset financing. 3 RESULTS The results for the year are set out on page 6. 4 DIRECTORS
The directors who held office during the year are shown on page 2. 6 AUDITORS M/s Wachira Irungu & Associates were appointed during the year and have expressed their willingness to continue in office in accordance with section 159(2) of the Kenyan Companies Act (Cap 486). BY THE ORDER OF THE BOARD SECRETARY---------------------------------------- DATE---------------------------------------
3 ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 STATEMENT OF THE DIRECTORS' RESPONSIBILITIES The Non-Governmental Organisation (NGO) Coordination Act requires the directors to prepare financial statements for each financial year, which give a true and fair view of the state of the financial affairs of the company as at the end of the financial year and of its operating results for that year.It also requires the directors to ensure that the company keeps proper accounting records which disclose with reasonable accuracy at any time, the financial position of the company.They are also responsible for safeguarding the assets of the organisation. The directors are responsible for the preparation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, in conformity with International Financial Reporting Standards and the requirements of the NGO Coordination Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of theorganisation and of its operating results. The directors further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control. Nothing has come to the attention of the directors to indicate that the organisation will not remain a going concern for at least twelve months from the date of this statement. DIRECTOR. DATE. DIRECTOR. DATE.
4 ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 REPORT OF THE INDEPENDENT AUDITORS TO MEMBERS OF SISDO REPORT ON FINANCIAL STATEMENTS DIRECTORS' RESPONSIBILITY FOR THE FINANCIAL STATEMENTS AUDITOR'S RESPONSIBILITY as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION CERTIFIED PUBLIC ACCOUNTANTS DOMINION HOUSE, MUTHITHI ROAD P.O. BOX 46671 - 00100 NAIROBI DATE:.... We have audited the accompanying financial statements of Smallholder Irrigation Scheme Development Organisation (SISDO) set out on pages 6 to 17 which comprise the balance sheet as at 31st December 2007, and the income statement, the statement of changes in capital funds and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes and have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the NGO Coordination Act. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. The NGO Coordination Act also requires the directors to ensure that the organisation maintains proper books of accounts which are in agreement with the balance sheet and profit and loss account. Our responsibility is to express an independent opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatements of the financial statements, whether due to fraud or error. In making those risk assessments, we considered the internal control relevant to the organisation's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of organisation's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, In our opinion, the financial statements give a true and fair view of the state of financial affairs of the organisation at 31st December 2007 and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the NGO Coordination Act.
Wachira Irungu & Associates 5 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 INCOME STATEMENT 2007 2006 Restated Note Kshs Kshs Income 2 61,915,713 33,592,944 Operating Expenses 3 69,227,486 42,883,456 Operating Loss (7,311,773) (9,290,512) Grants Received 7 3,098,736 6,107,785 Finance Costs 4 7,226,906 3,633,143 Net Loss for the Year (11,439,943) (6,815,870)
6 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 BALANCE SHEET 2007 2006 Restated Note Kshs Kshs ASSETS Non Current Assets Property, Equipment & Software 1 (d) & 5 23,319,488 20,951,068 Intangible Assets 1 (e) & 6 2,645,265 109,396 25,964,752 21,060,464 Current Assets Net Outstanding Loans 8 215,985,108 135,451,491 Other Receivables and Prepayments 9 2,684,609 1,534,084 Cash & Cash Equivalents 10 32,164,633 44,427,378 250,834,350 181,412,953 TOTAL ASSETS 276,799,102 202,473,417 FUNDS AND LIABILITIES Capital Funds Revolving Loan Fund 11 53,723,173 53,723,173 General Fund 12 (6,656,767) 4,783,176 47,066,406 58,506,349 Non-Current Liabilities Long-term loans 13 61,000,000 31,000,000 61,000,000 31,000,000 Current Liabilities Short-term loans 14 6,200,000 9,033,335 Collateral Deposits 15 155,476,880 102,894,832 Trade and Other Payables 16 7,055,816 1,038,901 168,732,696 112,967,068 TOTAL EQUITY AND LIABILITIES 276,799,102 202,473,417 The Financial Statements on pages 6 to 17 were approved for issue by the directors on__________________ and signed on their behalf by: DIRECTOR: ________________________ DIRECTOR: ________________________
