Download Islamic Financial Services Unit | Annual Report 2013/14

As One…
Islamic Financial Services Unit | Annual Report 2013/14
Corporate Information
Name of Company
People’s Leasing & Finance PLC
(Subsidiary of People’s Bank)
Legal Form
Public Limited Liability
Company (Incorporated and
domiciled in Sri Lanka)
Date of Incorporation
22nd August 1995
Date of Commencement
of Islamic Finance
10th October 2005
Company Registration
Number
PB 647 PQ
Accounting Year-end
March 31
Stock Exchange Listing
The Ordinary shares of the
Company were quoted on the
Main Board of the Colombo
Stock Exchange (CSE) on 24th
November 2011.
Registered Office
& Principle Place of
Business
1161, Maradana Road, Borella
Colombo 08, Sri Lanka.
Postal Code: 00200
Telephone +94 11 2631631
Fax +94 11 2631980/81
Email: [email protected]
Web Address: www.plc.lk
Company Secretary
Mr. Rohan Pathirage
Registrars
SSP Corporate Services (Pvt) Ltd
No. 101, Inner Flower Road,
Colombo 03, Sri Lanka.
Telephone: +94 11 2573894,
+94 11 2576871
Fax: +94 11 2573609
E-mail: [email protected]
Auditors
M/s. Ernst & Young
Chartered Accountants,
201, De Saram Place,
P.O. Box 101,
Colombo 10,
Sri Lanka.
Bankers
People’s Bank
Tax Payer Identity
Number (TIN)
114 156396 0000
Branch Offices
Dehiwala- Alsafa, Kalmunai,
Kandy – Alsafa, Kattankudy,
Mutur, Puttalam, Union Place,
VAT Registration
Number
114 156396 7000
Board of Directors
Mr. Gamini Senarath- Chairman
Mr. P. Kudabalage
Mr. N. Vasantha Kumar
Mr. P.A.I.S. Perera
Mr. H.H. Anura Chandrasiri
Shari’ah Supervisory
Board
Ash-Shaikh M I M Rizwe (Mufti)
Ash-Shaikh M H M Yusuf (Mufti)
Ash-Shaikh H. Abdul Nazar
Ash-Shaikh Fazil M. Farook
Central Bank
Registration Number
046 (Under the Finance
Business Act No.42 of 2011)
Credit Rating
‘AA-‘ (lka) stable by Fitch
Ratings Lanka Limited
‘B+/B’ stable by Standard
& Poor’s Rating Services
‘B+’ stable by Fitch Ratings
International
Management Team
Mr. D.P. Kumarage – CEO
Mr. Rohan Tennakoon – DGM
-Business Development & Islamic
Finance
Mr. Prabath Gunasena – AGM-ICT
Mr. Udesh Gunawardena – AGMInternal Audit
Mr. Uresh Jayasekara – Chief
Manager-HR
Mr. Omal Sumanasiri – Senior
Manager-Finance
Design & Concept by: Optima Designs (Pvt) Ltd.
Printed by: Printel (Pvt) Ltd.
Islamic Financial Services Unit | Annual Report 2013/14
As One…
It was a year of vitality and transformation
and as we record our highest ever profits in
history, we are enthused to state that we have
come back stronger than ever before. This
was in part, due to our team, individuals who
wholeheartedly embraced the idea of taking this
venture to higher heights. Their strength and
commitment ensured that new paths, and new
ways were discovered in creating excellence
and heralding change; all while being dynamic
and bringing our way of finance to life. And
as we begin another year, we chronicle this
process of revitalisation and look forward to
delivering a wide range of shari’ah - compliant
products and services that helps our customers
grow with us in faith. We at the Islamic
Financial Services Unit are embracing change
and changing the patterns of the industry… as
Contents
Chairman’s Review
CEO’s Review Board of Directors Shari’ah Supervisory Board Members Management Team
AIF Team
Management Discussion & Analysis Corporate Governance
Risk Management
Shari’ah Audit Report
10
14
20
24
26
29
30
44
52
56
Financial Report
Independent Auditor’s Report
Statement of Comprehensive Income
Statement of Financial Position
Notes to the Financial Statements
Corporate Information
59
60
61
62
Inner Back Cover
About Us
one.
People’s Leasing & Finance PLC is a leading provider of Islamic
Financial (IF) services in Sri Lanka. The Company has dedicated
branches to offer IF services to prospective clients. The customer
segment of IF services range from corporate, SME to high net worth
individuals and professionals who are mainly functioning in trading,
transportation, agriculture and services sectors in the economy.
For more information please visit http://www.plc.lk/inpages/
products_and_services/islamic_finance.php
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Islamic Financial Services Unit | Annual Report 2013/14
Islamic Financial Services Unit | Annual Report 2013/14
Creating ripples in the industry
through a qualified and
professional team
We are privileged to have a dynamic team, committed in taking our operations within
the AIF unit to greater heights. Our strategic investments in building our team with skills
training and enhancing their work ethics and values in Islamic finance have set us apart
from the other players within the industry. We deeply value and recognise our team for
their dedication and hard work, but more so, for upholding integrity and professionalism.
Our Vision
To become legendary in the Islamic financial services scene as a provider of
customer –friendly, creative and innovative total solutions.
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Islamic Financial Services Unit | Annual Report 2013/14
Islamic Financial Services Unit | Annual Report 2013/14
The Platforms
upon which we deliver
our products and services
We have in place a solid governance structure and set of corporate values that drive the
Company on a path of long-term sustainability. This coupled with our strong working ties
with the Shari’ah Board and scholars have paved a firm platform in which we could deliver
our products and services conscientiously and responsibly, as espoused by the Islamic
finance principles.
Our Mission
Dedicated value added customer service to accomplish organisational service
excellence whilst maintaining a sustainable competitive advantage.
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Islamic Financial Services Unit | Annual Report 2013/14
Islamic Financial Services Unit | Annual Report 2013/14
onwards and
upwards in our effort to
Moving
achieve further excellence
We are committed to continue with well-focused efforts to ensure the growth and success
of the AIF unit in the years ahead. Our aim is to further position the unit strategically,
enhance the scalability of our operations and deliver a service excellence; securing our
corporate goals towards greater financial inclusivity and long term sustainability.
Our Core Values
Economic viability, environmental responsibility and social accountability
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Islamic Financial Services Unit | Annual Report 2013/14
Financial Highlights
Financial Performance Gross income
Total operating income
Profit before tax
Income tax expense
Profit for the year
Financial Position
Loans and receivables
Total assets
Due to customers
Total liabilities
Total equity
Financial Goals & Achievements
Profit for the year (Rs. Mn)
Annual Grantings (Rs. Bn)
Return on Average Assets (%)
Non-Performing Advances Ratio (%)
2013/14
2012/13
Change %
Rs. Mn
Rs. Mn
810.18839.12 (3.45)
342.75226.99 51.00
222.24156.65 41.87
63.98 45.141.86
158.25111.5541.86
4,092.484,630.83 (11.63)
5,277.674,846.17
8.90
2,393.281,981.89 20.76
4,727.464,521.07
4.57
550.22325.10 69.25
2013/142014/15
AchievementTarget
158.25300
2.4
Over 2.5
4.39
Over 4
2.94
Below 3
Notwithstanding the challenging business environment, the AIF unit
managed its portfolio quality and ensured that the income levels were
robust. The year posted commendable growth in profits contributing to
the PLC’s overall results.
Islamic Financial Services Unit | Annual Report 2013/14
52%
9%
Growth in Net Income
Growth in Total Assets
Growth in Profit After Tax
Growth in Deposits
Total Assets
Gross Income
Jun-13
Sep-13
42%
21%
Jun-13
198.56
193.23
Dec-13
208.45
Mar-14
209.93
Sep-13
4,266.08
Dec-13
4,235.52
Mar-14
Rs. Mn
Due to Customers
Jun-13
Dec-13
Mar-14
5,277.67
Rs. Mn
Loans & Receivables
Sep-13
4,539.07
4,378.65
4,162.45
4,140.61
Jun-13
Sep-13
2,301.37
2,280.74
Dec-13
2,473.12
Mar-14
4,092.48
Rs. Mn
2,393.28
Rs. Mn
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Islamic Financial Services Unit | Annual Report 2013/14
Chairman’s Review
As One…
Within the new merged
structure of People’s
Leasing & Finance PLC
which came into effect
on 2nd April 2013,
we sought to
consolidate and
streamline Islamic
finance as a strategic
business unit within the
PLC network.
Islamic Financial Services Unit | Annual Report 2013/14
“We seek to advocate financial
inclusivity and empower our
customers with a ‘choice’,
complementing their values,
culture and lifestyle.
“
Strategic Forte
7 Dedicated Branches
We are focused in our strategy to maintain our
strength as a conventional financier whilst seizing
potential opportunities to further our ventures in
emerging businesses. Our vision is to be a total solution
provider; offering one-stop services with an array of
financial products, catering to the diverse needs of our
customers.
Gross Income
2013/14
13/14
Income from Islamic
credit95.2%
Net fee and commission
income4.5%
Other operating income0.3%
Within the new merged
structure of People’s Leasing
& Finance PLC (PLC / the
Company) which came into
effect on 2nd April 2013, we
sought to consolidate and
streamline Islamic finance
as a strategic business unit
within the PLC network. We
were definite in our efforts
It gives me great pleasure
on behalf of the Board of
Directors to present the
Annual Report of the Al-safa
Islamic Financial Services
Unit for the financial year
2013/14, along with the
audited financial statements
and related notes.
to position the product
offer and reinforce the
governance along the lines
of Islamic business ethics.
During the year, this venture
indeed proved to be one of
our fortes, reaping strong
dividends to bolster our
operational and financial
performance.
As a progressive institution,
we are focused in our
strategy to maintain our
strength as a conventional
financier whilst seizing
potential opportunities
to further our ventures
in emerging businesses.
Our vision is to be a total
solution provider; offering
one-stop services with an
array of financial products,
catering to the diverse
needs of our customers. We
seek to advocate financial
inclusivity and empower our
customers with a ‘choice’,
complementing their values,
culture and lifestyle. Our
engagement with Islamic
finance is indeed a strategic
step in this direction,
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Islamic Financial Services Unit | Annual Report 2013/14
Chairman’s Review Contd.
reaching out to faithbased needs of the Muslim
community as well as for
those customers seeking for
alternative options from the
traditional value proposition.
Islamic finance has a strong
ethical underpinning as it is
imbued with the concepts
of efficiency (avoiding
waste and resource
misallocation) and fairness
(equal distribution and nonmonopolisation) and we
strive to work within the said
ethical values.
In the year under review, we
saw the Islamic business unit
performing commendably,
with a noteworthy
contribution to the overall
financial performance of
the Company. The income
registered for the year was
robust at Rs. 810.2 million
whilst the profitability level
was strong with net profits
touching Rs 158.2 million,
representing a year-on-year
growth of 41.9 percent.
Burgeoning
Industry &
Challenges
With the cessation of the
three-decade long civil
conflict, Sri Lanka now
stands on a new paradigm,
gathering momentum
towards meeting the
development ambitions set
for the country. Within this
framework, Islamic finance,
the centuries-old tradition,
Rs. 158 MN Net Profit
In the year under review, we saw the Islamic business
unit performing commendably, with a noteworthy
contribution to the overall financial performance of
the Company.
is gaining recognition and
evolving rapidly to take its
place as a viable option in
the development process.
Our multi-ethno-cultural
landscape is definitely a plus,
paving the way for greater
prospects to grow as a niche
market within the finance
industry.
Yet, structural and cultural
issues continue to pose
challenges which have to
be met, if our nation is to
optimise on this potential.
This particularly calls
for greater awareness
and stronger regulatory
framework, emulating
the best practices and
standards of good
governance, blended well
with Islamic principles. It is
crucial that the country’s
regulators take heed of the
industry challenges and
formulate firm and clear
guidelines to standardise
the system with necessary
amendments to the relevant
Acts. A consultative
approach with the Shari’ah
Supervisory Board and
other stakeholders is called
for to keep pace with the
Islamic sensibilities whilst
advocating transparency
vital to appease the sociocultural challenges inherent
in our society. Consequently
Islamic finance products
and services are subject
to a twin-peaks approach
with supervision being
undertaken by both the
national regulator and
Shari’ah Board. Concerted
efforts are needed to
educate the stakeholders
and advocate the product as
an alternative to orthodox
financing. Significant
changes are already taking
place within the banking
circles especially after the
amendment to the Banking
Act effected in the year
2005 and it is significant
that this extends to the
non-bank financial sector,
which will give rise to market
confidence and level the
playing field.
Plans Ahead
As we move deeper into
our role as a responsible
Islamic Financial Services Unit | Annual Report 2013/14
finance institution, it is
important that we broaden
our horizon, embracing
multi-culturalism, which
not only makes strategic
sense; but reinforces our
mission towards holistic
operations, integrating
commercial viability with
social and environment
responsibility. Our focus into
the niche of Islamic finance
is a testament to this
commitment.
We have over the years,
since 2005, built a strong
foundation steeped in
Shari’ah principles to further
our engagement with
Islamic finance. Yet, much
work needs to be done and
we recognise the necessity
to fine-tune our operations
towards greater geographic
coverage, product versatility,
training our staff and driving
pricing efficiency. Nurturing
sustainable relationships
with our stakeholders and
being more focused in social
responsibility initiatives
will further underscore
the operations in the
ensuing years. We will also
prioritise and ensure the
supervision and compliance
complementing the overall
governance, the cornerstone
of our institution.
Appreciations
As we step into the future
with confidence to take
our business unit in Islamic
finance towards greater
prosperity, I wish to
recognise and appreciate
the support extended,
thus far, by all our valued
stakeholders.
I place my deepest
appreciation to my
colleagues at the PLC Board
and to the Board of our
parent- People’s Bank for
their visionary insight and
cooperation to establish
and reinforce the operations
of the Islamic finance unit.
My sincere gratitude to
the Shari’ah Supervisory
Board for their guidance
extended to strengthen our
operations as prescribed by
the Islamic value system. I
am sincerely impressed with
the efforts and enthusiasm
of the Al-safa team under
the strategic direction of
the Chief Executive Officer.
My commendation to them
for delivering a successful
year and hope to see similar
commitment in the ensuing
year.
To all stakeholders, thank
you.
Gamini S. Senarath
Chairman
People’ Leasing & Finance
PLC
25th September 2014
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Islamic Financial Services Unit | Annual Report 2013/14
CEO’s Review
As One…
The operations of
the specialised and
dedicated arm,
Al-safa Islamic
Financial Services
Unit (AIF Unit) were
consolidated and the
year saw a concerted
effort to position the
services at the forefront
of the non-bank
financial institutions.
Islamic Financial Services Unit | Annual Report 2013/14
“Our enabling strategy seeks to
support the diverse needs of our
customers including financial
services that are closest and
most appropriate to their
convictions.
“
Composition of Assets
As at 31st March 2014
Rs. 5.3 BN Total Assets
Total assets as at the year-end recorded to be one of
the largest asset bases among the Non-Bank Financial
Institutions in the Islamic finance field. Islamic finance
operations turned around positively, reaping the
benefits of proactive measures in the post-merger.
2014
Cash and cash equivalents
0.8%
Loans and receivables
77.5%
Property,plant
and equipment
0.2%
Other assets
21.5%
Committed to advocate
financial inclusivity, People’s
Leasing & Finance PLC
sought in the financial
year 2013/14 to reinforce
its venture in Shari’ahcompliant products. The
operations of the specialised
and dedicated arm, Al-safa
Islamic Financial Services
Unit (AIF Unit) were
consolidated and the year
saw a concerted effort to
position the services at the
forefront of the non-bank
financial institutions. I
present herewith a review
of the activities and
performance of our AIF
unit for the year ended 31st
March 2014.
Stable
Macroeconomic
Environment
In the year 2013, the country
rebounded closer to the
stronger growth levels
of 8 percent witnessed
in the immediate post
conflict years, moving
steadily towards meeting
its development goals. The
three key sectors recorded
a robust performance,
leading up to GDP growth
of 7.3 percent, up from
the sluggish 6.3 percent
registered in 2012 and
exceeding the growth levels
achieved by the advanced
nations and regional
counterparts.
The country witnessed
favourable macroeconomic
dynamics compared to the
imbalances that prevailed
in the preceding year.
With an improvement in
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Islamic Financial Services Unit | Annual Report 2013/14
CEO’s Review Contd.
domestic demand, stronger
exports, booming tourism
and consistent inward
remittances, the balance of
payments saw a substantial
improvement whilst the
inflation receded to lower
single digits. The monetary
policy continued to be
eased, setting the pace for
market interest rates to fall
and private sector credit
to improve; although the
response was sluggish given
the lagged effect from the
tight stance of 2012.
Embracing
Inclusivity
Our enabling strategy seeks
to support the diverse
needs of our customers
including financial services
that are closest and
most appropriate to their
convictions. Our venture into
Islamic financial services
which meets the socioeconomic goals of Islam,
ideally accomplishes this
objective.
This alternative that
essentially advocates risk
sharing and stake in returns
of an investment as against
the concept of interest
embedded in conventional
financial services is being
widely embraced not only
by the Muslim community,
but also gradually gaining
ground amongst the nonMuslims. It is estimated to
be a trillion dollar industry
in a global scale and is
“Aligned to our merger plans, our
focus in the reporting year was
to consolidate and streamline
the operations of the AIF Unit.
