RIGHTS ISSUE INFORMATION MEMORANDUM 2015 - Rich Finance Rights Iss… · · 2015-02-18RIGHTS...

1Rights Issue Information Memorandum 2015

turning dreams into homes

RIGHTS ISSUE INFORMATION MEMORANDUM 2015

turning dreams into homes


Housing Finance Company of Kenya LimitedIncorporated in Kenya under the Companies Act (Chapter 486, Laws of Kenya)

(Registration Number C.21/97)

Information Memorandum28th January 2015

In respect of

Rights Issue of 116,666,667 New Ordinary Shares at an Offer Price of KES 30 per share in the ratio of one (1) New Ordinary Share for every two (2) Ordinary Shares held

This Information Memorandum is issued in compliance with all applicable laws including the Companies Act (Cap 486), the Capital Mar-kets Act (Cap 485A) and the Nairobi Securities Exchange Listing Manual.


Lead Transaction Advisor

Lead Sponsoring Broker

Legal Advisor

Registrar

Reporting Accountant

Receiving Bank

Public Relations

Blueprint Marketing Limited


Vision“To be the leading provider of integrated solutions for the acquisition, development and improvement of property in Kenya.”

Mission“We will be the leading integrated solutions enabler for the property industry.We will offer innovative products and services, delivered under one roof by exceptionally committed people to enhance shareholder value.

We will operate across the property value-chain as suppliers and financiers that offer unique solutions to all while being environmentally responsible.”

ObjectivesHousing Finance:• Providesintegratedfinancialsolutions;• Focusesonbothcommercialandresidentialproperty;• Focusesonbothsupplyanddemand;and• Aimstobetheclearleaderinthisarenaforthebenefitofourstakeholders.


THIS DOCUMENT IS IMPORTANT FOR CONSIDERING WHAT ACTION TO TAKE AND REQUIRES YOUR CAREFUL ATTENTION AS IT INCLUDES LEGAL, MARKET AS WELL AS HISTORIC, CUR-RENT AND FUTURE FINANCIAL INFORMATION

This Information Memorandum contains information that is provid-edincompliancewiththerequirementsoftheCompaniesAct(Cap.486),therequirementsoftheCapitalMarketsAct(Cap.485A),theRules and Regulations made there under and the Rules of the Nai-robiSecuritiesExchange(“NSE”).

This Information Memorandum is issued by Housing Finance Com-pany of Kenya Limited (“Housing Finance” or “the Bank” or “theIssuer” or “the Company” or “the Group”) and has been prepared in respect of the issue and subscription of the New Shares being is-suedunderHousingFinance’scapitalraisingexercise(the“RightsIssue”) and subsequent listing of the New Shares on the Main InvestmentMarketSegment(“MIMS”)oftheNSE.Thisfollowsap-proval of the Rights Issue by the Board and shareholders through resolutions dated11thNovember and05thDecember 2014 re-spectively.

ApplicationhasbeenmadetotheCapitalMarketsAuthority(“CMA”)andapprovalhasbeengrantedfortheRightsIssue.Asamatterofpolicy, theCMAassumesnoresponsibility for thecorrectnessofany statements or opinions made or reports contained in this Infor-mationMemorandum.ApprovaloftheRightsIssueandthesubse-quent listing are not to be taken as an indication of the merits of the Bank or of the New Shares.

The NSE has given permission for listing of the New Shares on MIMS. It is expected that the admission of the New Shares will commence on15thApril2015.TheNSEassumesnoresponsibilityforthecor-rectness of any of the statements made or opinions or reports ex-pressedinthisInformationMemorandum.Admissionofthesharesissued pursuant to the Rights Issue on MIMS is not to be taken as an indication of the merits of the Bank or of the New Shares.

If you are in doubt as to the meaning of the contents of this Infor-mation Memorandum or as to what action to take, please consult your investment bank, financial advisor, stockbroker or other pro-fessional advisor, duly authorizedunder theCapitalMarkets Act,who specializes in advising on the acquisition of shares and other securities.

If you have sold or transferred all your ordinary shares in Housing Finance, please forward this Information Memorandum and the En-titlementandAcceptanceFormtothepurchaserortransferee,orto the stockbroker or agent through whom the sale or transfer was effected, for delivery to the purchaser or transferee.

Pursuanttosection40(6)oftheCompaniesAct,thisisaRightsIs-sue where the applicant has the right to renounce in favour of other persons and relates to shares that are to be in all respects uniform withsharespreviously issued; therefore, this InformationMemo-randum may not contain all the information generally required of a prospectus or form of application.

Acopyof this InformationMemorandum togetherwith thedocu-mentsrequiredbySection43oftheCompaniesAct(Cap.486)tobe attached hereto, have been delivered to the Registrar of Compa-nies for registration.

Directors’ ResponsibilityThe individualmembers of the Board of Directors of Housing Fi-nance(the“Directors”)beingthepersonsnamedinSection12.8(BoardofDirectors)ofthis InformationMemorandumhavetakenall reasonable care to ensure that the facts stated and the opinions expressed herein are true and accurate in all material respects, and there are no other material facts the omission of which would make anystatementherein,whether of fact or opinion,misleading. AlltheDirectorsofHousingFinanceacceptresponsibilityaccordingly.

Legal Advisor’s OpinionWalkerKontos,theLegalAdvisors,havegivenandnotwithdrawntheir written consent to the inclusion in this Information Memoran-dumoftheirLegalOpinion(attachedasSection16),andtherefer-ences to their names, in the form and context in which they appear, and have authorized the contents of the said Legal Opinion.

Reporting Accountant’s OpinionThis Information Memorandum contains statements from KPMGKenya,theReportingAccountants,whichconstitutesastatementmadebyanexpertintermsofSection42(1)oftheCompaniesAct.The Reporting Accountants have given and not withdrawn theirconsent to the issue of the said statements in the form and context in which they are included in this Information Memorandum.

Forward-looking StatementThis Information Memorandum contains “forward-looking state-ments” relating to the Company’s business. These forward-looking statements can be identified by the use of forward-looking ter-minology such as “believes”, “expects”, “may”, “is expected to”, “will”, “will continue”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. These statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of the Com-pany to be materially different from the future results, performance or achievements that may be expressed or implied by such for-ward-looking statements. Some of these factors are discussed in more detail under “Risk Factors” and “Business Overview”. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Information Memorandum as anticipated, believed, estimated or expected.

ThisInformationMemorandumisdated:28thJanuary2015

1 Important Notice


2 Chairman’s Statement


2 Chairman’s Statement

DearShareholders,OnbehalfoftheBoardofDirectors,Iwouldliketoextendourinvitation to enhance your investment in Housing Finance Company of Kenya Limited through this Rights Issue.

The Board and Shareholders of the Company have resolved to undertake a Rights Issue and the Incorporation of a wholly owned subsidiary of the Company and the proposed transfer of the mortgage finance business of the company to such subsidiary.

Rationale of the Proposed Rights Issue – (The Rights Issue)The Rights Issue is aimed at raising capital to fund the growth and expansion plans of the company and of its subsidiaries. The Rights Issue is subject to a number of authorizations and approvals including, the Central Bank of Kenya, the Capital Markets Authority and the NairobiSecurities Exchange.

Rationale of the Incorporation of a wholly owned subsidiary of the Company and the proposed transfer of the mortgage financebusinessofthecompanytosuchsubsidiary-(TheRe-organization)

The Banking Act currently prohibits the Company as amortgage finance company licensed and supervised by the Central Bank of Kenya, from:i. Lending to non-regulated subsidiariesii. Engaging directly in wholesale and retail trade except

in satisfaction of debts due to it oriii. Injectingmore than25% of its core capital as equity

into its non-mortgage finance subsidiaries.

The Act now permits non-operating holding companiesapproved and regulated by the Central Bank of Kenya to own morethan25%oftheequityofbanks,financialinstitutionsand mortgage finance companies whilst also investing in subsidiaries engaged in other businesses. This allows the company the opportunity to invest the company’s capital needed to establish and grow subsidiaries engaged in providing complementary services and to allow the company to offer integrated property solutions to its customers.

The Shareholders will continue to own the same shares that they own before the re-organization and these shares

would remain listed on the Nairobi Securities Exchange. After the re-organization, the wholly owned subsidiarywill report to the Central Bank of Kenya supervision as a licensed mortgage finance institution, while the company will report to the Central Bank of Kenya and be supervised as a non-operating holding company. The company will continue to be subject to regulations of the Capital Markets Authority and the listing rules of the Nairobi SecuritiesExchange.

The Rights Issue and the Re-organization, will give the organization the impetus to register further growth and optimally deliver on its growth strategy.

Strategy HighlightsOur current strategy continues to focus on the aggressive growth of the company. The subsidiaries contribution to the business has grown significantly and this trend is expected to continue. The commercial banking strategy is also taking shape and has positively impacted the Group’s profitability. Further we are increasing our retail foot print withbranchesalreadyopenatSameerBusinessParkandThika Road Mall, and plans underway to open branches in Kitengela, Westlands, Ongata Rongai and Naivasha before theendoftheyear.Anadditionalsevennewbranchesareset tobe rolledout in2015, in linewithbusinessgrowthstrategy. Our strategy also focuses on a county strategy and we have so far advanced a loan to Embu Water and Sanitation Company and have set aside funds to provide similar services to approximately ten other counties in the coming months.

I thank you greatly and urge you to continue supporting your Company as we continue to grow the business in line with the set out strategies.

Yours faithfully,

Steve Mainda, EBSChairman


3 Directors’ Statement

TheDirectorsofHousingFinanceCompanyofKenyaLimitedacceptresponsibilityfortheinformationcontainedinthisdocument.TothebestoftheknowledgeandbeliefoftheDirectors(whohavetakenallreasonablecaretoensurethatsuchisthecase),theinformationcontainedinthis document is in accordance with facts and does not omit anything likely to affect the import of such information.

TheDirectorsdeclarethatallinformationstatedinthisInformationMemorandumandthestatementscontainedhereinarecorrectandneithertheBoardofDirectors,minutes,auditreportsoranyotherinternaldocumentscontaininformationwhichcoulddistorttheinterpretationofthisInformation Memorandum.

Signed by:

Steve Mainda, EBS Frank M. Ireri, EBSChairman ManagingDirector


4 Corporate Information

Contact Information For The Company

Housing Finance Company of Kenya LimitedRehani House

Kenyatta Avenue/ Koinange StreetP.O. Box 30088 – 00100

Nairobi, KenyaFrank IreriManaging DirectorHousing Finance Company of Kenya LimitedEmail: [email protected]

Sam WaweruFinance & Administration DirectorHousing Finance Company of Kenya LimitedEmail: [email protected]

CURRENTDIRECTORSOFTHECOMPANYName Position Nationality AddressSteve Mainda Chairman(Non-Executive) Kenyan P.O.Box30088–00100NairobiFrank M. Ireri ManagingDirector(Executive) Kenyan P.O.Box30088–00100NairobiDr.BensonWairegi Director(Non-Executive) Kenyan P.O.Box30088–00100NairobiDavidR.Ansell Director(Non-Executive) American P.O.Box30088–00100NairobiProf.ShemMigot-Adholla Director(Non-Executive) Kenyan P.O.Box30088–00100NairobiPeterK.Munga Director(Non-Executive) Kenyan P.O.Box30088–00100NairobiAdanDaudMohamed Director(Non-Executive) Kenyan P.O.Box30088–00100NairobiGladys Ogallo Director(Non-Executive) Kenyan P.O.Box30088–00100NairobiConstance Gakonyo Director(Non-Executive) Kenyan P.O.Box30088–00100Nairobi

Other Corporate Information

Company Secretary Regina AnyikaMezzanine Floor, Rehani HouseKenyattaAvenue/KoinangeStreetP.O.Box30088-00100Nairobi, KenyaEmail: [email protected]

Registered Office Plot No. LR 209/9054Rehani HouseKenyattaAvenue/KoinangeStreetP.O.Box30088–00100Nairobi

Financial Calendar Financial Year end – 31st December

Auditors KPMG KenyaCertifiedPublicAccountants8thFloor,ABCTowersWaiyaki WayP.O.Box40612–00100Nairobi, Kenya


Legal Advisors Kaplan & Stratton AdvocatesWilliamson House4thNgongAvenueP.O.Box40111–00100Nairobi, Kenya

Walker Kontos AdvocatesHakika HouseBishops RoadP.O.Box60680–00200Nairobi, Kenya

Bankers Equity Bank LimitedNHIF Building, CommunityP.O.Box75104–00200Nairobi, Kenya

Standard Chartered Bank Kenya LtdKenyattaAvenueP.O.Box40310–00100Nairobi, Kenya

Barclays Bank of Kenya LtdBarclaysPlazaP.O.Box46661–00100Nairobi, Kenya

Citibank NAUpper Hill RoadP.O.Box30711–00100Nairobi, Kenya

Central Bank of KenyaHaileSelassieAvenueP.O.Box60000–00200Nairobi, Kenya



Subsidiaries of the Com-pany

The Company’s 100% beneficially owned subsidiaries as at the date of publication of this In-formation Memorandum comprise of Kenya Building Society Limited, First Permanent (East Africa) Limited, Housing Finance Insurance Agency Limited and Housing Finance Founda-tion. The various subsidiaries are discussed in more detail in section 11.6 of this Information Memorandum.

TRANSACTIONADVISORSANDAGENTS

LEAD ARRANGER LEAD SPONSORING BROKER

NIC Capital LimitedNIC HouseMasaba RoadP.O.Box44599-00100Nairobi, KenyaTel:+254202888000/4948000Fax:+254202888505Contact: Maurice OpiyoEmail: [email protected]

Kestrel Capital (East Africa) LimitedICEABuilding,5thFloorKenyattaAvenueP.O.Box40005-00100Nairobi, KenyaTel:+254202251758Fax:+254202243264Contact:AndreDeSimoneEmail: [email protected]

LEGAL ADVISOR REPORTING ACCOUNTANT

Walker Kontos AdvocatesHakika HouseBishops RoadP.O.Box60680–00200Nairobi, KenyaTel:+254202713023-6Fax:+254202718429Contact:PeterMwangiEmail: [email protected] Contact: Rahma W. KaranjaEmail: [email protected]

KPMG Kenya8thFloor,ABCTowersWaiyaki WayP.O.Box40612–00100Nairobi, KenyaTel:+254202806000Contact:JacobGathechaEmail: [email protected]: Maurice GachuhiEmail: [email protected]

REGISTRAR PUBLIC RELATIONS

Comprite Kenya LimitedCrescentBusinessCentre,2ndFloorTheCrescentoffParklandsRoad,P.O.Box63428-00619Nairobi, KenyaTel:+254(20)269-0955Contact: Stephen KiwindaEmail: [email protected]

BluePrint Marketing LimitedCVSPlaza,3rdFloor,Kasuku Rd, off Lenana Rd, KilimaniP.O.Box24823-00100Nairobi, KenyaTel:+254(20)2719251Fax:+254(20)2724988Contact:AlfredNg’ang’aEmail: [email protected]



5 Table of Contents

1 IMPORTANT NOTICE 52 CHAIRMAN’S STATEMENT 63 DIRECTORS’ STATEMENT 84 CORPORATE INFORMATION 95 TABLE OF CONTENTS 126 DEFINITIONS AND INTERPRETATIONS 167 KEY FEATURES OF THE OFFER 18

7.1 THEOFFER 187.2 RIGHTSISSUESTATISTICS 187.3 REASONSFORTHEOFFER 187.4 USEOFFUNDSFROMEARLIERRIGHTSISSUE 187.5 TIMETABLEOFPRINCIPALEVENTS 187.6 INTENTIONOFMAJORSHAREHOLDERS 197.7 MINIMUMSUBSCRIPTION 197.8 UNDERWRITING 197.9 BASISOFOFFERPRICE 197.10 KEYFINANCIALDATA 207.11 ACCEPTANCEANDAPPLICATIONPROCEDURES 207.12 OFFERFORSUBSCRIPTION 207.13 STATUSOFTHENEWSHARES 207.14 OPENINGANDCLOSINGDATEOFTHERIGHTSISSUE 217.15 ENTITLEMENT 217.16 SHAREHOLDERSWITHOUTCDSACCOUNTS 217.17 ACCEPTANCEPROCEDURE 217.18 APPLICATIONFORADDITIONALSHARESANDALLOCATIONPOLICY 227.19 RENUNCIATIONOFRIGHTS 22

7.19.1 RenunciationbywayofTradingintheRights 227.19.2 RenunciationbywayofPrivateTransfer 237.19.3 Renunciationbydeclining 23

7.20 RESTRICTIONONRENUNCIATIONOFRIGHTS 237.21 APPLICATIONMONEY 237.22 REJECTIONPOLICY 24

7.22.1 ApplicationForm 247.22.2 Payment 24

7.23 REFUNDPOLICY 247.24 NEWSHARES 257.25 UNTAKENRIGHTSANDALLOCATIONPOLICY 257.26 FOREIGNINVESTORS 257.27 REGULATORYRESTRICTIONS 267.28 TAXATIONIMPLICATIONS 267.29 EXPENSESOFTHEOFFER 267.30 GOVERNINGLAW 26


5 Table of Contents

8 KEY INVESTMENT CONSIDERATIONS 278.1 PROVENFINANCIALTRACKRECORD 27

8.1.1 ProfitAfterTax 278.1.2 TotalAssets 278.1.3 Shareholders’funds 288.1.4 Mortgagesandadvances 288.1.5 Depositsbook 298.1.6 ReturnonEquity(RoE) 298.1.7 ReturnonAssets(RoA) 29

8.2 INCREASINGDEMANDFORHOUSING 308.3 MARKETLEADER 308.4 WELLMANAGEDASSETBOOK 318.5 GOVERNMENTDEVOLUTION 318.6 REALESTATEINVESTMENTTRUSTS 328.7 EXPERIENCEDBOARDANDMANAGEMENTTEAM 32

9 ECONOMIC OUTLOOK AND OVERVIEW OF THE BANKING SECTOR 339.1 KENYAECONOMICOUTLOOK 33

9.1.1 KenyaEconomicPerformance 339.1.2 Macro-EconomicOverview 34

9.2 KENYABANKINGSECTOROVERVIEW 359.2.1 IndustryStructure 359.2.2 Assetbase 369.2.3 Branchnetwork 369.2.4 Marketshare 369.2.5 IndustryPerformance 379.2.6 Challenges 379.2.7 Opportunities 379.2.8 Recentdevelopments 389.2.9 FutureOutlook 38

10 OVERVIEW OF THE KENYAN HOUSING SECTOR 3910.1 PROPERTYMARKETSEGMENTS 39

10.1.1 Residentialmarket 3910.1.2 Retailmarket 3910.1.3 Officemarket 3910.1.4 Industrialmarket 39

10.2 TRENDSINTHEHOUSINGMARKET 4010.3 PRIVATESECTORPLAYERSINTHEHOUSINGSECTOR 4110.4 GROWTHINVALUEOFAPPROVEDBUILDINGPLANS 4110.5 HOUSINGMARKETPROJECTIONS 4210.6 MORTGAGEMARKET 4210.7 REGULATORYFRAMEWORK 4210.8 ANALYSISOFDEMANDFORHOUSING 42

10.8.1 ReboundingEconomy 4210.8.2 GrowingMiddleIncomeClassPuttingPressureontheResidentialSegment 4310.8.3 Remittances from abroad 4310.8.4 EastAfricanCommunityHub 44


11 OVERVIEW OF HOUSING FINANCE 4511.1 BACKGROUND 4511.2 KEYMILESTONES 4511.3 ACCOLADES 4611.4 SHAREHOLDINGSTRUCTURE 4611.5 BRANCHNETWORK 4811.6 SUBSIDIARIESANDJOINTVENTURES 48

11.6.1 KenyaBuildingSocietyLimited(KBSL) 4811.6.2 FirstPermanent(E.A)Limited 4811.6.3 HousingFinanceInsuranceAgencyLimited 4811.6.4 Housing Finance Foundation Limited 4811.6.5 PreciousHeightsLimited 4911.6.6 KahawaDownsLimited 49

11.7 EMPLOYEES 4911.8 PRODUCTSANDSERVICES 4911.9 GROUPFINANCIALPERFORMANCEANDSTATUTORYRATIOS 52

11.9.1 GroupStatementofProfitorLossandotherComprehensiveIncome 5211.9.2 GroupStatementofFinancialPosition 5211.9.3 RegulatoryCapitalandOtherRatios 53

11.10 PRUDENTIALRATIOS 5311.11 CAPITALADEQUACYRATIOS 5311.12 ASSETQUALITYRATIOS 5311.13 EARNINGSRATIOS 5411.14 LIQUIDITYRATIOS 5411.15 STRATEGYANDPROSPECTS/FUTUREOUTLOOK 54

11.15.1MarketShareandVolumegrowth 5411.15.2Involvementinthesupplysideofresidentialproperty 5511.15.3Funding 56

11.16 ORGANIZATIONSTRUCTURE 5712 CORPORATE GOVERNANCE, BOARD OF DIRECTORS AND SENIOR MANAGEMENT 58

12.1 RESPONSIBILITIESOFTHEBOARD 5812.2 COMPOSITIONOFTHEBOARD 5812.3 BOARDANDMANAGEMENTCOMMITTEES 58

12.3.1 AuditCommittee 5812.3.2 RiskManagementCommittee 5912.3.3 NominationandRemunerationCommittee 5912.3.4 CreditCommittee 5912.3.5 BoardStrategyCommittee 6012.3.6 BoardProcurementCommittee 60

12.4 ATTENDANCEOFINDIVIDUALDIRECTORS 6012.5 DIRECTORS’REMUNERATION 6112.6 DIRECTORS’SHAREHOLDING 6112.7 DIRECTORSHIPINOTHERENTITIES 6112.8 BOARDOFDIRECTORS 6112.9 CONFLICTSOFINTERESTS 6312.10 RELATIONSWITHSHAREHOLDERS 6312.11 SENIORMANAGEMENT 64

5 Table of Contents


13 RISK FACTORS 6613.1 POLITICALRISK 6613.2 ECONOMICRISK 6613.3 REGULATORYRISK 6613.4 CREDITRISK 6613.5 LIQUIDITYRISK 6713.6 MARKETRISK 6713.7 OPERATIONALRISK 6813.8 STRATEGICRISK 6813.9 CONCENTRATIONRISK 6813.10 REPUTATIONALRISK 68

14 STATUTORY AND GENERAL INFORMATION 6914.1 CORPORATEINFORMATION 69

14.1.1 IncorporationDetails 6914.1.2 RegisteredofficeoftheCompany 6914.1.3 AuthorisedAndIssuedShareCapital 6914.1.4 Additionalshareholdinginformation. 69

14.2 PRINCIPALOBJECTS 6914.3 PROVISIONSOFTHEARTICLESRELATINGTO: 69

14.3.1 Sharecapitalandvariationofrights 6914.3.2 ApplicationoftheCentralDepositoriesAct 7014.3.3 RefusaltoregisterTransfers 7014.3.4 IncreaseofCapital 7014.3.5 GeneralMeetings 7014.3.6 VotesofMembers 7014.3.7 Directors 7114.3.8 DividendsandReserves 71

14.4 DETAILSOFSUBSIDIARIES 7214.5 MATERIALANDRELATEDPARTYCONTRACTS: 72

14.5.1 MaterialContracts(withrestrictivecovenantsorrestrictionsonequity) 7214.5.2 RelatedPartyContracts 72

14.6 LICENSESANDPERMITS 7214.7 MATERIALLITIGATION 7314.8 CONSENTS 7514.9 MATERIALCHANGESINTHEFINANCIALORTRADINGPOSITION: 7514.10 DOCUMENTSAVAILABLEFORINSPECTION 7514.11 PROPOSEDREORGANISATION 7514.12 PROPOSEDSHAREACQUISITIONBYBRITISHAMERICANINSURANCECOMPANY(KENYA)LIMITED 76

15 REPORTING ACCOUNTANTS REPORT 7716 LEGAL OPINION 15117 AUTHORISED SELLING AGENTS 15718 APPENDICES 159

18.1 FORMOFGUARANTEE 15918.2 FORMOFQIIUNDERTAKING 16018.3 PALI 16118.4 PALII 163

5 Table of Contents


6 Definitions and Interpretations

Unless otherwise stated and as the context allows, the words in the first column have the meaning stated opposite them in the second col-umn, throughout this Information Memorandum, its appendices and enclosures. Words in the singular include the plural and vice versa, words signifying one gender include the other gender and references to a person include references to juristic persons and associations of persons:

Subject Definition

Additional Shares Shares applied for by Eligible Shareholders in excess of their Entitlement.

Application Money or Application Monies

Monies paid by Eligible Shareholders in respect of the New Shares they apply for.

Authorized Agent CMAlicensedstockbrokersand/orinvestmentbanks,orcommercialbankslicensedbytheCBKand appointed by Housing Finance for purposes of the Rights Issue to accept applications from Eligible Shareholders and Investors.

Bank HousingFinanceCompanyofKenyaLimitedanditssubsidiariesidentifiedinSection11.6(Sub-sidiariesandJointVentures).

Banking Act TheBankingAct(Chapter488oftheLawsofKenya).

Board TheBoardofDirectorsofHousingFinance.

Business Day Aday(otherthanaSaturdayoraSundayorGazettedPublicHoliday)onwhichcommercialbanksare open for business in Kenya.

CAGR CompoundAnnualGrowthRate.

CBK The Central Bank of Kenya.

CDS CentralDepositorySystem,anelectronicsharetransferfacilitytofacilitatethedepositanddeal-ing of immobilized shares at the NSE.

CDS 7 Form AprivatetransferformobtainablefromanyAuthorizedAgent.

CDS Account AsecuritiesaccountopenedonbehalfofashareholderwiththeCDSCforpurposesofrecordingthe deposit and dealing of immobilized shares.

CDSC TheCentralDepositoryandSettlementCorporationLimited.

Closing Date March13th,2015.ThelastdayforreceiptofApplicationsandApplicationMoney.

CMA CapitalMarketsAuthorityofKenyaestablishedundertheCapitalMarketsAct(Chapter485Aofthe Laws of Kenya).

Director AdirectorofHousingFinanceCompanyofKenyaLimited.

EFT Electronic Funds Transfer.

Eligible Shareholder ThoseShareholderswhoareregisteredasholdersofsharesasattheRecordDate.

Entitlement TheentitlementtoNewSharesofanEligibleShareholderasatRecordDate,pursuanttotheRightsIssue at the Entitlement Ratio.

Entitlement and Acceptance Form ReferstothePAL,FormEorFormRtobecompletedbyshareholders,investorsandrenounceesto apply and accept New Shares in the Rights Issue offer.

Entitlement or Rights Issue ratio Theentitlementto1NewOrdinaryShareforevery2OrdinarySharesheldasattheRecordDate.

Existing Shares OrdinarySharesofvalueKES5.00eachinHousingFinanceandheldbyEligibleShareholdersasoftheRecordDate.

IM InformationMemorandum.Thisdocumentdatedandissuedon28thJanuary2015.


6 Definitions and Interpretations

Subject Definition

Independent Director Means a director who: (i) hasnotbeenemployedbytheCompanyinanexecutivecapacitywithinthelastfiveyears;(ii) isnotassociatedtoanadvisororconsultanttotheCompanyoramemberoftheCompany’s

senior management or a significant customer or supplier of the Company or with a not-for-profitentitythatreceivessignificantcontributionsfromtheCompany;orwithinthelastfiveyears,hasnothadanybusinessrelationshipwiththeCompany(otherthanserviceasadirector)forwhichtheCompanyhasbeenrequiredtomakedisclosure;

(iii) hasnopersonalservicecontract(s)withtheCompany,oramemberoftheCompany’sse-niormanagement;

(iv) isnotemployedbyapubliclistedcompanyatwhichanexecutiveofficeroftheCompanyservesasadirector;

(v) isnotamemberoftheimmediatefamilyofanypersondescribedabove;or(vi) hasnothadanyoftherelationshipsdescribedabovewithanyaffiliateoftheCompany.

Kenyan Bank AbanklicensedtoconductbankingbusinessinKenyaundertheBankingAct.

KES or KShs Kenya Shillings, the lawful currency of the Republic of Kenya.

New Shares 116,666,667Ordinary Shares in the capital ofHousing Finance to be issued pursuant to theRights Issue.

Housing Finance or Housing Fi-nance Group or Group

HousingFinanceCompanyofKenyaLimitedanditssubsidiariesidentifiedinSection11.6(Sub-sidiariesandJointVentures).

NSE Nairobi Securities Exchange.

Offer Period TheperiodfromRecordDatetotheClosingDate.

Offer Price KES 30 per New Share.

Ordinary Shares TheordinarysharesofKES5.00eachinthecapitalofHousingFinance.

PAL TheProvisionalAllotmentLetter,whichindicatesanEligibleShareholders’Entitlementandcom-prisestheEntitlementandAcceptanceForm,andtheRenunciationandTransferForm.

Postbank KenyaPostOfficeSavingsBank.

Provisional Rights The number of New Shares offered based on the entitlement ratio.

RTGS Real Time Gross Settlement, a payment system used by commercial banks to effect electronic payment of funds.

Receiving Bank Housing Finance Company of Kenya Limited.

Record Date Wednesday,January28th,2015.ThedatefordeterminingentitlementsofEligibleShareholdersto participate in the Offer.

Register The register of members of Housing Finance Company of Kenya Limited.

Renounce The act of giving up or abandoning your Rights formally.

Renouncee Anypersonnotlessthan18yearsofageasatthedateofrenunciationandinwhosefavortheRights or part of the Rights of an Eligible Shareholder have been renounced under the terms of this InformationMemorandumandPAL.

Renunciation and Transfer Form The form by which Eligible Shareholders may renounce and transfer their rights to a third party.

Rights TherighttosubscribeforNewSharesunderthetermsofthisIMandthePAL.

Rights Issue Documents Meansa)theAbridgedInformationMemorandumandtheInformationMemorandumb)thePALand c) any other written communication or notification made by Housing Finance to Eligible Shareholders in connection with the Rights Issue.

TZS Tanzania Shillings, the lawful currency of the United Republic of Tanzania.

Untaken Rights The aggregate of New Shares not subscribed for, howsoever that may occur.

UGX Uganda Shillings, the lawful currency of the Republic of Uganda.

USSD UnstructuredSupplementaryServiceData.


7 Key Features of The Offer

This section contains a summary of the offer for New Shares. You should read this Information Memorandum in full along with other documents availableforinspectionforafullappreciationoftheOffer(definedbelow).

7.1 The OfferHousingFinanceisofferingatotalof116,666,667NewSharesatKES30perSharetoraiseapproximatelyKES3,500,000,000(beforeex-penses)underthisInformationMemorandumonthebasisof1NewShareforevery2OrdinarySharesheldontheRecordDate(3.00pmonWednesday,January28th,2015)(the“Offer”).

ThenumberofNewSharesthatyouareentitledtoisshownonthePAL.TheEntitlementRatio,oncedeclared,willnotbealtered.

Rights are renounceable, which means that Eligible Shareholders who do not wish to take up all or part of their New Shares may choose to abandon, sell, or transfer their Rights to a third party.

7.2 Rights Issue StatisticsOffer Price KES 30 per New ShareTotal number of New Shares offered 116,666,667OrdinaryShares,torankparipassuinallrespectswiththeexistingordinary

shares in Housing FinanceTotal amount to be raised before expenses KES3,500,000,000Ratio of Entitlement 1NewShareforevery2OrdinarySharesheld

7.3 Reasons for the OfferThe proceeds of the Rights Issue shall be used to expand the Company’s lending capacity.

7.4 Use of funds from earlier Rights IssueIn2008,HousingFinancecarriedoutaRightsIssuewherebytheCompanyraisedKShs2.3billion.Theobjectivewastostrengthenitscapitalbase in order to position it to expand its lending capacity via expanding its deposit base and leveraging its balance sheet. The increased lend-ing capacity enabled the Company to remain the leading mortgage provider, in terms of mortgage asset base, in the rapidly growing property developmentsectorinKenya;

Furthermore, the additional capital significantly increased Housing Finance’s additional deposits and therefore it’s lending capacity to over KShs20billion.Inaddition,theRightsIssuepositionedHousingFinancetoleverageitsbalancesheetbyraisingfurthercapitalvialongerdat-ed debt instruments. The additional deposit taking, leveraging of the balance sheet and the resultant enhanced lending capacity significantly boosted Housing Finance’s capacity to participate in financing the impressive growth experienced, and expected to continue in the property development sector in Kenya.

7.5 Timetable of Principal Events Activity TimingRecordDate Wednesday,January28th,2015DistributionofIMandPALstoEligibleShareholders Monday,February09th,2015Commencement of trading in Rights on the NSE Thursday,February19th,2015Last date for immobilization of Rights Monday,March02nd,2015Lastdateforrenunciation(bywayofprivatetransfer) Monday,March02nd,2015Last date for trading in Rights Monday,March02nd,2015ClosingDate Friday,March13th,2015Final date for confirmation of payment for New Shares to Receiving Bank for applications against Irrevocable Bank Guarantees

Monday,March23rd,2015

AnnouncementofOfferResults Thursday,March26th,2015Final date for payment for New Shares to Receiving Bank for applica-tions against Letters of Undertaking

Monday,March30th,2015



Activity TimingElectroniccreditingofCDSaccounts Tuesday,April14th,2015DispatchofpaymentofRefundsthroughElectronicFundsTransferor Refund Cheques

Wednesday,April15th,2015

Listing and Commencement of Trading at the NSE Wednesday,April15th,2015

These dates are subject to change and are indicative only. Housing Finance reserves the right to amend this indicative timetable and subject to approval from the CMA, a supplementary Rights Issue timetable will be issued. In particular, Housing Finance reserves the right, subject to the CMA’s approval to close the Offer early, to extend the Closing Date or to withdraw the Offer. Any extension of the Closing Date will have a consequential effect on the date of the issue of New Shares. Any such amendments will be published in the press.

7.6 Intention of Major ShareholdersPursuant toaSharePurchaseAgreementbetweenEquityBankLimitedandBritishAmerican InsuranceCompany(Kenya)Limited.BritishAmerican InsuranceCompany(Kenya)LimitedafullyownedsubsidiaryofBritish-American InvestmentsCompany(Kenya)Limitedcom-pletedtheacquisitionof57,270,000shares(the“Shares)inHousingFinanceCompanyofKenyaLimitedownedbyEquityBankLimitedon31stDecember2014raisingBritam’sdirectandindirectshareholdinginHousingFinanceto46.03%.Britamherebyconfirmsitsintentiontosubscribe for their full entitlement under the Housing Finance Rights Issue.

7.7 Minimum SubscriptionTheRightsIssueissubjecttoaminimumsubscriptionoffiftypercent(50%)oftheNewSharesthatisKES1,750,000,000or58,333,334NewShares.TheDirectorsreservetherightnottoproceedwiththefinalallotmentoftheNewSharesunlessthisminimumthresholdisachieved.Also,shouldtherebeanundersubsciptionontheofferbutoneabovetheminimumsubscriptionthreshold,theDirectorswillseektoutilizethefunds raised in a manner that will still achieve the objectives set out in the Information Memorandum.

7.8 UnderwritingThe Rights Issue is not underwritten.

7.9 Basis of Offer Price TheOfferPricerepresentsadiscountof28.9%totheweightedaverageclosingmarketpriceofanOrdinaryShareforthesix(6)monthstradingperiodended31stOctober,2014,beingthedatetheDirectorsmadetheRightsIssueannouncement.TheOfferPricehasbeendeterminedfromthetradinghistoryattheNSEofHousingFinancesharesandthefollowingfactors:• RecentperformanceoftheindexandturnoverattheNSE;• TheCompany’srecentannouncementofthefinancialresultsfortheyearended31December2013;• PastperformanceofRightsIssuesattheNSE;• Thecurrentmacro-economicenvironment;• Thebankingsectorenvironment;and• HousingFinance’sstrategicplan.

MonthPrice in KES Weighted Average

Price (KES)Number of Shares

TradedTurnover (KES)

Low HighMay-14 36.00 42.00 37.98 10,542,600 400,377,625Jun-14 37.75 42.75 39.69 2,213,900 87,871,975Jul-14 44.00 50.00 47.10 4,349,800 204,876,725Aug-14 43.50 45.75 44.91 3,376,800 151,664,225Sep-14 44.25 50.25 46.90 2,526,200 118,486,975Oct-14 45.25 49.00 46.89 1,476,900 69,247,100Total for the Period 24,486,200 1,032,524,625Six Month Weighted Average Price of Housing Finance Shares (KES) 42.17Closing Price on 31 October 2014 (KES) 45.00


7.10 Key Financial DataParValueofeachShare KES5Total number of authorized shares of Housing Finance 500,000,000Total number of issued and fully paid up shares before the Rights Issue 235,750,000AuthorizedsharecapitalofHousingFinance KES2,500,000,000Fully paid up share capital of Housing Finance before the Rights Issue KES1,178,750,000NetProfitfortheyearended31December2013 KES995,196,000TotalDividendsdeclaredandpaidfortheyearendedDecember2013 KES 404,301,000Earningspershare(EPS)fortheyearended31December2013 KES 4.30TotalDividendsdeclaredandpaidfortheyearended31December2013 KES1.75Price/Earnings(PE)ratiobasedontheclosingpriceofKES45.00attheNairobiSecuritiesExchangeon31October,2014basedontheresultsfortheyearended31December2013

10.47x

NetAssetValuepersharefortheyearended31December2013 KES24.85MarketCapitalizationbasedontheclosingpriceofKES45.00ontheNairobiSecuritiesExchangeon31October,2014

KES10,608,750,000

OfferPricepershare KES 30Number of New Shares on offer under the Rights Issue 116,666,667Grossproceedsoftheoffer(assumesnoineligibleRightsarise) KES3,500,000,000NetProceedsoftheoffer KES3,331,210,571Minimumsubscriptionrequired[50%ofKES3.5billion] KES1,750,000,000Total number of issued and fully paid up shares after the Rights Issue assuming full subscription 352,416,667NetAssetValuepersharefortheyearended31December2013accommodatingtheRightsIssue KES16.62Fully paid up share capital of Housing Finance post Rights Issue assuming full subscription KES1,762,083,335

7.11 Acceptance and Application ProceduresEligible Shareholders may take up all, some or none of their Rights. Eligible Shareholders wishing to take up all their Rights are required to observetheproceduressetoutinSection7.17(AcceptanceProcedure).

EligibleShareholderswishingtorenouncesomeoralloftheirRightsareinvitedtofollowthestepssetoutinSection7.19(RenunciationofRights).PleasenotethatEligibleShareholdersmayrenouncetheirRightsbywayofprivatetransferorsellingthesameinaccordancewiththesaid paragraph.

EligibleShareholderswishingtoapplyforAdditionalSharesmustdosointhemannersetoutinSection7.18(ApplicationforAdditionalSharesandAllocationPolicy).

7.12 Offer for Subscription1. HousingFinanceherebyofferstoEligibleShareholdersbywayofrenounceablerights,atotalof116,666,667NewSharesattheOffer

PriceofKES30perNewSharepayableinfullonacceptanceinthetermssetoutbelow.2. PersonswhoarenotEligibleShareholdersasoftheRecordDatewillnotbeentitledtoparticipateintheofferexceptasstipulatedin5

below.3. TheRightsIssueisonthebasisofaratioof1NewShareforevery2ExistingShares.4. ThenumberofNewSharesthatanEligibleShareholderisentitledto(i.e.yourentitlementoryournumberofRights)isshownonthePAL.5. RightsarerenounceableandmaybesoldortransferredtothirdpartiessubjecttotheprovisionsofthisIM.InformationonhowRightsmay

besoldortransferredissetoutinSection7.19.6. EligibleShareholdersmayalso,attheiroption,choosenottotakeanyactionatallanduntakenRightswillbeallocatedbytheDirectorsin

accordancewiththeAllocationPolicy.

7.13 Status of the New SharesThe New Shares will rank pari passu in all respects with the Existing Shares including the right to receive in full all dividends and other distribu-tions declared, made or paid in respect oftheOrdinaryShares,forthefinancialyearending31December2014.Therearethereforenotimelimitations in respect of the right to dividend for the said financial year.



7.14 Opening and Closing Date of the Rights IssueTheRightsIssuewillopenat9:00a.m.onThursday,February19th,2015andcloseat3:00p.m.onFriday,March13th,2015.

7.15 Entitlement

7.15.1 Your Entitlement is shown on the PAL.7.15.2 The number of New Shares offered to Eligible Shareholders has been calculated pro rata on the basis of the Entitlement Ratio and no

restrictions are placed on the number of Existing Shares to be held before entitlement accrues. However, mathematically, this might result in fractional entitlements to New Shares and in such an event, fractions will be rounded downwards to the nearest whole num-ber. Kindly, therefore note that where this occurs, the Eligible Shareholder will be allotted the number of New Shares after rounding down.

7.15.3 Fractions of New Shares that result from applying the Entitlement Ratio will form part of the Untaken Rights.7.15.4 EligibleShareholderswithCDSAccountswillhavesuchaccountscreditedwiththeapplicableEntitlement.Inthisregard,theBank

willnotifytheEligibleShareholdersoftheircreditedEntitlementthroughthePAL(PAL-I).7.15.5 EligibleShareholderswithoutCDSAccountswillbenotifiedoftheirRightsbytheBankthroughthePAL(PAL-II).7.15.6 Investors who wish to become shareholders in Housing Finance via this Rights Issue can purchase Rights being sold on the NSE by

EligibleShareholders.SuchinvestorswillbeissuedwithaFormE(seebelow)fromtheirAuthorizedAgentwhichisrequiredtobedulycompleted,acceptedandfullypaidforaspertheAcceptanceProcedurebelow.

7.15.7 EligibleShareholdersandotherinvestorsarerequiredtonotethatiftheywishtotakeanyactionotherthan(a)fullacceptanceoftheirEntitlementor(b)toallowtheirEntitlementtolapseinfullareaskedtonotethatthefollowingdocumentsmayberequiredforthe alternative actions as described below:

Form R FormofRenunciationforPrivateTransferstobeusedbyEligibleShareholderswithoutCDSAccountsrenouncingortransferring their Rights by way of private transfer and by Renouncees to take up their New Shares. The beneficiary shareholderwillberequiredtohaveaCDSAccount.

CDSForm1 CDSAccountOpeningformtobeusedbynewshareholderstoopenaCDSCAccountformeansoracquiringRightsthrough purchase on the NSE or means of private transfer.

CDSForm7 TobeusedinconnectionwithaprivatetransferbyEligibleShareholderswithCDSAccounts.FormZ To be completed by Eligible Shareholders wishing to appoint a third party as their lawful attorney or agent to act on

their behalf in connection with the Rights Issue. Form E FormofEntitlementforPurchasedRightsorRenouncedRightstobeusedinthecaseofRightspurchasedonthe

NSE by any person and issued in favour of such person or renounced and issued in favour of any person.CDSForm5 TobeusedbyinvestorswithCDSaccountsutilizingloanfacilitiestosubscribeforNewShares.

7.16 Shareholders without CDS accountsItisnotmandatoryforanEligibleShareholdertoopenaCDSAccount.However,withoutaCDSAccount,EligibleShareholderswillnotbeabletotradetheirRightsontheNSE.EligibleShareholderswhodonothaveCDSAccountsbutwishtoopenonearerequestedtosubmitdulycomplet-edandsignedCDSAccountopeningforms,togetherwiththeirPALIItotheAuthorizedAgentstoenablecreditingofEntitlementstothenewlyopened accounts.

7.17 Acceptance ProcedureAcceptanceoftheOffer,oncegivenisirrevocable.Fulldetailsoftheprocedureforacceptanceandpaymentaresetoutbelow:7.17.1 PersonswishingtoapplyforNewSharesmustcompletetheEntitlementandAcceptanceForm(PALIorPALII).7.17.2 CopiesoftheIMmaybeobtainedfromtheAuthorizedAgentsreferredtoinSection17ofthisIM.7.17.3 ExceptinthecaseofnegligenceorwillfuldefaultonthepartofHousingFinance,theirAdvisorsoranyoftheAuthorizedAgents,

neithertheIssuer,noranyoftheAdvisorsnoranyoftheAuthorizedAgentsnor itsProcessingAgentshallbeunderany liabilitywhatsoevershouldanEntitlementandAcceptanceFormnotbereceivedbytheClosingDate.

7.17.4 AcceptancemayONLYbecommunicatedbysubmittingadulycompletedEntitlementandAcceptanceFormtogetherwithAppli-cation Money for the number of New Shares applied for, which cannot be withdrawn and constitutes a binding application for the numberofNewShares(includinganyAdditionalShares)specifiedintheEntitlementandAcceptanceFormonthetermssetoutinthisInformationMemorandum.TheEntitlementandAcceptanceFormmustbesignedsoastobebinding.



7.17.5 TheEntitlementandAcceptanceForm,oncedulycompletedandsigned,mustbereturnedtoHousingFinanceeitherdirectlyorthroughanyAuthorizedAgent,togetherwiththeApplicationMoneyforthenumberofNewShares.PaymentoftheApplicationMoneybyallEligibleShareholdersmustbemadeasspecifiedinSection7.21(ApplicationMoney)nolaterthan3.00pmonFriday,March13th,2015.

7.17.6 NewSharesinrespectofwhichdulycompletedandsignedEntitlementandAcceptanceFormstogetherwiththeApplicationMoney,paidinaccordancewithSection7.17.5above,whicharenotreceivedbyHousingFinanceoranAuthorizedAgentbythedatesandtimesstipulatedinSection7.17.5abovewillbedeemednottohavebeendulysubscribedforandanyRightsinconnectionwiththesame will have lapsed.