7 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 STATEMENT OF CHANGES IN CAPITAL FUNDS Revolving Loan Fund Property & Equipment Fund Vehicle Fund Accumulated Fund Total Kshs Kshs Kshs Kshs Kshs At 01/01/2006 53,723,173 1,299,181 2,621,426 7,506,747 65,150,527 Deficit for the Year- Restated - - - (6,815,870) (6,815,870) Transfer to Property Fund - 7,000,000 - (7,000,000) - Prior Year Items - - - 171,692 171,692 Transfer to/(from) Accumulated Fund - 819,361 17,174 (836,535) - At 31/12/2006 53,723,173 9,118,542 2,638,600 (6,973,966) 58,506,349 At 01/01/2007 53,723,173 9,118,542 2,638,600 (6,973,966) 58,506,349 Deficit for the Year - - - (11,439,943) (11,439,943) Transfer to/ (from) Accumulated Fund - 2,858,306 13,406 (2,871,712) - At 31/12/2007 53,723,173 11,976,848 2,652,006 (21,285,622) 47,066,406
8 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 CASHFLOW STATEMENT 2007 2006 Restated Note Kshs Kshs Net Cash Used in Operations 17 (27,935,717) (13,390,341) Investing Activities Investment Income 397,324 - Interest received - 1,260,142 Purchase of Property & Equipment 5 (3,904,346) (20,479,495) Acquisition of computer software 6 (3,858,501) (164,094) Net cash used in investing activities (7,365,523) (19,383,447) Financing Activities Bank loans received 30,000,000 37,200,000 Bank loan repayment (2,833,336) (4,761,904) Interest on borrowings paid (4,376,778) (1,929,407) Interest on collateral deposits (2,297,687) (1,703,736) Loan processing fees (552,440) - Grants received 3,098,736 6,107,785 Net cash generated from financing Activities 23,038,495 34,912,738 Net (Decrease)/ Increase in Cash and Cash Equivalents (12,262,745) 2,138,950 Cash and cash equivalents at the beginning of the year 44,427,378 42,288,428 Cash and Cash Equivalents at the End of the Year 9 32,164,633 44,427,378
9 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 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. a) Basis of Preparation The financial statements are prepared in accordance with International Financial Reporting Standards(IFRS). The financial statements are presented in Kenya Shillings (Kshs) and are prepared under the historical cost basis of accounting. The preparation of financial statements in conformity with IFRS requires the use of assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. It also requires the directors to exercise judgement in the process of applying the company's accounting policies. These policies have been consistently applied during the year unless otherwise stated. b) Revenue Recognition Interest on loans is recognised when the amount is received with effect from 1st January 2007. Prior to this date, interest was being recognised on accrual basis. c) Change of an accounting policy During the year under review, the management considered it more prudent to recognise as income interest on loans only when this is actually received by the organisation. This is a major departure from prior reported periods whereby interest on loan earned but not yet received was recognised as income receiveable for the period. The decision was informed by the experience that much of this interest receiveable is not subsequently collected. The effect of this change was to write off the deferred interest income amounting to Kshs 25,655,000 against the loans receivable as on 31/12/2007.
d) Property & Equipment Property & Equipment are stated at historical cost less accumulated depreciation. Depreciation is calculated on a reducing balance method to write down their cost or revalued amounts to their residual values over their estimated useful lives using the following annual rates: Rate Land Nil Buildings 2.5% Office equipment, furniture & fittings 12.5% Computers 33% Gains and losses on disposal of property & equipment are determined by reference to their carrying amounts and are taken into account in determining operating profit. e) Intangible Assets Intangible Assets comprise the cost of purchased computer software programs. Costs incurred on computer software are initially accounted for at cost as intangible assets and subsequently at cost less any accumulated amortisation and accumulated impairment losses. Intangible assets are amortised on a reducing balance basis over their expected useful life of 3 years. f) Employee Benefits The organisation and all its employees contribute to the National Social Securiy Fund (NSSF), which is a defined contribution scheme registered under the National Social Security Act. The company's obligations under the scheme are limited to specific contributions legislated from time to time and are currently limited to a maximum of Kshs 200 per employee per month. The company's obligations are recognised in the income statement as they fall due.
