Contentssmebank.org/wp-content/uploads/2016/01/SME-Bank-Ltd.-Annual-Rep… · Contents 1. Corporate...

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Contents

1. Corporate Information 22. Vision & Mission Statement 3-43. President’s Message 54. Financial & Operational Highlights 75. Directors’ Report 86. Shareholding Pattern 167. Statement of Compliance with the Code of Corporate Governance 178. Statement on Internal Controls 229. Auditors’ Review Report to the Members on Code of Corporate Governance 23

10. SME Bank Limiteda. Auditors’ Report to the Members 27b. Statement of Financial Position 29c. Profit and Loss Account 30d. Statement of Comprehensive Income 31e. Cash Flow Statement 32f. Statement of Changes in Equity 33g. Notes to the Financial Statements 34h. Notice of 14th Annual General Meeting 94

11. Consolidated Financial Statements a. Auditors’ Report to the Members 97b. Statement of Financial Position 99c. Profit and Loss Account 100d. Statement of Comprehensive Income 101e. Cash Flow Statement 102f. Statement of Changes in Equity 103g. Notes to the Financial Statements 104

12. SME Leasing Limiteda. Auditor’s Review Report to Members on Code of Corporate Governance. 173b. Auditors’ Report to the Members 175c. Balance Sheet 177d. Profit and Loss Account 178e. Statement of Comprehensive Income 179f. Cash Flow Statement 180g. Statement of Changes in Equity 181h. Notes to the Financial Statements 182

13. List of addresses of Head Office, SME Branches, Recovery Offices, Treasury, Audit Offices and SME Leasing Ltd 22114. Form of Proxy 225

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Cor porate Infor mation

Board of Directors1. Mr. Muhammad Adnan Jalil2. Mr. Muhammad Alamgir Chaudhry3. Mr. Zarar Haider4. Mr. Badr-ul-Arifeen5. Mr. Ihsan ul Haq Khan6. Vacant7. Vacant

President and Chief Executive OfficerMr. Ihsan-ul-Haq Khan

Board Audit Committee1. Mr. Muhammad Adnan Jalil2. Mr. Zarar Haider3. Mr. Badr-ul-Arifeen

Company SecretaryMr. Sajjad Ahmad Warraich

Chief Financial OfficerMian Tahir Bashir

Legal AdvisorsBhatti Law AssociatesIslamabad.

Registered Office56-F, Nazim-ud-Din Road,F-6/1, Blue Area,IslamabadTel.: 051-9217000Fax: 051-9217001UAN: 111- 11 0-0 11Email: [email protected]: www.smebank.org

AuditorsKPMG Taseer Hadi & Co.Chartered AccountantsIslamabad

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Vision Statement

We will be the leading institution for providing financial assistance for the development and support of Small and Medium Enterprises (SMEs) in Pakistan.

We will respond to the needs of Small and Medium Enterprises by providing them with necessary financial assistance and business support services in the form of short to long term funds.

We Will, through support of SME sector, contribute to the growth of local entrepre-neurs, develop export markets and provide employment opportunities in the country.

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Mission Statement

To support and develop SME sector by providing necessary financial and technical assistance on a sustainable basis.

To enable SME sector to contribute to economic development through value addition and exports, promote entrepreneurship and create employment opportunities.

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President ’s Message

It is my pleasure to present the 14th Annual Report of SME Bank for the year ended December 31, 2015.

The economic activity seems slightly vibrant while growth in energy sector remain contained, and the SME sector bore the brunt of the energy crisis due to lack of access to alternate energy. In the coming year, China-Pakistan Economic Corridor (CPEC) is one of the biggest and most significant projects for Pakistan and the region. As per this agreement, both Pakistan and China will allow banks to open branches in each other’s country. With the opening of Pakistani banks in China, the remittances / LCs which are presently routed though European banks, shall be done through Pakistan’s own banks.

On the other hand, the opening of Chinese banks would facilitate Pakistani Financial sector to link with world largest economy, this would also ease Chinese investments for the Economic Corridor through Pakistani banks. There will be urgent need for reforms in different sector so that it is ready for taking advantage of economic corridor and facilitate in boosting investment in different corporate sectors of economy in Pakistan. In this context the small and medium sector will also grow and the SME Bank will take part in financing these sectors.

SME Bank continued to work with a limited equity base and bank is operating with paid-up capital of Rs 2.39 billion since 2007 and State Bank has granted exemption to meet the requirement of minimum paid-up capital which otherwise should have been Rs 10 billion by the end of 2015. In the shareholders’ meeting on October 7, 2009, it was advised that the Bank be recapitalized by increasing paid-up capital; management has approached Ministry of Finance for the same over the years.

With a network of 13 branches the Bank has very limited outreach. The Bank’s Directors have authorised the opening of additional branches, however in-principle approval from the State Bank is not forthcoming due to pending privatization.

Even under constrained circumstances there is no let up in the Bank’s primary operations, albeit at a slower than desired pace for reasons stated. We have been able to increase our disbursements from Rs 1,836 million last year to Rs 1,994 million at year end and deposits which has been increased by Rs.1,427 million and stood at Rs 4,770 million as on December 31,2015 as compared to last year Rs.3,343 million.

As business & economic activities remained depressed, repayment commitments were dishonoured by many borrowers, however due to the management’s focus and strenuous efforts by the field staff, non-performing portfolio decreased to Rs.611 million at the year-end December 31,2015 from Rs.732 million last year. Management has been able to reduce before tax loss by Rs. 103 million from Rs. 378 million in previous year to Rs. 275 million during the year.

We are hopeful that the process of restructuring or privatization will complete soon and this will cause further expansion in business and enhance operations to the advantage of all stakeholders.

It is the Management’s vision to build an image of SME Bank as the bank which is a friend of the Small & Medium Enterprises; a bank totally trusted with their deposits and ability and resources to cater to

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their business needs. Customers’ will see SME Bank as the bedrock integral to their business growth and sustainability and as a national institution ably playing its crucial role in the country’s economic growth & development.

On behalf of the management, I would like to take this opportunity to thank the State Bank of Pakistan, the Ministry of Finance and the Board of Directors for their continued support and guidance.

President

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Financial Highlightsfor the year 2015

Rs. In million

2015 2014 2013 2012 2011 2010PROFITABILITY

Income

Total Income 753.2 876.3 741.1 808.6 714.5 642.8 Interest Income 705.3 788.8 715.2 790.3 693.8 581.3

Expenses

Total Expenses 1,027.8 1,254.6 1,167.3 1,184.5 979.2 932.4 Interest Expenses 436.3 542.6 477.9 534.0 421.4 322.1 Spread (Net interest income / Gross interest income) 0.4 0.3 0.3 0.3 0.4 0.4 Gain on Settlement related to Retirement Benefit Plan - - - - - - (Loss) / Profit before tax (274.6) (378.3) (426.2) (375.9) (264.6) (289.7) (Loss) / Profit after tax (282.2) (387.1) (430.7) (384.5) (272.5) (247.9)

FINANCIAL POSITION

Shareholder's Funds 2,392.5 2,392.5 2,392.5 2,392.5 2,392.5 2,392.5 Net Equity 356.3 689.4 1,004.1 1,344.7 1,866.3 2,035.4

Liabilities

Total Liabilities 8,260.2 4,611.0 6,019.7 7,623.4 5,331.4 3,980.2 Borrowing from financial institutions 2,888.7 776.2 1,749.0 3,566.6 2,125.4 1,360.6 Deposits 4,770.2 3,343.1 3,713.1 3,328.0 2,647.2 2,225.8

Assets

Total Assets 8,616.5 5,300.4 7,023.8 8,968.1 7,197.7 6,015.6 Advances (net of provisions) 2,751.7 2,928.7 2,852.4 2,855.0 2,718.9 2,510.8 Investment 4,117.5 1,446.5 2,653.4 4,662.7 3,929.3 2,892.1

RATIOS

Return on Assets -4.05% -6.28% -5.39% -4.76% -4.12% -4.03%Return on Equity -53.97% -45.71% -36.67% -23.95% -13.97% -11.65%Capital Adequacy Ratio (Required 10%) 6.79% 21.17% 30.37% 34.92% 62.85% 85.72%Earning/(Loss) per share (1.18) (1.62) (1.80) (1.61) (1.14) (1.04)

BUSINESS ACHIEVEMENTS

Recoveries of Old portfolio - - - - - 16.5 Recoveries of New portfolio 767.7 724.0 707.0 582.8 596.3 516.4 Advances disbursed during the Year 1,993.6 1,835.6 1,659.0 1,968.0 1,728.7 1,930.2 Number of SMEs Finances 447.0 552.0 579.0 652.0 587.0 642.0

OTHER INFORMATION

Number of Employees 495 462 477 491 482 464 Number of Banking branches 13 13 13 13 13 13 Total Branches/Recovery Offices 21 21 22 22 22 27

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Directors ’ Repor t to the Shareholders

We are pleased to present the 14th annual report of SME Bank Limited with the audited accounts and auditors’ report thereon for the year ended December 31, 2015.

Economic ReviewWith year-to-date inflation at 2.06% in FY-2016, State Bank of Pakistan (SBP) slashed the benchmark interest rate effectively by 350bps, taking the policy rate to 6%. GoP also introduced a new tax of 0.3% on all banking transactions of PKR50k and above on non-filers, resulting in knee jerk withdrawals of public deposits, aggravating the already chronic liquidity situation. Worsening liquidity situation and banks’ insatiable appetite for risk free securities crowded out private sector and advances only posted a meager growth of 5% in 11MCY15.

Banks are facing challenges in keeping the balance between profitability and liquidity management as the market is short by 1.4 trillion per week, which is injected by the SBP through OMOs. As far as the interest rate scenario is concerned, we do not see the reversal in the monetary policy in the short to medium term. With a plethora of positive developments at the macro level engineered by the current finance team has left the Government with enough space to bolster the economy through easy monetary policy.

Operational HighlightsThe Bank is operating with paid capital of Rs 2.39 billion since 2007. State Bank has granted exemption to meet the requirement of minimum paid up capital of Rs 10 billion by June 30, 2016. Shareholders in their meeting on October 7, 2009, advised to recapitalize the bank by increasing its paid-up capital and management has approached Ministry of Finance for the same. The Board noted that in view of impending privatization of the Bank, SBP’s constraints on business expansion, and very narrow equity base of less than Rs 2 billion, it is a challenge to operate the bank on self sustainable basis.

In view of restrictions placed by State Bank of Pakistan there was no change in branch network during the year 2015 and the Bank continued to operate with 13 commercial banking branches and eight recovery offices.

Interest Rate ScenarioSBP discount rate at the beginning of the year 2015 was 9.50 percent. During the year the net decrease in discount rate was 3 percent to bring the discount rate to 6.50 percent at year end. The change in discount rate also affects KIBOR for different tenors and income of the bank as compared to previous year.

Credit RatingThe Bank was assigned a long term credit rating of BB (Double B) and short term rating of B (Single B) by PACRA credit rating agency on February 11, 2015. The credit rating company has expressed that growth in the bank’s operations is restricted due to delay in injection of additional equity into the bank; that although the management is taking measures to improve business functions, operational sustainability is dependent upon equity injection by the primary sponsor.

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Operational ResultsIn the backdrop of narrow equity base and shortage of funds, management has been able to meet day to day liquidity needs and maintenance of statutory liquidity requirements (SLR) set by the State Bank of Pakistan. Despite enormous pressure of liquidity crunch, loans and advances portfolio stood at Rs 2,990 million. During the year under review income from SME lending operations increased by an amount of Rs 28.38 million. The cost of deposits and borrowing decreased by an amount of Rs 106.314 million. The average cost of deposits decreased to 7.13% as compared to 8.29% in 2014.

The bank has booked before tax loss of Rs 275 million during the year 2015 as compared to before tax loss of Rs 378 million in 2014. In year 2015, we are able to reduce the losses over the previous year. Loss reduced mainly due to reversal of provisions on advances, investments and others by Rs.170 million and increase in net interest income over the last year. The reason for incurring losses were due to pending privatization, restructuring, limited outreach, inadequate level of equity and economic condition. In future, we expect to decrease the losses by enhancing revenues and reducing volume of our Non-performing loans.

During the year 2015, the bank reversed net provision of Rs 63 million against non-performing loans as against charged net provision of Rs 66 million in 2014. Loans and advances on account of the bank’s lending operation were Rs 2,990 million in 2015 to Rs 3,215 million in 2014.

The ongoing energy crises seriously dampened the business activities in the country to a great extent, which in turn affected the repayment capacity and behaviour of the bank’s borrowers but despite these hindrances the management of the bank made persistent efforts to reduce the non-performing loans of the bank resulting in decrease from Rs 732 million on December 31, 2014 to Rs 611 million on December 31, 2015.

The deposits of the bank has been increased by Rs.1,427 million and stand at Rs 4,770 million as on December 31,2015 as compared to last year Rs.3,343 million as on December 31,2014. The Bank has investment of Rs. 215.46 million in SME Leasing Limited (SMEL) which is carried in these financial statements at Rs. 70.2 million and has outstanding running finance exposure of Rs. 127 million at the balance sheet date. The company could not build up its lease portfolio due to non-availability of funds and an increase in non-performing loans has adversely affected the financials of SMEL during last couple of years. Market value of its share has thus witnessed decline and stood at Rs 0.25 per share as on December 31, 2015. The Bank periodically reviews its investment in SMEL for evidence of any impairment. The recoverable amount of investment in SMEL is determined with reference to its value in use. The Bank uses present value techniques and financial projections of SMEL to calculate its value in use.

With regard to the exposure granted to SME Leasing Limited, SME Bank applied for exemption on per party exposure to SBP in 2015. SBP has granted relaxation to SME Bank Limited for the amount of Rs 103.03 million in single related party exposure limit under Prudential Regulation R-1 regarding the financing of Rs 150 million to SME Leasing Ltd for the period up to June 30, 2016, subject to the condition that exposure to related party be adjusted within the prescribed limit and a plan to this effect is required to be submitted to SBP. The State Bank of Pakistan in its inspection report dated June 30, 2014 pointed out the shortfall in provision of Rs 21.56 million on account of TREC, out of which Rs 5.39 million of provision has been booked by the bank. The management is of the considered opinion that the bank has not lost its

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right of TREC even after the integration of Stock Exchanges. The Scheme of Integration of Karachi Stock Exchange and Lahore Stock Exchange states that “in case of dispute with regard to the status of a person as a TREC Holder of the transferor, the Commission will determine the status of such person as a TREC Holder or otherwise”.

Paid-up CapitalThe Bank is operating with paid up capital of Rs 2.39 billion since 2007. In line with the SBP guidelines banks are required to raise paid up capital to minimum capital requirements of Rs 10 billion by December 31, 2015. However the State Bank of Pakistan has granted exemption to meet the requirements of minimum paid up capital till June 30, 2016.

Financial StatementsFinancial statements have been prepared in accordance with International Accounting Standards as applicable in Pakistan, SBP Prudential Regulations and Companies Ordinance 1984. The disclosures in notes to financial statements correspond to the requirement of law and guidelines issued by the regulatory authorities.

Internal Control over financial reportingThe board is fully committed to ensure the existence of an effective system of internal control in the bank and continuously reviews and evaluates the adequacy and integrity of those systems. However, the board recognizes that such systems are designed to manage rather than eliminate the risks identified to acceptable levels. Therefore, the systems implemented can provide only reasonable and not absolute assurance against the occurrence of any material misstatement and loss.

Whilst the Board has overall responsibility for the bank’s system of internal controls, it has delegated the implementation of these internal control systems to the management in order to identify risk and take action to mitigate the risk. These internal control systems are subject to the board’s regular review with a view towards appraising the effectiveness of these systems in the bank.

DepositsDespite all the impediments, the deposit portfolio of the Bank was increased to Rs.4,770 million as on December 31, 2015.

Disbursements Liquidity constraints notwithstanding, the bank was able to achieve disbursement of Rs 1,994 million during the year as compared to Rs 1,836 million in the previous year. The number of clients served during the year was 477 and total number of outstanding borrowers stood at 1,612 at the year end.

Leasing Business SME Leasing Limited, a subsidiary of the Bank incorporated in 2002, has posted a loss before tax of Rs 21.106 million as compared to loss of Rs 10.58 million from last year. Net equity of the company is 174 million (2014: Rs 190 million). JCR-VIS has retained the long term credit rating to BB- (Double B minus) and short term rating of B (B) with stable outlook. Bank provides financing facility to SME leasing on mark-up basis as and when required.

SME Leasing disbursed Rs 45.79 million (2014: Rs 256.5 million) to 11 clients (2014: 46). Outstanding lease portfolio stands at Rs 443 million with 323 clients.

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Training & HR DevelopmentFor enhancement of skill/knowledge base of human capital available for specialised tasks, necessary training and skill development activities were carried out for the staff on the basis of training need assessment.

Information TechnologySME Bank’s Management is fully aware about the importance of IT enabled banking services in the success of the Bank and has invested substantially to upgrade its IT infrastructure to meet the ever changing challenges related to systems, database, application and network security; a prerequisite for launching technology driven products and offering quality services to the Bank’s customers.

SMS Alert service has been rolled out after stabilization phase and has become an earning avenue for the Bank. SME Bank’s website has been revamped to reflect the vibrancy in the Bank and to provide Bank’s potential customers a channel to communicate with our business functions for guidance & support.

Multiple new projects are also in the pipeline to improve the business processes through use of technology and to launch advanced products to empower the bank in overcoming its handicap due to limited branch network.

Basel II & III In 2012, State Bank of Pakistan advised all banks to submit their information for Quantitative Impact Study (QIS) – Basel III. SME Bank has applied for exemption from submission of this statement on the basis of already granted exemption from Basel II; Now State bank has granted exemption to the Bank from implementation of Basel II & III till its Restructuring/Privatization due to large investment required in software, human resource, training, etc.

Capital Adequacy ReturnBank is required to maintain CAR ratio at 10%.During the year ended on December 31, 2015 the CAR of the bank has reduced from prescribed limit. Bank has applied for exemption from maintaining the CAR below benchmark. SBP has granted the exemption in meeting the minimum CAR requirements till June 30, 2016. Income TaxesTax Department served notices regarding Income Tax pertaining to tax years 2003, 2004, 2005, 2008, 2010, 2012 and 2014. Bank has filed appeals with Appellate Tribunal for the Tax years 2008 & 2010 among which tax demand for the Tax Year 2008 is in process for adjustment and settlement against tax year 2007 and 2009. Whereas for the tax years 2003, 2004 Tax Department has filed reference in The Islamabad High Court against the decisions of the Appellate Tribunal & for the tax year 2005 tax department has filed an appeal with Appellate Tribunal against the decision. For the tax year 2012 appeal filed by the bank with the Commissioner (Appeals) who remanded back the case to DCIR. Tax Year 2014 is selected for audit and DCIR has desired certain information in this regard which is in process. Tax Department also served notices regarding sales tax pertaining to tax years 2008, 2009, 2010 and 2011-2012. Bank replied these notices and contested the cases but tax authorities passed orders against the bank. The bank filed appeal with Appellate Tribunal against these orders and obtained stay against recovery. Tax year 2008 and 2010 have been remanded back for fresh consideration of the cases.

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Risk Management FrameworkTo comply with SBP guidelines on Risk Management during the year 2015 risk function of the Bank was made more robust.

Whilst the State Bank has exempted the Bank from implementation of Basel-II till its privatization lending decisions are subjected to extensive and diligent credit risk evaluation and assessment process. Obligor, facility and guarantor internal credit risk rating system is in place and regular part of credit processing. Keeping in view the nature of SME lending, quick turn around time and efficiency, credit risk officers have been placed at branch level where ever feasible. Above a certain limit fixed for every branch, proposals are being reviewed at Head Office. Compliance with the State Bank’s regulations, policies and Bank’s own credit policies are ensured through risk review function.

The management endeavours that bank’s operation and credit activities conform to the prudential regulations and SBP instructions are strictly followed and efforts are consistently made to incorporate good business practices in fulfilling the risk function.

Privatization of BankThe Bank is on agenda of privatization by Privatization Commission (PC) since 2006. The process of privatization initiated in the year 2007.Financial Adviser was appointed by Privatization Commission in March 2007 who processed the transaction. Expression of interest was solicited in 2008. Received 18 Expression of Interests from the interested investors. Shortlisted firms/companies were in process of due diligence, when State Bank of Pakistan raised minimum Paid up Capital requirements for all locally incorporated banks to Rs. 23 billion (net of losses). The decision of the SBP adversely affected feasibility of the transaction. The interested investor could not keep remain their interest in the transaction resultantly the transaction was suspended by the Government of Pakistan.

Privatization of SME Bank reactivated in 2015 by the Privatization Commission. Financial Adviser for privatization of the bank has been appointed. Agreements are being executed with the appointed Financial Adviser.

Board of DirectorsBoard of Directors consists of seven directors nominated by the Federal Government; however, two positions of independent directors remained vacant during the year. Board meets frequently and ensures to meet at least every quarter.

Board held five meetings during 2015; attendance of which is given hereunder:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 5Mr. Muhammad Tanveer Butt 5Mr. Zarar Haider 5Mr. Muhammad Alamgir Chaudhry 4Mr. Ihsan ul Haq Khan 5Mr. Badr-ul-Arifeen - (Newly Inducted) Board has constituted five sub-committees namely Audit Committee, Risk Management Committee, Human Resource Committee, Nomination Committee and Procurement Committee.

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Audit CommitteeThis committee consists of three non-executive directors and has been formed to assist the Board in fulfilling its statutory and fiduciary responsibilities. This committee is advisory in nature and does not perform any management function. It assists the Board in discharging its responsibilities and in complying with good governance. During the year 2015, five meetings of Board Audit Committee were held. Attendance in these meetings was as follows: Directors Meetings AttendedMr. Muhammad Adnan Jalil 5Mr. Muhammad Tanveer Butt 5Mr. Zarar Haider 5

Risk Management CommitteeThis Committee consists of three non-executive directors and it assists the Board in measurement and mitigation of different risks. During the year 2015, four meetings of Board Risk Management Committee were held. Attendance in these meetings was as follows:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 4Mr. Muhammad Tanveer Butt 4Mr. Muhammad Alamgir Chaudhry 4

Human Resource CommitteeBoard Human Resource Committee comprising three directors has been formed to assist the Board in all staff related matters, policies and benefits including compensation. During the year 2015, four meetings of Board Human Resource Committee were held. Attendance in these meetings was as follows:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 4Mr. Muhammad Tanveer Butt 4Mr. Ihsan ul Haq Khan 4

Procurement CommitteeBoard procurement Committee comprising three directors has been formed to prepare, review and recommend to the Board, procurement related policies to ensure transparency in procurement transactions and in dealing with suppliers. During the year 2015, no meeting of Board Procurement Committee was held. Nomination CommitteeThis Committee consists of two non-executive directors and it assists the Board in identification and recommendation of independent directors on the Board. It meets on need basis. No meeting was held of Board nomination Committee during the year 2015.

Corporate Governance and Financial Reporting FrameworkSME Bank is committed to observe good corporate governance and has adopted the recently promulgated governance framework for pubic sector companies. The Directors have ensured that adequate arrangements are made to meet the financial recording and reporting parameters and are pleased to state that:

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• proper books of accounts as required by Companies Ordinance have been maintained;

• applicable international financial reporting standards have been followed in preparation of annual accounts;

• the accounts have been prepared on going concern basis and the Bank has adopted prudent accounting policies and used sound accounting estimates;

• Appropriate accounting policies have been consistently applied in preparation of financial statements and accounting estimates. Any departure has been adequately disclosed and explained;

• the financial statements prepared by the management of the Bank present fairly, state of affairs of the Bank as at December 31, 2015, the results of its operations for the period then ended, cash flow and changes in equity;

• the appointment of chairman and other members of board and the terms of their appointment along with the fee/remuneration adopted are in the best interests of the Bank as well as in line with the best practices.

• appropriate systems of internal control have been put in place for managing significant risks, with adequate arrangements for its effective implementation, continuous review and monitoring;

• the Board of Directors is satisfied with Bank’s ability to continue as a going concern;

• there are no outstanding statutory payments on account of taxes, duties and levies as on December 31, 2015, except as disclosed in the financial statements;

• the value of investments held for staff funds is reflected in note 34 of notes to the accounts;

• Bank has complied with the provisions of Public Sector Companies (Corporate Governance) Rules, 2013 and there has been no material departure from the best practices of corporate Governance.

• Key Operating and financial data of last six years is available in annual Reports.

Shareholding PatternThe statement showing pattern of shareholding as at December 31, 2015, as required under Code of Corporate Governance is annexed.

Loss per shareThe basic and diluted after tax loss per share for the year 2015 is Rs. (1.18). (2014: Rs.(1.62)

AuditorsThe existing auditors, M/s KPMG Taseer Hadi & Co, Chartered Accountants, will retire at conclusion of 14th Annual General Meeting.

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AppreciationWhile the Board appreciates the efforts of the management and staff trying to steer the Bank out of the current situation, it also highlights the need of more efforts for improving the recovery drive and for enhancing disbursements. The Board would also like to thank State Bank of Pakistan and other regulatory authorities for their continued support and guidance and the shareholders for the trust and confidence reposed in us.

_______________Chairman

(of the meeting)

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Shareholding Patter n

The pattern of shareholiding as at December 31, 2015 is given below ;

Sr. # Categories of Shareholders No. of Share-

holderShares held %

1 Federal Government 1 224,615,978 93.88

2 Banks 6 14,634,715 6.12

3 Individuals 7 7 -

Total 14 239,250,700 100

Government of Pakistan is the only shareholder holding 10% or more voting interests.Position of shareholding by each director is as under:

Name of Directors No. of Share (s)

1 Mr. Muhammad Adnan Jalil 01

2 Mr. Ihsan ul Haq Khan 01

3 Mr. Muhammad Alamgir Chaudhry 01

4 Mr. Zarar Haider 01

5 Mr. Badr-ul-Arifeen 01

6 Mr. Majyd Aziz Balagamwala (retired since Jan 23, 2013) 01

7 Mr. Zahid Oosman (retired since March 06, 2014) 01

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Statement of Compliancewith Public Sector Companies (Corporate Governance) Rules, 2013For the year ended December 31 , 2015

SCHEDULE I[See paragraph 2(1)]

SME Bank LimitedYear Ending December 31, 2015

I. This statement is being presented to comply with Regulation G-1 of the Prudential Regulations for Corporate/ Commercial Banking issued by State Bank of Pakistan and the Public Sector Companies (Corporate Governance) Rules, 2013 (hereinafter called “the Rules”) issued for the purpose of establishing a framework of good governance, whereby a public sector company is managed in compliance with the best practices of public sector governance.

II. SME Bank Ltd (the Bank) has complied with the provisions of the Rules in the following manner:

Sr. No.

Provision of the Rules Rule No.

Y N Remarks

Tick the relevant box

1. The independent Directors meet the criteria of independence, as defined under the Rules.

2(d)

2. Board has the requisite percentage of independent Directors. At pres-ent the Board includes:

Category Names Date ofAppointment

Independent Directors*

Mr. Muhammad Adnan Jalil 23-07-12

Executive Directors

Mr. Ihsan ul Haq Khan 27-05-14

Non-Execu-tive Directors

Mr. Zarar HaiderMr.Muhammad Alamgir ChaudhryMr. Badr-ul-Arifeen

16-07-201310-11-201427-10-2015

3(2) Government of Pakistan has not nominated direc-tors as a result of which two seats of independent direc-tors are vacant.

3. A casual vacancy occurring on the Board was filled up by the Directors within ninety days.

3(4)

Government of Pakistan (GoP) has not yet nominated Directors to fill casual vacancies.

4. The Directors have confirmed that none of them is serving as a director on more than five public sector companies and listed companies simultaneously except their subsidiaries.

3(5)

5. The appointing authorities have applied the fit and proper criteria given in the Annexure in making nominations of the persons for elec-tion as Board members under the provisions of the Ordinance.

3(7) All the nomination on the Board of Directors are made by the GoP.

6. The chairman of the Board is working separately from the chief executive of the Bank.

4(1) The Bank currently does not have Chairman of the Board of Direc-tors.

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7. The chairman is elected/appointed from amongst the independent Directors.

4(4) The Bank currently does not have Chairman of the Board of Direc-tors.

8. Board has evaluated the candidates for the position of the Chief Executive on the basis of the fit and proper criteria as well as the guidelines specified by the Commission.

5(2) Federal Govern-ment has ap-pointed CEO and SBP has cleared him under Fit and Proper Criteria.

9. (a) The Bank has prepared a “Code of Conduct” and has en-sured that appropriate steps have been taken to disseminate it throughout the Bank along with its supporting policies and procedures, including posting the same on the Bank’s website (www.smebank.org).

(b) The Board has set in place adequate systems and controls for the identification and redressal of grievances arising from unethical practices.

5(4)

10. The Board has established a system of sound internal control, to ensure compliance with the fundamental principles of probity and propriety; objectivity, integrity and honesty; and relationship with the stakeholders, in the manner prescribed in the Rules.

5(5)

11. The Board has developed and enforced an appropriate conflict of interest policy to lay down circumstances or considerations when a person may be deemed to have actual or potential conflict of inter-ests, and the procedure for disclosing such interest.

5(5)(b)(ii)

12. The Board has developed and implemented a policy on anti-corruption to minimize actual or perceived corruption in the Bank.

5(5)(b)(vi)

13. (a) The Board has ensured equality of opportunity by es-tablishing open and fair procedures for making appoint-ments and for determining terms and conditions of ser-vice.

(b) A committee/department has been formed to investigate deviations from the Bank’s code of conduct.

5(5)(c)(ii)

14. The Board has ensured compliance with the law as well as the Bank’s internal rules and procedures relating to public procurement, tender regulations, and purchasing and technical standards, when dealing with suppliers of goods and services.

5(5)(c)(iii)

15. The Board has developed a vision or mission statement, corporate strategy and significant policies of the Bank. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained.

5(6)

16. The Board has quantified the outlay of any action in respect of anyService delivered or goods sold by the Bank as a public service obliga-tion, and has submitted its request for appropriate compensation to the Government for consideration.

5(8) None

17. (a) The Board has met at least four times during the year.(b) Written notices of the Board meetings, along with

agenda and working papers, were circulated at least seven days before the meetings.

(c) The minutes of the meetings were appropriately re-corded and circulated.

6(1) 6(2)

6(3)

http://www.smebank.org

19

18. The Board has carried out performance evaluation of its members,Including the chairman and the chief executive, on the basis of a process, based on specified criteria, developed by it.

The Board has also monitored and assessed the performance of senior management on annual/half-yearly/quarterly basis.

8

Performance of management is as-sessed on quarterly basis while review-ing quarterly ac-counts.

19. The Board has reviewed and approved the related partyTransactions placed before it after recommendations of the audit committee. A party wise record of transactions entered into with the related parties during the year has been maintained.

9

20. The Board has approved the profit and loss account for, andBalance sheet as at the end of, the first, second and third quarter of the year as well as the financial year end, and has placed the annual financial statements on the Bank’s website. Monthly ac-counts were also prepared and circulated amongst the Board mem-bers.

10

21. All the Board members underwent an orientation course arranged by the Bank to apprise them of the material developments and informa-tion as specified in the Rules.

11 Except Mr. Badr-ul-Arifeen who joined the Board on October 27, 2015.

22. a. The Board has formed the requisite committees, as speci-fied in the Rules.

b. The committees were provided with written term of ref-erence defining their duties, authority and composition.

c. The minutes of the meetings of the committees were circulated to all the Board members.

d. The committees were chaired by the following non-executive Directors:

Committee Number of members Name of Chair

Audit Committee 3 Mr. Muhammad Adnan Jalil

Risk Management Committee 3 Mr. Badr-ul-Arifeen

Human Resources Committee 3 Mr. Muhammad

Adnan Jalil

Procurement Committee 3 No meetings were held during the year

Nomination Committee 2 No meetings were held during the year

12

23. The Board has approved appointment of Chief Financial Officer,Bank Secretary and Chief Internal Auditor, with their remuneration and terms and conditions of employment, and as per their prescribed qualifications.

13(1) Currently post of Chief Internal Auditor is vacant.

24. The Bank has adopted International Financial Reporting Standards notified by the Commission under clause (i) of sub- section (3) of section 234 of the Ordinance.

16

20

______________________ ______________________ Ihsan ul Haq Khan Zarar Haider CEO Director

26. The Directors, CEO and executives do not hold any interest in the shares of the Bank other than that disclosed in the pattern of shareholding.

18

27. A formal and transparent procedure for fixing the remuneration packages of individual Directors has been set in place. The annual report of the Bank contains criteria and details of remuneration of each director.

19

28. The financial statements of the Bank were duly endorsed by the chief executive and chief financial officer, before approval of the Board.

20

29. The Board has formed an audit committee, with defined and written terms of reference, and having the following members:

Name of member Category Professional background

Mr. Muhammad Adnan Jalil Independent Businessman

Mr. Badr-ul-Arifeen Non-Executive Deputy Secretary – Ministry of Finance

Mr. Zarar Haider Non-Executive

Joint Secretary – Ministry of Industries & Production

The chief executive and chairman of the Board are not members of the audit committee.

21

30. The Board has set up an effective internal audit function, which has an audit charter, duly approved by the audit committee, and which worked in accordance with the applicable standards.

22 However as mentioned earlier currently post of Chief Internal Auditor is vacant.

31. The Bank has appointed its external auditors in line with the requirements envisaged under the Rules.

23

32. The external auditors of the Bank have confirmed that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on Code of Ethics as applicable in Pakistan.

23(4)

33. The external auditors have not been appointed to provide non-audit services and the auditors have confirmed that they have observed applicable guidelines issued by IFAC in this regard.

23(5)

34. The Bank has complied with all the corporate and financial Reportingrequirements of the Rules.

25. The Directors’ report for this year has been prepared inCompliance with the requirements of the Ordinance and the Rules and fully describes the salient matters required to be disclosed.

17

26. The Directors, CEO and executives do not hold any interest in the shares of the Bank other than that disclosed in the pattern of share-holding.

18

27. A formal and transparent procedure for fixing the remuneration packages of individual Directors has been set in place. The annual report of the Bank contains criteria and details of remuneration of each director.

19

28. The financial statements of the Bank were duly endorsed by the chief executive and chief financial officer, before approval of the Board.

20

29. The Board has formed an audit committee, with defined and written terms of reference, and having the following members:

Name of member Category Professional

Mr. Muhammad Adnan Jalil Independent Businessman

Mr. Badr-ul-Arifeen Non-Executive Deputy Secretary – Ministry of Finance

Mr. Zarar Haider Non-ExecutiveJoint Secretary – Ministry of Industries & Production

The chief executive and chairman of the Board are not members of the audit committee.

21

30. The Board has set up an effective internal audit function, which has an audit charter, duly approved by the audit committee, and which worked in accordance with the applicable standards.

22

However as men-tioned earlier cur-rently post of Chief Internal Auditor is vacant.

31. The Bank has appointed its external auditors in line with the requirements envisaged under the Rules.

23

32. The external auditors of the Bank have confirmed that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on Code of Ethics as applicable in Pakistan.

23(4)

33. The external auditors have not been appointed to provide non-audit services and the auditors have confirmed that they have observed applicable guidelines issued by IFAC in this regard.

23(5)

34. The Bank has complied with all the corporate and financial Re-porting requirements of the Rules.

______________________ ______________________Ihsan ul Haq Khan Zarar Haider

CEO Director

21

Explanation for Non-Compliance with Public Sector Companies (Corporate Governance) Rules, 2013For the year ended December 31 , 2015

Explanation for Non-Compliance with thePublic Sector Companies (Corporate Governance) Rules, 2013

We confirm that all other material requirements envisaged in the Rules have been complied with except for the following, toward which reasonable progress is being made by the company to seek compliance by the end of next accounting year:

Sr.No.

Rule/sub-rule no.

Reasons for non-compliance Future course of action

1 3(2) Government of Pakistan has not nominated directors as a result of which two seats of independent directors are vacant.

Appointment by Federal Government is awaited.

2 3(4) Government of Pakistan has not nominated directors to fill casual vacancies.


3 4(1) & 4(4) Government of Pakistan has not nominated a chairman of the Board of Directors of the Bank.


4 5(5)(b)(ii) A separate policy for Conflict of Interest is not established, currently code of conduct is referred for conflict of interest.

Process to establish a separate policy is expected to be completed soon.

5 5(5)(b)(vi) A separate anti-corruption policy for the Bank is not established.

Process to establish a separate policy is expected to be completed soon.

6 11 An orientation course of all directors was conducted on October 31, 2015. All directors attended the course on that time expect Mr. Bard-ul-Arifeen who’s FPT was cleared by SBP on October 27, 2015.

Courses will be arranged in next year.

7 13(1) Post for Chief Internal Auditor is currently vacant.

Process for appointment of Chief Internal Auditor is underway.

______________________ ______________________Ihsan ul Haq Khan Zarar Haider CEO Director

22

The management of SME Bank recognizes its responsibility to establish and maintain a sound system of internal controls to provide reasonable assurance to achieve the following objectives.

• Efficiency and effectiveness of operations• Compliance with applicable laws and regulations• Reliability of financial reporting

The internal control system encompasses policies and procedures relating to all processes, products and activities of the Bank’s operations. The internal control policies and procedures are being reviewed by an independent internal audit function reporting directly to the Audit Committee of the Board of Director.

In management’s assessment, these systems, policies and procedures provide reasonable assurance as to the integrity and reliability of those controls and reports produced thereon. It recognizes the fact that these system are designed to mitigate and manage, rather than eliminate the risk of failure to achieve business objectives.

The board is fully committed to ensure the existence of an effective system of internal control and risk management and continuously reviews and evaluates the adequacy and integrity of those systems.

Internal Control over Financial Reporting (ICFR) aims to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the applicable financial reporting standards. We have endeavored to follow the guidelines issued by State Bank of Pakistan on Internal Control.

State Bank of Pakistan has granted exemption to SME Bank Ltd from submitting Long Form Report by its Statutory Auditors, with the condition that if any material gap on bank’s ICFR are reported by its inspection team/or Board Audit Committee ,then this exemption will be revoked. The SBP also advised to submit the Annual Assessment report on efficacy of ICFR through Board Audit committee to OSED.

Moreover SBP also advised to apprise its Board of Directors to take ownership of ICFR and Board Audit Committee to monitor progress and submit a detailed quarterly progress report regarding bridging of gaps to SBP

The Bank has revised the internal control policy in the year 2015 which emphasis that Management of the bank is responsible for maintaining a suitable system of ICFR that provides reasonable assurance regarding the reliability of financial reporting. The management should use a top down, risk-based approach, including the entity level and activity level controls in assessing financial reporting risks and the adequacy of controls

Chief Financial Officer

Statement of Inter nal ControlFor the year ended December 31 , 2015

23

Review Report to the Members on Statement of Compliance with the Public Sector Companies (Corporate Governance) Rules, 2013

We have reviewed the enclosed Statement of Compliance with the best practices contained in Public Sector Companies (Corporate Governance) Rules, 2013 (“the Code”) prepared by the Board of Directors of SME Bank Limited (“the Bank”) for the year ended 31 December 2015 to comply with Regulation G-1 of the Prudential regulations for Corporate I Commercial Banking issued by State Bank of Pakistan and the requirements of provisions of Public Sector Companies (Corporate Governance) Rules, 2013.

The responsibility for compliance with the Code is that of the Board of Directors of the Bank. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Bank’s compliance with the provisions of the Code and report if it does not, and to highlight any noncompliance with the requirements of the Code. A review is limited primarily to inquiries of the Bank’s personnel and review of various documents prepared by the Bank to comply with the Code.

As part of our audit of the financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an opinion on the effectiveness of such internal controls, the Bank’s corporate governance procedures and risks.

The Code requires the Bank to place before the Audit Committee, and upon recommendation of the Audit Committee, place before the Board of Directors for their review and approval of its related party transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm’s length transactions and transactions which are not executed at arm’s length price and recording proper justification for using such alternate pricing mechanism. We are only required and have ensured compliance of this requirement to the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the Audit Committee. We have not carried out any procedures to determine whether the related party transactions were undertaken at arm’s length price or not. Moreover, the Code also requires the Board to ensure compliance with the law as well as the Bank’s internal rules and procedures relating to public procurement, tender regulations, and purchasing and technical standards, when dealing with suppliers of goods and services, in accordance with the PPRA Rules. We have not carried out any procedures to verify the compliance with the above stated requirements of PPRA Rules.

Based on our review, nothing has come to our attention, which causes us to believe that the Statement of Compliance does not appropriately reflect the Bank’s compliance, in all material aspects with the Code as applicable to the Bank for the year ended 31 December 2015.

Further, we highlight instances of non-compliance with the requirements of the Code as reflected in Schedule II to the Statement of Compliance.

Islamabad05 March 2016

KPMG Taseer Hadi & Co.Chartered AccountantsEngagement PartnerSyed Bakhtiyar Kazmi

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25

SME BANK LIMITEDFINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2015

27

Auditors ’ Repor t to the MembersFor the year ended December 31 , 2015

We have audited the annexed unconsolidated statement of financial position of SME Bank Limited (“the Bank”) as at December 31, 2015 and the related unconsolidated profit and loss account, unconsolidated statement of comprehensive income, unconsolidated cash flow statement and unconsolidated statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the ‘financial statements’) for the year then ended, in which are incorporated the unaudited certified returns from the branches except for 10 branches which have been audited by us and we state that except for the matter as stated in paragraph a) below, we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the Bank’s Board of Directors to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on our audit.

Except for the matter as stated in paragraph a) below, we conducted our audit in accordance with the International Standards on Auditing as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our qualified opinion and, after due verification, which in the case of loans and advances covered more than 60% of the total loans and advances of the Bank, we report that:

a) The Bank has investment in SME Leasing Limited (SMEL) which is carried in these financial statements at Rs.70.2 million and has outstanding running finance exposure of Rs.126.8 million at the balance sheet date. SMEL continues to operate on a net loss basis and therefore the recoverability of investment and running finance exposure appears doubtful of recovery. Management has shared with us its assessment of the recoverability of investment and running finance however this does not take into account certain necessary factors. Accordingly we are unable to determine whether any impairment might be necessary against the carrying amount of the Bank’s investment and running finance exposure in SMEL and its possible effect on accumulated loss and capital adequacy ratio as at 31 December 2015.

b) Other assets include Trade Rights Entitlement Certificate (TREC) of Lahore Stock Exchange Limited having carrying amount of Rs.16.17 million. The State Bank of Pakistan had allowed the bank to record a provision of 25% against the carrying amount of TREC upto March 2015, and if the matter is not resolved to record 100% provision thereafter. However, the bank has recorded impairment only to the extent of 25% of the value of TREC. Had the provision been recorded at 100%, loss after tax for the year and accumulated losses would have increased by Rs.16.17 million; resulting in net loss after tax for the year to be Rs.298.33 million and capital adequacy ratio of the bank as at 31 December 2015 would have reduced by 0.43%.

c) Except for the possible effects of the matters stated in paragraphs (a) and (b) above, in our opinion, proper books of account have been kept by the Bank as required by the Companies Ordinance, 1984 (XLVII of 1984), and the returns referred to above received from the branches have been found adequate for the purposes of our audit;

28

d) in our opinion:

i) except for the possible effects of the matters stated in paragraphs (a) and (b) above, the unconsolidated statement of financial position and unconsolidated profit and loss account together with the notes thereon have been drawn up in conformity with the Banking Companies Ordinance, 1962 (LVII of 1962) and the Companies Ordinance, 1984 (XLVII of 1984), and are in agreement with the books of account and are further in accordance with accounting policies consistently applied except for the changes as stated in note 5 to the financial statements with which we concur;

ii) the expenditure incurred during the year was for the purpose of the Bank’s business; and

iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Bank and the transactions of the Bank which have come to our notice have been within the powers of the Bank;

e) except for the possible effects of the matters stated in paragraphs(a) and (b) above, in our opinion and to the best of our information and according to the explanations given to us, the unconsolidated statement of financial position, unconsolidated profit and loss account, unconsolidated statement of comprehensive income, unconsolidated cash flow statement and unconsolidated statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and give the information required by the Banking Companies Ordinance, 1962 (LVII of 1962) and the Companies Ordinance, 1984 (XLVII of 1984), in the manner so required and respectively give a true and fair view of the state of the Bank’s affairs as at December 31, 2015 and its true balance of the loss, its cash flows and changes in equity for the year then ended; and

f) in our opinion, Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the Bank and deposited in the Central Zakat Fund established under section 7 of that Ordinance.

Without further qualifying our opinion, we draw attention to note 6.4 in the unconsolidated financial statements with indicates that the Bank continues to operate in net loss situation and notwithstanding the matters referred to in paragraphs (a) and (b) above, has incurred a net loss after tax of Rs.282.16 million and its accumulated losses stand at Rs.2.296 billion as of the reporting date. Furthermore, the Bank has a shortfall of Rs.1.904 billion on 31 December 2015 in meeting the minimum capital requirement of Rs.2 billion (net of losses) as prescribed by the State Bank of Pakistan (SBP) on the basis of amounts reported in the unconsolidated statement of financial position. These conditions, along with other matters as set forth in note 6.4, indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern.

We draw attention to note 14.2 of the financial statements, wherein matter relating to recording of property amounting to Rs. 138.6 million and the status of the related legal proceedings has been explained. Our opinion is not qualified on the matter.

Islamabad KPMG Taseer Hadi & Co.05 March 2016 Chartered Accountants Engagement Partner Syed Bakhtiyar Kazmi

29

Note 2015 2014

ASSETSCash and balances with treasury banks 7 390,011 366,783 Balances with other banks 8 1,739 2,835 Lendings to financial institutions 9 885,000 215,000 Investments 10 4,117,491 1,446,493 Advances 11 2,751,710 2,928,737 Operating fixed assets 12 120,283 131,490 Deferred tax assets 13 - - Other assets 14 350,292 209,014

8,616,526 5,300,352 LIABILITIES

Bills payable 15 114,107 58,298 Borrowings 16 2,888,685 776,168 Deposits and other accounts 17 4,770,201 3,343,102 Other liabilities 18 487,217 433,418

8,260,210 4,610,986 NET ASSETS 356,316 689,366

REPRESENTED BYShare capital 19 2,392,507 2,392,507 Reserves 20 206,526 206,526 Unappropriated loss 20 (2,296,206) (1,972,670)

302,827 626,363 Surplus on revaluation of assets 21 53,489 63,003

356,316 689,366

CONTINGENCIES AND COMMITMENTS 22

(Rupees in '000)

The annexed notes from 1 to 41 and annexure form an integral part of these unconsolidated financial statements.

