Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698061083885.pdf (Liberia)
Municipality Credit Iceland Financial statements Annual Report 2008 Index Report of the Board of Directors and the Managing Director .................................................
Independent Auditor's Report ................................................................................................ Income Statement .................................................................................................................. Balance Sheet .......................................................................................................................
Statement of Changes in Equity ............................................................................................

Statement of Cash Flows .......................................................................................................

Statement of Cash Flows ....................................................................................................... Notes to the Financial Statements ......................................................................................... Bls.
2 - - 25 Municipality Credit Iceland Plc.

Identity number 580407-1100 Borgartun 30, Post-box 8100, 128 Reykjavik Report of the Board of Directors and the Managing Director 2 Lending and borrowings Disbursed long term loans during the year 2008 amounted to ISK 15,505 million compared to ISK 4,047 million for the same period last year.

Borrowings during 2008 totalled ISK 16,536 million, there of ISK 5,440 million in international currencies or 33%.
The financial market environment was unique, the domestic banking system collapsed and the securities and FX markets closed for a few weeks.

In addition to this some municipalities were forced to repay large sums due to building sites being returned to them, this causing great demand for short term funds.

MCI has therefore disbursed a total of ISK 6,158 million floating rate short term loans compared to ISK 5,840 million in the previous year before.

There are no defaults on loans at the end of the year.
MCI has never suffered a loan loss since it commenced operations in 1967 and does not make provisions for estimated loan losses in its books.

MCI takes pledge in the municipalities´s revenues but did not have to use this pledge in the year of 2008.

Loans financed with share capital are CPI-linked and can be prepaid.

The interests are variable and were lowered on April 1st 2008 from 5.95% to 5.00% and again on October 1st to 4.25%.
Borrowed money is re-lent back to back with a modest margin to cover running costs.

In the past MCI has never had more than minimum currency and interest rate risks in its operation.

With the collapse of the banking system in Iceland some currency hedges that MCI had with local banks closed and are un-hedged as of year-end leading to an open currency position of 4,225 million at year end.
Operating results and financial position The profit for the year amounted to ISK 1,225 million, as compared to ISK 1,219 million the previous year.

MCI took provision against derivatives within Glitnir bank and therefore the profit is lower than it would otherwise have been, ISK 1,225 million instead of 2,697 million.

The Central bank kept interest rates high all year and return on short term assets is therefore good.
MCI has three employees at year end and has an administrative service agreement with the Association of Local Authorities in Iceland.

The co-operation has been advantageous for MCI.

Total assets amounted to ISK 63,956 million, as compared to ISK 41,733 million the previous year.

Increase in the loan book was therefore ISK 21,091 million.

Thereof ISK 4,454 million was caused by an increase in CPI as 62% of MCI´s lending is CPI-linked.
Furthermore ISK 9,282 million of the increase in loans was due to an increase in FX rates as 32% of the lending is in international currencies.

Equity amounted to ISK 11,273 million at the year-end 2008, as compared to ISK 10,048 million at year-end 2007 which is an increase of 12.2% during the year.
The Board of Directors proposed that there will not be a payment of dividends for the operating year 2008, however it was proposed that the reduction of retained earnings will be according to the decision of the annual meeting of MCI on 23 March 2007.

Otherwise, the Board of Directors refers to the financial statements regarding the appropriation of the net profit and changes in equity for the year 2008.
Staff changes As of end last year Óttar Guðjónsson formally took over as Managing director for MCI from the outgoing Þorsteinn Þorsteinsson.

Furthermore Birgir L. Blöndal, credit manager for MCI, retired but he was employed by The Association of Local Authorities in Iceland.

In order to replace Birgir as well as take charge of Treasury two employees where hired and joined the fund in November.
3 Report of the Board of Directors and the Managing Director Statement by the Board of Directors and the Managing Director The financial statements for the year ended 31 December 2008 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and additional Icelandic disclosure requirements in Act No.

3/2006.
3/2006.

According to our best knowledge it is our opinion that the financial statements give a true and fair view of the financial performance of MCI for the financial year 2008, its assets, liabilities and financial position for the year 2008.

Further, in our opinion the financial statements gives a fair view of the development and performance of MCI´s operations and its position and describes the principal risks and uncertainties faced by the company.
The Board of Directors of Municipality Credit Iceland and the Managing Director hereby confirm the financial statements Reykjavik, 9 March 2009 Magnus B Jonsson Chairman Svanfridur Inga Jonasdottir Kristinn Jonasson Jonmundur Gudmarsson Anna Skuladottir Ottar Gudjonsson Managing Director 4 Independent Auditor's Report To the Board of Directors and Shareholders of Municipality Credit Iceland Plc.

We have audited the accompanying financial statements of Municipality Credit Iceland Plc.
(MCI) which comprise the income statement for the year 2008, balance sheet as of 31 December 2008, statement of changes in equity for the year 2008, statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes.
Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (EU).
This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor's responsibility Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our 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 financial statements are free from material misstatement.

e p ocedu es se ected depe d o t e aud to s judge e t, An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial c ud g t e assess e t o t e s s o state e ts statements.
The procedures selected depend on the auditor's judgement, 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 management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of MCI as of 31 December 2008, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