7.17.7 EligibleShareholderswhowishtotakeuptheirfullEntitlementarerequiredtodulycompletethesectionentitled“FullAcceptanceofNewShares”(PART1A)aswellasotherrelevantsectionsofthePAL.EligibleShareholderswishingtoacceptonlypartoftheiren-titlementarerequiredtodulycompletethesectionofthePALentitled“PartialAcceptanceofNewShares”(PART2)aswellasotherrelevantsectionsofthePAL.PleasenotethatpartialacceptancewillnotbepermittedforlessthanOnehundred(100)NewShares.

7.18 Application for Additional Shares and Allocation Policy7.18.1 EligibleShareholderswhohavetakenupalltheirEntitlementmayapplyforAdditionalSharesbycompletingthesectionforAppli-

cationforAdditionalSharesontheirPALandsigningandreturningthedulycompletedandsignedPALtogetherwiththeApplicationMoney.TheseshouldbereceivedbyHousingFinanceortherelevantAuthorizedAgentnotlaterthan3.00pmonMarch13th,2015.

7.18.2 AdditionalSharesappliedforbyEligibleShareholderswillbeallocatedbytheBoardofHousingFinanceinaccordancewiththeAllo-cationPolicytotheextentonlyofanyUntakenRights.PleasenotethatpaymentinrespectofanyAdditionalSharesappliedforandnotallocatedwillberefundedinaccordancewithSection7.23(RefundPolicy)andwillbefreeofinterest.Therewillbenochangesonce the basis of allocation has been announced.

7.18.3 SubjecttoSection7.18.4ofthissection,theUntakenRightswillbeallocatedonaproratabasisbasedontheentitlementtotheNewShares;andintheeventthat,afterthisallocationofUntakenRights,thereareanyadditionalUntakenRights,thenthesewillbeallocatedproratabasedonthenumberofNewSharesappliedforinaccordancewiththisSection7.18(ApplicationforAdditionalSharesandAllocationPolicy).

7.18.4 IfanypersonappliesforAdditionalShareswhichmighttriggertheregulatoryrestrictionsandobligationssetout inSection7.27(RegulatoryRestrictions)ofthisSection,theDirectorsreservetheright,attheirsolediscretion,nottoallocateanyAdditionalSharestoanysuchpersonunlessallrequiredregulatoryapprovalsaredulyobtainedandattachedwiththePALbefore3.00pmonMarch13th,2015.

7.18.5 EligibleShareholderswishingtotakeupAdditionalSharesarerequiredtodulycompletethesectionentitled“ApplicationforAddition-alShares”aswellasotherrelevantsectionsofthePAL.

7.19 Renunciation of RightsTheRightsarerenounceable.Accordingly,EligibleShareholdersmayelectto(a)giveuptheirRightsinfullorinpartor(b)transfertheirrightsinfullorinpartor(c)selltheirRightsinfullorinpart,allinaccordancewiththeproceduressetoutbelow.

7.19.1 Renunciation by way of Trading in the Rights7.19.1.1 The Rights constitute a security in the form of an option and are tradable on the NSE for a value but only by Eligible Shareholders with

CDSAccounts.TheRightsshallbelistedontheNSEundertheMIMS.7.19.1.2 EligibleShareholderswillbenotifiedoftheirRightsthroughthePAL.7.19.1.3 Inaddition,EligibleShareholderswithCDSAccountswillhavesuchaccountscreditedwiththeirRights.7.19.1.4 OnlyEligibleShareholderswithCDSAccountswillbepermittedtotradeinRights.Insuchanevent,EligibleShareholderswhowishto

renouncesomeoralloftheirRightsinthiswaymayinstructanyAuthorizedAgenttodisposeofanyorallofsuchRightsbywayofsale on the NSE.

7.19.1.5 EligibleShareholderswithoutCDSAccountswhowishtotradeinRightsinthiswaymustfirstopenCDSAccountsandimmobilisesuch Rights prior to trading and must duly complete the section entitled “Immobilisation for trading in the Rights” as well as other relevantsectionsofthePAL.TheCDSAccountopeningformsmaybeobtainedfromanyAuthorizedAgent.EligibleShareholderswhowishtoimmobilisetheirPALforpurposesoftradinginRightsmustensuretheydosobeforeMonday,March02nd,2015.

7.19.1.6 RightsmaybetradedontheNSEfromThursday,February19th,2015toMonday,March02nd,2015.7.19.1.7 PleasenotethattradingofRightsontheNSEwillattractabrokeragecommissionplusotherstatutorycostspayablebytheseller

and buyer of such Rights.7.19.1.8 TheCMAandNSEhaveapprovedthetradingofRights.



7.19.2 Renunciation by way of Private Transfer7.19.2.1 EligibleShareholderswishingtotransfertheirRightstoaparticularRenounceemaydosobywayofprivatetransfer,subjectto(a)

Section31oftheCapitalMarketsAct(b)Regulations57to61oftheCapitalMarkets(LicensingRequirements)(General)Regula-tions2002and(c)Rule43oftheCentralDepository(Operational)Rules,2003.Regulation57allowsatransfer,interalia,ofRightsbyanEligibleShareholdertoacloserelationintheformofagift.Insuchacase,anyAuthorisedSellingAgent,beingastockbroker,is required to assess, endorse and submit to the NSE a written application for such a transfer with the required information and supportingdocumentsstating the reason for theproposedprivate transfer.Aclose relationmeansa relationshipsupportedbydocumentary evidence of a spouse, parent, sibling, child, father-in-law, son-in-law, daughter-in-law, mother-in-law, brother-in-law, son-in-law, grandchild or spouse of a grandchild.

7.19.2.2 Inordertoeffectaprivatetransfer,anEligibleShareholderwithaCDSaccountmustdulycompleteandsubmitaCDSForm7whileshareholderswithoutaCDSAccountholdingaPAL-II,willsubmitaFormR.BoththeseformsareavailablefromAuthorizedAgents.Byexecutingtherelevantform,anEligibleShareholderisdeemedtorenounceand,subjecttoSection7.19.2.1,transfertherelevantRights.

7.19.2.3 Thelastdateandtimeforrenunciationbywayofprivatetransferis3.00pmonMonday,March02nd,2015.7.19.2.4 EligibleShareholdersareadvisedtocontactanyAuthorizedAgentforthepurposesofeffectingtherenunciationbywayofprivate

transfer.7.19.2.5 If an Eligible Shareholder accepts some of his Rights and renounces the remainder by way of private transfer in the manner spec-

ified in thisSection7.19.2 (RenunciationbywayofPrivate Transfer),suchEligibleShareholdershallbe required tosubmit theEntitlementandAcceptanceFormandFormRforsplittingofthePALandregulatoryapprovalsbyMonday,March02nd,2015.TheSplitPALinadditiontotheresultingFormEforthetransferee,bothdulycompletedandsignedandaccompaniedwiththeApplicationMoneyinconnectionwiththeAcceptedRightsshouldbesubmittedtoHousingFinanceortherelevantAuthorizedAgentnotlaterthan3.00pmonFriday,March13th,2015.EligibleShareholderswithoutCDSAccountswhowishtoacceptapartialnumberofrightsand renounce the remainder by way of private transfer, or who wish to renounce to more than one person are advised to immobilise theirRightsassetoutinSection7.19.1.5above.

7.19.3 Renunciation by decliningEligibleShareholderswhowishtodeclinetheirRightsneednotdoanything.AnyRightsnottakenupbysuchEligibleShareholderswillformpart of the Untaken Rights.

7.20 Restriction on Renunciation of Rights7.20.1 Section7.27(RegulatoryRestrictions)ofthisSectionsetsoutcertainregulatoryrestrictionsandobligationsthatmayberelevantto

any Eligible Shareholder or Renouncee.7.20.2 PleasenotethatanyrenunciationbywayoftradingofRightsthroughNSEorbywayofprivatetransferofRightsinaccordancewith

Section7.19.1(RenunciationbywayofTradinginRights)andSection7.19.2(RenunciationbywayofPrivateTransfer)ofthisSec-tion is only permitted if such renunciation does not trigger the said regulatory restrictions and obligations.

7.21 Application Money7.21.1 PaymentfortheNewSharesshallbemadeintheformofabanker’schequeforvaluesthatareunderonemillionshillingsorviaRTGS

forvaluesthatareonemillionshillingsandabove.PaymentmayalsobemadebyAuthorizedAgentsonbehalfofEligibleSharehold-ers(GlobalPaymentSystemorGPS).SuchbankerschequesforeachPALmustbeinKenyaShillingsanddrawnonalicensedcom-mercialbankthatisamemberoftheCentralBankofKenyaClearingHouse,andshouldbemadepayableto“HFCKRightsIssue-PALNo{InsertNo}”andbecrossed“A/CPayeeOnly”.EachbankerschequereceivedbyHousingFinancewillbedepositedimmediatelyforcollection.PleasenotethatnointerestwillbepayablebyHousingFinanceonmoneyreceived.AnyEligibleShareholdersap-plying for any New Shares may provide an Irrevocable Bank Guarantee in the form stipulated in Section 18.1 of this IM, for the full amount of the Shares, provided that such application is for a value of KES. 1,000,000 and above. Such a bank guarantee must be authenticatedbytheguaranteeingbankviaaSWIFTmessagesenttoHousingFinancebefore3.00pmonFriday,March20th,2015.TheEligibleShareholdermustattachtheoriginalIrrevocableBankGuaranteetothePALatthetimeofsubmissionby3.00pmonFriday,March20th,2015.QualifiedInstitutionalInvestorsapplyingforNewShareswhowishtomakepaymentaftertheallotmentof New Shares should note that acceptance of the application will be at the discretion of Housing Finance and must be secured by an IrrevocableLetterofUndertaking,intheformatrequiredbyHousingFinance(Section18.2)fortherequiredamount.Onlyoneformof payment is acceptable per application.

7.21.2 PaymentsmadeinaccordancewithSection7.21.1abovewill,uponreceiptbyHousingFinanceoftherelevantamountinclearedfunds, constitute acceptance of the Rights Issue upon the terms and condition set out in this Information Memorandum and in the EntitlementandAcceptanceForm.



7.21.3 EligibleShareholderswithCDSAccountsarerequiredtopaytheOfferPriceperNewShareinaccordancewiththeEntitlementandAcceptanceFormplusaseparatefeeofKES30.00payabledirectlytotheirAuthorisedAgentsinaccordancewiththeCentralDepos-itories(RegulationofCentralDepositories)(Amendment)Rules,2008.

7.22 Rejection PolicyApplicationswillberejectedforthefollowingreasons:

7.22.1 Issues relating to the Application Forma) ThePALismissing;b) ThenumberofsharesappliedforarebelowtheminimumornotinmultiplessetoutintheInformationMemorandum;c) MissingCDS5formnumber/financingbankdetailsincaseoffinancedapplication;d) Missingorillegiblenameofprimaryapplicant/jointapplicant/corporateapplicantinanyapplication;e) Missingorillegibleidentificationnumber,includingcompanyregistrationnumber;f) Missingaccountnumberornamefornomineeapplications;g) Insufficientdocumentation;h) Missingorillegiblepostaladdressandpostalcode;i) Missing bank details and verification documents where mode of refund is indicated as electronic fund transfer and the bank mandate

detailsarenotprovidedontheRegister(therefundwillbedefaultedtoachequepayment);j) MissingorinappropriatelysignedApplicationFormincluding:-

• Primarysignaturemissingfromsignaturesbox;• Jointsignaturemissingfromsignaturebox;• Oneorbothofthetwodirectors/officialoradirectorandcompanysecretaryhas/havenotsignedinthecaseofacorporateapplica-

tion;• Missingsealinthecaseofacorporateapplicationofacompanyregisteredunderthecompaniesact;• ApplicationbearsstampsfromtwodifferentAgents.

7.22.2 Issues relating to Paymenta) Thepaymentislessthanthevalueofthesharesappliedfor;b) Personalchequesusedtomakepayment;c) Paymentbycash;d) Paymentbypost-datedorstalecheques;e) Chequeamountinwordsdoesnotagreewithamountinfigures;f) AmountonchequedoesnotagreewithamountonApplicationForm;g) Chequeisnotsigned;h) Chequecarriesalterations;i) Mutilatedorcancelledcheques;j) Chequehasalreadybeenendorsed;k) Multiple types of payment for one application

7.23 Refund policyNointerestwillbepaidonanyApplicationMoniestoanyEligibleShareholderorotherpersontakingtheRights.Interest, ifany,earnedonApplicationMoniesispayabletotheCMAInvestorCompensationFundinaccordancewithCMAregulations.

Refunds in respect of applications for additional shares, where the allotted value is less than that applied for shall be in the form of refund chequesorbywayofEFTbyHousingFinance(whereanEligibleShareholderhasvalidEFTdetailsintheRegisterorhasprovidedaccurateEFTdetailstotheCDSCviatheirbroker).IntheeventanEligibleShareholderhasnovalidEFTdetailsontheRegisterorprovidedtotheCDSCthroughtheirbroker,therefundwillbemadebychequethroughtheAuthorisedSellingAgent.HousingFinancewillbeginrefundstoEligibleSharehold-ersfromWednesday,April01st,2015.EligibleShareholdersarerequiredtochoosetheirpreferredoptionofrefund:(a)byEFT,againstconfir-mationofbankdetailsifsuchdetailsarenotmandatedintheregisteror(b)collectedbytheEligibleShareholderfromtherelevantAuthorizedAgent(asdesignatedbytheEligibleShareholderonthePALforthatpurpose)againstproofofidentity.Wherealenderhasadvancedmoneytoan investor to subscribe for New Shares, refunds will be made to or for the account of such Lender as the case may be.

Paymentofrefundsinforeigncurrencyshallbemadehavingregardtotheprevailingexchangerateslessbankchargesfortheforeingcurren-cy draft and any fluctuations in the exchange rate shall be for the Eligible Shareholder’s or Investor’s account.

7.24 New Shares7.24.1 EligibleShareholdersandtheirRenounceeswithCDSAccountswhocomplywiththeproceduresforacceptanceassetoutinthis

InformationMemorandum,willreceivetheirNewSharesinelectronicformbywayofcredittotheirrespectiveCDSAccounts.Itis



theresponsibilityofEligibleShareholdersandRenounceestoensurethattheirCDSAccountdetailssetoutintheEntitlementandAcceptanceFormarecorrect.

7.24.2 EligibleShareholderswithoutaCDSAccountwhocomplywiththeproceduresforacceptanceassetoutinthisInformationMemo-randum, will receive their New Shares in credit to their shares account. Kindly note that due to dematerialization no certificates will beprintedorissued.TradingoftheNewSharesmayonlytakeplaceiftheEligibleShareholderhasaCDSAccount.

7.24.3 NewShareswillbeadmittedontheMIMSonWednesday,April15th,2015withdealingsofNewSharescommencingonthesamedate.

7.25 Untaken Rights and Allocation Policy7.25.1 AllEligibleShareholderswhoapplyfortheirNewSharesinfullshallreceivethefullnumberofNewSharesindicatedintheirPAL.New

SharesnottakenupshallformtheUntakenRights.TheUntakenRightsmaybeallocatedasAdditionalSharesinaccordancewiththeAllocationPolicysetoutinSection7.18toEligibleShareholderswhodulysubmitapplicationsforAdditionalSharesinaccordancewithSection7.18(ApplicationforAdditionalSharesandAllocationPolicy)

7.25.2 AnyresidualRightsnottakenupoftheUntakenRightsevenaftertheallocationinSection7.18,maybeallocatedbytheBoardintheirsolediscretionsubjecttoSection7.27(RegulatoryRestrictions)andifnotsoallotted,willlapse.

7.25.3 IftheresultsforthesubscriptionmakestheaboveAllocationPolicyimpractical,thenanamendmentoftheAllocationPolicyshallbemadewiththeapprovaloftheCapitalMarketsAuthorityandsuchamendmentwillbeannouncedwithintwentyfour(24)hoursofthe grant of the approval.

7.26 Foreign Investors7.26.1 TheCapitalMarkets(ForeignInvestors)Regulations,2002(asamended)(“theForeignInvestorRegulations”)providethat“aforeign

investor”(“ForeignInvestor”)isanypersonwhoisnotalocalinvestor.A“localinvestor”isdefinedtomean(a)anindividualbeinganaturalpersonwhoisacitizenofanEastAfricanCommunityPartnerStateor(b)abodycorporatebeingacompanyincorporatedundertheCompaniesActofKenyaorsuchothersimilarstatuteofanEastAfricanCommunityPartnerStateinwhichthecitizenortheGovernmentofanEastAfricanCommunityPartnerStatehavebeneficialinterestin100%ofitsordinarysharesoranyotherbodycorporateestablishedorincorporatedinanEastAfricanCommunityPartnerStateundertheprovisionsofanywrittenlaw.AnEastAfricanCommunityPartnerStatemeansStatesthataremembersoftheEastAfricanCommunity.

7.26.2 Foreign Investors wishing to apply for New Shares must satisfy themselves as to the full observance of the laws of the relevant territory and governmental and other consents to ensure that all requisite formalities are adhered to, and pay any issue, transfer or other taxes due in such territory. Before applying for and purchasing New Shares, foreign investors are advised to consult their own professional advisors as to whether they require any governmental or other approvals or need to observe any applicable legal or regulatory requirements.

7.26.3 TheForeignInvestorRegulationsrequirenotlessthan25%(asamendedbyLegalNoticeNo.28of2008)oftheordinarysharesinlisted companies which have been listed to be reserved for local investors.

7.26.4 ThisInformationMemorandumandaccompanyingPALdonot,andarenot intendedto,constituteanofferfortheNewSharesinany place outside Kenya or in any circumstances where such offer or solicitation is not authorized or is unlawful. In that regard, this InformationMemorandumandaccompanyingPALmaynotbeusedforor inconnectionwithanyofferto,orsolicitationby,anyone in any jurisdiction or in any circumstances where such offer or solicitation is not authorized or is unlawful. The distribution ofthisInformationMemorandumandtheaccompanyingPALoutsideofKenyamayberestrictedbylawandpersonswhocomeintopossessionofthis InformationMemorandumandtheaccompanyingPALshouldseekadviceonandobservethoserestrictions.Anyfailuretocomplywiththoserestrictionsmayconstituteaviolationofapplicablesecuritieslaws.AnysuchrecipientmustnottreatthisInformationMemorandumandaccompanyingPALasconstitutinganoffertohim,unlessintherelevantjurisdiction,suchinvitation or offer could be made lawfully to him without contravention of any unfulfilled registration or legal requirements. Without limitation,neitherthisInformationMemorandumnortheaccompanyingPALmaybesentorpassedorotherwisedistributedoutsideKenya.

7.26.5 Inparticular,theRightsIssuehasnotbeen,andwillnotbe,registeredundertheUnitedStatesSecuritiesAct,1933orthesecuritieslawsofanystateintheUnitedStatesofAmericaandisnotbeingmadeintheUnitedStatesofAmericaortopersonsresidentintheUnitedStatesofAmerica.Withoutlimitation,neitherthisInformationMemorandumnortheaccompanyingPALmaybesentorother-wisedistributedtoinvestorsintheUnitedStatesofAmerica.

7.26.6 Eligible Shareholders with a registered address in Kenya holding Existing Shares on behalf of persons who are resident in a juris-diction outside Kenya are responsible for ensuring that taking up New Shares under the Rights Issue does not breach securities lawsinthatotherjurisdiction.ThereturnofadulycompletedEntitlementandAcceptanceForminaccordancewiththisInformationMemorandum will not be deemed as a representation that there has been no breach of such laws.



7.27 Regulatory RestrictionsEligibleShareholdersarerequestedtonotethatHousingFinanceissubjecttotheprovisionsoftheBankingActandtheCapitalMarketsLeg-islation. Notable, for purposes of the Rights Issue are the provisions summarized below. Eligible Shareholders are required to seek their own adviceinconnectionwiththesematters.KindlynotethattheDirectorsmaytakethesaidprovisionsintoaccountwhendeterminingtheallo-cationofanyUntakenRightstoapplicantsforAdditionalShares.

7.27.1 Sections9A(2)and(4)(b)oftheBankingActprecludeanypersonfrombecominga“significantshareholder”,beingaperson,otherthan the Government of Kenya or a public entity who holds directly or indirectly or otherwise has a beneficial interest in more than 5%ofthesharecapitalofabank,financialinstitutionormortgagefinancecompany,unlesssuchpersonhasbeencertifiedbytheCentral Bank of Kenya as a fit and proper person.

7.27.2 Section13(1)oftheBankingActprohibitsparticularclassesofpersonsfromowning,directlyorindirectly,orotherwisehavingabeneficialinterestinmorethan25%ofthesharecapitalinabank,financialinstitutionormortgagefinancecompany.

7.27.3 TheCapitalMarkets(Take-OversandMergers)Regulations,2002,obligetheobservanceofcertainproceduresifanypersontakesup Rights which would result in that person “acquiring effective control” of a listed company.

7.28 Taxation Implications7.28.1 Eligible Shareholders interested in participating in the Rights Issue should consult their tax advisors of any possible tax implications

connectedwiththeRightsIssue.Therefore,HousingFinanceandtheDirectorsconsideritinappropriatetoprovidedetailedadviceinrespect of taxation consequences in connection with the Rights Issue save for what is expressly set out in this Information Memo-randum.

7.28.2 NeitherHousingFinancenoranyoftheDirectorsoranyHousingFinance’sofficersoradvisorsacceptsanyliabilityforanytaximpli-cations of Eligible Shareholders in connection with the Rights Issue.

7.28.3 Localinvestorsaresubjecttowithholdingtaxondividendsattherateof5%.ForeignInvestorswillbesubjecttoawithholdingtaxrateof10%.

7.29 Expenses of the OfferExpense Total (KES)*TransactionAdvisorCosts 40,600,000Sponsoring Broker 3,480,000Legal costs 2,088,000Registrar fees 7,550,069ReportingAccountantscosts 5,911,360PlacingAgents 60,900,000CMAapprovalfees 5,800,000NSE admission fees 580,000Advertising 30,000,000PublicRelations,PrintingandPostage 15,000,000Contingency 5,000,000Total 168,789,429

*ThesefiguresareinclusiveofVAT(whereapplicable)andmaybesubjecttochange.**SellingCommissionof1.5%ispayabletomembersoftheNSE(subjecttoaminimumofKES100)and1%fornon-NSEsellingagents.***Not included are interest costs that will be chargeable on issue proceeds payable to the Capital Markets Investor Compensation Fund on the basis of the average Central Bank of Kenya inter-bank overnight lending rate for the period between the closing date of the Offer and crediting of accounts.

TheexpensesoftheOfferamountto4.8%oftheOfferamount.

7.30 Governing LawTheRightsIssueDocumentsandanycontractresultingfromtheacceptanceofanapplicationtopurchasetheNewSharesshallbegovernedby and construed in accordance with the Laws of Kenya.



The investment considerations set forth below do not give a guarantee, neither are they indicative of future returns. Potential investors are advised to consult with their investment, legal and tax advisors to determine the suitability of an investment in the Notes, and the appropriate amount, if any, of an investment of this nature

8.1 Proven financial track record TheCompanyhasmaintainedanimpressivetrackrecordoverthepastfiveyears.ProfitaftertaxhasgrownataCAGRof43.6%whilegrossmortgageadvanceshavegrownataCAGRof24.8%tostandatKShs43.3billionasat30September2014.TotalassetshavealsogrownbyaCAGRof27.0%toKShs56.9billionasat30September2014.

8.1.1 Profit After Tax

Source: Company Financials

8.1.2 Total Assets


8 Key Investment Considerations


8.1.3 Shareholders’ funds


8.1.4 Mortgages and advances




8.1.5 Deposits book


8.1.6 Return on average Equity (ROaE)

Source: Company Financials and NICC Analysis

8.1.7 Return on average Assets (ROaA)

Source: Company Financials and NICC Analysis



The Company has become the leading regional mortgage finance provider fuelled by its constant development of innovative and pioneering products and services that are designed to meet the unique needs of the Kenyan market.

8.2 Increasing demand for housingKenya’srapidurbanizationanddemographicsputtheannualhousingneedatabout200,000units,whileactualdeliveryisonlyabout35,000housing units a year. With such a massive supply gap, the private sector is expected to play a critical role in meeting the shortage. Research publishedrecentlybytheWorldBankestimatesthepotentialsizeofthemortgagemarkettobeaboutKsh800billion(aboutUS$9.9billion)–thatisabout13timesitscurrentsize.Accordingto2013CentralBankofKenyastatistics,HousingFinanceCompanyofKenyaLimited,isthemarketleaderinthemortgagefinancingindustrywithmarketshareof25.5%.HousingFinanceisthereforewellpositionedtobenefitfromthisgrowing demand for housing through provision of suitable housing financial solutions.

8.3 Market leaderHousing Finance through its provision of diversified and innovative products has become a market leader in the Kenyan housing mortgage segment.Despiteincreasedcompetitionintheprovisionofmortgageloansascommercialbanksseektodiversifyrevenuestreams.HousingFinancecommands27.2%ofthetotalmortgageaccountsof19,879accordingtotheCBKResidentialmortgagemarketdevelopmentsurveyinDecember2013.HousingFinanceoutstandingmortgageswasKShs35.3bn,thisaccountedfor25.5%ofthetotalindustrymortgagesofKShs 138.1bn.

Outstanding Residential Mortgage value Account Numbers Market Leadership

Source: CBK Residential mortgage market development survey (December 2013)

Mortgages Outstanding




No. of Mortgage Accounts


8.4 Well Managed Asset BookThe rise in the property and mortgage industry has given substantial opportunities for Housing Finance which continues to own the largest market share. With the aggressive strategy that Housing Finance adopted in previous years, Housing Finance has managed to grow its mort-gagebookfromKShs10.4billionasatendof2008toKShs43.3billionasatendSeptember2014.Equally,throughdifferentmeasuresandrecoveryprocessesthattheCompanyinitiated,theassetqualityhasimprovedsignificantlyfrom88%in2009to90.5%asat30September2014.

Asset Quality

8.5 Government devolutionFollowingthepromulgationofthenewConstitutionin2010,Kenyaisgearedtowardsimplementingthedevolvedgovernmentstructures.Itisanticipated that this will create employment opportunities as well as opening up the country to investment. Housing Finance is well positioned to provide property development solutions for the newly established counties.



8.6 Real Estate Investment Trusts (REITs)TheREITsregulationweregazettedin2013settingthestageforcreationofREITsandsubsequentlistingontheNSE.REITsareexpectedtoprovide access to the capital markets thus reducing funding risk due to reliance on debt and enhance liquidity. Housing Finance, through its subsidiary Kenya Building Society has lined up various projects that would be implemented through REIT structures.

8.7 Experienced Board and Management TeamHousing Finance is led by a management team that represents very experienced professionals in the banking and housing industry having worked for different entities both locally and internationally. The Company is therefore well equipped to handle integrated solutions relating to acquisitions, development and improvement of property. The Board of Housing Finance also comprises members who have extensive ex-perience in various industries cutting across financial, insurance, investment and banking sectors and therefore are very vital in formulating Company strategies for superior growth.



9 Economic Outlook and Overview of the Banking Sector

9.1 KENYA ECONOMIC OUTLOOK

9.1.1 Kenya Economic Performance

Country Overview

Population, 2013 (mn) 44.35

Area (sq km) 580,367

GDP, 2013 (US$ bn) 55.2

GDP Growth, 2014 5.0%

Inflation, September 2014 6.6%

Accordingtodata1fromtheKenyaNationalBureauofStatistics(KNBS),Kenya’seconomicgrowthrateof5.8%inQ22014waslowerthanthe7.2%growthratepostedinQ22013,thoughhigherthanthegrowthpostedinQ12014.ThelowergrowthrateinQ22014isattributablemainlyto a decline in output in the expansive agricultural sector owing to depressed long rains season over most parts of the country. Robust activity in the construction, manufacturing, financial and insurance, information and communication, wholesale and retail trade sectors underpinned overallgrowthinQ22014.MerchandisetradedeficitwidenedinQ22014comparedtoQ22013drivenbyanincreaseintheimportbillby25%againstagrowthintheexportvalueby13%overthecorrespondingquarters.Currenttransferreceiptsincreasedby59.6%inQ22014comparedtoQ22013drivenbyagrowthinpersonaltransfersat14.3%andgrowthinnetinflowsinthecapitalandfinancialaccountby25.7%.The growth in the capital and financial account was supported by long term capital inflows from the sale of Eurobond. FollowingtherecentsuccessofKenya’sEurobondissuanceinQ22014,aprojectedrestraintingovernmentdomesticborrowingshouldcreateaconduciveenvironmentforimprovedeconomicgrowth.Privateconsumptionisalsolikelytoimproveasaresultofthestableexchangerateenvironment.Overall,Kenya’seconomyisestimatedtogrowby5.0%in2014.

Source: World Bank, Kenya National Bureau of Statistics

1Rebased GDP growth estimates (the GDP base year was changed from 2001 to 2009)


9.1.2 Macro-Economic Overview9.1.2.1 InflationTheoverallinflationhasbeenstableinthefirsthalfof2014remainingwithintheCBKtargetrateof7.5%onaccountofthemonetarypolicymeasures that have been put in place by the CBK, general stability in exchange rates, and implementation of food security measures. However theinflationdeterioratedinQ32014abovetheCBKtargetratebuoyedbyincreasesinpricesoffoodcommoditiesandenergyitems.InthemonthofJanuary2014inflationstoodat7.2%decliningto6.3%inMarchbeforesurgingto8.4%inAugustanddecliningto6.6%inSeptember.

TheincreasewitnessedbetweenAprilandAugustwasonthebackofincreasedcostoffuelandfoodcoupledwithslightriseinnon-food-non-fuelinflation.However,theinflationratedeclinedinSeptemberto6.6%downfrom8.4%inAugust.Goingforward,theinflationrateisexpectedto continue being within the CBK target as CBK seeks to anchor inflationary expectations through the monetary policy operations as well as easingoffoodcommoditypricesinlightoftheexpectedgoodshortrainsseasonandlowerenergycosts.Additionally,thisleveloftargetinflation is likely to be supported by the declining global oil prices.

Source: Kenya National Bureau of Statistics

9.1.2.2 Interest RatesTheShortterminterestrateshaveexhibitedgeneralstabilityoverthefirstthreequartersof2014.Thishasbeenoccasionedbydeclineindemandpressuresincethegovernmentborrowingprogrammeisontarget.The91dayT-bill,182T-billand364T-billwereat9.4%,10.4%and10.5%respectivelyinthefirstweekofJanuary2014.TheratesmarginallydeclinedattheendofQ1to8.9%,9.9%and10.3%however,therateshavewitnessedanincreaseinJunetoahighof11.4%,11.5%and11.8%respectivelyinthefirstweekofJuly2014.ThisupwardtrendreversedinsubsequentweeksofJulytocloseQ3at8.7%,8.7%and10.4%respectively.ThistrendisexpectedtocontinuethroughtheQ4of2014.

The sustained Open Market Operations by the Central Bank of Kenya has ensured stability with the interbank around the CBR. The interbank rateonthefirstweekofJanuary2014was12.1%decliningto10.0%attheendofQ2andthenfurtherdecliningto6.8%attheendofQ32014.Generally low and stable rates are expected owing to the improvement of liquidity in the market as well as the successful issuance of the Sovereign Bond which has enabled appropriate benchmarking of Kenya’s sovereign risk.

Source: Central Bank of Kenya



9.1.2.3 Exchange RatesTheshillingremainedstableduringthefirsthalfof2014,tradingwithinthe85-87rangetotheUSD.DuringQ3theshillingweakenedagainstthedollar toclose thequarteratKES89.10/USD.Theshillinggradually lostground in thefirsthalfof2014against theGBPand theEurotradingat142.72and118.80atthebeginningofQ1tocloseQ2at149.20and119.55respectively.HowevertheshillinggainedgroundagainsttheGBPandtheEuro inQ3tocloseat145.12and113.29respectively.Theshilling isexpectedtoremainresilientagainstmajorhard currencies on the back of foreign exchange inflows from diaspora remittances and sustained foreign investor participation at the Nairobi Securities Exchange.

TheCentralBankofKenyaincreaseditslevelofusableforeignexchangereservesfromUSD6.2bn,asatendofDecember2013toUSD6.4bn(4.21monthsofimportcover)asatbeginningofSeptember2014.Thislevelofimportcoverismarginallyhigherthantheminimumof4.0butadequate to cushion the foreign exchange market against temporary shocks.


9.1.2.4 Kenya Debt AnalysisKenya’spublicdebtasapercentageofrebasedGDPincreasedby224basispointsfromadebttoGDPratioof42.1%to44.4%inDecember2012andDecember2013respectively.Thisgrowthhasbeenascribedtoballooningofdomesticdebtthathasgrownbyabout22%toKES1.2trillionwhereasexternaldebtgrewbyabout12%toKES0.9trillion.AsatJuly2014,thelevelofdomesticdebthadincreasedby9%andexternaldebtby18%tostandatKES1.3trillionandKES1.1trillionrespectively.TheriseinexternaldebtislargelyattributabletotheforeignborrowingthroughSovereignbondthatwas issued inJune2014.FitchRatings,placedKenya’sdefault ratingsatastableB+ratingwhileMoody’s gave Kenya a B1 rating with a stable outlook.

KenyasuccessfullyissuedaUSD2.0billionEurobondinthesecondquarterof2014withanoversubscriptionofUSD1.0billion.Thefundswillbe used to pay off a syndicated loan and filling the infrastructure deficit.

Eurobond Issues Country USD(millions) Yield

Tanzania 600 6.28%Rwanda 400 6.88%Ghana 750 8.00%Nigeria 500 6.63%

9.2 Kenya Banking Sector Overview

9.2.1 Industry StructureThebankingsectorinKenyacomprisesofbankinginstitutions(commercialbanksandamortgagefinancecompany),representativeofficesofforeignbanks,microfinancebanks(MFBs),foreignexchangebureaus,moneyremittanceproviders(MRPs)andcreditreferencebureaus(CRBs).AdiagrammaticrepresentationofthebankingindustrymarketstructureinKenyaisasfollows:



Figure 1: Banking industry structure


9.2.2 Asset BaseThebankingsectornetassetsstoodatKES3.08trillionasat30September2014upfromKES2.97trillioninJune2014representinga3.7%growth.Asat31December2013,thebankingsectortotalassetsstoodatKES2,703.4billionandthe26localprivatecommercialbanksaccountedfor61.4%,the14foreignownedcommercialbanksaccountedfor34.0%ofthesector’stotalassets.Detailsofownershipandassetbaseamongthecommercialbanksasat30December2013areasshownbythefollowingtable:

Table 1: Ownership and asset base

OwnershipNumber Share (%) Total Assets (KES BN) Share (%)

Local public commercial banks 3 7.0% 124,853 4.6%Foreign commercial banks 14 32.6% 919,524 34.0%

Local private commercial banks 26 60.4% 1,659,017 61.4%

TOTAL 43 100.0% 2,703,394 100.0%


9.2.3 Branch NetworkDuringtheyear2013,banksincreasedtheirbranchnetworkby70,whichtranslatedtoatotalof1,342branches.Theincreaseisanindicationofincreasedprovisionofbankingservices.NairobiCountyaccountedforthehighestnumberofnewbranchesin2013asitrecordedagrowthof12branchesfollowedbyKiambuCountywith11branchesandMombasaCountywith10branches.Theincreaseinbanks’branchnetworkis occasioned by increase of economic activity based on the introduction of the county system.

9.2.4 Market ShareKenyan commercial banks are classified by the Central Bank of Kenya into three peer groups using a weighted composite index that comprises assets,deposits,capitalsize,numberofdepositaccountsandloanaccounts.Abankwithaweightedcompositeindexof5.0%andaboveisclassifiedasa largebank,amediumbankhasaweightedcomposite indexofbetween1.0%and5.0%whileasmallbankhasaweightedcomposite indexof lessthan1.0%.For theperiodended31December2013, therewere6 largebankswhichaccountedfor52.4%of themarketshare,16mediumbankswithamarketshareof39.1%and21smallbankswithamarketshareof8.5%.Detailsofmarketshareanalysis are as shown by the following table:

Table2:MarketshareanalysisBank Weighted Share (%) No of Banks Total Assets

(KES Million)Deposits

(KES Million)Capital

(KES Million)Small Bank 8.5% 21 231,503 174,481 35,061Medium Bank 39.1% 16 1,083,250 789,114 157,633Large Bank 52.4% 6 1,388,641 972,066 239,484

TOTAL 100.0% 43 2,703,394 1,935,661 432,178Source: Central Bank of Kenya



9.2.5 Industry PerformanceThe banking sector in Kenya continued its outstanding performance as exhibited by key performance indicators for the period ending September2014:• TotalcustomerdepositbaseincreasedfromKES1.91trillionasatendofSeptember2013toKES2.25trillionasatendofSeptember

2014representingaYoYgrowthrateof17.8%;• Totalassetsgrewby17.6%YoYfromKES2.62trillionasatendofSeptember2013toKES3.08trillionasatendofSeptember2014;• GrossadvancestocustomersincreasedfromKES1.52trillionasatendofSeptember2013toKES1.91trillionasatendofSeptember

2014representingYoYgrowthrateof25.7%;• Pre-taxprofitabilityfortheindustryincreasedfromKES31.0billionasrecordedinSeptember2013toKES33.5billionasatendSeptember

2014representingYoYgrowthrateof8.1%;• Thebankingsectorcorecapitalalso increasedfromKES383.8billionasatendofSeptember2013toKES458.1billionasatendof

September2014representingYoYgrowthrateof19.4%;and• Equally,grossnon-performingloansandadvancesincreasedby30.1%fromKES79.7billionasatendofSeptember2013toKES103.7

billionasatendofSeptember2014.The banking sector in Kenya is expected to maintain its growth momentum largely supported by innovations and adoption of cost effective channels of offering financial services. The domestic outlook for the short to medium term indicates low inflationary environment, and stable exchange rate environment.

9.2.6 ChallengesThe following factors pose challenges to the banking sector in Kenya:

9.2.6.1 Increased competitionCompetition within the banking sector is becoming more aggressive both from conventional and non-conventional banking players. Substitute products and services have emerged to a great extent in the banking industry mostly in the form of money transfer services provided by mobile telephony companies. Consequently, this development is likely to revolutionize how the banking industry players perform their financial intermediation services.ThepublicationoftheMicroFinanceAct2006whichallowedthelicensingofmicrofinanceinstitutionsasdeposittakersandtheSACCOAct,2008whichempoweredSavingsandCreditCooperativeSocieties(SACCOs)toplayaroleinthebankingindustryislikelytoaddmorepressureto competition within the banking industry specifically on the deposit mobilization front.

9.2.6.2 Accessibility of banking servicesIn order to get services closer to customers, banks have been forced to incur additional costs such as on establishing new branch networks and on acquiring information technology.

9.2.6.3 FraudThere has been a significant rise in fraud related cases in banks, which has resulted in losses for banks. Banks have continued to invest in sophisticated technology for better security.

9.2.6.4 Money launderingPersonswhoareengagedincriminalactivitiesareseekingwaysofconcealingtheoriginsofillegallygeneratedfunds.HoweverthegovernmenthascomeupwithTheProceedsofCrimeandAntiMoneyLaunderingAct,2009.TheActseekstocreateacomprehensivelegislativeframeworkto combat the offence of money laundering in Kenya and to provide for the identification, tracing, freezing, seizure and confiscation of the proceeds of crime among other measures.

9.2.7 OpportunitiesMany opportunities remain in the Kenyan banking sector:

9.2.7.1 Regional ExpansionNew emerging markets such as Southern Sudan, which is highly unbanked, and regional cooperation arrangements will offer new business opportunities within the region.

9.2.7.2 Mobile phone bankingMobile phone banking is a growing phenomenon among the key players within the banking industry. This service is likely to create additional products in which banks can tap into to grow their revenue lines.



9.2.7.3 Unbanked populationAlthoughoverrecentyearsthenumberofunbankedpeoplehasbeenreducing,therestillexistsalargepoolofpeoplewhohavenoaccesstofinancial services. This mostly comprises of youth and women.

9.2.7.4 A growing SME marketThesmallandmediumenterprises(SME’s)inKenyahavedevelopedconsiderablyoverthelasttenyearsbothinnumbersandineconomicscale. This growth provides the banks with a perfect opportunity as a number of SMEs continually demand financial services.

9.2.7.5 Agency BankingAgencyBankingisaconceptintroducedtothebankingsectorbyCentralBankofKenyain2010.Thisconceptallowsbankstoofferlimitedservices through business outlets that are not banks and not necessarily financial services e.g. supermarkets, chemists etc. This will enable banks to extend banking services to a wider population in areas where physical bank branches may not be viable.

9.2.7.6 Other Emerging needs such as Insurance Premium FinancingInJanuary2008,achange in the lawcompelled insurancecompaniesto issue insurancecertificatesandeffectpolicycoversonlyuponreceiptofthefullpremiumpaymentforthedurationthatthecover/policyisineffect.Thiscreatedanopportunityforbankstooffercreditfacilities.

9.2.7.7 TechnologyGeneral technological advancement and stiff competition in the banking industry has led to major implementation of technology such as internet banking and mobile banking applications. This has impacted positively on the industry i.e. transaction time as well as better customer experience. Banks are increasingly using social media not only in advertising but also receiving customer feedback.

9.2.8 Recent DevelopmentsIn the recent past, developments within the banking sector have been majorly guided by the medium term objectives of the financial sector reform and development strategy embedded in the economic development blueprint, Vision 2030. Of late, access to financial servicescontinues to be enhanced, spurred by increased innovation in the delivery of financial products and services throughout the country. Specific developments within the banking industry in Kenya that have occurred within the last three years include the following:• ContinuedexpansionofbanksthroughbranchesandotherplacesofbusinessacrossKenyaaswellasthelargerEastAfricanregion;• Increaseincapitalrequirements;• GrowthofthedeposittakingmicrofinancesubsectorthroughthegrowthindepositsandloansoflicensedDTM’s;• Increased permeation ofmobile financial serviceswith an increased number of banks entering into partnershipwithmobile service

providerstoprovidefinancialservicesthroughthemobilephoneplatform;• Increasedusageoftheagencybankingmodelwhichwasrolledoutinmid-2010thatallowscommercialbankstoengagethirdpartiesto

offerspecifiedbankingservicesontheirbehalf;and• IncreasednumberofRepresentativeOfficesestablishedinKenyawhichsignifiesgrowing interest intheKenyanbankingsectorfrom

regional and international banking institutions. This is an indication that the existing business opportunities in the banking sector are yet to be fully exploited. Some of the existing Representative Offices plan to upgrade to either fully fledged subsidiaries or branches in the short to medium term.

9.2.9 Future OutlookThe increasing interest in the Kenyan banking sector by regional and global banking brands will enhance competition especially through productdiversification.Productinnovationsbybanksandadoptionofconvenientandcosteffectivechannelsofofferingbankingservicesisexpected to continue as banks position themselves to expand their market niches.• Thebankingindustryisexpectedtomaintainthegrowthmomentumbasedonthefollowingfactors;• Branchexpansion• Creditinformationsharing;• Regionalintegrationinitiatives;• Advancesincommunicationtechnology;and• DevolvedgovernancesysteminKenya.



Real Estate is considered as one of the principal sectors that not only enhances quality of life but also spurs economic growth in Kenya throughthesector’smultipliereffectonthecountry’sGrossDomesticProduct.Atpresent,thehousingsectorischaracterizedbyinadequateaffordableanddecenthousingascurrentdemandof200,000unitsperannumcontinuestooutstrip theannualsupplyof35,000units.Furthermore, only about 6,000 of annual housing supply caters for the low income population. This shortage in housing is manifested by overcrowding, proliferation of slums and informal settlements in urban areas and poor quality housing in rural areas. Currently, the levels of homeownershiparelowat16%ofthepopulation(Source:MinistryofHousing).

10.1 Property Market Segments

10.1.1 Residential MarketHighlevelsofinflationandinterestratesin2011and2012hadaseverenegativeimpactonhouseprices,especiallyforthosewithvariableinterest rate mortgages. Borrowers who had taken out loans at the edge of their affordability found they were unable to manage the increased monthlycostswithinterestratesgoingupashighas30.0%.However,thesectorisslowlyrecoveringfollowingthereductionofinterestratestobetween15.0%-20.0%.Thefinanciersmanagedthesituationbyrestructuringtheloantermsinsteadofincreasingthemonthlyrepaymentsthereby maintaining a low level of non-performing loans.

Underlying demand for development land is still very high despite the skyrocketing land prices. The sector has also received a boost with the commencement of infrastructure construction of Tatu City, the proposed satellite city in Kenya which is set to continue following a court rulingagainstawindingupcall.DemandforhighendresidentialTownHousesandStandAloneHousesonlargeacreageswithinthepreferredsuburbscontinuestogrowwithaskingrents reachingashighasUSD5,900forasixbed-roomedhouseon3acres inKaren.Partof thisdemand is attributed to the expatriate community. The sector is expected to recover with interest rates slowly dropping and a relatively stable economy, together with the successful general election.

10.1.2 Retail MarketThefourthquarterof2012continuedtoseeaproliferationofdecentralizedurbanshoppingmallsinmajorcitiesandtowns.Buoyedbyanexpanding middle class, improved infrastructure and an enduring property boom, supermarkets have continued to grow their market share and penetration outside the capital city as they become the preferred shopping outlets for many middle and high-income consumers in towns. Several supermarkets opened new branches across the country including Naivas at the Greenhouse on Ngong road, Nairobi and Nakumatt atOasisMallinMalindi.OasisMallachievedapre-letrateofover85.0%withthelineshoptenantsbeginningtheirfit-outsfrom01December2012withatradingdateof01February2013.MtwapaMallanchoredbyTuskys,thefirstandonlycontemporaryretailcentreinthisareaopeneditsdoorsinJune2012andhastransformedtheretailatmosphereintheneighbourhood.