Statement of Financial Posit ionFor the year ended December 31 , 2015

President/Chief Executive Director Director Director

30

Note

Mark-up/ return/ interest earned 23 705,267 788,780 Mark-up/ return/ interest expensed 24 436,280 542,594 Net mark-up/ interest income 268,987 246,186

Provision against non-performing loans and advances-net 11.5 (62,867) 66,394 Provision for diminution in the value of investments 10.4 - 11,702 Bad debts written off directly - -

(62,867) 78,096 Net mark-up/ interest income after provisions 331,854 168,090

NON MARK-UP/ INTEREST INCOME

Fee, commission and brokerage income 11,022 10,586 Dividend income 1,395 906 Income from dealing in foreign currencies - - Gain on sale of securities 25 32,536 73,434 Unrealized gain on revaluation of investments classified as held for trading - - Other income 26 2,981 2,602 Total non-markup/ interest income 47,934 87,528

379,788 255,618

NON MARK-UP/ INTEREST EXPENSES

Administrative expenses 27 645,250 596,050 Other provisions/ write offs 14.4 & 12.2 8,282 37,068 Other charges 28 826 831 Total non-markup/ interest expenses 654,358 633,949 LOSS BEFORE TAXATION (274,570) (378,331) Taxation - Current 29 7,587 8,742 - Prior - - - Deferred - -

7,587 8,742 LOSS AFTER TAXATION (282,157) (387,073) Unappropriated loss brought forward (1,972,670) (1,593,421) Effect of experience adjustments of staff retirement benefits (41,379) 7,824 Loss available for appropriation (2,296,206) (1,972,670)

Basic/diluted (loss) per share (Rupees) 30 (1.18) (1.62)


(Rupees in '000)2015 2014

Profi t and Loss AccountFor the year ended December 31 , 2015


31

Net loss after taxation (282,157) (387,073)

(41,379) 7,824 Comprehensive income transferred to equity (323,536) (379,249)

Net change on remeasurement of available for sale investment to fair value (9,514) 64,497 - -

(9,514) 64,497

Total comprehensive income (333,050) (314,752)


Deferred tax

2015

Items that will never be reclassified subsequently to profit and loss accountRecognition of net actuarial (loss)/gain

Components of comprehensive income not reflected in equity

2014 (Rupees in '000)

Statement of Comprehensive IncomeFor the year ended December 31 , 2015


32

2015

NoteCASH FLOW FROM OPERATING ACTIVITIES Loss before taxation (274,570) (378,331) Less: Dividend income (1,395) (906)

(275,965) (379,237) Adjustments for non-cash/ other items Depreciation 28,010 18,341 Amortization 733 1,084 (Reversal)/provision against non-performing advances (62,867) 66,394 Charge of provision for diminution in the value of investment - 11,702 Gain on sale of fixed asset (1,607) (1,156) Finance charges on leased assets - 104 Other provisions 8,282 37,068

- - (27,449) 133,537

(303,414) (245,700) (Increase)/ Decrease in operating assets Lendings to financial institutions (285,000) 200,000 Advances 239,894 (142,756) Other assets (excluding advance taxation) (149,560) 58,637

(194,666) 115,881 Increase/ (Decrease) in operating liabilities Bills payable 55,809 (27,477) Borrowings from financial institutions 2,112,517 (972,792) Deposits 1,427,099 (370,009) Other liabilities (excluding current taxation) 17,129 (19,935)

3,612,554 (1,390,213) 3,114,474 (1,520,032)

Income tax paid (12,296) (11,888) Net cash flow generated from / (used in) operating activities 3,102,178 (1,531,920) CASH FLOW FROM INVESTING ACTIVITIESNet (investment)/disinvestment in available-for-sale securities (2,658,825) 1,259,690 Net investment in held-to-maturity securities (21,687) - Dividend received 1,395 906 Investment in operating fixed assets (19,304) (55,482) Sale proceeds of property and equipment disposed-off 3,375 1,897 Net cash flow (used in) / generated from investing activities (2,695,046) 1,207,011 CASH FLOW FROM FINANCING ACTIVITIESPayment of lease obligations - (7,639) Net cash flow used in financing activities - (7,639) Increase/(Decrease) in cash and cash equivalents 407,132 (332,548) Cash and cash equivalents at beginning of the year 384,618 717,166 Cash and cash equivalents at end of the year 31 791,750 384,618

Bad debts written off directly

(Rupees in '000)

2014


Cash F low StatementFor the year ended December 31 , 2015


33

Share Capital Statutory reserve

Unappropriated loss Total

(Rupees in '000)

Balance as at January 01, 2014 2,392,507 206,526 (1,593,421) 1,005,612

Total comprehensive income for the year endedDecember 31, 2014

Net loss for the year ended December 31, 2014 - - (387,073) (387,073)

Effect of recognition of actuarial gain - - 7,824 7,824 Balance as at December 31, 2014 2,392,507 206,526 (1,972,670) 626,363

Total comprehensive income for the year endedDecember 31, 2015

Net loss for the year ended December 31, 2015 - - (282,157) (282,157)

Effect of recognition of actuarial loss - - (41,379) (41,379) Balance as at December 31, 2015 2,392,507 206,526 (2,296,206) 302,827


Statement of Change in EquityFor the year ended December 31 , 2015


34

Notes to the Financial StatementsFor the year ended December 31 , 2015

1. GENERAL INFORMATION

1.1 SME Bank Limited (the Bank) is a public limited company incorporated in Pakistan on October 30, 2001 under the Companies Ordinance, 1984 having its registered office at 56-F, Nazim-ud-Din Road, F-6/1, Blue Area Islamabad. The Bank obtained its business commencement certificate on April 16, 2005 which became effective from the date of its issue. The Bank is a Scheduled Commercial Bank engaged in the business of banking with the primary objective to support and develop Small and Medium Enterprise (SME) sector in Pakistan by providing necessary financial assistance and business support services on sustainable basis. The Bank is operating through a network of 13 Commercial banking branches. Based on the latest credit rating report dated February 11, 2015 issued by PACRA Credit Rating Company Limited, credit rating of the Bank was “BB” (Double B) in the long term and “B” (Single B) in the short term.

In terms of the provisions of the State Bank of Pakistan BSD circular No. 7 of 2009, the Bank was required to increase its paid up capital (net of losses) as at December 31, 2014 up to Rs. 10 billion. The State Bank of Pakistan (SBP) has granted exemption from meeting the enhanced Minimum Capital Requirement and the Bank is allowed to operate with minimum paid up capital (net of losses) of Rs. 2 billion till privatization of the Bank. Further State Bank of Pakistan also has granted extension to the Bank till 30 June 2016, from meeting the reduced requirement of maintaining minimum paid up capital (net of losses) of Rs. 2 billion.

1.2 Amalgamation of defunct RDFC and SBFC

The Federal Government promulgated the Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) Amalgamation and Conversion Ordinance, 2001 (the Ordinance 2001) setting forth the mechanism of amalgamation of defunct RDFC and SBFC. Both these entities were Development Financial Institutions (DFIs). In pursuance of the Ordinance 2001, Finance Division, Ministry of Finance issued an Order (SRO (1) 2001) dated December 29, 2001 setting forth the scheme of amalgamation of RDFC and SBFC with the Bank effective January 1, 2002. Pursuant to this scheme entire assets and liabilities of defunct RDFC and SBFC as at December 31, 2001 were transferred to the Bank at fair value. These two institutions stand dissolved and ceased to exist effective January 1, 2002. The Bank allotted its shares to the share holders of defunct RDFC and SBFC in proportion to their shareholding therein based on the fair value of net assets of defunct RDFC and SBFC on December 31, 2001.

2. BASIS OF PRESENTATION

2.1 These unconsolidated financial statements have been presented in accordance with the requirements of format prescribed by the State Bank of Pakistan’s BSD Circular No. 4 dated February 17, 2006.

2.2 These unconsolidated financial statements are separate financial statements of the Bank in which the investment in subsidiary is stated at cost and has not been accounted for on the

35


basis of reported results and net assets of the investees which is done in consolidated financial statements.

2.3 Items included in the unconsolidated financial statements are measured using the currency of the primary economic environment in which the Bank operates. The unconsolidated financial statements are presented in Pak. Rupee, which is the Bank’s functional currency. Figures have been rounded off to the nearest thousand of rupees unless otherwise stated.

3. STATEMENT OF COMPLIANCE

3.1 These unconsolidated financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB) , provisions of and directives issued under the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962 and the directives issued by the State Bank of Pakistan. In case requirements differ, the provisions of and directives issued under the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 and the directives issued by the State Bank of Pakistan shall prevail.

International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”, International Accounting Standard 40, “Investment Property” and International Financial Reporting Standard 7,”Financial Instruments: Disclosure” are not applicable to banking companies in Pakistan. Accordingly, the requirements of these Standards have not been considered in the preparation of these unconsolidated financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by the State Bank of Pakistan through various circulars.

3.2 Standards, interpretations and amendments to approved accounting standards that are not yet effective

The following standards, amendments and interpretations of approved accounting standards will be effective for accounting periods beginning on or after 01 January 2016:

- Amendments to IAS 38 Intangible Assets and IAS 16 Property, Plant and Equipment (effective for annual periods beginning on or after 1 January 2016) introduce severe restrictions on the use of revenue-based amortization for intangible assets and explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. The rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate can be overcome only when revenue and the consumption of the economic benefits of the intangible asset are ‘highly correlated’, or when the intangible asset is expressed as a measure of revenue. The amendments are not likely to have an impact on Company’s unconsolidated financial statements.

- Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10

36

– Consolidated Financial Statements and IAS 28 – Investments in Associates and Joint Ventures) [effective for annual periods beginning on or after 1 January 2016) clarifies (a) which subsidiaries of an investment entity are consolidated; (b) exemption to present consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity; and (c) how an entity that is not an investment entity should apply the equity method of accounting for its investment in an associate or joint venture that is an investment entity. The amendments are not likely to have an impact on Company’s unconsolidated financial statements.

- Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11 ‘Joint Arrangements’ (effective for annual periods beginning on or after 1 January 2016) clarify the accounting for the acquisition of an interest in a joint operation where the activities of the operation constitute a business. They require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. The amendments are not likely to have an impact on Company’s unconsolidated financial statements.

- Amendment to IAS 27 ‘Separate Financial Statement’ (effective for annual periods beginning on or after 1 January 2016) allows entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is not likely to have an impact on Company’s unconsolidated financial statements.

- Agriculture: Bearer Plants [Amendment to IAS 16 and IAS 41] (effective for annual periods beginning on or after 1 January 2016). Bearer plants are now in the scope of IAS 16 Property, Plant and Equipment for measurement and disclosure purposes. Therefore, a company can elect to measure bearer plants at cost. However, the produce growing on bearer plants will continue to be measured at fair value less costs to sell under IAS 41 Agriculture. A bearer plant is a plant that: is used in the supply of agricultural produce; is expected to bear produce for more than one period; and has a remote likelihood of being sold as agricultural produce. Before maturity, bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment during construction. The amendments are not likely to have an impact on Company’s unconsolidated financial statements.

Annual Improvements 2012-2014 cycles (amendments are effective for annual periods beginning on or after 1 January 2016). The new cycle of improvements contain amendments to the following standards:

a) - IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 is amended to clarify that if an entity changes the method of disposal of an asset (or disposal group) i.e. reclassifies an asset from held for distribution to owners to held for sale or vice versa without any time lag, then such change in classification is considered as continuation of the original plan of disposal and if an entity determines that an asset (or disposal group) no longer meets the criteria to be classified as held for distribution, then it ceases held for distribution accounting in the same way as it would cease held for sale accounting.


37

b) - IFRS 7 ‘Financial Instruments- Disclosures’. IFRS 7 is amended to clarify when servicing arrangements on continuing involvement in transferred financial assets in cases when they are derecognized in their entirety are in the scope of its disclosure requirements. IFRS 7 is also amended to clarify that additional disclosures required by ‘Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS7)’ are not specifically required for inclusion in condensed interim financial statements for all interim periods.

c) - IAS 19 ‘Employee Benefits’. IAS 19 is amended to clarify that high quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid.

d) - IAS 34 ‘Interim Financial Reporting’. IAS 34 is amended to clarify that certain disclosures, if they are not included in the notes to interim financial statements and disclosed elsewhere should be cross referred.

The above amendments are not likely to have an impact on Company’s unconsolidated financial statements.

4. BASIS OF MEASUREMENT

4.1 These unconsolidated financial statements have been prepared under the historical cost convention as modified for certain investments which are carried at fair value, and defined benefit pension and gratuity plan, defined benefit unfunded gratuity scheme, unfunded compensated absences and benevolent fund which are carried at present value of defined benefit obligations net of fair value of plan assets, wherever applicable.

4.2 Use of critical accounting estimates and judgments

The preparation of unconsolidated financial statements in conformity with approved accounting standards as applicable in Pakistan requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The Bank uses estimates and assumptions concerning the future. The resulting accounting estimate will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are as follow:

i) classification of investments (note 5.2)ii) provision/ impairment against investments (note 5.2), advances (note 5.4) and other

assets (note 5.6)iii) valuation and impairment of available for sale securities (note 5.2 and 5.6)iv) useful life and residual value of property and equipments, intangible assets (note 5.5)v) taxation (note 5.8)vi) staff retirement benefits (note 5.9)


38

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The accounting policies adopted in the preparation of thses unconsolidated financial statements are consistent with those of the previous financial year, except for the following standards, which became effective during the year.

IFRS 10 - ‘Consolidated Financial Statements’

It replaces the current guidance on consolidation in IAS 27 - Consolidated and Separate Financial Statements. It introduces a single model of assessing control whereby an investor controls an investee when the investor has the power to control, exposure to variable returns and the ability to use its power to influence the returns of the investee.

SECP vide its notification SRO 633 (I)/2014 dated 10 July 2014, adopted IFRS 10 effective from the periods starting from 30 June 2014. However, vide its notification SRO 56 (I)/2016 dated 28 January 2016, provides the requirements of IFRS 10 will not be applicable with respect to investment in mutual funds established under Trust structure.

In light of the above, the application of IFRS 10 did not result in any additional investee being in control of the Company.

IFRS 13 - ‘Fair Value Measurement’

It consolidates the guidance on how to measure fair value into one comprehensive standard. It introduces the use of an exact price, as well as extensive disclosure requirements, particularly the inclusion of non financial instruments into the fair value hierarchy. The application of IFRS 13 does not have an impact on the unconsolidated financial statements of the Company except for certain disclosures as mentioned in note 37.

5.1 Cash and cash equivalents

Cash and cash equivalents comprise of cash and balances with treasury banks, balances with other banks and call money lendings.

5.2 Investments

Investments other than those categorised as held-for-trading are initially recognised at fair value which includes transactions costs associated with the investments. Investments classified as held-for-trading are initially recognised at fair value, and transaction costs are expensed in the profit and loss account.

All regular way purchases / sales of investment are recognised on the trade date, i.e., the date the Bank commits to purchase / sell the investments. Regular way purchases or sales of investment require delivery of securities within the time frame generally established by regulation or convention in the market place.


39

The Bank has classified its investment portfolio, except for investments in subsidiary into ‘held-for-trading’, ‘held-to-maturity’ and ‘available-for-sale’ as follows:

Held for trading

These are securities which are acquired with the intention to trade by taking advantage of short-term market / interest rate movements and are to be sold within 90 days. These are carried at market value, with the related unrealized gain / (loss) on revaluation being taken to profit and loss account.

Held to maturity

These represent investments acquired by the Bank with the intention and ability to hold them upto maturity. These are carried at amortized cost less impairment if any. Impairment in debt securities is determined in accordance with the requirements of Prudential Regulations issued by SBP.

Available for sale

These are investments that do not fall under the held-for-trading or held-to-maturity categories. These are carried at market value except in case of unquoted securities where market value is not available, which are carried at cost less provision for diminution in value, if any. Surplus / (deficit) on revaluation is taken to ‘surplus / (deficit) on revaluation of assets’ account shown below equity. Provision for diminution in value of investments in respect of unquoted shares is calculated with reference to book value of the same. On derecognition or impairment in quoted available-for-sale investments, the cumulative gain or loss previously reported as ‘surplus / (deficit) on revaluation of assets’ below equity is included in the profit and loss account for the period.

Provision for diminution in values of securities (other than term finance certificates) is made after considering impairment if any in their values, where the decline in prices of available for sale equity securities is significant or prolonged, it is considered impaired and included in unconsolidated profit and loss account. Provision for diminution in the value of term finance certificates is made as per Prudential Regulations issued by State Bank of Pakistan.

Held-for-trading and quoted available-for-sale securities are marked to market with reference to ready quotes on Reuters page (PKRV) or MUFAP or the Stock Exchanges, as the case may be.

Investment in subsidiary

Investment in subsidiary is carried at cost less impairment, if any. However the investment in subsidiary is not marked to market as per prudential regulations issued by SBP.


40

5.3 Agreements for sale and purchase of securities (repo and reverse repo)

Securities sold under repurchase agreement (repo) are retained in the unconsolidated financial statements as investments and a liability for consideration received is included in borrowings. The difference between sale and repurchase price is treated as mark-up expense and recognized over the period of contract.

Securities purchased under agreement to resell (reverse repo) are included in lendings to financial institutions. The difference between purchase and resale price is treated as mark-up income and recognized over the period of the contract.

5.4 Advances

Advances are stated net off specific and general provisions. Provisions are made in accordance with the requirements of Prudential Regulations issued by the SBP and charged to the profit and loss account. These regulations prescribe an age based criteria (as supplemented by subjective evaluation of advances by the banks) for classification of non-performing loans and advances and computing provision / allowance there against. Such regulations also require the Bank to maintain general provision / allowance against its Small Entity (SE) advances portfolio at specified percentage of such portfolio.

Advances are written off when there is no realistic prospect of recovery.

5.5 Capital work-in-progress, operating fixed assets, depreciation and amortization

Capital work-in-progress

Capital work-in-progress is stated at cost less impairment loss, if any. These are transferred to specific assets as and when assets are available for use.

Operating fixed assets-owned

These are stated at cost less impairment losses and accumulated depreciation except for leasehold land. Land is stated at cost less impairment, if any.

Maintenance and normal repairs are charged to unconsolidated profit and loss account as and when incurred. Major renewals and improvements are capitalized.

Depreciation

Depreciation is charged on straight line method at the rates given in note 12.2, commencing from the month in which the asset is available for use. No depreciation is charged in the month of disposal of the asset. The residual value, useful life and depreciation method is reviewed and adjusted, if appropriate, at each balance sheet date.


41

Gains or losses on disposal of property and equipment are taken to the unconsolidated profit and loss account.

Assets subject to finance lease

Assets subject to finance lease are stated at cost less accumulated depreciation at the rates similar to the bank’s owned assets and impairment loss (if any). The outstanding obligation under finance lease less financial charges allocated to future periods is shown as liability. Finance charges are calculated at interest rates implicit in the lease and are charged to unconsolidated profit and loss account in the period in which these are incurred.

Intangible assets

An intangible asset is recognized only if it is identifiable, the Bank has control over the asset, it is probable that economic benefits will flow to the enterprise and the cost of the asset can be measured reliably.

All amortizable intangible assets that meet the recognition criteria are initially measured at cost and are amortized on a straight line basis at the rate given in note 12.3 commencing from the month when these assets are available for use. Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. The residual value, useful life and amortization method is reviewed and adjusted, if appropriate, at each balance sheet date.

5.6 Impairment

The carrying amount of assets are reviewed at each balance sheet date for impairment, whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. If such indication exists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to their recoverable amount. The resulting impairment loss is taken to the unconsolidated profit and loss account. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying value that would have been determined net of depreciation/amortization, if no impairment loss had been recognized.

The available for sale equity investments are impaired when there has been a significant or prolonged decline in the value below its cost. Impairment loss is recognized in unconsolidated profit & loss account.

5.7 Deposits

Deposits are recorded at the nominal values of proceeds received. Markup accrued on deposits is recognised separately as part of other liabilities and is charged to unconsolidated profit and loss account on a time proportion basis.


42

5.8 Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the unconsolidated profit and loss account, except to the extent that it relates to items recognised directly in other comprehensive income or below equity, in which case it is recognised in other comprehensive income or below equity.

Current

Provision for current tax is the expected tax payable on the taxable profit for the year using tax rates applicable at the date of unconsolidated statement of financial position and any adjustment to tax payable for previous years.

Deferred

Deferred tax is accounted for using the balance sheet liability method in respect of all major temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit at the rates that are expected to apply to the period when the differences reverse based on the tax rates that have been enacted. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax asset is reduced to the extent it is no longer probable that the related tax benefits will be realized.

The Bank also recognizes deferred tax asset/ liability on deficit/ surplus on revaluation of investments which is adjusted against the related deficit/ surplus in accordance with the requirements of International Accounting Standard on ‘Income Taxes’ (IAS 12). However, keeping in view the future profitable operation and uncertain status of privatization of the bank; deferred tax assets has only been recognized to the extent of deferred tax liability as at balance sheet date.

The Bank takes into account the current income tax law and decisions taken by the taxation authorities. Instances where the Bank’s views differ from the views taken by the income tax department at the assessment stage and where the Bank considers that its view on items of material nature is in accordance with law, the amounts are shown as contingent liabilities.

5.9 Staff retirement and other benefits

The Bank operates following staff retirement and other benefit schemes for its employees:

Defined benefit plan- Pension and gratuity scheme

Fully funded defined benefit pension and gratuity scheme for permanent employees. Contributions are made in accordance with the actuarial valuation which is carried out periodically using ‘Projected Unit Credit Method’. All actuarial gains and losses are recognized immediately through other comprehensive income.


43

Defined benefit unfunded gratuity scheme

The Bank operates a defined benefit unfunded gratuity scheme for its contractual employees. The obligation under the defined benefit unfunded gratuity scheme is recognized on the basis of actuarial valuation using the ‘Projected Unit Credit Method’.

Benevolent fund

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to this fund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basis of actuarial advice using the Projected Unit Credit Method.

Compensated absences

The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent and contractual employees. For its eligible employees, related provision is made in accordance with actuarial valuation. Provision for the year is charged to unconsolidated profit and loss account. The amount recognized in unconsolidated statement of financial position represents present value of defined benefit obligation.

Defined benefit plans are provided to employees of the Bank. Calculations in this respect require assumptions to be made of future outcomes, the principal ones being in respect of increase in remuneration, the expected long-term return on plan assets and the discount rate used to convert future cash flows to current values. Calculations are sensitive to changes in the underlying assumptions.

5.10 Revenue recognition

5.10.1 Advances

Advances disbursed by SME Bank Limited:

Markup/ interest on performing advances is recognized on a time proportion basis over the term of loan and advances. Markup/ interest/ penal markup recoverable on non performing advances is recognized on receipt basis. Mark-up / interest on rescheduled / restructured advances and investments is recognised as permitted by the regulations of the SBP.

Advances disbursed by defunct RDFC and defunct SBFC :

Advances and related markup are suspended. Markup/ interest on advances is recognized on receipt basis.


44

5.10.2 Return on investments

Return on investments is recognized on a time proportion basis except on classified investment which is recognized on receipt basis. Any premium paid or discount received on purchase of securities is amortized through unconsolidated profit and loss account over the remaining period of maturity on time apportionment basis.

5.10.3 Dividend income

Dividend income is recognized when the Bank’s right to receive the dividend is established.

5.10.4 Interest, fee, brokerage and commission

Interest, fee, brokerage and commission, profit on other investments, bank deposits and staff loans is recognized on accrual basis. Income on non-funded facilities (fee, commission, documentation charges etc.) is recognized on receipt basis except commission on bank guarantees which is recognized on accrual basis.

5.11 Off setting

Financial assets and liabilities are off set and the net amount is reported in the unconsolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or realize the asset and settle the liability simultaneously.

5.12 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset are capitalized. Other borrowing costs are recognized as an expense in the period in which it incurs.

5.13 Provisions

Provisions are recorded when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Provision for guarantee claims and other off balance sheet obligations is recognized when intimated and reasonable certainty exists to settle the obligations. Expected recoveries are recognized by debiting customer accounts. Charge to unconsolidated profit and loss account is stated net off expected recoveries.

5.14 Financial assets and liabilities

All financial assets and financial liabilities are recognized at the time when the Bank becomes a party to the contractual provisions of the instrument. A financial asset is derecognised where


45

(a) the rights to receive cash flows from the asset have expired; or (b) the Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Bank has transferred substantially all the risks and rewards of the asset, or (ii) the Bank has neither transferred nor retained substantially all the risk and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Any gain or loss on derecognition of the financial assets and financial liabilities is taken to income currently.

5.15 Segment reporting

A segment is the distinguishable component of the Bank that is subject to risks and rewards that are different from those of other segments. A business segment is one that is engaged either in providing certain products or services, whereas a geographical segment is one engaged in providing products and services within a particular economic environment. Segment information is presented as per the Bank’s functional structure and the guidance of the State Bank of Pakistan. The Bank’s primary format of reporting is based on business segments:

5.15.1 Business segments

Trading and sales

This segment undertakes the Bank’s treasury, money market and capital market activities.

Commercial banking

It includes loans, deposits and other transactions with individuals/ staff, small and medium enterprises and corporate customers.

5.15.2 Geographical segments

The Bank operates only in Pakistan.

5.16 Appropriation to reserves

Dividend and appropriation to reserves (except appropriation required by law) after the balance sheet date are recognized as liability in the Bank’s financial statement in the year in which these are approved.

6. FINANCIAL RESTRUCTURING AND GOING CONCERN ASSUMPTION

6.1 The Government of Pakistan (GoP) assisted by Asian Development Bank (ADB) is working on SME Sector Development Programme (SME SDP). Loan agreement for this programme between GoP and ADB and project agreement between ADB, SBP, Small and Medium Enterprise Development Authority (SMEDA) and the Bank have been signed on February


46

10, 2004. This programme, apart from other aspects on policy matrix relating to SME sector of Pakistan, also envisaged restructuring of SME Bank Limited. Salient features of the restructuring of the Bank are given below:

i) Adjustment of accumulated balances due from SBP on account of its share in profits and losses of the Bank against credit lines provided by SBP;

ii) Payment of Rs 3 billion to SBP before January 1, 2004 against outstanding credit lines and conversion of balance of remaining credit lines into a loan repayable in full by June 30, 2006;

iii) Raising the paid-up capital to Rs 1,100 million by issuing additional shares to GoP;

iv) The Ministry of Finance (MoF) shall ensure that SBP’s shareholding in the Bank is terminated through the purchase of SBP held shares at nominal value by shareholders or otherwise;

v) 100% provision to be made against non performing financial assistance extended by the defunct RDFC and SBFC prior to January 1, 2002 which provision to be adjusted against SBP credit lines. SBP will recover this amount from proceeds of ADB loan to GoP;

vi) Reduction in the number of recovery branches, staff rationalization through Voluntary Separation Scheme (VSS), human resource audit and hiring of new professional staff on merit;

vii) Reimbursement by GoP of costs related to VSS launched for all regular employees;

viii) SBP to issue a banking license to the Bank on compliance with all conditions of restructuring and applicable SBP regulations. The commercial banking operations will be separate from the recovery operations of the defunct RDFC and SBFC portfolio and the two operations will be run as independent units within the Bank; and

ix) Privatization of the Bank by June 2006.

6.2 Current status of the above referred financial restructuring is given below:

i) Accumulated balances of Rs 3,275.752 million due from SBP on account of its share in profits and losses of the Bank have been adjusted against credit lines provided by SBP;

ii) Rs. 7,393 million has been paid to SBP since 2003, to fully adjust the loan liability.

iii) Paid-up capital has been increased to Rs. 2,393 million by issue of 73,502,453 additional shares of Rs 10 each to GoP without right issue in 2004, issue of 40,000,000


47

additional shares of Rs 10 each to GoP without right issue in 2005, issue of 50,000,000 additional bonus shares of Rs 10 each to GoP without right issue in 2006 and issue of 39,250,700 additional shares of Rs. 10 each to GoP without right issue in 2007. Proceeds against issue of additional shares in 2004 were paid by GoP to SBP against the Bank’s loan balance due to SBP;

iv) Provision of Rs 1,283.196 million against non performing financial assistance extended by the defunct RDFC and SBFC was adjusted against credit lines of SBP in 2003;

v) VSS was approved by the Board of Directors of the Bank on November 7, 2003. 707 employees were relieved under the scheme upto December 31, 2005 and the aggregate reported cost for 707 employees was Rs. 1,764.268 million, which has been received by the bank by March 31, 2007;

vi Human resource technical audit has been completed and report has been submitted to the Bank;

vii) Banking license was issued by SBP on September 13, 2004 and the Bank has started banking operations after the issue of certificate for commencement of banking business by SBP on April 16, 2005;

viii) Privatization Commission (PC) has constituted a transaction committee which is represented by members from the Privatization Commission, State Bank of Pakistan, Ministry of Finance and the Bank. Privatization Commission has approved M/s BMA Capital as Financial Advisors for the Bank and due diligence exercise for the privatization of the Bank has been carried out in the year 2008; and

ix) No further progress has been made on the privatization of the Bank.

6.3 Further restructuring of SME Bank:

In compliance to the decisions taken during meeting at Ministry of Finance dated September 14, 2009 following actions have been undertaken.

i) VSS offered to the regular employees of the Bank in November 2009, wherein 138 employees opted for VSS offered vide Circular No. HO/HR&SD/2009/5385 dated October 15, 2009. These employees have been relieved at a total cost of Rs. 653 million with effect from November 14, 2009;

ii) Refer Note 11.2, for status of transfer of Old portfolio of defunct RDFC & defunct SBFC to National Bank of Pakistan ; and

iii) Government of Pakistan have allocated an amount of Rs. 1 billion in the annual budget 2013-14 for equity injection into the Bank.


48

6.4 Going concern assumption and minimum capital requirement

The Bank continues to operate in net loss situation. During the period, the Bank has incurred a net loss after tax of Rs. 282.16 million and its accumulated losses stand at Rs. 2.296 billion as of the reporting date. Further the Bank has shortfall of Rs. 1.904 billion on 31 Dec 2015 in meeting the minimum capital requirements of Rs. 2 billion (net of losses) as prescribed by the State Bank of Pakistan (SBP). These conditions indicate a material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern and therefore, that it may be unable to realize its assets and discharge its liabilities in the ordinary course of business. However the Bank’s management believes that going concern assumption is appropriate basis to prepare these unconsolidated financial statements since the Government of Pakistan (GoP), holds 94% shares of the Bank through Ministry of Finance (MoF).Government of Pakistan (GoP) has reduced the budget allocation, to provide further equity contribution to Bank, to nil. This allocation has been reduced from previously allocated budget of Rs. 2 billion for the year ended 2012-13 and Rs. 1 billion for the year 2013-14 and Rs. 0.5 billion for the year 2014-15. Further SBP has allowed exemption to the Bank from meeting the minimum capital requirement of Rs. 2 billion (net of losses) till June 30, 2016. With regards to reduction in budget allocation by GoP, the management is contemplating to approached MoF for increase in equity contribution, which will enable the bank to meet the minimum capital requirement of Rs. 2 billion (net of losses). Further keeping in view the past trend and the fact that the Bank is in the privatization list of GoP, the management believes that SBP will further extend the exemption in case the Bank is not able to meet the minimum capital requirement of Rs. 2 billion (net of losses) till June 30, 2016.


49

Note 2015 20147. (Rupees in '000)

In hand - local currency 76,593 54,298 In transit - local currency - -

National Prize Bonds 152 157

With State Bank of Pakistan (SBP) in :Local currency current accounts 7.1 275,450 277,763

With National Bank of Pakistan in :Local currency current accounts 37,816 34,565

390,011 366,783

7.1

Note 2015 20148. BALANCES WITH OTHER BANKS (Rupees in '000)

In Pakistan: On current accounts 498 501 On deposit accounts 8.1 11,241 12,334 Provision for doubtful balance with a bank 8.2 (10,000) (10,000)

1,739 2,835

8.1

8.2

Note 2015 20149. LENDINGS TO FINANCIAL INSTITUTIONS (Rupees in '000)

Call money lendings 400,000 15,000 Letter of placement 485,000 200,000

9.1 885,000 215,000

9.1 PARTICULARS OF LENDING

In local currency 9.1.1 885,000 215,000 In foreign currencies - -

885,000 215,000

9.1.1

Deposits with the State Bank of Pakistan are maintained to comply with the statutory requirements issued fromtime to time.

These carry interest rate ranging from 1.50% to 6.50% (2014: 1.50 % to 7.0%) per annum.

Provision for doubtful balance is in respect of deposit of Rs. 10 million with Indus Bank Limited which is underliquidation.

These lendings carry markup rate ranging between 6.50% to 6.95% (2014: 9.25% to 10.15%) per annum andhave maturity period upto 2 months (2014: upto 2 months).

CASH AND BALANCES WITH TREASURY BANKS


50

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2014


51

SME Bank LimitedNotes to the Unconsolidated Financial StatementsFor the year ended December 31, 2015

Note 2015 201410.2 INVESTMENTS BY SEGMENTS :

Federal Government Securities:

- Market Treasury Bills (MTBs) 10.3 2,317,253 416,513 - Pakistan Investment Bonds (PIBs) 10.3 1,586,398 828,313

3,903,651 1,244,826

Fully paid up ordinary shares:

- Listed companies/mutual fund 10.6 22,805 22,805 - Unlisted companies 10.7 47,443 47,443

70,248 70,248 Subsidiary company:

SME Leasing Limited 10.8 215,457 215,457

Other investments:

- Certificates of Investment (COIs) 762 762 - Term Deposit Receipts (TDRs) 61,687 40,000

62,449 40,762

Total investments at cost 4,251,805 1,571,293

Provision for diminution in value of investments 10.4 (187,803) (187,803)

Investment (net of provision) 4,064,002 1,383,490

Net Surplus on revaluation of available for sale securities - net 21 53,489 63,003

Total investments 4,117,491 1,446,493

(Rupees in '000)


52

SME Bank LimitedNotes to the Unconsolidated Financial StatementsFor the year ended December 31, 201510.3 Principal terms of investments in Federal Government securities

Name of investment

Market Treasury Bills On maturityPakistan Investment Bonds On maturity

Note 2015 201410.4 Particulars of provision for diminution in value of investments

Opening balance 187,803 176,101 Charge for the year 10.8 - 11,702 Closing balance 187,803 187,803

10.4.1 Particulars of provision in respect of type and segmentAvailable-for-sale securities -Fully paid up ordinary shares - Quoted Companies 20,797 20,797 - Unlisted Shares 20,000 20,000 - Delisted Companies 10.7.2 1,003 1,003

Held-to-maturity securities - Certificates of Investment 762 762

Investment in subsidiary - SME Leasing Limited 10.8 145,241 145,241 187,803 187,803

NoteMarket value Rating Market value Rating

10.5 Quality of Available-for-sale securities (Rupees '000) (Rupees '000)

Market Treasury Bill 10.5.1 2,316,915 unrated 416,362 unratedPakistan Investment Bonds 10.5.1 1,635,058 unrated 886,347 unrated

Fully paid up ordinary shares 10.5.2National Refinery Limited 3,347 AA+/A1+ 2,773 AA+/A1+PICIC Investment Fund Limited 1,573 1-Star 1,680 1-StarLotte Pakistan PTA Limited 519 unrated 547 unratedDewan Salman Fibre Limited 38 unrated 35 unratedPakistan Telecommunication Company Limited 142 unrated 198 unratedNishat Chunian Mills Limited 13 A-/A-2 17 A-/A-2Crescent Textile Mills Limited 1 unrated 1 unratedInvest Capital Investment Bank Limited 1,543 unrated 1,878 unrated

7,176 7,129

3,959,149 1,309,838

10.5.1 These are Government of Pakistan guaranteed securities.

10.5.2 Rating of these equity securities represent 'Entity/Funds Rating'.

10.5.3

Rate per annum

Market Treasury Bills and Pakistan Investment Bonds are securities eligible for re-discounting with the State Bank of Pakistan.

January 2016 to September 2016July 2017 to March 2025

6.25% to 8.80%

(Rupees in '000)

Coupon/Mark up payment

Principal payment

Maturity

at maturitysemi-annually

2015 2014

Securities have either been rated by 'The Pakistan Credit Rating Agency Limited' (PACRA) or 'JCR-VIS Credit RatingCompany Limited' (JCR-VIS). These ratings reflect independent credit risk assessment by respective credit rating entities.

7.65% to 12.52%


53


10.6 Investments in listed companies/mutual fund

2015 20142015 2014 Name of company/mutual fund Note

15,000 15,000 354.17 National Refinery Limited 5,311 5,311 137,668 137,668 18.12 PICIC Investment Fund Limited 2,494 2,494 79,775 79,775 10.15 Lotte Chemical Pakistan Limited 810 810 18,449 18,449 18.24 Dewan Salman Fibre Limited 337 337 8,600 8,600 68.20 Pakistan Telecommunication Company Limited 586 586

385 385 77.49 Nishat (Chunian) Limited 30 30 18 18 34.84 Crescent Textile Mills Limited 1 1

1,117,876 1,117,876 11.84 Invest Capital Investment Bank Limited 13,236 13,236

22,805 22,805

Impairment in available for sale listed shares 10.6.1 (20,797) (20,797) Investment in listed shares (net of impairment) 2,008 2,008

Surplus on revaluation of listed shares - (net) 5,167 5,120 Market value as on December 31 7,175 7,128

10.6.1 Impairment in available for sale listed sharesNational Refinery Limited 3,885 3,885 PICIC Investment Fund Limited 2,215 2,215 Lotte Chemical Pakistan Limited 683 683 Dewan Salman Fibre Limited 310 310 Pakistan Telecommunication Company Limited 441 441 Nishat (Chunian) Limited 27 27 Invest Capital Investment Bank Limited 13,236 13,236

20,797 20,797

10.7 Particulars of investments held in unlisted companies, fund and delisted companies

Islamabad Stock Exchange Limited 10.7.1 18,000 18,000 Lahore Stock Exchange Limited 10.7.1 8,440 8,440 AKD Venture Fund 10.7.1 20,000 20,000 Companies delisted from stock exchange 10.7.2 1,003 1,003

47,443 47,443

note 10.7.1.2(Rupees) (Rupees in '000)

10.7.1 8% 2,000,000 10.00 20,000 - Sohaib UmarIslamabad Stock Exchange Limited 1% 3,034,603 5.93 18,000 11.10 Mian Ayyaz AfzalLahore Stock Exchange Limited 1% 843,975 10.00 8,440 12.21 Aftab Ahmad Ch.

10.7.1.1

10.7.1.2

Total paid up value

Cost/Paid-up value per unit

held

Break up value

Break up value per share is based on the financial statements of investees for the year ended June 30, 2015

(Rupees in '000)

Paid-up value per

share/ average price per unit (Rs)

Management has fully provided the investment in AKD Venture Fund as irrecoverable and impaired.

Name of Chief

executive

Number of units

held

AKD Venture Fund

No. of ordinary shares/units

% age


54


10.7.2 Particulars of investments in shares of companies delisted from stock exchange and are currently under liquidation.

(Rupees)

Mohib Exports Company Limited 4,600 23.81 109 Sunflow Citrus Limited 100,000 4.22 422 Tawakal Garments Company Limited 4,000 38.38 154 Tristar Shipping Lines Limited 5,000 23.56 118 Zahoor Textile Mills Limited 15,200 13.16 200

1,003

10.8 Subsidiary company

SME Leasing Limited (SMEL) was incorporated on July 12, 2002 as a public limited company under the Companies Ordinance,1984. Upto the year 2005, SMEL was a wholly owned subsidiary of the Bank, however, a public offering of 10 million ordinaryshares was made during the year 2006 at an offer price of Rs. 11 per share. The Bank subscribed for 1,405,205 shares in SMELand holds 73.14% shares in SMEL as at December 31, 2015. SMEL is listed on Lahore Stock Exchange. This investment isdesignated as a 'Strategic Investment' in terms of BPD Circular Letter No. 16 dated August 1, 2006. SMEL continue to operateon a net loss basis and the Bank maintains provision of Rs. 145.24 million (2014: Rs. 145.24 million) against the aforesaidinvestment of Rs. 215.457 million.

Cost/Paid-up value per share

Number of shares

held

(Rupees in '000)

Total paid up value


55


11. ADVANCES NoteLoans, cash credits, running finances, etc- In Pakistan

Extended by:Defunct SBFC 11.2 4,376,451 4,377,908 Defunct RDFC 11.2 505,441 505,441 SME Bank Ltd 2,990,029 3,215,436

Due from ex-employees 11.2 17,534 17,951 Due from employees 121,174 135,613

8,010,629 8,252,349

Net investment in finance lease - In Pakistan 11.3 1,253 1,253 Advances - gross 8,011,882 8,253,602

Provision for non-performing advances Specific provision (5,251,998) (5,315,765) General provision (8,174) (9,100)

11.5 (5,260,172) (5,324,865)

Advances - net of provision 2,751,710 2,928,737

11.1 Particulars of Advances (Gross)11.1.1 In local currency 8,011,882 8,253,602

In foreign currencies - - 8,011,882 8,253,602

11.1.2 Short term (upto one year) 1,477,300 1,800,285 Long term (over one year) 6,534,582 6,453,317

8,011,882 8,253,602

11.2

a) the non-performing loans, collateral and the debtors;

20142015(Rupees in '000)

Assignment of Non-Performing Loan (NPL) portfolios of defunct SBFC & RDFC to National Bankof Pakistan (NBP)

The Board through its resolution by circular No.10/circ/33 dated March 08, 2010 duly endorsed by themembers in their meeting dated May 20, 2010 has approved the transfer and assignment of fully non-performing loan portfolios of defunct SBFC & RDFC to NBP on the basis of deferred transfer price.Subsequently transfer and assignment agreement was executed between the Bank and National Bank ofPakistan at Karachi on July 01, 2010 (Effective date). According to the agreement, the transferor (SME) andthe acquirer (NBP) acknowledge, declare and confirm the transfer, assignment and vesting of all rights,interests, privileges, title, powers and remedies in favour of the acquirer with respect to:

b) all agreements, deeds, instruments and other documents relating to the non-performing loans, debtors andcollateral and to which the transferor is, or legally deemed to be, a party or a beneficiary;


56


On request of the Bank's management the decision to transfer of the portfolio was revisited by the BoD in its65th meeting held on July 13, 2011 and resolved that the agreement of assignment of the old portfolio to NBPshould be cancelled and Board’s pronouncement for revocation of agreement to Ministry of Finance toarrange retrieval/restoration of old portfolio to the Bank in the interest of recovery of public funds.

In the meeting held on March 04, 2013 the Board of Directors reconsidered the position taken earlier on thismatter on grounds of related cost of recovery and infrastructure on request of then management and decidedthat since the Bank is still on the privatization list, BoD would be able to decide on portfolio after Bank'sdelisting from privatization.

Pending cancellation of transfer and assignment agreement with NBP non- performing loan portfolios ofdefunct SBFC and RDFC stands recognised in these unconsolidated financial statements and accordingly theamount recovered by the Bank from the borrowers of defunct SBFC & RDFC has been recognized as liabilityto NBP on a prudent basis. Funds received by NBP to be apportioned in terms of this agreement have alsonot been accounted for by the Bank.

Under the above referred arrangements, portfolio of defunct SFBC & RDFC outstanding as on June 30, 2010(Except outstanding loans of RDFC where facility of Equity Participation Fund had also been extended) weretransferred to NBP.

c) all legal proceedings by and against the transferor with respect to the non-performing loans, the debtors andcollateral, which may be pending before any court, tribunal, arbitrator or authority, without being subject toany liabilities of the transferor to any person.

The agreed transfer price is an amount equal to 50% of the net recoveries.

In view of the above, foregoing Board was requested in its 83rd meeting, held on August 30, 2014 and themanagement of the Bank was allowed to proceed further in pursuance of resolution / direction passedregarding the subject matter in 64th and 65th Meeting of the Board of Directors held on May 16, 2011 andJuly 13, 2011 respectively by overruling to verdict of the Board of Directors given on the issue in 75th Meetingof Board of Directors held on March 04, 2013.

The incumbent Management has again reviewed the situation and noted that no comparative analysis/studypertaining to transfer of portfolio was conducted which could justify the decision of assigning old portfolio toNBP.


57

11.3 NET INVESTMENT IN FINANCE LEASE

Lease rentals receivable 973 - - 973 973 - - 973 Residual value 280 280 280 - - 280 Minimum lease payments 1,253 - - 1,253 1,253 - - 1,253 Financial charges for future periods - - - - - - - - Present value of minimum lease payments 1,253 - - 1,253 1,253 - - 1,253

11.4

Provision Provision Category of Classification Domestic Overseas Total Required Held

(Rupees in '000)

Other Assets Especially Mentioned 2,313 - 2,313 - - Substandard 6,836 - 6,836 54 54 Doubtful 42,462 - 42,462 488 488 Loss 5,465,971 - 5,465,971 5,251,456 5,251,456

5,517,582 - 5,517,582 5,251,998 5,251,998


(Rupees in '000)Other Assets Especially Mentioned 268 - 268 2 2 Substandard 22,889 - 22,889 56 56 Doubtful 16,760 - 16,760 328 328 Loss 5,600,973 - 5,600,973 5,315,379 5,315,379

5,640,890 - 5,640,890 5,315,765 5,315,765

11.5 Particulars of provision against non-performing advances

Specific General Total Specific General Total(Rupees in '000)

Opening balance 5,315,765 9,100 5,324,865 5,251,248 9,414 5,260,662 Amounts written off (37) - (37) (887) - (887) Reversal of provision of transferred portfolio (1,789) - (1,789) (1,304) - (1,304) Charge/(reversals)Charge for the year 50,438 2,594 53,032 84,021 3,224 87,245 Reversal for the year (112,379) (3,520) (115,899) (17,313) (3,538) (20,851)

(61,941) (926) (62,867) 66,708 (314) 66,394 Closing balance 5,251,998 8,174 5,260,172 5,315,765 9,100 5,324,865

11.5.1

11.5.2 Specific General Total Specific General Total(Rupees in '000)

In local currency 5,251,998 8,174 5,260,172 5,315,765 9,100 5,324,865 In foreign currencies - - - - - -

5,251,998 8,174 5,260,172 5,315,765 9,100 5,324,865

Particulars of provisions against non-performing advances

2015 2014

The FSV benefit availed in last years has been reduced by Rs. 62,193 thousand (net of FSV benefit availed during the period), which hasresulted in increased charge for specific provision for the period ended by the same amount. The FSV benefit is not available for cash orstock dividend / bonus to employees. Had the FSV benefit not recognized, loss before and after tax for the year ended would have beenlower by Rs. 62,193 thousand (December 31, 2014: lower by Rs. 8,302 thousand).

Advances include Rs. 5,517,582 thousand (Dec 2014: Rs. 5,640,890 thousand) which have been placed under non-performingstatus as detailed below:

TotalOver five years

Later than one and less than five

years

Total

2015

2015

Later than one and less

than five years

Classified Advances

Over five years

2014(Rupees in '000)

20142015

2014Classified Advances

Not later than one

year

Not later than one

year


58

Note 2015 201411.6 Particulars of Write Off:

11.6.1 Against provisions 11.5 37 887 Directly charged to Profit & Loss account - -

37 887

11.6.2 Write Offs of Rs. 500,000 and above 11.7 - - Write Offs of below Rs. 500,000 37 887

37 887

11.7 Details of Loan Write Off of Rs. 500,000 and above

11.8 Note 2015 2014

Balance at beginning of the year 102,442 100,170 Loans granted/added during the year 60,984 25,738 Repayments - net (34,918) (23,466) Balance at end of the year 128,508 102,442

Debts due by subsidiary company

Balance at beginning of the year 155,044 43,483 Loans granted/added during the year -net - 111,561 Repayments -net (28,198) - Balance at end of the year 126,846 155,044

255,354 257,486

Note 2015 2014

12. OPERATING FIXED ASSETS

Capital work-in-progress 12.1 1,054 841 Property and equipment 12.2 149,992 161,618 Intangible assets 12.3 1,281 1,075

152,327 163,534 Less: Provision held against property and equipment 12.2 (32,044) (32,044) Operating Fixed Assets 120,283 131,490

12.1 Capital work-in-progress

Advances to suppliers and contractors 1,054 841 1,054 841

(Rupees in '000)

In terms of sub-section 3 of Section 33-A of the Banking Companies Ordinance, 1962 the Statement in respect ofwritten-off loans or any other financial relief of five hundred thousand rupees or above allowed to a person(s)during the year ended December 31, 2015 is given at Annexure-1.