Reykjavik, 9 March 2009 PricewaterhouseCoopers hf.
Sigrún Guðmundsdóttir Helga Harðardóttir Income Statement 5 Year ended 31 December Notes 2008 2007 Interest income .......................................................................................... Interest expense ........................................................................................ Net interest income Loss on financial assets held for trading .................................................... Net gains on financial assets designated at FV through P&L ..................... Net foreign exchange gains ....................................................................... Other operating income 7.482.949.301 (4.762.000.803) 2.720.948.498 3.378.805.797 (1.993.546.983) 1.385.258.814 (632.718.324) 122.435.817 (879.590.590) (1.389.873.097) (446.281.319) 143.857.861 205.898.045 (96.525.413) 5 6 7 8 Net operating income 1.331.075.401 1.288.733.401 Salaries and related expenses ................................................................... Other operating expenses .......................................................................... Depreciation ............................................................................................... Operating expenses 9 10,11 18 41.358.423 63.147.391 1.195.628 105.701.442 25.835.854 42.429.487 1.195.628 69.460.969 Profit for the year 1.225.373.959 1.219.272.432 Earnings per share Basic and diluted earnings per share ......................................................... 12 0,25 0,24 Municipality Credit Iceland Plc.
Financial statements 2008.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Amounts in ISK Balance Sheet 6 At 31 December Notes 2008 2007 Assets Cash and balances within the Central bank ...............................................
Amounts due from credit institutions .......................................................... Loans ......................................................................................................... Financial assets held for trading - Derivatives ............................................ Financial assets designated at fair value through profit or loss .................. Property, plant and equipment ................................................................... Other assets .............................................................................................. Total assets Liabilities Debt securities in issue .............................................................................. Other borrowed funds ................................................................................ Financial liabilities held for trading - Derivatives .........................................
Liability to municipalities ............................................................................. Other liabilities ........................................................................................... Post-employment obligations ..................................................................... Total liabilities Equity Equity Share capital .............................................................................................. Reserves ..................................................................................................
Retained earnings ...................................................................................... Total equity Total equity and liabilities 63.956.387.201 41.733.250.193 Municipality Credit Iceland Plc.
Financial statements 2008.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Amounts in ISK 7 Statement of Changes in Equity Changes in equity 2007 Equity at 1.1.2007 ....................................... Shares, change to Plc.

................................
Transfer to reserves .................................... Profit for the year ........................................ Equity as at 31.12.2007 ............................. Changes in equity 2008 Equity at 1.1.2008 ....................................... Profit for the year ........................................ Equity as at 31.12.2008 .............................. Share capital Reserves Retained earnings Total 0 5.000.000.000 0 1.250.000.000 5.000.000.000 1.250.000.000 8.828.738.889 (5.000.000.000) (1.250.000.000) 1.219.272.432 3.798.011.321 8.828.738.889 0 0 1.219.272.432 10.048.011.321 5.000.000.000 1.250.000.000 5.000.000.000 1.250.000.000 3.798.011.321 1.225.373.959 5.023.385.280 10.048.011.321 1.225.373.959 11.273.385.280 Municipality Credit Iceland Plc.
Financial statements 2008.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Amounts in ISK Statement of Cash Flows Cash flows from operating activities Profit for the year .......................................................................................

Items not affecting cash: Depreciation ...............................................................................................
Indexation and exchange rate difference ................................................... Post employment obligations, changes ...................................................... Financial assets designated at FV through P&L - Deriv.
changes .............. Other assets, decrease (increase) ............................................................. Other liabilities, increase (decrease) .......................................................... Net cash from operating activities 18 23 8 Year ended 31 December 2008 2007 1.225.373.959 1.219.272.432 1.195.628 (795.775.702) 6.849.216 591.268.586 4.621.833 41.114.211 1.074.647.731 1.195.628 (847.629.449) 3.198.727 446.281.319 (4.349.663) 4.526.984 822.495.978 Cash flows from investing activities Amounts due from credit institutions, changes ........................................... Loans, changes ......................................................................................... Financial assets designated at FV through P&L, changes .......................... o o Cash flows from financing activities Borrowings, changes .................................................................................
Charge due to derivatives .......................................................................... Payment to municipalities .......................................................................... gs, c a ges 271.249.832 (7.354.618.822) 1.092.403.240 (5.990.965.750) (69.479.045) (6.359.017.817) (24.840.759) (6.453.337.621) 21 9 33 660 5 9.332.660.542 (564.316.854) (750.000.000) 8.018.343.688 9 3 6 9 6 6.926.779.372 (552.849.394) (750.000.000) 5.623.929.978 Net increase (decrease) in cash and cash equivalents 3.102.025.669 (6.911.665) Cash and cash equivalents at 1.1.2008 ..................................................... Cash and cash equivalents at end of year 77.532.252 3.179.557.921 84.443.917 77.532.252 Interest and similar income received .......................................................... Interest paid ............................................................................................... 2.871.601.006 (1.769.774.047) 1.267.111.376 (959.951.264) Municipality Credit Iceland Plc.
Financial statements 2008.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Amounts in ISK 9 Notes 1.

General information Municipality Credit Iceland Plc.

(MCI) is a statutory limited liability company owned by 78 Icelandic municipalities.

MCI is a financial institution, and operates pursuant to Act No.

161/2002 on Financial undertakings; cf.

The Companies Act No.

2/1995 and is supervised by the Icelandic Financial Supervisor.
MCI´s main function is to secure favorable funding to the municipalities and related organisations and enterprises.

In order for MCI to be able to fund projects on behalf of the municipalities they have to be of general economic interest.

MCI is incorporated and domiciled in Iceland.

The address of its registered office is as follows: Borgartún 30, Reykjavík.

MCI has issued bonds which are listed at the OMX Nordic Exchange and part of them are being traded by market makers.
The Financial statements have been approved for issue by the Board of Directors of Municipality Credit Iceland on 9 March 2009.

2.

Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below.

These policies have been consistently applied to all years, unless otherwise stated.
2.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

The financial statements are prepared on the historical cost basis, except for derivatives and short-term securities which are measured at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgement in the process of applying the company's accounting policies.

See further explanation in Note 3.

Amendments implemented in 2008 which did not affect MCI´s financial statement: IFRIC 11, IFRS 2, Group and Treasurey share transactions IFRIC 12 Service confession arrangements.

IFRIC 13 Customer loyalty programmes.

IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

.
.

Standards, amendments and intepretations to existing standards that are not yet effective.

IAS 1 (Revised) Presentation of Financial Statements (effective from 1 January 2009).

Amendments to IAS 32 and IAS 1, Puttable Financial Instruments and Obligations arising on Liquidations (effective from 1 January 2009).
Amendments to IAS 1 Presentation of Financial statements , IAS 16 Property, Plant and Equipment , IAS 19 Employee Benefits , IAS 36 Impairment of Assets , IAS 39 Financial Instruments: Recognition and Measurements.