Marketing and letting have been intensified for proposed retail centers across the country. Garden City Mall on Thika Road and Two Rivers in Runda, Nairobi, continued to record strong interest from both local and international retailers who are seeking entry into the expanding local retailscene.Pre-lettingofGardenCityMallstoodatapproximately50.0%asatDecember2012.

10.1.3 Office MarketTheofficemarketcontinuedtowitnesshightakeupofnewdevelopmentsespeciallyinWestlandsandWaiyakiWayinNairobi.DeltaCornerandSkyparkTowerswhichwerecompletedinthe4thquartersupplyingapproximately32,000squaremetresachieved100.0%takeupbyyearend.Skyparkachievedabout90.0% lettingbeforecompletion.DemandforofficespacealongMombasaRoadwhich is traditionallyaquasi-industrialnode remained lowduring thequarterwithmostprojectsstruggling toachieve100.0%occupancy longaftercompletion.UpperHillarearecordedlimitedsupplyofspace in2012,althoughmostoftheprojects inthis localityareduefordelivery in2013/2014.Parklandsareaisanewhotspotforcommercialdevelopmentsasithaswitnessednumerouschangesofuserfromresidentialtocommercial.High construction and financing costs continued to eat into the rental yields and may have adverse effects on the sector if the present market parameterspersist.Officesaleswerelowandfarbetweeninthemarketin2012.Inthelastquarterof2012officepremisesrecordedsaleprices rangingbetweenUSD1,400 toUSD2,000persquaremetredependingmainlyonsizeand location.Averageasking rents fornewprojectsrangedbetweenUSD11-13persquaremeterpermonthexclusiveofservicechargeandvalueaddedtaxduringthesameperiod.

10.1.4 Industrial MarketThe industrial market which has largely been owner occupied in the past is set to witness a major boost following the recent launch of the 5,000acreKonzaTechnopolis.AccordingtotheGovernment,phase1oftheproposedTechnopolisdubbed“TheAfricanSiliconSavannah”has attracted major local service industry players, boosting its chances of success as foreign firms also line up for space in the project. The flagshipprojectundertheVision2030economicblueprintissettopositionKenyaastheICTpowerhouseinEasternAfrica.Itwillhouseaninternational financial centre, a convention centre and a light electronic manufacturing plant. The city will be part of the Special Economic

10 Overview of the Kenyan Housing Sector


ZonesthatwillreplacetheEPZsandisanticipatedtocreatesome200,000jobs.

Property segment Prime rents Prime yieldsOffices US$15persqmpermonth 9%Retail US$31persqmpermonth 10%Industrial US$4persqmpermonth 12%Residential US$4,400permonth* 6%

*4 bedroom executive house in a prime locationSource: Knight Frank Africa Report 2013.

10.2 Trends in the housing marketThe Government of Kenya through its agencies continues to lay focus on the residential market segment as indicated by the growth in value ofresidentialbuildingscompletedbyGoKanditsagencies.ThevalueofcompletedresidentialbuildingsgrewfromKES210mnin2008toKES4.6bnin2012.Ontheotherhand,GOK’sinvestmentinnon-residentialbuildingsdeclinedfromKES232.8mnin2008toKES70mnin2012.This is attributed to the growing middle income class and economic growth.

Source: Economic Survey 2013

Note: 2012 statistics are provisional.

DuetothecontinuedimprovementsininfrastructurebyGoKespeciallyonroads,electricityandwater,accessibilitytotheCentralBusinessDistrict (CBD)willbeeasierandhencereducecongestion in theCBDand itsproximity.Thiswill lead toestablishmentof furtherpropertydevelopments in the Nairobi metropolitan areas including Kitengela, Ruiru, Thika and Kiambu.



10.3 Private sector players in the housing sectorPrivatesectorplayershavecontinuedtoinvestinthehousingsectorattributedtothelucrativereturnsfrominvestment.ThevalueofcompletedbuildingsbytheprivatesectorgrewbyaCAGRof64.5%fromKES6.3bn in2008to46.1bn in2012.FurthermoreapprovedprivateplansincreasedbyaCAGRof27.1%fromKES69.3bnin2008toKES180.6bnin2012.



10.4 Growth in value of approved building plansThevalueofapprovedbuildingplanshasmorethandoubledfromKES69bnin2008toKES181bnin2012.Nairobicontinuestorepresentover75%ofthevalueofapprovedbuildingplansoverthe5yearperiod.InNairobiin2013,2,438planningapprovalsweregrantedforrealestatepropertydevelopmentwithanestimatedvalueofKES149.75billion.InQ12014,530planningapprovalsweregrantedwithanestimatedvalueofKES26.87billion.





10.5 Housing market projectionsWith increasing investment in housing and a number of incentives provided to the private sector, it is estimated that 4.3m housing units will beproducedbetween2008and2030.

Source: Ministry of Housing

10.6 Mortgage marketKenya is set to have a vibrant mortgage market backed by the growing demand for property from the growing middle and high income consumers. In2010theaveragemortgageloansizewasKES4milliongrowingtoKES5million in2012.Theweightedaveragemortgageinterestratewas14.07%in2010risingto16.89%inQ42013.TheaveragemortgagerateroseslightlyinQ12014to17.00%beforeamarginaldecreaseinQ22014tostandat16.30%.

RecentdevelopmentssuchastherecentintroductionofKenyaBankersReferenceRate(KBR)inQ32014arelikelytoseeapotentialreductionin the mortgage rates as banks adopt this new based rate to price their mortgages. The lower mortgage rates combined with increased borrowingcoststransparencythroughtheKenyaBankersAssociation’sAnnualPercentageRateislikelytoseeanincreasedmortgageuptake.

10.7 Regulatory frameworkTheCapitalMarketsAuthorityintroducedaregulatoryframeworktopromotepoolingofinvestmentsinincomeproducingrealestateassetsthroughRealEstateInvestmentTrusts(REITs).Thisisexpectedtoencouragemobilizationofsavingsforinvestmentinthehousingsectoraswell as introduce additional capital markets instruments for retail and institutional investors.In2012,threeActsofParliamentwereenactedandcameintoforceon2ndMay2012–TheLandAct2012;LandRegistrationAct2012;NationalLandCommissionAct2012.Thenewlegislationhasbroughtchanges includingclassificationof land;ownershipof landbynon-Kenya citizens, creation of charges on land among other changes.

10.8 Analysis of demand for housing10.8.1 Rebounding EconomyKenya’s economic growth in the last 10 years and improving macroeconomic environment owing to prudent monetary and fiscal policies has led to greater economic stability, making the country a prime investment destination in the region. Furthermore, GoK’s investment in infrastructuredevelopmenthasopeneduppreviouslyinaccessibleregions.Acombinationofthesefactorsindicatesthattheoutlookfortheproperty market appears promising.



10.8.2 Growing Middle Income Class Putting Pressure on the Residential SegmentOver the last seven years, a number of Kenyans have joined the middle income class due to improved economic activities that have opened upnewjobopportunities.ThenumbersofKenyanswhohavejoinedthemiddleincomeclasshaveincreasedfrom2.9millionasat2006to5.2millionasatJuly2012.Thewagebillshavealsogrownovertheperiodthusleavingthemiddleincomeclasswithreasonabledisposalincometo invest in capital goods such as housing.

2006 2007 2008 2009 2010 2011 2012KenyanPopulation(million) 36.1 37.2 38.3 38.6 39.8 41.6 43%ofMiddleIncome 8.00% 10.00% 10.00% 10.00% 11.00% 12.00% 12.00%No.ofMiddleIncomeClass(million) 2.9 3.7 3.8 3.9 4.4 5.0 5.2

Source: KNBS, CIA World Factbook and NIC Capital Estimates

The growth in the middle income class on the back of improved economic conditions has resulted in increased demand of residential housing that so far outstretches the current market supply. Consequently, residential property mostly in the middle and upper income category has seenapricesurge.Thesalespriceshavegrownbyanestimated50.0%since2006,aclearindicationofinadequatesupplywithinthepropertymarket.

Figure 2: Hass Composite Sales Index

10.8.3 Remittances from abroadDiaspora remittanceshavemore than tripled fromUSD338m in2004 toUSD1,291m in2013drivenbyeconomicgrowth indevelopedeconomiesaswellasavailabilityofinvestmentopportunitiesinKenya.Partoftheremittanceshasremainedinvestedinthepropertymarket.This trend is expected to continue in future creating more demand within the housing sector.




10.8.4 East African Community HubTheadventoftheEastAfricanCommunitywillalsoaugerwellforKenyawithpreferenceofNairobiasthecentralhubfortheothermembercountries.ThiswillleadtointernationalcorporateswithinterestintheEastAfricanmarketsettingupshopsinKenya.ThiswouldatthesametimecreatenewopportunitiesbothforKenyansandforotherEastAfricans,leadingtofurtherdemandforhousingasmorepeoplelooktosettlein Nairobi and its neighboring towns.



11.1 BackgroundHousingFinanceCompanyofKenyaLimitedwasincorporatedon18November1965undertheCompaniesActasaprivatecompany.Atthetime of incorporation and for a long period thereafter, almost the entire business funding needs were derived from funds injection by the two mainshareholders,theGovernmentofKenya(GoK)andCommonwealthDevelopmentCorporationoftheUnitedKingdom(CDC).In1992,theCompanygotlistedattheNairobiSecuritiesExchange(NSE)withCDCandGoKretainingashareholdingof30.4%eachandKenyanindividualandinstitutionalinvestorstakingupthebalanceof39.2%.ThispositionhaschangedovertheyearstothecurrentshareholdingstructureinwhichtheGoKonlycontrols3.6%shareholdingwiththerestbeinginprivatehands.

In2002,theCompanyunderwentarebrandingthatsawachangeinitstradingnametoHousingFinance.Foroverforty-fiveyears,HousingFinance has been providing access to mortgage finance to Kenyans for the acquisition, development and improvement of property. Housing Finance has therefore played a key role in enabling Kenyans build, buy and own homes and wants to continue along this path with a greater emphasis on low to lower middle income cost housing solutions.

The low and middle income class forms a high proportion of the Kenyan population and the trend is expected to continue increasing. Increase in population especially in the urban and peri-urban areas pushes up the demand for housing units and hence more pressure is currently on the supply of affordable housing units for this populace. However, due to the fact that the supply of houses mainly depends on land, a challengehasalwaysbeenonthecostoflandanditsavailability.PricesoflandinurbanareascontinuedtoincreaseovertheyearsbeyondthereachofmanyKenyans.Thisisamajorobstacletowardsaffordablehousingdevelopments.Duetothecontinuedimprovementontheinfrastructure by the GoK especially on roads, electricity, and water, accessibility to the central business district will be easier and hence reducecongestioninCBDanditsproximity.ThiswillleadtoestablishmentoffurtherpropertydevelopmentsintheNairobimetropolitanarease.g. Kitengela and Ruiru.

11.2 Key Milestones

11 Overview of Housing Finance


11.3 AccoladesHousing Finance prides itself in having won the following prestigious awards:

2014• BestBankinProductInnovation(Makao)–1stRunner-Up• BestBankinMortgageFinance-2ndRunner-Up• BankwiththeLowestCharge-2ndRunner-Up• BestBankinProductMarketing(Ezesha)-2ndRunner-Up

2013• ThinkBusinessBankingAwards-BestBankinMortgageFinance

2012• ThinkBusinessBankingAwards-BestBankinMortgageFinance• ThinkBusinessBankingAwards-2ndBestBankinProductMarketing• AfricanRealEstateandHousingFinance(AREHF)Awards-BestRealEstateLendingInstitutioninAfricaAward

2011• BusinessInitiativeDirections(B.I.D)QualityCrownAward• ThinkBusinessCapitalMarketsAwards–Bondoftheyear

2010• BankingSurveyAwards-1stRunnersupintheBestBankinMortgageFinanceCategory• 3rdMombasaHomesExpo-1stOverallPosition• 3rdMombasaHomesExpo-OverallBestExhibitor• KisumuHomesExpo-1stPositionintheFinancialCategory• 11thHomesKenyaExpo-2ndRunnersupintheFinancialCategory

2009• BankingSurveyAwards-BestBankinProductInnovation(FortheMakaoProduct)• MombasaHomesExpo-1stPosition• KenyaHomesExpo-2ndPosition• KisumuExpo-1stPositionFinancialCategory• PrimeMediaExpo-1stPosition

2008• BuildExpo-1stPositionforbeingtheBestServiceProvider• BankingSurveyAwards-BestBankinProductInnovation(Forthe1stHopAccount)• HomesKenyaExpo-2ndPosition• HomesKenyaExpo-2ndRunnersup• PropertyandHomesLivingexpo-2ndPosition

11.4 Shareholding StructureThenumberofshareholdersasat31stOctober2014was26,534(December2013–27,790andDecember2012–25,620).Thetop10majorshareholders,basedontheGroup’sshareregisterasat31stDecember2014areasfollows:

Names Number of Shares %BritishAmericanInsuranceCompany(Kenya)Ltd 77,986,045 33.68EquityNomineesLimitedA/C00104 28,602,000 12.35National Social Security Fund 15,716,448 6.79SCBA/CPanAfricanUnitLinkedFD 9,098,700 3.93PermanentSecretaryTreasury 8,422,850 3.64



Names Number of Shares %JubileeInsuranceCompanyofKenyaLimited 2,514,772 1.09BAICo(Mtius)Ltd 2,183,900 0.94CFCStanbicNomineesLtdA/CNR1030833 1,984,050 0.86CFCStanbicNomineesLtdA/CNR1030852 1,761,650 0.76Kibuwa Enterprises Ltd 1,716,858 0.74Total Top Ten Shareholders 149,987,273 64.78

Note:EquityNomineesLimitedA/C00104aresharesownedbyBritishAmericanInsuranceCompany(Kenya)Limited.

Theshareholdersowning3%ormoreoftheissuedordinarysharesduringeachofthelastthreefinancialyearsto31stDecember2014areas follows:

Shareholder % Shareholding 2012

% Shareholding 2013

% Shareholding 2014

Equity Bank Ltd 24.84 24.78 0EquityNomineesLimitedA/C00104 10.13 10.11 12.35BritishAmericanInsuranceCompany(Kenya)Ltd 8.85 8.84 33.68National Social Security Fund 6.82 6.80 6.79PermanentSecretaryTreasury 3.65 3.65 3.64SCBA/CPanAfricanUnitLinkedFD 0 0 3.93Total 54.29 54.18 60.39

Distributionofshareholdersasat31.12.2014

Number of shares No. of shareholders No. of shares held % shareholding

1-500 9,535 2,548,125 1.10

501-1,000 4,249 3,660,784 1.58

1,001-10,000 11,596 31,898,655 13.77 10,001-50,000 798 15,970,368 6.90 50,001-100,000 146 19,338,795 8.35 100,001 – 1,000,000 8 5,738,800 2.48 Over 1,000,000 13 152,424,473 65.82 TOTAL 26,345 231,580,000 100%

TheBank’sshareholderprofileasat31stDecember2014isasshowninthefollowingtable.

Category No. of Shareholders No. of Shares % shareholdingLocal individual investors 25,256 61,207,267 26.436Local institutional investors 1,130 161,705,926 69.842Foreign individual investors 107 744,381 0.322Foreign institutional investors 15 7,193,200 3.107EastAfricaindividualinvestors 21 385,826 0.167EastAfricainstitutionalinvestors 5 293,400 0.127Total 26,534 231,580,000 100%



11.5 Branch NetworkHousing Finance is in the business of providing mortgages, financial services and a wide range of other related services to homeowners and propertydevelopersinKenya.AkeywayinwhichHousingFinancetakesthesevitalservicesclosertothepeopleisthroughthewidenetworkof14branchesspreadaroundsixmajorurbancentresinKenyaand2SalesandServiceCenters.

Town Location BranchNairobi Rehani House KenyattaAvenue/KoinangeStreet

GillHouse,MoiAvenue Gill HouseMaserah House Kenyatta MarketEprenCentre,Opp.BuruburuPoliceStation Buru BuruThika Road Mall Branch Thika RoadSameerBusinessPark Mombasa RoadSkypark, Waiyaki Way Westlands

Mombasa PermanentHouse,MoiAvenue Mombasa BranchNyali Centre Nyali Branch

Naivasha Buffalo Mall NaivashaNakuru AFCBuilding,GeoffreyKamauWay NakuruNyeri MeghiRutshiBuilding/KimathiWay NyeriEldoret KVDAPlaza,Oloo/UtaliiStreet EldoretKisumu Tivoli Centre, Court Road KisumuThika Uhuru Street ThikaMeru WestwindAnnexPlaza,TomMboyaStreet MeruKitengela NewtonHouse(Sales&ServiceCentre) KitengelaOngata Rongai MaasaiMall(Sales&ServiceCentre) Ongata Rongai Sales Centre

Inadditiontotheabovebranchnetwork,HousingFinancehave14brandedATM’s.WithHousingFinanceEasyCashDebitCard,customerscantransactatanyHousingFinance,andKenswitchbrandedATM’Stowithdrawmoneyatanyplace,anywhereandanytime.CustomerscanalsousetheHousingFinanceEasyCashDebitCardtopurchasegoodsatanymerchant’soutletswithaSenatorandKenswitchlogo.

11.6 Subsidiaries and Joint VenturesHousing Finance has four subsidiaries namely Kenya Building Society Limited, First Permanent (East Africa) Limited, Housing FinanceInsuranceAgencyLimitedandHousingFinanceFoundation.HousingFinancehastwojointventures,namely:PreciousHeightsLimitedandKahawaDownsLimited.

11.6.1 Kenya Building Society Limited (KBSL)KBSL is a wholly owned subsidiary of Housing Finance that engages in the development of houses for sale. Housing Finance has recapitalized andrestructuredKBSLwithanobjectiveofachievingandmaintainingmarket leadershipinpropertydevelopmentinKenya. InMay2012,HFmadeagrandreturntopropertysupplyandhascompletedthecontructionandsaleof162maisonetteesinKomarock.Ongoingprojectsinclude additional maisonettes and an elaborate commercial centre in Komarock.

11.6.2 First Permanent (E.A) LimitedThis is a wholly owned subsidiary of Housing Finance that currently does not carry out any trading activities.

11.6.3 Housing Finance Insurance Agency LimitedThisisawhollyownedsubsidiaryofHousingFinanceincorporatedin2013asaninsuranceagencyinthepropertyandinvestmentsmarket.ItcommencedoperationsinJuly2013.

11.6.4 Housing Finance Foundation LimitedThisisawhollyownedsubsidiaryofHousingFinanceincorporatedin2012astheCorporateSocialResponsibilityArmofHousingFinance.TheflagshipprojectoftheArmyof1MillionArtisans,aVision2030flagshipprojectwaslaunchedin2013.



11.6.5 Precious Heights LimitedIn2012,HousingFinanceenteredintoajointventureinthenameofPreciousHeightsLtdwithalandownerfordevelopmentofhousingunits(apartments)inRiruta,Nairobi.Theentityisjointlycontrolledwitheachpartyholding50%oftheshareholding.HousingFinancecontributedcapital which is equivalent to value of the land where the housing units will be developed.

11.6.6 Kahawa Downs LimitedIn2013,HousingFinanceenteredintoajointventureinthenameofKahawaDownsLtdwithalandownerfordevelopmentofhousingunits(apartments)inKahawaWendani,Nairobi.Theentityisjointlycontrolledwitheachpartyholding50%oftheshareholding.HousingFinancecontributed capital which is equivalent to value of the land where the housing units will be developed.

11.7 EmployeesAsat31stOctober2014,theGrouphadatotalworkforceof418employeescomprising337permanentstaffand81temporarystaff.Thebreakdown by entity is shown below:

Organization Permanent TemporaryHousing Finance Company of Kenya Limited 325 73Kenya Building Society Limited 4 1FirstPermanent(E.A.)Limited - -HousingFinanceInsuranceAgencyLimited 4 1Housing Finance Foundation Limited 4 6Total 337 81

11.8 Products and ServicesHousingFinance,asaleadingmortgagefinanceinstitutioninKenyawith25.6%marketshare,hashelpedmanyKenyansturntheirdreamsinto homes all over the country by constantly developing innovative and pioneering products and services designed to meet the unique needs oftheKenyanMarket.TheCompanywashonouredwithanawardofbeingthebestbankinproductinnovationin2008and2009.Thiswasasa result of 1st Hop and Makao products launch in the market. Furthermore, the Company has a team dedicated to product innovation which isledbytheProductDevelopmentManager.Theteamiscontinuallyinvolvedinresearchandgatheringofmarketintelligencewhichisakeycomponent of developing suitable products for the Kenyan public.HousingFinancelaunchedtwokeyproductsin2009,namelyCross-oversavingsaccountandHomeFreedommortgageproductalongsideits other products. The company continually strives to come up with innovative products which are most suitable for its clients and this has resultedinHousingFinancewinningtheBestBankinMortgageFinanceatthe2010bankingsurvey.Housing Finance products can generally be categorized as follows:• RetailProducts;• MortgageProducts;and• ProjectFinance

The table below outline the features of Housing Finance products:

Retail BankingTransactional AccountsCurrent AccountThis is the flagship product for the transactional accounts. It allows customers unlimited access to funds through various channels but primarilythroughachequebook.TheHFCurrentAccountisuniqueinthatitlinkscustomerstoaone-stop-shoponpropertymatters.

Transactional AccountThis account targets the young aspiring low to medium income earners who are actively engaged in any economic activity and is designed to be affordable to the vast majority of the populace.

Lengo AccountThe Lengo account is an interest earning transactional account meant for customers with a relatively long-term horizon.




Savings AccountsCrossover AccountAsavingsaccount that earns relativelyhigher interest andmeant toencouragecustomers to save in readiness for transition tohomeownership. Customers are able to earn loyalty points redeemable for various items.

1st Hop AccountThis is a product that is uniquely designed for the Kenya who desires to save for a home. It aims to promote savings for the sole purpose of homeownership.HOSPisasavingsplanestablishedundertheCap470(IncomeTaxAct)ofthelawsofKenya.

Housing Development BondTheHousingDevelopmentBondisdesignedfortheindividualsaverwhowillnotneedtoaccesshisorhersavingsforthedurationoftheplan.HDBaccountholdersdeclaretheamounttobeinvestedasalumpsum,fixedforaperiodtobeagreed.Thelongertheagreedterm,thehigher the interest paid based on the interest rate trends.

Treasure AccountTheTreasureAccountisdesignedtoallowparentsandguardianstoputmoneyasidefortheirchildren.Thisallowsthemoneytogrowintoasum that will cushion them from the growing cost of education and also provide their young children with a good start in adult life.

Fixed Term DepositThis account is designed for both individuals and institutions that will not need to access their savings for the duration of the saving plan.Credit facilitiesPersonal loansThese are loan products designed to meet a wide range of needs such as financing an education, home improvement, medical emergencies among others

Asset FinanceThis product enables the customer to acquire assets for your business and personal use such as New and pre-owned vehicles, Tractors and related implements, Medical and laboratory equipment, School buses, Industrial, Contractor and office equipment.

Insurance Premium FinancingThis product enables customers to pay your insurance premium in installments reducing the challenge involved in raising the full premium amount upfront.

Trade Finance ProductsTheseproductsfacilitateSMEstradinglocallyandinternationally.TheseincludeLettersofCredit,LPOfinancing,invoicediscountingamongothersMortgageswner Occupier MortgageThis is a loan given to a borrower who will occupy the unit property. In addition to the competitive rates we offer, the tax laws of Kenya also offerreliefoninterestforowneroccupiedResidentialmortgages(tobeclaimedbyyouthroughyourownannualtaxreturns).

Plot Purchase MortgageThis loan helps satisfy the aspirations of many Kenyans by providing access to funds that will contribute toward the purchase of a plot. Dependingonthelocation,weprovideloansfortheplotssubjecttoamaximumplotsizeandloanamount.Theloansforplotsareavailableonlyforamaximumtenureof5years.

Construction MortgagesThis is a facility that allows those who already own a plot to borrow and build a residential unit on it. For construction loans, we require that the relevant authorities approve the plans and there will be conditions relating to disbursement in accordance with our guidelines.

Investment Residential MortgageThisloanfacilityisforthoseindividualswhowanttobuyanotherhometojoininthealreadyexistingstableofinvestments.Andyoudon’tnecessarilyhavetohavefinishedthefirstmortgage(conditionswillapply)toobtainthisnextmortgage.



MortgagesOwner Occupier MortgageThis is a loan given to a borrower who will occupy the unit property. In addition to the competitive rates we offer, the tax laws of Kenya also offerreliefoninterestforowneroccupiedResidentialmortgages(tobeclaimedbyyouthroughyourownannualtaxreturns).

Plot Purchase MortgageThis loan helps satisfy the aspirations of many Kenyans by providing access to funds that will contribute toward the purchase of a plot. Dependingonthelocation,weprovideloansfortheplotssubjecttoamaximumplotsizeandloanamount.Theloansforplotsareavailableonlyforamaximumtenureof5years.

Construction MortgagesThis is a facility that allows those who already own a plot to borrow and build a residential unit on it. For construction loans, we require that the relevant authorities approve the plans and there will be conditions relating to disbursement in accordance with our guidelines.

Investment Residential MortgageThisloanfacilityisforthoseindividualswhowanttobuyanotherhometojoininthealreadyexistingstableofinvestments.Andyoudon’tnecessarilyhavetohavefinishedthefirstmortgage(conditionswillapply)toobtainthisnextmortgage.

Vuna Hela MortgageThroughregularrepayment,oneacquires‘equity’intheirmortgageequivalenttotheamountalreadypaidup.Acquiredequitycanbeavailedfor further property development or other purposes. Money is lent on the value of the equity.

Cyclical MortgageThisisaproductthatofferscustomersconvenienceofrepayingtheirmortgagesinpre-agreedcycles(bi-Monthly,quarterly,semi-annuallyetc.) that correspond to their income receipts. This product is especially suited for those in the informal sector or professionals such as consultants whose income flow may vary from month to month. This is a major diversion from traditional mortgages that suit the salaried employees in the formal sector.

MakaoThis is a hassle free building solution that aims to help potential home owners who already own a piece of land to build a home conveniently and cost-effectively. The Makao product provides an end to end solution for the construction of houses involving a consortium of professionalsintheconstructionindustry.ThisteamconsistsofArchitects,ProjectManagers,QuantitySurveyors,Structuralengineers,LegalAdvisors,ServicesEngineersandContractors,whoallworktogethertoensuredeliveryofyourpreferredhome.

Project FinanceThis is a specialized solution designed to cater for both small and large property developers who wish to put up multiple units either as build to rent or build to sell. Financing is normally based on the anticipated cash inflows or income of the property being developed. Lending is up to70%ofthetotalprojectcost(inclusiveofthevalueofland.)


11.9 Group Financial Performance and Statutory Ratios11.9.1 Group Statement of Profit or Loss and other Comprehensive Income

( KShs. ‘000) 2009 2010 2011 2012 2013 Q3 2014Interest Income 1,804,122 2,475,814 3,464,079 5,068,815 5,440,059 4,570,919Interest Expense (656,579) (1,074,826) (1,562,517) (3,118,780) (2,886,682) (2,386,412)NET INTEREST INCOME 1,147,543 1,400,988 1,901,562 1,950,035 2,553,377 2,184,507Fees and Commission revenue 169,092 168,479 211,870 210,884 245,940 286,229Fees and Commission expense - - - - - -NET FEES AND COMMISSION REVENUE 169,092 168,479 211,870 210,884 245,940 286,229Trading revenue - - - - - -Other operating income 57,810 85,717 79,749 73,003 1,122,430 406,051NON-INTEREST REVENUE 226,902 254,196 291,619 283,887 1,368,370 692,280TOTAL OPERATING INCOME 1,374,445 1,655,184 2,193,181 2,233,922 3,921,747 2,876,787Loans impairment charges (225,487) (238,445) (186,297) (197,766) (280,893) (273,279)INCOME AFTER IMPAIRMENT CHARGES 1,148,958 1,416,739 2,006,884 2,036,155 3,640,854 2,603,508Staff costs (388,687) (489,608) (601,450) (684,429) (804,060) (732,515)Other operating expenses (409,153) (366,103) (429,639) (444,095) (1,356,438) (826,045)OPERATING EXPENSES (797,840) (855,711) (1,031,089) (1,128,524) (2,160,498) (1,558,560)PROFIT BEFORE TAX 351,118 561,028 975,795 907,631 1,480,356 1,044,947Income tax expense (116,942) (181,497) (353,517) (164,297) (485,160) (335,868)PROFIT FOR THE PERIOD/ YEAR 234,176 379,531 622,278 743,334 995,196 709,079

11.9.2 Group Statement of Financial Position

(KShs ‘000) 2009 2010 2011 2012 2013 Q3 2014ASSETSCash and bank balances 319,839 420,390 384,034 1,454,359 1,719,004 3,040,470Placementswithotherbanks 2,106,419 7,866,266 4,724,183 6,395,958 6,878,601 7,093,247Investment in Government securities 509,507 539,835 379,847 723,616 288,167 276,067Mortgageadvancestocustomers(Net) 14,495,208 19,503,400 25,222,836 30,293,711 35,215,897 43,273,307Other assets 808,386 948,505 1,160,016 2,088,933 3,287,708 3,233,783

18,239,359 29,278,396 31,870,916 40,956,577 47,389,377 56,890,874LIABILITIESCustomers’ deposits 12,219,449 15,943,341 18,671,586 22,937,649 26,507,204 33,146,542Other liabilities 220,443 447,043 329,927 784,326 587,545 920,156TaxPayable 26,091 26,337 135,934 - 71,471 18,036Borrowed Funds 1,700,000 8,604,269 8,016,105 12,097,358 14,363,650 16,701,904

14,165,983 25,020,989 27,153,552 35,819,333 41,529,870 50,786,638SHAREHOLDERS’ EQUITYShare capital 1,150,000 1,150,000 1,152,125 1,153,000 1,155,350 1,157,600Reserves 2,872,626 3,056,657 3,514,489 3,933,494 4,653,407 4,895,886Shareholders’ income notes and loans 50,750 50,750 50,750 50,750 50,750 50,750

4,073,376 4,257,407 4,717,364 5,137,244 5,859,507 6,104,236TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

18,239,359 29,278,396 31,870,916 40,956,577 47,389,377 56,890,874



11.9.3 Regulatory Capital and Other RatiosThe Central Bank of Kenya sets and monitors capital requirements for banks and other non-bank financial institutions. In implementing the current capital requirements, CBK requires the Company to maintain a prescribed ratio of core capital to total risk weighted assets and total capital to Total risk weighted assets. This requirement is calculated for market risk in the banking portfolio of Housing Finance. The regulatory capital is analysed in two tiers:• Tier1capitalincludesordinarysharecapital,sharepremium,perpetualbonds,retainedearnings,translationreserveandminorityinterest

after deduction of goodwill and intangible assets and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

• Tier2capital includesqualifyingsubordinated liabilities,collective impairmentallowancesand theelementof the fairvalue reservesrelating to unrealized gains on equity instruments classified as available for sale.

Housing Finance’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Company appreciates 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.

The Company and its individually regulated operations have complied with all externally imposed capital requirements throughout the year. There have been no material changes in the Company’s management of capital during the year.

Housing Finance’s capital adequacy ratios have been well above the minimum prudential requirements. This has been partly attributed to the rightsissueexerciseconductedin2008.

11.10 Prudential Ratios 2009 2010 2011 2012 2013 Q3 2014Corecapital/TotalDepositLiabilities(%) 23.6 20.0 19.9 18.2 15.0 12.9MinimumStatutoryRatio(%) 8.0 8.0 8.0 8.0 8.0 8.0CoreCapital/TotalRiskWeightedAssets(%) 31.1 24.4 21.4 19.1 13.8 10.3MinimumStatutoryRatio(%) 8.0 8.0 8.0 8.0 8.0 8.0TotalCapital/TotalRiskweightedAssets(%) 34.1 48.7 34.0 29.5 21.6 15.3MinimumStatutoryRatio(%) 12.0 12.0 12.0 12.0 12.0 12.0LiquidityRatio(%) 23.9 55.7 29.1 36.8 33.1 30.3MinimumStatutoryRatio(%) 20.0 20.0 20.0 20.0 20.0 20.0

11.11 Capital Adequacy Ratios

2009 2010 2011 2012 2013 Q3 2014Deposits/TotalAssets 67.0% 54.5% 58.6% 56.0% 55.9% 58.3%Shareholders’Funds/TotalDeposits 33.3% 26.7% 25.3% 22.4% 22.1% 18.5%Shareholders’Funds/TotalAssets 22.3% 14.5% 14.8% 12.5% 12.4% 10.8%

11.12 Asset Quality Ratios

2009 2010 2011 2012 2013 Q3 2014Non-PerformingLoans/Loans&Advances 12.1% 7.4% 6.2% 7.6% 9.0% 9.8%Provisions/NonPerformingLoans 27.8% 30.0% 24.4% 16.4% 16.3% 17.0%Non-PerformingLoans/TotalAssets 10.0% 5.0% 5.0% 5.7% 6.8% 7.6%Provisions/Loans&Advances 3.4% 2.2% 1.5% 1.2% 1.5% 1.7%



11.13 Earnings Ratios

2009 2010 2011 2012 2013 Q3 2014Cost/Income 58.0% 51.7% 47.0% 50.5% 55.1% 54.2%ProfitMargin 17.0% 22.9% 28.4% 33.3% 25.4% 25.0%Return on Equity 6.1% 9.1% 13.9% 15.1% 36.2% 24.0%ReturnonAssets 1.4% 1.6% 2.0% 2.0% 4.5% 2.8%

11.14 Liquidity Ratios

2009 2010 2011 2012 2013 Q3 2014Loans&Advances/Deposits 118.6% 122.3% 135.1% 132.1% 132.9% 130.6%Loans/TotalAssets 79.5% 66.6% 79.1% 74.0% 74.3% 76.1%LiquidAssets/TotalAssets 16.1% 30.1% 17.2% 20.9% 19.1% 18.3%

11.15 Strategy and Prospects/ Future Outlook

11.15.1 Market Share and Volume growthHousing Finance has positioned itself as a one stop shop for property solutions over the years. Housing Finance’s strategy is to provide Kenyan society with home acquisition solutions through mortgage financing. Two key pillars to this achievement are funding and supply of houses. The supply side will ensure that there are houses in the market which the Kenyan populace can afford. In addition, the GoK vision 2030blueprinthasunderthesocialpillaridentifieddecenthousingasonekeyinitiativethatmustbeachievedforKenyatobecomeamiddleincomecountryby2030.

HousingFinanceseekstohave300,000activeinvestmentcustomersand25,000propertycustomersby2016.TheCompanyintendstocreate and retain new and existing markets through:a) Formationofstrategicpartnerships,collaborationsandjointventureswithpersons/institutionswithhugetractsoflandwhereHousing

Finance can leverage on to develop substantial number of housing units.b) Increase outreach and access to property and investment solutions, nationally and regionally through:• PhysicalChannels

− 10 New Branches within 3 years− 100 sales and service centers within 4 years− 1,000Agentswithin5years

• Virtualchannels− 30%ofcustomerbasebothforinformationalandtransactionalpurposes

• InformalChannels− AnnualMajorExpos− Semi-annual property seminars− QuarterlyBarazas− 20countyplanninggroups

• Regionalpresence− UtilizationofpartnershipstogainaccessinAfrica.− Physical–2BranchesinAfricaby2016

c) Diversification:HousingFinanceasaonestopshopforpropertysolutionsshallfacilitatewealthcreation&managementtoitscustomerswithin the property sector through:

• Settingupofanadvisoryunit• Wideningtherangeofcustomerofferingacrossthepropertysector

− Bancassurance;− Womenfriendlysolutions;− PropertyUnitTrusts;− TenantPurchase;and− Forex.



• Increasingcustomerproductusageratioto3percustomer:HousingFinancewillinitiatedialogueandlobbywithbothgovernmentsandother relevant authorities to ease the property acquisition process for customers as well as:− Initiate20MOU’swithutilitycompaniesandcounties;− Setthestageforpolicyreforminthepropertyandhousingsector;and− Lobby with the Government to reduce conveyance period.

• Establishaproperty transactionsexchangecentre (clearinghouse): Thisservice isexpected toearnHousingFinance feesofKES100.0mn per annum from:− Partnershipforsaleofbuildingmaterials;− PropertydealstransactedthroughHF;and− PropertyprojectmanagementforSaccos,Selfhelpgroups,CommunityBasedOrganization,individuals.

11.15.2 Involvement in the supply side of residential propertyHousing Finance intends to raise its involvement on the supply side of residential middle and lower income housing, which will in turn create significant mortgage lending opportunities for the company. The housing supply strategy is projected to accelerate HF’s established presence asamajorsupplierofaffordablehousing;spearheadingappropriateproductdevelopmentfortheinformalsectorandmiddletolowincomeearners. HF aims to be a point of reference and a benchmark in the real estate market by:• Accessingstrategiclandbankscountrywideanddevelopinghousingestatesthrough:

− HFowneddevelopments;− Jointventures;− PublicPrivatePartnerships(PPP’s);− BuildOperateTransferprojects;and− Site, service and outright sale of accessed land.

• CommenceandcompleteoneHFownedhousingestatewithpartemphasisonalternativetechnology:− Complete1,000unitsin2014andanother1,000unitsin2016.

• Completeprojectsthroughjointventures.HousingFinancecurrentlyhastwojointventuresunderwayandseekstosignajointventureeveryyeartocomplete1,840unitsby2016:− 360unitsin2013;− 440unitsin2014;− 440unitsin2015;and− 600unitsin2016.

• BuildOperateTransferwithanemphasisonalternativetechnologyisalongtermbusinessopportunityforHousingFinance:− There are untapped opportunities from institutions for provision of warehouses, tuition blocks and hostels. HF is already in

discussions with several institutions of higher learning.• HousingFinanceseekstoestablish1,000unitsthroughPublicPrivatePartnershipsby:

− AddresshousinggapstothepublicandGovernmentinstitutions(Prisons,Police,CivilServantsHousingSchemes);− Countiesoutreach;and− InfluencingoperationsofthePPPcommittee.

• Furthermore,theCompanywillbuilditscapacityforprojectmanagementandstructuringpropertyinvestmentsthroughtheengagementin partnerships with institutions providing services in the real estate sector.



11.15.3 FundingInmid-2013, theCentralBankofKenyaadvised the realestatesector toseekalternativesourcesof funding topreventabankingcrisisthat would occur if too much lending went to the sector and housing prices dropped sharply. Housing Finance seeks to mobilize stable and optimum priced funding to support desired business growth• HousingFinanceseekstodiversifyitssourcesoffundsforbusinessgrowthsustainabilityandwilluseinnovativestructuresincluding

covered bonds, REIT’s etc.• Monitortheraisingofretaildepositstoenableprovisionofaffordablecustomersolutions.HF’stargetmarketiscomposedofplayers

both in the Company’s primary and secondary ecosystems as well as the customers’ own ecosystems including Medium to high net-worth individuals, SME’s registered or doing business in own name and their ecosystem and Corporates and their ecosystems.



11.16 Organization StructureTheorganizationstructureofHousingFinanceasat31December2014isasfollows:


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12.1 Responsibilities of the BoardThe Board of Housing Finance Company of Kenya Ltd is responsible for the overall management of the Group and is committed to ensuring that its business and operations are conducted with integrity and in compliance with the law, internationally accepted principles and best practices in corporate governance.

In recent years various recommendations have been made in several legal and professional publications in an attempt to determine the most appropriate way for companies to be structured to achieve the highest standards of corporate governance. The Board is committed to fullcomplianceofalltherelevantlawsincludingTheGuidelinesonCorporateGovernance(CBK/PG/02)issuedbytheCentralBankofKenyainJanuary2013underSection33(4)oftheBankingActandTheGuidelinesonCorporateGovernancePractisesbyPublicListedCompaniesinKenyaissuedbytheCapitalMarketsAuthorityinMay2002underCap.485AoftheCapitalMarketsAuthorityActandHousingFinanceCompany of Kenya Limited confirms full compliance with the same.

The Board is responsible for drawing and implementing strategies for the long-term success of the Company as well as carrying out the fiduciary duty of monitoring and overseeing the activities of management. To this end, the Board meets regularly and has a formal schedule of matters reserved for its decision. These matters include determining and reviewing the strategy of the Company and the Group and overseeing the Group’s compliance with statutory and regulatory obligations.

NoticesandagendaforallBoardmeetingsarecirculatedtoallDirectorsonatimelybasistogetherwiththerespectivedocumentsfordiscussion.

12.2 Composition of the BoardTheBoardiscomposedofsevennon-executiveDirectors,anindependentChairmanandoneexecutiveDirector.Mr.FrankIreriistheManagingDirector.Atleastathirdofthedirectorsareindependentandnon-executive.TheDirectorshaveawiderangeofskillsandexperienceandeachcontributes independent judgement and knowledge to the Board’s discussions.

Onappointment,eachDirectorisprovidedwithacomprehensiveandtailoredinductionprocesscoveringtheGroup’sbusinessandoperationsand provided with information relating to their legal and regulatory obligations.

Allnon-executiveDirectorsarerequiredtosubmitthemselvesforre-electioninaccordancewiththeCompany’sArticlesofAssociation.

12.3 Board and Management CommitteesThe Board has constituted 6 sub-committees chaired by Non-Executive Directors, namely Audit, Risk Management, Nomination andRemuneration,Credit,StrategyandProcurement.

12.3.1 Audit CommitteeThisiscomposedofthreenon-executiveDirectors:• DavidAnsell (Chairman)• Prof.ShemMigot-Adholla• Dr.BensonWairegiAll the members of this committee are non-executive directors. The Board considers that each member has appropriate professionalqualifications and brings broad experience and knowledge of financial reporting to the Committee’s deliberations.

The Committee reviews and monitors the integrity of the Group’s annual and interim financial statements, circulars to shareholders and any formal announcements relating to the Group’s financial performance, including significant financial reporting judgements contained within them. The Committee also reviews the appropriateness of the Group’s accounting policies, recommendations for provisions against bad or doubtful loans and other credit exposures. Ultimate responsibility for the approval of the annual and interim financial statements rests with the Board.

Atleastonceayear,theAuditCommitteemeetsseparatelywiththeexternalauditorandtheHeadofInternalAuditwithoutmanagementbeingpresent to discuss any issues arising from the audit.InrelationtotheInternalAuditfunction,theCommittee’sresponsibilitiesinclude:• MonitoringandassessingtheroleandeffectivenessoftheInternalAuditfunctionandreceivingreportsonthesematters;and• Consideringtheappointment,resignationordismissaloftheHeadofInternalAudit.

12 Corporate Governance, Board of Directors and Senior Management



In relation to the Group’s external auditor, the Committee’s responsibilities include:• ConsideringandmakingrecommendationstotheBoardontheappointment,re-appointment,resignationordismissaloftheexternal

auditor;• Approvingthetermsofengagement,natureandscopeoftheaudit;and• Reviewingthefindingsoftheauditincludinganymajorissuesthataroseduringthecourseoftheaudit.

12.3.2 Risk Management CommitteeThiscommitteeiscomposedofthreenon-executiveDirectorsandtheManagingDirector:• Prof.ShemMigot-Adholla (Chairman)• AdanMohammed• ConstanceGakonyo

The Risk Management committee’s primary responsibility is to ensure the quality, integrity and reliability of the Group’s risk management framework. The Committee reviews and assesses the integrity of the risk control systems and ensures that the risk policies and strategies are effectively managed.

The basic principles of risk management that are followed and enforced through the Risk Management committee include:• TheBoardassumestheultimate responsibility for the levelof risks takenbytheGroupand is responsible tooverseetheeffective

implementationoftheriskstrategies;• Theorganizationalriskstructureandthefunctions,tasksandpowersoftheemployees,committeesanddepartmentsinvolvedinthe

riskprocessesarecontinuouslybeingreviewedtoensureclarityoftheirrolesandresponsibilities;• Riskissuesaretakenintoconsiderationinallbusinessdecisions;• Identifiedrisksarereportedinatransparentandtimelymannerandinfulltotheresponsibleseniormanagement;and• Appropriate,effectivecontrolsexistforallprocessesentailingrisks.

12.3.3 Nomination and Remuneration CommitteeThemembersoftheNominationandRemunerationcommitteearetheManagingDirectorand:• PeterMunga(Chairman)• Dr.BensonWairegi• ConstanceGakonyo• GladysOgallo

Allthecommitteemembersareindependentnon-executivedirectorswiththeexceptionoftheManagingDirector.The Committee’s responsibilities include: • Reviewingthestructure,sizeandcompositionoftheBoardtoensuretheoptimumbalanceofskills,knowledgeandexperiencetaking

intoaccounttheopportunitiesandchallengeswhichfacetheGroup;• IdentifyingandnominatingfortheapprovaloftheBoardasuitablecandidateforanyBoardvacancywhichmayarise;• MonitoringthedevelopmentofsuccessionplansfortheGrouprelatingtoseniorexecutivemanagement;• ReviewingtheemolumentsofbothexecutiveandnonexecutiveDirectors,andseniormanagement.

This Committee carries out a peer and self-evaluation of the Board and its committees to assess their contribution and also to ensure that there is the requisite mix of skills and experience available to effectively discharge their duties.

12.3.4 Credit CommitteeThisisaBoardCommitteecomprisingofthreeNon-ExecutiveDirectorsandtheManagingDirector:• DavidAnsell (Chairman)• SteveOMainda• AdanMohammed

The primary responsibilities of the Board Credit Committee are:• ReviewandoverseetheoverallCreditpolicyandensurethattherisklendinglimitsarereviewedannuallyasandwhentheenvironment

sodictates;.• DeliberateandconsiderloanapplicationsbeyondthelimitsofManagementLendingCommittee;


• Direct,monitor,reviewandconsiderallissuesthatmaymateriallyimpactonthepresentandfuturequalityoftheCompany’screditriskmanagement;

• Ensurethatthecreditpolicysetsoutacceptablelevelsofexposuretothevariouseconomicsectors,currenciesandmaturitiesaswellas target markets, diversification and concentration of the credit portfolio.