Debts due by directors, executives or officers of the bank or any ofthem either severally or jointly with any other persons:

Particulars of Loans and Advances to Directors, AssociatedCompanies, Etc. (Rupees in '000)

(Rupees in '000)


59


12.2

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61

SME Bank LimitedNotes to the Unconsolidated Financial StatementsFor the year ended December 31, 201512.4

VehiclesSuzuki Jeep 190 190 - 243 AuctionHonda CD-125 24 24 - 21 AuctionSuzuki Cultus 643 643 - 64 As Per Bank PolicySuzuki Cultus 960 576 384 480 As Per Bank PolicyToyota Corolla 926 926 - 2 As Per Bank PolicySuzuki Liana 708 708 - 71 As Per Bank PolicySuzuki Liana 708 708 - 71 As Per Bank PolicySuzuki Cultus 605 605 - 60 As Per Bank PolicySuzuki Cultus 566 566 - 57 As Per Bank PolicySuzuki Cultus 563 563 - 56 As Per Bank PolicySuzuki Cultus 602 602 - 60 As Per Bank PolicyToyota Corolla 946 946 - 95 As Per Bank PolicyToyota Corolla 555 555 - 56 As Per Bank PolicyToyota Corolla 873 873 - 87 As Per Bank PolicyHonda City 873 873 - 87 As Per Bank PolicyToyota Corolla 880 880 - 88 As Per Bank PolicyToyota Corolla 2,048 667 1,381 1,381 As Per Bank PolicySuzuki Cultus 879 879 - 88 As Per Bank PolicySuzuki Cultus 587 587 - 59 As Per Bank PolicySuzuki Swift 873 873 - 87 As Per Bank Policy

15,009 13,244 1,765 3,213

1,829 1,826 3 162 2015 16,838 15,070 1,768 3,375 2014 21,888 21,147 741 1,897

12.512.6

2015 201413. DEFERRED TAX (ASSETS)/LIABILITIES

Taxable temporary differences on: Accelerated tax depreciation and amortization (1,092) (5,309)

(1,092) (5,309) Deductible temporary differences on: Unused tax losses 1,092 5,309

1,092 5,309 - -

13.1 Temporary differences for which no deferred tax is recognized 582,551 503,526 due to uncertain taxable profits

Mr. Kishwar Malik - employeeMr. Muhammad Ayub - employeeMs. Fakhra Jabeen - employee

Mr. Anwar Kazim - employeeMr. Sajjad-ul-Hassan - employeeMr. Tariq Mehmood Malik - employeeMr. Sohail Ishtiaq Khan - employeeMr. Abdul Razzaq - employee

Details of disposal of fixed assets :Book value

Particulars of assets Cost Accumulated

depreciationMode of disposal Particulars of buyers

----------------------(Rupees '000)--------------------

Sale proceeds

Gross carrying amount of fully depreciated assets that are still in use was Rs. 148,365 thousands (2014: Rs. 163,370 thousand).

Mr. Imran Mustafa - Auctioner

Other assets havingbook value of lessthan Rs. 250,000 orcost less than ofRs.1,000,000 whichever is less

Mr. Junaid Mohmand - employee


Mr. Barkat Ali Lashari - employee

Syed Oshaid Akhtar - employee

(Rupees in '000)

This represent cost of land measuring 500 square yards in sector G-7 and 4666.66 square yards situated in sector G-5/2 which was originallyallotted to SBFC and RDFC respectively. CDA required payment of Rs. 3.637 million for transferring the plot in the name of the Group fromSBFC and RDFC. However, on receiving draft of the required amount, CDA returned the same requiring payment of market value in view ofproposed privatization of the Bank. The management of the Bank has taken up the matter with the Privatization Commission Governmentof Pakistan (PC). Pursuant to which Departmental Audit Committee (DAC) of PC directed the Bank to take up the case of restoration ofplots through Ministry of Finance, Government of Pakistan (MOF). Upon management’s perusal and in compliance with directions of DAC,MOF vide its letter dated 12 February 2014 has advised CDA to reconsider the Bank’s request for restoration of the above said land and takesteps for early restoration of land. Management believes that since the Bank is a successor of RDFC and SBFC by virtue of Section 5 of theAmalgamation and Conversion Ordinance, 2001. The bank has inherited aforementioned land and is not required to pay the market value ofthe plot. Accordingly the Bank has ownership rights over this land, however on the advice of SBP to classify these plots in doubtful category,the Bank has recorded a impairment of Rs. 32.044 million against these plots.

Mr. Tariq Mehmood Cheema - employeeMr. Sabur Ahmed Khan - employeeMirza Naddem ud Din - employeeMr. Nasser Durrani - employeeKhawaja Laeeque Ahmed - employeeMr. Attique ur Rehman - employeeMr. Saeed Ahmed - employee


62


Note 2015 201414. OTHER ASSETS

Income/ mark-up accrued in local currency 14.1 142,479 141,414 Advances, deposits, advance rent and other prepayments 46,401 41,582 Non banking asset acquired in satisfaction of claims 14.2 138,600 - Due from benevolent fund- unsecured 33.4.2 321 1,794 Advance Taxation 2,261 - Receivable from subsidiary company 1,194 1,919 Receivable from Equity Participation Fund 1,354 44 Trading right entitlement certificate 14.3 21,560 21,560 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 6,048 7,248 Others 66,930 61,997

446,788 297,198 Less: Provision held against other assets 14.4 96,496 88,184 Other assets (net of provision) 350,292 209,014

14.1

14.2

14.3 Trading right entitlement certificate Note 2015 2014

Lahore Stock Exchange Limited 14.3.1 21,560 21,560 Islamabad Stock Exchange Limited 14.3.1 - -

21,560 21,560

(Rupees in '000)

This represents successful bid price against auction of the property of a Bank’s borrower in default. The auciton wascarried out on 30 June 2015, subsequent to the auction, The Honourable Lahore High Court through its decision dated14 July 2015 allowed the Bank to adjust the bid price against its outstanding dues from the borrower against the financefacilities extended to the borrower, suspended mark-up and cost of funds. However the counter party has appealedbefore Lahore High court against the dscision which is pending adjudication.The management on the basis of legaladvice strongly believes that the decision of the appeal will be in the Bank's favour. The ownership rights or possessionof the said property has not yet been conveyed to the Bank, however the settlement transaction has been recognised inthese financial statements as management believes that under the provision of section 65 of the Civil Procedure Code,the ownership right in the immovable property is deemed to have vested in the Bank, retrospectively from the datewhen auction was held i.e. 30 June 2015 and accordingly recording of property and related impacts in the financialstatements is appropriate. The market value of property is Rs. 138.6 million.

This balance has been arrived at after adjusting interest in suspense of Rs. 4,052,861 thousand (2014: Rs. 4,056,996

(Rupees in '000)


63

SME Bank LimitedNotes to the Unconsolidated Financial StatementsFor the year ended December 31, 201514.3.1

2015 201414.4 Provision against other assets

Opening balance 88,184 83,155 Charge for the year 9,482 6,024 Reversals (1,200) (1,000)

8,282 5,024 Transferred to NBP 30 5 Closing balance 96,496 88,184

Provision balance is in respect of:Income/ mark-up accrued in local currency:

Universal Leasing Limited 22 22 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 6,048 7,248 Other receivables- SME Portfolio 39,691 36,049 Legal charges recoverable from borrowers- SBFC & RDFC 22,213 21,734 Trading right entitlement certificate - TREC 5,390 - Others 3,492 3,491

96,496 88,184

(Rupees in '000)

In accordance with the requirements of the Stock Exchanges (Corporatization, Demutualization and Integration) Act2012 (the Act), the Bank received equity shares and one Trading Right Entitlement certificate each in Lahore StockExchange Limited (LSE) and Islamabad Stock Exchange Limited (ISE) in lieu of its membership cards in theseexchanges during the year ended December 31, 2012.

Based on the revalued assets and liabilities of LSE and ISE, a total of 843,975 ordinary shares of Rs. 10 each and3,034,603 ordinary shares of Rs. 10 each in the corporatized and demutualized LSE and ISE respectively were allottedto the Bank in a dematerialized form. Out of the aforementioned, 337,590 ordinary shares in LSE and 1,213,841ordinary shares in ISE (i.e. 40 percent) have been received in the Bank’s CDC participant account whereas 506, 385ordinary shares in LSE and 1,820,762 ordinary shares in ISE (i.e. 60 percent) have been held in the blocked subaccounts maintained under LSE and ISE participant ID with Central Depository Company of Pakistan Limited. Therights attached to 60% shares held in blocked account shall be dealt with in accordance with the provisions contained inthe Act. The blocked account shall be operated by the Board of Directors of the stock exchanges in the mannerprescribed by the Securities and Exchange Commission of Pakistan.

In case of LSE, par value of shares received by the Bank was recognised during the year ended December 31, 2012 asavailable for sale investment and the excess of value of shares over the carrying value of membership card in LSE wasrecognised as trading right. However in case of ISE, since the par value of shares received by the Bank was more thanthe carrying value of membership card, investment in ISE has been recognised to the extent of the carrying value ofmembership card and trading right in ISE has been recognised at Nil value.

Pursuant to the requirements of the Act, during the year trading rights of the Bank in Lahore and Islamabad StockExchange has lapsed. However the management is considering to approach Securities and Exchange Commission ofPakistan. for extension in time and further the inspection team of the State Bank of Pakistan has allowed the Bank torecord a provision of 25% against the carrying amount of TREC upto March 2015 and if the matter is not resolved torecord 100% provision thereof. However the management has recorded a provision of Rs. 5.39 million against thecarrying value of TREC at the year end.


64

Note 2015 201415. BILLS PAYABLE (Rupees in '000)

In Pakistan 114,107 58,298 Outside Pakistan - -

114,107 58,298

16. BORROWINGSIn Pakistan 2,888,685 776,168 Outside Pakistan - -

2,888,685 776,168 16.1 Particulars of borrowings with respect to currencies

In local currency 2,888,685 776,168 In foreign currencies - -

2,888,685 776,168

16.2 Details of borrowings secured/unsecuredBorrowings from State Bank of Pakistan - unsecured 16.2.1 48,892 53,068 Repurchase agreement borrowings - secured 16.2.2 2,839,793 723,100

2,888,685 776,168

16.2.1

16.2.2

2015 201417. DEPOSITS AND OTHER ACCOUNTS (Rupees in '000)

Customers

Fixed deposits 1,046,304 800,191 Savings deposits 2,505,838 1,258,358 Current accounts - non-remunerative 465,904 532,827 Margin accounts 34,946 29,612

4,052,992 2,620,988 Financial Institutions

Remunerative deposits 17.2 715,760 721,167 Non-remunerative deposits 1,449 947

4,770,201 3,343,102

17.1 Particulars of depositsIn local currency 4,770,201 3,343,102 In foreign currencies - -

4,770,201 3,343,102

17.2

These represent transactions with financial institutions for sale of Government Securities under re-purchaseagreement (REPO) in the inter bank money market at mark-up rates ranging from 6.20% to 6.50% (Dec 31, 2014:9.50% to 10.00%) per annum for period upto two month (Dec 31, 2014: upto one month). REPO transactions aresecured against investment of the Bank in Government securities.

This represents financing facility obtained from State Bank of Pakistan under the scheme "Financing Facility ForStorage of Agri Produce (FFSAP)" vide SMEFD circular No. 08 dated June 04, 2010 & IH&SSMEFD circular No.05 dated Feb 23, 2015. These carries revised mark up rate of 2.50 % & 3.25% respectively and is repayable inquarterly instalments.

Remunerative deposits include Rs. 365.757 million (December 31, 2014: Rs. 346.167 million) related to EquityParticipation Fund.


65

Note 2015 201418. OTHER LIABILITIES

Mark-up/ return/ interest payable in local currency 58,941 43,508 Unearned commission on guarantees 1,567 1,167 Accrued expenses 8,085 18,470 Income tax payable - 4,709 Accounts payable 12,762 5,364 Sundry creditors 18.1 117,325 115,702 Payable to NBP 11.2 5,229 5,672 Branch adjustment account 4,860 938 Payable against employees' benefit plans

Defined benefit pension 33.1.2 112,383 79,907 Defined benefit unfunded gratuity scheme 33.2.2 53,821 44,711 Unfunded compensated absences 33.3.3 77,399 79,075

Security deposits against lease 280 280 Employees' VSS payments withheld 18.2 14,026 14,026 Payable to Equity Participation Fund - unsecured - - Income tax withheld payable 18,911 18,134 Others 1,628 1,755

487,217 433,418

18.1

18.2 Employees VSS payments of Rs. 14.026 million (December 31, 2014: Rs. 14.026 million) has been withheld dueto legal cases pending in the courts against employees, filed by the Bank and customers.

This includes amount of Rs. 90.6 million (December 31, 2014: Rs. 90.6 million) payable either to SBP or FBR onVSS payments related to pension on finalization of tax assessment of financial year 2009.

(Rupees in '000)


66

19. SHARE CAPITAL19.1 Authorized Capital

2015 2014 2015 2014(Rupees in '000)

1,000,000,000 1,000,000,000 Ordinary shares of Rs. 10 each 10,000,000 10,000,000

19.2 Issued, subscribed and paid up capital

2015 2014 Ordinary shares 152,853,153 152,853,153 Fully paid in cash 1,528,532 1,528,532 50,000,000 50,000,000 Issued as bonus shares 500,000 500,000 36,397,547 36,397,547 Issued for consideration other than cash 363,975 363,975

239,250,700 239,250,700 2,392,507 2,392,507

Number of19.3 Break-up of share capital is as follows: shares %

Federal Government 224,615,978 93.89 2,246,160 2,246,160 National Bank of Pakistan 6,121,095 2.56 61,211 61,211 United Bank Limited 3,975,003 1.66 39,750 39,750 Habib Bank Limited 1,987,501 0.83 19,875 19,875 MCB Bank Limited 1,490,619 0.62 14,906 14,906 Allied Bank Limited 774,351 0.32 7,744 7,744 Industrial Development Bank Limited 286,146 0.12 2,861 2,861 Directors 7 - - -

239,250,700 100 2,392,507 2,392,507

20. RESERVES Statutory Un-appropriated 2015 2014Reserve loss

Balance at beginning of the year 206,526 (1,972,670) (1,766,144) (1,386,895)

- (323,536) (323,536) (379,249) Balance at end of the period/year 206,526 (2,296,206) (2,089,680) (1,766,144)

20.1

21. SURPLUS ON REVALUATION OF ASSETS 2015 2014(Rupees in '000)

Surplus/(Deficit) on revaluation of available-for-sale securitiesFederal Government securities

- Market Treasury Bills (MTBs) (338) (151) - Pakistan Investment Bonds (PIBs) 48,660 58,034

48,322 57,883 Fully paid up ordinary shares/units

- Listed companies/mutual funds 5,167 5,120 53,489 63,003

- Deferred tax - - 53,489 63,003

Deferred tax thereon 13 - - 53,489 63,003

As at December 31, 2015, the Bank has availed net of tax benefit of Forced Sales Value (FSV) of Rs. 237,146 thousand(December 31, 2014: Rs. 299,339 thousand) in respect of pledged stocks, mortgaged residential, commercial, industrialproperties (land and building only) and plant and machinery under charge held as collateral against non-performing assets.Reserves and un-appropriated profit to that extent are not available for distribution by way of cash, stock dividend orbonus to employees.

Total comprehensive income/(loss) transferred to equity

(Rupees in '000)


67

2015 201422. CONTINGENCIES AND COMMITMENTS (Rupees in '000)22.1 Transaction-related contingent liabilities

Guarantees in favour of:Government 178,737 172,820 Others - -

22.2 Other Contingenciesa) 22,826 24,972 b)

49,800 49,800 c)

15,000 15,000 d)

612,707 612,707

e)

13,505 13,505

f)

211,716 211,716

g) 113,260 112,240

22.3 Commitments in respect of forward lending

Commitments to extend credit 126,450 212,410

22.4 Commitments for the acquisition of operating fixed assets 9,053 2,346

22.5 Commitments against repo/reverse repo transactions

Sale and repurchase agreements 2,871,813 729,012 22.6 Other commitments

Undrawn facilities 151,813 138,968 22.7 Bills for collection

Payable in Pakistan 50 66

Back benefits and claims of staff/employees under litigation.

The Bank and the income tax department have filed an appeal before theAppellate Tribunal Inland Revenue against the appellate order of theCommissioner (Appeals), who had partly set aside the order of the Taxationofficer, resulting in taxable income of Rs. 151,234 thousand and tax liabilityof Rs. 52,932 thousand against the declared tax loss of Rs. 23,489 thousandand tax liability of Rs. 4,249 thousand for the tax year 2008. Withoutprejudice to the appeal, the demand has been paid by the Bank; however noprovision has been made in these financial statements as the management isconfident of a favorable outcome.

Claims not acknowledged as debt from various borrowers

Damages claimed by an ex-employee of the then RDFC involved in RaviSecurities (Pvt) Limited and Taas Securities (Pvt) Limited affairs and adirector of Ravi Securities (Pvt) Limited and Taas Securities (Pvt) Limitednot acknowledged as debt.

Damages claim by borrower for delay in recording repayments received fromborrower, not acknowledged as debt.

Tax demands of Rs. 612.707 million raised by the Income Tax Authoritiesrelated to VSS staff cost (tax year-2005) has been decided in favour of theBank. However tax authorities have filed appeal before ATIR against thedecision of the Commissioner Income Tax (Appeals). The management ofthe Bank strongly believes and expects favourable outcome and therefore noprovision has been made for this effect in the financial statements.

The bank is in appeal before the Appellate Tribunal Inland Revenue againstthe amended assessment order for the tax year 2010, whereby the taxationofficer had assessed income of Rs. 636,499 thousand and tax liability of Rs.222,774 thousand as against income of Rs. 7,559 thousand and tax liability ofRs. 3,947 thousand admitted by the Bank. The CIR(A) decided the appealpartly in the Bank's favor while setting aside certain matters. the re-assessment has not yet been finalized by the taxation officer.


68

2015 201423. MARK-UP/ RETURN/ INTEREST EARNED Note (Rupees in '000)

On loans and advances to Customers

Extended by:Defunct RDFC - 5,325 Defunct SBFC - - SME Bank Limited 369,235 336,092

369,235 341,417

Employees 4,707 5,464

Financial Institution - SME Leasing Limited - a subsidiary company 17,192 15,868

391,134 362,749

On investments in

Available for sale securities 283,537 371,316 Held to maturity securities 4,388 4,056

287,925 375,372

On deposits with financial institutions 176 240 On securities purchased under resale agreements 1,157 814 On clean lending 17,156 42,803 On call money lending 7,719 6,802

705,267 788,780

24. MARK-UP/ RETURN/ INTEREST EXPENSED

On deposits 285,020 308,194 On securities sold under repurchase agreements 145,056 227,354 On SBP Refinance Scheme 2,802 3,970 Brokerage and commission 3,005 2,774 Bank charges 397 302

436,280 542,594

25. GAIN ON SALE OF SECURITIES - net

Federal Govt. SecuritiesMarket Treasury Bills 396 196 Pakistan Investment Bonds 32,140 68,629

Mutual Funds/Shares - 4,609 32,536 73,434

26. OTHER INCOME

Gain on sale of operating fixed assets 1,607 1,156 Fee on fund managed by the Bank-EPF 1,152 1,285 Others 222 161

2,981 2,602


69

2015 201427. ADMINISTRATIVE EXPENSES Note (Rupees in '000)

Salaries, allowances, etc. 395,516 365,361 Charge for defined benefit plans

- pension fund and gratuity 33.1.4 40,273 42,468 - unfunded gratuity scheme 33.2.4 10,488 12,936 - unfunded compensated absences 10,254 (303)

Contribution to defined contribution plan - benevolent fund 33.4.3 1,913 1,155 Non-executive directors' fees, allowances and other expenses 1,406 1,060 Rent, taxes, insurance, electricity, etc. 75,050 81,011 Legal and professional charges 13,993 14,479 Communications 5,739 5,537 Repairs and maintenance 23,577 16,571 Finance charges on leased assets - 104 Stationery and printing 4,102 3,603 Advertisement and publicity 800 680 Auditors' remuneration 27.1 1,100 1,100 Depreciation 12.2 28,010 18,341 Amortization 12.3 733 1,084 Donations - - Recruitment expenses 176 153 Travel and transport 3,127 3,180 Vehicle running and maintenance expenses 6,393 6,620 Entertainment 2,793 2,455 Training 422 142 Books, subscription and newspapers 2,575 2,565 Other expenses 27.2 16,810 15,748

645,250 596,050

27.1 Auditors' remunerationAudit fee 900 900

200 200 1,100 1,100

27.2

2015 201428. OTHER CHARGES (Rupees in '000)

Penalties imposed by the State Bank of Pakistan 826 831

Special certifications, half yearly review and audit of consolidatedfinancial statements

This includes Security charges of Rs. 13.08 million (2014: Rs. 11.79 million) and NIFT charges of Rs. 1.51 million(2014: Rs. 1.58 million).


70

2015 2014

29. TAXATION

Current 29.2 7,587 8,742 Prior years - - Deferred - -

7,587 8,742

29.1 Relationship between tax expense and accounting loss2015 2014

Loss before tax (274,570) (378,331)

Applicable tax rate 35% 35%

Tax on loss (Rupees in '000) (96,100) (132,416) Tax arising on Deferred tax asset not recognised including permanent differences (Rupees in '000) 79,025 132,833 Tax effect of income taxed at lower rate (Rupees in '000) 339 (417) Minimum tax (Rupees in '000) 7,248 8,742 Tax credit for prior years (Rupees in '000) - - Other permanent differences (Rupees in '000) 17,075 -

7,587 8,742

29.2

2015 201430. BASIC/ DILUTED LOSS PER SHARE

Net loss after tax for the year (282,157) (387,073)

Weighted average number of ordinary shares 239,250,700 239,250,700

Basic/ diluted loss per share (1.18) (1.62)

2015 201431. CASH AND CASH EQUIVALENTS

Cash and balances with treasury banks 390,011 366,783 Balances with other banks 1,739 2,835 Call money lendings 400,000 15,000

791,750 384,618

2015 201432. STAFF STRENGTH

Permanent 183 184Temporary/ on contractual basis 201 189Bank's own staff strength at end of the year 384 373Outsourced 111 89Total staff strength at end of the year 495 462

Average number of employees during the year 479 470

(Rupees in '000)

Provision for current year expenses is charged on minimum tax rate of 1% of the turnover due to tax losses of theBank for the year ended December 31, 2014.

(Rupees in '000)

Numbers

(Rupees in '000)

(Rupees)

(Rupees in '000)

Number of shares


71


33. EMPLOYEE BENEFIT PLANS33.1 Defined benefit pension and gratuity33.1.1 General description

The scheme entitles the members to:

-

-

33.1.2 The amounts recognised in the balance sheet for defined benefit pension and gratuity are as follows:

2015 2014

Present value of defined benefit obligation 834,743 721,255 Fair value of plan assets (719,350) (641,348) Receivable from the fund (3,010) - Deficit 112,383 79,907

33.1.3 Movement in net liability recognised in the balance sheet

Opening balance 79,907 78,613 Expense for the year 40,273 42,468

Other comprehensive income 31,846 2,451 Contribution to the fund (36,633) (43,625)

Receivable from the fund (3,010) - Closing balance 112,383 79,907

33.1.4 The amounts recognised in the profit and loss account are as follows:

Current service cost 33,344 35,084 Net interest 6,929 7,384 Expense for the year 40,273 42,468

The expense has been recognized in administrative expenses in profit and loss account.

33.1.5 Actual return on plan assets 65,570 69,410

2015 201433.1.6 Changes in present value of defined benefit obligation

Present value of obligation at the beginning of the year 721,255 617,807 Current service cost 33,344 35,084 Interest cost 79,780 79,608 Benefits paid (existing pensioners) (24,201) (10,881) Actuarial loss/(gain) 24,565 (363) Present value of obligation at the end of the year 834,743 721,255

2015 201433.1.7 Changes in fair value of plan assets

Fair value of opening plan assets 641,348 539,194 Expected return on plan assets 72,851 72,224 Contributions 36,633 43,625 Benefits paid (24,201) (10,881) Actuarial (loss) (7,281) (2,814) Fair value of closing plan assets 719,350 641,348

The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund at thebeginning of the period, for returns over the entire life of the related obligation.

(Rupees '000)

The Bank operates an approved defined benefit pension and gratuity scheme for all its eligible employees. Contributions are made inaccordance with the actuarial recommendations.

Gratuity payable to members who have completed a minimum of 5 years of service and total service on retirement or cessation ofservice or death is less than 10 years.

Pension payable to members who have completed a minimum of 10 years of service with the Bank on retirement at age of sixtyyears or on completion of 25 years of service with the Bank or on permanent disability or on death during service.

(Rupees '000)

(Rupees '000)


72


33.1.8 Break-up of category of assets(Rupees '000) % age (Rupees '000) % age

Pakistan Investment Bonds (PIBs) 184,130 26% 182,653 28%Term Deposits Receipts (TDRs) 535,194 74% 458,686 72%Bank deposit accounts 26 0% 9 0%

719,350 100% 641,348 100%

33.1.9 Principal actuarial assumptions

2015 2014

Valuation discount rate - per annum 9.00% 11.25%Expected return on plan assets - per annum 9.00% 11.25%Salaries increase rate - per annum 7.00% 9.25%Pension indexation rate 5.00% 7.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005

33.1.10 Disclosure for current and previous four annual years

2015 2014 2013 2012 2011

Present value of obligation 834,743 721,255 617,807 629,749 471,902 Fair value of plan assets (719,350) (641,348) (539,194) (442,793) (355,551) Deficit 115,393 79,907 78,613 186,956 116,351

Experience adjustmentson plan liabilities-(gain)/loss 24,565 (363) (119,517) 78,268 (720)

Experience adjustmentson plan assets-(loss)/gain (7,281) (2,814) (8,331) (5,724) 1,595

33.1.11 Sensitivity analysis

Assumptions Change in assumption

Increase in assumption

Decrease in assumption

Discount rate 1% (105,345) 123,625 Salary rate 1% 72,873 (58,515) Withdrawal rate 10% 3,339 (2,504) Mortality age 1 year (7,513) 7,847

33.1.12 Risks Associated with Defined Benefit Plans

Investment Risks:

Longevity Risks:

Impact on Defined Benefit Obligation

(Rupees '000)

The risk arises when the actual performance of the investments is lower than expectation and thus creating a shortfall in thefunding objectives.

The risk arises when the actual lifetime of retirees is longer than expectation. This risk is measured at the plan level over the entireretiree population.

Actuarial valuation is carried out annually. Latest actuarial valuation was carried out as at December 31, 2015 using Projected UnitCredit Method. Significant actuarial assumptions used are as follows:

2015

(Rupees '000)

2014

Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant.Sensitivity analysis of discount rate and salary increase rate is presented in the below tables:


73


Salary Increase Risk:

Withdrawal Risk:

33.1.13 The expected pension expense for the next financial year works out to Rs. 41.374 million (2014: Rs. 42.334 million).

33.1.14 Maturity Profile 2015 2014

The weighted average duration of the obligation (in years) 14 15

33.2 Defined benefit- unfunded gratuity scheme

33.2.1 General description

2015 201433.2.2 The amounts recognised in the balance sheet are as follows:

Present value of defined benefit obligation 53,821 44,711 Net liability 53,821 44,711

33.2.3 Movement in net liability recognised in the balance sheet 2015 2014

Opening balance of liability 44,711 46,906 Expense for the year 10,488 12,936 Other comprehensive income 9,533 (10,275)Benefits paid during the year (10,911) (4,856)Closing balance of net liability 53,821 44,711

2015 201433.2.4 The amounts recognised in the profit and loss account are as follows:

Current service cost 6,072 7,154 Net interest 4,416 5,782

10,488 12,936


2015 201433.2.5 Movement in payable to defined benefit unfunded gratuity scheme

Present value of obligation at the beginning of the year 44,711 46,906 Current service cost 6,072 7,154 Interest cost 4,416 5,782 Benefits paid (10,911) (4,856)Actuarial loss/(gain) 9,533 (10,275)Present value of obligation at the end of the year 53,821 44,711

33.2.6 Significant actuarial assumptions are as follows: 2015 2014

Discount factor - per annum 10.25% 11.25%Salary increase rate - per annum (short term - 1 year) 5.50% 9.25%Salary increase rate - per annum (long term) 8.25% 9.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005

33.2.7 Disclosure for current and previous four annual periods

2015 2014 2013 2012 2011

Present value of obligation 53,821 44,711 46,906 41,654 42,517 Experience adjustmentson plan liabilities (loss)/gain 9,533 (10,275) 2,497 1,511 (8,075)

(Rupees '000)

The Bank operates a defined benefit unfunded gratuity scheme for all eligible employees.

(Rupees '000)

(Rupees '000)

The most common type of retirement benefit is one where the benefit is linked with final salary. The risk arises when the actualincreases are higher than expectation and impacts the liability accordingly.

The risk of actual withdrawals varying with the actuarial assumptions

(Rupees '000)

(Rupees '000)


74






Discount rate 1% (6,273) 7,421 Salary rate 1% 7,781 (6,658) Withdrawal rate 10% 42 (42) Mortality age 1 Year 58 (58)

34.2.9 Maturity ProfileParticulars

Undiscounted

(Millions of RuYear 1 1.696 Year 2 2.835 Year 3 1.381 Year 4 1.364 Year 5 1.419 Year 6 to Year 10 14.281 Year 11 and above 239.671


Longevity Risks:


Withdrawal Risk:

33.2.11 The expected gratuity expense for the next financial year works out to Rs. 11.218 million (2014: Rs. 11.029 million).



33.3 Unfunded compensated absences



2015 2014

Discount factor - per annum 9.00% 11.25%Salaries increase rate - per annum 7.00% 9.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005

2015 201433.3.3 The amounts recognised in the balance sheet are as follows:

Present value of defined benefit obligation 77,399 79,075

(Rupees '000)

Actuarial valuation was carried out as at December 31, 2015 using Projected Unit Credit Method. Significant actuarial assumptions usedwere as follows:


The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent and contractual employees.


(Rupees '000)

The risk arises when the actual lifetime of retirees is longer than expectation. This risk is measured at the plan level over the entireretiree population;

The most common type of retirement benefit is one where the benefit is linked with final salary. The risk arises when the actualincreases are higher than expectation and impacts the liability accordingly;

The risk of actual withdrawals varying with the actuarial assumptions can impose a risk to the benefit obligation. The movement ofthe liability can go either way


75


2015 201433.3.4 Movement in liability recognized in the balance sheet

Balance at beginning of the year 79,075 88,127 Expense/ (reversal) for the year 10,254 (303) Benefits paid during the year (11,930) (8,749) Closing net Liability 77,399 79,075





Discount rate 1% (1,038) 11,266 Salary rate 1% 11,328 (1,191)


Longevity Risks:


Withdrawal Risk:

33.3.7 The expected compensated absences expense for the next financial year works out to Rs. 7.323 million (2014: Rs. 12.033 million).



(Rupees '000)

The risk of actual withdrawals varying with the actuarial assumptions can impose a risk to the benefit obligation. The movement ofthe liability can go either way.


Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant. Sensitivity analysis of discount rate and salary increase rate is presented in the below tables:




76


33.4 Benevolent fund


33.4.2 Actuarial liability for active employees 12,927 3,343 16,270 10,436 2,564 13,000 Actuarial liability for beneficiaries 38 74 112 75 82 157

Total actuarial liability 12,965 3,417 16,382 10,511 2,646 13,157

Fair value of plan assets (12,736) (3,957) (16,693) (11,266) (3,685) (14,951)

Funding surplus 229 (540) (311) (755) (1,039) (1,794) Receivable from fund (10) - (10) - - - Asset recognized in balance sheet 219 (540) (321) (755) (1,039) (1,794)

Current service cost 210 77 287 356 137 493 Net interest (21) (49) (70) (85) (117) (202)

189 28 217 271 20 291

33.4.3

Expense for the year 1,313 600 1,913 773 382 1,155 Funding surplus - - - - - -

1,313 600 1,913 773 382 1,155



16,693 100% 14,951 100%



The amount recognized in the profitand loss account is as follows:

(Rupees '000) (Rupees '000)

Expected benevolent expense/ (income) for the next one year commencing 01 January, 2016

2015 2014

Total

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to thisfund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% ofbasic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on thebasis of actuarial advice using the Projected Unit Credit Method.

(Rupees '000)2015 2014

Officers Benevolent

Fund

Officers Benevolent

Fund

Staff Benevolent

Fund

Staff Benevolent

Fund Total


77

34. COMPENSATION OF DIRECTORS AND EXECUTIVES President/Chief Executive

2015 2014 2015 2014 2015 2014

Fees - - 1,000 790 - - Managerial remuneration 6,983 6,684 - - 154,228 120,523 Charge for defined benefit plan 1,527 1,418 - - 36,671 20,818 Rent and house maintenance 3,841 2,378 - - 48,774 33,217 Utilities 698 619 - - 15,222 12,052 Medical 1,047 711 - - 18,843 15,285 Conveyance 52 237 - - 8,407 5,998 Leave fare assistance 1,119 20 - - 6,951 6,505 Others 3,026 2,494 406 270 35,424 44,820

18,293 14,561 1,406 1,060 324,520 259,218 Number of persons 1 2 4 8 188 153

Directors Executives

(Rupees in '000)

Executives mean employees, other than the chief executive and directors, whose basic salary exceeds five hundredthousand rupees in a financial year. The remuneration of the Directors has been fixed in accordance with the Articleof Association.


78

SME

Ban

k Li

mite

dN

otes

to th

e U

ncon

solid

ated

Fin

anci

al S

tate

men

tsFo

r the

yea

r end

ed D

ecem

ber 3

1, 20

1535

FAIR

VAL

UE

OF

FIN

ANCI

AL IN

STR

UM

EN

TS

35.1

On

bala

nce

shee

t fin

anci

al in

stru

men

ts

Not

eAv

aila

ble

for

sale

Hel

d to

m

atur

ityH

eld

for

tradi

ngLo

ans a

nd

rece

ivab

les

Oth

er

finan

cial

as

sets

othe

r fin

anci

al

liabi

litie

sT

otal

Leve

l 1Le

vel 2

Leve

l 3

Secu

ritie

s no

t at f

air

valu

eT

otal

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent S

ecur

ities

(T b

ills a

nd P

IBs)

3,95

1,97

3

-

-

-

-

-

3,

951,

973

-

3,95

1,97

3

-

-

3,

951,

973

Ord

inar

y sh

ares

of l

isted

com

pani

es7,

175

-

-

-

-

-

7,17

5

7,

175

-

-

-

7,17

5

O

rdin

ary

shar

es o

f unl

isted

com

pani

es26

,440

26

,440

-

-

-

26

,440

26

,440

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks35

.2-

-

-

-

31

3,41

8

-

313,

418

-

-

-

31

3,41

8

313,

418

- B

alanc

es w

ith o

ther

ban

ks35

.2-

-

-

-

1,

739

-

1,73

9

-

-

-

1,

739

1,73

9

- L

endi

ng to

fina

ncial

inst

itutio

ns35

.2-

-

-

88

5,00

0

-

-

885,

000

-

-

-

88

5,00

0

885,

000

- A

dvan

ces

35.2

-

-

-

2,75

1,71

0

-

-

2,

751,

710

-

-

-

2,75

1,71

0

2,

751,

710

- Oth

er a

sset

s35

.2-

-

-

-

14

8,94

0

-

148,

940

-

-

-

14

8,94

0

148,

940

-O

ther

Inve

stm

ent (

COI/

TDR)

35.2

-

61,6

87

61,6

87

61,6

87

61,6

87

- Sub

sidiar

ySM

E L

easin

g Li

mite

d70

,216

-

-

-

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70

,216

-

-

-

70

,216

70

,216

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s Pay

able

-

-

-

-

-

114,

107

11

4,10

7

-

-

-

114,

107

11

4,10

7

- Bor

row

ings

-

-

-

-

-

2,88

8,68

5

2,

888,

685

-

-

-

2,88

8,68

5

2,

888,

685

- Dep

osits

-

-

-

-

-

4,77

0,20

1

4,

770,

201

-

-

-

4,77

0,20

1

4,

770,

201

- Oth

er L

iabili

ties

-

-

-

-

-

217,

996

21

7,99

6

-

-

-

217,

996

21

7,99

6

The

fair

valu

e of

quo

ted

secu

rities

oth

er th

an th

ose

class

ified

as h

eld to

mat

urity

, is b

ased

on

quot

ed m

arke

t pric

e. Q

uote

d se

curit

ies c

lassif

ied a

s held

to m

atur

ity a

s car

ried

at c

ost.

The

fair

valu

e of

unq

uote

d eq

uity

secu

rities

, oth

er th

an

inve

stm

ents

in a

ssoc

iates

and

subs

idiar

ies, i

s det

erm

ined

on

the

basis

of t

he b

reak

-up

valu

e of

thes

e in

vest

men

ts a

s per

their

late

st a

vaila

ble

audi

ted

finan

cial s

tate

men

ts.

The

fair

valu

e of

unq

uote

d de

bt se

curit

ies, f

ixed

term

loan

s, ot

her a

sset

s, ot

her l

iabili

ties,

fixed

term

dep

osits

and

bor

row

ings

can

not

be

calcu

lated

with

suffi

cient

relai

bilit

y du

e to

the

abse

nce

of c

urre

nt a

nd a

ctiv

e m

arke

t for

thes

e as

sets

and

lia

bilit

ies a

nd re

liabl

e da

ta re

gard

ing

mar

ket r

ates

for s

imila

r ins

trum

ents

.

BOO

K VA

LUE

FAIR

VAL

UE

In th

e op

inio

n of

the

man

agem

ent,

the

fair

valu

e of

the

rem

ainin

g fin

ancia

l ass

ets a

nd li

abili

ties a

re n

ot si

gnifi

cant

ly di

ffere

nt fr

om th

eir c

arry

ing

valu

es. S

ince

thes

e ar

e eit

her s

hort

term

in n

atur

e or

, in

the

case

of d

epos

its, a

re fr

eque

ntly

pre-

price

d.

2015

2015

(Rup

ees i

n '0

00)

(Rup

ees i

n '0

00)


79

SME

Ban

k Li

mite

dN

otes

to th

e U

ncon

solid

ated

Fin

anci

al S

tate

men

tsFo

r the

yea

r end

ed D

ecem

ber 3

1, 20

15

On

bala

nce

shee

t fin

anci

al in

stru

men

ts (c

ontin

ued)

Avai

labl

e fo

r sa

leH

eld

to

mat

urity

Hel

d fo

r tra

ding

Loan

s and

re

ceiv

able

s

Oth

er

finan

cial

as

sets

Oth

er

finan

cial

lia

bilit

ies

Tot

alLe

vel 1

Leve

l 2Le

vel 3

Se

curit

ies

not a

t fai

r va

lue

Tot

al

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent S

ecur

ities

(T b

ills a

nd P

IBs)

1,30

2,70

9

-

-

-

-

-

1,

302,

709

-

1,30

2,70

9

-

-

1,

302,

709

Ord

inar

y sh

ares

of l

isted

com

pani

es7,

128

-

-

-

-

-

7,12

8

7,

128

-

-

-

7,12

8

O

rdin

ary

shar

es o

f unl

isted

com

pani

es26

,440

-

-

-

-

-

26

,440

-

-

-

26

,440

26

,440

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks-

-

-

-

31

2,48

5

-

312,

485

-

-

-

31

2,48

5

312,

485

- B

alanc

es w

ith o

ther

ban

ks-

-

-

-

2,

835

-

2,83

5

-

-

-

2,

835

2,83

5

- L

endi

ng to

fina

ncial

inst

itutio

ns-

-

-

21

5,00

0

-

-

215,

000

-

-

-

21

5,00

0

215,

000

- A

dvan

ces

-

-

-

1,44

6,49

3

-

-

1,

446,

493

-

-

-

1,44

6,49

3

1,

446,

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- Oth

er a

sset

s-

-

-

-

14

6,27

1

-

146,

271

-

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-

14

6,27

1

146,

271

-O

ther

Inve

stm

ent (

COI/

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-

40,0

00

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40,0

00

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40,0

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40,0

00

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E L

easin

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,216

-

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70

,216

-

-

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70

,216

70

,216

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s Pay

able

-

-

-

-

-

58,2

98

58,2

98

-

-

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58,2

98

58,2

98

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row

ings

-

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-

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776,

168

77

6,16

8

-

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776,

168

77

6,16

8

- Dep

osits

-

-

-

-

-

3,34

3,10

2

3,

343,

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-

-

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3,34

3,10

2

3,

343,

102

- Oth

er L

iabili

ties

-

-

-

-

-

204,

497

20

4,49

7

-

-

-

204,

497

20

4,49

7

On

Bala

nce

shee

t fin

anci

al in

stru

men

ts

The

bank

mea

sure

s fair

valu

es u

sing

the

follo

win

g fa

ir va

lues

heir

arch

y th

at re

flect

s the

sign

ifica

nce

of th

e in

puts

use

d in

mak

ing

the

mea

sure

men

ts.

Leve

l 1: F

air v

alue

mea

sure

men

t usin

g qu

oted

pric

es (u

nadj

uste

d) in

act

ive

mar

kets

for i

dent

ical a

sset

s and

liab

ilitie

s.Le

vel 2

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

oth

er th

an q

uote

d pr

ices i

nclu

ded

with

in le

vel 1

that

are

obs

erva

ble

for a

sset

or l

iabili

ty, e

ither

dire

ctly

(i.e.

as p

rices

) or i

ndire

ctly

(i.e.

deriv

ed fr

om p

rices

). Le

vel 3

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

for t

he a

sset

s and

liab

ilitie

s tha

t are

not

bas

ed o

n ob

serv

able

mar

ket d

ata

(i.e.

unob

serv

able

inpu

ts).

35.2

35.3

35.4

BOO

K VA

LUE

FAIR

VAL

UE

2014

2014

The

bank

has

not

disc

lose

d th

e fa

ir va

lue

for t

hese

fina

ncial

ass

ets a

nd li

abili

ties,

as th

ese

are

for s

hort

term

and

or r

e-pr

iced

over

shor

t ter

m. T

here

fore

their

car

ryin

g am

ount

s are

reas

onab

le ap

prox

imat

ion

of fa

ir va

lue.

The

bank

's po

licy

is to

reco

gnise

tran

sfer

into

and

out

of t

he d

iffer

ent f

air v

alue

heira

rchy

leve

ls at

the

date

, the

eve

nt o

r cha

nge

in c

ircum

stan

ces,

that

cau

sed

the

trans

fer o

ccur

red.

The

re w

ere

no tr

ansf

ers b

etw

een

level

1 an

d lev

el 2

durin

g th

e ye

ar.

Curr

ently

no

finan

cial i

nstru

men

ts a

re c

lassif

ied in

leve

l 3.


80

36. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES

The segment analysis with respect to business activity is as follows:

Trading & Commercial TotalSales Banking

Total income 347,906 405,295 753,201 Total expenses 303,364 724,407 1,027,771 Net income/ (loss) before tax 44,542 (319,112) (274,570) Segment Assets (gross) 5,604,507 8,598,534 14,203,041 Segment Non Performing Loans - 5,517,582 5,517,582 Segment Provision Required 207,443 5,379,072 5,586,515 Segment liabilities 3,044,025 5,216,185 8,260,210 Segment Return on net Assets (ROA) (%) 0.83% -9.91%Segment cost of funds (%) 9.97% 13.89%

Total income 500,131 376,177 876,308 Total expenses 420,036 834,603 1,254,639 Net income/ (loss) before tax 80,095 (458,426) (378,331) Segment assets (gross) 2,252,181 8,659,023 10,911,204 Segment non performing loans - 5,640,890 5,640,890 Segment provision required 207,443 5,403,409 5,610,852 Segment liabilities 945,155 3,665,831 4,610,986 Segment Return on net Assets (ROA) (%) 3.92% -14.08%Segment cost of funds (%) 44.44% 22.77%

Assumptions used:

-

- Unallocatable liabilities representing 5.18% (2014: 8.46%) of the total liabilities have been allocated tosegments based on their respective incomes.

Dcember 31, 2014

December 31, 2015 (Rupees in '000)

Unallocatable assets representing 0.81% (2014: 0.97%) of the total assets have been allocated to segmentsbased on their respective incomes.


81

37.

RE

LAT

ED

PAR

TY

TR

ANSA

CTIO

NS

Det

ails o

f bala

nces

out

stan

ding

at p

erio

d en

d an

d tra

nsac

tions

with

relat

ed p

artie

s are

as f

ollo

ws:

Subs

idia

ry

Key

Oth

erD

irect

ors

Equ

ity

Em

ploy

ees

Em

ploy

ees

Subs

idiar

y K

eyO

ther

Dire

ctor

sE

quity

E

mpl

oyee

sE

mpl

oyee

sSM

EL

Man

agem

ent

Em

ploy

ees

Parti

cipa

tion

bene

fitPr

ovid

ent

SME

LM

anag

emen

tE

mpl

oyee

sPa

rtici

patio

nbe

nefit

Prov

iden

t Pe

rson

nel

Fund

plan

sT

rust

Pers

onne

lFu

ndpl

ans

Trus

t

Balan

ces o

utst

andi

ng a

s at

-In

vest

men

t in

subs

idiar

y21

5,45

7

-

-

-

-

-

-

21

5,45

7

-

-

-

-

-

-

-

Adv

ance

s12

6,84

6

12

,718

135,

536

-

-

-

-

15

5,04

4

10,3

30

147,

732

-

-

-

-

-

Rece

ivab

les/

mar

kup

1,194

6,

381

46

,330

-

1,3

54

32

1

-

1,91

9

5,08

7

47

,041

-

44

1,79

4

-

-

Dep

osits

1,449

13

,317

100,

480

-

365,

757

-

84,4

05

94

7

1,33

4

58

,229

17

34

6,16

7

-

2,15

4

-Pa

yabl

es/m

arku

p-

30

63

6

-

1,3

98

24

3,60

3

633

-

12

430

-

-

20

3,69

3

7

Tran

sact

ions

dur

ing

the

year

end

ed

-N

et m

ark-

up /

inte

rest

ear

ned

17,19

2

377

4,33

0

-

-

-

-

15,8

68

35

4

5,11

0

-

-

-

-

-

Net

mar

k-up

/ in

tere

st e

xpen

sed

-

26

4

4,

657

-

16,15

6

-

4,35

6

-

319

4,

670

2

22

,979

-

107

-To

tal d

ebit

in ru

nnin

g fin

ance

57,8

05

-

-

-

-

-

-

25

3,35

1

-

-

-

-

-

-

-

Tota

l cre

dits

in ru

nnin

g fin

ance

86,0

03

-

-

-

-

-

-

14

1,79

0

-

-

-

-

-

-

-

Paym

ents

mad

e on

beh

alf o

f59

5

-

-

-

158

-

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49

2

-

-

-

70

-

-

-

Paym

ents

rece

ived

from

595

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721

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-

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mun

erat

ion

and

allow

ance

s-

42,16

9

33

6,41

8

-

-

-

-

-

33

,562

31

8,65

6

-

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-

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ymen

ts to

em

ploy

ees b

enef

it pl

ans

-

-

-

-

-

84

,104

-

-

-

-

-

-

68

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-

-

Char

ge fo

r the

yea

r rel

atin

g to

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-

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empl

oyee

s ben

efit

plan

s-

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-

-

-

62,9

28

-

-

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-

56,2

56

-

-Fe

e an

d co

mm

issio

n in

com

e-

-

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-

1,1

52

-

-

-

-

-

-

1,

285

-

-

Rem

uner

atio

n of

chi

ef e

xecu

tive

offic

er, D

irect

ors a

nd e

xecu

tives

is d

isclo

sed

in n

ote

35 to

the

finan

cial

stat

emen

ts.