(Effective from 1 January 2009).

Amendments to IFRS 7 Financial Instruments: Disclosures , IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors , IAS 10 Events after the Balance Sheet Date , IAS 18 Revenue and IAS 34 Interim Financial Reporting.
Standards, amendments and interpretations to existing standards that are not yet effective have not been early adopted by MCI.

The changes are not exptected to have any material impact of MCI's financial statements.

There are a number of minor amendments to IFRS 7.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 10 Notes 2.2 Segment reporting Due to the nature of the MCI´s business its operation has not been split into different segments.
2.3 International currency translation (a) Functional and presentation currency The Financial statements is presented in the Icelandic krona (ISK) which is MCI´s functional and presentational currency.

(b) Transactions and balances International currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
International currency exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in international currencies are recognised in the income statement.
2.4 Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified at fair value through profit or loss, are recognised within in the income statement using the effective interest method.

The effective interest rate method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, MCI estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit rate MCI estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses.

The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets have been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

2.5 Derivatives Derivatives are initially recognised at fair value on the date which a derivative contract is entered into and are subsequently remeasured at their fair value.
Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate.

The derivative market in Iceland was inactive at year end 2008 and total uncertainty concerning the treatment of MCI´s derivatives.

As a consequence it was not possible to obtain a true market value of MCI´s derivatives within Glitnir Bank hf.
and was therefore estimated by discounting future cash flows.

All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The best method to measure the fair value of a derivative is to use quoted market prices except when the price of the derivative is based on a price of a similar transactions with similar financial instruments in a comparable market.

The fair value can also be found from valuation techniques.
Certain derivatives are embedded in other financial instruments, and are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss.

These embedded derivatives are measured at fair value with the changes in fair value recognised in the income statement.
MCI´s financial instruments do not qualify for hedge accounting and are recognised as trading assets or trading liabilities in the balance sheet.

Changes in their fair value are recognised as net gain or loss on financial instruments held for trading in the income statement.

Municipality Credit Iceland Plc.

Financial statements 2008.


Amounts in ISK 11 Notes 2.6 Financial assets MCI classifies its financial assets in the following categories: Financial assets held for trading, financial assets designated at fair value through profit or loss and loans and receivables.

The classifications are determined at initial recognition.

(a) Financial assets held for trading Financial assets held for trading are financial assets acquired principally for the purpose to sell immediately or in the short term.
Derivatives are also categorised as held for trading unless they are designated as hedging instruments.

(b) Financial assets designated at fair value through profit or loss Financial assets are designated at fair value through profit or loss when: - Financial assets are managed and evaluated on a fair value basis in accordance with the fund's risk management or investment strategy.
- Financial assets, such as debt securities, containing one or more embedded derivatives can significantly modify the cash flows.

Financial assets designated at fair value through profit or loss are initially recognised and subsequently measured at fair value in the balance sheet with fair value changes being recognised in the income statement.

After initial recognition as financial asset designated at fair value through profit or loss a resclassification is not possible.
(c) Loans and receivables Loans and receivables are financial instruments with fixed or determinable payments which are not quoted in an active market.

Loans and receivables are recognised when cash is advanced to borrowers and the fund does not intend to sell immediately or in the near term.

in the near term Loans and receivables are recognised at amortised cost using the effective interest method.

Accrued interest is included in the carrying amount of the loans and receivables in the balance sheet.
2.7 Impairment on loans and receivables At the end of each financial period, the fund assesses whether there is objective evidence of a financial asset or group of financial assets being impaired.

According to MCI´s Articles of Association, the principal objective of MCI is to secure favorable funding for the Icelandic municipalities, their organisations and enterprises for projects which are of general public interest.
The condition for the provision of credit to municipality-owned enterprises and institutions is that such enterprises and institutions must be wholly owned by municipalities or jointly owned by municipalities and the State Treasury, with both acting as guarantors to the company for the loans.

According to paragraph 3 of article 73 of Act No.

45/1998 (Local Government Act), municipalities may put up their revenues as security for loans they receive from MCI and for guarantees they grant.
The Minister of Social Affairs may make further provisions in regulations, regarding MCI’s security in municipal revenues (Act No.

123/2006).

MCI's objective is to demand such lines as security for the loans.

MCI has not had any impairment losses on loans since its inception in 1967 and therefore does not have an impairment allowance account.

Municipality Credit Iceland Plc.

Financial statements 2008.


Amounts in ISK 12 Notes 2.8 Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.9 Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation.
Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost of the item can be measured reliably.

All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Property ............................................................................................... 50 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

The recoverable amount is the higher of the asset's fair value less costs to sell and value in use.
t d t' ll f t i l i l l Gains and losses on disposals are determined by comparing proceeds with carrying amount.

These are included in other operating expenses in the income statement.

2.10 Cash and cash equivalents Cash and cash equivalents in the statement of cash flows consist of cash, non-restricted balances with central banks and loans and advances to banks on demand.
2.11 Post-employment obligations MCI and other jointly administrated institutions are subject to pension fund obligations related to their employees, that have and do participate in the B-department of the State Employees' Pension Fund.

MCI's obligation is calculated at the end of the year and recorded as debt in the balance sheet in accordance with Actuary´s calculations.
Those calculations are the same as for the B-department of the State Employees´ Pension Fund, with a 2,0% interest rate and same expected lifetime as for 2001- 2005.

The benchmark of 65 years is used in order to calculate the post-employment liability.

2.12 Borrowings Borrowings are recognised initially at fair value net of transaction costs incurred.

Borrowings are subsequently stated at amortised cost using the effective interest method.
2.13 Share capital In December, 2006 the Icelandic Parliament, Althingi, approved a new Act No.

150/2006 on the incorporation of Municipality Credit Iceland as a statutory limited liability company.