12.3.5 Board Strategy CommitteeThiscommitteeiscomposedoffourNon-ExecutiveDirectorsandtheManagingDirector.• Dr.BensonWairegi (Chairman)• PeterKMunga• AdanMohammed• SteveMainda• GladysOgallo

The principal roles of the committee are to:• OverseetheimplementationoftheGroup’sstrategy;• Approveandparticipateintheannualstrategyreviewprocess;• Approve all key strategic initiatives including but not limited to; appointment of consultants, capital & revenue expenditure and

investments.

12.3.6 Board Procurement CommitteeThiscommitteeiscomposedofTwoNon-ExecutiveDirectorsandtheManagingDirector.• PeterKMunga(Chairman)• AdanMohammed

The principal roles of the committee are to:• Ensurethattheprocessesforprocurementcomplywiththeprocurementpoliciesandproceduresmanualandareanchoredonquality,

speedofdeliveryandprice;• Ensureeffectiveandtimelyimplementationofspecialprojectsthrougheffectiveprocurement,andthattheseareinlinewiththeGroup

strategy.

12.4 Attendance of Individual DirectorsThe following table shows the number of Board meetings held during the period and the attendance of individual directors:

Board meetings attendance for the ten month period ended 31 October 2014

Board meetings Total attendance

Date 18/2 22/4 15/7 24/10Steve Mainda √ √ √ √ 4DavidR.Ansell √ √ √ √ 4Benson Wairegi √ √ √ √ 4PeterMunga √ √ √ √ 4Prof.ShemMigot-Adholla √ √ √ √ 4AdanD.Mohamed √ √ √ √ 4Gladys Ogallo √ √ √ √ 4Constance Gakonyo N/A X √ X 1Frank Ireri √ √ √ √ 4

√ Attendedx Absent with apologyN/A Meeting occurred prior to the joining date

AnumberofManagementcommitteeshavebeenestablishedbytheBoardtooverseeoperationsinsomecriticalareas.TheseareExecutivecommittee(EXCO),AssetandLiabilitycommittee(ALCO),RiskManagementcommittee,Lendingcommittee,ArrearsManagementcommittee,



InformationTechnologySteeringcommitteeandManagementStrategycommittee(STRATCOM).TheBoardappointsothercommitteesasandwhen necessary.

12.5 Directors’ RemunerationDirectoremolumentssummary;

Kshs ‘000’ 31st December 2013 31st October 2014Fees 2,435 3,296Expenses 9,039 12,383AsExecutives 59,009 60,676

12.6 Directors’ Shareholding NoneoftheDirectorsindirectlyordirectlyholdinexcessof1%ofthesharecapitaloftheIssuer.

12.7 Directorship in Other Entities DirectorsoftheCompanythatserveontheboardsofotherpubliclylistedcompaniesasoutlinedbelow:

Director Public Listed Entity RoleSteve Mainda Sasini Limited Non-executiveDirectorFrank Ireri FTG Holdings Limited Non-executiveDirectorDr.BensonWairegi British-American Investments Company

(Kenya)LimitedGroupManagingDirector

Equity Bank Limited ViceChairman,Non-executiveDirectorPeterMunga Equity Bank Limited Chairman,Non-executiveDirector

British-American Investments Company(Kenya)Limited

Non-executiveDirector

Prof.ShemMigot-Adholla Equity Bank Limited Non-executiveDirectorDavidR.Ansell Equity Bank Limited Non-executiveDirector

The Company hereby confirms that the Chairman does not hold a similar position in more than two public listed companies and that none of the directors holds a similar position in more than five public listed companies.

12.8 Board of Directors CurrentlytheCompany’sdirectorsareappointedbytheshareholdersasprovidedintheArticlesofAssociationoftheCompany.Abriefprofileof the Company’s directors at the date of the Information Memorandum is as follows:

Steve Mainda (EBS)(Non-Executive,Independent)Age:68years

Mr.SteveMainda(EBS)wasappointedDirector inJuly2009.Hehasbroadandextensivefinancial,insurance, investment, educational and management background in the Financial Services industry.

Mr.MaindaisaFellowoftheInstituteofDirectorsofLondonandholdsM.AandB.ADegreesfromtheUniversitiesofPrincetonandCambridge.

He is Chairman of Housing Finance Company of Kenya Ltd. and also the Chairman of Insurance RegulatoryAuthority.Heholdsdirectorships inSasiniLtd.,RyceEALtdandKKGroupofCompaniesamong others.



Frank Ireri (EBS)(Executive,Non-Independent)Age:52years

FrankwasappointedManagingDirectorofHousingFinanceinJuly2006.Heisaseasonedbankerwithmorethan20yearsstandinghavingjoinedfromBarclaysBankAfricawherehewasHeadofBarclayCardAfricaOperations,coveringKenya,Botswana,Zambia,Mauritius,SeychellesandEgypt.Priortothis,heworkedwithCommercialBankofAfricaandCitibank.Duringhisbankingcareer,hehashadinternationalexposureinPoland,SriLankaandZambia.

Frank is anHonorary Counselmember of AIESEC, amember of the Sub-Saharan Africa Chamber ofCommerceAdvisoryBoard,amemberoftheHabitatforHumanityKenyaBoardandamemberoftheMadison‘Who’sWho’.In2011,theformerKenyanHeadofState,H.E.MwaiKibakiconferreduponhimtheElderoftheBurningSpear(EBS)inrecognitionofhisdistinguishedservicerenderedtotheNation.

Prof. Shem Migot-Adholla(Non-Executive,Independent)Age:72years

ShemE.Migot-Adholla isadevelopmentsociologistwith long inter-disciplinaryresearchexperiencein many countries. He is a private consultant on agriculture and rural development, land policy reform andenvironmentalissuesbasedinNairobi,Kenya.HeiscurrentlyamemberoftheBoardofDirectorsof Equity Bank Kenya and serves as Chairman of Equity Bank South Sudan and Center for Corporate Governance,Nairobi,aswellastheInstituteofPolicyAnalysisandResearch(IPAR).HeisamemberoftheBoardofDirectors,HousingFinanceCompanyofKenya,andtheKenyaWildlifeTrust,acharitablefundbased inNairobi.HehaspreviouslyservedasVice-Chairmanof theBoardofDirectors,KenyaWildlifeServicebetween2004and2007andwasLeadSpecialistonLandPolicyandAdministrationforAfricaRegionattheWorldBankHeadquarters,Washington,between1986and2004.Duringthatperiod he also served (on secondment from theWorld Bank) as Permanent Secretary,Ministry ofAgricultureandRuralDevelopment,GovernmentofKenya,wherehewasresponsibleforformulationand implementation of agricultural and rural development policy as well as general oversight of 38 state corporations.EarlierhewasAssociateResearchProfessorat the Institute forDevelopmentStudies(IDS), University of Nairobi and has numerous publications focusing on land issues, pastoralism,farmers’ institutions and rural development. He was also involved in a number of feasibility studies, projectreviewsandevaluationsinmanypartsKenyaandEastAfrica.HisworkingexperiencespansmanyAfricancountriesaswellasHaiti,KyrgyzRepublicandseveralAsiancountries.

Dr. Benson I. Wairegi (EBS)(Non-Executive,Independent)Age:62years

BensoniscurrentlyGroupManagingDirectorofBritish-AmericanInvestmentsCompany(Kenya)Ltd.HejoinedBritish-AmericanInsuranceCompanyLtd.in1980astheChiefAccountant.HehadpreviouslyworkedwithPriceWaterhouse,theforerunnerofPricewaterhouseCoopersfor3years.Benson’sotherdirectorships are in Equity Bank Ltd. and is currently Chancellor of Kenyatta University.

BensonholdsaBachelorofCommercedegreeinAccountingandanMBAinStrategicManagement.HeisamemberoftheInstituteofCertifiedPublicAccountantsofKenya(ICPAK).

David R. Ansell(Non-Executive,Independent)Age:68years

DavidAnsellwasappointedDirectorinOctober2001.HeretiredfromCitibankinFebruary2001,after30yearsofService, includinganassignmentasDirectorofCitibank’sAfricanBusinessesbased inNairobi.

HewasalsopreviouslyManagingDirectorofEcobankTransnationalInc.basedinLome,Togo.HealsoservesontheBoardofDirectorsofEquityBankUgandaandAdvisoryBoardofthePrivateEquityNewmarketsfundmanagedbyBankInvest,thelargestAssetManagerinDenmark.

David Ansell has a B.A (Mathematics) from theUniversity ofNorth Carolina andMasters degree inFinance from Thunderbird Graduate School of International Management.

Peter K. Munga (EBS)(Non-Executive,Independent)Age:71years

Mr. Munga is the Chairman of Equity Bank Limited, Chairman of National Oil Corporation (NOCK),ChairmanofMicro-EnterpriseSupportProgrammeTrust(MESPT)andadirectorRockfellerFoundation,Equatorial Nut Processors and British-American Investments Company (Kenya) Ltd. He is anenterprisingbusinessmanandrunsthePioneerGroupofSchools. HeisaCertifiedPublicSecretarywith vast experience in both public and private sector management and holds a diploma in Human ResourcesandFinancialManagement.Mr.MungaisaretiredDeputySecretary.



Adan D. Mohammed (EBS)(Non-Executive,Independent)Age:51years

Adanjoinedtheboardon15thOctober2012.HeistheChairmanandaMemberoftheBoardofTrusteesat the National Social Security Fund (NSSF). Adan has extensive knowledge and expertise in Lawhaving engaged in legal representation in and outside the country. He has also engaged in the training and evaluation of law enforcement officials in matters involving access to justice and eradication of inequalities based on race, gender or national origin.

Gladys Ogallo(Non-Executive,Independent)Age:48years

Gladysjoinedtheboardon8thJanuary2014.SheholdsaBachelorofEducationdegreeandaMastersinBusinessAdministration(MBA).SheistrainedandcertifiedbySHLandPDAInternational.BothSHLandPDAInternationalaregloballeadersintalentassessmentsolutions,supportingorganisationsinthe selection, performance management and development of people at all levels and across all sectors.

She has over 13 years experience in the ICT sector working with Africa Online as a Training &DevelopmentManagerinchargeof9countriesandlaterHeadofHumanResourceatUUNET(nowMTNBusiness).SheistheCEOandFounderofVirtualHumanResourcesServicesLtd.

GladysistheViceChairoftheGrouponCapacityBuildingInitiatives(GCBI).GCBIisconstitutedbyWorldTelecommunicationsDevelopmentConferenceoftheInternationalTelecommunicationsUnion. Shealso consults for the International Telecommunication Union, among other international assignments. Gladys is also a board member of several boards.

Constance Gakonyo(Non-Executive,Independent)Age:49years

Constance joined theboardon17thApril2014.She isastrategicmanagementexpertwitha legalbackground and extensive entrepreneurial and corporate governance experience. She held the position ofExecutiveDirector,RealInsuranceGroupfrom2009to2012,wheresheoversawthekeyareasforthe group’s four business units in Kenya, Malawi, Mozambique and Tanzania. She also worked as Chief ExecutiveOfficer–JalicoLimited,PerformanceManagementandE.A.LegalConsultant–SABMillerAfricaandAsia(Pty)Ltd,DirectorStrategicResources–NileBreweriesLtd,Director–HumanResourceandLegalaffairs–CastleBreweriesKenyaLtd,GroupLegalandHumanResourceManager–StandardNewspapersGroupLimited.ShehasanMBA(StrategicManagement)fromtheUniversityofNairobi,DiplomainLawfromKenyaSchoolofLawandBachelorofLawsdegreefromUniversityofNairobi.ShehasbeenamemberofvariousboardsincludingEastAfricaBreweriesLimited,ParapetLimited,MozaicInvestmentLimited,MurekaInvestmentLimited,JalicoLimited,HomeAfricaLimited,MobilePlatformSolutionLimitedandAhadiKenyaTrust(Co-FounderTrustee).

12.9 Conflicts of Interests Business transactions with all parties, directors or their related parties are carried out at arms’ length. The directors of the Company are under a fiduciary duty to act honestly and in the best interests of the institution.

12.10 Relations with ShareholdersThe company is committed to:• Ensuringthatshareholdersandthefinancialmarketsareprovidedwithfullandtimelyinformationaboutitsperformance;and• CompliancewithregulationsandobligationsapplicabletotheSecuritiesExchangeandtheCapitalMarketsAuthority.

Information is disseminated to the shareholders through an annual report and press notices following the release of quarterly, half yearly and annualresults.Pressreleasesonsignificantdevelopmentsarealsoreported.



12.11 Senior Management Housing Finance is led by a management team that represents very experienced professionals in the banking and housing industry having worked for different entities both locally and internationally.

AbriefprofileoftheCompany’smanagementisasfollows:

Frank IreriManagingDirectorAge:52years

FrankwasappointedManagingDirectorofHousingFinanceinJuly2006.Heisaseasonedbankerwithmorethan20yearsstandinghavingjoinedfromBarclaysBankAfricawherehewasHeadofBarclayCardAfricaOperations,coveringKenya,Botswana,Zambia,Mauritius,SeychellesandEgypt.Prior tothis,heworkedwithCommercialBankofAfricaandCitibank.Duringhisbankingcareer,hehashadinternationalexposureinPoland,SriLankaandZambia.

FrankisanHonoraryCounselmemberofAIESEC,amemberoftheSub-SaharanAfricaChamberofCommerceAdvisoryBoard,amemberoftheHabitatforHumanityKenyaBoardandamemberoftheMadison‘Who’sWho’.In2011,theformerKenyanHeadofState,H.E.MwaiKibakiconferreduponhimtheElderoftheBurningSpear(EBS)inrecognitionofhisdistinguishedservicerenderedto the Nation.

Sam WaweruFinance&AdministrationDirectorAge:45years

SamjoinedHousingFinanceinDecember2005astheHeadofInternalAudit.HebeganhiscareerattheinternationalauditandadvisoryfirmofErnst&Youngin1992asanAccountant/Auditor.HehasalsoheldthefollowingpositionspriortojoiningHousingFinance;SeniorInternalAuditoratLonrhoAfricaManagementServices;HeadofInternalAuditatUchumisupermarkets;andHeadofInternalAudit,AgaKhanHealthServices,EastAfrica.

Duringhiscareerlife,SamhasgainedworkingexposureindifferentcountrieswhichincludeabouttenAfricancountriesandtheUnitedKingdom.

SamisaBachelorofCommerce(AccountingOption)graduateoftheUniversityofNairobiandaCertifiedPublicAccountant(CPAK).

Winnie Kathurima-ImanyaraExecutive Director – Housing FinanceFoundationAge:54years

Winnie joinedHousingFinanceasChangeandStrategyDirector in June2009,havingworkedpreviously with Equity Bank. Winnie is currently the Executive Director – Housing FinanceFoundation.ShehasalsoheldseniorHumanResourcepositionsatSafaricom,KenyaPetroleumRefineries,SmithKlineBeechamandReckitt&Colman.

WinniehasaBachelor of Arts (BusinessAdministration) andBachelor of Science in IndustrialPsychologyqualifications.ShealsohasPostGraduateDiplomasinHumanResourceManagement&StrategyandLeadership.

James KaranjaExecutive Director – Kenya BuildingSocietyAge:41years

JamesjoinedHousingFinanceinMay2009asaSeniorManager-ProjectFinance.HewaslaterpromotedasHeadofProjectFinanceinJune2010.HeiscurrentlytheExecutiveDirector–KenyaBuildingSociety.Jameshasover10yearsbankingexperiencehavingpreviouslyworkedatCFCBank Limited and Co-operative Bank of Kenya Limited.

JamesholdsaMasterinBusinessadministration(MBA)qualificationfromWarbroughUniversityUKandisaqualifiedmemberoftheAssociateKenyaInstituteofBankers(AKIB).

Caroline ArmstrongDirector–StrategicProjectsAge:40years

CarolinejoinedtheCompanyon2ndMay2008.SheiscurrentlytheDirector–StrategicProjects.PriortojoiningthecompanyCarolineworkedwithABNAMRObankandBarclaysBankrespectively.

Caroline is a seasoned banker with 14 years experience. She has a Bachelor of Arts degree(InternationalBusinessAdministration)fromtheUnitedStatesInternationalUniversity.



Constantine BarasaGeneralManager–RiskAge:36years

ConstantinejoinedHousingFinanceinJuly2006asanInternalAuditorrisingthroughtherankstobecometheHeadofInternalAuditbeforebeingpromotedtoAssistantGeneralManager–Riskand thereafter to his current position of General Manager - Risk.

HeisaBachelorofCommerce(Accounting)graduatefromtheUniversityofNairobi,aCertifiedPublicAccountantCPA(K)andaCertifiedPublicSecretaryCPS(K).HealsoholdsanMBAfromtheUniversity of Nairobi.

Joseph NgareGeneralManager-AuditAge:45years

Joseph joinedHousingFinanceon19April2010asHeadof InternalAudit.Prior to joining theCompany,JosephworkedwithGulfAfricanBankandCooperativeBankofKenyaLimited.

JosephholdsaBachelorofCommercedegree(FinanceOption)andisaqualifiedCertifiedPublicAccountant(Kenya),CertifiedInternalAuditor(CIA)andaCertifiedQualityAssessor(QA).

Timothy GitongaDirectorBusinessOperationsAge:43years

TimothyjoinedHousingFinanceon11thMarch2013asBusinessOperationsDirector.TimothyjoinedusfromNICBankwhereheheldthepositionofActingRetailBankingDirector.Priortothishe was Head of Business Banking.

TimothyholdsaMasterofBusinessAdministration(StrategicManagement)andaBachelorofScienceinAgricultureRangeManagement.HealsohasaPostgraduateDiplomainBankingandisanAssociateofKenyaInstituteofBankers(AKIB).

Ben LanyaGeneralManager–HumanResourcesAge:43years

Ben joinedHousingFinanceon3rdJune2013asGeneralManager–HumanResources.BenJoinedusfromStandardCharteredBankwhereheheldthepositionofSeniorHumanResourcesRelationship Manager.

Ben holds a Msc. Human Resource Management from University of Salford Manchester, MAEnglishandAppliedLinguisticsandB.EdArts

Kevin IsikaDirector–CreditAge:40years

KevinjoinedtheCompanyon3rdMarch2014.HeiscurrentlytheDirector–Credit.Priortojoiningthe company Kevin worked with Standard Chartered Bank Ltd for over 14 years.

KevinholdsaMasterofBusinessAdministrationDegreeandaBachelorofCommerceDegree–Accountingoption.HeholdsCPA(K)andCPS(K)certifications.KevinisalsoCSA–certified,whichis an International Credit Certification.

Regina AnyikaGeneralManager–LegalServicesandCompany SecretaryAge:46years

Regina joinedtheCompanyon16thSeptember2013.She iscurrentlytheGeneralManager–LegalServicesandCompanySecretary.PriortojoiningthecompanyReginaworkedwiththeCo-operative Bank of Kenya Limited and Senator Cards Limited.

Regina is a seasoned InHouse Counselwith over 20years’ experience. She holds anMBA–EmployeeRelations from theUniversityof Leicester (U.K), aBachelor of Laws (LLB) from theUniversityofNairobi,aDiplomafromtheKenyaSchoolofLawandisaCertifiedPublicSecretary(CPS(K)).



13 Risk Factors

HousingFinancefacesvarioustypesofriskswhicharisefromitsdaytodayoperationsasafinancialinstitution.TheBoardofDirectorsandManagement therefore devote a significant portion of their time to the management of these risks. The mainstay of effective risk management is the identification of significant risks, quantification of the Company’s risk exposure and defining and describing actions to limit these risks. The main aim of risk management is to ensure that all risks assumed in the course of the Company’s business are recognized early on and mitigated by effective risk management practices. Successful risk management is recognized as a pre-condition for the sustained growth and success of the Company. Risk management and monitoring is implemented via the Company’s risk management and risk control process and the organization structure corresponds to the CBK Risk Management Guidelines.

In order to ensure continuous improvement of risk management at all times, the following key risk principles have been adopted and are in application:• TheBoardofDirectorsassumestheultimateresponsibilityforthelevelofriskstakenbytheCompanyandisresponsibletooverseethe

effectiveimplementationoftheriskstrategies;• Theorganizationalriskstructureandthefunctions,tasksandpowersoftheemployees,committeesanddepartmentsinvolvedintherisk

processesarecontinuouslybeingreviewedtoensureclarityoftheirrolesandresponsibilities;• Riskissuesaretakenintoconsiderationinallbusinessdecisions.Measuresareinplacetodeveloprisk-basedperformancemeasures

and this is being supplemented by setting risk limits at the overall Company and divisional levels, as well as by enforcing consistent operatinglimitsforindividualbusinessactivities;

• Riskmanagementisincreasinglybeinglinkedtomanagementprocessessuchasstrategicplanning,annualbudgetingandperformancemeasurement;

• Identifiedrisksarereportedinatransparentandtimelymannerandinfulltotheresponsibleseniormanagement;and• Appropriateandeffectivecontrolsexistforallprocessesentailingrisks.

These principals are further supplemented by specific guidelines for measuring and monitoring individual risk types as issued by the CBK Risk Management Guidelines. The section below provides details of the Company’s risk exposures.

13.1 Political RiskKenya, like the majority of developing countries, is subject to certain political, economic and social events that may individually or collectively, create risks for investors. These risks are more difficult to predict and measure than in developed countries.

13.2 Economic RiskHousing Finance is mainly engaged in the housing sub-sector mortgage financing. The growth in this sector is dependent on the continued economic and infrastructure developments with the support of both the public and private sectors. The economic growth is dependent on the formulation of policies and procedures to support the initiatives of the public and private sectors to remain profitable and yield net returns that will maintain current investments and attract other foreign direct investments, bilateral and multilateral aid.

13.3 Regulatory RiskRegulatory risk relates to the risk of non-compliance or non-conformity with laws, rules, regulations, prescribed practice or ethical standards issued from time to time. Regulatory risk may arise in instances where the laws and rules governing the conduct of business may be ambiguous or change drastically. There is always a risk that changes in government and subsequent regulations and legislation can affect the banking sector in general and more specifically, the operations of the Company.

BankingservicesinKenyaareregulatedbytheBankingAct(anditsamendments)andtheFinanceAct.HousingFinanceisregulatedbytheCentralBankofKenya(CBK)andisthereforesubjecttocomplywiththeCBKActs.NewpolicyguidelinesissuedbytheCBKcouldimpactonthe operations of the Company.

13.4 Credit RiskCredit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the Company or if an obligor otherwise fails to perform as agreed.

13.4.1 Management of credit risk The Company is subject to credit risk through its lending and investing activities. Credit risk is the Company’s largest risk and considerable resources, expertise and controls are devoted to managing it and comprehensive strategies, policies and procedures have been developed toeffectivelymanagethisrisk.TheBoardprovideseffectiveoversightoftheoverallcreditportfoliothroughtheBoardCreditCommittee(BCC).


13 Risk Factors

Thiscommitteeisthedecisionmakingbodywithresponsibilityforloansthatexceedthescopeofthemanagementlendingcommittee.Actingon the basis of the powers granted to it by the Board, the BCC decides on the overall lending limits for the Company and approves the credit risk strategiestobeadopted.TheCompanyhasadequateBoardapprovedCreditPolicieswhicharereviewedannuallyandwhichcoverallaspectsofcreditriskmanagement(mortgageorigination,analysisandappraisal,acceptablecollateral,approvalauthoritiesandnon-performingloanmanagement).

Atthemanagementlevel,thereisaCreditRiskDepartmentstaffedwithhighlyskilledpersonnelwhoensurecreditrisksareidentifiedandmitigated. Within this department there is a fully fledged mortgage recoveries and rehabilitation unit with the responsibility of formulating workable solutions and also charged with restructuring mortgages in distress.

The Company’s primary exposure to credit risk arises through its mortgage advances to customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. The Company is also exposed to credit risk on debt investments. The current credit exposure in respect of the instruments is equal to the carrying amount of these assets in the statement of financial position. The risk that counterparties to instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Company only deals with counterparties of good credit standings and obtain collateral. The Company also monitors concentration of credit risk that arises from customers in relation to mortgage advances to customers. The Company has no significant exposure to any individual customer or counterparty.

13.5 Liquidity RiskLiquidity risk is the current or prospective risk to earnings and capital arising from the institution’s failure to meet its maturing obligations when they fall due without incurring unacceptable losses.

13.5.1 Management of Liquidity RiskThe key measure used by the Company for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment securities for which there is an active and liquid marketlessanydepositsfrombanks,otherborrowingsandcommitmentsmaturingwithinthenext91days.

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.Tothisend,thereisapolicythathasbeenapprovedbytheBoardofDirectorstoeffectivelymanageliquidityatalltimestomeetmortgagedemandsanddepositwithdrawals,regulatoryrequirements(liquidityratio),unexpectedoutflow/non-receiptofexpectedinflowoffundsaswellasensureadequatediversificationoffundingsources.TheAsset&LiabilityCommittee(ALCO)undertakesstatementoffinancialpositionliquidity management and scenario analysis as per the policy on a bi-weekly basis.

Worth noting is that Housing Finance has access to a diverse funding base. Funds are raised mainly from deposits, share capital and loans. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. Housing Finance strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Company continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Company strategy. In addition, Housing Finance holds a portfolio of liquid assets as part of its liquidity risk management strategy.

13.6 Market RiskMarket risk is the risk that changes in market prices, such as interest rate and foreign exchange rates will affect the Housing Finance income or the value of its holdings of financial instruments.

13.6.1 Interest Rate RiskThe principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates.

13.6.2 Foreign Exchange RiskHousing Finance takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions which are monitored daily.


13.6.3 Price RiskPriceriskistheriskthatthevalueofasecurityorportfolioofsecuritieswilldeclineinthefutureduetoafallinthemarketprice.

13.6.4 Management of Market RiskThe objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the returnonrisk.OverallauthorityformarketriskisvestedinALCO.ALCOisresponsibleforthedevelopmentofdetailedriskmanagementpoliciesand for the day-to-day review of their implementation.

13.7 Operational RiskOperational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Housing Finance processes, personnel, and technology, infrastructure and from external factors other than the credit, market, concentration and liquidity risks.

The Company’s objective is to manage operational risk so as to balance the avoidance of financial loss and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity.

13.7.1 Management of Operational RiskThe Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness while at the same time avoiding control procedures that restrict business processes and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. The responsibility is supported by the development of overall Company standards for the management of operational risks. Compliance with Company standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to theBoardAuditCommitteeandseniormanagementoftheCompany.

13.8 Strategic RiskStrategic risks are those risks that arise from formulation of strategic plans, business plans and implementation of plans that are inappropriate and inconsistent with internal factors and the external environment which may in turn affect earnings, capital fund or viability of the business. To avert strategic risks, the Board of directors and senior management carefully formulates strategic and business plans, supportive to corporate governance, in addition to putting in place internal infrastructure appropriate for implementation of the strategic plan.

13.9 Concentration RiskHousing Finance mostly derives its revenue from the housing sub sector by way of mortgage financing and project financing. It’s lending is spread across borrowers with diverse backgrounds thereby minimizing the level of concentration risk.

13.10 Reputational RiskReputational risk is the potential that negative publicity regarding an institution’s business practices, whether true or false, will cause a decline in the customer base, costly litigations, or revenue reductions. This risk may result from a financial institutions’ failure to effectively manage any or all of the other risk types. The ultimate accountability for reputational risk management rests with the board. The Board of DirectorsaddressesexplicitlyreputationalriskasdistinctandcontrollablerisktoHousingFinance’ssafetyandsoundnessthroughaversatileriskmanagementframeworkforreputationalrisk.ResponsibilityforcorporatereputationisresidedwiththeManagingDirector’sofficeandmanagedbyPublicAffairs&CommunicationDepartment.

13 Risk Factors


14.1 Corporate Information

14.1.1 Incorporation Details Housing FinanceCompanyofKenya Limitedwas incorporated inKenyaon18thNovember1965under theCompanies Act as a limitedliabilitycompany,andisdomiciledinKenya(currentregistrationnumberC.21/97).Thecompany’ssharesarelistedontheNairobiSecuritiesExchange.

14.1.2 Registered office of the Company TheregisteredofficeoftheCompanyissituatedatRehaniHousesituateLandReferenceNumber209/9054,NairobianditspostaladdressisPostOfficeBoxNumber30088-00100Nairobi.

14.1.3 Authorised And Issued Share CapitalPursuanttoaresolutionoftheCompanyattheAnnualGeneralMeetingheldon25thApril2014,theauthorizedsharecapitaloftheIssuerwasincreasedfromKshs.1,178,750,000.00toKShs2,500,000,000.00bycreationofadditional264,250,000newordinarysharesofKshs.5.00each.TheauthorisedsharecapitaloftheIssuerasat31stDecember2014wasKShs2,500,000,000.00dividedinto500,000,000ordinarysharesofKShs5.00each.

The issuedand fullypaidupsharecapitalof the Issuerasat31stDecember2014wasKShs1,157,900,000divided into231,580,000ordinarysharesofKShs5.00each.

TheholdersofordinarysharesareentitledtoreceivedividendsdeclaredfromtimetotimeandareentitledtoonevoteassetoutinArticle81below.

14.1.4 Additional shareholding information. The share capital of the Company is not divided into different classes of shares and all of the Ordinary Shares carry equal rights and the New Shares,whenissued,willrankequallyinallrespectswiththeexistingShares.5,750,000sharesarereservedforallotmenttothetrusteesoftheIssuer’sEmployeeShareOptionPlan.

14.2 Principal objects TheIssuer’sprincipalobjectsascontainedinitsMemorandumofAssociationare:3AToadvancemoneytoanypersonuponsecuritybywayofmortgageofland(includinganybuildingorotherstructureorimprovementerectedorconstructedthereon)situateinKenya,oruponanyothermarketablesecurity,andinparticular(butwithoutderogationfromthegenerality of the foregoing) to advance money upon the security of or for the purpose of enabling the person borrowing the same to erect or purchase or enlarge or repair any house or building or to enable such person to acquire any estate or interest in any land upon such terms and conditions as the Company may think fit.

3B To receive money on deposit or loan and borrow or raise money in such manner as the Company shall think fit, either with or without securityandinparticularbytheissueofNotesandloannotes,anddebenturesordebenturestock(perpetualorotherwise)andtosecurethe repayment of any money borrowed, raised or owing by mortgage, charge or lien upon all or any of the property or assets of the Company (bothpresentandfuture)includingitsuncalledcapitalandalsoinsimilarmannertosecureandguaranteetheperformancebytheCompanyor such other person or company as the case may be.

3C To acquire by purchase, lease, exchange, hire or otherwise, lands and property situate in Kenya of any tenure, or any estate or interest in the same or any rights over or connected with such lands and property and to develop the same by preparing building sites and by constructing altering improving decorating furnishing and maintaining cottages houses offices flats shops schools hotels buildings works and conveniences of all kinds.

3DTomanageland,buildingsandotherpropertysituateinKenyawhetherbelongingtotheCompanyornot,andtocollectrentsandincome.

14.3 Provisions of the Articles relating to :

14.3.1 Share capital and variation of rightsArticle8-AtthedateofthisIssuethesharecapitaloftheCompanyisShillingsTwobillionfivehundredmilliondividedintoFivehundredmillion(500,000,000)ordinarysharesoffiveshillings(KShs.5)each

14 Statutory and General Information


Article9-Withoutprejudicetoanysuchrightpreviouslyconferredontheholdersofanysharesorclassofshares,anyshareintheCompanymay be issued with such preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company by ordinary resolution determines, or if no such resolution has been passed or so far as the resolution does not make specific provision as the Board may determine.

Article13-therightsorprivilegesattachedtoanysharesshallnot,unlessotherwiseexpresslyprovidedbytheconditionsofissueofsuchshares,bedeemedtobealtered,abrogatedorvariedbythecreationorissueofanynewsharesrankingparipassuinallrespects(saveastothe date from which such new shares shall rank for dividend) with or subsequent to those already issued or by the reduction of capital paid up on such shares.

14.3.2 Application of the Central Depositories ActArticle20-TheprovisionsoftheCentralDepositoriesAct,2000(the“CDAct”)asamendedormodifiedfromtimetotimeshallapplytotheIssuertotheextentthatanysecurities(assuchtermisdefinedinsection2(1)oftheCDAct)oftheCompanyareinpartorinwholeimmobilisedordematerialisedorarerequiredbytheregulationsorrulesissuedundertheCDActtobeimmobilisedordematerialisedinpartorinwhole,asthecasemaybe.AnyprovisionsoftheseArticlesthatareinconsistentwiththeCDActoranyrulesorregulationsissuedormadepursuanttheretoshallbedeemedtobemodifiedtotheextentofsuchinconsistenciesintheirapplicationtosuchsecurities.ForthepurposesoftheseArticles,immobilisationanddematerialisationshallbeconstruedinthesamewayastheyareconstruedintheCDAct.

Article21-whereanysecuritiesoftheCompanyareforfeitedpursuanttotheseArticlesafterbeingimmobilizedordematerialized,theCompanyshall be entitled to transfer such securities to a securities account designated by the Board for this purpose.

14.3.3 Refusal to register TransfersArticle34-subject to theStatutes, the registrationof transfersmaybesuspendedatsuch timeand forsuchperiodsas theBoard maydetermine,providedalwaysthatsuchregistrationshallnotbesuspendedformorethanthirty(30)daysinanyyear

14.3.4 Increase of CapitalArticle56-TheCompanymayfromtimetotime,byordinaryresolution,increaseitssharecapitalbysuchsumtobedividedintosharesofsuch amounts as the resolution shall prescribe

14.3.5 General MeetingsArticle59-TheCompanyshall,ineachyearholdageneralmeetingasitsannualgeneralmeetinginadditiontoanyothermeetingsinthatyearandshallspecifythemeetingassuchinthenoticescallingit.Notmorethanfifteen(15)monthsshalllapsebetweenthedateofoneannualgeneralmeetingoftheCompanyandthatofthenext.AnnualandothergeneralmeetingsshallbeheldatsuchtimesandsuchplaceastheBoardshallappoint.Allgeneralmeetings,otherthanannualgeneralmeetingsshallbecalledextraordinarygeneralmeetings

Article60-TheBoardmayconveneanextraordinarygeneralmeetingwhenever it thinksfit. Extraordinarygeneralmeetingsshallalsobeconvenedonsuchrequisitionor,indefaultmaybeconvenedbysuchrequisitionistsasprovidedbysection132oftheAct.Atanymeetingconvened by such requisitionists, no business shall be transacted except that stated by the requisition or proposed by the Board

Article65-Allbusinessshallbedeemedspecialthatistransactedatanextraordinarygeneralmeetingandalsoallbusinessthatistransactedat an annual general meeting with the exception of the declaration of dividends, the consideration of the accounts and balance sheets, and anyotherdocumentsaccompanyingorannexedthereto,thereportsoftheDirectorsandauditors,theelectionofDirectors,theappointmentofauditorsandthefixingoftheremunerationoftheDirectorsandauditors.

Article66-Nobusinessshallbetransactedatanygeneralmeetingunlessaquorumispresentwhenthemeetingproceedstobusiness.SaveasotherwiseprovidedbytheseArticles,twenty-five(25)memberspresentinpersonorbyproxyor,inthecaseofacorporation,representedinaccordancewithArticle93,andentitledtovoteatthemeetingandholidngtogethernotlessthan(35%)oftheissuedsharesinthecapitalofthe Company carrying the right to vote for the time being shall be a quorum, provided that one or more other members or one person holding proxies of two or more members shall not constitute a quorum.

14.3.6 Votes of MembersArticle81-Subjecttoanyspecialtermsastovotinguponwhichanysharesmaybeissuedormayforthetimebeingbeheld,onashowofhandseverymemberwhoispresentinpersonor(beingacorporation)ispresentbyarepresentativeappointedinaccordancewithArticle93



shallhaveonevote.Aproxyshallnotbeentitledtovoteexceptonapoll.Onapolleverymemberpresentinpersonorinproxy,presentbyarepresentativeappointedinaccordancewithArticle93shallhaveonevoteforeachshareofwhichheistheholder.

14.3.7 Directors Article94- Thenumber ofDirectors shall not be less thanfive and, unless anduntil otherwise determinedby ordinary resolution of theCompany in general meeting shall not exceed nine.

Article97-Adirectorneednotbeashareholder,butshallbeentitledtoreceivenoticeofandtoattendandspeakatallgeneralmeetingsoftheCompany or at any separate meeting of the holders of any class of shares of the Company.

14.3.8 Dividends and ReservesArticle144-TheCompanymay,ingeneralmeeting,declaredividendsbutwithoutprejudicetothepowersoftheCompanytopayinterestonshare capital, no dividend shall be payable except out of the profits of the Company, or in excess of the amount recommended by the Board

Article145-TheBoardmay,fromtimetotime,declareorpaytothemembersinterimdividendsasappeartotheBoardtobejustifiedbytheprofits of the Company

Article146-Subjecttotherightsofanypersonsentitledtoshareswithspecialrightsastodividends,alldividendsshallbedeclaredandpaidaccording to the amounts paid up on the shares in respect whereof the dividends are declared but no amount paid or credited as paid on a shareinadvanceofcallsshallbetreatedforthepurposesofthisArticleaspaidupontheshare.Adividendshallbeapportionedandpaidproportionately to the amounts paid or credited as paid up on the shares during any portion or portions of the period in respect of which the dividend is paid but, if any share be issued on terms providing that it shall rank for dividend as from a particular date, such share shall rank for dividend accordingly

Article147-TheBoardmaydeductfromanydividendpayableonashareanysumsofmoneypresentlypayable,bythepersontowhomthedividend is payable, to the Company on account of calls or otherwise

Article148-TheBoardmayretainanydividendorothermoneypayableonorinrespectofashareonwhichtheCompanyhasalienandmayapply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists.

Article149-NodividendorothermoniespayablerespectofashareshallbearinterestagainsttheCompany.

Article150-Withthesanctionofageneralmeeting,anydividendmaybepaidwhollyorinpartbythedistributionofspecificassetsand,inparticular, of paid-up shares or debentures of any other company or in anyone or more of such ways. Where any difficulty arises in regard to such distribution, the Board may settle the same as it deems expedient and, in particular, may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Member upon the footing of the value fixed in order to adjust the rights of those entitled to participate in the dividend and may vest any such specific assets in trustees upon trust for the members entitled to the dividend as may seem expedient to the Board.

Article151-Anydividend,interestorothersumpayableincashtotheholderofsharesmaybepaidbychequeorwarrantsentthroughthepost addressed to such holder at his registered address or, in the case of joint holders, addressed to the holder whose name stands first on the Register in respect of the shares. Every such cheque or warrant shall, unless the holder otherwise directs, be made payable to the order of the registered holder or, in the case of joint holders, to the order of the holder whose name stands first on the Register in respect of such sharesandshallbesentathisortheirrisk.Anyoneoftwoormorejointholdersmaygiveeffectualreceiptsforanydividendsorothermoneyspayable in respect of the shares held by such joint holders.

Article152-InadditiontoanyreservesprovidedforincompliancewiththerequirementsoftheStatutes,theBoardmay,beforerecommendingany dividend, set aside out of the profits of the Company such sum as it thinks proper as a reserve which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may, at the like discretion,eitherbeemployedinthebusinessoftheCompanyorbeinvestedinsuchinvestments(otherthansharesoftheCompanyoritsholding company, if any) as the Board may from time to time think fit. The Board may divide the reserve into such special funds or any parts of any special fund into which the reserve may have been divided. The Board may also, without placing the same to reserve, carry forward any profits which it may think prudent not to divide.



14.4 Details of Subsidiaries

Name of Subsidiary Date of Registration Certificate of Incorporation

Shares held by the Issuer

HousingFinanceInsuranceAgencyLimited 29thNovember2011

CPR/2011/62077 999/1000sharesissued

Housing Finance Foundation Limited(acompanylimitedbyGuarantee)

21stMarch2012 CPR/2011/60897 N/A

Kenya Building Society Limited 26thApril1963 C.5/63 4,999,997/5,000,000shares issued

FirstPermanent(EastAfrica)Limited 28thDecember1961

C.5137 250,994/251,000

TheIssueralsoowns50%ofthesharesinthefollowingcompanies:-

Name Date of Registration Certificate of IncorporationKahawaDownsLimited 5thJuly2012 CPR/2012/77820PreciousHeightsLimited 9thMay2012 CPR/2012/77820

14.5 Material and Related Party Contracts:ApartfromcontractsenteredintobytheIssuerintheordinarycourseofitsbusinessandthecontractsoutlinedin14.5.1and14.5.2belowthe Issuer has not entered into:-(i) anymaterialcontractswiththirdpartieswhichhaveonerousorillegalcovenants;(ii) anycontractsthatrestricttheIssuer’sfreedomtocarryonitsbusinessasitdeemsfitorrestricttheabilityoftheIssuertotransferthe

wholeorpartofitsbusiness;(iii) anytransactionotherwisethanatarmslength;(iv) anycontractsofmaterialcapitalcommitments;(v) anycontractswithsubsidiariesofothergroupcompanies

14.5.1 Material Contracts (with restrictive covenants or restrictions on equity)• TermLoanFacilityAgreementdated23rdJanuary,2014withNorwegianInvestmentFundforDevelopingCountries-requiresnotification

onanyissuanceofsharesorstockoranyinstrumentconvertibletoshareorstock(whetherordinaryorpreferenceandwhetherornotredeemable)

• GuaranteeAgreementNo.615-DCA-13-025withUnitedStatesAgencyforInternationalDevelopment-requiresapprovalofUSAIDineventof certain changes to the shareholding in the Issuer

14.5.2 Related Party ContractsExcept for the Contracts listed below, the Issuer has not entered into any agreements with related third parties.Contracts with related third parties:• JointventureagreementmadewithKahawaDownsLimitedinconnectionwithproposeddevelopmenttobeknownasKahawaGardens.• Jointventureagreementdated24thJuly,2012madeinconnectionwithPreciousHeightsLimited

14.6 Licenses and PermitsTheIssuerhasbeenissuedwithalicencetotransactbankingbusinessdated11thDecember2014issuedbytheCentralBankofKenyapursuant to which it is unconditionally licensed to carry out banking business at its Head Office as well as the branches listed below for the periodfrom1stJanuary2015to31stDecember2015:(i) Rehani – Koinange Street, Nairobi(ii) Gill House – Moi Avenue, Nairobi(iii) Kenyatta Market, Maseras House, Golf Course Shopping Centre, , Nairobi(iv) Buru Buru – Mumias Road, Nairobi(v) Thika Road Mall, Nairobi(vi) Sameer Business Park, Nairobi



(vii) Skypark- Waiyaki Way, Nairobi (viii) Thika- Uhuru Street(ix) Nyeri- Kimathi Way(x) Mombasa- Moi Avenue (xi) Mombasa- Nyali Centre (xii) Naivasha- Buffalo Mall(xiii) Nakuru- AFC Building, Geoffrey Kamau Way(xiv) Eldoret- Oloo/Utalii Street(xv) Kisumu- Court Road(xvi) Meru-Tom Mboya Street(xvii) Kitengela- Red Heron Court Centre, Kajiado/Namanga Road(xviii) Ongata Rongai- Maasai Mall

TheIssuerhasbeenissuedwitha licencetotransactforeignexchangebusinessdated11thDecember2014issuedtotheissuerbytheCentralBankofKenyapursuanttowhichissuerwaslicencedtotransactforeignexchangebusinessinKenyafortheperiodfrom1stJanuary2015to31stDecember2015.

14.7 Material LitigationThe Company is involved in the following material litigation or dispute resolution proceedings:

NAME OF PLAINTIFF NATURE OF MATTER ESTIMATED VALUE OF LAWSUITHousing Finance Company of Kenya Limited vs. Kenya Broadcasting Corporation

Housing Finance sued KBC to restrain KBC from interfering with our plots valued at KES 44million in Mombasa.

ThematterhasnowbeenmovedtotheEnvironmentandLandDivisionandhas been confirmed ready for hearing. The parties currently await to fix a date at the Court Registry.

K.Shs. 44,000,000

Kenya Breweries Ltd vs. Kenya Bus Services Ltd. Housing Finance and Bus track Ltd.

TheIssuerhereinisjoinedinasuitbythePlaintiffforhavingissuedaletterofcomforttothePlaintiffwhichthe latterallegescompelled it toagreetosell aproperty to the1stDefendant. Thesalenothavingproceeded, thePlaintiffissuingthe1stDefendantandtheIssuerforspecificperformanceof the transaction, although the said property having since been sold, the PlaintiffhasamendedhisclaimtooneforgeneralandspecialdamagesinthesumofK.Shs.228,620,563.40plusinterestthereonattherateof32%perannumfrom31stMarch,2001untilpaymentinfull.

ThesuitwassettledbetweenKenyaBreweriesandtheFirstDefendant.Thematter is ongoing between the Issuer and Kenya Breweries as to costs of the suit.

.Thematter was also scheduled for submissions on 14th October 2014but was adjourned to 26th November 2014 to enable highlighting ofsubmissions.

K.Shs.228,620,563.40



ICEAversusHousingFinance, CFC Stanbic and another

ICEAhasinstitutedproceedingsagainsttheIssuerand2othersclaimingthelossofKshs.120millionwhichwasfraudulentlylostthroughanintricateseries of fixed and call deposit accounts opened by the third defendant withtheissuerandthe2nddefendantonbehalfofICEA,fundswhichwerelater transferred or diverted to other accounts and withdrawn. The plaintiff blames the HFCK for breach of the terms governing the customer banker relation and the account operationmandates. The 3rd defendant, ICEA’sformerAssistantGeneralManagerisalsofacingacriminalsuitregardingthematter in which the firm of Murgor and Murgor is watching our brief.

