ANNUAL REPORT 2011 VISION, MISSION & VALUES INFORMATION CORPORATE CHAIRMAN’S MESSAGE REPORT DIRECTORS’ CEO’S MESSAGE STATEMENTS FINANCIAL
Contents
01 Vision & Mission 3 02 Values 3 03 Corporate Information 5 04 Board of Directors 6 05 Management Team 10 06 Chairman's Message 12 07 Directors’ Report to the Shareholders 15 08 Message from the President & CEO 27 09 Shari'ah Rating 28 10 Shari’ah Division 29 11 Shari’ah Advisor's Report 30 12 Notice of 6th Annual General Meeting 34 13 Statement of Compliance with the Best Practices of Code of Corporate Governance 36 14 Auditors' Review Report to the Members on Statement of Compliance with the Best Practices of the Code of Corporate Governance 38 15 Statement of Internal Controls 39 16 Auditors' Report to the Members 41 17 Financial Statements 45 18 Pattern of Shareholdings 106 19 Branch Network 108 20 Proxy Form Purity Purity encompasses essential business values for Islamic banking such as purity of return and truthfulness of character / actions Burj Bank Limited 03 (Formerly Dawood Islamic Bank Limited)
Vision To be the Islamic Bank of Choice. Mission Provide innovative and efficient Islamic banking solutions to exceed customer expectations and optimize shareholder value.
Defining Values
Values that define our culture, our business, our processes and who we are.
Purity Purity encompasses essential business values for Islamic banking such as purity of return and truthfulness of character / actions
Integrity Integrity is the essential value of banking, particularly Islamic Banking, it reflects honesty and clarity within our communication, processes and our business dealings. Progressive Values
Values that will take us forward and reflect an enduring commitment to growth & progress.
Passion Passion reflects a winning attitude, an obsession with our profession, delivery of highest levels of customer services and an overwhelming strive towards excellence.
Devotion Devotion indicates the need for hard work, consistency, perseverance & a commitment towards the organization, its customers and all its stakeholders. VISION, MISSION & VALUES 04 Annual Report 2011
Islamic Banking is a growing sector in Pakistan and besides being a viable trade it also holds great expectations from the viewpoint of economic development. Company Secretary Head Office Registered Office / Share Registrar Auditors Legal Advisor Shari’ah Advisor Audit Committee Board ofDirectors Corporate Information (effective from March 5,2012) Director Mr. AminHussain Mr. NicolasEdouard Martin (resigned onMarch 1,2012) Karachi I. ChundrigarRoad, Trade Center, I. ChundrigarRoad,Karachi Office #1108,11thFloor, Trade Center, F.D. RegistrarServices(SMC-Pvt)Ltd. Chartered Accountants M/s. A.F. Ferguson&Co. Consultants Advocates &CorporateLegal Member M/s. MohsinTayebaly Member &Co. Prof. MuftiMunib-ur-Rehman Chairman Mr. BasheerA. Chowdry Mr. AzamEssof Kolia Mr. JamilAhmed Qureshi Director Director Director Director Mr. MohammedTariq Director Director /President &CEO Mr. JamilAhmedQureshi Director Chairman /Vice Mr. BasheerA.Chowdry Mr. AzamEssofKolia Mr. AdelYousef Al-Saqabi Mr. AhmedKhizerKhan Mr. ShehabM.Gargash Chairman Mr. KhaledMohammadAl-Aboodi (Formerly DawoodIslamicBankLimited) Burj BankLimited05
CORPORATE INFORMATION 06 Annual Report 2011 Burj Bank Limited 07 (Formerly Dawood Islamic Bank Limited)
Board of Directors
Mr. Khaled Mohammad Al-Aboodi - Chairman Mr. Khalid Mohammad Al- Aboodi is the Chief Executive Officer of Islamic Corporation for Development of the Private Sector (ICD), Islamic Development Bank Group, Jeddah. He has held this position since 2007 and has been associated with this organization since 2001 at a senior position. ICD has seen tremendous growth throughout the Islamic world. Prior to his current assignment he worked with the Ministry of Finance and National Economy, Kingdom of Saudi Arabia. He also had a stint with the World Bank from 1997 to 2001 in Washington, DC USA. Mr Aboodi holds a Masters in Economics from Northeastern University, Boston, USA and Bachelors in Economics from King Saud University, Riyadh, Kingdom of Saudi Arabia. He is on various Boards of companies in different companies. He became the Chairman of Burj Bank in March 2011. Mr. Shehab M. Gargash - Vice Chairman / Director Mr. Shehab Gargash has been actively involved in the development of Capital Markets in the UAE, both in the context of his institutional work and in his personal capacity.
During 12 years in the UAE banking industry his roles have included Marketing, Distribution, Trade Finance and Investment Banking, first with Citibank (1989-1993) and later on with the Emirates Bank Group (1993-2001). In 2001 Mr. Shehab founded Daman Investments PSC, and is currently the Managing Director of the company. The company is a privately held, non-bank financial services concern focused on developing capital market opportunities within the UAE and Middle East.
A board member of AREIT (Arabian Real Estate Investment Trust) the first REIT launched for and in the Middle East region, he also serves as a board member of Saraya Real Estate Fund (MENA) a major regional real estate development fund. Mr. Ahmed Khizer Khan - President & CEO Mr. Ahmed Khizer Khan is the President & CEO of Burj Bank Limited. Prior to joining Burj Bank, he was the Chief Operating Officer of ICD. He was the Chief Executive of Barclays Global Retail and Commercial Banking, UAE from 2006 to 2010. He was associated with Citigroup from 1997 to 2006 in various senior level assignments including Country Business Manager, Pakistan and Managing Director Operations and Technology, Central Europe. He did his MBA from Rutgers University, Newark, New Jersey and his Bachelors in Economics from Bucknell University Lewisburg Pennsylvania, USA. Mr. Adel Yousef Al-Saqabi Mr. Adel is a graduate in Business Administration with majors in Finance, from University of Kuwait in 1988. Currently he is the Managing Director of M/s Al-Safwa Group Holding, Kuwait, which has major focus on the investment in various sectors including oil & gas, services, industrial & banking sectors all over the world.
Having a professional experience of over 20 years, Mr. Adel has served at senior positions in leading companies like Gulf Investment Corporation, Al-Ahlia Investment Co. and Al-Safat Holding Co. where he has been mainly responsible for the existing portfolio as well as developing and analyzing new investment opportunities. This covers technical, financial and marketing aspects of the opportunities in the portfolio.
At present he is board member of M/s Al-Safat Holding Co., M/s Al-Safwa Group Holding Co. and M/s Flexible Industrial Packaging Co., while he has been on the board membership of various other companies based in Kuwait, Saudi Arabia, and Bahrain. Mr. Azam Essof Kolia Mr. Kolia is a well reputed business executive and has an influential presence in the Asia Pacific market, especially in the import and export trade of commodity products, like edible oil, sugar, spices and metals, especially since he has been engaged in this trade for the last 30 years. Taking on influential positions in so many companies, both locally and internationally, Mr. Kolia is indeed a prominent and highly respected figure.
He is also extensively involved in various social and charitable organizations. Mr. Kolia is member of the Board of Directors of Burj Bank. 08 Annual Report 2011 Burj Bank Limited 09 (Formerly Dawood Islamic Bank Limited)
Mr. Basheer A. Chowdry Mr. Basheer A. Chowdry commenced his banking career in 1963. He is a gold medalist from Punjab University, holds a Diploma in Banking and is also a Member of the British Institute of Management, Member of the British Institute of Directors, and Member of the Institute of International Affairs, London. He has wide banking experience in commercial, investment banking, international banking and the leasing business for the last 42 years having held very senior assignments with Bank of Credit & Commerce International, United Kingdom. He is a founder member of AI-Zamin Leasing Modaraba and has held the position of Chief Executive Officer for 17 years. He has served as the Chairman, Modaraba Association and Leasing Association of Pakistan and was a Director on the Board of Karachi Stock Exchange (Guarantee) Limited nominated by Securities & Exchange Commission of Pakistan as well as a member of the steering committee of the United Nations Development Program for Corporate Governance in Pakistan. Mr. Jamil Ahmed Qureshi Mr. Jamil A. Qureshi was the Group Chief Executive Officer at Gulf Investments Ltd and Gulf Cap. He has previously held the position of Director Business Advisory Solutions at Ernst & Young and has had extensive experience in private equity, business & investment advisory, resulting in strong credentials through directing and managing a diversified range of transaction support, corporate finance and lead advisory services. He has over 22 years of experience as a business, financial and investment advisor including various international assignments. Mr. Qureshi is a member of the board since 2007 and has personal shareholding in the Bank. He is also member of the risk management committee & human resource committee of the Bank. He holds an MBA Degree. Mr. Mohammed Tariq Mr. Tariq is currently serving as advisor to the President of Islamic Development Bank (IDB), Jeddah. Prior to his current position he was serving as the Treasurer of IDB, Jeddah, Saudi Arabia. As Treasurer, his responsibilities combined both the traditional treasury role (liquidity and resource management) as well as management of short, medium and long-term investments in conventional and Islamic asset classes. Mr. Tariq has been affiliated with Arab Banking Corporation, Bahrain as Assistant Treasurer and Head of Marketable Securities and with Faysal Islamic Bank of Bahrain as Head of Capital Markets and Asset Management amongst other reputable positions at various other institutions.
Mr. Tariq is a member of the Institute of Actuaries (London), Securities Institute (London) and has been a former member of Securities and Futures Authority (London).
He resigned from the Board of Directors of Burj Bank effective from March 1, 2012. We wish him all the success in his future endeavors. Mr. Nicolas Edouard Martin Mr. Nicolas E. Martin is the Managing Director Strategic M&A at Bank Al-Khair B.S.C. (c) based in Manama, Bahrain since 2009. Bank Al-Khair B.S.C. (c) is a leading Islamic investment bank and has interest in various businesses in different countries including Bahrain Finance Company (BFC) the largest of the money transfer companies in Bahrain. He has rich experience in the financial and technology sectors in Europe and Asia. He was associated with Fortis, a large banking and insurance group in Brussels and Hong Kong. He spent over 15 years with ABN AMRO bank at senior positions in Amsterdam, London and Hong Kong. He has an MBA from INSEAD, France and a Bachelors degree in Business from Universite de Genéve, Switzerland. He has been on the Board of the bank since 2009. 10 Annual Report 2011
Management Team
The Management Team of Burj Bank comprises of a seasoned team of senior banking professionals.
We are proud to have them as our Management Team:
Ahmed Khizer Khan Mushtaq Riaz Mirza President & CEO Group Head Corporate
Taimur Afzal Zoya Tazeen Jafarey Group Head Consumer Banking Group Head Strategy Planning & SME
Ayaz Wasay Umer Fareed Group Head Treasury & FI Group Head Marketing & Public Affairs Burj Bank Limited 11 (Formerly Dawood Islamic Bank Limited)
Saifuddin Shafi Sohail Sikandar Group Head IT Chief Financial Officer
Seemin Shafi Saad Ullah Khan Group Head HRD Head of Operations
Ihsan Ullah Ihsan Aamir Ali Chief Risk Officer Head of Compliance & Control 12 Annual Report 2011
Chairman’s Message
Assalam-O-Alaykum Looking at the recent performance of the emerging economies, there are many positive indicators in my view. I believe that with the help of smaller economies, the world economy is now moving into a slow yet stable growth process. The global GDP has grown at a per annum rate of 3-4% between 2010 and 2011 whereas the collective GDP of developing countries has grown at a per annum rate of 6-7% in the same years. The developing countries have contributed to over 50% of the ongoing economic progress. This indeed is a healthy sign from an investor’s perspective and we can forecast greater economic progress in the medium term primarily driven by the developing economies. Importantly, the enhanced capacities of the developing economies present a balanced and sustainable future for the global economy.
The mandate of Islamic Corporate for the Development of Private Sector (ICD) is to support economic development of its member countries through funding to various private sector projects in accordance with principles of Shari’ah thus promoting private sector development. ICD’s footprint extends across 45 Islamic member countries across the globe. We concentrate on those sectors that have a high impact on the economies of member countries. This is a conscious decision since we believe that some sectors have the potential to reach larger numbers of people and benefit multiple sectors of the economy. The priorities include 7 sectors, out of which 2 sectors namely, “industrial” and “financial” absorb the highest share of sectoral allocation of ICD financing. These two sectors collectively received 83 percent of ICD’s total financing last year. In most member countries, ICD follows a channeled strategy whereby one financial organization acts as the hub for all our funding & investment within that economy. In Pakistan, Burj Bank holds immense strategic significance for us as it is the funding channel for all ICD investments within the country.
Islamic Banking is a growing sector in Pakistan and besides being a viable trade it also holds great expectations from the viewpoint of economic development. ICD has already invested regionally in Islamic Banking and we have contributed to the expansion of Islamic finance through various projects. We are excited about our investment in Burj Bank given the organization’s recent growth and its role within the Islamic Finance sector of Pakistan. Our great confidence in this institution is reflected in the decision by the major shareholders to inject additional capital of Rs.1.8 billion in June of 2011. Chairman Khaled Mohammad Al-Aboodi sector ofPakistan! in thecomingyearsBurjBankwillbeoneofgreatest successstoriesinthefinancial As theChairmanofBank&onbehalfallinvestors,Icanconfidentlysaythat country. made majorcontributionstowards thestrengthening ofthebankingsystem issue ofrightshares aswelltherebranding exercise. Allregulatory bodieshave I wouldliketothanktheSBPandSECPfortheircooperationsupportduring Islamic BankingasthefirstchoiceforallconsumersoffinancialservicesinPakistan. changing approach andtheuniquetalentofourhumanresource wewillsoonestablish thesincerityofourefforts, agame of aShari’ahCompliantfinancialmodel.With development ofthiscountryisalsointerconnected withthenationwideestablishment growth oftheIslamicfinancial systeminPakistan.We believethattheprogress and its marketshare by2016.We haveasoaringcommitmenttowards theexpansionand current pacewecanexpect BurjBanktomultiplyitsbusinessbyfivetimesandtriple Alhamdulillah, theorganizationhasundergoneanexemplarytransitionandat have faithinthemanagementteam’s capabilitytoachievethiscustomercentricvision. re-branding effort. OurvisionistomakeBurjBanktheIslamicofChoiceandI team, anarrayofnewproducts, ahealthybalancesheetandanextremely successful deposit growth, increased capital,enhancedentityratings,arejuvenated management The year2011hasseentheBankgrow from strength tostrength withsignificant (Formerly DawoodIslamicBankLimited) Burj BankLimited13
CHAIRMAN’S MESSAGE Integrity Integrity is the essential value of banking, particularly Islamic Banking, it reflects honesty and clarity within our communication, processes and our business dealings. for thefirstninemonthsof2011wasPKR8bnagainst PKR2.9bnlastyear. the totaldistributionnetworkhasincreased to841branches.NetIncomeforthe segment theadditionof99branchesin2011, banking assetsasofninemonthsended2011.With 2011. Islamicbankingassetsgrew ata5-yearCAGRof37%,accountingfor7.3% oftotal The performanceofIslamicbankingindustrycontinued itsimpressive runduring theyear volatility andeffectively, lackluster indexperformance. between theUnitedStatesandPakistanwere allfactorsthatcontributedtolowvolumes, from overcapitalgainstax,politicaluncertaintyandthefractiousrelationship Dec‘10.Concerns The yearwasdullfortheKSE-100Indexasitclosedat11,347points,downbyabout5.6% acknowledged; resultantly policyratewaskeptonholdinNov2011. stimulate economicactivitiesintheeconomy, risksemergingfromsectorwere external cumulative of200bpsto12.0percent. Whilethismonetaryeasingwasexpectedtohelp SBP easeditsmonetarypolicystanceinJulandOct2011reducing thepolicyratebya coalition supportfundsandsaleof3Glicenses. realizes inflowsfromsystem isunlikelytoeaseinfiscalyear2012unlessthegovernment the businesses bythebankingsectorshowednegligiblegrowth. Thepressure onthebanking funding,leadingtothecrowdingof external outtheprivatesector. Fundingtoprivate continueditsrelianceOn theflipside,Government onbankingsystemduetolack years. single digits(9.7percent) inDec2011,from thedoubledigitmark,forfirsttimeintwo pressures were eased,supplementedbyeasingfoodprices.CPIinflation(YoY) declinedto the corresponding quarteroffiscalyear2011.Consequently, demand-driveninflationary first quarteroffiscalyear2012was1.2percent ofGDP, compared with1.5percent during due toalowbaseeffect. Fiscalimprovements were witnessedasthebudgetdeficitfor crop inPunjab.Large-ScaleManufacturing(LSM)registered animproved growth ratemainly expected togetaboostfrom improved wheatandriceproduction alongwitha goodcotton at thebeginningoffiscalyear2012,agriculture sectorhasshownitsresiliency andis financingandenergyshortages.Despiteanotherrepeatfloods, lackofexternal thefloods The fiscalyear2011sawthecountry’s growth curtailedto2.4%onthebackof devastating The Economy for theyearendedDecember31,2011. Fifth AnnualReportalongwiththeauditedfinancialstatementsandAuditors’report thereon The Board ofDirectors ofBurjBankLimited(“theBank”or“Burj”)ispleasedtopresent the totheShareholders Directors’ Report efficiencies andachievingcriticalmasswith respect tothedeposit base. undertook nobranchexpansion duringtheyearandmaintainedfocusonoptimizing branch Total Assetsgrew by56%toPKR28bnontheback ofdepositsgrowth of61%. Thebank Burj experiencedsignificant growth across allbalancesheetheadsduringtheyear 2011. Financial Highlights (Formerly DawoodIslamicBankLimited) Burj BankLimited15
DIRECTORS’ REPORT 16 Annual Report 2011
Burj Bank is a growing institution and it is constantly looking to innovate and implement customer- centric ideas. Burj Bank Limited 17 (Formerly Dawood Islamic Bank Limited)
PKR ‘mn’ Financing Portfolio Risk 1400 100%
Key Balance Sheet Items 1200 PKR ‘mn’ 78% 30,000 80% 27,645 1,153 1000 25,000 1,003
20,341 800 54% 60% 20,000 786 17,676 600 15,000 621 40% 12,636 13,233 400 10,000 7,432 20% 200 5,000
0 0 0% Deposits Financings Total Assets 31-December 2010 31-December 2011 31-December 2010 31-December 2011 NPL Provisions Coverage Gross financings grew by 78%, from PKR 7.4bn to PKR 13.2bn as the bank focused on underwriting quality credits. Despite the challenging credit environment, NPLs declined substantially from PKR 1,153mn to PKR 1,003mn in 2011. NPF formation was also curtailed year on year due to the Bank’s prudent lending policy.
However, taking exogenous circumstances into perspective, Burj created a buffer against potential financing losses by recording a discretionary general provision of PKR 180mn, in addition to the prescribed specific provision. Resultantly, coverage has risen from 54% to 78% this year. The bank’s portfolio quality is further reflected by the reduction of NPF to gross financing ratio, which has been reduced by half in a year’s time from 16% to 8% in 2011.
Investments PKR ‘mn’ 9,983 Investments trended upwards, showing a growth 10000 of 98%, from PKR 5bn to PKR 9.9bn. The bank 8000 participated in Govt. Ijarah Sukuk auctions during 6000 March, May and December deploying PKR 5,051 1.725bn, PKR 1bn and PKR 3bn respectively. 4000
Net investment in Govt. Sukuk stood at PKR 2000 8.3bn at year end. 0 31-December 2010 31-December 2011 Total revenue grew by 90% to PKR 1,141mn Total Revenue as income on Sukuk registered a threefold PKR ‘mn’ 1000 188 increase from PKR 322mn to PKR 899mn. 800 Income on financing rose from PKR 630mn to 952 PKR 1,241mn as a result of higher volumes. 600 64 400 Other income grew substantially as the bank 537 earned capital gains on sukuk in the falling 200 interest rate environment, in addition to significant 0 31-December 2010 31-December 2011 dividend income from equity securities and Net Revenue Other Income mutual funds.
PKR ‘mn’ Operating Expenses 1400 Operating efficiency as measured by the total 1,229 1200 revenue to operating expense ratio was further 1000 987 rationalized to 0.93x from 0.61x in the preceding 800 year. The current year’s operating expenses 600 were higher on account of business building 400 activities such as advertising spend during the 200 0 rebranding campaign. 31-December 2010 31-December 2011 18 Annual Report 2011
PKR ‘mn’ Provision Expense Despite recording a discretionary general 500
provision of PKR 180mn during the year, overall 429 provision expense still decreased to PKR 257mn 400
300 in 2011 from PKR 429mn, reflecting efforts by 258 the management to recover outstanding 200 balances from the delinquent portfolio as well as effective portfolio risk management. 100
0 31-December 2010 31-December 2011
During the year under review, the bank registered increasing volumes on the financing front; however, we are committed to further enhancing our volume base to achieve profitability. The loss for the year is PKR 288mn and is mainly due to higher discretionary provisions and also accounts for the impact of one-off marketing costs. Although the bank has posted substantial gains from other income to supplement earnings, we are looking to further enhance our deposit base in the year 2012 to achieve optimum utilization of our capital.
Right Issue
During the year, the bank successfully closed a right issue of 240mn shares at a price of PKR 7.5 per share i.e. 25% discount to par. Subsequent to the right issue, the Bank’s paid-up- capital (free of losses) as at June 30, 2011 was PKR 6.061bn. The major portion of the right issue was subscribed by two of our largest shareholders i.e. the Islamic Corporation for the Development of the Private Sector (“ICD”) and Bank Al-Khair, Bahrain. Subsequent to the right issue, the shareholding of ICD and Bank Al-Khair in Burj Bank has increased to 33% and 36.9% respectively.
Minimum Capital Requirement
The State Bank of Pakistan (SBP) vide BSD Circular No. 7 of 2009 dated April 15, 2009 had revised Minimum Capital Requirement (MCR) for banks such that issued, subscribed and paid-up capital (net of losses) is required to be PKR 10 billion by the end of December 2013. Furthermore, the bank has submitted a detailed capital plan to meet the above capital requirement of PKR 10 billion. SBP has indicated that it intends to discuss the Bank’s capital position further. However, the SBP has granted extension in meeting MCR till March 31, 2012.
Business Development
Burj Bank is a growing institution and it is constantly looking to innovate and implement customer-centric ideas.
In October 2011, the Bank launched its car financing product called ‘Burj Carsaaz’. By year end, Burj has booked 292 units and the portfolio stands at PKR 240mn. With an aggressive acquisition strategy and a dedicated consumer risk team, we are endeavoring to transform Carsaaz into the industry leader.
Furthermore, in an effort to enhance the effectiveness of our distribution network and tap into sustainable profitability, we have set up a customer service quality unit. The unit is looking to address all customer related needs by conducting process re-engineering, and developing Burj Bank Limited 19 (Formerly Dawood Islamic Bank Limited)
innovative ways of increasing customer touch points capability for the Bank. Initiatives undertaken in this respect include transformation of the call centre and restructuring of the complaint management unit.
Burj entered into an agreement with Pak Qatar Takaful for distribution of bancatakaful product. It will contribute to the revenue substantially. Additionally, it will help address the gap in customer needs and increase cross-sell.
In order to effectively leverage the existing system capacity and expertise of dedicated resources, we are focusing on developing transaction banking. Our latest initiative in this direction has been the setup of a Cash Management unit. The business unit is currently developing products and conducting trial runs. This will increase cross-sell for Corporate Banking and will enhance the deposit base.
People
Our people are our greatest strength and we are committed to retaining and attracting quality human resources. We are diligently working towards ensuring that our people have the environment to optimally perform to their potential and contribute towards our strategic goals.
We have taken significant steps towards reducing turnover and attracting quality human capital. In 2011, we participated in a study undertaken by Aon Hewitt consultants, an international firm, aimed at identifying compensation and benefit packages across the local banking sector. We are currently working towards implementing the findings of the study.
Effective coordination, communication and a culture of transparency is being instilled in the organization at all levels to ensure goal concurrence and success of our organizational strategy. We are engaging our people at all levels, giving them platforms like weekly breakfast meetings with the CEO to raise matters pertaining to streamlining our processes and identifying and minimizing inefficiencies. Town-hall meetings were recently conducted in Karachi, Lahore and Islamabad for bringing our people on board the new strategic direction of Burj Bank.
In order to strengthen our human capital base and enhance Burj’s image as an employer, we are conducting career counseling sessions at top universities. Furthermore, in the past few months, we have attracted experienced resources from the industry to spearhead Service Quality, Consumer Risk and Operational Risk.
Training and Development is the backbone of our organization. During the year, employees at all levels including senior management underwent training sessions. Furthermore, Banking, Compliance and Shariah training is being imparted to all branch level employees. We are currently working with our strategy unit to redesign key performance indicators (“KPIs”) for each functional area in order to align job performance and business objectives. These KPIs are being cascaded down to employees at all levels.
Operations
We have restructured our Operations Group in terms of processes efficiencies, staff repositioning and departmental streamlining to ensure complete support to all business functions and concurrence with regulatory and Shari’ah policies in all areas.
Clearing, TDR Issuance and Account Opening functions were centralized to address gaps and disparities. In addition to this, segregation of Remittances department was done from 20 Annual Report 2011
Treasury to Centralized Operations. Centralized Reconciliations, Business Process Re- engineering, ATM Operations were established to introduce more control and quality in our work flow.