On the initial shareholders´ meeting of the fund on 23 March 2007 it was decided that the capital was to be ISK 5,000 million.

The shareholders of MCI are all 78 municipalities, which are defined in Act No.

150/2006.

Municipality Credit Iceland Plc.

Financial statements 2008.


Amounts in ISK 13 Notes 2.14 Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

2.15 Taxes According to Act No.

90/2003 on Income tax, MCI is exempted from paying income tax.

According to Act No.

94/1996 on Capital tax, MCI is exempted from paying capital tax.

3.
3.

Critical accounting estimates and judgements Assets and liabilities are based on management´s judgement and are valued with respect to upcoming financial year.

Such estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under given circumstances.
There is a substantial risk of causing material change to the carrying amounts of assets and liabilities within the next financial year.

Determination of fair value changes is an example of that.

The determination of the fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques.

These valuation techniques are validated and periodically reviewed by qualified personnel.

4.

Financial risk management 4.1.


General Through MCI's activities it is exposed to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management to some degree of risk or combination of risks.

Effective risk management includes analysis of main risk factors, risk measurement, processes to limit risk and continous supervision.
MCI´s aim is therefore to identify MCI´s main risk factors, iniate processes to monitor them, access them regularly, maintain supervision and rules in order to keep the risk factors within predefined risk limits.

The Board of Directors determines MCI's risk management policy and is responsible for it´s uphold.

The Managing Director is responsible to the Board of Directors and proposes new policies and if appropriate, risk limits and is responsible for the monitoring of the major risk factors.
Great uncertainty remains around the settlement of MCI´s derivatives in Glitnir bank hf.

following the takeover in October 2008 by the Financial Supervisory Authority .

Glitnir went into receivership in November 2008.

Glitnir´s Resolution committee has If the bank will go into announced that derivative claims against the bank will not be paid out under current circumstances.
MCI is an intermediary for the Icelandic municipalities and their organisations and enterprises to the domestic and foreign financial markets.

The main objective is to secure them funding on favourable terms.

Credit risk is the greatest single risk faced by the company, however liquidity risk, counterparty risk and operational risk are also subject to the fund.

Market risk is kept at it´s minimum even though it is present in terms of interest and currency risk.

4.2.
4.2.

Risk policy Exposure to credit risk arises from MCI´s loans to Icelandic municipalities and the State Treasury.

MCI solely grants loans to municipalities, their organisations and enterprises.

The condition for the provision of credit to municipality-owned enterprises and organisations is that such enterprises and organisations must be wholly owned by municipalities or jointly owned by municipalities and the State Treasury, with both acting as guarantors to the Company for respective loans.
According to the Local Government Act No.

45/1998, municipalities may pledge their revenues as security for loans granted by MCI and for guarantees it provides, but for no other loans or guarantees.

When granting loans it is the policy of MCI that such security should be provided for by the municipality in question.

Income derived from the State Treasury and Ministry of Social Affairs serves as secure collateral for MCI.

Municipality Credit Iceland Plc.

Financial statements 2008.


Amounts in ISK 14 Notes 4.2.

Risk policy cont.

Liquidity risk is the risk that MCI will encounter difficulty in meeting contractual payment obligations associated with its financial liabilities.

MCI formulates liquidity management policies regarding its liquidity position and funding, to maintain the flexibility needed.

The principal is to finish the funding process of a loan before granting a loan commitment.
Part of the equity resources is managed for short term to ensure a constant access to liquid capital and to maintain flexibility.

Counterparty risk arises in financial assets and derivatives.

Counterparty risk excluding the credit risk is limited to the State Treasury and entities with guaranties from the State Treasury as well as domestic financial institutions which have a license from the Financial Services Authority, to a maximum of 25% of their equity.
If risk arises from a foreign financial institution it is required to have a minimum rating of A from at least one international rating agency.

Regarding operational risk, MCI aims to have written and clear policies for all major business processes and standardise it´s loan agreements.

It has also been a policy to outsource administrative services in order to minimise risk by distributing operations.
MCI focuses as well on integrating the information systems in order to increase the electronic information transfers.

As the operation of MCI can be characterised as relatively simple with the clients both being homogeneous and limited, the operational risk is limited.

There are a total of 650 loan agreements between MCI and 69 municipalities and 26 municipality- owned enterprises.
Regarding interest risk , it is the policy of MCI to hold a balance between the interest bearing assets and liabilities as well as fixed and variable interest rates.

Loans normally should have the same maturity, payment schedule, interest rate, date of interest payments and date of terms re-evaluation.

The interest rates on the CPI linked loans which are funded with equity and have variable interest rates can be changed by MCI.
MCI is not permitted to invest in shares, raw materials or financial instruments linked to the price index of shares and raw materials, nor corporate bonds other than bonds within financial institutions in line with Counterparty risk explanation here above.

The policy of MCI is to eliminate currency risk by minimizing the mismatch between financial assets and financial liabilities denominated in foreign currencies.
The mismatch shall never exceed 4% of equity for each international currency and total net currency gap shall not be over 6%.

These requirements are only 1/5 of the rules set by the Central Bank of Iceland.

MCI has not been able to comply with this policy since the Financial Services Authority took over Glitnir Bank hf.

operations in October 2008.

As a consequence there is a complete uncertainty with regards to the value of MCI´s derivatives within Glitnir Bank hf.
This has had major effects on MCI´s currency hedging swaps.

Further explanations on MCI´s derivatives can be found in Notes 4.6 and 16.

4.3. Credit Risk The exposure in credit risk arises from MCI´s loans to the municipalities.

The maximum exposure is the book value of the loans recognised in the balance sheet.
4.3.1 Lending process When loan applications are reviewed, the borrower has to fulfill all of the legal requirements for receiving a loan as well as the project being of general economic interest.

A thorough valuation on the financial position and development of the borrowers and their guarantors is performed.

All loan applications are introduced to the board of directors, either for their approval or as an introduction in line with MCI´s credit rules which are summarized on MCI´s web site.
4.3.2 Loan portfolio The exposure to credit risk is limited to the Icelandicic municipalities.

