1.0 preferred financial services partner in Tanzania. 1.2 Mission

1.0 INTRODUCTION:

National Microfinance Bank Plc
(NMB) is one of the largest commercial banks in Tanzania, providing banking
services to individuals, small to medium sized corporate clients, as well as
large businesses. It was established under the National Microfinance Bank
Limited Incorporation Act of 1997, following the break-up of the old National
Bank of Commerce, by an Act of parliament .Three new entities were created at
the time, namely: NBC Holding Limited, National Bank of Commerce (1997) Limited
and National Microfinance Bank Limited. Initially NMB could only provide
payment services as well as offer savings account, with limited lending
capabilities, before becoming a fully-fledged universal retail bank.

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In 2005, the Government of the United Republic of Tanzania
privatized the bank when it sold part of its shareholding (49%) to a consortium
led by the Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (‘Rabobank
Group’). Subsequently, there was further divestiture in 2008 when the Tanzanian
Government off loaded another 21% of its shareholding to the Tanzanian public
through an initial Public Offering(IPO).The listing of the bank’s stock on the
Dar es Salaam Stock Exchange has led to a diversified ownership structure. The
Bank is incorporated in Tanzania under the Companies Act, 2002 as a public
limited liability company.

1.1 Vision Statement

To be the preferred financial services partner in Tanzania.

1.2 Mission Statement

Through
innovative distribution and its extensive branch network, the Bank offers
affordable, customer focused financial services to the Tanzanian community, in
order to realize sustainable benefits for all its stakeholders.

1.3 Core Values

The bank has over
3,000 employees coming together from all walks of life, offering various expertises
to bring forth the best customer experience through the product offerings and
services. Like any group of people brought together to achieve a common goal in
unity, NMB employees share a set of core values namely Eagerness, Customer
Focus, Ownership, Team Work, Integrity and Compliance that guide, bind and
drive them. Those values, they firmly believe are fundamental in not defining
who they are but what they do and in what manner should they serve.

2.0 CORE ACTIVITIES

The
bank is authorized to perform and carry out banking business in Tanzania as a
bank. The bank is regulated by the central bank of Tanzania (BOT) and is
subject to the provisions of the Banking and Financial Institutions Act, 2006
and its regulations.

The bank’s core
activities involves accepting customers’ deposit through various types of bank
account , providing credits facilities to the different type of customers and
offering other commercial banking services. The bank’s lending products
includes Salaried Workers’ Loans, Personal Loans, Pensioners Loans, Out Growers
Loans, Corporate Loans, Post Import Loans, Loans to SMEs and Overdraft for both
corporate and SMEs customers. The bank’s deposit products includes; Personal
Accounts, Junior Savings, Bonus Savings, Wisdom Account, Business Accounts,
Kilimo Accounts, Student Accounts, Chap Chap Accounts, Call Deposits, Chipukizi
Accounts and Fixed Deposit Accounts. Other products and services include Letter
of Credit (LC), Guarantees, Internet Banking and Mobile Banking.

3.0 DEFINITION OF KEY TERMS:

3.1
ANALYTICAL PROCEDURES

According to the ISA 520, Analytical procedures indicate evaluations
of financial information made by a study of plausible relationships among both
financial and non-financial data. Analytical procedures also encompass the
investigation of identified fluctuations and relationships that are
inconsistent with other relevant information or deviate significantly from
predicted amounts (ISA 520). Analytical procedures consist of the analysis
of significant ratios and trends including the resulting investigation of
fluctuations and relationships that are inconsistent with other relevant
information or deviate from predictable amounts. It entails the use of
comparisons and the relationships to determine whether account balances or
other data appear reasonable. Such procedures allow the auditors to look at
things in overview and answer the questions in order to obtain reasonable
assurance that the financial statements are free from material misstatement.
Analytical procedures are used to determine relationships among financial
information that would be expected to conform to predictable patterns based on
entity’s experience, such as gross margin percentages, and between financial
and non-financial information such as the relationship between payroll costs
and the number of employees.

3.2
ANALYTICAL REVIEW

It is the process of planning, executing and drawing conclusions from
analytical procedures. In the planning stage, the purpose of analytical review
is to highlight risk areas to narrow the focus of planning the nature, timing
and extent of auditing procedures. In the overall review stage, the objective
of analytical procedures is to assess the conclusions reached and evaluate the
overall financial statement presentation. It may be used to detect material
misstatements that other test can overlook, such as fraud or understatement
errors.

