*rt: EFCM/ 1129 2018 V) December 31. 2018 Ref.No. Randa Akeel 3 DEC 2018 Task Team Leader for SMEFP = The World Bank Addis Ababa, Ethiopia Subject: Submitting External Audit Report of SMEFP for June 30, 2018 Attached herewith, please find independent external auditor's report & Management letter for Small & Medium Enterprises Financing Project (SMEFP) P148447, IDA credit line No.57930 ET, and Co- financer European Investment Bank. With regards, Behallu Kassay* (Dr.) External Fund & Credit Managennt DIMretateOro OENT Encl. Audit Report with Management letter C.C. * V/P Small &, Medium Enterprises Financing Development Bank of Ethiopia 1 I I I INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS OF THE DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK I FOR THE YEAR ENDED 30 JUNE 2018 I I I I I I I I GLOSSARY OF TERMS DBE Development Bank of Ethiopia EIB European Investment Bank FESMMIDA Federal Small and Medium Manufacturing Industries Development Agency IDA International Development Association NBE National Bank of Ethiopia PMI Project Management Unit PIU Project Implementation Unit PFI Participating Financial Institutions SMEFP Small and Medium Enterprise Finance Project I SME Small and Medium Enterprise 1 I I I I I I U I I Addis Ababa 1 Ethiopia Chartered Certified Accountants and Authorized Auditors Tel: +251 115 527666/67 o Th V14'0 P#.(Fax: +251 115 528384 www.hst-et.com I I I 24 December 2018 Dr. Behailu Kassaye Director, External Fund & Credit Management Directorate Development Bank of Ethiopia, Addis Ababa, Ethiopia Dear Dr. Behailu, INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS OF THE DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK We have now completed the audit of the above Project funded by the International Development Association and European Investment Bank and are pleased to present our findings thereon. Should you require to discuss any of the issues mentioned in this report, please do not hesitate to contact us. We wish to thank the staff and management of the Development Bank of Ethiopia for the cooperation and courtesies accorded to us during the audit. Yours f I ar IPa rt I U I Audit *Tax Conbfi * Learmng Solution T-L=eva rphr: Solomon Gizaw; Getu Jemaneh; Yonas Harun; Solomon Melaku I DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 TABLE OF CONTENTS Pages I PART 1 INTRODUCTION 1.1 Background 4 1.2 Project Description 4 1.3 Audit Objectives 4 1.4 Audit Scope 4 1.5 Audit Methodology 5-6 1.6 Results of the Audit 6 PART 2 STATEMENT OF MANAGEMENT'S FINANCIAL REPORTING RESPONSIBILITIES 7 PART 3 INDEPENDENT AUDITORS' REPORT ON THE SPECIAL PURPOSE FINANCIAL STATEMENTS 3.1 Independent Auditors' Report 8-9 3.2 Statement of Income and Expenditure 10 3.3 Statement of Financial Position 11 3.4 Notes to the Financial Statements 12-13 PART 4 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL 4.1 Independent Auditors' Report 14 4.2 Findings and Observations on Internal Control 15 PART 5 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE 5.1 Independent Auditors' Report 16 I I I 1 3 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 1. INTRODUCTION 1.1 Background The Federal Democratic Republic of Ethiopia and the International Development Association (IDA) made an agreement on 15th June 2016 to implement a program entitled 'increase access to finance for eligible Small and Medium Enterprise in Ethiopia based on eligible criteria (P148447)' Grant No. IDA 57930. An additional agreement was also signed with European Investment Bank (EIB) for the same objective. The International Development Association (IDA) and European Investment bank have agreed to provide SDR 139,732,000 and SDR 76,000,000 respectively for the Project. 1.2 Project description The objective of the Project is to increase access to finance for eligible Small and Medium Enterprise in Ethiopia based on eligible criteria The Project consists of the following components: 1. Financial services to SMEs: establishment and operation of a credit facility providing access to finance for: (a) working capital, leasing finance and investment finance for Participating Financial Institutions (PFIs) which in turn on-lend to eligible SMEs; and leasing finance for eligible SMEs. 2. Enabling Environment for SMEs Finance: supporting the improvement of an enabling environment for facilitating SMEs financing through, inter alia: (a) supporting the creation of centralized electronic collateral registry to support both the lending and leasing business; and (b) supporting a diagnostic review on insolvency and debtor/creditor regime aiming to analyse and identify key bottlenecks to SME lending. 