The municipalities have been reliable borrowers and there has not been a loan loss since MCI commenced operations in 1967.

MCI does not make provisions for loan losses in its books.

For loans and guarantees MCI has a pledge in the municipalities' revenues.

MCI did not have to use this pledge in the year 2008.

Municipality Credit Iceland Plc.

Financial statements 2008.


Amounts in ISK 15 Notes 4.3.2 Loan portfolio cont.

The municipalities are now a total of 78, their number has decreased over the last years which has led to a stronger financial position towards MCI.

At year-end MCI had loans outstanding to 69 municipalities.

The Local Government Act is a solid legal frame for the municipalities to operate under.
The Icelandic municipalities can technically not become bankrupt as it is stated in the Local Government Act that the State secures the financial solvency of a municipality.

At year end two of MCI's customers were defined as large exposures.

Large exposures are defined as exposures that exceed 10% of MCI´s equity.

Ten of the largest borrowers hold 55% of the total loans.

According to MCI´s internal limits, no single exposure may exceed 25% of MCI´s equity foundation.
4.3.3 Impairments MCI sets very strict requirements regarding granting loans to the municipalities and has therefore never suffered a loan loss since MCI commenced operations in 1967.

An evaluation on the loan portfolio has never led to write offs and accordingly MCI does not make provisions for future estimated loan losses in its books.
4.3.4 Maximum Credit Risk excluding pledges The following table shows MCI´s maximum Credit Risk at year end 2008 and 2007 irrespective of provided pledges and credit EUR loans (Euribor + margin) Loans to municipalities and their companies ................................................................................... Financial assets held for trading - Derivatives ................................................................................. Bonds ................................................................................................................................................
Amounts due from credit institutions ................................................................................................ Other assets ...................................................................................................................................... Total Credit Risk 60.358 0 113 415 10 60.896 39.267 98 413 989 806 41.573 Maximum Credit exposure 2008 2008 2007 2007 4.3.5 Credit risk management The managing director is responsible for MCI´s credit risk monitoring.
Exposure to credit risk is regularly reviewed and managed through an analysis and evaluation of loans and defaults.

Defaults are very seldom.

In the year 2008 MCI did not have to use their pledge right due to defaults.

4.4 Liquidity Risk MCI monitors maturities on the financial instruments in order to secure that it can pay all liabilities on due dates.

MCI always has to have enough liquidity to be able to meet predictable and unpredictable obligations.
The following tables present the cash flow for financial instruments excluding derivatives according to contractual repayments: Financial instruments at 31.12.2008 Financial assets Cash and deposits .................................... Financial assets, securities ...................... Loans ........................................................ 0 to 1 months 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years 3.179 243 1.253 4.432 2.215 2.458 9 4.449 4.458 113 22.700 22.813 29.004 29.004 Total 3.422 122 59.621 63.165 Municipality Credit Iceland Plc.
Financial statements 2008.

Amounts in ISK 16 Notes 4.4 Liquidity Risk cont.

Financial liabilities Short term liabilities .................................. Borrowed funds and bonds issued ...........
Liability to municipalities ........................... Total Financial liabilities 5 61 66 3.649 3.649 2.178 750 2.928 22.847 750 23.597 22.731 22.731 5 51.466 1.500 52.971 Net, Assets - Liabilities 4.366 (1.191) 1.530 (784) 6.273 10.194 Financial instruments at 31.12.2007 Financial assets Liquid assets ............................................. Financial assets, securities ...................... Loans ........................................................ Total Financial assets Financial liabilities Short term liabilities .................................. Borrowed funds and bonds issued ...........
Liability to municipalities ........................... Total Financial liabilities p y 0 to 1 months 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years 1.094 1.119 13 2.226 6 62 68 2.125 2.125 6.748 6.748 95 14.386 14.481 15.995 15.995 1.948 1.948 5.970 750 6.720 11.127 1.500 12.627 10.147 10.147 Total 1.094 1.214 39.267 41.575 6 29.254 2.250 31.510 Net, Assets - Liabilities 2.158 177 28 1.854 5.848 10.065 Financial instruments - Repayment profile split by currency in ISK million 31.12.2008.
CPI linked ISK ISK EUR USD Other currencies 8 14 1366% 14 14 298 361 JPY 21 25 25 25 25 191 313 0 0 Total 11.348 7.034 7.658 4.200 3.920 29.004 63.165 6.643 7.088 8.732 5.215 2.561 22.731 52.971 Financial assets Year 2009 ........................... Year 2010 ........................... Year 2011 ........................... Year 2012 ........................... Year 2013 ........................... Over 5 years ....................... Total Financial assets Financial liabilities Year 2009 ........................... 1 January 2008 ................... Year 2011 ........................... Year 2012 ........................... Year 2013 ........................... 31 December 2008 ............. Total Financial liabilities 4.4.1 Derivatives cash flow MCI had outstanding derivatives with Glitnir bank hf.
which went into receivership in November 2008.

As a consequence no payments were exchanged between MCI and Glitnir bank hf.

in relation to the before mentioned contracts.

The tables below present the contractual cash flow as it would have looked like at 31.12.2008 if Glitnir bank hf.

had not gone into receivership.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Notes 4.4.1 Derivatives cash flow cont.
The table below illustrates the repayment profile for MCI´s derivatives in ISK million as at 31.12.2008.

Derivatives, settled on a net basis.