Moreover, physical archiving was completed for 25,000 pre-centralized Account Opening Forms from branches to a centralized location, ensuring control and custody efficiency. Furthermore, detailed manuals were developed for processes including Guarantees, Foreign Exchange Imports & Foreign Exchange Exports. In addition, Centralized Clearing, Account Opening & TDR Issuance manuals were also formulated to ensure all loose ends are identified and eliminated.
The year-end saw unprecedented transaction volumes in the Financing Operations Department, Treasury Back Office and Trade Finance Services, which were managed optimally as a result of planning and development.
Risk Management
The Bank has a robust risk management framework and governance structure to deal with the wide array of risks faced by a banking entity. The Board’s Risk Management Committee (“BRMC”) periodically reviews the overall position of the bank. Due consideration is given to avoid concentration of the bank’s risk assets in a single sector, counterparty or group. Committees have been formed at the management level with clearly defined mandates to oversee risk activities on an ongoing basis.
The Risk Management Group functions in an integrated manner having separate departments for Financing (Credit) & Investment Risk, Financing Administration, Market Risk and Treasury Middle Office and Operational Risk. These departments are properly staffed with skilled personnel who have the capacity to understand the underlying risks associated with their respective activities. All business propositions are thoroughly assessed before recommendation is made for adjudication. In addition, a dedicated function has been set up under the risk umbrella for managing consumer risk to monitor and manage risks associated with the Car Ijara product – Carsaaz, launched by the bank in the last quarter of 2011. The function will be further beefed up as and when the business volume grows and the bank introduces new consumer products.
We are well aware of the ramifications of Operational Risk, inherent in banking; therefore, the Bank is putting in place a comprehensive operational risk management framework. Material progress has been made in this direction with the completion of risk and control self assessment workshops, risk appetite matrix, business profiling for each key department and historical loss data collection on bank-wide basis. All these elements will be integrated into a specialized operational risk system. Furthermore, operational risk strategies and policies have also been formulated for monitoring and controlling operational risk events.
The Bank is continuously monitoring its portfolio and taking corrective action wherever needed. Moreover, the management has also taken steps to upgrade the skill set personnel in this group through imparting trainings and will induct more resources when the requirement grows.
Internal Control Framework
The Board of Directors and Senior Management of the Bank, being cognizant of the importance of internal controls framework in achievement of the bank’s overall objectives, have continuously Burj Bank Limited 21 (Formerly Dawood Islamic Bank Limited)
been working to maintain and consistently operate a sound system of internal controls and contributed efforts to further strengthen it to ensure stability and soundness of the Bank. The management of Burj Bank, in compliance of SBP guidelines on Internal Controls, undertook implementation of requirements related to Internal Control over Financial Reporting (ICFR) and reached to the stage V of the roadmap of SBP guidelines; and during the year under review, the Bank’s external auditors evaluated the Bank’s efforts in their implementation and submitted their long-form report to State Bank. The report greatly acknowledged the Bank’s efforts and work done towards strengthening Internal Controls over Financial Reporting. Besides ICFR, the management has also focused to strengthen the performance and compliance targeted controls; and towards this end, significant value has been added to control environment, risk assessment and control activities of the bank. Significant milestones achieved in this regard are detailed in the ‘Statement on Internal Controls’ attached to this Annual Report
Rating for Shari’ah Quality
The board takes immense pleasure to note that the Islamic International Rating Agency (IIRA) has maintained the ‘AA’ rating in respect of Shari’ah Quality of the Burj. The rating reflects, in IIRA’s opinion that the Burj conforms to very high standards of Shari’ah compliance in all aspects of Shari’ah Quality analysis.
Credit Rating
JCR-VIS a credit rating company acknowledged the above progress and has revised medium to long term entity rating of Burj from BBB+ (Triple B Plus) to A (Single A) and the short term rating from A-3 (A Three) to A-2 (A Two). Outlook on the assigned ratings is “Stable”.
Corporate Governance
The Bank has complied with the requirements of the Code of Corporate Governance relevant for the year ended December 31, 2011. A prescribed statement together with the Auditors Review Report thereon is annexed.
Financial Reporting
1. The financial statements prepared by the management of the Bank present a fair state of affairs, the result of its operations, cash flows and changes in equity. 2. Proper books of account of the Bank have been maintained. 3. Appropriate accounting policies have been consistently applied, in preparation of financial statements and accounting estimates. Approved Accounting Standards, as applicable in Pakistan, have been followed in preparation of financial statements and any departure there-from has been adequately disclosed. 4. No dividend / bonus shares have been declared for the year. 5. The system of internal control is sound in design and has been effectively implemented and monitored on the best possible efforts basis. 6. There are no doubts upon the Bank’s ability to continue as a going concern. 7. There has been no material departure from best practices of corporate governance, as detailed in the listing regulations. 8. Key operating and financial data for the last five years has been given in (Table 1) attached with the Directors’ Report as this is the 5th year of Bank’s operations. 9. There is no overdue statutory payment on account of taxes, duties, levies and charges. 22 Annual Report 2011
Employee Benefits Scheme
Value of investments of Employees’ Provident Fund for the year ended December 31, 2011 (Unaudited) is PKR 57.53 mn.
Directors
During the year under review, Mr. Ahmed Khizer Khan has been appointed as a Director to fill in the casual vacancy.
Trading of Shares of the Bank
No trades in the shares of the Bank were carried out by the CEO, CFO, Company Secretary their spouses and minor children during the year 2011.
Pattern of Shareholding
The pattern of shareholding as on December 31, 2011 along with disclosures required under the Code of Corporate Governance is annexed to the Report.
President & CEO
The Board welcomes Mr. Ahmed Khizer Khan as the new President & CEO of the Bank. Mr. Khizer brings with himself vast experience of international financial institutions. He has been associated with ICD as Chief Operating Officer. Prior to joining ICD, he served as the Chief Executive of Barclays Global Retail and Commercial Banking for Emerging Markets from 2006 to 2010. He was also associated with Citigroup from 1997 to 2006 in various senior level assignments including Country Business Manager. We are confident that his experience, professionalism and charismatic leadership will take Burj to new heights.
Board of Directors Meetings
Nine Board of Directors meetings were held during the financial year. Information about the attendance is as under:
Name of Directors No. of meetings attended Mr. Khaled Mohammad Al Aboodi 8 Mr. Shehab M. Gargash 6 Mr. Adel Yousef Al Saqabi 2 Mr. Basheer A. Chowdry 9 Mr. Jamil Ahmed Qureshi 8 Mr. Mohammed Tariq 6 Mr. Nicolus Edouard Martin 7 Mr. Azam Essof Kolia 6 Mr. Ahmed Khizer Khan (appointed on 06-06-2011) 5 Mr. Pervez Said (resigned on 28-09-2011) 8 Burj Bank Limited 23 (Formerly Dawood Islamic Bank Limited)
Auditors
Present auditors, M/s. A. F. Ferguson & Co., Chartered Accountants, a member firm of Price Water House Coopers, retired and offer themselves for reappointment. On the recommendation of the Audit Committee of your Bank, the Board has agreed to recommend the appointment of M/s. A. F. Ferguson & Co., Chartered Accountants, to function as Bank's statutory auditors for the year ending December 31, 2012.
Future Outlook
We believe that the country has always displayed resiliency in the wake of adversity. Despite the current political upheaval, it is expected that the situation will improve as an equilibrium is struck, balancing the roles of various democratic institutions.
Reflecting on the past twelve months, we feel that the moral for our future success will revolve around the following key lessons. i. Instilling a culture of pay for performance to attract and retain quality human capital ii. Building a strong foundation based on stringent compliance & controls and a vibrant technological delivery mechanism. iii. Focusing on the customer, prioritizing service as our key differentiator. iv. Increasing focus on branch efficiency, reducing deposit cost, increasing the number of customers and focusing on current accounts in the CASA mix.
We have planned several key initiatives for 2012 including i. Implementing the core banking application project in order to enhance our system capability ii. Venturing into the SME Sector iii. Setting up an Investment Banking Unit iv. Taking a Strategic Decision on Relocation and premises plan v. Relocating existing non-performing branches to optimize efficiency levels
Effective coordination, communication and a culture of transparency is being instilled in the organization at all levels to ensure success of planned initiatives. As an institution, we are constantly learning and adapting to the dynamic environment around us and we feel that unlike the history of this Bank, this year will help us tap into sustainable quality earnings.
We would like to thank the State Bank of Pakistan and other regulatory bodies for their contributions towards strengthening the banking system of the country. The Board also extends sincere gratitude to all our employees for their efforts, loyalty and significant contribution to the growth and success of the bank.
For & on behalf Board of Directors
Chairman Karachi: March 01, 2012 24 Annual Report 2011
Financial Summary
Table 1 2011 2010 2009 2008 2007* Rupees in ‘000
OPERATIONAL RESULTS
Total Income 2,564,122 1,327,721 1,188,691 901,647 258,601 Operating Expenses 1,229,402 996,829 686,002 434,160 166,579 Profit/(Loss) before Income Tax and Provisions (88,451) (395,433) (148,063) 63,986 34,116 Profit/(Loss) before Income Tax (346,908) (824,560) (405,152) 60,111 32,259 Profit/(Loss) after Taxation (288,488) (535,522) (292,627) 32,727 51,031
BALANCE SHEET
Shareholders’ Equity 5,804,578 4,325,983 4,841,780 4,074,810 3,665,888 Total Assets 27,644,829 17,675,686 13,008,675 9,481,137 6,850,534 Financings-net of provisions 10,509,340 5,616,202 4,763,622 5,639,877 3,723,752 Investment-net of provisions 9,982,793 5,050,878 2,861,751 2,045,146 1,318,657 Deposits and other accounts 20,341,241 12,636,083 6,784,750 5,063,393 2,888,762
OTHERS
Imports 3,288,979 2,530,861 1,461,854 2,567,557 1,099,771 Exports 930,495 1,020,077 321,312 1,208,643 107,712
RATIOS
Capital Adequacy 41.81% 38.44% 50.98% 45.15% 51.80% Profit before Tax ratio (PBT/Gross mark up income) -15% -65% -36% 7% 13% Gross spread ratio (Net mark up income/gross mark up income) 40% 43% 43% 53% 77% Income/Expense ratio 0.88 0.61 0.75 1.07 1.14 Return on Average Equity (ROE) -4.99% -12.55% -6.09% 0.80% 1.39% Return on Average Assets (ROA) -1.27% -3.49% -2.60% 0.41% 0.74% Financings/Deposits Ratio 56% 49% 74% 111% 129% Book value per share excluding revaluation of Assets 7.80 8.51 9.58 10.21 12.17 Book value per share including revaluation of Assets 7.83 8.63 9.66 10.18 12.22 Basic Earnings / (Loss) per share -0.46 -1.07 -0.6 0.08 0.17 No. of employees (other than outsourced) 539 473 449 220 89
*Operational results for 2007 represents period from April 10, 2007 to December 31, 2007
Passion Passion reflects a winning attitude, an obsession with our profession, delivery of highest levels of customer services and an overwhelming strive towards excellence. earnings in2012andbeyond. earnings Exchange CommissionofPakistan, andourshareholders, weare endeavoringto achievesustainablequality continued supportandguidance ofourregulators especially theStateBankofPakistanandSecurities of anytransformationshouldbe asustainablesteptowards changeinanorganization’s the performance. With Each organizationisdifferent andeverytransformationeffort isunique.What’s common is thatthecentralgoal our bank-wideinitiatives. key performanceindicatorsforeachfunctionalarea inorder toensure robust implementationandmonitoringof processes andidentifyingminimizinginefficiencies. Ourstrategyunitiscurrently workingtowards redesigning at alllevels,givingthemplatformslikeweeklybreakfast meetingstoraiseissuespertaining tostreamlining our customersonboardour internal newstrategicdirection. Furthermore, Iamconstantlyengagingourpeople potential andcontributetowards ourstrategicgoals.In2011,weconductedseveraltown-hall meetingstotake We are diligentlyworkingtowards ensuringthatourpeoplehavetheenvironment tooptimallyperformtheir Our peopleare ourgreatest strength andweare committedtoretaining andattractingqualityhumanresources. of thestudy. and benefitpackagesacross thelocalbankingsector. We are currently workingtowards implementing thefindings firm,aimedatidentifyingcompensation participated inastudyundertakenbyAonHewittconsultants,an international We havetakensignificantstepstowards reducingandattractingqualityhumancapital.In2011,we turnover consumer riskteam,weare endeavoringtotransformCarsaazintotheindustryleader. anaggressivelaunched itscarfinancingproduct acquisitionstrategyandadedicated called‘BurjCarsaaz’.With margins andgoingforward, weexpectthistohaveasignificantimpactonourprofitability. Recently, thebank volumes bytappinggrowth opportunitiesintheretail andSMEsegments.Boththesesegmentsboastsuperior In order toachievecritical masswithrespect tobothourdepositsandassets,weare alsolookingtoincrease developing innovativewaysofincreasing customertouchpointcapabilityfortheBank. quality unit.Theunitislookingtoaddress allcustomerrelated needsbyconductingprocess re-engineering, and effectiveness ofourdistribution networkandtapintosustainableprofitability, wehavesetupacustomerservice We alsorealize thattruedifferentiation canonlybeachievedonthebasisofservice.Inaneffort toenhancethe order tolaythefoundation foracustomercentric,efficient andscalableoperatingmodel. requirements. Henceforth,weare entering2012withtheaimofstrengthening compliance,control &systemsin tend tofeelchaoticbytheirdynamicnature, soitisvitaltoadoptadisciplinedapproach toeachofthese change andunleashedthegameplanforvitaltransformationoforganization,goingforward. Transformations plans. We havedefinedour visiontobetheIslamicBankofChoice,setpriorities,laidbuildingblocksfor We havedevelopedacomprehensive fiveyearstrategyentailingtheBank’s short,mediumandlongtermgrowth transformation’s context,well-articulatedaspirations,energyandideas,arigorous process. steering anorganizationthrough atransformationrequires aclearunderstanding, from theoutset,of poised totrend upwards. There isnodoubtinmymindthatchangehasarrived. Asaleader, Iunderstandthat ofthepastfewyearsandwithitscleanbalancesheet,is Burj hasmanagedtoridetheeconomicdown-turn and alsoaccountsfortheimpactofone-off marketingcostsrelated totherebranding campaign. The lossfortheyearisPKR288mnandmainlyduetohigherdiscretionary generalprovisions ofPKR180mn increasing volumesandrising otherincome.We are committedtofurtherenhancing volumestoachieveprofitability. the year, growing Investmentsby98%.Total revenue hasalsowitnessedhealthygrowth of90%ontheback base. Gross financingshave grown by78%.We participatedinthree IjarahSukukauctionsduring Government and maintaineditsfocusonoptimizingbranchefficiencies andachievingcriticalmasswithrespect toitsdeposit Message fromthePresident&CEO back ofDepositsgrowth of 61%.Thebankundertooknobranchexpansion Burj haspostedsignificantgrowth thisyear. Total Assetsgrew by56%onthe to takeusforward. outtherequiredthis equilibriumtotranslateintostabilityandchurn leadership achieve equilibriumwithrespect toinstitutionalroles. Onehopesandexpects stability. Personally, I’mlong onthefuture ofPakistanasIfinallyseethecountry symptoms, it’s apparent thattheonlymissingingredients are leadershipand over thepastfewdecadesbutwhenoneseparatesproblems from the Burj BankLimited.It’s nosecret thatPakistanhasunderperformeditspotential In November2011,ItookonthechallengeofenteringPakistanasCEO effort. different typesofchange(organizational,operational, commercial), andaprolonged transformation ischaracterizedbystartlinglyhighambitions,theintegrationof profitability, enticingopportunity, ortheloomingthreat ofcompetitors.Atrue change. Thedecisionmaybeprompted byavarietyofcircumstances: achieving There comesatimewheneveryorganizationfacestheneedforfundamental (Formerly DawoodIslamicBankLimited) Burj BankLimited27
CEO’S MESSAGE 28 Annual Report 2011
Shari'ah Rating Islamic International Rating Agency (IIRA) has maintained Shari'ah Quality Rating of AA (SQR) for Burj Bank Limited (Formerly Dawood Islamic Bank Limited). The rating reflects IIRA's opinion that Burj Bank conforms to the highest standards of Shari'ah requirements in all aspects of Shari'ah compliance.
The rating is supported by the fact that Burj Bank has an effective Shari'ah Supervisory Structure consisting of an Internal Shari'ah Supervisory Committee (ISSC), headed by an eminent, highly learned and widely respected Shari'ah scholar, Professor Mufti Munib-ur-Rehman. The ISCC includes two qualified Shari'ah Scholars of high repute, namely Mufti Syed Sabir Hussain and Mufti Syed Zahid Siraj.
Burj Bank has approved procedures and a manual for Shari'ah compliance, audit and control. The ISSC enjoys close working relationship with the shareholders, Board of Directors, executives and all other staff of the bank.
The Shari'ah Advisor and his coordinators regularly monitor and examine every business transaction of the Bank across all branches & regions both before and after execution in order to avoid any negligence in Shariah compliance.
Burj Bank also has an aggressive Shari'ah training program for all new inductees and for the existing staff. The ISSC members actively participate in Shari'ah training programs, morning lectures in Head Office to enhance the overall Shari'ah knowledge and its application among bank's staff. The current procedures have proved to be extremely effective and they reflect the management commitment towards the important aspect of Shari'ah training & development. Burj Bank Limited 29 (Formerly Dawood Islamic Bank Limited)
Shari’ah Division
Sitting from left to right Standing from left to right
Mufti Syed Zahid Siraj Syed Qadeer Ahmed Shari’ah Coordinator / Shari’ah Audit Shari’ah Compliance Officer
Prof. Mufti Munib-ur-Rehman Allama Hyder Ali Lashari Shari’ah Advisor Shari’ah Audit Officer
Mufti Syed Sabir Hussain Allama Hafiz M. Shams-ul-Zaman Senior Shari’ah Coordinator / Shari’ah Coordinator Shari’ah Compliance 30 Annual Report 2011
Shari'ah Advisor’s Report For The Financial Year-2011
To, The Shareholders, Burj Bank Ltd (formerly Dawood Islamic Bank Limited)
The year under review is the 5th financial year of Burj Bank Limited (the Bank).
During the year 2011, the Shari'ah Department/Internal Shari'ah Supervisory Committee reviewed various products, structures, process flows/modus operandi, concepts, and transactions for opinion/fatwa on Shari'ah compliance, referred by several departments of Burj Bank. In order to enhance and improve the Islamic banking knowledge and expertise, Islamic banking trainings were made mandatory for all staff of the Bank and training at different levels were arranged in order to further inculcate the Shari'ah compliance culture in their day to day affairs.
As part of the Shari'ah compliance framework a full-fledged Shari'ah Department is working under my supervision for Shari'ah Compliance & Control and Shari'ah Audit functions. During the year, the bank focused on Islamic banking products and services, which were already approved by the undersigned with the aim of maintaining superior Shari'ah Quality.
Following are the major developments that took place during the year under review; 1. 'AA' Rating for Shari'ah Quality
Islamic International Rating Agency (IIRA) based in Bahrain maintained Shari'ah Quality Rating of 'AA' for the Bank. The rating reflects IIRA's opinion that the Bank conforms to their high standards of Shari'ah requirements in all aspects of Shari'ah Quality analysis and implementation. We would like to dedicate this success to all the staff members of the Bank. 2. Transaction Approval System
All financing transactions which included funded transactions namely Murabaha, Murabaha cum Mudarabah, Ijarah, Istisna' and Diminishing Musharakah products as well as non-funded products namely Letters of Credit, Guarantees etc. were duly examined and scrutinized by the Shari'ah Department as per approved Standard Operating Procedure, prior to its execution in order to ensure Shari'ah compliance beforehand. On this basis, Shari'ah compliance was ensured and errors, if any, were rectified before actual execution of transactions. The Shari'ah Department has developed and managed a comprehensive program for online Shari'ah review of each class of transaction for the North and Central Region (Islamabad, Lahore and Faisalabad) in order to efficiently scrutinize transactions while ensuring Shari'ah compliance on pre- consummation basis. 3. Training & Development:
During the year, several in-house functional-level Islamic banking orientation and training sessions were held in coordination with HRD at Head Office and at other stations of the Bank. Online Shari'ah finance & other training modules were also developed, which were executed by HRD in coordination with the Shari'ah Department. Special training sessions were conducted on Shari'ah Compliance during Shari'ah Department's visits to branches across the country.
To enhance awareness among the staff of the Bank about Islam & Islamic finance, a comprehensive program of lectures was being conducted on alternate days at Head Office of the bank and the summary of selected lectures were circulated among all staff via e-mail. Burj Bank Limited 31 (Formerly Dawood Islamic Bank Limited)
The Bank supported and participated in various Islamic banking workshops, seminars and certificate courses arranged by different institutions including National Institute of Banking & Finance (NIBAF), State Bank of Pakistan, Riphah International University Islamabad, Sheikh Zayed Islamic Centre, University of Karachi, Institute of Banking Pakistan (IBP), E&Y Ford Rhodes Sidat Hyder & Company and Al-Muneeb Shari'ah Academy, Karachi. Shariah Coordinators of the Bank also participated in the Islamic Banking Seminar as facilitator organized by the Bank in collaboration with State Bank of Pakistan. 4. Shari’ah Consultancy:
Taking a step further, during the year Shari'ah Department of the bank has signed off agreements to provide Shariah Consultancy Services to other Islamic Financial Institutions. 5. Shari’ah Structuring Services for Syndicate Transactions:
During the year Shari’ah Department has also provided Shari’ah Advisory services to other banks for drafting Shari’ah compliant Syndicate Structures under DM & Murabaha based financing. Summary of Shari'ah Advisor's Review: Liability Side:
On the liability side, the Bank offered variety of Shari'ah compliant deposit products based on the underlying Shari'ah modes of Al-Qard for Current Account and Mudarabah for Saving & Term deposit accounts. Weightages and profit sharing ratio were reviewed on regular basis and amendments were being made with our approval. Profit declaration mechanism as developed by us was duly implemented and sign-offs were obtained from us on monthly basis.
On liability side, a new product namely ‘Burj Business Account’ a unique product catering business customers has been launched. Revamping of all existing liability products has been made with new names & modified features to attract the customers. Assets Side:
On the asset side, besides focusing on Corporate and SME customers, during the year consumer financing program of Auto Carsaaz (Auto Ijarah) was implemented with the true spirit of Shariah compliance. The Bank was able to service its customers well by successfully fulfilling their working capital requirements as well as capital budgeting/expenditure requirements through various modes of financing based on Murabaha, Ijarah, Istisna', Diminishing Musharakah and Mudarabah modes. However, Murabaha based financing including Islamic Export Refinance Scheme, remained a significant portion of financing portfolio of the bank. New Investment Avenue:
During the year Treasury function of the bank successfully launched its Equity desk for investments in stock market securities under the guidance and supervision of Shariah Department. Shariah Department has reviewed the process and approved investments in KMI- 30 index companies. Shari'ah Audit & Compliance Reviews:
To ensure that all the products and services being offered by the bank are strictly adhered to according to the conjunctions of Shari'ah guidelines, Shari'ah Department actively reviewed 32 Annual Report 2011
and monitored almost all financial transactions of the bank throughout the year.
During the year, financing approvals, restructuring of financing facilities, customer specific modus operandi/process flows of various transactions, approval of contents and wordings of letters of guarantee (LGs), opening of LCs, security documents and various agreements were reviewed to ensure Shari'ah compliance while offering such financing facilities to the customers.
Profit-sharing ratios, profit weightages, pool working, asset and deposit allocation for deposit products were monitored periodically by Shari'ah department. During the year, Shari'ah Audit of certain departments and selected branches was conducted in order to ensure and evaluate the overall Shari'ah compliance of the bank's activities in accordance with the guidelines given by Shari'ah department/Shari'ah Advisor and State Bank of Pakistan. Charity Movement:
As far as Shari'ah rulings are concerned, charity in Islamic Banks has two sources and two applications: i. The charity which is collected from delayed payments from customers, in accordance with guidelines of Shari'ah it is NAZR-UN-LILLAH, which comes under the head of SADAQAT-E-WAJIBAH i.e. Obligatory to pay once it is intended by the NAZIR (the customer who undertakes to pay).
ii. Whereas the other sources of charity is a void transaction / non purified income (in this case, profit of the void transaction/non-purified income and is declared as charitable)
Application of both types of charity is done in different manner: i. The Charity which is collected on default/delayed payments, must be distributed among those who are specified in the Verse 60 of Surah Al-Taubah. Translation (9:60 Alms are for the poor and the needy, and those employed to administer the (funds); for those whose hearts have been reconciled; for those in bondage and in debt; in the cause of Allah. and for the wayfarer: ordained by Allah, and Allah is full of knowledge and wisdom.)
ii. While for other source of General charity, (SADAQAT-E-NAFILA), there is no such restriction.
Shari'ah department considers both types of charity and approves the distribution according to their nature and in conformity with Shariah guidelines.
The charity funds that were obtained by the Bank were kept in a specially designated charity account of the bank. An Approval Procedure for Distribution of Charity has been devised and a committee has been formed for effective and transparent utilization and after due scrutiny of the deserving beneficiaries whether individuals or charitable institutions with the approval of Shari'ah Adviser in compliance with the instructions of the State Bank of Pakistan.
