The Balance Sheet of Njenge bank as at 31 December 2017 is as follows:

Assets	K million	Liabilities	K million
Cash in hand	923	Issued & Paid-up Capital	200
Balances with Central Banks (1)	8,986	Reserves & Surplus (5)	54,464
Balances with Banks Abroad (2)	80,526	Deposits	110,568
Investment in Govt Securities (3)	35,428	Borrowings from Banks	66,084
Loans & Overdrafts (4)	104,362	Other Liabilities	532
Fixed Assets	942
Other Assets	681
Total assets	231,848	Total Liabilities	231,848

Memorandum Item: K million

Inward Bills held for Collection 8,231

(1) Balances with Central Banks comprise:

Rating K million

Banque de France AAA 3,212

Bank of England AAA 4,921

Central Bank of

Madagascar B- 534

Bank of Uganda BB+ 319

(2) Balances with Banks Abroad comprise:

Rating K million

HSBC London AAA 30,241

Credit Lyonnais, Paris A+ 20,212

ABSA, Johannesburg BBB- 3,424

Other Banks Unrated 26,649

(3) Investments in Government Securities comprise:

Rating K million

Government of Kenya Bills BB+ 25,231

Government of India Bonds BBB- 5,683

Other Unrated 4,514

(4) Twenty per cent of the loans and overdrafts are claims collateralized by cash deposits placed with Njenge bank. Other Claims are:

Rating K million

Company X AAA 13,421

Company Y BB- 3,211

Company Z A+ 11,345

Other Corporates Unrated 10,218

Residential Loan 15,000

Regulatory Retail Portfolio 30,294.6

(5) Reserves and Surplus include:

K million

Retained Profits 34,281

Statutory Reserves 200

General Provisions 4,521

Revaluations Reserves 3,210

Undisclosed Reserves 12,252

Additional Notes:

Risk Weights	AAA to AA-	A+ to A-	BBB+ to BBB-	BB+ to B-	Below B-	Unrated
Claims on sovereigns and central banks	0%	20%	50%	100%	150%	100%
Claims on banks	20%	50%	50%	100%	150%	50%
	AAA to AA-	A+ to A-	BBB+ to BB-	Below BB-	Unrated
Claims on corporates	20%	50%	100%	150%	100%

- Claims included in the regulatory retail portfolios have a risk-weight of 75%.

- Claims secured by residential property have a risk weight of 35%.

- Other assets are risk weighted at 100%.

- Cash in hand and claims collateralized by cash in the same currency have a supervisory risk weight of 0%.

You are required to:

(i) Prepare a statement showing the computation of the capital adequacy ratio of Njenge bank as at 31 December 2017 using the Standardised Approach of Credit Risk of Basel II.

(16 marks)

(ii) Comment on your result. (4 marks)

(iii) Differentiate between Supervisory Review (Pillar 2) and Market Discipline (Pillar 3) of Basel II.

(10 marks)