 

3.3
TYPES OF ANALYTICAL PROCEDURES:

3.3.1 TREND ANALYSIS:

It is the type of
analytical procedure analysis of changes in an account balance over time.

3.3.2 RATIO ANALYSIS:

Ratio analysis is the comparison of
relationship between financial statements accounts, the comparison of an
account with non-financial data, or the comparison of relationships between
firms in an industry. Ratio
analysis is a tool that was developed to perform quantitative analysis on
numbers found on financial statements. Ratios help link the three financial
statements together and offer figures that are comparable between companies and
across industries and sectors. Ratio analysis is one of the most widely used
fundamental analysis techniques (Dean, 2000).

3.3.3 REASONABLENESS
TESTING:

It is the analysis of account balances or changes in account balances an
accounting period in terms of their reasonableness in the light of expected
relationships between accounts.

3.3.4 DATA MINING:

It is a set of computer- assisted techniques that use sophisticated
statistical analysis, including artificial intelligence techniques to relate assessment of the
risk of material misstatement at the assertion level.

4.0 ANALYTICAL REVIEW AND DISCUSSION ON THE FINANCIAL
STATEMENTS FOR THREE YEARS 2014-2016 AS PER ISA 520

The Financial statements of National Microfinance Bank Plc (NMB) reviewed were from 2014 to year 2016.The
financial statements of the bank are prepared in accordance with the financial
reporting framework. The analytical procedure used was ratio analysis. The
analysis was based on key performance indicators of ratios such as earnings
ratios, liquidity ratios, capital adequacy ratios and assets quality ratios.
The Board of Directors confirms that applicable accounting standards have been followed
and that the financial statements have been prepared on a going concern basis.
The Board of Directors has reasonable expectation that the Bank has adequate resources
to continue in operational existence for the foreseeable future.

4.1
PROFITABILITY/ EARNINGS RATIOS

The earnings of the bank are good. Although the return on equity is
positive for the entire period of three years, but it has been slightly
deteriorated from year 2014 through 2016. This implies that the interest rate
of the bank decreased or increases in operating cost. Also the return on assets
were maintained at the rate of 4% in year 2014 and 2013 but in 2016 the return
on assets slightly decrease to 3%. This was due to decrease in total assets of
the bank. The cost to income ratio was also slightly increasing throughout the
recently three years, this implies that the bank has high operating cost
compared to income, this is very sensitive area for an auditor to concentrate
because it will safeguard the bank’s ability to continue as a going concern so
that it can continue to provide returns for shareholders and benefits for other
stakeholders. Despite the business challenges we faced the Bank managed to
deliver a good performance. The Bank’s balance sheet expanded 18% on year from
TZS 3,882 billion in 2014 to TZS 4,580 billion in 2015 and 8% on year from TZS
4,580 billion in 2015 to TZS 4,951 billion in 2016. Total loans and advances
grew 24% from TZS 2,007 billion in 2014 to TZS 2,482 billion in 2015 and 13% to
TZS 2,794 billion in 2016 driven largely by growth in our Salary Worker Loan
portfolio. Customer deposits grew 19% from TZS 3,007 billion in 2014 to TZS 3,568
billion in 2015 and 5% to TZS 3,737 billion in 2016. The fallen in deposits in
2016 is largely affected by decreasing in Fixed-term deposits and fallen in
trust account balances from Mobile Network Operators (MNOs). The quality of the
loan book has deteriorated, with the NPL ratio increasing from 2.4% in 2015 to
4.8% in 2016. The Bank’s equity also remained robust, with the Total Shareholders’
Equity increased by 15% in 2016. However, despite of the strong equity of the
bank but the Return on Equity has been deteriorated by 1.8% in 2016 due to the
slightly increase of profit after tax. During the year 2016 the profit after
tax were slightly increase by 2.1% which is very low compare to the percentage
increase in shareholders’ funds. This implies that the company failed to
maintain its equity in order to increase returns. But an auditor should be very
careful on the assessment of the risk of fraud on equity such as retained
earning profit (loss) account and other capital accounts.