Assets Interest rate swaps ................................... Total assets Liabilities Interest rate swaps ................................... Total liabilities Net, assets-liabilities Derivatives, settled on a net basis.
Assets Cross currency swaps .............................. Total assets Liabilities Cross currency swaps .............................. Total liabilities Net, assets-liabilities 0 to 1 months 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years 0 0 0 0 0 0 0 0 0 0 to 1 months 1 to 3 months 3 to 12 months 0 0 0 4.261 4.261 2.631 2.631 1.630 30 30 35 35 (5) 559 559 686 686 (127) 1 to 5 years 755 755 839 839 (84) 0 0 0 Over 5 years 0 0 0 The table below illustrates the repayment profile for MCI´s derivatives in ISK million as at 31.12.2007.
Derivatives, settled on a net basis.
Assets Interest rate swaps ................................... Total assets Liabilities Interest rate swaps ................................... Total liabilities Net, assets-liabilities 4.5 Interest rate risk 0 to 1 months 1 to 3 months 3 to 12 months 0 0 0 0 0 0 0 0 0 1 to 5 years 526 526 581 581 (55) Over 5 years 0 0 0 17 Total 559 559 686 686 (127) Total 5.046 5.046 3.505 3.505 1.541 Total 526 526 581 581 (55) MCI monitors interest sensitivity of all interest bearing loans and funding with relation to their duration.
Part of the loans are funded with MCI´s equity which explains why financial assets are greater than financial liabilities in the chart below.

The table below shows the interest bearing loans and funding categorised by interest periods.

Amounts with variable interest rates are categorised by the maturity of the interest.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 18 Notes 4.5 Interest rate risk cont.
Financial assets and liabilities, classified by interest repricing time, in ISK million.

0-1 years 1-5 years 5-10 years Over 10 y.
Total Financial assets ISK .................................................................................. ISK - CPI linked .............................................................. EUR ................................................................................. USD ................................................................................. JPY .................................................................................. CHF ................................................................................. SEK ................................................................................. CAD ................................................................................. GBP ................................................................................. Total Financial assets Financial liabilities ISK .................................................................................. ISK - CPI linked .............................................................. EUR ................................................................................. USD ................................................................................. Total Financial liabilities The net interest sensitivity analysis shows, with relation to the maturity profile, that 1% interest increase, increases the interest The net interest sensitivity analysis shows with relation to the maturity profile that 1% interest increase increases the interest income by ISK 18 million or 0.17% of equity.
CPI link effects The total CPI linked assets amounted to ISK 37,274 million while the total CPI linked liabilities were ISK 27,932 million at 31 December 2008.

4.6 Currency Risk The policy of MCI, as illustrated in Note 4.2, is to have a balance between the assets and liabilities denominated in international currency.
A breach in that policy occurred in October 2008 when the Financial Services Authority took over Glitnir bank hf´s operations as a consequence of unusual and one off situation on the Icelandic financial market.

Following, there was a great uncertainty with respect to settlement of MCI´s derivatives within Glitnir bank hf.

which then went into receivership in November 2008.
This uncertainty with regards to the derivatives settlement is still there and has great effect on MCI´s currency swaps and thereby MCI´s currency hedging.

The table below shows the position in international currency.

Financial assets and liabilities in ISK million as at 31.12.2008 CPI-linked ISK ISK EUR USD JPY Other currency Financial assets Cash and deposits .............. Fin.
assets, securities ......... Loans .................................. Total Financial assets Financial liabilities Short term liabilities ............ Borrowed funds ...................
Liability to municipalities ..... Total Financial liabilities 113 37.161 37.274 27.932 27.932 3.422 9 3.500 6.931 5 340 1.500 1.845 15.211 15.211 3.075 3.075 313 313 361 361 20.469 2.725 20.469 2.725 0 0 Total 3.422 122 59.621 63.165 5 51.466 1.500 52.971 Net, assets-liabilities 9.342 5.086 (5.258) 350 313 361 10.194 Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Notes 4.6 Currency Risk cont.


Financial assets and liabilities in ISK million as at 31.12.2007 CPI-linked ISK ISK EUR USD JPY Other currency Financial assets Cash and deposits .............. Fin.

assets, securities ......... Loans .................................. Total Financial assets Financial liabilities Short term liabilities ............ Borrowed funds ...................
Liability to municipalities ..... Total Financial liabilities 1.214 24.851 26.065 15.923 15.923 1.094 9 3.362 4.465 5 2.524 2.250 4.779 9.425 9.425 1.620 1.620 9.415 1.393 9.415 1.393 Net, assets-liabilities 10.142 (314) 10 227 0 0 0 0 0 0 19 Total 1.094 1.223 39.258 41.575 5 29.255 2.250 31.510 10.065 Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 20 Notes 5.
Net Interest Income Interest income and indexation Loans .................................................................................................................... Cash and short term funds ................................................................................... Securities .............................................................................................................. Other interest income ........................................................................................... 2008 2007 7.214.390.281 135.748.660 132.810.360 0 7.482.949.301 3.176.815.105 24.229.804 177.753.063 7.825 3.378.805.797 Interest expense and indexation Debt securities in issue and other borrowed funds ............................................... Other interest expenses ........................................................................................ 4.761.984.741 16.062 4.762.000.803 1.993.167.440 379.543 1.993.546.983 6.
Net gain (loss) on financial instruments held for trading Net interest rate swaps ......................................................................................... Fair value adjustments .......................................................................................... Fair value adjustments - impairment of derivatives within Glitnir bank hf.

............ (564.316.854) 1.403.540.286 (1.471.941.756) (632.718.324) (224.346.894) (221.934.425) 0 (446.281.319) 7.
Net gain on financial instruments designated at fair value through profit or loss Net gain on financial instruments designated at fair value through profit or loss is specified as follows: Bonds .................................................................................................................... Money market securities ....................................................................................... 55.283.455 67.152.362 122.435.817 36.526.572 107.331.289 143.857.861 8.
Net foreign exchange gains Loans ....................................................................................................................

Borrowings ............................................................................................................

Amounts due from credit institutions ..................................................................... 9.282.285.150 (9.659.652.301) (502.223.439) (879.590.590) (174.028.719) 377.230.139 2.696.625 205.898.045 9.
Salaries and related expenses At the end of 2008 there were three employees working for MCI.