10 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) g) Financial Instruments Financial assets and financial liabilities are recognised on the entity's balance sheet when the institution has become a party to the contractual provisions of the instrument. Loans and receivables originated by the organisation Loans and receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on the review of all outstanding amounts at the year end. In addition, general provisions are maintained based on managements evaluation of the portfolio of loans to SISDO's customers and other exposures in respect of losses which, although not specifically identified, are known from experience to be present in any such portfolio. When a loan is deemed uncollectable it is written off against the related bad debt provision and/ collateral deposits from the customer held by the organisation. Subsequent recoveries of loans that have been written off are credited to the income statement. Trade and Other Payables Trade and other payables are stated at their nominal value. Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Borrowing costs are charged to the income statement when incurred. h) Impairment At each balance sheet date, the company reviews the carrying amounts of its financial assets, tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairement loss. If any such indications exists, the recoverable amounts of the assets are estimated and an impairment loss is recognised in the income statement whenever the carrying amount of the asset exceeds its recoverable amount.
i) Critical Judgements and Estimates In the process of applying the company's accounting policies, management has made estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. These are dealt with below: Equipment Critical estimates are made by the directors in determining the useful lives and depreciation rates for equipment. Impairement If an indication exists that the company's assets have suffered an impairement loss at the balance sheet date, the directors estimate the asset's recoverable amount. j) Cash & Cash Equivalents For the purpose of the cashflow statement, cash and cash equivalents comprise cash in hand and bank balances. k) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. In particular, comparative figures have been adjusted to comply with the presentation as per the International Financial Reporting Standards.
11 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 2007 2006 Restated Kshs Kshs 2 Income a) Interest on loans 54,698,085 28,295,089 b) Other income Loan application fees 4,496,791 2,201,873 Bank interest - 954,052 Registration fees 964,410 760,320 Passbook fees 790,166 643,501 Bad debts recovered 336,564 383,530 Investment income 397,325 306,090 Penalties and exit fees 232,372 48,489 7,217,628 5,297,855 61,915,713 33,592,944 3 Operating Expenses Personnel 29,717,101 22,410,983 Bad debts written off 3,232,515 1,576,936 Transport and travel 4,844,755 2,762,205 Rent & rates 1,101,785 1,749,524 Board travel 1,514,628 1,646,184 Stationery and printing 1,643,035 1,309,331 Communication 1,873,036 1,219,490 Training 1,185,386 1,122,108 Office expenses 700,840 534,229 Bank charges 1,069,311 501,400 Advertisement & publicity 498,405 442,705 Licenses and permits 486,590 291,500 Client mobilization & market research 125,100 228,350 Electricity and water 