 

4.2
CAPITAL ADEQUACY/MANAGEMENT RATIOS:

The management ratios deal with the management of capital requirements
set by BOT in order to maintain a strong capital base to support the
development of the business. The capital adequacy as a percentage of risk
weighted assets decreased by 5% through both years from 2014 to 2016. The
capital of the firm seems to fluctuate due to the issue of share to the public
and increase in capital expenditure by expanding its business by opening new
branches. During the year 2016, NMB opened 13 new branches and installed 75 new
ATMs. This is consistent with their goal of continuing to expand their network.
The branches and ATMs will allow them to better serve their customers
throughout the country. Another highlight was the launch of NMB’s MasterCard debit
card. Their partnership with MasterCard will allow their customers to pay
easily and securely by card, domestically, internationally and online. The Bank
expects to generate additional transaction fees by opening up ATM network,
which is currently “closed”, to non-NMB customers with Visa and MasterCard
acquiring. The external auditor should take care on the
stability of the capital structure of the bank so that reserve the customer
balances, to comply with the capital requirements set by BOT, to safeguard the
bank’s ability to continue as a going concern so that it can continue to
provide returns for shareholders and benefits for other stakeholders and to
maintain a strong capital base to support the development of the business.

4.3 ASSETS QUALITY RATIOS:

The ratio
of non-performing loans to gross loan has increased from 2.6% in year 2014 to 4.8%
in year 2016. This implies that the loans defaulter increased from gross loans.
Gross loans to customer’s deposits remain stable for two years but increased to
76% in year 2016 from 71% in year 2015, this implies that the customers’ deposits
decreased to the extent of 7% per annum. The external auditor should be very
carefully on the reasons of decreasing to customer deposits because it will
cause disaster to the bank. The total assets growths decreased by 56% from 18%
in 2015 to 8% in 2016. This implies that the assets of the bank were impaired
and some of it are disposed or depreciated.

(a)   
The International Standard on
Auditing (ISA 315) deals with the
auditor’s responsibility to identify and assess the risks of material
misstatement in the financial statements, through understanding the entity and
its environment, including the entity’s internal control. The objective of the
auditor is to identify and assess the risks of material misstatement, whether
due to fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity’s internal
control, thereby providing a basis for designing and implementing responses to
the assessed risks of material misstatement. An audit involves performing procedures to
obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including
the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by the directors, as
well as evaluating the overall presentation of the financial statements.

5.0 THE BUSINESS RISK EVALUATION MEMORANDUM:

The principal risks that may significantly affect the Bank’s strategies
and development are mainly operational, fraud and financial risks. Below are
the descriptions of the fraud, operational and financial risks facing by the
bank:

5.1 Credit risk

The bank takes on exposures to credit risk, which is the risk that
counterparty will cause a financial loss to the bank by failing to discharge an
obligation. Credit risk is the most important risk for the bank’s business.
Management therefore, carefully manages its exposure to credit risk. Credit
exposures arise principally in lending activities that lead to loans and
advances, and investment activities that bring debt securities and other bills
into the Bank’s asset portfolio. There is also credit risk in off-balance sheet
financial instruments, such as loan commitments. The credit risk management and
control are centralized in the credit risk management team of the bank and
reported to the board of directors and heads of department regularly.

5.2 Market risk

The bank takes on exposure to market risks, which is the risk that the
fair value of future cash flows of a financial instrument will fluctuate
because of changes in market prices. Market risks arise from open positions in
interest rate and currency, all of which are exposed to general and specific
market movements and changes in the level of volatility of market rates or
prices such as interest rates, credit spreads, and foreign exchange rates. The
bank separates exposures to market risk into either trading or non-trading
portfolios.

The market risks arising from trading and non-trading activities are
concentrated in the bank’s treasury department and monitored regularly. Regular
reports are submitted to the bank’s Asset and Liability Committee (ALCO) and
heads of department.

5.3 Foreign exchange risk

The bank takes on exposure to the effects of fluctuations in the
prevailing foreign currency exchange rates on its financial position and cash
flows. ALCO sets limits on the level of exposure by currency and in aggregate
for both overnight and intra-day positions, which are monitored daily.

5.4 Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates. Fair value interest rate risk is the risk that the value of financial
instrument will fluctuate because of changes in market interest rates.

Fair value interest rate risk is the risk that the value of a financial
instrument will fluctuate because of changes in market interest rates. The Bank
takes on exposure to the effects of fluctuations in the prevailing levels of
market interest rates on both its fair value and cash flow risks. Interest
margins may increase as a result of such changes but may reduce losses in the
event that unexpected movements arise. The Bank’s Asset and Liability Committee
(ALCO) sets limits on the level of mismatch of interest rate reprising that may
be undertaken, which is monitored regularly by the Bank.

5.5 Fraud risk

There is a general increase in fraudulent transactions in the banking
industry in Tanzania. The bank has experienced an increase in fraud cases by
way of ATM card skimming and cybercrime. The number and value of fraud cases
was however very low and the bank was able to implement both remedial and
preventive measures.

