CHANGING LIVES
ANNUAL REPORT 2013/14 OUR VISION To be a customer centric, innovative and broad based financial solutions partner. OUR MISSION Operate and expand aggressively, efficiently and Setup the ‘best-in-the-breed’ operational platform to profitably; with special focus on the Micro, Small and support growth aspirations Medium Enterprise segments Offer a challenging and rewarding work environment that Develop and offer high quality, innovative products and provides opportunities for growth services Contribute to the quality of life in our communities Seek and grow business and markets with significant potential growth Transform the company into a trusted household financial brand Make products easily accessible to the target consumer by investing in distribution channels
CONTENTS MANAGEMENT INFORMATION FINANCIAL INFORMATION Chairman’s Review 04 Independent Auditors’ Report 66 CEO’s Report 06 Statement of Comprehensive Income 67 Board of Directors 08 Statement of Financial Position 68 Management Discussion & Analysis 12 Statement of Changes in Equity 69 Operational Review 14 Cash Flow Statement 70 Financial Review 16 Notes to the Financial Statements 71 Risk Management 18 Shareholders’ Information 98 Branch Network 100 SUSTAINABILITY REPORT Notice of Meeting 101 Sustainability Report 24 Notes 102 Our Events 27 Brac Lanka Finance PLC Form of Proxy Corporate Governance Report 29 Corporate Information - Inner Back Cover Report of the Directors 55 Director’s Statement on Internal Controls Over Financial Reporting 60 Report of the Audit Committee 61 Report of the Integrated Risk Management Committee 61 Report of The Remuneration Committee 62 Directors‘ Responsibility For Financial Reporting 63 CHANGING LIVES
BRAC Lanka Finance PLC was established with a passion and tenaciousness to support and sustain the emerging lives of Sri Lankans. We used the platform of Microfinance and Financial solutions to setup a regulated finance company imbued with decades of experience of BRAC partnered with LOLC. BRAC is the World’s largest development organization inured with poverty reduction and empowerment of women with its specialist knowledge in Microfinance and Lanka ORIX Leasing Company PLC is one of the most successful and well-respected group of companies in Sri Lanka. Our combination of expertise in international Microfinance applications and domestic market knowledge will ensure innovative solutions and constitute a long term relationship pushing the boundaries of financial inclusion to empower and create wealth for people across the country.
Annual Report 2013/14 | 1 MANAGEMENT INFORMATION
2 | BRAC Lanka Finance PLC Annual Report 2013/14 | 3 CHAIRMAN’S REVIEW
Muhammad A. (Rumee) Ali Chairman
Since its inception in 1972 in Bangladesh, BRAC has In Bangladesh, BRAC is one of the strongest non been driven by its founder Sir Fazle Hasan Abed’s government providers of health and education services vision of a world free from all forms of exploitation and and is a prominent advocate to women and children’s discrimination, where everyone has the opportunity to rights. Our poverty alleviation programmes are funded realise their potential ability. This further emanates from not only through donor funds but also through our own Sir Abed’s philosophy that poverty is not an act of God, enterprises and investments. BRAC’s objective was not but is a result of societal attitudes and social systems that to generate profit, but to build a genuine strong social disempower some communities. As noted by Sir Abed, impact and this differentiates BRAC’s social enterprises the root cause of poverty is exclusion and denial of that are aimed at creating livelihoods towards poverty access to the three basic rights of finance, education and alleviation. This unique model of self financing has health. Therefore, BRAC was designed with a mission been the key to BRAC’s long term sustainability. Today, of empowering people in situations of poverty and BRAC Bank is a recognised bank in Bangladesh which exclusion, through economic and social programmes also play’s a vital role in reaching out to undeserved that intervene in the three areas of health, education populations at the bottom of the pyramid. BRAC EPL and finance. We believe in the old adage that health is Investments Limited (BEIL), is an investment bank, wealth, which is particularly true for people with little or which is the only institution in Bangladesh certified no access to resources. We believe education is a key tool for consultancy services for environmental and social of empowerment, by paving the way for people to help impact assessment, by the United Nations Framework themselves. Education is a stepping stone to financial Convention for Climate Change. literacy and economic empowerment that in turn, facilitate autonomy and self determination. Finally BRAC supports BRAC Lanka Finance PLC in Sri Lanka, which is a joint financial development for the poorest of poor through venture with the local financial giant Lanka ORIX Leasing Micro Credit Programmes that help the under privileged Company PLC, is yet another international venture by families overcome poverty. Today, as the world’s largest BRAC. As the world’s most successful Microfinance Non Governmental Organisation, BRAC has made it its Organisation, we strive to introduce our tried and tested business to combat poverty across 14 countries in the poverty alleviation model in Sri Lanka. Our aim is to world through a range of interventions that support the replicate the BRAC Microfinance model in Sri Lanka, to BRAC philosophy of people empowerment. empower rural Sri Lankan populations who do not have
4 | BRAC Lanka Finance PLC “BRAC Lanka Finance PLC in Sri Lanka, which is a joint venture with the local financial giant Lanka ORIX Leasing Company PLC, is yet another international venture by BRAC. As the world’s most successful Microfinance Organisation, we strive to introduce our tried and tested poverty alleviation model in Sri Lanka.”
access to formal financial services. However, due to Sri Lanka’s plans for financial sector consolidation, BRAC Lanka Finance PLC, like all other financial institutions in Sri Lanka, is in the process of evaluating its strategic direction for the future. Nevertheless, as an Organisation that believes in human values, the best interests of all stakeholders will be upheld in our final decision, with regards to our plans for Sri Lanka.
I wish to thank the regulators, our business partners LOLC, the Board, Management and staff of BRAC Lanka Finance PLC, for their contributions rendered during the current year. I also extend my warm appreciations to our customers in Sri Lanka.
Sincerely
Muhammad A. (Rumee) Ali Chairman
Annual Report 2013/14 | 5 CEO’S REVIEW
Abedur Rahman Sikder Chief Executive Officer
I would like to thank all our shareholders for gracing this and then to enter a higher growth path of over 8% in the second Annual General Meeting of BRAC Lanka Finance medium term. This expansion is expected to be broad PLC. I am most privileged to present the performance based with all major sectors, contributing positively in of the Company for the first year of its operations, since the coming years. its acquisition by BRAC Bangladesh and Lanka ORIX Leasing Company PLC (LOLC) of Sri Lanka. The even more encouraging fact is that Sri Lanka’s National Development Policy places special emphasis on BRAC Lanka’s entry into the Sri Lankan financial Small and Medium Enterprise (SME) for women focused markets took place against a backdrop of many positive growth, as outlined in the Central Bank Road Map for developments in the Sri Lankan economy. Although 2014. This policy framework opens a clear window for global economic conditions continued to remain weak, BRAC Lanka Finance PLC involvement in Sri Lanka’s future with global GDP growth contracting from 3.1% in 2012 growth, and in this positive backdrop we look forward to to 3% in 2013. The Sri Lankan economy improved from a introducing the tried and tested BRAC poverty alleviation 6.3% rate of growth in 2012 to a GDP growth rate of 7.3% model in Sri Lanka. In our first phase of operations, we will by the end of 2013. The industrial sector expanded by focus on strengthening Sri Lanka’s grassroots economy 9.9% during the year. The agriculture sector recorded a through Microfinance that will empower rural, female growth rate of 4.7%, compared the 5.2% growth in 2012, populations. Under our second phase of growth we will and the services sector saw a robust growth of 6.4%, target Small and Medium Enterprise sector development compared to the 4.6% rate of growth in 2012. In spite through a range of specialised products. Even at this early of significant rising adjustments to the domestic energy stage of operations, BRAC Lanka Finance PLC is a true prices, the rate of inflation was stable and remained example of rural and women focused development, as at single digit level. Headline inflation was 4.7% year- our client base comprises about 40,000 who are women on-year and 6.9% on an annual average basis. With Microfinance recipients, served by a workforce which is exports recording a growth of 6.4% in 2013 and import about 90% women. Through our operations we have not expenditure declining by 6.2%, a significant improvement only opened up avenues of economic empowerment for was seen in the trade balance, and the overall balance of women by way of entrepreneurial activities for women, the BOP recording a surplus of US$ 985 million in 2013, we also create employment and growth opportunities in comparison to a surplus of US$ 151 million recorded in within the company, for women. 2012. Economic growth is expected to reach 7.8% in 2014
6 | BRAC Lanka Finance PLC “The current Financial year was a challenging one for BRAC Lanka Finance PLC due to the need of consolidating market position, while shifting to the Microfinance business model. During the current financial year, we commenced this process by placing the infrastructure for Microfinance Services, including the recruitment of experienced personnel from Sri Lanka’s Microfinance sector and expanding the Branch/ Service Network from 01 to 10.”
The current Financial year was a challenging one for BRAC our respected Shareholders and all other Stakeholders Lanka Finance PLC due to the need of consolidating for the trust placed in me to head this Company. With market position, while shifting to the Microfinance our years of experience in poverty alleviation through business model. During the current financial year, we Micro Credit, and your cooperation as Shareholders of commenced this process by placing the infrastructure this Company, I am confident we can take this Company for Microfinance Services, including the recruitment of to the next level of growth. experienced personnel from Sri Lanka’s Microfinance sector and expanding the Branch / Service Network from Sincerely 01 to 10. To deliver Microfinance services to Sri Lanka’s rural populations we intend to expand our Branch / Service Network exponentially over the next few years starting with 80-100 Branches / Service Centers by end 2014. I am happy to report that even with our extremely Abedur Rahman Sikder limited infrastructure, during the current financial year, Chief Executive Officer BRAC Lanka Finance PLC disbursed over LKR 700 mn in micro loans. In addition to this, progress over the current financial year includes a customer base increased to 39,378 from 994 in 2013, with a total asset base growth of 191%, where the loan portfolio has expanded by 284%. I am confident of sustained growth over the next few years that will position BRAC Lanka Finance PLC as a leading Microfinance Institution in Sri Lanka.
I would like to thank the Board of Directors for their guidance and leadership during this formative year of BRAC Lanka Finance PLC towards building a solid foundation for the future. I would like to thank the Management and Staff of BRAC Lanka Finance PLC for their dedication and hard work over the last year. I also thank
Annual Report 2013/14 | 7 BOARD OF DIRECTORS
1 2 3 4 5
6 7 8 9
1. Mr. Muhammad A (Rumee) Ali Investment Climate Fund, International Chamber of Chairman - Non-Executive Director Commerce, Bangladesh and CEOs Forum for inclusivity. Rumee Ali Chairman of BRAC Bangladesh and Board He also served as a member of the governing body of of Director of BRAC Lanka Finance PLC, has served at PKSF and as a Vice-President of Bangladesh Association different levels for the local and international Banking of Banks and of the Employers Federation of Bangladesh. sectors. Prior to joining BRAC, he served as the Deputy He has received a number of awards including C. R. Governor of Bangladesh Bank. With his appointment as Das, Atish Dipanker and Sarojini Naidu Gold Medal for Country Head and General Manager of ANZ Grindlays Banking in 1995, 1999 and 2009 respectively, and the Bank, Bangladesh in March 1997, Mr. Rumee Ali became ‘CEO of the Year’ award by Junior Chamber International, the first Bangladeshi to head a major international bank Bangladesh. in Bangladesh. In July 2000, following the takeover of ANZ Grindlays Bank by Standard Chartered Bank, Mr. Ali received his BA and MA in economics from the Mr. Rumee Ali was appointed the Chief Executive Officer University of Dhaka. of the Standard Chartered Group in Bangladesh, heading both Standard Chartered Bank and Standard Chartered 2. Mr. Ishara Chinthaka Nanayakkara Grindlays Bank. His banking experience includes stints in Non-Executive Director India, United Kingdom and Australia. Mr. Rumee Ali was Ishara Nanayakkara joined the Board of Lanka ORIX elected as fellow member of the Bangladesh Institute of Leasing Company PLC (LOLC) in 2002 and is, presently Bankers in 2001. the Deputy Chairman of LOLC and of Lanka ORIX Finance Company PLC. He is also the Chairman of Commercial He is the Chairman of BRAC EPL Investments Ltd, BRAC Leasing and Finance PLC, a leading finance company in EPL Stock Brokerage Ltd, bKash Ltd, BRAC Sajaan the country. Exchange Ltd, BRAC IT Services Ltd, BRAC Lanka Finance Ltd and also the Director of several other organisations, Mr. Nanayakkara is the Chairman of LOLC Micro Credit including BRAC Bank, BRAC Net and Alliance for Limited, the Microfinance arm of LOLC Group. He also Bangladesh Worker Safety. Mr. Rumee Ali is a member of serves on the Board of PRASAC Microfinance Institute; the global steering committee of the performance-based one of the largest Microfinance institutions in Cambodia. grants initiatives of the International Finance Corporation, His enduring interest in Microfinance was further evident and the technical advisory committee of Bangladesh by his latest initiative and LOLC’s first overseas investment
8 | BRAC Lanka Finance PLC - LOLC Myanmar Microfinance Company Ltd in which he Mr. Kairy supervises the overall financial control and is the founding Chairman. He was also instrumental in management over the sources and applications of funds the joint venture between BRAC and LOLC to form BRAC for BRAC activities, both development and commercial. Lanka Finance PLC. His responsibilities include ensuring effective financial control, transparency and accuracy of financial data Mr. Nanayakkara is the Deputy Chairman of Seylan Bank and reporting. Mr. Kairy is responsible for ensuring the PLC, a premier commercial bank in the country. His effective procurement and asset management of BRAC. strategic participation in general, life and micro insurance through LOLC Insurance Company Ltd, factoring and He is currently serving on the board of BRAC Bank Limited working capital through LOLC Factors Ltd, stock brokering and BRAC Lanka Finance PLC (Sri Lanka) as a director and securities through LOLC Securities Ltd, Islamic finance nominated by BRAC. through LOLC Al-falaah, SME financing in addition to conventional lending and deposit product knowhow, 4. Mr. Waduthantri Dharshan Kapila Jayawardena reflects his vivid exposure in the financial services arena. Non-Executive Director Kapila Jayawardena counts over thirty two year’s He is also the Executive Chairman of Brown & Company experience in Banking, Financial Management and PLC and Browns Investments PLC. The Browns Group is a Corporate Management. Mr. Jayawardena was appointed renowned conglomerate with leading market position in as the Group Managing Director/CEO of Lanka ORIX trade, leisure, manufacturing, consumer appliances and Leasing Company PLC in 2007. He was the former CEO/ agriculture equipment and Browns Investments is the Country Head of Citibank N.A. Sri Lanka & Maldives. strategic investing arm of Browns that consists a portfolio of Leisure, Plantation, construction, agriculture inputs and Mr. Jayawardena has played a pivotal role in the banking banking. sector contributing to the financial market reforms, development and regularly advising regulators on Mr. Nanayakkara also serves on the Boards of Sierra prudential requirements and has widespread experience Constructions Ltd, Free Lanka Holdings PLC, Lanka Century in introducing innovative financial service products to the Investment PLC, Associated Battery Manufacturers (Cey) market. Ltd and Agstar Fertilizer PLC. LOLC Group is one of the largest conglomerates in Sri He holds a diploma in Business Accounting from Australia. Lanka with presence in diversified industries such as Financial Services, Trading, Manufacturing, Construction, 3. Mr. Shib Narayan Kairy Leisure and Renewable Energy. Non-Executive Director Mr. Kairy is the chief financial officer of BRAC and BRAC As an individual with extensive International and domestic International. He is also a member of the executive financial experience, Mr. Jayawardena was a key member management committee, the organisation’s management of the following committees: decision-making committee. Following the completion of his MCom in accounting from the University of Dhaka, he • Chairman Sri Lanka Bank’s Association (SLBA) joined the accounts section of BRAC in April 1982. 2003/2004 • Member of the Financial Services Reforms Committee At BRAC, he progressed through the roles of chief (FSRC) 2003/ 2004 accountant, finance manager, head of finance, director of • Director of Lanka Clear and was instrumental in finance and accounts, and was appointed to his current completing the Automated Clearing Project for the position in May 2011. Sri Lankan banking industry 2004 • President of the American Chamber of Commerce Sri Lanka 2006/2007
Annual Report 2013/14 | 9 BOARD OF DIRECTORS
• Member of the inaugural Sovereign ratings team for London. He then moved to Global Emerging Markets, a Sri Lanka boutique investment bank concentrating on emerging • Member of the National Council of Economic markets based out of London. Subsequently he moved Development (NCED) to Bangladesh and was responsible for establishing the structured finance unit of Industrial and Infrastructure • Board Member of the United States - Sri Lanka Development Finance Company Limited where he Fulbright Commission launched the first ever zero coupon bond in Bangladesh. Presently, Mr. Jayawardena holds Chairmanship / Prior to establishing RSA he was the treasury consultant Directorship in the following companies: with Price water house Coopers for restructuring Agrani Bank one of the largest state owned banks in Bangladesh. • Lanka ORIX Leasing Company PLC - Group Managing Director/CEO Mr. Ahmad has established himself as one of the leading structured finance bankers in Bangladesh by launching the • Lanka ORIX Finance Company PLC - Chairman first ever zero coupon bond, the first step down syndicated • LOLC Insurance Company Limited - Chairman loan facility, the first ever unsecured international term • LOLC Securities Limited - Chairman loan facility for a Micro Finance institution and of course • Palm Garden Hotels PLC - Chairman the world’s first micro credit securitization, the first ever • Speed Italia (Pvt) Ltd - Chairman variable rate subordinated domestic convertible bond as Tier 2 Capital with international participation in the • United Dendro Energy (Pvt) Ltd - Chairman Bangladesh market. • LOLC General Insurance Ltd - Chairman • LOLC Life Insurance Ltd - Chairman He is also a partner in Mekong Brahmaputra Clean • LOLC Micro Credit Ltd - Director Development Fund involved in investing in clean energy project in Cambodia, Vietnam, Laos, Sri Lanka, Nepal, • Commercial Leasing & Finance PLC - Director Thailand and Myanmar. • Brown & Company PLC - Director • Browns Investments PLC - Director 6. Mr. Ravindra Dhammika Tissera • Seylan Bank PLC - Director Non-Executive Director • Eden Hotels Lanka PLC - Director Mr. Ravi Tissera joined the LOLC Group in 1993 and is a • Riverina Resorts (Pvt) Ltd - Director Development Finance Specialist. Mr. Tissera has obtained his post Graduate Diploma in Marketing and is a member Qualifications : of the Chartered Institute of Marketing UK. He has Master of Business Administration, American followed Strategic Leadership Training in Microfinance University of Asia at Harvard Business School. He is also on the Boards of Sundaya Lanka (Pvt) Ltd, LOLC Micro Investments Ltd, Fellow of the Institute of Bankers, Sri Lanka LOLC Micro Credit Ltd and LOLC Myanamar Microfinance Associate of the Institute of Cost and Executive Co Ltd. which are subsidiaries of the LOLC Group. Accountants, London 7. Mr. Shameran Abed 5. Mr. Sameer Ahmad Non-Executive Director Independent Director Shameran Abed manages BRAC’s Micro Finance Sameer Ahmad is a versatile investment banker with over operations, which serves more than five million clients and 20 years of experience encompassing the geographic has total assets exceeding USD 1 billion. He also serves areas of Europe, Middle East, Emerging Africa and South on the Boards of BRAC Bank’s mobile Financial Services East Asia. Sameer started his career in Kidder Peabody, subsidiary, bKash, and the Delta BRAC Housing Finance subsequently UBS in the emerging markets team in
10 | BRAC Lanka Finance PLC Corporation. Additionally, he sits on the Microfinance Waterhouse in London from October 1995 to February Network Steering Committee and the World Economic 1998. At Price Waterhouse, he assisted in a variety of Forum Financial Inclusion Steering Committee. Prior fraud related investigations, including investigation into to joining BRAC, Mr. Abed was a journalist and wrote allegations of market manipulation and insider dealing primarily on political issues. and asset tracing exercises for both criminal and civil prosecutions. He also assisted in the review of various Mr. Abed is a lawyer by training, having been made a operations of different foreign banks in London to ensure barrister by the Honourable Society of Lincoln’s Inn in their compliance with the Banking Act 1987. Whilst at London, UK. He completed his undergraduate studies Price Waterhouse, Afzal assisted in writing articles on at Hamilton College in the United States, majoring in asset tracing and money laundering for Price Waterhouse economics and minoring in political science. internal journals and newsletters. He was also involved in preparing articles and presentations on fraud prevention 8. Mr. Syed Afzal Hassan Uddin initiatives for businesses. Independent Director Afzal is an Advocate of the Supreme Court of Bangladesh Mr. Uddin is currently serving on the board of AB and the Managing Partner of SYED ISHTIAQ AHMED Bank Limited, one of the first private sector banks in & ASSOCIATES (SIA&A) a leading law firm in Dhaka, Bangladesh and also on the board of Square Textiles Bangladesh. Afzal received his BSc (Hons) degree in Limited, a publicly listed company and one of the Chemistry and Management from King’s College, London largest manufacturing industries in Bangladesh, as an in 1993. He then completed a postgraduate Diploma in independent director. Afzal is also sits on the board of Law in 1994 from South Bank University. Afzal was called FRIENDSHIP, a non-government organization, which to the Bar from Lincoln’s Inn, London in March 1996. Afzal provides education, training and medical facilities to the is enrolled as an Advocate of the High Court Division of rural poor of Bangladesh. the Supreme Court of Bangladesh in 2001. 9. Ms. Chrishanthi S Emmanuel SIA & A offers a full range of legal advice and assistance Company Secretary to business clients in all sectors of industries, both Ms. Chrishanthi Emmanuel brings over 20 years of domestic and international. Afzal undertakes a large experience to the role of Company Secretary. She is amount of advisory work for corporate clients on matters a Fellow of the Institute of Chartered Secretaries and such as negotiation and review of contracts, international Administrators – UK and a Fellow of the Institute of trade, banking regulations, corporate compliance, joint Chartered Corporate Secretaries (Sri Lanka). She also venture agreements, corporate finance arrangements served as Company Secretary of several companies and establishing and advising companies on financing within the LOLC Group and now serves as a Director of and restructuring. Afzal advises leading banks, non- LOLC Corporate Services (Private) Ltd. banking financial institutions, statutory corporations and private sector corporate clients, including multinational companies, in manufacturing, distribution, logistics, computers, energy, power and telecommunications on a regular basis. His areas of expertise include advising clients in the areas of gas and oil exploration, power generation and telecommunications, mergers and acquisitions, due diligence of companies and general corporate affairs.