“
16
burgeoning in Sri Lanka.
Our tactical approach is to
leverage on the potential
opportunities in this niche
market, complementing
our core business whilst
effectively reinforcing our
passion to promote financial
inclusivity.
Consolidating
Operations
Our pioneering venture in
Islamic finance within the
leasing sector commenced
way back in 2005 which
subsequently in the year
2009 came within the
scope of our subsidiary
operations, People’s Finance
PLC. In conjunction with
the strategic merger with
People’s Finance PLC on 2nd
April 2013, this function once
again, came under our direct
wing.
Aligned to our merger plans,
our focus in the reporting
year was to consolidate and
streamline the operations of
the AIF Unit. We sought to
differentiate the functions
and the related processes
between the conventional
business and Islamic finance.
We introduced a separate IT
system for Islamic finance,
facilitating clear segregation
of transactions, accounting
and reporting processes.
We extended strategic
training to the staff of the
AIF unit and related window
operations. This enabled the
Islamic finance functions to
be carried out with greater
clarity, transparency and
accountability in compliance
with Islamic principles. This
also enhanced the efficacy
of operations, leading up to
better the top-line results
and greater discipline in
managing transactional
costs.
Creditable
Performance
Taking the cue from the
strong signals emanating
from the growing economy,
we were focused in the
reporting year to deliver a
strong performance from
the AIF unit, yielding a
Islamic Financial Services Unit | Annual Report 2013/14
Our 7 dedicated branches
functioning under Islamic
principles together with
the window representation
in 20 branches reached
4,364 customers across
the island including
other communities. Our
key financing products
including ‘Murabaha’ and
‘Ijarah’ remained strong
with a portfolio value Rs.
4,092 million whilst funds
raised primarily through
‘Mudharabha’, grew by 21.5
percent.
The total gross income
generated from the AIF
Unit was Rs. 810.2 million,
representing a marginal
contraction of around
3 percent vis-à-vis the
preceding year. However,
the AIF unit managed to
effectively rationalise profit
share ratios in line with the
market trends, leading up
to strong net profits of Rs.
158.3 million, corresponding
to a commendable increase
of 41.9 percent. This
accounted for over 5 percent
of the consolidated profits
of the Company.
Total assets as at the yearend 31st March 2014 reached
to Rs. 5.3 billion, one of the
largest asset bases within
the Non - Bank Financial
Institutions in the Islamic
finance field. The current
ratio was healthy at 1.1 times
whilst the return on assets
was commendable at 4.39
percent.
Social
Responsibility
In the true spirit of Islamic
ethos and also supported by
our strong conviction in the
triple-bottom-line approach,
integrating environmental,
social and economic
facets in our businesses,
we recognise our fiduciary
obligations and steadfast in
our actions to uphold a good
balance between profits
“
and social responsibility.
Our utmost respect towards
our customers and the
trust we have built over
the years bind us to extend
products that are ethical and
responsible as guided by the
Shari’ah law. Even defaults
and breaches of contracts
are sought to be resolved
with a humane approach.
It is in this context that
we have to appreciate
our efforts to manage the
non-performing portfolio
effectively; in the year under
review, we maintained our
non performing ratio at
2.94 percent in line with
the Company’s overall non
AIF unit managed to
effectively rationalise profit
share ratios in line with the
market trends
“
significant contribution
to the Company’s overall
results. Although the year
commenced at a subdued
pace, Islamic finance
operations turned-around
positively in the latter
stages of the year, reaping
the benefits of proactive
measures in the post-merger
scenario as discussed above.
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Islamic Financial Services Unit | Annual Report 2013/14
CEO’s Review Contd.
performing ratio and well
below the average registered
for the non-bank finance
sector.
The penalties that we
charge for wilful defaults
are taken into our charity
fund as endorsed by Shari’ah
principles.
Governance &
Compliance
As connoted by our brand
tagline “Inspired by Shari’ah”,
we are conscientious in
maintaining the highest
standards in our governance
practices. The Board is
fully committed to good
governance and seek advice
and guidance from the
Shari’ah Supervisory Board
“
on matters and decisions
pertaining to the AIF
operations. We also have in
place an in-house Shari’ah
scholar to direct and assist
our officers to be diligent in
daily operations aligned to
the Islamic ethics. In the year
under review, we have been
duly audited; the Certificate
of Compliance received from
the Shari’ah Supervisory
Board aptly demonstrates
our commitment to
safeguard the essence of
socio-economic practices
prescribed by Islam. This
complements our diligent
efforts as a Company to
comply with the statutory
and regulatory requirements
as stipulated by the relevant
bodies.
As connoted by our brand tagline
“Inspired by Shari’ah”, we are
conscientious in maintaining the
highest standards in our governance
practices.
“
18
Recognition Awards
It is truly an honour to be
recognised amongst the top
contenders for performance
excellence at the Sri Lanka
Islamic Banking and
Financial Industry Awards
2013 held for the third time
on 27th March 2014 at the
Galadari Hotel in Colombo.
We received the prestigious
Bronze Award in the ‘Best
Islamic Finance Entity of
the Year’ category. We were
also proud of our Operations
Executive, Mr. M. Hikam
Hussain for showcasing his
talent with a Silver Award as
the ‘Rising Islamic Finance
Personality of the Year’.
Opportunities to
Grow
The evolving economic
landscape in Sri Lanka
complemented by the
trending up-turn in the
global economy has set
the pace to accomplish
the development goals
envisaged over the
medium term. The dynamic
macroeconomic policies
coupled with the fast-
tracked infrastructure
development are expected
to lay out a solid foundation
to consolidate the traditional
sectors led by tea and
apparel, and promote
the five hubs - maritime,
aviation, commercial and
tourism, knowledge and
energy leveraging on the
country’s geographic
positioning. This is
anticipated to establish the
country at a higher ground
with the economy growing
sustainably and moving on
to the upper-tier income
status.
The growth prospects
for Islamic finance in the
medium to long term
within the emerging Sri
Lankan economy are
strong and attractive. The
country with a geographic
advantage, the emerging
demographic trends and
foreign investment inflows
especially from the cashrich Middle Eastern region
essentially underscore
the potential to advocate
Islamic finance as a viable
Islamic Financial Services Unit | Annual Report 2013/14
option to fund the country’s
development aspirations.
As a progressive financial
institution, we are excited
and keen to avail the
opportunities present within
the nascent Islamic finance
sector and look forward
to taking our venture into
the next phase. Our aim is
to further leverage the AIF
unit and gradually increase
our outreach in strategic
locations and build on a
wider customer base. We
intend to establish another
dedicated AIF branch in
Galle whilst establishing the
expertise to handle Islamic
finance function across
our entire branch network.
Training initiatives in this
context, focusing on service
excellence, technical skills
and above all, knowledge
and decorum in line with the
Islamic fundamentals are
vital to our strategic plans
of the AIF operations. We
also intend to strengthen
and diversify our product
portfolio with innovation,
value added features
such as the debit/visa
card, customisation and
focused promotions. Our
plans include inter-alia,
to promote investment
products specially targeting
minors, senior citizens and
women; further our key
financing products as well
as re-energise and fully
leverage on the lesserknown products such as
‘Diminishing Musharakah’
with joint venture features
targeting the working
capital requirements.
Appreciations
Within this one year,
post-merger, we made
a concentrated effort to
streamline and consolidate
the Islamic finance as a
strategic unit within the
PLC network. This is an
ideal opportunity to place
my sincere gratitude to our
Chairman and the Board of
Directors for giving their
unstinted support to the AIF
operations. My appreciation
is extended to the AIF team
for their commitment to
ensure a job well-done; to
all PLC staff for being united
and supportive to make
Islamic finance a part of the
Company’s culture.
I wish to place on record our
gratitude to the Shari’ah
Supervisory Board for
the advice, guidance and
support extended to the AIF
unit in compliance to Islamic
business principles.
To all stakeholders, thank
you for the trust and
confidence placed in our
operations.
D. P. Kumarage
Chief Executive Officer
People’s Leasing & Finance
PLC
25th September 2014
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Islamic Financial Services Unit | Annual Report 2013/14
Board of Directors
03
04
01
05
02
06
01. Mr. Gamini Sedara Senarath
04.Mr. P. A. I. S. Perera
Chairman
Director
Non-Executive, Non-Independent 02.Mr. Piyadasa Kudabalage
Non-Executive, Non-Independent Director
03.Mr. N. Vasantha Kumar
Non-Executive, Non-Independent Director
Non-Executive, Senior Independent 05.Mr. H. H. Anura Chandrasiri
Non-Executive, Independent Director
06.Mr. Rohan Pathirage
Company Secretary
Islamic Financial Services Unit | Annual Report 2013/14
Mr. Gamini sedara
senarath
Non-Executive, NonIndependent Chairman
Appointment date: 28th
February 2013.
Skills and Experience:
A graduate of the University
of Kelaniya, Mr. Senarath
joined the Sri Lanka
Administrative Service in the
year 1984 as an Assistant
Government Agent. He has
also served in the capacity
of Assistant Controller and
Deputy Controller of the
Department of Immigration
and Emigration, Senior
Assistant Secretary to
the Ministry of Transport
and Civil Aviation and the
Commissioner General of
Motor Traffic. Mr. Senarath
was appointed as the Chief
of Staff to His Excellency the
President in the year 2009,
after his successful tenure as
the Additional Secretary to
the Prime Minister and as an
Additional Secretary to the
President. He was the former
Chairman of the Sri Lanka
Insurance Corporation. He
is a well reputed officer in
the Sri Lanka Administrative
Service.
Other Directorships:
Currently holds the post of
Chairman in several other
institutions including,
People’s Bank, People’s
Leasing Fleet Management
Limited, People’s Leasing
Property Development
Limited, People’s Leasing
Havelock Properties Limited,
People’s Microfinance
Limited, Litro Gas Lanka
Limited, Litro Gas Lanka
Terminal (Private) Limited,
Canowin Hotels & Spas (Pvt)
Limited, Canwill Holdings
(Pvt) Limited, Sino Lanka
Hotels & Spa (Pvt) Limited,
Helanco Hotels & Spa (Pvt)
Ltd and Taprobane Hotels &
Spa (Pvt) Ltd.
Mr. Piyadasa
Kudabalage,
Non-Executive, NonIndependent Director
Appointment date: 18th July
2013.
Skills and Experience:
He is a Fellow Member
of the Institute of
Chartered Accountants
of Sri Lanka. He holds
a B.Com (Hons) Degree
from the University of
Kelaniya. He is also a Fellow
Member of the Institute
of Certified Management
Accountants of Sri Lanka
and the Institute of Certified
Professional Managers of Sri
Lanka. He has well over 30
years’ experience and held
several senior positions in
the mercantile sector.
Other Directorships:
Mr. Kudabalage is the
Managing Director of
Sri Lanka Insurance
Corporation and also the
Managing Director/ Chief
Executive Officer of Litro
Gas Lanka Ltd, Litro Gas
Lanka Terminal (Pvt) Ltd,
Canwill Holdings (Pvt) Ltd,
Sinolanka Hotels & Spa (Pvt)
Ltd, Taprobane Hotels & Spa
(Pvt) Ltd, Helanco Hotels &
Spa (Pvt) Ltd and Canowin
Hotels and Spas (Pvt) Ltd
and he is the Chairman of
People’s Merchant Finance
PLC. He also serves on the
Boards of People’s Bank,
Colombo Dockyard PLC,
Management Services
Rakshana (Pvt) Limited, Sri
Lanka Insurance Corporation
(Pvt) Ltd – Maldives,
People’s Leasing Property
Development Ltd and
People’s Microfinance Ltd as
a director. Mr. Kudabalage
is a Senior Partner of M/s
P Kudabalage & Company,
Chartered Accountants as
well.
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Islamic Financial Services Unit | Annual Report 2013/14
Board of Directors Contd.
Mr. N. Vasantha
Kumar
Non-Executive, NonIndependent Director
Appointment date: 24th July
2007.
Skills and Experience:
He holds a Master’s Degree
in Business Administration
and counts over 32 years
of experience in Treasury
Management. He was
the past President of the
Association of Primary
Dealers and of the Sri Lanka
Forex Association.
At present Mr. Kumar
functions as the CEO/
General Manager of People's
Bank. Prior to joining
People’s Bank, he served
as the Treasurer at ANZ
Grindlays Bank, Colombo.
Other Directorships:
Mr. Kumar also serves on the
Boards of Lanka Financial
Services Bureau Ltd., Sri
Lanka Bank’s Association
(Guarantee) Ltd. and
Financial Ombudsman Sri
Lanka Guarantee Ltd. as
the Chairman and Credit
Information Bureau of Sri
Lanka, Institute of Bankers
of Sri Lanka, National
Payment Council, People’s
Insurance Limited, People’s
Travels (Pvt) Limited,
People’s Leasing Havelock
Properties Limited and
People’s Leasing Property
Development Limited as a
Director.
Mr. P. A. I. S. Perera
Non-Executive, Senior
Independent Director
Appointment date: 22nd
August 2011.
Skills and Experience:
Mr. Perera is a holder of a
Diploma in Accountancy and
Higher National Diploma
in Finance from UK and
has completed up to the
final stage of Association
of Chartered Certified
Accountants (UK).
From 1974 to 1979, Mr.
Perera was employed at
International Computers
Limited, and M/s. R. K.
Fryer & Co., Chartered
Accountants in UK as an
Accountant and Audit
Senior respectively. He was
awarded the title of "Best
Chief Executive" by the Sri
Lanka Association of the
Advancement of Quality and
Productivity in the year 1998.
He has served as a Director
of Lanka Ceramics Limited
and Lanka Salt Limited and
as a member of the Labour
Advisory Council.
He has also served as an
Executive Consultant for
Noritake Lanka Porcelain
(Private) Limited and
was the Director/General
Manager at Noritake Lanka
Porcelain (Private) Limited,
Noritake Pannala Limited
and Matale Packaging
(Private) Limited.
Other Directorships:
Mr. Perera presently holds
the position of Chairman
of the Urban Development
Authority, On’ally Holdings
PLC, Lanka Logistics and
Technologies Limited and
Waters Edge Limited. He
also serves as a Director
of the Road Development
Authority, Ocean View
Development Company
Limited, Urban Investment
& Development Company
Limited and Rest House
Management Limited.
He resigned from the office
of Non-Executive, Senior
Independent Director with
effect from 28th June 2014.
Mr. H. H. Anura
Chandrasiri
Non-Executive, Independent
Director
Appointment date: 18th July
2013.
Skills and Experience:
He is an Attorney-at-Law
of the Supreme Court of Sri
Lanka and holds a Bachelor
of Laws Degree from the
Open University of Sri Lanka.
He earned his Post
Graduate Qualification in
Criminology and Criminal
Justice from the University
of Sri Jayewardenepura of
Sri Lanka and received the
opportunity to attend and
Islamic Financial Services Unit | Annual Report 2013/14
present his research findings
to the Refugee Studies
Center at University of
Oxford, UK.
Mr. Chandrasiri possesses
over 11 years’ experience in
areas of Civil, Criminal and
Immigration Law
Other Directorships:
Presently functions as the
Managing Director of Nation
Lanka Capital Ltd.
He also serves as a Director
of Protege Investment (Pvt)
Ltd., Dambulla Hotel Resort
& Country Club (Pvt) Ltd.,
and Punnaikudah Beach
Resort (Pvt) Ltd.
Mr. Rohan Pathirage
CompanySecretary
Appointment Date:
December 2007
Skills and Experience:
He is an Attorney-at-Law
with a Bachelor of Laws
Degree from the University
of Colombo. He holds a
Postgraduate Diploma in
Banking and a MBA in Bank
Management from the
Massey University in New
Zealand.
Other Positions
At present, he is the
Secretary to the Board of
Directors of People’s Bank.
He serves as the Company
Secretary of People’s Travels
(Pvt) Limited, People’s
Leasing Fleet Management
Limited, People’s Leasing
Property Development
Limited, People’s Insurance
Limited, People’s Leasing
Havelock Properties Limited
and People’s Microfinance
Limited.
23
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Islamic Financial Services Unit | Annual Report 2013/14
Shari’ah Supervisory Board Members
1.
Ash-Sheikh Mufti M.I.M Rizwe
Ash-Sheikh Mufti M.I.M
Rizwe gained MA in Arabic
& Islamic Studies by Higher
Education Commission,
(Wifaqul Madaris) Pakistan
and is specialised in Islamic
Jurisprudence (Al Takhassus
Fil Fiqhil Islami) Jamiyyathul
Uloomil Islamiya, Pakistan.
He is the President of All
Ceylon Jamiyyathul Ulama
and currently serves as an
advisor on Non-Interest
Banking for leading Financial
Institutions in Sri Lanka and
Abroad. He is a member
of the Supreme Council of
Arabic Colleges in Sri Lanka
and President of many
other Arabic Colleges in Sri
Lanka. Ex-Officio President
and Member of the various
committees of All Ceylon
Jamiyyathul Ulama.
2.
Ash-Shaikh H. Abdul Nazar
Ash-Shaikh H. Abdul Nazar
is a licentiate in Arabic and
Shari’ah Studies at AlJamiah Al-Rahmaniyyah,
Akurana, Sri Lanka. He has
a Diploma in Advanced
English for Administration
and Academic Purposes
and a Certificate in English
for Careers at University
of Colombo. Presently,
he acts as a member of
Shari’ah Supervisory Boards
of many Islamic banking
and financial institutions.