Thematterwasmentionedon4thNovember2013forpre-trialdirections.Only the Plaintiff and HF had complied with pre-trial directions. Hencefurthermentionfixedfor6thDecember2013toconfirmcompliancebytheother defendants.

Thematterwasmentionedon19thMarch2014toconfirmcompliancewithdirectionstoexchange&filedocumentsbutthe2ndDefendant(CFC)hadnot complied. The court held that it shall proceed with the documents on record.TheMattercameupforHearingon4thJune2014butwasadjournedatthebehestofthePlaintiff.

The Matter has stood over generally and fresh dates are to be taken at the registry

Sharok Kher Mohamed Hirji versus Housing Finance

ThePlaintiffhasinstitutedproceedingsagainsttheIssuerinrespectofthePlaintiff’spropertywhichwassoldbywayofpublicauction.JudgmentforthesumofKshs.20millionwasawardedtothePlaintiff,howevertheIssuerhas applied for a stay of execution pending appeal which was granted subject to the deposit of an unconditional Bank Guarantee for the sum of Kshs.30million pending hearing of the appeal.

ThematterisongoingandthePlaintiff’sapplicationforleavetoexecutewasheardon23rdSeptember2014andfixedforfurthermentionon13thOctober2014toconfirmiftheoriginalbankguaranteehasbeenproduced.

The court set aside the stay orders and application to review these orders was filed by the Defendant’s. The Submissions on the application to setaside these orders have been filed at the court and the court has set the Rulingdatefor30thJanuary2015.

K.Shs20,000,000.00

Esther Njeri Gichuru and 22othersvs.HousingFinance

Customers of the Company have filed a declaratory suit through the Interest Rates Calculation Bureau against us claiming that they have been overcharged and levied with penalty and default charges. This matter was stayedonthe9thNovember2007pendingthedeterminationofthesuitbelow which is of a similar nature.

This is a class action suit involving many claimants.

PaulNgangaNdetei&63 Others vs. Housing Finance

The initial suit was by 63 customers but they dropped off as they redeemed their mortgages and only 4 Customers are left. They had filed a suit against us through the Interest Rates Calculation Bureau claiming that they have been overcharged and levied with penalty and default charges. Currently all the customers have now redeemed their accounts and one is deceased. Thesuitwassetforhearingon5thMarch2014butwastakenoutofthedays hearing list. Fresh dates for the Hearing have to be taken at the Court registry

This is a class action suit involving many claimants.



14.8 ConsentsThe Borrower has obtained the requisite regulatory, corporate and all consents required to implement the Rights Issue.

14.9 Material Changes in the financial or trading position:Save as indicated in this Information Memorandum, there have been no material changes in the financial or trading position of the Issuer from 31stJune2014tothedateofthisInformationMemorandum

14.10 Documents available for inspectionCopies of the following documents will, when published, be available for inspection at the Registered Offices of the Issuer in Nairobi, Kenya:

(i) theMemorandumandArticlesofAssociationoftheIssuer;

(ii) theconsolidatedauditedfinancialstatementsoftheIssuer/Groupinrespectoftheyearfinancialperiodended2013,2012,2011,2010includingallnotes,reportsorinformationrequiredbytheCompaniesAct;

(iii) copyoftheBoardresolutionapprovingtheRightsIssue;

(iv) copyoftheShareholdersresolutionapprovingtheRightsIssue;

(v) acopyoftheCirculartoshareholdersdated11thNovember2014;

(vi) theRegisterusedtodetermine(asoftheRecordDate)theEntitlementstoEligibleShareholders;

(vii) acopyoftheapprovaloftheCapitalMarketsAuthorityinrespectoftheissuanceoftheNewSharespursuanttotheRightsIssueandlistingofNewSharesontheNSE;

(viii)acopyoftheapprovaloftheNairobiSecuritiesExchangeforthelistingoftheNewSharesontheMainInvestmentMarketSegmentoftheNSE;

(ix) acopyoftheletterof“noobjection”fromtheCentralBankofKenyawithrespecttotheproposedIssue;

(x) thelegalopinionofWalkerKontosAdvocates;

(xi) reportingaccountantsreportasreproducedintheInformationMemorandum;

14.11 Proposed Reorganisation

A. IntroductionSubjecttoallapplicableregulatoryapprovals,theCompanyandawhollyownedsubsidiary(“theWhollyOwnedSubsidiary”)intendtoenterintoanassettransferagreement(“theAssetTransferAgreement”)inordertogiveeffecttothetransferoftheCompany’smortgagefinancebusiness(“MFBusiness”)totheWhollyOwnedSubsidiary(“theRe-organisation”).Ifregulatoryapprovalsarereceived,theRe-organisationwill entail the following:

A.1. TheWhollyOwnedSubsidiarywillbeincorporatedasalimitedliabilitycompanywiththeCompanyasthesolebeneficialownerofitsentireissuedsharecapital;

A.2. theMFBusinesswillbe transferred to theWhollyOwnedSubsidiarypursuant tosection9of theBankingActwitheffect fromtheCompletionDate(asspecifiedintheAssetTransferAgreement)whichwillcarryontheMFBusinessasagoingconcern;

A.3. theMemorandumofAssociationoftheCompanywill,beamendedbydeletingtheobjectsthatrelatetoamortgagefinancebusinessandreplacingthemwiththeobjectsofanon-operatingholdingcompanyapprovedforsuchpurposebytheCentralBankofKenya(“theCBK”);and



A.4. thenameoftheCompanywillbechangedfrom“HousingFinanceCompanyofKenyaLimited”to“HFGroupLimited”toreflectitsnewstatus as a non-operating holding company.

B. Rationale for the Re-organisationTheBankingAct(chapter488oftheLawsofKenya)currentlyprohibitstheCompany,asamortgagefinancecompanylicensedandsupervisedbytheCBK,from(i)lendingtonon-regulatedsubsidiaries(ii)engagingdirectlyinwholesaleandretailtradeexceptinsatisfactionofdebtsduetoitor(iii)injectingmorethan25%ofitscorecapitalasequityintoitsnon-mortgagefinancesubsidiaries.

TheBankingActpermitsnon-operatingholdingcompaniesapprovedandregulatedbytheCBKtoownmorethan25%oftheequityofbanks,financial institutions and mortgage finance companies whilst also investing subsidiaries engaged in other businesses. This allows the Company the opportunity to invest the Company’s capital needed to establish and grow subsidiaries engaged in providing complementary services to and to allow the Company to offer integrated property solutions to its customers.

C. Effects of the Re-organisation on the Company’s shareholders and other partiesIt is the intention of the Company that the Company’s shareholders, regulators, customers and employees should encounter limited, if any, direct impact from the proposed Re-organisation:

• ShareholderswillcontinuetoownthesamesharesthattheyownbeforetheRe-organisationandtheseshareswillremainlistedonNSE.

• CustomersoftheCompanywillnotberequiredtotakeanyactionandwillencounterminimalpracticaleffectsoftheRe-organisationastheiraccountbalances,customercontractsandcollateralwill,automaticallyandbyoperationoflawpursuanttothesaidSection9oftheBankingAct,betransferredtotheWhollyOwnedSubsidiary.

• EmployeesoftheCompanywillseeminimalimpact.AlloftheCompany’semployees(withtheexceptionofthoseengagedinexecutivemanagement, who will continue in employment at the holding company level) will be employed by the Wholly Owned Subsidiary on exactly the same terms and conditions currently enjoyed. The Wholly Owned Subsidiary will assume all accrued obligations of the Company in relation to such employees. The Company’s existing pension scheme will continue in place and all employees will continue to be members thereof, as well as of the Company’s employee share ownership programme.

AftertheRe-organisation,theWhollyOwnedSubsidiarywillreporttoCBKandbesubjecttoCBK’ssupervisionasalicensedmortgagefinanceinstitution, while the Company will report to CBK and be supervised as a non-operating holding company. The Company will continue to be subjecttoregulationsoftheCMAandthelistingrulesofNSE.

14.12 Share Acquisition by British American Insurance Company (Kenya) Limited I. PursuanttoaSharePurchaseAgreementdated30thJune2014betweenEquityBankLimited(“EquityBank”).andBritishAmerican

InsuranceCompany(Kenya)Limited(“Britam”),Britamacquired57,270,000shares(“theSaleShares”) representing24.75%of theissued share capital of Housing Finance from Equity Bank.

II. Asaresultoftheacquisition,BritamnowlegallyandbeneficiallydirectlyandindirectlyownsatotalofOneHundredandsixmillionsixhundredandeighteenthousandfivehundredandforty-five(106,618,545)oftheissuedordinarysharesinHousingFinanceamountingto46.03%ofHousingFinance’sissuedsharecapital.

III. The requisite approval for the transaction was obtained from the CBK.



Housing Finance Company of Kenya LimitedAccountants’Reportonfinancialinformationfor

five years and nine-month period ended 30September2014

©2014KPMGKenya,aregisteredpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternationalCooperative(“KPMGInternational”),aSwissentity.

78

Accountants’ Report on financial information for five years and nine-month period ended 30 September 2014

15 Reporting Accountants Report

Rights Issue Information Memorandum 2015

Contents

1 Accountants’report 792 Consolidatedstatementofprofitorlossandothercomprehensiveincome 803 Statementoffinancialposition 82

3.1 Consolidatedstatementoffinancialposition 823.2 Separatestatementoffinancialposition 83

4 Consolidated statement of cash flows 845 Statementofchangesinequity 85

5.1 Consolidatedstatementofchangesinequity 855.2 Separatestatementofchangesinequity 88

6 Notestotheconsolidatedfinancialstatements 916.1 Reportingentity 916.2 Basisofpreparation 916.3 Significantaccountingpolicies 916.4 Financialriskmanagement 996.5 Operatingsegments 1136.6 Useofestimatesandjudgements 1156.7 Interestincome 1166.8 Interest expense 1166.9 Non-interestincome 1166.10 Non-interest expenses 1166.11 Profitbeforetaxation 1176.12 Taxation 1176.13 Earnings per share 1186.14 Dividendpershare 1186.15 Financialassetsandliabilities 1186.16 Cashandbankbalances 1246.17 InvestmentinGovernmentsecurities 1246.18 Placementswithotherbanks 1246.19 Mortgageadvancestocustomers 1256.20 Investmentinsubsidiariesandjointventures 1276.21 Amountsduetosubsidiaries 1276.22 Otherassets 1276.23 Equityinvestments 1286.24 Housingdevelopmentprojects 1286.25 Propertyandequipment 1296.26 Prepaidoperatingleaserentals 1376.27 Intangibleassets 1386.28 Deferredtaxassetsandliabilities 1396.29 Employeebenefits 1426.30 Customer deposits 1436.31 Other liabilities 1446.32 Loansfrombanks 1446.33 Borrowedfunds 1456.34 Corporatebond 1456.35 Capitalandreserves 1456.36 Shareholders’incomenotesandloans 1476.37 Notestothestatementofcashflows 1476.38 Contingent liabilities 1486.39 Operatingleasearrangements 1496.40 Mortgagecommitments 1496.41 Capitalcommitments 1506.42 Assetspledgedassecurity 1506.43 Relatedpartytransactions 150

79




1 Accountants’ report

TheBoardofDirectorsHousing Finance Company of Kenya LimitedRehani HouseKenyattaAvenue/KoinangeStreetPOBox30088-00100Nairobi, Kenya

Reporting Accountants Report - Housing Finance Company of Kenya Limited

IntroductionWe have examined the consolidated audited financial statements of Housing Finance Company of Kenya Limited (“the Company”), itssubsidiaries,KenyaBuildingSocietyLimited,HousingFinanceInsuranceAgencyLimitedandFirstPermanent(EastAfrica)Limitedandjointventures(collectivelyreferredtoas“theGroup”)forthefiveyearsto31December2013.Wehavealsoreviewedtheconsolidatedinterimfinancialstatementsforthenine-monthperiodended30September2014fortheGroupandtheapplicablecriteriaonthebasisofwhichthedirectorsofthecompanyhavecompliedwiththeCompaniesAct486(ThirdScheduleParagraph19)andtheFourthScheduleoftheCapitalMarkets(Securities)(PublicOffers,ListingandDisclosures)Regulations,2002(hereafterreferredtoasthe“Regulations”).

Responsibility of the directorsThe directors of the Company are responsible for the preparation of the Information Memorandum and all the information contained therein andforthefinancialstatementsandfinancialinformationtowhichthisAccountants’Reportrelatesandfromwhichithasbeenprepared.

Our responsibilityOurresponsibilityistoreviewandcompilethefinancialinformationsetoutintheAccountantsReportfromthefinancialstatements.Our review and preparation of the Financial Information Memorandum has been performed in accordance with International Standard on Related Services 4410– Compilation Engagements (“ISRS 4410”) and International Standard on Review Engagements 2410– Reviewof InterimFinancial InformationPerformedby the IndependentAuditorof theEntity(ISRE2410).TheFinancial InformationMemorandumincludedintheinformationmemorandumoftheBankwascompiledfromtheauditedfinancialstatementsfortheyearsended31December2009,2010,2011,2012and2013andreviewoftheunauditedfinancialinformationforthe9monthsperiodended30September2014,preparedinaccordancewithInternationalStandardonReviewEngagements2410–ReviewofFinancialInformationPerformedbytheAuditor(ISRE2410)(together,the“FinancialStatements”).

KPMGKenyahasactedasauditorsoftheGroupforthefiveyearsto31December2013andthenine-monthperiodended30September2014.Foreachofthefiveyearsaudited,unqualifiedauditreportswereissued.Therewasnoqualificationinthereviewreportforthenine-monthperiodended30September2014.We are not aware of any material items not mentioned in the Information Memorandum regarding the Rights Issue at the Nairobi Securities Exchange, which could influence the evaluation by the investors of the assets, liabilities and financial position of the Group.

The financial statements have been prepared on the basis of the accounting policies set out in Section 6 of this report. For all the accounting periods dealt with in this report, the financial statements have, in all material respects, been prepared in accordance with the International Financial Reporting Standards currently effective and the Regulations.

Review conclusionThefinancial information issetout inSection2to6below.Sinceacompilationengagement isnotanassuranceengagement,wearenotrequiredtoverifytheaccuracyofcompletenessofinformationusedtocompilethefinancialinformation.Accordingly,wedonotexpressanopinion on whether these financial statements are prepared in accordance with International Financial Reporting Standards. However, based on our review, nothing has come to our attention that causes us to believe that the audited financial statements of the Group for each of the fiveyearsended31December2013andtheunauditedfinancialinformationforninemonthsperiodended30September2014donotgiveatrue and fair view in accordance with International Financial Reporting Standards.

80




ConsentWe consent to the inclusion of this report in the Information Memorandum in support of the rights issue of Housing Finance Company of Kenya Limitedtobeissuedonoraround28January2015intheformandcontextinwhichitappears.

TheEngagementPartnerresponsibleforthereviewresultinginthisaccountantsreportisCPAJacobGathecha–P/1610.

KPMG KenyaCertifiedPublicAccountantsABCTowerP.O.Box40612–00100Nairobi, Kenya

Date:28January2015

81




2 Consolidated statement of profit or loss and other comprehensive income

Theconsolidatedstatementofprofitorlossandothercomprehensiveincomeforthenine-monthperiodended30September2014andthefinancialyearsended31December2013,2012,2011,2010and2009aresetoutbelow:

Note 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Interestincome 6.7 4,570,919 5,440,059 5,068,815 3,464,079 2,475,814 1,804,122Interestexpense 6.8 (2,386,412) (2,886,682) (3,118,780) (1,562,517) (1,074,826) (656,579) Net interest income 2,184,507 2,553,377 1,950,035 1,901,562 1,400,988 1,147,543 Impairment losses on mortgageadvances 6.19.2 (273,279) (280,893) (197,766) (186,297) (238,445) (225,487) Net interest income after impairment losses on mortgage advances 1,911,228 2,272,484 1,752,269 1,715,265 1,162,543 922,056 Noninterestincome 6.9 692,279 1,368,370 283,886 291,619 254,196 226,902Noninterestexpenses 6.10 (1,558,560) (2,160,498) (1,128,524) (1,031,089) (855,711) (797,840) Profit before taxation 1,044,947 1,480,356 907,631 975,795 561,028 351,118 Incometaxexpense 6.12 (335,868) (485,160) (164,297) (353,517) (181,497) (116,942) Net profit after tax for the period/year 709,079 995,196 743,334 622,278 379,531 234,176 Other comprehensive income Items that would be reclassified to profit or loss Change in fair value of available-for-saleinvestments 6.35(e) (2,812) 57,018 (2,503) (34,000) - -Net amount reclassified toprofitorloss 6.35(e) (61,500) - - - - -Revaluationofproperty 6.25 - - - 63,129 - 255,784 Total comprehensive income for the period/year 644,767 1,052,214 740,831 651,407 379,531 489,960 Basic and diluted earnings per share - KShs 6.13 4.08 4.30 3.22 2.70 1.65 1.02 Dividend per share - KShs 6.14 0.75 1.75 1.40 1.20 0.70 0.50

ThestatementsofcomprehensiveincomearetobereadinconjunctionwiththenotestoandformingpartoftheAccountants’Reportsetoutonpages91to150.

82




3 Statement of financial position

3.1 Consolidated statement of financial position

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009ASSETS Note KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cashandbankbalances 6.16 3,014,470 1,719,004 1,454,359 384,034 420,390 319,839InvestmentinGovernmentsecurities 6.17 276,067 288,167 723,616 379,847 539,835 509,507Placementswithotherbanks 6.18 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419Mortgageadvancestocustomers(Net) 6.19 43,273,307 35,215,897 30,293,711 25,222,836 19,503,400 14,495,208InvestmentinJointVenture 6.20 190,800 190,800 86,700 - - -Otherassets 6.22 906,502 1,126,173 384,425 246,178 200,208 83,203Equityinvestments 6.23 - 151,500 60,000 56,000 - -Housingdevelopmentprojects 6.24 110,821 117,822 442,055 20,130 20,130 20,130Propertyandequipment 6.25.1 1,024,090 945,515 716,708 705,208 600,417 580,907Prepaidoperatingleaserentals 6.26 46,203 46,685 47,329 47,973 48,615 49,257Intangibleassets 6.27 487,181 395,935 9,923 2,578 3,085 4,146Deferredtaxasset 6.28.1 373,275 313,278 272,637 81,949 76,050 70,743Taxrecoverable 94,911 - 69,156 - - -

56,890,874 47,389,377 40,956,577 31,870,916 29,278,396 18,239,359 LIABILITIES Customers’deposits 6.30.1 33,146,542 26,507,204 22,937,649 18,671,586 15,943,341 12,219,449Otherliabilities 6.31.1 873,797 539,835 760,214 329,927 321,598 220,443Taxpayable 18,036 71,471 - 135,934 26,337 26,091Dividendpayable 46,359 47,710 24,112 - - -Loansfrombanks 6.32 6,093,557 3,803,905 1,702,834 847,507 1,573,369 1,700,000Borrowedfunds 6.33 147,000 347,276 181,891 - - -Corporatebond 6.34 10,461,347 10,212,469 10,212,633 7,168,598 7,156,344 - 50,786,638 41,529,870 35,819,333 27,153,552 25,020,989 14,165,983

SHAREHOLDERS’ EQUITY Sharecapital 6.35 1,157,600 1,155,350 1,153,000 1,152,125 1,150,000 1,150,000Reserves 4,895,886 4,653,407 3,933,494 3,514,489 3,056,657 2,872,626Shareholders’incomenotesandloans 6.36 50,750 50,750 50,750 50,750 50,750 50,750 6,104,236 5,859,507 5,137,244 4,717,364 4,257,407 4,073,376

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 56,890,874 47,389,377 40,956,577 31,870,916 29,278,396 18,239,359

TheconsolidatedstatementsoffinancialpositionaretobereadinconjunctionwiththenotestoandformingpartoftheAccountants’Reportsetoutonpages91to150.

83




3 Statement of financial position (Continued)

3.2 Separate statement of financial position

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009ASSETS Note KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cashandbankbalances 6.16 3,014,457 1,718,991 1,454,346 384,022 420,377 319,839InvestmentinGovernmentsecurities 6.17 276,067 288,167 723,616 379,847 539,835 509,507Placementswithotherbanks 6.18 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419Mortgageadvancestocustomers(Net) 6.19 43,273,307 35,215,897 30,293,711 25,222,836 19,503,400 14,495,208Investmentinsubsidiaries 6.20 255,120 255,120 255,120 130,020 130,020 130,020InvestmentinJointVenture 6.20 190,800 190,800 86,700 - - -Otherassets 6.22 509,283 367,214 388,032 250,300 203,819 83,109Equityinvestments 6.23 - 151,500 60,000 56,000 - -Propertyandequipment 6.25.2 1,018,110 939,444 710,769 699,208 594,341 574,756Prepaidoperatingleaserentals 6.26 39,979 40,326 40,787 41,249 41,710 42,171Intangibleassets 6.27 487,181 395,935 9,923 2,571 3,068 4,094Deferredtaxasset 6.28.2 373,112 313,116 220,193 81,877 23,006 15,638Taxrecoverable 91,723 - 46,773 - - -

56,622,386 46,755,111 40,685,928 31,972,113 29,325,842 18,280,761 LIABILITIES Customers’deposits 6.30.2 33,356,28426,588,851 22,968,209 18,674,421 15,945,317 12,234,645Amountsduetosubsidiarycompany 6.21 - - 100 14,958 14,958 2,851Otherliabilities 6.31.2 788,504 351,478 632,223 324,374 315,882 208,841Loansfrombanks 6.32 6,093,557 3,803,905 1,702,834 847,507 1,573,369 1,700,000CorporateBond 6.34 10,461,347 10,212,469 10,212,633 7,168,598 7,156,344 -Dividendspayable 46,359 47,710 24,112 - - -Taxpayable - 68,845 - 160,037 50,441 50,193

50,746,051 41,073,258 35,540,111 27,189,895 25,056,311 14,196,530

SHAREHOLDERS’ EQUITY Sharecapital 6.35 1,157,600 1,155,350 1,153,000 1,152,125 1,150,000 1,150,000Reserves 4,667,985 4,475,753 3,942,067 3,579,343 3,068,781 2,883,481Shareholders’incomenotesandloans 6.36 50,750 50,750 50,750 50,750 50,750 50,750 5,876,335 5,681,853 5,145,817 4,782,218 4,269,531 4,084,231TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 56,622,386 46,755,111 40,685,928 31,972,113 29,325,842 18,280,761

TheconsolidatedstatementsoffinancialpositionaretobereadinconjunctionwiththenotestoandformingpartoftheAccountants’Reportset out on pages 91to150.

84




4 Consolidated statement of cash flows

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 Notes KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Net cash flows from operating activities 6.37 1,912,813 1,741,341 2,201,041 (2,812,166) 6,118,593 (265,520) INVESTING ACTIVITIES Purchaseofpropertyandequipment (47,781) (107,573) (75,230) (88,829) (60,862) (11,801)Sale/(purchase)ofequityinvestments 151,500 - - (90,000) - -InvestmentinJointVenture - (104,100) (86,700) - - -Capitalworkinprogress (93,381) (192,263) - - - -Proceedsfromsaleofequipment 30 4,025 912 2,548 222 80Purchaseofintangibleassets (98,379) (396,410) (10,131) (2,021) (1,659) - Net cash flow from investing activities (88,011) (796,321) (171,149) (178,302) (62,299) (11,721) FINANCING ACTIVITIES EmployeeShareOwnershipPlan 4,500 4,700 1,750 4,250 - -Dividendpaid (405,889) (311,052) (319,798) (192,221) (195,896) (69,000) Net cash flow from financing activities (401,389) (306,352) (318,048) (187,971) (195,896) (69,000) Net increase/(decrease) in cash and cash equivalents 1,423,413 638,668 1,711,844 (3,178,439) 5,860,398 (346,241) TheconsolidatedstatementsofcashflowsaretobereadinconjunctionwiththenotestoandformingpartoftheAccountants’Reportsetouton pages 91to150.

85




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86




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87




5 St

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88




5 St

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Thestatem

entsofchangesinequityaretobereadinconjunctionwiththenotestoandformingpartoftheAccountants’Reportsetoutonpages91to150

.

91




6.1 Reporting entityHousingFinanceisincorporatedasalimitedcompanyinKenyaundertheKenyanCompaniesAct,andisdomiciledinKenya.TheconsolidatedfinancialstatementsoftheGroupasatandforthenine-monthperiodended30September2014includethecompany,itssubsidiariesandjointventures(togetherreferredasthe“Group”andindividuallyas“Groupentities”.TheGroupisprimarilyinvolvedinmortgagelending.

6.2 Basis of preparation6.2.1 Statement of complianceTheconsolidatedfinancialstatementshavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(IFRSs)andinamannerrequiredbytheKenyanCompaniesAct.

6.2.2 Basis of measurementThe consolidated financial statements have been prepared on the historical cost basis except where otherwise stated in the accounting policies below.

6.2.3 Functional and presentation currencyTheseconsolidatedfinancialstatementsarepresentedinKenyaShillings(KShs),whichistheGroup’sfunctionalcurrency.

Items included in the financial statements are measured using the currency of primary economic environment in which the entity operates i.e. Kenya Shillings. Except as otherwise indicated, financial information presented in Kenya Shillings has been rounded to the nearest thousand (KShs‘000).

6.2.4 Use of estimates and judgementsThe preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application ofaccountingpoliciesandthereportedamountsofassets,liabilities,incomesandexpenses.Actualresultsmayultimatelydifferfromtheseestimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements is described in Note 6.6. 6.3 Significant accounting policiesThe accounting policies set out below have been applied consistently to all years presented on these financial statements and have been applied consistently by the Group.

6.3.1 Consolidation principlesThe consolidated financial statements comprise the financial statements of the parent company and its subsidiaries made up to 30 September2014.Subsidiariesareentitiescontrolledbythecompany.Controlexistswhenthecompanyhaspower,directlyorindirectly,togovern the financial and operating policies so as to obtain benefits from its activities. In assessing control, potential voting right that presently areexercisablearetakenintoaccount.AlistingofthesubsidiariesissetoutonNote6.20.

The accounting policies of subsidiaries have been changed where necessary to align them with the accounting policies adopted by the Group.

6.3.2 Transactions eliminated on consolidationIntra-groupbalances,andincomeandexpenses(exceptforforeigncurrencytransactiongainsorlosses)arisingfromintra-grouptransactions,are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

6.3.3 Revenue recognitionIncome is recognised on an accrual basis.

6 Notes to the consolidated financial statements

92




6.3.3.1 InterestInterest income and expense are recognised in profit or loss using the effective interest method. The effective interest rate is the rate that exactlydiscounts theestimated futurecashpaymentsand receipts through theexpected lifeof thefinancialassetor liability (or,whereappropriate, a shorter period) to the carrying amount of the financial asset or liability. 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 paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in the statement of comprehensive income include:

• interestonfinancialassetsandliabilitiesatamortisedcostonaneffectiveinterestratebasis;and,• interestonavailable-for-saleinvestmentsecuritiesonaneffectiveinterestbasis.

6.3.3.2 Non interest income Fees and commission incomeFees and commission income that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees, are recognised as the related services are performed.

Other incomeOther income comprises of rental income, gains on disposal of equipment, other operating income and foreign exchange differences. Other income is recognized when the right to receive income is established.

6.3.4 Foreign currency transactionsTransactions in foreign currencies during the year are converted into Kenya Shillings at the rates ruling at the transaction dates. Monetary assets and liabilities at the reporting date which are expressed in foreign currencies are translated into Kenya shillings at rates ruling at the reporting date. The resulting realised and unrealised differences from conversion and translations are recognised in the statement of comprehensive income. Non-monetary assets and liabilities denominated in foreign currency are recorded at the exchange rate ruling at the date of the transaction.

6.3.5 Property and equipment6.3.5.1 Recognition and measurementAll categories of property and equipment are initially recorded at cost. Property and equipment is subsequently shown at a revaluedamount,being its fairvalueat thedateof revaluation lessanysubsequentaccumulateddepreciationand impairment losses.Valuationsareperformedbyexternalindependentvaluers.Purchasedsoftwarethatisintegraltothefunctioningofrelatedequipmentiscapitalizedaspartofthatequipment.Increasesinthecarryingamountarisingonrevaluationarecreditedtoothercomprehensiveincome.Decreasesthatoffsetpreviousincreasesofthesameassetarechargedagainsttherevaluationsurplus;allotherdecreasesarechargedtothestatementofcomprehensive income.

The cost of replacing a component of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced item is derecognized. The cost of day to day servicing of property and equipment are recognized in the profit and loss.

6 Notes to the consolidated financial statements (Continued)6.3 Significant accounting policies (Continued)6.3.3 Revenue recognition (Continued)

93




6.3.5.2 Depreciation

Freehold land is not depreciated. Depreciationiscalculatedonastraightlinebasistoallocatethecostorrevaluedamounttotheirresidualvaluesovertheirestimatedusefullives as follows:

Buildings 2%Computers 20%Motorvehicles 20%Officeequipment,fixturesandfittings 5%-20%

Buildings on leasehold land are depreciated over the remaining period of the lease. Buildings on freehold land are depreciated over fifty years.

Depreciationmethod,usefullivesandresidualvaluesarereassessedatthereportingdate.

6.3.5.3 Disposal of property and equipmentGains and losses on disposal of property and equipment are determined by reference to the carrying amount and are recognised in the statement of comprehensive income in the period in which they arise.

6.3.6 Intangible assetsWhere computer software is not an integral part of the related computer hardware it is recognised as an intangible asset. The software are stated on the statement of financial position at costs less accumulated amortisation and impairment losses. Subsequent expenditure on softwareassetsiscapitalisedonlywhenitincreasesthefutureeconomicbenefitembodiedinthespecificassettowhichitrelates.Allotherexpenditure is expensed as incurred.

Softwarecostsareamortisedovertheestimatedusefullife,currentlyestimatedatfive(5)years,onastraightlinebasisfromthedatetheyare available for use.

6.3.7 LeasesLeaseswhereasignificantportionoftherisksandrewardsofownershipareretainedbythelessorareclassifiedasoperatingleases.Paymentsmadeunderoperating leasesarrangements(whetherpre-paidorpost-paid)arechargedtothestatementofcomprehensive incomeonastraight-line basis over the period of the lease. 6.3.8 Employee benefits

6.3.8.1 Employee Retirement Benefits PlanThe Group operates a defined contribution scheme whose funds are held in a separate trustee administered and guaranteed scheme managed by an approved insurance company. The pension plan is funded by contributions from the employees and the Group. The Group’s contributions are charged to the statement of comprehensive income in the year to which they relate.

The employees and the Group also contribute to the National Social Security Fund, a national retirement benefit scheme. Contributions are determined by the local statute and the Group’s contributions are charged to the statement of comprehensive income in the year to which they relate. The Group has no further obligation once the contributions have been paid.

6.3.8.2 Employee Share Ownership Plan (ESOP)The grant date fair value of equity-settled share-based payment awards (i.e. stock options) granted to employees is recognised as anemployee expense, with a corresponding increase in equity, over the period in which the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are expected to be met such that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

6 Notes to the consolidated financial statements (Continued)

6.3 Significant accounting policies (continued)

6.3.5 Property and equipment (Continued)

94




6.3.8.3 Accrued leaveAccrualforannualleaveismadeasemployeesearnitandreducedwhentaken.

6.3.8.4 Termination benefitsTermination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. 6.3.8.5 Short-term benefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.Aprovisionisrecognisedfortheamountexpectedtobepaidundershort-termcashbonusorprofit-sharingplansiftheGrouphasapresentlegal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

6.3.9 TaxationTax on the operating results for the year comprises current tax and the change in deferred tax. Current tax is provided on the results in the year as shown in the financial statements adjusted in accordance with tax legislation.

Deferred tax is recognized in respect of temporary differences between carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for taxation purposes except differences relating to the initial recognition of assets or liabilities which affect neither accounting nor taxable profit.

Adeferredtaxasset isrecognisedforunusedtax lossesanddeductibletemporarydifferencestotheextentthat it isprobablethatfuturetaxableprofitwillbeavailableagainstwhichthetaxassetcanbeutilised.Deferredtaxassetsarereviewedateachreportingdateandarereducedtotheextentthatitisnolongerprobablethattherelatedtaxbenefitwillberealised.Deferredtaxiscalculatedonthebasisofthetaxrates enacted at the reporting date.

6.3.10 Cash and cash equivalentsCash and cash equivalents include notes and coins at hand, unrestricted balances held with Central Bank of Kenya, balances with commercial banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

Cash and cash equivalents are carried at amortised cost in the statement of financial position.

6.3.11 Financial assets and liabilities6.3.11.1 RecognitionTheGroupinitiallyrecognisesloansandadvances,depositsanddebtsecuritiesonthedateatwhichtheyareoriginated.Allotherfinancialassetsandliabilities(includingassetsdesignatedatfairvaluethroughprofitandloss)areinitiallyrecognisedonthetradedateatwhichtheGroup becomes a party to the contractual provision of the instrument.Afinancialassetorliabilityisinitiallymeasuredatfairvalueplus(foranitemnotsubsequentlymeasuredatfairvaluethroughprofitorloss)transaction costs that are directly attributable to its acquisition or issue.

Subsequenttoinitialrecognition,financialliabilities(depositsanddebtsecurities)aremeasuredattheiramortizedcostusingtheeffectiveinterest method except where the Group designates liabilities at fair value through profit and loss.

6.3.11.2 ClassificationTheGroupclassifiesitsfinancialassetsinthefollowingcategories:financialassetsatfairvaluethroughprofitorloss;loansandreceivables;held-to-maturityinvestments;andavailable-for-salefinancialassets.Managementdeterminestheclassificationofitsinvestmentsatinitialrecognition.



6.3.8 Employee benefits (Continued)

95




6.3.11.3 Financial assets at fair value through profit or lossThiscategoryhastwosub-categories:financialassetsheldfortrading,andthosedesignatedatfairvaluethroughprofitorlossatinception.Afinancial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. 6.3.11.4 Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a debtor with no intention of trading the receivable. These include mortgage advances to customers, staff loans and placements with other banks. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.

6.3.11.5 Held-to-maturityHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. These include treasury bills, treasury bonds and government stock.

6.3.11.6 Available-for-saleAvailableforsalefinancialassetsarethosenonderivativefinancialassetsthataredesignatedasavailableforsaleorarenotclassifiedas(a)loansandreceivables(b)held–to-maturityor(c)financialassetsatfairvaluethroughprofitandloss.Availableforsalefinancialassetsarerecognized initially at fair value plus any directly attributable transaction costs

Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available for sale debt instruments are recognized in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognized, the gain or loss accumulated in equity is re-classified to profit or loss.

6.3.11.7 Identification and measurement of impairment of financial assetsAteachreportingdatetheGroupassesseswhetherthereisobjectiveevidencethatfinancialassetsnotcarriedatfairvaluethroughprofitor loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset than can be estimated reliably.

The Group considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets areassessedforspecificimpairment.Allsignificantassetsfoundnottobespecificallyimpairedarethencollectivelyassessedforanyimpairmentthathasbeen incurredbutnotyet identified.Assetsthatarenot individuallysignificantarethencollectivelyassessedfor impairmentbygroupingtogetherfinancialassets(carriedatamortisedcost)withsimilarriskcharacteristics.

Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower,restructuring of a loan or advance by the Group on terms that the Group would otherwise not consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses arelikelytobegreaterorlessthansuggestedbyhistoricaltrends.Defaultrate,lossratesandtheexpectedtimingoffuturerecoveriesareregularly benchmarked against actual outcomes to ensure that they remain appropriate.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective interest rate. Losses are recognised in the statement of comprehensive income and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount.


6.3.11 Financial assets and liabilities (Continued)


96




When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through statement of comprehensive income.

Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to the statement of comprehensive income. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through statement of comprehensive income. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income. 6.3.11.8 DerecognitionThe Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership ofthefinancialassetaretransferred.AnyinterestintransferredfinancialassetsthatiscreatedorretainedbytheGroupisrecognisedasaseparate asset or liability.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

The Group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the statement of financial position. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions.

6.3.12 Impairment for non-financial assetsThe carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the assets’ recoverable amount is estimated.

An impairment loss is recognised if thecarryingamountofanassetor itscash-generatingunitexceeds its recoverableamount.Acash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the statement of comprehensive income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assetsintheunit(groupofunits)onapro-ratabasis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

6.3.13 Segmental reportingAnoperatingsegmentisacomponentoftheGroupthatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses,includingrevenuesandexpensesthatrelatetotransactionswithanyoftheGroup’sothercomponents.Alloperatingsegments’operatingresultsarereviewedregularlybytheGroup’sExecutiveCommittee(EXCO)tomakedecisionsaboutresourcestobeallocatedtothesegmentand assess its performance, and for which discrete financial information is available.

6.3.14 DividendsDividendsarerecognisedasaliabilityintheyearinwhichtheyaredeclared.Proposeddividendsaredisclosedasaseparatecomponentofequity.

6.3.15 Earnings per shareEarningspershareiscalculatedbasedontheprofitattributabletoshareholdersdividedbythenumberofordinaryshares.Dilutedearningspershareisthesameasthebasicearningspershare.Dilutedearningspersharearecomputedusingtheweightedaveragenumberofequity


6.3.11 Financial assets and liabilities (Continued)


6.3.11.7 Identification and measurement of impairment of financial assets (Continued)

97




sharesanddilutivepotentialordinarysharesoutstandingduringtheyear.Duringtheyeartherewerenosignificantoutstandingshareswithdilutive potential.

6.3.16 ProvisionsProvisionsare recognisedwhen theGrouphasapresent legalorconstructiveobligationasa resultofpasteventsand it isprobable thatan 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.

6.3.17 OffsettingFinancial assets and liabilities are offset and the net amount reported on the statement of financial position when there is a legally enforceable right to offset the recognised amount and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

6.3.18 Joint ventureJoint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiringunanimous consent for strategic financial and operating decisions. Investments in jointly controlled entities are accounted for using the equity method and are recognised initially at cost. The consolidated financial statements include the Group’s share of the income and expenses and equity movements of equity accounted investees, from the date that joint control commences until the date the joint control ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

6.3.19 ComparativesWhere necessary, comparative figures have been restated to conform with changes in presentation in the current year.

6.3.20 New standards and interpretations effective in 2014 and relevant to the Group

New standard or amendments Effective for annual periods beginning on or after• AmendmentstoIAS32-OffsettingFinancialAssetsandFinancialLiabilities(2011) 1January2014• InvestmentEntities-AmendmentstoIFRS10,IFRS12,andIAS27(2012) 1January2014• AmendmentstoIAS36-RecoverableAmountDisclosuresforNon-Financial

Assets(20131January2014

• AmendmentstoIAS39–NovationofDerivativesandContinuationofHedgeAccounting

1January2014

• IFRIC21Levies(2013) 1January2014

Impact of relevant new and amended standards and interpretations on the financial statements for the nine-month period period ended 30 September2014.

Amendments to IAS 32: Offsetting Financial Assets and Financial LiabilitiesTheamendmentsaddressinconsistenciesincurrentpracticewhenapplyingtheoffsettingcriteriainIAS32,mainlybyclarifyingthemeaningof “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement. The Group has considered the provisions of these amendments in the preparation of the Group’s Financial Statements and there has been no impact.

Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities (2012)Theamendmentsdefine“investmententities”andprovidethemanexemptionfromtheconsolidationofsubsidiaries;instead,aninvestmententityisrequiredtomeasuretheinvestmentineacheligiblesubsidiaryatfairvaluethroughprofitorlossinaccordancewithIFRS9/IAS39(theexceptiondoesnotapplytosubsidiariesthatprovideservicesrelatingtotheinvestmententity’sinvestmentactivities).



6.3.15 Earnings per share (Continued)

98




Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities (2012) (Continued)An investmententity is required toaccount for its investment ina relevantsubsidiary in thesameway in its consolidatedandseparatefinancialstatements,andadditionaldisclosuresareintroduced.TheGroupreassesseditscontrolconclusionsasof1January2014.Followingthe assessment, there was no impact on the Group Financial Statements.

Amendments to IAS 36: Recoverable Amount Disclosures for Non-Financial Assets (2013)The amendments reduce the circumstances in which the recoverable amount of assets or cash-generating units is required to be disclosed, clarify the disclosures required, and introduce an explicit requirement to disclose the discount rate used in determining impairment (orreversals)whererecoverableamount(basedonfairvaluelesscostsofdisposal)isdeterminedusingapresentvaluetechnique.Consequently,the Group has expanded its disclosure of recoverable amounts when they are based on fair value less costs of disposals and assessed any impairment.

Amendments to IAS 39 titled Novation of Derivatives and Continuation of Hedge Accounting (June 2013)The amendments permit the continuation of hedge accounting in a situation where a counterparty to a derivative designated as a hedging instrumentisreplacedbyanewcentralcounterparty(knownas‘novationofderivatives’),asaconsequenceoflawsorregulations,ifspecificconditions are met. The amendment did not have an impact on the Group’s financial statements.

IFRIC 21: Levies (2013)The interpretation provides guidance on when to recognise a liability for a levy imposed by a government. The obligating event for the recognition of a liability is the activity that triggers the payment of the levy in accordance with the relevant legislation. It also provides guidance on recognition of a liability to pay levies: the liability is recognised either progressively if the obligating event occurs over a period of time, or when the minimum threshold is reached if an obligation is triggered on reaching that minimum threshold. The amendment did not have an impact on the Group’s financial statements.

6.3.21 New standards and interpretations not yet adopted

New standard or amendments Effective for annual periods beginning on or after• IFRS9FinancialInstruments(2010) 1January2018• IFRS15Revenuefromcontractswithcustomers 1January2017

IFRS 9: Financial Instruments (2010)ItreplacespartsofIAS39-FinancialInstruments,RecognitionandMeasurementthatrelatestoclassification,measurementandrecognitionoffinancialassetsandfinancialliabilities.IFRS9requiresfinancialassetstobeclassified,atinitialrecognitionaseithermeasuredatfairvalueor at amortised cost. The classification depends on the entity’s business model for managing its financial instruments and the characteristics ofthecontractualcashflowsoftheinstrument.Forfinancial liabilities,thestandardretainsmostoftherequirementsof IAS39.Themainchange is that, in cases where the fair value option is applied for financial liabilities, the part of a fair value change arising from a change in an entity’s own credit risk is recorded in other comprehensive income rather than in the profit or loss, unless this creates an accounting mismatch.IFRS9iseffectiveforannualreportingperiodsbeginningonorafter1January2018,withearlyadoptionpermitted.TheGroupisassessingthepotentialimpactonitsconsolidatedfinancialstatementsresultingfromtheapplicationofIFRS9.

IFRS 15 Revenue from Contracts with Customers The IFRS specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contractswithcustomersinrecognisingrevenuebeing:Identifythecontract(s)withacustomer;Identifytheperformanceobligationsinthecontract;Determinethetransactionprice;Allocatethetransactionpricetotheperformanceobligationsinthecontract;andRecogniserevenuewhen(oras)theentitysatisfiesaperformanceobligation.

IFRS15iseffectiveforannualreportingperiodsbeginningonorafter1January2017,withearlyadoptionpermitted.TheGroupisassessingthepotentialimpactonitsconsolidatedfinancialstatementsresultingfromtheapplicationofIFRS15.


6.3.20 New standards and interpretations effective in 2014 and relevant to the Group (Continued)


99




6.4 Financial risk managementPrinciplesHousingFinancefacesvarioustypesofriskswhicharisefromitsdaytodayoperationsasafinancialinstitution.TheBoardofDirectorsandManagement therefore devote a significant portion of their time to the management of these risks. The mainstay of effective risk management is the identification of significant risks, the quantification of the Group’s risk exposure, actions to limit risk and the constant monitoring of risk.

The overarching aim of risk management is to ensure that all risks assumed in the course of the Group’s business are recognized early on and mitigated by effective risk management. Successful risk management is recognized as a pre-condition for the sustained growth and success of the Group. Risk management and monitoring are implemented via the Group’s risk management and risk control process and the organization structure corresponds to the CBK Risk Management Guidelines.In order to ensure continuous improvement of risk management at all times the following key risk principles have been adopted and are applied;• TheBoardofDirectorsassumestheultimateresponsibilityforthelevelofriskstakenbytheGroupandisresponsibletooverseethe

effective implementation of the risk strategies.• Theorganizationalriskstructureandthefunctions,tasksandpowersoftheemployees,committeesanddepartmentsinvolvedinthe

risk processes are continuously being reviewed to ensure clarity of their roles and responsibilities.• Riskissuesaretakenintoconsiderationinallbusinessdecisions.Measuresareinplacetodeveloprisk-basedperformancemeasures

and this is being supplemented by setting risk limits at the overall Group and divisional levels, as well as by enforcing consistent operating limits for individual business activities.

• Riskmanagementisincreasinglybeinglinkedtomanagementprocessessuchasstrategicplanning,annualbudgetingandperformancemeasurement.

• Identifiedrisksarereportedinatransparentandtimelymannerandinfulltotheresponsibleseniormanagement.• Appropriateandeffectivecontrolsexistforallprocessesentailingrisks.

Alltheseprinciplesareenshrinedinthenewlyadoptedriskmanagementframework.Itisfurthersupplementedbyspecificguidelinesformeasuring and monitoring individual risk types as issued by the CBK Risk Management Guidelines.

The section below provides details of the Group’s exposure to various risks and describes the methods used by management to control risk. The most important types of financial risks to which the Group is exposed are credit risk, liquidity risk and market risk mainly interest risk and operational risk.

6.4.1 Credit riskCredit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the Group or if an obligor otherwise fails to perform as agreed.

Management of credit riskThe Group is subject to credit risk through its lending and investing activities. Credit risk is the Group’s largest risk and considerable resources, expertise and controls are devoted to managing it and comprehensive strategies, policies and procedures have been developed to effectively manage this risk.