Prior to joining Syed Ishtiaq Ahmed & Associates, Afzal worked for the Civil Litigation Department of Price
Annual Report 2013/14 | 11 MANAGEMENT DISCUSSION & ANALYSIS
BRAC Lanka Finance PLC is a joint venture between Lending Portfolio Composition BRAC Bangladesh and Lanka ORIX Leasing Company As at 31st March 2014, Microfinance accounting for PLC (LOLC) Sri Lanka. The Company was originally 69.3% of total lending, Loans, Mortgages, Personal incorporated in Sri Lanka in January 1961, as a limited and Education Loans account for 15% of total lending, liability company under the Companies Ordinance No. leasing represented 6.4% of lending while Hire Purchase 51 of 1938 and re-registered under the Companies Act accounted for 9.3% of the portfolio. no. 07 of 2007 in 2008. Nanda Investments and Finance PLC was brought by BRAC and there after the Nanada name changed to BRAC Lanka Finance PLC. Following the acquisition of the Company by BRAC Bangladesh and Lanka ORIX Leasing Company PLC (LOLC) in 2013. BRAC Lending Poftfolio as at 31st March 2014 Lanka Finance PLC is now a Licensed Finance Company registered with the Central Bank of Sri Lanka. The core business of the Company is Microfinance. 9% Scope of Operations 7% Post Acquisition, the Company had one branch in Colombo. Following a rights issue in December 2013, 15% approval was obtained from the Board to set up 15 new Branches including the head office of the Company to provide Microfinance services. As at end March 2014, the 69% BRAC Lanka Finance PLC Service Network comprised 10 Service Delivery points including 3 Branches in Colombo (Head Office), Kalmunai and Kandy and 7 Service Micro Credit Centers. The Service Center are located in Mahara in the Gampaha District, Udapalatha in Kandy, Dambulla, Loans, Mortgages, Personal and Education Loans Eravur in the Batticaloa District, Mullipothana in the Trincomalee District, and Hikkaduwa and Habaraduwa in Leasing the Galle District. Hire Purchase
Business Portfolio BRAC Lanka Finance PLC lending portfolio comprises Microfinance, Auto Finance, Commercial Credit and As at 31st March 2014, the total value of the lending Personal Loans. Since acquisition, a range of new portfolio stood at LKR 1.06 bn, against LKR 276.8 mn products have been introduced. There are Micro Credit, as at 31st March 2013, which is a 283.5% growth. Hire Personal Loans, Education Loans, Housing Loans and Purchase saw a decline of LKR 49 mn due to premature Short Term Trading Loans for Retail Small and Medium settlements, while Lease and Loans saw a growth of 42.7% Enterprise (SME) Entrepreneurs. The existing Auto and 91.3% respectively to LKR 68.1mn and LKR 159.8m. Financing Portfolio was rebalanced with the introduction The Micro Credit portfolio, which is a new addition to the of high value asset classes such as Motor Cars, tourist business brought in LKR 736.9 mn. coaches and machinery.
12 | BRAC Lanka Finance PLC Marketing and Sales Technology Credit Marketing activities have been revitalised through New technology infusions have enhanced performance the establishment of a Credit Marketing Team. This is a efficiency and productivity at BRAC Lanka Finance PLC. dedicated sales force to market and sell BRAC Lanka A significant improvement has been the replacement Finance PLC Loan products. of the manual ledger system with a cloud system from Bangladesh that has increased accuracy and speed of Credit Administration accounting operations. Employees are provided training A Credit Administration Division has been established on the new system to ensure maximum benefits. New to evaluate all commercial lending to mitigate credit software has also been introduced to facilitate internal risk. The evaluation process comprise rating the credit documentation and reporting, which has improved application and screen it for creditworthiness and monitoring and communications of daily activities. compiling security documentation.
Recoveries Department Recoveries have been streamlined with the setting up of a Recoveries Department. The dedicated recovery unit has improved efficiency of Credit Management and contributed directly towards reducing the overall NPL ratio from 4.2% to 2.6%. Despite the sharp growth in the lending portfolio overall provisioning saw only a marginal increase of LKR 0.4 mn to reach LKR 11.1 mn.
Deposits A Deposit Division has been established with an enhanced Sales Team to raise awareness and attract deposits. However, expansion of the deposit portfolio was challenging due to lowering interest rates during the current financial year and lack of awareness in the market regarding BRAC as a new financial entity. In spite of these challenges the deposit base recorded a net growth of 19.4% to reach LKR 105.4 mn from LKR 88.2 mn.
The total deposit base comprises Fixed Deposits. We are currently in the process of developing Savings Products for the Sri Lankan Market.
Annual Report 2013/14 | 13 OPERATIONAL REVIEW
Loans & Advances Portfolio Trend During the FYE 2014 total advances of the company grew Rs. Mn. by Impressive 283.5% to RS.1.06 bn owing to introduction 800 HP of Microfinance facilities to the Company, utilizing the Lease 700 Loan expertise of it’s new owners. Although HP portfolio Micro Finance 600 witnessed a decline of Rs.49mn due to premature settlements effected during the period of transition, 500 lease and loan portfolios grew by 42.7% & 91.3% to 400 Rs. 68.1 mm & 159.8mm respectively due to concerted efforts and the efficient business model introduced by 300 the new management. 200
100 Whilst the Company has taken steps to aggressively expand their HP, Leasing & Loan portfolios, key area of 0 focus remains on it’s Microfinance Operations which the 2014 2013 2012 2011 current portfolio outstanding is Rs. 736.9 mn.
2014 (Rs.) 2013 (Rs.) 2012 (Rs.) 2011 (Rs.) HP 96,746,848 145,542,429 117,970,747 117,663,120 LEASE 68,145,962 47,759,706 34,903,707 12,852,426 Loan 159,850,245 83,575,075 81,403,036 41,478,057 Microfinance 736,945,328 - - - Total 1,061,688,383 276,877,210 234,277,490 171,993,603
Deposits FD Portfolio Rs. Mn. Despite the change of ownership of the Company, it’s 120 FD Fixed deposit portfolio reported a steady growth of 19.4% to reach Rs.105.4mn during the period under 100 review, reflecting the renewed confidence and support 80 of the Deposit holders towards the new owners. 60
The company is currently planning to launch a unique 40 savings product to expand the deposit base through 20 it’s newly commissioned 2 Branch Offices and 7 Service Centers. 0 2014 2013 2012 2011
2014 (Rs.) 2013 (Rs.) 2012 (Rs.) 2011 (Rs.) 105,476,750 88,287,900 47,884,400 35,562,450
14 | BRAC Lanka Finance PLC Credit Risk Management NPA Provision Rs. Mn. Although the NPA Ratio has significantly improved HP 10 Lease during the period under review to 1.8% from 4.20%, Loan over the FYE 2013 total provisioning for Non-performing 8 Accommodations has increased marginally by Rs. 4mn to reach Rs. 11.1mn. However, we expect to reverse this 6 trend through implementation of more stringent debt recovery mechanism and restructuring of recoveries 4 division to facilitate a smoother and effective operation.
2
0 2014 2013 2012 2011 Provision for doubtful debts
2014 (Rs.) 2013 (Rs.) 2012 (Rs.) 2011 (Rs.) HP 6,725,044 5,612,706 8,154,493 5,742,316 LEASE 1,219,364 499,423 - - Loan 3,177,188 4,528,421 3,515,344 312,222 Total 11,121,596 10,640,550 11,669,837 6,054,538
Annual Report 2013/14 | 15 FINANCIAL REVIEW
The dawn of the new financial year posed challenges to Operating Costs the Company due to rapid expansion of business activities Operating costs increased by LKR 20 mn, which is and changes of strategic direction from conventional a 48.46% increase over the previous year. This cost Leasing and Hire Purchases business to Microfinance increase was mainly due to setting up the branch/service business. In spite of the expansion plan and the policy network and recruitment of new staff. changes of government relating to Finance, Company has managed to maintain its financial performance at an Net Interest Margin acceptable level. Net interest margins have been positively affected with the inclusion of Microfinance portfolio into the lending Profitability book. Net interest income increase to 76.3 Mn compared As at 31st March 2014, profit before tax stood at LKR to 57.3 Mn in last yaer. 21.7 mn, compared to LKR 31.4 in the previous year, which is a decrease of LKR 9.6 mn. The company saw Total Assets lower profitability during the first year of operations due Total assets increased to LKR 1.9 bn from LKR 0.6 bn, to investments in human resources, and infrastructure. which is a 191% growth. Asset growth was mainly driven This was mainly due to expansion activities, which saw by the addition of Microfinance to the lending portfolio a sharp increase in overheads and staff costs, with the and borrowing done to finance that portfolio. recruitment of over 142 personnel and the setting up of the branch network. Profit after tax amounted to LKR 13.9 Liabilities mn, against LKR 28.5 mn in the previous year due to the Total liabilities have increased to LKR 1.3bn due to change in tax rates from 10% to 28%, in current financial borrowings made to finance the lending growth. year as a Group of Companies. Capital Adequacy Interest Income A rights issue was made in December 2013 to the value BRAC Lanka Finance PLC saw interest income increase of LKR 45.3 Mn. as declared in note no. 29. by 40.29% to LKR 96.6 mn, from LKR 68.8 mn. The growth was mainly due to Microfinance business which is a new NPL’s segment to the Company. The overall NPL ratio has improved due to the Microfinance portfolio that has extremely low default As at 31st March 2014 Microfinance Portfolio is Rs. 736.9 rates. NPL’s of the Micro Credit Portfolio stood at 0% as mn compared with last year nil balance. at 31st March 2014 and the overall NPL ratio improved to 1.8% from 4.2% in the previous year. Total provisioning Interest Expenses was LKR 5 mn for the current financial year. Interest Expenses increased to LKR 20.3 mn, from LKR 11.4 mn, due to a loan of US$ 3 mn, from BRAC International. Portfolio at Risk (PAR) The credit was utilized to finance Microfinance Portfolio. The PAR is the default rates for Loan for a period of 3 months or more. As at 31 March 2014, the PAR was 4.8% of the Company.
16 | BRAC Lanka Finance PLC Earnings Per Share Earnings per share was LKR 0.14 as at 31st March 2014, Compared to the LKR 0.28 in 31st March 2013 due to lower profit after tax compared to last year and increase in number of shares as a right issue,
Return on Assets The return on assets fell from 4.52%, to 1.06% in 2014, due to lower profit after tax over the increased asset base. This is mainly due to expansion that was in place in the latter part of the financial year. Asset base has increased rapidly whereas corresponding income represents only for the last two months.
Share Price BRAC Lanka Finance PLC share price increased to LKR 7.50 from LKR 5.90 a year ago, which is indicative of the growing public confidence in the Company following acquisition by BRAC Lanka Finance PLC and Lanka ORIX Leasing Company PLC (LOLC).
Annual Report 2013/14 | 17 RISK MANAGEMENT
Risk is the probability that an actual return on an activity Integrated Risk Management Committee that will be lower than the expected. In all types of (IRMC) undertaking there is the potential requirement for Primary purpose of the IRMC is to assist the Board in events and consequences that constitute opportunities fulfilling its oversight responsibilities, providing insight for benefit or threats to success and it’s an integral and into the business decision making process in order to inevitable component which exists in different degrees. enhance management effectiveness. Being a registered finance company, BRAC Lanka Finance PLC is also exposed to some form of risk as it faces the Members of this committee are appointed by the task of wealth maximization of all its Stakeholders. Board of Directors and include Board Members with the participation of the CEO, General Manager, Chief Risk in general can be identified as the potential that Financial Officer, Head of Microfinance and Head of a chosen action or activity will lead to an undesirable Human Resources outcome or a significant condition, circumstance, action or an event that could adversely affect an entity’s ability Credit Risk to achieve its objectives and execute its strategies. Credit risk is the risk of loss arises due to the failure of the borrower or counterparty to meet their financial Hence an effective risk management system is key to obligations to the lender. In the ordinary course of the the success of the Company since it maintains a balance business, the Company is exposed to credit risk through between risk and rewards. The prime objective of its lending activities. BLF’s risk management framework is to ensure that the impact of risk is predictable, measurable and within the To counter this risk, the Company has implemented acceptable levels in order to maximize the shareholders a sound credit evaluation process to ascertain the returns. credit worthiness of borrowers and guarantors and continuously review the exposure and credit concentration Risk Management Approach of customers. groups and sectors. Additionally, BRAC The Company with the awareness of the risk and reward Lanka Finance PLC has implemented a strong recovery relationship has placed a Risk Management Governance process to monitor and collect the dues on time. Structure with oversight by the Board of Directors, through the Integrated Risk Management Committee. The Company has identified NPL ratio as one of the most important measures of credit risk. The ratio is on NPL Board’s Role in Risk Management for the year at 1.8%. Therefore, Credit Risk Management The Board approves the strategies and policies, monitors remains healthy and further the recorded ratio of 1.8% is compliance and activities of the Senior Management very much advanced over the industry average. and this approach is monitored through Board approved Committees. The Committee consists of members of the Board and Senior Management. The committees which ensure the practice of an effective Risk Management Policy in the company are as follows;
18 | BRAC Lanka Finance PLC Concentration Risk 31-03-2014 This can arise from ineffective diversification of the credit portfolio 1 12 1 1 4 2 1 1 1 Focusing on to one or few products in the Company 3 product portfolio, geographical areas and industries 73 4 3 or even with a few customers would expose high concentration risk. Company has been mostly focusing on the Microfinance as the main product.
Asset Concentration
Leasing, Hire-purchase and Loans
544
Agriculture & Fishing Land & Property 31-03-2013 Bank Finance and Insurance Manufacturing 1 10 Bevarage Foods Plantation 3 1 Chemicals and Pharmaceutical Printing /Advertising 1 6 Construction and Engineering Services 1 5 2 3 Footwear and Textile Telecommunication 28 7 Hotels and Travels Trading
Micro Finance
1.07% 0.01% 0.01%
33.53% 33.05%
612
Agriculture & Fishing Land & Property Bank Finance and Insurance Manufacturing Bevarage Foods Plantation Construction and Engineering Services Footwear and Textile Telecommunication 0.01% Footwear / Textiles Trading 0.29% Hotels and Travels 0.56% 31.47%
Agriculture & Fishing Trades Manufacturing New Economy Tourism Financial and Transport Business Services Other Services Construction
Annual Report 2013/14 | 19 RISK MANAGEMENT
Liquidity Risk Company. In order to manage the compliance risk, the Liquidity risk arises due to unmatched maturities of assets Company has appointed a Compliance Officer whose and liabilities, and hinders the Company’s capacity to duty is to regularly evaluate the compliance position of honor its commitments as and when they fall due or will the Company in addition to the monthly assessment of have to do so at an excessive cost. compliance being reported to the Board of Directors & confirming the adherence to regulatory requirements. At present the Company maintains a healthy liquidity position and this is mainly because of significant amount Operational Risk of assets of the Company is being financed from equity Operational risk is the possible financial loss arising where a major percentage comes through the share due to human error of fraud, failure of information capital. systems, challenges in, data migration with new systems, unforeseen natural disasters, breaches in set policies Market Risk and procedures and non-compliance with laws and This is the risk associated with a change in the value of regulations. investments due to the volatility of economic indicators interest rates, equity and Prices. Operational Risk Management is a main responsibility of the Senior Management of each Department. They BRAC Lanka Finance PLC has taken measures to analyse are responsible for the maintenance of internal controls the market risk. and procedures of the Company. In order to mitigate operational risk the Company has implemented proper Interest Rate Risk control procedures, segregated duties of each category This is an inevitable risk for financial institutions. In order of employees and deployed highly qualified internal to manage the interest rate risk, the Company regularly audit team. The internal audit team regularly monitors monitors the movement of the interest rates and ensures the daily operational activities of each staff member and the containment of this risk at an acceptable level. The ensures that controls are in order. interest rates movements are analysed on regular basis to ascertain their impact on the earnings of the Company. New IT systems and processes are to be implemented to reduce the need for manual records. Yet all online Compliance Risk transactions are supported by manual records to avoid This is the Inability to comply with rules and regulations malpractices. applicable to a Company. Company has to comply with number of laws, regulations and acts passed by different authorities including Finance Business Act & SEC regulations. Inability to comply with these rules imposed by the regulators may lead to losses, penalties, sanctions or even negative public perception of the
20 | BRAC Lanka Finance PLC Reputation Risk Risk of losing current & prospective earnings and capital base due to negative public perception of the Company and low spending on communication and brand building.
Any internal fault/error which creates customer dissatisfaction can be the root cause of negative public perception of the Company.
Since the Company in the business of servicing the public and especially the word of mouth advertisement technique is adopted by the Company and special attention is made by the Company to maintain the reputation.