He is the founding father
of the Centre for Spiritual
Solidarity, Puttalam, Sri
Lanka and its President since
2006. He also functions
as a Director of Academy
of Skills Development,
Puttalam since 2008 and
as a Secretary of Nadwatur
Rahmaniyyeen, Akurana
since 2008.
He is a consultant
on administration,
management, Shari’ah
disciplines, Arabic Language
and Literature, Islamic
Economics, Islamic Banking
and Finance, Islamic
Insurance and curricula,
course materials and
teaching methodology.
He has produced various
documents on Shari’ah
disciplines, Arabic Language
and Literature, Islamic
Economics, Islamic Banking
and Finance and Islamic
Insurance.
3.
Ash- Sheikh Mufthi M.H.M. Yoosuf
Ash- Sheikh Mufthi M.H.M.
Yoosuf is a Licentiate
in Arabic and Shari’ah
Studies at Al-Jamiah AlRahmaniyyah, Akurana, Sri
Lanka and holds “IFTHAA”
Specialisation in Islamic
Jurisprudence and Islamic
Financing at Islamic
University of Karachi,
Pakistan. Currently he serves
as the Chairman of Fath
Academy and is a Member
of the Executive Committee
of All Ceylon Jamiyyathul
Ulama (ACJU). He is also a
Director of Knowledge Box
and functions as a member
of the Shariah Supervisory
Boards (SSB) of leading
financial institutions in Sri
Lanka.
Islamic Financial Services Unit | Annual Report 2013/14
4.
Ash-Shaikh F. Fazil Farook
Ash-Shaikh F. Fazil Farook
is a graduate in Islamic
Shari’ah and completed
Dharuthul Hadith from the
Darul Uloom, South Africa.
Also he is a qualified and
leading scholar in Islamic
Banking and Finance.
Presently he serves as a
member of the Banking
Advisory Committee of
All Ceylon Jamaiyyathul
Ulama (ACJU) Colombo,
and as a head of academic
affairs at the Al-Ain Islamic
Institute and principal
of International Islamic
Institute, Sri Lanka.
In-House Shari'ah
advisor
5. Ash-Sheikh Arif Abdeen
Ash-Sheikh Arif Abdeen is
a licentiate in Arabic and
Islamic Studies at Ibnu
Abbas Arabic College, Galle.
Functioning full time as InHouse Shari'ah advisor since
2012 at People's Leasing and
Finance PLC Al-Safa Islamic
Unit. He holds B.A Degree
in University of Peradeniya
and has more than 06 years’
experience in lecturing of
Arabic, Islamic studies and
Islamic Banking & Finance
various institutions.
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Islamic Financial Services Unit | Annual Report 2013/14
Management Team
03
02
01
04
05
01.Mr. D.P. Kumarage
04.Mr. Udesh Gunawardena
Chief Executive Officer /
General Manager
02.Mr. Rohan Tennakoon
Deputy General Manager –Business Development & Marketing
03.Mr. Prabath Gunasena
Assistant General Manager - ICT (Group)
Assistant General Manager - Internal Audit (Group)
05.Mr. Omal Sumanasiri
Senior Manager – Finance
06.Mr. Uresh Jayasekara
Chief Manager - Human Resources (Group) - (Not Pictured)
Islamic Financial Services Unit | Annual Report 2013/14
Mr. D.P. Kumarage
Chief Executive Officer /
General Manager
Experience
Functions as the CEO / GM
of PLC since September
1997. Presently functions as
the Managing Director of
the subsidiary companies
of PLC, Vice President
of the Asian Leasing &
Finance Association and the
Chairman of the Leasing
Association of Sri Lanka.
Also serves as a NonExecutive Director of
SANASA Development Bank
and Lanka Ashok Leyland
PLC and is a Director of the
Financial Ombudsman Sri
Lanka (Guarantee) Limited
(FOSL).
Has over 33 years of
experience in Banking and
Finance at People's Bank.
Qualifications
Holds a Postgraduate
Diploma in Modern Banking
and is a Passed Finalist of
the Chartered Institute of
Management Accountants
UK.
Mr. Rohan
Tennakoon
Deputy General Manager
–Business Development &
Marketing
Head of Islamic Division
(Al-safa)
Experience
Over a period of almost
16 years’ experience at
PLC in various capacities
and counts over 24 years
of experience in different
fields such as Banking,
Manufacturing & Exports
and in Travel Trade etc.
Qualifications
Holds a Masters Degree of
Business Administration
(MBA) from the University
of Colombo, a MSc in
Management from
the University of Sri
Jayawardenapura, a BSc in
Business Administration –
Special Degree (2nd Class
Upper) from the University
of Sri Jayawardenapura and
an Associate Member of the
Institute of Bankers of Sri
Lanka. In addition, he holds
the position of a Council
Member at Finance House
Association of Sri Lanka.
Mr. Prabath
Gunasena
Assistant General Manager ICT (Group)
Experience
15 years of experience as
Head of ICT at PLC.
Qualifications
Holds a Masters Degree in
Business Administration
(MBA) from the University
of Western Sydney (UWS)
and a Diploma in Computer
System Design from the
National Institute of
Business Management
(NIBM), Sri Lanka. He is
a member of the British
Computer Society.
Mr. Udesh
Gunawardena
Assistant General Manager Internal Audit (Group)
Experience
Counts over 20 years of
experience in the fields
of finance, covering
accounting, auditing,
financial management,
treasury operations and
management information
systems and possesses over
15 years of experience at
PLC. He serves as Secretary
to Board Audit Committees
of PLC and People's
Insurance Limited.
Qualifications
An Associate Member of
the Institute of Chartered
Accountants of Sri Lanka,
Institute of Certified
Management Accountants
of Sri Lanka as well as the
Institute of Professional
Finance Managers (UK) and
a Member of the Institute
of Internal Auditors.
He holds a Diploma in
Treasury, Investments and
Risk Management from
the Institute of Bankers
of Sri Lank. Also, he is
a world prize winner of
the Australian Computer
Society.
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Islamic Financial Services Unit | Annual Report 2013/14
Management Team Contd.
Mr. Uresh
Jayasekara
Programme on Solving
Human and Organisational
Problems (SHOP), in the year
2014.
Experience
15 years of experience in the
field of Human Resources
including the garments,
hospital and financial
sectors. He is functioning as
the Head of HR for the PLC
Group.
Mr. Omal Sumanasiri
Chief Manager - Human
Resources (Group)
Qualifications
Holds a Bachelor's Degree
of Science (Honours) from
the University of Kelaniya,
Diploma in Management
from the Open University
and Postgraduate Diploma in
Business Management from
the University of Colombo.
Also holds a Master’s Degree
in Business Administration
(MBA) specialised in Human
Resources Management
from the University of
Colombo.
Also, he was awarded a
Japanese Scholarship to
represent Sri Lanka at
the International Training
Senior Manager – Finance
Experience
Possesses over 10 years of
experience in the fields of
Accounting and Auditing.
Served as a Senior Manager
- Assurance at Ernst & Young
Chartered Accountants.
Qualifications
Holds a Bachelor’s Degree
in Business Management
(Accountancy) (1st Class)
from the University of
Kelaniya. Also an Associate
Member of the Institute of
Chartered Accountants of
Sri Lanka and the Institute
of Certified Management
Accountants of Sri Lanka.
Islamic Financial Services Unit | Annual Report 2013/14
AIF Team
Mr. Rizwan Ismail
Mr. Hikam Hussain
Deputy Manager/ OIC - Union Place
Assistant Manager/ OIC - Kattankudy
Executive - Branch Operations
Mr. Shihan Abdul Gaffoor
Mr. Ameen Rilah
Executive/ OIC - Kalmunai
Executive/ OIC - Kandy Al-Safa
Mr. Muksith Ajwath
Mr. Aslam Badurdeen
Mr. Najath Jiffry
Senior Staff Officer II/ OIC - Puttalam
Management Trainee/ OIC - Dehiwela Al-Safa
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Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis
Key Performance Indicators
For the F.Y.
2013/14
2012/13
% Change
Customers (Number)
4,364
4,265
2.32
Muslim Customers
(% of Total)
93.52
96.09
(2.67)
6.48
3.91
65.73
4,136.68
4,669.27
(11.41)
158.25
111.55
41.86
Deposits (Rs. Mn.)
2,393.28
1,981.89
20.76
Non Performing
Portfolio (Rs. Mn.)
106.50
107.90
(1.30)
Non-Muslim Customers
(% of Total)
Gross Portfolio (Rs. Mn.)
Net Profit (Rs. Mn.)
Sri Lanka Islamic Banking and Financial Industry Awards 2013, 27th March 2014, Galadari Hotel, Colombo
<
Mr. Rohan Tennakoon
receiving the Bronze
Award in the ‘Best Islamic
Finance Entity of the
Year’ category.
<
Mr. M. Hikam Hussain,
Operations Executive,
Silver Award - ‘Rising
Islamic Finance
Personality of the Year’
Islamic Financial Services Unit | Annual Report 2013/14
Overview
LEASING & LENDING
DEPOSITS & INVESTMENT
Ijarah
Murabaha - Asset Finance
Murabaha - Trade Finance
Notwithstanding the challenging business environment, the
AIF unit managed its portfolio quality and ensured that the
income levels were robust. The year posted commendable
growth in profits and contributed well to the PLC’s overall
results and maintained a strong asset position.
Mudharabah Saving & Investments
Corporate Saving Plus
Usfoor Minor Savings
Wakalah Investments
Underpinned by the Company’s conviction in inclusive
finance and aspirations to diversify its operations from its
core business in leasing, People’s Leasing & Finance PLC in
2005 embraced the emerging Islamic finance. Al-Safa Islamic
Financial Services (AIF) unit was established as a strategic
business unit within the PLC operations which subsequently in
the year 2010 came under the scope of its subsidiary, People’s
Finance PLC. With the merger coming into play between PLC
and People’s Finance PLC in the year under review, Islamic
finance function came once more within the direct scope of
the Company.
The AIF unit in the year under review looked to consolidate the
Islamic finance operations and reinforce its market positioning
within an increasingly competitive market place. Progressive
measures were taken to properly segregate the operations
between Islamic finance and conventional core businesses to
lay emphasis to compliance under the Shari’ah guidelines. This
coupled with AIF’s strategic outreach, comprehensive product
offer, proactive team, and efforts to ensure good governance
enabled the AIF unit to be the foremost Islamic financial
services provider in the non-bank finance sector.
Operational Review
Business Environment
World Economy
World Economy Growth %
Advanced Nations Growth %
Emerging & Developing
Nations - Growth %
2013: 3.0%
2013: 1.3%
2013: 4.7%
2012: 3.2%
2012: 1.4%
2012: 5.0%
The year 2013 saw the global economy stepping up from
the five year long recession that afflicted the advanced
countries, with serious implications to the developing and
emerging nations. Supported by a mix of fiscal adjustments
and monetary policy measures, the US sought to gain ground
with relatively stronger fundamentals leading up to better
consumer and investor sentiments. Yet, the hyper-partisan
politics and fiscal challenges dampened the recovery trends in
the US. The Eurozone, more so, the core regained its economic
activity levels whilst the peripheral nations bottomed out from
the recession. Japan led by the Abenomic programme also
gained momentum, although still uneven and uncertain of
the recovery. The Middle East still fraught with politico-civil
unrest continued to be sluggish in its economic activity levels.
emerging and developing economies led by China and India,
though still strong, slowed down in its growth pace to settle
at more sustainable rates. This impacted the overall global
31
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Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
economy which grew at a decelerated pace of 3.0 percent in 2013 compared to the growth of 3.2
percent in 2012. (World Economic Outlook, April 2014, IMF).
Sri Lankan Economy
GDP Growth
Budget Deficit
(% of GDP)
Inflation (Y-o-Y)
Balance of Payment
Average Weighted
Prime Lending Rate
2013: 7.3%
2013: -5.9%
2013: 4.7%
2013: US$ 985 Mn
10.13%
2012: 6.3%
2012: -6.5%
2012: 9.2%
2012: US$ 151 Mn
14.4%
Reaping benefits from the growing optimism in the world economy, Sri Lanka rebounded in
the year to keep pace with its development drive. The monetary policy adjustment towards an
easy stance; fiscal consolidation; inflation at mid-single-digit; relatively stable exchange rate;
and favourable balance of payment position supported the economy to post better results. All
three key sectors – agriculture, industry and services registered strong growth levels. The gross
domestic product (GDP) grew at 7.3 percent, up from the sluggish level of 6.3 percent achieved
in 2012 and well above the growth rates of emerging and developing economies. The per capita
income reached US$ 3,280 from US$ 2,922 in 2012, edging the economy towards the aspired
higher-end mid income category by 2016. (Annual Report 2013, Central Bank of Sri Lanka)
Islamic Finance in Sri Lanka
In the backdrop of our rapidly growing economy, Islamic finance has penetrated the market
and is increasingly being embraced by the Muslim community and is making in-roads amongst
non-Muslim customers seeking for alternatives from the conventional product offerings.
The Banking Act No. 30 of 1988 was amended in the year 2005, supporting to strengthen the
institutional framework of Islamic finance within the banking sector.
Islamic Financial Services Unit | Annual Report 2013/14
Strategic Priorities
Outreach
Strategic Priorities 2013/14
Strategic Outreach
Awareness Building
Focused Training
Establish dedicated
branches and develop
window operations within
the PLC network.
Promote awareness
on Islamic financial
products amongst general
public through focused
promotions
Develop a specialised
team with proficiency in
extending Islamic finance
services.
Leverage Technology
Good Governance
Risk Management &
Controls
Ensure compliance to
Shari’ah framework and to
the regulatory & statutory
requirements
Effective and timely
monitoring of risks, take
action to mitigate such
risks and exercise controls
Automate functions and
work process to bring in
greater efficiency.
Performance Highlights 2013/14
Reinforced Outreach
Consolidated operations
within the dedicated
branches and window
operations.
Commendable
Financial Results
The Al-Safa unit posted
a creditable profit of
Rs.222.2 million (before
tax).
Segregation
Compliance
Clearly segregated Islamic
finance functions from
conventional products
in terms of work process,
accounting & preparation
of financial statements.
Strengthened compliance
to Shari’ah governance
principles and obtained
necessary certifications
Streamlined
Processes
Automated Islamic
finance functions with a
customised system and
extended due training to
the team.
PLC’s overall strategy lays
emphasis on accessibility,
targeting an outreach across
the provinces reaching a
wider customer base. Aligned
to this, the Company during
the reporting year sought
to reinforce its outreach
in Islamic finance through
the AIF dedicated branches
and window operations set
up in strategic locations. In
the year, there were seven
dedicated and fully-fledged
branches specialising in
Shari’ah compliant products in
Union Place, Dehiwela, Kandy,
Puttalam and three in the
Eastern Province – Kattankudy,
Kalmunai and Muttur. In
addition, most of the PLC
branches across the country
now caters Islamic financial
services to it’s customers.
This year, the Company
commenced the work to set up
another dedicated branch in
Galle which is expected to be
launched in the next financial
year and sought options to
setup 20 ‘windows’ within PLC
branches.
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Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
Branch Structure
Product
Dedicated Branches
PLC Branches that carry out
Islamic financial services
Trincomalee
Mutur
Anuradapura
Kekirawa
Puttalam
Kattankudy
Wariyapola
Chilaw
Kuliyapitiya
Kurunegala
Mathale
Kalmunai
Digana
Kandy
Ampara
Minuwangoda
Nittambuwa
GrandPass
Pettah
Union Place
Haveloc City
Dehiwala
Wellawatta
Panadura
Financial inclusivity is
key to PLC with a mission
seeking to be a diversified
financial services provider,
underscoring the longterm sustainability of
the business. Islamic
finance is an initiative
in this direction, with a
significant contribution
to the overall operations,
especially gaining ground
as an alternative to the
conventional financing
operations.
Hatton
Hambantota
The AIF unit is structured
to offer Shari’ah compliant
product range, catering to
customer needs of both
institutional clients in
trading, transportation,
agriculture and services as
well as to the retail market
to finance goods/assets
and working capital needs
as well as savings and
investments. The AIF unit
was focused in its efforts to
develop a versatile product
offer, with value added
features tailored to serve
the customer better in terms
of timeliness, convenience,
current lifestyle needs
and business demands. To
this end, automation of
Islamic finance functions as
effected in the year under
review and introducing
innovative features like the
debit card are expected to
brace the products offer in
the years ahead.
Marketing & Promotions
With the merger in place
and the Islamic finance
function once again coming
under the PLC operations as
a significant strategic unit,
the AIF sought to strengthen
the brand ‘Al-safa’ with its
tagline ‘Inspired by Shari’ah.
The logo of ‘Al-safa’ was
strategically displayed within
the dedicated branches
alongside the PLC logo,
strongly bringing out the
brand qualities of both
the AIF unit and that of
the Company; supporting
effective brand recall.
This complemented the
Company’s rebranding
Islamic Financial Services Unit | Annual Report 2013/14
campaign which was
intensified in the year under
review.
Human Capital
Female
2013/14
In the year under review, the
AIF unit was restructured
with a team totaling to
69 employees dedicated
and specialised to handle
Islamic finance transactions.