TheBoardprovideseffectiveoversightoftheoverallcreditportfoliothroughtheBoardCreditCommittee(BCC).Thiscommitteeisthedecisionmakingbodywithresponsibilityforloansthatexceedthescopeofauthorityofthemanagementlendingcommittee.Actingonthebasisofthe powers granted to it by the Board, the BCC decides on the overall lending limits for the Group and approves the credit risk strategies to be adopted.

TheGrouphasadequateBoardapprovedCreditPolicieswhicharereviewedannuallyandwhichcoverallaspectsofcreditriskmanagement(mortgageorigination,analysisandappraisal,acceptablecollateral,approvalauthoritiesandnon-performingloanmanagement).Atthemanagementlevel,thereisaCreditRiskDepartmentstaffedwithhighlyskilledpersonnelwhoensurecreditrisksareidentifiedandmitigated. Within this department there is a fully fledged mortgage recoveries and rehabilitation unit with the responsibility of formulating workout solutions and restructuring mortgages in distress.


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The Group’s primary exposure to credit risk arises through its mortgage advances to customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. The Group is also exposed to credit risk on debt investments. The current credit exposure in respect of the instruments is equal to the carrying amount of these assets in the statement of financial position.

The risk that counterparties to instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Group deals with counterparties of good credit standings and obtain collateral.

The Group also monitors concentration of credit risk that arises by customer in relation to mortgage advances to customers. The Group has no significant exposure to any individual customer or counterparty.

Impaired mortgage advancesImpaired loans and securities are loans and advances for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan. These loans are graded as substandard to loss categories in the Group’s internal credit risk grading system.

Past due but not impaired mortgagesPastduebutnotimpairedloansarethoseforwhichcontractualinterestorprincipalpaymentsarepastduebutnotformorethanthreemonthsand the Group believes that impairment is not appropriate on the basis that in the Group’s assessment the total outstanding balances are recoverableandthe levelofsecurity/collateralavailableand/or thestageofcollectionofamountsowedto theGroup isadequate.Anyamounts past due for more than three months are considered impaired. Mortgages with renegotiated termsMortgages with renegotiated terms are mortgages that have been restructured due to deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category until satisfactory performance after restructuring.

Allowances for impairmentThe Group establishes an allowance for impairment losses on assets carried at amortised cost or classified as available for sale that represents its estimate of incurred losses in its loan and investment debt security portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans that are considered individually insignificant as well as individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired.

Write-off policyTheGroupwritesoffa loan/securitybalance(andanyrelatedallowancesfor impairment losses)whenGroupCreditdeterminesthat themortgages/securitiesareuncollectible.Thisdeterminationisreachedafterconsideringinformationsuchastheoccurrenceofsignificantchanges in the borrower financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

6.4 Financial risk management (continued)

6.4.1 Credit risk (Continued)


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Exposure to credit risk 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Mortgage advances: Impairedloans 4,311,507 3,209,739 2,331,482 1,579,576 1,467,815 1,815,135Grossamountallowanceforimpairment (1,125,405) (878,649) (647,688) (480,768) (382,378) (596,490) Carrying amount 3,186,102 2,331,090 1,683,794 1,098,808 1,085,437 1,218,645 Neither past due nor impaired (normalandwatch) 40,159,227 32,952,381 28,687,140 24,197,426 18,470,033 13,308,875Allowanceforimpairmentincurredbutnotreported (72,022) (67,574) (7,223) (73,398) (52,070) (32,312) Carrying amount 40,087,205 32,884,807 28,679,917 24,124,028 18,417,963 13,276,563 Net carrying amount 43,273,307 35,215,897 30,363,711 25,222,836 19,503,400 14,495,208 Investment in government securities: Neitherpastduenorimpaired 276,067 288,167 723,616 379,847 539,535 509,507Allowanceforimpairmentincurredbut not reported - - - - Carrying amount 276,067 288,167 723,616 379,847 539,535 509,507 Net carrying amount 276,067 288,167 723,616 379,847 539,535 509,507 Investment in equities: Neitherpastduenorimpaired - 151,500 60,000 56,000 - -Allowanceforimpairmentincurredbut not reported - - - -

Carrying amount - 151,500 60,000 56,000 - - Net carrying amount - 151,500 60,000 56,000 - -

Placement with other banks: Neitherpastduenorimpaired 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419Allowanceforimpairmentincurredbut not reported - - - - - -Carrying amount 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419 Net carrying amount 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419




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Inadditiontotheabove,theGrouphasenteredintolendingcommitmentsofKShs10,491,226,367(2013–KShs8,193,903,790,2012–KShs.4,438,269,576,2011-KShs8,912,165,247,2010–KShs6,585,885,192,2009–KShs5,851,242,321)withvariouscounterparties.

The Group holds collateral against mortgage advances to customers in the form of mortgage interests over property. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral is not held over placements with banks and investment in government securities as these are considered to be risk free.

Anestimateofthefairvaluesofcollateralagainstloansandadvancestocustomersisshownbelow:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Againstimpairedaccounts 8,023,965 5,819,734 4,379,006 2,654,837 2,049,810 2,067,062Againstaccountsnotimpaired 123,991,953 86,650,273 80,603,867 67,779,150 43,021,535 28,894,606 132,015,918 92,470,007 85,182,873 70,433,987 45,071,345 30,961,668

Detailsoffinancialandnon-financialassetsobtainedbytheGroupduringthe5yearsandnine-monthperiodended30September2014bytaking possession of collateral held against loans and advances held at period end are shown below:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Properties 131,970,848 92,443,172 85,160,264 70,433,987 45,071,345 30,961,668Securedbycash 45,070 26,835 22,609 - - - 132,015,918 92,470,007 85,182,873 70,433,987 45,071,345 30,961,668

The Group’s policy is to pursue timely realisation of the collateral in an orderly manner. The Group generally does not use the non-cash collateral for its own operations.

6.4.2 Liquidity riskLiquidity risk is the current or prospective risk to earnings and capital arising from the institution’s failure to meet its maturing obligations when they fall due without incurring unacceptable losses.

The Group’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 Group’s reputation.

To this end, there is a Board approved policy to effectively manage liquidity at all times to meet mortgage demand and deposit withdrawals, regulatory requirements (liquidity ratio), unexpected outflow / non-receipt of expected inflow of funds as well as ensure adequatediversificationoffundingsources.TheAsset&LiabilityCommittee(ALCO)undertakesstatementoffinancialpositionliquiditymanagementand scenario analysis as per the policy on a bi-weekly basis.

The Group has access to a diverse funding base. Funds are raised mainly from deposits, share capital, medium term notes and loans. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Group strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Group continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Group strategy.




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In addition the Group holds a portfolio of liquid assets as part of its liquidity risk management strategy.

Exposure to liquidity riskThe key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment securities for which there is an active and liquid market lessanydepositsfrombanks,otherborrowingsandcommitmentsmaturingwithinthenextmonth.DetailsofthereportedGroupratioofnetliquid assets to customers’ deposits at the reporting date and during the reporting periods were as follows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 At30September/December 30.33% 33.12% 36.80% 29.10% 55.73% 23.90%Averagefortheperiod/year 30.11% 34.18% 29.80% 44.78% 38.35% 26.00%Maximumfortheperiod/year 34.50% 39.12% 37.69% 58.08% 64.61% 27.60%Minimumfortheperiod/year 25.82% 26.40% 21.02% 28.02% 28.84% 23.90%

Contractual maturity analysis of financial assets and liabilities

The table below analyses the liquidity position of the Group’s financial assets and liabilities:

Due between Due30 September 2014: Due on Due within 3 and12 between 1 Due after demand 3 months months and 5 years 5 years Total KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandbankbalances 3,014,470 - - - - 3,014,470Placementswithotherbanks 320,633 5,991,059 781,555 - - 7,093,247InvestmentinGovernmentsecurities 276,067 - - - - 276,067Netmortgageadvancestocustomers 54,268 1,263,587 3,228,101 4,640,579 34,086,772 43,273,307

Total 3,665,438 7,254,646 4,009,656 4,640,579 34,086,772 53,657,091

Financial liabilities Customerdeposits 9,864,836 11,770,748 6,122,595 58,049 5,330,314 33,146,542Loansfrombanks - 322,605 491,699 3,986,316 1,292,937 6,093,557Borrowedfunds - - 147,000 - - 147,000Corporatebond - 461,347 - 7,030,900 2,969,100 10,461,347Governmentincomenotes - - - - 50,750 50,750

Total 9,864,836 12,554,700 6,761,294 11,075,265 9,643,101 49,899,196

Unrecognised mortgage commitments - 4,518,235 5,972,991 - - 10,491,226

At 30 September 2014 (6,199,398) (9,818,289) (8,724,629) (6,434,686) 24,443,671 (6,733,331)


6.4.2 Liquidity risk (Continued)


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6.4.2 Liquidity risk (Continued) Due between Due Due on Due within 3 and12 between 1 Due after demand 3 months months and 5 years 5 years Total31 December 2013: KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandbankbalances 1,719,004 - - - - 1,719,004Placementswithotherbanks - 6,878,601 - - - 6,878,601InvestmentinGovernmentsecurities 288,167 - - - - 288,167Equityinvestments - - - - 151,500 151,500Netmortgageadvancestocustomers 154,735 2,632,483 1,592,026 3,045,379 27,791,274 35,215,897

Total 2,161,906 9,511,084 1,592,026 3,045,379 27,942,774 44,253,169

Financial liabilities Customerdeposits 7,318,699 11,623,828 3,017,766 71,364 4,475,547 26,507,204Loansfrombanks - 151,360 405,543 2,491,791 755,211 3,803,905Borrowedfunds - - - - 347,276 347,276Corporatebond - - 212,469 7,030,900 2,969,100 10,212,469Governmentincomenotes - - - - 50,750 50,750

Total 7,318,699 11,775,188 3,635,778 9,594,055 8,597,884 40,921,604

Unrecognised mortgage commitments - 4,551,681 3,642,223 - - 8,193,904 At 31 December 2013 (5,156,793) (6,815,785) (5,685,975) (6,548,676) 19,344,890 (4,862,339) 31 December 2012: Financial assets Cashandbankbalances 1,454,359 - - - - 1,454,359Placementswithotherbanks - 6,395,958 - - - 6,395,958InvestmentinGovernmentsecurities - 401,644 - - 321,972 723,616Equity investments - - - - 60,000 60,000Netmortgageadvancestocustomers - 525,530 1,435,399 4,031,429 24,301,353 30,293,711

Total 1,454,359 7,323,132 1,435,399 4,031,429 24,683,325 38,927,644

Financial liabilities Customerdeposits 7,907,698 3,630,282 7,683,090 276,030 3,440,549 22,937,649Loansfrombanks - 179,165 215,001 1,012,974 295,694 1,702,834Borrowedfunds - - - 181,891 - 181,891Corporatebond - - 212,633 - 10,000,000 10,212,633Governmentincomenotes - - - - 50,750 50,750

Total 7,907,698 3,809,447 8,110,724 1,470,895 13,786,993 35,085,757

Unrecognised mortgage commitments - 2,569,535 1,868,735 - - 4,438,270 At 31 December 2012 (6,453,339) 944,150 (8,544,060) 2,560,534 10,896,332 (596,383)


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Due between Due Due on Due within 3 and12 between 1 Due after demand 3 months months and 5 years 5 years Total31 December 2011: KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cash and bank balances 384,034 - - - - 384,034Placementswithotherbanks - 3,608,915 1,115,268 - - 4,724,183InvestmentinGovernmentsecurities - - 6,288 373,559 - 379,847Equityinvestments - - - - 56,000 56,000Netmortgageadvancestocustomers - 536,657 1,931,688 2,570,509 20,183,982 25,222,836

Total 384,034 4,145,572 3,053,244 2,944,068 20,239,982 30,766,900

Financial liabilities Customerdeposits 6,502,854 6,254,214 2,920,832 91,776 2,901,910 18,671,586Loansfrombanks - 85,777 668,887 92,843 - 847,507Corporatebond - - 137,698 - 7,030,900 7,168,598Governmentincomenotes - - - - 50,750 50,750

Total 6,502,854 6,339,991 3,727,417 184,619 9,983,560 26,738,441

Unrecognised mortgage commitments - 3,173,895 5,738,270 - - 8,912,165 At 31 December 2011 (6,118,820) (5,368,314) (6,412,443) 2,759,449 10,256,422 (4,883,706) 31 December 2010: Financial assets Cashandbankbalances 420,390 - - - - 420,390Placementswithotherbanks - 6,599,080 1,267,186 - - 7,866,266InvestmentinGovernmentsecurities - - 9,835 530,000 - 539,835Netmortgageadvancestocustomers - 324,479 1,069,660 2,295,392 15,813,869 19,503,400

Total 420,390 6,923,559 2,346,681 2,825,392 15,813,869 28,329,891

Financial liabilities Customerdeposits - 6,199,573 2,744,267 4,591,549 2,407,952 15,943,341Loansfrombanks - 78,858 646,771 847,740 - 1,573,369Corporatebond - - 125,444 - 7,030,900 7,156,344Governmentincomenotes - - - - 50,750 50,750

Total - 6,278,431 3,516,482 5,439,289 9,489,602 24,723,804

Unrecognised mortgage commitments - 2,384,128 4,201,757 - - 6,585,885 At 31 December 2010 420,390 (1,739,000) (5,371,558) (2,613,897) 6,324,267 (2,979,798)


6.4.2 Liquidity risk (Continued)


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6.4.2 Liquidity risk (Continued) Due between Due Due on Due within 3 and12 between 1 Due after demand 3 months months and 5 years 5 years Total31 December 2009: KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandbankbalances 319,839 - - - - 319,839Placementswithotherbanks 100,092 1,293,775 712,552 - - 2,106,419InvestmentinGovernmentsecurities - - 9,507 500,000 - 509,507Netmortgageadvancestocustomers - 370,237 713,368 2,055,344 11,356,259 14,495,208

Total 419,931 1,664,012 1,435,427 2,555,344 11,356,259 17,430,973 Financial liabilities Customerdeposits - 5,295,805 1,447,054 3,790,230 1,686,360 12,219,449Loansfrombanks - 700,000 - 1,000,000 - 1,700,000Governmentincomenotes - - - - 50,750 50,750

Total - 5,995,805 1,447,054 4,790,230 1,737,110 13,970,199 Unrecognised mortgage commitments - 2,673,346 3,177,896 - - 5,851,242 At 31 December 2009 419,931 (7,005,139) (3,189,523) (2,234,886) 9,619,149 (2,390,468)

6.4.3 Market riskManagement of market riskMarket risk is the risk that changes in market prices, such as interest rate and foreign exchange rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptableparameters,whileoptimising the returnon risk.Overallauthority formarket risk isvested inALCO.ALCO is responsible for thedevelopment of detailed risk management policies and for the day-to-day review of their implementation.

Exposure to interest rate riskThe principal risk to which financial assets and liabilities are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gapsandbyhavingpre-approvedlimitsforrepricingbands.ALCOisthemonitoringbodyforcompliancewiththeselimitsandisassistedbyRisk Management in its day-to-day monitoring activities.The table below summarises the exposure to interest rate risks. Included in the table below are the Group’s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates:


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Due between Due Average Due on Due within 3 and12 between 1 Due after interest rate demand 3 months months and 5 years 5 years Total30 September 2014: % KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandbankbalances - 3,014,470 - - - - 3,014,470Placementswithotherbanks 7.87% 320,633 5,991,059 781,555 - - 7,093,247InvestmentinGovernmentsecurities 12.64% 276,067 - - - - 276,067Netmortgageadvancestocustomers 14.52% 54,268 1,263,587 3,228,101 4,640,579 34,086,772 43,273,307 3,665,438 7,254,646 4,009,656 4,640,579 34,086,772 53,657,091 Financial liabilities Customerdeposits 6.86% 9,864,836 11,770,748 6,122,595 58,049 5,330,314 33,146,542Loansfrombanks 8.84% - 322,605 491,699 3,986,316 1,292,937 6,093,557Borrowedfunds 16.50% - - 147,000 - - 147,000Corporatebond 10.17% - 461,347 - 7,030,900 2,969,100 10,461,347Governmentincomenotes 8.25% - - - - 50,750 50,750 9,864,836 12,554,700 6,761,294 11,075,265 9,643,101 49,899,196

Unrecognised mortgage commitments - 4,518,235 5,972,991 - - 10,491,226 At 30 September 2014: (6,199,398) (9,818,289) (8,724,629) (6,434,686) 24,443,671 (6,733,331)

31 December 2013: Financial assets Cashandbankbalances - 1,719,004 - - - - 1,719,004Placementswithotherbanks 8.23% - 6,878,601 - - - 6,878,601InvestmentinGovernmentsecurities 12.07% - - - - 288,167 288,167Netmortgageadvancestocustomers 14.01% - 34,697,698 - 518,199 - 35,215,897Equityinvestments - 151,500 - - - - 151,500 Total 1,870,504 41,576,299 - 518,199 288,167 44,253,169 Financial liabilities Customerdeposits 6.75% 7,322,073 11,620,454 3,017,766 71,364 4,475,547 26,507,204Loansfrombanks 7.34% - 1,189,186 1,729,758 - 884,961 3,803,905Borrowedfunds 16.50% - - - 347,276 - 347,276Corporatebond 10.17% - - 212,469 7,030,900 2,969,100 10,212,469Governmentincomenotes 8.25% - - - - 50,750 50,750 Total 7,322,073 12,809,640 4,959,993 7,449,540 8,380,358 40,921,604 Unrecognised mortgage commitments - 4,551,681 3,642,223 - - 8,193,904 At 31 December 2013 (5,451,569) 24,214,978 (8,602,216) (6,931,341) (8,092,191) (4,862,339)


6.4.3 Market risk (continued)


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Due between Due Average Due on Due within 3 and12 between 1 Due after interest rate demand 3 months months and 5 years 5 years Total31 December 2012: % KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandbankbalances - 1,454,359 - - - - 1,454,359Placementswithotherbanks 14.12% - 6,395,958 - - - 6,395,958InvestmentinGovernmentsecurities 14.65% - 401,644 - - 321,972 723,616Netmortgageadvancestocustomers 15.57% - 525,530 1,435,399 4,031,429 24,301,353 30,293,711 1,454,359 7,323,132 1,435,399 4,031,429 24,623,325 38,867,644

Financial liabilities Customerdeposits 8.03% 7,907,698 3,630,282 7,683,090 276,030 3,440,549 22,937,649Loansfrombanks 7.87% - 179,165 215,001 1,012,974 295,694 1,702,834Borrowedfunds 16.50% - - - 181,891 - 181,891Corporatebond 9.01% - - 212,633 - 10,000,000 10,212,633Governmentincomenotes 8.25% - - - - 50,750 50,750 7,907,698 3,809,447 8,110,724 1,470,895 13,786,993 35,085,757

Unrecognised mortgage commitments - 2,569,535 1,868,735 - - 4,438,270 At 31 December 2012 (6,453,339) 944,150 (8,544,060) 2,560,534 10,836,332 ( 656,383)

31 December 2011: Financial assets Cash and bank balances - 384,034 - - - - 384,034Placementswithotherbanks 15.04% - 3,608,915 1,115,268 - - 4,724,183InvestmentinGovernmentsecurities 11.90% - - 6,288 373,559 - 379,847Netmortgageadvancestocustomers 14.63% - 536,657 1,931,688 2,570,509 20,183,982 25,222,836 384,034 4,145,572 3,053,244 2,944,068 20,183,982 30,710,900

Financial liabilities Customerdeposits 10.25% 6,502,854 6,254,214 2,920,832 91,776 2,901,910 18,671,586Loanfrombank 13.30% - 85,777 668,887 92,843 - 847,507Corporatebond 8.88% - - 137,698 - 7,030,900 7,168,598Governmentincomenotes 8.25% - - - - 50,750 50,750 6,502,854 6,339,991 3,727,417 184,619 9,983,560 26,738,441

Unrecognised mortgage commitments - 3,173,895 5,738,270 - - 8,912,165 At 31 December 2011 (6,118,820) (5,368,314) (6,412,443) 2,759,449 10,200,422 (4,939,706)




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Due between Due Average Due on Due within 3 and12 between 1 Due after interest rate demand 3 months months and 5 years 5 years Total31 December 2010: % KShs’000 KShs ‘000 KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandbankbalances - 420,390 - - - - 420,390Placementswithotherbanks 4.70% - 6,599,080 1,267,186 - - 7,866,266InvestmentinGovernmentsecurities 6.92% - - 9,835 530,000 - 539,835Netmortgageadvancestocustomers 5.41% - 324,479 1,069,660 2,295,392 15,813,869 19,503,400 420,390 6,923,559 2,346,681 2,825,392 15,813,869 28,329,891 Financial liabilities Customerdeposits 3.91% 4,495,580 6,199,573 2,744,267 95,969 2,407,952 15,943,341Loansfrombanks 7.92% - 78,858 646,771 847,740 - 1,573,369Corporatebond 7.32% - - 125,444 - 7,030,900 7,156,344Governmentincomenotes 8.25% - - - - 50,750 50,750 4,495,580 6,278,431 3,516,482 943,709 9,489,602 24,723,804


31 December 2009:

Financial assets Cashandbankbalances - 319,839 - - - - 319,839Placementswithotherbanks 8.97 100,092 1,293,775 712,552 - - 2,106,419InvestmentinGovernmentsecurities 6.72 - - 9,507 500,000 - 509,507Netmortgageadvancestocustomers 5.5 - 370,237 713,368 2,055,344 11,356,259 14,495,208 419,931 1,664,012 1,435,427 2,555,344 11,356,259 17,430,973

Financial liabilities Customerdeposits 5.42 6,633,199 4,117,450 1,447,054 21,746 - 12,219,449Loansfrombanks 10.32 - 700,000 - 1,000,000 - 1,700,000Governmentincomenotes 8.25 - - - - 50,750 50,750 6,633,199 4,817,450 1,447,054 1,021,746 50,750 13,970,199





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6.4.3 Market risk (continued) Sensitivity analysis interest rate riskAt30September2014,ifinterestratesatthatdatehadbeen100basispointslowerwithallothervariablesheldconstant,pre-taxprofitfortheperiodwouldhavebeenKShs20.014million(2013–KShs15.433million,2012–KShs13.790million,2011–KShs10.070million,2010-KShs10.186million,2009–KShs50.438million)lowerarisingmainlyasaresultoflowerinterestincomeonvariableborrowings,andothercomponentsofequitywouldhavebeenKShs14.010million(2013–KShs10.803million,2012–KShs9.653million,2011–KShs7.049million,2010–KShs7.130million,2009-KShs35.307million)lowerarisingmainlyasaresultofanincreaseinthefairvalueoffixedrate financial assets classified as held to maturity.

Ifinterestrateshadbeen100basispointshigher,withallothervariablesheldconstant,pre-taxprofitswouldhavebeenKShs20.014million(2013–KShs15.433million,2012–KShs13.790million,2011–KShs10.070million,2010–KShs10.186million2009–KShs36.754.million) lower, arising mainly as a result of higher interest expense on variable borrowings and other components of equity would have been KShs14.010million(2013–KShs10.803million,2012-KShs9.653million,2011–KShs7.049milliom,2010KShs7.130million,2009–KShs25.728million)lower,arisingmainlyasaresultofadecreaseinthefairvalueoffixedratefinancialassetsclassifiedasheldtomaturity.

Profitismoresensitivetointerestratedecreasesthanincreasebecauseofborrowingwithcappedinterestrates.

Sensitivity analysis foreign currency exchange riskThe Group is exposed to currency risk to the extent that there is a mismatch between the currencies in which bank placements and borrowings are denominated and the respective functional currencies of the Group companies. The functional currency of Group is the Kenya Shillings. The Group’s policy is to ensure that its net exposure is kept at an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

The summary quantitative data about the Group’s exposure to currency risk as reported to the management is as follows.

30.9.2014 31.12.2013 31.12.2012 USD USD USD

Bankplacements 15,098,167 33,103,344 9,000,000Loans&advances 28,731,178 - -Bankloans (37,087,970) (33,750,000) (8,333,333)

Net statement of financial position exposure ( 6,741,375) ( 646,656) 666,667

Averagerate 89.35 86.3097 86.0286Period/year-endspotrate 87.35 86.2139 85.9383

Areasonablypossiblestrengthening/(weakening)oftheKShsagainsttheUSDasat30September2014wouldhaveaffectedthemeasurementof financial instruments denominated in foreign currency and affected equity and profit or loss by the amounts shown below. The analysis assumes that all other variables, in particular interest rates remain constant.

Profit or loss Equity Strengthening Weakening Strengthening Weakening

30September2014 USD10%Movement 674,138 (674,138) 674,138 (674,138) 31December2013 USD10%Movement 64,666 (64,666) 64,666 (64,666)31December2012 USD10%Movement 66,667 (66,667) 66,667 (66,667)


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6.4.3 Market risk (continued) In2009–2011,theGroup’sassetsandliabilitieswereheldinthelocalcurrencyandthereforefluctuationsintheforeignexchangeratewerenot expected to have any significant impact on the Group.

6.4.4 Operational riskThe Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. The responsibility is supported by the development of overall Group standards for the management of operational risks. Compliance with Group standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal auditreviewsarediscussedwiththemanagementofthebusinessunittowhichtheyrelate,withsummariessubmittedtotheBoardAuditcommittee and senior management of the Group.

Risk measurement and controlInterest rate, credit, liquidity, operational risk and other risks are actively managed by independent risk control groups to ensure compliance with the Group’s risk limits. The Group’s risk limits are assessed regularly to ensure their appropriateness given the Group’s objectives and strategies and current market conditions.

6.4.5 Capital managementThe Central Bank of Kenya sets and monitors capital requirements for banks and other non-bank financial institutions. In implementing the current capital requirements Central Bank of Kenya requires the Group to maintain a prescribed ratio of total risk weighted assets. This requirement is calculated for market risk in the banking portfolio of Housing Finance Company of Kenya Limited.

The regulatory capital is analysed in two tiers:• Tier 1 capital includes ordinary share capital, share premium, perpetual bonds, retained earnings, translation reserve andminority

interest after deduction of goodwill and intangible assets and other regulatory adjustments relating to items that are included in equity butaretreateddifferentlyforcapitaladequacypurposes;and

• Tier2capital includesqualifyingsubordinatedliabilities,collectiveimpairmentallowancesandtheelementofthefairvaluereservesrelating to unrealized gains on equity instruments classified as available for sale.

The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Group recognizes 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.

The company and its individually regulated operations have complied with all externally imposed capital requirements throughout the period. TherehavebeennomaterialchangesintheGroup’smanagementofcapitalduringthe5yearsandnine-monthperiodended30September2014.



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Thecompany’sregulatorycapitalpositionasat30September2014andforthefiveyearsended31December2013,2012,2011,2010and2009wasasfollows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Tier 1 capital Ordinarysharecapital 1,157,600 1,155,350 1,153,000 1,152,125 1,150,000 1,150,000Sharepremium 1,556,773 1,554,523 1,552,173 1,551,298 1,549,173 1,549,173Retainedearnings 2,001,701 1,939,458 1,474,298 1,017,703 487,164 185,071 4,716,074 4,649,331 4,179,471 3,721,126 3,186,337 2,884,244

Tier2capital Collectiveallowancesforimpairment 311,561 238,371 241,845 217,112 163,468 116,004Revaluationreserve 112,301 112,301 112,301 112,301 - -Qualifyingsubordinatedliabilities 1,678,201 1,901,469 1,914,797 1,860,562 1,705,469 163,051 2,102,063 2,252,141 2,268,943 2,189,975 1,868,937 279,055 Totalregulatorycapital 6,818,137 6,901,472 6,448,414 5,911,101 5,055,274 3,163,299 Riskweightedassets 42,104,048 28,946,161 21,847,824 17,368,931 13,077,391 9,280,302


Capital ratios Total regulatory capital expressed as a percentage of total risk-weightedassets 15.30% 23.80% 29.52% 34.03% 38.66% 34.09% Total tier 1 capital expressed as a percentageofrisk-weightedassets 10.31% 16.06% 19.13% 21.42% 24.37% 31.08%

Compliance date Minimum core capital

31December2010 500million31December2011 700million31December2012 1billion31December2013 1billion30September2014 1billion

The Company is already compliant with this requirement.


6.4.5 Capital management (continued)


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6.5 Operating segmentsTheGroup isorganised in twomain reportingsegments:MortgagesandDepositsmobilisation.This isbasedontheGroup’smanagementandinternalreportingstructure.ThemortgagesegmentisfurthersplitbetweenRetailmortgages,SchemesmortgagesandProjects,whiledeposits mobilisation segment is further split between Retail deposits and Corporate deposits.

The following summary describes the operations of each Group’s reportable segment:• Retailmortgages: This segment is mainly responsible for sourcing residential mortgages for individual owner occupiers and it forms the

major proportion of the mortgage lending of the Group.• Schemesmortgages: This segment is mainly responsible for arranging corporate mortgage packages with employers such that the

employees of the participating companies can enjoy preferential interest rates on their mortgage loans.• Projects:This segment provides lending to property developers for construction. This includes construction of residential houses for

sale, construction of office blocks, schools, hospitals and other related infrastructure.• RetailDeposits:This segment plays a critical role in the operations of the Group by sourcing for deposits from retail customers which are

then used to finance the Group’s mortgage products. • CorporateDeposits:This segment is responsible for sourcing for deposits from corporate organizations.

Informationregardingtheresultsofeachreportablesegmentisincludedbelow.Performanceismeasuredbasedonsegmentprofitbeforeincometax,asincludedintheinternalmanagementreportsthatarereviewedbytheGroup’sEXCO.

Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of each.

(a) Mortgage Lending`Retail

External 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 revenues KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 Interestincome 2,561,723 3,133,568 2,901,842 1,662,318941,669 1,015,528Interestexpense-Retail (1,263,517) (1,488,663) (1,566,060) (225,484)(233,181)(197,423) Net interest income 1,298,206 1,644,905 1.335,782 1,436,834 708,488 818,105 Noninterestincome 313,555 222,378 197,485 206,678179,995148,850Reportingsegmentprofitbeforeincometax 654,919 851,340 720,437 737,151 283,319 252,306Loandisbursements 5,721,903 6,687,674 5,164,672 6,230,0284,987,788 2,957,978Loansales 6,483,861 7,612,454 5,265,105 7,430,603 5,586,3754,522,646Depositsbalances 14,763,335 11,743,599 9,813,268 7,721,686 6,968,8476,230,993 Other material non-cash items Impairmentlossesonmortgageloans (145,429) (206,189) 146,893 154,400 230,741186,277Capitalexpenditure 63,190 307,416 28,270 28,146 28,640 8,412Reportablesegmentassets 29,104,852 24,074,531 20,412,573 13,463,753 14,343,976 7,941,379Reportablesegmentliabilities 23,954,751 19,238,424 16,151,432 11,263,733 9,416,394 4,087,013

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Corporate

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009External revenues KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 Interestincome 2,008,718 2,306,491 2,166,973 1,801,761 1,534,145 788,594Interestexpense-Corporate (1,133,979) (1,398,389) (1,552,798) (1,337,077) (841,672) (459,258) Net interest income 874,739 908,102 (614,157) 464,684 692,473 329,336 Non-interestincome 111,740 81,941 75,454 83,201 72,459 59,921Reportingsegmentprofitbeforeincometax 313,699 362,089 181,564 238,401 276,914 101,568Loandisbursements 7,681,810 5,379,866 4,876,404 4,435,534 3,941,095 3,391,807Loansales 11,217,442 8,119,181 6,782,408 7,176,429 5,105,718 5,286,357Depositbalances 18,592,949 14,845,251 13,154,941 10,952,736 8,976,470 6,003,652 Other material non-cash items Impairmentlossesonmortgageloans (127,850) (74,704) (50,872) 31,897 7,705 39,210Capitalexpenditure 56,593 388,609 36,820 11,338 11,537 3,389Reportablesegmentassets 27,517,534 22,680,580 20,273,357 18,508,36014,981,865 10,560,549Reportablesegmentliabilities 26,791,300 21,885,584 19,439,340 15,976,91215,690,667 10,160,268

Totals 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009External revenues KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 KShs‘000 Interestincome 4,570,441 5,440,059 5,068,815 3,464,079 2,475,814 1,804,122Interest expense: -Retail (1,263,517) (1,488,663) (1,566,060) (225,484) (233,181) (197,423)-Corporate (1,133,979) (1,398,389) (1,552,798) (1,337,077) (841,672) (459,258) Net interest income 2,172,945 2,553,007 1,949,957 1,901,518 1,400,961 1,147,441 Noninterestincome 425,295 304,319 272,940 289,879 252,456 208,771Reportingsegmentprofitbeforeincometax 968,618 1,213,429 902,001 975,552 560,235 353,875Loandisbursements 13,403,713 12,067,540 10,041,076 10,665,562 8,928,883 6,349,785Loansales 17,701,303 15,731,635 12,047,513 14,607,032 11,203,093 9,809,003Depositsbalances 33,356,284 26,588,851 22,968,209 18,674,421 15,945,317 12,234,645 Other material non-cash items Impairmentlossesonmortgageloans (273,279) (280,893) (197,766) 186,297 238,445 225,487Capitalexpenditure 119,783 696,025 65,090 39,484 40,177 11,801Reportablesegmentassets 56,622,386 46,755,111 40,685,930 31,972,113 29,325,842 18,280,761Reportablesegmentliabilities 50,746,051 41,124,008 35,590,862 27,240,645 25,107,061 14,247,280

6.5 Operating segments (continued)

(a) Mortgage Lending (continued)


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6.5 Operating segments (continued)

(a) Mortgage Lending (continued)Reconciliations of reportable segment revenues, profit or loss, assets and liabilities


Net interest income Totalnetinterestincomeforreportablesegments 2,172,944 2,553,007 1,949,957 1,901,518 1,400,961 1,147,441Otherinterestincomeadjustments 11,563 300 78 44 27 102Consolidatednetinterestincome 2,184,507 2,553,307 1,950,035 1,901,562 1,400,988 1,147,543 Non interest income Totalnoninterestincomeforreportablesegments 425,295 304,319 272,940 289,879 252,456 208,771Othernoninterestincome 266,984 1,064,051 10,946 1,740 1,740 18,131Consolidatednoninterestincome 692,279 1,368,370 283,886 291,619 254,196 226,902 Profit or loss Totalprofitorlossforreportablesegments 968,618 1,213,429 902,001 975,552 560,235 353,875Otherprofitorloss 76,329 266,927 5,630 243 793 (2,757)Consolidatedprofitbeforeincometax 1,044,947 1,480,356 907,631 975,795 561,028 351,118 Assets Totalassetsforreportablesegments 56,622,386 46,755,111 40,685,930 31,972,113 29,325,842 18,280,761Otherassets 268,488 634,266 270,647 (101,197) (47,446) (41,402) Consolidatedtotalassets 56,890,874 47,389,377 40,956,577 31,870,916 29,278,396 18,239,359 Liabilities Totalliabilitiesforreportablesegments 50,746,051 41,124,008 35,590,862 27,240,645 25,107,061 14,247,280Otherliabilities 40,587 408,242 228,471 (87,093) (86,072) (81,297)Consolidatedtotalliabilities 50,786,638 41,532,250 35,819,333 27,153,552 25,020,989 14,165,983

6.6 Use of estimates and judgements

Allowances for credit lossesAssetsaccountedforatamortisedcostareevaluatedforimpairmentonabasisdescribedinaccountingpolicy6.3.11.7.The specific counterparty component of the total allowances for impairment applies to financial assets evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function.

Collectively assessed impairment allowances cover credit losses inherent in portfolios of loans and advances and held-to-maturity investment securities with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired loans and advances and held-to-maturity investment securities, but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions.


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6.7 Interest income


Arising from:Advancestocustomers 4,146,475 4,888,272 4,288,484 2,911,341 2,221,791 1,556,862Treasurybonds 26,972 46,536 63,185 36,222 35,222 32,556Placementswithotherbanks 397,472 505,251 717,146 516,516 218,801 214,704 4,570,919 5,440,059 5,068,815 3,464,079 2,475,814 1,804,122

IncludedininterestincomeonmortgageadvancesfortheperiodisatotalofKShs442,386,352(2013–KShs411,995,347,2012–KShs226,491,925,2011–KShs165,018,405,2010–KShs144,992,807,2009–KShs92,545,871)accruedonimpairedassets.Interestincome on treasury bonds relates to investment securities that are held to maturity.

6.8 Interest expense


Arising from: Customerdeposits 1,311,244 1,598,378 2,296,853 850,003 793,444 571,569Interestonborrowedfunds 1,075,168 1,288,304 821,927 712,514 281,382 85,010 2,386,412 2,886,682 3,118,780 1,562,517 1,074,826 656,579

6.9 Non-interest income


Arising from: Feesandcommissionincome 286,228 245,940 210,884 210,367 168,480 169,092Rentalincome 31,282 40,901 43,352 39,252 40,958 32,280Housesalesincome 219,711 1,021,644 - - - -Otheroperatingincome 155,028 58,189 32,171 40,268 44,536 25,450Gain/(loss)onsaleofpropertyandequipment 30 1,696 (2,521) 1,732 222 80 692,279 1,368,370 283,886 291,619 254,196 226,902

6.10 Non-interest expenses


Arising from: Salariesandemployeebenefits 730,310 803,850 683,512 601,450 489,608 414,118Rentalexpenses 25,566 23,946 7,622 6,949 13,131 12,106DepositProtectionFund 32,708 37,281 32,078 25,649 23,942 17,163Costofsoldhouses 157,190 793,753 - - - -Generaladministrationexpenses 612,786 501,668 405,312 397,041 329,030 354,453 1,558,560 2,160,498 1,128,524 1,031,089 855,711 797,840


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6.11 Profit before taxationTheprofitbeforetaxationisarrivedataftercharging/(crediting):


Directors’remuneration: -Fees 2,771 2,435 3,164 2,682 3,039 1,988-Expenses 9,955 9,039 11,222 21,205 8,182 4,106-Asexecutives 68,480 59,009 51,498 43,049 31,640 25,431Auditors’remuneration 7,080 9,440 8,800 7,800 7,004 6,815Amortisationofprepaidoperatingleaserentals 482 644 644 642 642 643Amortisationofintangibleassets 7,133 10,397 2,786 2,528 2,720 5,474Depreciation 62,587 68,700 60,297 46,351 41,352 36,530(Gain)/lossonsaleoffixedassets (30) (1,696) 2,521 (1,732) (222) (80)

6.12 Taxation 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Currenttaxat30% 395,865 525,801 348,779 359,416 182,644 122,663Prioryearunder/(over)provision–currenttax - - 6,206 - 4,160 -Deferredtax(credit)/charge(Note6.28.1) (59,997) (40,641) (190,688) (5,899) (5,307) (5,721) 335,868 485,160 164,297 353,517 181,497 116,942

The tax on the Group’s profit before tax differs from the theoretical amount using the basic tax rate as follows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Accountingprofitbeforetaxation 1,044,947 1,480,356 907,631 975,795 561,028 351,118 Taxattheapplicablecorporationtaxrateof30% 313,484 444,107 272,289 292,739 168,308 105,335Prioryearunderprovisiononcorporatetax - - 6,206 - 4,160 -Tax effect of non-deductible costs andnon-taxableincome 22,384 41,374 13,506 8,160 7,290 11,607Deferredtaxassetderecognized - 4 - - - -Deferredtaxassetpreviouslyunrecognized - (325) (52,618) 52,618 2,181 -Adjustmentfordeferredtaxassetonprovisionfrompriorperiods - - (75,086) - (392) - 335,868 485,160 164,297 353,517 181,547 116,942


The following items are included with salaries and employee benefits: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 Kshs '000 Kshs '000 Kshs '000 Kshs '000 Kshs '000 Kshs '000

Compulsorysocialwelfarecontributions 892 818 701 634 611 459Contributionstothedefinedcontributionretirementscheme 42,216 53,833 49,605 43,045 32,619 27,041

6.10 Non-interest expenses (Continued)

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6.13 Earnings per share

BasicEarning per share is calculated based on the profit attributable to shareholders divided by the number of ordinary shares in issue in each period as follows: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Netprofitfortheperiod/yearattributable to shareholders 709,079 995,196 743,334 622,278 379,531 234,176 Numberofordinarysharesinissue(000’s) 231,520 231,070 230,600 230,425 230,000 230,000

Weightedaveragenumberofordinaryshares(000’s) 231,327 230,929 230,502 230,150 230,000 230,000

Basicearningspershare–KShs 4.08 4.30 3.22 2.70 1.65 1.02 Dilutedearningspershare–KShs 4.08 4.30 3.22 2.70 1.65 1.02

6.14 Dividend per share

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Dividend 173,468 404,301 322,823 276,498 161,000 115,000 Numberofordinaryshares(000’s) 231,520 231,070 230,600 230,425 230,000 230,000 Dividendpershare–KShs 0.75 1.75 1.40 1.20 0.70 0.50

The dividend per share is based on the number of issued and fully paid ordinary shares.

6.15 Financial assets and liabilitiesThe table below sets out the Group’s classification of each class of financial assets and liabilities and their fair values including accrued interest:

Group

Other Held-to- Loans and amortised maturity advances cost/fair value Fair value30 September 2014: KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandbalanceswithbanks - - 3,014,470 3,014,470Placementswithotherbanks - - 7,093,247 7,093,247Investmentingovernmentsecurities - - - 276,067Mortgageadvancestocustomers - 43,273,307 - 43,273,307 - 43,273,307 10,107,717 53,657,091

Financial liabilities Customerdeposits - - 33,146,542 33,146,542Corporatebond - - 10,461,347 10,461,347Borrowedfunds - - 147,000 147,000Loansfrombanks - - 6,093,557 6,093,557 - - 49,848,446 49,848,446


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Other Held-to- Loans and amortised maturity advances cost/fair value Fair value31 December 2013: KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandcashequivalents - - 1,719,004 1,719,004Placementswithbanks - - 6,878,601 6,878,601Investmentingovernmentsecurities - - - 288,167Equityinvestments - - - 151,500Mortgageadvances - 35,215,897 - 35,215,897 - 35,215,897 8,597,605 44,253,169


31 December 2012: Financial assets Cashandcashequivalents - - 1,454,359 1,454,359Placementswithbanks - - 6,395,958 6,395,958Investmentingovernmentsecurities 401,644 - 321,972 723,616Equity investments - - 60,000 60,000Mortgageadvances - 30,293,711 - 30,293,711 401,644 30,293,711 8,232,289 38,927,644


31 December 2011:

Financial Assets Cash and cash equivalents - - 384,034 384,034Placementswithbanks - - 4,724,183 4,724,183Investmentingovernmentsecurities 379,847 - - 371,222Equityinvestments - - 56,000 56,000Mortgageadvances - 25,222,836 25,222,836 379,847 25,222,836 5,164,217 30,758,275

Financial Liabilities Customerdeposits - - 18,671,586 18,671,586Corporatebond - - 7,168,598 7,168,598Loansfrombanks - - 847,507 847,507 - - 26,687,691 26,687,691

6.15 Financial assets and liabilities (continued)


Group (continued)

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Other Held-to- Loans and amortised maturity advances cost/fair value Fair value31 December 2010: KShs’000 KShs’000 KShs’000 KShs’000 Financial Assets Cashandcashequivalents - - 420,390 420,390Placementswithbanks - - 7,866,266 7,866,266Investmentingovernmentsecurities 539,835 - - 548,938Mortgageadvances - 19,503,400 - 19,503,400 539,835 19,503,400 8,286,656 28,338,994

Financial Liabilities Customerdeposits - - 15,943,341 15,943,341Corporatebond - - 7,156,344 7,156,344Loanfrombank - - 1,573,369 1,573,369 - - 24,637,054 24,637,054

31 December 2009 Financial Assets Cashandcashequivalents - - 319,839 319,839Placementswithbanks - - 2,106,419 2,106,419Investmentingovernmentsecurities 509,507 - - 510,417Mortgageadvances - 14,495,208 - 14,495,208 509,507 14,495,208 2,426,258 17,431,883

Financial Liabilities Customerdeposits - - 12,219,449 12,219,449Loansfrombanks - - 1,700,000 1,700,000 - - 13,919,449 13,919,449



Group (continued)

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Company Other Held-to- Loans and amortised maturity advances cost/fair value Fair value30 September 2014: KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandcashequivalents - - 3,014,457 3,014,457Placementswithbanks - - 7,093,247 7,093,247Investmentingovernmentsecurities - - - 276,067Equity investments - - - -Mortgageadvances - 43,273,307 - 43,273,307 - 43,273,307 10,107,704 53,657,078

Financial liabilities Customerdeposits - - 33,356,284 33,356,284Corporatebond - - 10,461,347 10,461,347Loansfrombanks - - 6,093,557 6,093,557 - - 49,911,188 49,911,188

Other Held-to- Loans and amortised maturity advances cost/fair value Fair value31 December 2013: KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandcashequivalents - - 1,718,991 1,718,991Placementswithbanks - - 6,878,601 6,878,601Investmentingovernmentsecurities - - - 288,167Equityinvestments - - - 151,500Mortgageadvances - 35,215,897 - 35,215,897 - 35,215,897 8,597,592 44,253,156

Financial liabilities Customerdeposits - - 26,588,851 26,588,851Corporatebond - - 10,212,469 10,212,469Loansfrombanks - - 3,803,905 3,803,905 - - 40,605,225 40,605,225



122





Other Held-to- Loans and amortised maturity advances cost/fair value Fair value31 December 2012: KShs’000 KShs’000 KShs’000 KShs’000 Financial assets Cashandcashequivalents - - 1,454,346 1,454,346Placementswithbanks - - 6,395,958 6,395,958Investmentingovernmentsecurities 401,644 - 321,972 723,616Mortgage advances - - 60,000 60,000 - 30,293,711 - 30,293,711 401,644 30,293,711 8,232,276 38,927,631

Financial liabilities Customerdeposits - - 22,968,209 22,968,209Corporatebond - -10,212,633 10,212,633Loanfrombank - - 1,702,834 1,702,834 - - 34,883,676 34,883,676

31 December 2011:

Financial assets Cashandcashequivalents - - 384,022 384,022Placementswithbanks - - 4,724,183 4,724,183Investmentingovernmentsecurities 379,847 - - 371,222Equityinvestments - - 56,000 56,000Mortgageadvances - 25,222,836 - 25,222,836 379,847 25,222,836 5,164,205 30,758,263

Financial liabilities Customerdeposits - - 18,674,421 18,674,421Corporatebond - - 7,168,598 7,168,598Loansfrombanks - - 847,507 847,507 - - 26,690,526 26,690,526


Company (continued)

123




Other Held-to- Loans and amortised maturity advances cost/fair value Fair value31 December 2010: KShs’000 KShs’000 KShs’000 KShs’000

Financial assets Cashandcashequivalents - - 420,377 420,377Placementswithbanks - - 7,866,266 7,866,266Investmentingovernmentsecurities 539,835 - - 548,938Mortgageadvances - 19,503,400 - 19,503,400 539,835 19,503,400 8,286,643 28,338,981

Financial liabilities Customerdeposits - - 15,943,317 15,943,317Corporatebond - - 7,156,344 7,156,344Loanfrombank - - 1,573,369 1,573,369 - - 24,673,030 24,673,030

31 December 2009: Financial assets Cashandcashequivalents - - 319,839 319,839Placementswithbanks - - 2,106,419 2,106,419Investmentingovernmentsecurities 509,507 - - 510,417Mortgageadvances - 14,495,208 - 14,495,208 509,507 14,495,208 2,426,258 17,431,883

Financial liabilities Customerdeposits - - 12,234,645 12,234,645Loansfrombanks - - 1,700,000 1,700,000 - - 13,934,645 13,934,645

The fair value of treasury bonds is based on the indicative price of the specific issues as at the reporting date. The indicative prices are derived from trading at the Nairobi Securities Exchange. For Treasury bills, placements with other banks, cash and cash equivalents and deposits the amortisedcostisdeemedareasonableapproximationoffairvaluebecauseoftheirshorttermnatureand/orrepriceannually.