In the year 2011, charity of PKR 16.195 million was collected on account of overdue financing/default in payments and PKR 13.751 million has been distributed to the institutions/individuals as per the charity policy already approved by Board of the Bank. (Details of the charity distribution can be referred in the note 17.2.1 to the financial statements.) Waiver / Exemptions of Charity Requests:
We considered several requests for the waiver of charity on grounds which were specified as unavoidable circumstances, it was duly communicated that according to Shari'ah rulings no one is allowed to waive NAZAR-UN-LILLAH once it is intended by the NAZIR. Therefore, they were notified that if they were exempted on special grounds from depositing their charity in Burj Bank Limited 33 (Formerly Dawood Islamic Bank Limited)
bank's charity account, their liability will not extinguish unless they pay their charity in the way of ALLAH Al-Mighty on their own and at their own convenience. However, such exemptions were allowed after ascertaining the genuineness of such requests. Nevertheless such exemptions were allowed as exceptions only and not as a general practice and such exemption must not be deemed as precedence for future. Such charity amounts cannot be adjusted in their ZAKAT or any other obligatory SADAQAT. The Shari'ah department has also devised a procedure for entertaining such requests of charity reversal/ exemption/waiver. Observations & Recommendations:
In our opinion training and awareness of Islamic banking and finance is a continuous process and the personnel of the Bank also require regular training and development in future. We have recommended that a aptitude test program should be put in place with regards to Shariah knowledge before hiring of new staff. Any new entrant should be required to undergo minimum competency requirement process before being allowed to hold any position. All in all, successful completion of the “Shariah Orientation Course” should be made mandatory.
In order to take its rightful place as an 'Islamic bank of choice', the bank needs to further strengthen its Product Development & Research Department which should closely coordinate with Shari'ah Advisor/Shari'ah Department. Efforts are being made to augment human resource for pro-active development of Shariah based products and services. Not only do we seek to enhance the level of expertise but also product development and Shariah compliance function would liaison closely with all other product managers of Corporate, Consumer, Retail, SME,Investment Banking and Treasury.
Notwithstanding the fact, the conventional benchmark of KIBOR is still prevalent in Pakistan. However, the matter of usage of conventional benchmark still remains a matter of concern for Shari'ah Advisers.
Several workshops/seminars were held for the employees of the bank and it is further recommended that such events should also be conducted for larger audiences and general public in order to improve awareness and understanding of Islamic banking. Conclusion:
Based on the reviews of almost all transactions of BURJ, the relevant documentations & procedures adopted, the allocation of funds, weightages, profit sharing ratios and all other activities & affairs the undersigned has unequivocal grounds to believe that the business of BURJ is being carried out in accordance with rules and principles of Shari'ah, SBP regulations and guidelines related to Shari'ah compliance and other rules as well as with specific Fatawa issued from time to time.
The charity due to void transactions, non-purified income from dividend has been duly transferred into the Charity Account of the Bank.
Prof. Mufti Munib-ur-Rehman Shari'ah Advisor Burj Bank Ltd 34 Annual Report 2011
Notice of 6th Annual General Meeting Burj Bank Limited (Formerly Dawood Islamic Bank Limited) Notice is hereby given that the 6th Annual General Meeting of Burj Bank Limited (Formerly Dawood Islamic Bank Limited) will be held at 3rd Floor, Board Room, Trade Center, I.I. Chundrigar Road, Karachi on Wednesday March 28, 2012 at 11:00 am, to transact the following business:
Ordinary Business
1. To confirm the minutes of 5th Annual General Meeting held on March 30, 2011. 2. To receive, consider and adopt the Audited Accounts of the Bank for the year ended December 31, 2011 together with the Directors' Report and Auditors' Report thereon. 3. To appoint Auditors for the year ending December 31, 2012 and to fix their remuneration.
Other Business:
4. To consider any other business with the permission of Chairman.
By Order of the Board
March 07, 2012 Ahmed Khizer Khan Karachi Acting Company Secretary
Notes:
i) The share transfer books of the Bank will remain closed from March 21, 2012 to March 28, 2012 (both days inclusive). ii) A member entitled to attend and vote at the Meeting may appoint another member as his/her proxy to attend, speak and vote on his/her behalf at the meeting. No person other than a member shall act as proxy. A corporation being a member may appoint as its proxy any of its official or any other person whether a member of the Bank or otherwise. iii) An instrument appointing a proxy and the Power of Attorney or other Authority (if any) under which it is signed, or notarized copy of such Power or Authority, in order to be valid, must be deposited at the Registered Office of the Bank, F.D.Registrar Services (SMC-Pvt) Limited, Office # 1108, 11th Floor, Trade Centre, I.I. Chundrigar Road, Karachi - 74000, not less than 48 hours before the time fixed for holding the meeting and must be duly stamped, signed and witnessed. iv) Members are requested to notify change in their address, if any, to our Share Registrar immediately. v) CDC account holders will in addition, have to follow under mentioned guidelines as laid down in Circular No. 1 dated January 26, 2000 issued by the Securities and Exchange Commission of Pakistan for attending the meeting. Burj Bank Limited 35 (Formerly Dawood Islamic Bank Limited)
A. For attending the meeting i) In case of individuals, the account holder or sub-account holder and/or the person whose securities are in group account and their registration details are uploaded as per the Regulations, shall authenticate his/her identity by showing his/her original Computerized National Identity Card (CNIC) or original passport at the time of attending the meeting. ii) In case of corporate entity, the Board of Directors' resolution/power of attorney with specimen signature of the nominee shall be produced (unless it has been provided earlier) at the time of the meeting.
B. For appointing proxies i) In case of individuals, the account holder or sub-account holder and/or the person whose securities are in group account and their registration details are uploaded as per the regulations, shall submit the proxy form as per the above requirement. ii) The proxy form shall be witnessed by two persons whose names, addresses and NIC numbers shall be mentioned on the form. iii) Attested copies of NIC or the passport of the beneficial owners and of the proxy shall be furnished with the proxy form. iv) The proxy shall produce his/her original CNIC or original passport at the time of the meeting. v) In case of a corporate entity, the Board of Directors' resolution/power of attorney with specimen signature shall be submitted (unless it has been provided earlier) along with proxy form to the Bank. 36 Annual Report 2011
Statement of Compliance with the Best Practices of Code of Corporate Governance For the year ended December 31, 2011 This statement is being presented to comply with the Code of Corporate Governance contained in Regulation G-1 of the Prudential Regulations for Corporate / Commercial Banking issued by the State Bank of Pakistan for the purpose of establishing a framework of good governance, whereby a bank is managed in compliance with the best practice of corporate governance.
The bank has applied the principles contained in the Code in the following manner:
1. At present the Board comprises of nine directors, out of which three directors are non- executive directors. Currently the Board does not have any independent non-executive director.
2. The directors have submitted details to the State Bank of Pakistan that none of them is serving as a director in more than ten listed companies, including this bank. The Bank is taking steps to obtain a formal declaration to this effect.
3. All the resident directors of the bank are registered as taxpayer and none of them has defaulted in payment of any loan to a banking company, or a Development Financial Institution (DFI), or an Non Banking Financial Institution (NBFI), or, being a member of a stock exchange, has been declared as a defaulter by that stock exchange. The directors of the bank are individuals of repute and integrity with vast diversified experience of the corporate affairs.
4. Two casual vacancies occurred on the Board during the financial year ended December 31, 2011. Mr. Amir Hussain resigned on December 31, 2010 and the casual vacany was filled by Mr. Ahmed Khizer Khan on June 6, 2011. Another casual vacancy occurred with the resignation of Mr. Pervez Said, Ex-Chief Executive officer of the Bank. Mr. Ahmed Khizer Khan who was serving as a Director on the Board was appointed as the Chief Executive Officer of the Bank with effect from November 1, 2011. The Board is taking steps to fill the casual vacancy.
5. The bank has prepared a 'Statement of Ethics and Business Practices', which has been signed by all the Directors and employees of the bank.
6. The Board has formulated 'Vision Statement' and 'Mission Statement'. Corporate strategies and significant policies of the bank have been made with appropriate delegation of authorities and responsibilities to various levels of the management. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained.
7. All the powers of the Board have been duly exercised and decisions on material transactions, including appointment and determination of remuneration and terms and conditions of employment of the Chief Executive Officer have been taken by the Board.
8. The meetings of the Board were presided over by the Chairman. The Board meetings were held at least once in a quarter. Written notices of the Board meetings along with agenda and working papers, were circulated atleast seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated.
9. Although a formal orientation course has not been arranged for the Directors, the management of the bank circulates a summary of provisions of various laws i.e. the Companies Ordinance 1984, the Code of Corporate Governance, the Banking Companies Ordinance 1962, the Prudential Regulations of the State Bank of Pakistan and the Listing Regulations of Karachi Stock Exchange as required under clause (xiv) of the Code to acquaint the Directors of their duties and responsibilities and enable them to manage the affairs of the bank on behalf of the shareholders. Burj Bank Limited 37 (Formerly Dawood Islamic Bank Limited)
10. The Board has approved the appointment of the CFO, Company Secretary and the Head of Internal Audit, including their remuneration and terms and conditions of employment, as recommended by CEO. During the year, Company Secrectary resigned with effect from April 20, 2011. Subsequent to year end, the Board has appointed a new Company Secretary and approved his remuneration and terms and conditions of employment.
11. The Directors' report for this year has been prepared in compliance with the requirements of the Code and fully describes the salient matters required to be disclosed.
12. The financial statements of the bank were duly endorsed by the Chief Executive Officer and Chief Financial Officer before approval of the Board.
13. The directors, CEO and executives do not hold any interest in the shares of the bank other than that disclosed in the pattern of shareholdings.
14. The bank has complied with all the corporate and financial reporting requirements of the Code.
15. The Board has formed an audit committee. It comprises of three members, of whom two are non-executive directors including the chairman of the committee.
16. The meetings of the audit committee were held at least once every quarter prior to the approval of interim and final results of the Bank and as required by the Code. The terms of reference of the committee have been formed, approved by the Board and advised to the committee for compliance.
17. The Board has set up an effective internal audit function. The staff of Internal Audit Department is suitably qualified and experienced for the purpose and is conversant with the policies and procedures of the bank.
18. The statutory auditors of the bank have confirmed that they have been given a satisfactory rating under the quality control review program of the Institute of Chartered Accountants of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the bank and that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by Institute of Chartered Accountants of Pakistan.
19. The statutory auditors of the bank or the persons associated with them have not been appointed to provide other services except in accordance with the listing regulations and the auditors have confirmed that they have observed the IFAC guidelines in this regard.
20. The related party transactions have been placed before the audit committee and approved by the Board of Directors.
21. We confirm that except for the matters highlighted above all the other material principles contained in the Code have been duly complied with.
For and on behalf of the Board
Chairman Karachi: March 01, 2012 38 Annual Report 2011
A. F. FERGUSON & CO. Auditors' Review Report to the Members on Statement of Compliance with the Best Practices of the Code of Corporate Governance
We have reviewed the statement of compliance with the best practices contained in the Code of corporate Governance prepared by the Board of Directors of Burj Bank Limited (formerly Dawood Islamic Bank Limited) (“the Bank”) to comply with regulation G-1 of the Prudential Regulations for Corporate / Commercial Banking issued by the State Bank of Pakistan.
The responsibility for compliance with the Code of Corporate Governance is that of the Board of Directors of the Bank. Our responsibility is to review, , to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Bank's compliance with the provisions of Code of Corporate Governance and report if it does not. A review is limited primarily to inquire of the Bank personnel and review of various documents prepared by the Bank to comply with the Code.
As part of our audit of the financial statements, we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We have not carried out any special review of the internal control system to enables us to express an opinion as to whether the Board's statement on internal control covers all controls and the effectiveness of such internal controls.
The Code of Corporate Governance requires the Bank to place before the Board of Directors for their consideration and approval, related party transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm's length transactions and transactions which are not executed at arm's length price recording proper justification for using such alternate pricing mechanism. Further, all such transactions are also required to be separately placed before the audit committee. We are only required and have ensured compliance of the above requirements to the extent of approval of related party transactions by the Board of Directors and placement of such transactions before the audit committee. We have not carried any procedures to determine whether the related party transactions were undertaken at arm's length prices or not.
Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance does not appropriately reflect the Bank's compliance, in all material respects, with the best practices contained in the Code of Corporate Governance as applicable to the Bank for the year ended December 31, 2011.
Chartered Accountants Date: March 05, 2012 Karachi
A. F. FERGUSON & CO., Chartered Accountants, a member firm of the PwC network State Life Building No. 1-C, I. I. Chundrigar Road, P.O. Box 4716, Karachi-74000, Pakistan Tel: (+92-21) 32426682-6/32426711-5; Fax:+92 (21) 32415007/32427938; < www.pwc.com/pk> Lahore: 23-C, Aziz Avenue, Canal Bank, Gulberg V, P.O.Box 39, Shahrah-e-Quaid-e-Azam, Lahore-54000; Tel:+92 (42) 35715864-71; Fax: +92 (42) 35715872 Islamabad: PIA Building, 3rd floor, 49 Blue Area, Fazl-ul-Haq Road, P.O.Box 3021, Islamabad-44000; Tel: +92 (51) 2273457-60; Fax: +92 (51) 2277924 Kabul: House No. 1916, Street No. 1, Behind Cinema Bariqot, Nahar-e-Darsan, Karte-4, Kabul, Afghanistan; Tel: +93 (779) 315320, +93 (799) 315320 Burj Bank Limited 39 (Formerly Dawood Islamic Bank Limited)
Statement on Internal Controls
The Board of Directors and Senior Management of the Bank, being fully cognizant of the significance of internal controls framework in achievement of the Bank's overall objectives, have continuously been working to maintain and consistently operate a sound system of internal controls and contributed considerable efforts to further strengthen the framework to ensure stability and soundness of the Bank.
The year 2011 has been a year of beginning for the change - the change not only in terms of branding, but also shift in business strategies and priorities. The management, besides emphasis on exploring new business avenue, widening the Bank's product menu and improving their quality of delivery to the customers, equally prioritized the corresponding controls. On controls front, strong 'Governance Framework' and robust 'Risk Management Framework' remained the broad objectives of the Board and management of the Bank and significant milestones achieved in respective components of Internal Controls System targeting these objectives. Brief overview of key control initiatives is given in following part of the statement.
The Bank, in compliance of SBP guidelines on Internal Controls, undertook implementation of requirements related to Internal Control over Financial Reporting (ICFR) and completed five stages of the regulatory roadmap; and during the year under review, the Bank's external auditors evaluated the Bank's efforts in completing the milestones of the roadmap and submitted their long-form report to State Bank. The report greatly acknowledged the bank's efforts and work done towards strengthening Internal Controls over Financial Reporting. In the backdrop of stated broad objectives; besides ICFR, the management also focused to strengthen the performance and compliance targeted controls; and towards this end, significant value has been added to all components of the Internal Control System, particularly the Bank's 'Control Environment', 'Risk Assessment' and 'Control Activities'.
The Bank's control environment, being of pivotal importance for the Internal Control System, remained one of the focused areas during the year under review and a number of dimensions improved and other added to strengthen it. During entire year, the Board remained the source of direction and guidance to the management and also ensured effective oversight through revamping MIS and policy framework. Newly established Executive Committee, a Board sub- committee, acted as a medium and catalyst for the Board's overall oversight and remained actively engaged in devising and assessing the Bank's strategies, policies, management philosophies, operating styles, performance etc. and MIS for the Board of Directors. Policy framework has remained under overhauling process and strengthened through filling of policy gaps and aligning others to operating environment through revision and updation. The key policies revamped and approved by the Board during the year include Human Resource Policy, Internal Audit Policy & Manual, Expenditure Policy, Accounting & Disclosure Policy, and Fixed Assets Policy. The realignment of rest of the components of policy framework have passed through the review process and prioritized to be completed within shortest possible time. To establish and promote a culture of integrity; highest moral and business ethics; and compliance, the disciplinary action policies and processes have been redesigned and its implementation is strengthened through bringing in high profile Disciplinary Action Committee.
During the year, Bank also strived to strengthen the control activities through effectively identifying and assessing the risks it is exposed to, particularly operational risk. Towards this end; besides financial reporting, the management also emphasized putting in effective operational and compliance controls. Necessary control activities ranging from departmental restructurings, 40 Annual Report 2011
revised processes, procedural manuals, automations to revised MIS etc. have been designed in the light of risks identified through various means. To ensure quality, the control activities have been reviewed by the risk review functions of the bank. The key milestones in this regard include centralization of more functions at back office, restructuring of operations back office functions, revamping of procedural manuals etc. Further, Operational Risk Management Unit of the Bank started functioning during the year and undertook project to put in place Operational Risk Management Framework, comprising of policy and system.
In view of continuously changing operating environment and thus inherent risks, the internal controls system needs ongoing review and assessment to remain effective. The Board and senior management, besides their endeavors to ensure its existence, have been periodically reviewing its components as well as the entire system to ensure its adequacy, maintenance and effective implementation within the Bank.
Going forward, in light of the Bank's five year business strategy with year 2012 declared as the year of building foundations whereby compliance and controls are amongst the foundation stones; the management has laid strong emphasis on building robust internal control system and a strong compliance structure in the Bank. A number of initiatives have been planned and are underway to implementation in these areas. Integration of the Bank's Internal Controls System to make the components more cohesive, aligned & complementary to each other and contributing to the Bank's governance framework; system switchover to put in place modern state of the art technology platform; and processes reengineering are a few amongst these initiatives. Specific action plans are being figured out to reinforce individual components of the internal control system with more emphasis to the control environment and control activities through comprehensive policy framework and automated controls. With regard to ICFR, the project is targeted to be completed to full extent in the light of regulatory roadmap by the end of third quarter of 2012.
The Internal Controls System evolves continuously and hence its evaluation is an ongoing process; and this statement of internal controls is based on the management's assessment towards various aspects of the Internal Controls System of the Bank. The Internal Controls System of the Bank is architected to minimize the inherent risks; and the Bank's control functions can only provide reasonable assurance against any material misstatement or loss. The management of Burj Bank, however, is confident that the Bank's prevailing internal controls system is adequately designed, maintained and effectively implemented at a satisfactory level and the Board of Directors endorses the management's evaluation towards its adequacy and efficacy.
For and on behalf of the Board
Ahmed Khizer Khan President & CEO Burj Bank Limited 41 (Formerly Dawood Islamic Bank Limited)
A. F. FERGUSON & CO.
Auditors' Report to the Members
We have audited the annexed statement of financial position of Burj Bank Limited (formerly Dawood Islamic Bank Limited) as at December 31, 2011 and the related profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the 'financial statements') for the year then ended, in which are incorporated the un-audited certified returns from the branches except for five branches which have been audited by us and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.
It is the responsibility of the Bank's management to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with the approved accounting standards and the requirements of the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with the International Standards on Auditing as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and after due verification, which in the case of financings covered more than sixty percent of the total financings of the Bank, we report that:
(a) in our opinion, proper books of account have been kept by the Bank as required by the Companies Ordinance, 1984 (XLVII of 1984), and the returns referred to above received from the branches have been found adequate for the purposes of our audit;
(b) in our opinion:
(i) the statement of financial position and profit and loss account together with the notes thereon have been drawn up in conformity with the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984), and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;
A. F. FERGUSON & CO., Chartered Accountants, a member firm of the PwC network State Life Building No. 1-C, I. I. Chundrigar Road, P.O. Box 4716, Karachi-74000, Pakistan Tel: (+92-21) 32426682-6/32426711-5; Fax:+92 (21) 32415007/32427938; < www.pwc.com/pk> Lahore: 23-C, Aziz Avenue, Canal Bank, Gulberg V, P.O.Box 39, Shahrah-e-Quaid-e-Azam, Lahore-54000; Tel:+92 (42) 35715864-71; Fax: +92 (42) 35715872 Islamabad: PIA Building, 3rd floor, 49 Blue Area, Fazl-ul-Haq Road, P.O.Box 3021, Islamabad-44000; Tel: +92 (51) 2273457-60; Fax: +92 (51) 2277924 Kabul: House No. 1916, Street No. 1, Behind Cinema Bariqot, Nahar-e-Darsan, Karte-4, Kabul, Afghanistan; Tel: +93 (779) 315320, +93 (799) 315320 42 Annual Report 2011
A. F. FERGUSON & CO.
(ii) the expenditure incurred during the year was for the purpose of the Bank's business; and
(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Bank and the transactions of the Bank which have come to our notice have been within the powers of the Bank;
(c) in our opinion and to the best of our information and according to the explanations given to us the statement of financial position, profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with the approved accounting standards as applicable in Pakistan, and give the information required by the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984), in the manner so required and give a true and fair view of the state of the Bank's affairs as at December 31, 2011, and its true balance of loss, its comprehensive loss, its cash flows and changes in equity for the year then ended; and
(d) in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980) was deducted by the Bank and deposited in the Central Zakat Fund established under section 7 of that Ordinance.
Emphasis of matter paragraph
We draw attention to note 18.4 to the accompanying financial statements which describes the matter relating to shortfall in minimum capital requirement of the Bank as at December 31, 2011 and the State Bank of Pakistan's limited extension in this regard till March 31, 2012 to meet this requirement. Our opinion is not qualified in respect of this matter.
Chartered Accountants Audit Engagement Partner: Salman Hussain Dated: March 05, 2012 Karachi Devotion Devotion indicates the need for hard work, consistency, perseverance & a commitment towards the organization, its customers and all its stakeholders. 44 Annual Report 2011 Financial Statements FINANCIAL STATEMENTS FINANCIAL 46 Annual Report 2011
Statement of Financial Position As at December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
ASSETS
Cash and balances with treasury banks 6 1,379,696 1,324,461 Balances with other banks 7 2,215,636 400,468 Due from financial institutions 8 - 2,679,753 Investments - net 9 9,982,793 5,050,878 Financings - net 10 10,509,340 5,616,202 Operating fixed assets 11 671,890 646,645 Deferred tax assets - net 12 480,377 393,116 Other assets 13 2,405,097 1,564,163 27,644,829 17,675,686
LIABILITIES
Bills payable 14 210,932 86,867 Due to financial institutions 15 447,300 287,291 Deposits and other accounts 16 20,341,241 12,636,083 Sub-ordinated loans - - Liabilities against assets subject to finance lease - - Deferred tax liabilities - - Other liabilities 17 840,778 339,462 21,840,251 13,349,703 NET ASSETS 5,804,578 4,325,983
REPRESENTED BY Share capital 18 7,410,458 5,010,458 Reserves 16,751 16,751 Accumulated losses (1,649,630) (761,142) 5,777,579 4,266,067 Surplus on revaluation of assets - net 19 26,999 59,916 5,804,578 4,325,983
CONTINGENCIES AND COMMITMENTS 20
The annexed notes 1 to 40 form an integral part of these financial statements.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi Burj Bank Limited 47 (Formerly Dawood Islamic Bank Limited)
Profit and Loss Account For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
Profit / return earned 21 2,375,585 1,263,461 Profit / return expensed 22 (1,423,171) (726,325) Net spread earned 952,414 537,136
Provision against non-performing financings - net 10.7 (165,374) (382,826) Provision for diminution in the value of investments - net 9.8 (86,206) (23,453) Bad debts written off directly - - (251,580) (406,279) Net spread after provisions 700,834 130,857
Other income Fee, commission and brokerage income 34,363 19,815 Dividend income 33,757 275 Income from dealing in foreign currencies 20,845 17,593 Gain on sale of securities - net 23 80,758 2,215 Unrealised loss on revaluation of investments classified as held for trading - net 9.9 - (50) Other income 24 18,814 24,412 Total other income 188,537 64,260 889,371 195,117 Other expenses Administrative expenses 25 (1,229,345) (986,592) Other provisions / write-offs 13.3 (6,877) (22,848) Other charges 26 (57) (10,237) Total other expenses (1,236,279) (1,019,677) Extra ordinary / unusual items - -
Loss before taxation (346,908) (824,560)
Taxation 27 - Current (25,184) - - Prior years - - - Deferred 83,604 289,038 58,420 289,038 Loss after taxation (288,488) (535,522) Accumulated losses brought forward (761,142) (225,620)
Accumulated losses carried forward (1,049,630) (761,142)
------Rupees ------
Basic / diluted loss per share 28 (0.463) (1.069)
The annexed notes 1 to 40 form an integral part of these financial statements.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi 48 Annual Report 2011
Statement of Comprehensive Income For the year ended December 31, 2011
2011 2010 ------Rupees in '000 ------
Loss after taxation for the year (288,488) (535,522)
Other comprehensive income - -
Total Comprehensive loss for the year transferred to equity (288,488) (535,522)
Components of comprehensive income / (loss) not reflected in equity:
(Deficit) / surplus on revaluation of available for sale investments - net of tax (32,917) 19,725
Total comprehensive loss for the year (321,405) (515,797)
The annexed notes 1 to 40 form an integral part of these financial statements.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi Burj Bank Limited 49 (Formerly Dawood Islamic Bank Limited)
Statement of Changes in Equity For the year ended December 31, 2011
Share Statutory Accumulated Total capital reserve * losses ------Rupees in '000 ------
Balance as at January 1, 2010 5,010,458 16,751 (225,620) 4,801,589
Loss after taxation for the year - transferred from Statement of Comprehensive Income - - (535,522) (535,522)
Balance as at December 31, 2010 5,010,458 16,751 (761,142) 4,266,067
Issue of right shares (note 18.3.1) 2,400,000 - - 2,400,000
Discount on issue of right shares (note 18.3.1) - - (600,000) (600,000)
Loss after taxation for the year - transferred from Statement of Comprehensive Income - - (288,488) (288,488)
Balance as at December 31, 2011 7,410,458 16,751 (1,649,630) 5,777,579
* This represents reserve created under section 21(i)(a) of the Banking Companies Ordinance, 1962.