5.6 Operational risk

This is a risk resulting from the Bank’s activities not being conducted
in accordance with formally recognized procedures including non compliance with
Know Your Customer (KYC) principle and account opening procedures. Management
ensures that the bank complies with KYC and other internal procedures.

5.7 Financial risk

The bank’s activities expose it to a variety of financial risks and
those activities involve the analysis, evaluation, acceptance and management of
some degree of risk or combination of risks.

5.8 Country risk

This is the of foreign customers and counterparties failing to settle
their obligations because of economic, political and social factors of the
counterparties’ home country and external to the customer or counter party. This
risk was automatically facing National Microfinance
Bank Plc.
The external auditor should be aware with the country risk. Currently the bank
continues to perform well in all its departments. As the Bank continues to
scale up its operations, it ensures that the resultant commercial and
operational risks are mitigated through enforcement of appropriate policies and
procedures. The Bank’s activities expose it to a variety of financial risks
including credit, liquidity, market and strategic risks. The Bank’s overall
risk management policies are set out by the Board of Directors and implemented
by the management. These policies involve analysis, evaluation, acceptance and
management of some degrees of risks or a combination of risks.

5.9 Currency risk

It is the risk of loss arising from future movements in the exchange
rates applicable to foreign currency assets, liabilities, rights and
obligations. The bank should hedge its foreign currency transactions by using
hedging techniques such as forward contracts, futures, options and swaps.

5.10 Legal and documental risk

This is the risk that contracts are documented incorrectly or are not
legally enforceable in the relevant jurisdiction in which the contracts are to
be enforced or where the counterparties operate. This can include the risk that
assets will turn out to be worth less or liabilities will turn out to be
greater than expected because of inadequate or incorrect legal advice or
documentation. In addition, existing laws may fail to resolve legal issues
involving a bank, a court case involving a particular bank may have wider implications
for the banking business and involve costs to it and may or all other banks,
and laws affecting banks or other commercial enterprises may change. Banks are
particularly susceptible to legal risks when entering into new types of
transactions and when the legal right of counterparty to enter into a
transaction is not established.1 –

6.0 RISK MANAGEMENT AND INTERNAL CONTROL

The Board accepts final responsibility for the risk management and
internal control systems of the Bank. It is the task of the directors to ensure
that adequate internal financial and operational control systems are developed
and maintained on an ongoing basis in order to provide reasonable assurance
regarding to the effectiveness and efficiency of operations, the safeguarding
of the Bank’s assets,  compliance with applicable
laws and regulations, the reliability of accounting records, business
sustainability under normal as well as adverse conditions; and responsible behavior
towards all stakeholders.

The efficiency of any internal control system is dependent on the strict
observance of prescribed measures. There is always a risk of non-compliance of
such measures by staff. Whilst no system of internal control can provide
absolute assurance against misstatement or losses, the bank’s system is
designed to provide the Board with reasonable assurance that the procedures in
place are operating effectively. The Board assessed the internal control
systems throughout the financial year ended 31 December 2016 and is of the
opinion that they met accepted criteria. The Board monitors risk and internal
control effectiveness through the Board Audit, and Credit Risk and Compliance
Committees.

 

According to ISA 570, Going Concern Assumption; under the going concern
assumption, an entity is viewed as continuing in business for the foreseeable
future. General purpose financial statements are prepared on a going concern
basis, unless management either intends to liquidate the entity or to cease
operations, or has no realistic alternative but to do so. Special purpose
financial statements may or may not be prepared in accordance with a financial
reporting framework for which the going concern basis is relevant for example,
the going concern basis is not relevant for some financial statements prepared
on a tax basis in particular jurisdictions. When the use of the going concern
assumption is appropriate, assets and liabilities are recorded on the basis
that the entity will be able to realize its assets and discharge its
liabilities in the normal course of business. The Board of Directors has reasonable
expectation that the Bank has adequate resources to continue in operational
existence for the foreseeable future. But an external
auditor should consider the external environment and the risk function provides
independent oversight and control on the bank’s operational, credit, market,
compliance and other risks. An auditor should be committed to continually
re-evaluating and enhancing risk management policies and practices in order to
help the bank to exist for the foreseeable future.

 

 

 

 

7.0 CONCLUSIONS

The analytical procedures permit the auditors to come out with the
strong overview in planning stage of auditing and answer the questions in order
to obtain reasonable assurance that the financial statements are free from
material misstatement. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by
the directors, as well as evaluating the overall presentation of the financial
statements.

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