Prin

cipa

l ter

ms o

f loa

n fa

cilit

y to

SM

EL

Amou

nt (R

s. in

000

) 1

50,0

00

1

year

Kib

or +

3.5

0%T

erm

Runn

ing

finan

ce fa

cilit

y (re

view

able

ann

ually

)

Rup

ees i

n '0

00Ru

pees

in '0

00

Inte

rest

rate

Dec

embe

r 31,

2015

Dec

embe

r 31,

201

4 Notes to the Financial StatementsFor the year ended December 31 , 2015

82

38. CAPITAL ADEQUACY

2015 2014Regulatory capital base (Rupees in '000)Tier I capital Shareholders capital/assigned capital 2,392,507 2,392,507 Reserves 206,526 206,526 Unappropriated/unremitted profits (net of losses) (2,296,206) (1,972,670)

302,827 626,363 Less: Adjustments

Goodwill/intangible Assets 1,281 1,075 Investment in equity of subsidiary 70,216 70,216 Deficit on revaluation of available for sale investments - 151

71,497 71,442 Total tier I capital 231,330 554,921 Tier II capital 8,174 11,660 Eligible tier III capital - - Total regulatory capital (a) 239,504 566,581

Risk-weighted exposures Book Value Risk Adjusted Book Value Risk Adjusted

Value ValueCredit riskBalance sheet items: Cash and other liquid assets 391,750 348 369,618 567 Investments/ lending to financial institutions 5,002,491 660,302 1,661,493 276,568 Loans and advances 2,751,710 1,632,168 2,928,737 1,713,243 Fixed assets 120,283 120,283 131,490 131,490

Deferred tax assets - - - - Other assets 350,292 292,670 209,014 164,582

8,616,526 2,705,771 5,300,352 2,286,450 Off balance sheet itemsWeighted Non-funded exposures 167,605 83,803 161,283 80,642

167,605 83,803 161,283 80,642

Credit risk-weighted exposures (b) 8,784,131 2,789,574 5,461,635 2,367,092

Market risk 737,793 309,661 Market risk-weighted exposures - 737,793 - 309,661

Total risk-weighted exposures (c) 3,527,367 2,676,753 Capital adequacy ratio credit risk [ (a) / (b) x 100 ] 8.59% 23.94%Total Capital adequacy ratio [ (a) / (c) x 100 ] 6.79% 21.17%

State Bank of Pakistan (SBP) has granted exemption to the Bank vide letter No. BSD/SU-21/220/1624/2007 dated June08, 2007 from computing capital adequacy ratio under BASEL II till restructuring/privatization and has grantedexemption from implementation of Basel III Capital Instructions till restructuring/privatization vide SBP letter #BPRD/BA&CPD/646/000886/16 dated January 12, 2016. Accordingly, the Bank computes capital adequacy ratio underBASEL I and SBP has allowed exemption in meeting the minimum CAR requirements of 10% till June 30, 2016 vide SBPletter No. BPRD/BA&CP/646/3116/2016 dated February 08, 2016.

(Rupees '000)

The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacy is asfollows:

2015 2014


83

39. RISK MANAGEMENT

39.1 Credit risk

39.1.1 Segment by class of business

Contingencies andCommitments

(Rupees Percent (Rupees Percent (Rupees Percent in '000) in '000) in '000)

Chemical and pharmaceuticals 171,680 2.1% 105 0.0% - - Agriculture, forestry, hunting and fishing 248,968 3.1% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 444,915 5.6% 76,646 1.6% - - Cement 20,268 0.3% - - - -

86,890 1.1% 2,804 0.1% - - - -

81,786 1.0% 143 0.0% - - Financial 126,846 1.6% 717,209 15.0% 2,871,813 65.6%Insurance - 0.0% 19 0.0% - -

- 40,428 0.5% 1,003 0.0% - -

375,856 4.7% - - - - -

61,609 0.8% 1,350 0.0% - - Wholesale and trade 1,941,230 24.2% - - - -

74,464 0.9% - - - - Individuals 1,644,950 20.5% 1,678,625 35.2% 391,523 9.0%Services 110,076 1.4% - - 15,000 0.3%Government - - - - 1,016,665 23.2%Others 2,572,863 32.1% 2,292,297 48.1% 81,729 1.9%

8,011,882 100% 4,770,201 100% 4,376,730 100%

39.1.2Segment by sector

Public/ Government - - 2,471,992 52% 1,016,665 23%Private 8,011,882 100% 2,298,209 48% 3,360,065 77%

8,011,882 100% 4,770,201 100% 4,376,730 100%

Transport, storage, and communication

Construction

Footwear and leather garments

Credit risk represents the accounting loss that would be recognised at the reporting date if counter parties failed completely toperform as contracted. The Bank is not exposed to major concentration of credit risk. Written procedures for credit and riskmanagement functions have been developed and implemented. Credit evaluation system comprise of well designed loan approvaland review responsibilities and it is ensured that Bank's credit-granting activities conform to the established strategy, prudentialregulations and SBP instructions are strictly followed. To ensure that credit granting activities are adequately diversified, besidesfixing limits on individual credit, it is ascertained that there is no concentration in a particular industry or economic sector,geographical region and specific product. Special attention is placed on such non-performing loans and a Special AssetsManagement Division follows up and recovers all such loans. Recovery against certain specific non-performing loans has beenoutsourced to National Bank of Pakistan.

Automobile and transportation equipment

Electronics and electrical appliances

Power (electricity), gas, water and sanitary

2015

Deposits Advances (Gross)


84

Segment by class of business



Chemical and pharmaceuticals 163,217 2.0% 218 0.0% - - Agriculture, forestry, - hunting and fishing 247,424 3.0% - 0.0% - - Mining & quarrying 9,053 0.1% - - - - Textile 455,858 5.5% 75,074 2.3% - - Cement 20,268 0.3% 42,006 1.3% - -

89,614 1.1% 583 0.0% - - - -

91,435 1.1% 23 0.0% - - Financial 155,044 1.9% 722,114 21.6% 729,012 31.8%Insurance - - 19 0.0% - -

- 35,246 0.4% 19 0.0% - -

289,426 3.5% - - - - -


- - 70,473 0.9% - - - -

Individuals 1,660,754 20.1% 1,569,584 47.0% 463,618 20.2%Services 108,851 1.3% - - 15,000 0.7%Government - - - 1,010,748 44.0%Others 2,836,462 34.4% 931,144 27.9% 77,184 3.4%

8,253,602 100% 3,343,102 100% 2,295,562 100%

Segment by sector

Public/ Government - - 1,318,187 39.4% 1,010,748 44.0%Private 8,253,602 100% 2,024,915 60.6% 1,284,814 56.0%

8,253,602 100% 3,343,102 100% 2,295,562 100%

Electronics and electrical appliancesConstructionPower (electricity), gas, water and sanitary


2014

Advances (Gross) Deposits

Footwear and leather garmentsAutomobile and transportation equipment


85


39.1.3 Details of non-performing advances and specific provisions by class of business segment

Specific Specific Provisions Provisions

Held Held

Chemical and pharmaceuticals 102,379 100,017 104,778 101,023 Agriculture, forestry, hunting and fishing 203,286 203,286 203,408 203,408 Mining & quarrying 9,053 9,053 9,053 9,053 Textile 366,196 355,325 374,680 357,546 Cement 20,268 20,268 20,268 20,268 Sugar - - - - Footwear and leather garments 78,174 59,388 59,919 58,591 Automobile and transportation equipment 17,404 8,553 19,692 7,402 Electronics and electrical appliances 15,551 13,494 12,891 9,258 Construction 71,037 67,183 42,044 38,244 Power (electricity), gas, water and sanitary 13,615 10,900 23,867 12,362 Wholesale and trade 1,399,520 1,345,897 1,538,713 1,505,034 Transport, storage and communication 654 654 2,031 2,031 Individuals 1,522,679 1,522,679 1,523,166 1,523,166 Services 7,590 6,630 70,716 66,934 Others 1,690,176 1,528,671 1,635,664 1,401,445

5,517,582 5,251,998 5,640,890 5,315,765

39.1.4 Details of non-performing advances - - and specific provisions by sector

Public/ Government - - - - Private 5,517,582 5,251,998 5,640,890 5,315,765

5,517,582 5,251,998 5,640,890 5,315,765

2015 2014(Rupees in '000)

Classified Advances

Classified Advances


86


39.1.5 GEOGRAPHICAL SEGMENT ANALYSIS

Contingenciesand

commitments

Pakistan (274,570) 8,616,526 356,316 4,376,730 Asia Pacific (including South Asia) - - - - Europe - - - - United States of America and Canada - - - - Middle East - - - - Others - - - -

(274,570) 8,616,526 356,316 4,376,730

Contingenciesand

commitments


(378,331) 5,300,352 689,366 2,295,562

39.2 Market risk

2015

(Rupees in '000)

Market risk is the risk that the value of on and off-balance sheet positions of the Bank will be adverselyaffected by movements in interest rates, foreign exchange rates and equity prices resulting in a loss to earningsand capital. The Bank's interest rates exposure comprises those originating from investing and lendingactivities. The Asset and Liability Committee of the Bank monitors and manages the interest rate risk with theobjective of limiting the potential adverse effect on the profitability of the Bank.

Net assets employed

Total assets employed

(Rupees in '000)

Loss before taxation


2014

Net assets employed

Total assets employees


87


39.2.1 Foreign exchange risk

Presently the Bank does not deal in foreign exchange.

Net foreigncurrencyexposure

(Rupees in '000)

Pakistan rupee 8,616,526 8,260,210 4,376,730 - United States dollar - - - - Great Britain pound - - - - Deutsche mark - - - - Japanese yen - - - - Euro - - - - Other currencies

8,616,526 8,260,210 4,376,730 -


(Rupees in '000)


5,300,352 4,610,986 2,295,562 -

39.2.2 Equity position risk

The Bank's exposure in equity market is classified in available for sale category with the intent to earn profitbased on fundamentals.

Assets Off-balance sheet items

2015

2014

Assets Liabilities Off-balance sheet items

Liabilities


88

SME

Ban

k Li

mite

dN

otes

to th

e U

ncon

solid

ated

Fin

anci

al S

tate

men

tsFo

r the

yea

r end

ed D

ecem

ber 3

1, 20

15

39.2

.3M

ism

atch

of i

nter

est r

ate

sens

itive

ass

ets a

nd li

abili

ties

Effe

ctiv

eN

on-in

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Yiel

d/be

arin

gIn

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otal

finan

cial

rate

inst

rum

ents

On-

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nce

shee

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anci

al in

stru

men

tsAs

sets

Cash

and

bala

nces

with

trea

sury

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ks39

0,01

1

-

-

-

-

-

-

-

-

-

39

0,01

1

Ba

lance

s with

oth

er b

anks

4.12

%1,7

39

587

21

0

144

60

67

-

12

161

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49

8

Lend

ing

to fi

nanc

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7.58

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5,00

0

40

0,00

0

485,

000

-

-

-

-

-

-

-

-

In

vest

men

ts9.

23%

4,11

7,49

1

356,

121

39

7,83

9

297,

885

1,34

9,18

1

375,

754

275,

511

41

8,36

1

576,

623

-

70

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A

dvan

ces

12.9

9%2,

751,7

10

142,

123

42

8,87

6

671,

249

956,

228

88,8

64

410,

878

28

,418

19,3

10

5,76

4

-

O

ther

ass

ets

148,

940

-

-

-

-

-

-

-

-

-

148,

940

8,29

4,89

1

898,

831

1,

311,

925

969,

278

2,30

5,46

9

464,

685

686,

389

44

6,79

1

596,

094

5,

764

609,

665

Liab

ilitie

sBi

lls p

ayab

le11

4,10

7

-

-

-

-

-

-

-

-

-

11

4,10

7

Bo

rrow

ings

from

fina

ncial

inst

itutio

ns7.

22%

2,88

8,68

5

2,35

4,62

6

48

9,51

1

4,34

4

8,68

8

17,2

46

9,13

1

5,

139

-

-

-

Dep

osits

and

oth

er a

ccou

nts

7.13

%4,

770,

201

1,30

7,91

1

81

8,85

1

225,

434

41

7,20

6

5,42

5

-

-

1,49

3,07

5

-

50

2,29

9

Su

b-or

dina

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loan

s-

-

-

-

-

-

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-

-

-

-

Loan

from

the

Stat

e Ba

nk o

f Pak

istan

-

-

-

-

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-

-

-

-

-

-

Li

abili

ties a

gain

st a

sset

s sub

ject

to fi

nanc

e lea

se-

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

217,

996

-

-

-

-

-

-

-

-

-

217,

996

7,99

0,98

9

3,66

2,53

7

1,

308,

362

229,

778

425,

894

22,6

71

9,13

1

5,

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1,49

3,07

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-

83

4,40

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O

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30

3,90

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(2,7

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06)

3,

563

739,

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1,

879,

575

44

2,01

4

67

7,25

8

441,

652

(8

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5,76

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(224

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O

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Com

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278,

263

278,

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-

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Com

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aga

inst

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bor

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2,87

1,813

2,

384,

407

487,

406

-

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Off-

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076

2,66

2,67

0

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7,40

6

-

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Tota

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(5,4

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(483

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739,

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1,87

9,57

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677,

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1,65

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(896

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(5,4

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(5

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)

(5,1

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(3,2

91,1

44)

(2,8

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(2,1

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(1

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)

(2,6

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01)

(2

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-

39

.2.3

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conc

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of a

sset

s and

liab

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s exp

osed

to y

ield/

inte

rest

rate

risk

with

tota

l ass

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nd li

abili

ties

(Rup

ees '

000)

(Rup

ees '

000)

Tota

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ancia

l ass

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s per

not

e 39

.2.3

8,29

4,89

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Tota

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l liab

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s as p

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ote

39.2

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7,99

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A

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on-fi

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120,

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1

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201,

352

Balan

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616,

526

Balan

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s per

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Shee

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260,

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39.2

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Yiel

d ris

k is

the

risk

of d

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ear

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s due

to a

dver

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ovem

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f the

yiel

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39.2

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Inte

rest

rate

risk

2015 Exp

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to Y

ield

/Int

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(Rup

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n '0

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Inte

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kth

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ofRs

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94,8

91th

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014:

Rs.5

,106

,119

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whi

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ere

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tere

stra

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kam

ount

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Rs.7

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(201

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48th

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amou

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,996

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Ass

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ittee

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prop

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itiga

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ny in

tere

st ra

te a

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quid

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sk.

Ove

r 1 to

3

mon

ths

Ove

r 3 to

6

mon

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Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

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pto

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r 2 to

3

year

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ver 3

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r 5 to

10

year

sAb

ove

10

year

sNotes to the Financial StatementsFor the year ended December 31 , 2015

89

Mis

mat

ch o

f int

eres

t rat

e se

nsiti

ve a

sset

s and

liab

ilitie

s

Effe

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on-in

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d/be

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otal

finan

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On-

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nce

shee

t fin

anci

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men

tsAs

sets

Cash

and

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with

trea

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ban

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6,78

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-

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-

-

-

-

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36

6,78

3

Balan

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ban

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69%

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23

3

98

11

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282

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50

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10.17

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0

15,0

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-

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-

Inve

stm

ents

11.14

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46,4

93

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222,

793

837

2,67

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6

524,

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8,

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70,2

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2,64

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464,

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82

7,14

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92

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1

53

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45

6,17

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54

26

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-

O

ther

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146,

271

-

-

-

-

-

-

-

-

-

146,

271

5,

106,

119

38

0,32

1

678,

067

1,

050,

168

92

0,94

6

56

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81

8,07

3

575,

205

36

,018

7,

053

583,

771

Li

abili

ties

Bills

pay

able

58,2

98

-

-

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n ap

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Upt

o 1

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thO

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90

39.3

Liqu

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k

39.3

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of A

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Ove

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sets

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h an

d ba

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s with

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sury

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serv

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ratio

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isk

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isk is

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risk

of lo

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sulti

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om in

adeq

uate

or f

ailed

inte

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proc

esse

s, pe

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ainta

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ny fu

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fina

ncial

obl

igat

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ratio

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isks

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line

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sines

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cpo

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lsan

dm

onito

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ples

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ses,

frau

d m

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ts, t

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actio

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sing

mon

itorin

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d an

alysis

and

bus

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s con

tinui

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lanni

ng.

2015

Inco

mpl

iance

with

the

BSD

circu

larlet

ter

No.

03of

2011

date

dFe

brua

ry22

,201

1,all

asse

tsan

dlia

bilit

iesw

ithco

ntra

ctua

lmat

uriti

esha

vebe

enre

porte

das

per

their

rem

ainin

gm

atur

ities

,and

whe

reco

ntra

ctua

lmat

uriti

esar

eno

tava

ilabl

e,su

chas

sets

and

liabi

lities

have

been

repo

rted

aspe

rthe

irex

pect

edm

atur

ities

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erm

ined

onth

eba

sisof

beha

vior

stud

yof

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year

s' hi

stor

ic da

ta u

nder

vol

atili

ty m

etho

dolo

gy. T

hese

bas

es h

ave

also

been

app

rove

d by

the

Ass

et a

nd L

iabili

ty C

omm

ittee

(ALC

O) o

f the

Ban

k.


91

Mat

uriti

es o

f Ass

ets a

nd L

iabi

litie

s

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

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r 5U

pto

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s to

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to 10

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thm

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arye

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year

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rs

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upee

s in

'000

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sets

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h an

d ba

lance

s with

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sury

ban

ks36

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31

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10

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nces

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er b

anks

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1,

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gain

st a

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x lia

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isk

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ratio

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isk is

the

risk

of lo

ss re

sulti

ng fr

om in

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uate

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ailed

inte

rnal

proc

esse

s, pe

ople

and

syst

em o

r fro

m e

xter

nal e

vent

s.

2014

Ope

ratio

nalr

isks

are

man

aged

thro

ugh

Bank

-wid

eor

line

ofbu

sines

ssp

ecifi

cpo

licies

and

proc

edur

es,c

ontro

lsan

dm

onito

ring

tool

s.E

xam

ples

ofth

ese

inclu

depe

rson

nelm

anag

emen

tpr

actic

es, d

ata

reco

ncili

atio

n pr

oces

ses,

frau

d m

anag

emen

t uni

ts, t

rans

actio

n pr

oces

sing

mon

itorin

g an

d an

alysis

and

bus

ines

s con

tinui

ty p

lanni

ng.

Inco

mpl

iance

with

the

BSD

circu

larlet

ter

No.

03of

2011

date

dFe

brua

ry22

,201

1,all

asse

tsan

dlia

bilit

iesw

ithco

ntra

ctua

lmat

uriti

esha

vebe

enre

porte

das

per

their

rem

ainin

gm

atur

ities

,and

whe

reco

ntra

ctua

lmat

uriti

esar

eno

tava

ilabl

e,su

chas

sets

and

liabi

lities

have

been

repo

rted

aspe

rthe

irex

pect

edm

atur

ities

,det

erm

ined

onth

eba

sisof

beha

vior

stud

yof

prev

ious

six

year

s' hi

stor

ic da

ta u

nder

vol

atili

ty m

etho

dolo

gy. T

hese

bas

es h

ave

also

been

app

rove

d by

the

Ass

et a

nd L

iabili

ty C

omm

ittee

(ALC

O) o

f the

Ban

k.


92


2015 201440 EMPLOYEES PROVIDENT FUND TRUST

Size of the Fund 191,657 169,761 Cost of investments made 141,295 123,836 Percentage of investments made 74% 73%Fair value of investments 141,295 123,836

Breakup of investments is as follows:Rupees % Rupees %

(000) (000)

Term Deposits Receipts (TDRs) 12,663 9% 77,456 63%Pakistan Investment Bonds (PIBs) 44,226 31% 44,226 35%

84,406 60% 2,154 2%

41 DATE OF AUTHORIZATION

These financial statements were authorized for issue by the Board of Directors of the Bank on March 05, 2016.

(Rupees in '000)

2015 2014

Bank deposit accounts

All investments out of provident fund trust have been made in accordance with Section 227 of theCompanies Ordinance, 1984 and rules formulated for this purpose.



93

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s Notes to the Financial StatementsFor the year ended December 31 , 2015

94

SMEBL: HO: CS: 2016/ 15 / 1323

NOTICE OF 14th ANNUAL GENERAL MEETING To

All Members of the Bank KPMG Taseer Hadi & Co. Notice is hereby given that 14th Annual General Meeting of SME Bank Limited will be held on Wednesday, March 30, 2016 at 4:00 pm at Registered Office, SME Bank Ltd., 56-F, Nazimuddin Road, Blue Area, F-6/1, Islamabad to transact the following:

Ordinary Business:

1. To confirm the minutes of 9th Extra Ordinary General Meeting of shareholders of the Company held on November 03, 2015.

2. To receive, consider and adopt the Audited Financial Statements of the Bank for the year ended December 31, 2015 together with Auditors’ Report, Statement of Compliance with Public Sector Companies (Corporate Governance) Rules and Review Report thereon.

3. Review of Contents of Annual Report 2015 4. To appoint Auditors and to fix their remuneration for the year ending December 31, 2016. 5. To transact any other business with the permission of the Chair.

By Order of the Board Islamabad Sajjad Ahmad Warraich Dated: March 7, 2016 Company Secretary

(Cell # 0300-5599658) Notes:

1. A Member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote for

him/her at the meeting. A proxy must be a member of the company. However, an association (whether body corporate or not) being a member of the Company may appoint as its proxy one of its officers though not a member of the Company. (Form of Proxy is attached)

2. An instrument of the proxy and the Power of Attorney or other Authority (if any) under which it is signed or

a notarially certified copy of such Power of Attorney or Authority in order to be valid must be duly signed and deposited at registered office of the Company not less than 48 hours before the time of holding the meeting.

95

SME BANK LIMITEDCONSOLIDATED FINANCIAL STATEMENTS


97

Auditors ’ Repor t to the MembersFor the year ended December 31 , 2015

We have audited the annexed consolidated statement of financial statements comprising consolidated statement of financial position of SME Bank Limited and its subsidiary company (“ the Group”) as at December 31, 2015 and the related consolidated profit and loss account, consolidated statement of comprehensive income, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the ‘financial statements’) for the year then ended, in which are incorporated the unaudited certified returns from the branches except for 10 branches which have been audited by us. We have also expressed separate opinions on the financial statements of SME Bank Limited and is subsidiary company namely SME Leasing Limited. These financial statements are responsibility of the Holding Company’s management. Our responsibility is to express an opinion on these financial statements based on audit.

Our audit was conducted in accordance with the International Standards on Auditing and accordingly included such test of accounting records and such auditing procedures as we considered necessary in the circumstances.

a) Other assets include Trade Rights Entitlement Certificate (TREC) of Lahore Stock Exchange Limited having carrying amount of Rs.16.17 million. The State Bank of Pakistan had allowed the bank to record a provision of 25% against the carrying amount of TREC upto March 2015, and if the matter is not resolved to record 100% provision thereafter. However, the bank has recorded impairment only to the extent of 25% of the value of TREC. Had the provision been recorded at 100%, loss after tax for the year and the accumulated losses would have increased by Rs. 16.17 million and the consolidated capital adequacy return of the Bank as at 31 December 2015 would have reduced by 0.38%.

In our opinion, except for the effect on the consolidated financial statements of the matter described in paragraph (a) above, the consolidated financial statements presents fairly the financial position of SME Bank Limited and its subsidiary company as at December 31, 2015 and the results of their operation for the year than ended

Without further qualifying our opinion, we draw attention to:

• Note 7.4.1 to the consolidated financial statements with indicates that the Group continues to operate in net loss situation and notwithstanding the matter referred to in paragraph (a) above, has incurred a net loss after tax of Rs. 299.5 million during the year ended December 31, 2015 and its accumulated losses stand at Rs. 2.275 billion as of the reporting date. Further the Bank on a standalone basis has shortfall of Rs. 1.904 billion on 31 December 2015 in meeting the minimum capital requirement of Rs. 2 billion (net of losses) as prescribed by the State Bank of Pakistan (SBP) on the basis of amounts reported in the unconsolidated statement of financial position. These conditions, along with other matters as set forth in note 7.4.1, indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern.

• Note 7.4.2 to the consolidated financial statements, which elaborates that SME Leasing

Limited has not complied with the minimum equity requirements of the Non-Banking finance Companies and Notified Entities regulations, 2008 issued by Securities and Exchange

98

Commission of Pakistan. This condition, along with other matters as set forth in the above referred note indicate the existence of material uncertainty that may cast significant doubt about SME Leasing Limited’s ability to continue as going concern. However, the financial statements of SME Leasing Limited which have been incorporated in these consolidated financial statements are prepared on the going concern basis as the management,

considering the mitigating factors mentioned in the above referred note including availability of financing from the Holding Company, is confident that SME Leasing Limited will be able to continue its business in the foreseeable future.

We further draw attention to note 15.2 of the consolidated financial statements, wherein matter relating to recording of property amounting to Rs. 138.6 million and the status of the related legal proceedings has been explained. Our opinion is not qualified on this matter.

Islamabad KPMG Taseer Hadi & Co.05 March 2016 Chartered Accountants Engagement Partner Syed Bakhtiyar Kazmi

99

Consol idated Statement of Financial Posit ionAs at December 31 , 2015

Note 2015 2014

ASSETSCash and balances with treasury banks 8 390,101 366,873 Balances with other banks 9 3,315 7,318 Lendings to financial institutions 10 885,000 215,000 Investments 11 4,051,558 1,379,486 Advances 12 3,166,833 3,402,772 Operating fixed assets 13 129,581 141,955 Deferred tax assets 14 - - Other assets 15 356,489 217,204

8,982,877 5,730,608 LIABILITIES

Bills payable 16 114,107 58,298 Borrowings 17 2,889,058 777,433 Deposits and other accounts 18 4,768,752 3,342,155 Liability against assets subject to finance lease 19 1,975 3,173 Other liabilities 20 748,437 739,925

8,522,329 4,920,984 NET ASSETS 460,548 809,624

REPRESENTED BYShare capital 21 2,392,507 2,392,507 Reserves 22 234,660 234,660 Unappropriated loss 22 (2,275,143) (1,939,100)

352,024 688,067 Non-controlling interest 23 52,765 57,070

404,789 745,137 Surplus on revaluation of assets 24 55,759 64,487

460,548 809,624

CONTINGENCIES AND COMMITMENTS 25

(Rupees in '000)

The annexed notes from 1 to 44 and annexure form an integral part of these consolidated financial statements.


100

Consol idated Profi t and Loss AccountFor the year ended December 31 , 2015

Note

Mark-up/ return/ interest earned 26 715,659 819,048 Mark-up/ return/ interest expensed 27 436,487 542,878 Net mark-up/ interest income 279,172 276,170

Provision against non-performing loans and advances-net 12.5 (68,842) 68,716 Provision for diminution in the value of investments 11.4 - - Bad debts written off directly - -

(68,842) 68,716 Net mark-up/ interest income after provisions 348,014 207,454

NON MARK-UP/ INTEREST INCOME

Fee, commission and brokerage income 11,022 10,586 Dividend income 1,395 906 Income from dealing in foreign currencies - - Gain on sale of securities 28 32,536 73,434 Unrealized gain on revaluation of investments classified as held for trading - - Other income 29 3,287 2,686 Total non-markup/ interest income 48,240 87,612

396,254 295,066

NON MARK-UP/ INTEREST EXPENSES

Administrative expenses 30 682,821 634,381 Other provisions/ write offs 15.4 & 13.2 8,282 37,068 Other charges 31 826 831 Total non-markup/ interest expenses 691,929 672,280 LOSS BEFORE TAXATION (295,675) (377,214) Taxation - Current 32 7,866 9,204 - Prior (4,073) - - Deferred - -

3,793 9,204 LOSS AFTER TAXATION (299,468) (386,418) Attributable to :Equity holders of the Bank (294,818) (383,451) Non-controlling interest (4,650) (2,967)

(299,468) (386,418)

(Rupees in '000)


2015 2014


101

Consol idated Statement of Comprehensive IncomeFor the year ended December 31 , 2015

Net loss after taxation (299,468) (386,418)

(41,168) 7,789 Comprehensive income transferred to equity (340,636) (378,629)

Net change on remeasurement of available for sale investment to fair value (8,440) 65,718 - -

(8,440) 65,718

Total comprehensive income (349,076) (312,911)

Attributable to :Equity holders of the Bank (344,771) (310,263) Non-controlling interest (4,305) (2,648)

(349,076) (312,911)

2015 2014


(Rupees in '000)

Items that will never be reclassified subsequently to profit and loss accountRecognition of net actuarial (loss)/gain

Components of comprehensive income not reflected in equity

Deferred tax


102

Consol idated Cash F low StatementFor the year ended December 31 , 2015

2015 Note

CASH FLOW FROM OPERATING ACTIVITIES Loss before taxation (295,675) (377,214) Less: Dividend income (1,395) (906)

(297,070) (378,120) Adjustments for non-cash/ other items Depreciation 29,687 20,292 Amortization 755 1,113 (Reversal)/provision against non-performing advances (68,842) 68,716 Charge of provision for diminution in the value of investment - - Gain on sale of fixed asset (1,743) (1,167) Finance charges on leased assets 266 488 Other provisions 8,282 37,068

- - (31,595) 126,510

(328,665) (251,610) (Increase)/ Decrease in operating assets Lendings to financial institutions (285,000) 200,000 Advances 304,781 (149,841) Other assets (excluding advance taxation) (147,567) 59,040

(127,786) 109,199 Increase/ (Decrease) in operating liabilities Bills payable 55,809 (27,477) Borrowings from financial institutions 2,111,625 (975,508) Deposits 1,426,597 (369,264) Other liabilities (excluding current taxation) (21,539) (10,843)

3,572,492 (1,383,092) 3,116,041 (1,525,503)

Income tax paid (14,910) (12,431) Net cash generated from / (used in) operating activities 3,101,131 (1,537,934) CASH FLOW FROM INVESTING ACTIVITIESNet (investment)/disinvestment in available-for-sale securities (2,658,825) 1,261,690 Net investment in held-to-maturity securities (21,687) - Dividend received 1,395 906 Investment in operating fixed assets (20,032) (57,936) Sale proceeds of property and equipment disposed-off 3,707 2,143 Net cash (used in) / generated from investing activities (2,695,442) 1,206,803 CASH FLOW FROM FINANCING ACTIVITIESPayment of lease obligations (1,464) (7,285) Net cash used in financing activities (1,464) (7,285) Increase/(Decrease) in cash and cash equivalents 404,225 (338,416) Cash and cash equivalents at beginning of the year 389,191 727,607 Cash and cash equivalents at end of the year 34 793,416 389,191


Bad debts written off directly



103

Consol idated Statement of Changes in EquityFor the year ended December 31 , 2015

Shar

e Ca

pita

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tatu

tory

rese

rve

Res

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aga

inst

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ture

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es

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S

ub T

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nce

as a

t Jan

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01,

2014

2,39

2,50

7

227,

019

7,64

1

(1,5

63,4

47)

1,06

3,72

0

59,7

18

1,

123,

438

T

otal

com

preh

ensi

ve in

com

e fo

r the

yea

r end

edD

ecem

ber 3

1, 20

14N

et lo

ss fo

r the

yea

r end

ed D

ecem

ber 3

1, 2

014

-

-

-

(3

83,4

51)

(3

83,4

51)

(2

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)

(386

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)

Surp

lus o

n re

valu

atio

n of

inve

stm

ent

328

328

Effe

ct o

f rec

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tion

of a

ctua

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loss

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-

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7,79

8

7,79

8

(9)

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Ba

lanc

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at D

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1, 20

142,

392,

507

227,

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7,

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(1

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688,

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57

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745,

137

Tot

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me

for t

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Dec

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2014

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nded

Dec

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r 31,

201

5-

-

-

(294

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)

(294

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(4,6

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(2

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68)

Su

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ion

of in

vest

men

t28

8

28

8

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f rec

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of a

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225)

(41,

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57

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Bala

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t Dec

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2015

2,39

2,50

7

22

7,01

9

7,64

1

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75,14

3)

35

2,02

4

52,7

65

40

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42

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Dire

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D

irect

or

104

Notes to the Consol idated Financial StatementsFor the year ended December 31 , 2015

1. GENERAL INFORMATION

1.1 SME Bank Limited (the Bank) is a public limited company incorporated in Pakistan on October 30, 2001 under the Companies Ordinance, 1984 having its registered office at 56-F, Nazim-ud-Din Road, F-6/1, Blue Area Islamabad. The Bank obtained its business commencement certificate on April 16, 2005 which became effective from the date of its issue. The Bank is a Scheduled Commercial Bank engaged in the business of banking with the primary objective to support and develop Small and Medium Enterprise (SME) sector in Pakistan by providing necessary financial assistance and business support services on sustainable basis. The Bank is operating through a network of 13 Commercial banking branches. Based on the latest credit rating report dated February 11, 2015 issued by PACRA Credit Rating Company Limited, credit rating of the Bank was “BB” (Double B) in the long term and “B” (Single B) in the short term.

In terms of the provisions of the State Bank of Pakistan BSD circular No. 7 of 2009, the Bank was required to increase its paid up capital (net of losses) as at December 31, 2014 up to Rs. 10 billion. The State Bank of Pakistan (SBP) has granted exemption from meeting the enhanced Minimum Capital Requirement and the Bank is allowed to operate with minimum paid up capital (net of losses) of Rs. 2 billion till privatization of the Bank. Further State Bank of Pakistan also has granted extension to the Bank till 30 June 2016, from meeting the reduced requirement of maintaining minimum paid up capital (net of losses) of Rs. 2 billion.

1.2 Amalgamation of defunct RDFC and SBFC

The Federal Government promulgated the Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) Amalgamation and Conversion Ordinance, 2001 (the Ordinance 2001) setting forth the mechanism of amalgamation of defunct RDFC and SBFC. Both these entities were Development Financial Institutions (DFIs). In pursuance of the Ordinance 2001, Finance Division, Ministry of Finance issued an Order (SRO (1) 2001) dated December 29, 2001 setting forth the scheme of amalgamation of RDFC and SBFC with the Bank effective January 1, 2002. Pursuant to this scheme entire assets and liabilities of defunct RDFC and SBFC as at December 31, 2001 were transferred to the Bank at fair value. These two institutions stand dissolved and ceased to exist effective January 1, 2002. The Bank allotted its shares to the share holders of defunct RDFC and SBFC in proportion to their shareholding therein based on the fair value of net assets of defunct RDFC and SBFC on December 31, 2001.

2. BASIS OF CONSOLIDATION

These consolidated financial statements include the financial statements of the Bank and SMEL (collectively referred to as “ the Group”).

The assets and liabilities of the SMEL have been consolidated on a line by line basis and the carrying value of investment held by the Bank is eliminated against the SMEL’s equity held by the Bank in the consolidated financial statements.

105


Non-controlling interest is that part of the net results of operations and of net assets of the SMEL attributable to the interest which are not owned by the Bank. Non controlling interests are presented as separate item in these consolidated financial statements.

Material intra-group balances and transactions have been eliminated.

3. BASIS OF PRESENTATION

3.1 These consolidated financial statements have been presented in accordance with the requirements of format prescribed by the State Bank of Pakistan’s BSD Circular No. 4 dated February 17, 2006.

3.2 Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the Bank operates. The consolidated financial statements are presented in Pak. Rupee, which is the Bank’s functional currency. Figures have been rounded off to the nearest thousand of rupees unless otherwise stated.

4. STATEMENT OF COMPLIANCE

4.1 These consolidated financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB) , provisions of and directives issued under the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962 and the directives issued by the State Bank of Pakistan. In case requirements differ, the provisions of and directives issued under the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 and the directives issued by the State Bank of Pakistan shall prevail.

International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”, International Accounting Standard 40, “Investment Property” and International Financial Reporting Standard 7,”Financial Instruments: Disclosure” are not applicable to banking companies in Pakistan. Accordingly, the requirements of these Standards have not been considered in the preparation of these consolidated financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by the State Bank of Pakistan through various circulars.

4.2 Standards, interpretations and amendments to approved accounting standards that are not yet effective


• Amendments to IAS 38 Intangible Assets and IAS 16 Property, Plant and Equipment (effective for annual periods beginning on or after 1 January 2016) introduce severe restrictions on the

106

use of revenue-based amortization for intangible assets and explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. The rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate can be overcome only when revenue and the consumption of the economic benefits of the intangible asset are ‘highly correlated’, or when the intangible asset is expressed as a measure of revenue. The amendments are not likely to have an impact on Group’s consolidated financial statements.

• Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10 – Consolidated Financial Statements and IAS 28 – Investments in Associates and Joint Ventures) [effective for annual periods beginning on or after 1 January 2016) clarifies (a) which subsidiaries of an investment entity are consolidated; (b) exemption to present consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity; and (c) how an entity that is not an investment entity should apply the equity method of accounting for its investment in an associate or joint venture that is an investment entity. The amendments are not likely to have an impact on Group’s consolidated financial statements.

• Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11 ‘Joint Arrangements’ (effective for annual periods beginning on or after 1 January 2016) clarify the accounting for the acquisition of an interest in a joint operation where the activities of the operation constitute a business. They require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. The amendments are not likely to have an impact on Group’s consolidated financial statements.

• Amendment to IAS 27 ‘Separate Financial Statement’ (effective for annual periods beginning on or after 1 January 2016) allows entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is not likely to have an impact on Group’s consolidated financial statements.

• Agriculture: Bearer Plants [Amendment to IAS 16 and IAS 41] (effective for annual periods beginning on or after 1 January 2016). Bearer plants are now in the scope of IAS 16 Property, Plant and Equipment for measurement and disclosure purposes. Therefore, a Group can elect to measure bearer plants at cost. However, the produce growing on bearer plants will continue to be measured at fair value less costs to sell under IAS 41 Agriculture. A bearer plant is a plant that: is used in the supply of agricultural produce; is expected to bear produce for more than one period; and has a remote likelihood of being sold as agricultural produce. Before maturity, bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment during construction. The amendments are not likely to have an impact on Group’s consolidated financial statements.

Annual Improvements 2012-2014 cycles (amendments are effective for annual periods beginning on or after 1 January 2016). The new cycle of improvements contain amendments to the following standards:


107

a. - IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 is amended to clarify that if an entity changes the method of disposal of an asset (or disposal group) i.e. reclassifies an asset from held for distribution to owners to held for sale or vice versa without any time lag, then such change in classification is considered as continuation of the original plan of disposal and if an entity determines that an asset (or disposal group) no longer meets the criteria to be classified as held for distribution, then it ceases held for distribution accounting in the same way as it would cease held for sale accounting.

b. - IFRS 7 ‘Financial Instruments- Disclosures’. IFRS 7 is amended to clarify when servicing arrangements on continuing involvement in transferred financial assets in cases when they are derecognized in their entirety are in the scope of its disclosure requirements. IFRS 7 is also amended to clarify that additional disclosures required by ‘Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS7)’ are not specifically required for inclusion in condensed interim financial statements for all interim periods.

c. - IAS 19 ‘Employee Benefits’. IAS 19 is amended to clarify that high quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid.

d. - IAS 34 ‘Interim Financial Reporting’. IAS 34 is amended to clarify that certain disclosures, if they are not included in the notes to interim financial statements and disclosed elsewhere should be cross referred.

The above amendments are not likely to have an impact on the Group’s consolidated financial statements.

5. BASIS OF MEASUREMENT

5.1 These consolidated financial statements have been prepared under the historical cost convention as modified for certain investments which are carried at fair value, and defined benefit pension and gratuity plan, defined benefit unfunded gratuity scheme, unfunded compensated absences and benevolent fund which are carried at present value of defined benefit obligations net of fair value of plan assets, wherever applicable.

5.2 Use of critical accounting estimates and judgments

The preparation of consolidated financial statements in conformity with approved accounting standards as applicable in Pakistan requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The Bank uses estimates and assumptions concerning the future. The resulting accounting estimate will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are as follow:


108

i. classification of investments (note 6.2)ii. provision/ impairment against investments (note 6.2), advances (note 6.4) and other

assets (note 6.6)iii. valuation and impairment of available for sale securities (note 6.2 and 6.6)iv. useful life and residual value of property and equipments, intangible assets (note 6.5)v. taxation (note 6.8)vi. staff retirement benefits (note 6.9)

6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The accounting policies adopted in the preparation of these consolidated financial statements are consistent with those of the previous financial year, except for the following standards, which became effective during the year.

IFRS 10 - ‘Consolidated Financial Statements’

It replaces the current guidance on consolidation in IAS 27 - Consolidated and Separate Financial Statements. It introduces a single model of assessing control whereby an investor controls an investee when the investor has the power to control, exposure to variable returns and the ability to use its power to influence the returns of the investee.

SECP vide its notification SRO 633 (I)/2014 dated 10 July 2014, adopted IFRS 10 effective from the periods starting from 30 June 2014. However, vide its notification SRO 56 (I)/2016 dated 28 January 2016, provides the requirements of IFRS 10 will not be applicable with respect to investment in mutual funds established under Trust structure.

In light of the above, the application of IFRS 10 did not result in any additional investee being in control of the Bank.

IFRS 13 - ‘Fair Value Measurement’

It consolidates the guidance on how to measure fair value into one comprehensive standard. It introduces the use of an exact price, as well as extensive disclosure requirements, particularly the inclusion of non financial instruments into the fair value hierarchy. The application of IFRS 13 does not have an impact on the consolidated financial statements of the Group except for certain disclosures as mentioned in note 37.

IFRS 12 - ‘Disclosure of Interest in Other Entities

As a result of IFRS 12, the Group hs expanded disclosures about its interest in subsidiaries


Cash and cash equivalents comprise of cash and balances with treasury banks, balances with other banks and call money lendings.


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6.2 Investments

Investments other than those categorised as held-for-trading are initially recognised at fair value which includes transactions costs associated with the investments. Investments classified as held-for-trading are initially recognised at fair value, and transaction costs are expensed in the profit and loss account.

All regular way purchases / sales of investment are recognised on the trade date, i.e., the date the Group commits to purchase / sell the investments. Regular way purchases or sales of investment require delivery of securities within the time frame generally established by regulation or convention in the market place.

The Bank has classified its investment portfolio, except for investments in subsidiary into ‘held-for-trading’, ‘held-to-maturity’ and ‘available-for-sale’ as follows:

Held for trading

These are securities which are acquired with the intention to trade by taking advantage of short-term market / interest rate movements and are to be sold within 90 days. These are carried at market value, with the related unrealized gain / (loss) on revaluation being taken to profit and loss account.

Held to maturity

These represent investments acquired by the Group with the intention and ability to hold them upto maturity. These are carried at amortized cost less impairment if any. Impairment in debt securities is determined in accordance with the requirements of Prudential Regulations issued by SBP.

Available for sale

These are investments that do not fall under the held-for-trading or held-to-maturity categories. These are carried at market value except in case of unquoted securities where market value is not available, which are carried at cost less provision for diminution in value, if any. Surplus / (deficit) on revaluation is taken to ‘surplus / (deficit) on revaluation of assets’ account shown below equity. Provision for diminution in value of investments in respect of unquoted shares is calculated with reference to book value of the same. On derecognition or impairment in quoted available-for-sale investments, the cumulative gain or loss previously reported as ‘surplus / (deficit) on revaluation of assets’ below equity is included in the profit and loss account for the period.

Provision for diminution in values of securities (other than term finance certificates) is made after considering impairment if any in their values, where the decline in prices of available for sale equity securities is significant or prolonged, it is considered impaired and included in consolidated profit and loss account. Provision for diminution in the value of term finance


110

certificates is made as per Prudential Regulations issued by State Bank of Pakistan.

Held-for-trading and quoted available-for-sale securities are marked to market with reference to ready quotes on Reuters page (PKRV) or MUFAP or the Stock Exchanges, as the case may be.

Investment in subsidiary

Investment in subsidiary is carried at cost less impairment, if any. However the investment in subsidiary is not marked to market as per prudential regulations issued by SBP.

6.3 Agreements for sale and purchase of securities (repo and reverse repo)

Securities sold under repurchase agreement (repo) are retained in the consolidated financial statements as investments and a liability for consideration received is included in borrowings. The difference between sale and repurchase price is treated as mark-up expense and recognized over the period of contract.

Securities purchased under agreement to resell (reverse repo) are included in lendings to financial institutions. The difference between purchase and resale price is treated as mark-up income and recognized over the period of the contract.

6.4 Advances

Advances are stated net off specific and general provisions. Provisions are made in accordance with the requirements of Prudential Regulations issued by the SBP and charged to the profit and loss account. These regulations prescribe an age based criteria (as supplemented by subjective evaluation of advances by the banks) for classification of non-performing loans and advances and computing provision / allowance there against. Such regulations also require the Bank to maintain general provision / allowance against its Small Entity (SE) advances portfolio at specified percentage of such portfolio.

Advances are written off when there is no realistic prospect of recovery.

6.5 Capital work-in-progress, operating fixed assets, depreciation and amortization

Capital work-in-progress

Capital work-in-progress is stated at cost less impairment loss, if any. These are transferred to specific assets as and when assets are available for use.

Operating fixed assets-owned

These are stated at cost less impairment losses and accumulated depreciation except for leasehold land. Land is stated at cost less impairment, if any.


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Maintenance and normal repairs are charged to consolidated profit and loss account as and when incurred. Major renewals and improvements are capitalized.

Depreciation

Depreciation is charged on straight line method at the rates given in note 13.2, commencing from the month in which the asset is available for use. No depreciation is charged in the month of disposal of the asset. The residual value, useful life and depreciation method is reviewed and adjusted, if appropriate, at each balance sheet date.

Gains or losses on disposal of property and equipment are taken to the consolidated profit and loss account.

Assets subject to finance lease

Assets subject to finance lease are stated at cost less accumulated depreciation at the rates similar to the bank’s owned assets and impairment loss (if any). The outstanding obligation under finance lease less financial charges allocated to future periods is shown as liability. Finance charges are calculated at interest rates implicit in the lease and are charged to consolidated profit and loss account in the period in which these are incurred.

Intangible assets

An intangible asset is recognized only if it is identifiable, the Bank has control over the asset, it is probable that economic benefits will flow to the enterprise and the cost of the asset can be measured reliably.

All amortizable intangible assets that meet the recognition criteria are initially measured at cost and are amortized on a straight line basis at the rate given in note 13.3 commencing from the month when these assets are available for use. Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. The residual value, useful life and amortization method is reviewed and adjusted, if appropriate, at each balance sheet date.

6.6 Impairment

The carrying amount of assets are reviewed at each balance sheet date for impairment, whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. If such indication exists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to their recoverable amount. The resulting impairment loss is taken to the consolidated profit and loss account. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying value that would have been determined net of depreciation/amortization, if no impairment loss had been recognized.

The available for sale equity investments are impaired when there has been a significant or


112

prolonged decline in the value below its cost. Impairment loss is recognized in consolidated profit & loss account.

6.7 Deposits

Deposits are recorded at the nominal values of proceeds received. Markup accrued on deposits is recognised separately as part of other liabilities and is charged to consolidated profit and loss account on a time proportion basis.

6.8 Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the consolidated profit and loss account, except to the extent that it relates to items recognised directly in other comprehensive income or below equity, in which case it is recognised in other comprehensive income or below equity.