All employees are encouraged to be professional maintaining the highest level of integrity.
The release of financial information to the public is subject to the approval of the Board.
Proper care is given at the transaction levels to avoid any loopholes which could result in customer dissatisfaction or lead to legal issues.
Staff is recruited form respective branch areas to enhance the Company’s image at the regional level.
Annual Report 2013/14 | 21 SUSTAINABILITY REPORT
22 | BRAC Lanka Finance PLC Annual Report 2013/14 | 23 SUSTAINABILITY REPORT
Our Approach to Sustainability BRAC’s sustainable social enterprises three decades BRAC Lanka Finance PLC formally known as Nanda ago. In doing so, BRAC gave the world the true definition Investments and Finance PLC (NIFL) is a reputed of ‘Corporate Social Responsibility’ or CSR. Businesses Non-Banking Financial Institution (NBFI). NIFL was that do not consider the long and short-term social and incorporated in 1961 and the company is enlisted in environmental impact of their products and processes, Colombo Stock Exchange since July 2011. NIFL is an focusing primarily on maximising profit, cannot claim to innovative financial services provider for the last fifty two be socially responsible, irrespective of how much budget years which is now acquired by BRAC Lanka Finance PLC they give for CSR. To really make an impact, CSR means that continues to provide financial services in Sri Lanka. moving past the ‘Maximization of Shareholder Value’ to BRAC Lanka Finance PLC is majority owned by BRAC ‘Maximisation of Stakeholder Value’. International B.V., registered in the Netherlands as the Innovative, client-focused and sustainable, BRAC’s holding company of BRAC International which is the Microfinance programme is a critical component of international arm of the Bangladeshi Non Governmental our holistic approach to support livelihoods across the (NGO) organization BRAC. Over the last four decades Nations. Over the course of the last few decades, we have BRAC focused in poverty reduction and empowerment grown to become one of the world’s largest providers of women and its significant expertise in Microfinance of financial services to the poor, providing tools that and Small and Medium Enterprises (SME) lending, which millions can use to better manage their lives. consist mainly females who are underprivileged. Our internal governance systems include Risk Management, With our inception in 2005 in Sri Lanka immediately Management and Information Systems, Human Resources after the devastating Tsunami, BRAC diversified its and Research and Information Systems centers around intervention from relief to Microfinance, with the vision retaining Public Trust in our prestigious organization. of a sustainable future for both the Organisation and our Therefore our approach to sustainability is founded on Clients in Sri Lanka. We have over 68,000 borrowers who the principles of long term relationship building with our are served by 650 trained staff. The salient feature of stakeholders and we strive to ensure long term values for BRAC is its remarkable efforts to protect the core value our shareholders and customers. of Microfinance with its concept of village organisations where economically active women are empowered to BRAC has never shied away from entering into the achieve better living standards. private sector domain as a pro-poor actor, to create more secure and rewarding links between the market We provide poor women with access to targeted financial and the livelihoods of the poor. This has led BRAC to services. We strongly believe that the poor are able to venture into many frontier market developments that help themselves when organised effectively. With this in create backward and forward linkages to the enterprises mind, we conduct comprehensive door-to-door surveys, of the poor increasing accessibility to finance. BRAC consulting community and government leaders to select experiments in high-risk ventures have sometimes shown poor, uneducated but economically active women. These the private sector ways to invest in a new areas in frontier groups, led by rigorously trained BRAC Credit Officers, as well as emerging economies. network and support the women to be effective conduits for their own social and financial change. This is the genesis of a sustainable social enterprise. Initially Sir Fazle’s visionary mind created the first of
24 | BRAC Lanka Finance PLC While improving the sustainability of our own operations resources, demands for energy and water, and the that expresses our values, improving the sustainability potentially devastating effects of climate change, it of the projects we deliver for clients offers the potential becomes increasingly clear that everything in our world to address global issues in a much more powerful way. is connected. Businesses and governments must work In partnership with our clients, we can help reduce the together, across boundaries and jurisdictions, to create energy and fuel consumption of major civil works and a thriving green economy that will sustain a safe world for industrial facilities; curtail carbon emissions; optimize those generations coming after us. efficiency in manufacturing and other processes to reduce material resource consumption; redesign Sustainability is not only about being a good corporate processes to eliminate the use of toxic or hazardous citizen, but also about risk mitigation and economics, substances; restore damaged lands and ecosystems; helping communities and organizations develop find beneficial uses for waste; and revitalize urban areas. practical actions that save money, support economic development, and benefit the environment at the same In delivering these sustainable solutions, we help time. generate positive financial metrics for our clients, provide long-term social benefits, and act in accordance Our Pledge to the World with the precautionary principle, which means that when BRAC Lanka Finance PLC embraces the Values out lined confronted with a choice that affects the environment, we by the BRAC Group in order adhere to good governance choose that which carries the lesser impact. Our people such as complying with Labour Laws of Sri Lanka are energized by these opportunities to make the world including Prohibition of underage recruitments, a better place. In the last few years, we have attracted Zero Tolerance against Sexual Harassment within the and trained talented people who offer expertise along organization, Non Discrimination against Religion the full spectrum of sustainable solutions. or Ethnicity and our employees enjoy freedom of association. We work closely with our clients to work within their economic constraints, while also maximizing their return Our Ethics and Practices on investment. Another challenge associated with the We maintain an Open Door policy which enables rapidly evolving sustainability market is staying at the and helps our employees disclose any concerns or forefront of technical developments. Consequently, we grievances, feedbacks and suggestions. We believe that invest in our people to attend courses, present papers, employees are the core strength of our organization and and participate in technical forums and professional organizational growth which will take BRAC forward to programmes. improve the livelihoods of poor people uplifting their financial position in the economy. From a business perspective, sustainability trends present a range of issues and risks, as well as the Rewarding Our Team opportunity to bring new value, services, and improved BRAC Lanka Finance PLC values every member of our delivery systems and technologies to our clients. organization and we provide the support and the care to The world is at a critical juncture. As we observe global make sure our staff members achieve their goals which population growth combined with crumbling and non- are regained and valued while overall it improves the existent infrastructure, increasingly scarce natural organizational growth. It is vital to improve the Human
Annual Report 2013/14 | 25 SUSTAINABILITY REPORT
Resource pool of an organization while investing in Human Resources – Our Family human capital through rewarding the existing employees and following various programmes that will improve the Recruitment Development Retain service level of staff to achieve better results in a very competitive landscape • Identified Business Needs • Diversity & Inclusion Development and Growth We believe development enhances and enables the • Appraisal employee a better quality in work hence we have • Training provided trainings which some of it are in-house and some are external. • Professional Qualifications
Employee Welfare • Promotions
Our employees are our strength hence the Organization • Reward & Recognition has taken initiatives to provide subsidiary for meals, donations for weddings and death. We have many • Work-Life-balance plans in the pipeline which are still to be implemented • Communication as we grow as an Organization and those programmes include blood donation campaigns, donations to cancer • Grievance Handling patients, workshops for eye care, child protection and grooming women. Culture, Respect, Values and Trust
Employees Our Human Resources strategies are formulated to recruit, develop and retain our staff to take into account As a Financial Organization we understand that our their aspirations and needs. We have implemented to employees are our greatest asset and vital to build our ensure that we take Human Resource services to the brand and growing our business and taking it forward. We staff, particularly at the branches by visiting them to have set in place policies and procedures which govern identify their needs and evaluate the effectiveness of the the needs and shelter the discipline and standards. solutions implemented. We strive to nurture the cultural Our employees grew from 27 to 364 as we created values and we believe that our ability to retain staff has opportunities to groom and a firm and unbroken career enabled the fostering of our culture to a great degree. path. We maintain an open door communication system We are proud that our employees trust us to deliver on which helps employees to address their graveness and our promises and provide the means for achieving for concerns which are dealt with confidentiality which we will aspirations. continue maintaining through effective implementation of best practices in Human Resources Management.
26 | BRAC Lanka Finance PLC OUR EVENTS
New Year Celebration BRAC Birthday
Dambulla Service Center Opening Kandy Branch Opening
Annual Report 2013/14 | 27 OUR EVENTS
Sinhala & Tamil New Year IT System Training
Cricket Match Talent Event at the BRAC Birthday Celebration
28 | BRAC Lanka Finance PLC CORPORATE GOVERNANCE REPORT
In August 2013 the Company was acquired by subsidiaries of BRAC International (“BRAC”) and Lanka ORIX Leasing Company PLC (“LOLC”) .Following the acquisition, the Board was re-constituted. BRAC and LOLC both subscribe to the principles of good governance , and the new Board has endeavoured to bring the Company into a state of compliance. Much effort has gone into analyzing the requirements and reviewing the existing systems, to ascertain the gaps if any. Steps have been taken and are continuing to be taken, to put in place procedures and measures that will facilitate both monitoring and ensuring compliance.
The chart below gives more details on the Company’s compliance.
Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 2 The Responsibilities of the Board of Directors 2.1 The Board of Directors shall strengthen the safety and soundness of the finance company by: a. approving and overseeing the finance company’s strategic Complied with objectives and corporate values and ensuring that such The Board has approved a vision and mission. objectives and values are communicated throughout the The corporate values are being finalized. finance company;
b. approving the overall business strategy of the finance Complied with. company, including the overall risk policy and risk A two year Business Plan has been approved by management procedures and mechanisms with measurable the Board and progress is monitored at each goals, for at least immediate next three years; Board meeting.
c. identifying risks and ensuring implementation of appropriate Complied with systems to manage the risks prudently; The Board has delegated this functionality to the Integrated Risk Management Committee (IRMC) , which is a Board subcommittee,.
Approved minutes of the IRMC meetings are tabled at Board Meetings thereby ensuring that the entire Board is kept informed.
d. approving a policy of communication with all stakeholders, Complied with including depositors, creditors, shareholders and borrowers; A Board approved Stakeholder Communication Policy which covers all stakeholders is in place.
e. reviewing the adequacy and the integrity of the finance The Board has delegated this functions to the company’s internal control systems and management Audit Committee, which is a sub-committee of information systems; the Board.
The approved minutes of the Audit Committee meetings are tabled at Board Meetings for their information and review.
Annual Report 2013/14 | 29 CORPORATE GOVERNANCE REPORT
Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 f. identifying and designating key management personnel, who Complied with are in a position to: The Board has identified and designated KMPs as defined in the Sri Lanka Accounting 1. influence policy; Standards. 2. direct activities; and
3. exercise control over business activities, operations and risk management;
g. defining the areas of authority and key responsibilities for the Complied with Board and for the key management personnel; A Board approved, documented description of the role of the board defines the powers and duties of the Board Directors.
The responsibilities of the key management personnel have been defined in individual job descriptions.
h. ensuring that there is appropriate oversight of the affairs of Complied with the finance company by key management personnel, that is To assist in this oversight, the Board has consistent with the finance company’s policy; appointed an Asset Liability Committee. The CEO together with the CFO / Compliance Officer also monitor financial affairs and report periodically to the Board.
i. periodically assessing the effectiveness of its governance Complied with practices, including: As mentioned at the beginning of this report, following the acquisition of the Company, the newly appointed Board has commenced a review of the existing governance practices, to facilitate compliance.
1. the selection, nomination and election of directors and A Board approved procedure for appointment appointment of key management personnel; of Directors has been put in place . Directors are selected and nominated to the Board for skills and experience which will enable them to play an effective role and add value to the discussion and decision making of the Board
2. the management of conflicts of interests; and A Board approved procedure for related party transactions addresses conflicts of interest. Further, on a monthly basis directors disclose their directorships in other companies.
3. the determination of weaknesses and implementation of Performance and conformance reports (written changes where necessary; and oral) presented at Board meetings enable the Board to make this determination and rectify procedures.
30 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 j. ensuring that the finance company has an appropriate Will be complied with succession plan for key management personnel; As a part of the restructuring of the Company, the employees and the organization chart were reviewed. The succession plan will follow. However any decision in this regard will be subject to the Central Bank’s direction on financial sector consolidation. k. meeting regularly with the key management personnel to Complied with review policies, establish lines of communication and monitor Management has been delegated to the CEO, progress towards corporate objectives; who is invited to attend board meetings. Through the CEO’s reports and also through discussions, the Directors can verify that objectives are being clearly communicated. The Board approved process on delegation has ensured that delegation happens in a manner that enables the Board to remain in control.
Key Management Personnel will be called in by the members of the Board during board and board committee meetings when the need arises to explain matters relating to their area of functions. l. understanding the regulatory environment; Complied with The Board continues to put in place systems and procedures which will facilitate monitoring and reporting.
At each Board meeting, all correspondence with regulators received since the last meeting is tabled. This further contributes to an understanding of the regulatory environment, including updates on directives.
The process will be strengthened further by calling for additional reports. m. exercising due diligence in the hiring and oversight of Complied with external auditors. The Auditors of the Company are KPMG, a reputed audit firm and one of the “big four” globally recognized audit firms.
The Audit Committee has recommended that the auditors be re-appointed for 2014/15, and the Board is making a similar recommendation to the shareholders.
Annual Report 2013/14 | 31 CORPORATE GOVERNANCE REPORT
Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 2.2 The Board shall appoint the Chairman and the Chief Complied with Executive Officer and define and approve the functions and The Board has appointed the Chairman, M A responsibilities of the chairman and the chief executive officer Rumee Ali and CEO A R Sikder. in line with paragraph 7 of this Direction. Functions and responsibilities of the Chairman and the CEO will be defined and approved going forward.
2.3 There shall be a procedure determined by the Board to enable Complied with directors, upon reasonable request, to seek independent The Board has approved a policy on its professional advice in appropriate circumstances, at the role, which includes provision for obtaining finance company’s expense. The Board shall resolve to provide independent professional advice. separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the finance company. 2.4 A director shall abstain from voting on any Board resolution Complied with. in relation to a matter in which he or any of his relatives or The relevant Board approved procedure a concern in which he has substantial interest, is interested, on Related Party Transactions provides for and he shall not be counted in the quorum for the relevant Directors to declare their interests and refrain agenda item at the Board meeting. from participating in the discussions or decision making. This is also detailed in the Board approved policy on the Role of the Board 2.5 The Board shall have a formal schedule of matters specifically Complied with reserved to it for decision to ensure that the direction and The role of the Board has been defined, control of the finance company is firmly under its authority. documented and approved by the Board. This includes details of the Board’s responsibilities and the matters which are specifically reserved to it for approval.
At its meetings the Board discussed both performance and compliance, ensuring that control is exercised. 2.6 The Board shall, if it considers that the finance company is No such situation has arisen. or is likely to be unable to meet its obligations or is about to In the unlikely event of such a situation become insolvent or is about to suspend payments due to occurring, the Board will ensure that the depositors and other creditors, forthwith inform the Director Company complies with all requirements. of the Department of Supervision of Non-Bank Financial Institutions of the situation of the finance company prior to taking any decision or action.
2.7 The Board shall include in the finance company’s Annual Complied with Report, an annual corporate governance report setting out This report serves the said requirement. the compliance with this Direction.
2.8 The Board shall adopt a scheme of self-assessment to be Will be complied with undertaken by each director annually, and maintain records Evaluations carried out by finance sector of such assessments. companies will be benchmarked.
32 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 3 Meetings of the Board 3.1 The Board shall meet at least twelve times a financial year at Will be complied with approximately monthly intervals. A schedule of meetings to comply with this requirement was agreed on at the end of the Obtaining the Board’s consent through the circulation of previous calendar year. However, as there are written or electronic resolutions/papers shall be avoided as several directors who are based overseas, far as possible. certain meetings have had to be re-scheduled.
Approvals obtained through the circulation of resolutions are subsequently tabled at the next board meeting. 3.2 The Board shall ensure that arrangements are in place to Complied with enable all directors to include matters and proposals in the A Board approved Policy on the Board’s agenda for regular Board meetings where such matters relationship with the Company Secretary and proposals relate to the promotion of business and the provides for all directors to include matters management of risks of the finance company. and proposals in the agenda for regular board meetings.
As notice of a meeting is given in advance, any director is able to request the inclusion of matters on the agenda.
3.3 A notice of at least 7 days shall be given of a regular Board Complied with meeting to provide all directors an opportunity to attend. For A schedule of all meetings planned for the year all other Board meetings, a reasonable notice shall be given. was tabled at the Board meeting held at the end of the previous calendar year.
Reasonable notice has been given for all other board meetings.
Notices and agendas are sent out 7 days prior to the meeting.
Dates of meetings are communicated to all Directors and consensus sought where possible.
3.4 A director who has not attended at least two-thirds of the Will be complied with meetings in the period of 12 months immediately preceding As several of the directors are based overseas, or has not attended the immediately preceding three appointing suitable alternate directors is being consecutive meetings held, shall cease to be a director. considered. Provided that participation at the directors’ meetings through an alternate director shall, however, be acceptable as attendance.
Annual Report 2013/14 | 33 CORPORATE GOVERNANCE REPORT
Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 3.5 The Board shall appoint a company secretary whose primary Complied with responsibilities shall be to handle the secretarial services to The Company Secretary for the year under the Board and shareholder meetings and to carry out other review is a fully qualified Chartered Secretary, functions specified in the statutes and other regulations. admitted as a Fellow of the Institute of Chartered Secretaries & Administrators, UK (FCIS) and of the Institute of Chartered Corporate Secretaries, Sri Lanka. (FCCS) and registered as a Company Secretary with the Registrar General of Companies.
In addition to assisting the Chairman with Board meetings, she handles all other Company Secretarial functions including those related to shareholder meetings. This is included in the Board approved procedure relating to the functions of the Company Secretary.
3.6 If the chairman has delegated to the company secretary the Complied with function of preparing the agenda for a Board meeting, the The Board approved policy on the Board’s company secretary shall be responsible for carrying out such relationship with the Company Secretary function. provides for the Chairman to delegate to the Company Secretary the preparation of the agenda for board meetings.
3.7 All directors shall have access to advice and services of Complied with the company secretary with a view to ensuring that Board The Board approved policy on the Board’s procedures and all applicable laws, directions, rules and relationship with the Company Secretary regulations are followed. provides that all directors shall have access to the advice/services of the Company Secretary.
3.8 The company secretary shall maintain the minutes of Board Complied with meetings and such minutes shall be open for inspection at The Minutes are in the custody of the Company any reasonable time, on reasonable notice by any director Secretary , who can provide them to any director for inspection at any reasonable time, on reasonable notice by any director. This is also provided for in the policy on the Board’s relationship with the Company Secretary.
34 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 3.9 Minutes of Board meetings shall be recorded in sufficient Complied with detail so that it is possible to gather from the minutes, as Detailed minutes are kept covering the given to whether the Board acted with due care and prudence in criteria. performing its duties. The minutes of a Board meeting shall clearly contain or refer to the following:
(a) a summary of data and information used by the Board in its deliberations;
(b) the matters considered by the Board;
(c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence;
(d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations;
(e) the Board’s knowledge and understanding of the risks to which the finance company is exposed and an overview of the risk management measures adopted; and
(f) the decisions and Board resolutions.
4 Composition of the Board 4.1 The number of directors on the Board shall not be less than 5 Complied with and not more than 13. The Board comprises 8 members.
4.2 The total period of service of a director other than a director Complied with who holds the position of chief executive officer or executive None of the non executive directors have director shall not exceed nine years. The total period in office completed 9 years of service during the of a non executive director shall be inclusive of the total financial year. period of service served by such director up to the date of this Direction.
4.3 Subject to the transitional period an employee of a finance Complied with company may be appointed, elected or nominated as a None of the Directors are executive directors. director of the finance company (hereinafter referred to as an “executive director”) provided that the number of executive directors shall not exceed one-half of the number of directors of the Board. In such an event, one of the executive directors shall be the chief executive officer of the company.