The annexed notes 1 to 40 form an integral part of these financial statements.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi 50 Annual Report 2011
Cash Flow Statement For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
CASH FLOWS FROM OPERATING ACTIVITIES Loss before taxation (346,908) (824,560) Less: Dividend income (33,757) (275) (380,665) (824,835) Adjustments for non-cash and other items Depreciation - owned assets 11.2 117,457 110,855 Depreciation - Ijarah assets 109,178 49,495 Amortisation 25.3 34,993 57,780 Operating fixed assets written off 25 22,402 - Provision against non-performing financings - net 10.7 165,374 382,826 Provision for diminution in the value of investments - net 9.8 86,206 23,453 Other provisions / write-offs 13.3 6,877 22,848 Unrealised loss on revaluation of investments classified as held for trading - net 9.9 - 50 Unrealised loss on forward foreign exchange contracts - net 17 1,516 - Reversal of rent expense on purchase of building 35.1.1 (8,649) - Gain on sale of operating fixed assets - net 24 (1,370) (242) Gain on sale of securities - net 23 (80,758) (2,215) 453,226 644,850 72,561 (179,985) (Increase) / decrease in operating assets Due from financial institutions 2,679,753 178,189 Net investment in held for trading securities 200,004 (200,054) Financings (5,167,690) (1,284,901) Other assets (excluding advance taxation and deferred cost) (847,418) (1,015,117) (3,135,351) (2,321,883) Increase / (decrease) in operating liabilities Bills payable 124,065 28,604 Due to financial institutions 160,009 (807,084) Deposits and other accounts 7,705,158 5,851,333 Other liabilities 499,800 109,955 8,489,032 5,182,808 5,426,242 2,680,940 Income tax paid (32,165) (13,354) Net cash generated from operating activities 5,394,077 2,667,586
CASH FLOWS FROM INVESTING ACTIVITIES Net investment in available for sale securities (11,828,280) (2,113,725) Dividend income received 33,757 275 Proceeds from sale of investments 6,654,339 125,280 Investment in operating fixed assets (196,213) (214,143) Proceeds from sale of operating fixed assets 12,723 6,319 Net cash used in investing activities (5,323,674) (2,195,994)
CASH FLOWS FROM FINANCING ACTIVITIES Issue of right shares 1,800,000 - Net cash generated from financing activities 1,800,000 -
Increase in cash and cash equivalents during the year 1,870,403 471,592 Cash and cash equivalents at the beginning of the year 1,724,929 1,253,337 Cash and cash equivalents at the end of the year 29 3,595,332 1,724,929
The annexed notes 1 to 40 form an integral part of these financial statements.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi Burj Bank Limited 51 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
1 STATUS AND NATURE OF BUSINESS
1.1 Burj Bank Limited (formerly Dawood Islamic Bank Limited) (the Bank) was incorporated in Pakistan as a public limited company on August 29, 2005 under the Companies Ordinance, 1984 to carry out business of an Islamic Commercial Bank in accordance with the principles of Islamic Shariah. The head office of the Bank is situated at Trade Centre, I.I. Chundrigar Road, Karachi.
1.2 The State Bank of Pakistan (SBP) issued a "Scheduled Islamic Commercial Bank" license to the Bank on March 16, 2007 and granted approval for commencement of Islamic Banking Business on April 9, 2007. The Bank is principally engaged in commercial, consumer and investment activities. At present the Bank is operating through its fifty branches including eight sub branches (2010: fifty branches including eight sub branches).
1.3 Based on the financial statements of the Bank for the year ended December 31, 2010, JCR VIS Credit Rating Company Limited has determined the Bank's long term rating as "A" and short term rating as "A-2".
1.4 During the year, in pursuance of the special resolution approved in the Annual General Meeting held on March 30, 2011, the name of the Bank was changed from Dawood Islamic Bank Limited to Burj Bank Limited. The change of name was approved by the SBP vide its notification number BPRD (R&P- 01)/2011/8949 dated July 9, 2011, and was effective from July 1, 2011. The certificate of change of name has been issued by the Securities and Exchange Commission of Pakistan (SECP) dated May 26, 2011.
2 BASIS OF PRESENTATION
The Bank provides financing mainly through Murabaha, Ijarah, and other Islamic modes. Under Murabaha the goods are purchased and are then sold to the customers on credit. The purchases and sales arising under these arrangements are not reflected in these financial statements as such but are restricted to the amount of facility actually utilised and appropriate portion of profit thereon. The income on such financing is recognised in accordance with the principles of Islamic Shariah. However, income if any, received which does not comply with the principles of Islamic Shariah is recognised as charity payable if so directed by the Shariah Advisor.
3 STATEMENT OF COMPLIANCE
3.1 These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board and Islamic Financial Accounting Standards, issued by the Institute of Chartered Accountants of Pakistan, as are notified under the Companies Ordinance, 1984, the requirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 or directives issued by the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP). Wherever the requirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 or directives issued by the SECP and the SBP differ with the requirements of IFRS, the requirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 or the requirements of the said directives prevail.
3.2 The SBP has deferred the applicability of International Accounting Standard (IAS) 39, 'Financial Instruments: Recognition and Measurement' and International Accounting Standard (IAS) 40, 'Investment Property' for Banking Companies through BSD Circular Letter No. 10 dated August 26, 2002 till further instructions. Further, the SECP has deferred the applicability of International Financial Reporting Standard (IFRS) 7 'Financial Instruments: Disclosures' through its notification S.R.O 411(I)/2008 dated April 28, 2008. 52 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Accordingly, the requirements of these standards have not been considered in the preparation of these financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by the SBP through various circulars.
3.3 SBP through its BSD Circular No. 07 dated April 20, 2010 has clarified that for the purpose of preparation of financial statements in accordance with International Accounting Standard - 1 (Revised) 'Presentation of Financial Statements', two statement approach shall be adopted i.e., separate 'Profit and Loss Account' and 'Statement of Comprehensive Income' shall be presented, and 'Balance Sheet' shall be renamed as 'Statement of Financial Position'. Furthermore, the Surplus / (Deficit) on revaluation of Available For Sale Securities (AFS) only may be included in the 'Statement of Comprehensive Income' but will continue to be shown separately in the 'Statement of Financial Position'. Accordingly, the above requirements have been adopted in the preparation of these financial statements.
3.4 IFRS 8 'Operating Segments' is effective for the Bank's accounting period beginning on or after January 1, 2009. All banking companies in Pakistan are required to prepare their annual financial statements in line with the format prescribed under BSD Circular No. 4 dated February 17, 2006, 'Revised Forms of Annual Financial Statements', effective from the accounting year ended December 31, 2006. The management of the Bank believes that as the SBP has defined the segment categorisation in the above mentioned circular, the SBP requirements prevail over the requirements specified in IFRS 8. Accordingly, segment information disclosed in these financial statements is based on the requirements laid down by the SBP.
3.5 New and amended standards and interpretations that are effective in the current year
The following new and amended standards and interpretations have been published and are mandatory for the Bank's accounting period beginning January 1, 2011:
(a) IAS 1, 'Presentation of financial statements' (effective January 1, 2011). The amendment clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements.
The Bank has adopted the above amendment with effect from January 1, 2011. The Bank's current policy and disclosures are in line with the requirements prescribed by SBP as described in note 3.3 and accordingly, the above amendment does not have any impact on the Bank's financial statements.
(b) IAS 24 (revised), 'Related party disclosures' issued in November 2009. It supersedes IAS 24, 'Related party disclosures', issued in 2003. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The revised standard does not have any effect on the Bank's financial statements.
There are other new and amended standards and interpretations that are mandatory for the Bank's accounting period beginning on or after January 1, 2011 but are considered not to be relevant or to have any significant effect on the Bank's operations and are, therefore, not disclosed in these financial statements.
3.6 New and amended standards and interpretations, as adopted in Pakistan, that are not yet effective
The following standards and amendments to existing standards and interpretations have been published and are mandatory for the Bank's accounting period beginning January 1, 2012 and have not been early adopted by the Bank. Burj Bank Limited 53 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
(a) IAS 1, 'Presentation of financial statements' (effective July 1, 2012). The main change resulting from these amendments is a requirement for entities to group items presented in ‘other comprehensive income’ (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. Because of the circumstances described in note 3.3 above, this amendment will not have any impact on the Bank's financial statements.
(b) IAS 12, ‘Income taxes’ (effective January 1, 2012), currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, ‘Investment property’. This amendment therefore introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, ‘Income taxes - recovery of revalued non-depreciable assets’, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. Since IAS 40 has been deferred as mentioned in note 3.2, therefore, the amendment will not have any impact on the Bank's financial statements.
There are other new and amended standards and interpretations that are mandatory for the Bank's accounting periods beginning on or after January 1, 2012 but are considered not to be relevant or do not have any significant effect on the Bank's operations and are therefore not detailed in these financial statements.
3.7 Critical accounting estimates and judgments
The preparation of financial statements in conformity with the approved accounting standards as applicable in Pakistan requires the use of certain critical accounting estimates. It also requires the management to exercise its judgment in the process of applying the Bank's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.3 to these financial statements.
3.8 Early adoption of standards
The Bank has not early adopted any new or amended standard in 2011.
4 BASIS OF MEASUREMENT
4.1 Accounting convention
These financial statements have been prepared under the historical cost convention, except that certain investments, foreign currency balances and commitments in respect of foreign exchange contracts have been marked to market and are carried at fair value.
4.2 Functional and presentation currency
These financial statements are presented in Pakistani Rupees, which is the Bank's functional and presentation currency. 54 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
4.3 Critical accounting estimates and judgments
The preparation of financial statements in conformity with approved accounting standards as applicable in Pakistan requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and income and expenses. It also requires management to exercise judgment in application of its accounting policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.
Significant accounting estimates and areas where judgments were made by the management in the application of accounting policies are as follows:
i) Classification and provisioning against investments (notes 5.2 and 9) ii) Classification and provisioning against financings (notes 5.3 and 10) iii) Current and deferred taxation (notes 5.7, 12 and 27) iv) Determination of useful lives and depreciation / amortisation (notes 5.4 and 11)
5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these financial statements are set out below. These have been consistently applied to all years presented, unless otherwise specified.
5.1 Cash and cash equivalents
Cash and cash equivalents for the purpose of cash flow statement comprise of cash and balances with treasury banks and balances with other banks in current and deposit accounts.
5.2 Investments
5.2.1 Classification
Investments of the Bank, other than investments in associates are classified as follows:
(a) Held for trading
These are investments, which are either acquired for generating profits from short-term fluctuations in market prices or are securities included in a portfolio for which there is evidence of a recent actual pattern of short-term profit taking.
(b) Held to maturity
These are investments with fixed or determinable payments and fixed maturity and the Bank has the positive intent and ability to hold them till maturity.
(c) Available for sale
These are investments which do not fall under 'held for trading' or 'held to maturity' categories. Burj Bank Limited 55 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
5.2.2 Regular way contracts
All purchases and sales of investments that require delivery within the time frame established by regulation or market convention are recognised at trade date, which is the date on which the Bank commits to purchase or sell the investments.
5.2.3 Initial recognition and measurement
Investments other than those categorised as 'held for trading' are initially recognised at fair value which includes transaction costs associated with the investment. Investments classified as 'held for trading' are initially recognised at fair value and transaction costs are expensed in the profit and loss account.
5.2.4 Subsequent measurement
Subsequent to initial recognition investments are valued as follows:
(a) Held for trading
These are measured at subsequent reporting dates at fair value. Gains and losses on remeasurement are included in the net profit and loss for the year.
(b) Held to maturity
These are measured at amortised cost using effective profit rate method, less any impairment loss recognised to reflect irrecoverable amount.
(c) Available for sale
In accordance with the requirements specified by the SBP, quoted securities other than those classified as 'held to maturity' and 'investments in associates', are subsequently re-measured to market value. Unquoted equity securities are valued at the lower of cost and break-up value. Break-up value of equity securities is calculated with reference to the net assets of the investee company as per the latest available audited financial statements. Investment in other unquoted securities are valued at cost less impairment losses, if any.
Surplus / deficit arising on revaluation of quoted securities which are classified as 'available for sale', is included in the statement of comprehensive income but is kept in a separate account which is shown in the statement of financial position below equity.
(d) Investments in associates
Investment in associates is carried at cost less accumulated impairment losses, if any.
5.2.5 Impairment
Impairment loss in respect of investments classified as available for sale and held to maturity (except sukuk certificates) is recognised based on management's assessment of objective evidence of impairment as a result of one or more events that may have an impact on the estimated future cash flows of the investments. A significant or prolonged decline in fair value of an equity investment below its cost is also considered an objective evidence of impairment. Provision for diminution in the value of sukuk certificates is made as 56 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
per the Prudential Regulations issued by the SBP. In case of impairment of available for sale securities, the cumulative loss that has been recognised directly in surplus / (deficit) on revaluation of securities on the statement of financial position below equity is removed therefrom and recognised in the profit and loss account. For investments classified as held to maturity, the impairment loss is recognised in the profit and loss account.
5.2.6 Gains or losses on sale of investments are included in the profit and loss account for the year.
5.3 Financings
These are financial products originated by the Bank and principally comprise of Murabaha, Modaraba, Ijarah, Diminishing Musharika and Istisna receivables. These are stated net of specific and general provision against non performing financings, if any.
Specific provision
The Bank maintains specific provision for doubtful debts based on the requirements specified in the Prudential Regulations issued by the SBP.
General provision
The Bank maintains general provision at the rate of 5% against unsecured consumer portfolio and at the rate of 1.5% against secured consumer portfolio in accordance with the Prudential Regulations issued by the SBP. In addition, with effect from the current year, the Bank has also created general provision in respect of corporate, commercial and SME financing against potential losses present in the portfolio which have not been specifically identified. This provision is created based on management's best estimate and is approved by the Board of Directors.
The net provision made / reversed during the year is charged to profit and loss account and accumulated provision is netted off against financings. Financings are written off when there are no realistic prospects of recovery.
5.3.1 Ijarah financings
Ijarah financings executed on or before December 31, 2008 have been accounted for under Finance method, thereafter all Ijarah financings are accounted for under IFAS-2.
(a) Under finance method, the present value of minimum ijarah payments have been recognised and shown under financings. The unearned income i.e., the excess of aggregate ijarah rentals over the cost of the asset and documentation charges under ijarah facility is deferred and then amortised over the term of the ijarah, so as to produce a constant rate of return on net investment in the ijarah. Gains / losses on termination of ijarah contracts are recognised as income on a receipt basis. Income on ijarah is recognised from the date of delivery of the respective assets to the mustajir (lessee).
(b) Under IFAS-2 method, assets underlying ijarah financings have been carried at cost less accumulated depreciation and impairment, if any, and are shown under financings. Rentals accrued from ijarah financings net of depreciation charged are taken to the profit and loss account. Depreciation on ijarah assets is charged by applying the straight line method over the ijarah period which is from the date of delivery of respective assets to mustajir upto the date of maturity / termination of ijarah agreement. Burj Bank Limited 57 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
5.4 Operating fixed assets
5.4.1 Capital work in progress
Capital work in progress is stated at cost less impairment losses, if any.
5.4.2 Property and equipment
These assets are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation, except for ijarah assets, is charged to the profit and loss account by applying the straight line method over the estimated useful lives, using the rates specified in note 11.2 to the financial statements. The depreciation charge for the year is calculated after taking into account residual value, if any. Depreciation is charged from the month of acquisition and up to the month preceding the month of disposal.
The assets' residual values, if significant, and their useful lives are reviewed and adjusted, if appropriate, at each reporting date.
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repair and maintenance are charged to the profit and loss account as and when incurred.
Gains and losses on disposal of property and equipment, if any, are taken to the profit and loss account.
5.4.3 Intangible assets
Intangible assets having a finite useful life are stated at cost less accumulated amortisation and accumulated impairment losses, if any. Such intangible assets are amortised using the straight-line method over their estimated useful lives. The useful lives and amortisation method are reviewed and adjusted, if appropriate at each reporting date. Intangible assets having an indefinite useful life are stated at acquisition cost, less accumulated impairment losses, if any. Amortisation is charged from the month of acquisition and up to the month preceding the month of deletion.
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably.
Intangible assets having an indefinite useful life are stated at acquisition cost less accumulated impairment losses, if any. Gains and losses on disposals, if any, are taken to the profit and loss account in the period in which they arise.
5.5 Impairment
At each reporting date, the Bank reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Recoverable amount is the greater of net selling price and value in use. 58 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately in the profit and loss account.
Where an impairment loss reverses subsequently, the carrying amount of the assets is increased to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognized as income immediately.
5.6 Deferred costs
As allowed by the SBP, pre-operating / preliminary expenses are included in deferred costs and these are amortised over a maximum period of five years on a straight line basis from the date of commencement of business.
5.7 Taxation
Current
The provision for current taxation is based on taxable income for the year, if any, at current rates of taxation, after taking into consideration available tax credits, rebates and tax losses as required under the seventh schedule to the Income Tax Ordinance, 2001. The charge for current tax also includes adjustments, where considered necessary relating to prior years, which arises from assessments / developments made during the year. In addition, the Bank also provides for turnover tax in accordance with the requirements of section 113 of the Income Tax Ordinance, 2001.
Deferred
Deferred tax is recognised using the balance sheet liability method on all major temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and amounts used for taxation purposes. In addition, the Bank also records deferred tax asset on available tax losses. Deferred tax is calculated using the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
The carrying amount of the deferred tax asset is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be utilised.
The Bank also recognises deferred tax asset / liability on deficit / surplus on revaluation of securities which is adjusted against the related deficit / surplus in accordance with the requirements of the International Accounting Standard 12 - Income Taxes. Burj Bank Limited 59 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
5.8 Staff retirement benefits
Defined contribution plan
The Bank operates a recognised contributory provident fund scheme for all its permanent employees. Equal monthly contributions are made, both by the Bank and the employees, to the fund at the rate of 10% of basic salary. The Bank has no further payment obligation once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due.
5.9 Funds due to financial institutions / deposits and their cost
(a) Funds due to financial institutions / deposits are recorded at the proceeds received.
(b) Profits / returns on funds due to financial institutions / deposits are recognised as expense in the period in which these are incurred using effective profit rate method to the extent that these are not directly attributable to the acquisition of or construction of qualifying assets. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) is capitalised as part of the cost of that asset.
5.10 Provisions and contingent assets and liabilities
Provisions are recognised when the Bank has a present, legal or constructive, obligation arising as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are reviewed at each reporting date and are adjusted to reflect the current best estimates.
Contingent assets are not recognised, and are also not disclosed unless an inflow of economic benefits is probable. Contingent liabilities are disclosed but not recognised unless the probability of an outflow of resources embodying economic benefit is not remote.
5.11 Revenue recognition
5.11.1 Profit from murabaha financing is accounted for on culmination of murabaha transaction. However, the profit on that portion of murabaha not due for payment is deferred by accounting for "Unearned Murabaha Income" with a corresponding credit to "Deferred Murabaha Income" which is recorded as a liability. The same is then recognised on a time proportion basis.
5.11.2 Income from ijarah financings under both finance and IFAS-2 method is recognised on an accrual basis.
5.11.3 Profit on diminishing musharika, modaraba and istisna are recognised on an accrual basis.
5.11.4 Fee, commission and brokerage income including commission income on letters of credit and letters of guarantees are accounted for on receipt basis.
5.11.5 Profit on investments in sukuks is recognised on an accrual basis. Where debt securities (excluding held for trading securities) are purchased at a premium or discount, those premiums / discounts are amortised through the profit or loss account over the remaining maturity, using the effective yield method. 60 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
5.11.6 Dividend income is recognised when the Bank's right to receive dividend is established.
5.11.7 Gain or loss on sale of investments is recognised in profit and loss account in the year in which it arises.
5.12 Acceptances
Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be simultaneously settled with the reimbursement from the customers. Acceptances are accounted for as off balance sheet transactions and are disclosed as contingent liabilities and commitments.
5.13 Foreign currencies
Foreign currency transactions are recorded in rupees at exchange rates prevailing on the date of transaction. Monetary assets, monetary liabilities and contingencies and commitments in foreign currencies, except forward contracts, at the year end are reported in Rupees at exchange rates prevalent on the reporting date.
Forward contracts relating to the foreign currency deposits are valued at forward rates applicable to the respective maturities of the relevant foreign exchange contracts. Exchange gains and losses are included in the profit and loss account.
Commitments
Commitments for outstanding forward foreign exchange contracts are disclosed at contracted rates. Contingent liabilities / commitments for letters of credit and letters of guarantee denominated in foreign currencies are expressed in rupee terms at the exchange rates ruling on the reporting date.
5.14 Offsetting
Financial assets and financial liabilities are off-set and the net amount reported in the financial statements only when there is a legally enforceable right to set-off the recognised amount and the Bank intends either to settle on a net basis, or to realise the assets and to settle the liabilities simultaneously. Income and expense items of such assets and liabilities are also off-set and the net amount is reported in the financial statements.
5.15 Financial instruments
All financial assets and liabilities are recognised at the time when the Bank becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the Bank loses control of the contractual rights that comprise the financial assets. Financial liabilities are derecognised when they are extinguished, i.e., when the obligation specified in the contract is discharged, cancelled or expired. Any loss on derecognition of the financial assets and financial liabilities is taken to the profit and loss account directly. Financial assets carried on the statement of financial position include cash and bank balances with treasury banks, balances with other banks, due from financial institutions, investments, financings, certain receivables and financial liabilities include bills payable, due to financial institutions, deposits and other payables. The particular recognition methods adopted for significant financial assets and financial liabilities are disclosed in the individual policy statements associated with them. Burj Bank Limited 61 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
5.16 Dividend and appropriation to reserves
Dividend and appropriation to reserves, except appropriations which are required under the law, after the date of Statement of Financial Position, are recognised as a liability in the Bank's financial statements in the year in which these are approved.
5.17 Earnings per share
The Bank presents basic and diluted earnings per share (EPS) for its shareholders. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, if any.
5.18 Segment reporting
A segment is a distinguishable component of the Bank that is engaged either in providing product or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Bank's primary format of reporting is based on business segments.
5.18.1 Business segments
The business segments within the Bank have been categorised into the following classifications of business segments in accordance with the requirements specified by the SBP.
Corporate finance
It includes investment banking, syndications, IPO related activities (excluding investments), secondary private placements, underwriting and securitisation.
Trading and sales
It includes equity, foreign exchanges, commodities, own securities and placements.
Retail banking
It includes retail financings, deposits and banking services offered to its retail customers and small and medium enterprises.
Commercial banking
It includes project finance, export finance, trade finance, ijarah, guarantees and bills of exchange relating to its corporate customers.
5.18.2 Geographical segments
The operations of the Bank are currently based only in Pakistan. 62 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
6 CASH AND BALANCES WITH TREASURY BANKS
In hand - local currency 428,513 338,100 - foreign currencies 35,869 68,438 464,382 406,538
With the State Bank of Pakistan in - local currency current account 6.1 774,196 694,544 - foreign currency current account 11,758 141,152 - foreign currency deposit accounts cash reserve account 6.2 26,984 17,127 special cash reserve account 6.3 32,380 20,553 59,364 37,680 With National Bank of Pakistan in - local currency current account 69,996 44,547 1,379,696 1,324,461
6.1 The local currency current account is maintained with the SBP as per the requirements of Section 36 of the State Bank of Pakistan Act, 1956. This section requires banking companies to maintain a local currency cash reserve in the current account opened with the SBP at a sum not less than such percentage of its time and demand liabilities in Pakistan as may be prescribed by the SBP.
6.2 As per BSD Circular No. 15 dated June 21, 2008, cash reserve of 5% is required to be maintained with the SBP on deposits held under the New Foreign Currency Accounts Scheme (FE-25 deposits).
6.3 Special cash reserve of 6% is required to be maintained with the SBP on FE-25 deposits as specified in BSD Circular No. 15 dated June 21, 2008. During the year this deposit account was not remunerated (2010: Nil).
Note 2011 2010 ------Rupees in '000 ------
7 BALANCES WITH OTHER BANKS
In Pakistan - On current account 294 902 - On deposit account 7.1 2,050,680 301,513
Outside Pakistan - On current account 164,662 98,053 2,215,636 400,468
7.1 These represent deposit accounts carrying profit at the rates ranging from 5.00% to 12.90% (2010: 5.01% to 7.92%) per annum. Burj Bank Limited 63 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
8 DUE FROM FINANCIAL INSTITUTIONS
Commodity murabaha 8.1 & 8.2 - 2,679,753
8.1 This represented placements made with various financial institutions under commodity murabaha agreement and carried return at rates ranging from 12.15% to 13.75% and had a maturity period of upto March 24, 2011.