Current

Provision for current tax is the expected tax payable on the taxable profit for the year using tax rates applicable at the date of consolidated statement of financial position and any adjustment to tax payable for previous years.

Deferred

Deferred tax is accounted for using the balance sheet liability method in respect of all major temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit at the rates that are expected to apply to the period when the differences reverse based on the tax rates that have been enacted. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax asset is reduced to the extent it is no longer probable that the related tax benefits will be realized.

The Bank also recognizes deferred tax asset/ liability on deficit/ surplus on revaluation of investments which is adjusted against the related deficit/ surplus in accordance with the requirements of International Accounting Standard on ‘Income Taxes’ (IAS 12). However, keeping in view the future profitable operation and uncertain status of privatization of the bank; deferred tax assets has only been recognized to the extent of deferred tax liability as at balance sheet date.

The Bank takes into account the current income tax law and decisions taken by the taxation authorities. Instances where the Bank’s views differ from the views taken by the income tax department at the assessment stage and where the Bank considers that its view on items of material nature is in accordance with law, the amounts are shown as contingent liabilities.


113

6.9 Staff retirement and other benefits

The Bank operates following staff retirement and other benefit schemes for its employees:

Defined benefit plan- Pension and gratuity scheme

Fully funded defined benefit pension and gratuity scheme for permanent employees. Contributions are made in accordance with the actuarial valuation which is carried out periodically using ‘Projected Unit Credit Method’. All actuarial gains and losses are recognized immediately through other comprehensive income.

Defined benefit unfunded gratuity scheme

The Bank operates a defined benefit unfunded gratuity scheme for its contractual employees. The obligation under the defined benefit unfunded gratuity scheme is recognized on the basis of actuarial valuation using the ‘Projected Unit Credit Method’.

Benevolent fund

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to this fund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basis of actuarial advice using the Projected Unit Credit Method.

Compensated absences

The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent and contractual employees. For its eligible employees, related provision is made in accordance with actuarial valuation. Provision for the year is charged to consolidated profit and loss account. The amount recognized in consolidated statement of financial position represents present value of defined benefit obligation.

Defined benefit plans are provided to employees of the Bank. Calculations in this respect require assumptions to be made of future outcomes, the principal ones being in respect of increase in remuneration, the expected long-term return on plan assets and the discount rate used to convert future cash flows to current values. Calculations are sensitive to changes in the underlying assumptions.


6.10.1 Advances


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Advances disbursed by SME Bank Limited:

Markup/ interest on performing advances is recognized on a time proportion basis over the term of loan and advances. Markup/ interest/ penal markup recoverable on non performing advances is recognized on receipt basis. Mark-up / interest on rescheduled / restructured advances and investments is recognised as permitted by the regulations of the SBP.

Advances disbursed by defunct RDFC and defunct SBFC :

Advances and related markup are suspended. Markup/ interest on advances is recognized on receipt basis.

6.10.2 Return on investments

Return on investments is recognized on a time proportion basis except on classified investment which is recognized on receipt basis. Any premium paid or discount received on purchase of securities is amortized through consolidated profit and loss account over the remaining period of maturity on time apportionment basis.

6.10.3 Dividend income

Dividend income is recognized when the Group’s right to receive the dividend is established.

6.10.4 Interest, fee, brokerage and commission

Interest, fee, brokerage and commission, profit on other investments, bank deposits and staff loans is recognized on accrual basis. Income on non-funded facilities (fee, commission, documentation charges etc.) is recognized on receipt basis except commission on bank guarantees which is recognized on accrual basis.

6.11 Off setting

Financial assets and liabilities are off set and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or realize the asset and settle the liability simultaneously.

6.12 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset are capitalized. Other borrowing costs are recognized as an expense in the period in which it incurs.


115

6.13 Provisions

Provisions are recorded when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Provision for guarantee claims and other off balance sheet obligations is recognized when intimated and reasonable certainty exists to settle the obligations. Expected recoveries are recognized by debiting customer accounts. Charge to consolidated profit and loss account is stated net off expected recoveries.


All financial assets and financial liabilities are recognized at the time when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognised where (a) the rights to receive cash flows from the asset have expired; or (b) the Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Group has transferred substantially all the risks and rewards of the asset, or (ii) the Group has neither transferred nor retained substantially all the risk and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Any gain or loss on derecognition of the financial assets and financial liabilities is taken to income currently.

6.15 Segment reporting

A segment is the distinguishable component of the Group that is subject to risks and rewards that are different from those of other segments. A business segment is one that is engaged either in providing certain products or services, whereas a geographical segment is one engaged in providing products and services within a particular economic environment. Segment information is presented as per the Bank’s functional structure and the guidance of the State Bank of Pakistan. The Bank’s primary format of reporting is based on business segments:

6.15.1 Business segments

Trading and sales

This segment undertakes the Group’s treasury, money market and capital market activities.

Commercial banking

It includes loans, deposits and other transactions with individuals/ staff, small and medium enterprises and corporate customers.


116

6.15.2 Geographical segments

The Group operates only in Pakistan.

6.16 Appropriation to reserves

Dividend and appropriation to reserves (except appropriation required by law) after the balance sheet date are recognized as liability in the Bank’s financial statement in the year in which these are approved.

7. FINANCIAL RESTRUCTURING AND GOING CONCERN ASSUMPTION

7.1 The Government of Pakistan (GoP) assisted by Asian Development Bank (ADB) is working on SME Sector Development Programme (SME SDP). Loan agreement for this programme between GoP and ADB and project agreement between ADB, SBP, Small and Medium Enterprise Development Authority (SMEDA) and the Bank have been signed on February 10, 2004. This programme, apart from other aspects on policy matrix relating to SME sector of Pakistan, also envisaged restructuring of SME Bank Limited. Salient features of the restructuring of the Bank are given below:

i. Adjustment of accumulated balances due from SBP on account of its share in profits and losses of the Bank against credit lines provided by SBP;

ii. Payment of Rs 3 billion to SBP before January 1, 2004 against outstanding credit lines and conversion of balance of remaining credit lines into a loan repayable in full by June 30, 2006;

iii. Raising the paid-up capital to Rs 1,100 million by issuing additional shares to GoP;

iv. The Ministry of Finance (MoF) shall ensure that SBP’s shareholding in the Bank is terminated through the purchase of SBP held shares at nominal value by shareholders or otherwise;

v. 100% provision to be made against non performing financial assistance extended by the defunct RDFC and SBFC prior to January 1, 2002 which provision to be adjusted against SBP credit lines. SBP will recover this amount from proceeds of ADB loan to GoP;

vi. Reduction in the number of recovery branches, staff rationalization through Voluntary Separation Scheme (VSS), human resource audit and hiring of new professional staff on merit;

vii. Reimbursement by GoP of costs related to VSS launched for all regular employees;

viii. SBP to issue a banking license to the Bank on compliance with all conditions of


117

restructuring and applicable SBP regulations. The commercial banking operations will be separate from the recovery operations of the defunct RDFC and SBFC portfolio and the two operations will be run as independent units within the Bank; and

ix. Privatization of the Bank by June 2006.

7.2 Current status of the above referred financial restructuring is given below:

i. Accumulated balances of Rs 3,275.752 million due from SBP on account of its share in profits and losses of the Bank have been adjusted against credit lines provided by SBP;

ii. Rs. 7,393 million has been paid to SBP since 2003, to fully adjust the loan liability.

iii. Paid-up capital has been increased to Rs. 2,393 million by issue of 73,502,453 additional shares of Rs 10 each to GoP without right issue in 2004, issue of 40,000,000 additional shares of Rs 10 each to GoP without right issue in 2005, issue of 50,000,000 additional bonus shares of Rs 10 each to GoP without right issue in 2006 and issue of 39,250,700 additional shares of Rs. 10 each to GoP without right issue in 2007. Proceeds against issue of additional shares in 2004 were paid by GoP to SBP against the Bank’s loan balance due to SBP;

iv. Provision of Rs 1,283.196 million against non performing financial assistance extended by the defunct RDFC and SBFC was adjusted against credit lines of SBP in 2003;

v. VSS was approved by the Board of Directors of the Bank on November 7, 2003. 707 employees were relieved under the scheme upto December 31, 2005 and the aggregate reported cost for 707 employees was Rs. 1,764.268 million, which has been received by the bank by March 31, 2007;

vi. Human resource technical audit has been completed and report has been submitted to the Bank;

vii. Banking license was issued by SBP on September 13, 2004 and the Bank has started banking operations after the issue of certificate for commencement of banking business by SBP on April 16, 2005;

viii. Privatization Commission (PC) has constituted a transaction committee which is represented by members from the Privatization Commission, State Bank of Pakistan, Ministry of Finance and the Bank. Privatization Commission has approved M/s BMA Capital as Financial Advisors for the Bank and due diligence exercise for the privatization of the Bank has been carried out in the year 2008; and

ix. No further progress has been made on the privatization of the Bank.


118

7.3 Further restructuring of SME Bank:

In compliance to the decisions taken during meeting at Ministry of Finance dated September 14, 2009 following actions have been undertaken.

i. VSS offered to the regular employees of the Bank in November 2009, wherein 138 employees opted for VSS offered vide Circular No. HO/HR&SD/2009/5385 dated October 15, 2009. These employees have been relieved at a total cost of Rs. 653 million with effect from November 14, 2009;

ii. Refer Note 11.2, for status of transfer of Old portfolio of defunct RDFC & defunct SBFC to National Bank of Pakistan ; and

iii. Government of Pakistan have allocated an amount of Rs. 1 billion in the annual budget 2013-14 for equity injection into the Bank.

7.4 Going concern assumption and minimum capital requirement

7.4.1 The Bank

The Bank continues to operate in net loss situation. During the period, the Bank has incurred a net loss after tax of Rs. 282.16 million and its accumulated losses stand at Rs. 2.296 billion as of the reporting date. Further the Bank has shortfall of Rs. 1.904 billion on 31 Dec 2015 in meeting the minimum capital requirements of Rs. 2 billion (net of losses) as prescribed by the State Bank of Pakistan (SBP). These conditions indicate a material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern and therefore, that it may be unable to realize its assets and discharge its liabilities in the ordinary course of business. However the Bank’s management believes that going concern assumption is appropriate basis to prepare these unconsolidated financial statements since the Government of Pakistan (GoP), holds 94% shares of the Bank through Ministry of Finance (MoF).Government of Pakistan (GoP) has reduced the budget allocation, to provide further equity contribution to Bank, to nil. This allocation has been reduced from previously allocated budget of Rs. 2 billion for the year ended 2012-13 and Rs. 1 billion for the year 2013-14 and Rs. 0.5 billion for the year 2014-15. Further SBP has allowed exemption to the Bank from meeting the minimum capital requirement of Rs. 2 billion (net of losses) till June 30, 2016. With regards to reduction in budget allocation by GoP, the management is contemplating to approached MoF for increase in equity contribution, which will enable the bank to meet the minimum capital requirement of Rs. 2 billion (net of losses). Further keeping in view the past trend and the fact that the Bank is in the privatization list of GoP, the management believes that SBP will further extend the exemption in case the Bank is not able to meet the minimum capital requirement of Rs. 2 billion (net of losses) till June 30, 2016.

7.4.2 SME Leasing Limited - Subsidiary Company (SMEL)

During the year ended 31 December 2015, SMEL incurred loss of Rs. 17.312 million (2014:


119

Rs. 11.046 million) increasing the accumulated losses to Rs. 197.122 million (2014: Rs. 180.021 million) as at the year end. Further, the net assets of SMEL amounting to Rs. 197.122 million (2014: 190.474 million) includes non-performing leases and loan and finances, net provision of Rs. 199.751 million (129.885 million). Furthermore, the license to conduct leasing business granted to SMEL by the Securities and Exchange Commission of Pakistan ((SECP) expired on 20 May 2013.

The SMEL applied for renewal of the license on 22 April 2013 and submitted a detailed business plan including measures to be taken for improvement of financial health of SMEL and due compliance with the minimum equity requirement as per NBFC Regulations 2008. Considering the financial health of SMEL and expiry of leasing license, the SECP in its letter dated 05 July 2013 instructed SMEL to not to raise deposits from general public in any form till the compliance of the minimum equity requirement and the renewal of the leasing license.

During the year, the NBFC Regulations 2008 have been amended by SECP and the minimum equity requirement for the ‘existing NBFCs with valid deposit taking permission having leasing license’ has been revised at Rs.500 million where as minimum equity requirement for ‘non deposit taking NBFCs for Leasing or Discounting or Housing Finance Services licenses’ has been set at Rs. 50 million for each form of business. SMEL is in the process of determining whether they will operate as ‘deposit taking’ or ‘Non deposit taking’ NBFC.

Further, SMEL is dependent on running finance facility granted by the Bank amounting to Rs 150 million which has been renewed on 23 April 2015. As at 31 December 2015, SMEL has utilized Rs 129.066 million of the said facility. The revised Prudential Regulations of State Bank of Pakistan (SBP) has restricted the exposure by a bank to a related part to the extent of 7.5% of its equity considering which the Bank is in non compliance with said requirement in terms of running finance facility granted the company. However, the SBP vide its letter no. BPRD/BRD/PRs/23947/2015 dated 29 October 2015 has granted relaxation to the Bank from aforesaid requirement till 30 June 2016 subject the condition that the exposure will be adjusted within the said date and a plan to this effect shall be submitted accordingly. The Bank in its reply to SBP has mentioned that Government of Pakistan has decided to privatized the Bank and has put it in the fast track for privatization. Therefore, the Bank is of the opinion that with the privatization of the bank, equity of Rs 0.6 billion at least will be injected. Consequently the enhanced single related party exposure limit of the Bank will cover the financing to SMEL.

The above factors indicate the existence of a material uncertainty which may cast significant doubt on the SMEL’s ability to continue as a going concern and it may not be able to realize its assets and discharge its liabilities in the normal course of business. However, these financial statement have been prepared on going concern basis considering the factors mentioned below:

The management of SMEL has prepared cash flow projections which reflect that based on financial support by the Bank, SMEL will be able to continue its business on going concern basis in the foreseeable future;


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Concerted efforts are being made for the recovery of non-performing leases and loans and finances. During the years Rs. 23.012 million has been recovered and subsequent to the year-end Rs. 9,209 has been recovered to date;

The credit review system of SMEL has been further strengthened and after careful scrutiny leases and finances amounting to Rs. 45.79 million were disbursed during the year at attractive mark-up rates and reasonable deposits margins;

Considering the privatization of the Bank as discussed above, further financial support is expected from the Bank.

Based on the above mentioned financial measures and the concerted operational measures being taken by SMEL, the management is confident of the profitable operations in the foreseeable future and therefore, has prepared the financial statements on going concern basis.


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Note 2015 20148. (Rupees in '000)

In hand - local currency 76,660 54,365 In transit - local currency - -

National Prize Bonds 152 157

With State Bank of Pakistan (SBP) in :Local currency current accounts 8.1 275,473 277,786

With National Bank of Pakistan in :Local currency current accounts 37,816 34,565

390,101 366,873

8.1

Note 2015 20149. BALANCES WITH OTHER BANKS (Rupees in '000)

In Pakistan: On current accounts 1,778 4,838 On deposit accounts 9.1 11,537 12,480 Provision for doubtful balance with a bank 9.2 (10,000) (10,000)

3,315 7,318

9.1

9.2

Note 2015 201410. LENDINGS TO FINANCIAL INSTITUTIONS (Rupees in '000)

Call money lendings 400,000 15,000 Letter of placement 485,000 200,000

10.1 885,000 215,000

10.1 PARTICULARS OF LENDING

In local currency 10.1.1 885,000 215,000 In foreign currencies - -

885,000 215,000

10.1.1

Deposits with the State Bank of Pakistan are maintained to comply with the statutory requirements issued fromtime to time.

These carry interest rate ranging from 1.50% to 6.50% (2014: 1.50 % to 7.0%) per annum.

Provision for doubtful balance is in respect of deposit of Rs. 10 million with Indus Bank Limited which is underliquidation.

These lendings carry markup rate ranging between 6.50% to 6.95% (2014: 9.25% to 10.15%) per annum andhave maturity period upto 2 months (2014: upto 2 months).

CASH AND BALANCES WITH TREASURY BANKS


122

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123

SME Bank LimitedNotes to the Consolidated Financial StatementsFor the year ended December 31, 2015

Note 2015 201411.2 INVESTMENTS BY SEGMENTS :

Federal Government Securities:

- Market Treasury Bills (MTBs) 11.3 2,317,253 416,513 - Pakistan Investment Bonds (PIBs) 11.3 1,586,398 828,313

3,903,651 1,244,826

Fully paid up ordinary shares:

- Listed companies/mutual fund 11.6 23,985 23,985 - Unlisted companies 11.7 47,443 47,443

71,428 71,428

Other investments:

- Certificates of Investment (COIs) 762 762 - Term Deposit Receipts (TDRs) 61,687 40,000

62,449 40,762

Total investments at cost 4,037,528 1,357,016

Provision for diminution in value of investments 11.4 (42,562) (42,562)

Investment (net of provision) 3,994,966 1,314,454

Net Surplus on revaluation of available for sale securities - net 24 56,592 65,032

Total investments 4,051,558 1,379,486

(Rupees in '000)


124

SME Bank LimitedNotes to the Consolidated Financial StatementsFor the year ended December 31, 201511.3 Principal terms of investments in Federal Government securities

Name of investment

Market Treasury Bills On maturityPakistan Investment Bonds On maturity

Note 2015 201411.4 Particulars of provision for diminution in value of investments

Opening balance 42,562 42,562 Charge for the year - - Closing balance 42,562 42,562

11.4.1 Particulars of provision in respect of type and segmentAvailable-for-sale securities -Fully paid up ordinary shares - Quoted Companies 20,797 20,797 - Unlisted Shares 20,000 20,000 - Delisted Companies 11.7.2 1,003 1,003

Held-to-maturity securities - Certificates of Investment 762 762

42,562 42,562

NoteMarket value Rating Market value Rating

11.5 Quality of Available-for-sale securities (Rupees '000) (Rupees '000)

Market Treasury Bill 11.5.1 2,316,915 unrated 416,362 unratedPakistan Investment Bonds 11.5.1 1,635,058 unrated 886,347 unrated

Fully paid up ordinary shares 11.5.2National Refinery Limited 3,347 AA+/A1+ 2,773 AA+/A1+PICIC Investment Fund Limited 1,573 1-Star 1,680 1-StarLotte Pakistan PTA Limited 519 unrated 547 unratedDewan Salman Fibre Limited 38 unrated 35 unratedPakistan Telecommunication Company Limited 142 unrated 198 unratedNAMCO Balanced Fund 4,283 5-Star 3,208 3-StarNishat Chunian Mills Limited 13 A-/A-2 17 A-/A-2Crescent Textile Mills Limited 1 unrated 1 unratedInvest Capital Investment Bank Limited 1,543 unrated 1,878 unrated

11,459 10,337

3,963,432 1,313,046

11.5.1 These are Government of Pakistan guaranteed securities.

11.5.2 Rating of these equity securities represent 'Entity/Funds Rating'.

11.5.3

at maturitysemi-annually

2015 2014

Securities have either been rated by 'The Pakistan Credit Rating Agency Limited' (PACRA) or 'JCR-VIS Credit Rating CompanyLimited' (JCR-VIS). These ratings reflect independent credit risk assessment by respective credit rating entities.

7.65% to 12.52%

Rate per annum

Market Treasury Bills and Pakistan Investment Bonds are securities eligible for re-discounting with the State Bank of Pakistan.

January 2016 to September 2016July 2017 to March 2025

6.25% to 8.80%

(Rupees in '000)

Coupon/Mark up payment

Principal payment

Maturity


125


11.6 Investments in listed companies/mutual fund

2015 20142015 2014 Name of company/mutual fund Note

15,000 15,000 354.17 National Refinery Limited 5,311 5,311 137,668 137,668 18.12 PICIC Investment Fund Limited 2,494 2,494 79,775 79,775 10.15 Lotte Chemical Pakistan Limited 810 810 18,449 18,449 18.24 Dewan Salman Fibre Limited 337 337 8,600 8,600 68.20 Pakistan Telecommunication Company Limited 586 586

385 385 77.49 Nishat (Chunian) Limited 30 30 18 18 34.84 Crescent Textile Mills Limited 1 1

1,117,876 1,117,876 11.84 Invest Capital Investment Bank Limited 13,236 13,236 Mutual Fund

NAMCO Balanced Fund 1,180 1,180

23,985 23,985

Impairment in available for sale listed shares 11.6.1 (20,797) (20,797) Investment in listed shares (net of impairment) 3,188 3,188

Surplus on revaluation of listed shares - (net) 8,270 7,149 Market value as on December 31 11,458 10,337

11.6.1 Impairment in available for sale listed sharesNational Refinery Limited 3,885 3,885 PICIC Investment Fund Limited 2,215 2,215 Lotte Chemical Pakistan Limited 683 683 Dewan Salman Fibre Limited 310 310 Pakistan Telecommunication Company Limited 441 441 Nishat (Chunian) Limited 27 27 Invest Capital Investment Bank Limited 13,236 13,236

20,797 20,797

11.7 Particulars of investments held in unlisted companies, fund and delisted companies

Islamabad Stock Exchange Limited 11.7.1 18,000 18,000 Lahore Stock Exchange Limited 11.7.1 8,440 8,440 AKD Venture Fund 11.7.1 20,000 20,000 Companies delisted from stock exchange 11.7.2 1,003 1,003

47,443 47,443

note 10.7.1.2(Rupees) (Rupees in '000)

11.7.1 8% 2,000,000 10.00 20,000 - Sohaib UmarIslamabad Stock Exchange Limited 1% 3,034,603 5.93 18,000 11.10 Mian Ayyaz AfzalLahore Stock Exchange Limited 1% 843,975 10.00 8,440 12.21 Aftab Ahmad Ch.

11.7.1.1

11.7.1.2

No. of ordinary shares/units

% age

(Rupees in '000)

Paid-up value per

share/ average price per unit (Rs)

Management has fully provided the investment in AKD Venture Fund as irrecoverable and impaired.

Name of Chief

executive

Number of units held

AKD Venture Fund

Total paid up value

Cost/Paid-up value per unit

held

Break up value

Break up value per share is based on the financial statements of investees for the year ended June 30, 2015


126


11.7.2 Particulars of investments in shares of companies delisted from stock exchange and are currently under liquidation.

(Rupees)

Mohib Exports Company Limited 4,600 23.81 109 Sunflow Citrus Limited 100,000 4.22 422 Tawakal Garments Company Limited 4,000 38.38 154 Tristar Shipping Lines Limited 5,000 23.56 118 Zahoor Textile Mills Limited 15,200 13.16 200

1,003

Total paid up value

Cost/Paid-up value per share

Number of shares

held

(Rupees in '000)


127


12. ADVANCES NoteLoans, cash credits, running finances, etc- In Pakistan

Extended by:Defunct SBFC 12.2 4,376,451 4,377,908 Defunct RDFC 12.2 505,441 505,441 SME Bank Ltd 2,966,735 3,174,139

Due from ex-employees 12.2 17,534 17,951 Due from employees 121,787 136,824

7,987,948 8,212,263

Net investment in finance lease - In Pakistan 12.3 597,425 679,717 Advances - gross 8,585,373 8,891,980

Provision for non-performing advances Specific provision (5,410,366) (5,480,108) General provision (8,174) (9,100)

12.5 (5,418,540) (5,489,208)

Advances - net of provision 3,166,833 3,402,772

12.1 Particulars of Advances (Gross)12.1.1 In local currency 8,585,373 8,891,980

In foreign currencies - - 8,585,373 8,891,980

12.1.2 Short term (upto one year) 1,910,084 2,216,828 Long term (over one year) 6,675,289 6,675,152

8,585,373 8,891,980

12.2

a) the non-performing loans, collateral and the debtors;

20142015(Rupees in '000)

Assignment of Non-Performing Loan (NPL) portfolios of defunct SBFC & RDFC to National Bank ofPakistan (NBP)

Under the above referred arrangements, portfolio of defunct SFBC & RDFC outstanding as on June 30, 2010(Except outstanding loans of RDFC where facility of Equity Participation Fund had also been extended) weretransferred to NBP.

The Board of Directors of the Bank through its resolution by circular No.10/circ/33 dated March 08, 2010 dulyendorsed by the members in their meeting dated May 20, 2010 has approved the transfer and assignment of fully non-performing loan portfolios of defunct SBFC & RDFC to NBP on the basis of deferred transfer price. Subsequentlytransfer and assignment agreement was executed between the Bank and National Bank of Pakistan at Karachi on July01, 2010 (Effective date). According to the agreement, the transferor (SME) and the acquirer (NBP) acknowledge,declare and confirm the transfer, assignment and vesting of all rights, interests, privileges, title, powers and remediesin favour of the acquirer with respect to:

b) all agreements, deeds, instruments and other documents relating to the non-performing loans, debtors andcollateral and to which the transferor is, or legally deemed to be, a party or a beneficiary;

c) all legal proceedings by and against the transferor with respect to the non-performing loans, the debtors andcollateral, which may be pending before any court, tribunal, arbitrator or authority, without being subject to anyliabilities of the transferor to any person.

The agreed transfer price is an amount equal to 50% of the net recoveries.


128


Pending cancellation of transfer and assignment agreement with NBP non- performing loan portfolios of defunctSBFC and RDFC stands recognised in these unconsolidated financial statements and accordingly the amountrecovered by the Bank from the borrowers of defunct SBFC & RDFC has been recognized as liability to NBP on aprudent basis. Funds received by NBP to be apportioned in terms of this agreement have also not been accounted forby the Bank.

In view of the above, foregoing Board was requested in its 83rd meeting, held on August 30, 2014 and themanagement of the Bank was allowed to proceed further in pursuance of resolution / direction passed regarding thesubject matter in 64th and 65th Meeting of the Board of Directors held on May 16, 2011 and July 13, 2011respectively by overruling to verdict of the Board of Directors given on the issue in 75th Meeting of Board ofDirectors held on March 04, 2013.

The incumbent Management has again reviewed the situation and noted that no comparative analysis/studypertaining to transfer of portfolio was conducted which could justify the decision of assigning old portfolio to NBP.

On request of the Bank's management the decision to transfer of the portfolio was revisited by the BoD in its 65thmeeting held on July 13, 2011 and resolved that the agreement of assignment of the old portfolio to NBP should becancelled and Board’s pronouncement for revocation of agreement to Ministry of Finance to arrangeretrieval/restoration of old portfolio to the Bank in the interest of recovery of public funds.

In the meeting held on March 04, 2013 the Board of Directors reconsidered the position taken earlier on this matteron grounds of related cost of recovery and infrastructure on request of then management and decided that since theBank is still on the privatization list, BoD would be able to decide on portfolio after Bank's delisting fromprivatization.


129


Lease rentals receivable 393,502 42,852 - 436,354 401,682 104,235 - 505,917 Residual value 188,307 53,041 241,348 206,448 65,972 - 272,420 Minimum lease payments 581,809 95,893 - 677,702 608,130 170,207 - 778,337 Financial charges for future periods (76,187) (4,090) - (80,277) (85,212) (13,408) - (98,620) Present value of minimum lease payments 505,622 91,803 - 597,425 522,918 156,799 - 679,717

12.4


(Rupees in '000)


5,875,764 - 5,875,764 5,410,366 5,410,366



5,935,111 - 5,935,111 5,480,108 5,480,108




(67,916) (926) (68,842) 69,030 (314) 68,716 Closing balance 5,410,366 8,174 5,418,540 5,480,108 9,100 5,489,208

12.5.1



5,410,366 8,174 5,418,540 5,480,108 9,100 5,489,208

2015

2015


than five years

Classified Advances

Over five years


20142015


Not later than one

year

Not later than one

year




years

Total


2015 2014

The FSV benefit availed in last years has been reduced by Rs. 62,193 and increased by 7,686 thousand for the Bank and SMELrespectively (net of FSV benefit availed during the period), which has resulted in increased charge for specific provision for the periodended by the same amount. The FSV benefit is not available for cash or stock dividend / bonus to employees. Had the FSV benefit notrecognized, Group's loss before and after tax for the year ended would have been lower by Rs. 54,507 thousand (December 31, 2014:lower by Rs. 6,077 thousand).


130

Note 2015 201412.6 Particulars of Write Off:

12.6.1 Against provisions 12.5 37 887 Directly charged to Profit & Loss account - -

37 887

12.6.2 Write Offs of Rs. 500,000 and above 12.7 - - Write Offs of below Rs. 500,000 37 887

37 887

12.7 Details of Loan Write Off of Rs. 500,000 and above

12.8 Note 2015 2014

Balance at beginning of the year 102,442 100,170 Loans granted/added during the year 60,984 25,738 Repayments - net (34,918) (23,466) Balance at end of the year 128,508 102,442

Note 2015 2014

13. OPERATING FIXED ASSETS

Capital work-in-progress 13.1 1,054 841 Property and equipment - Gross 13.2 159,273 172,044 Less: Provision held against property and equipment 13.6 (32,044) (32,044) Property and equipment - Net 127,229 140,000 Intangible assets 13.3 1,298 1,114 Operating Fixed Assets 129,581 141,955

13.1 Capital work-in-progress

Advances to suppliers and contractors 1,054 841 1,054 841

(Rupees in '000)

(Rupees in '000)

(Rupees in '000)

In terms of sub-section 3 of Section 33-A of the Banking Companies Ordinance, 1962 the Statement inrespect of written-off loans or any other financial relief of five hundred thousand rupees or above allowed toa person(s) during the year ended December 31, 2015 is given at Annexure-1.

Debts due by directors, executives or officers of the bank or anyof them either severally or jointly with any other persons:

Particulars of Loans and Advances to Directors, AssociatedCompanies, Etc.


Lease rentals receivable 393,502 42,852 - 436,354 401,682 104,235 - 505,917 Residual value 188,307 53,041 241,348 206,448 65,972 - 272,420 Minimum lease payments 581,809 95,893 - 677,702 608,130 170,207 - 778,337 Financial charges for future periods (76,187) (4,090) - (80,277) (85,212) (13,408) - (98,620) Present value of minimum lease payments 505,622 91,803 - 597,425 522,918 156,799 - 679,717

12.4


(Rupees in '000)


5,875,764 - 5,875,764 5,410,366 5,410,366



5,935,111 - 5,935,111 5,480,108 5,480,108




(67,916) (926) (68,842) 69,030 (314) 68,716 Closing balance 5,410,366 8,174 5,418,540 5,480,108 9,100 5,489,208

12.5.1



5,410,366 8,174 5,418,540 5,480,108 9,100 5,489,208

2015

2015


than five years

Classified Advances

Over five years


20142015


Not later than one

year

Not later than one

year




years

Total


2015 2014

The FSV benefit availed in last years has been reduced by Rs. 62,193 and increased by 7,686 thousand for the Bank and SMELrespectively (net of FSV benefit availed during the period), which has resulted in increased charge for specific provision for the periodended by the same amount. The FSV benefit is not available for cash or stock dividend / bonus to employees. Had the FSV benefit notrecognized, Group's loss before and after tax for the year ended would have been lower by Rs. 54,507 thousand (December 31, 2014:lower by Rs. 6,077 thousand).


131

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31, 2

014


133

SME Bank LimitedNotes to the Consolidated Financial StatementsFor the year ended December 31, 201513.4

VehiclesSuzuki Jeep 190 190 - 243 AuctionHonda CD-125 24 24 - 21 AuctionSuzuki Cultus 643 643 - 64 As Per Bank PolicySuzuki Cultus 960 576 384 480 As Per Bank PolicyToyota Corolla 926 926 - 2 As Per Bank PolicySuzuki Liana 708 708 - 71 As Per Bank PolicySuzuki Liana 708 708 - 71 As Per Bank PolicySuzuki Cultus 605 605 - 60 As Per Bank PolicySuzuki Cultus 566 566 - 57 As Per Bank PolicySuzuki Cultus 563 563 - 56 As Per Bank PolicySuzuki Cultus 602 602 - 60 As Per Bank PolicyToyota Corolla 946 946 - 95 As Per Bank PolicyToyota Corolla 555 555 - 56 As Per Bank PolicyToyota Corolla 873 873 - 87 As Per Bank PolicyHonda City 873 873 - 87 As Per Bank PolicyToyota Corolla 880 880 - 88 As Per Bank PolicyToyota Corolla 2,048 667 1,381 1,381 As Per Bank PolicySuzuki Cultus 879 879 - 88 As Per Bank PolicySuzuki Cultus 587 587 - 59 As Per Bank PolicySuzuki Swift 873 873 - 87 As Per Bank PolicySuzuki Alto 698 500 198 279 Terms of employment

15,707 13,744 1,963 3,492

1,994 1,993 1 215 2015 17,701 15,737 1,964 3,707 2014 22,612 21,636 976 2,143

13.513.6

2015 201414. DEFERRED TAX (ASSETS)/LIABILITIES

Taxable temporary differences on:(1,610) (5,816)

(40,654) (68,633) (42,264) (74,449)

Deductible temporary differences on:Provision against potential lease losses and long term finances and loans 47,511 57,520 Unused tax losses 675,169 668,771

722,680 726,291 Deferred tax asset not recignized (680,416) (651,842)

- - Temporary differences for which no deferred tax is recognized due to uncertain taxable profits 680,416 651,842

Mr. Kishwar Malik - employeeMr. Muhammad Ayub - employeeMs. Fakhra Jabeen - employee

Mr. Anwar Kazim - employeeMr. Sajjad-ul-Hassan - employeeMr. Tariq Mehmood Malik - employeeMr. Sohail Ishtiaq Khan - employeeMr. Abdul Razzaq - employee

Details of disposal of fixed assets :Book value

Particulars of assets Cost Accumulated

depreciation Mode of disposal Particulars of buyers

----------------------(Rupees '000)--------------------

Sale proceeds

Gross carrying amount of fully depreciated assets that are still in use was Rs. 156,668 thousands (2014: Rs. 171,757 thousand).


Other assets havingbook value of lessthan Rs. 250,000 orcost less than ofRs.1,000,000 whichever is less

Mr. Junaid Mohmand - employee


Accelerated tax depreciation and amortizationNet investment in finance lease

Mr. Barkat Ali Lashari - employee

Syed Oshaid Akhtar - employee

(Rupees in '000)

This represent cost of land measuring 500 square yards in sector G-7 and 4666.66 square yards situated in sector G-5/2 which wasoriginally allotted to SBFC and RDFC respectively. CDA required payment of Rs. 3.637 million for transferring the plot in the name of theGroup from SBFC and RDFC. However, on receiving draft of the required amount, CDA returned the same requiring payment of marketvalue in view of proposed privatization of the Bank. The management of the Bank has taken up the matter with the PrivatizationCommission Government of Pakistan (PC). Pursuant to which Departmental Audit Committee (DAC) of PC directed the Bank to take upthe case of restoration of plots through Ministry of Finance, Government of Pakistan (MOF). Upon management’s perusal and incompliance with directions of DAC, MOF vide its letter dated 12 February 2014 has advised CDA to reconsider the Bank’s request forrestoration of the above said land and take steps for early restoration of land. Management believes that since the Bank is a successor ofRDFC and SBFC by virtue of Section 5 of the Amalgamation and Conversion Ordinance, 2001. The Bank has inherited aforementionedland and is not required to pay the market value of the plot. Accordingly the Bank has ownership rights over this land, however on theadvice of SBP to classify these plots in doubtful category, the Bank has recorded a impairment of Rs. 32.044 million against these plots.

Mr. Tariq Mehmood Cheema - employeeMr. Sabur Ahmed Khan - employeeMirza Naddem ud Din - employeeMr. Nasser Durrani - employeeKhawaja Laeeque Ahmed - employeeMr. Attique ur Rehman - employeeMr. Saeed Ahmed - employeeMs. Shafaq - employee


134



Income/ mark-up accrued in local currency 15.1 142,493 142,805 Advances, deposits, advance rent and other prepayments 52,059 46,320 Non banking asset acquired in satisfaction of claims 15.2 138,600 - Due from benevolent fund- unsecured 36.4.2 321 1,794 Receivable from Equity Participation Fund 1,354 44 Trading right entitlement certificate 15.3 21,560 21,560 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 6,048 7,248 Asset held for sale 3,980 3,980 Others 66,930 61,997


15.1

15.2



21,560 21,560

15.3.1

(Rupees in '000)

Based on the revalued assets and liabilities of LSE and ISE, a total of 843,975 ordinary shares of Rs. 10each and 3,034,603 ordinary shares of Rs. 10 each in the corporatized and demutualized LSE and ISErespectively were allotted to the Bank in a dematerialized form. Out of the aforementioned, 337,590ordinary shares in LSE and 1,213,841 ordinary shares in ISE (i.e. 40 percent) have been received in theBank’s CDC participant account whereas 506, 385 ordinary shares in LSE and 1,820,762 ordinary sharesin ISE (i.e. 60 percent) have been held in the blocked sub accounts maintained under LSE and ISEparticipant ID with Central Depository Company of Pakistan Limited. The rights attached to 60% sharesheld in blocked account shall be dealt with in accordance with the provisions contained in the Act. Theblocked account shall be operated by the Board of Directors of the stock exchanges in the mannerprescribed by the Securities and Exchange Commission of Pakistan.

In case of LSE, par value of shares received by the Bank was recognised during the year ended December31, 2012 as available for sale investment and the excess of value of shares over the carrying value ofmembership card in LSE was recognised as trading right. However in case of ISE, since the par value ofshares received by the Bank was more than the carrying value of membership card, investment in ISE hasbeen recognised to the extent of the carrying value of membership card and trading right in ISE hasbeen recognised at Nil value.

Pursuant to the requirements of the Act, during the year trading rights of the Bank in Lahore andIslamabad Stock Exchange has lapsed. However the management is considering to approach Securitiesand Exchange Commission of Pakistan. for extension in time and further the inspection team of theState Bank of Pakistan has allowed the Bank to record a provision of 25% against the carrying amount ofTREC upto March 2015 and if the matter is not resolved to record 100% provision thereof. However themanagement has recorded a provision of Rs. 5.39 million against the carrying value of TREC at the yearend.

(Rupees in '000)

This represents successful bid price against auction of the property of a Bank’s borrower in default. Theauciton was carried out on 30 June 2015, subsequent to the auction, The Honourable Lahore High Courtthrough its decision dated 14 July 2015 allowed the Bank to adjust the bid price against its outstandingdues from the borrower against the finance facilities extended to the borrower, suspended mark-up andcost of funds. However the counter party has appealed before Lahore High court against the dscisionwhich is pending adjudication.The management on the basis of legal advice strongly believes that thedecision of the appeal will be in the Bank's favour. The ownership rights or possession of the saidproperty has not yet been conveyed to the Bank, however the settlement transaction has been recognisedin these financial statements as management believes that under the provision of section 65 of the CivilProcedure Code, the ownership right in the immovable property is deemed to have vested in the Bank,retrospectively from the date when auction was held i.e. 30 June 2015 and accordingly recording ofproperty and related impacts in the financial statements is appropriate. The market value of property isRs. 138.6 million.

This balance has been arrived at after adjusting interest in suspense of Rs. 4,052,861 thousand (2014: Rs.4,056,996 thousand).

In accordance with the requirements of the Stock Exchanges (Corporatization, Demutualization andIntegration) Act 2012 (the Act), the Bank received equity shares and one Trading Right Entitlementcertificate each in Lahore Stock Exchange Limited (LSE) and Islamabad Stock Exchange Limited (ISE)in lieu of its membership cards in these exchanges during the year ended December 31, 2012.


135



Income/ mark-up accrued in local currency 15.1 142,493 142,805 Advances, deposits, advance rent and other prepayments 52,059 46,320 Non banking asset acquired in satisfaction of claims 15.2 138,600 - Due from benevolent fund- unsecured 36.4.2 321 1,794 Receivable from Equity Participation Fund 1,354 44 Trading right entitlement certificate 15.3 21,560 21,560 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 6,048 7,248 Asset held for sale 3,980 3,980 Others 66,930 61,997


15.1

15.2



21,560 21,560

15.3.1

(Rupees in '000)

Based on the revalued assets and liabilities of LSE and ISE, a total of 843,975 ordinary shares of Rs. 10each and 3,034,603 ordinary shares of Rs. 10 each in the corporatized and demutualized LSE and ISErespectively were allotted to the Bank in a dematerialized form. Out of the aforementioned, 337,590ordinary shares in LSE and 1,213,841 ordinary shares in ISE (i.e. 40 percent) have been received in theBank’s CDC participant account whereas 506, 385 ordinary shares in LSE and 1,820,762 ordinary sharesin ISE (i.e. 60 percent) have been held in the blocked sub accounts maintained under LSE and ISEparticipant ID with Central Depository Company of Pakistan Limited. The rights attached to 60% sharesheld in blocked account shall be dealt with in accordance with the provisions contained in the Act. Theblocked account shall be operated by the Board of Directors of the stock exchanges in the mannerprescribed by the Securities and Exchange Commission of Pakistan.

In case of LSE, par value of shares received by the Bank was recognised during the year ended December31, 2012 as available for sale investment and the excess of value of shares over the carrying value ofmembership card in LSE was recognised as trading right. However in case of ISE, since the par value ofshares received by the Bank was more than the carrying value of membership card, investment in ISE hasbeen recognised to the extent of the carrying value of membership card and trading right in ISE hasbeen recognised at Nil value.

Pursuant to the requirements of the Act, during the year trading rights of the Bank in Lahore andIslamabad Stock Exchange has lapsed. However the management is considering to approach Securitiesand Exchange Commission of Pakistan. for extension in time and further the inspection team of theState Bank of Pakistan has allowed the Bank to record a provision of 25% against the carrying amount ofTREC upto March 2015 and if the matter is not resolved to record 100% provision thereof. However themanagement has recorded a provision of Rs. 5.39 million against the carrying value of TREC at the yearend.

(Rupees in '000)

This represents successful bid price against auction of the property of a Bank’s borrower in default. Theauciton was carried out on 30 June 2015, subsequent to the auction, The Honourable Lahore High Courtthrough its decision dated 14 July 2015 allowed the Bank to adjust the bid price against its outstandingdues from the borrower against the finance facilities extended to the borrower, suspended mark-up andcost of funds. However the counter party has appealed before Lahore High court against the dscisionwhich is pending adjudication.The management on the basis of legal advice strongly believes that thedecision of the appeal will be in the Bank's favour. The ownership rights or possession of the saidproperty has not yet been conveyed to the Bank, however the settlement transaction has been recognisedin these financial statements as management believes that under the provision of section 65 of the CivilProcedure Code, the ownership right in the immovable property is deemed to have vested in the Bank,retrospectively from the date when auction was held i.e. 30 June 2015 and accordingly recording ofproperty and related impacts in the financial statements is appropriate. The market value of property isRs. 138.6 million.

This balance has been arrived at after adjusting interest in suspense of Rs. 4,052,861 thousand (2014: Rs.4,056,996 thousand).

In accordance with the requirements of the Stock Exchanges (Corporatization, Demutualization andIntegration) Act 2012 (the Act), the Bank received equity shares and one Trading Right Entitlementcertificate each in Lahore Stock Exchange Limited (LSE) and Islamabad Stock Exchange Limited (ISE)in lieu of its membership cards in these exchanges during the year ended December 31, 2012.


2015 201415.4 Provision against other assets

Opening balance 88,184 83,155 Charge for the year 9,482 6,024 Reversals (1,200) (1,000)

8,282 5,024 Transferred to NBP 30 5 Closing balance 96,496 88,184

Provision balance is in respect of:Income/ mark-up accrued in local currency:

Universal Leasing Limited 22 22 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 6,048 7,248 Other receivables- SME Portfolio 39,691 36,049 Legal charges recoverable from borrowers- SBFC & RDFC 22,213 21,734 Trading right entitlement certificate - TREC 5,390 - Others 3,492 3,491

96,496 88,184

(Rupees in '000)


136



114,107 58,298




2,889,058 777,433

17.2 Details of borrowings secured/unsecuredBorrowings from State Bank of Pakistan - unsecured 17.2.1 48,892 53,068 Repurchase agreement borrowings - secured 17.2.2 2,839,793 723,100 Long tern finance - secured 17.2.3 373 1,265

2,889,058 777,433

17.2.1

17.2.2

17.2.3

Note 2015 201418. DEPOSITS AND OTHER ACCOUNTS (Rupees in '000)

Customers



Remunerative deposits 18.2 715,760 721,167 Non-remunerative deposits - -

4,768,752 3,342,155


4,768,752 3,342,155

18.2

These represent transactions with financial institutions for sale of Government Securities under re-purchaseagreement (REPO) in the inter bank money market at mark-up rates ranging from 6.20% to 6.50% (Dec 31, 2014:9.50% to 10.00%) per annum for period upto two month (Dec 31, 2014: upto one month). REPO transactionsare secured against investment of the Bank in Government securities.

This represents financing facility obtained from State Bank of Pakistan under the scheme "Financing Facility ForStorage of Agri Produce (FFSAP)" vide SMEFD circular No. 08 dated June 04, 2010 & IH&SSMEFD circularNo. 05 dated Feb 23, 2015. These carries revised mark up rate of 2.50 % & 3.25% respectively and is repayable inquarterly instalments.


This represents balance due against financing facilities amounting to Rs. 7.3 million from National EnergyConservation Centre (Enercon) by SMEL. The facilities from Enercon have been obtained under an agreementwhereby they have agreed to provide funds to SME Leasing for granting lease / finance facility to its customersfor procuring and using energy efficient equipments. The facility carries mark-up at the rate of 5% per annumpayable on quarterly basis subject to the condition that the SMEL will provide lease / finance facility to itscustomers at a preferential mark-up rate.


137



114,107 58,298




2,889,058 777,433

17.2 Details of borrowings secured/unsecuredBorrowings from State Bank of Pakistan - unsecured 17.2.1 48,892 53,068 Repurchase agreement borrowings - secured 17.2.2 2,839,793 723,100 Long tern finance - secured 17.2.3 373 1,265

2,889,058 777,433

17.2.1

17.2.2

17.2.3

Note 2015 201418. DEPOSITS AND OTHER ACCOUNTS (Rupees in '000)

Customers



Remunerative deposits 18.2 715,760 721,167 Non-remunerative deposits - -

4,768,752 3,342,155


4,768,752 3,342,155

18.2

These represent transactions with financial institutions for sale of Government Securities under re-purchaseagreement (REPO) in the inter bank money market at mark-up rates ranging from 6.20% to 6.50% (Dec 31, 2014:9.50% to 10.00%) per annum for period upto two month (Dec 31, 2014: upto one month). REPO transactionsare secured against investment of the Bank in Government securities.

This represents financing facility obtained from State Bank of Pakistan under the scheme "Financing Facility ForStorage of Agri Produce (FFSAP)" vide SMEFD circular No. 08 dated June 04, 2010 & IH&SSMEFD circularNo. 05 dated Feb 23, 2015. These carries revised mark up rate of 2.50 % & 3.25% respectively and is repayable inquarterly instalments.


This represents balance due against financing facilities amounting to Rs. 7.3 million from National EnergyConservation Centre (Enercon) by SMEL. The facilities from Enercon have been obtained under an agreementwhereby they have agreed to provide funds to SME Leasing for granting lease / finance facility to its customersfor procuring and using energy efficient equipments. The facility carries mark-up at the rate of 5% per annumpayable on quarterly basis subject to the condition that the SMEL will provide lease / finance facility to itscustomers at a preferential mark-up rate.

19. LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE

(Rupees in '000)Not later than one year 1,477 103 1,374 1,463 264 1,199

607 6 601 2,083 109 1,974 Over five years - - - - - -

2,084 109 1,975 3,546 373 3,173

Note 2015 2014

20. OTHER LIABILITIESMark-up/ return/ interest payable in local currency 58,918 43,971 Unearned commission on guarantees 1,567 1,167 Accrued expenses 9,083 19,159 Income tax payable 5,926 17,043 Accounts payable 12,762 5,364 Sundry creditors 20.1 117,325 115,702 Payable to NBP 12.2 5,229 5,672 Branch adjustment account 4,860 938 Payable against employees' benefit plans

Defined benefit pensionThe Bank 36.1.2 112,383 79,907

Defined benefit unfunded gratuity schemeThe Bank 36.2.2 53,821 44,711 SMEL 36.5.2 4,891 4,606

Unfunded compensated absencesThe Bank 36.3.3 77,399 79,075 SMEL 1,070 1,034

Payable on termination/maturity of lease 1,172 200 Security deposits against lease 241,348 272,420 Employees' VSS payments withheld 20.2 14,026 14,026 Payable to Equity Participation Fund - unsecured - - Income tax withheld payable 18,911 18,134 Others 7,746 16,796

748,437 739,925

20.1

20.2

Principal outstanding

Minimum lease

payments

Financial charges

for future periods

Principal outstandi

ng

Minimum lease

payments

Later than one year andnot later than five years

(Rupees in '000)

Employees VSS payments of Rs. 14.026 million (December 31, 2014: Rs. 14.026 million) has been withhelddue to legal cases pending in the courts against employees, filed by the Bank and customers.

2015 2014

This represents liability against vehicle lease agreements of SMEL with leasing companies & commercialbanks. Monthly lease rentals are payable including financial charges at 14.39% to 15.10% (2014: 14.39% to23%) per annum. These finance lease arrangement will mature in the year 2015 to 2017. The purchase optionis available with the Group at the time of payment of the last installment or surrender of deposit moneyunder the lease agreements.

This includes amount of Rs. 90.6 million (December 31, 2014: Rs. 90.6 million) payable either to SBP or FBRon VSS payments related to pension on finalization of tax assessment of financial year 2009.

Financial charges for

future periods


138


(Rupees in '000)Not later than one year 1,477 103 1,374 1,463 264 1,199

607 6 601 2,083 109 1,974 Over five years - - - - - -

2,084 109 1,975 3,546 373 3,173

Note 2015 2014

20. OTHER LIABILITIESMark-up/ return/ interest payable in local currency 58,918 43,971 Unearned commission on guarantees 1,567 1,167 Accrued expenses 9,083 19,159 Income tax payable 5,926 17,043 Accounts payable 12,762 5,364 Sundry creditors 20.1 117,325 115,702 Payable to NBP 12.2 5,229 5,672 Branch adjustment account 4,860 938 Payable against employees' benefit plans

Defined benefit pensionThe Bank 36.1.2 112,383 79,907

Defined benefit unfunded gratuity schemeThe Bank 36.2.2 53,821 44,711 SMEL 36.5.2 4,891 4,606

Unfunded compensated absencesThe Bank 36.3.3 77,399 79,075 SMEL 1,070 1,034

Payable on termination/maturity of lease 1,172 200 Security deposits against lease 241,348 272,420 Employees' VSS payments withheld 20.2 14,026 14,026 Payable to Equity Participation Fund - unsecured - - Income tax withheld payable 18,911 18,134 Others 7,746 16,796

748,437 739,925

20.1

20.2


Minimum lease

payments

Financial charges

for future periods

Principal outstandi

ng

Minimum lease

payments

Later than one year andnot later than five years

(Rupees in '000)

Employees VSS payments of Rs. 14.026 million (December 31, 2014: Rs. 14.026 million) has been withhelddue to legal cases pending in the courts against employees, filed by the Bank and customers.

2015 2014

This represents liability against vehicle lease agreements of SMEL with leasing companies & commercialbanks. Monthly lease rentals are payable including financial charges at 14.39% to 15.10% (2014: 14.39% to23%) per annum. These finance lease arrangement will mature in the year 2015 to 2017. The purchase optionis available with the Group at the time of payment of the last installment or surrender of deposit moneyunder the lease agreements.

This includes amount of Rs. 90.6 million (December 31, 2014: Rs. 90.6 million) payable either to SBP or FBRon VSS payments related to pension on finalization of tax assessment of financial year 2009.


future periods


139


21. SHARE CAPITAL

21.1 Authorized Capital

2015 2014 2015 2014(Rupees in '000)

1,000,000,000 1,000,000,000 Ordinary shares of Rs. 10 each 10,000,000 10,000,000

21.2 Issued, subscribed and paid up capital

2015 2014 Ordinary shares

152,853,153 152,853,153 Fully paid in cash 1,528,532 1,528,532 50,000,000 50,000,000 Issued as bonus shares 500,000 500,000 36,397,547 36,397,547 Issued for consideration other than cash 363,975 363,975

239,250,700 239,250,700 2,392,507 2,392,507

Number of21.3 Break-up of share capital is as follows: shares %

Federal Government 224,615,978 93.89 2,246,160 2,246,160 National Bank of Pakistan 6,121,095 2.56 61,211 61,211 United Bank Limited 3,975,003 1.66 39,750 39,750 Habib Bank Limited 1,987,501 0.83 19,875 19,875 MCB Bank Limited 1,490,619 0.62 14,906 14,906 Allied Bank Limited 774,351 0.32 7,744 7,744 Industrial Development Bank Limited 286,146 0.12 2,861 2,861 Directors 7 - - -

239,250,700 100 2,392,507 2,392,507

22. RESERVES Statutory Reserve against Un-appropriated 2015 2014Reserve Future loss loss

(Rupees in '000)

Balance at beginning of the year 227,019 7,641 (1,939,100) (1,704,440) (1,328,787)

- (336,043) (336,043) (375,653) Balance at end of the period/year 227,019 7,641 (2,275,143) (2,040,483) (1,704,440)

22.1 As at December 31, 2015, the Bank and SMEL has availed net of tax benefit of Forced Sales Value (FSV) of Rs. 237,146 and 131,190thousand respectively (December 31, 2014: Rs. 299,339 and 123,504 thousand) in respect of pledged stocks, mortgaged residential,commercial, industrial properties (land and building only) and plant and machinery under charge held as collateral against non-performing assets. Reserves and un-appropriated profit to that extent are not available for distribution by way of cash, stock dividendor bonus to employees.

Total comprehensive income/(loss) transferred to equity


140


23. NON-CONTROLLING INTEREST- (NCI)

SME Leasing Limited

NCI Percentage 26.859% 26.859%

2015 2014ASSETSCurrent assetsCash and bank balances 3,115 5,520 Advances 2,484 2,129 Deposits, prepayments and other receivables 1,631 982 Accrued interest on loans 14 1,391 Investments 4,283 3,209 Asset held for sale 3,980 3,980 Current maturity of non-current assets 432,784 416,544

448,291 433,755 Non-current assetsLong term finances and loans 17,381 57,648 Net investment in finance leases 91,803 154,887 Long term deposits and prepayments 1,543 1,627 Fixed assets 9,298 10,466

120,025 224,628

Total Assets 568,316 658,383

LIABILITIESCurrent liabilitiesAccrued and other liabilities 6,067 15,654 Accrued mark-up on borrowings 1,171 2,382 Short term borrowings 129,066 155,320 Current maturity of non-current liabilities 189,775 208,633 Provision for compensated absences 1,070 1,034 Provision for taxation - net 8,187 12,334

335,336 395,357 Non-current liabilitiesLiabilities against assets subject to finance lease 601 1,974 Long term deposits 53,041 65,972 Deferred liabilities 4,891 4,606

58,533 72,552

Total liabilities 393,869 467,909

NET ASSETS 174,447 190,474

Carrying Amount of NCI 46,855 51,158

Adjustments:Share premium specifically allocable to NCI 5,910 5,910

52,765 57,068

(Rupees in '000)

The following table summarises the information relating to the Group's subsidiary that has NCI


141


2015 2014

Revenue 27,889 46,220 Loss for the year (17,312) (11,046) Other comprehensive income 1,285 1,186 Total comprehensive income (16,027) (9,860) Loss attributable to NCI (4,650) (2,967)

345 319

Cash flows from operating activities 26,536 (115,730) Cash flows from investment activities (395) 1,935 Cash flows from financing activities, before dividends to NCI (2,292) (4,504) Cash flows from financing activities-cash dividends to NCI - - Net increase / (decrease) in cash and cash equivalents 23,849 (118,299)

SME Leasing Limited has its principal place of business in Pakistan

24. SURPLUS ON REVALUATION OF ASSETS 2015 2014(Rupees in '000)

Surplus/(Deficit) on revaluation of available-for-sale securitiesFederal Government securities

- Market Treasury Bills (MTBs) (338) (151) - Pakistan Investment Bonds (PIBs) 48,660 58,034

48,322 57,883 Fully paid up ordinary shares/units

- Listed companies/mutual funds 8,270 7,149

56,592 65,032 Non-controlling interest (833) (545)

55,759 64,487

Other Comprehensive Income allocated to NCI

(Rupees in '000)


142

2015 201425. CONTINGENCIES AND COMMITMENTS (Rupees in '000)25.1 Transaction-related contingent liabilities

Guarantees in favour of:Government 178,737 172,820 Others - -

25.2 Other Contingenciesa) 22,826 24,972 b)

49,800 49,800 c)

15,000 15,000 d)

e)

13,505 13,505

f)

211,716 211,716

3,800 3,800

g) 113,260 112,240

25.3 Commitments in respect of forward lending

Commitments to extend credit 126,450 212,410 Commitments for lease disbursement 14,467 11,000

25.4 Commitments for the acquisition of operating fixed assets 9,053 2,346

25.5 Commitments against repo/reverse repo transactions

Sale and repurchase agreements 2,871,813 729,012 25.6 Other commitments

Undrawn facilities 151,813 138,968 25.7 Bills for collection

Payable in Pakistan 50 66

Back benefits and claims of staff/employees under litigation.

The Bank and the income tax department have filed an appeal before the AppellateTribunal Inland Revenue against the appellate order of the Commissioner (Appeals),who had partly set aside the order of the Taxation officer, resulting in taxable incomeof Rs. 151,234 thousand and tax liability of Rs. 52,932 thousand against the declaredtax loss of Rs. 23,489 thousand and tax liability of Rs. 4,249 thousand for the tax year2008. Without prejudice to the appeal, the demand has been paid by the Bank;however no provision has been made in these financial statements as the managementis confident of a favorable outcome.

Claims not acknowledged as debt from various borrowers

Damages claimed by an ex-employee of the then RDFC involved in Ravi Securities(Pvt) Limited and Taas Securities (Pvt) Limited affairs and a director of RaviSecurities (Pvt) Limited and Taas Securities (Pvt) Limited not acknowledged as debt.

Damages claim by borrower for delay in recording repayments received fromborrower, not acknowledged as debt.

Tax demands of Rs. 612.707 million raised by the Income Tax Authorities related toVSS staff cost (tax year-2005) has been decided in favour of the Bank. However taxauthorities have filed appeal before ATIR against the decision of the CommissionerIncome Tax (Appeals). The management of the Bank strongly believes and expectsfavourable outcome and therefore no provision has been made for this effect in thefinancial statements.

The bank is in appeal before the Appellate Tribunal Inland Revenue against theamended assessment order for the tax year 2010, whereby the taxation officer hadassessed income of Rs. 636,499 thousand and tax liability of Rs. 222,774 thousand asagainst income of Rs. 7,559 thousand and tax liability of Rs. 3,947 thousand admittedby the Bank. The CIR(A) decided the appeal partly in the Bank's favor while settingaside certain matters. the re-assessment has not yet been finalized by the taxationofficer.The tax authorities have served order under section 122(1) read with section 117(1)and 214 C of the Income Tax Ordinance, 2001 to SMEL disallowing expense relatingto depreciation allowance, markup on loan to employees and financial cost andcreating tax demand of Rs. 3.8 million. The SMEL has filed an appeal beforeCommissioner Inland Revenue (Appeals-II) against the said order and the case has notyet been fixed for hearing.


143

2015 201426. MARK-UP/ RETURN/ INTEREST EARNED Note (Rupees in '000)

On loans and advances to customers 375,526 352,537 On investment in finance lease to customers 21,239 34,870

396,765 387,407 On loans and advances to employees 4,742 5,535

401,507 392,942

On investments in

Available for sale securities 283,537 371,330 Held to maturity securities 4,388 4,056

287,925 375,386

On deposits with financial institutions 195 301 On securities purchased under resale agreements 1,157 814 On clean lending 17,156 42,803 On call money lending 7,719 6,802

715,659 819,048

27. MARK-UP/ RETURN/ INTEREST EXPENSED

Deposits 285,020 308,194 Borrowings 145,125 227,468 SBP Refinance Scheme 2,802 3,970 Brokerage and commission 3,005 2,774 Bank charges 535 472

436,487 542,878

28. GAIN ON SALE OF SECURITIES - net

Federal Govt. SecuritiesMarket Treasury Bills 396 196 Pakistan Investment Bonds 32,140 68,629

Mutual Funds/Shares - 4,609 32,536 73,434

29. OTHER INCOME

Gain on sale of operating fixed assets 1,743 1,167 Fee on fund managed by the Bank-EPF 1,152 1,285 Gain on termination of lease 170 73 Others 222 161

3,287 2,686


144

2015 2014

30. ADMINISTRATIVE EXPENSES Note (Rupees in '000)Salaries, allowances, etc. 416,146 386,320 Charge for defined benefit plans

- pension fund and gratuity 36.1.4 40,273 42,468 - unfunded gratuity scheme - the Bank 36.2.4 10,488 12,936 - unfunded gratuity scheme - SMEL 36.5.5 1,107 1,069 - unfunded compensated absences 36.3.4 10,254 (303)

Contribution to defined contribution plan - benevolent fund 36.4.3 1,913 1,155 Non-executive directors' fees, allowances and other expenses 1,906 1,504 Rent, taxes, insurance, electricity, etc. 79,069 85,232 Legal and professional charges 17,219 17,445 Communications 6,624 6,564 Repairs and maintenance 24,012 17,090 Finance charges on leased assets 266 488 Stationery and printing 4,781 4,373 Advertisement and publicity 1,170 860 Auditors' remuneration 30.1 1,640 1,639 Depreciation 13.2 29,687 20,292 Amortization 13.3 755 1,113 Donations - - Recruitment expenses 176 153 Travel and transport 5,160 5,128 Vehicle running and maintenance expenses 6,800 7,079 Entertainment 2,793 2,455 Training 555 187 Books, subscription and newspapers 2,629 2,625 Other expenses 30.2 17,398 16,509

682,821 634,381

2015 201430.1 Auditors' remuneration (Rupees in '000)

Audit fee 1,150 1,150

350 350 Out-of-pocket expenses 140 139

1,640 1,639

30.2

2015 201431. OTHER CHARGES (Rupees in '000)

Penalties imposed by the State Bank of Pakistan 826 831

Special certifications, half yearly review and audit of consolidatedfinancial statements

This includes Security charges of Rs. 13.08 million (2014: Rs. 11.79 million) and NIFT charges of Rs. 1.51 million

(2014: Rs. 1.58 million).


145

2015 2014

32. TAXATION

Current 33.1 7,866 9,204 Prior years (4,073) - Deferred - -

3,793 9,204

33. Relationship between tax expense and accounting loss2015 2014

Loss before tax (295,675) (377,214)

Applicable tax rate 35% 35%

Tax on loss (Rupees in '000) (103,486) (132,025) Tax arising on Deferred tax asset not recognised including permanent differences (Rupees in '000) 28,574 46,810 Tax effect of income taxed at lower rate (Rupees in '000) 339 753 Minimum tax (Rupees in '000) 7,527 8,451 Tax credit for prior years (Rupees in '000) (4,073) - Other permanent differences (Rupees in '000) 74,912 85,215

3,793 9,204

33.1

2015 201434. CASH AND CASH EQUIVALENTS

Cash and balances with treasury banks 390,101 366,873 Balances with other banks 3,315 7,318 Call money lendings 400,000 15,000

793,416 389,191

2015 201435. STAFF STRENGTH

Permanent 212 210Temporary/ on contractual basis 212 203Daily wagers 1 1Group's own staff strength at end of the year 425 414Outsourced 111 89Total staff strength at end of the year 536 503

Average number of employees during the year 520 511

(Rupees in '000)

Provision for current year expenses is charged on minimum tax rate of 1% of the turnover due to tax losses ofthe Group for the year ended December 31, 2015.

(Rupees in '000)

Numbers

(Rupees in '000)


146


36. EMPLOYEE BENEFIT PLANS36.1 Defined benefit pension and gratuity



-

-


2015 2014
















Pension payable to members who have completed a minimum of 10 years of service with the Bank on retirement at age of sixty yearsor on completion of 25 years of service with the Bank or on permanent disability or on death during service.

(Rupees '000)

(Rupees '000)

The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund at the beginningof the period, for returns over the entire life of the related obligation.

(Rupees '000)


147


36. EMPLOYEE BENEFIT PLANS36.1 Defined benefit pension and gratuity



-

-


2015 2014
















Pension payable to members who have completed a minimum of 10 years of service with the Bank on retirement at age of sixty yearsor on completion of 25 years of service with the Bank or on permanent disability or on death during service.

(Rupees '000)

(Rupees '000)

The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund at the beginningof the period, for returns over the entire life of the related obligation.

(Rupees '000)




719,350 100% 641,348 100%


2015 2014

Valuation discount rate - per annum 9.00% 11.25%Expected return on plan assets - per annum 9.00% 11.25%Salaries increase rate - per annum 7.00% 9.25%Pension indexation rate 5.00% 7.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005

36.1.10 Disclosure for current and previous four annual years

2015 2014 2013 2012 2011

Present value of obligation 834,743 721,255 617,807 629,749 471,902 Fair value of plan assets (719,350) (641,348) (539,194) (442,793) (355,551) Deficit 115,393 79,907 78,613 186,956 116,351

Experience adjustmentson plan liabilities-(gain)/loss 24,565 (363) (119,517) 78,268 (720)

Experience adjustmentson plan assets-(loss)/gain (7,281) (2,814) (8,331) (5,724) 1,595





Discount rate 1% (105,345) 123,625 Salary rate 1% 72,873 (58,515) Withdrawal rate 10% 3,339 (2,504) Mortality age 1 year (7,513) 7,847

Actuarial valuation is carried out annually. Latest actuarial valuation was carried out as at December 31, 2015 using Projected Unit CreditMethod. Significant actuarial assumptions used are as follows:

2015

(Rupees '000)

2014



(Rupees '000)


148



Investment Risks:

Longevity Risks:


Withdrawal Risk:

36.1.13 The expected pension expense for the next financial year works out to Rs. 41.374 million (2014: Rs. 42.334 million).



36.2 Defined benefit- unfunded gratuity scheme - the Bank


2015 2014

36.2.2 The amounts recognised in the balance sheet are as follows:

Present value of defined benefit obligation 53,821 44,711 Net liability 53,821 44,711

36.2.3 Movement in net liability recognised in the balance sheet 2015 2014

Opening balance of liability 44,711 46,906 Expense for the year 10,488 12,936 Other comprehensive income 9,533 (10,275)Benefits paid during the year (10,911) (4,856)Closing balance of net liability 53,821 44,711

2015 201436.2.4 The amounts recognised in the profit and loss account are as follows:

Current service cost 6,072 7,154 Net interest 4,416 5,782

10,488 12,936


2015 201436.2.5 Movement in payable to defined benefit unfunded gratuity scheme

Present value of obligation at the beginning of the year 44,711 46,906 Current service cost 6,072 7,154 Interest cost 4,416 5,782 Benefits paid (10,911) (4,856)Actuarial loss/(gain) 9,533 (10,275)Present value of obligation at the end of the year 53,821 44,711

(Rupees '000)

The risk arises when the actual performance of the investments is lower than expectation and thus creating a shortfall in the fundingobjectives.



The risk of actual withdrawals varying with the actuarial assumptions

(Rupees '000)

The Bank operates a defined benefit unfunded gratuity scheme for all eligible employees.

(Rupees '000)

(Rupees '000)


149


36.2.6 Significant actuarial assumptions are as follows: 2015 2014

Discount factor - per annum 10.25% 11.25%Salary increase rate - per annum (short term - 1 year) 5.50% 9.25%Salary increase rate - per annum (long term) 8.25% 9.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005


2015 2014 2013 2012 2011

Present value of obligation 53,821 44,711 46,906 41,654 42,517 Experience adjustmentson plan liabilities gain/(loss) 9,533 (10,275) 2,497 1,511 (8,075)





Discount rate 1% (6,273) 7,421 Salary rate 1% 7,781 (6,658) Withdrawal rate 10% 42 (42) Mortality age 1 Year 58 (58)

36.2.9 Maturity ProfileParticulars Undiscounted

Payments

(Millions of Rupees)

Year 1 1.696 Year 2 2.835 Year 3 1.381 Year 4 1.364 Year 5 1.419 Year 6 to Year 10 14.281 Year 11 and above 239.671


Longevity Risks:


Withdrawal Risk:


(Rupees '000)

The risk arises when the actual lifetime of retirees is longer than expectation. This risk is measured at the plan level over the entireretiree population;

The most common type of retirement benefit is one where the benefit is linked with final salary. The risk arises when the actualincreases are higher than expectation and impacts the liability accordingly;

The risk of actual withdrawals varying with the actuarial assumptions can impose a risk to the benefit obligation. The movement of theliability can go either way

(Rupees '000)



150





36.3 Unfunded compensated absences



2015 2014

Discount factor - per annum 9.00% 11.25%Salaries increase rate - per annum 7.00% 9.25%

Mortality rateSLIC

2001-2005SLIC

2001-2005

2015 2014

36.3.3 The amounts recognised in the balance sheet are as follows:

Present value of defined benefit obligation 77,399 79,075

2015 201436.3.4 Movement in liability recognized in the balance sheet

Balance at beginning of the year 79,075 88,127 Expense/ (reversal) for the year 10,254 (303) Benefits paid during the year (11,930) (8,749) Closing net Liability 77,399 79,075





Discount rate 1% (1,038) 11,266 Salary rate 1% 11,328 (1,191)


Longevity Risks:


Withdrawal Risk:


Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant. Sensitivity analysis of discount rate and salary increase rate is presented in the below tables:



The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent and contractual employees.

(Rupees '000)

Actuarial valuation was carried out as at December 31, 2015 using Projected Unit Credit Method. Significant actuarial assumptions usedwere as follows:

The risk of actual withdrawals varying with the actuarial assumptions can impose a risk to the benefit obligation. The movement of theliability can go either way.


151


36.3.7 The expected compensated absences expense for the next financial year works out to Rs. 7.323 million (2014: Rs. 12.033 million).



36.4 Benevolent fund


36.4.2 Actuarial liability for active employees 12,927 3,343 16,270 10,436 2,564 13,000 Actuarial liability for beneficiaries 38 74 112 75 82 157

Total actuarial liability 12,965 3,417 16,382 10,511 2,646 13,157

Fair value of plan assets (12,736) (3,957) (16,693) (11,266) (3,685) (14,951)

Funding surplus 229 (540) (311) (755) (1,039) (1,794) Receivable from fund (10) - (10) - - - Asset recognized in balance sheet 219 (540) (321) (755) (1,039) (1,794)

Current service cost 210 77 287 356 137 493 Net interest (21) (49) (70) (85) (117) (202)

189 28 217 271 20 291

36.4.3

Expense for the year 1,313 600 1,913 773 382 1,155 Funding surplus - - - - - -

1,313 600 1,913 773 382 1,155



16,693 100% 14,951 100%

Officers Benevolent

Fund

Staff Benevolent

Fund

Staff Benevolent

Fund Total Total

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to this fundwere made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basicsalary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basis ofactuarial advice using the Projected Unit Credit Method.

(Rupees '000)2015 2014

Officers Benevolent

Fund

The amount recognized in the profitand loss account is as follows:

(Rupees '000) (Rupees '000)

Expected benevolent expense/ (income) for the next one year commencing 01 January, 2016

2015 2014


152




36.5 SMEL operates following staff retirement and other benefits schemes for its employees

36.5.1 Principal actuarial assumptions 2015 2014

Discount rate 10.00% 11.25%Expected long term rate of increase in salary level 10.00% 11.25%

Demographic assumptions

Mortality rate SLIC SLIC(2001-2005) (2001-2005)

Employee turnover rate Moderate Moderate

2015 201436.5.2 Liability in balance sheet

Present value of defined benefit obligation 4,891 4,606 4,891 4,606

36.5.3 Movement in liability during the year 2015 2014

Opening balance 4,606 3,674 Charged to profit and loss account 1,107 1,069 Remeasurements loss chargeable in other comprehensive income (210) 35 Benefits paid during the year (612) (172) Closing balance 4,891 4,606

2015 201436.5.4 Reconciliation of the present value of defined benefit obligations

Present value of obligations as at 1 January 4,606 3,674 Current service cost 640 622 Interest cost 467 447 Benefits paid during the year (612) (172) Remeasurements loss chargeable in other comprehensive income (210) 35 Present value of obligations as at 31 December 4,891 4,606

SMEL operates an unapproved and unfunded gratuity scheme for all its permanent employees. Number of employees covered under thescheme are 32 (2014: 27). The latest actuarial valuation of the gratuity scheme was carried out as at December 31, 2015 using the ProjectedUnit Credit Method. The following significant assumptions were used for valuation of the scheme:

(Rupees '000)

(Rupees '000)

(Rupees '000)


153


2015 201436.5.5 Charge for the year

Current services cost 640 622 Interest cost 467 447

1,107 1,069

2015 201436.5.6 Re-measurements recognised in other comprehensive income

Experience adjustment (210) 35 Total re-measurements recognised in other comprehensive income (210) 35



Discount rate effect (Rupees '000) Rate effect

Original liability 4,891 10%1% increase 4,386 11%1% Decrease 5,483 9%

Salary increase rate effect

Original liability 4,891 10%1% increase 5,486 11%1% Decrease 4,374 9%

36.5.9 Maturity profile 2015 2014



2015 2014 2013 2012 2011

Present value of defined benefit obligation 4,891 4,606 3,674 3,365 4,409 Experience adjustmentson plan liabilities (loss)/gain (210) 35 (513) (145) 24

(Rupees '000)

The sensitivity analysis prepared presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

(Rupees '000)

(Rupees '000)

Actuarial (gains)/losses on obligation

Sensitivity analysis has been performed by varying one assumption keeping all other assumptions constant and calculating the impact on the present value of the defined benefit obligations under the employee benefit schemes. The increase / (decrease) in the present value of defined benefit obligations as a result of change in each assumption is summarized below:


154


37. COMPENSATION OF DIRECTORS AND EXECUTIVES President/Chief Executive

2015 2014 2015 2014 2015 2014

Fees - - 1,500 1,234 - - Managerial remuneration 6,983 6,684 - - 159,894 126,047 Charge for defined benefit plan 1,527 1,418 - - 37,191 21,567 Rent and house maintenance 3,841 2,378 - - 51,040 35,427 Utilities 698 619 - - 15,222 12,052 Medical 1,047 711 - - 19,410 15,837 Conveyance 52 237 - - 8,407 5,998 Leave fare assistance 1,119 20 - - 6,951 6,805 Others 3,026 2,494 406 270 35,740 45,131

18,293 14,561 1,906 1,504 333,855 268,864 Number of persons 1 2 10 15 196 161

Directors Executives

(Rupees in '000)

Executives mean employees, other than the chief executive and directors, whose basic salary exceeds five hundredthousand rupees in a financial year. The remuneration of the Directors has been fixed in accordance with the Articleof Association.


155

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58,2

98

58,2

98

-

-

-

58,2

98

58,2

98

- Bor

row

ings

-

-

-

-

-

777,

433

77

7,43

3

-

-

-

777,

433

77

7,43

3

- Dep

osits

-

-

-

-

-

3,34

2,15

5

3,

342,

155

-

-

-

3,34

2,15

5

3,

342,

155

- Oth

er L

iabili

ties

-

-

-

-

-

204,

497

20

4,49

7

-

-

-

204,

497

20

4,49

7

On

Bala

nce

shee

t fin

anci

al in

stru

men

ts

The

bank

mea

sure

s fair

valu

es u

sing

the

follo

win

g fa

ir va

lues

heir

arch

y th

at re

flect

s the

sign

ifica

nce

of th

e in

puts

use

d in

mak

ing

the

mea

sure

men

ts.

Leve

l 1: F

air v

alue

mea

sure

men

t usin

g qu

oted

pric

es (u

nadj

uste

d) in

act

ive

mar

kets

for i

dent

ical a

sset

s and

liab

ilitie

s.Le

vel 2

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

oth

er th

an q

uote

d pr

ices i

nclu

ded

with

in le

vel 1

that

are

obs

erva

ble

for a

sset

or l

iabili

ty, e

ither

dire

ctly

(i.e.

as p

rices

) or i

ndire

ctly

(i.e.

deriv

ed fr

om p

rices

). Le

vel 3

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

for t

he a

sset

s and

liab

ilitie

s tha

t are

not

bas

ed o

n ob

serv

able

mar

ket d

ata

(i.e.

unob

serv

able

inpu

ts).

38.2

38.3

38.4

BOO

K VA

LUE

FAIR

VAL

UE

2014

2014

The

bank

has

not

disc

lose

d th

e fa

ir va

lue

for t

hese

fina

ncial

ass

ets a

nd li

abili

ties,

as th

ese

are

for s

hort

term

and

or r

e-pr

iced

over

shor

t ter

m. T

here

fore

their

car

ryin

g am

ount

s are

reas

onab

le ap

prox

imat

ion

of fa

ir va

lue.

The

bank

's po

licy

is to

reco

gnise

tran

sfer

into

and

out

of t

he d

iffer

ent f

air v

alue

heira

rchy

leve

ls at

the

date

, the

eve

nt o

r cha

nge

in c

ircum

stan

ces,

that

cau

sed

the

trans

fer o

ccur

red.

The

re w

ere

no tr

ansf

ers b

etw

een

level

1 an

d lev

el 2

durin

g th

e ye

ar.

Curr

ently

no

finan

cial i

nstru

men

ts a

re c

lassif

ied in

leve

l 3.


157

39. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES

The segment analysis with respect to business activity is as follows:

Trading & Commercial Other Leasing TotalSales Banking Operations

Total income 347,906 388,103 27,890 763,899 Total expenses 303,364 724,407 31,803 1,059,574 Net income/ (loss) before tax 44,542 (336,304) (3,913) (295,675) Segment Assets (gross) 5,389,050 8,468,233 725,236 14,582,519 Segment Non Performing Loans - 5,517,582 358,182 5,875,764 Segment Provision Required 62,204 5,379,069 158,369 5,599,642 Segment liabilities 3,044,025 5,212,475 265,829 8,522,329 Segment Return on net Assets (ROA) (%) 0.84% -10.89% -0.69%Segment cost of funds (%) 9.97% 13.90% 11.96%

Total income 500,131 360,309 46,220 906,660 Total expenses 408,334 834,603 40,937 1,283,874 Net income/ (loss) before tax 91,797 (474,294) 5,283 (377,214) Segment assets (gross) 2,036,724 8,502,057 821,781 11,360,562 Segment non performing loans - 5,640,890 294,221 5,935,111 Segment provision required 62,204 5,403,406 164,344 5,629,954 Segment liabilities 944,208 3,665,831 310,945 4,920,984 Segment Return on net Assets (ROA) (%) 4.65% -15.31% 0.80%Segment cost of funds (%) 43.25% 22.77% 13.17%

Assumptions used:

-

- Unallocatable liabilities representing 8.01% (2014: 8.46%) of the total liabilities have been allocated tosegments based on their respective incomes.

Dcember 31, 2014

December 31, 2015 (Rupees in '000)

Unallocatable assets representing 0.82% (2014: 0.97%) of the total assets have been allocated to segmentsbased on their respective incomes.


158

40.

RE

LAT

ED

PAR

TY

TR

ANSA

CTIO

NS

Det

ails o

f bala

nces

out

stan

ding

at p

erio

d en

d an

d tra

nsac

tions

with

relat

ed p

artie

s are

as f

ollo

ws:

Key

Oth

erD

irect

ors

Equ

ity

Em

ploy

ees

Em

ploy

ees

Key

Oth

erD

irect

ors

Equ

ity

Em

ploy

ees

Em

ploy

ees

Man

agem

ent

Em

ploy

ees

Parti

cipa

tion

bene

fitPr

ovid

ent

Man

agem

ent

Em

ploy

ees

Parti

cipa

tion

bene

fitPr

ovid

ent

Pers

onne

lFu

ndpl

ans

Tru

stPe

rson

nel

Fund

plan

sTr

ust

Balan

ces o

utst

andi

ng a

s at

-A

dvan

ces

12,7

18

13

6,14

9

-

-

-

-

10

,330

14

8,94

3

-

-

-

-

-Re

ceiv

able

s/m

arku

p6,

381

46

,330

-

1,3

54

32

1

-

5,08

7

47

,041

-

44

1,79

4

-

-

Dep

osits

13,3

17

10

0,48

0

-

36

5,75

7

-

84

,405

1,33

4

58

,229

17

34

6,16

7

-

2,15

4

-Pa

yabl

es/m

arku

p30

636

-

1,3

98

24

3,60

3

633

12

430

-

-

20

3,69

3

7

Tran

sact

ions

dur

ing

the

year

end

ed

-N

et m

ark-

up /

inte

rest

ear

ned

377

4,36

5

-

-

-

-

354

5,

181

-

-

-

-

-N

et m

ark-

up /

inte

rest

exp

ense

d26

4

4,

657

-

16,15

6

-

4,35

6

319

4,

670

2

22

,979

-

107

-To

tal d

ebit

in ru

nnin

g fin

ance

-

-

-

-

-

-

-

-

-

-

-

-

-

Tota

l cre

dits

in ru

nnin

g fin

ance

-

-

-

-

-

-

-

-

-

-

-

-

-

Paym

ents

mad

e on

beh

alf o

f-

-

-

158

-

-

-

-

-

70

-

-

-Pa

ymen

ts re

ceiv

ed fr

om-

-

-

-

-

-

-

-

-

-

-

-

-Re

mun

erat

ion

and

allow

ance

s45

,174

354,

043

-

-

-

-

37

,806

33

5,37

1

-

-

-

-

-Pa

ymen

ts m

ade

durin

g th

e ye

ar-

-

-

-

84

,716

89

-

-

-

-

68,6

04

28

-Ch

arge

for t

he y

ear

-

-

-

-

64,0

35

57

0

-

-

-

-

57,3

25

42

9

-

Fee

and

com

miss

ion

inco

me

-

-

-

1,1

52

-

-

-

-

-

1,28

5

-

-

Rem

uner

atio

n of

chi

ef e

xecu

tive

offic

er, D

irect

ors a

nd e

xecu

tives

is d

isclo

sed

in n

ote

37 to

the

finan

cial

stat

emen

ts.

Dec

embe

r 31,

2015

Dec

embe

r 31,

201

4

Rup

ees i

n '0

00Ru

pees

in '0

00


159

41. CAPITAL ADEQUACY

2015 2014Regulatory capital base (Rupees in '000)Tier I capital Shareholders capital/assigned capital 2,392,507 2,392,507 Reserves 234,660 234,660 Non-controlling interest 52,765 57,070 Unappropriated/unremitted profits (net of losses) (2,275,143) (1,939,100)

404,789 745,137 Less: Adjustments

Goodwill/intangible Assets 1,298 1,114 Investment in equity of subsidiary - - Deficit on revaluation of available for sale investments - 151

1,298 1,265 Total tier I capital 403,491 743,872 Tier II capital 8,174 12,675 Eligible tier III capital - - Total regulatory capital (a) 411,665 756,547

Risk-weighted exposures Book Value Risk Adjusted Book Value Risk Adjusted

Value ValueCredit riskBalance sheet items: Cash and other liquid assets 393,416 663 374,191 1,464 Investments/ lending to financial institutions 4,936,558 664,585 1,594,486 279,777 Loans and advances 3,166,833 1,831,867 3,402,772 1,907,932 Fixed assets 129,581 129,581 141,955 145,936

Deferred tax assets - - - - Other assets 356,489 301,128 217,204 168,291

8,982,877 2,927,824 5,730,608 2,503,400 Off balance sheet itemsWeighted Non-funded exposures 167,605 83,803 161,283 80,642

167,605 83,803 161,283 80,642

Credit risk-weighted exposures (b) 9,150,482 3,011,627 5,891,891 2,584,042

Market risk 746,359 316,079 Market risk-weighted exposures - 746,359 - 316,079

Total risk-weighted exposures (c) 3,757,986 2,900,121 Capital adequacy ratio credit risk [ (a) / (b) x 100 ] 13.67% 29.28%Total Capital adequacy ratio [ (a) / (c) x 100 ] 10.95% 26.09%

State Bank of Pakistan (SBP) has granted exemption to the Bank vide letter No. BSD/SU-21/220/1624/2007 dated June08, 2007 from computing capital adequacy ratio under BASEL II till restructuring/privatization and has granted exemptionfrom implementation of Basel III Capital Instructions till restructuring/privatization vide SBP letter #BPRD/BA&CPD/646/000886/16 dated January 12, 2016. Accordingly, the Bank computes capital adequacy ratio underBASEL I and SBP has allowed exemption in meeting the minimum CAR requirements of 10% till June 30, 2016 vide SBPletter No. BPRD/BA&CP/646/3116/2016 dated February 08, 2016.

(Rupees '000)

The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacy is asfollows:

2015 2014


160

42. RISK MANAGEMENT

42.1 Credit risk

42.1.1 Segment by class of business



Chemical and pharmaceuticals 204,995 2.4% 105 0.0% - - Agriculture, forestry, hunting and fishing 293,268 3.4% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 488,035 5.7% 76,646 1.6% - - Cement 20,268 0.2% - - - -

99,073 1.2% 2,804 0.1% - - - -

219,073 2.6% 143 0.0% - - Financial - - 715,760 15.0% 2,871,813 65.3%Insurance - - 19 0.0% - -

- 62,129 0.7% 1,003 0.0% - -

385,011 4.5% - - - - -


80,717 0.9% - - - - Individuals 1,644,950 19.2% 1,678,625 35.2% 391,523 8.9%Services 277,759 3.2% - - 15,000 0.3%Government - - - - 1,020,465 23.2%Others 2,701,257 31.5% 2,292,297 48.1% 96,196 2.2%

8,585,373 100% 4,768,752 100% 4,394,997 100%

42.1.2Segment by sector

Public/ Government - - 2,471,992 52% 1,020,465 23%Private 8,585,373 100% 2,296,760 48% 3,374,532 77%

8,585,373 100% 4,768,752 100% 4,394,997 100%


Construction

Footwear and leather garments

Credit risk represents the accounting loss that would be recognised at the reporting date if counter parties failedcompletely to perform as contracted. The Group is not exposed to major concentration of credit risk. Written proceduresfor credit and risk management functions have been developed and implemented. Credit evaluation system comprise ofwell designed loan approval and review responsibilities and it is ensured that Bank's credit-granting activities conform tothe established strategy, prudential regulations and SBP instructions are strictly followed. To ensure that credit grantingactivities are adequately diversified, besides fixing limits on individual credit, it is ascertained that there is no concentrationin a particular industry or economic sector, geographical region and specific product. Special attention is placed on suchnon-performing loans and a Special Assets Management Division follows up and recovers all such loans. Recovery againstcertain specific non-performing loans has been outsourced to National Bank of Pakistan.

Automobile and transportation equipment

Electronics and electrical appliances

Power (electricity), gas, water and sanitary

2015

Deposits Advances (Gross)


161

Segment by class of business



Chemical and pharmaceuticals 186,643 2.1% 218 0.0% 3,000 0.1%Agriculture, forestry, - hunting and fishing 291,515 3.3% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 502,352 5.7% 75,074 2.3% - - Cement 20,268 0.2% 42,006 1.3% - -

99,383 1.1% 583 0.0% - - - -

91,435 1.0% 23 0.0% - - Financial - - 721,167 21.6% 729,012 31.6%Insurance - - 19 0.0% - -

- 55,679 0.6% 19 0.0% - -

314,668 3.5% - - - - -


- - 237,610 2.7% - - - -

Individuals 1,660,754 18.7% 1,569,584 47.0% 463,618 20.1%Services 167,810 1.9% - - 15,000 0.7%Government - - - - 1,014,548 43.9%Others 3,182,464 35.8% 931,144 27.9% 85,184 3.7%

8,891,980 100% 3,342,155 100% 2,310,362 100%

Segment by sector

Public/ Government - - 1,318,187 39.4% 1,014,548 43.9%Private 8,891,980 100% 2,023,968 60.6% 1,295,814 56.1%

8,891,980 100% 3,342,155 100% 2,310,362 100%

Electronics and electrical appliancesConstructionPower (electricity), gas, water and sanitary


2014

Advances (Gross) Deposits

Footwear and leather garmentsAutomobile and transportation equipment


162


42.1.3 Details of non-performing advances and specific provisions by class of business segment

Specific Specific Provisions Provisions

Held Held

Chemical and pharmaceuticals 114,544 107,204 106,862 103,107 Agriculture, forestry, hunting and fishing 230,025 214,975 228,501 215,135 Mining & quarrying 9,053 9,053 9,053 9,053 Textile 387,717 360,384 394,220 365,208 Cement 20,268 20,268 20,268 20,268 Sugar - - - - Footwear and leather garments 89,855 59,388 67,091 61,008 Automobile and transportation equipment 87,111 69,554 19,692 7,402 Electronics and electrical appliances 27,032 19,978 21,325 15,710 Construction 74,434 69,842 46,248 41,496 Power (electricity), gas, water and sanitary 43,236 10,900 41,122 12,376 Wholesale and trade 1,434,668 1,350,267 1,538,713 1,505,034 Transport, storage and communication 4,977 1,607 82,591 66,254 Individuals 1,522,679 1,522,679 1,523,166 1,523,166 Services 61,052 38,458 78,415 74,486 Others 1,769,113 1,555,809 1,757,844 1,460,405

5,875,764 5,410,366 5,935,111 5,480,108

42.1.4 Details of non-performing advances - - and specific provisions by sector

Public/ Government - - - - Private 5,875,764 5,410,366 5,935,111 5,480,108

5,875,764 5,410,366 5,935,111 5,480,108

2015 2014(Rupees in '000)

Classified Advances

Classified Advances


163


42.1.5 GEOGRAPHICAL SEGMENT ANALYSIS

Contingenciesand

commitments


(295,675) 8,982,877 460,548 4,394,997

Contingenciesand

commitments


(377,214) 5,730,608 809,624 2,310,362

42.2 Market risk

2015

(Rupees in '000)

Market risk is the risk that the value of on and off-balance sheet positions of the Group will be adverselyaffected by movements in interest rates, foreign exchange rates and equity prices resulting in a loss to earningsand capital. The Group's interest rates exposure comprises those originating from investing and lendingactivities. The Asset and Liability Committee of the Bank monitors and manages the interest rate risk with theobjective of limiting the potential adverse effect on the profitability of the Bank.

Net assets employed

Total assets employed

(Rupees in '000)



2014

Net assets employed

Total assets employees


164


42.2.1 Foreign exchange risk

Presently the Bank does not deal in foreign exchange.


(Rupees in '000)


8,982,877 8,522,329 4,394,997 -


(Rupees in '000)


5,730,608 4,920,984 2,310,362 -

42.2.2 Equity position risk

The Group's exposure in equity market is classified in available for sale category with the intent to earn profitbased on fundamentals.

Assets Off-balance sheet items

2015

2014

Assets Liabilities Off-balance sheet items

Liabilities


165

SME

Ban

k Li

mite

dN

otes

to th

e Co

nsol

idat

ed F

inan

cial

Sta

tem

ents

For t

he y

ear e

nded

Dec

embe

r 31,

2015

42.2

.3M

ism

atch

of i

nter

est r

ate

sens

itive

ass

ets a

nd li

abili

ties

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stT

otal

finan

cial

rate

inst

rum

ents

On-

bala

nce

shee

t fin

anci

al in

stru

men

tsAs

sets

Cash

and

bala

nces

with

trea

sury

ban

ks39

0,10

1

-

-

-

-

-

-

-

-

-

39

0,10

1

Ba

lance

s with

oth

er b

anks

4.12

%3,

315

88

3

210

14

4

60

67

-

12

16

1

-

1,77

8

Le

ndin

g to

fina

ncial

inst

itutio

ns7.

58%

885,

000

400,

000

48

5,00

0

-

-

-

-

-

-

-

-

Inve

stm

ents

9.23

%4,

051,5

58

356,

121

40

2,12

2

297,

885

1,34

9,18

1

375,

754

275,

511

41

8,36

1

506,

407

-

70

,216

A

dvan

ces

11.5

8%3,

166,

833

25

4,35

0

653,

366

57

6,42

5

1,

020,

273

12

5,26

0

48

3,66

7

28,4

18

19

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5,

764

-

Oth

er a

sset

s14

7,76

0

-

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-

-

-

-

-

14

7,76

0

8,

644,

567

1,

011,

354

1,54

0,69

8

87

4,45

4

2,

369,

514

50

1,08

1

75

9,17

8

446,

791

52

5,87

8

5,76

4

60

9,85

5

Li

abili

ties

Bills

pay

able

114,

107

-

-

-

-

-

-

-

-

-

114,

107

Borr

owin

gs fr

om fi

nanc

ial in

stitu

tions

7.22

%2,

889,

058

2,

354,

626

489,

884

4,

344

8,

688

17

,246

9,

131

5,13

9

-

-

-

D

epos

its a

nd o

ther

acc

ount

s7.

13%

4,76

8,75

2

1,

307,

911

818,

851

22

5,43

4

417,

206

5,

425

-

-

1,

493,

075

-

500,

850

Sub-

ordi

nate

d lo

ans

-

-

-

-

-

-

-

-

-

-

-

Lo

an fr

om th

e St

ate

Bank

of P

akist

an-

-

-

-

-

-

-

-

-

-

-

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t to

fina

nce

lease

1,975

1,

975

-

-

-

-

-

-

-

-

-

O

ther

liab

ilitie

s22

5,08

9

-

-

-

-

-

-

-

-

-

22

5,08

9

7,

998,

981

3,

664,

512

1,30

8,73

5

22

9,77

8

42

5,89

4

22

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9,

131

5,13

9

1,

493,

075

-

840,

046

On-

balan

ce sh

eet g

ap

645,

586

(2

,653

,158

)

231,

963

64

4,67

6

1,94

3,62

0

478,

410

750,

047

44

1,65

2

(967

,197

)

5,

764

(2

30,1

91)

Off-

bala

nce

shee

t fin

anci

al in

stru

men

tsCo

mm

itmen

ts to

ext

end

cred

it29

2,73

0

29

2,73

0

-

-

-

-

-

-

-

-

-

Co

mm

itmen

ts a

gain

st re

po b

orro

win

g2,

871,8

13

2,38

4,40

7

48

7,40

6

-

-

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Off-

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ce sh

eet g

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164,

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l Yiel

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ivity

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(5,3

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(255

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)

644,

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1,94

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(967

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Cum

ulat

ive

Yiel

d/ In

tere

st R

isk S

ensit

ivity

Gap

(5,3

30,2

95)

(5

,585

,738

)

(4,9

41,0

62)

(2,9

97,4

42)

(2,5

19,0

32)

(1,7

68,9

85)

(1

,327

,333

)

(2,2

94,5

30)

(2

,288

,766

)

-

42

.2.3

.1Re

conc

iliat

ion

of a

sset

s and

liab

ilitie

s exp

osed

to y

ield/

inte

rest

rate

risk

with

tota

l ass

ets a

nd li

abili

ties

(Rup

ees '

000)

(Rup

ees '

000)

Tota

l fin

ancia

l ass

ets a

s per

not

e 42

.2.3

8,64

4,56

7

Tota

l fin

ancia

l liab

ilitie

s as p

er n

ote

42.2

.3

7,99

8,98

1

A

dd n

on-fi

nanc

ial a

sset

s:A

dd n

on-fi

nanc

ial li

abili

ties:

O

pera

ting

fixed

ass

ets

129,

581

O

ther

liab

ilitie

s52

3,34

8

O

ther

ass

ets

208,

729

Balan

ce a

s per

Bala

nce

Shee

t8,

982,

877

Balan

ce a

s per

Bala

nce

Shee

t8,

522,

329

42.2

.3.2

Yiel

d ris

k is

the

risk

of d

eclin

e in

ear

ning

s due

to a

dver

se m

ovem

ent o

f the

yiel

d cu

rve.