242,511 190,603 Provision for audit fees 200,000 196,040 Security 144,000 195,024 Legal fees 37,450 183,850 Repairs & Maintenance 314,281 175,471 Subscription 84,800 147,300 Consultancy 121,429 607,470 Insurance 54,126 52,513 Transformation costs 210,809 - Performance incentives and awards 378,107 208,788 Foreign exchange loss 577,970 - Evaluation costs 876,288 - Provision for bad and doubtful debts 15,134,668 4,249,146 Provision for depreciation 1,535,927 827,608 Amortisation of intangible assets 1,322,632 54,698 69,227,486 42,883,456
12 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 2007 2006 Kshs Kshs 4 Finance Costs Interest on borrowings 4,376,778 1,929,407 Loan processing fees 552,440 - Interest on collateral deposits 2,297,688 1,703,736 7,226,906 3,633,143 5 Property & Equipment COST/VALUATION Land Building Office Equipment, Furniture & Fittings Computers Totals Kshs. Kshs. Kshs. Kshs Kshs. At 01/01/2006 - - 1,007,755 1,062,741 2,070,496 Additions 14,720,010 4,000,000 669,755 1,253,824 20,643,589 At 31/12/2006 14,720,010 4,000,000 1,677,510 2,316,565 22,714,085 At 01/01/2007 14,720,010 4,000,000 1,677,510 2,316,565 22,714,085 Transfers to Intangible assets ( Note 6) - - - (164,094) (164,094) Additions - 962,002 422,254 2,520,090 3,904,346 At 31/12/2007 14,720,010 4,962,002 2,099,764 4,672,561 26,454,337 DEPRECIATION At 01/01/2006 - - 276,163 495,152 771,315 Charge for the year - 100,000 175,168 607,138 882,306 On transfers - - - (54,698) (54,698) At 31/12/2006 - 100,000 451,331 1,047,592 1,598,923 At 01/01/2007 - 100,000 451,331 1,047,592 1,598,923 Charge for the year - 121,550 206,054 1,208,323 1,535,927 At 31/12/2007 - 221,550 657,385 2,255,915 3,134,850 NET BOOK VALUE At 31/12/2007 14,720,010 4,740,452 1,442,379 2,416,646 23,319,487 At 31/12/2006 14,720,010 3,900,000 1,226,179 1,104,879 20,951,068 During the year, computer software was re-categorised as an intangible asset (Note 6) so as to comply with IAS 38.
13 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 2007 2006 Restated Kshs Kshs 6 Intangible Assets Cost At 1st January 164,094 - Additions 3,858,501 164,094 At 31st December 4,022,595 164,094 Amortisation At 1st January 54,698 - Charge for the year 1,322,632 54,698 At 31st December 1,377,330 54,698 Net Book Value At 31st December 2,645,265 109,396 7 Grants Received Oxfam Novib 2,767,236 6,107,785 Oxfam International 331,500 - 3,098,736 6,107,785 8 Net Outstanding Loans Micro-entreprise 198,637,019 121,417,101 Agriculture 29,426,142 38,758,583 Agri-business 6,713,556 5,868,921 Other products 4,588,556 3,307,383 Gross loans receivable 239,365,273 169,351,988 Deferred interest income derecognised (Note 1(c ). - (25,655,000) Loan loss provision (23,380,165) (8,245,497) 215,985,108 135,451,491 9 Other Receivables and Prepayments Staff car-loans 1,070,676 428,722 Rent deposits 384,156 347,656 Prepayments 1,081,214 714,873 Sundry debtors 64,944 32,204 Field staff travel imprest 83,619 10,629 2,684,609 1,534,084 10 Cash and Cash Equivalents For purposes of the cashflow statement, cash and cash equivalents comprise of the following: Bank balances 32,149,853 6,171,288 Fixed deposits - 27,950,000 Money market fund - 10,306,090 Petty cash in hand 14,780 - 32,164,633 44,427,378 11 Revolving Fund Balance at 31st December 53,723,173 53,723,173 This represents funds received from donors for on-lending.