2011 2010 ------Rupees in '000 ------
8.2 Particulars of amount due from financial institutions with respect to currencies
In local currency - 2,679,753 In foreign currency - - - 2,679,753
9 INVESTMENTS - NET
9.1 Investments by types Note 2011 2010 Held by Given as Total Held by Given as Total bank collateral bank collateral ------Rupees in '000 ------
Held for trading securities Fully paid up ordinary shares - listed - - - 1,559 - 1,559 Sukuk bonds - - - 198,495 - 198,495 - - - 200,054 - 200,054 Available for sale securities Fully paid up ordinary shares - listed 346,754 - 346,754 85,229 - 85,229 Sukuk bonds / certificates 9,305,798 - 9,305,798 4,432,624 - 4,432,624 Units of open-end mutual funds 434,901 - 434,901 314,901 - 314,901 10,087,453 - 10,087,453 4,832,754 - 4,832,754
Investments at cost 10,087,453 - 10,087,453 5,032,808 - 5,032,808
Less: Provision for diminution in the value of investments 9.8 (134,659) - (134,659) (48,453) - (48,453)
Investments (net of provisions) 9,952,794 - 9,952,794 4,984,355 - 4,984,355
Unrealised loss on revaluation of held for trading securities - net 9.9 - - - (50) - (50)
Surplus on revaluation of available for sale securities - net 19 29,999 - 29,999 66,573 - 66,573
Total investments at market value 9,982,793 - 9,982,793 5,050,878 - 5,050,878 64 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
9.2 Investments by segments
Federal Government Securities GoP ijarah sukuk - unlisted 9.4 8,252,486 3,298,495
Fully paid up ordinary shares / units Listed companies / mutual funds 9.5 781,655 401,689
Bonds Sukuk certificates - unlisted 9.6 1,053,312 1,332,624
Investments at cost 10,087,453 5,032,808 Less: Provision for diminution in the value of investments 9.8 (134,659) (48,453)
Investments (net of provisions) 9,952,794 4,984,355 Unrealised loss on revaluation of held for trading securities - net 9.9 - (50) Surplus on revaluation of available for sale securities - net 19 29,999 66,573 Total investments at market value 9,982,793 5,050,878
9.3 Investments include certain approved / government securities which are held by the Bank to comply with the Statutory Liquidity Reserve requirement determined on the basis of the Bank's demand and time liabilities as set out under section 29 of the Banking Companies Ordinance, 1962.
9.4 Particulars of Federal Government Securities - Unlisted, Secured
Face value of Rs. 100 each unless otherwise stated.
Particulars Collateral Profit Profit 2011 2010 rate payment Nominal value ------Rupees in '000 ------
GOP IJARAH SUKUK - I Government of 6 months Semi-annually - 200,000 Nil (2010: 2,000,000) certificates Pakistan Sovereign T-Bill plus 0.45% Maturity date: September 26, 2011
GOP IJARAH SUKUK - IV Government of 6 months Semi-annually 800,000 800,000 8,000,000 (2010: 8,000,000) certificates Pakistan Sovereign T-Bill minus 0.05% Maturity date: September 17, 2012
GOP IJARAH SUKUK - V Government of 6 months Semi-annually 1,121,891 1,100,000 11,120,000 (2010: 11,000,000) certificates Pakistan Sovereign T-Bill Maturity date: November 15, 2013
GOP IJARAH SUKUK - VI Government of 6 months Semi-annually 1,003,000 1,198,495 10,030,000 (2010: 11,980,000) certificates Pakistan Sovereign T-Bill Maturity date: December 20, 2013
GOP IJARAH SUKUK - VII Government of 6 months Semi-annually 32,400 - 3,240,000 (2010: Nil) certificates Pakistan Sovereign T-Bill Maturity date: March 7, 2013
GOP IJARAH SUKUK - VIII Government of 6 months Semi-annually 2,295,195 - 22,900,700 (2010: Nil) certificates Pakistan Sovereign T-Bill Maturity date: May 16, 2013
GOP IJARAH SUKUK - IX Government of 6 months Semi-annually 3,000,000 - 30,000,000 (2010: Nil) certificates Pakistan Sovereign T-Bill Maturity date: December 26, 2014
8,252,486 3,298,495 Burj Bank Limited 65 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
9.5 Particulars of investments in listed companies / mutual funds
2011 2010 2011 2010 Number of shares / units ------Rupees in '000 ------
Listed companies - Fully paid up ordinary shares of Rs. 10 each 350,000 200,000 Lotte Pakistan PTA Limited 4,624 2,430 450,000 100,000 Fauji Fertilizer Bin Qasim Limited 23,850 3,426 350,000 100,000 Lucky Cement Limited 27,411 7,487 170,000 50,000 Pakistan State Oil Company Limited 43,921 14,324 250,000 50,000 Pakistan Petroleum Limited 47,124 10,232 275,000 100,000 Fauji Fertilizer Company Limited 45,967 11,275 240,000 50,000 Pakistan Oil Fields Limited 86,058 13,512 252,483 100,000 Oil and Gas Development Company Limited 38,026 16,471 650,000 150,000 Pakistan Telecommunication Company Limited 8,376 2,953 100,000 150,000 D.G. Khan Cement Company Limited 1,900 4,678 500,000 - Hub Power Company Limited 19,497 - 346,754 86,788 Mutual funds - Face value of Rs. 100 each 2,628,981 2,500,000 Dawood Islamic Fund 214,901 214,901 1,000,000 1,000,000 KASB Islamic Income Opportunity Fund 100,000 100,000 974,766 - Askari Islamic Income Fund 100,000 - 193,274 - Faysal Islamic Savings Growth Fund 20,000 - 434,901 314,901 781,655 401,689
9.6 Particulars of Sukuk Certificates - Unlisted, Secured
Face value of Rs. 5,000 each unless otherwise stated.
Particulars Collateral Profit Profit 2011 2010 rate payment Nominal value ------Rupees in '000 ------
WAPDA Second Sukuk Certificates Government of 6 months Semi-annually 100,000 100,000 20,000 (2010: 20,000) certificates Pakistan Sovereign KIBOR minus Maturity date: July 13, 2017 0.25%
Karachi Shipyard & Engineering Works Limited N/A N/A N/A - 100,000 Nil (2010: 20,000) certificates Maturity date: February 04, 2016
Sui Southern Gas Company limited Tangible 3 months Quarterly 275,000 440,000 110,000 (2010: 110,000) certificates Assets KIBOR plus Maturity date: December 31, 2012 0.2%
House Building Finance Corporation Tangible 6 months Semi-annually 25,000 35,000 10,000 (2010: 10,000) certificates Assets KIBOR plus Maturity date: May 07, 2014 1%
Engro Fertilizers Limited Tangible 6 months Semi-annually 242,962 150,000 48,400 (2010: 30,000) certificates Assets KIBOR plus Maturity date: September 05, 2015 1.50%
Sitara Chemical Industries Limited Tangible 3 months Quarterly 41,667 75,000 20,000 (2010: 20,000) certificates Assets KIBOR plus Maturity date: January 02, 2013 1%
Sitara Energy Limited Tangible 6 months Semi-annually 8,118 16,177 1,624 (2010: 3,235) certificates Assets KIBOR plus Maturity date: July 19, 2012 1.95% 66 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Particulars Collateral Profit Profit 2011 2010 rate payment Nominal value ------Rupees in '000 ------
Security Leasing Corporation Limited Tangible 6,000 (2010: 6,000) certificates Assets 6% Monthly 12,656 18,281 Maturity date: March 18, 2014
Century Paper and Board Mills Limited Tangible 6 months Semi-annually 15,000 20,000 5,000 (2010: 5,000) certificates Assets KIBOR plus Maturity date: September 25, 2014 1.35%
Shahmurad Sugar Mills Limited N/A N/A N/A - 16,667 Nil (2010: 25) certificates of Rs. 100,000 each Maturity date: September 27, 2012
Amtex Limited Tangible 3 months Quarterly 37,500 37,500 10,000 (2010: 10,000) certificates Assets KIBOR plus Maturity date: October 11, 2012 2%
Maple Leaf Cement Factory Limited - Sukuk I Tangible 3 months Quarterly 49,915 49,957 10,000 (2010: 10,000) certificates Assets KIBOR plus Maturity date: December 03, 2018 1%
Maple Leaf Cement Factory Limited - Sukuk II Tangible 3 months Quarterly 1,875 1,875 375 (2010: 375) certificates Assets KIBOR plus Maturity date: March 03, 2012 1%
Al Zamin Leasing Modaraba Tangible 6 months Monthly 79,167 79,167 20,000 (2010: 20,000) certificates Assets KIBOR plus Maturity date: November 12, 2013 1.9%
K.S. Sulemanji Esmailji and Sons (Private) Limited Tangible 3 months Quarterly 15,952 28,500 6,000 (2010: 6,000) certificates Assets KIBOR plus Maturity date: June 30, 2014 1.4%
Eden Builders Limited Tangible 3 months Quarterly 13,500 19,500 4,800 (2010: 4,800) certificates Assets KIBOR plus Maturity date: March 08, 2014 2.3%
Quetta Textile Mills Limited Tangible 6 months Semi-annually 135,000 145,000 30,000 (2010: 30,000) certificates Assets KIBOR plus Maturity date: September 26, 2015 1.5%
1,053,312 1,332,624 Burj Bank Limited 67 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
9.7 Quality of available for sale securities 2011 2010 2011 2010 Long / Medium Term ----- Rupees in '000 ----- Credit Rating
Sukuk bonds / certificates - (at cost) GOP Ijarah - I - Unrated - 200,000 GOP Ijarah - IV Unrated Unrated 800,000 800,000 GOP Ijarah - V Unrated Unrated 1,121,891 1,100,000 GOP Ijarah - VI Unrated Unrated 1,003,000 1,000,000 GOP Ijarah - VII Unrated - 32,400 - GOP Ijarah - VIII Unrated - 2,295,195 - GOP Ijarah - IX Unrated - 3,000,000 - WAPDA Second Sukuk Certificates Unrated Unrated 100,000 100,000 Karachi Shipyard & Engineering Works Limited N/A Unrated - 100,000 Sui Southern Gas Company Limited AA AA 275,000 440,000 House Building Finance Corporation Limited A A+ 25,000 35,000 Engro Fertilizers Limited AA- AA 242,962 150,000 Sitara Chemical Industries Limited A+ AA- 41,667 75,000 Sitara Energy Limited Unrated Unrated 8,118 16,177 Security Leasing Corporation Limited Unrated Unrated 12,656 18,281 Century Paper and Board Mills Limited A+ A+ 15,000 20,000 Shahmurad Sugar Mills Limited N/A A- - 16,667 Amtex Limited D A 37,500 37,500 Maple Leaf Cement Factory Limited D BBB- 51,790 51,832 Al Zamin Leasing Modaraba C Unrated 79,167 79,167 K.S. Sulemanji Esmailji and Sons (Private) Limited Unrated Unrated 15,952 28,500 Eden Builders Limited A (RW) A 13,500 19,500 Quetta Textile Mills Limited BBB+ BBB+ 135,000 145,000 9,305,798 4,432,624 Ordinary shares - listed (at market value) Lotte Pakistan PTA Limited Unrated Unrated 3,245 2,740 Fauji Fertilizer Bin Qasim Limited Unrated Unrated 19,094 3,573 Lucky Cement Limited Unrated Unrated 26,264 7,579 Pakistan State Oil Company Limited AA+ Unrated 38,626 14,759 Pakistan Petroleum Limited Unrated Unrated 42,080 10,858 Fauji Fertilizer Company Limited Unrated Unrated 41,123 12,586 Pakistan Oilfields Limited Unrated AA+ 83,148 14,798 Oil and Gas Development Company Limited AAA AAA 38,280 17,083 Pakistan Telecommunication Company Limited Unrated Unrated 6,754 2,913 D.G. Khan Cement Company Limited Unrated Unrated 1,903 3,017 Hub Power Company Limited AA+ - 17,100 - 317,617 89,906 Units of open-end mutual funds (at market value) Dawood Islamic Fund Unrated Unrated 274,590 279,563 KASB Islamic Income Opportunity Fund Unrated Unrated 101,032 97,234 Askari Islamic Income Fund Unrated - 98,326 - Faysal Islamic Savings Growth Fund A+ - 20,089 - 494,037 376,797 10,117,452 4,899,327 Less: Provision for diminution in the value of investments (134,659) (48,453) 9,982,793 4,850,874 68 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
9.8 Particulars of provision for diminution in the value of investments
Opening balance 48,453 25,000 Charge for the year 97,425 43,078 Reversals during the year (11,219) (19,625) 86,206 23,453 Closing balance 9.8.1 134,659 48,453
9.8.1 Particulars of provision for diminution in the value of investments by type and segment
Unlisted Sukuk certificates - available for sale investments 134,659 48,453
9.9 Unrealised loss on revaluation of held for trading securities - net
Unrealised loss Cost Investee company 2011 2010 2011 2010 ------Rupees in '000 ------
D.G. Khan Cement Company Limited - (50) - 1,559
Note 2011 2010 ------Rupees in '000 ------
10 FINANCINGS - NET
In Pakistan - Murabaha 10.1.2 & 10.2 6,064,473 3,238,039 - Diminishing musharika 3,912,832 2,121,343 - Net investment in ijarah 10.3 869,041 497,059 - Modaraba 256,322 294,155 - Staff finance 10.4 192,693 86,253 Financings - gross 11,295,361 6,236,849 Provision against non performing financings 10.6 & 10.7 (786,021) (620,647) Financings - net of provision 10,509,340 5,616,202
10.1 Murabaha sale price 14,962,268 6,835,200 Purchase price 14,063,953 6,366,180 898,315 469,020
10.1.1 Unearned murabaha income
Opening balance 179,987 78,126 Arising during the year 898,315 469,020 Recognised during the year (642,168) (367,159) 436,134 179,987 Burj Bank Limited 69 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2011 2010 ------Rupees in '000 ------
10.1.2 Murabaha receivable
Opening balance 3,238,039 1,521,565 Sales during the year 14,962,268 6,835,200 Received during the year (12,135,834) (5,118,726) 6,064,473 3,238,039
10.2 This includes financings amounting to Rs. 238.788 million (2010: Rs. 379.257 million) against murabaha under Islamic Export Refinance Scheme.
Note 2011 2010 ------Rupees in '000 ------
10.3 Net investment in ijarah
- Ijarah under finance method 10.3.1 85,263 257,666 - Ijarah accounted for under IFAS-2 10.3.2 783,778 239,393 869,041 497,059
Brief description of the ijarah arrangements
Ijarah contracts entered into by the Bank essentially represent arrangements whereby the Bank (being the owner of assets) transfers its usufruct to its customers for an agreed period at an agreed consideration. The significant ijarah contracts entered into by the Bank are with respect to vehicles, plant and machinery and equipment and are for periods ranging from 3 to 5 years.
10.3.1 Net investment in ijarah - ijarah under finance method
2011 2010
Not later Later than Over five Total Not later Later than Over five Total
than one one and less years than one one and less years year than five year than five years years
------Rupees in '000 ------
Ijarah rentals receivable 76,337 33,381 - 109,718 77,736 206,787 - 284,523 Residual value 3,517 9,448 - 12,965 38,673 20,071 - 58,744 Minimum ijarah payments 79,854 42,829 - 122,683 116,409 226,858 - 343,267 Less: Profits for future periods 15,215 22,205 - 37,420 16,257 69,344 - 85,601 Present value of minimum ijarah payments 64,639 20,624 - 85,263 100,152 157,514 - 257,666 70 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
10.3.2 Net investment in ijarah - ijarah accounted for under IFAS-2
Movement in net book value of ijarah assets
Assets under ijarah Opening balance 316,228 99,956 Ijarah disbursed during the year 714,505 216,272 Disposals during the year (73,227) - Closing balance 957,506 316,228
Accumulated depreciation Opening balance 76,835 28,203 Charged during the year 108,269 48,632 Adjustment during the year (11,376) - Closing balance 173,728 76,835 Net investment in ijarah - accounted for under IFAS-2 10.3.3 783,778 239,393
10.3.3 Net investment in ijarah - ijarah accounted for under IFAS-2 2011 2010
Not later Later than Over five Total Not later Later than Over five Total than one one and less years than one one and less years year than five year than five years years ------Rupees in '000 ------
Ijarah rentals receivable 258,462 525,316 - 783,778 105,301 134,092 - 239,393
Note 2011 2010 ------Rupees in '000 ------
10.4 Staff finance
Staff ijarah under finance method 10.4.1 290 458 Staff ijarah accounted for under IFAS-2 10.4.2 12,601 3,968 Staff housing finance under diminishing musharika 179,802 81,827 192,693 86,253
10.4.1 Staff finance - ijarah under finance method 2011 2010
Not later Later than Over five Total Not later Later than Over five Total than one one and less years than one one and less years year than five year than five years years ------Rupees in '000 ------
Ijarah rentals receivable 201 114 - 315 187 303 - 490 Residual value ------Minimum ijarah payments 201 114 - 315 187 303 - 490 Less: Profits for future periods 15 10 - 25 19 13 - 32 Present value of minimum ijarah payments 186 104 - 290 168 290 - 458 Burj Bank Limited 71 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
10.4.2 Staff finance - ijarah accounted for under IFAS-2
Movement in net book value of ijarah assets
Assets under ijarah Opening balance 5,284 5,502 Ijarah disbursed during the year 12,661 2,264 Disposals during the year (3,550) (2,482) Closing balance 14,395 5,284
Accumulated depreciation Opening balance 1,316 453 Charged during the year 909 863 Adjustment during the year (431) - Closing balance 1,794 1,316
Staff finance - ijarah accounted for under IFAS-2 10.4.3 12,601 3,968
10.4.3 Staff Finance - ijarah accounted for under IFAS-2
2011 2010
Not later Later than Over five Total Not later Later than Over five Total than one one and less years than one one and less years year than five year than five years years ------Rupees in '000 ------
Ijarah rentals receivable 2,827 9,774 - 12,601 1,319 2,649 - 3,968
2011 2010 ------Rupees in '000 ------
10.5 Particulars of financings
In local currency 11,295,361 6,236,849 In foreign currency - - 11,295,361 6,236,849
Short term 6,320,795 3,532,194 Long term 4,974,566 2,704,655 11,295,361 6,236,849 72 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
10.6 Financings include Rs. 1,002.534 million (2010: Rs. 1,153.118 million) which have been placed under non- performing status as detailed below:
2011 Classified financings Provision required Provision held Category of classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total ------Rupees in '000 ------
Substandard 599 - 599 113 - 113 113 - 113 Doubtful 335,329 - 335,329 119,182 - 119,182 119,182 - 119,182 Loss 666,606 - 666,606 482,920 - 482,920 482,920 - 482,920 1,002,534 - 1,002,534 602,215 - 602,215 602,215 - 602,215
2010 Classified financings Provision required Provision held Category of classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total ------Rupees in '000 ------
Substandard 216,716 - 216,716 33,149 - 33,149 33,149 - 33,149 Doubtful 475,524 - 475,524 206,262 - 206,262 206,262 - 206,262 Loss 460,878 - 460,878 378,352 - 378,352 378,352 - 378,352 1,153,118 - 1,153,118 617,763 - 617,763 617,763 - 617,763
10.6.1 As per instructions of the SBP financing facilities amounting to Rs. 393.374 million (2010: 342.412 million) allowed to a customer have been placed under the 'Special Mention Category'.
10.6.2 During the year, the SBP vide BSD Circular No. 1 dated October 21, 2011 (effective from September 30, 2011) has introduced certain amendments in the Prudential Regulations in respect of availing benefit of Forced Sale Value (FSV) of collateral held against classified loans and advances for determination of amount of provision against such portfolio. Under the revised guidelines issued by the SBP, banks have been allowed to avail the FSV as follows:
a. Prudential regulation R-8 for Corporate / Commercial Banking and Prudential Regulation R-11 for SME Financing:
Category of asset Benefit of FSV allowed from the date of classification
Mortgaged residential, commercial, and 75% for first year industrial properties (land & building only) 60% for second year 45% for third year 30% for fourth year, and 20% for fifth year
Plant and machinery under charge 30% for first year 20% for second year, and 10% for third year
Pledged stocks 40% for first, second and third years
b. Prudential Regulations R-22 for Consumer Financing:
Category of asset Benefit of FSV allowed from the date of classification
Mortgaged residential property 75% for first and second years 50% for third and fourth years, and 30% for fifth year Burj Bank Limited 73 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
However, as per the circular the additional impact on profitability arising from availing the benefit of forced sales value against pledged stocks, mortgaged residential, commercial and industrial properties and plant and machinery would not be available for payment of cash or stock dividend. Under the previous guidelines issued by the SBP which were effective from September 30, 2009, banks were allowed to avail the benefit of 40% of forced sales value of pledged stocks and mortgaged residential, commercial and industrial properties held as collateral against all non-performing finances for 3 years from the date of classification for calculating provisioning requirement. However, the benefit of forced sales value of plant and machinery was previously not available to banks for calculating provisioning requirement.
Had the provision against non-performing finances been determined in accordance with the previously laid down requirements of the SBP, the specific provision against non-performing finances and loss before taxation would have been higher and consequently finances (net of provisions) as at December 31, 2011 would have been lower by approximately Rs. 57.682 million.
10.6.3 As allowed by the SBP, the Bank has availed benefit of forced sale values amounting to Rs. 199.493 million (2010: Rs. 168.433 million) in determining the provisioning against non-performing financings as at December 31, 2011.
10.7 Particulars of provision against financings
2011 2010 Specific General Total Specific General Total ------Rupees in '000 ------
Opening balance 617,763 2,884 620,647 234,937 2,884 237,821 Charge for the year 140,193 182,846 323,039 460,822 - 460,822 Reversals during the year (155,741) (1,924) (157,665) (77,996) - (77,996) (15,548) 180,922 165,374 382,826 - 382,826
Closing balance 602,215 183,806 786,021 617,763 2,884 620,647
10.7.1 General provision is held in respect of the following:
(a) consumer finance portfolio calculated in accordance with the requirements of the Prudential Regulations issued by the SBP. This amounts to Rs 3.806 million (2010: Rs 2.884 million); and
(b) With effect from the current year, the Bank has also decided to create general provision against commercial, corporate and SME financings in respect of losses present in the portfolio which have not been specifically identified. The management is of the view that maintenance of such provision is a prudent practice in view of the uncertain economic conditions which prevail currently. In this respect, based on the approval of the Board of Directors, an amount of Rs. 180 million has been provided during the current year.
Had the management followed the previous method of calculating general provision, loss before taxation would have been lower by Rs. 180 million and financings (net of provision) would have been higher by this amount. 74 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
10.7.2 Particulars of provision against financings with respect to currencies
2011 2010 Specific General Total Specific General Total ------Rupees in '000 ------
In local currency 602,215 183,806 786,021 617,763 2,884 620,647 In foreign currency ------602,215 183,806 786,021 617,763 2,884 620,647
10.7.3 Although the Bank has made provision against its non-performing portfolio as per the category of classification of the financing, the Bank holds enforceable collateral in the event of recovery through litigation. These securities comprise of charge against various tangible assets of the financee including land, building and machinery, stock in trade etc.
2011 2010 ------Rupees in '000 ------
10.8 Particulars of financings to directors, executives, officers, etc.
Due from directors, executives or officers of the Bank or any of them either severally or jointly with any other persons
Balance at the beginning of the year 86,253 61,126 Disbursements during the year 150,036 57,047 Repayments made during the year (43,596) (31,920) Balance at the end of the year 192,693 86,253
10.8.1 The Bank does not have any financing balances outstanding as at December 31, 2011 and December 31, 2010 from the following: - companies or firms in which the directors of the bank are interested as directors, partners or in the case of private companies as members; and - subsidiary companies, controlled firms, managed modarabas and other related parties.