42.2

.3.3

Inte

rest

rate

risk

2015 Exp

osed

to Y

ield

/Int

eres

t ris

k

(Rup

ees i

n '0

00)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

ges

inth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

ets

ofRs

.8,6

44,5

67th

ousa

nd(2

014:

Rs.5

,517

,191

thou

sand

),th

efin

ancia

lass

ets

whi

chw

ere

subj

ectt

oin

tere

stra

teris

kam

ount

edto

Rs.8

,034

,712

thou

sand

(201

4:Rs

.4,9

99,7

38th

ousa

nd).

Inve

stm

ents

and

othe

rass

ets

amou

ntin

gto

Rs.3

,996

,405

thou

sand

(201

4:Rs

.1,3

47,1

41th

ousa

nd)r

espe

ctiv

elyar

egu

aran

teed

byth

eG

over

nmen

tof

Pak

istan

. An

Ass

ets L

iabili

ty C

omm

ittee

of t

he B

ank

mee

ts p

erio

dica

lly a

nd e

nsur

es th

at th

e in

vest

men

ts a

re m

ade

in a

n ap

prop

riate

man

ner t

o m

itiga

te a

ny in

tere

st ra

te a

nd li

quid

ity ri

sk.

Ove

r 1 to

3

mon

ths

Ove

r 3 to

6

mon

ths

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sU

pto

1 m

onth

Ove

r 2 to

3

year

sO

ver 3

to 5

ye

ars

Ove

r 5 to

10

year

sAb

ove

10

year

sNotes to the Consol idated Financial StatementsFor the year ended December 31 , 2015

166

Mis

mat

ch o

f int

eres

t rat

e se

nsiti

ve a

sset

s and

liab

ilitie

s

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stT

otal

finan

cial

rate

inst

rum

ents

On-

bala

nce

shee

t fin

anci

al in

stru

men

tsAs

sets

Cash

and

bala

nces

with

trea

sury

ban

ks36

6,87

3

-

-

-

-

-

-

-

-

-

36

6,87

3

Balan

ces w

ith o

ther

ban

ks6.

69%

7,31

8

1,41

2

34

3

23

3

98

11

2

-

-

282

-

4,

838

Le

ndin

g to

fina

ncial

inst

itutio

ns10

.17%

215,

000

200,

000

15

,000

-

-

-

-

-

-

-

-

In

vest

men

ts11

.14%

1,379

,486

59

,615

198,

362

22

2,79

3

83

7

2,

674

361,

896

52

4,45

1

8,85

8

-

-

Adv

ance

s10

.87%

3,40

2,77

2

202,

290

70

3,28

5

696,

115

992,

061

134,

010

590,

326

50

,754

26,8

78

7,05

3

-

Oth

er a

sset

s14

5,74

2

-

-

-

-

-

-

-

-

-

14

5,74

2

5,51

7,19

1

463,

317

91

6,99

0

919,

141

992,

996

136,

796

952,

222

57

5,20

5

36,0

18

7,05

3

51

7,45

3

Liab

ilitie

sBi

lls p

ayab

le58

,298

-

-

-

-

-

-

-

-

-

58,2

98

Bo

rrow

ings

from

fina

ncial

inst

itutio

ns10

.11%

777,

433

723,

980

3,

852

4,

021

7,

488

14

,977

14

,846

8,26

9

-

-

-

Dep

osits

and

oth

er a

ccou

nts

8.29

%3,

342,

155

96

0,21

4

572,

720

13

6,68

3

23

2,99

6

10

,116

-

-

86

6,04

0

-

563,

386

Su

b-or

dina

ted

loan

s-

-

-

-

-

-

-

-

-

-

-

Lo

an fr

om th

e St

ate

Bank

of P

akist

an-

-

-

-

-

-

-

-

-

-

-

Li

abili

ties a

gain

st a

sset

s sub

ject

to fi

nanc

e lea

se3,

173

3,

173

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

204,

497

-

-

-

-

-

-

-

-

-

204,

497

4,

385,

556

1,

687,

367

576,

572

14

0,70

4

24

0,48

4

25

,093

14

,846

8,26

9

86

6,04

0

-

826,

181

O

n-ba

lance

shee

t gap

1,1

31,6

35

(1

,224

,050

)

340,

418

77

8,43

7

752,

512

11

1,70

3

93

7,37

6

566,

936

(8

30,0

22)

7,05

3

(308

,728

)

Off-

bala

nce

shee

t fin

anci

al in

stru

men

tsCo

mm

itmen

ts to

ext

end

cred

it36

2,37

8

36

2,37

8

-

-

-

-

-

-

-

-

-

Com

mitm

ents

aga

inst

repo

bor

row

ing

729,

012

729,

012

-

Off-

balan

ce sh

eet g

ap1,0

91,3

90

1,0

91,3

90

-

-

-

-

-

-

-

-

-

Tota

l Yiel

d/ In

tere

st R

isk S

ensit

ivity

Gap

(2,3

15,4

40)

340,

418

77

8,43

7

75

2,51

2

11

1,70

3

93

7,37

6

566,

936

(8

30,0

22)

7,05

3

-

-

Cum

ulat

ive

Yiel

d/ In

tere

st R

isk S

ensit

ivity

Gap

(2,3

15,4

40)

(1

,975

,022

)

(1,1

96,5

85)

(444

,073

)

(332

,370

)

605,

006

1,

171,

942

341,

920

348,

973

Reco

ncili

atio

n of

ass

ets a

nd li

abili

ties e

xpos

ed to

yiel

d/ in

tere

st ra

te ri

sk w

ith to

tal a

sset

s and

liab

ilitie

s(R

upee

s '00

0)(R

upee

s '00

0)To

tal f

inan

cial a

sset

s as p

er n

ote

40.2

.35,

517,

191

To

tal f

inan

cial l

iabili

ties a

s per

not

e 40

.2.3

4,

385,

556

Add

non

-fina

ncial

ass

ets:

Add

non

-fina

ncial

liab

ilitie

s:

Ope

ratin

g fix

ed a

sset

s14

1,95

5

Oth

er li

abili

ties

535,

428

Oth

er a

sset

s71

,462

Ba

lance

as p

er B

alanc

e Sh

eet

5,73

0,60

8

Ba

lance

as p

er B

alanc

e Sh

eet

4,92

0,98

4

Yiel

d ris

k is

the

risk

of d

eclin

e in

ear

ning

s due

to a

dver

se m

ovem

ent o

f the

yiel

d cu

rve.

Inte

rest

rate

risk

(Rup

ees i

n '0

00)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

gesi

nth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

ets

ofRs

.5,5

17,1

91th

ousa

nd(2

013:

Rs.7

,275

,099

thou

sand

),th

efin

ancia

lass

ets

whi

chw

ere

subj

ectt

oin

tere

stra

teris

kam

ount

edto

Rs.4

,999

,738

thou

sand

(201

3:Rs

.6,7

01,4

69th

ousa

nd).

Inve

stm

ents

and

othe

rass

etsa

mou

ntin

gto

Rs.1

,347

,141

thou

sand

(201

3:Rs

.2,5

74,7

03th

ousa

nd)r

espe

ctiv

elyar

egu

aran

teed

byth

eG

over

nmen

tof

Pak

istan

. An

Ass

ets L

iabili

ty C

omm

ittee

of t

he B

ank

mee

ts p

erio

dica

lly a

nd e

nsur

es th

at th

e in

vest

men

ts a

re m

ade

in a

n ap

prop

riate

man

ner t

o m

itiga

te a

ny in

tere

st ra

te a

nd li

quid

ity ri

sk.

2014 Exp

osed

to Y

ield

/Int

eres

t ris

k

Upt

o 1

mon

thO

ver 1

to 3

m

onth

sO

ver 3

to 6

m

onth

s

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sO

ver 2

to 3

ye

ars

Ove

r 3 to

5

year

sO

ver 5

to 10

ye

ars

Abov

e 10

ye

ars


167

42.3

Liqu

idity

Ris

k

42.3

.1M

atur

ities

of A

sset

s and

Lia

bilit

ies

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5U

pto

1to

3to

6m

onth

s to

1to

2to

3

to 5

to 10

Abov

eT

otal

mon

thm

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s10

yea

rs

(R

upee

s in

'000

)As

sets

Cas

h an

d ba

lance

s with

trea

sury

ban

ks39

0,10

1

344,

221

9,33

1

540

1,43

5

-

-

-

34,5

74

-

Bala

nces

with

oth

er b

anks

3,31

5

2,

661

21

0

144

60

67

-

12

16

1

-

Len

ding

to fi

nanc

ial in

stitu

tions

885,

000

40

0,00

0

48

5,00

0

-

-

-

-

-

-

-

Inv

estm

ents

4,05

1,558

356,

121

402,

122

29

7,88

5

1,34

9,18

1

375,

754

275,

511

41

8,36

1

576,

623

-

A

dvan

ces

3,16

6,83

3

19

3,85

6

52

3,33

0

477,

088

66

5,63

1

39

4,07

1

66

2,87

5

156,

011

88

,207

5,76

4

Ope

ratin

g fix

ed a

sset

s12

9,58

1

2,66

6

6,36

1

7,83

8

15,3

89

24

,875

12

,157

20,9

50

7,

302

32

,043

Def

erre

d ta

x as

sets

-

-

-

-

-

-

-

-

-

-

Oth

er a

sset

s35

6,48

9

234,

541

9,92

3

8,04

5

1,69

8

4,07

9

250

24

7

97,7

06

-

8,98

2,87

7

1,

534,

066

1,

436,

277

791,

540

2,

033,

394

79

8,84

6

95

0,79

3

595,

581

80

4,57

3

37

,807

Liab

ilitie

s B

ills p

ayab

le11

4,10

7

98,8

40

-

-

-

-

-

-

15,2

67

-

Bor

row

ings

from

fina

ncial

inst

itutio

ns2,

889,

058

2,35

4,62

6

489,

884

4,

344

8,

688

17

,246

9,

131

5,13

9

-

-

D

e pos

its a

nd o

ther

acc

ount

s4,

768,

752

1,57

9,81

9

821,

011

22

6,36

2

422,

329

5,42

5

-

-

1,

713,

806

-

Sub

-ord

inat

ed lo

ans

-

-

-

-

-

-

-

-

-

-

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t

to fi

nanc

e lea

se1,9

75

11

7

23

3

525

525

575

-

-

-

-

D

efer

red

tax

liabi

lities

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

748,

437

27

5,31

1

11

8,15

7

8,69

1

9,34

5

18,7

24

35,3

63

2,

043

280,

803

-

8,

522,

329

4,30

8,71

3

1,42

9,28

523

9,92

2

440,

887

41,9

70

44,4

94

7,

182

2,00

9,87

6

-

N

et a

sset

s46

0,54

8

(2,7

74,6

47)

6,

992

55

1,61

8

1,

592,

507

75

6,87

6

90

6,29

9

58

8,39

9

(1

,205

,303

)

37,8

07

Shar

e ca

pita

l2,

392,

507

Rese

rves

234,

660

U

napp

ropr

iated

pro

fit(2

,275

,143)

N

on-c

ontro

lling

inte

rest

52,7

65

Surp

lus o

n re

valu

atio

n of

ass

ets

55,7

59

46

0,54

8

42.4

Ope

ratio

nal R

isk

Ope

ratio

nal r

isk is

the

risk

of lo

ss re

sulti

ng fr

om in

adeq

uate

or f

ailed

inte

rnal

proc

esse

s, pe

ople

and

syst

em o

r fro

m e

xter

nal e

vent

s.

Liqu

idity

risk

refle

cts

anen

terp

rise's

inab

ility

inra

ising

fund

sto

mee

tcom

mitm

ents

.In

orde

rto

avoi

dliq

uidi

tyris

k,th

eBa

nkha

sa

polic

yto

main

tain

suffi

cient

liqui

dity

.To

close

lyw

atch

liqu

idity

pos

ition

, the

Ass

ets L

iabili

ty C

omm

ittee

mee

ts p

erio

dica

lly to

ens

ure

that

ade

quat

e liq

uidi

ty is

main

tain

ed to

mee

t any

futu

re fi

nanc

ial o

blig

atio

n.

Ope

ratio

nal

risks

are

man

aged

thro

ugh

Bank

-wid

eor

line

ofbu

sines

ssp

ecifi

cpo

licies

and

proc

edur

es,

cont

rols

and

mon

itorin

gto

ols.

Exa

mpl

esof

thes

ein

clude

pers

onne

lm

anag

emen

t pra

ctice

s, da

ta re

conc

iliat

ion

proc

esse

s, fr

aud

man

agem

ent u

nits

, tra

nsac

tion

proc

essin

g m

onito

ring

and

analy

sis a

nd b

usin

ess c

ontin

uity

plan

ning

.

2015

Inco

mpl

iance

with

the

BSD

circu

larlet

ter

No.

03of

2011

date

dFe

brua

ry22

,201

1,all

asse

tsan

dlia

bilit

iesw

ithco

ntra

ctua

lmat

uriti

esha

vebe

enre

porte

das

per

their

rem

ainin

gm

atur

ities

,and

whe

reco

ntra

ctua

lmat

uriti

esar

eno

tava

ilabl

e,su

chas

sets

and

liabi

lities

have

been

repo

rted

aspe

rthe

irex

pect

edm

atur

ities

,det

erm

ined

onth

eba

sisof

beha

vior

stud

yof

pre

viou

s six

yea

rs' h

istor

ic da

ta u

nder

vol

atili

ty m

etho

dolo

gy. T

hese

bas

es h

ave

also

been

app

rove

d by

the

Ass

et a

nd L

iabili

ty C

omm

ittee

(ALC

O) o

f the

Ban

k.


168

Mat

uriti

es o

f Ass

ets a

nd L

iabi

litie

s

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5U

pto

1to

3to

6m

onth

s to

1to

2to

3

to 5

to 10

Abov

eT

otal

mon

thm

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s10

yea

rs

(R

upee

s in

'000

)As

sets

Cas

h an

d ba

lance

s with

trea

sury

ban

ks36

6,87

3

319,

296

10,1

49

1,

212

1,

649

-

-

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169


2015 201443 EMPLOYEES PROVIDENT FUND TRUST

Size of the Fund 196,597 174,967 Cost of investments made 146,089 128,660 Percentage of investments made 74% 74%Fair value of investments 146,089 128,660

Breakup of investments is as follows:Rupees % Rupees %

(000) (000)

Term Deposits Receipts (TDRs) 12,663 9% 77,456 60%Pakistan Investment Bonds (PIBs) 44,226 30% 44,226 35%Mutual Funds 3,641 2% 4,014 3%

85,559 59% 2,964 2%

44 DATE OF AUTHORIZATION

These financial statements were authorized for issue by the Board of Directors of the Bank on March 05, 2016.

(Rupees in '000)

2015 2014

Bank deposit accounts

All investments out of provident fund trust have been made in accordance with Section 227 of the CompaniesOrdinance, 1984 and rules formulated for this purpose.



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171

SME LEASING LIMITEDFINANCIAL STATEMENT


173

KPMG Taseer Hadi & Co.Chartered AccountantsSheikh Sultan Trust Building No. 2Beaumont RoadKarachi, 75530 Pakistan

Telephone + 92 (21) 3568 5847Fax + 92 (21) 35685095Internet www.kpmg.com.pk

REVIEW REPORT TO THE MEMBERS ON THE STATEMENT OF COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE AND PUBLIC SECTOR COMPANIES (CORPORATE GOVERNANCE) RULES, 2013

We have reviewed the enclosed Statement of Compliance with the best practices contained in the Code of Corporate Governance and Public Sector Companies (Corporate Governance) Rules, 2013 (both herein referred to as ‘Codes’) prepared by the Board of Directors of SME Leasing Limited for the year ended 31 December 2015 to comply with the requirements of Listing Regulation of the Pakistan Stock Exchange where the Company is listed and the provisions of Public Sector Companies (Corporate Governance) Rules, 2013.

The responsibility for compliance with the Codes is that of the Board of Directors of the Company. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Company’s compliance with the provisions of the Codes and report if it does not and to highlight any non-compliance with the requirements of the Codes. A review is limited primarily to inquiries of the Company’s personnel and review of various documents prepared by the Company to comply with the Codes.

As a part of our audit of the financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an opinion on the effectiveness of such internal controls, the Company’s corporate governance procedures and risks

The Codes require the Company to place before the Audit Committee, and upon recommendation of the Audit Committee, place before the Board of Directors for their review and approval its related party transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm’s length transactions and transactions which are not executed at arm’s length price and recording proper justification for using such alternate pricing mechanism. We are only required and have ensured compliance of this requirement to the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the Audit Committee. We have not carried out any procedures to determine whether the related party transactions were undertaken at arm’s length price or not.

Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance does not appropriately reflect the Company’s compliance, in all material aspects, with the Codes as applicable to the Company for the year ended December 31, 2015.

Further, we highlight below instances of non-compliance with the requirements of the Codes as reflected in the point / paragraph references where these are stated in the Statement of Compliance:

174



Point / paragraph

S.No. Reference Descriptioni. S No. 2 As stated in the Explanation, the Board does not have majority of its total

members as independent membersii. S No. 18(a) As stated in the Explanation, performance evaluation forms were approved

by the Board in the 59th Board meeting but the evaluation has not been carried out.

iii. S No. 21 As stated in the Explanation, orientation course for the Board members has not been arranged by the Company.

iv. S No. 22 As stated in the Explanation, the Chairman of the Risk Management Committee and Human Resource Committee are not elected from amongst the independent directors. Also, the committees of the Board do not constitute majority of independent directors.

v. S No. 30 As stated in the Explanation, Head of Internal Audit is also acting as Head of Compliance.

02 March 2016 KPMG Taseer Hadi & Co. Chartered AccountantsKarachi Mazhar Saleem

175



Auditors ’ Repor t to The MembersFor the year ended December 31 , 2015

We have audited the annexed balance sheet of SME Leasing Limited (“the Company”) as at 31 December 2015 and the related profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the Company’s management to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by the management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

a) in our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance, 1984;

b) in our opinion:

i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account and are further in accordance with accounting policies consistently applied except for the change described in note 3.1 with which we concur;

ii) the expenditure incurred during the year was for the purpose of the Company’s business; and

iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Company;

c) in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan and give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of the loss, its cash flows and changes in equity for the year then ended; and

176



Auditor ’s Repor t to The MembersFor the year ended December 31 , 2013

d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

Without qualifying our opinion, we draw attention to note 1.2 to the financial statements which indicates that the Company has incurred net loss of Rs. 17.312 million during the year ended 31 December 2015, and as of that date, its accumulated losses amounted to Rs. 197.122 million. These conditions, along with other matters as set forth in the above referred note; indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.

02 March 2016 KPMG Taseer Hadi & Co. Chartered AccountantsKarachi Mazhar Saleem

177

Note 31 December 31 December2015 2014

ASSETSCurrent assetsCash and bank balances 4 3,115,209 5,520,170 Advances 5 2,484,094 2,129,255 Deposits, prepayments and other receivables 6 1,630,488 982,396 Accrued interest on loans 13,843 1,391,293 Investments 7 4,283,091 3,209,123 Asset held for sale 8 3,979,986 3,979,986 Current maturity of non-current assets 9 432,784,153 416,543,263

448,290,864 433,755,486

Non-current assetsLong term finances and loans 10 17,380,776 57,647,617 Net investment in finance leases 11 91,803,251 154,887,400 Long term deposits and prepayments 12 1,543,322 1,626,654 Fixed assets 13 9,297,595 10,466,345

120,024,944 224,628,016 Total assets 568,315,808 658,383,502

LIABILITIESCurrent liabilitiesAccrued and other liabilities 14 6,066,743 15,654,125 Accrued mark-up on borrowings 15 1,171,429 2,382,032 Short term borrowings 16 129,066,524 155,320,077 Current maturity of non-current liabilities 17 189,774,946 208,632,647 Provision for compensated absences 1,069,901 1,033,768 Provision for taxation - net 8,186,714 12,334,023

335,336,257 395,356,672

Non-current liabilitiesLong term finances 18 - - Liabilities against assets subject to finance lease 19 600,977 1,974,255 Long term deposits 11 53,040,880 65,971,901 Deferred liabilities 20 4,890,705 4,606,467

58,532,562 72,552,623 Total liabilities 393,868,819 467,909,295 NET ASSETS 174,446,989 190,474,207

FINANCED BY

Authorised share capital100,000,000 (31 December 2014: 100,000,000) ordinary shares of Rs. 10 each 1,000,000,000 1,000,000,000

Issued, subscribed and paid-up capital 21 320,000,000 320,000,000 Reserves 48,466,329 48,466,329 Accumulated loss (197,122,431) (180,021,245)

171,343,898 188,445,084

Surplus on revaluation of available-for-sale investments - net 3,103,091 2,029,123

Total shareholder's equity 174,446,989 190,474,207

COMMITMENTS 22

The annexed notes 1 to 38 form an integral part of these financial statements.

(Rupees)

Balance SheetAs at December 31 , 2015

Chief Executive OfficerDirector

178

Note 2015 2014

INCOMEIncome from leasing operations 23 27,699,519 46,062,940

OTHER OPERATING INCOMEProfit on bank accounts / return on investments 24 18,881 75,056Other income 25 170,720 81,700

189,601 156,756

27,889,120 46,219,696

EXPENSESAdministrative and operating expenses 26 37,304,838 37,945,238Finance cost 27 17,665,337 16,535,320

54,970,175 54,480,558

(27,081,055) (8,260,862)

PROVISIONSProvision for potential lease losses - net 11.1.3 (6,361,725) 2,006,744Provision for doubtful finances and loans - net 10.3 386,733 315,705

(5,974,992) 2,322,449

Loss before taxation (21,106,063) (10,583,311)

Taxation 28 - Current

For the period (278,891) (462,197)Prior year 4,073,209 -

3,794,318 (462,197)

Loss for the year (17,311,745) (11,045,508)

Loss per share - basic and diluted 29 (0.54) (0.35)


(Rupees)

Profi t and Loss AccountFor the year ended December 31 , 2015


179

2015 2014

Loss after tax (17,311,745) (11,045,508)

Other comprehensive income

Surplus on revaluation of available-for-sale investments 1,073,968 1,221,424

Actuarial gain / (loss) on defined benefit obligations 210,559 (35,412)1,284,527 1,186,012

Total comprehensive income for the year (16,027,218) (9,859,496)


(Rupees)

Statment of Comprehensive IncomeFor the year ended December 31 , 2015


180

Note 2015 2014

CASH FLOW FROM OPERATING ACTIVITIES Loss before taxation (21,106,063) (10,583,311)

Adjustments for: - Depreciation and amortisation 1,699,173 1,978,404 - Gratuity 1,106,797 1,069,380 - Finance cost 17,399,275 16,151,671 - Profit on bank accounts / return on investments (53,868) (145,756) - Lease finance charges 266,062 383,649 - Gain on disposal of fixed assets (135,733) (11,000) - Provision for potential lease losses (6,361,725) 2,006,744 - Provision for doubtful finances and loans 386,733 315,705

14,306,714 21,748,797Operating (loss) / profit before working capital changes (6,799,349) 11,165,486

Movement in working capital(Increase) / decrease in operating assets - Accrued interest on loans 1,377,450 (1,258,522) - Decrease in net investment in finance leases 82,292,384 (61,303,497) - Deposits and prepayments (648,092) 1,145,784 - Long term deposits and prepayments 83,332 (66,599) - Advances (354,839) (846,325)

82,750,235 (62,329,159)(Decrease) / increase in operating liabilities - Provision for compensated absences 36,133 356,897 - Long term deposits received (31,071,864) (1,409,770) - Accrued and other liabilities (9,587,382) 8,814,047

(40,623,113) 7,761,174Cash generated from operations 35,327,773 (43,402,499)

- Decrease in long term finances and loans 10,792,708 (57,343,424) - Financial charges paid (18,492,291) (14,414,513) - Interest received 53,868 145,756 - Gratuity paid (612,000) (172,394) - Taxes paid (534,554) (543,267)

(8,792,269) (72,327,842)Net cash flows from operating activities 26,535,504 (115,730,341)

CASH FLOW FROM INVESTING ACTIVITIES - Capital expenditure (728,186) (310,266) - Proceeds from disposal of fixed assets 333,500 245,670 - Proceeds from disposal of investments - 2,000,000Net cash flows from investing activities (394,686) 1,935,404

CASH FLOW FROM FINANCING ACTIVITIES - Decrease in long-term finances (892,256) (2,515,350) - Decrease in certificates of investment - (200,000) - Lease rentals paid (1,399,970) (1,788,550)Net cash flows used in financing activities (2,292,226) (4,503,900)Net increase in cash and cash equivalents 23,848,592 (118,298,837)

Cash and cash equivalents at beginning of the year (149,799,907) (31,501,070)Cash and cash equivalents at end of the year 32 (125,951,315) (149,799,907)


(Rupees)

Statement of Cash F lowFor the year ended December 31 , 2015


181

Share premium

Statutory reserve

Reserve against future

losses

Accumulated loss

Surplus / (deficit) on

revaluation of available-for-

saleinvestments

Balance as at 31 December 2013 320,000,000 10,000,000 28,019,277 10,447,052 (168,940,325) 807,699 200,333,703

Total comprehensive income for the year ended 31 December 2014

Loss for the year - - - - (11,045,508) - (11,045,508)


Actuarial loss on defined benefit obligation - - - - (35,412) - (35,412)

Surplus on revaluation of available-for-sale investments - - - - - 1,221,424 1,221,424

Balance as at 31 December 2014 320,000,000 10,000,000 28,019,277 10,447,052 (180,021,245) 2,029,123 190,474,207

Total comprehensive income for the year ended 31 December 2015

Loss for the year - - - - (17,311,745) - (17,311,745)


Actuarial loss / (gain) on defined benefit obligation - - - - 210,559 - 210,559

Surplus on revaluation of available-for-sale investments - - - - - 1,073,968 1,073,968

Balance as at 31 December 2015 320,000,000 10,000,000 28,019,277 10,447,052 (197,122,431) 3,103,091 174,446,989


--------------------------------------------------------------------- (Rupees) ----------------------------------------------------------

Issued, subscribed and paid-up capital

Capital reserves Revenue reserves Total shareholder

equity

-------------------(Refer note 3.21)-------------------

Statment of Changes in EquityFor the year ended December 31 , 2015


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1. STATUS AND NATURE OF BUSINESS

1.1 SME Leasing Limited (the Company) was incorporated in Pakistan on 12 July 2002 as an unlisted public company and acquired the status of a listed company on 13 December 2006. The Company is a subsidiary of SME Bank Limited (holding company), which holds 73.14% (31 December 2014: 73.14%) of the Company’s shares. At the time of incorporation, the Company was a wholly owned subsidiary of SME Bank Limited, whereby under an arrangement the assets and liabilities of the leasing division of SME Bank Limited were transferred to the Company on 28 January 2003. The Company is listed on Pakistan Stock Exchange (formaly listed on Lahore Stock Exchange).Its registered office is situated at 56-F, Nazim-ul-Din Road, Blue Area, Islamabad. The core objective of the Company is to extend lease and working capital financing facilities to small and medium enterprises of the country.

1.2 During the year ended 31 December 2015, the Company incurred loss of Rs. 17.312 million (2014: Rs. 11.046 million) increasing the accumulated losses to Rs. 197.122 million (2014: Rs. 180.021 million) as at the year end. Further, the net assets of the Company amounting to Rs. 174.447 million (2014: Rs. 190.474 million) includes non-performing leases and loan and finances, net of provision of Rs. 199.751 million (Rs. 129.885 million). Furthermore, the license to conduct leasing business granted to the Company by the Securities and Exchange Commission of Pakistan (SECP) expired on 20 May 2013.

The Company applied for renewal of the license on 22 April 2013 and submitted a detailed business plan including measures to be taken for improvement of financial health of the Company and due compliance with the minimum equity requirement as per NBFC Regulations 2008. Considering the financial health of the Company and expiry of leasing license, the SECP in its letter dated 05 July 2013 instructed the Company to not to raise deposits from general public in any form till the compliance of the minimum equity requirement and the renewal of the leasing license.

During the year, the NBFC Regulations 2008 have been amended by SECP and the minimum equity requirement for ‘existing NBFCs with valid deposit taking permission having leasing license’ has been revised at Rs. 500 million whereas minimum equity requirement for ‘non-deposit taking NBFCs for Leasing or Discounting or Housing Finance Services licenses’ has been set at Rs. 50 million for each form of business. The Company is in the process of determining whether they will operate as a ‘deposit taking’ or ‘non-deposit taking’ NBFC.

Further, the Company is dependent on the running finance facility granted by the Parent Company amounting to Rs. 150 million which has been renewed on 23 April 2015. As at 31 December 2015, the Company has utilized Rs. 129.066 million of the said facility. The revised Prudential Regulation of State Bank of Pakistan (SBP) has restricted the exposure by a bank to a related party to the extent of 7.5% of its equity, considering which the Parent Company is in non-compliance with the said requirement in terms of running finance facility granted to the Company. However, the SBP vide its letter no. BPRD/BRD/PRs/23947/2015 dated 29 October 2015 has granted relaxation to the Parent Company from the aforesaid requirement till 30 June 2016 subject to the condition that the exposure will be adjusted within


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the said date and a plan to this effect shall be submitted accordingly. The Parent Company in its reply to SBP has mentioned that Government of Pakistan has decided to privatize the Parent Company and has put it on fast track for privatization. Therefore, the Parent Company is of the opinion that with the privatization of the bank, equity of Rs. 6 billion at least will be injected. Consequently the enhanced single related party exposure limit of the Parent Company will cover the financing to the Company.

The above factors indicate the existence of a material uncertainty which may cast significant doubt on the Company’s ability to continue as a going concern and the Company may not be able to realize its assets and discharge its liabilities in the normal course of business. However, these financial statements have been prepared on going concern basis considering the factors mentioned below:

- The management of the Company has prepared cash flow projections which reflect that based on financial support by the Parent Company, the Company will be able to continue its business on going concern basis in the foreseeable future;

- Concerted efforts are being made for the recovery of non-performing leases and loans and finances. During the year Rs. 23.012 million has been recovered and subsequent to the year-end Rs. 9.209 has been recovered to date;

- The credit review system of the Company has been further strengthened and after careful scrutiny leases and finances amounting to Rs. 45.79 million were disbursed during the year at attractive mark-up rates and reasonable deposit margins;

- Considering the privatization of the Parent Company as discussed above, further financial support is expected from the Parent Company.

Based on the above mentioned financial measures and the concerted operational measures being taken by the Company, the management is confident of the profitable operations in the foreseeable future and therefore, has prepared the financial statements on going concern basis.

2. BASIS OF PREPARATION

2.1 Statement of compliance

These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as are notified under the Companies Ordinance, 1984 (the Ordinance), the requirements of the Ordinance, the Non-Banking Finance Companies (Establishment and Regulations) Rules, 2003 (the NBFC Rules), the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (the NBFC Regulations), and the directives issued by the Securities and Exchange Commission of Pakistan (the SECP). Wherever the requirements of the Ordinance, the NBFC Rules, the NBFC Regulations, or the directives issued by the SECP


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differ with the requirements of IFRS, the requirements of the Ordinance, the NBFC Rules, the NBFC Regulations and the directives issued by the SECP prevail.

2.2 Basis of measurement

These financial statements have been prepared under the historical cost convention, except that investments classified as ‘available-for-sale’ are marked to market and carried at fair value.

2.3 Functional and presentation currency

These financial statements are presented in Pakistan Rupees, which is the Company’s functional currency. All financial information presented in Pakistan Rupees has been rounded to the nearest rupee.

2.4 Use of estimates and judgments

The preparation of financial statements in conformity with approved accounting standards as applicable in Pakistan, requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of approved accounting standards, as applicable in Pakistan, that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the subsequent years are as follows:

i) Classification and valuation of investments (notes 3.9 and 7).

ii) Provision for current and deferred taxation and recognition and measurement of deferred tax assets and liabilities (notes 3.14 and 28).

iii) Classification and provision of net investment in finance lease and loans and finances (notes 3.6, 3.7, 10 and 11).

iv) Determination and measurement of useful life and residual value of operating fixed assets (note 3.2 and 13).


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v) Staff retirement benefits (3.5 and 20).

2.5 STANDARDS AND IFRIC INTERPRETATIONS THAT ARE NOT YET EFFECTIVE


- Amendments to IAS 38 Intangible Assets and IAS 16 Property, Plant and Equipment (effective for annual periods beginning on or after 1 January 2016) introduce severe restrictions on the use of revenue-based amortization for intangible assets and explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. The rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate can be overcome only when revenue and the consumption of the economic benefits of the intangible asset are ‘highly correlated’, or when the intangible asset is expressed as a measure of revenue. The amendments are not likely to have an impact on Company’s financial statements.

- Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10 – Consolidated Financial Statements and IAS 28 - Investments in Associates and Joint Ventures) [effective for annual periods beginning on or after 1 January 2016) clarifies (a) which subsidiaries of an investment entity are consolidated; (b) exemption to present consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity; and (c) how an entity that is not an investment entity should apply the equity method of accounting for its investment in an associate or joint venture that is an investment entity. The amendments are not likely to have an impact on Company’s financial statements.

- Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11 ‘Joint Arrangements’ (effective for annual periods beginning on or after 1 January 2016) clarify the accounting for the acquisition of an interest in a joint operation where the activities of the operation constitute a business. They require an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a business. The amendments are not likely to have an impact on Company’s financial statements.

- Amendment to IAS 27 ‘Separate Financial Statement’ (effective for annual periods beginning on or after 1 January 2016) allows entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is not likely to have an impact on Company’s financial statements.

- Agriculture: Bearer Plants [Amendment to IAS 16 and IAS 41] (effective for annual periods beginning on or after 1 January 2016). Bearer plants are now in the scope of IAS 16 Property, Plant and Equipment for measurement and disclosure purposes. Therefore, a company can elect to measure bearer plants at cost. However, the produce growing on bearer plants will continue to be measured at fair value less costs to sell under IAS 41 Agriculture. A bearer plant is a plant that: is used in the supply of agricultural produce; is expected to bear produce


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for more than one period; and has a remote likelihood of being sold as agricultural produce. Before maturity, bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment during construction. The amendments are not likely to have an impact on Company’s financial statements.

- Annual Improvements 2012-2014 cycles (amendments are effective for annual periods beginning on or after 1 January 2016). The new cycle of improvements contain amendments to the following standards:

- IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 5 is amended to clarify that if an entity changes the method of disposal of an asset (or disposal group) i.e. reclassifies an asset from held for distribution to owners to held for sale or vice versa without any time lag, then such change in classification is considered as continuation of the original plan of disposal and if an entity determines that an asset (or disposal group) no longer meets the criteria to be classified as held for distribution, then it ceases held for distribution accounting in the same way as it would cease held for sale accounting.

- IFRS 7 ‘Financial Instruments- Disclosures’. IFRS 7 is amended to clarify when servicing arrangements on continuing involvement in transferred financial assets in cases when they are derecognized in their entirety are in the scope of its disclosure requirements. IFRS 7 is also amended to clarify that additional disclosures required by ‘Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS7)’ are not specifically required for inclusion in condensed interim financial statements for all interim periods.

- IAS 19 ‘Employee Benefits’. IAS 19 is amended to clarify that high quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid.

- IAS 34 ‘Interim Financial Reporting’. IAS 34 is amended to clarify that certain disclosures, if they are not included in the notes to interim financial statements and disclosed elsewhere should be cross referred.

The above amendments are not likely to have an impact on Company’s financial statements.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented.

3.1 Standards, interpretations and amendments effective in current year

The accounting policies adopted in the preparation of these financial statements are consistent with those of the previous financial year, except for the following standards, which became effective during the year:


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IFRS10 ‘Consolidated Financial Statements’, IFRS11 ‘Joint Arrangements’, IFRS12 ‘Disclosure of Interests in Other Entities’, IFRS13 ‘Fair Value Measurements’. These standards became applicable from 1 January 2015, as per the adoption status of IFRS in Pakistan.

IFRS 10 replaces the current guidance on consolidation in IAS 27 Consolidated and Separate Financial Statements. It introduces a single model of assessing control where by an investor controls an investee when it has the power, exposure to variable returns and the ability to use its power to influence the returns of the investee. IFRS 10 also includes specific guidance on defacto control, protective rights and the determination of whether a decision maker is acting as principal or agent, all of which influence the assessment of control. The application of IFRS 10 did not result in any investee being in control of the company.

IFRS11 replaces IAS31 Interests in Joint Ventures. It requires all joint ventures to be equity accounted thereby removing the option in IAS31 for proportionate consolidation. It also removes the IAS31 concept of jointly controlled assets. The application of IFRS 11 did not result in identification of any associate as a joint venture.

IFRS12 prescribes additional disclosures around significant judgements and assumptions made in determining whether an entity controls another entity and has joint control or significant influence over another entity. The standard also requires disclosures on the nature and risks associated with interests in unconsolidated structured entities. The application of IFRS 12 did not result in additional disclosures.

IFRS13 Fair Value Measurement, consolidates the guidance on how to measure fair value, which was spread across various IFRS, into one comprehensive standard. It introduces the use of an exit price, as well as extensive disclosure requirements, particularly the inclusion of non-financial instruments in to the fair value hierarchy. As a result, the Company has included additional disclosures in this regard (see Note 35).


Cash and cash equivalents comprise of cash balances and balances in current and savings bank accounts. Short term running finance that are repayable on demand and form an integral part of the Company’s cash management, are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

3.3 Fixed assets

3.3.1 Property and equipment

These are stated at cost less accumulated depreciation and impairment losses, if any. Depreciation is charged to profit and loss accounts by applying using the straight line method at the rates specified in note 12.1 after taking into account residual value, if any. Depreciation on additions is charged from the month the assets are put to use while no depreciation is charged in the month in which the assets are disposed off. The residual values, useful lives


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and depreciation methods are reviewed and adjusted, if appropriate, at each balance sheet date.

Subsequent costs are included in the assets’ carrying amounts or recognised as a separate asset, as appropriate, only when it is probable that future benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other subsequent costs including repairs and maintenance are charged to the profit and loss account as and when incurred.

Gains or losses on sale of assets are charged to the profit and loss account in the period in which they arise.

3.3.2 Intangible

These are stated at cost less accumulated amortisation and impairment losses, if any. Amortisation is charged using the straight line method over its estimated useful life at the rates specified in note 12.2 after taking into account residual value, if any. The residual values, useful lives and amortisation methods are reviewed and adjusted, if appropriate, at each balance sheet date.

Amortisation on additions is charged from the month the assets are put to use while no amortisation is charged in the month in which the assets are disposed off.

Gain and losses on disposal of such assets, if any, are included in the profit and loss account.

3.4 Assets held under finance lease

The Company accounts for assets acquired under finance lease by recording the asset and related liability. The amounts are determined on the basis of lower of their fair value of assets and present value of minimum lease payments at the inception of lease. Financial charges are allocated to accounting periods in a manner so as to provide a constant periodic rate of charge on the outstanding liability. Leased assets are depreciated on a basis similar to owned assets.

3.5 Assets held for sale

Non current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognised in profit or loss.


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3.6 Staff retirement benefits

Defined contribution plan

The Company operates an approved defined contributory provident fund for all its permanent employees. Monthly contributions are made to the fund equally by the Company and the employees at the rate of 8 percent of basic salary. The contributions are recognised as employee benefit expense when they become due.

Staff retirement benefits are payable to employees on completion of the prescribed qualifying period of service under the scheme.

Employees’ compensated absences

The Company accounts for its liability towards accumulating compensated absences, when the employees render service that increase their entitlement to future compensated absences.

Defined benefit plan

The Company operates an unapproved and unfunded gratuity scheme covering all of its permanent employees who have completed the qualifying period under the scheme. The scheme is administered by the trustees and contributions therein are made in accordance with the actuarial recommendations.

The valuation in this regard is carried out at each year end, using the Projected Unit Credit Method for the valuation of the scheme. Remeasurement of the defined benefit liability, which comprises of actuarial gains and losses are recognised immediately in other comprehensive income based on actuarial.

The company determines the net interest expense (income) on the net defined benefit liability (asset) for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual year to the net defined benefit liability (asset), taking into account and change in the net defined benefit liability (asset) during the year as a result of contribution and benefit payments. Net interest expense and other expense related to defined benefit plans are recognized in profit and loss account.

Net investment in lease finance

Leases where the Company transfers substantially all the risks and rewards incidental to ownership of the leased assets to the lessees, are classified as finance leases.

The leased asset is derecognised and the present value of the lease receivable is recognised on the balance sheet. The difference between the gross lease receivables and the present value of the lease receivables is recognised as unearned finance income. A receivable is recognised at an amount equal to the present value of the minimum lease payments under the lease agreements, including guaranteed residual value, if any.


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Each lease payment received is applied against the gross investment in the finance lease receivable to reduce both the principal and the unearned finance income. The finance income is recognised in the profit and loss account on a basis that reflects a constant periodic rate of return on the net investment in the finance lease receivables.

Initial direct costs incurred by the company in negotiating and arranging finance leases are added to finance lease receivables and are recognised as an expense in the profit and loss account over the lease term on the same basis as the finance lease income.

3.8 Provision for potential lease losses and doubtful loans and receivables

Specific provision for potential lease losses and doubtful loans and receivables are made based in the appraisal of each lease or loan on the basis of the requirements of the NBFC Regulations.


All the financial assets and financial liabilities are recognised at the time when the Company becomes a party to the contractual provisions of the instrument and derecognised when the Company losses control of contractual rights that comprises the financial assets and in the case of financial liabilities when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on derecognition of financial assets and financial liabilities is taken to profit and loss account directly.

Financial assets carried at balance sheet date includes cash and bank balances, investments, long term finances and loans, net investment in finance leases, deposits and other receivables.

Financial liabilities carried at balance sheet date includes certificates of investment, deposits, short term borrowing, long term finances, liabilities against assets subject to finance lease, accrued and other payables.

3.10 Investments

All investments are initially recognised at cost, being the fair value of the consideration given and include transaction costs except for held for trading investments in which case transaction costs are charged to the profit and loss account. All purchase and sale of investments that require delivery within the required time frame established by regulations or market convention are accounted for at the trade date. Trade date is the date when the Company commits to purchase or sell the investments. These are recognised and classified as follows:

Investment at fair value through profit or loss (held for trading)

At the time of acquisition, quoted investments which are acquired principally for the purpose of generating profit from short term fluctuations in price or are part of portfolio for which there is a recent actual pattern of short term profit taking are classified as held for trading.


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Subsequent to initial recognition these are remeasured at fair value by reference to quoted market prices with the resulting gain or loss being included in net profit or loss for the period in which it arises.

Available-for-sale

These are stated at fair value, with any resultant gain or loss being recognised directly in equity. Gains or losses on revaluation of available-for-sale investments are recognised directly in equity until the investments are sold or other wise disposed off, or until the investments are determined to be impaired, at which time cumulative gain or loss previously reported in the equity is included in current year’s profit and loss.

All investments classified as available-for-sale are initially recognised at cost inclusive of transaction costs and subsequently quoted investments are marked to market using the last quoted rate at the close of the financial year.

Held to maturity

At the time of acquisition, investments with fixed maturity, where management has both the intent and the ability to hold to maturity, are classified as held to maturity.

Subsequently, these are measured at amortised cost less provision for impairment in value, if any. Amortised cost is calculated by taking into account any discount or premium on acquisition by using the effective yield method.

The difference between the redemption value and the purchase price of the held to maturity investments is amortised and taken to the profit and loss account over the term of the investment.

These are reviewed for impairment at year end and any losses arising from impairment in values are charged to the profit and loss account.

3.11 Loans and receivables

These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

These are initially recognised at fair value plus any related transaction costs directly attributable to the acquisition. Subsequent to initial recognition, they are carried at amortised cost.

3.12 Impairment

The carrying value of the Company’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such an indication exists, the


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recoverable amount of such asset is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the profit and loss account.

3.13 Derivative financial instruments

Derivative financial instruments are initially recognised at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. All derivative financial instruments are carried as assets when fair value is positive and liabilities when fair value is negative. Any change in the fair value is recognised in the profit and loss account.

3.14 Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amount and the Company intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

3.15 Taxation

Taxation charge in the profit and loss account comprises of current and deferred tax.

Current

Provisions for current taxation is based on taxability of certain income streams of the Company under presumptive / final tax regime and minimum tax under section 113 of the Income Tax Ordinance, 2001, wherever applicable, at the applicable tax rates and remaining income streams chargeable at current rate of taxation under the normal tax regime after taking into account tax credits and tax rebates available, if any.

Deferred

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

3.16 Provisions

A provision is recognised in the balance sheet when the Company has legal or constructive


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obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provision are reviewed at each balance sheet date and are adjusted to reflect the current best estimate.

3.17 Long term finances

Long term finances are initially recognised at cost being the fair value of the consideration received together with the associated transaction cost.

Subsequently, these are carried at amortised cost using effective interest method. Transaction cost relating to the long term finance is being amortised over the period of agreement using the effective interest method.

3.18 Foreign currency translation

Transactions in foreign currencies are translated to Pakistani Rupees at the foreign exchange rates prevailing on the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into Pakistani Rupees at the rates of exchange approximating those prevailing on the balance sheet date. Exchange differences are taken to the profit and loss account.


- The Company follows the finance lease method in accounting for the recognition of lease income. Under this method, the unearned lease income i.e. the excess of gross lease rentals and the estimated residual value over the cost of the leased assets is deferred and taken to income over the term of the lease contract, so as to produce a systematic return on the net investment in finance lease. Unrealised lease income is held in suspense account, where necessary, in accordance with the requirements of the NBFC Regulations.

- Front-end fees and documentation charges are taken to income when realised.

- Income on investments is accounted for on accrual basis.

- Dividend income is recognised when the right to receive the dividend is established.

- Income on loans and finances is accounted for on accrual basis using effective interest method.

- Unrealised lease income and unrealised income on loans and finances is held in suspense account, where necessary, in accordance with requirements of the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (NBFC Regulations).

- Profit on bank deposit and short term placements is accrued on a time proportion basis.


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- Gain or loss arising on sale of investments are taken to income in the period in which they

3.20 Earnings / (loss) per share

The Company presents basic and diluted earnings / (loss) per share (EPS) for its shareholders. Basic EPS is calculated by dividing the profit or loss attributable to ordinary share holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effect of all dilutive potential ordinary shares, if any.