3. Business development services to SMEs: supporting SMEs through the provision of tailored business development services to address constraints on the demand side. 4. Project management, communication and impact evaluation: (a) strengthening the capacity of the PIU (Project Implementation Unit) in MOI and the PMT (Project Management Team) in DBE in implementing their respective parts of the project; (b) expanding outreach and understanding of the project among targeted beneficiaries and other stakeholders and carrying out of a program of public information disclosure about the project and dissemination of results, lessons learned and good practices; and (c) carrying out impact evaluation of the Project. A Project Management Team (PMT) will be established in DBE with the direct responsibility of managing the credit facility under component 1. A Project Implementation Unit (PIU) will be established in the FESMMIDA with the mandate of overall Project coordination and direct responsibility of component 2,3 and 4. National Bank of Ethiopia (NBE) will assign a focal person that will act as the key technical reference of the PIU for component 2. At the regional level, FESMMIDA offices will serve for marketing the Project and coordinating SMEFP's services to clients. 1.3 Audit objectives The objective of the audit is to express an opinion on the financial statements for the Project for the year ended 30 June 2018. The audit includes but not limited to the following tasks: 1.4 Audit scope The audit scope required us to carry out sufficient audit steps and procedures to ensure that the audit objectives were met for the year ended 30 June 2018. Details of t e_stVp5nd procedures are given below. 1 4 I DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 1. INTRODUCTION (continued) 1.5 Audit Methodology We conducted the audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the statement of income and expenditure is free from material misstatement. 1.5.1 Internal controls We evaluated the Project's significant internal controls to obtain a sufficient understanding of the design of relevant controls, policies and procedures and whether they have been in operation during the period under review. 1.5.2 Compliance with agreement terms and applicable laws and regulations We reviewed, assessed and reported on compliance with the terms and conditions of the agreement. 1.5.3 Representations by grantees We obtained specific written representations from management. 1.5.4 Contractual obligations a) We have appraised relevant documents such as agreement between the Federal Democratic Republic of Ethiopia and the International Development Association and European Investment Bank as well as documents concerning rights and obligations with a view to providing a comprehensive appraisal of the Project; b) we have verified compliance of Project expenditures with relevant terms of agreements as well as all the applicable rules; c) we have verified compliance of the recipient with the terms and conditions of the agreement with the donor; and d) we ensured timely submission of interim unaudited financial reports for the Project as stipulated in the agreement. 1.5.5 Receipts and disbursements I We verified compliance with the disbursements and procurement procedures set up for the Project. 1.5.6 Implementation a) We examined whether the expenditures are classified in accordance with the budget; b) we reviewed bank statements and accounts of the recipient and other relevant books of accounts and assessed whether they show a complete view of the income received and expenditure incurred in accordance with generally accepted principles; c) we verified and confirmed that all commitments are genuine, with the relevant agreements disclosed within the financial records and are for the pursuance of agreed Project objectives; d) we examined a representative sample of payments transactions of and within the Project including accuracy and completeness of records; and e) we verified individual Project accounts and gave an opinion and/ or advice regarding the manner they are operated. e_ 1 01145 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 1. INTRODUCTION (continued) 1.5 Audit Methodology (continued) 1.5.7 Other income sources a) Established whether other income generated by the Project, such as interest, in-kind/local contributions, exchange gains, etc. have been used in furtherance of the Project's objectives. b) Verified that contributions made towards project activities were made and used in accordance with relevant agreement. 