Annual Report 2013/14 | 35 CORPORATE GOVERNANCE REPORT
Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 4.4 Subject to the transitional period the number of independent Complied with non-executive directors of the Board shall be at least one There are 02 independent directors on the fourth of the total numbers of directors. A non-executive Board, S A H Uddin and S Ahmad, and this director shall not be considered independent if such director: constitutes one fourth of the Board.
a) has shares exceeding 2% of the paid up capital of the finance company or 10% of the paid up capital of another finance company; b) has or had during the period of two years immediately preceding his appointment as director, any business transactions with the finance company as described in paragraph 9 hereof, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds of the finance company as shown in its last audited balance sheet; c) has been employed by the finance company during the two year period immediately preceding the appointment as director; d) has a relative, who is a director or chief executive officer or a key management personnel or holds shares exceeding 10% of the paid up capital of the finance company or exceeding 12.5% of the paid up capital of another finance company. e) represents a shareholder, debtor, or such other similar stakeholder of the finance company; f) is an employee or a director or has a share holding of 10% or more of the paid up capital in a company or business organization: (i) which has a transaction with the finance company as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds as shown in its last audited balance sheet of the finance company; or (ii) in which any of the other directors of the finance company is employed or is a director or holds shares exceeding 10% of the capital funds as shown in its last audited balance sheet of the finance company; or (iii) in which any of the other directors of the finance company has a transaction as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds, as shown in its last audited balance sheet of the finance company.
36 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 4.5 In the event an alternate director is appointed to represent an Complied with independent non-executive director, the person so appointed During the year under review there were no shall also meet the criteria that apply to the independent non- appointments of alternate directors. executive director.
4.6 Non-executive directors shall have necessary skills and Complied with experience to bring an objective judgment to bear on issues Directors profiles are provided on pages 8 to 11. of strategy, performance and resources.
4.7 A meeting of the Board shall not be duly constituted, although Complied with the number of directors required to constitute the quorum at All the directors are non-executive , thus at any such meeting is present, unless at least one half of the number Board meeting the quorum will be as stipulated. of directors that constitute the quorum at such meeting are non-executive directors.
4.8 The independent non-executive directors shall be expressly Complied with identified as such in all corporate communications that The directors for the year under review are: disclose the names of directors of the finance company. The finance company shall disclose the composition of the Board, M. A. (Rumee) Ali - Non Executive Director by category of directors, including the names of the chairman, (Chairman ) executive directors, non-executive directors and independent S. N. Kairy - Non Executive Director non-executive directors in the annual corporate governance S. B. Abed - Non Executive Director report which shall be an integral part of its Annual Report. I. C. Nanayakkara - Non Executive Director W. D. K. Jayawardena - Non Executive Director R. D. Tissera - Non Executive Director S. A. H Uddin - Independent Director S. Ahmad - Independent Director The directors profiles are given on pages 8 to 11.
4.9 There shall be a formal, considered and transparent procedure Complied with for the appointment of new directors to the Board. There shall There is a Board approved procedure for also be procedures in place for the orderly succession of appointment of a Director. In addition, the appointments to the Board. Board ensures that all regulatory and statutory requirements are complied with
4.10 All directors appointed to fill a casual vacancy shall be subject Complied with to election by shareholders at the first general meeting after At the last Annual General Meeting, which was their appointment. the first such Meeting held after the acquisition of the Company , every director retired and was re-appointed by the shareholders .
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 4.11 If a director resigns or is removed from office, the Board shall Complied with announce to the shareholders and notify the Director of the While there were no such resignations during Department of Supervision of Non-Bank Financial Institutions the year under review, the Company will ensure of the Central Bank of Sri Lanka, regarding the resignation of compliance if such a situation arises. the director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant director’s disagreement with the Board, if any.
5 Criteria to assess the fitness and propriety of directors 5.1 Subject to the transitional provisions contained herein, a Complied with person over the age of 70 years shall not serve as a director None of the Directors are over 70 years of age. of a finance company All the Directors have been assessed as fit and proper in terms of section 3 (3) and (4) of the Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No. 3 of 2011
5.2 A director of a finance company shall not hold office asa Complied with director or any other equivalent position in more than 20 No director holds directorships of more than companies/societies/bodies corporate, including associate 20 companies /entities/ institutions inclusive of companies and subsidiaries of the finance company. Provided subsidiaries or associate companies. that such director shall not hold office of a director or any other equivalent position in more than 10 companies that are classified as Specified Business Entities in terms ofthe Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995.
6 Delegation of Functions 6.1 The Board shall not delegate any matters to a board Complied with committee, chief executive officer, executive directors or key The Board has approved polices on delegation management personnel, to an extent that such delegation of authority by the directors to the CEO and would significantly hinder or reduce the ability of the Board Management and on oversight of the affairs of as a whole to discharge its functions. the company by KMPs. 6.2 The Board shall review the delegation processes in place on Complied with a periodic basis to ensure that they remain relevant to the The delegated powers are reviewed periodically needs of the finance company. by the Board. 7 The Chairman and the Chief Executive Officer 7.1 The roles of chairman and chief executive officer shall be Complied with. separated and shall not be performed by the one and the The roles of Chairman and CEO are separate same person. and held by two different individuals, appointed by the Board.
38 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 7.2 The chairman shall be a non-executive director. In the case Complied with where the chairman is not an independent non-executive The Chairman is a non-executive Director. An director, the Board shall designate an independent non- independent director will be appointed the executive director as the Senior Director with suitably Senior Director. documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the finance company’s Annual Report.
7.3 The Board shall disclose in its corporate governance report, Complied with by this statement which shall be an integral part of its Annual Report, the name There is no financial, business, family or other of the chairman and the chief executive officer and the nature relationship between the Chairman and the of any relationship [including financial, business, family or CEO. other material/ relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships There is no financial, business, family or among members of the Board. other material relationship between any other members of the Board except for some Directors serving together on other Boards.
7.4 The chairman shall: Complied with The Chairman ensures that all directors (a) provide leadership to the Board; participate in discussion and decision making and also invites the CEO to provide information (b) ensure that the Board works effectively and discharges its clarification or other contribution. responsibilities and
(c) ensure that all key issues are discussed by the Board in a timely manner. 7.5 The chairman shall be primarily responsible for the preparation Complied with of the agenda for each Board meeting. The Chairman has delegated this function to the secretary. The chairman may delegate the function of preparing the agenda to the company secretary. This has been included in the “Policy on Board’s relationship with the Company Secretary” approved by the Board.
7.6 The chairman shall ensure that all directors are informed Complied with adequately and in a timely manner of the issues arising at Through delegation to the Company Secretary, each Board meeting. the Chairman ensures that the agendas of Board meetings notify all directors of the issues to be discussed, with supporting board papers containing further information.
As Minutes of previous month’s board meeting are among the agenda items and board papers, issues can be discussed to a satisfactory conclusion.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 7.7 The chairman shall encourage each director to make a full and Complied with active contribution to the Board’s affairs and take the lead to The Chairman ensures that all Directors ensure that the Board acts in the best interests of the finance participate in discussions. Directors contribute company. further by serving on Board sub committees. 7.8 The chairman shall facilitate the effective contribution of Complied with non-executive directors in particular and ensure constructive All the Directors are non-executive directors, relationships between executive and non-executive directors. and the Chairman facilitates their effective contribution by ensuring that they have received the relevant papers and other information in a timely manner. 7.9 The chairman shall not engage in activities involving direct Complied with supervision of key management personnel or any other The Chairman is a non-executive director and executive duties whatsoever. does not engage in any executive activities 7.10 The chairman shall ensure that appropriate steps are taken to Complied with maintain effective communication with shareholders and that The Board has approved a policy on the views of shareholders are communicated to the Board. communication with stakeholders.
The Annual General Meeting of the Company provides a forum for shareholder communication. Periodic announcements made to the Colombo Stock Exchange also contribute towards keeping all stakeholders informed and updated on significant actions of the Company.
7.11 The chief executive officer shall function as the apex executive- Complied with in-charge of the day-to-day-management of the finance The CEO is the apex executive-in charge of the company’s operations and business. Company’s business operations.
40 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 8 Board appointed Committees 8.1 Every finance company shall have at least the two Board Complied with committees set out in paragraphs 8(2) and 8(3) hereof. Each The Company has appointed an Audit committee shall report directly to the Board. Committee and an Integrated Risk Management Committee. A Remuneration Each committee shall appoint a secretary to arrange its Committee has also been appointed . Minutes meetings, maintain minutes, records and carry out such other of Meetings of these Committees are tabled secretarial functions under the supervision of the chairman of at Board meetings, which help to keep the the committee. Board informed of Committee discussions and decisions. The Board shall present a report on the performance, duties and functions of each committee, at the annual general The Company Secretary functions as the meeting of the company. Committee Secretary .
The Annual Report includes individual reports of each committee, including a summary of its duties and performance.
Please refer the reports on pages 61 to 62. 8.2 Audit Committee Please refer page 61 for the Committee Report a. The chairman of the committee shall be a non-executive Complied with director who possesses qualifications and experience in The Chairman of the Audit Committee is S N accountancy and/or audit. Kairy, a Non-Executive director. Mr. Kairy has a Master of Commerce degree in Accounting from the University of Dhaka, Bangladesh. b. The Board members appointed to the committee shall be Complied with non-executive directors. The remaining members of the Committee are:
R. D. Tissera - Non-Executive director
S. A. H. Uddin - Independent director c. The committee shall make recommendations on matters in Will be complied with. connection with: After the conclusion of the Financial year, a formal Agenda for Audit Committee meetings (i) the appointment of the external auditor for audit services including items prescribed by the Direction was to be provided in compliance with the relevant statutes; drawn up for the conduct of Audit Committee meetings. (ii) the implementation of the Central Bank guidelines issued to auditors from time to time; The Board has approved Terms of Reference for the Audit Committee. (iii) the application of the relevant accounting standards; and
(iv) the service period, audit fee and any resignation or dismissal of the auditor, provided that the engagement of an audit partner shall not exceed five years, and that the particular audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 d. The committee shall review and monitor the external auditor’s Complied with independence and objectivity and the effectiveness of the The external Auditors are independent as they audit processes in accordance with applicable standards and report direct to the Audit Committee of the best practices. Board. e. The committee shall develop and implement a policy with Will be complied with the approval of the Board on the engagement of an external The Board has approved such a policy. This was auditor to provide non-audit services that are permitted done subsequent to the end of the financial under the relevant statutes, regulations, requirements and year under review. guidelines. In doing so, the committee shall ensure that the provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the committee shall consider:
(i) whether the skills and experience of the auditor make it a suitable provider of the non-audit services;
(ii) whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and
(iii) whether the nature of the non-audit services, the related fee levels and the fee levels
individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the external auditor.
f. The committee shall, before the audit commences, discuss Complied with and finalize with the external auditors the nature and scope of Before the commencement of the Audit, the the audit, including: Committee met with the external auditors to discuss the scope of the audit and any other (i) an assessment of the finance company’s compliance with issues of concern. Directions issued under the Act and the management’s internal controls over financial reporting;
(ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and
(iii) the co-ordination between auditors where more than one auditor is involved.
42 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 g. The committee shall review the financial information of the Complied with finance company, in order to monitor the integrity ofthe The Committee reviewed the quarterly and financial statements of the finance company, its annual report, annual audited financial statements presented accounts and periodical reports prepared for disclosure, by the CFO. and the significant financial reporting judgments contained therein. In reviewing the finance company’s annual report and accounts and periodical reports before submission to the Board, the committee shall focus particularly on:
(i) major judgmental areas;
(ii) any changes in accounting policies and practices;
(iii) significant adjustments arising from the audit;
(iv) the going concern assumption; and
(v) the compliance with relevant accounting standards and other legal requirements. h. The committee shall discuss issues, problems and reservations Complied with arising from the interim and final audits, and any matters the The Committee met with the external auditors auditor may wish to discuss including those matters that may in the absence of the executive management need to be discussed in the absence of key management and discussed issues arising from the audit. personnel, if necessary. i. The committee shall review the external auditor’s management Will be complied with letter and the management’s response thereto. As a part of the continuous process to identify and rectify gaps in the governance process, the Committee will be including this in its annual agenda.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 j. The committee shall take the following steps with regard to Will be complied with the internal audit function of the finance company: The Committee will work with the Head of Internal Audit to put these in place. (i) Review the adequacy of the scope, functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work;
(ii) Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department;
(iii) Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department;
(iv) Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function;
(v) Ensure that the committee is apprised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;
(vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care;
k. The committee shall consider the major findings of internal Will be complied with investigations and management’s responses thereto; Any internal investigations with the management’s responses thereto will be considered by the Committee.
l. The chief finance officer, the chief internal auditor anda Complied with representative of the external auditors may normally attend There are no executive Directors. The only meetings. Other Board members and the chief executive executive officer invited to attend the meeting officer may also attend meetings upon the invitation of with the External Auditors was the CEO , as the the committee. However, at least once in six months, the Committee and the Board wished to ensure he committee shall meet with the external auditors without the was properly instructed on the measure to be executive directors being present. taken to rectify any deficiencies.
44 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 m. The committee shall have: Complied with The Board approved Terms of Reference of (i) explicit authority to investigate into any matter within its the Audit Committee ensures that it has the terms of reference; authority as required.
(ii) the resources which it needs to do so;
(iii) full access to information; and
(iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. n. The committee shall meet regularly, with due notice of issues Will be complied with to be discussed and shall record its conclusions in discharging The Committee will meet regularly. At a its duties and responsibilities. meeting held after the end of finacial year, an annual agenda was agreed upon, to ensure that all necessary issues are monitored. o. The Board shall, in the Annual Report, disclose in an Complied with informative way, Please refer report on page 61.
(i) details of the activities of the audit committee;
(ii) the number of audit committee meetings held in the year; and
(iii) details of attendance of each individual member at such meetings. p. The secretary to the committee (who may be the company Complied with secretary or the head of the internal audit function) shall The Company Secretary has been appointed as record and keep detailed minutes of the committee meetings the secretary to the Committee. Minutes of the Meetings of the Committee are recorded and maintained by her. q. The committee shall review arrangements by which employees Will be complied with of the finance company may, in confidence, raise concerns Steps will be taken to put a procedure in place. about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the finance company’s relations with the external auditor.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 8.3 Integrated Risk Management Committee Please refer page 61 for the Committee Report
a. The committee shall consist of at least one non-executive Complied with director, CEO and key management personnel supervising The Integrated Risk Management Committee broad risk categories, i.e., credit, market, liquidity, operational comprises: and strategic risks. The committee shall work with key R. D. Tissera - Non-Executive Director management personnel closely and make decisions on Committee Chairman behalf of the Board within the framework of the authority and S. N. Kairy - Non-Executive Director responsibility assigned to the committee. S. Ahmad - Independent Director A. R. Sikder - CEO U. Suraweera - General Manager
b. The committee shall assess all risks, i.e., credit, market, liquidity, Will be complied with operational and strategic risks to the finance company on The Terms of reference of the Committee a monthly basis through appropriate risk indicators and have been approved by the Board and the management information. In the case of subsidiary companies Committee will ensure that meetings will focus and associate companies, risk management shall be done, on identifying , monitoring and mitigating risks. both on the finance company basis and group basis.
c. The committee shall review the adequacy and effectiveness of Will be complied with all management level committees such as the credit committee The Credit Committee and the Asset Liability and the asset-liability committee to address specific risks and Committee (ALCO) were recently reconstituted. to manage those risks within quantitative and qualitative risk Further steps will be taken to ensure their limits as specified by the committee. effectiveness .
d. The committee shall take prompt corrective action to mitigate Will be complied with the effects of specific risks in the case such risks are at levels Procedures to facilitate this action by the beyond the prudent levels decided by the committee on the committees will be adopted basis of the finance company’s policies and regulatory and supervisory requirements.
e. The committee shall meet at least quarterly to assess all Will be complied with aspects of risk management including updated business As a part of strengthening governance, continuity plans. meetings will be scheduled quarterly .
f. The committee shall take appropriate actions against the Will be complied with officers responsible for failure to identify specific risks If such instances are identified, appropriate and take prompt corrective actions as recommended by steps will be taken. the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.
g. The committee shall submit a risk assessment report within a Will be complied with week of each meeting to the Board seeking the Board’s views, The Committee will work with the Internal concurrence and/or specific directions. Auditor to put appropriate procedures in place.
46 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 h. The committee shall establish a compliance function to assess Complied with the finance company’s compliance with laws, regulations, A Compliance Officer has been appointed directions, rules, regulatory guidelines, internal controls and by the Board to monitor compliance of CBSL approved policies on all areas of business operations. A rules, regulations and directions issued under dedicated compliance officer selected from key management the Finance Business Act. personnel shall carry out the compliance function and report to the committee periodically.
9 Related party transactions 9.1 The following shall be in addition to the provisions contained in the Finance Companies (Lending) Direction, No. 1 of 2007 and the Finance Companies (Business Transactions with Directors and their Relatives) Direction, No. 2 of 2007 or such other directions that shall repeal and replace the said directions from time to time.
9.2 The Board shall take the necessary steps to avoid any conflicts Complied with of interest that may arise from any transaction of the finance The Board has approved a procedure on company with any person, and particularly with the following related party transactions. categories of persons who shall be considered as “related parties” for the purposes of this Direction: Further, at each Board meeting, the Directors individually declare any companies in which a) A subsidiary of the finance company; they have a significant influence, which facilitates avoidance of conflicts of interest b) Any associate company of the finance company;
c) A director of the finance company;
d) A key management personnel of the finance company;
e) A relative of a director or a key management personnel of the finance company;
f) A shareholder who owns shares exceeding 10% of the paid up capital of the finance company;
g) A concern in which a director of the finance company or a relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance company, has substantial interest.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 9.3 The transactions with a related party that are covered in this Complied with Direction shall be the following: The Board has approved a procedure on related party transactions. a) Granting accommodation,
Further, at each Board meeting, the Directors b) Creating liabilities to the finance company in the form of individually declare any companies in which deposits, borrowings and investments, they have a significant influence, which c) providing financial or non-financial services to the finance facilitates avoidance of conflicts of interest company or obtaining those services from the finance company,
d) creating or maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party.
48 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 9.4 The Board shall ensure that the finance company does not The documented process and the existing engage in transactions with a related party in a manner that reporting system will be further reviewed to would grant such party “more favourable treatment” than strengthen identification and extraction of the that is accorded to other similar constituents of the finance required details of such transactions and to company. For the purpose of this paragraph, “more favourable monitor that “More favorable treatment” is not treatment” shall mean: offered to related parties.
a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the finance company’s regulatory capital, as determined by the Board. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the finance company’s share capital and debt instruments with a remaining maturity of 5 years or more.
b) Charging of a lower rate of interest than the finance company’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty;
c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/ commissions, that extends beyond the terms granted in the normal course of business with unrelated parties;
d) Providing or obtaining services to or from a related-party without a proper evaluation procedure;
e) Maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for the performance of legitimate duties and functions.