11 OPERATING FIXED ASSETS Note 2011 2010 ------Rupees in '000 ------
Capital work-in-progress 11.1 39,479 40,151 Property and equipment 11.2 600,241 568,396 Intangible assets 11.3 32,170 38,098 671,890 646,645
11.1 Capital work-in-progress
Civil works 5,580 24,208 Advance for computer hardware 7,802 7,093 Advance for computer software 12,192 8,850 Advance for vehicles 13,905 - 39,479 40,151 Burj Bank Limited 75 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
11.2 Property and equipment
2011 Cost Depreciation Book value As at Additions / As at As at Charge for As at As at Rate of January 1, (disposals) December January 1, the year / December December depreciation 2011 during the 31, 2011 2011 (disposals) 31, 2011 31, 2011 % year Rupees in '000
Leasehold improvements 355,917 52,264 383,892 70,776 38,592 102,450 281,442 10 (24,289) (6,918)
Building - 62,444 62,444 - 2,862 2,862 59,582 5
Furniture and fixtures 64,010 1,298 62,807 12,476 6,463 18,176 44,631 10 (2,501) (763)
Office equipment 72,063 1,543 67,497 13,434 6,844 17,688 49,809 10 (6,109) (2,590)
Computer equipment 205,903 19,225 225,005 130,231 44,146 174,265 50,740 33.33 (123) (112)
Vehicles 125,210 43,646 152,459 27,790 18,550 38,422 114,037 20 (16,397) (7,918)
823,103 180,420 954,104 254,707 117,457 353,863 600,241 (49,419) (18,301)
2010 Cost Depreciation Book value As at Additions / As at As at Charge for As at As at Rate of January 1, (disposals) December January 1, the year / December December depreciation 2010 during the 31, 2010 2010 (disposals) 31, 2010 31, 2010 % year Rupees in '000
Leasehold improvements 311,343 44,574 355,917 36,635 34,141 70,776 285,141 10
Furniture and fixtures 51,391 13,062 64,010 6,293 6,220 12,476 51,534 10 (443) (37)
Office equipment 53,964 18,099 72,063 6,356 7,078 13,434 58,629 10
Computer equipment 149,742 56,434 205,903 82,694 47,678 130,231 75,672 33.33 (273) (141)
Vehicles 78,265 57,945 125,210 17,513 15,738 27,790 97,420 20 (11,000) (5,461)
644,705 190,114 823,103 149,491 110,855 254,707 568,396 (11,716) (5,639)
11.2.1 The cost of fully depreciated assets still in use amounts to Rs. 100.039 million (2010: Rs. 66.532 million). 76 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
11.3 Intangible assets
2011 Cost Amortisation Book value As at Additions / As at As at Charge for As at As at Rate of January 1, (disposals) December January 1, the year / December December amortisation 2011 during the 31, 2011 2011 (disposals) 31, 2011 31, 2011 % year Rupees in '000
Computer software 185,449 25,114 196,400 147,351 28,405 164,230 32,170 33.33 (14,163) (11,526)
2010
Cost Amortisation Book value As at Additions As at As at Charge As at As at Rate of January 1, during the December January 1, for the December December amortisation 2010 year 31, 2010 2010 year 31, 2010 31, 2010 % Rupees in '000
Computer software 174,256 11,193 185,449 96,159 51,192 147,351 38,098 33.33
11.3.1 The cost of fully amortised assets still in use amounts to Rs. 132.353 million (2010: 107.083 million).
11.4 Details of disposal of operating fixed assets made during the year are as follows:
Description Cost Accumulated Net book Sale Mode of disposal Particulars of purchaser depreciation / value proceeds amortisation ------Rupees in '000 ------Leasehold improvements Standby power supply 1,150 96 1,054 - Write off N/A Renovation work 255 72 183 - Write off N/A Renovation work 170 52 118 - Write off N/A Renovation work 703 228 475 - Write off N/A Renovation work 5,745 1,963 3,782 - Write off N/A Renovation work 6,522 1,523 4,999 - Write off N/A Renovation work 97 28 69 - Write off N/A Renovation work 293 88 205 - Write off N/A Renovation work 93 29 64 - Write off N/A Renovation work 540 176 364 - Write off N/A Renovation work 2,825 965 1,860 - Write off N/A Renovation work 700 233 467 - Write off N/A Renovation work 944 290 654 - Write off N/A Renovation work 1,789 492 1,297 - Write off N/A Renovation work 130 41 89 - Write off N/A Renovation work 2,333 642 1,691 - Write off N/A 24,289 6,918 17,371 -
Furnitures and fixtures Signage 2,211 664 1,547 - Write off N/A Signage 290 99 191 - Write off N/A 2,501 763 1,738 -
Office equipment Generator 4,904 2,041 2,863 756 Insurance Claim Pak Kuwait Takaful Company Limited Generator 330 130 200 - Write off N/A Generator 430 181 249 - Write off N/A Generator 445 238 207 - Write off N/A 6,109 2,590 3,519 756 Burj Bank Limited 77 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Description Cost Accumulated Net book Sale Mode of disposal Particulars of purchaser depreciation / value proceeds amortisation ------Rupees in '000 ------
Computer equipment Laptop 61 50 11 11 Bank's policy Asif Ali Alvi Laptop 62 62 - 31 Insurance Claim Pak Kuwait Takaful Company Limited 123 112 11 42 Vehicles Toyota Corolla GLI 1,452 173 1,279 1,370 Insurance Claim Pak Kuwait Takaful Company Limited Suzuki Cultus 611 371 240 247 Bank's Policy Mufti Syed Sabir Hussain Suzuki Cultus 714 290 424 424 Bank's Policy Syed Ali Zaidi Suzuki Cultus 873 135 738 845 Insurance Claim Pak Kuwait Takaful Company Limited Honda City 1,001 533 468 468 Bank's Policy Ali Shaharyar Rizvi Toyota Corolla 1,391 448 943 943 Bank's Policy Asif Ali Alvi Honda Civic 1,318 924 394 1,086 Bid Syed Riaz Ahmed Honda City 1,065 647 418 781 Bid Syed Riaz Ahmed Honda Civic 1,288 843 445 1,091 Bid Syed Riaz Ahmed Honda City 947 452 495 931 Bid Syed Riaz Ahmed Honda City 948 452 496 887 Bid Syed Riaz Ahmed Honda City 934 401 533 941 Bid Syed Riaz Ahmed Suzuki Cultus 656 274 382 676 Bid Syed Riaz Ahmed Honda City 914 630 284 284 Bank's Policy Qazi Shaukatullah Suzuki Cultus 641 375 266 274 Bank's Policy Irshad Ali Junejo Suzuki Cultus 611 364 247 247 Bank's Policy Ghulam Fareed Khanzada Honda City 1,033 606 427 430 Bank's Policy Mufti Muneeb-ur-Rehman 16,397 7,918 8,479 11,925
Computer software Blue Coat Proxy Renewal 513 256 257 - Write off N/A Al-Chemy Middle 8,000 7,346 654 - Write off N/A Apvision Islamic Share System 5,650 3,924 1,726 - Write off N/A 14,163 11,526 2,637 -
63,582 29,827 33,755 12,723
Note 2011 2010 ------Rupees in '000 ------
12 DEFERRED TAX ASSETS - NET
Deferred credits arising due to Accelerated tax depreciation on operating fixed assets (32,221) (30,109) Surplus on revaluation of investments 19 (3,000) (6,657)
Deferred debits arising in respect of Accelerated depreciation on ijarah assets 17,651 4,782 Minimum tax liability 25,184 - Provision for diminution in the value of investments 47,131 16,959 Provision against other assets 13.3.1 4,806 - Provision against non-performing financings 120,108 178,800 Available tax losses 12.1 300,718 229,341 480,377 393,116 78 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
12.1 The Bank has an aggregate amount of Rs. 859.193 million (2010: Rs. 655.260 million) in respect of tax losses as at December 31, 2011. The management carries out periodic assessment to assess the benefit of these losses as the Bank would be able to set off the profit earned in future years against these carry forward losses. Based on this assessment the management has recognised deferred tax debit balance on losses amounting to Rs. 300.718 million (2010: Rs. 229.341 million) [including on unabsorbed tax depreciation of Rs. 462.793 million (2010: Rs. 310.970 million)]. The amount of this benefit has been determined based on the projected financial statements for the future periods. The determination of future taxable profit is most sensitive to certain key assumptions such as cost to income ratio of the Bank, deposit composition, kibor rates, growth of deposits and financings, investment returns, product mix of financings, potential provision against assets and branch expansion plan. Any significant change in the key assumptions may have an effect on the realisibility of the deferred tax asset.
Note 2011 2010 ------Rupees in '000 ------
13 OTHER ASSETS
Profit / return accrued in local currency 201,717 167,030 Advances, deposits, advance rent and other prepayments 13.1 & 13.3.1 2,187,215 1,367,269 Advance taxation (payments less provision) 35,769 28,788 Deferred cost 13.2 1,646 8,234 Others 8,475 15,690 2,434,822 1,587,011 Less: Provision held against other assets 13.3 (29,725) (22,848) Other assets (net of provisions) 2,405,097 1,564,163
13.1 This includes advance against future financings amounting to Rs. 1,937.790 million (2010: Rs. 1,194.869 million).
13.2 Deferred cost
This represents preliminary / pre-commencement expenses incurred upto April 9, 2007 (i.e., date of grant of Islamic Banking license by the SBP) and are being amortised over a period of five years.
Note 2011 2010 ------Rupees in '000 ------
Opening balance 8,234 14,822 Less: Amortised during the year (6,588) (6,588) Closing balance 1,646 8,234
13.3 Provision held against other assets
Opening balance 22,848 - Charge for the year 13.3.1 23,519 23,102 Reversals (16,642) (254) 6,877 22,848 Closing balance 29,725 22,848 Burj Bank Limited 79 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
13.3.1 During the year, the Bank identified that a deposit account of the Bank was used for unauthorised transfer of funds amounting to Rs. 100 million from another financial institution. Upon identification of the matter, this amount was settled by the Bank and recorded as an asset which is appearing in note 13 above. The Bank has been able to recover Rs. 86.268 million which is reflected as a liability in note 17 pending final resolution of the legal proceedings in this matter. However, on account of prudence, the unrecovered balance of Rs. 13.732 million as at December 31, 2011 has been fully provided which is included in charge for the year above.
Note 2011 2010 ------Rupees in '000 ------
14 BILLS PAYABLE
In Pakistan 210,932 86,867 Outside Pakistan - - 210,932 86,867
15 DUE TO FINANCIAL INSTITUTIONS
In Pakistan 447,300 287,291 Outside Pakistan - - 447,300 287,291
15.1 Particulars of due to financial institutions with respect to currencies
In local currency 447,300 287,291 In foreign currency - - 447,300 287,291
15.2 Details of due to financial institutions - Secured / Unsecured
Secured Musharika from the State Bank of Pakistan under Islamic Export Refinance Scheme 15.2.1 222,300 287,291
Unsecured Musharika 15.2.2 225,000 - 447,300 287,291
15.2.1 The Musharika is on profit and loss sharing basis maturing within four months (2010: four months) and is secured against demand promissory note executed in favour of the SBP. The SBP has the right to recover the outstanding amount from the Bank at the date of maturity of the finance by directly debiting the current account maintained by the Bank with the SBP. A limit of Rs. 400 million (2010: Rs. 400 million) had been allocated to the bank by the SBP under Islamic Export Refinance Scheme for the year 2011.
15.2.2 This represents musharika arrangement with a bank at a profit rate of 11.90% and having maturity in January 2012. 80 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
16 DEPOSITS AND OTHER ACCOUNTS
Customers Fixed deposits 9,984,465 5,605,366 Savings deposits 7,016,634 4,724,455 Current accounts - Non-remunerative 1,919,738 1,722,559 Margin deposits 32,412 11,162 18,953,249 12,063,542 Financial institutions Remunerative deposits 1,285,974 555,383 Non-remunerative deposits 102,018 17,158 1,387,992 572,541 20,341,241 12,636,083
16.1 Particulars of deposits
In local currency 19,918,486 12,338,940 In foreign currencies 422,755 297,143 20,341,241 12,636,083
17 OTHER LIABILITIES
Profit / return payable in local currency 17.1 210,542 104,837 Profit / return payable in foreign currencies 602 340 Security deposits against ijarah 224,013 95,093 Security deposit against diminishing musharika 681 681 Deferred murabaha income - commodity murabaha - 14,182 Deferred murabaha income - financings 135,161 79,446 Charity collection account 17.2 9,819 7,375 Accrued expenses 118,057 29,346 Withholding tax and federal excise duty payable 8,003 3,207 Unrealised loss on forward foreign exchange contracts - net 1,516 - Others 13.3.1 132,384 4,955 840,778 339,462
17.1 This includes Rs. 4.332 million (2010: Rs 4.897 million) in respect of profit accrued on Musharika with the SBP under Islamic Export Refinance Scheme.
Note 2011 2010 ------Rupees in '000 ------
17.2 Reconciliation of charity collection account
Opening balance 7,375 12,894 Additions during the year 16,195 6,580 Charity paid during the year 17.2.1 (13,751) (12,099) Closing balance 9,819 7,375 Burj Bank Limited 81 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2011 2010 ------Rupees in '000 ------
17.2.1 Charity was paid to the following institutions:
Edhi Foundation 3,000 500 Saylani Welfare International Trust 2,750 2,800 Shaukat Khanum Memorial Trust (SKMT) 2,000 500 SOS Village 1,000 1,720 Chhipa Welfare 500 200 Al-Mustafa Welfare Society 500 500 Alamgir Welfare Trust International 500 500 Indus Hospital 500 500 All Pakistan Women Association 500 - Marie Adeliade Leprosy Centre 500 200 Habibiyah Anjuman Trust 500 - Move Pakistan Foundation 300 - New Horizons Care Center 300 - Madina Foundation Trust 200 - The Care Society 200 - Children Health and Education Foundation 200 360 Neelum Amanat 100 - Syed Nazeer Shah 50 - Abdul Razzaq 50 - Khadija Qureshi 50 - Bantwa Memon Khidmat Committee 26 - Zaib-un-Nisa 25 - Hajiani Hanifa Haji Mohammad Trust - 664 Army Welfare Fund for IDPs - 635 Sindh Institute of Urology and Transplantation - 500 The Citizen Foundation - 500 Muhammad Rayyan - 500 The Kidney Centre - 500 Sindh Balochistan Naz Welfare Association - 500 Okhai Memon Jamat and Anjuman - 400 Young Presidents Organisation - 120 13,751 12,099
17.2.2 Charity was not paid to any staff of the Bank or to any individual / organisation in which a director or his spouse had any interest at any time during the year. 82 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
18 SHARE CAPITAL
18.1 Authorised Capital
2011 2010 2011 2010 ------Number of shares ------Rupees in '000 ------
1,200,000,000 1,200,000,000 Ordinary shares of Rs. 10 each 12,000,000 12,000,000
18.2 Issued, subscribed and paid-up capital
2011 2010 2011 2010 ------Number of shares ------Rupees in '000 ------
741,045,824 501,045,824 Ordinary shares - Fully paid in cash 7,410,458 5,010,458 741,045,824 501,045,824 7,410,458 5,010,458
18.3 The movement in the issued, subscribed and paid-up capital during the year is as follows:
Note 2011 2010 ------Number of shares ------
Opening balance 501,045,824 501,045,824 Shares issued during the year 18.3.1 240,000,000 - Closing balance 741,045,824 501,045,824
18.3.1 During the current year, the Bank has issued 240 million ordinary shares of par value of Rs. 10 per share at a discounted subscription price of Rs. 7.5 per share. The issue of shares at discount was approved by the SBP through its letter no. BSD/BAI-3/608/7546/2011 dated June 11, 2011. The discount on issue of shares amounting to Rs. 600 million has been taken directly to equity and added to accumulated losses while the share capital has been recorded at the par value of shares.
18.4 The State Bank of Pakistan (SBP) vide BSD Circular No. 7 of 2009 has revised the Minimum Capital Requirement (MCR) for banks. As per the circular, banks are required to raise their issued, subscribed and paid-up capital (net of losses) to Rs. 10 billion in a phased manner by December 31, 2013. The requirement as at December 31, 2011 is Rs 8 billion (net of losses). The SBP granted exemption to the Bank in meeting the capital requirements applicable as at December 31, 2010 provided the Bank raises its issued, subscribed and paid-up capital (net of losses) to Rs. 6 billion by June 30, 2011. This was complied with by the Bank through injection of equity of Rs. 1.8 billion as reflected in the 'Statement of Changes in Equity'. Subsequent to this injection of equity, the SBP directed the bank to submit a time bound capital enhancement plan for complying with the MCR specified by the SBP. The plan was duly submitted by the Bank to the SBP. Vide its letter BSD/CSD/2137/12/2012 dated February 16, 2012, the SBP has indicated that it intends to discuss the bank's capital position further with the management in a meeting. However, the SBP has granted the Bank with a limited extension in timeline for meeting MCR till March 31, 2012. Burj Bank Limited 83 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
19 SURPLUS ON REVALUATION OF ASSETS - NET
Available for sale securities - Listed shares (29,137) 4,677 - Units of open end mutual funds 59,136 61,896 29,999 66,573 Related deferred tax liability (3,000) (6,657) 26,999 59,916
20 CONTINGENCIES AND COMMITMENTS
20.1 Direct credit substitutes 16,100 18,545
20.2 Transaction-related contingent liabilities
Guarantees favouring - beneficiary (i) Government 142,600 103,854 (ii) Others 62,097 44,616 204,697 148,470
20.3 Trade-related contingent liabilities
Import letters of credit 433,716 357,325 Acceptances 225,650 42,193 659,366 399,518
20.4 Commitments in respect of forward exchange contracts
Purchase 33.2 276,271 - Sale 33.2 94,764 - 371,035 -
20.5 Commitments for the acquisition of operating fixed assets
Civil works 2,300 1,105 Acquisition of computer hardware 9,187 9,250 Acquisition of computer software 33,615 4,012 45,102 14,367
20.6 Commitments to extend credit
The Bank makes commitment(s) to extend credit in the normal course of business but these being revocable commitments do not attract any significant penalty or expense if the facility is unilaterally withdrawn. 84 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------21 PROFIT / RETURN EARNED
On financings to customers 1,241,175 630,063 On investments in - held for trading securities 8,706 364 - available for sale securities 899,083 321,700 On deposits with financial institutions 21,455 2,468 On inter bank murabaha / modaraba / musharika agreements 205,166 308,866 2,375,585 1,263,461
22 PROFIT / RETURN EXPENSED On deposits and other accounts 1,391,021 701,715 On other short term fund musharikas / modarabas 32,150 24,610 1,423,171 726,325
23 GAIN ON SALE OF SECURITIES - NET Federal Government Securities - Sukuk bonds 68,125 438 Shares / units of open end mutual funds - listed 12,633 1,777 80,758 2,215
24 OTHER INCOME Fees 3,421 3,185 Rental income 175 197 Gain on sale of property and equipment - net 1,370 242 Swift charges recovered 978 530 Others 12,870 20,258 18,814 24,412
25 ADMINISTRATIVE EXPENSES Salaries, allowances, etc. 25.1 371,589 303,436 Remuneration to shariah advisor 3,790 3,265 Contribution to defined contribution plan 31 16,454 13,371 Non-executive directors' fees, allowances and other expenses 15,607 6,514 Rent, taxes, insurance, electricity, etc. 235,484 218,724 Legal and professional charges 19,255 26,557 Communications 46,944 70,139 Fees and subscription 10,749 6,842 Repairs and maintenance 62,615 45,523 Travelling and conveyance 43,663 26,765 Stationery and printing 11,339 10,169 Advertisement and publicity 95,181 9,894 Brokerage and commission 5,080 2,766 Service utilisation charges 39,816 23,397 Auditors' remuneration 25.2 4,420 3,198 Depreciation 11.2 117,457 110,855 Amortisation of intangible assets and deferred costs 25.3 34,993 57,780 Security service charges 33,283 27,153 Operating fixed assets written off 22,402 - Others 39,224 20,244 1,229,345 986,592
25.1 This includes Rs. 1.883 million (2010: Rs. 1.801 million) in respect of Contribution to Employees' Old Age Benefit Institution. Burj Bank Limited 85 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Note 2011 2010 ------Rupees in '000 ------
25.2 Auditors' remuneration
Audit fee 1,150 1,100 Fee for interim review 350 350 Special certifications and sundry advisory services 2,529 1,570 Out-of-pocket expenses 391 178 4,420 3,198
25.3 Amortisation
Deferred costs 13.2 6,588 6,588 Intangible assets 11.3 28,405 51,192 34,993 57,780
26 OTHER CHARGES
Penalties imposed by the State Bank of Pakistan 57 10,237
27 TAXATION
For the year - Current 27.1 (25,184) - - Deferred 83,604 289,038 58,420 289,038 Prior years - - 58,420 289,038
27.1 Current tax charge for the year represents minimum tax on turnover as stipulated in the Income Tax Ordinance, 2001.
27.2 The income tax assessments of the Bank have been finalised upto and including tax year 2011. Matters of disagreement exist between the Bank and tax authority for tax year 2009 wherein the tax authorities have added back certain income based on the presumption that certain loans and advances were given to the associate entities of the Bank without earning mark-up income thereon. The management's appeal in respect of this add-back is currently pending with the Commissioner of Inland Revenue (Appeals). The management is confident that this matter will be decided in favour of the Bank and consequently has not made any provision in respect of this amount. Note 2011 2010 ------Rupees in '000 ------27.3 Relationship between tax charge and accounting losses
Loss before taxation (346,908) (824,560)
Tax at the applicable rate of 35% (2009: 35%) (121,418) (288,596)
Effect of: - permanent differences 63,020 3,583 - others (22) (4,025) Tax charge for the year (58,420) (289,038) 86 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2011 2010 ------Rupees in '000 ------
28 LOSS PER SHARE - BASIC / DILUTED
Loss after taxation for the year (288,488) (535,522)
------Number of shares ------
Weighted average number of ordinary shares 623,347,194 501,045,824
------Rupees ------
Basic / diluted loss per share (0.463) (1.069)
There were no convertible / dilutive potential ordinary shares outstanding as at December 31, 2011 and December 31, 2010. Note 2011 2010 ------Rupees in '000 ------
29 CASH AND CASH EQUIVALENTS
Cash and balances with treasury banks 6 1,379,696 1,324,461 Balances with other banks 7 2,215,636 400,468 3,595,332 1,724,929
2011 2010 Number of employees
30 STAFF STRENGTH
Permanent 521 452 Temporary / on contractual basis 18 21 Bank's own staff strength at the end of the year 539 473 Outsourced 281 110 Total staff strength 820 583
31 DEFINED CONTRIBUTION PLAN
The Bank operates a provident fund scheme administered by the Board of Trustees of the fund for all of its permanent employees. Equal monthly contributions are made both by the Bank and employees @ 10% of basic salary.
2011 2010 ------Rupees in '000 ------
Contribution made by the Bank 16,454 13,371 Contribution made by the employees 16,454 13,371 32,908 26,742 Burj Bank Limited 87 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
32 COMPENSATION OF DIRECTORS AND EXECUTIVES
2011 2010 President / President / Chief Directors Executives Chief Directors Executives Executive * Executive ------Rupees in '000 ------
Fees - 15,607 - - 6,514 - Managerial remuneration 16,545 - 99,760 14,400 - 65,252 Contribution to defined contribution plan 1,654 - 7,226 1,440 - 6,525 Rent and house maintenance 4,045 - 44,891 6,480 - 29,363 Utilities 455 - 9,976 1,440 - 6,525 Medical 455 - 9,976 1,440 - 6,525 Fuel and conveyance 4,333 - 31,960 311 - 2,280 Others - - - 157 - 887 27,487 15,607 203,789 25,668 6,514 117,357
Number of persons 2 10 140 1 10 81
* During the year the Bank has appointed a new Chief Executive with effect from November 1, 2011.
32.1 The Chief Executive and certain executives have been provided with the free use of Bank maintained cars.
33 FAIR VALUE OF FINANCIAL INSTRUMENTS
33.1 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.
The fair value of quoted investments is based on quoted market prices. Unquoted equity securities are valued at lower of cost and break-up value as per the latest available audited financial statements. Other unquoted securities are valued at cost less impairment losses. The provision for impairment in the value of investments has been determined in accordance with the accounting policy as stated in note 5.2.5 to these financial statements.
Fair values of financings cannot be determined with reasonable accuracy due to absence of current and active market. The provisions against financings have been calculated in accordance with the accounting policy as stated in note 5.3 to these financial statements. The repricing, maturity profile and effective rates are stated in note 37 to these financial statements.
Fair values of all other financial assets and liabilities cannot be calculated with sufficient accuracy as active market does not exist for these instruments. In the opinion of the management, fair value of these assets and liabilities are not significantly different from their carrying values since assets and liabilities are either short term in nature and in case of financings and deposits are frequently repriced. 88 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2011 2010 Book value Fair value Book value Fair value ------Rupees in '000 ------33.2 Off-balance sheet financial instruments
Forward purchase of foreign exchange 276,271 276,141 - -
Forward agreements for borrowing - - - -
Forward sale of foreign exchange 94,764 96,150 - -
Forward agreements for lending - - - -
34 SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES
The segment analysis with respect to business activity is as follows:
2011 Corporate Trading & Retail Commercial Total finance sales banking banking ------Rupees in '000 ------
Total income 2,540 1,248,314 64,171 1,249,097 2,564,122 Total expenses 1,230 723,561 1,436,787 749,452 2,911,030 Net income / (loss) 1,310 524,753 (1,372,616) 499,645 (346,908) Segment assets (Gross) - 12,846,550 2,024,429 13,724,255 28,595,234 Segment non performing financings - - 73,956 928,578 1,002,534 Segment provision required and held - 134,659 56,890 758,856 950,405 Segment liabilities - 486,104 20,829,724 524,423 21,840,251 Segment return on net assets (%) - 4.29 (7.28) 4.02 (5.98) Segment cost of funds (%) - 9.34 9.34 9.34 9.34
2010 Corporate Trading & Retail Commercial Total finance sales banking banking ------Rupees in '000 ------
Total income 1,706 576,552 49,597 699,866 1,327,721 Total expenses 1,347 495,915 692,990 962,029 2,152,281 Net income / (loss) 359 80,637 (643,393) (262,163) (824,560) Segment assets (Gross) - 8,505,305 1,618,505 8,220,976 18,344,786 Segment non performing financings - - 61,504 1,091,614 1,153,118 Segment provision required and held - 48,453 37,011 583,636 669,100 Segment liabilities - 287,291 12,744,495 317,917 13,349,703 Segment return on net assets (%) - 0.99 (5.76) (3.58) (19.06) Segment cost of funds (%) - 8.59 8.59 8.59 8.59
35 RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions and include a subsidiary company, associated companies with or without common directors, retirement benefit funds, directors and key management personnel. Burj Bank Limited 89 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
The Bank has related party relationship with its shareholders, directors, associated undertakings, employee benefit plans and its key management personnel (including their associates). A number of banking transactions are entered into with related parties in the normal course of business. These include financing and deposits transactions. These transactions are executed substantially on the same terms including profit rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than a normal risk. Contributions to staff retirement benefit plan are made in accordance with the terms of the contribution plan. Remuneration to the executives are determined in accordance with the terms of their appointment. 35.1 The details of transactions with related parties and balances with them, apart from compensation to executives as disclosed in note 32 are given below:
December 31, 2011 December 31, 2010 Associated Directors Share Key Others Total Associated Directors Share Key Others Total companies holders management companies holders management personnel ** personnel ** ------Rupees in '000 ------
Financings As at January 01 - - 13,500 60,400 - 73,900 - - - 61,126 - 61,126 Disbursed during the year - - - 123,629 - 123,629 - - - 107,730 - 107,730 Repaid during the year - - (13,500) (9,421) - (22,921) - - (13,500) (67,742) - (81,242) Adjustments * - - - (8,968) - (8,968) - - 27,000 (40,714) - (13,714) As at December 31 - - - 165,640 - 165,640 - - 13,500 60,400 - 73,900
Deposits As at January 01 84,385 3,985 31,822 38,303 4,520 163,015 574,098 16,385 - 12,798 - 603,281 Received during the year 10 45,846 49,645 304,273 70,727 470,501 911,738 43,921 2,258,243 560,986 25,025 3,799,913 Withdrawals during the year (2,580) (40,553) (66,958) (287,878) (70,435) (468,404) (945,311) (47,946) (2,516,781) (553,832) (20,505) (4,084,375) Adjustments * (81,766) - - (12,769) - (94,535) (456,140) (8,375) 290,360 18,351 - (155,804) As at December 31 49 9,278 14,509 41,929 4,812 70,577 84,385 3,985 31,822 38,303 4,520 163,015
Investments As at January 01 79,167 - - - - 79,167 550,000 - - - - 550,000 Redemptions during the year ------(18,750) - - - - (18,750) Adjustments * ------(452,083) - - - - (452,083) As at December 31 79,167 - - - - 79,167 79,167 - - - - 79,167
Others Security deposits - - 19,350 - - 19,350 - - 19,350 - - 19,350 Other receivables - - 688 - - 688 - - 908 - - 908 Provision held against sukuk bonds 79,167 - - - - 79,167 19,792 - - - - 19,792
Year ended December 31, 2011 Year ended December 31, 2010 Associated Directors Share Key Others Total Associated Directors Share Key Others Total companies holders management companies holders management personnel ** personnel ** ------Rupees in '000 ------
Transactions during the year Profit earned on financings - - 1,555 4,187 - 5,742 - - 3,481 4,623 - 8,104 Profit expensed on financings 6 180 487 1,853 503 3,029 116 418 11,728 7,126 191 19,579 Rent paid - - 21,081 - - 21,081 - - 40,289 - - 40,289 Disposal of sukuks - - - - 16,453 16,453 - - - - 4,348 4,348 Purchase of sukuk - - - 3,000 - 3,000 ------Brokerage paid 254 - - - - 254 ------Purchase of building (note 35.1.1) - - 58,510 - - 58,510 ------Proceeds from issue of shares 1,799,962 - 38 - - 1,800,000 ------Contribution made to provident fund - - - - 32,908 32,908 - - - - 26,742 26,742 Reversal of rent expense (note 35.1.1) - - 8,649 - - 8,649 ------Disposal of operating fixed assets - - - 3,328 - 3,328 - - - 5,759 - 5,759
* Primarily relates to those directors, associates and key management personnel who are no longer related parties or have become related parties of the Bank as at December 31, 2011.