1.6 Results of the audit 1.6.1 Summary of results by audit objectives (a) Reach an opinion as to the validity of the statement of income and expenditure. In our opinion, the financial statement referred to above show a true and fair view of the sources and uses of funds in accordance with the accounting policies set out on note 3.4 and in conformity with the grant agreement. (b) Report on the financial management and internal controls findings We reviewed the internal control structure and concluded that the system was adequate to meet the needs of the program. We have not observed significant deficiency on the internal control of the Project. (c) Report on the compliance with agreement terms and applicable laws and regulations. 1 The results of our tests disclosed no instances of non-compliance as discussed in Section 5.1 of this report. I6 I I I 6 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 2 STATEMENT OF MANAGEMENT'S FINANCIAL REPORTING RESPONSIBILITIES The management of the Development Bank of Ethiopia (DBE) are responsible for preparing the financial statements for each financial period which gives a true and fair view of the state of affairs of the financial position as at the end of the period and of the Project's operating results for that period. Management is required to ensure the Project keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Project. They are also responsible for safeguarding the assets of the Project. The management of the DBE accept responsibility for the financial statements which has been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with the accounting polices stated in note 3.4 to the financial statements and in the manner required by the accounting policies of the Project and for such internal controls as the management determine are necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. The management of DBE are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Project and of the results of its activities. The management of DBE further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of the financial statements, as well as adequate systems of internal financial control. The management certify that, to the best of their knowledge, the information furnished to the auditors for the purpose of the audit was correct and is an accurate presentation of the Project's financial I transactions. I Dr. Behaild Kassaye a Hussien Director, External Fund & Credit Management Directorate Finance Team Manager I I I I 7 Addis Ababa Ethiopia Chartered Certified Accountants and Authorized Auditors Tel: +251 115 527666/67 Fax: +251 115 528384 www.hst-et.com DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 June 2018 I 3.1 INDEPENDENT AUDITORS' REPORT Opinion We have audited the accompanying financial statements of 'SMEFP (P148447) GRANT No. IDA 57930, funded by the International Development Association (IDA) and European Investment Bank (EIB) set out from page 10-13, which comprise the Statement of Financial Position as at 30 June 2018, the Statement of Income and Expenditure for the year then ended and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements show a true and fair view of the financial position of the Project as at 30 June 2018, and its statement of income and expenditure for the year then ended in accordance with the Project's financial reporting provisions the accounting policies as set out in note 3.4. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the organization in accordance with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Managements' Responsibilities for the Financial Statements Management are responsible for the preparation and fair presentation of the financial statements in accordance with the Project's financial reporting provisions the accounting policies as set out in note 3.4. of this report and for such internal control as management determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibilities for the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected t jnfluence the economic decisions of users taken on the basis of these financial statements. Audit Tax Consulting Learning Solution T-.