3.21 Dividend distribution and transfer between reserves

Dividend distribution (including stock dividend) to the Company’s shareholders and transfer between reserves, except appropriations which are required under law, are recognised in the financial statements in the period in which such dividends are declared or such transfers between reserves are made.

3.22 Capital and Revenue reserves

Share premium

The share premium was recorded in the year 2006 on issue of shares in accordance with requirements of the Companies Ordinance, 1984. This premium is available for restrictive use as per section 83 of the Companies Ordinance 1984.

Statutory reserves

In accordance with the requirements of the NBFC Regulations, an amount of not less than 20 percent of after tax profits shall be transferred to statutory reserve till such time when the reserve equals the amount of paid-up capital, and thereafter a sum of not less than 5 percent shall be transferred. Consequently, during the current year the Company has transferred an amount of Rs. Nil (2014: Rs. Nil) to its statutory reserve.

Reserve against future losses

This reserve represents amounts set aside in view of the risks associated with the economic cyclical nature of the business and is recognised as an appropriation of retained earnings. Any credits resulting from reduction of such amounts result in an increase in unappropriated profit and are not included in the determination of profit and loss for the period. The amount to be set aside against future losses is determined at the rate of 0.5 percent of the outstanding balance of the regular portfolio of leases and loans and receivables as at each year end. No such reserve has been created by the Company for the year ended 31 December 2015.


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4. CASH AND BANK BALANCES 2015 2014

Cash in hand 66,412 66,508 Balance with State Bank of Pakistan in current account 23,431 23,095

Balances with banks in:- current accounts 4.1 2,729,541 5,285,026 - saving accounts 4.2 295,825 145,541

3,115,209 5,520,170

4.1 These include balance with a related party amounting to Rs. 1.451 million (2014: Rs 0.946 million).

4.2 These carry profit rate of 4.5% to 6% per annum (2014: 6% to 7% per annum).

5. ADVANCES - considered good

Advances to: - employees 5.1 425,819 502,855 - others 2,058,275 1,626,400

2,484,094 2,129,255

5.1 This represents interest free advances given to employees. These are recovered through monthlydeductions from salaries over a period of one year from the date of disbursement.

6. DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES

Security deposits - 95,000 Prepayments 556,552 887,396 Other receivable 1,073,936 -

1,630,488 982,396

7. INVESTMENTS - available-for-sale

Mutual Funds- Open end mutual fund 7.1 4,283,091 3,209,123

4,283,091 3,209,123

7.1

8. ASSETS HELD FOR SALE

(Rupees)

This reprents property located at F.B area classified as assets held for sale in accordance with therequirements of IFRS 5 'Non-Current Assets Held for Sale and Discontinued Operations. The Companyhas received bids from prospective buyers, however it has not received bid for a suitable price. TheCompany is committed to dispose off the said property prior to 31 December 2016 and for that purpose it has re-designed its marketing strategy and negotiations are being held to finalize the sale at a higher price.

This represents investment in 327,709 units (2014: 327,709) of Namco Balanced Fund, an open endmutual fund. As at 31 December 2015, the cost of the above investments amounted to Rs. 1.18 million(2014: Rs. 1.18 million).


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9. CURRENT MATURITY OF NON-CURRENT ASSETS 2015 2014

Current portion of : - Long term finances and loans 10 81,344,787 52,257,387 - Net investment in leases 11 351,439,366 364,285,876

432,784,153 416,543,263

10. LONG TERM FINANCES AND LOANS - secured

Related parties - considered good - Employees 10.1 613,458 1,211,419

Other than related partiesCustomers 10.2 - considered good 20,795,532 78,682,315 - considered doubtful 82,756,374 35,064,338

103,551,906 113,746,653Provision for doubtful finances 10.3 (5,439,801) (5,053,068)

98,112,105 108,693,585

98,725,563 109,905,004Less: Current maturity 9Related parties - Employees (70,907) (107,709)Other than related parties - Customers (81,273,880) (52,149,678)

(81,344,787) (52,257,387)

17,380,776 57,647,617

10.1

10.2

2015 201410.3 Provision for doubtful finances and loans

Balance at beginning of the year 5,053,068 4,737,363

Provision for the year 418,255 315,705Reversal for the year (31,522) -

386,733 315,705

Balance at end of the year 5,439,801 5,053,068

11. NET INVESTMENT IN FINANCE LEASES

Net investment in finance leases 443,242,617 519,173,276Current portion shown under current assets (351,439,366) (364,285,876)

91,803,251 154,887,400

(Rupees)

(Rupees)

These represent housing loans given to employees. These loans are recovered through deduction fromsalaries over varying periods up to a maximum period of 20 years. These loans are granted to the employeesin accordance with their terms of employment. The housing loans are secured by registered mortgage infavour of the Company. These loans carry mark-up at 5% (2014: 5%) per annum.

These represent loans to customers for a period of three to five years on mark-up basis and are secured byway of hypothecation of stock and immovable property. The rate of mark-up ranges from 11% to 27.02%(2014: 13.5% to 25.44%) per annum.


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11.1 Net investment in finance leases

Not later than one year

Later than one year and less

than five years

Total Not later than one year

Later than one year and less than five

years

Total

Minimum lease payments 11.1.1 392,528,718 42,852,505 435,381,223 400,708,895 104,235,133 504,944,028

Add: Residual value of leased assets 11.1.2 188,027,480 53,040,880 241,068,360 206,168,322 65,971,901 272,140,223

Gross investment in leases 580,556,198 95,893,385 676,449,583 606,877,217 170,207,034 777,084,251

Unearned lease income (16,797,199) (4,090,134) (20,887,333) (27,662,431) (13,407,649) (41,070,080) Mark-up held in suspense (59,390,248) - (59,390,248) (57,549,785) - (57,549,785)

(76,187,447) (4,090,134) (80,277,581) (85,212,216) (13,407,649) (98,619,865)

504,368,751 91,803,251 596,172,002 521,665,001 156,799,385 678,464,386 Provision for potential lease losses 11.1.3 (152,929,385) - (152,929,385) (157,379,125) (1,911,985) (159,291,110)

Net investment in finance leases 351,439,366 91,803,251 443,242,617 364,285,876 154,887,400 519,173,276

The Internal Rate of Return (IRR) on lease contract receivable ranges from 8% to 29% per annum (2014: 10% to 29.1% per annum).

11.1.1

11.1.2

11.1.3 Provision for potential lease losses 2015 2014

Balance at beginning of the year 159,291,110 157,284,366

Provision for the year 3,815,790 9,001,370 Reversals for the year (10,177,515) (6,994,626)

(6,361,725) 2,006,744

Balance at end of the year 152,929,385 159,291,110

12. LONG TERM DEPOSITS AND PREPAYMENTS

Security deposits against assets acquired under lease arrangements 775,100 775,100 Other deposits 768,222 768,222 Prepayments - 83,332

1,543,322 1,626,654

13. FIXED ASSETS

Property and equipment 13.1 9,282,095 10,428,865 Intangible assets 13.2 15,500 37,480

9,297,595 10,466,345

--------------------------------------------------------------- (Rupees) -------------------------------------------------------------------

2015 2014

(Rupees)

This includes a lease receivable of Rs. 8.371 million, restored as a result of the order of the Supreme Court of Pakistan dated 03January 2014. The said order cancelled the previous settlement of the lease through sale of underlying mortgaged property. Liabilityof Rs. 9.819 million towards the buyer of the property has been deposited with the additional registrar of Sindh High Court inrespect of said order.

These represent interest free security deposits received against lease contracts and are refundable / adjustable at the expiry /termination of the respective leases. The amount is net of security deposit held against matured leases amounting to Rs. 251.808million (2014: Rs. 240.233 million).


198

13.1

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199

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200

13.1.2 Particulars of disposal of fixed assets

Cost WDV Sale Gain on Mode of Particulars of buyers proceeds disposal

Owned Vehicles

Glass Partioning 39,893 - 12,800 12,800 Tender Mr. Abdul RasheedAlto (AVP Compliance) 698,000 197,767 279,200 81,433 Terms of employment Ms ShafaqAir Conditioner 26,700 - 14,000 14,000 Tender Afzal ElectronicsAir Conditioner 59,984 - 18,000 18,000 Tender Ahmed Brothers Air Conditioner 38,700 - 9,500 9,500 Tender Ahmed Brothers

31 December 2015 863,277 197,767 333,500 135,733

31 December 2014 723,961 234,670 245,670 11,000

13.2 Intangible AssetsNet book Amortisation

As at Additions / As at As at For the As at value as at rate %1 January (disposals) 31 December 1 January year 31 December 31 December per annum

2015 2015 2015 2015 2015

Software licenses and licenses 807,142 - 807,142 769,663 21,979 791,642 15,500 33.33

Net book AmortisationAs at Additions / As at As at For the As at value as at rate %

1 January (disposals) 31 December 1 January year 31 December 31 December per annum2014 2014 2014 2014 2014

Software licenses and licenses 786,830 20,312 807,142 740,749 28,913 769,662 37,480 33.33

14. ACCRUED AND OTHER LIABILITIES 2015 2014

Accrued liabilities 998,362 688,681 Rentals received in advance 110,000 289,425 Payable on maturity of leases 1,172,293 200,000 Insurance payable 3,635,128 3,772,997 Payable to SME Bank Limited - holding company - - Unclaimed dividend 20,629 20,629 Payable to Staff Provident Fund - 90,685 Others 11.1.1 130,331 10,591,708

6,066,743 15,654,125

15. ACCRUED MARK-UP ON BORROWINGS

Interest accrued on:

- Long term finances - 458,252 - Short term borrowings 15.1 1,171,429 1,923,780

1,171,429 2,382,032

15.1 The amount represents accrued interest payable to the holding company.

16. SHORT TERM BORROWING

The Company has a running finance facility available from the holding company amounting to Rs. 150 million (2014: Rs.180 million) at mark-up ratesranging between 10.71% to 13.49% (2014: 13.49% to 15.42%) per annum. Above arrangements are secured by way of hypothecation of theCompany's specific leased assets and related receivables of the Company. Further, the said facility can be extended to the extent of Rs. 300 millionas per the stand-by agreement for finance facility.

2015 201417. CURRENT MATURITY OF NON-CURRENT LIABILITES

Long term finances 18 373,233 1,265,489 Liabilities against assets subject to finance lease 19 1,374,233 1,198,836 Long term deposits 11.1 188,027,480 206,168,322

189,774,946 208,632,647

18. LONG TERM FINANCES - secured

National Energy Conservation Centre 18.1 373,233 1,265,489 Current maturity (373,233) (1,265,489)

- -

(Rupees)

(Rupees)

----------------------------- (Rupees) -----------------------------

COST ACCUMULATED AMORTISATION

-------------------------------------------------------------(Rupees)-------------------------------------------------------

COST ACCUMULATED AMORTISATION

----------------------------------------------------------(Rupees)----------------------------------------------------------

2015

2014


201

18.1


Payable not later than one year 1,477,040 102,807 1,374,233 1,463,193 264,357 1,198,836

Payable later than one year but not later than five years 606,870 5,893 600,977 2,082,955 108,700 1,974,255

2,083,910 108,700 1,975,210 3,546,148 373,057 3,173,091

19.1

20. DEFFERED LIABILITIES

Principal actuarial assumptions

2015 2014

Valuation Discount rate 10.00% 11.25%Expected long term rate of increase in salary level 10.00% 11.25%

Demographic assumptions

Mortality rate SLIC SLIC (2001- 2005) (2001- 2005)

Employee turnover rate Moderate Moderate

The Company operates an unapproved and unfunded gratuity scheme for all of its permanent employees.Number of employees covered under the scheme are 32 (2014:27).

The latest actuarial valuation of the gratuity scheme was carried out on 31 December 2015 by NaumanAssociates using the Projected Unit Credit Method. The following significant assumptions were used forvaluation of the scheme:

The finance lease arrangements have been entered into with Commercial Banks & Leasing Companies forvehicles. Lease rentals are payable in monthly installments at mark-up rates ranging from 14.39% to15.10% per annum (2014: 14.39% to 23% per annum). These finance lease arrangements will mature in theyear 2015 to 2017. At the end of lease term, the Company has the option to acquire the assets subject to theadjustment of security deposit which it intends to exercise.

This represents balance due against financing facilities amounting to Rs. 7.3 million from National EnergyConservation Centre (Enercon). The facilities from Enercon have been obtained under an agreementwhereby they have agreed to provide funds to the Company for granting lease / finance facility to itscustomers for procuring and using energy efficient equipments. The facility carries mark-up at the rate of5% per annum payable on quarterly basis subject to the condition that the Company will provide lease /finance facility to its customers at a preferential mark-up rate.

Minimum lease

payments


future periods


-------------------------------------------------------- (Rupees) --------------------------------------------------------

2014 Financial

charges for future


2015 Minimum

leasepayments


202

c Liability in balance sheet 2015 2014(Rupees)

Present value of defined benefit obligation 4,890,705 4,606,467

20.2 Movement in liability during the year

Opening balance 4,606,467 3,674,069Charged to profit and loss account 1,106,797 1,069,380Remeasurements chargeable in other comprehensive income (210,559) 35,412Benefits paid during the year (612,000) (172,394)Closing balance 4,890,705 4,606,467

20.3 Reconciliation of the present value of defined benefit obligations

Present value of obligations as at 1 January 4,606,467 3,674,069Current service cost 639,869 622,457Interest cost 466,928 446,923Benefits paid during the year (612,000) (172,394)Remeasurements loss / (gain) chargeable in other comprehensive income (210,559) 35,412Present value of obligations as at 31 December 4,890,705 4,606,467

20.4 Charge for the year

Current services cost 639,869 622,457Interest cost 466,928 446,923

1,106,797 1,069,380

20.5 Re-measurements recognised in other comprehensive income

Actuarial losses / (gains) on obligationExperience adjustment (210,559) 35,412Total re-measurements recognised in other comprehensive income (210,559) 35,412

20.6 Expected accrual of expenses in respect of defined benefit scheme in the next financial year on theadvice of the actuary is Rs. 1.222 million.

20.7 Sensitivity analysis

Sensitivity analysis has been performed by varying one assumption keeping all other assumptionsSensitivity analysis has been performed by varying one assumption keeping all other assumptionsconstant and calculating the impact on the present value of the defined benefit obligations under theemployee benefit schemes. The increase / (decrease) in the present value of defined benefit obligations asa result of change in each assumption is summarized below:


203

(Rupees) (Rate effect)Discount rate effect

Original liability 4,890,705 10%1% increase 4,385,989 11%1% decrease 5,483,270 9%

Salary increase rate effect

Original liability 4,890,705 10%1% increase 5,485,795 11%1% decrease 4,374,368 9%

The sensitivity analysis prepared presented above may not be representative of the actual change in thedefined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of oneanother as some of the assumptions may be correlated.

20.8 Maturity profile 2015 2014


21. ISSUED, SUBSCRIBED AND PAID-UP CAPITAL

2015 2014 2015 2014

10,100,000 10,100,000 Ordinary shares of Rs. 10 each issued as fully paid in cash 101,000,000 101,000,000

19,900,000 19,900,000 Ordinary shares of Rs. 10 each issued as fully paid forconsideration other than cash 199,000,000 199,000,000

2,000,000 2,000,000 Ordinary shares of Rs 10 each issued as fully paid bonus shares 20,000,000 20,000,000

32,000,000 32,000,000 320,000,000 320,000,000

21.1 At 31 December 2015 SME Bank Limited (holding company) and its nominees hold 73.14% (2014:73.14%) of ordinary shares of Rs. 10 each.

22. COMMITMENTS 2015 2014

Lease disbursements 22.1 14,466,500 11,000,000

22.1 This represents those leases which have been approved by the Company as at the year end.

(Rupees)

(Rupees)

(Number of shares)


204

23. INCOME FROM LEASING OPERATIONS 2015 2014

LeasesIncome from finance lease operations 21,239,032 34,869,679Gain on termination of leases 169,802 72,815

21,408,834 34,942,494

Income on finances and loans to customers 6,290,685 11,120,44627,699,519 46,062,940

24. PROFIT ON BANK ACCOUNTS / RETURN ON INVESTMENTS

Mark-up on government securities - 13,672Profit on bank accounts 18,881 61,384

18,881 75,056

25. OTHER INCOME

Income from financial assetsMark-up on loans to employees 34,987 70,700

Income from non-financial assetsGain / (loss) on disposal of fixed assets 135,733 11,000

170,720 81,700

26. ADMINISTRATIVE & OPERATING EXPENSES 2015 2014

Salaries, allowances and other benefits 26.1 & 26.2 21,737,404 22,027,740Directors' fee 26.3 500,000 444,000Rent 2,201,473 2,110,728Electricity, gas and water 868,451 1,139,764Telephone and postage 885,428 1,027,110Repairs and maintenance 434,924 519,391Books and periodicals 37,994 39,577Fees and subscriptions 15,551 20,894Vehicle running 406,638 458,965Advertising 369,641 179,799Training and development 132,500 45,000Travelling, conveyance and entertainment 2,033,313 1,947,578Printing and stationery 678,681 769,871Auditors' remuneration 26.4 540,125 539,000Depreciation and amortisation 13 1,699,173 1,978,404Legal and professional 3,225,960 2,965,888Insurance 949,352 970,817Miscellaneous 588,230 760,712

37,304,838 37,945,238

(Rupees)

(Rupees)


205

26.1

26.2 Remuneration of Chief Executives and Executives

The aggregate amount charged in the financial statements, including all benefits, to the Chief Executiveand Executives of the Company are as follows:

Chief Executive

Executives Chief Executive

Executives

Managerial remuneration 1,903,226 3,763,080 2,329,032 3,194,957Housing and utilities 761,290 1,505,232 931,613 1,277,977Provident fund - 301,128 - 234,316Medical and other perquisites 190,323 376,296 232,903 319,486Leave fare assistance - - 300,000 -Gratuity - 218,623 300,000 214,524Leave encashment 150,000 165,430 150,000 160,893Others - - - -

3,004,839 6,329,789 4,243,548 5,402,153

Number of persons 1 7 1 7

26.2.1 The chief executive and certain executives were also provided with free use of Company owned andmaintained cars in accordance with their terms of employment.

26.3 This represents remuneration paid to the non-executive directors of the Company for attendingmeetings of the Board and Board's committees.

26.4 Auditors' remuneration 2015 2014

Annual audit 250,000 250,000Half yearly review 100,000 100,000Other certifications 50,000 50,000Out of pocket expenses 140,125 139,000

540,125 539,000

27. FINANCE COST

Mark-up on:- Long term finance 96,702 96,774- Short term borrowings 27.1 17,164,534 15,864,547- Certificates of investment - 20,243

17,261,236 15,981,564

Lease finance charges 266,062 383,649Bank charges 138,039 170,107

17,665,337 16,535,320

Salaries allowances and other benefits include Rs. 1.107 million (2014: Rs.1.069 million) in respect ofstaff gratuity scheme and Rs. 0.57 million (2014: Rs. 0.429 million) in respect of staff provident fund. Inaddition the amount charged to the profit and loss account in respect of compensated absences was Inaddition the amount charged to the profit and loss account in respect of compensated absences was Rs.0.8 million (2014: Rs. 0.969 million)

(Rupees)

---------------------- (Rupees) ----------------------

20142015


206

27.1 Finance cost includes mark up expense related to the holding company as follows:

2015 2014

Long term finance - -Short term borrowings 17,164,534 15,864,547

17,164,534 15,864,547

28. TAXATION

28.1 Current tax liability

28.2 Current status of tax assessments

28.3

28.4 Deferred tax liabilities / (assets) - net 2015 2014

Deductible temporary differencesCarried forward losses (91,526,344) (97,843,537)Provisions against potential lease losses & long term finances and loans (47,510,756) (57,520,462)Liabilities against gratuity expense (1,467,212) (1,612,263)

(140,504,312) (156,976,262)

Taxable temporary differencesNet investment in lease 40,653,965 68,632,999Liabilities against assets subject to finance lease 117,104 1,259,938Accelerated tax depreciation on fixed assets 518,301 520,845

41,289,370 70,413,782

(99,214,942) (86,562,480)

28.4.1 The Company has recognised deferred tax asset on deductible temporary difference only to the extent ofdeferred tax liability on taxable temporary difference. Deferred tax asset of Rs. 99.215 million (2014: Rs.86.562 million) has not been recognised as the Company does not foresee future taxable profits againstwhich unused tax losses will be utilised.

Provision for the current year income tax has been made under the provisions of minimum tax underSection 113 of the Income Tax Ordinance, 2001 (Ordinance).

The income tax assessments of the Company have deemed to be finalised up to and including Tax year2015, except for Tax year 2012, which has been selected for audit.

In respect of Tax year 2012, the tax authorities have served order under section 122(1) read with section177(1) and 214C of the Income Tax Ordinance, 2001 disallowing expenses relating to depreciationallowance, markup on loan to employees and financial cost and creating tax demand of Rs. 3.8 million.The Company has filed an appeal before the Commissioner Inland Revenue (Appeals-II) against the saidorder and the case has not yet been fixed for hearing.

During the year, the Company has reversed the excess tax liability provided in financial years prior to2009 on the basis that the assessment for the year 2009 and earlier tax years have attained finality andcannot be amended.

(Rupees)

(Rupees)


207

29. LOSS PER SHARE - BASIC AND DILUTED 2015 2014

Loss after taxation attributable to ordinary shareholders (17,311,745) (11,045,508)

Weighted average number of outstanding ordinary shares 32,000,000 32,000,000

Loss per share - basic and diluted (0.54) (0.35)

29.1 No figure for diluted earnings per share has been presented as the Company has not issued any instrument which wouldhave an impact on earnings per share when exercised.

30. TRANSACTIONS WITH RELATED PARTIES

The related parties comprises of SME Bank Limited (holding company), key management personnel, non- executivedirectors and contributory employee plan:

Key management

personnel

SME Bank Limited(Holding

Company)

Key management

personnel

SME Bank Limited(Holding

Company)

BorrowingsBalance as at 1 January - 155,320,077 - 37,534,120Borrowings during the year - - - 126,540,120Repayments during the year - (26,253,553) - (8,754,163)Balance as at year end - 129,066,524 - 155,320,077

Loans and advancesBalance as at 1 January - - - -Advances given during the year - - - -Repayments during the year - - - -Balance as at year end - - - -

2015 2014Balances

(Payable) / receivable from Staff Provident Fund 80,000 (90,685)

Transactions during the year

Mark-up expense against borrowings from holding company 17,164,534 15,864,547Disposal of Motor Vehicle to the Chief Financial Officer- Sales proceeds - -Rent expense 325,608 325,608Key management remuneration 4,530,639 4,243,548Post retirement benefits - 300,000Staff Provident Fund - Company's contribution 89,376 28,372

31. PROVIDENT FUND

Size of the fund (Net Assets) 4,940,125 5,205,604Cost of Investment made 3,640,687 4,013,897Percentage of investment made 73.70% 77.11%Fair value of investments 3,999,252 4,440,687

All the investments of the Provident Fund are kept in mutual funds.

Investments out of provident fund have been made in accordance with the provisions of the section 227 of the CompaniesOrdinance, 1984 and the rules formulated for this purpose.

2015 2014

(Rupees)

(Rupees)

(Number of shares)

(Rupees)

-------------------------------- (Rupees) --------------------------------


208

32. CASH AND CASH EQUIVALENTS 2015 2014

Cash and bank balances 4 3,115,209 5,520,170Short term borrowings 16 (129,066,524) (155,320,077)

(125,951,315) (149,799,907)

33. FINANCIAL RISK MANAGEMENT

Introduction and overview

The Company has exposure to the following risks from financial instruments:

- credit risk- liquidity risk- market risk

This note presents information about the Company’s exposure to each of the above risks, the Company’sobjectives, policies and processes for measuring and managing it.

33.1 Risk management framework

33.2 Credit risk

33.2.1 Management of credit risk

(Rupees)

The Board has established the Risk Management Committee, which is responsible for developing andmonitoring the Company’s risk management policies. The committee reports regularly to the Board ofDirectors on its activities.

The Company’s risk management policies are established to identify and analyse the risks faced by theCompany, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Riskmanagement policies and systems are reviewed regularly to reflect changes in market conditions and theCompany’s activities. The Company, through its training and management standards and procedures, aimsto develop a disciplined and constructive control environment in which all employees understand theirroles and obligations.

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and causethe other party to incur a financial loss, without taking into account the fair value of any collateral.Concentration of credit risk arises when a number of counter parties are engaged in similar businessactivities or have similar economic features that would cause their ability to meet contractual obligations tobe similarly affected by changes in economics, political or other conditions. Concentrations of credit riskindicate the relative sensitivity of the Company's performance to developments affecting a particularindustry.

The Company's policy is to enter into financial contracts in accordance with the internal risk managementpolicies and the requirements of the NBFC Rules and Regulations. The Company attempts to control creditrisk by monitoring credit exposures, limiting transactions with specific counter parties, and continuallyassessing the credit worthiness of counter parties.


209

33.2.2 Exposure to credit risk

In summary, compared to the maximum amount included in the balance sheet, the maximum exposure to credit risk as at 31 December 2015 is as follows:

Bank balances 3,091,778 3,025,366 5,497,075 5,430,576 Investments 4,283,091 4,283,091 3,209,123 3,209,123 Advances 2,484,094 2,484,094 2,129,255 2,129,255 Accrued interest on working capital loans 13,843 - 1,391,293 - Net investment in finance lease 443,242,617 443,242,617 519,173,276 519,173,276Long term finances and loans 98,725,563 98,725,563 109,905,004 109,905,004Short term and long term deposits 3,173,810 3,173,810 2,609,050 2,609,050

555,014,796 554,934,541 643,914,076 642,456,284

33.2.3 Credit ratings and Collaterals

Details of the credit ratings of balances with the banks (including profit receivable) as at 31 Decemberwere as follows:

Ratings 2015 2014

A1+ 13.00% 7.51%A-1+ 50.00% 74.59%A-3 0.00% 17.36%Others 37.00% 0.54%

100% 100%

33.2.4 Description of Collateral held

The Company's leases are secured against assets leased out. In a few leases additional collateral isalso obtained.

Details of exposures and the collateral as at 31 December 2015 against them are as follows:

Net Lower ofExposure collateral

and grossexposure

Lease Finance - Regular 135,161,086 135,161,086 - Non Performing net of provision 308,081,531 308,081,531

443,242,617 443,242,617Working Capital Finance - Regular 20,795,532 20,795,532 - Non Performing net of provision 77,316,573 77,316,573

98,112,105 98,112,105

2015 2014

-------------------------------------- (Rupees) -------------------------------------

Balance sheet Maximum exposure

Balance sheet Maximum exposure


210

Settlement risk

Settlement risk is the risk of loss due to the failure of an entity to honour its obligations to deliver cashor other assets as contractually agreed on sale.

This risk is addressed more or less in accordance with the parameters set out in the credit riskmanagement above.

33.2.5 Impairment losses and past due balances

Not past due 155,955,983 20,795,532 135,160,451 -1 - 179 days 83,017,680 32,717,148 50,300,532 -180 days - 1 year 25,985,262 17,443,965 8,541,297 -More than 1 year 276,395,162 32,595,261 402,169,087 (158,369,186)

541,354,087 103,551,906 596,171,367 (158,369,186)

Not past due 325,065,142 78,682,315 246,382,827 -1 - 179 days 3,369,415 105,889 3,263,526 -180 days - 1 year 12,165,911 2,399,799 9,766,112 -More than 1 year 451,610,571 32,558,650 419,051,921 (164,344,178)

792,211,039 113,746,653 678,464,386 (164,344,178)

33.2.6 Concentration of credit risk - gross investment in finance lease

To reduce the exposure to credit risk the Company has developed a formal approval process wherebycredit limits are applied to its customers. The management continuously monitors the credit exposuretowards the customers and makes provision against those balances considered doubtful of recovery (andalso obtains security / advance payments, wherever considered necessary). Cash is held only withreputable banks with high quality credit worthiness.

The Company seeks to manage its credit risk through diversification of financing activities to avoidundue concentration of credit risk with individuals or groups of customers in specific locations orbusiness sectors. It also obtains collaterals when appropriate.

The management of the Company follows two sets of guidelines. Internally, it has its own policies andprocedures duly approved by the Board of Directors whereas externally it adheres to the regulationsissued by the SECP. The operating policy defines the extent of fund based exposures with reference to aparticular sector or group of leases.

2014

2015

-------------------------------------- (Rupees) --------------------------------------

---------------------------------------- (Rupees) -------------------------------------

Total

Total Loans and receivables

Netinvestment in finance lease

Impairmentrecognised

Impairmentrecognised

Loans and receivables

Net investment in finance lease


211

Details of the composition of leases and loans and fianances portfolio of the Company are given below:

Rupees Percentage Rupees Percentage

Cargo Carriers 38,012,108 4.69 55,150,877 5.95Chemicals 20,658,876 2.55 28,686,351 3.10Communication 6,802,623 0.84 6,802,623 0.73Confectionary 10,440,318 1.29 10,440,318 1.13Construction And Building Products 9,972,339 1.23 27,199,149 2.93Dates 550,947 0.07 550,947 0.06Education 26,380,027 3.25 20,689,196 2.23Engineering 24,269,640 2.99 23,372,245 2.52Entertainment 52,792,056 6.51 60,469,756 6.52Film Processing 60,260,116 7.43 65,731,842 7.09Fisheries 1,285,857 0.16 1,285,857 0.14Food And Beverages 49,588,143 6.11 49,296,467 5.32Furniture 2,480,157 0.31 551,872 0.06Garments 45,460,501 5.60 70,547,617 7.61Gems & Jewelery 13,921,662 1.72 14,482,865 1.56Health Care 50,677,697 6.25 49,169,081 5.31Leather & Tannery 15,364,218 1.89 15,631,112 1.69Miscellaneous 64,479,172 7.95 82,993,536 8.96Oil & Gas 54,241,689 6.69 54,241,067 5.85Pharma 17,950,954 2.21 18,748,310 2.02Plastic 22,275,668 2.75 25,168,880 2.72Printing & Packaging 52,806,596 6.51 57,318,637 6.18Public Transport Services 120,323,223 14.83 132,284,584 14.27Rubber 614,190 0.08 1,409,593 0.15Textile 49,502,038 5.90 54,550,209 6.00

811,110,815 100 926,772,991 100

33.3 Liquidity risk

33.3.1 Management of liquidity risk

The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always havesufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, withoutincurring unacceptable losses or risking damage to the Company's reputation. Due to nature of thebusiness, the Company maintains flexibility in funding by maintaining committed credit linesavailable. The Company’s liquidity management involves projecting cash flows and considering thelevel of liquid assets necessary to fulfil its obligation; monitoring balance sheet liquidity ratios againstinternal and external requirements and maintaining debt financing plans.

2015 2014

Liquidity risk is the risk that the Company will encounter difficulty in meeting its financial obligationsas they fall due. Liquidity risk arises because of the possibility that the Company could be required topay its liabilities earlier than expected or may face difficulty in raising funds to meet commitmentsassociated with financial liabilities as they fall due.


212

33.3.2 Maturity analysis for financial liabilities

LiabilitiesAccrued and other liabilities 6,066,743 6,066,743 6,066,743 - Short term borrowings 129,066,524 129,066,524 129,066,524 - Long term finances - secured 373,233 373,233 373,233 Long term deposits 241,068,360 241,068,360 188,027,480 53,040,880 Liabilities against asset subject to finance lease 1,975,210 2,083,910 1,477,040 606,870

378,550,070 378,658,770 325,011,020 53,647,750

LiabilitiesTrade and other payables 15,654,125 15,654,125 15,654,125 - Short term borrowings 155,320,077 155,320,077 155,320,077 - Long term finances - secured 1,265,489 1,265,489 1,265,489 - Long term deposits 272,140,223 272,140,223 206,168,322 65,971,901 Liabilities against asset subject to finance lease 3,173,091 3,546,148 1,463,193 2,082,955

447,553,005 447,926,062 379,871,206 68,054,856

33.4 Market risk

The Company is exposed to interest rate and other price risk only.

33.4.1 Management of market risk

The table below analyses the Company's financial liabilities into relevant maturity groupings based on theremaining period at the balance sheet date to maturity date and represents the undiscounted cash flows. Theamounts in the table are the gross nominal undiscounted cash flows (including interest payments).

Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchangerates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will effect theCompany’s income or the value of its holdings of financial instruments. The objective of market riskmanagement is to manage and control market risk exposures within acceptable parameters, while optimisingthe return on risk.

The objective of market risk management is to manage and control market risk exposures within acceptableparameters, while optimising the return on risk. The Company manages the market risk by monitoringexposure on marketable securities by following internal risk management policies and regulations laid downby the Securities and Exchange Commission of Pakistan.

--------------------------------------- (Rupees) ----------------------------------

------------------------------------ (Rupees) ------------------------------------

Total Contractual cash flow

Upto one year More than one year

2014

Total Contractual cash flow

Upto one year More than one year

2015


213

33.4.2 Interest rate risk

At 31 December, details of the interest rate profile of the Company's interest bearing financialinstruments were as follows:

2015 2014Fixed rate instruments

Financial assetsNet investments in finance lease 443,242,617 519,173,276Long term finance and loans 98,725,563 109,905,004

541,968,180 629,078,280

Financial liabilitiesLong term finance 373,233 1,265,489Liabilities against assets subject to finance lease 1,975,210 3,173,091

2,348,443 4,438,580

Variable rate instruments

Financial assetsBank balances 295,825 145,541

295,825 145,541

Financial liabilitiesShort term borrowings 129,066,524 155,320,077

129,066,524 155,320,077

33.4.3 Fair value sensitivity analysis for fixed rate instruments

33.4.4 Cash flow sensitivity analysis for variable rate instruments

The sensitivity analysis prepared as of 31 December 2015 is not necessarily indicative of the impacton the Company's net assets of future movements in interest rates and profit for the year and assets /liabilities of the Company.

Carrying amount

(Rupees)

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument willfluctuate because of changes in market interest rates. Majority of the interest rate exposure arises oninvestment in finance lease, finance and loans, investment in government securities, bank balancesand borrowing from banks. The Company carries a mix of fixed and floating rate financial

The Company does not account for any fixed rate financial assets and liabilities at fair value throughprofit and loss. Therefore, a change in interest rates at the reporting date would not affect profit andloss account.

A change of 100 basis points in interest rates at the reporting date would have increased / (decreased)profit or loss by Rs. 1.288 million (2014: Rs.1.551 million). This analysis assumes that all othervariables, remain constant. The analysis is performed on the same basis which were used for the yearended 31 December 2014.


214

33.4.5 Interest rate gap position

Yield / interest rate sensitivity position for on balance sheet financial instruments based on the earlier of contractual re-pricing ormaturity date is as follows:

Financial assets

Cash and bank balances 4.5 - 6 295,825 295,825 - - Long term finances and loans 11-27.2 98,725,563 33,429,079 47,915,708 17,380,776 Net investment in finance lease 8-29 443,242,617 250,281,131 101,158,235 91,803,251

Total financial assets as on 31 December 2015 542,264,005 284,006,035 149,073,943 109,184,027

Financial liabilities

Short term borrowings 10.79 - 13.49 129,066,524 - 129,066,524 - Long term finances 5 373,233 373,233 - - Liabilities against asset subject to finance lease 14.39-15.10 1,975,210 276,531 1,097,702 600,977

Total financial liabilities as on 31 December 2015 131,414,967 649,764 130,164,226 600,977

On balance sheet gap 410,849,038 283,356,271 18,909,717 108,583,050 Total interest rate sensitivity gap 410,849,038 283,356,271 302,265,988 410,849,038

Financial assets

Cash and bank balances 6-7 145,541 145,541 - - Investments 11.60-14.2 - - - - Long term finances and loans 5-25.44 109,905,004 41,995,925 58,239,992 9,669,087 Net investment in finance lease 9.5-25.11 519,173,276 348,764,114 87,826,683 82,582,479

Total financial assets as on 31 December 2014 629,223,821 390,905,580 146,066,675 92,251,566

Financial liabilities

Short term borrowings 13.44-13.96 155,320,077 - 155,320,077 - Certificates of investment 10.5-14 - - - Long term finances 5 1,265,489 595,500 669,989 - Liabilities against asset subject to finance lease 21.53 - 23 3,173,091 350,000 1,050,000 1,773,091

Total financial liabilities as on 31 December 2014 159,758,657 945,500 157,040,066 1,773,091

469,465,164 389,960,080 (10,973,391) 90,478,475 Total interest rate sensitivity gap 469,465,164 389,960,080 378,986,689 469,465,164

Upto three months

More than three months and upto

one year

More than one year

-------------------------------- (Rupees) ---------------------------------

-------------------------------- (Rupees) ---------------------------------

Exposed to mark-up / interest / profit rate risk 2014

Effective mark-up / interest / profit rate %

Total

2015Effective

mark-up / interest / profit

rate %

Total Exposed to mark-up / interest / profit rate risk Upto three

months More than

three months and upto one

year

More thanone year


215

33.5 Price risk

34. CAPITAL RISK MANAGEMENT

34.1

34.2 Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio.This ratio is calculated as total debt divided by total capital employed:

2015 2014(Rupees)

Total debt 373,233 1,265,489Total equity 171,343,898 188,445,084Total capital employed 171,717,131 189,710,573

Gearing ratio 0.22% 0.67%

34.3 Financial risk management objectives and policies

35. FINANCIAL INSTRUMENTS

The table below analyses recurring fair value measurements for financial assets and financial liabilities.These fair value measurements are categorised into different levels in the fair value hierarchy based onthe inputs to valuation techniques used. The different levels are defined as follows:

Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuatebecause of changes in market prices (other than those arising from interest risk or currency risk) whetherthose changes are caused by factors specific to the individual financial instrument or its issuer, or factorsaffecting all similar financial instruments traded in the market. Presently, the Company is not exposed toequity securities price risk as the Company does not hold any equity securities as at 31 December 2015.

The Company's prime objective when managing capital is to safeguard its ability to continue as a goingconcern in order to provide adequate returns for shareholders and benefits for other stakeholders and tomaintain an optimal capital structure to reduce its cost of capital.

The Company finances its operations through equity, borrowings and management of its working capitalwith a view to maintaining an appropriate mix between various sources of finance to minimise liquidityrisk. Taken as a whole, the Company's risk arising from financial instruments is limited as there is nosignificant exposure to price and cash flow risk in respect of such instruments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the maeasurement date. Fair value of underlying financialassets are determined based on requirements of Regulation 66 of Non-Banking Finance Companies andNotified Entities Regulations, 2008 and directives if any, issued by the Securities and ExchangeCommision of Pakistan. Fair value of debt instruments other than Government Securities, which areunlisted or listed but not traded regularly on stock exchange be valued at rates notified by Mutual FundsAssociation of Pakistan. The fair value of financial assets traded in active market i.e. listed securities arebased on the quoted market price at determined by stock exchange in accordance with its regulations.


216

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217

36. SEGMENT INFORMATION

All assets and liabilities are allocated to reportable segments other than assets and liabilities not directlyrelated to the particular segment.

Finance Loans and Investment Others Totallease receivables

Segment revenue 21,408,834 6,290,685 - 189,601 27,889,120Segment profit 27,770,559 5,903,952 - 189,601 33,864,112Segment result 33,864,112

Unallocated cost

Finance cost 17,665,337Administrative and operating expenses 37,304,838

54,970,175

Loss before tax (21,106,063)Taxation 3,794,318Loss after tax (17,311,745)

Other informationSegment assets 443,242,617 98,112,105 4,283,091 - 545,637,813Unallocated assets 22,677,995 22,677,995Total assets 568,315,808

Segment liabilities 245,985,781 - - - 245,985,781Unallocated liabilities 147,883,038 147,883,038Total liabilities 393,868,819

Net assets 174,446,989

Capital expenditure - - - 728,186 728,186

36.1 Revenue reported above represents revenue from external customers. There are no intersegment sales.

-------------------------------------------------- (Rupees) -------------------------------------------

2015

A segment is a distinguishable component of the Company that is engaged in business activities fromwhich the Company earns revenues and incur expenses and its results are regularly reviewed by theCompany's chief operating decision maker to make decisions about resources to be allocated to the segmentand assess its performance. Further, discrete financial information is available for each segment.

The Company's reportable segments under IFRS 8 are therefore finance lease, loans and receivables, andinvestments. Other operations, which are not deemed by the management to be sufficiently significant todisclose as separate items are reported under Others.


218

36.2

Finance Loans and Investment Others Totallease receivables

Segment revenue 34,942,494 11,120,446 13,672 143,084 46,219,696Segment profit 32,935,750 10,804,741 13,672 143,084 43,897,247Segment result 43,897,247

Unallocated cost

Finance cost 16,535,320Administrative and operating expenses 37,945,238

54,480,558

Loss before tax (10,583,311)Taxation (462,197)Loss after tax (11,045,508)

Other informationSegment assets 519,173,276 108,693,585 3,209,123 - 631,075,984Unallocated assets 27,307,518 27,307,518Total assets 658,383,502

Segment liabilities 276,402,645 - - - 276,402,645Unallocated liabilities 191,506,650 191,506,650Total liabilities 467,909,295

Net assets 190,474,207

Capital expenditure - - - 310,266 310,266

37. NUMBER OF EMPLOYEES

The number of employees as on the year end were 41 and average number of employees during theyear were 40

38. DATE OF AUTHORISATION FOR ISSUE

These financial statements were authorised for issue on March 02, 2016 by the Board of Directors of the Company.

2014

-------------------------------------------------- (Rupees) -------------------------------------------

Revenue from finance lease includes income from finance lease operations and gain/loss on termination oflease. Revenue from loans and receivable includes mark-up income on loans to customers and employees,and revenue from investments include gain on disposal of investments, dividend income and mark-up ongovernment securities.



219

BRANCH NETWORK

221

56-F, Nazim-ud-Din Road,F-6/1, Blue Area,

Islamabad.Ph.# (051) 9217000, Fax.# (051)9217001

UAN: 111 11 00 11Website: www.smebank.org

HEAD OFFICE

SME Bank LtdLahore Main Branch13-L, Mini Market, Gulberg-II,LAHORE. PH # (042) 35710513, 35752260 & 35751226Fax # (042) 35756225UAN # (042) 111-11-00-11

SME Bank LtdAlamgir Building Ground Floor17-Edwards Road(Mouj Darya Road)LAHORE CITY.PH # (042) 37220663, 37221008, 37046217-9Fax (042) 37220663

SME Bank Ltd923-B, Maulana Shaukat Ali Road,Faisal Town,LAHORE.PH # (042) 35218601

(042) 35218602(042) 35218604

SME Bank Ltd56-F, Nazim-ud-Din Road,F-6/1, Blue Area,ISLAMABAD. PH # (051) 9219260, 9213478, 9213743Fax # (051) 9213742UAN # (051) 111-11-00-11

SME Bank LtdState Life Building, Ground Floor, 34-The Mall, PESHAWAR PH # (091) 5262780, 5285939, 5262779Fax # (091) 285177UAN (091) 111-11-00-11

SME Bank Ltd26-27-J,Trust Plaza, G.T. Road,GUJRANWALA. PH # (055) 9220767, 9200443Fax # (055) 9200243UAN # (055) 111-11-00-11

BRANCH NETWORK

222

SME Bank LtdJunaid Plaza, Iqbal Road,Near Committee Chowk,RAWALPINDI.PH # (051) 5553902, 5553922

SME Bank LtdKarachi Main BranchB/9-B/3, Near Post Office, S.I.T.EKARACHI.Ph # 32587144-6Fax # (021) 32587144-46UAN # (021) 111-11-00-11

SME Bank LtdFederal B-Area BranchS 4 & S 5, Latif TerracePlot # St-4-D, Block 20,FEDERAL B-AREA KARACHIPH # (021) 36800768-9

(021) 36800771-2Fax # (021) 36800773UAN # (021) 111-11-00-11

SME Bank LtdPlot # LS-4, Sector 12,Orangi TownKARACHI.PH # (021) 36653424-5Fax # (021) 36653425

SME Bank LtdP-341-B, Peoples Colony No.1,Satyana Road, FAISALABAD. PH # (041) 9220481-4,Fax # (041) 9220483UAN # (041) 111-11-00-11

SME Bank LtdGround Floor, Al-Amin Building, Opp. SCCI Paris Road, SIALKOT. PH # (052) 4266055, 9250566-7Fax # (052) 4265041UAN # (052) 111-11-00-11

SME Bank LtdPlot# 1-6/28 (404)M.A. Jinnah Road, QUETTA.PH # (081) 2836816Fax # (081) 2836817

223

SME Bank Limited56-F, Nazim-ud-Din Road,F-6/1, Blue Area,IslamabadRAWALPINDI Ph.# (051) 9217000, 9206652

SME Bank Limited17-E Edwards Road,LAHORE CITYPH.#(042) 37312078, 37355350

SME Bank Limited782/1, Mahmoodabad,Ward # 21, Makkah Street,Opposte MEPCO Head Office,MULTANPH.#(061) 9201015-16

SME Bank LimitedAwan Huts, Lala Rukh ColonyMansehra RoadABBOTTABADPH.#(0992) 9310159PH.#(0992) 9310311

SME Bank Limited1st Floor, SLIC Building 34-The Mall, Peshawar Cantt. PESHAWARPH.#(091) 5274997-5276264

SME Bank Limited801-802, 8th Floor, Park Avenue24-A, Block PECHS, Shahrah-e-Faisal KARACHI (EAST)PH.#(0213) 4538041-4533886

SME Bank LimitedB # 104, Akhuwat Nagar, Airport RoadSUKKURPH.#(071) 5804556-7

SME Bank LimitedPlot # 16-A/1483, 2nd FloorBushra Center, Model TownQUETTAPH.#(081) 9202841

RECOVERY OFFICES

224

KARACHI801-802, 8TH Floor, Park Avenue

24-A, Block PECHShahrah-e-Faisal

KARACHI (EAST).PH#(021) 34382310, 34382311

LAHORE13-L, Mini Market, Gulberg-II

LAHOREPH # (042) 35760860

KARACHI801-802, 8TH Floor

Park Avenue24-A, Block PECH

Shahrah-e-FaisalKARACHI (EAST).PH#(021) 34383100

(A Wholly owned subsidiary)

HEAD OFFICEOffice # 304, 3rd Floor

Business ArcadeShahrah-e-Faisal

KARACHIPH # (021) 34322128-9Fax # (021) 34322082

TREASURY OFFICE

AUDIT OFFICES

SME LEASING LTD.

225

FORM OF PROXY

I/We __________________________________ of_________________________________ being

a member of SME BANK LIMITED, hereby appoint ___________________________________

or failing him____________________________________ of ____________________________

as my/our proxy, to vote for me/us and on my/our behalf at the 14th Annual General Meeting of the

Bank to be held on March 30, 2016 at 4:00 pm and at any adjournment thereof.

As witness my/our hand the _____________ day of ______________________ signed by the said

______________________________ in the presence of ________________________________.

Revenue Stamps:

Signature: _________________________

Name: ____________________________

Designation: _______________________

Address: __________________________

__________________________

Witness: Signature: _______________________

Name: _______________________

Signature: _______________________

Name: _______________________

Notes:

1. A proxy must be a member of the Bank. However, an association (whether body corporate or not) being a member of the Bank may appoint as its proxy one of its officers though not a member of the Bank.

2. Proxy form, in order to be valid, must be duly signed and deposited at registered office of the Bank not less than 48 hours before the time of holding the meeting.

226

AFFIX CORRECT POSTAGE

The Company Secretary

SME Bank Ltd.56-F, Nazim-ud-Din Road,F-6/1, Blue Area, Islamabad.

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