** These include balances and transactions with Chief Executive Officer of the Bank. 90 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
35.1.1 This represents purchase of floor at Saima Trade Tower which was initially in use of the Bank under rental arrangement. The cost of this building includes an amount of Rs. 20.878 million which was paid on account of advance rent and was being amortised over the lease term. An amount of Rs. 10.229 million was amortised till December 31, 2010. Out of this amount, Rs. 8.649 million has been reversed in the current period as it has been adjusted against the cost of the property.
36 CAPITAL ASSESSMENT AND ADEQUACY
36.1 Capital management
Capital management aims to safeguard the Bank's ability to continue as a going concern and to provide adequate returns to shareholders in the long run by pricing products and services commensurately with the level of risk. For that purpose, the Bank ensures strong capital position and efficient use of capital as determined by the underlying business strategy i.e., maximising growth on continuing basis. The Bank maintains a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also appreciated and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.
This process is managed by Asset Liability Committee (ALCO) of the Bank. The objective for ALCO is to derive the most appropriate strategy in terms of the mix of assets and liabilities given its expectations of the future and the potential consequences of interest rate movement, liquidity constraints and capital adequacy and its implication on risk management policies.
36.2 Goals of managing capital
The goals of managing capital of the Bank are as follows:
- To be a well capitalised institution, considering the requirements set by the regulators of the banking markets where the Bank operates;
- Maintain strong ratings and to protect the Bank against unexpected events; and
- Availability of adequate capital at a reasonable cost so as to enable the Bank to operate progressively and provide reasonable value addition for the shareholders and other stakeholders.
36.3 Statutory minimum capital requirement and management of capital
The State Bank of Pakistan through its BSD Circular No. 7 dated April 2009 requires the minimum paid- up capital (net of losses) for Banks / Development Finance Institutions to be raised to Rs. 10 billion by the year ending December 31, 2013. The raise is to be achieved in a phased manner requiring Rs. 8 billion paid-up capital (net of losses) by the end of the financial year 2011. The paid-up capital (net of losses) of the Bank as at December 31, 2011 stood at Rs. 5.778 billion (excluding surplus on revaluation of securities amounting to Rs. 27.0 million). During the year, an amount of Rs. 1.8 billion has been injected as equity by the sponsors to meet with the regulatory requirements. Further steps are being taken by the Bank to achieve compliance with the SBP requirements as more fully explained in note 18.4 to these financial statements which also highlights that the SBP has granted the Bank limited extension in timeline on meeting the minimum capital requirement till March 31, 2012. In addition, banks are also required to maintain a minimum Capital Adequacy Ratio (CAR) of 10 percent of the risk weighted exposure of the Bank. The Bank's CAR as at December 31, 2011 was approximately 41.81% of its risk weighted exposures. Burj Bank Limited 91 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
36.4 Capital structure
Banks regulatory capital has been analysed into three tiers as follows:
- Tier I Capital, which includes fully paid-up capital, general reserves and unappropriated profits (net of losses) etc., after deduction for certain specified items such as book value of intangibles etc.
- Tier II Capital, which includes general provision for loan losses (upto a maximum of 1.25% of total risk weighted assets) and reserve on revaluation of equity investments after deduction of deficit on available for sale investments (upto a maximum of 45%).
- Tier III Capital has also been prescribed by the SBP for managing market risk; however, the Bank does not have Tier III capital.
The total of Tier II and Tier III capital has to be limited to Tier I capital.
Banking operations are categorised in either the trading book or the banking book and risk weighted assets are determined according to the specified requirements that seek to reflect the varying levels of risk attached to assets and off balance sheet exposures. The total risk weighted exposures comprise the credit risk, market risk and operational risk.
36.5 Capital adequacy ratio
The capital to risk weighted assets ratio, calculated in accordance with the SBP guidelines on capital adequacy using Basel II Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk is presented below:
2011 2010 ------Rupees in '000 ------
Regulatory capital base
Tier I capital Issued, subscribed and paid-up capital 7,410,458 5,010,458 Reserves as disclosed on the Statement of Financial Position 16,751 16,751 Accumulated losses (1,649,630) (761,142) Other deductions Book value of intangible assets (computer software) (44,362) (46,948) Total Tier I capital 5,733,217 4,219,119
Tier II capital General provisions for loan losses - upto maximum of 1.25% of risk weighted assets 177,061 2,884 Revaluation reserves up to 45% 12,150 26,962 Other deductions - - Total Tier II capital 189,211 29,846
Eligible Tier III capital - -
Total regulatory capital base (a) 5,922,428 4,248,965 92 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
Risk-weighted exposures 2011 2010 Capital Risk adjusted Capital Risk adjusted requirement value requirement value ------Rupees in '000 ------Rupees in '000 ------
Credit risk
Portfolios subject to standardised approach (Simple approach for CRM) Banks and securities firms 45,713 457,126 62,495 624,953 Public Sector Entities 20,000 200,000 - - Corporate portfolio 741,503 7,415,029 434,992 4,349,920 Retail non mortgages 14,747 147,468 795 7,950 Mortgages – residential 6,908 69,080 3,967 39,673 Fixed assets 67,263 672,630 61,406 614,064 Other assets 96,368 963,677 195,728 1,957,279 Past due exposures 40,543 405,434 55,893 558,924
Market risk
Capital requirement for portfolios subject to standardised approach Interest rate risk 79,297 792,975 89,308 893,081 Equity position risk 162,330 1,623,300 93,642 936,424 Foreign exchange risk 4,554 45,538 4,799 47,985
Operational risk
Capital requirement for operational risks subject to Basic Indicator Approach 137,260 1,372,600 102,223 1,022,232
Total (b) 1,416,486 14,164,857 1,105,248 11,052,485
Capital adequacy ratio
Total eligible regulatory capital held (a) 5,922,428 - 4,248,965 -
Total risk weighted assets (b) 14,164,857 - 11,052,485 -
Capital adequacy ratio [(a / b) x 100] 41.81% 38.44%
37 RISK MANAGEMENT
The Bank has set-up a separate Risk Management Group for risk management functions in the Bank. The Bank's risk management function is developed based on the SBP guidelines and International regulatory frameworks. Independent of the business functions, the groups have various departments to encompass risks on enterprise wide basis. To ensure Board’s oversight on the risk management functions, the Board of Directors has established a Risk Management Committee consisting of Board members with mandate as follows:
- To review risk management policies of the bank as and when required and recommend additions, deletions and modifications to the Board of Directors for approval. Burj Bank Limited 93 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
- To review overall risk exposure of the bank and develop and advise an overall risk strategy to be followed by relevant management committees for approving exposures.
- To ensure that a proper system is installed which provides all the required information pertaining to efficient and timely identification, control and reporting of risk including development of an effective MIS for risk management.
- To ensure that the resources allocated for risk management are adequate given the size, nature and volume of the business.
- To monitor Bank's progress towards Basel II and to take and approve all such actions as may be required for successful implementation of Basel II and its different approaches.
- To review major risk exposures of the Bank and advise the management of any change in appetite thereof and to communicate the planned / executed corrective actions to the Board.
- To formulate an overall view of the adequacy of Bank's Capital and its optimum allocation to various business activities with a risk weighted perspective.
- As and when required, to review appropriateness and effectiveness of rating models adopted by the bank for different business classes and align them in accordance with the business needs of the bank.
Scope and nature of risk reporting tools
The comprehensive risk management framework enables the Bank to identify, assess, manage and monitor risks using a range of quantitative and qualitative tools. Some of these tools are common to a number of risk categories, while others are tailored to particular features of specific risk categories and enable generation of information such as:
- Internal risk rating system for Corporate, SME and Consumer financings, risk concentration and distribution;
- Collateral coverage ratios, limit utilisations and past due alerts;
- Stress testing to estimate variation in the value of portfolio in view of changes in the equity prices, foreign exchange rates, profit rates and various other factors.
Risk management process
Through the risk management framework, transactions and outstanding risk exposures are quantified and compared against authorised limits, whereas non quantifiable risks are monitored against policy guidelines and key risk and control indicators. Any discrepancies, excess or deviations, are escalated to the management for appropriate and timely action.
Furthermore, the Management Finance Committee and ALCO also have regular oversight of the risk management activities of the Bank. In addition, all the business proposals, both financing and investments, are independently evaluated by a separate division before review and then approved by the relevant approving committee.
The fundamental risks associated with the financial institution business are credit, market, liquidity and operational risk. 94 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.1 Credit Risk
Credit risk represents the potential that a Bank’s customer or counterparty will be unable to meet its obligations in accordance with agreed terms.
Credit risk management and structure
The Bank’s approach to credit risk management is based on the foundation of preserving the independence and integrity of the credit risk assessment, management and reporting process combined with clear policies, limits and approval structures in the business divisions.
To identify and manage the credit risk, the Bank has developed and implemented a comprehensive credit risk assessment process which is supported by obligor risk rating system developed in conformity with the Basel II and SBP guidelines. The whole process facilitates in evaluation of the creditworthiness of customers before consideration for any financing facilities. Further, the Bank has implemented risk concentration and risk distribution policy guidelines which control the exposure to a single customer, group by the risk rating and overall in any business sector. In consumer financing the Bank has implemented product-wise score card risk rating models which assist the Bank in selection of customers and management of underlying risk. The credit risk is evaluated and managed on a transaction, customer as well as portfolio basis.
"Watchlist" procedure is also functioning which identifies financings with early warning indicator in respect of clients carrying the potential to become non performing. The risk management division also monitors the non performing financing portfolio of the Bank and reports the significant matters to Risk Management Committee.
The Bank operates within;
- Exposure ceilings imposed by the State Bank of Pakistan - Exposure ceilings imposed by the Board of Directors - Various sectoral ceilings
Financing administration department is working towards ensuring that all the approval terms are adhered to and spirit of the transaction is implemented and followed. Special Asset Management (SAM) department is functional and handles its responsibility with respect to non performing portfolio.
Management of corporate and consumer financing risk
All the corporate and consumer financing proposals are first evaluated by the business group and thereafter independent evaluation / due diligence analyses are carried out by a separate division subsequent to which they are further reviewed, evaluated and decided by the Management Finance Committee. The performance of customers is monitored and the risk ratings changes wherever required. Further, to ensure segregation of duties and independence of risk review functions, the concept of front office, middle office and back office are implemented in the Bank. In addition, Risk Management Division separately reviews, controls and monitors the financing and investments’ portfolios on an overall basis. Burj Bank Limited 95 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.1.1 Segmental information
37.1.1.1 Segments by class of business
2011 Financings (Gross) Deposits Contingencies and commitments* Rupees in Percent Rupees in Percent Rupees in Percent '000 '000 '000
Agri business (Food products and beverages) 3,908,366 34.60 33,895 0.17 20,084 2.28 Automobile and transportation equipment 434,414 3.85 8,631 0.04 15,552 1.77 Cement 131,250 1.16 237 0.00 - - Chemical and pharmaceuticals 839,980 7.44 2,127,454 10.46 - - Construction 81,846 0.72 413,814 2.03 30,446 3.46 Electronics and electrical appliances 239,017 2.12 9,131 0.04 299,979 34.08 Exports / Imports 40,248 0.36 - - 16,237 1.84 Financial Institutions (NBFI, DFI, Banks) 105,239 0.93 1,383,271 6.80 - - Fuel, oil and gas exploration 161,723 1.43 1,713 0.01 - - Insurance - - 3,527 0.02 - - Non-Government Organizations (NGOs) - - 940,889 4.63 - - Plastic products 85,875 0.76 3,382 0.02 18,074 2.05 Power (electricity), Gas, Water, Sanitary 1,000,000 8.85 13,972 0.07 1,900 0.22 Production and transmission of energy 695,682 6.16 - - 18,832 2.14 Services 75,502 0.67 994,861 4.89 33,360 3.79 Shoe & leather garments 23,918 0.21 3,767 0.02 - - Sugar 640,280 5.67 1,828 0.01 - - Textile 1,396,623 12.36 753,915 3.71 191,307 21.74 Wholesale and retail trade 71,659 0.63 406,878 2.00 110,166 12.52 Individuals 516,729 4.57 10,675,563 52.48 - - Others 847,010 7.50 2,564,513 12.61 124,226 14.11 11,295,361 100.00 20,341,241 100.00 880,163 100.00
* Contingent liabilities for the purpose of this note are presented at cost and includes direct credit substitutes, transaction related contingent liabilities and trade related contingent liabilities. 96 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2010 Financings (Gross) Deposits Contingencies and commitments* Rupees in Percent Rupees in Percent Rupees in Percent '000 '000 '000
Agri business (Food products and beverages) 1,337,662 21.45 54,767 0.43 9,562 1.69 Automobile and transportation equipment 267,243 4.28 79 0.00 - - Cement 150,000 2.41 109 0.00 - - Chemical and pharmaceuticals 369,093 5.92 686,012 5.43 88,740 15.66 Construction 104,049 1.67 - - 35,111 6.20 Electronics and electrical appliances 157,130 2.52 5,053 0.04 42,650 7.53 Exports / Imports 122,504 1.96 - - - - Financial Institutions (NBFI, DFI, Banks) - - 427,380 3.38 - - Fuel, oil and Gas exploration - - - - 8,321 1.47 Insurance - - 145,162 1.15 - - Non-Government Organizations (NGOs) - - 761,884 6.03 - - Plastic products 83,357 1.34 - - - - Power (electricity), Gas, Water, Sanitary 142,803 2.29 - - 6,600 1.16 Production and transmission of energy 104,279 1.67 99,784 0.79 - - Services 297,737 4.77 - - 12,054 2.13 Shoe & leather garments 31,471 0.50 2,006 0.02 28,046 4.95 Sugar 495,179 7.94 128,454 1.02 - - Textile 1,415,184 22.69 69,804 0.55 167,447 29.56 Wholesale and retail trade - - - - 162,731 28.72 Individuals 358,579 5.75 8,032,094 63.56 2,800 0.49 Others 800,579 12.84 2,223,495 17.60 2,471 0.44 6,236,849 100.00 12,636,083 100.00 566,533 100.00
37.1.1.2 Segment by sector 2011 Financings (Gross) Deposits Contingencies and commitments* Rupees in Percent Rupees in Percent Rupees in Percent '000 '000 '000
Public / Government 3,485,251 30.86 2,196,337 10.80 142,600 16.20 Private 7,810,110 69.14 18,144,904 89.20 737,563 83.80 11,295,361 100.00 20,341,241 100.00 880,163 100.00
2010 Financings (Gross) Deposits Contingencies and commitments* Rupees in Percent Rupees in Percent Rupees in Percent '000 '000 '000
Public / Government 434,416 6.97 747,069 5.91 - - Private 5,802,433 93.03 11,889,014 94.09 566,533 100.00 6,236,849 100.00 12,636,083 100.00 566,533 100.00
* Contingent liabilities for the purpose of this note are presented at cost and includes direct credit substitutes, transaction related contingent liabilities and trade related contingent liabilities. Burj Bank Limited 97 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.1.1.3Details of non-performing financings and specific provisions by class of business segment
2011 2010 Classified Specific Classified Specific financings provisions held financings provisions held ------Rupees in '000 ------
Automobile and transportation equipment 267,243 198,645 267,243 214,884 Chemical and pharmaceuticals - - 37,059 9,265 Construction 25,299 - 36,846 - Financial Institutions (NBFI, DFI, Banks) 105,239 101,117 - - Fuel, Oil and Gas Exploration 74,223 70,542 - - Production and transmission of energy 33,329 31,675 97,933 61,914 Services - - 174,074 76,023 Textile 48,055 33,605 271,572 117,457 Individuals 73,956 39,352 163,152 42,779 Others 375,190 127,279 105,239 95,441 1,002,534 602,215 1,153,118 617,763
37.1.1.4Details of non-performing financings and specific provisions by sector
2011 2010 Classified Specific Classified Specific financings provisions held financings provisions held ------Rupees in '000 ------
Public / Government - - - - Private 1,002,534 602,215 1,153,118 617,763 1,002,534 602,215 1,153,118 617,763
37.1.1.5Geographical segment analysis
2011 Loss before Total assets Net assets Contingencies taxation employed employed and commitments* ------Rupees in '000 ------
Pakistan (346,908) 27,644,829 5,804,578 880,163
2010 Loss before Total assets Net assets Contingencies taxation employed employed and commitments* ------Rupees in '000 ------
Pakistan (824,560) 17,675,686 4,325,983 566,533
* Contingent liabilities for the purpose of this note are presented at cost and includes direct credit substitutes, transaction related contingent liabilities and trade related contingent liabilities. 98 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.1.2 Credit risk - General disclosures Basel II specific
The Bank has adopted Standardised Approach for calculation of capital charge against credit risk according to Basel II guidelines. However, as highlighted in note 37.1, the Bank has already implemented the criteria of advance approaches by establishment and implementation of obligor risk rating system for corporate and consumer financing in the Bank along with policy guidelines on the risk concentration and distribution.
37.1.2.1Credit risk: Disclosures for portfolio subject to Standardised Approach
Under standardised approach the capital requirement is based on the credit rating assigned to the counterparties by the External Credit Assessment Institutions (ECAIs) duly recognised by the SBP for capital adequacy purposes. In this connection, Bank utilises the credit ratings assigned by ECAIs and has recognised agencies such as PACRA (Pakistan Credit Rating Agency), JCR-VIS (Japan Credit Rating Company - Vital Information System), Standard & Poors and Fitch which are also recognised by the SBP.
Types of exposures and ECAI's used:
Exposures PACRA JCR-VIS Standard Fitch & Poors
Corporate ✓✓ N/A N/A Banks ✓✓ ✓✓ Public Sector Entities (PSEs) ✓ N/A N/A N/A
Use of ECAI Ratings
The Bank prefers solicited ratings over unsolicited ratings at all times, owing to the greater degree of accuracy (in general) associated with solicited ratings. Unsolicited ratings may only be used in cases where a solicited rating is not available.
Mapping to SBP Rating Grades
The alignment of the Alphanumerical scale of each agency used with risk buckets is as per instructions laid down by SBP under Basel II requirements. Burj Bank Limited 99 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.1.2.2 Credit exposures subject to Standardised approach
For exposure amounts after risk mitigation subject to the standardised approach, the amount of the Bank’s outstanding (rated & unrated) in each risk bucket as well as those that are deducted are as follows:
2011 2010 Exposures Rating AmountDeduction Net Amount Deduction Net category outstanding credit risk amount outstanding credit risk amount mitigation mitigation ------Rupees in '000 ------
Corporate 1 1,110,906 - 1,110,906 164,991 - 164,991 2 807,478 - 807,478 412,781 - 412,781 3,4 114,845 - 114,845 424,606 - 424,606 Unrated 7,025,215 38,079 6,987,136 4,019,215 26,593 3,992,622 Banks 1 1,695,447 - 1,695,447 2,424,919 - 2,424,919 2 550,164 - 550,164 601,796 - 601,796 3,4 - - - 45,706 - 45,706 Unrated 40,021 - 40,021 52,347 - 52,347 Public Sector Entities 1 1,000,000 - 1,000,000 - - - Unrated 2,485,251 2,485,251 - - - -
37.1.2.3 Credit Risk: Disclosures with respect to Credit risk mitigation for Standardised approach
The Bank has adopted the Simple Approach of Credit Risk Mitigation for the Banking Book. In instances where the Bank’s exposure on an obligor is secured by collateral that conforms to the eligibility criteria under the Simple Approach of CRM, then the Bank reduces its exposure under that particular transaction by taking into account the risk mitigating effect of the collateral for the calculation of capital requirement i.e., risk weight of the collateral instrument securing the exposure is substituted for the risk weight of the counter party.
The Bank accepts cash, lien on deposits, government securities under the simple approach of Credit Risk Mitigation. The Bank has in place detailed guidelines with respect to valuation and management of various collateral types. In order to obtain the credit risk mitigation benefit, the Bank uses realisable value of eligible collaterals to the extent of outstanding exposure.
Counterparty ratings are obtained through the two local SBP authorised External Credit Rating Agencies; JCR-VIS and PACRA and other international sources such as Fitch, Standard and Poor's etc. Credit risk assessment and the continuous monitoring of counterparty and portfolio credit exposures is carried out by the Risk Management function.
37.1.3 Credit concentration risk
Credit concentration risk arises mainly due to concentration of exposures under various categories viz., industry, geography, and single / group borrower exposures. Within credit portfolio, as a prudential measure aimed at better risk management and avoidance of concentration of risks, the SBP has prescribed regulatory limits on banks’ maximum exposure to single borrowers and group borrowers. Within the SBP limits, the Bank has further defined limits to avoid excessive concentration of portfolio. 100 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.2 Market risk
Market risk is the risk of losses arising from fluctuation in the market value of trading and non-trading instruments under investments portfolio. The four standard market risk factors are profit rates, foreign exchange rates, equity prices and commodity prices.
The Bank is using standardised approach to calculate capital charge for market risk as per the current regulatory framework under Basel II. Both general and specific risks are recognised under MCR, general market risk is related to profit rates and equity price risk, whereas specific risk has issuer related factors.
Market risk management
The Bank is using Stress Testing techniques as risk management tool to estimate variation in the value of the portfolio in view of changes in the equity prices, foreign exchange rates, profit rates and various other factors. Further, the Bank as a policy does not engage into any speculative transaction.
In addition to the market risk policies, which cover both trading and banking books, as well as stress testing, bank applies Value at Risk (VaR) technique as risk management tool which quantifies the maximum loss that might arise due to change in risk factors, if exposure remains unchanged for a given period of time.
Equity position in the banking and trading book - Basel II Specific
The Bank classifies and value its investment portfolio in accordance with the directives of SBP as stated in note 5.2 to these financial statements.
Trading book
- Held for trading and available for sale securities; - They are marked to market weekly; - Any valuation difference charged to profit and loss account in case of held for trading securities and to equity in case of available for sale securities.
Banking book
- The Bank at present does not maintain held-to-maturity portfolio.
37.2.1 Foreign exchange risk
The foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to the changes in foreign exchange rates.
The objectives of the foreign exchange risk management function is to minimise the adverse impact of foreign exchange assets and liabilities mismatch and maximise the earnings observing the limits set by the Bank.
The Bank does not take any currency exposure except to the extent of statutory net open position prescribed by the SBP. Foreign exchange open and mismatch positions are controlled through internal limits and are marked to market on a daily basis to contain the foreign exchange exposures. Burj Bank Limited 101 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
The analysis below represents the concentration of the Bank's foreign currency risk for on and off balance sheet financial instruments.