-efimt r4pbru: Solomon Gizaw; Getu Jemaneh; Yonas Harun; Solomon Melaku DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT(SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 June 2018 Auditors' Responsibilities for the Financial Statements (continued) As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit 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 Project's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit The engagement partner on the audit resulting in this independent auditors' report is Yonas Harun. P r1 C Re t udtor 24 De o HST Genera artnership, Chartered Certified Accountants and Authorized Auditors (Auditors' of SMEFP) Addis Ababa, Ethiopia 1 1 9 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 3.2 STATEMENT OF INCOME AND EXPENDITURE FOR THE YEAR ENDED 30 JUNE 2018 Notes 2018 2018 USD ETB Income Cash received from IDA 3.4.6 50,314,444 1,322,830,984 Cash received from EIB 3.4.6 12,361,100 336,668,000 Gain from foreign exchange transaction - 44,921,062 62,675,544 1,704,420,046 Expenditure Window 1: Lease finance to SMEs 3.4.7.1 15,216,553 417,062,766 Window 2: Working capital finance to SMEs through PFIs 3.4.7.2 980,933 26,985,075 Loss from foreign exchange 649,525 - Bank charge 113 3,705 16,847,124 444,051,546 Surplus for the year 45,828,419 1,260,368,500 I I I I I I 10 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 3.3 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 30 JUNE 2018 30 JUNE 2018 Notes USD ETB Assets Cash and bank balance 3.4.10 44,572,080 1,225,807,097 Advance to PFIs 3.4.11 1,256,339 34,561,403 Total assets 45,828,419 1,260,368,500 Fund balance Accumulated Surplus 45,828,419 1,260,368,500 Total fund balance 45,828,419 1,260,368,500 The financial statements on page 10-13 were approved by the Development Bank of Ethiopia management on 24 December 2018 and signed on its behalf by: Dr. e ikura Hussien Director, External Fund & Credit Management Directorate Finance Team Manager I I I I I I I1 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 3.4 NOTES TO THE FINANCIAL STATEMENTS 3.4.1 Basis of preparation The financial statements have been prepared on a modified cash basis i.e. Cash receipts and disbursements modified to accrue for outstanding payables and receivables. 3.4.2 Income I Income and expenditure are recognized on a modified cash basis of accounting, i.e., Income is recognized when cash is received, and expenditures are recognized when incurred. 3.4.3 Advances Advances represents amounts disbursed to participating financial institutions and not yet received by eligible SMEs. 3.4.4 Foreign currency transactions Cash receipts and payments arising from transactions are recorded in the financial statements using the actual rate of exchange. Cash balances held in foreign currency are reported using the closing rate, i.e. 1 USD = 27.5347 ETB. Advances to participating financial institutions are recorded using the rate at which total fund for working capital transferred to pooled account, i.e. 1 USD = 27.5096 ETB. Any gains or losses on foreign currency transactions/balances area dealt with in the statement of income and expenditure. 3.4.5 Currency I The financial statements are presented in Ethiopian Birr (ETB) and US Dollar (USD). 3.4.6 Cash received from IDA and EIB I Amount Amount Amount received received received Application no. Date per receipt USD EUR ETB DBE-SME-002 27/3/18 22,400,000 - 610,137,920 DBE-SME-001 18/9/17 12,000,000 - 279,194,400 DBE-SME-004 07/5/18 10,314,444 - 281,032,504 DBE-SME-003 15/2/18 5,600,000 - 152,466,160 50,314,444 - 1,322,830,984 17/4/18 12,361,100 10,000,000 336,668,000 62,675,544 10,000,000 1,659,498,984 A I 12 DEVELOPMENT BANK OF ETHIOPIA, SMALL AND MEDIUM ENTERPRISE FINANCE PROJECT (SMEFP) (P148447, IDA 57930) FUNDED BY THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND EUROPEAN INVESTMENT BANK FOR THE YEAR ENDED 30 JUNE 2018 3.4 NOTES TO THE FINANCIAL STATEMENTS (Continued) 3.4.7 Expenditure 3.4.7.1 Window 1: Lease finance to SMEs 2018 2018 USD ETB Addis Ababa district 9,761,778 267,742,357 Adama district 5,454,775 149,320,409 15,216,553 417,062,766 3.4.7.2 Window 2: working capital finance to SMEs through PFIs Amhara Credit and Saving Institution S.C. 490,195 13,485,075 United Bank S.C. 283,538 7,800,000 Enat Bank S.C. 199,930 5,500,000 Vision Micro Finance S.C. 7,270 200,000 980,933 26,985,075 3.4.8 Cash and bank balances Bank account No Bank name 1 0101171300037 National Bank of Ethiopia (USD) 29,497,777 812,212,447 0101171040006 National Bank of Ethiopia (EUR) 9,318,239 255,103,168 0101171300042 National Bank of Ethiopia (ETB) 4,022,782 110,766,084 0101171040003 National Bank of Ethiopia (ETB) 1,733,282 47,725,398 44,572,080 1,225,807,097 3.4.9 Advance to PFIs I United Bank S.C. 670,564 18,446,957 Enat Bank S.C. 420,818 11,576,526 Vision Micro Finance S.C. 108,867 2,994,890 Wasasa Microfinance S.C. 56,091 1,543,030 I 1,256,340 34,561,403 I 13