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Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 10 Disclosures 10.1 The Board shall ensure that: (a) annual audited financial Complied with statements and periodical financial statements are prepared The financial statements are prepared in and published in accordance with the formats prescribed by accordance with the new Sri Lanka Accounting the regulatory and supervisory authorities and applicable Standards (SLFRSs/LKASs)and the formats accounting standards, and that (b) such statements are prescribed by the regulators. published in the newspapers in an abridged form, in Sinhala, Tamil and English. Annual financial statements are disclosed in the annual report; biannual (unaudited) financial statements are published in newspapers in all three languages and the quarterly statements are posted on CSE website
10.2 The Board shall ensure that at least the following disclosures are made in the Annual Report: a. A statement to the effect that the annual audited financial Complied with by this statement statements have been prepared in line with applicable The Annual Audited financial statements accounting standards and regulatory requirements, inclusive have been prepared in line with applicable of specific disclosures. accounting standards and regulatory requirements , inclusive of specific disclosures .
b. A report by the Board on the finance company’s internal Complied with control mechanism that confirms that the financial reporting Please refer the Directors Statement on Internal system has been designed to provide a reasonable Controls Over Financial Reporting on page 60. assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements.
c. The external auditor’s certification on the effectiveness of Complied with the internal control mechanism in respect of any statements The Company has obtained a certification prepared or published after March 31, 2010. from KPMG Chartered Accountants on the effectiveness of the internal controls over financial reporting.
d. Details of directors, including names, transactions with the Complied with finance company. Please refer the Directors transactions with the Company on page 55.
50 | BRAC Lanka Finance PLC Direction Reference to the Finance Companies Corporate The Company’s level of compliance No. Governance Direction No. 3 of 2008 e. Fees/remuneration paid by the finance company to the Complied with directors in aggregate, in the Annual Reports published after The directors do not receive any Remuneration January 1, 2010. f. Total net accommodation as defined in paragraph 9(4) Complied with outstanding in respect of each category of related parties Net accommodations granted to each category and the net accommodation outstanding in respect of each of related parties as a percentage of capital category of related parties as a percentage of the finance funds of the Company at the year-end: company’s capital funds. Entities in which the Parent of the Company has a substantial interest 13%
Key Management Personnel 0% g. The aggregate values of remuneration paid by the finance Complied with company to its key management personnel and the aggregate Please refer page 83 Note 8. values of the transactions of the finance company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the finance company. h. A report setting out details of the compliance with prudential Complied with requirements, regulations, laws and internal controls and Status of compliance with prudential measures taken to rectify any non - compliances. requirements, regulations and laws as set out in this report. i. A statement of the regulatory and supervisory concerns on Complied with lapses in the finance company’s risk management, or non There were no significant supervisory concerns/ compliance with the Act, and rules and directions that have lapses in the Company’s risk management and been communicated by the Director of the Department of compliance with this direction to be directed Supervision of Non-Bank Financial Institutions, if so directed by the Monetary Board to be disclosed to the by the Monetary Board to be disclosed to the public, together public. with the measures taken by the finance company to address such concerns.
j. The external auditor’s certification of the compliance with the Complied with Act and rules and directions issued by the Monetary Board The Company has engaged the services of the in the annual corporate governance reports published after external auditors to assess the company’s level January 1, 2011. of compliance with the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board.
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Section Rules of the Colombo Stock Exchange The Company’s Level of compliance No. 7.10 Corporate Governance 7.10 Statement confirming that as at the date of the annual The Company’s compliance with the listing rules of report that the Company is in compliance with these rules. the Colombo Stock Exchange is explained below.
7.10.1 Non-Executive Directors Complied with The Board of Directors of a listed entity shall include at The Board comprises 8 directors of whom all are least : two non-executive directors; or such number of non executive directors non-executive directors equivalent to one third of the total number of directors whichever is higher
7.10.2 Independent Directors Complied with Where the constitution of the Board of Directors includes The Board comprises 2 independent directors. only two non-executive directors in terms of 7.10.1, both such non-executive directors shall be independent. In all other instances two or 1/3rd of the non-executive directors appointed to the Board, whichever is higher shall be independent.
7.10.3-4 Directors disclosures Will be complied with Annual determination as to the independence or non- The relevant declaration, as prescribed by the independence of each non-executive director Colombo Stock Exchange were called for from each director after the end of the financial year.
Please refer directors profiles on pages 8 to 11 7.10.5 Remuneration Committee Will be complied with Shall comprise of a minimum of two independent non- The Remuneration Committee comprises 2 non- executive directors or of non-executive directors a majority executive directors. S Abed and I C Nanayakkara of whom shall be independent, which ever shall be higher Please refer the committee report on page 62. 7.10.6 Audit Committee Will be complied with Shall comprise of a minimum of two independent non- After the Financial year the committee was re- executive directors or of non-executive directors a majority constituted and now comprises: of whom shall be independent, which ever shall be higher S N Kairy - Non-Executive director
R D Tissera - Non-Executive director
S A H Uddin – Independent director
Please refer committee report on page 61.
52 | BRAC Lanka Finance PLC Attendance at Board Meetings
Date of the Meeting 05.04.2013 23.05.2013 08.07.2013 12.09.2013 27.11.2013 25.02.2014 19.03.2014
Director Classification
M. A. (Rumee) Ali*1 Non-Executive √ √ - √ Chairman I. C. Nanayakkara*1 Non-Executive √ √ √ √ Director S. N. Kairy*1 Non-Executive √ √ √ √ Director W. D. K. Jayawardena*1 Non-Executive √ √ √ √ Director S. B. Abed*1 Non-Executive √ √ √ √ Director R. D. Tissera*1 Non-Executive √ √ √ √ Director S. Ahmad*1 Independent √*3 √ √ √*3 Director S. A. H. Uddin*1 Independent √ √ √ √*3 Director Dr. S P Jayawardane*2 Non-Executive √ √ - Chairman Mr. L A Mallawarachchi*2 Managing √ √ √ Director Mrs. G P Mallawarachchi*2 Executive √ √ √ Director Mrs. C Mallawarachchi*2 Executive √ √ √ Director Mr. J O M Gamage*2 Independent √ √ - Director Mr. K L J N Perera*2 Independent √ √ √ Director
*1 appointed w.e.f. 29th August 2013 *2 resigned w.e.f. 29th August 2013 *3 via teleconference
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Attendance at Audit Committee Meetings
Date of the Meeting 27.11.2013 19.03.2014
Director Classification
R. D. Tissera Non-Executive Director √ √ (appointed w.e.f. 12th September 2013) S. A. H. Uddin Independent Director √ √ (appointed w.e.f. 12th September 2013) S. Ahmad Committee Chairman, √ - (appointed Chairman w.e.f 16th July 2014) Independent Director S. N. Kairy Committee Chairman, (appointed Chairman on 12th September 2013 Non-Executive Director √ √ and resigned as Chairman on 16th July 2014)
Attendance at Remuneration Committee Meetings Date of the Meeting 27.11.2013 Director Classification S. A. H. Uddin Committee Chairman, Independent Director - (appointed Chairman on 16th July 2014) I. C. Nanayakkara Non-Executive Director √ (appointed on 12th September 2013)
S. B. Abed Committee Chairman, (appointed Chairman on 12th September 2013 √ and resigned as Chairman on 16th July 2014) Non-Executive Director
Attendance at Integrated Risk Management Committee Meetings Date of the Meeting 27.11.2013 Director Classification R. D. Tissera*1 Committee Chairman, Non-Executive Director √ S. Ahmad*1 Independent Director - S. N. Kairy*1 Non-Executive Director √
*1 appointed w.e.f. 12th September 2013)
54 | BRAC Lanka Finance PLC REPORT OF THE DIRECTORS
Following the acquisition of the Company by the BRAC Directors shareholdings Group and the LOLC Group, the Board has sought to 2014 2013 build on the Company‘s strengths. Steps were taken to M A (Rumee) Ali (Chairman) Nil Nil expand the branch network, and also enhance both the lending and deposit mobilization portfolio. Processes S N Kairy Nil Nil and procedures are also being reviewed and amended, S B Abed Nil Nil thereby facilitating improvements in both performance I C Nanayakkara Nil Nil and conformance. W D K Jayawardena Nil Nil The Board of Directors R D Tissera Nil Nil The Board of Directors is as follows : S A H Uddin Nil Nil M A (Rumee) Ali (Chairman) - Non-Executive Director S Ahmad Nil Nil S N Kairy - Non-Executive Director S B Abed - Non-Executive Director Shareholding structure Following the Rights Issues last year, the Company has I C Nanayakkara - Non-Executive Director 105, 752,566 shares in issue. The shareholding structure W D K Jayawardena - Non-Executive Director is given on pages 98 to 99, together with the 20 largest R D Tissera - Non-Executive Director shareholders. During the year, the share price ranged S A H Uddin - Independent Director from Rs. 5.40 to Rs. 9.00. As at the end of trading on 31st March, 2014, the share price was Rs. 7.50/- S Ahmad - Independent Director Compliance with laws and regulations The Directors profiles can be found on pages 8 to 11 Following the acquisition, the new Board of Directors Lists of other companies on which they serve as directors is continuously reviewing and improving compliance. are given on pages 57 to 59. The Company is compliant with the Listing Rules of the Directors’ interests in contracts Colombo Stock Exchange, including the rules relating to Corporate Governance. The Directors have made the declarations required by the Companies Act No. 7 of 2007 . These have been Financial Statements noted by the Board, recorded in the Minutes and The Financial statements together with the notes are entered into the Interest Register which is maintained thereon, found on pages 67 to 97, are in compliance with by the Company. Sri Lanka Accounting Standards and the requirements of Directors’ remuneration the Companies Act No. 7 of 2007. The New Directors did not receive any remuneration for Significant accounting policies the year under review. The Report of the Remuneration The significant accounting policies adopted when Committee is on page 62. preparing these financial statements and any changes thereof if applicable are given on pages 71 to 81.
Annual Report 2013/14 | 55 REPORT OF THE DIRECTORS
Statutory Payments Post Balance Sheet Events For the year under review, all known statutory payments have been made and all retirement gratuities have been Financial sector consolidation provided for. Further, all management fees and payments In accordance with the Central Bank’s direction on to related parties for the year under review have been financial sector consolidation, the Company is in reflected in the accounts. Details are given in Note no 8 discussion with other financial sector companies, with a on page 83. view to an amalgamation.
Going concern Amendments to the Articles The Directors have reviewed the interim financials and Having obtained the approval of the Central Bank the year-end financials, reports on operations for the of Sri Lanka, the Board is now recommending to the year and projections for the coming year. Based on shareholders that the Company’s Articles of Association information received, the Directors are of the opinion be amended to better reflect the dynamic environment that the Company is in a position to continue its in which finance companies operate, as listed and operations in the foreseeable future. Accordingly, the regulated companies. The proposed new Articles Financial Statements are prepared on the basis that the conform to statutory and regulatory requirements. Company is a going concern Notice of Meeting Directors’ responsibility for financial reporting The notice of Meeting is found on page 101. If you are The Directors statement on responsibility for financial unable to be present, please complete and return the reporting is on page 63. Form of Proxy.
Auditors On behalf of the board of Directors BRAC Lanka Finance PLC The Auditors, M/s KPMG retire and offer themselves for re-appointment. The Board recommends their re-appointment for the year 2014/2015 at a fee to be decided upon by the Board. Mr. M A (Rumee) Ali The fees paid to the auditors are disclosed in the notes to Chairman the Accounts on page 83.
As far as the Directors are aware, the Auditors do not have any other relationship with the Company or any of its subsidiaries nor do they have any interest in contracts Ms. Chrishanthi Emmanuel with the Company or any of its subsidiaries. Director - LOLC Corporate Services (Pvt) Ltd Secretaries The Report of the Auditors is given on page 66.
56 | BRAC Lanka Finance PLC Directors’ Declarations
Name Directorships held M. A. (Rumee) Ali Chairman: BRAC Impact Ventures Limited BRAC Environment Enterprise Ltd BRAC EPL Investments Ltd BRAC EPL Stock Brokerage Limited bKash Ltd BRAC Sajaan Exchange Ltd BRAC Lanka Finance PLC
Vice Chairman: Bangladesh Association of BRAC
Director: BRAC Bank Ltd Delta BRAC Housing Finance Corporation Ltd
Advisor: Enterprise and Investment – BRAC Bangladesh I. C. Nanayakkara Chairman: Commercial Leasing & Finance PLC Brown & Company PLC LOLC Micro Credit Limited Browns Investments PLC
Deputy Chairman: Lanka ORIX Leasing Company PLC Lanka ORIX Finance PLC Seylan Bank PLC
Director: PRASAC Microfinance Institute Sierra Constructions Limited Agstar Fertilizers PLC BRAC Lanka Finance PLC LOLC Myanmar Microfinance Co. Ltd FLC Holdings PLC Associated Battery Manufacturers (Ceylon) Ltd Lanka Centuary Investments PLC
Annual Report 2013/14 | 57 REPORT OF THE DIRECTORS
Name Directorships held S. N. Kairy Director: BRAC Bank Limited BRAC IT Services Limited BRAC Impact Ventures Limited BRAC Environmental Enterprises Ltd BRAC Karnafuli Tea Company Ltd BRAC Kaiyachera Tea Company Ltd BRAC Banskhali Tea Company Ltd BRAC Kodala Tea Compant Limited BRAC Lanka (Guarantee) Ltd BRAC Lanka Investment (Private) Limited Stichting BRAC International, Inc (Philippines) BRAC Lanka Finance PLC
Mr W. D. K. Jayawardena Chairman: LOLC Insurance Company Limited LOLC Securities Ltd United Dendro Energy (Private) Limited Lanka ORIX Finance PLC Eden Hotels Lanka PLC LOLC Life Insurance Limited LOLC General Insurance Limited Palm Garden Hotels PLC Speed Italia (Pvt) Limited
Managing Director/ Group CEO: Lanka ORIX Leasing Company PLC
Director: LOLC Micro Credit Limited Commercial Leasing & Finance PLC Brown & Company PLC Browns Investments PLC Riverina Resorts (Pvt) Ltd BRAC Lanka Finance PLC Seylan Bank PLC
58 | BRAC Lanka Finance PLC Name Directorships held S. B. Abed Director: bKash Limited Delta BRAC Housing Finance Corporation Ltd BRAC Tanzania Finance Ltd BRAC Uganda BRAC Uganda Microfinance Company Ltd BRAC Microfinance (SL) Ltd BRAC Myanmar Microfinance Company Ltd BRAC Lanka Finance PLC
R. D. Tissera Director: Sundaya Lanka (Pvt) Ltd LOLC Micro Credit Ltd LOLC Micro Investments Ltd LOLC Myanmar Microfinance Co Ltd BRAC Lanka Finance PLC
S. Ahmad Founder/Owner: RAS Capital
Director: Apex Investments Limited Guardian Life Insurance Limited Apex Hotels Limited BRAC Lanka Finance PLC
S. A. H. Uddin Director: A B Bank Limited AB Exchange (UK) Limited Millennium Aviation Limited Managewell Holdings Limited Managewell Investmets Limited Managewell Communications Limited Managewell Services Limited Managewell Media Limited Hyundai Auto Mobiles Bangladesh Limited Forwardair Aviation (Pvt) Ltd BRAC Lanka Finance PLC
Annual Report 2013/14 | 59 DIRECTOR’S STATEMENT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Responsibility Confirmation In line with the Finance Companies Direction No. 03 of Based on the above processes, the Board confirms that 2008 section 10(2)(b) , the Board of Directors present this the Financial Reporting System of the Company has been report on Internal Control over Financial Reporting. designed to provide reasonable assurance regarding the reliability of Financial Reporting and the preparation of The Board has established an ongoing process for Financial Statements for external purposes and has been identifying, evaluating and managing the significant done in accordance with Sri Lanka Accounting Standards risks faced by the Company and this process includes the and regulatory requirements of the Central Bank of Sri system of Internal Control over Financial Reporting. The Lanka. process is regularly reviewed by the Board. The Board is of the view that the system of Internal Control over External Auditors Certification Financial Reporting in place is sound and adequate to The External Auditors have submitted a certification on provide reasonable assurance regarding the reliability of the process adapted by the Directors on the system of Financial Reporting, and that the preparation of Financial internal controls over financial reporting. Statements for external purposes is in accordance with relevant accounting principles and regulatory By order of the Board requirements. The management assists the Board in the BRAC Lanka Finance PLC implementation of the Board’s policies and procedures pertaining to Internal Control over Financial Reporting. The management is continuously in the process of enhancing the documentation of the system of Internal Control over Financial Reporting. In assessing the Internal Mr. M A (Rumee) Ali Control System over Financial Reporting, identified Chairman officers of the Company collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Company. These in turn are being observed and checked by the Internal Auditor of the Company for suitability of design Ms. Chrishanthi Emmanuel Director - LOLC Corporate Services (Pvt) Ltd and effectiveness on an on-going basis. Secretaries
60 | BRAC Lanka Finance PLC REPORT OF THE AUDIT COMMITTEE
The Committee was re-constituted during the year, to of the Committee, and facilitate the role the Committee include S. N. Kairy (Non-Executive Director), R. D. Tissera needs to play in ensuring compliance with directives of (Non-Executive Director) and S. A. H. Uddin (Committee the Central Bank of Sri Lanka, and also of Accounting Chairman, Independent Director) as Committee Standards and other regulations. Members. In July the Committee again changed. The Committee now comprises the following: An annual agenda, which would ensure that significant issues are addressed, was also agreed upon. S. Ahmad (Committee Chairman) - Independent Director
S. A. H. Uddin - Independent Director Mr. S. Ahmad R. D. Tissera - Non-Executive Director Chairman - Audit Committee At its first meeting, the Committee approved Terms of Reference. These Terms of Reference detailed the scope
REPORT OF THE INTEGRATED RISK MANAGEMENT COMMITTEE
The Committee was re-constituted during the year, and At its first meeting, the Committee approved Terms of now comprises the following: Reference, which included the scope of the Committee.
Mr. Ravi Tissera (Committee Chairman) - Non-Executive Director
Mr. Narayan Kairy - Non-Executive Director Mr. Ravi Tissera Chairman - Integrated Risk Management Committee Mr. Sameer Ahmad - Independent Director
Mr. Abedur Sikder - Chief Executive Officer
Mr. Upul Suraweera - The General Manager
Annual Report 2013/14 | 61 REPORT OF THE REMUNERATION COMMITTEE
The Committee was re-constituted during the year, to competitive in the market, to attract, motivate and retain include Mr. S. B. Abed (Committee Chairman, Non- human resources and to encourage and reward high Executive Director) and Mr. I. C. Nanayakkara (Non- levels of performance and achievement of corporate Executive Director) as Committee Members. In July, goals and objectives. the Committee again changed. The Committee now comprises the following: The Committee also reviewed remuneration proposals submitted, and made its recommendation to the Board. S. A. H. Uddin (Committee Chairman) - Independent Director
I. C. Nanayakkara - Non-Executive Director Mr. S. A. H. Uddin S. B. Abed - Non-Executive Director Chairman - Remuneration Committee
The Committee drafted a Remuneration Policy relating to employees, including the CEO and Executive Directors. The policy recognizes the need for remuneration to be
62 | BRAC Lanka Finance PLC DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING
The Directors confirm that the Company’s financial M/s KPMG, the Auditors, were provided with the statements for the year to 31st March, 2014 have opportunity to make appropriate inspections of financial been prepared and presented in conformity with the records, connected documentation and minutes of requirements of the Sri Lanka Accounting Standards, directors’ and shareholders’ meetings to enable them to the Regulations and Directions of the Central Bank form an opinion of the Financial Statements. The Report of Sri Lanka, the Listing Rules of the Colombo Stock of the Auditors is on page 66. Exchange, the Finance Business Act No. 42 of 2011 and the Companies Act No. 7 of 2007. They are therefore of By Order of the Board the view that these financial statements present a true BRAC Lanka Finance PLC and fair view of the state of the affairs of the Company for the above mentioned financial year.
