Annual REPORT

ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2015
NOTES TO THE FINANCIAL STATEMENTS (Continued)
4 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
(a)
Credit risk (Continued)
Management of credit risk (Continued)
· Developing and maintaining the group’s risk gradings in order to categorise exposures according to the degree of
risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining
where impairment provisions may be required against specific credit exposures.
· Varying degrees of risk of default and the availability of collateral or other credit risk mitigation. Risk grades are
subject to regular reviews by credit department.
· Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country
risk and product types. Regular reports are provided to the group credit committee on the credit quality of local
portfolios and appropriate corrective action is taken.
· Providing advice, guidance and specialist skills to branches to promote best practice throughout the group in the
management of credit risk.
Credit risk measurement
In measuring credit risk of loans and advances to customers, the group takes into account the following factors:
· The probability of default: this is the possibility of the customer failure to pay over the stipulated period in the contract.
· Current exposure on the borrower and the likely future development from which the group derives the exposure at
default.
· Estimated recovery ratio should default occur; this is the amount that can be recovered through sale of collateral.
The group assesses the probability of default of individual borrowers using internal rating methods tailored to the various
categories of the borrower. In assessing the credit quality of the customer the group takes into account the customers
financial position, past experience and other industry specific factors. The credit risk measurements are embedded
in the group’s daily operational management and closely aligned to the Central Bank of Kenya loan classifications. The
impairment allowances on loans and advances computed through the group’s internal measures and the Central Bank of
Kenya prudential guidelines are contrasted with the measurement of impairment under the IAS 39.
Risk limit control and mitigation policies
The group structures the level of credit risk it undertakes by placing limits on amounts of risk accepted in relation to
one borrower or a group of borrowers. Such risks are monitored on a revolving basis and are subject to annual or more
frequent review.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet
interest and capital repayment obligations and by changing limits where appropriate.
The group takes security for funds advances and implements guidelines on the acceptability of specific classes of collateral.
To minimise credit loss the group will seek additional collateral from the counterparty as soon as impairment
indicators are identified for the relevant individual loans and advances. Collateral held for other financial assets other
than loans and advances depends on the nature of the instrument.
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