The teams working within
the AIF branches were
Male
The Company recognises
the significance of employee
factor to accomplish
the goals set within its
mission. PLC as a policy
as well as a strategy gives
priority and invests well on
developing employees with
due recognition, rewards,
competitive remuneration,
training skills and welfare.
Apart from the overall
initiatives, focused training
is extended to the AIF
team on technical aspects,
customer service, and
information technology
applications and on Shari’ah
principles.
Female
PLC has always aspired
to be a customer centric
organisation, with product
versatility and the best in
service quality. The AIF unit
aligned to this unwavering
commitment towards
prioritising customer
relationships, focused on
product responsibility and
service standards which are
well attuned with the Islamic
value system. Reinforcing
Islamic values in daily
operations and training staff
on products, services as well
as on the accepted etiquette
are focused upon, effectively
AIF Team
2012/13
Customer Relationships
strengthened with transfers from the head office. As at end
March 2014, the branches were manned by 64 staff members
with five overlooking operations at the head office.
Male
The AIF unit also resorted to
showcase its service quality
and product offer with
below the line measures distributing brochures and
leaflets coupled with cost
effective media coverage
through appropriate
newspapers and radio
programmes.
supporting to establish a
‘positive-word-of-mouth’
and extend the customer
base.
2
2
9
46
1
Senior Management
1
Line Management
7
Executives
2
2
Non Executives
10
45
1
2
Minor Staff
7
Staff Composition
The AIF team was given intensive training on the new system
assigned to carry out Islamic finance functions, handling
operations and customer service excellence as well as personal
development of employees. The in-house Shari’ah consultant
played a key role in imparting his knowledge and training the
team members on the decorum and ethics of Islamic business
practices. During the year, technical and soft skills trainings
covered 68 employees for 2,742 man-hours.
35
36
Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
Training hours per Employee Category
Type of
training
Senior
Management
Line Managers
Executives
Non Executives
No. of
Employees
Training
hours
No. of
Employees
Training
hours
No. of
Employees
Training
hours
No. of
Employees
Training
hours
2
14
2
16
12
271
52
1,659
Technical
Soft Skills
-
-
2
16
12
150
52
616
Total
2
14
2
32
12
421
52
2,275
Training
hours per
employee
7
16
35
44
Technology
The Company invests appropriately on technology as a tactical support service. In the year, as a part of the consolidation efforts,
the AIF unit sought to offer seamless solutions in Islamic finance, reinforcing the processes aligned to the Shari’ah ethics. To
this end, a new system was developed, tailored to handle Islamic finance functions separately from the core functions within the
conventional services. This system is able to process transactions and generate reports including on daily collections and financial
statements vital for costing, recovery management and for overall decision making. As mentioned above, the AIF team was given
a comprehensive training on adopting and carrying out their functions in the new system.
Managing Quality
PLC has always been committed and given precedence to manage and maintain a quality portfolio. Stemming from this overall
strategy, the AIF unit focuses on timely collections and seeks to curtail non-performing facilities in line with the Shari’ah
principles. Building strong bonds throughout the life-cycle of the facility underpinned by Islamic conviction is essentially linked
to maintaining a healthy portfolio, especially within a challenging market landscape. Effective evaluations of customer profiles
and ventures, consistent monitoring coupled with hands-on assistance to support any difficulties in meeting the contractual
obligations are key in this endeavour. Penal charges are only taken in the event of wilful defaults as guided by Islamic ethos and
are expended on social responsibility initiatives.
Risk Management, Internal Controls, Governance
Good governance is an integral part of the PLC network. This complemented by the business ethics upheld within the practices of
Islamic finance has set the pace for the AIF unit to build its operations on a solid foundation of best business practices.
Islamic Financial Services Unit | Annual Report 2013/14
On one hand, the AIF unit
comes under the overall
supervision of the Board
of Directors with risk
management and internal
controls supporting the
Islamic finance operations
to be well in line with good
governance. The AIF unit
as part of the Company, is
aligned to the statutory and
regulatory requirements
prescribed by the relevant
bodies including the Central
Bank of Sri Lanka under the
Finance Business Act No 42
of 2011, Code of Best Practice
on Corporate Governance
2013 issued jointly by the
Securities and Exchange
Commission of Sri Lanka and
the Institute of Chartered
Accountants of Sri Lanka
and the Continuous Listing
Rules issued by the Colombo
Stock Exchange. Compliance
to the best practices,
regulatory and statutory
obligations is consistently
monitored by the Internal
Audit, Risk Management
and the Compliance Officer
with timely reporting to
the Board of Directors and
to the regulatory bodies as
prescribed.
On the other hand, AIF
operations come under the
purview of an independent
non-executive, Shari’ah
Supervisory Board. This
body which comprises
four eminent scholars in
Shari’ah principles as well
as in Islamic finance, audits
AIF’s financials, processes
and operations to ensure
Shari’ah compliance. The
AIF unit also has in place a
full-time Shari’ah scholar
who assists and supports
the team to ensure that the
operations are carried out in
compliance to the business
principles advocated by the
Shari’ah law.
The AIF unit adheres to
the Sri Lanka Financial
Reporting Standards and
Lanka Accounting Standards
aligned to International
Financial Reporting
Standards. Detailed reports
on Corporate Governance
and Risk Management are
given in pages 44 to 55
Performance Review
Granting: Rs.
Operational
Financial
2.4 billion
2.4 billion
NPL Ratio: 2.94%
Deposits: Rs.
Income: Rs.
810.18 million
158.25 million
Net Profits: Rs.
Lending Portfolio
Complemented by the relatively stable macroeconomic
landscape, the Islamic finance portfolio performance was well
managed to meet the targets and sustained the market share
as the leading Islamic finance institution within the non-bank
financial sector.
However, the portfolio performance compared to the
preceding year was lukewarm given the country’s sluggish
activity levels especially in the agriculture sector which was
hit by adverse weather conditions in first part of the year.
The value of the lending portfolio led by Ijarah, and Murabaha
declined by 11.63 percent to Rs. 4,092.48 million from Rs.
4,630.83 million in the preceding year.
The income generated from the portfolio witnessed a
marginal drop of 5 percent to Rs. 771.28 million as compared
to Rs. 811.45 million in the preceding year. This accounted
for 4 percent of the total income of the Company. With
conscientious efforts to manage costs and profit share
ratios, the AIF registered a net profit of Rs. 158.25 million,
37
38
Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
representing a commendable increase of 42 percent over the
previous year.
Customers
The total customer base in terms of the lending operations
reached to 4,364 in the reporting year where the majority of
93.52 percent accounting for Muslim customers whilst the
balance comprised non-Muslim customers.
Product Performance
Key Lending Products
Ijarah (Lease)
Goods and assets are purchased on behalf of a customer and the ownership is transferred over a specific period of time by paying a pre-agreed rental as specified in the Ijarah contract. The customer has the right to use the item prior to ownership transfer.
Murabaha / Trading Murabaha
This is a short to medium term financing scheme. The Company purchases goods/ assets as per customer’s request and sells the same back to the customer at a pre-agreed sale price on deferred payment basis. The Company will disclose to the customer the cost and the profit components in the sale price. This is a popular mode of financing for registered vehicles / commodities.
The product mix of the AIF unit continued to be dominated
by ‘Murabaha’, the short to medium term financing product
of goods/assets along the lines of hire purchase followed
by ‘Ijarah’, the leasing
counterpart of the orthodox
portfolio. Both these
products accounted for 87
percent share of the total
portfolio.
In the year under review,
the portfolio of ‘Murabaha’
slightly grew by 7 percent
with granting amounting to
Rs. 1.2 billion; the portfolio
value reached Rs. 1,849.24
million which accounted
for the largest share of 45
percent of the total Islamic
finance portfolio. Ijarah
granting during the year
amounted to Rs. 627.5
million. The Ijarah portfolio
value of Rs. 1,734.02 million
represented a significant 42
percent share of the total
portfolio. Trading Murabaha,
a value added product in
trade finance gained share,
absorbing the balance 13
percent at a portfolio value
of Rs. 553.43 million.
Product Wise Granting
2013/14
Ijarah26%
Murabaha49%
Trading Murabaha 25%
Sector Performance
The granting in the year was
mainly targeted at financing
trading sector accounting
for 37.43 percent of the total
granting. Granting for the
services sector absorbed
a notable slice of 13.01
percent with granting of Rs.
317 million whilst transport
sector recorded Rs. 103.34
million granting.
Islamic Financial Services Unit | Annual Report 2013/14
Branch Performance
As discussed under the section ‘Outreach’ above, AIF
presence was strongest in Eastern province where we have 3
dedicated branches. However, Western Province accounted
to the highest grantings which totalled to Rs. 1,197.25 million,
corresponding to 49.14 percent of the total. Amongst the
dedicated AIF branches, the Union Place branch recorded the
highest granting of Rs. 978.71 million, absorbing 40.18 percent
of the total granting. This was followed by the AIF branch in
Kandy with granting of Rs. 509.53 million and a share of 20.91
percent.
quality of the portfolio. Yet, the AIF unit continued to focus
on ‘hands-on’ recovery management - fostering relationships
to address any issues that hinder customers from standing
by their contractual obligations. Recoveries were flexible and
benevolent towards customers as per Shari’ah guidelines.
Hence, the non-performing portfolio was well managed and
the ratio was curtailed to 2.94 percent at the yearend, from
the ratio of above 3 percent recorded at the beginning of the
financial year. The non-performing ratio was in line with the
overall company performance of 2.18 percent.
NPA Ratio throughout the year
2013/14
220.46
9.05
Dehiwala
213.06
8.75
Puttalam
179.86
7.38
Kalmunai
134.82
5.53
39.18
1.62
160.41
6.58
Muttur
Window Offices
Collections & Non Performing Ratio
In the reporting year, the efforts taken to effectively manage
the portfolio supported to sustain the collections which
touched Rs. 4,758.36 million with a ratio of 95.09 percent.
However, the agriculture sector related exposure of the total
lending portfolio mainly from the Eastern Province came
under heavy pressure given the volatilities in weather that
impacted the performance of this sector. This pressured the
1.00
0.00
Mar-14
Kattankudy
2.00
Jan-14
20.91
Feb-14
509.53
Dec-13
Kandy
3.00
Nov-13
40.18
Oct-13
978.71
Sep-13
Union Place
Jul-13
% Share
Aug-13
Rs. Mn.
%
4.00
Jun-13
AIF Branches
39
40
Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
Funding
Key Savings & Investment Products
Mudharabah Savings Account
Minimum investment is Rs. 1,000 with no restrictions on withdrawals or number of transactions and service charge for maintaining a low balance. VISA Debit Card and SMS alert service on every debit transactions are value added features. The account holder is permitted to withdraw Rs. 100,000 per day.
Usfoor Minor Savings Account
Minimum investment is Rs. 500 and profit is calculated monthly. Withdrawals are permitted by the parent/guardian for education and hospitalisation. The account will be converted to a normal Mudharabah Savings Account when the minor turns 18 years of age.
Corporate Savings Plus
Profit is calculated on the daily average investment balance and credited to the account monthly . Minimum investment is Rs. 100,000 and the minimum balance to be maintained is Rs. 5,000/=. Withdrawal is unrestricted, but large amounts require prior notice.
12 months Mudharabah Investment Account - (Profit at Maturity)
Medium-term product with a minimum investment of Rs. 100,000 and pre-mature withdrawal with prior notice and re-investment as an option. Profit is calculated at maturity on a profit share ratio of 75% for regular investors and senior citizens at a higher ratio of 77%.
12 months Mudharabah Investment Account - (Monthly Profits)
Medium-term product with a minimum investment of Rs. 100,000 for regular investors and profit share ratio is 65% while Rs. 50,000 for senior citizens and widows with profit share ratio of 67%. Profit is calculated monthly. Pre-mature withdrawal with prior notice and re-investments are options.
Being Shari’ah compliant,
the AIF unit’s operations
are not reliant to the
Company’s conventional
funding channels. Funds
are mainly sourced from
the savings and deposit
product, ‘Mudharabah’.
The ‘Mudharabah’ portfolio
reached to Rs. 2.2 billion
corresponding to 22
percent increase as against
the previous year and
accounted for 92 percent
share of the total funding
base of the AIF unit.
Funds were also sourced
through corporates and
financial institutions under
the Wakalah investment
scheme.
Social Responsibility
As part of a socially
responsible organisation,
the AIF Unit actively
engages in developing the
communities especially
in areas where the
branches operate and in
philanthrophic activities
that reflect well on the
Islamic value system.
The penalties charged on
Islamic Financial Services Unit | Annual Report 2013/14
customers for delays in
meeting their financial
obligations are duly
transferred to carry out
these CSR initiatives.
Financial Review
At the dawn of the financial
year 2013/14, the AIF unit
had to contend with some
key challenges, resulting
from the merger between
PLC and its subsidiary
People’s Finance PLC.
Changes embraced in
accounting practices of the
AIF unit, in line with the
PLC’s accounting practices
especially relating to the
provisioning policy and
the grace period given
to customers required
adjustments to the
financials of the unit. In
this light, the AIF unit faced
losses at the beginning of
the financial year which was
subsequently improved to
healthy profits at the end
of the financial year given
the perceptive management
policies and stringent
recovery efforts.
Profitability
Gross income comprised
income from Islamic credit,
net fee and commission
income and other operating
income. Gross income posted a
marginal decline of 03 percent
compared to the previous
year, following the decline in
income generated from Islamic
credit. Nevertheless, effective
management of finance
expenses and profit paid to
investors resulted in a 24
percent decline; this led to a 52
percent growth in net income.
It is noteworthy that the AIF unit managed a 26 percent
decline in impairment charges for loans and losses in 2013/14
compared to the impairment charges in 2012/13. However, the
focused efforts in recovery activities supported the AIF unit
to uphold its profitability levels. Although personnel expenses
witnessed a notable increase in line with the expansion of
business activities, overall cost to income ratio remained
around 29 percent which is below the ratio of PLC.
In this backdrop, both profit before and after tax of the AIF
unit reached Rs. 222 million and Rs. 158 million respectively,
corresponding to a commendable growth of 42 percent as
against the previous year.
Profit Before & After Tax
158.3
2013/14
Profit after
tax
Gross Income
2013/14
222.2
2012/13
111.6
Profit before
156.7
tax
Rs. Mn
Financial Position
2012/13
12/1313/14
Income from Islamic
credit
96.7%95.2%
Net fee and commission
income
3.3%4.5%
Other operating income 0.0% 0.3%
Total assets of the AIF Unit which comprised cash and cash
equivalents, loans and receivables, property, plant and
equipment and other assets registered a 9 percent increase
over the total assets as at 31st March 2013 and reached
Rs. 5,278 million as at 31st March 2014. Loans and receivables
portfolio which accounted for 78 percent of the total assets
reflected a marginal decline of 12 percent and stood at Rs.
4,092 million as at 31st March 2014.
41
42
Islamic Financial Services Unit | Annual Report 2013/14
Management Discussion & Analysis Contd.
Composition of Assets
As at 31st March 2014
reflected a significant
growth of 122 percent as at
31st March 2014 compared
to the balance as at 31st
March 2013 where the main
contributor to the increase is
bank overdraft.
Due to Customers
As at 31st March 2014
As at 31st March 2013
20132014
Cash and cash equivalents 2.2% 0.8%
Loans and receivables
95.6% 77.5%
Property,plant
and equipment
0.2% 0.2%
Other assets
2.0% 21.5%
Financial liabilities of the AIF
unit mainly comprised due
to banks and customers,
other financial liabilities, and
other liabilities. Reflecting
the positive signs of the
amalgamation, customers
that consist of Mudharabah
investment, Islamic savings
deposits, minor savings
deposits and other savings
deposits posted a 21 percent
growth as against the
position as at 31st March
2013. Due to banks balance
As at 31st March 2013
20132014
Mudharabah investments 92.7% 93.3%
Islamic savings deposits
7.3% 6.6%
Minor & savings deposits 0.0% 0.1%
Future Outlook
With the world economy on
a positive note and relatively
favourable macroeconomic
setting in the domestic front,
Sri Lanka is on a firm course
towards achieving the upper
strata of a mid-income
country status by the year
2016. Within this emerging
economic landscape and
the resultant socio-cultural
changes, Islamic finance is
gradually coming of age with
greater levels of awareness
and acceptance as an
alternative and a viable
solution to conventional
finance.
The industry has already
taken the cue and concerted
efforts are in place to
seek the latent potential
and optimise the future
prospects. In effect, the
demand for Shari’ah based
products has become
increasingly popular and
growing rapidly since the last
decade, especially with the
amendment to the Banking
Act in 2005. The years ahead
are expected to see greater
participation of the nonbank institutions and bear
fruit to this nascent industry
with spill-over effects on
the nation’s wealth creation
process.
With an advantage of a
head-start gained over most
of the other players in the
non-bank financial arena
of this country, coupled
with a sound brand image
of – 'Al-Safa' established as
a symbol of purity, AIF has
the potential and necessary
foundation to grow its
market share further and
substantially support
PLC’s corporate goals.
The strategic focus will
remain on the setting up of
dedicated units and windows
in key locations; targeted
promotions and awareness
building campaigns;
initiating new products and
value addition; leveraging on
technology; and extending
the tactical training to build
a skilled and productive
team.
Islamic Financial Services Unit | Annual Report 2013/14
The plans set for the short to medium term are set out below:
Plans FY 2014/2015
Strengthen operations in the existing specialised branches
Outreach
Launch a dedicated branch in Galle
Increase window operations up to 22 within the PLC branch network in selected locations.