2011 Assets Liabilities Off-balance Net foreign sheet items currency exposure ------Rupees in '000 ------
Pakistan Rupee 27,373,022 21,414,320 (180,102) 5,778,600 United States Dollar 229,533 375,677 186,638 40,494 Great Britain Pound 8,561 18,226 - (9,665) Euro 28,671 32,028 (6,536) (9,893) Japanese Yen 1,333 - - 1,333 AED 1,311 - - 1,311 SAR 2,398 - - 2,398 Total foreign currency exposure 271,807 425,931 180,102 25,978 Total currency exposure 27,644,829 21,840,251 - 5,804,578
2010 Assets Liabilities Off-balance Net foreign sheet items currency exposure ------Rupees in '000 ------
Pakistan Rupee 17,330,215 13,052,217 - 4,277,998 United States Dollar 247,836 239,053 - 8,783 Great Britain Pound 47,690 20,260 - 27,430 Euro 41,581 38,173 - 3,408 Japanese Yen 7,198 - - 7,198 AED 1,166 - - 1,166 Total foreign currency exposure 345,471 297,486 - 47,985 Total currency exposure 17,675,686 13,349,703 - 4,325,983
37.2.2 Yield / profit rate risk
Yield risk is the risk of decline in earnings due to adverse movement of the yield curve. Profit rate risk is the risk that the value of the financial instrument will fluctuate due to changes in market profit rates. The Bank is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-price in a given period. The Bank monitors this risk and manages it by re-pricing of assets and liabilities with the objective of limiting the potential adverse effects on the profitability of the Bank. 102 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.2.2.1Mismatch of profit rate sensitive assets and liabilities
The position for on and off balance sheet instruments is based on the earlier of contractual repricing or maturity date. The position for off balance sheet instruments is based on settlement dates. 2011 Exposed to yield / profit risk Non-profit Effective Total Upto 1 Over 1 to 3 Over 3 to 6 Over 6 Over 1 to 2 Over 2 to 3 Over 3 to 5 Over 5 to 10 Above 10 bearing yield / profit month months months months to 1 years years years years years financial rate year instruments % ------Rupees in '000------
On-balance sheet financial instruments
Assets Cash and balances with treasury banks - 1,379,696 ------1,379,696 Balances with other banks 5.00 - 12.90 2,215,636 2,050,680 ------164,956 Due from financial institutions ------Investments - net 11.79 - 15.75 9,982,793 67,729 67,211 74,903 150,460 4,538,512 3,061,357 292,065 918,902 - 811,654 Financings - net 5.00 - 22.24 10,509,340 - 7,229,047 2,743,196 344,774 308 1,193 11,726 68,275 110,821 - Other assets - 2,135,100 ------2,135,100 26,222,565 2,118,409 7,296,258 2,818,099 495,234 4,538,820 3,062,550 303,791 987,177 110,821 4,491,406 Liabilities Bills payable - 210,932 ------210,932 Due to financial institutions 10.00 -11.90 447,300 225,000 46,300 176,000 ------Deposits and other accounts 0.39 - 11.29 20,341,241 8,200,146 2,907,467 1,579,591 3,956,971 52,922 110,896 1,325,629 - 185,863 2,021,756 Other liabilities - 737,573 ------737,573 21,737,046 8,425,146 2,953,767 1,755,591 3,956,971 52,922 110,896 1,325,629 - 185,863 2,970,261 On-balance sheet gap 4,485,519 (6,306,737) 4,342,491 1,062,508 (3,461,737) 4,485,898 2,951,654 (1,021,838) 987,177 (75,042) 1,521,145
Off-balance sheet financial instruments
Forward exchange contracts - purchase 276,271 269,399 4,462 2,410 ------Forward exchange contracts - sale 94,764 87,892 4,462 2,410 ------Off-balance sheet gap 181,507 181,507 ------
Total yield / profit risk sensitivity gap (6,125,230) 4,342,491 1,062,508 (3,461,737) 4,485,898 2,951,654 (1,021,838) 987,177 (75,042) 1,521,145
Cumulative yield / profit risk sensitivity gap (6,125,230) (1,782,739) (720,231) (4,181,968) 303,930 3,255,584 2,233,746 3,220,923 3,145,881 4,667,026
2010 Exposed to yield / profit risk Non-profit Effective Total Upto 1 Over 1 to 3 Over 3 to 6 Over 6 Over 1 to 2 Over 2 to 3 Over 3 to 5 Over 5 to 10 Above 10 bearing yield / profit month months months months to 1 years years years years years financial rate year instruments % ------Rupees in '000------On-balance sheet financial instruments
Assets Cash and balances with treasury banks - 1,324,461 ------1,324,461 Balances with other banks 5.01 - 7.92 400,468 301,513 ------98,955 Due from financial institutions 12.15 - 13.75 2,679,753 2,369,582 310,171 ------Investments - net 12.10 - 15.66 5,050,878 12,333 34,518 87,137 383,075 1,186,390 2,471,705 370,008 37,500 - 468,212 Financings - net 5.00 - 19.98 5,616,202 - 4,042,480 1,381,571 110,552 1,280 1,570 11,103 1,826 65,820 - Other assets - 1,365,028 ------1,365,028 16,436,790 2,683,428 4,387,169 1,468,708 493,627 1,187,670 2,473,275 381,111 39,326 65,820 3,256,656 Liabilities Bills payable - 86,867 ------86,867 Due to financial institutions 7.50 - 10.00 287,291 23,247 104,778 159,266 ------Deposits and other accounts 0.39 - 14.33 12,636,083 5,878,358 1,596,038 1,003,274 1,907,108 138,667 64,846 178,978 - - 1,868,814 Other liabilities - 331,300 ------331,300 13,341,541 5,901,605 1,700,816 1,162,540 1,907,108 138,667 64,846 178,978 - - 2,286,981 On-balance sheet gap 3,095,249 (3,218,177) 2,686,353 306,168 (1,413,481) 1,049,003 2,408,429 202,133 39,326 65,820 969,675
Off-balance sheet financial instruments
Forward exchange contracts - purchase ------Forward exchange contracts - sale ------Off-balance sheet gap ------
Total yield / profit risk sensitivity gap (3,218,177) 2,686,353 306,168 (1,413,481) 1,049,003 2,408,429 202,133 39,326 65,820 969,675
Cumulative yield / profit risk sensitivity gap (3,218,177) (531,824) (225,656) (1,639,137) (590,134) 1,818,295 2,020,428 2,059,754 2,125,574 3,095,249 Burj Bank Limited 103 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
2011 2010 ------Rupees in '000 ------
37.2.2.2Reconciliation of assets and liabilities exposed to yield / profit rate risk with total assets and liabilities
Total financial assets as per note 37.2.2.1 26,222,565 16,436,790 Add: Non financial assets Operating fixed assets 671,890 646,645 Deferred tax asset 480,377 393,116 Other assets 269,997 199,135 Total assets as per Statement of Financial Position 27,644,829 17,675,686
Total financial liabilities as per note 37.2.2.1 21,737,046 13,341,541 Add: Non financial other liabilities 103,205 8,162 Total liabilities as per Statement of Financial Position 21,840,251 13,349,703
37.2.3 Equity position risk
Equity position risk is the risk arising from taking long positions, in the trading book, in the equities and all instruments that exhibit market behavior similar to equities.
The Bank's equity portfolio comprises of 'held for trading' and 'available for sale' portfolio of shares. The objective of equity portfolio classified as 'held for trading' portfolio is to take advantages of short-term capital gains, while the 'available for sale' portfolio is maintained with a medium term view of capital gains and dividend income. Special emphasis is given to the details of risks / mitigants, limits / controls for equity trading portfolios of equity portfolio unit. All the investments are within the limit prescribed in the SBP regulations and are fully Shariah compliant.
37.3 Liquidity risk
Liquidity risk is the risk that the Bank either does not have sufficient financial resources available to meet its obligations and commitments as they fall due or can fulfill them only at excessive cost that may affect the Bank’s income and equity.
The Bank seeks to ensure that it has access to funds at reasonable cost even under adverse conditions, by managing its liquidity risk across all classes of assets and liabilities in accordance with regulatory guidelines and to take advantage of any lending and investment opportunities as they arise. 104 Annual Report 2011
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.3.1 Maturities of assets and liabilities
2011 Total Upto 1 month Over 1 to 3 Over 3 to 6 Over 6 months Over 1 to 2 Over 2 to 3 Over 3 to 5 Over 5 to 10 Above 10 months months to 1 year years years years years years ------Rupees in '000------
Assets Cash and balances with treasury banks 1,379,696 1,379,696 ------Balances with other banks 2,215,636 2,215,636 ------Due from financial institutions ------Investments - net 9,982,793 879,383 67,211 74,903 150,460 4,538,512 3,061,357 292,065 918,902 - Financings - net 10,509,340 1,482,151 2,003,387 2,151,550 168,887 394,177 534,531 3,312,836 216,740 245,081 Operating fixed assets 671,890 12,340 24,679 37,019 74,038 114,976 98,474 145,059 136,942 28,363 Deferred tax assets 480,377 - - - 480,377 - - - - - Other assets 2,405,097 570,383 763,607 822,726 63,437 19,361 35,974 67,925 30,862 30,822 27,644,829 6,539,589 2,858,884 3,086,198 937,199 5,067,026 3,730,336 3,817,885 1,303,446 304,266
Liabilities Bills payable 210,932 210,932 ------Due to financial institutions 447,300 225,000 46,300 176,000 ------Deposits and other accounts 20,341,241 10,179,214 2,907,467 1,580,350 3,957,038 52,922 110,896 1,367,493 - 185,861 Other liabilities 840,778 437,843 90,005 92,267 17,301 22,017 48,952 108,713 23,680 - 21,840,251 11,052,989 3,043,772 1,848,617 3,974,339 74,939 159,848 1,476,206 23,680 185,861
Net assets 5,804,578 (4,513,400) (184,888) 1,237,581 (3,037,140) 4,992,087 3,570,488 2,341,679 1,279,766 118,405
Share capital 7,410,458 Reserves 16,751 Accumulated loss (1,649,630) Surplus on revaluation of assets - net of tax 26,999 5,804,578
2010 Total Upto 1 month Over 1 to 3 Over 3 to 6 Over 6 months Over 1 to 2 Over 2 to 3 Over 3 to 5 Over 5 to 10 Above 10 months months to 1 year years years years years years ------Rupees in '000------
Assets Cash and balances with treasury banks 1,324,461 1,324,461 ------Balances with other banks 400,468 400,468 ------Due from financial institutions 2,679,753 2,369,582 310,171 ------Investments - net 5,050,878 480,545 34,518 87,137 383,075 1,186,390 2,471,705 370,008 37,500 - Financings - net 5,616,202 811,792 1,365,341 1,217,006 70,295 393,619 586,445 693,032 355,751 122,921 Operating fixed assets 646,645 8,689 17,373 26,060 52,120 104,240 104,240 124,167 209,756 - Deferred tax assets 393,116 - - - 393,116 - - - - - Other assets 1,564,163 43,637 1,322,320 83,912 69,298 28,153 8,839 3,738 4,216 50 17,675,686 5,439,174 3,049,723 1,414,115 967,904 1,712,402 3,171,229 1,190,945 607,223 122,971
Liabilities Bills payable 86,867 86,867 ------Due to financial institutions 287,291 23,247 104,778 159,266 ------Deposits and other accounts 12,636,083 7,747,172 1,596,038 1,003,274 1,907,108 138,667 64,846 178,978 - - Other liabilities 339,462 58,489 74,158 64,967 19,978 37,159 40,937 29,365 10,709 3,700 13,349,703 7,915,775 1,774,974 1,227,507 1,927,086 175,826 105,783 208,343 10,709 3,700
Net assets 4,325,983 (2,476,601) 1,274,749 186,608 (959,182) 1,536,576 3,065,446 982,602 596,514 119,271
Share capital 5,010,458 Reserves 16,751 Accumulated losses (761,142) Surplus on revaluation of assets - net of tax 59,916 4,325,983 Burj Bank Limited 105 (Formerly Dawood Islamic Bank Limited)
Notes to and Forming Part of the Financial Statements For the year ended December 31, 2011
37.4 Operational risk
Operational risk is the risk of direct or indirect loss due to an event or action resulting from the failure of processes, systems, personnel and other risks having an operational impact such as unauthorised activities, fraud and business malpractices.
Operational risk management and structure
The Bank is using Basic Indicator Approach of Basel II for operational risk. The bank has a separate operational risk management function which is involved in developing an overall operational risk management framework with the objective of gradually move towards advanced approach under Basel II.
The Bank is also supervised by the Shariah Supervisory Committee, headed by the Shariah Advisor, which sets out guidelines, policies and procedures for the Bank to ensure that all its activities and products are Shariah compliant.
A business continuity plan and a disaster recovery plan have also been formulated to ensure uninterrupted flow of operations of the Bank.
38 DATE OF AUTHORISATION FOR ISSUE
These financial statements were authorised for issue on March 01, 2012 by the Board of Directors of the Bank.
39 CORRESPONDING FIGURES
Comparative information has been re-classified, re-arranged or additionally incorporated in these financial statements, wherever necessary to facilitate comparison and to confirm with changes in presentation in the current year. There were no significant reclassifications during the year.
40 GENERAL
Figures have been rounded off to the nearest thousand Rupees unless otherwise stated.
CHAIRMAN PRESIDENT / CEO VICE CHAIRMAN DIRECTOR Khaled Mohammad Al-Aboodi Ahmed Khizer Khan Shehab M. Gargash Jamil Ahmed Qureshi 106 Annual Report 2011
Pattern of Shareholdings as on December 31, 2011
Number of Shareholdings Total Number Shareholders From To of Shares Held 7 501 - 1,000 4,800 1 10,001 - 15,000 10,021 1 195,001 - 200,000 200,000 1 265,001 - 270,000 270,000 1 385,001 - 390,000 390,000 1 545,001 - 550,000 550,000 1 730,001 - 735,000 730,600 1 820,001 - 825,000 822,600 2 995,001 - 1,000,000 2,000,000 1 1,195,001 - 1,200,000 1,200,000 1 1,220,001 - 1,225,000 1,222,600 3 1,330,001 - 1,335,000 3,999,999 2 1,335,001 - 1,340,000 2,680,000 1 2,345,001 - 2,350,000 2,345,034 3 2,495,001 - 2,500,000 7,500,000 1 2,510,001 - 2,515,000 2,512,299 1 4,995,001 - 5,000,000 5,000,000 1 9,995,001 - 10,000,000 10,000,000 1 11,495,001 - 11,500,000 11,500,000 1 16,315,001 - 16,320,000 16,320,000 1 16,925,001 - 16,930,000 16,927,968 1 20,200,001 - 20,205,000 20,200,920 1 20,290,001 - 20,295,000 20,291,284 1 26,660,001 - 26,665,000 26,662,516 1 29,685,001 - 29,690,000 29,685,986 1 39,995,001 - 40,000,000 40,000,000 1 244,545,001 - 244,550,000 244,545,122 1 273,470,001 - 273,475,000 273,474,075 40 741,045,824
Categories of Shareholders as on December 31, 2011
Shareholder's Number of Number of Percentage Category Shareholders Shares Held
Financial Institutions 5 551,250,217 74.39 Individuals 26 110,968,941 14.97 Investment Companies 2 41,000,000 5.53 Joint Stock Companies 4 18,840,000 2.54 Leasing Companies 1 1,333,333 0.18 Modarabas 2 17,653,333 2.38 40 741,045,824 100.00 Burj Bank Limited 107 (Formerly Dawood Islamic Bank Limited)
Additional Information as on December 31, 2011
Particulars Number of Shareholders Shares held Percentage
Associated Companies
Bank Al Khair B.S.C (c) 1 273,474,075 36.90% Islamic Corporation for the Development of The Private Sector 1 244,545,122 33.00% Alsafat Investment Company 1 40,000,000 5.40% Gargash Enterprises L.L.C 1 10,000,000 1.35% Al-Zamin Leasing Modaraba 1 1,333,333 0.18%
Directors
Azam Essof Kolia 1 26,662,516 3.60% Shehab M. Gargash 1 16,927,968 2.28% Mohammed Tariq 1 390,000 0.05% Muhammad Jamil Ahmed Qureshi 1 10,021 0.00%
Public Sector Companies, Corporations, Banks, Development Finance Institutions, Non-Banking Finance Institutions, Mutual Funds and other Organizations
PAIR 1 29,685,986 4.01% B.R.R Guardian Modaraba 1 16,320,000 2.20% F. Rabbi Steel (Private) Limited 1 5,000,000 0.67% Al Hoqani Securities & Investment Corp. (Private) Limited 1 2,500,000 0.34% Dawood Capital Management Limited 1 2,345,034 0.32% Dossa Cotton & General Trading (Private) Limited 1 1,340,000 0.18% Saudi Pak Leasing Company Limited 1 1,333,333 0.18% Orix Investments Bank Pakistan Limited 1 1,200,000 0.16% Descon Holding (Private) Limited 1 1,000,000 0.13%
Others (Shareholders with less than 10% Shareholding) 22 66,978,436 9.04%
40 741,045,824 100% 108 Annual Report 2011
Branch Network as on December 31, 2011
Branch Name of Branches Locality Telephone Branch / Code Sub Branch
0001 Main Branch Trade Center, I.I Chundrigar Road, Karachi. 021-32272447 Branch 0002 Sharah-e-Faisal Branch 3/A Zubeida Garden, Near Awami Markaz, Main Shahrah-e-Faisal, Karachi. 021-34533720 Branch 0003 Gulshan-e-Iqbal Branch Plot No.Zc-5, Dawood Avenue, Block-7, Gulshan-e- Iqbal, Karachi. 021-34833782-3 Branch 0004 Hussain Chowk Branch 57-B-III, Near Hussain Chowk, Gulberg-III, Lahore. 042-5772672 Branch 0005 Jodia Bazar Branch Daryalal Street,Napier Quarters, Jodia Bazar, Karachi. 021-32529081-82 Branch 0006 Kharadar Branch Ground Floor, Qasr-e-Yaseen Bunder Quarters, Kharadar, Karachi. 021-32315176 Branch 0007 Sir Syed Road Branch Shop No. G-07, Madina Arcade, Plot No. 154-6 Block-2, Sir Syed Road, P.E.C.H.S., Karachi. 021-34303084 Branch 0008 Dhorajee Branch Ground Floor, Chhotani Arcade, C.P. Berar Co-operative Housing Society Ltd. Plot No. 35/130,Block 7/8. Karachi. 021-34860871-2 Branch 0009 Small Industrial Estate Branch Plot No. B III-8S-202, Shahab-Pura Road, Near Small Industrial Estate, Sialkot. 052-3557062 Branch 0010 Hasan Arcade Faisalabad Branch Hasan Arcade, Chen One Road, Faisalabad. 041-8730017-19 Branch 0011 Iqbalabad Branch 5,6 Moza Dera Shams, Iqbalabad, Rahimyar-Khan. 068-5678002 Branch 0012 Blue Area Branch Saleem Plaza, 19 Jinnah Road, Blue Area, Islamabad. 051-2871103 Branch 0013 13 Wala More Branch 13 Wala More, Chuck 13 6 Kilometer, Muzaffar Gadh Road, District Kushab. 045-42720901-7 Branch 0014 Vehari Road Branch Plot No 616, Near Islam Nagar, Vehari Road, Multan. 061-6244991-4 Branch 0015 Zamzama Branch Zamzama Boulevard, Phase V, DHA, Karachi. 021-3530203-24 Branch 0016 Zaibunnisa Street Saddar Branch Shop # 04 , Survey 6, Sb 07, Zaibunnisa Street, Saddar, Karachi. 021-35224490-93 Branch 0017 M. A Jinnah Road Branch M. A. Jinnah Road, Karachi. 021-32764851 Branch 0018 Bank Road Branch Plot # 1, Survey No 364, Bank Road, Rawalpindi. 051-5584530 Branch 0019 Model Town Branch Plot # 85, 19/20/B, Model Town, Gujranwala. 055-3734162-63 Branch 0020 Latifabad Branch Plot # 325-D, Block-c, Latifabad, Unit # 7 Hyderabad. 022-3810706 Branch 0021 Mansehra Road Branch Near Sethi Masjid Supply Bazaar Mansehra Road Abbottabad. 099-2344393 Branch 0022 Gulistan-e-Jauher Branch Shop # 10, Rufi Lake Drive, Sub Plot 118/2/20 & C/B-x, Block 18, KDA Scheme 36,Gulistan-e-Jauher, Karachi. 021-34610992-3 Branch 0023 March Bazar Branch Plot No B-897/1 March Bazar, Sukkur. 071-5621335 Branch 0024 M.A. Jinnah Branch, Tando Adam M. A. Jinnah Road, Tando Adam District Sanghar. 023-5574956-8 Branch 0025 DHA Phase-II Branch Plot No.108-C Commercial Area -B DHA Karachi. 021-35314194 Branch 0026 Hussainabad Branch F.B Area Block-3 KDA Scheme No -16. Karachi. 021-36334434-6 Branch 0027 F-10 Markaz Branch Plot No1-V, Margalla Plaza, Main Double Road, F-10 Markaz, Islamabad. 051-2297542 Branch 0028 Sabu Rahu Branch Survey No 64/2 Main National Highway, Sabu Rahu, Tehsil Sakrand. 024-4284969 Branch 0029 Odero Lal Station Branch Survey No 481/2,483/1-4 & 487/2, Opposite Rural Health Center, Odero Lal Station, Tehsil & District Matyari. 022-2027102 Branch 0030 Hyderi Market Branch Se-6, Block-G, Hyderi Market, North Nazimabad, Karachi. 021-36644213-14 Branch Burj Bank Limited 109 (Formerly Dawood Islamic Bank Limited)
Branch Name of Branches Locality Telephone Branch / Code Sub Branch
0031 Sargodha Branch Khasra No.75/5/6, Khewet No.545, 45 Alif Shumali Khilji Building, Railway Road, Sargodha. 048-3723806-7 Branch 0032 Allama Iqbal Town Branch 5 Hunza (A), Block Main Boulevard, Allama Iqbal, Town, Lahore. 042-35296852-55 Branch 0033 M.A. Johar Town Branch 68 R-1, M.A Johar Town, Lahore. 042-35314980-1 Branch 0034 DHA Branch Lahore T-56, CAA Phase 2, DHA, Lahore. 042-35707680 Branch 0035 Rail Bazar Branch Plot No. 2 Rail Bazar, Near Clock Tower, Faisalabad. 041-2621281-3 Branch 0036 Mughal Plaza Branch Ground Floor, Mughal Plaza G.T. Road, Rawat Islamabad. 051-4612212-5 Branch 0037 Manga Mandi Branch Khasra # 10736/2, Khewet # 950, Khatooni # 1845, Madina Market, Kalma Chowk, Mangi Mandi, Lahore. 042-35384245 Branch 0038 Feroze Pur Road Branch Khasra # 1643, Khewet # 698, Khatooni # 1228 & 1229, Mouza Gaju Matta, Feroze Pur Road Khana, Lahore. 042-35271462 Branch 0039 G.T Road Branch Ground Floor,Pak Doha Trade Centre, Khasra # 1107/771 G.T Road, Tarnol. 051-2226572-73 Branch 0040 M.A. Jinnah Road Quetta Khasra # 28, Khatooni # 343-404, M.A. Jinnah Road, Quetta. 081-2865700-02 Branch 0041 Sadar Road Branch 6 Sadar Road, Peshawar Near Deans Bakery. 091-5279953-54 Branch 0042 Business & Trade Tower Branch Shop No.3, Business Finance & Trade Tower, Karachi. I.I. Chundrigar Road Branch, Karachi. 021-32472447-49 Branch 7081 Tipu Sultan Road (Sub Branch) Plot No 116-117-Z, Block 7/8, Shabbirabad Commercial Area, Dawoodi Bohra Co-operative Housing Society Ltd, Tipu Sultan Road, Karachi. 021-34306580-1 Sub Branch 7102 Clifton Karachi (Sub Branch) S-07, Ground Floor, Yousuf Grand Plaza, Block 8, KDA Scheme 5 Kehkeshan, Clifton. 021-35876077 Sub Branch 7131 City Sub Branch Pioneer Cement Limited, Factory Site, Jauharabad, Khushab. 052-3557062-4 Sub Branch 7141 Old Bahawalpur Rd. (Sub Branch) Plot No 126, Old Bahawalpur Road, Multan. 061-4512054-5 Sub Branch 7151 Khayaban-e-Sehar (Sub Branch) Plot No 19 -E, Khayaban-e-Sehar, Phase VI DHA, Khi. 021-35342585 Sub Branch 7221 Sir Syed University (Sub Branch) Sir Syed University of Engineering & Technology, Main University Road, Karachi. 021-34834778 Sub Branch 7251 DHA Extention (Sub Branch) C-45, 21st Commercial Street, DHA Phase II Extension DHA, Karachi. 021-35397366 Sub Branch 7401 Shah Alam Market (Sub Branch) 14-A, Shah Alam Market, Main Road, Lahore. 042-7655208 Sub Branch 110 Annual Report 2011 Form of Proxy
Folio / CDC Account No.
I / We of being members(s) of
Burj Bank Limited (formerly Dawood Islamic Bank Limited) (”the Bank”) holding
ordinary share, hereby appoint of of failing of him / her of member of the Bank, as my / our proxy to voice for me/us, and on my / our behalf at the 6th Annual General Meeting of the Bank to be held on Wednesday March 28, 2012 and at any adjournment thereof.
As witness my / our hand this day of 2012.
Witness:
Name:
CNIC No./ Passport No: (Member’s signature on Address: Rs. 5/- Revenue Stamp)
Name:
CNIC No./ Passport No:
Address: Please affix correct postage
The Company Secretary Burj Bank Limited (formerly Dawood Islamic Bank Limited) Trade Center, I.I.Chundrigar Road, Karachi, Pakistan. Head Office:
BURJ BANK LIMITED (formerly Dawood Islamic Bank Limited) Trade Center, I.I. Chundrigar Road, Karachi-Pakistan Tel: +92-21-32637174 & 75 Toll Free Helpline: +92 (0) 800-00343 www.burjbankltd.com