14 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 2007 2006 Restated Kshs Kshs 12 General Fund Balance brought forward 4,783,176 11,427,354 Prior year adjustment - 171,692 Net loss for the year (11,439,943) (6,815,870) Balance at 31st December (6,656,767) 4,783,176 13 Long-term Loans Oxfam Novib- Long term loan 31,000,000 31,000,000 MESPT loan 30,000,000 - 61,000,000 31,000,000 Oxfam Novib loan is secured by SISDO's portfolio for a total amount of 150% of the outstanding loan plus interest due in favour of the lender. The loan is repayable in six equal capital instalments, commencing 31/12/2007. Interest is charged at a rate of 6% plus the yearly rate of inflation in Kenya; but the maximum rate is fixed at 11% per annum. MESPT loan is secured by a floating debenture over all of SISDO's assets, book debts and property. The loan is repayable in 3 years from the date of disbursement. Interest is charged at a flat rate of 5% per annum subject to change depending on the prevailing market conditions. 2007 2006 Kshs Kshs 14 Short-term Loans Oxfam Novib- Short term loan 6,200,000 6,200,000 Jitegemee trust loan - 2,833,335 6,200,000 9,033,335 15 Collateral Deposits Balance at 31st December 153,179,192 101,191,096 Provision for interest payable on the deposits 2,297,688 1,703,736 155,476,880 102,894,832 16 Trade and Other Payables Trade payables 401,045 - Accrued expenses 2,819,837 781,051 Other payables 3,577,084 - Contingent liability (Note 20) 257,850 257,850 7,055,816 1,038,901
15 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 2007 2006 Restated Kshs Kshs 17 Cash Generated From Operations Operating loss (7,311,773) (9,290,512) Adjustments for: Depreciation 1,535,927 827,608 Amortisation 1,322,632 54,698 Investment Income (397,324) (306,090) Interest income - (954,042) Prior year adjustment - 171,692 Operating Loss Before Working Capital Changes (4,850,538) (9,496,646) Increase in loans to customers (80,533,617) (46,693,882) (Increase)/decrease in other receivables & prepayments (1,150,525) 694,744 Increase in trade and other payables 6,016,915 385,552 Increase in deferred interest income - 6,202,793 Increase in collateral deposits 52,582,048 35,517,098 Net Cash Used in Operations (27,935,717) (13,390,341) 18 Financial Risk Management Objectives and Policies The organisation's activities expose it to a variety of financial risks, including credit risk and the effects of changes in foreign currency exchange rates and interest rates. The organisations overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance, but the organisation does not hedge any risks. Risk management is carried out by the management of the organisation in accordance with policies approved by the Board of Directors. Foreign exchange risk The organisation's operations are predominantly in Kenya, where the currency has remained relatively stable against major convertible currencies.A significant portion of the organisations borrowings and grants are denominated in foreign currencies, and is therefore exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro. Foreign exchange risk arises from future commercial transactions, and recognised assets and liabilities. Credit risk The organisation takes on exposure to credit risk, which is the risk that a counter party will be unable to pay amounts in full, when due. The organisation structures the levels of credit risk it undertakes by placing limits on amounts of risk accepted in relation to one borrower or group of borrowers. Such risks are monitored on a revolving basis and subject to annual or more frequent review. The organisation's credit risk is concentrated on low-income earners of the economy engaged in smallholder crop and dairy farming, agribusiness and other micro-enterprises. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and group guarantees.
16 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS (CONT'D) 18 Financial Risk Management Objectives and Policies (cont'd) Liquidity risk Prudent liquidity risk management includes maintaining sufficient cash balances to cover anticipated deposit refunds to exiting customers and loan repayment instalments that fall due. Excess liquid funds are invested in assets that can be easily liquidated. Operational Risk The company is exposed to operational risk which is associated with human error, system failures and inadequate procedures and controls. The company ensures that there is an effective, integrated operational risk management framework that incorporates a clearly defined organizational structure, with defined roles and responsibilities for all aspects of operational risk. 19 Restatement of prior year comparatives This relates to corrections made to opening balances of various items so as to fairly state them in the current year. 20 Contingent Liabilities A former employee sued the organisation fpr alleged wrong computation of his terminal benefits. The matter is pending in court and the expected contingent liability of Kshs. 257,850, has been provided for. (2006: Kshs. 257,850) 21 Foreign Currency Transactions during the year in foreign currencies are translated at the rates ruling at the dates of the transactions. Assets and liabilities denominated in foreign currencies at the end of the year are translated at the rates of exchange ruling at the balance sheet date. Gains and losses on exchange are dealt with in the income statement in the year in which they arise. 22 Incorporation The organisation is domiciled and registered in Kenya as a Non Governmental Organisation (NGO) under the Non- Governmental Organisations Coordination Act, 1990. 23 Currency The financial statements are expressed in Kenya Shillings(Kshs).