Company (continued)

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6.16 Cash and bank balances

(a) Group


Cashathand 214,391 142,103 139,376 119,721 101,224 106,118Balanceswithcommercialbanks 354,322 (29,084) 284,727 - - -Balances with Central Bank of Kenya - Unrestricted 1,561,392 808,319 341,210 264,313 319,166 213,721- Restricted(cashreserveratio) 884,365 797,666 689,046 - - - 3,014,470 1,719,004 1,454,359 384,034 420,390 319,839

(b) Company


Cashathand 214,391 142,103 139,376 119,721 101,224 106,118Balanceswithcommercialbanks 354,309 (29,097) 284,714 - - -Balances with Central Bank of Kenya - Unrestricted 1,561,392 808,319 341,210 264,301 319,153 213,721- Restricted(cashreserveratio) 884,365 797,666 689,046 - - - 3,014,457 1,718,991 1,454,346 384,022 420,377 319,839

6.17 Investment in Government securities

Group and Company


Held to Maturity Treasurybondsdueafter180days - - 401,644 379,847 539,835 509,507 Availableforsale Treasury bonds classified as availableforsale 276,067 288,167 321,972 - - - 276,067 288,167 723,616 379,847 539,835 509,507

Theweightedaverageeffectiveinterestrateongovernmentsecuritiesasat30September2014was12.64%(2013–12.07%,2012–14.65%,2011–11.90%,2010-6.92%,2009–7.0%).

6.18 Placements with other banksGroup and Company: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Placementswithcommercialbanks 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419


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6.19 Mortgage advances to customers

Group and Company:

6.19.1 Mortgage advances at amortised cost

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Mortgages 44,470,734 36,162,121 31,018,622 25,777,002 19,937,848 15,124,010Less:Provisionforimpairmentlosses (1,197,427) (946,224) (724,911) (554,166) (434,448) (628,802) 43,273,307 35,215,897 30,293,711 25,222,836 19,503,400 14,495,208 Maturing: Withinfiveyears 9,310,833 6,485,767 7,509,510 5,419,088 3,689,531 3,703,752Overfiveyearstotenyears 7,031,374 5,809,544 5,781,173 4,166,985 4,560,441 4,504,914Overtenyearstofifteenyears 16,867,343 14,516,630 11,686,727 10,973,778 6,849,438 4,346,073Overfifteenyears 10,063,757 8,403,956 5,316,301 4,662,985 4,403,990 1,940,469 43,273,307 35,215,897 30,293,711 25,222,836 19,503,400 14,495,208

6.19.2 Reserve for impairment losses

Impairment Portfolio losses impairment Total KShs’000 KShs’000 KShs’000 At1January2014 878,649 67,575 946,224Chargefortheperiod 486,059 5,401 491,460Provisionsnolongerrequired (218,181) - (218,181)Writtenoffagainstbalances (22,076) - (22,076) At 30 September 2014 1,124,451 72,976 1,197,427 At1January2013 648,261 76,650 724,911Chargefortheyear 487,025 (9,075) 477,950Impairmentnolongerrequired (97,057) - (197,057)Writtenoffagainstbalances (59,580) - (59,580) At 31 December 2013 878,649 67,575 946,224


126




6.19 Mortgage advances to customers (continued)

Impairment Portfolio losses impairment Total KShs’000 KShs’000 KShs’000 At1January2012 480,768 73,398 554,166Chargefortheyear 246,600 3,252 249,852Impairmentnolongerrequired (52,086) - (52,086)Writtenoffagainstbalances (27,021) - (27,021) At 31 December 2012 648,261 76,650 724,911 At1January2011 382,378 52,070 434,448Charge/(credit)fortheyear 171,701 21,328 193,029Impairmentnolongerrequired (6,732) - (6,732)Writtenoffagainstbalances (66,579) - (66,579) At 31 December 2011 480,768 73,398 554,166 At1January2010 596,490 32,312 628,802Chargefortheyear 234,386 19,758 254,144Impairmentnolongerrequired (15,699) - (15,699)Writtenoffagainstbalance (432,799) - (432,799) At 31 December 2010 382,378 52,070 434,448 At1January2009 871,664 27,155 898,819Chargefortheyear 220,330 5,157 225,487Writtenoffagainstbalances (495,504) - (495,504) At 31 December 2009 596,490 32,312 628,802

6.19.3 Mortgage advancesIncluded in the mortgage is interest yet to be received in cash from mortgage advances classified as impaired mortgages as shown below:


Interest on impaired mortgages which has not yet been received in cash 189,160 191,030 233,788 234,433 283,632 555,353

Theweightedaverageeffectiveinterestrateonmortgageadvancestocustomersasat30September2014was14.52%(2013–14.01%,2012–15.09%,2011–14.15%,2010–12.80%,2009–13.09%).

6.19.2 Reserve for impairment losses


127




6.20 Investment in subsidiaries and joint ventures

Subsidiaries

Shareholding 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

KenyaBuildingSocietyLimited 100% 250,000 250,000 250,000 125,000 125,000 125,000FirstPermanent(EastAfrica)Limited 100% 5,020 5,020 5,020 5,020 5,020 5,020HousingFinanceInsuranceAgencyLimited 100% 100 100 100 - - - 255,120 255,120 255,120 130,020 130,020 130,020

Joint Ventures Shareholding 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

PreciousHeightLimited 50% 86,700 86,700 86,700 - - -KahawaDownsLimited 50% 104,100 104,100 - - - - 190,800 190,800 86,700 - - -

6.21 Amounts due to subsidiariesCompany: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

KenyaBuildingSocietyLimited - - - (48) (48) -FirstPermanent(EastAfrica)Limited - - - 15,006 15,006 2,851HousingFinanceInsuranceAgencyLimited - - 100 - - - - - 100 14,958 14,958 2,851

6.22 Other assets

(a) Group 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Staffdebtors 83,495 78,507 57,547 62,033 27,665 15,538Prepayments 247,749 223,338 147,142 135,799 123,737 18,977Depositsandrentreceivable 18,803 8,389 7,684 6,022 5,995 8,612Loanoverpayment - - 9,008 - - -Housesales 382,196 742,350 - - - -Otherreceivables 174,259 73,589 163,044 42,324 42,811 40,076 906,502 1,126,173 384,425 246,178 200,208 83,203


128




(b) Company

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Staffdebtors 83,495 78,507 57,547 62,033 27,665 15,538Prepayments 247,749 223,338 147,142 135,800 123,737 18,977Depositsandrentreceivable 18,803 8,389 7,684 6,022 5,995 8,612Loanoverpayment - - 9,008 - - -Otherreceivables 159,236 56,980 166,651 46,445 46,422 39,982 509,283 367,214 388,032 250,300 203,819 83,109

Included in staff debtors are staff car loans of KShs 16,350,467 (2013 – KShs 17,111,361, 2012 – KShs 8,208,174, 2011 – KShs11,002,370,2010–KShs17,836,916,2009-KShs14,776,669)andstaffpersonalloansofKShs85,831,571(2013–KShs60,600,843;2012–KShs49,150,308;2011–KShs48,402,595;2010KShs8,188,696;2009–KShs1,132,148).

6.23 Equity investments

Group and Company 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1January 151,500 60,000 56,000 - - -Acquiredintheyear - - - 90,000 - -Soldduringtheperiod (151,500) - - - - -Changeinfairvalue - 91,500 4,000 (34,000) - - - 151,500 60,000 56,000 - -

6.24 Housing development projects

Group 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KomarockHousingProjects 110,821 117,822 442,055 20,130 20,130 20,130

Therewerenocommitmentsinrespectoftheseprojectswereauthorisedin2014(2013–Nil,2012–KShs456,241,013,2011–Nil,2010–Nil,2009-Nil).

6.22 Other assets (continued)


129




6.25 Property and equipment6.25.1 Group Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2014: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2014 7,000 475,596 361,826 272,418 1,116,840Additions - - 47,781 93,381 141,162 At30September2014 7,000 475,596 409,607 365,799 1,258,002 Comprising: Atcost - 20,651 409,607 365,799 796,057Atvaluation 7,000 454,945 - - 461,945 7,000 475,596 409,607 365,799 1,258,002

Depreciation: At1January2014 - 30,967 140,358 - 171,325Chargefortheperiod - 5,291 57,296 - 62,587 At30September2014 - 36,258 197,654 - 233,912 Net book value: At 30 September 2014 7,000 439,338 211,953 365,799 1,024,090 2013: Cost or valuation: At1January2013 7,000 475,596 260,703 80,155 823,454Additions - - 107,573 192,263 299,836Disposals - - (6,450) - (6,450) At31December2013 7,000 475,596 361,826 272,418 1,116,840 Comprising: Atcost - 20,651 361,826 272,418 654,895Atvaluation 7,000 454,945 - - 461,945 7,000 475,596 361,826 272,418 1,116,840

Depreciation: At1January2013 - 23,837 82,909 - 106,746Chargefortheyear - 7,130 61,570 - 68,700Disposals - - (4,121) - (4,121) At31December2013 - 30,967 140,358 - 171,325 Net book value: At 31 December 2013 7,000 444,629 221,468 272,418 945,515


130




Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2012 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2012 7,000 475,596 199,500 70,030 752,126Additions - - 65,105 10,125 75,230Disposals - - (3,902) - (3,902) At31December2012 7,000 475,596 260,703 80,155 823,454 Comprising: Atcost - 20,651 260,703 80,155 361,509Atvaluation 7,000 454,945 - - 461,945 7,000 475,596 260,703 80,155 823,454

Depreciation: At1January2012 - 16,706 30,212 - 46,918Chargefortheyear - 7,131 53,166 - 60,297Disposals - - (469) - (469) At31December2012 - 23,837 82,909 - 106,746 Net book value: At 31 December 2012 7,000 451,759 177,794 80,155 716,708 2011: Cost or valuation: At1January2011 7,000 475,596 551,616 20,685 1,054,897Additions - - 39,484 49,345 88,829Disposals - - (382,909) - (382,909)Revaluationsurplus - - (8,691) - (8,691) At31December2011 7,000 475,596 199,500 70,030 752,126 Comprising: Atcost - 20,651 39,484 70,030 130,165Atvaluation 7,000 454,945 160,016 - 621,961 7,000 475,596 199,500 70,030 752,126

Depreciation: At1January2011 - 9,574 444,906 - 454,480Chargefortheyear - 7,132 39,219 - 46,351Disposals - - (446,038) - (446,038)Revaluation - - (7,875) - (7,875) At31December2011 - 16,706 30,212 - 46,918 Net book value: At 31 December 2011 7,000 458,890 169,288 70,030 705,208

6.25 Property and equipment (continued)6.25.1 Group (continued)


131




6.25.1 Group (continued) Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2010: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2010 7,000 475,596 515,119 - 997,715Additions - - 40,177 20,685 60,862Disposals - - (3,680) - (3,680) At31December2010 7,000 475,596 551,616 20,685 1,054,897 Comprising: Atcost - 20,651 551,616 20,685 592,952Atvaluation 7,000 454,945 - - 461,945 7,000 475,596 551,616 20,685 1,054,897

Depreciation: At1January2010 - 2,443 414,365 - 416,808Chargefortheyear - 7,131 34,221 - 41,352Disposals - - (3,680) - (3,680) At31December2010 - 9,574 444,906 - 454,480 Net book value: At 31 December 2010 7,000 466,022 106,710 20,685 600,417 2009: Cost or valuation: At1January2009 7,000 233,651 505,503 - 746,154Additions - - 11,801 - 11,801Disposals - - (2,185) - (2,185)Revaluationsurplus - 241,945 - - 241,945 At31December2009 7,000 475,596 515,119 - 997,715 Comprising: - Atcost - 20,651 515,119 - 535,770Atvaluation 7,000 454,945 - - 461,945 7,000 475,596 515,119 - 997,715

Depreciation: At1January2009 - 12,977 383,321 - 396,298Chargefortheyear - 3,301 33,229 - 36,530Disposals - - (2,185) - (2,185)Revaluation - (13,835) - - (13,835) At31December2009 - 2,443 414,365 - 416,808 Net book value: At 31 December 2009 7,000 473,153 100,754 - 580,907

TheGroup’slandandbuildingswereprofessionallyvaluedbyanindependentvalueronanopenmarketbasison31December2009andon31December2005.Theresultingsurpluswascreditedtorevaluationreserve.

6.25 Property and equipment (continued)


132




Thenetbookvalue(NBV)ofpropertiesattheirhistoricalcostisasfollows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Freeholdland 206 206 206 206 206 206Buildings 16,411 22,598 28,785 34,972 38,159 41,346

IncludedinequipmentareassetswithagrossvalueofKShs38,734,664(2013-KShs7,369,304,2012–KShs7,369,304,2011–KShs7,369,304,2010–KShs304,112,531,2009–KShs299,707,541)whicharefullydepreciatedandstillinuse.SuchassetswouldhaveattractedanotionaldepreciationofKShs9,683,666(2013–KShs955,613,2012–KShs955,613,2011–KShs1,149,240,2010–KShs58,510,242,2009-KShs58,024,081).



6.25.1 Group (continued)

133




6.25.2 Company Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2014: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2014 7,000 467,000 356,223 272,418 1,102,641Additions - - 47,781 93,381 141,162

At30September2014 7,000 467,000 404,004 365,799 1,243,803

Comprising: Atcost - 54,055 - 365,799 419,854Atvaluation 7,000 412,945 404,004 - 823,949 7,000 467,000 404,004 365,799 1,243,803

Depreciation: At1January2014 - 28,224 134,973 - 163,197Chargefortheperiod - 5,293 57,203 - 62,496Disposals - - - - -

At30September2014 - 33,517 192,176 - 225,693

Net book value:

At 30 September 2014 7,000 433,483 211,828 365,799 1,018,110

2013: Cost or valuation: At1January2013 7,000 467,000 255,321 80,155 809,476Additions - - 107,352 192,263 299,615Disposals - - (6,450) - (6,450)

At31December2013 7,000 467,000 356,223 272,418 1,102,641

Comprising: Atcost - 54,055 - 272,418 326,473Atvaluation 7,000 412,945 356,223 - 776,168 7,000 467,000 356,223 272,418 1,102,641

Depreciation: At1January2013 - 21,168 77,541 - 98,709Chargefortheyear - 7,056 61,553 - 68,609Disposals - - (4,121) - (4,121)

At31December2013 - 28,224 134,973 - 163,197

Net book value: At 31 December 2013 7,000 438,776 221,250 272,418 939,444



134




Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2012: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2012 7,000 467,000 194,134 70,030 738,164Additions - - 65,091 10,125 75,216Disposals - - (3,902) - (3,902)

At31December2012 7,000 467,000 255,323 80,155 809,478

Comprising: Atcost - 54,055 - 80,155 134,210Atvaluation 7,000 412,945 255,323 - 675,268 7,000 467,000 255,323 80,155 809,478

Depreciation: At1January2012 - 14,112 24,844 - 38,956Chargefortheyear - 7,056 53,166 - 60,222Disposals - - (469) - (469)

At31December2012 - 21,168 77,541 - 98,709

Net book value: At 31 December 2012 7,000 445,832 177,782 80,155 710,769 2011 Cost or valuation: At1January2011 7,000 467,000 546,250 20,685 1,040,935Additions - - 39,484 49,345 88,829Revaluationsurplus - - (382,909) - (382,909)Disposals - - (8,691) - (8,691)

At31December2011 7,000 467,000 194,134 70,030 738,164

Comprising: Atcost - 54,055 39,484 70,030 163,569Atvaluation 7,000 412,945 154,650 - 574,595 7,000 467,000 194,134 70,030 738,164

Depreciation: At1January2011 - 7,056 439,538 - 446,594Chargefortheyear - 7,056 39,219 - 46,275Revaluation - - (446,038) - (446,038)Disposals - - (7,875) - (7,875)

At31December2011 - 14,112 24,844 - 38,956

Net book value: At 31 December 2011 7,000 452,888 169,290 70,030 699,208



6.25.2 Company (continued)

135




6.25 Property and equipment (continued) Furniture fixtures, equipment Freehold & motor Work in land Buildings vehicles progress Total2010: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Cost or valuation: At1January2010 7,000 467,000 509,753 - 983,753Additions - - 40,177 20,685 60,862Disposals - - (3,680) - (3,680)

At31December2010 7,000 467,000 546,250 20,685 1,040,935

Comprising: Atcost - 54,055 546,250 20,685 620,990Atvaluation 7,000 412,945 - - 419,945 7,000 467,000 546,250 20,685 1,040,935

Depreciation: At1January2010 - 408,997 - 408,997Chargefortheyear - 7,056 34,221 - 41,277Disposals - - (3,680) - (3680)

At31December2010 - 7,056 439,538 - 446,594

Net book value: At 31 December 2010 7,000 459,944 106,712 20,685 594,341 2009 Cost or valuation: At1January2009 7,000 225,055 500,137 - 732,192Additions - - 11,801 - 11,801Revaluationsurplus - 241,945 - - 241,945Disposals - - (2,185) - (2,185)

At31December2009 7,000 467,000 509,753 - 983,753

Comprising: Atcost - 54,055 509,753 - 563,808Atvaluation 7,000 412,945 - - 419,945 7,000 467,000 509,753 - 983,753

Depreciation: At1January2009 - 10,608 377,954 - 388,562Chargefortheyear - 3,229 33,228 - 36,457Revaluation - (13,837) - - (13,837)Disposals - - (2,185) - (2,185)

At31December2009 - - 408,997 - 408,997

Net book value: At 31 December 2009 7,000 467,000 100,756 - 574,756

TheGroup’sfurniture,fittings,equipmentandmotorvehicleswereprofessionallyvaluedbyanindependentvalueron1June2011whilelandandbuildingswereprofessionallyvaluedbyanindependentvalueronanopenmarketbasison31December2009.Theresultingsurpluswascredited to revaluation reserve.



136




Thenetbookvalue(NBV)ofpropertiesattheirhistoricalcostisasfollows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Freeholdland 206 206 206 206 206 206Buildings 16,411 22,598 28,785 34,972 38,159 41,346

6 Notes to the consolidated financial statements (Continued)6.25 Property and equipment (continued)6.25.2 Company (continued)

137




6.26 Prepaid operating lease rentals

(a) Group

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009Cost: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1Januaryand30September/31December 54,612 54,612 54,612 54,612 54,612 54,612 Amortisation: At1January 7,927 7,283 6,639 5,997 5,355 4,712Chargefortheperiod/year 482 644 644 642 642 643 8,409 7,927 7,283 6,639 5,997 5,355

At 30 September/31 December 46,203 46,685 47,329 47,973 48,615 49,257

(b) Company:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009Cost: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1Januaryand30September/31December 45,706 45,706 45,706 45,706 45,706 45,706 Amortisation: At1January 5,380 4,919 4,457 3,996 3,535 3,074Chargefortheperiod/year 347 461 462 461 461 461 At30September/31December 5,727 5,380 4,919 4,457 3,996 3,535 At 30 September/31 December 39,979 40,326 40,787 41,249 41,710 42,171

Asat30September2014theunexpiredleaserangesfrom63to82years.Leaseholdlandisrecognizedatcost.Thecompanyleaseholdlandwasvaluedprofessionallyon31December2009toKShs,225,000,000.

6 Notes to the consolidated financial statements6 Notes to the consolidated financial statements (Continued)

138




6.27 Intangible assets

(a) Group

2014 2013 2012 2011 2010 2009Cost: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1January 535,628 139,218 129,087 127,066 125,407 125,407Additionsduringtheperiod/year 98,379 396,410 10,131 2,021 1,659 - 634,007 535,628 139,218 129,087 127,066 125,407

Amortisation: At1January 139,693 129,296 126,509 123,981 121,261 115,787Amortisationduringtheperiod/year 7,133 10,397 2,787 2,528 2,720 5,474 146,826 139,693 129,296 126,509 123,981 121,261

Net book value: At 30 September/31 December 487,181 395,935 9,923 2,578 3,085 4,146

(b) Company

2014 2013 2012 2011 2010 2009Cost: KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 AtJanuary 535,556 139,146 129,015 126,994 125,310 125,310Additionsduringtheperiod/year 98,379 396,410 10,131 2,021 1,659 -Reclassification - - - - 25 - 633,935 535,556 139,146 129,015 126,994 125,310

Amortisation: AtJanuary 139,621 129,223 126,444 123,926 121,216 115,760Amortisationduringtheperiod/year 7,133 10,398 2,779 2,518 2,710 5,456 Asat30September/31December 146,754 139,621 129,223 126,444 123,926 121,216 Net book value: At 30 September/31 December 487,181 395,935 9,923 2,571 3,068 4,094


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6.28 Deferred tax assets and liabilitiesDeferredtaxassetsandliabilitiesareattributabletothefollowing:

6.28.1 Group Prior year under Recognised 1 January provision in income 30 September2014: KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 1,140 - 6,600 7,740Othergeneralprovisions 21,806 - (11,774) 10,032Unrealizedexchangelosses 6,055 - (9,780) (3,725)Generalprovisiononmortgages 284,277 - 74,951 359,228

Net deferred tax 313,278 - 59,997 373,275

Prior year under Recognised 1 January provision in income 31 December2013: KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment (4,214) - 5,358 1,140Othergeneralprovisions 5,570 - 16,236 21,806Unrealizedexchangelosses 1,489 - 4,566 6,055Taxlossescarriedforward 52,319 - (52,319) -Generalprovisiononmortgages 217,473 321 66,479 284,277

Net deferred tax 272,637 321 40,320 313,278

Prior year under Recognised 1 January provision in income 31 December2012: KShs’000 KShs’000 KShs’000 KShs ‘000 Arising from: Plantandequipment 11,764 - (15,978) (4,214)Othergeneralprovisions 2,404 - 3,166 5,570Unrealisedexchangelosses - - 1,489 1,489Taxlossescarriedforward - - 52,319 52,319Generalprovisiononmortgages 67,781 75,086 74,606 217,473

Net deferred tax 81,949 75,086 115,602 272,637

Prior year year under Recognised Unrecognised 1 January provision in income tax assets 31 December2011: KShs’000 KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 7,254 - 4,510 - 11,764Othergeneralprovisions 212 - 2,192 - 2,404Generalprovisiononmortgages 15,621 - 52,160 - 67,781Taxlossescarriedforward 52,963 - - (52,963) -

Net deferred tax 76,050 - 58,862 (52,963) 81,949 Prior


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year under Recognised Unrecognised 1 January provision in income tax assets 31 December2010: KShs’000 KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 5,882 (42) 1,414 - 7,254Othergeneralprovisions 2,335 - (2,123) - 212Generalprovisiononmortgages 9,693 - 5,928 - 15,621Taxlossescarriedforward 52,833 434 1,877 (2,181) 52,963

Net deferred tax 70,743 392 7,096 (2,181) 76,050

Recognised 1 January in income 31 December2009 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 3,646 2,275 5,921Othergeneralprovisions 507 1,828 2,335Generalprovisiononmortgages 8,146 1,547 9,693Taxlossescarriedforward 52,723 71 52,794

Net deferred tax 65,022 5,721 70,743

6.28.2 Company Prior year under Recognised 1 January provision in income 30 September2014: KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 1,089 - 6,599 7,688Othergeneralprovisions 21,695 - (11,774) 9,921Unrealizedexchangelosses 6,055 - (9,780) (3,725)Generalprovisiononmortgages 284,277 - 74,951 359,228 Net deferred tax 313,116 - 59,996 373,112 Prior year under Recognised 1 January provision in income 31 December2013: KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment (4,282) - 5,371 1,089Othergeneralprovisions 5,513 - 16,182 21,695Unrealizedexchangelosses 1,489 - 4,566 6,055Generalprovisiononmortgages 217,473 325 66,479 284,277 Net deferred tax 220,193 325 92,598 313,116

6.28 Deferred tax assets and liabilities (continued)


6.28.1 Group (continued)

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Prior year under Recognised 1 January provision in income 31 December2012: KShs’000 KShs’000 KShs’000 KShs ‘000 Arising from: Plantandequipment 11,692 - (15,974) (4,282)Othergeneralprovisions 2,404 - 3,109 5,513Unrealisedexchangelosses - - 1,489 1,489Generalprovisiononmortgages 67,781 75,086 74,606 217,473

Net deferred tax 81,877 75,086 63,230 220,193

Recognised Unrecognised 1 January in income tax assets 31 December2011: KShs’000 KShs’000 KShs’000 KShs ‘000

Arising from: Plantandequipment 7,173 4,519 - 11,692Othergeneralprovisions 212 2,192 - 2,404Generalprovisiononmortgages 15,621 52,160 - 67,781

Net deferred tax 23,006 58,871 - 81,877

Unrecognised tax lossesDeferredtaxassetshavenotbeenrecognisedinrespectofthefollowingitems:

31.12.2011 31.12.2010 KShs’000 KShs’000

Taxlosses–KenyaBuildingSocietyLimited 176,543 -Taxlosses-FirstPermanent(EastAfrica)Limited - 7,270 176,543 7,270

Thetaxlossesexpirein2014.Deferredtaxassetshavenotbeenrecognisedinrespectoftheseitemsbecauseitisnotprobablethatfuturetaxable profit will be available against which the subsidiaries can utilise the benefits therefrom.




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Prior year under Recognised 1 January provision in income 31 December2010: KShs’000 KShs’000 KShs’000 KShs ‘000 Arising from: Plantandequipment 5,790 42 1,341 7,173Othergeneralprovisions 154 - 58 212Generalprovisiononmortgages 9,694 - 5,927 15,621

Net deferred tax 15,638 42 7,326 23,006

Prior year Recognised under 1 January in income provision 31 December2010: KShs’000 KShs’000 KShs’000 KShs ‘000 Arising from: Plantandequipment 3,531 2,259 - 5,790Othergeneralprovisions 126 28 - 154Generalprovisiononmortgages 8,146 1,548 - 9,694

Net deferred tax 11,803 3,835 - 15,638

6.29 Employee benefits

6.29.1 Employee Share Ownership Plan (ESOP)

MovementinthenumberofshareoptionsheldfortheemployeesundertheEmployeeShareOwnershipPlanisasfollows:

Cost: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 Outstandingatstartofyear 640,000 625,000 550,000 - - -Grantedduringtheperiod/year 685,000 785,000 675,000 575,000 - -Lapsed (360,000) (300,000) (425,000) - - -Exercised (450,000) (470,000) (175,000) (425,000) - - Outstandingatperiod/yearend 515,000 640,000 625,000 150,000 - - Exercisepricepershare(KShs) 10.00 10.00 10.00 10.00 - - Tradingpricesat(KShs) 47.25 31.50 15.45 12.40 - -

Back ground of Employee Share Ownership Plan

On26July2006,theshareholdersgaveapprovalforanEmployeeShareOwnershipPlan(ESOP)tobesetuptofacilitatetheownershipofsharesinHousingFinanceCompanyofKenyaLimitedbyemployeesofthecompany.Approvaltoissueadditionalshares,listingofsharesandallotment to theEmployeeShareOwnershipPlan (ESOP)wasapprovedbyCapitalMarketAuthorityon20December2010. The totalnumberofsharesapprovedunder theESOPamount to5,750,000. TheESOP is forCompanyemployees (excludingnon-executiveboarddirectors) who have attained the age of 18 years, have completed the probationary period and have been confirmed as employees of the Company in accordance with their contract of employment. However, the right to exercise an Option shall terminate immediately upon the Option holder ceasing to be an eligible employee, unless the holder of an unexercised Option dies before exercising a subsisting Option, where theOptionmaybeexercisedbyhispersonalrepresentativeswithin12monthsofthedateofdeath.Theeligible employees pay for the units by cash at a price determined by Trustees either in full or by instalments until price is paid in full. The Unit holder is not allowed to sell, transfer or otherwise dispose of Units registered in his name to another Unit holder or to any third party whatsoever. The administrative offices of the ESOP–UnitTrustarethePrincipalOfficesoftheCompany.




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6.30 Customer deposits6.30.1 Group 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Government and parastatals: Payablewithin90days 3,104,969 1,408,242 400,914 384,265 652,446 269,800Payableafter90daysandwithinoneyear 510,685 313,183 478,839 243,559 202,920 192,010Payableafteroneyear - 2,025,327 1,611,885 1,649,629 1,326,248 913,296 Private sector and individuals: Payablewithin90days 23,860,929 17,534,284 11,137,066 12,372,805 5,546,355 5,026,005Payableafter90daysandwithinoneyear 5,611,910 2,704,583 7,204,251 2,677,273 2,541,347 1,255,044Payableafteroneyear 58,049 2,521,585 2,104,694 1,344,055 5,674,025 4,563,294 33,146,542 26,507,204 22,937,649 18,671,586 15,943,341 12,219,449

6.30.2 Company


Government and parastatals: Payablewithin90days 3,104,969 1,408,242 400,914 384,265 652,446 269,800Payableafter90daysandwithinoneyear 510,685 313,183 478,839 243,559 202,920 192,010Payableafteroneyear 2,025,327 1,611,885 1,649,629 1,326,248 913,296 Private sector and individuals: Payablewithin90days 24,070,671 17,615,930 11,167,626 12,375,640 5,548,331 5,026,005Payableafter90daysandwithinoneyear 5,611,910 2,704,583 7,204,251 2,677,273 2,541,347 1,255,044Payableafteroneyear 58,049 2,521,586 2,104,694 1,344,055 5,674,025 4,578,490 33,356,284 26,588,851 22,968,209 18,674,421 15,945,317 12,234,645

(a) Includedincustomers’depositsisKShs149,070,449(2013–KShs44,029,486,2012–KShs21,460,807,2011–KShs2,834,772,2010–KShs1,976,527,2009–KShs651,978)due toasubsidiary,KenyaBuildingSocietyLimited,KShs17,537,622(2013-KShs1,707,155,2012–KShs6,404,2011–Nil,2010–Nil,2009–KShs14,543,828)duetosubsidiary,FirstPermanent(EastAfrica)Limited,KShs43,133,429(2013–KShs35,808,730,2012–KShs9,106,282,2011–Nil,2010–Nil,2009–Nil)duetoasubsdiary,HousingFinanceInsuranceAgencyLimited.

(b) Theweightedaverageeffectiveinterestrateoncustomerdepositsasat30September2014was6.86%(2013–6.75%,2012–8.03%,2011–10.25%,2010–3.91%,2009–5.42%).


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6.31 Other liabilities6.31.1 Group 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000

Interest payable on the Government ofKenyaincomenotes 1,046 2,093 2,093 2,093 2,093 2,093Housesalesdeposits 5,474 1,524 119,101 1,524 1,524 1,524Withholdingtaxpayable 86,219 35,843 32,236 21,555 19,609 15,000Unclaimeddividends - - - 21,209 17,730 18,126Sundrycreditors 222,972 117,147 70,892 72,512 91,175 87,627Insurancepremiumspayable - - 238,018 - - -Otherliabilities 558,086 383,228 297,874 211,034 189,467 96,073 873,797 539,835 760,214 329,927 321,598 220,443

6.31.2 Company 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Interest payable on the Government of Kenyaincomenotes 1,046 2,093 2,093 2,093 2,093 2,093Withholdingtaxpayable - 35,843 32,236 21,555 19,609 15,000Unclaimeddividends 86,219 - - 21,209 17,730 18,126Sundrycreditors 222,972 117,147 70,892 72,512 91,175 87,627Insurancepremiumspayable - - 238,018 - - -Otherliabilities 478,267 196,395 288,984 207,005 185,275 85,995 788,504 351,478 632,223 324,374 315,882 208,841

6.32 Loans from banks 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Loansfrombanks 6,093,557 3,803,905 1,702,834 847,507 1,573,369 1,700,000

In2013,theCompanyreceivedaUSD15millionloanfromGhanaInternationalBankinLondonforaperiodof3yearswitheffectfrom19September2013at therateof3monthsUSDLIBORplusamarginof5.50%.Both interestandprincipalof this facilityarerepayableonaquarterlybasis.In2012theCompanyreceivedtwoloantranchesfromEuropeanInvestmentBankofKShs668,085,425at10.783%andKShs211,000,000at11.269%.In2014,thecompanyreceived3tranchesofKShs356,283,794at10.664%,KShs447,052,320at10.712%andUSD7,088,000at5.037%foraperiodof7yearsforlendingtoSmallandMediumEnterprisesintherealestatesector.Interestandprincipalarepayablesemi-annuallywitha2yeargraceperiodforprincipalrepayments.AfurtherUSD20mloanwasreceivedfromInternationalFinanceCorporationon1July2013.Theloanisfor7yearsatarateof6monthsUSDLiborplusamarginof4.30%.Interestispaidhalfyearlywitha3year grace period on the principal loan repayment.


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6.33 Borrowed funds

Group 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Borrowed funds from Shelter Afrique 147,000 347,276 181,891 - - -

In2012,KenyaBuildingSocietyLtd(KBSL)which isa100%ownedsubsidiaryofHousingFinanceCompanyofKenyaLtdentered intoafinancingarrangementwithShelterAfriquefordevelopmentof162housingunitsatKomarockphaseV.ThetotalamountofthefacilityisKShs647millionsecuredbythelandwherethedevelopmentistakingplace.TheloanisatShelterAfrique’sbaseratecurrentlyat13%plus3.50%margin. Both interest and principal are payable on a quarterly basis with a 30 months grace period on the principal.

6.34 Corporate bondGroup and Company: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Corporatebond 10,000,000 10,000,000 10,000,000 7,030,900 7,030,900 -Interestpayableoncorporatebond 461,347 212,469 212,633 137,698 125,444 - 10,461,347 10,212,469 10,212,633 7,168,598 7,156,344 -

In2012,thecompanyraisedKShs2,969,100,000whichwasthebalanceonthe7yearKShs10billionmediumtermnote(MTN)programme.Thetotalamountisatafixedrateof13%.

In2010,thecompanyraisedKShs7,030,900,000underthe7yearMTNwhoseprogrammesizeisKShs10,000,000,000.Thetotalnotesonafixedrateof8.5%perannumamounttoKShs5,865,400,000whilethetotalnotesonfloatingrateareKShs1,165,500,000.Thefloatingratenotesareonamarginof3%plus182dayTreasurybillrateofthelastauctionimmediatelyprecedingtheinterestpaymentdatesubjecttoaminimumof5%perannumandmaximumof9.5%perannum.

6.35 Capital and reserves

Group and company:(a) Ordinary share capital


At 1 January: AuthorizedordinarysharesofKShs5.00each 1,178,750 1,178,750 1,178,750 1,178,750 1,178,750 1,178,750Increase in authorisedordinarysharesofKShs5.00each 1,321,250 - - - - - At 30 September/ 31 December Authorized ordinary shares of KShs 5.00 each 2,500,000 1,178,750 1,178,750 1,178,750 1,178,750 1,178,750


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30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1January: Issued and fully paid ordinary shares ofKShs5.00each 1,155,350 1,153,000 1,152,125 1,150,000 1,150,000 1,150,000 Ordinary shares ofKShs5.00eachissuedintheperiod/year 2,250 2,350 875 2,125 - - At 30 September/ 31 December: Issued and fully paid ordinary shares ofKShs 5.00 each 1,157,600 1,155,350 1,153,000 1,152,125 1,150,000 1,150,000

The holders of ordinary shares are entitled to receive dividends declared from time to time and are entitled to one vote per share at annual generalmeetingsofthecompany.Issuedandfullypaidordinaryshareswere231,520,000sharesasat30September2014(2013-231million,2012–231million,2011–230million,2010–230million,2009–230million).Duringthenine-monthperiodended30September2014,450,000(Yearended31December2013–470,000,2012–175,000,2011–425,000,2010–Nil,2009-Nil)ordinaryshareswereissuedatKShs10.00pershareleadingtoasharepremiumofKShs5.00pershareissued.

(b) Share premiumThesereservesariseatatimewhenthesharesofthecompanyareissuedatapricehigherthanthenominal(par)value.

(c) Revaluation reserveRevaluation reserves arise from the periodic revaluation of freehold land and buildings. The book values of these assets are adjusted to the revaluations. Revaluation surpluses are not distributable.

(d) Statutory reserveWhere impairment losses required by legislation or regulations exceed those computed under International Financial Reporting Standards (IFRSs), theexcess isrecognisedasastatutoryreserveandaccountedforasanappropriationof retainedprofits.Thesereservesarenotdistributable.

(e) Available for-sale reserve

The available-for-sale reserve includes the cumulative net change in the fair value of available-for-sale investments and available-for-sale Treasury bonds, excluding impairment losses, until the investment is derecognised.

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Asat1January 20,515 (36,503) (34,000) - - -Changeinfairvalueduringtheperiod/year Equityinvestmentsclassifiedasavailableforsale (61,500) 91,500 4,000 (34,000) - -Treasurybondsclassifiedasavailableforsale (2,812) (34,482) (6,503) - - - (64,312) 57,018 (2,503) (34,000) - - ( 43,797) 20,515 (36,503) (34,000) - -

6.35 Capital and reserves (continued)

(a) Ordinary share capital (Continued)


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6.36 Shareholders’ income notes and loans

Group and Company: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 GovernmentofKenya–Incomenotes 50,750 50,750 50,750 50,750 50,750 50,750

TheGovernmentofKenya–Incomenotescarrynoredemptiondateandarechargedinterestatafixedrateof8.25%perannum(2013–8.25%,2012–8.25%,2011–8.25%,2010–8.25%,2009–8.25%).

6.37 Notes to the statement of cash flows6.37.1 Reconciliation of operating profit to net cash flows from operating activities

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Groupprofitbeforetaxation 1,044,947 1,480,356 907,631 975,795 561,028 351,118Depreciation 62,587 68,700 60,297 46,351 41,352 36,530Amortisationofintangibleasset 7,133 10,397 2,786 2,528 2,720 5,474Amortisationofprepaidoperatingleaserentals 482 644 644 642 642 643(Profit)/lossonsaleofpropertyandequipment (30) (1,696) 2,521 (1,732) (222) (80)Gainonsaleofequityinvestment (61,500) - - - - -IncreaseinbalanceswithCentralBankofKenya(CRR) (86,699) (108,620) (1,030,256) - - -Increaseincustomerdeposits 6,639,338 3,569,555 4,266,063 2,728,245 3,723,892 2,155,619Netmovementinmortgageadvancestocustomers (8,057,410) (4,922,186) (5,070,875) (5,719,436) (5,008,192) (4,080,550)InvestmentinGovernmentsecurities 9,288 400,967 (350,272) 159,988 (30,328) (30,913)(Increase)/decreaseinotherassets 219,671 (741,748) (138,247) (45,970) (117,005) 35,271Increase/(decrease)inotherliabilities 333,962 (220,379) 451,496 4,850 101,551 42,321Increaseinfundsfromcorporatebonds - 2,969,100 - 7,030,900 -Increaseininterestpayableoncorporatebond - - 74,935 12,254 125,444 -Increaseinborrowedfunds 2,338,254 2,266,292 181,891 - - -Increaseinloansfrombanks - 855,327 (725,862) (126,631) 1,300,000Increase/(decrease)inhousingprojects 7,001 324,233 (421,925) - - Net cash flows from operating activities before tax 2,457,024 2,126,515 2,761,116 (2,562,347) 6,305,151 ( 184,567) Incometaxpaid (544,211) (385,174) (560,075) (249,819) (186,558) (80,953) Net cash flows from operating activities 1,912,813 1,741,341 2,201,041 (2,812,166) 6,118,593 ( 265,520)


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6.37.2 Analyses of cash and cash equivalents

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Cashinhandandbank 2,130,105 921,338 765,313 384,034 420,390 319,839Balancesduefrombankinginstitutions 7,093,247 6,878,601 6,395,958 4,724,183 7,866,266 2,106,419 9,223,352 7,799,939 7,161,271 5,108,217 8,286,656 2,426,258

6.38 Contingent liabilities6.38.1 Guarantees Asattheyearended30September2014andat31Decemberofeachyearcoveredbythisreport,thecompanyhadissuedguaranteesintheordinary course of business to third parties as shown below:

2014 2013 2012 2011 2010 2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Guarantees 89,442 31,518 13,819 1,033 1,033 1,033

6.38.2 Other contingent liabilities

Intheordinarycourseofbusiness,thecompanyanditssubsidiariesaredefendantsinvariouslitigationsandclaims.Althoughtherecanbenoassurances, the directors believe, based on the information currently available and legal advice, that the claims can be successfully defended and therefore no provision has been made in the financial statements. The significant claims are described below:

KenyaBuildingSocietyLimited(KBSL)isa100%ownedsubsidiaryofHousingFinance.ThecompanyenteredintoajointventureagreementwithSantackLimitedforthedevelopmentofahousingprojectinKomarock(KomarockPhaseV).KBSterminatedthecontractbecauseSantackLimited was unable to perform as per the contract. Upon termination of the contract Santack raised a claim of KShs 340 million being their estimated loss following the terminationof thecontract.HousingFinancealso raisedacounterclaimofKShs74million. Thematterwasreferred for arbitration as provided for in the joint venture agreement.

Inthearbitration,theClaimantwasseekingKShs.24,880,000togetherwiththerighttopossessionofthesubjectsite(TitleNumberNairobiBlock/11344),aspursuanttothecasefiledwiththeHighCourt,theRespondentwaspermittedtostayonsite.Bywayofcounter-claiminthearbitration,RespondentclaimedKShs376,550,205inrespectofmoniesputintotheworks,lossofprofitsorthecurrentmarketvalueofthesite,thecostsofmaintainingthesiteandgeneraldamagesfordefamation.ThearbitratorsruledinfavourofKBSLon5April2012.

ICEALION(formerlyInsuranceCompanyofEastAfricaLimited(ICEA))hassuedHousingFinanceandothersforlossofKShs120mwhichwerefundswithdrawnbythethirddefendant,ICEA’sformerAssistantGeneralManager,anddepositedwithNyagaStockBrokers.TheCompany’sadvocateshavefiledadefenceagainstICEA.

6.37 Notes to the statement of cash flows (continued)


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6.39 Operating lease arrangements

Group and company: 6.39.1 The company as a lessorRentalincomeearnedduringthenine-monthperiodended30September2014wasKShs29,797,621(2013–38,921,219,2012–KShs41,374,367,2011–KShs39,251,575,2010–KShs40,957,788,2009–KShs28,519,727).At the reportingdate, thecompanyhadcontracted with tenants for the following future lease receivables.

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Withinoneyear 34,817 35,220 34,212 31,946 31,182 30,191Insecondtofifthyearinclusive 77,836 92,343 100,162 92,570 83,878 86,748Afterfiveyears - 3,315 2,893 7,341 - 643 112,653 130,878 137,267 131,857 115,060 117,582

Leases are negotiated for an average term of 6 years and rentals are reviewed every two years. The leases are cancellable with a penalty when the tenants do not give three months’ notice to vacate the premises.

6.39.2 The company as a lessee

Atthereportingdate,thecompanyhadoutstandingcommitmentsunderoperatingleaseswhichfalldueasfollows:

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Withinoneyear 46,813 22,654 19,651 4,966 13,335 11,579Insecondtofifthyearinclusive 165,469 62,321 69,473 23,592 30,726 39,342Afterfiveyears 12,136 1,652 1,301 22,391 10,670 - 224,418 86,627 90,425 50,949 54,731 50,921

Operating lease payments represent rentals payable by the company for its branches premises. Leases are negotiated for an average term of 6 years.