The Directors accept responsibility for the integrity and accuracy of the Financial Statements presented, and Mr. M A (Rumee) Ali confirm that appropriate accounting policies have been Chairman selected and applied consistently, and reasonable and prudent judgment has been exercised so as to accurately report transactions.
The Directors confirm that to the best of their knowledge, Ms. Chrishanthi Emmanuel all statutory payments due in respect of the Company as Director - LOLC Corporate Services (Pvt) Ltd at the balance sheet date have been paid for, or where Secretaries relevant, provided for.
Annual Report 2013/14 | 63 FINANCIAL REPORTS
64 | BRAC Lanka Finance PLC Annual Report 2013/14 | 65 INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF BRAC LANKA An audit includes examining, on a test basis, evidence FINANCE PLC supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting Report on the Financial Statements policies used and significant estimates made by management, We have audited the accompanying Financial as well as evaluating the overall Financial Statement Statements of BRAC Lanka Finance PLC, which presentation. comprise the Statement of Financial Position as at 31st March 2014, and the Statement of We have obtained all the information and explanations which Comprehensive Income, Statement of Changes in to the best of our knowledge and belief were necessary for Equity and Statement of Cash Flow for the year then the purposes of our audit. We therefore believe that our audit ended, and a summary of Significant Accounting provides a reasonable basis for our opinion. Policies and other Explanatory notes set out on pages 67 to 97 of the annual report. Opinion In our opinion, so far as appears from our examination, the Management’s Responsibility for the Company maintained proper accounting records for the year Financial Statements ended 31st March 2014 and the Financial Statements give a Management is responsible for the preparation true and fair view of the financial position of the company as and fair presentation of these Financial Statements at 31st March 2014 and its financial performance and its cash in accordance with Sri Lanka Accounting flows for the year then ended in accordance with Sri Lanka Standards. This responsibility includes: designing, Accounting Standards. implementing and maintaining internal control relevant to the preparation and fair presentation Report on Other Legal and Regulatory Requirements of Financial Statements that are free from material These Financial Statements also comply with the requirements misstatement, whether due to fraud or error; of Section 151(2) of the Companies Act No. 07 of 2007. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Scope of Audit and Basis of Opinion CHARTERED ACCOUNTANTS Our responsibility is to express an opinion on 27th May 2014 these Financial Statements based on our audit. We Colombo. conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the Financial Statements are free from material misstatement.
66 | BRAC Lanka Finance PLC STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31ST MARCH 2014 2013 Restated Note Rs. Rs.
Interest Income 4 96,630,493 68,878,504 Interest Expense 5 (20,328,870) (11,494,220) Net Interest Income 76,301,623 57,384,284 Change in Fair Value of Investment Property 1,507,808 3,849,898 Other Income 6 10,392,565 10,573,773 88,201,996 71,807,955 Operating Expenses Staff Cost (26,673,589) (15,833,062) General & Administration Expenses (23,858,522) (13,565,909) Depreciation and Amortization (4,634,790) (5,341,682) Premises, Equipment and Establishment Expenses (6,254,241) (6,632,073) (61,421,142) (41,372,726) Profit from operations before loan loss provision & tax 26,780,854 30,435,229 (Provision) / Reversal for Losses on Loans and Inventory 7 (5,009,542) 1,029,286 Profit Before Tax 8 21,771,312 31,464,515 Income Tax Expense 9 (7,854,953) (2,934,004) Profit for the Year 13,916,359 28,530,511
Other Comprehensive Income Retirement benefit plan actuarial gains/ (losses) (938,165) 313,200 Revaluation gain on Property, plant and equipment net of tax 1,271,330 1,850,473 Total Comprehensive Income for the year 14,249,524 30,694,184
Earnings per share (Rs) 10 0.14 0.28
The accounting policies and explanatory notes form an integral part of these financial statements.
Figures in brackets indicate deductions.
Annual Report 2013/14 | 67 STATEMENT OF FINANCIAL POSITION
AS AT 31ST MARCH 2014 2013 Restated Note Rs. Rs. ASSETS Cash and Cash Equivalents - 3 months renewable 11 90,961,055 38,548,526 Fixed Deposits with Bank 12 396,358,574 - Investment in Government Securities - less than 3 months 13 14,796,665 5,210,741 Investment Securities - unquoted 14 211,000 211,000 Receivable on Hire-Purchase 15 106,136,939 153,639,556 Receivable on Lease 16 71,741,189 48,622,160 Receivable on Secured Loans and Microfinance 17 908,737,176 86,675,376 Other Receivables 18 6,686,489 4,222,255 Deposits and Prepayments 1,471,190 1,677,223 Income Tax Receivable - 2,515,008 Inventory 19 13,256,155 2,242,222 Property, Plant and Equipment 20 99,855,538 84,827,594 Intangible Assets 21 1,072,834 1,145,338 Investment Property 22 236,291,712 238,987,604 Total Assets 1,947,576,516 668,524,603 EQUITY AND LIABILITIES Liabilities Bank Overdraft 11 49,868,105 - Deposits from Customers 23 111,660,087 97,641,296 Interest Bearing Loans and Borrowings 24 667,218,582 1,880,386 Trade Payables 25 481,988,829 Accrued Charges and Other Payables 26 19,034,751 18,508,393 Microfinance Fund Account 2,583,200 - Income Tax Payable 1,819,076 - Retirement Benefit Obligations 27 6,745,767 4,423,733 Deferred Tax Liabilities 28 18,230,163 17,214,887 Total Liability 1,359,148,560 139,668,695 Equity Stated Capital 29 171,180,454 125,857,930 Capital Reserves 135,714,017 133,746,869 Revenue Reserves 281,533,485 269,251,109 Total Equity 588,427,956 528,855,908 Total Equity and Liabilities 1,947,576,516 668,524,603 The Accounting Policies and Notes form an integral part of these Financial Statements. These financial statements are prepared in accordance with the requirement of the Companies Act No 07 of 2007.
H. T. P. Sushantha A. R. Sikder Chief Financial Officer Chief Executive Officer
The Board of Directors are responsible for the preparation and presentation of these financial statements. Approved and signed for and on behalf of the Board of BRAC Lanka Finance PLC.
M A (Rumee) Ali R. D. Tissera Chairman Director 27th May 2014 Colombo.
68 | BRAC Lanka Finance PLC STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST MARCH 2014 Capital Reserves Revenue Reserves
Stated Reserve Revaluation General Retained Total Capital Fund Reserve Reserve Earnings Restated Rs. Rs. Rs. Rs. Rs. Rs.
Balance as at 1st April 2012 125,857,930 45,500,000 74,396,396 44,300,000 210,688,334 500,742,660 Effect on restatements - - - - 4,469,235 - Restated balance as at 1st April 2012 125,857,930 45,500,000 74,396,396 44,300,000 215,157,569 505,211,895 Revaluation gain on Property, plant and equipment net of tax - - 1,850,473 - - 1,850,473 Transfer to Reserve Fund - 12,000,000 - 12,000,000 (24,000,000) - Profit for the Year - - - - 28,530,511 28,530,511 Retirement benefit plan actuarial gains/ (losses) - - - - 313,200 313,200 Dividend - 2011/12 - - - - (7,050,171) (7,050,171) Restated balance as at 31st March 2013 125,857,930 57,500,000 76,246,869 56,300,000 212,951,109 528,855,908 Revaluation gain on Property, plant and equipment net of tax - - 1,271,330 - - 1,271,330 Transfer to Reserve Fund - 695,818 - - (695,818) - Right Issue 45,322,524 - - - - 45,322,524 Profit for the Year - - - - 13,916,359 13,916,359 Retirement benefit plan actuarial gains/ (losses) - - - - (938,165) (938,165) Balance as at 31st March 2014 171,180,454 58,195,818 77,518,199 56,300,000 225,233,485 588,427,956
The accounting policies and explanatory notes form an integral part of these financial statements.
Figures in brackets indicate deductions.
Annual Report 2013/14 | 69 CASH FLOW STATEMENT
FOR THE YEAR ENDED 31ST MARCH 2014 2013 Rs. Rs.
Cash Flows from Operating Activities Interest Receipts 100,896,204 73,560,797 Interest Payments (20,328,870) (11,286,555) Receipts from Other Operating Activities 10,392,565 8,897,053 Gratuity Paid (134,418) - Cash Payments to Employees and Suppliers (67,806,120) (37,543,999) 23,019,361 33,627,296`
Changes in Operating Assets Short Term Funds (Net) (822,061,800) (505,631) Funds Advanced to Secured Loan Customers - Net 24,383,588 (2,172,039) Others 475,089,058 (32,250,585) (322,589,154) (34,928,255) Changes in Operating Liabilities Net Security Deposits Received/(Refunded) to Customers 14,018,792 40,403,500 Finance Creditors - - 14,018,792 40,403,500
Income Tax Paid (3,000,000) (6,408,652) Net Cash Inflow/ (Outflow) from Operating Activities (288,551,001) 32,693,889
Cash Flows from Investing Activities Proceeds from Disposal Property, Plant and Equipment - 2,992,857 Purchase of Property, Plant and Equipment (13,620,795) (445,317) Purchase of Intangible Asset - (93,872) Net Cash used in Investing Activities (13,620,795) 2,453,668
Cash Flows from Financing Activities Share Issue 45,322,524 - Investments in Treasury Bills (9,585,924) - Term Loan Received 666,253,245 - Term Loan Rentals Paid (915,049) (2,017,336) Dividend Paid - (7,050,171) Net Cash Inflow/ (Outflow) from Financing Activities 701,074,796 (9,067,507)
Net Change in Cash and Cash Equivalents 398,902,999 26,080,050 Cash and Cash Equivalents at the beginning of the year 38,548,526 12,468,476 Cash and Cash Equivalents at the end of year 437,451,524 38,548,526
Note: A Reconciliation of Cash and Cash Equivalents Fixed Deposit 396,358,574 13,437,041 Cash in Hand and Cash at Bank 41,092,950 25,111,485 437,451,524 38,548,526
70 | BRAC Lanka Finance PLC NOTES TO THE FINANCIAL STATEMENTS
1 REPORTING ENTITY 2.5 Functional and Presentation Currency The Financial Statements are presented in Sri Lankan 1.1 General Rupees which is the Company’s functional currency. BRAC Lanka Finance PLC (Formaly Known as Nanda Investments and Finance PLC) is a limited liability 2.6 Significant Accounting Judgments, Estimates Company incorporate domiciled in Sri Lanka, under and Assumptions the Companies Act No. 07 of 2007. The Registered The preparation of the financial statements in Office of the Company is situated at No.25 C. W.W conformity with Sri Lanka Accounting Standards Kannagara Mawatha, Colombo 07. (SLFRS) requires management to make judgments, estimates and assumptions that affect the application 1.2 Principal Activities and Nature of Operations. of accounting policies and the reported amounts The principal line of business of Company consist of assets, liabilities, income and expenses. Actual of lease finance, hire purchase, secured loans, results may differ from these estimates. Microfinance and property mortgaged loans. The estimates and associated assumptions are 2 BASIS OF PREPARATION based on historical experience and various other factors that are believed to be reasonable under 2.1 Statement of Compliance the circumstance, the result of which form the basis The Financial Statements of the Company comprise of making the judgment about carrying values of the Statements of Comprehensive Income, assets and liabilities that are not readily apparent Statement of Financial Position, Statement of from the other sources. Changes in Equity and Statement of Cash Flows together with the Accounting Policies and Notes to Estimates and underlying assumptions are reviewed the Financial Statements. on an ongoing basis. Revisions to accounting estimates are recognized in the period in which These Financial Statements have been prepared in the estimates are revised and in any future periods accordance with Sri Lanka Accounting Standards affected. (SLFRS) as issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and with the Information about critical judgments in applying requirements of the Companies Act No. 07 of 2007. accounting policies that have the most significant effect on the amounts recognized in the financial 2.2 Date of authorization for issue. statements is included in the following notes: The Financial Statements of BRAC Lanka Finance PLC for the period ended 31st March 2014 were • Note - 27 – Measurement of deferred tax liability. authorized for issue by the Board of Directors on 27th May 2014. • Note - 26 – Employee Benefit.
2.3 Responsibility for Financial Statements 3 Significant Accounting Policies The Board of Directors is responsible for the The accounting policies set out below have been preparation and presentation of the Financial applied consistently to all the periods presented in Statements of the Company in accordance with the these Financial Statements and have been applied provisions of the Companies Act No. 07 of 2007 and consistently by the Company, unless otherwise Sri Lanka Accounting Standards. stated.
2.4 Basis of Measurement The directors have made an assessment of the The Financial Statements have been prepared on Company’s ability to continue as a going concern historical cost basis except for the following material in the foreseeable future and is satisfied that it items in the Statement of Financial Position. has the resources to continue in business for the foreseeable future and they do not foresee a need • Employee Benefit Liability recognized based on for liquidation or cessation of business. Therefore, actuarial valuation (LKAS - 19) the Financial Statements continue to be prepared on the going concern basis. • Investment Property measured at fair value.
• Land and Building measured at fair value.
Annual Report 2013/14 | 71 NOTES TO THE FINANCIAL STATEMENTS
3.1 Foreign Currency Translation 3.3.1.2.1 Financial assets at fair value through profit or In preparing the Financial Statements of the loss individual entities, transactions in currencies A financial asset at fair value through profit or other than the entity’s functional currency (foreign loss includes financial assets held for trading and currencies) are recorded in the functional currencies financial assets designated upon initial recognition using the exchange rates prevailing at the dates of at fair value through profit or loss. Financial assets the transactions. are classified as held for trading if they are acquired for the purpose of selling or repurchasing in At each reporting date, monetary items denominated the near term. Derivatives, including separated in foreign currencies are translated at the closing embedded derivatives are also classified as held rate. Non-monetary items measured at fair value are for trading unless they are designated as effective translated at the rates prevailing on the date when hedging instruments. Financial assets at fair value the fair value was determined Non-monetary items through profit and loss are carried in the Statement measured at historical cost are translated at the rates of Financial Position at fair value with changes in fair prevailing on the date of transaction. value recognized in finance income or finance costs in the Statement of Comprehensive Income. Exchange differences arising on the settlement of monetary items and on the translation of monetary 3.3.1.2.2 Loans and receivables items are included in profit or loss for the period. Loans and receivables are non-derivative financial assets with fixed or determinable payments Exchange differences arising on the translation that are not quoted in an active market. After of non-monetary items carried at fair value are initial measurement, such financial assets are included in profit or loss for the period except subsequently measured at amortized cost using the for the differences which are recognized in other comprehensive income. effective interest rate method (EIR), less impairment. Amortized cost is calculated by taking into account 3.2 Financial Instrument any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR 3.2.1.1 Finance Assets amortization is included in finance income in the Statement of Comprehensive Income. The losses 3.2.1.2 Initial Recognition and Measurement arising from impairment are recognized in the Financial assets within the scope of LKAS 39 are Statement of Comprehensive Income in finance classified as financial assets at fair value through costs. profit or loss, loans and receivables, held-to- maturity investments or available-for-sale financial Loans and receivables held by the Company assets, as appropriate. The Company determines comprise of trade receivables, amounts due from the classification of its financial assets at initial related parties, deposits, advances and other recognition. receivables and cash and cash equivalents. All financial assets are recognized initially at fair value 3.3.1.2.3 Held-to-maturity investments plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs. Non-derivative financial assets with fixed or determinable payments and fixed maturities are The Company’s financial assets include cash and classified as held-to-maturity when the Company short term deposits, trade and other receivables has the positive intention and ability to hold them to and loans and receivables. maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using 3.3.1.2 Subsequent Measurement the effective interest method, less impairment. The subsequent measurement of financial assets Amortized cost is calculated by taking into account depends on their classification as follows: any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the
72 | BRAC Lanka Finance PLC Statement of Comprehensive Income. The losses 3.3.2 Financial Liabilities arising from impairment are recognized in the Statement of Comprehensive income in finance 3.3.2.1 Initial Recognition and Measurement costs. Financial liabilities within the scope of LKAS 39 are classified as financial liabilities at fair value through 3.3.1.2.4 Available-for-sale financial investments profit or loss or loans and borrowings, as appropriate. Available-for-sale financial investments include The Company determines the classification of its equity and debt securities. Equity investments financial liabilities at initial recognition. classified as available-for-sale are those, which are All financial liabilities are recognized initially at fair neither classified as held for trading nor designated value plus, in the case of loans and borrowings, at fair value through profit or loss. Debt securities transaction costs that are directly attributable to the in this category are those which are intended to acquisition or issue of such financial liability. be held for an indefinite period of time and which may be sold in response to needs for liquidity or in The Company’s financial liabilities include trade response to changes in the market conditions. and other payables, bank overdrafts, loans and borrowings. After initial measurement, available-for-sale financial investments are subsequently measured at fair value 3.3.2.2 Subsequent Measurement with unrealized gains or losses recognized as other 3.3.2.2.1 Financial liabilities at fair value through profit comprehensive income in the available-for-sale or loss reserve until the investment is derecognized, at Financial liabilities at fair value through profit or which time the cumulative gain or loss is recognized loss include financial liabilities held for trading in other operating income, or determined to be and financial liabilities designated upon initial impaired, at which time the cumulative loss is recognition as at fair value through profit or loss. reclassified to the Statement of Comprehensive Financial liabilities are classified as held for trading Income in finance costs and removed from the if they are acquired for the purpose of selling in available-for-sale reserve. Interest income on the near term. Gains or losses on liabilities held available-for-sale debt securities is calculated using for trading are recognized in the Statement of the effective interest method and is recognized in Comprehensive Income. profit or loss. The Company has not designated any financial 3.3.1.3 De –recognition liabilities upon initial recognition as at fair value through profit or loss. A financial asset (or, where applicable a part of a financial asset or part of a Company of similar 3.3.2.2.2 Loans and borrowings financial assets) is derecognized when: After initial recognition, interest bearing loans and borrowings are subsequently measured at • The rights to receive cash flows from the asset have amortized cost using the effective interest rate expired method. Gains and losses are recognized in the • The Company has transferred its rights to receive Statement of Comprehensive Income when the cash flows from the asset or has assumed an liabilities are derecognized as well as through the obligation to pay the received cash flows in full effective interest rate method (EIR) amortization process. without material delay to a third party under a ‘pass through’ arrangement; and either (a) the Amortized cost is calculated by taking into account Company has transferred substantially all the risks any discount or premium on acquisition and fees and rewards of the asset, or (b) the Company has or costs that are an integral part of the EIR. The neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred EIR amortization is included in finance costs in the control of the asset. Statement of Comprehensive Income.
Annual Report 2013/14 | 73 NOTES TO THE FINANCIAL STATEMENTS
3.3.2.3 De-recognition the end of each reporting period. Financial assets A financial liability is derecognized when the are considered to be impaired when there is obligation under the liability is discharged or objective evidence that as a result of one or more cancelled or expires. events that occurred after the initial recognition of the financial assets, the estimated future cash from 3.3.2.4 Offsetting of Financial Instruments the asset has been affected. Financial assets and financial liabilities are offset and the net amount reported in the Statement of The Company assesses at each reporting date Financial Position if, and only if, there is a currently whether there is any objective evidence that a enforceable legal right to offset the recognized financial asset or a Company of financial assets is amounts and there is an intention to settle on a net impaired. A financial asset or a Company of financial basis, or to realize the assets and settle the liabilities assets is deemed to be impaired if, and only if, there simultaneously. is objective evidence of impairment as a result of one or more events that have occurred after the 3.3.3 Amortized Cost Measurement initial recognition of the asset and that loss event The amortized cost of a financial asset or liability is had an impact on the estimated future cash flows the amount at which the financial asset or liability of the financial asset or the Company of financial is measured at initial recognition, minus principal assets that can be reliably estimated. repayments and any impairment and plus/minus the cumulative amortization using the effective 3.4.2 Impairment Losses on Financial Assets carried interest method of any difference between the initial at Amortized Cost amount recognized and the maturity amount, minus Impairment losses on assets carried at amortized any reduction for impairment. cost are measured as the difference between the carrying amount of the financial asset and 3.3.4 Fair Value Measurement the present value of estimated future cash flows Fair value is the amount for which an asset could discounted at the asset’s original effective interest be exchanged, or a liability settled, between rate. knowledgeable, willing parties in an arm’s length transaction on the measurement date. Impairment losses are recognized in profit or loss and reflected in an allowance account against loans The fair value of financial instruments that are and advances. When a subsequent event causes traded in an active market at each reporting date is the amount of impairment loss to decrease, the determined by reference to quoted market prices or dealer price quotations, without any deduction for decrease in impairment loss is reversed through transaction costs. profit or loss.