Targeted Promotions
Organise special promotional campaigns on the product offer and benefits in strategic locations predominantly inhabited by the Muslim community.
Awareness Building
Create awareness on Islamic finance targeting both Muslim and Non-Muslim communities.
Product Development
Value Addition
System Improvements
Technical and Soft
Skills Training
Develop new products especially targeting microfinance and special deposits targeting women and children
Launch the lending product ‘Diminishing Musharakah’ for working capital requirements/ project finance/ property finance
Add-value to core products with special benefits to retain the existing customer base as well as to attract new customers.
Further improve the system assigned for Islamic finance to enhance the versatility and efficiency.
Extend intensive training to AIF staff on credit, customer care, system and processes
Create awarness amongst staff working within the conventional divisions on Islamic principles and product knowledge.
43
Islamic Financial Services Unit | Annual Report 2013/14
Corporate Governance
Working on a threepronged core value system
of economic viability,
environmental responsibility
and social accountability,
we firmly believe that sound
governance practices form
the cornerstone of effective
decision making that
ensures corporate success
and sustainable value
creation.
This report sets out PLC’s
approach to corporate
governance practices and
the manner in which it
ensures the adherence to
the regulatory requirements
on corporate governance
issued by the Central Bank of
Sri Lanka (CBSL), Colombo
Stock Exchange (CSE) and
“
the Securities and Exchange
Commission of Sri Lanka
(SEC) and the emerging best
practices being followed
worldwide.
Demonstrating the
Company’s commitment
to diversity and inclusive
finance, Al-Safa Islamic
Financial Services Unit
(AIF) was established to
provide Islamic finance
products in compliance
with Shari’ah guidelines in
Sri Lanka. AIF which began
its operations in 2005 has
evolved presently to be one
of the foremost Islamic
financial service providers
in the non-bank financial
sector in the country. AIF
operates through seven
We firmly believe that sound governance
practices form the cornerstone of effective
decision making that ensures corporate
success and sustainable value creation.
“
44
fully-fledged branches and
has representation in other
branches of PLC in strategic
locations.
The Company is committed
to the highest standards
of corporate governance
and believes that such
standards underpin its
ability to function with
integrity and accountability,
to systematically and
independently review risks
and opportunities and to
make decisions that will
render sustainable value.
Thus, the operations of AIF
are carried out separately
and independently from
the conventional finance
business of the Company,
with necessary internal
monitoring and control
mechanisms to ensure a
clear demarcation of funds
in line with the Shari’ah
guidelines.
Governance
Philosophy
Principles of good business
conduct are imperative
for protection of investor
interests and enhancing the
integrity of an institution.
Thus, observance of
principles of ethical business
conduct, conviction and
transparency are the key
requirements that underpin
the validity of a Shari’ah
compliant contract.
PLC’s overall governance
philosophy is based on an
organisational environment
where sound governance
practices have become
a way of life in daily
operations for each member
of the PLC Group including,
the AIF unit. This is ensured
by instilling the following
key practices, which are
also closely attuned to the
principles of Shari’ah, into
the group strategy:
 compliance with the
law and commercial
legitimacy;
 fair treatment of all
stakeholders and
employees;
 responsibility to the
environment and the
community in which it
operates; and
Islamic Financial Services Unit | Annual Report 2013/14
 probity, integrity and
business ethics in its
operational practices.
Governance
Framework
The effective and responsible
Board and Management,
the independent Shari’ah
Council that is both
competent and accountable,
the well-defined internal
charters, and the
independent governance
assurance mechanisms
reflect the sound and robust
governance framework
that is in place within the
Company including the
AIF unit. The distinction of
the functions between the
Board, Management and
the Shari’ah Council allows
for effective and efficient
decision making with clear
accountabilities whilst
internal charters support the
institutionalisation of best
processes for governance.
The independent
governance assurance
mechanisms ensure integrity
of operations and existence
of a sound governance
system.
A. SHARI’AH COUNCIL
The Shari’ah Council plays
a key role in advising AIF
on its compliance with
Shari’ah rules and principles.
The Shari’ah Council which
comprises four eminent
scholars in Shari’ah
principles as well as in
Islamic finance is responsible
to audit AIF’s financials and
processes and to ensure
Shari’ah compliance.
No individual member of the
Shari’ah Council is connected
with PLC or serves another
function within PLC, thereby
ensuring that each member
of the Council is capable of
exercising his independent
judgment.
The management of PLC
ensures that all relevant
information is supplied
to the Shari’ah Council
promptly and in such a
manner that enables them
to discharge their duties
properly. This includes
allowing the Shari’ah
Council independent access
to Senior Management
and forwarding further
enquiries that they consider
necessary.
B. BOARD OF DIRECTORS
1. Role of the Board
At PLC, the ultimate
responsibility to ensure that
it operates within a robust
and sound governance
framework rests with
the Board of Directors.
Accordingly, the Board
provides entrepreneurial
leadership within a
framework of prudent and
effective controls enabling
risks to be assessed and
managed whilst setting
the Company’s values and
standards to meet the
obligations towards the
shareholders and other
stakeholders.
The Board of Directors sets
the strategic objectives
of PLC, determines its
operational policies
and performance
criteria and delegates
to the Management the
detailed planning and
implementation of those
objectives and policies in
accordance with appropriate
risk parameters. The Board
also monitors compliance
with policies and actual
performance against set
objectives by holding the
Management accountable
for its activities through
regular dialogue.
2. Board Balance & Diversity
PLC is committed towards
a balanced and diversified
Board leading to a culture
of leadership that provides
a long-term vision and
policy thinking and thereby,
improving the quality of
governance.
The Board is comprised
solely of non-executive
directors who are
experienced and influential
individuals with diverse
backgrounds and expertise.
Their mix of skills and
business experience is a
major contributor to the
proper functioning of the
Board and its committees,
45
46
Islamic Financial Services Unit | Annual Report 2013/14
Corporate Governance Contd.
ensuring that matters are fully debated and that no individual or group dominates the Board’s
decision making processes.
Company Secretary in the
Board Minutes.
Composition of the Board as at 31st March 2014 was as follows and their profiles are given on
pages [20] to [23]
6. Directors’ Interests in Contracts
No of
members
05
Executive
Nil
NonExecutive
Independent
05
3.
Board Meetings
4.
Roles of the Chairman and the CEO
02
Age Distribution
Non
Independent
03
Below
50
01
50-60
60-70
03
01
Board meetings are usually held on a monthly basis and at each of these meetings, the Chief
Executive Officer reports to the Board an update on the progress of implementing the business
strategy, operational performance and funding strategy. The Board also receives reports from
the Board Committees from time to time and may also receive reports from the Company
Secretary on any relevant corporate governance matters.
The posts of Chairman and the Chief Executive Officer (CEO) are held by different individuals
thereby, ensuring the balance of power and authority.
Whilst the Chairman provides leadership to the Board and is responsible for governance and the
effective operations of the Board, the CEO/General Manager is responsible and accountable to
the Board to recommend the Company’s strategy and its subsequent implementation.
5.
Avoidance of conflicts of interest
In terms of the Code of Business Conduct and Ethics of PLC, each member of the Board has
a responsibility to determine whether he/she has a potential or actual conflict of interests
arising from personal relationships, external associations and interest in material matters which
may have a bearing on his/her independent judgment. Directors who have an interest in a
matter under discussion refrain from engaging themselves in the deliberations on that matter
and abstain from voting thereon. Such abstentions from decisions are duly recorded by the
In compliance with section
200 of the Companies Act
No. 2007, the Directors
have disclosed to the
Board their shareholding
in the Company and any
acquisitions or disposals
thereof.
Islamic Financial Services Unit | Annual Report 2013/14
Accordingly, the Directors’ individual shareholdings in the Company as at 31st March 2014 were
as follows,
Name
Mr. Gamini S. Senarath
Position
No. of Shares as at 31st
March 2014
Chairman
Nil
Mr. P. Kudabalage
Director
Nil
Mr. N. Vasantha Kumar
Director
1,000,000
Mr. P. A. I. S. Perera
Director
20,000
Mr. H. H. A. Chandrasiri
Director
Nil
7.
Senior Independent Director
In compliance with the requirements of Finance Companies (Corporate Governance) Direction
No. 3 of 2008, the Board of Directors of PLC has designated one of its members as the
Senior Independent Director with Board approved Terms of Reference. The role of the Senior
Independent Director is to act as a support to the Chairman, to be a point of contact for
shareholders to address their concerns and issues and to assist the other members of the Board
as a whole in resolving issues in periods of stress.
8.
Board Evaluation
In the last quarter of 2013/14, the Board carried out a comprehensive self-evaluation of its
performance and its committees. This process was led by the Chairman and supported by the
Company Secretary.
The assessment focused, inter-alia, on the Board’s effectiveness in the following areas:




contribution to the development, monitoring and implementation of the strategy;
contribution to ensuring robust and effective risk management;
quality of the relationships with the management, employees and shareholders;
its contribution to ensuring proper functioning of Board Sub-Committees.
Based on these findings of the above assessment, it is duly affirmed that the Board and its
committees operated effectively during the year under review.
9. Stakeholder Communications
Recognising the importance
of two-way communication
with its stakeholders,
PLC has adopted a
comprehensive policy that
governs communications
with its different
stakeholders which is based
on the following four guiding
principles:
 efficiency
transparency
clarity
 cultural awareness and
feedback
The Board places
considerable importance
to the maintenance of
constructive relationships
with shareholders and its
other stakeholders.
10.Accountability
The Board has the overall
responsibility for ensuring
that PLC maintains an
adequate system of
internal controls and risk
management and for
reviewing its effectiveness
47
Islamic Financial Services Unit | Annual Report 2013/14
Corporate Governance Contd.
and has delegated certain of
its functions to four subcommittees. These subcommittees are provided
with sufficient resources
enabling them to focus on
their designated areas of
responsibility and ensure
independent oversight.
11. Board Sub-
Committees
The Board has delegated
certain of its functions to
four of sub-committees
named below.
(I) Board Audit Committee
The Board Audit Committee,
on behalf of the Board,
undertakes the detailed
monitoring, inter alia, of the
“
following and reports to the
Board on its findings;
 integrity of the financial
information/financial
statements of the
Company, including its
interim management
statements and
any other formal
announcement
relating to its financial
performance;
 compliance with financial
reporting requirements,
information
requirements of the
Companies Act No. 07 of
2007 and other relevant
financial reporting
related regulations and
requirements; and
 internal controls and risk
Sub-committees are provided with
sufficient resources enabling them to focus
on their designated areas of responsibility
and ensure independent oversight.
“
48
management systems
ensuring the procedures
are adequate to meet
the requirements of
the Sri Lanka Auditing
Standards.
(II) Integrated Risk Management Committee
The Integrated Risk
Management Committee
(IRMC) reviews and
assesses the adequacy and
effectiveness of the risk
profile of the Company
including, credit, market,
liquidity, operational and
strategic risks, on a monthly
basis through appropriate
risk indicators. During the
year under review, the IRMC
reviewed and updated
the risk tolerance levels
for better monitoring and
evaluation.
(III) Remuneration
& Nomination Committee
The Committee operates
within the agreed Terms
of Reference and is
committed to the principles
of accountability and
transparency, and ensuring
that remuneration and
rewards are aligned
with performance. The
Committee has the authority
to discuss issues under
its purview and report
back to the Board with
recommendations, enabling
the Board to take a final
decision on the matter.
(IV)Related Party Transactions Review Committee
With the voluntary adoption
of the Code of Best
Practices on related party
transactions – December
2013 (‘the Code’) issued by
the Securities and Exchange
Commission of Sri Lanka, the
Related Party Transactions
Review Committee was
established to ensure strict
compliance with rules and
regulations governing
related party transactions
for listed entities and thus
improve its internal control
mechanisms. The purpose of
the Committee is to review in
advance all proposed related
Islamic Financial Services Unit | Annual Report 2013/14
party transactions other
than those transactions
explicitly exempted in the
Code.
C.MANAGEMENT
In order to ensure that
internal operations are
managed under the
guidance of the Board,
several cross-functional
committees are formed at
the management level of
PLC. Under the stewardship
and direction of the Board of
Directors, these committees
implement the policies and
strategies determined by
the Board and manage the
business and affairs of PLC
with the main objective of
improving on sustainable
growth.
D.INTERNAL CHARTERS
Internal charters and policies
of PLC are too designed
to support and maintain a
transparent and effective
internal control system,
institutionalisation of best
processes for governance,
management of risk and
compliance across the
organisation, including the
AIF unit.
1. Corporate Governance Charter
The Corporate Governance
Charter documented in
compliance with the Finance
Companies (Corporate
Governance) Directions,
Code of Best Practice on
Corporate Governance
issued jointly by the
Securities and Exchange
Commission of Sri Lanka
and The Institute of
Chartered Accountants of
Sri Lanka (1st July 2008) and
the Corporate Governance
Rules of the Colombo
Stock Exchange, clearly
sets out the procedures
and processes governing
the Board, management,
shareholders and other
stakeholders with the
objective of ensuring that
the highest principles of
corporate governance are
maintained across the
board.
2.
Code of Business Conduct and Ethics
Business ethics at PLC is not
limited to ethical behaviour,
but clearly articulates the
ethical principles embedded
in the Company’s ethos and
ensures that those principles
are fully integrated into the
entity’s management and
operations.
The Company has in place
a comprehensive Code of
Business Conduct & Ethics
(‘the Code’) applicable to
all Directors and employees
of the Company. The Code
has been circulated to all
the Directors and employees
and has been published in
the Company’s intranet to
ensure strict compliance
with same.
3.
Whistleblower Policy
PLC is committed to
promote ethical behaviour in
all its business activities and
has in place a mechanism of
reporting illegal or unethical
behaviour. To this end, the
Company’s whistleblower
policy enables the employees
to report violations of
laws, rules, regulations or
unethical conduct to the
Board Audit Committee.
Information routed through
the whistleblower channel
is verified carefully and
appropriate actions are
taken by the Committee.
The confidentiality of
those reporting violations
is maintained and they
are not subjected to any
discriminatory action. The
policy has been published
in all three languages in the
Company’s intranet.
4.
IT Governance
PLC believes that
information technology
(IT) is a strategic asset and
forms an integral part of
the Company’s corporate
governance process. In this
context, PLC has recognised
the need to manage IT, so
as to leverage competitive
business benefits for the
Company. To achieve the
same, PLC maintains a wellestablished IT governance
structure, having policies at
the forefront.
49
50
Islamic Financial Services Unit | Annual Report 2013/14
Corporate Governance Contd.
Regular information security
audits are carried out to
ensure the confidentiality,
integrity and availability
of the system. Password
and access control policies
have been implemented
to authenticate the user
access and necessary
validation and verification
functions are activated at
the information entry level.
In addition, biometrics
controls have been installed
for the entrances of the ICT
department premises at the
Head Office and 24-hour
security is provided to the
disaster recovery site.
The Information
& Communication
Technology Department
was awarded the ISO/IEC
27001:2005 certification
by Det Norske Veritas
(DNV) for conforming
to the prestigious global
benchmark of the ISO/IEC
27001:2005 Information
Security Management
System Standard.
5.
Business Continuity Plan (BCP)
With a view of managing
operational risk due to
system failure, a Business
Continuity Plan (BCP)
has been established
in compliance with ISO
quality standards (ISO /
IEC 27001:2005 (E), Clause
A.14 Business Continuity
Management). The key
objective of BCP is to
allow the executive to
continue to manage
business operations under
adverse conditions, by the
introduction of appropriate
resilience strategies,
recovery objectives, business
continuity, operational risk
management considerations
and crisis management
plans.
As a step towards pre-crisis
preparation, the Company
has an off-site disaster
recovery site used for
business continuity.
6.
Disaster Recovery Plan (DRP)
The DRP mainly focuses on
the technical environment
and provides for the manner
in which continuity of IT
systems shall be achieved
in a disaster. A disaster
recovery site has been
established in a separate
geographical area which
has capabilities to continue
operations in the event of
primary site unavailability.
The disaster recovery site
and other facilities are
compliant with ISO/IEC
27001:2005 Information
Security Management
System Standard and it
is annually reviewed and
audited by external auditors.
E.INDEPENDENT GOVERNANCE ASSURANCE
PLC has implemented
several independent
mechanisms which act as
the supervisory module of
its corporate governance
framework and ensures
integrity of its operations
and existence of a sound
governance system.
1.Compliance
Recognising the importance
of strengthening governance
over internal controls, PLC
has established a separate
compliance function
whose task is to monitor
and assess the Company’s
compliance with laws,
regulations, regulatory
guidelines, internal controls
and approved policies on all
areas of business operations.
The Compliance Officer
reports to the Integrated
Risk Management
Committee on a quarterly
basis on compliance
activities relating to the
respective areas.
2.
Internal Audit
PLC’s internal audit
department which focuses
on providing an independent
risk based oversight to the
Board Audit Committee on
Islamic Financial Services Unit | Annual Report 2013/14
appropriateness, adequacy
and effectiveness of the
Company’s internal controls
which form an essential
part of a sound corporate
governance mechanism.
The internal audit
department is responsible
for independent, objective
assurance on internal control
mechanism, in order to
systematically evaluate
and propose improvements
for more effective internal
control processes and
governance. Internal audit
also carries out independent
reviews of compliance with
risk policies and procedures
to ensure the effectiveness
of risk management
procedures in place at PLC.