MCI has entered into a service agreement with the Icelandic Association of Local Authorities regarding the purchase of administrative services and such expense is recorded under the other operational expenses item.
Salaries and related expenses are specified as follows: Salaries ................................................................................................................. Related expenses ................................................................................................. Pension obligations ............................................................................................... 27.527.047 1.961.624 11.869.752 41.358.423 17.634.507 1.275.825 6.925.522 25.835.854 Municipality Credit Iceland Plc.
Financial statements 2008.

Amounts in ISK Notes 9.

Salaries and related expenses (cont.)
Salaries and other fees to the Board of Directors and the Managing Director are specified as follows: 21 Ottar Gudjonsson, managing director ................................................................... Board of Directors: Magnus B. Jonsson, chairman ............................................................................. Kristinn Jonasson ................................................................................................. Svanfridur Inga Jonasdottir ................................................................................... Jonmundur Gudmarsson ...................................................................................... Anna Skuladottir ................................................................................................... Paley Borgthorsdottir ............................................................................................ Run Halldorsdottir ................................................................................................. Sigurdur Ingi Johannsson ..................................................................................... 10.
Auditor's fees Audit of the financial statements ........................................................................... Review of interim accounts ................................................................................... Other services ....................................................................................................... 11.
Other operating expenses Professional fees .................................................................................................. Computers and software ....................................................................................... Joint office expenses ............................................................................................
Bond issuance registration fees ............................................................................ Housing expenses ................................................................................................

Annual and regulation fees, Financial Supervisory Authority ................................ Travelling expenses ..............................................................................................
Reception .............................................................................................................. Office equipment ................................................................................................... Staff related expenses .......................................................................................... Other operating expenses ..................................................................................... 12.
Earnings per share Earnings per share is specified as follows: 2008 2007 Profit attributable to equity holders of the company ..............................................

Weighted average number of ordinary shares in issue ........................................ Earnings per share 1.225.373.959 5.000.000.000 0,25 1.219.272.432 5.000.000.000 0,24 Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 22 Notes 13.


Cash and balances with the Central bank 2008 2007 Mandatory reverse deposits with the Central bank ...............................................

Non mandatory reverse deposits with the Central bank ....................................... 0 3.007.397.320 3.007.397.320 105.097.908 0 105.097.908 Mandatory reserve deposits are not available for use in MCI´s day-to-day operations.

14.
14.

Amounts due from credit institutions 2008 2007 Bank accounts ...................................................................................................... Money market loans .............................................................................................. 172.160.601 243.041.442 415.202.043 77.532.252 911.416.805 988.949.057 15.
Loans and receivables Loans and receivables are specified as follows: International currency loans .................................................................................. CPI linked loans .................................................................................................... Other loans ........................................................................................................... Loans are specified as follows by maturity: On demand ........................................................................................................... Up to 3 months ..................................................................................................... 3 to 12 months ...................................................................................................... 1 - 5 years ............................................................................................................. Over 5 years ......................................................................................................... 2008 2007 19.187.961.681 37.649.936.470 3.520.131.159 60.358.029.310 11.031.415.677 24.950.793.950 3.285.017.097 39.267.226.724 71.643.467 3.439.833.452 4.806.097.520 22.514.233.265 29.526.221.606 60.358.029.310 13.147.738 2.125.085.030 6.748.076.391 14.385.938.426 15.994.979.139 39.267.226.724 Loans which are already on due date but not yet on final payment date are classified as on demand.
No loans had passed the final payment date at year end.

After valuating MCI´s credit risk it does not justify creation of a specific provision account with regards to future estimated losses.

16.

Derivatives Fair value Asset Liability Fair value changes Total Interest rate swaps Interest rate swap at Glitnir bank hf.

(nom.

ISK 500m) ............................................ Equity linked derivative .................................. Total Currency swaps Currency swap at Glitnir bank hf.
(nom EUR 25m) ............................................. Total 4.406.253 4.406.253 (75.614.049) (57.179.895) (132.793.944) 71.207.796 0 71.207.796 0 (57.179.895) (57.179.895) 1.627.704.902 1.627.704.902 (84.555.347) (84.555.347) (1.543.149.555) (1.543.149.555) 0 0 Total 1.632.111.155 (217.349.291) (1.471.941.759) (57.179.895) Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 23 Notes 16.

Derivatives cont.


Great uncertainty remains around the settlement of MCI´s derivatives in Glitnir bank hf.

following the takeover in October 2008 by the Financial Supervisory Authority .

Glitnir went into receivership in November 2008.

Glitnir´s Resolution committee has announced that derivative claims against the bank will not be paid out under current circumstances.
If the bank will go into insolvency, all derivatives will close automatically and customer claims with relation to those contracts will be paid out in accordance with Icelandic insolvency laws.

MCI´s management claim that it is impossible to evaluate MCI´s derivatives market price in the current market environment.

The market value of MCI´s derivatives is therefore defined as present value of future estimated cash flows.
The Icelandic financial market is very volatile at the moment and therefore a great uncertainty remains as to how much MCI will receive in cash from Glitnir bank hf.

due to the derivatives.

As a consequence MCI´s derivatives in Glitnir bank hf.

are written down to 0, or by ISK 1.472 million.

17.
17.

Financial assets designated at fair value 2008 2007 Bonds .................................................................................................................... Money market loans .............................................................................................. 112.895.696 8.540.525 121.436.221 412.799.752 801.039.709 1.213.839.461 18.
Property, plant and equipment At year end 2007: Opening net book amount .................................................................................................................... Depreciation during the year ................................................................................................................

Closing net book amount ......................................................................................................................
Closing net book amount Closing net book amount is specified as: Historical cost .......................................................................................................................................

Accumulated depreciation ....................................................................................................................
Closing net book amount ...................................................................................................................... At year end 2008 Opening net book amount .................................................................................................................... Depreciation during the year ................................................................................................................
Closing net book amount ......................................................................................................................

Closing net book amount is specified as: Historical cost .......................................................................................................................................