For financial instruments not traded in an active 3.4.3 Impairment Losses on Available-for-Sale Financial Assets market, the fair value is determined using appropriate valuation techniques. Such techniques Impairment losses on available-for-sale investment may include using recent arm’s length market. securities are recognized by transferring the cumulative loss that has been recognized in Transactions reference to the current fair value of other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss another instrument that is substantially the same; that is reclassified from other comprehensive a discounted cash flow analysis or other valuation income to profit or loss is the difference between models. the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any 3.4 Impairment impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable 3.4.1 Impairment of Non-derivative Financial Assets to time value are reflected as a component of Financial assets other than those measured at fair interest income. value are assessed for indicators of impairment at
74 | BRAC Lanka Finance PLC If, in a subsequent period, the fair value of an 3.6 Property, Plant & Equipment impaired available for- sale debt security increases Property, plant and equipment are tangible items and the increase can be objectively related to an that are held for use in the production or supply of event occurring after the impairment loss was goods or services or for administrative purposes recognized in profit or loss, the impairment loss is and are expected to be used during more than one reversed, with the amount of the reversal recognized period. in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale 3.6.1 Cost and Valuations equity security is recognized in other comprehensive (a) Cost Model income. The Company applies the Cost Model to all plant and 3.4.4 Impairment of Non-Financial Assets equipment which comprises the cost of purchase together with any incidental expenses thereon less The carrying amount of the Company’s non-financial accumulated depreciation and any accumulated assets other than inventories and deferred tax assets impairment losses. are reviewed at each reporting date to determine whether there is an indication of impairment. If any (b) Revaluation Model such indication exists or when annual impairment The company applies the Revaluation Model for the testing for an asset is required, then the asset’s entire class of freehold land and buildings. Such recoverable amount is estimated. The recoverable properties are carried at a revalued amount, being amount of an asset or cash-generating unit is the the fair value at the date of revaluation less any greater of its value in use and its fair value less costs subsequent accumulated depreciation on buildings to sell. In assessing value in use, the estimated future and any accumulated impairment losses charged cash flows are discounted to their present value subsequent to the date of valuation. using a pre-tax discount rate that reflects current market assessments of the time value of money Revaluation is made with sufficient regularity to and the risks specific to the asset. In determining ensure that their carrying amount does not differ fair value, less costs to sell, an appropriate valuation materially from their fair value as at the Balance model is used. Sheet date. On revaluation of an asset, any increase in the carrying amount is credited directly to equity, An impairment loss is recognized if the carrying under Revaluation Reserve or used to reverse a amount of an asset or cash-generating unit exceeds previous loss on revaluation of the same asset, its estimated recoverable amount. Impairment losses which was debited to the income statement. In this are recognized in profit and loss. An impairment circumstance, the increase is recognized as income loss is reversed if there has been a change in the only. estimates used to determine the recoverable amount. An impairment loss is reversed only to the to the extent of the previous written down. Any extent that the asset’s carrying amount does not decrease in the carrying amount is recognized as exceed the carrying amount that would have been an expense in the income Statement or debited determined, net of depreciation or amortization, if directly to revaluation reserve under equity only no impairment loss had been recognized. to the extent of any credit balance existing in that reserve in respect of that asset. Any balance 3.5 Cash and Cash Equivalents remaining in the revaluation surplus in respect of an Cash and cash equivalents comprise cash in hand, asset, is transferred directly to Retained Earnings on demand deposits and short-term highly liquid retirement or disposal of the asset. investments, readily convertible to known amounts of cash and subject to insignificant risk of changes 3.6.2 Subsequent Costs in value. For the purpose of cash flow statement, Expenditure incurred to replace a component of cash and cash equivalents consist of cash in hand an item of property, plant and equipment that is and deposits in banks net of outstanding bank accounted for separately, is capitalized with the overdrafts. Investments with short maturities, i.e. carrying amount of the component being written three months or less from the date of acquisition are off. Other subsequent expenditure is capitalized also treated as cash equivalent. only when it increases the future economic benefits
Annual Report 2013/14 | 75 NOTES TO THE FINANCIAL STATEMENTS
embodied in the item of property, plant and its use or disposal. The gain or loss arising from equipment. All other expenditure is recognized in the de-recognition of an item of Property, Plant & the income statement as an expense as incurred. Equipment is included in profit or loss when the item is derecognized. When replacement costs Expenditure incurred for the purpose of acquiring, are recognized in the carrying amount of an item extending or improving assets of a permanent of Property, Plant and Equipment, the remaining nature by means of which to carry on the business carrying amount of the replaced part is derecognized. or to increase the earning capacity of the business Major inspection costs are capitalized. At each such has been treated as capital expenditure. capitalization, the remaining carrying amount of the previous cost of inspections is derecognized. 3.6.3 Depreciation Depreciation is recognized in profit and loss on a 3.7 Leased Assets straight line basis over the estimated useful lives of Assets funded through finance leases are stated at each part of an item of property, plant and equipment an amount equal to the lower of its fair value and except for freehold buildings. Freehold buildings the present value of minimum lease payments at the are depreciated using a reducing balance method. inception, less accumulated depreciation and the Assets held under finance lease are depreciated resulting lease obligations are included in creditors over the shorter of the lease term and their useful net of finance charges. Lease payments consisting lives of equivalent owned assets. Freehold land is of capital and interest elements are charged to not depreciated. Income statement. Assets held under finance lease are amortized over the estimated useful lives unless The estimated useful lives are as follows: ownership is not transferred at the end of the lease period. In such case the assets are amortized over Buildings 10 years the shorter of lease term or their useful lives.
Furniture and Fittings 10 years 3.8 Investment Property
Office Equipment 10 years Investment property is property held either to earn rental income or for capital appreciation or Motor Vehicles 04 years for both, but not for sale in the ordinary course of the business, use in the production or supply of Plant and Machinery 03 years goods or services or for administrative purposes. Investment property is measured at cost on initial Depreciation of an asset commences when the recognition and subsequently at fair value. Formal asset is available for use and ceases at the earlier valuations are carried out annually by a qualified of the date in which the asset is derecognized and valuer and any change therein recognized in profit held for sale. Methods of depreciation, useful lives or loss. and residual values are reviewed at each reporting Investment Properties are derecognized when date and adjusted prospectively if appropriate, as disposed of, or permanently withdrawn from use changes in accounting estimates. because no future economic benefits are expected. 3.6.4 Gains and losses on disposal Any gains or losses arising from retirement or disposal are recognized in the income statement in Gains and losses on disposal of an item of property, the year of retirement of disposal. plant and equipment are determined by comparing the proceeds from disposal with the carrying When the use of the property changes such that it is amount of property, plant and equipment, and reclassified as property, plant and equipment, its fair are recognized net within “other income/other value at the date of reclassification becomes its cost expenses” in profit or loss. for subsequent accounting.
3.6.5 De-recognition 3.9 Intangible Assets The carrying amount of an item of Property, Plant An intangible asset is recognized if it is probable & Equipment is derecognized on disposal or when that future economic benefits will flow to the no future economic benefits are expected from entity and the cost of the asset can be measured
76 | BRAC Lanka Finance PLC reliably in accordance with LKAS 38 on Intangible 3.11 Stated Capital Assets. Intangible assets with finite useful lives are Ordinary shares are classified as equity. Incremental measured at cost less accumulated amortization costs directly attributable to the issue of ordinary and accumulated impairment losses. shares are recognized as a deduction from equity, net of any tax effects 3.9.1 Software All computer software cost incurred, which are 3.12 Provisions not internally related to associate hardware, which Provisions are recognized when the Company has can be clearly identified, reliably measured and a present legal or constructive obligation as a result its probable that they will lead to future economic of a past event, that can be measured reliably, and benefits, are included in the Statement of Financial it is probable that an outflow of economic benefits Position under the category of intangible assets. will be required to settle the obligation. Provisions 3.9.1.1 Subsequent Expenditure are determined by discounting the expected future Expenditure incurred on software is capitalized cash flows at a pre-tax rate that reflects current only when it increases the future economic benefits market assessments of the time value of money and embodied in the specific assets to which it relates. the risks specific to the liability. The unwinding of the All other expenditure is recognized in the income discount is recognized as finance cost. statement as incurred. 3.13 Capital Commitments and Contingencies Intangible assets with finite lives are amortized over Capital commitments and contingent liabilities of the useful economic life and assessed for impairment the Company are disclosed in the respective Notes whenever there is an indication that the intangible to the Financial Statement unless the outflow of asset may be impaired. The amortization period resource is remote. and the amortization method for an intangible asset with a finite useful life are reviewed at least at 3.14 Employee benefits each financial year-end. Changes in the expected useful life or the expected pattern of consumption 3.14.1 Short-term employee benefits of future economic benefits embodied in the asset Short term employee benefit obligations are is accounted for by changing the amortization measured on an undiscounted basis and are period or method, as appropriate, and treated as expensed as the related service is provided. A changes in accounting estimates. Amortization liability is recognized for the amount expected expense on intangible assets with finite lives is to be paid under short-term cash bonus or profit- recognized in profit or loss on a straight-line basis sharing plans if the Company has a present legal or over the estimated useful lives, from the date they constructive obligation to pay this amount as a result are available for use. of past service provided by the employee, and the The estimated useful lives of intangible assets with obligation can be estimated reliably. finite lives are as follows: 3.14.2 Defined Benefit plans The Class of Intangible Assets Useful Life The liability recognized in the Statement of Financial Position is the present value of the Defined Benefit Computer Software 20 years Obligation at the reporting date, with the advice of an actuary. The Company’s obligation in respect of 3.10 Inventories Defined Benefit Pension Plans is calculated annually using the Projected Unit Credit (PUC) Method as Inventories are measured at the lower of cost and recommended by LKAS 19 – Employee Benefits. net realizable value after making due allowances for Actuarial gains or losses arising are recognized obsolete & slow moving items. Net realizable value in other comprehensive income in the period in is the estimated selling price in the ordinary course which they arise. Past service costs are recognized of business, less the estimated costs necessary to immediately in the Statement of Comprehensive make the sale Income.
Annual Report 2013/14 | 77 NOTES TO THE FINANCIAL STATEMENTS
The provision has been made for retirement revenue as it is earned, using the effective interest gratuities from the first year of service for all rate method. employees, in conformity with LKAS 19 – ‘Employee Benefits’. However, under the Payment of Gratuity (a) Interest Act No. 12 of 1983, the liability to an employee Interest income and expense are recognized in arises only on completion of 5 years of continued profit or loss using the effective interest method. service. The effective interest rate is the rate that exactly 3.14.3 Defined Contribution Plan discounts the estimated future cash payments and receipts through the expected life of the financial A defined contribution plan is a post-employment benefit plan under which an entity pays fixed assets or liability (or, where appropriate, a shorter contributions into a separate entity and has no period) to the carrying amount of the financial asset legal or constructive obligation to pay further or liability. When calculating the effective interest amounts. Obligations for contributions to defined rate, the Company estimates future cash flows contribution plans are recognized as an employee considering all contractual terms of the financial benefit expense in profit or loss in the periods during instruments, but not future credit losses. which related services are rendered by employees. Prepaid contributions are recognized as an asset to The calculation of the effective interest rate includes the extent that a cash refund or a reduction in future all transaction costs and fees and points paid or payments is available. received that are an integral part of the effective interest rate. Transaction costs include incremental 3.14.4 Employees’ Provident Fund costs that are directly attributable to the acquisition The Company and employees contribute 15% and or issue of a financial asset or liability. 10% respectively of the employee’s monthly gross salary (excluding overtime) to the Provident Fund. Interest income and expense presented in the The Company’s Provident Fund is an approved fund statement of comprehensive income includes: under the Employees’ Provident Fund Act. • Interest on financial assets and financial liabilities 3.14.5 Employees’ Trust Fund measured at amortized cost calculated on an The Company contributes 3% of the salary of each effective interest basis; employee to the Employees’ Trust Fund. The total amount recognized as an expense to the Company • Interest on available-for-sale investment securities for contribution to ETF is disclosed in the notes to calculated on an effective interest basis; Financial Statements. (b) Fees and commission 3.15 STATEMENT OF COMPREHENSIVE INCOME Fees and commission income and expense that are 3.15.1 Revenue Recognition integral to the effective interest rate on a financial Revenue is recognized to the extent that it is asset or liability are included in the measurement of probable that the economic benefits will flow to the effective interest rate. the Company and the revenue and associated costs incurred or to be incurred can be reliably Other fees and commission income, including measured. Revenue is measured at the fair value account servicing fees, are recognized as the related of the consideration received or receivable, net of services are performed. returns, trade discounts and turnover taxes. The Other fees and commission expense relate mainly following specific criteria are used for the purpose to transactions and service fees, which are expensed of recognition of revenue. as the services are received. 3.15.1.1 Hire Purchase, Lease and Loans & Advances (c) Dividends The excess of aggregated contract receivables Dividend income is recognized when the right to over the cost of the hired assets constitutes the receive income is established. total unearned income at the commencement of (d) Others a contract. The unearned income is recognized as Other income is recognized on an accrual basis.
78 | BRAC Lanka Finance PLC 3.15.2 Expenditure Recognition A deferred tax asset is recognized for unused tax Expenses are recognized in profit or loss on the basis losses and deductible temporary differences, to of a direct association between the cost incurred the extent that it is probable that future taxable and the earning of specific items of income. All profits will be available against which they canbe expenditure incurred in the running of the business utilized. The carrying amount of deferred tax assets and in maintaining the Property, Plant & Equipment is reviewed at each reporting date and is reduced in a state of efficiency has been charged to income to the extent that it is no longer probable that the in arriving at the (loss) for the period. related tax benefit will be realized.
3.15.2.1 Finance Lease 3.15.2.3 Borrowing Costs. Minimum lease payments made under finance Borrowing costs are recognized as an expense in leases are apportioned between the finance the period in which they are incurred. expense and the reduction of the outstanding 3.15.2.4 Events after the Reporting Period liability. The finance expense is allocated to each period during the lease term so as to produce a All material events after the reporting date have constant periodic rate of interest on the remaining been considered and where necessary adjustments balance of the liability. made in these Financial Statements.
3.15.2.2 Taxation 3.15.2.5 Earnings per Share Income tax expense comprises both current and The company presents basic Earnings per Share deferred tax. Income tax expense is recognized in (EPS) for its ordinary shares. Basic EPS is calculated profit and loss, except to the extent that it relates by dividing the profit or loss attributable to ordinary to items recognized directly in equity, or in other shareholders of the Company by the weighted comprehensive income. number of ordinary shares outstanding during the period. a) Current Taxes 3.15.3 Cash Flow Statement The current tax is the expected tax payable on the taxable income for the period, using tax rates The cash flow statement has been prepared using enacted or substantially enacted at the reporting the direct method. For the purpose of cash flow date, and any adjustment to tax payable in respect statement, cash and cash equivalents consists of of previous years. Current tax payable also includes cash in hand, and Fixed Deposits. any tax liability arising from the declaration of dividends. 3.16 New Accounting Standards Issued But Not Yet Effective b) Deferred Taxation Standard issued but not yet effective up to the date Deferred tax is recognized in respect of temporary of issuance of the Company’s financial statements differences between the carrying amount of assets are listed below. This listing is of standards issued, and liabilities for financial reporting purposes and which the Company reasonably expects to be the amounts used for taxation purposes. applicable at a future date. The Company intends to adopt those standards when they become effective. The measurement of deferred tax reflects the tax consequences that would follow the manner in a) SLFRS 9 – Financial Instruments which the Company expects, at the end of the SLFRS 9 as issued reflects the replacement of LKAS reporting period, to recover or settle the carrying 39 and applies to the classification and measurement amount of its assets and liabilities. of financial assets and financial liabilities as defined in LKAS 39. This standard becomes effective for Deferred tax is measured at the tax rates that are annual periods beginning on or after January 01, expected to be applied to temporary differences 2015. The adoption of SLFRS 9 will have an impact when they reverse, based on tax laws that have been on classification and measurement of Company’s enacted or substantively enacted by the reporting financial assets. date.