In addition to the audit at
the financial year end, PLC
performs an interim audit
to obtain assurance that the
internal controls that are in
place for the preparation
and presentation of the
financial statements are
adequate and effective.
The internal audit reports
directly to the Board Audit
Committee on a quarterly
basis.
3.
External Audit
External audit report enables
the Board with necessary
proof to determine the
M/s. Ernst & Young,
Chartered Accountants are
the external auditors of PLC
as well as its subsidiaries.
In addition to the normal
audit services, the external
auditors also provide certain
non-audit services to the
Group. All such services
have been provided with
the approval of the Board
Audit Committee and in a
manner to ensure that there
are no adverse effects on
the independence of their
audit work or the perception
of such independence.
The external auditors also
provide a certificate of
independence on an annual
basis.
M/s. Ernst & Young
Chartered Accountants were
re-appointed as auditors
of the Company by the
shareholders at the Annual
General Meeting held on
27th June 2014.
4. External Auditors’ Certification on Compliance
In terms of the requirements
of the Finance Companies
(Corporate Governance)
Directions, the external
auditors perform
procedures in line with
the Sri Lanka Standards
on Related Service 4750
(SLSRS 4750) issued by
the Institute of Chartered
Accountants of Sri Lanka,
to assess the Company’s
level of compliance to the
requirements of the said
Directions and provide a
certification thereon to the
Board.
The findings reported by
the external auditors for
the preceding year were
deliberated by the Board and
their recommendations for
further improvements were
implemented within the
financial year under review.
“The internal audit department
is responsible for independent,
objective assurance on internal
control mechanism
“
the processes and controls
within the Company and
the level of compliance with
laws and regulations plays a
vital role in the governance
structure of the Company.
51
52
Islamic Financial Services Unit | Annual Report 2013/14
Risk Management
1.Overview
Islamic finance similar to
other finance businesses
is exposed to intense
competition and hence is
compelled to encounter
various types of financial,
non-financial, systematic
and unsystematic risks.
Therefore, it is vital to focus
on the unit separately with
the objective of enhancing
the shareholder value by
balancing the risk and
reward trade-off. The risk
management approach
of PLC will be similarly
applicable to the AIF unit.
This report will discuss the
common risk management
approach specifically
focusing on the AIF unit.
2. Risk Management Framework
The AIF unit being a
strategic division of PLC
comes under the purview of
the overall risk management
framework of the Company.
The risk framework
encompasses three elements
namely risk governance, risk
management process and day to day risk management at the branch level operations.
Risk
Governance
Risk
Management
Process
Risk
Management
at Branch
Level
2.1 Risk Governance
Key elements of the risk governance structure have been explained focusing on direct
applicability to the Islamic finance unit.
Level
Committee
Main functionality
Board Level
Integrated Risk Management
Committee (IRMC)
IRMC with the authority delegated
by the Board assesses the risk profile
of PLC and its subsidiaries. Islamic
borrowing and lending product
performance details are also reported
to the IRMC for the Committee’s review.
Management
Level
Senior Management
Committee (SMC)
SMC engages in policy decisions related
to overall operations including Islamic
finance. SMC also reviews the status of
system improvement decisions related
to the AIF unit.
Management
Level
Asset & Liability Management
Committee (ALCO)
ALCO plays a vital role in the risk
governance structure including
reviewing and monitoring the market
risk and liquidity risk.
Islamic Financial Services Unit | Annual Report 2013/14
2.2 Risk Management Process
The essential functions of risk management are to identify, assess, treat, monitor and report the
risk profile of the unit on a regular basis.
Risk
Management
Process
Risk
Treat
me
nt
Risk
in
e
R port g
I
Ass R
es
isk ment
s
Risk ation
fic
nti
de
Risk
Monitoring
Process element
Description
Risk Identification
Identifying risks or broad range of potential events that could
undermine the desired objectives of the AIF unit. This is supported by
quantitative and qualitative techniques.
Risk Assessment
This includes implementing measurement tools, quantification and
evaluation of identified risks or events and analyse against the related
objectives which may be affected.
Risk Treatment
Based on the risk assessment, establishing key control processes and
practices, including limit structures as necessary to minimise the risk
impact.
Risk Monitoring
Risk monitoring within day-to -day risk management process and higher
level monitoring at the senior management level, taking the established
risk limits into consideration.
Risk Reporting
The results of monitoring are reported to IRMC and to the relevant
members of the executive management for their review.
Day-to-Day Risk
Management
The day-to-day risk
management is the
responsibility of the business
units, while risk department
of PLC along with IRMC,
SMC and ALCO develop the
structure, policies, tools and
methodologies to identify,
measure, monitor and
control the various risks.
Internal audit complements
this structure by providing
independent assurance
of the overall efficiency
and effectiveness of risk
management.
53
Islamic Financial Services Unit | Annual Report 2013/14
Risk Management Contd.
3.0 Risk Profile
The risks that the AIF Unit faces can be mainly divided into
financial and non-financial risks. Financial risk can be further
sub-divided into credit risk, market risk and liquidity risk. Nonfinancial risks inter alia, include operational risk, strategic risk,
and non-Shari’ah compliance risk. The nature of those risks is
discussed below.
regularly for individual problem credits and follow-up actions
are taken to minimise the negative impact.
NPA Ratio throughout the year
%
4.00
3.00
2.00
Mar-14
Jan-14
Feb-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Aug-13
ALCO regularly meets to assess the market risk using variety
of market risk measurement tools and the internal reporting
system is in placed to provide required detail information.
ALCO analyses the maturity profile of assets and liabilities of
AIF unit and reviews monthly lending, borrowing rates and
competitor behaviour. The ALCO reports to the IRMC which
assesses factors affecting the market risk, and in response
implement necessary policy changes.
Net Financing Margin
%
8.00
6.00
4.00
Mar-14
Jan-14
Feb-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
2.00
0.00
Aug-13
Liqu
id
Ris ity
k
Credit risk arises when the counter-party fails to meet its
obligations timely and fully in accordance with the agreed
terms. Clearly outlined common credit risk strategies are
available, indicating the unit’s willingness to grant credit
to different sectors, geographical locations, maturity and
profitability. Well defined credit-granting criteria enable
comprehensive assessment of credit risk of the borrower or
counter-party to minimise the problem credits. The credit
risk inherent in all of the assets and activities are regularly
reviewed and monitored at the business unit level as well as
the senior management level. Credit portfolio is monitored
3.2 Market Risk
Jun-13
Market
Risk
Co
3.1 Credit Risk
nancial Risk
Non-Fi
s
Risk Profile of
Islamic Finance
Unit
Strategic
Risk
Financial Risk
0.00
l
dit
Cre isk
R
Jun-13
1.00
Oper
ati
Risk ona
i’ah
har Risk
n-S
e
No plianc
m
54
Islamic Financial Services Unit | Annual Report 2013/14
3.4 Operational Risk
Operational risk
encompasses the loss
resulting from inadequate
or failed internal processes,
people and systems or from
external events. Sound
internal control mechanism
has been established
within PLC to minimise the
3.5 Strategic Risk
Strategic risk can be defined
as the current or prospective
risk to earnings and capital
arising from changes in
the business environment
and from adverse business
decisions, improper
implementation of decisions
or lack of responsiveness
to changes in the business
environment. The senior managers meet on a weekly basis
to brainstorm, to share their experiences and knowledge on
the market, industry and competitor behavior. A market and
competitor analysis is carried out to implement policies and
to review business strategy in an attempt to minimise the
strategic risk.
ROA & ROE
%
%
5
3.6 Non-Shari’ah Compliance Risk
Feb-14
Mar-14
Jan-14
Dec-13
Oct-13
Nov-13
0
Sep-13
60.00
40.00
20.00
0.00
20.00
40.00
60.00
80.00
Aug-13
operational risk. IT driven
system controls ensure the
adherence to procedures at
different levels, segregation
of duties and escalation of
transactions to required
authority levels to minimise
the operational risk of the
transaction. The Internal
Audit division of PLC
provides an independent
risk based oversight to the
Board Audit Committee on
the processes and controls
that help to mitigate major
weaknesses. Internal Audit
carried out independent
reviews in compliance with
risk policies and procedures
to ensure effectiveness
of risk management
procedures.
Jul-13
Liquidity risk arises when
the Company does not have
sufficient financial resources
to meet its obligations as
and when they are due or
will have to do so at an
excessive cost. The essence
of liquidity management
is in the trade-off between
liquidity and profitability
and mismatch between
demand and supply of liquid
assets. Treasury division of
PLC centrally assesses the
liquidity position regularly
by analysing the reports
of maturity gap analysis,
movements of the deposit
base and availability of
unutilised funding lines with
the objective of minimising
the liquidity risk.
Jun-13
3.3 Liquidity Risk
ROE
ROA
-5
This risk arises from the failure to comply with the Shari’ah
rules and principles. Non- compliance could lead to
reputational damage, which could have a material adverse
effect on the Company’s Islamic business operations. The AIF
unit ensures the compliance on the Shari’ah requirements
applicable throughout in its activities, products and services to
avoid any non-compliances.
55
Shari’ah Audit Report
Shari’ah Supervisory Board
Islamic Financial Services Unit - People’s Leasing & Finance PLC
Report of Shari’ah Supervisory Board
With the name of Allah, the All Merciful, the Very Merciful
To the Shareholders of the People’s Leasing & Finance PLC - Islamic Financial Services Unit,
We have reviewed the principles and contracts relating to the transactions and applications introduced by the People’s Leasing & Finance PLC - Islamic Financial
Services Unit during the period ended 31st March 2014.
We have also conducted our review to form an opinion as to whether the People’s Leasing & Finance PLC - Islamic Financial Services Unit has complied with the
Shari’ah Rules and Principles and also with the specific Fatwas, rulings and guidelines issued by us.
The Management of the People’s Leasing & Finance PLC - Islamic Financial Services Unit is responsible for ensuring that it conducts its business in accordance with
the Islamic Shari’ah Rules and Principles. It is our responsibility to form an independent opinion, based on our review of the operations of the People’s Leasing &
Finance PLC - Islamic Financial Services Unit and to report to you.
We conducted our review which included examining, on a test basis of each type of transaction, the relevant documentation and procedures adopted by the
People’s Leasing & Finance PLC - Islamic Financial Services Unit. We planned and performed our review so as to obtain all the information and explanation which
we considered necessary, in order to provide us with sufficient evidence to give reasonable assurance that the People’s Leasing & Finance PLC - Islamic Financial
Services Unit has not violated Islamic Shari’ah Rules and Principles.
In our opinion:
1. The contracts, transactions and dealings entered into by the People’s Leasing & Finance PLC - Islamic Financial Services Unit during the year ended 31st March
2014 that we reviewed, are in compliance with the Islamic Shari’ah Rules and Principles, and
2. The allocation of profits and charging of losses relating to investments accounts conform to the basis that had been approved by us in accordance with the
Islamic Shari’ah Rules and Principles.
However, few observations have been forwarded by us to the Management of the People’s Leasing & Finance PLC - Islamic Financial Services Unit and the
Management is advised to act accordingly.
We beg Allah the Almighty to grant us all the success and straight–forwardness.
Ash-Shaikh M. I. M. Rizwe (Mufti)
Ash-Shaikh M. H. M. Yusuf (Mufti)
Ash-Shaikh H. Abdul Nazar.
Ash-Shaikh F. Fazil Farook.
Islamic Financial Services Unit | Annual Report 2013/14
Financial Information
Content
Independent Auditor’s Report
Statement of Comprehensive Income
Statement of Financial Position
Notes to the Financial Statements
59
60
61
62
57
58
Islamic Financial Services Unit | Annual Report 2013/14
Islamic Financial Services Unit | Annual Report 2013/14
Independent Auditor’s Report
Report on the Special
Purpose Financial
Statements
We have audited the
accompanying special
purpose financial
statements of the Islamic
Financial Services Unit of
People’s Leasing & Finance
PLC (“IFSU”) which comprise
the statements of financial
position as of 31 March
2014, and the statement of
comprehensive income for
the year then ended and
summary of accounting
policies and other notes.
Management’s
Responsibility for the
Financial Statements
These special purpose
financial statements
are the responsibility of
People’s Leasing & Finance
PLC’s management. Our
responsibility is to express
an opinion on these reports,
based on our audit.
Scope of Audit and Basis of
Opinion
We conducted our audit in
accordance with Sri Lanka
Auditing Standards. Those
Standards require that
we plan and perform the
audit to obtain reasonable
assurance about whether
the special purpose
financial statements of the
IFSU are free of material
misstatement. Our audit
includes examining, on a test
basis, evidence supporting
the amounts and disclosures
in the special purpose
financial statements of
the IFSU. An audit also
includes assessing the
accounting policies used
and significant estimates
made by management,
as well as evaluating the
overall presentation of the
special purpose financial
statements. We believe
that our audit provides a
reasonable basis for our
opinion.
Opinion
In our opinion, the
special purpose financial
statements give a true and
fair view of the financial
position of the IFSU as of 31
March 2014 and the results
of its operations for the year
then ended, in accordance
with the accounting
policies of these financial
statements.
25th September 2014
Colombo
59
60
Islamic Financial Services Unit | Annual Report 2013/14
Statement of Comprehensive Income
For the year ended 31st March
20142013
Note Rs.Rs.
Gross income
810,175,346839,117,420
Income from Islamic credit
771,277,954811,447,138
Less -Profit paid to investors
467,428,922612,126,511
Net income5
303,849,032199,320,627
Net fee and commission income
6
36,183,39227,670,282
Other operating income
2,714,000Total operating income
342,746,424226,990,909
Less: Impairment charges for loans and losses
7
5,761,1707,785,841
Net operating income
336,985,254219,205,068
Less:
Personnel expenses
8
46,826,92828,949,790
Depreciation of property, plant and equipment
5,428,3054,357,290
Other operating expenses
9
45,986,75829,230,513
Total operating expenses
98,241,99162,537,593
Operating profit before value added tax (VAT)
238,743,263156,667,475
Less :Value added tax (VAT) on financial services
16,508,07021,479
Operating profit after value added tax (VAT)
222,235,193156,645,996
Less : Income tax expense
10
63,981,51245,098,382
Profit for the year
158,253,681111,547,614
Other comprehensive income for the year
-Total comprehensive income for the year
158,253,681111,547,614
Notes on pages 62 to 78 form an integral part of these Special Purpose Financial Statements.
Further, this should be read in conjunction with notes of the primary set of Financial Statements issued by People's Leasing &
Finance PLC, for the year ended 31st March 2014, which form an integral part of these Special Purpose Financial Statements.
Islamic Financial Services Unit | Annual Report 2013/14
Statement of Financial Position
As at 31st March
20142013
Note Rs.Rs.
Assets
Cash and cash equivalents
11
40,079,830106,554,667
Loans and receivables
12
4,092,480,2494,630,833,706
Property, plant and equipment
13
12,591,60810,257,805
Other assets
14
1,132,522,97298,525,533
Total assets
5,277,674,6594,846,171,711
Liabilities
Due to banks
15
2,193,949,413990,447,166
Due to customers
16
2,393,277,1281,981,894,598
Other financial liabilities
17
55,395,8111,315,194,255
Other liabilities
18
84,835,070233,534,272
Total liabilities
4,727,457,4224,521,070,291
Equity
Retained earnings
550,217,237325,101,420
Total equity
550,217,237325,101,420
Total liabilities and equity
5,277,674,6594,846,171,711
Notes on pages 62 to 78 form an integral part of these Special Purpose Financial Statements.
Further, this should be read in conjunction with notes of the primary set of financial statements issued by People's Leasing & Finance PLC, for the year ended
31st March 2014, which form an integral part of these Special Purpose Financial Statements.
K.S. Bandaranayake
Chief Financial Officer
The Board of Directors is responsible for the preparation and presentation of these Special Purpose Financial Statements.
Approved and signed for and on behalf of the Board
G.S. Senarath
Chairman
25th September 2014
Colombo
H.H.A. Chandrasiri
D.P. Kumarage
Director
Chief Executive Officer
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Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements
1.CORPORATE INFORMATION
1.1General
People’s Leasing & Finance
PLC (the ‘Company’) has
set up the Islamic Financial
Services unit in October
2005 in compliance with
Islamic Shari’ah Law. AlSafa unit is located at No
167, Union Place, Colombo
02.
The principal activities of
the Islamic financial services
unit are providing Islamic
financial services comprising
of Ijarah, Murabaha, BBA
(Bai Bithaman Ajil), issuing
Mudarabah investment
certificates and Wakalah.
2. BASIS OF PREPARATION
2.1 Statement of Compliance
The results of Islamic
financial services unit
and the financial position
of the Islamic financial
services unit form part of
the financial statements of
People’s Leasing & Finance
PLC which was prepared in
accordance with Sri Lanka
Accounting Standards
(SLFRS and LKAS), laid
down by the Institute of
Chartered Accountants of
Sri Lanka and in compliance
with the requirements of the
Companies Act No. 07 of
2007, the Finance Business
Act No. 42 of 2011 and the
Listing Rules of the Colombo
Stock Exchange and it was
authorised for issue by
the Board of Directors in
accordance with a resolution
of the Directors passed on
19th May 2014. Therefore,
the isolated Financial
Statements of the Islamic
financial services unit should
be read in conjunction with
the People’s Leasing &
Finance PLC’s primary set
of Financial Statements.