Accumulated depreciation ....................................................................................................................
Closing net book amount ...................................................................................................................... 56.194.491 (1.195.628) 54.998.863 54 998 863 59.781.371 (4.782.508) 54.998.863 54.998.863 (1.195.628) 53.803.235 59.781.371 (5.978.136) 53.803.235 19.
Debt securities in issue - 2008 Unlisted securities, due 2013 .......... 5,00% LSS 08 0530, notes due 2008 ......... LSS '03, notes due 2018 ................. 5,17% LSS '04, notes due 2019 ................. 4,08% LSS '05 3A+B, notes due 2010 ........ LSS '05-1, notes due 2012 .............. 4,16% LSS '05-2, notes due 2022 .............. 4,30% LSS '05-4, notes due 2020 .............. 4,11% LSS 150224, notes due 2024 .......... 5,26% LSS '08 1, notes due 2034 ............. 5,44% - Average Interest rate* 2007 5,00% - 5,17% 4,08% - 4,16% 4,30% 4,11% - - Total 31.12.2008 76.034.438 0 918.095.264 1.773.258.844 465.823.046 3.971.677.593 6.619.451.590 1.026.212.479 5.783.995.134 5.674.809.879 26.309.358.267 Repayments paid in 2008 19.420.863 4.750.000.000 133.678.803 225.580.230 0 988.049.998 631.003.899 103.894.460 0 166.566.979 7.018.195.232 Total 31.12.2007 78.311.914 4.505.000.000 870.868.145 1.659.393.402 475.603.925 4.270.043.166 6.139.940.936 942.336.257 0 0 18.941.497.745 * Average interest rate is calculated in accordance with the effective interest rate method.
Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK Notes 20.


Other borrowings 2008 EUR loans (Euribor + margin) ......... 0,27% USD loans (LIBOR + margin) .......... 0,13% ISK loans (CPI linked) ...................... 5,76% Average Interest rate* 2007 0,12% 0,13% 5,65% New borrowings in 2008 thereof: ..... EUR 30m due 2011 ....................... (EURIBOR + margin) ....................... 0,70% EUR 15m due 2018 ......................... (LIBOR + margin) ............................ 0,11% 21.
Liability to municipalities 24 Total 31.12.2008 20.631.340.747 2.751.136.838 1.333.852.895 24.716.330.480 Repayments paid in 2008 1.254.009.916 337.997.483 464.415.890 2.056.423.289 Total 31.12.2007 7.218.168.487 1.592.908.366 1.502.268.984 10.313.345.837 5.115.679.476 2.566.417.628 7.682.097.104 In accordance with temporary provision no.

I of Act No.
I of Act No.

150/2006 on the incorporation of Municipality Credit Iceland as a statutory limited liability company, the annual general meeting of MCI for 2006 decided to reduce the equity of MCI by ISK 3 billion as MCI continues to comply with the conditions of statutory law regarding the equity ratio of financial undertakings, notwithstanding the reduction, and retains sufficient cash to meet its obligations.
This reduction of ISK 3 billion will be paid to the municipalities as owners during the years 2007-2010, thereof ISK 750 million were paid in the year 2008 and ISK 750 million will be paid in 2009.

22.

Other liabilities Creditors ...............................................................................................................
Liabilities due to derivatives .................................................................................. Salaries related expenses .................................................................................... 2008 2007 5.294.265 41.449.383 0 46.743.648 4.801.218 0 828.219 5.629.437 Financial assets, securities .............. 23.
Post-employment obligations MCI and other jointly administrated institutions are subject to pension fund obligations related to their employees, that have and do participate in the B-department of the State Employees' Pension Fund.

The calculations of an actuary has been calculated for the pension fund obligations and recorded as debt in the balance sheet based on a 2,0% interest rate.

The benchmark of 65 years is used when it comes to calculating the post-employment obligations.
Post-employment obligations are specified as: 2008 2007 Pension liability as at 1.1.

.....................................................................................
Paid during the year .............................................................................................. Increase during the year ....................................................................................... 46.540.415 (1.914.503) 8.763.719 53.389.631 43.341.688 (1.714.510) 4.913.237 46.540.415 Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK 25 Notes 24.


Equity Balance 01.01 ...................................................................................................................................... Net profit for the year ............................................................................................................................ 10.048.011.321 1.225.373.959 11.273.385.280 Financial assets, securities .............. At the end of the year the total share capital was ISK 5.000 million.
One vote is entitled to each nominal ISK.

Total equity at year end is ISK 11.273 million or 17.7% of the balance sheet.

The capital adequacy ratio (CAD) which was calculated according to Basel I was 112.25% at year end 2007.

At year end 2008 the CAD ratio, based on Basel II, was 57%.
Under Icelandic law the minimum requirement is 8.0% The capital adequacy ratio is determined as follows (in thousand ISK) Risk base: Assets recorded in the financial statements ......................................................... Market risk ............................................................................................................
Operational risk ..................................................................................................... Risk base total Book value 63.956.387.201 63.956.387.201 Weighted value 2008 12.178.933.515 5.258.349.000 2.379.997.000 19.817.279.515 Capital: Recorded equity..................................................................................................... Capital total 11.273.385.280 11.273.385.280 11.273.385.280 11.273.385.280 Capital adequacy ratio .......................................................................................................................... 57% 25.
Related party disclosures Related parties are defined as municipalities and companies owned by them which are related to members of MCI´s board of directors as well as municipalities and related companies who have significant incluence as the largest shareholders of MCI.

This definition is based on IAS 24.
Information regarding related parties are as follows (in ISK thousand): 1 January 2008 ..................................................................................................... New loans to related parties ................................................................................. Loan payments to related parties ......................................................................... Other changes ...................................................................................................... 31 December 2008 ............................................................................................... 2008 4.334.814.000 153.614.000 (2.934.029.000) 1.315.290.000 2.869.689.000 2007 1.576.264.000 2.787.350.000 (246.010.000) 217.210.000 4.334.814.000 No provisions have been recognised in respect of loans given to related parties.
Transactions with related parties are all in the normal course of MCI´s activities.

Municipality Credit Iceland Plc.

Financial statements 2008.

Amounts in ISK