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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 1 2 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. 3 4 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. 5 6 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 7 8 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 9 10 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, 11 12 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 13 14 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 15 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. 17 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 19 20 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. 21 22 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 24 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. 25 26 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. 27 28 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 29 30 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 32 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. 33 34 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 61 62 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. 63 64 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. 65 66 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 67 68 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 69 70 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. 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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