6.40 Mortgage commitments

Group and Company:MortgagecommitmentsamountingtoKShs10,491,226,367(2013-KShs8,193,903,790,2012–KShs4,438,269,576,2011–KShs8,912,165,247,2010–KShs6,585,192,2009-KShs5,851,242,321)areanalysedbelow:


Commitment in principle but not authorisedforpayment 5,972,991 4,551,681 2,569,534 8,912,165 6,585,885 5,851,242Authorisedbutnotpaid 4,518,235 3,642,223 1,868,735 - - - 10,491,226 8,193,904 4,438,269 8,912,165 6,585,885 5,851,242


150




6.41 Capital commitmentsGroup and Company: 30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 Authorisedbutnotcontracted 536,162 300,824 402,297 71,219 60,655 63,008

6.42 Assets pledged as securityThere were no assets pledged by the Group to secure liabilities and there were no secured Group liabilities for the nine-month period ended 30 September2014andforthefiveyearsended31December2013,2012,2011,2010and2009.

6.43 Related party transactionsGroup and Company:The Group has entered into transactions with its employees as follows:

(a) Loans

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1January 806,073 798,657 606,403 459,861 318,845 245,543Loansadvancedduringtheperiod/year 192,827 269,286 281,457 226,500 205,197 162,049Loansrepaymentsreceived (146,813) (261,870) (89,203) (79,958) (64,181) (88,747) At 30 September/ 31 December 852,087 806,073 798,657 606,403 459,861 318,845

IncludedinrelatedpartytransactionsarestaffcarloansofKShs21,114,180(2013-17,111,361,2012–KShs8,208,174,2011–KShs11,002,370,2010–KShs17,835,916,2009–KShs14,776,669)andstaffpersonalloansofKShs83,548,123(2013–KShs60,600,843,2012–KShs49,150,308,2011–KShs48,402,595,2010–KShs8,188,696,2009–Nil).Therelatedinterestincomeforstaffcarandpersonalloansat30September2014wasKShs892,324(2013–KShs1,065,000,2012–KShs596,677,2011–KShs973,413,2010–KShs1,289,155,2009-KShs1,237,777)andKShs3,825,649(2013–KShs3,900,341,2012–KShs3,487,354,2011–KShs2,521,072,2010–KShs136,162,2009–Nil).

In the normal course of business, transactions have been entered with certain related parties at commercial terms.

(b) Remuneration to directors is disclosed under Note 6.11.

(c) Compensationtoseniormanagementforthenine-monthperiodended30September2014amountedtoKShs172,056,468(2013–155,978,416,2012–KShs106,039,097,2011–KShs100,585,987,2010–KShs71,241,980,2009-KShs56,463,942).

(d) Transactions with Equity Bank Limited

30.09.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 KShs’000 At1January - 93,538 447,507 773,369 700,000 -Loans received - - - - 300,000 -Loanrepayment - (93,538) (353,969) (325,862) (226,731) - At30September/31December - - 93,538 447,507 773,269 -



16 Legal Opinion

WALKER KONTOS

ADVOCATES ٠۰ NOTARIES PUBLIC ٠۰ COMMISSIONERS FOR OATHS

AlexandraKontosMichael S. KontosPeterM.MwangiDeepenN.ShahGreg KarungoPaulOgundeDianaSitumaRahma W. KaranjaMartha Gitonga-Muturi

www.walkerkontos.com

Hakika House, Bishops RoadP.O.Box60680–00200,Nairobi,Kenya

DZNo.40

Landlines: (+25420)2713023-6(+25420)2718432-6(+25420)2652449(+25420)2589510(+25420)2652461

Mobiles:0720679913072425670607344549810736752000

Facsimile:(+25420)2718429

The Directors, 28th January, 2015Housing Finance Company of Kenya LimitedRehani HouseKenyatta Avenue/ Koinange Street,NAIROBI

Dear Sirs, LEGAL OPINION IN RESPECT OF THE RIGHTS ISSUE OF 116,666,667 NEW ORDINARY SHARES IN HOUSING FINANCE COMPANY OF KENYA LIMITED

We have acted as legal advisors for Housing Finance Company of Kenya Limited (the “Issuer”) in relation to the Rights Issue, the terms and conditions of which are contained in the Information Memorandum issued by the Issuer and dated 28th January 2015 (“the Information Memorandum”).

Walker Kontos Advocates are Advocates of the High Court of Kenya, practicing and qualified as such to practice in Kenya, and to advise on the laws of the Republic of Kenya.

Unless otherwise stated, or the context otherwise requires, the words and terms used in this opinion bear the same meaning as those defined in the Information Memorandum.


16 Legal Opinion

This Opinion is based on our examination of originals or certified copies of the following documents:-

1. Preliminary Matters

1.1 This opinion is addressed to the Directors of Housing Finance Company of Kenya Limited.

1.2 This opinion is limited to Kenyan Law as applied in the Courts of Kenya and as of the date of this opinion and to matters of fact prevailing as of the date of this opinion.

2. Assumptions and Documents Reviewed

2.1 For the purposes of this opinion, we have assumed that:-

2.1.1 all information contained in the Information Memorandum and all information provided to us by the Issuer, and its officers and advisers is true, accurate and up to date;

2.1.2 all copies of and the signatures and seals on documents supplied to us are genuine and the copies of the documents we have examined conform to the original documents and no alteration, variation or modification has been made to them;

2.1.3 all agreements and other relevant documents have been duly authorized, executed and delivered by the parties to such documents other than the Issuer;

2.1.4 with respect to matters of fact, we have relied on the representations contained in the documents supplied to us and the representations of the Issuer its officers and other advisers;

2.2 In rendering this opinion, we have relied upon documents and information provided to us by the Issuer comprising copies of:

(a) copy of certificate of incorporation of the Issuer together with any changes of name the Memorandum and Articles of Association of the Issuer and amendments thereto to date;

(b) license to transact banking business dated 11th December 2014 issued to the Issuer by the Central Bank of Kenya pursuant to which the Issuer was unconditionally licensed to carry out banking business at its Head Office as well as the branches listed below for the period from 1st January 2015 to 31st December 2015

(i) Rehani – Koinange Street, Nairobi(ii) Gill House – Moi Avenue, Nairobi(iii) Kenyatta Market, Maseras House, Golf Course Shopping Centre, , Nairobi(iv) Buru Buru – Mumias Road, Nairobi(v) Thika Road Mall, Nairobi(vi) Sameer Business Park, Nairobi (vii) Skypark- Waiyaki Way, Nairobi (viii) Thika- Uhuru Street(ix) Nyeri- Kimathi Way(x) Mombasa- Moi Avenue (xi) Mombasa- Nyali Centre (xii) Naivasha- Buffalo Mall(xiii) Nakuru- AFC Building, Geoffrey Kamau Way(xiv) Eldoret- Oloo/Utalii Street(xv) Kisumu- Court Road(xvi) Meru-Tom Mboya Street(xvii) Kitengela- Red Heron Court Centre, Kajiado/Namanga Road(xviii) Ongata Rongai- Maasai Mall


(c) licence to transact foreign exchange business dated 11th December 2014 issued to the Issuer by the Central Bank of Kenya pursuant to which the Issuer was licensed to transact foreign exchange business in Kenya for the period from 1st January 2015 to 31st December 2015;

(d) resolution of the shareholders of the Issuer in an Extraordinary General Meeting dated 5th December 2014 approving inter alia, the Rights Issue;

(e) The documents of title relating to various properties registered in the name of the Issuer as more particularly listed in Schedule 1 of this

opinion;

(f) The Certificate of Registration dated 28th July 2005 in respect of the Issuer’s staff Retirement Benefit Scheme;

(g) The Annual Returns filed on behalf of the Issuer made up to 6th May 2014;

(h) Letter dated 26th January 2015 from the Company Secretary of the Issuer setting out the names of the Issuer’s current directors and top ten shareholders as at 31st December 2014 and specifying the number of shares in the Issuer held by such directors and shareholders;

(i) Letters signed by each director of the Issuer confirming that they are not involved in any material litigation, prosecution or other civil or criminal action;

(j) A letter dated 16th January 2015 from the Capital Markets Authority approving the Issue; and

(k) A letter dated 20th January 2015 from the Nairobi Securities Exchange (“NSE”) to the Issuer approving the Rights Issue in the manner prescribed under the Information Memorandum.

3. Opinion

Subject to the foregoing and to the reservations expressed below we opine as follows:-

3.1 Status of the Issuer

3.1.1 The Issuer is a limited liability company, duly registered under the Companies Act (Chapter 486 of the Laws of Kenya) under Certificate of Registration Number C.21/97. The Issuer’s registered offices are situated on Land Reference Number 209/9054 Nairobi, Rehani House, Nairobi and its postal address is P O Box 30088-00100 Nairobi.

3.1.2 The Issuer is listed at the Nairobi Securities Exchange with power to execute, deliver and exercise its rights and perform its obligations pursuant to the Rights Issue and such execution delivery and performance have been duly authorized by the requisite corporate action.

3.1.3 All rights and obligations of the Issuer contemplated by the Rights Issue constitute valid and binding rights and obligations.

3.1.4 The transactions contemplated by the Rights Issue and the performance by the Issuer of its obligations thereunder will not violate any laws of Kenya.

3.2 Licenses and ConsentsThe Issuer has all licenses and consents required to perform its business.

16 Legal Opinion


3.3 Ownership of AssetsThe Issuer is the registered proprietor of the immovable properties particulars of which are listed in Part A of Schedule 1 hereto.

Kindly note that the Issuer’s title in respect of Title Numbers Mombasa / Block XXI/580, 581 and 582 is the subject matter of a dispute further particulars of which are detailed in Schedule 2 of this opinion.

The Issuer is also registered as owner of 4,999,997 ordinary shares in Kenya Building Society Limited (KBSL). The remaining 3 shares in KBSL are held by a nominee on behalf of the Issuer.

The Issuer is also registered as owner of 999 ordinary shares in Housing F inance Insurance Agency (HFIA). One share is held by a nominee on behalf of the Issuer

3.4 Contracts Save for the contracts disclosed in the Information Memorandum at section 14.5, the Issuer has not entered into any material contracts other than contracts entered into in the ordinary course of the business carried on by the Issuer. No opinion is expressed as to the validity or enforceability thereof or as to the rights of the parties thereto.

3.5 Material LitigationThe material litigation particulars of which are set out in Schedule 2 of this opinion has been disclosed to us.

3.6 Share CapitalThe authorised share capital of the Issuer is KShs 2,500,000,000.00 divided into 500,000,000.00 ordinary shares of KShs 5.00 each and meets the minimum capital requirements specified in the Banking Act, Chapter 488 of the Laws of Kenya.

4. ConsentIn accordance with Section 42(1) of the Companies Act, we have given, and have not prior to the date of this Information Memorandum withdrawn our consent to the issue of the Information Memorandum containing the statements by us in the form and context in which they are included.

5. Effective DateThis letter and the opinions in it are governed by Kenyan law and relate only to Kenyan law as applied by the Kenyan courts as at today’s date.

Yours faithfully,

WALKER KONTOS

Schedule 1

Particulars of immovable property registered in the name of the IssuerProperty Reference Brief ParticularsLandReferenceNumber209/9054Nairobi GrantNo.I.R.34513/1

0.1394ofahectareTerm99yearsfrom1/1/1978

TitleNumberMombasa/BlockXXI/217 0.1211ofanacre.Land CertificateTerm is freehold

TitleNumberMombasa/BlockXXI/580 0.0450hectaresLease from Government of Kenya.Term99Yearsfrom1/5/1994

16 Legal Opinion


Property Reference Brief ParticularsTitleNumberMombasa/BlockXXI/581 Lease from Government of Kenya.

Term99Yearsfrom1/5/19940.0414 hectares

TitleNumberMombasa/BlockXXI/582 Lease from Government of Kenya. Term99Yearsfrom1/5/19940.0414 hectares

Schedule 2

Material Litigation

1. Milimani HCCC No. 474 of 2012ICEA Lion vs Housing Finance Company of Kenya Limited CfC Stanbic Bank Limited and another

ICEA instituted proceedings against the Issuer and 2 others claiming the loss of Kshs. 120 million which was fraudulently lost through an intricate series of fixed and call deposit accounts opened by the third defendant with the issuer and the 2nd defendant on behalf of ICEA, funds which were later transferred or diverted to other accounts and withdrawn. The plaintiff blames the Issuer for breach of the terms governing the customer banker relation and the account operation mandates. The 3rd defendant, ICEA’s former Assistant General Manager is also facing a criminal suit regarding the matter in which the firm of Murgor and Murgor is acting for the Issuer.

The matter was mentioned on 19th March 2014 to confirm compliance with directions to exchange & file documents but the 2nd Defendant (CfC Stanbic Bank Limited) had not complied. The court held that it shall proceed with the documents on record. The Matter came up for Hearing on 4th June 2014 but was adjourned at the behest of the Plaintiff.

The Matter was stood over generally and fresh dates are to be taken at the Registry

2. HCCC No.562 of 2005 -Esther Njeri Gichuru and 22 others vs. Housing Finance

Customers of the Issuer have filed a declaratory suit through the Interest Rates Calculation Bureau against the company claiming that they have been overcharged and levied with penalty and default charges. This matter was stayed on the 9th November 2007 pending the determination of case 3 below which is of a similar nature

3. HCCC No.151 of 2003-Paul Nganga Ndetei & 63 Others vs. Hou sing Finance-

The initial suit was by 63 customers but they dropped off as they redeemed their mortgages and only 4 Customers are left. They had filed a suit against us through the Interest Rates Calculation Bureau claiming that they have been overcharged and levied with penalty and default charges. Currently all the customers have now redeemed their accounts and one is deceased. The suit was set for hearing on 5th March 2014 but was taken out of the day’s hearing list. Fresh dates for the Hearing have to be taken at the Court Registry.

4. Mombasa HCCC No. 27/ 2006 or Comm. No. 169/2006Housing Finance Company of Kenya Limited vs. Kenya Broadcasting Corporation & 2 Others

The 1st Defendant herein disputes the Issuer’s ownership of Title Numbers Mombasa/Block XXI/580, 581 and 582 (“the Suit Property”) on the grounds that the Suit Property had been reserved for the 1st Defendant. The Suit Property which is vacant was purchased by the Issuer from M/s Kensko Agroproducts on 15th March, 1995 for KShs 44,000,000.00 on which date Certificates of Lease over the Suit Property were issued in respect of the Suit Property. The 1st Defendant prays that the Issuer be deregistered as the owner of the Suit Property and that the 1st Defendant be registered as owner.

The 2nd Defendant herein is the Attorney General who has prayed for orders identical to those of the 1st Defendant.

The matter has now been moved to the Environmental and Land Division and has been fixed for hearing on 12th March 2015.

16 Legal Opinion


The Issuer is represented by Messrs. Kanyi J & Company, Advocates of Treasury Square, Bank of India Building, PO Box 99426 – 80107, Mombasa.

No opinion is expressed as to the likelihood of loss by the Issuer in this matter.

Copies of all pleadings are av ailable for inspection at the registered office of the Issuer.

5. Milimani HCCC No. 545/ 2001Kenya Breweries Limited vs. Kenya Bus Services Limited (as 1st Defendant), Housing Finance Company of Kenya Limited (as 2nd Defendant) and Bustrack Kenya Limited (as 3rd P arty)

The Issuer herein is joined in a suit by the Plaintiff for having issued a letter of comfort to the Plaintiff which the latter alleges compelled it to agree to sell a property to the 1st Defendant. The sale not having proceeded, the Plaintiff is suing the 1st Defendant and the Issuer for specific performance of the transaction, although the said property having since been sold, the Plaintiff has amended his claim to one for general and special damages in the sum of K.Shs. 228,620,563.40 plus interest thereon at the rate of 32% per annum from 31st March, 2001 until payment in full.

The suit was settled between Kenya Breweries and the First Defendant. The matter is ongoing between the Issuer and Kenya Breweries as to costs of the suit.

The matter was scheduled for submissions on 26th November 2014 but was adjourned. Fresh dates to be taken at the registry.

The Issuer is represented by Messrs. Daly & Figgis, Advocates of ABC Towers, ABC Place, 6th Floor, PO Box 40034, Nairobi 00100.


Copies of all pleadings are av ailable for inspection at the registered office of the Issuer.

6. HCCC No. 226/03Sharok Kher Mohamed Hirj i vs. Housing Finance Company of Kenya Limited

The Plaintiff has instituted proceedings against the Issuer in respect of the Plaintiff’s property which was sold by way of public auction. Judgment for the sum of Kshs.20 million was awarded to the Plaintiff, however the Issuer has applied for a stay of execution pending appeal which was granted subject to the deposit of an unconditional Bank Guarantee for the sum of Kshs.30million pending hearing of the appeal. The matter is ongoing and the Plaintiff’s application for leave to execute was heard on 23rd September 2014 and fixed for further mention on 13th October 2014 to confirm if the original bank guarantee has been produced.

The court set aside the stay orders and application to review these orders was filed by the Defendant’s. The Submissions on the application to set aside these orders have been filed at the court and the court has set the Ruling date for 30th January 2015.

The Issuer is represented by Messrs. MMC Africa Advocates of MMC Arches, Spring ValleyClose, off Spring Valley Road, Nairobi


16 Legal Opinion


17 Authorised Selling Agents

HousingFinanceCompanyofKenyaLimitedhasappointedspecificAuthorisedSellingAgentsinconnectionwiththeOffer.TheseAuthorisedSellingAgentshavesignedagencyagreementswithHousingFinancewhichcontainvarioustermsandconditionsthateachAuthorisedSellingAgentisrequiredtocomplywith.TheAuthorisedSellingAgentsareMembersoftheNSEthatareissuedwithannuallicensesbytheCMA.TheseAuthorisedSellingAgentsinKenyaarelistedbelow.

Licensed Investment Banks

African Alliance Kenya Investment Bank Limited1stFloor,Trans-nationalPlazaMama Ngina StreetPOBox27639,00506NairobiTel:2762000/[email protected]

Genghis Capital LimitedDeltaTowersP.O.Box9959-00100,NairobiTel:2774760

Barclays Financial Services LimitedBarclaysPlazaM6Loita StreetP.O.Box30120-00100,NairobiTel: 310843

KCB Capital LimitedKencom HouseP.O.Box48400-00101,NairobiTel:2287000

CBA Capital LimitedMara and Ragati Roads, Upper HillPOBox30120,00100NairobiTel:2884444

Kestrel Capital (E.A) Ltd5thFloor,ICEABuilding,KenyattaAvenuePOBox40005,00100,Nairobi.Tel:2251758/[email protected]

Dyer&BlairInvestmentBankLimited10th Floor, Loita House, Loita StreetPOBox45396,00100,Nairobi.Tel:3240000/[email protected]

NIC Capital LimitedNIC House, Masaba RoadPOBox44599,00100,Nairobi.Tel:[email protected]

Equity Investment Bank LimitedEquity CenterHospital Road, Upper HillPOBox74454,00200NairobiTel:2262000

Renaissance Capital (Kenya) Limited 6thFloor,PurshottamPlace,ChiromoRoadPOBox40560-00100Nairobi.Tel:3682000/[email protected]

Faida Investment Bank 1st Floor, Windsor House, University Way POBox45236,00100,Nairobi.Tel:[email protected]

SBG Securities LimitedCFC Stanbic House2ndFloor,CFCCentre,ChiromoRoad,POBox47198,00100Nairobi.Tel:3638900,[email protected]

Standard Investment Bank Ltd16thfloor,ICEABuilding,KenyattaAvenuePOBox13714,00100,Nairobi.Tel:2228963/[email protected]


17 Authorised Selling Agents

Licensed Stockbrokers

ABC Capital Limited5thFloor,IPSBuilding,KimathiStreetPOBox34137,00100,Nairobi.Tel:2246036/[email protected]

Kingdom Securities Limited5thFloorCo-operativeHouse,HaileSelassieAvenuePOBox48231-00100,Nairobi.Tel:[email protected]

AIB Capital Limited9thFloor,FinanceHouse,LoitaStreetPOBox11019,00100,Nairobi.Tel:2210178/[email protected]

NIC Securities LimitedNIC House, Masaba RoadPOBox63046,00200,Nairobi.Tel:[email protected]

ApexAfrica Capital Limited4th Floor, Rehani House, Koinange StreetP.O.Box43676,00100,Nairobi.Tel:2242170/[email protected]

Old Mutual Securities Limited6thFloor,IPSBuilding,KimathiStreetPOBox50338,00200,Nairobi.Tel:2241350/4/[email protected]

Francis Drummond and Company Limited2nd Floor, Hughes Building, Kenyatta Avenue, PO Box 45465,00100,Nairobi.Tel:318690/[email protected]

Sterling Capital Limited11th Floor, Finance House, Loita StreetP.O.Box45080,00100,Nairobi.Tel:2213914/[email protected]

Genghis Capital Limited5thFloor,PrudentialBuilding,WaberaStreetP.OBox1670-00100,Nairobi.Tel:2337535/[email protected]

Suntra Investment Bank Ltd10th Floor, Nation Centre, Kimathi StreetPOBox74016,00200,Nairobi.Tel:[email protected]


18 Appendices

18.1 Form of Guarantee

[LETTERHEADOFCOMMERCIALBANK]

Date:The Chief ExecutiveHousing Finance Company of Kenya LimitedPOBox30088-00100Nairobi

DearSirs

HOUSING FINANCE COMPANY OF KENYA LIMITED – RIGHTS ISSUE GUARANTEE IN RESPECT OF PAYMENT FOR ALLOCATION OF SHARES TO [name of INVESTOR]

WHEREAS[nameofInvestor/EligibleShareholder](“theInvestor”)hasbyanapplicationformdated[]appliedforXXXXXXNewSharesassetoutintheInformationMemorandumdated[]2014(“theHFCK Information Memorandum”). Capitalised terms used in this Guarantee shall have the meaning and interpretation given to such terms in the HFCK Information Memorandum.

AND WHEREAS it has been stipulated by you in the HFCK Information Memorandum that the Investor shall furnish you with an irrevocable on demand guarantee for the full value of the price of the New Shares.

AND WHEREASwe[nameofGuarantor]haveagreedtogivethisGuarantee:NOWattherequestoftheInvestorandinconsiderationoftheIssueragreeingtoaccepttheInvestor’sEntitlementandAcceptanceFormonthetermssetforthinSection7.21.1oftheInformationMemorandumandtopermitpaymentbytheInvestoroftheOfferPriceforsuchnumberofthe New Shares applied for and in consideration of your allocating to the Investor the New Shares or such lesser number as you shall in your absolute discretion determine, we hereby irrevocably guarantee to pay you, forthwith upon your first written demand declaring the Investor to be in default and without delay or argument, such sum as may be demanded by you up to a maximum sum of Kenya Shillings __________________ without your needing to prove or to show grounds or reasons for your demand for the sum specified therein either by way of RTGS transfer to suchbankaccountasshallbespecifiedinyourdemandforpayment(wherethemoneypayableisinexcessofKenyaShillingsonemillion(KES.1,000,000)orbanker’schequepayabletoHousingFinanceCompanyofKenyaLimited.

ThisGuaranteewillremaininforceuptoandincluding[]p.m.on[]2014andanydemandinrespectthereofshouldreachusnotlaterthan the above date and time.

This Guarantee shall be governed and construed in accordance with the laws of Kenya.

[dueexecutionbyauthorisedsignatories]


18 Appendices

18.2 Form of QII Undertaking

Date:The Chief ExecutiveHousing Finance Company of Kenya LimitedPOBox30088-00100Nairobi

DearSirs

UNDERTAKING IN RESPECT OF PAYMENT ON ALLOCATION OF SHARES TO [name of QII]WHEREAS[nameofinvestor](“theInvestor”)haveappliedfor[]ordinaryshares(“theNewShares”)inHousingFinanceCompanyofKenyaLimited(the“Company”)beingofferedbyyouforsubscriptionassetoutintheInformationMemorandumdated[]2014(“HFCK Information Memorandum”). Capitalised terms used in this letter of undertaking shall have the meaning and interpretation given to such terms in the HFCK Information Memorandum.

NOW inconsiderationof the Issuerhavingagreedatour request topermitpaymentbyusof theOfferPrice forsuchnumberof theNewShareswhichwehaveappliedforandareallottedtousonthetermssetforthinSection7.21.1oftheHFCKInformationMemorandumAND in consideration of you allotting to us the number of New Shares we have applied for or such lesser number as you shall in your absolute discretion determine, we hereby undertake to pay you without delay or argument, forthwith upon your first written notice specifying how many of the New Shares have been provisionally allotted to us, such sum not exceeding Kenya shillings __________________corresponding to the OfferPriceofsuchnumberoftheNewSharesasyoushallhaveprovisionallyallottedtousinclusiveofanyCDSexpensesandnetofallbankcharges.

ShouldsuchpaymentnotbemadewithintwoBusinessDaysfollowingthedeemedserviceofsuchnoticethentheIssuershallbeentitledwithout further notice to either: treat our application as having been repudiated and cancel the provisional allotment to us and re-allocate the provisionally allotted New Shares on such terms and conditions as it shall think fit without prejudice to any rights to damages for such repudiationor;toallowusfurthertimeforpaymentonsuchtermsandconditionsasitshallthinkfitinwhicheventweshallpaydefaultinterestonallsumsoutstandingattherateof15percentperannumcalculatedondailybalancesandcompoundedmonthly.AnynoticetobeservedonusshallbeinwritingandshallbedeemedtohavebeenproperlyservedonusifdeliveredbyhandorsentbyfaxoremailtousataddressspecifiedinourEntitlementandAcceptanceForm.

Any notice shall be deemed to have been received, if delivered by hand, at the time of delivery or, if sent by fax, on the completion oftransmission or if by email receipt of a confirmed delivery notice.

This undertaking shall be governed and construed in accordance with the laws of Kenya and we irrevocably submit to the non-exclusive jurisdiction of the Courts of Kenya. If we are not a Kenyan Company and in addition to any other permitted means of service, we hereby irrevocablyappointtheAuthorisedAgentsubmittingourEntitlementandAcceptanceFormfortheNewSharesasouragentforthereceiptofany legal process.

INWITNESSWHEREOFTHISLETTEROFUNDERTAKINGHASBEENEXECUTEDBYUSTHIS________DAYOF______________2014.Signed By:

1) Name __________________________________________________________________________________ Signature___________________________________________________________

Title __________________________________________________________________________________________

2)Name__________________________________________________________________________________ Signature____________________________________________________________

Title __________________________________________________________________________________________

Note:QualifiedInstitutionalInvestors(QII’s)areFundManagers,AuthorizedDepositoriesandInvestmentBankslicensedundertheCapitalMarketsActandInsuranceCompanieswhomanagelifefundsandlicensedbytheInsuranceRegulatoryAuthority.

OFFI

CIAL

USE

ONL

YPA

RT 1

APA

RT 1

BPA

RT 1

C

POWER OF ATTORNEY:

ACKNOWLEDGEMENT SLIP—HF RIGHTS ISSUE 2015

ACCEPTANCE IN FULL

ADDITIONAL SHARES

TOTAL SHARES

Eligible Shareholders who wish to appoint an attorney to deal with the Rights Issue may do so via Form Z (Form of Appointment of Attorney) hereby enclosed or available from an Authorised Agent.

I/We hereby accept in full, subject to the terms of the Information Memorandum, this PAL-I and the Memorandum and Articles of Association of Housing Finance Company of Kenya Limited, the number of New Shares above in Box 2 for the value in Box 3 above.

Having accepted all the New Shares in PART 1A above, I/we hereby apply for Additional Shares

(in multiples of 100), subject to the terms of the Information Memorandum, this PAL-I and the

Memorandum and Articles of Association of Housing Finance Company of Kenya Limited, the

number of Additional Shares in Box 4 for the value in Box 5 herein.

Having accepted all the New Shares in PART 1A above and applied for Additional Shares in PART

1B above (where applicable), I/we hereby apply for the total New Shares in Box 6 for the value in

Box 7 herein.

OFFICIAL USE ONLY

PROVISIONAL ALLOTMENT LETTER FOR CDS ACCOUNTS (PAL-I)

Authorised Agent Stamp Authorised Agent Code Date of this PAL-I28 January 2015

THIS DOCUMENT IS OF VALUE AND IS NEGOTIABLE . IT IS TO BE READ AND EXECUTED IN CONJUCTION WITH DOCUMENTS FOR THE RIGHTS ISSUE INCLUDING THE INFORMATION MEMORANDUM DATED 28 JANUARY 2015 AND NOTES ON THE REVERSE OF THIS FORM. PLEASE CONSULT YOUR PREFERRED ADVISOR IF REQUIRED. RIGHTS ISSUE OPENS AT 9.00 A.M. ON 19 FEBRUARY 2015 AND CLOSES AT 4.00 P.M. ON 13 MARCH 2015

Tick (√ )

Eligible Shareholder PAL-I No. New Shares Accepted Authorised Agent Stamp & Date

PART

4PA

RT 3

REFUNDS:

BANKER’S CHEQUE / EFT/ RTGS AUTHORISED AGENT

IRREVOCABLE BANK GUARANTEE (IBG)

PAYMENT — SELECT ONE OPTION

SIGNATURE OF ELIGIBLE SHAREHOLDER OR AUTHORISED ATTORNEY

Amount in figures (Kshs)

Provide your Email and Tel No:

Cheque No.

FINANCED APPLICATIONS

CDS Form 5 No.

Loan Reference

Institution / Branch

Tick if your Authorised Agent will forward payment on your behalf

for ADDITIONAL SHARES ONLYMinimum Kshs 1 million value

Electronic Transfer Reference No.

Bank & Branch

Signature 1 Signature 2 Company Seal/Stamp (if applicable)

Date:__________________________________________________________________________________

Tick (√ )

Where bank account information has been provided to the CDSC prior to the Register Closure, refunds shall be made directly to such bank accounts. All other refunds will be made by way of Banker’s Cheque delivered to the Authorised Agent.

Tear off

BOX 1Existing Shares registered in your name as at 28 January 2015

BOX 2Number of New Shares provisionally allotted to you

BOX 3Amount payable (Kshs) in full by 4.00 p.m. on 13 March 2015

BOX 4Number of Additional Shares(multiples of 100)

BOX 5Amount payable (Kshs)(multiply figure in Box 4 by Kshs 30)

BOX 6Number of total New Shares(Box 2 + Box 4)

BOX 7Amount payable (Kshs)(Box 3+ Box 5)

PART

2NO

TE

PARTIAL ACCEPTANCE OF NEW SHARES

RENUNCIATION by PRIVATE TRANSFER or TRADING of RIGHTSRenunciation is subject to the terms and conditions contained in Section 7 of the Information Memorandum and Articles of Association of Housing Finance

Company of Kenya Limited. Renunciation of Rights by private transfer can be effected using a CDS Form 7 to a Renouncee with a CDS Account. Renunciation by

trading of Rights can be effected using this PAL-I and by selling all or part of your Entitlement on the NSE via an Authorised Agent.

To accept any balance Rightsin your CDS Account pleasecomplete a Form E (Form of Entitlement) available from

your Authorised Agent.

IF PART 1 ABOVE IS NOT ACCEPTED. I/We hereby accept in part, subject to the terms of the

Information Memorandum, this PAL-I and the Memorandum and Articles of Association of Housing

Finance Company of Kenya Limited the number of New Shares specified in Box 8 for the value set

out in Box 9 herein.

BOX 8Number of New Shares accepted in part (multiples of 100)


If you wish to take action, please follow the instructions below:

PART 1 ACCEPTANCE IN FULL, ADDITIONAL SHARES, TOTAL NEW SHARES

a. Tick PART 1A if accepting in full all New Shares as in Box 2.b. Application for Additional Shares can only be made if all New Shares in Box 2 were accepted in full. To apply for Additional Shares (PART 1B), follow the direc-

tions below, otherwise, skip to instruction (d).• Fill in Box 4 subject to multiples of 100.• Fill in the amount due for these Additional Shares in Box 5 by multiplying the number in Box 4 by Kshs 30 per New Share.

c. If you have chosen not to apply for Additional Shares, write “0” in both Box 4 and Box 5.d. Complete total number of New Shares applied for in Box 6 in PART 1C, i.e. Box 6 = Box 2 + Box 4.e. Complete the total value of New Shares applied for in Box 7, PART 1C. i.e. Box 7= Box 3 + Box 5.f. Allocation and Allotment is subject to Section 7.17 and Section 7.18 in the Information Memorandum. (Section 5.14 of the abridged IM)

PART 2 PARTIAL ACCEPTANCE OF NEW SHARES

a. Complete this part only for acceptance of a portion of the New Shares to which you are entitled. You must not have completed PART 1.b. Enter number of New Shares you would like to accept into Box 8 subject to multiples of 100. This number must be less than the number in Box 2, subject to a

minimum of 100 New Shares.c. Enter the amount due for the New Shares in Box 9 by multiplying the number in Box 8 with Kshs 30 per New Share.

NOTE RENUNCIATION by PRIVATE TRANSFER or TRADING of RIGHTS

The section is a note.a. Rights have been credited to your CDS Account.b. Section 7.19.2 in the Information Memorandum (Section 5.8.2.5 of the abridged IM) provides details on Renunciation by Private Transfer. The last date and

time is 2 March 2015 by 4.00 pm.c. Section 7.19.1 in the Information Memorandum (Section 5.81 of the abridged IM) provides details on Renunciation by Trading of Rights & Dealing in Rights.

The last date and time is 2 March 2015 .d. To accept the balance of Rights in your CDS Account (where applicable), use the Form E (Form of Entitlement) available from an Authorised Agent. The last

date and time is 13 March 2015.

PART 3 PAYMENT

a. Section 7.21 in the Information Memorandum (Section 5.10 of the abridged IM) provides details on Application Payment.b. All payments are to be made in Kenya Shillings.c. All Application Money in Part 1A and Part 2 must be made in cleared funds on or before 4:00 pm on 13 March 2015. Pay Kshs 30 for CDSC directly to the

Authorised Agent.d. All Banker’s Cheque payments should be drawn in favour of ’ HF 2015 Rights Issue Collection Account— PAL-I No’.(The PAL No. is shown overleaf on the top

right hand corner) For EFT/RTGS payment use: Account Name: HF 2015 Rights Issue Collection Account; Account no. 760-0000001 at Hous-ing Finance Company of Kenya Limited, SWIFT Code: HFCOKENA or refer to your Authorised Agent for the appropriate account number.

e. Complete the amount in figures.f. Complete the Banker’s Cheque number or Electronic Transfer Reference No (EFT/RTGS) where applicable.g. Provide the bank and branch details.h. For electronic payments attach a copy of the electronic confirmation to this PAL-I.i. If payment is being forwarded to the Receiving Agent via an Authorised Agent tick the box provided.j. If payment for Additional Shares is via IBG and the minimum is Kshs 1 million worth, tick the box provided and attach the IBG to this PAL-I.k. If a Lender is involved, complete section labeled ‘Financed Applications’ by providing the CDS Form 5 No, the loan reference and the name of the institution

and branch.l. Multiple payments will NOT be accepted .

If no action is taken on the Rights, they will lapse and be subject to Section 7.19.3(Section 5.8.3 of the abridged IM) (Renunciation by declining) and 7.25(Section 5.14 of the abridged IM) (Untaken Rights and Allocation Policy) of the Information Memorandum.

PART 4 SIGNATURE

The PAL-I must be signed to ensure acceptance. For limited liability companies the company seal must be affixed next to the signatures of two directors or one director & company secretary or signed and executed as per the company mandate.

Authorised Agents. HF has appointed specific Authorised Agents (Including the Lead Transaction Advisors/Sponsoring Stockbrokers namely NIC Capital & Kestrel Capital (East Africa) Ltd) in connection with the Rights Issue. The other Authorised Agents are trading participants of the NSE as listed in Section 17 of the Information Memorandum. (Section 10 of the abridged IM)

Acknowledgement Slip. For proof of delivery to an Authorised Agent this slip as stamped by the Authorised Agent, must be kept in safe custody by the Eligible Shareholder/Purchaser of Rights.

The last date and time for acceptance and payment of the New Shares and Additional Shares is on or before 4:00 p.m. on 13 March 2015

NOTES (PAL- I)

Tear off

OFFI

CIAL

USE

ONL

YPA

RT 1

APA

RT 1

BPA

RT 1

CPA

RT 5

PART

4

POWER OF ATTORNEY:

REFUNDS:

BANKER’S CHEQUE / EFT/ RTGS AUTHORISED AGENT

IRREVOCABLE BANK GUARANTEE (IBG)

PAYMENT — SELECT ONE OPTION FINANCED APPLICATIONS

SIGNATURE OF ELIGIBLE SHAREHOLDER OR AUTHORISED ATTORNEY

ACKNOWLEDGEMENT SLIP—HF RIGHTS ISSUE 2015

ACCEPTANCE IN FULL

ADDITIONAL SHARES

TOTAL SHARES

Eligible Shareholders who wish to appoint an attorney to deal with the Rights Issue may do so via Form Z (Form of Appointment of Attorney) hereby enclosed or available from an Authorised Agent.

I/We hereby accept in full, subject to the terms of the Information Memorandum, this PAL-II and the Memorandum and Articles of Association of Housing Finance Company of Kenya Limited, the number of New Shares above in Box 2 for the value in Box 3 above.

Having accepted all the New Shares in PART 1A above, I/we hereby apply for Additional Shares

(in multiples of 100), subject to the terms of the Information Memorandum, this PAL-II and the

Memorandum and Articles of Association of Housing Finance Company of Kenya Limited, the

number of Additional Shares in Box 4 for the value in Box 5 herein.

Having accepted all the New Shares in PART 1A above and applied for Additional Shares in PART

1B above (where applicable), I/we hereby apply for the total New Shares in Box 6 for the value in

Box 7 herein.

OFFICIAL USE ONLY

PROVISIONAL ALLOTMENT LETTER FOR NON TRADING CDS ACCOUNTS (PAL-II)

Authorised Agent Stamp Authorised Agent Code

BOX 1Existing Shares registered in your name as at 28 January 2015

BOX 2Number of New Shares provisionally allotted to you

BOX 3Amount payable (Kshs) in full by 4.00 p.m. on 13 March 2015

Date of this PAL-II28 January 2015

THIS DOCUMENT IS OF VALUE AND IS NEGOTIABLE . IT IS TO BE READ AND EXECUTED IN CONJUCTION WITH DOCUMENTS FOR THE RIGHTS ISSUE INCLUDING THE INFORMATION MEMORANDUM DATED 28 JANUARY 2015 AND NOTES ON THE REVERSE OF THIS FORM. PLEASE CONSULT YOUR PREFERRED ADVISOR IF REQUIRED. RIGHTS ISSUE OPENS AT 9.00 A.M. ON 19 FEBRUARY 2015 AND CLOSES AT 4.00 P.M. ON 13 MARCH 2015

Tick (√ )

Amount in figures (Kshs)

Provide your Email and Tel No:

Cheque No.

CDS Form 5 No.

Loan Reference

Institution / Branch

Tick if your Authorised Agent will forward payment on your behalf

for ADDITIONAL SHARES ONLYMinimum Kshs 1 million value

Electronic Transfer Reference No.

Eligible Shareholder PAL-II No. New Shares Accepted Authorised Agent Stamp & Date

Bank & Branch

Signature 1 Signature 2

Tear off

Company Seal/Stamp (if applicable)

Date:__________________________________________________________________________________

Tick (√ )

Where bank account information has been provided to the Registrar prior to the Register Closure, refunds shall be made directly to such bank accounts. All other refunds will be made by way of Banker’s Cheque delivered to the Authorised Agent.

BOX 4Number of Additional Shares(multiples of 100)

BOX 6Number of total New Shares Box 2 + Box 4)


BOX 7Amount payable (Kshs)(Box 3+ Box 5)

PART

2PA

RT 3

PARTIAL ACCEPTANCE OF NEW SHARES

RENUNCIATION by PRIVATE TRANSFER or TRADING of RIGHTSRenunciation is subject to the terms contained

in Section 7 of the Information Memorandum and

Articles of Association of Housing Finance Company

of Kenya Limited.

Eligible Shareholders who wish to renounce all their Entitlement in Box 2 above via private transfer are required to fill in Form R (Form of Renunciation for PAL-II) hereby enclosed or available from an Author-ised Agent. For multiple renunciations, immobilize all your Rights into a CDS Account, complete multiple CDS Form 7s, attach all relevant documentation and deliver to an Authorised Agent for further processing

I/We hereby wish to immobilize and sell all or part of my Entitlement on the NSE via an Authorised Agent and I enclose CDS Form 1 and CDS Form 2 for this action.

To accept any balance Rights in your CDS Account please complete a Form E (Form of Entitlement) available from your Authorised Agent.

Tick (√ )

IF PART 1 ABOVE IS NOT ACCEPTED. I/We hereby accept in part, subject to the terms of the

Information Memorandum, this PAL-II and the Memorandum and Articles of Association of

Housing Finance Company of Kenya Limited the number of New Shares specified in Box 8 for the

value set out in Box 9 herein.

BOX 8Number of New Shares accepted in part (multiples of 100)


If you wish to take action, please follow the instructions below:

PART 1 ACCEPTANCE IN FULL, ADDITIONAL SHARES, TOTAL NEW SHARES

a. Tick PART 1A if accepting in full all New Shares as in Box 2.b. Application for Additional Shares can only be made if all New Shares in Box 2 were accepted in full. To apply for Additional Shares (PART 1B), follow the direc-

tions below, otherwise, skip to instruction (d).• Fill in Box 4 subject to multiples of 100.• Fill in the amount due for these Additional Shares in Box 5 by multiplying the number in Box 4 by Kshs 30 per New Share.

c. If you have chosen not to apply for Additional Shares, write “0” in both Box 4 and Box 5.d. Complete total number of New Shares applied for in Box 6 in PART 1C, i.e. Box 6 = Box 2 + Box 4.e. Complete the total value of New Shares applied for in Box 7, PART 1C. i.e. Box 7= Box 3 + Box 5.f. Allocation and Allotment is subject to Section 7.17 and Section 7.18 in the Information Memorandum. (Section 5.14 of the abridged IM)

PART 2 PARTIAL ACCEPTANCE OF NEW SHARES

a. Complete this part only for acceptance of a portion of the New Shares to which you are entitled. You must not have completed PART 1.b. Enter number of New Shares you would like to accept into Box 8 subject to multiples of 100. This number must be less than the number in Box 2, subject to a

minimum of 100 New Shares.c. Enter the amount due for the New Shares in Box 9 by multiplying the number in Box 8 with Kshs 30 per New Share.

PART 3 RENUNCIATION by PRIVATE TRANSFER or TRADING of RIGHTS

a. Section 7.19.2 in the Information Memorandum (Section 5.8.2.5 of the abridged IM) provides details on Renunciation by Private Transfer. The last date and time is 2 March 2015 by 4.00 pm. Renouncees use Form R (Form of Renunciation of PAL-II) available from an Authorised Agent.

b. Section 7.19.1 in the Information Memorandum (Section 5.81 of the abridged IM) provides details on Renunciation by Trading of Rights & Dealing in Rights. Rights need to be credited to a CDS Account. Tick the box to indicate immobilization, complete CDS Form 1 and CDS Form 2 (or only CDS Form 2 is you have a CDS account) and hand over this PAL-II to your Authorised Agent for further processing. Trading of Rights is between 19 February 2015 and 2 March 2015.

c. To accept the balance of Rights in your CDS Account (where applicable), use the Form E (Form of Entitlement) available from an Authorised Agent. The last date and time is 13 March 2015.

PART 4 PAYMENT

a. Section 7.21 in the Information Memorandum (Section 5.10 of the abridged IM) provides details on Application Payment.b. All payments are to be made in Kenya Shillings.c. All Application Money in Part 1A and Part 2 must be made in cleared funds on or before 4:00 pm on 13 March 2015.d. All Banker’s Cheque payments should be drawn in favour of ’ HF 2015 Rights Issue Collection Account— PAL-II No’..(The PAL No. is shown overleaf on the

top right hand corner) For EFT/RTGS payment use: Account Name: HF 2015 Rights Issue Collection Account; Account no. 760-0000001 at Housing Finance Company of Kenya Limited, SWIFT Code: HFCOKENA or refer to your Authorised Agent for the appropriate account number.

e. Complete the amount in figures.f. Complete the Banker’s Cheque number or Electronic Transfer Reference No (EFT/RTGS) where applicable.g. Provide the bank and branch details.h. For electronic payments attach a copy of the electronic confirmation to this PAL-II.i. If payment is being forwarded to the Receiving Agent via an Authorised Agent tick the box provided.j. If payment for Additional Shares is via IBG and minimum is Kshs 1 million worth, tick the box provided and attach the IBG to this PAL-II.k. If a Lender is involved, complete section labeled ‘Financed Applications’ by providing the CDS Form 5 No, the loan reference and the name of the institution

and branch.l. Multiple forms of payments per application will NOT be accepted.

You must ensure this PAL-II and payment arrives at the Receiving Agent, either directly or through your Authorised Agent on or before

If no action is taken on the Rights, they will lapse and be subject to Section 7.19.3 (Section 5.8.3 of the abridged IM) (Renunciation by declining) and 7.25 (Section 5.14 of the abridged IM) (Untaken Rights and Allocation Policy) of the Information Memorandum.

PART 4 SIGNATURE

The PAL-II must be signed to ensure acceptance. For limited liability companies the company seal must be affixed next to the signatures of two directors or one director & company secretary or signed and executed as per the company mandate.

Authorised Agents. HF has appointed specific Authorised Agents (Including the Lead Transaction Advisors/ Lead Sponsoring Stockbrokers namely NIC Capital & Kestrel Capital (East Africa) Ltd) in connection with the Rights Issue. The other Authorised Agents are trading participants of the NSE as listed in Section 17 of the Information Memorandum. (Section 10 of the abridged IM)

Acknowledgement Slip. For proof of delivery to an Authorised Agent this slip as stamped by the Authorised Agent, must be kept in safe custody by the Eligible Shareholder.

The last date and time for acceptance and payment of the New Shares and Additional Shares is on or before 4:00 p.m. on 13 March 2015

NOTES (PAL- II)

Tear off


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