Statement of comprehensive
income, statements of
financial position and Notes
together are referred as
Special Purpose Financial
Statements.
2.1.1 Basis of Measurement
2.1.4 Presentation of Financial Statements
The financial statements
have been prepared on the
historical cost basis except
for financial instruments
that are measured at fair
value.
The assets and liabilities of
the Islamic Financial Services
Unit in the Statement
of Financial Position are
grouped by nature and listed
in an order that reflects
their relative liquidity and
maturity pattern.
2.1.2Responsibility for Financial Statements
The Board of Directors is
responsible for preparation
and presentation of these
Financial Statements of the
Islamic Financial Services
Unit as per the provision of
the Companies Act No. 07 of
2007 and SLFRS and LKAS.
2.1.5 Functional and Presentation Currency
2.1.3Approval of Financial Statements by the Board of Directors
2.1.6Materiality & Aggregation
The Financial Statements
of the Islamic Financial
Services Unit for the year
ended 31st March 2014
(including comparatives)
were approved and
authorised for issue on 25th
September 2014.
The financial statements
are presented in Sri Lanka
Rupees (Rs.), which is the
Group’s functional and
presentation currency.
In compliance with the Sri
Lanka Accounting Standard
- LKAS 01 on ‘Presentation
of Financial Statements’,
each material class of similar
items is presented separately
in the Financial Statements.
Items of dissimilar nature or
functions too are presented
separately, unless they are
immaterial.
Islamic Financial Services Unit | Annual Report 2013/14
2.1.7 Rounding
The amounts in the Financial
Statements have been
rounded-off to the nearest
Rupees, except where
otherwise indicated as
permitted by the Sri Lanka
Accounting Standard- LKAS
01 on ‘Presentation of
Financial Statements’.
2.1.8 Comparative Information
The accounting policies have
been consistently applied
by the Islamic Financial
Services Unit with those of
the previous financial year
in accordance with the Sri
Lanka Accounting Standard
- LKAS 01 on ‘Presentation
of Financial Statements’.
Comparative information
is reclassified wherever
necessary to comply with
the current presentation.
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the
Financial Statements of the
Islamic Financial Services
Unit in conformity with
SLFRS and LKAS requires
management to make
judgments, estimates and
assumptions that affect the
application of accounting
policies and the reported
amounts of assets, liabilities,
income and expenses.
Further, management is
also required to consider key
assumptions concerning the
future and other key sources
of estimation uncertainty at
the reporting date that have
significant risk of causing a
material adjustment to the
carrying amounts of assets
and liabilities within the
next financial year. Actual
results may differ from these
estimates.
Accounting judgments,
estimates and underlying
assumptions are reviewed on
an ongoing basis. Revisions
to accounting estimates
are recognised in the period
in which the estimates are
revised and in any future
periods affected.
The key significant
accounting judgments,
estimates and assumptions
involving uncertainty are
discussed below, whereas
the respective carrying
amounts of such assets
and liabilities are as given in
related Notes
4. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set
out below have been applied
consistently to all periods
presented in these financial
statements by the Islamic
Finance Service Unit.
4.1 Revenue Recognition
4.1.1Murabaha Income
The profits arising from
Murabaha transactions are
recognised at the time of
contracting if the sale is
for cash or on credit not
exceeding the financial
period.
Profit of a credit sale which
will be paid for either by
means of one payment due
after the current financial
period or by installments
over several future financial
periods are recognised so as
to yield a constant periodic
rate of return on the asset.
4.1.2 Ijarah Income
Profit arising from Ijarah
assets is recognised over
the term of the lease,
commencing from the
month in which the lease
is executed so as to yield a
constant periodic rate of
return on Ijarah assets.
4.1.3 Mudharabah Income
Profit arising from
Mudharabah Investments is
recognised in the accounting
period in which it is earned
at an agreed profit sharing
ratio. In the case of a loss,
the Mudharabah fund will
bear the entire capital loss
up to a maximum value
not exceeding its capital
investment provided that the
conditions stipulated under
the Mudharabah agreement
have been complied with.
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Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
4.1.4 Profit Payable to the Mudharabah Investors
Profit payable is recognised
on accrual basis and credited
to Investors account when
the profit is due on monthly,
quarterly, biannually and
annually.
Investors are awarded points
in terms of the value and
period of their investment in
Mudharabah operations on a
basis determined by the Fund
Manager from time to time.
If the Mudharabah operation
reports a profit that would
be distributed amongst
investors in proportion to the
number of points attributed
to individual investors. If
the Mudharabah operation
reports a loss, that loss
would have to be borne by
the investors in proportion
to the number of points
attributed to individual
investors. Profit distributed
is added to the investment
amount whilst losses
apportioned are deducted
from the investment
amount.
4.1.5 Expenditure Recognition
Expenses are recognised
in the Statement of
Comprehensive Income
on the basis of a direct
association between the cost
incurred and the earning of
specific items of income. All
expenditure incurred in the
running of the business and
in maintaining the Property,
plant and equipment in
a state of efficiency has
been charged to income in
arriving at the profit for the
year.
For the presentation
of Statement of
Comprehensive Income the
Directors are of the opinion
that the nature of expenses
method present fairly the
element of the Islamic
Financial Services Unit’s
performance, and hence
such presentation method is
adopted.
Value Added Tax on financial
services have been computed
at appropriate rates.
4.2 Financial Instruments
4.2.1Recognition and Initial measurement
The Islamic Financial
Services Unit initially
recognises receivables
from financing activities,
Mudharabah, debt securities
issued and subordinated
liabilities on the date at
which they are originated.
Regular way purchases and
sales of financial assets are
recognised on the trade
date at which the Islamic
Financial Services Unit
commits to purchase or sell
the asset.
4.1.6Taxation
All other financial assets
and liabilities are initially
recognised on the trade
date at which the Islamic
Financial Services Unit
becomes a party to the
contractual provisions of the
instrument.
For the purpose of these
special purpose financial
reports, Income Tax and
A financial asset or financial
liability is measured initially
at fair value plus, (For an item
not subsequently measured
at fair value through profit or
loss) transaction costs that
are directly attributable to its
acquisition or issue.
4.2.2 De-recognition
The Islamic Financial
Services Unit de-recognises
a financial asset when the
contractual rights to the
cash flows from the financial
asset expire, or when it
transfers the financial asset
in a transaction in which
substantially all the risks
and rewards of ownership
of the financial asset are
transferred or in which the
Islamic Financial Services
Unit neither transfers
nor retains substantially
all the risks and rewards
of ownership and it does
not retain control of
the financial asset. Any
installment in transferred
financial assets that qualify
for de-recognition that is
created or retained by the
Islamic Financial Services
Unit is recognised as a
separate asset or liability in
Islamic Financial Services Unit | Annual Report 2013/14
the statement of financial
position.
The Islamic Financial
Services Unit enters into
transactions whereby it
transfers assets recognised
on its statement of financial
position, but retains either
all or substantially all of
the risks and rewards of
the transferred assets or
a portion of them. If all or
substantially all risks and
rewards are retained, then
the transferred assets are not
de-recognised.
In transactions in which the
Islamic Financial Services
Unit neither retains nor
transfers substantially all
the risks and rewards of
ownership of a financial asset
and it retains control over the
asset, the Islamic Financial
Services Unit continues to
recognise the asset to the
extent of its continuing
involvement, determined
by the extent to which it is
exposed to changes in the
value of the transferred
asset.
In certain transactions, the
Islamic Financial Services
Unit retains the obligation
to service the transferred
financial asset for a fee.
The transferred asset is
de-recognised if it meets the
de-recognition criteria. An
asset or liability is recognised
for the servicing contract,
depending on whether the
servicing fee is more than
adequate (asset) or is less
than adequate (liability) for
performing the servicing.
asset and settle the liability
simultaneously.
The Islamic Financial Services
Unit de-recognises a financial
liability when its contractual
obligations are discharged or
cancelled or expired.
The amortised cost of a
financial asset or liability
is the amount at which the
financial asset or liability
is measured at initial
recognition, minus principal
repayments, plus or minus
the cumulative amortisation
using the effective profit
rate method of any
difference between the initial
amount recognised and the
maturity amount, minus any
reduction for impairment.
4.2.3 Offsetting
Financial assets and
liabilities are offset and
the net amount presented
in the statement of
financial position when,
and only when, the Islamic
Financial Services Unit has
a legal right to set off the
recognised amounts and it
intends either to settle on
a net basis or to realise the
Income and expenses are
presented on a net basis
only when permitted under
SLFRSs, or for gains and
losses arising from a Islamic
Financial Services Unit of
similar transactions such
as in the Islamic Finance
Service Unit's trading
activity.
4.2.4 Amortised cost Measurement
4.2.5 Fair value Measurement
Fair value is the amount
for which an asset could
be exchanged, or a
liability settled, between
knowledgeable, willing
parties in an arm's
length transaction on the
measurement date.
When available, the Islamic
Financial Services Unit
measures the fair value of
an instrument using quoted
prices in an active market
for that instrument. A
market is regarded as active
if quoted prices are readily
and regularly available
and represent actual and
regularly occurring market
transactions on an arm's
length basis.
4.2.6 Cash and Cash
Equivalents
Cash and cash equivalents
are defined as cash in hand,
demand deposits in banks
and short term highly liquid
investment, readily convertible
to known amounts of cash and
subject to insignificant risk of
change in value.
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Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
Cash and cash equivalents
are carried at amortised cost
in the statement of financial
position.
4.2.7 Receivables
Receivables are financial
assets with fixed or
determinable payments
that are not quoted in an
active market. Such assets
are recognised initially at
fair value plus any directly
attributable transaction
costs. Subsequent to initial
recognition receivables are
measured at amortised cost
using the effective profit
rate, less any impairment
losses.
Receivables comprise
receivables from Ijarah,
Murabaha and other
Receivables.
4.2.7.1 Ijarah receivables
The People’s Leasing &
Finance PLC –Islamic Financial
Services Unit buys and rents
out for a fee (Rental), the
asset required by the client.
The duration of the lease and
value of the rental is agreed
in advance. Ownership of the
asset will remain in the hands
of the Unit till the end of the
lease period. Ijarah receivables
include the aggregate of
the Ijarah Rental Receivable
and Ijarah Debtors, net of
unearned Ijarah income.
Receivable’’ and “ Murabaha
(BBA) receivable” and are
stated in the Statement
of Financial Position after
netting off the prepaid
rentals, unearned income
and the provision for
impairment.
Ijarah Rental Receivable
Gross rental receivable under
Ijarah transactions, which
are not yet fallen due have
been categorised under
Ijarah Rental Receivable.
4.2.7.3 Other Receivables
Unearned Ijarah income
Profits relating to the rentals
that are not yet fallen due
have been categorised under
Unearned Ijarah income.
4.2.8 Impairment of Financial Assets
4.2.7.2 Murabaha Receivable
(Trading/ BBA)
Trading Murabaha is sale
of goods at a prices which
includes a profit margin in
addition to the cost. BBA is a
sale of goods on a deferred
payment basis. Amounts
receivable under Trading
Murabaha and Murabaha
(BBA) are included under
“Trading Murabaha Rentals
Other Receivables are stated
at the amounts they are
estimated to realise net
of allowances for bad and
doubtful receivables.
Islamic Financial Services
Unit assesses at each
reporting date, whether
there is any objective
evidence that a financial
asset or a group of financial
assets are impaired. A
financial asset or a group of
financial assets is deemed
to be impaired if, and only if,
there is objective evidence
of impairment as a result
of one or more events that
have occurred after the
initial recognition of the
asset (an ‘incurred loss
event’) and that loss event
(or events) has an impact on
the estimated future cash
flows of the financial asset
or the group of financial
assets that can be reliably
estimated.
Loans and Receivables
Losses for impaired loans
are recognised promptly
when there is objective
evidence that impairment of
a loan or portfolio of loans
has occurred. Impairment
allowances are calculated
on individual and collective
basis. Impairment losses
are recorded as charges
to the Statement of
Comprehensive Income. The
carrying amount of impaired
loans on the Statement
of Financial Position is
reduced through the use
of impairment allowance
accounts. Losses expected
from future events are not
recognised.
Individually Assessed
Loans and Receivables
For all loans that are
considered individually
Islamic Financial Services Unit | Annual Report 2013/14
significant, the Islamic
Financial Services Unit
assesses on a case-by-case
basis at each reporting
date whether there is any
objective evidence that a
loan is impaired. The criteria
used to determine that there
is such objective evidence
include;
 known cash flow
difficulties experienced
by the borrower;
 past due contractual
payments of either
principal or Profit Share;
 breach of covenants or
conditions;
 the probability that
the borrower will enter
bankruptcy or other
financial realisation; and
 a significant
downgrading in credit
rating by an external
credit rating agency.
For those loans where
objective evidence of
impairment exists,
impairment losses are
determined considering the
following factors:
 Islamic Financial Services
Unit’s aggregate
exposure to the
customer;
 the viability of the
customer’s business
model and their capacity
to trade successfully out
of financial difficulties
and generate sufficient
cash flow to service debt
obligations;
 the amount and timing
of expected receipts and
recoveries;
 the extent of other
creditors’ commitments
ranking ahead of, or
pari-passu with, the
Islamic Financial Services
Unit’s and the likelihood
of other creditors
continuing to support
the Unit;
 the complexity of
determining the
aggregate amount and
ranking of all creditor
claims and the extent
to which legal and
insurance uncertainties
are evident;
 the realisable value
of security (or other
credit mitigates) and
likelihood of successful
repossession;
 the likely deduction of
any costs involved in
recovery of amounts
outstanding;
 the ability of the
borrower to obtain, and
make payments in, the
currency of the loan if
not denominated in local
currency; and
 the likely dividend
available on liquidation
or bankruptcy;
Impairment losses are
calculated by discounting
the expected future cash
flows of a loan at its original
effective Profit Share
ratio and comparing the
resultant present value with
the loan’s current carrying
amount. The impairment
allowances on individually
significant accounts are
reviewed more regularly
when circumstances
require. This normally
encompasses re-assessment
of the enforceability of
any collateral held and the
timing and amount of actual
and anticipated receipts.
Individually assessed
impairment allowances are
only released when there is
reasonable and objective
evidence of a reduction
in the established loss
estimate.
Collectively Assessed Loans
and Advances
Impairment is assessed
on a collective basis to
cover losses which have
been incurred but have
not yet been identified on
loans subject to individual
assessment.
Incurred but not yet
Identified Impairment
Individually assessed loans
for which no evidence of
loss has been specifically
identified on an individual
basis are grouped together
according to their credit
risk characteristics for the
purpose of calculating an
estimated collective loss.
This reflects impairment
losses that the group has
incurred as a result of
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Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
events occurring before
the reporting date, which
the Financial Services Unit
is not able to identify on
an individual loan basis,
and that can be reliably
estimated. These losses
will only be individually
identified in the future.
As soon as information
becomes available which
identifies losses on individual
loans within the group,
those loans are removed
from the group and assessed
on an individual basis for
impairment.
The collective impairment
allowance is determined
after taking into account;
 historical loss experience
in portfolios of similar
credit risk; and
management’s
experienced judgment
as to whether current
economic and credit
conditions are such
that the actual level of
inherent losses at the
reporting date is likely
to be greater or less
than that suggested by
historical experience.
Loans are grouped into
ranges according to the
number of days in arrears
and statistical analysis
is used to estimate the
likelihood that loans in each
range will progress through
the various stages of
delinquency, and ultimately
prove irrecoverable.
Current economic conditions
and portfolio risk factors
are also evaluated when
calculating the appropriate
level of allowance required
to cover the inherent loss.
These additional macro and
portfolio risk factors may
include:
 recent lending portfolio
growth and product mix,
 unemployment rates,
Gross Domestic
Production (GDP)
growth, inflation
 exchange rates, interest
rates
 changes in laws and
regulations
Write-off of Loans and
Advances
Loans (and the related
impairment allowance
accounts) are normally
written off, either partially
or in full, when there is
no realistic prospect of
recovery. Where loans are
secured, this is generally
after receipt of any proceeds
from the realisation of
security.
Renegotiated Loans
Where possible, the Islamic
Financial Services Unit seeks
to restructure loans rather
than to take possession of
collateral. This may involve
extending the payment
arrangements and the
agreement of new loan
conditions. Once the terms
have been renegotiated,
any impairment is measured
using the original EIR
as calculated before the
modification of terms
and the loan is no longer
considered past due.
Management continually
reviews renegotiated loans
to ensure that all criteria
are met and that future
payments are likely to
occur. The loans continue
to be subject to any criteria
are met and that future
payments are likely to occur.
The loans continue to be
subject to an individual
or collective impairment
assessment, calculated using
the loan’s original EIR.
Reversals of Impairment
If the amount of an
impairment loss decreases
in a subsequent period,
and the decrease can be
related objectively to an
event occurring after the
impairment was recognised,
the excess is written back
by reducing the loan
impairment allowance
account accordingly. The
write-back is recognised
in the Statement of
Comprehensive Income.
Islamic Financial Services Unit | Annual Report 2013/14
4.2.9 Financial Liabilities (Non- derivative)
The People’s Leasing &
Finance PLC – Islamic
Financial Services Unit
initially recognises
subordinated liabilities
on the date that they are
originated. All other financial
liabilities are recognised
initially on the trade date
at which Islamic Financial
Services Unit becomes a
party to the contractual
provisions of the instrument.
Islamic Financial Services
Unit de-recognises a
financial liability when its
contractual obligations are
discharged or cancelled or
expired.
Islamic Financial Services
Unit has non-derivative
financial liabilities such
as customers’ Accounts
and other payables. Such
financial liabilities are
recognised initially at fair
value plus any directly
attributable transaction
costs. Subsequent to initial
recognition, these financial
liabilities are measured at
amortised cost.
Customer Accounts
comprise following products.
Savings Accounts
Savings Account is a profit
earning account which
offers customer a way to
share profit distributions by
investing their savings in a
Sharia’ah compliant manner.
The Islamic Financial
Services Unit invests
deposited funds and shares
the profits between the
Islamic Financial Services
Unit and the customer based
on the Unit’s declared profit
ratio at the end of each
month following the concept
of Mudarabah.
Salient features:
 Profit sharing
 Minimum deposit
amount for individuals
Rs. 500
 Profit distributions on
monthly
General Investment
Accounts
General Investment Account
is a profit earning account
which offers customer a
way to share in Unit’s profit
distributions by investing
their money in a Sharia’ah
compliant manner based on
Mudarabah concept.
Islamic Financial Services
Unit invests deposited
funds and shares the
profits between the Islamic
Financial Services Unit and
the customer based on the
Unit’s declared profit rate at
the end of each month and
paid on maturity date.
Salient features:
 Profit sharing
 Profit distribution at
maturity
 Flexible investment
periods from 3, 6, 9 & 12
months
 Minimum deposit
amount for customers
Rs. 10,000
4.3 Property, Plant and Equipment
4.3.1 Recognition and Measurement
The Property Plant and
Equipment are recorded
at cost less accumulated
depreciation and impairment
losses as set out below.
Items of property, plant and
equipment are derecognised
upon disposal or when no
future economic benefits
are expected from its use.
Any gain or loss arising on
derecognition of the assets
is included in the income
statement in the year the
assets are derecognised.
The cost of property, plant
and equipment is the cost
of purchase or construction
together with any expenses
incurred in bringing the
assets to its working
condition for its intended
use.
Expenditure incurred for
the purpose of acquiring,
extending or improving
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Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
assets of permanent
nature by means of which
to carry on the businesses
or to increase the earning
capacity of the business
has been treated as capital
expenditure.
4.3.2 Subsequent Costs/ Replacement of Parts
The cost of replacing part of
an item of property, plant
and equipment is recognised
in the carrying amount of
the item if it is probable that
the future economic benefits
embodied within the part will
flow to the Unit and its cost
can be measured reliably.
The carrying amount of
those parts that are replaced
is derecognised. The costs
of the day–to-day servicing
of property, plant and
equipment are recognised in
profit or loss as incurred.
4.3.3 Depreciation
Depreciation on property,
plant and equipment has
been provided on straight –
line basis over the periods
appropriate to estimated
useful lives of the different
types of property, plant
and equipment as shown as
below:
Motor vehicles
Computer
equipment
Office furniture
and equipment
Name boards
5 Years
5 Years
5 Years
5 Years
4.4 Liabilities and Provisions
4.4.1 Provisions
Provisions are recognised
when the Islamic Financial
Services Unit has a present
obligation (legal or
constructive ) as a result
of a past event, where 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.
4.4.2 Mudharabah Investments
Mudharabah is an
investment partnership,
whereby the investor
provides capital to the
entrepreneur in order to
undertake the business or
investment activities while
the profits are shared on a
pre-agreed ratio, losses are
borne by the investor.
applies to classification and
measurement of financial
assets and liabilities as
defined in LKAS 39. SLFRS
9 was issued in 2012 and
effective date of this
standard has been deferred
until further notice.
Profits allocated to the
Mudharabah fund are being
distributed between Islamic
Financial Services Unit as
Fund Manager and the
investors on a pre-agreed
ratio.
SLFRS 13 - Fair Value
Measurement
SLFRS 13 establishes a
single source of guidance
under SLFRS for all fair
value measurements. SLFRS
13 does not change when
an entity is required to
use fair value, but rather
provides guidance on how
to measure fair value under
SLFRS when fair value is
required or permitted. Use of
principles of measurement
in this standard is currently
encouraged.
4.5 STANDARDS ISSUED BUT NOT YET EFFECTIVE
The following Sri Lanka
Accounting Standards were
issued by the Institute of
Chartered Accountants of
Sri Lanka and is effective for
the periods commencing on
or after 1st January 2014.
SLFRS 9 - Financial
Instruments: Classification
and Measurement
SLFRS 9, as issued, reflects
the first phase of work on
replacement of LKAS 39 and
Pending the completion of
full study of this standard,
the financial impact is not
yet known and reasonably
estimable.
Islamic Financial Services Unit | Annual Report 2013/14
Year ended 31st March
20142013
Rs.Rs.
5.NET INCOME
Income from Islamic credit
Profit margin - Ijarah
315,630,890381,795,478
Profit margin - BBA
339,330,219329,330,725
Profit margin - Murabaha
116,316,845100,320,935
Total income
771,277,954811,447,138
Profit paid to investors
Profit distribution on savings deposits
10,493,2874,714,045
Profit distribution on short term loan - Outsiders
255,772,415237,520,237
Profit distribution on Wakala
113,518,026174,464,089
Profit distribution on Wakala - PLC
87,645,194195,428,140
Total expenses
467,428,922612,126,511
Net income303,849,032199,320,627
6.NET FEE AND COMMISSION INCOME
Insurance commission
8,127,33115,059,395
Other fees recovered
28,056,06112,610,887
Fee and commission income
36,183,39227,670,282
7.IMPAIRMENT CHARGES FOR LOANS AND OTHER LOSSES
Impairment on Ijarah
2,484,067(1,238,738)
Impairment on BBA
7,606,4539,079,548
Impairment on Murabaha
(4,329,350)(54,969)
Total
5,761,1707,785,841
8. PERSONNEL EXPENSES
Remuneration42,945,30826,367,735
Contributions to defined contribution plans
3,125,9232,135,555
Defined benefit plan - Gratuity
755,697446,500
Total46,826,92828,949,790
71
72
Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
Year ended 31st March
20142013
Rs.Rs.
9. OTHER OPERATING EXPENSES
Auditors' remunerations
400,000Professional fees
1,589,0003,091,145
Advertising
85,3501,640,978
Legal fees
39,75012,500
Office administration and establishment expenses
43,872,65824,485,890
45,986,75829,230,513
10.INCOME TAX EXPENSES
10.1 Income tax expense
Income Statement
Current income tax charge
63,981,51245,098,382
Income tax expense recognised in income statement
63,981,51245,098,382
Statement of Comprehensive Income
Current income tax charge
Income tax charge/(reversal) recognised in Other Comprehensive Income
Effective tax rate
--28%
28%
Income Tax is provided at 28% of the taxable profits computed in accordance with the Inland Revenue Act No 10 of 2006 (and
amendments thereto)
Islamic Financial Services Unit | Annual Report 2013/14
Year ended 31st March
20142013
Rs.Rs.
10.2Reconciliation of accounting profit and taxable income
Profit as per income statement
222,235,193156,645,996
Add: Disallowable expenses
-Add: Lease capital recoverable
-Less: Allowable expenses
-Exempted /allowable income
-Statutory income
222,235,193156,645,996
Less: Tax loss set off
-Assessable income
222,235,193156,645,996
Taxable income
222,235,193156,645,996
At the effective income tax
63,981,51245,098,382
(Over)/ under provision- previous years
-Current tax on profits for the year
63,981,51245,098,382
Tax expense for the period
63,981,51245,098,382
The applicable income tax rate of People's Leasing & Finance PLC is 28%.
11.CASH AND CASH EQUIVALENTS
Cash in hand
1,322,044129,843
Current account with banks
32,327,36811,896,113
Savings account with banks
6,430,41894,528,711
Total
40,079,830106,554,667
12.LOANS AND RECEIVABLES
Loans and receivables (Note 12.1) 4,136,682,5864,669,274,873
Less:
Individual impairment charges (Note 12.2)
9,943,15420,606,647
Collective impairment charges (Note 12.2)
34,259,18317,834,520
Net loans and receivables
4,092,480,2494,630,833,706
73
74
Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
Year ended 31st March
20142013
Rs.Rs.
12.1Analysis
12.1.1
Analysis by product
Ijhara receivables
1,734,016,8102,217,731,726
Trading murabaha receivables
553,426,084604,939,553
BBA receivables
1,849,239,6921,838,242,032
Staff loans
-8,361,562
Gross total
4,136,682,5864,669,274,873
12.2 Movement in Individual and collective impairment charges during the year Impairment allowance for loans and advances to customers
A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows:
Ijara
BBA
Trading Total
Murabaha
Rs.Rs.Rs.Rs.
At 1st April 2012 6,426,095 7,205,318 17,023,91430,655,327
Charge/(Reversal) for the year
(1,238,738)
9,079,547
(54,969)
7,785,840
Amounts written off
-
-
-
At 31st March 2013 5,187,35716,284,86516,968,945 38,441,167
Individual impairment
-
7,163,493
13,443,154
20,606,647
Collective impairment
5,187,357
9,121,372
3,525,791
17,834,520
5,187,35716,284,86516,968,945 38,441,167
Islamic Financial Services Unit | Annual Report 2013/14
75
Ijara
BBA
Trading Total
Murabaha
Rs.Rs.Rs.Rs.
At 1st April 2013 5,187,35716,284,86516,968,945 38,441,167
Charge/(Reversal) for the year
2,484,067
7,606,453
(4,329,350)
5,761,170
Amounts written off
-
-
-
At 31st March 2014 7,671,424 23,891,318 12,639,59544,202,337
Individual impairment
-
-9,943,1549,943,154
Collective impairment
7,671,424
23,891,318
2,696,441
34,259,183
7,671,424 23,891,318 12,639,59544,202,337
Year ended 31st March
13. PROPERTY, PLANT AND EQUIPMENT
2013/14 (Current year)
Cost/fair value
Opening balance at 01.04.2013
Additions
Disposals
Closing balance at 31.03.2014
(Less): Accumulated depreciation
Opening balance at 01.04.2013
Additions
Disposals
Closing balance at 31.03.2014
(Less): Impairment charges
Net book value at 31.03.2014
Name
Computer
Office
Furniture
Boards
Hardware
Equipment
and Fittings
Total
Rs.Rs.Rs.Rs.Rs.
-
8,349,971
7,689,076
4,898,715
20,937,762
1,548,150 2,275,514 1,715,7072,222,7377,762,108
----1,548,150 10,625,485 9,404,783 7,121,45228,699,870
-
4,270,092
3,270,076
3,139,789
10,679,957
184,422 1,367,8672,363,650 1,512,3665,428,305
----184,422 5,637,959 5,633,726 4,652,15516,108,262
----1,363,728 4,987,526 3,771,057 2,469,29712,591,608
76
Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
Year ended 31st March
13. PROPERTY, PLANT AND EQUIPMENT Contd.
2012/13 (Previous year)
Cost/fair value
Opening balance at 01.04.2012
Additions
Disposals
Closing balance at 31.03.2013
(Less): Accumulated depreciation
Opening balance at 01.04.2012
Charge for the year
Disposals
Closing balance at 31.03.2013
(Less): Impairment charges
Net book value at 31.03.2013
Name
Computer
Office
Furniture
Boards
Hardware
Equipment
and Fittings
Total
Rs.Rs.Rs.Rs.Rs.
1,343,025
6,977,905
6,709,358
4,433,093
19,463,380
-1,372,066 979,718 465,6222,817,407
(1,343,025)---
(1,343,025)
- 8,349,971 7,689,076 4,898,71520,937,762
332,849
2,517,038
1,768,872
2,036,757
6,655,517
-
1,753,054
1,501,204
1,103,032
4,357,290
(332,849)---
(332,849)
- 4,270,092 3,270,076 3,139,78910,679,957
----- 4,079,879 4,419,000 1,758,92610,257,805
Year ended 31st March
20142013
Rs.Rs.
14. OTHER ASSETS
Advance payments
6,582,2617,511,987
VAT recoverable
5,582,759102,169,251
Current account with Islamic Unit
800,556,083(431,635)
Current account with People's Leasing & Finance PLC
319,801,869(10,724,070)
Total
1,132,522,97298,525,533
15.DUE TO BANKS
Overdraft
1,231,602,81048,363,838
Wakala loan investment
962,346,603942,083,328
Total2,193,949,413990,447,166
Islamic Financial Services Unit | Annual Report 2013/14
Year ended 31st March
20142013
Rs.Rs.
16.DUE TO CUSTOMERS
Mudharabah investment
2,232,822,8111,837,705,150
Islamic savings deposits
157,338,018143,936,768
Minor savings deposits
10,550100
Savings deposits
3,105,749252,580
Total
2,393,277,1281,981,894,598
17. OTHER FINANCIAL LIABILITIES
Short term loans
55,395,8111,315,194,255
55,395,8111,315,194,255
18. OTHER LIABILITIES
Insurance payable
19,751,93717,877,146
Retirement benefit obligations (Note 17.1)
1,070,748638,500
Charity fund payable
28,499,91040,817,569
Other liabilities
35,512,475174,201,057
Total
84,835,070233,534,272
18.1 Retirement Benefit Obligations
At the beginning of the year
Charge for the period
Benefits paid
At the end of the year
638,500192,000
755,697446,500
(323,449)1,070,748638,500
77
78
Islamic Financial Services Unit | Annual Report 2013/14
Notes to the Financial Statements Contd.
19. RELATED PARTY DISCLOSURE
19.1 Transactions with Key Management Personnel
As per the Sri Lanka Accounting Standard (LKAS -24 ) - “Related Party Disclosures”, the KMPs include those who are having
authority and responsibility for planning, directing and controlling the activities of the Islamic Financial Services Unit. Accordingly,
the Board of Directors and members of the Corporate Management of the Company have been classified as KMPs of the Unit.
There were no transactions with Key Management Personnel during the year.
20.EVENTS OCCURRING AFTER THE REPORTING DATE
There were no other material events occurring after the reporting date that require adjustments to or disclosure in the special
purpose financial statements.
21.COMMITMENTS
There are no material capital commitments as at the reporting date.
22.CONTINGENCIES
There are no material contingent liabilities outstanding as at the reporting date, which require adjustments to or disclosure in the
special purpose financial statements.
Islamic Financial Services Unit | Annual Report 2013/14
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Islamic Financial Services Unit | Annual Report 2013/14
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Corporate Information
Name of Company
People’s Leasing & Finance PLC
(Subsidiary of People’s Bank)
Legal Form
Public Limited Liability
Company (Incorporated and
domiciled in Sri Lanka)
Date of Incorporation
22nd August 1995
Date of Commencement
of Islamic Finance
10th October 2005
Company Registration
Number
PB 647 PQ
Accounting Year-end
March 31
Stock Exchange Listing
The Ordinary shares of the
Company were quoted on the
Main Board of the Colombo
Stock Exchange (CSE) on 24th
November 2011.
Registered Office
& Principle Place of
Business
1161, Maradana Road, Borella
Colombo 08, Sri Lanka.
Postal Code: 00200
Telephone +94 11 2631631
Fax +94 11 2631980/81
Email: [email protected]
Web Address: www.plc.lk
Company Secretary
Mr. Rohan Pathirage
Registrars
SSP Corporate Services (Pvt) Ltd
No. 101, Inner Flower Road,
Colombo 03, Sri Lanka.
Telephone: +94 11 2573894,
+94 11 2576871
Fax: +94 11 2573609
E-mail: [email protected]
Auditors
M/s. Ernst & Young
Chartered Accountants,
201, De Saram Place,
P.O. Box 101,
Colombo 10,
Sri Lanka.
Bankers
People’s Bank
Tax Payer Identity
Number (TIN)
114 156396 0000
Branch Offices
Dehiwala- Alsafa, Kalmunai,
Kandy – Alsafa, Kattankudy,
Mutur, Puttalam, Union Place,
VAT Registration
Number
114 156396 7000
Board of Directors
Mr. Gamini Senarath- Chairman
Mr. P. Kudabalage
Mr. N. Vasantha Kumar
Mr. P.A.I.S. Perera
Mr. H.H. Anura Chandrasiri
Shari’ah Supervisory
Board
Ash-Shaikh M I M Rizwe (Mufti)
Ash-Shaikh M H M Yusuf (Mufti)
Ash-Shaikh H. Abdul Nazar
Ash-Shaikh Fazil M. Farook
Central Bank
Registration Number
046 (Under the Finance
Business Act No.42 of 2011)
Credit Rating
‘AA-‘ (lka) stable by Fitch
Ratings Lanka Limited
‘B+/B’ stable by Standard
& Poor’s Rating Services
‘B+’ stable by Fitch Ratings
International
Management Team
Mr. D.P. Kumarage – CEO
Mr. Rohan Tennakoon – DGM
-Business Development & Islamic
Finance
Mr. Prabath Gunasena – AGM-ICT
Mr. Udesh Gunawardena – AGMInternal Audit
Mr. Uresh Jayasekara – Chief
Manager-HR
Mr. Omal Sumanasiri – Senior
Manager-Finance
Design & Concept by: Optima Designs (Pvt) Ltd.
Printed by: Printel (Pvt) Ltd.
As One…
Islamic Financial Services Unit | Annual Report 2013/14