Annual Report 2013/14 | 79 NOTES TO THE FINANCIAL STATEMENTS
b) SLFRS 10 – Consolidated Financial Statements This note presents information about the Company’s SLFRS 10 replaces the portion of LKAS 27 exposure to each of the above risks, the Company’s Consolidated and Separate Financial Statements objectives, policies and processes for measuring and that address the accounting for Consolidated managing risk and the Company’s management of Financial Statements. SLFRS 10 establishes a single capital. Further quantitative disclosures are included control model that applies to all entities including throughout these Financial Statements. special purposes entities. The changes introduced by SLFRS 10 will require management to exercise 3.17.2 Risk Management Framework significant judgment to determine which entitles The Board of Directors has overall responsibility for are controlled and therefore are required to be the establishment and oversight of the Company’s consolidated by the parent. This standard becomes risk management framework. The Company’s risk effective for annual periods beginning on or after management policies are established to identify January 01, 2014. and analyze the risks faced by the Company, to set appropriate risk limits and controls and to monitor c) SLFRS 11 – Joint Agreements risks and adherence to limits. SLFRS 11 replaces LKAS 31 Interest in Joint Ventures and removes the option to account jointly control Risk management policies and systems are reviewed entities using proportionate consolidation. Under regularly to reflect changes in market conditions the new standards joint ventures must be accounted and the Company’s activities. The Board of Directors for using the equity method. This standard becomes oversees how management monitors compliance effective for annual periods beginning on or after with the Company’s risk management policies and January 01, 2014. procedures and reviews the adequacy of the risk d) SLFRS 12 – Disclosure of interest in other entities management framework in relation to the risks faced by the Company. The Company’s Directors SLFRS 12 includes all of the disclosures that were are assisted in their oversight role by Internal previously in LKAS 27 related to consolidated Audit. Internal Audit undertakes both regular and financial statements, as well as all of the disclosures ad hoc reviews of risk management controls and that were previously included in LKAS 31 and LKAS procedures, the results of which are reported to the 28. A number of new disclosures are also required. Company’s Directors. This standard becomes effective for annual periods beginning on or after January 01, 2014. a) Credit Risk e) SLFRS 13 – Fair Value Measurement Credit risk is the risk of financial loss to the SLFRS 13 establishes a single source of guidance Company if a customer or counterparty to a financial under SLFRS for all fair value measurements. SLFRS instrument fails to meet its contractual obligations 13 does not state when an entity is required use fair and arises principally from the Company’s trade and value, but provides guidance on how to measure other receivables. fair value under SLFRS when fair value is required or permitted. This standard becomes effective for Treasury Bills annual period beginning on or after January 01, The Company invests not less than 7.5% of the 2014. Public Deposits in Treasury Bills to comply with the Central Bank of Sri Lanka Direction No. 1 of 2009. 3.17 Financial Risk Management Loans and advances to Customers 3.17.1 Financial Risk Management Overview The Company’s exposure to credit risk relates to The Company has exposure to the following risks sale of products on installment credit/hire purchase from its use of financial instruments: which is an integral part of the business of the Company. • Credit risk
• Liquidity risk The Company’s exposure to credit risk on instalment • Market risk credit/ hire purchase contracts is influenced mainly • Interest rate by the individual characteristics of each customer. The demographics of the Company’s customer • Operational risk
80 | BRAC Lanka Finance PLC base, including the default risk of the country in and generally accepted standards of corporate which customers reside, has a lesser influence on behaviour. Operational risks arise from operations credit risk. Geographically, there is no concentration of the company. of credit risk. Goods are sold, subject to collateral undertakings so that in the event of non-payment, The Company’s objective is to manage operational the Company can have a secured claim. risk so as to balance the avoidance of financial losses and damage to the Company’s reputation The Company assesses the impairment of Loans with overall cost effectiveness and to avoid control and Advances to customers on a collective basis. In procedures that restrict initiative and creativity. assessing collective impairment the Company uses historical trends of the probability of default, timing The primary responsibility for the development of recoveries and the amount of losses incurred, and implementation of controls to address adjusted for management’s judgment as to whether operational risk is assigned to senior management current economic and credit conditions are such of the company. This responsibility is supported that the actual losses are likely to be greater or less by the development of company standards for the than suggested by historical data. Default rates, loss management of operational risk in the following rates and expected timing of future recoveries are areas: regularly benchmarked against actual outcomes to ensure that they remain appropriate. • Requirements for appropriate segregation of duties, including the independent authorization of b) Liquidity Risk transactions. Liquidity risk is the risk that the Company will not be • Requirements for the reconciliation and monitoring able to meet its financial obligations as they fall due. of transactions. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have • Compliance with regulatory and other legal sufficient liquidity to meet its liabilities when due, requirements. under both normal and stressed conditions, without incurring unacceptable losses or risking damage to • Documentation of controls and procedures the Company’s reputation. • Requirements for the periodic assessment of c) Market Risk operational risks faced and the adequacy of controls Market risk is the risk that changes in market prices, and procedures to address the risks identified. such as foreign exchange rates, Government Duties and interest rates will affect the Company’s income. • Requirements for the reporting of operational losses The objective of market risk management is to and proposed remedial action. manage and control market risk exposures within acceptable parameters, while optimizing the return. • Development of contingency plans.
d) Interest Rate Risk • Training and professional development. The Company manages interest rate risk on • Ethical and business standards. borrowings by using a combination of fixed and floating interest rates. • Risk mitigation, including insurance where this is effective e) Operational Risk Operational risk is the risk of direct or indirect loss Compliance with Company standards is supported arising from a wide variety of causes associated with by a programme of periodic reviews undertaken by the Company’s processes, personnel, technology Internal Audit. The results of Internal Audit reviews and infrastructure and from external factors other are discussed with the management of the business than credit, market and liquidity risks such as those unit to which they relate Senior Management of the arising from legal and regulatory requirements company and the Board of Directors.
Annual Report 2013/14 | 81 NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST MARCH 2014 2013 Rs. Rs.
4 Interest Income Hire Purchase Interest Income 35,031,823 36,404,244 Leasing Interest Income 16,726,365 8,648,419 Secured Loans Interest Income 20,468,583 18,265,196 Overdue Rentals and Finance Charges 11,697,813 9,014,750 Interest Income on Government Securities and Deposits with Banks (Note 4.1) 5,121,737 1,228,188 Interest on Microfinance Group Loans 11,849,883 - Gross Interest 100,896,204 73,560,797 Less : VAT on Financial Services (4,201,334) (4,682,293) Nation Building Tax (64,377) - Net Interest 96,630,493 68,878,504
4.1 Notional Credit for Withholding Tax on Government Securities on Secondary Market Transactions Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a Company which derives interest income from the secondary market transactions in Government securities be entitled to a notional tax credit (being one ninth of the net interest income), provided such interest income forms part of the statutory income of the Company for that year of assessment.
5 Interest Expense Interest on Customer Deposits 14,523,536 11,073,595 Interest on Borrowings 2,934,647 420,625 Interest on Related Party Loans 2,870,687 - 20,328,870 11,494,220
6 Other Income Rent Income 8,874,507 7,301,238 Dividend Received 19,800 19,800 Sundry Income 586,394 159,445 Profit on Sale of Property Plant and Equipment - 1,656,920 Commissions Received on Insurance 306,645 412,951 Profit on sale of Threewheel Stock 10,830 550,756 Exchange Gain 65,000 - Creditors Written back 529,389 472,663 10,392,565 10,573,773
7 (Provision) / Reversal for Losses on Loans and Inventory Impairment Provision/(Reversal) for Hire Purchase Rental Receivable 1,112,338 (2,541,787) Impairment Provision/(Reversal) for Lease Rental Receivable 719,941 499,424 Impairment Provision/(Reversal) for Loan Rental Receivable (1,351,233) 1,013,077 Provision made for Re-possessed Assets 5,594,269 - Provision Reversal on Sale of Re- Possessed Assets (1,065,773) - 5,009,542 (1,029,286)
82 | BRAC Lanka Finance PLC FOR THE YEAR ENDED 31ST MARCH 2014 2013 Rs. Rs.
8 Profit from operations before loan loss provision & tax is stated after charging all the expenses including the following. Directors’ Emoluments 726,742 1,736,133 Directors’ Fees 127,500 405,000 Legal Expenses 345,987 783,810 Secretarial Fees 407,318 252,538 Auditors’ Remuneration - Statutory Audit 400,000 350,000 Donations 25,000 86,600 Staff Related Cost; Salaries, Wages and Bonus 23,729,961 11,532,978 Defined Contribution Plan Cost -EPF/ETF 2,278,980 1,406,869 Defined Benefit Plan Cost - Retiring gratuity 1,518,287 752,081 VAT on Financial Services (Note 8.1) 4,201,334 4,682,293
8.1 The value base for Value Added Tax for the Company is the adjusted accounting profit before tax and emoluments paid to employees. The adjustment to the accounting profit before tax is for economic depreciation computed on prescribed rates, instead of the rates adopted in the financial statements. The tax rate of 20% commencing from 1st January 2006 was decreased to 12% from 1st January 2011.
9 Income Tax Expense 9.1 Tax on Profit for the Year 7,520,816 3,077,513 (Over) / Under Provision in Respect of Previous Year (186,733) (4,613,669) Deferred Tax Expense (Note 27) 520,870 4,470,161 Total Income Tax Expense 7,854,953 2,934,004
9.2 Reconciliation of Accounting Profit and Taxable Income Accounting profit 21,771,312 31,464,515 Less:- Non - Business Income (18,253,973) (13,746,305) 3,517,339 17,718,210 Aggregate Disallowed Items 16,309,420 16,365,285 Aggregate Allowable Items (6,050,586) (7,415,555) Taxable Business Profit 13,776,173 26,667,940 Non Business Income 13,083,885 4,107,185 Taxable Income 26,860,058 30,775,126
Income Tax @ 28% (Tax Rate for 2012/2013 was 10%) 7,520,816 3,077,513 7,520,816 3,077,513
The provision for income tax is based on the elements of income and expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act No.10 of 2006 and subsequent amendments thereto. In terms of the section 59B of the Inland Revenue Act No. 10 of 2006 newly introduced by the Inland Revenue (Amendment) Act No. 22 of 2011, the Company is liable for income tax at 10% on its taxable income for any year of assessment commencing on or after April 1, 2011 on the basis that its annual turnover does not exceed Rs. 300 Mn. However this will not be applicable for a group of company. As such for the year of assessment 2013/2014 this concession will not be applicable for the company since it is a group of company from 26th June 2013.
Annual Report 2013/14 | 83 NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST MARCH 2014 2013 Rs. Rs.
9.3 Reconciliation of Tax Loss from Leasing Business Loss Brought Forward - 2,101,780 Loss during the year - - Set-off against current tax expense - (2,101,780) Loss Carried Forward - -
10 Basic Earnings per Share The calculation of basic earnings per share is based on the profit attributable to ordinary shareholders for the year divided by the weighted average number of ordinary shares outstanding during the year and is calculated as follows,
Profit Attributable to the Ordinary Shareholders for the year (Rs.) 13,916,359 28,530,511 Weighted Average number of Ordinary Shares outstanding during the year 101,958,443 100,716,730 Basic Earnings per Share (Rs.) 0.14 0.28
10.1 Calculation of Weighted Average Number of Ordinary Shares Weighted average number of ordinary shares at the beginning of the year 100,716,730 100,716,730 Effect of the right issue 1,241,713 - Weighted average number of ordinary shares at the ending of the year 101,958,443 100,716,730
AS AT 31ST MARCH
11 Cash and Cash Equivalents - 3 months renewable Favourable Balance Fixed deposits with bank - 13,437,041 Cash at bank 40,592,002 25,041,485 Cash in hand 369,053 70,000 Cash in Transit 50,000,000 90,961,055 38,548,526 Unfavourable Balance Bank Overdraft (49,868,105) - Cash and cash equivalents for the purpose of Statement of Cash Flow 41,092,950 38,548,526
12 Fixed Deposits with Bank Fixed Deposits - BOC 4,168,574 - USD Fixed Deposit at - HNB 130,730,000 - Commercial Bank USD F/D 130,730,000 - Seylan Bank USD F/D 130,730,000 - 396,358,574 -
13 Investment in Government Securities Treasury Bills - Face Value 14,942,833 5,254,483 Less: Interest in Suspense (146,168) (43,742) 14,796,665 5,210,741
84 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014 2013 Rs. Rs.
14 Investment Securities - Unquoted 110 Shares of Rs.100/- each in Credit Investment Bureau of Sri Lanka 11,000 11,000 20,000 Shares of Rs.10/- each in Finance Houses Consortium (Pvt) Ltd. 200,000 200,000 211,000 211,000
14.1 Non-Performing Investments Included in the above 20,000 Shares of Rs.10/- each in Finance Houses Consortium (Pvt) Ltd. 200,000 200,000 200,000 200,000
15 Receivable on Hire-Purchase 15.1 Future Rentals Receivable Rentals Receivable 128,629,477 201,475,114 Less : Un-earned Finance Income (31,882,629) (55,932,685) 96,746,848 145,542,429
15.2 Overdue rental receivable Hire Purchase Debtors 16,115,135 13,709,833 (Less) Provision for Impairment (6,725,044) (5,612,706) 9,390,091 8,097,127 Total Receivable 106,136,939 153,639,556
16 Receivable on Lease 16.1 Future Rentals Receivable Rentals Receivable 96,063,857 69,580,598 Less : Un-earned Finance Income (27,917,895) (21,820,892) 68,145,962 47,759,706
16.2 Overdue rental receivable Lease Debtors 4,814,591 1,361,877 (Less) Provision for Impairment (1,219,364) (499,423) 3,595,227 862,454 Total Receivable 71,741,189 48,622,160
Annual Report 2013/14 | 85 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014 2013 Rs. Rs.
17 Receivable on Secured Loans Future Rentals Receivable 207,865,358 117,295,560 Secured Loan Debtors 14,860,710 7,188,722 Loans Secured by Fixed Deposits 258,081 440,000 Microfinance Group Loans 736,945,328 - Less : Un-earned Finance Income (48,015,113) (33,720,485) Provision for Impairment (3,177,188) (4,528,421) 908,737,176 86,675,376
18 Other Receivables Value Added Tax Recoverable 1,858,337 1,683,139 Notional Tax Receivable - 64,377 Shop Rent Receivable 3,332,159 2,126,816 Interest Receivable on Fixed Deposits 1,430,853 226,923 Others 65,140 121,000 6,686,489 4,222,255
19 Inventory Re-Possessed Assets 18,892,071 4,415,413 Less: Provision for decrease in value (5,635,916) (2,173,191) 13,256,155 2,242,222
20 Property, Plant and Equipment 20.1 Cost/ Valuation Balance Additions Surplus on Disposals Balance as at during Revaluation Transfer as at 1-Apr-13 the year During 31-Mar-14 the year Rs. Rs. Rs. Rs. Rs.
Land 61,031,780 - - - 61,031,780 Buildings 16,980,616 - 492,192 4,203,700 21,676,508 Motor Vehicles - Freehold 8,786,446 2,736,000 - - 11,522,446 Furniture and Fittings 4,203,118 4,006,575 - - 8,209,693 Office Equipments 5,044,156 6,878,220 - - 11,922,376 Plant and Machinery 2,186,033 - - - 2,186,033 Total Cost 98,232,149 13,620,795 492,192 4,203,700 116,548,836
86 | BRAC Lanka Finance PLC AS AT 31ST MARCH
20.2 Accumulated Depreciation Balance Charge Surplus on Disposals Balance as at for the Revaluation Transfer as at 1-Apr-13 year During 31-Mar-14 the year Rs. Rs. Rs. Rs. Rs.
Buildings - 1,815,457 (1,273,544) - 541,913 Motor Vehicles - Freehold 6,654,625 1,458,362 - - 8,112,987 Furniture and Fittings 2,201,773 446,580 - - 2,648,353 Office Equipments 2,794,539 614,726 - - 3,409,265 Plant and Machinery 1,753,618 227,162 - - 1,980,780 Total Accumulated Depreciation 13,404,555 4,562,287 (1,273,544) - 16,693,298
Written Down Value 84,827,594 99,855,538
20.3 The land and building were valued as at 31st December 2013 by Mr. N.M. Jayatilake, Incorporated valuer. The surplus on revaluation was incorporated in the financial statements from its effective date which is 31st December 2013. Such assets were valued on an open market value for existing use basis, the surplus arising from the revaluation was transferred to the revaluation reserve.
Method of Valuation Valuer Revalued Market Company Properties Valuation as at Amount Value Rs. Rs.
Building constructed on land at Contractor’s 31-Dec-13 Mr. N.M. 82,708,288 82,708,288 No: 25, Dr. C.W.W. Kannangara Mawatha, Test Jayatilake Colombo 7.
20.4 The cost of the fully depriciated assets as at reporting date is as follows.
2014 2013 Rs. Rs.
Motor Vehicles 5,740,000 3,994,445 Furniture and Fittings 1,297,771 1,149,157 Office Equipments 1,662,165 1,662,165 Plant and Machinery 1,504,547 1,504,547 Total 10,204,483 8,310,314
21 Intangible Assets - Computer Software Cost/Valuation Balance at the beginning of the year 1,595,445 1,501,573 Add: Additions during the year - 93,872 Balance at the end of the year 1,595,445 1,595,445
Accumulated Amortization Balance at the beginning of the year 450,107 281,156 Amortization for the year 72,504 168,951 Balance at the end of the year 522,611 450,107 Written Down Value 1,072,834 1,145,338
Annual Report 2013/14 | 87 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014 2013 Rs. Rs.
22 Investment Property Fair Value at the beginning of the year 238,987,604 235,137,706 Change in Fair Value during the year 1,507,808 3,849,898 Transfer to property, plant and equipment (4,203,700) Fair Value at the end of the year 236,291,712 238,987,604
22.1 In accordance with the Sri Lanka Accounting Standard (LKAS) 40 - Investment Property, the commercial property of the Company was classified as Investment Property.
22.2 With effect from 1st of January 2014 part of the Investment property (662 Sq feet at a rate of Rs. 6350/- per Sq feet) has been reclassified as Property plant and equipment based on the fair value of the date of reclassification.
22.3 In order to adopt the Fair Value model on Investment Property, Land and Building related to Investment Property was valued by Mr. N.M. Jayatilake, an Incorporated Valuer & a registered member of the Institute of Valuers of Sri Lanka, as at 31st December 2013. Such assets were valued on an open market value for existing use basis, the surplus arising from the revaluation amounting to Rs. 1,507,808/- (2013 March - Rs. 3,849,898/-) was transferred to the Statement of Comprehensive Income as gain on change in Fair Value of Investment Property.
22.4 In the opinion of the Directors of the Company the Fair Value of Investment Property as at 31st March 2014 amounted to Rs. 236,291,712/- (2013 March - Rs. 238,987,604/-).
22.5 The company earned rental income of Rs. 8,874,507/- (2012/13 - Rs.7,301,238/-) during the financial year by renting out the Building and Land. Direct cost incurred during the year is Rs. 667,760/-. ( 2012/13 Rs. 549,628/-)
2014 2013 Rs. Rs. Restated
23 Deposits from Customers Fixed Deposits 105,476,750 88,287,900 Add: Interest accrued 6,183,337 9,353,396 111,660,087 97,641,296
24 Interest Bearing Loans and Borrowings Balance at the beginning of the year 1,880,386 3,897,724 Add: Loans obtained during the year (24.3) 666,253,245 - 668,133,631 3,897,724 Less: Loans repaid during the year (915,049) (2,017,338) Balance at the end of the year 667,218,582 1,880,386
24.1 Payable within One Year Gross Loan Obligation 131,751,670 2,301,608 Less: Interest in Suspense (25,223,088) (421,222) Net Loan Obligation 106,528,582 1,880,386
24.2 Payable After One Year Gross Loan Obligation 584,749,500 - Less: Interest in Suspense (24,059,500) - Net Loan Obligation 560,690,000 - Total Net Obligation 667,218,582 1,880,386
88 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014 24.3 Company has entered into a loan agreement with Seylan Bank PLC to borrow Rs.100,000,000/- at a rate of 9.5% per annum to be settled within 12 months. The loan was secured through a Fixed deposit bearing number CGD/14/448503 amounting to USD 1,000,000/-.
Company has entered into loan agreements with Hatton National Bank to borrow Rs. 57,600,000/-, Rs. 6,400,000/- and Rs. 54,500,000/- at the rates of 12%,12.5% and 10.5% per annum respectively to be settled in 2 years .The loans are secured through Fixed deposits bearing number 076921014570 and 076921014563 total amounting to USD 1,000,000/-.
Company has entered into a loan agreement with Commercial Bank to borrow 130,000,000/- at a rates of 9.75% , 10.25% and 11% in year -1 ,year -2 and year - 3 per annum respectively and to be settled within three years as bullet payment being the first instalment of said loan company received Rs. 50,000,000/- as at 31/3/2014. The Loan was secured through a Fixed Deposit bearing number 3010003033 amounting to USD 1,000,000/-.
24.4 Company has entered into a Loan Agreement with BRAC International BV under External Commercial Borrowing Scheme (ECBS) to borrow USD 7,000,000/- and an amount of USD 3,000,000/- has been received up to 31/03/2014 at a rate of 7% per annum.
2014 2013 Rs. Rs.
25 Trade Payables BRAC Lanka (Guarantee ) Limited 481,988,829 -
25.1 During the current financial year, BRAC Lanka (Guarantee) Limited, customers with facilities amounting to Rs 732,148,869/- have approached BRAC Lanka Finance PLC for new facilities and the Company has settled Rs. 250,160,040/- to BRAC Lanka (Guarantee) Limited on request of their Customers. Balance amounting to Rs.481,988,829/- is payable as at 31st March 2014.
2014 2013 Rs. Rs.
26 Accrued Charges and Other Payables Accrued Expenses 3,510,065 936,234 Rent Received in Advance 3,751,392 3,907,914 Hire Purchase Rentals Received in Advance 1,159,166 292,916 Tax Payable 822,407 1,467,384 VAT Payable on Financial services 656,527 347,935 Payable to Software Vendor 266,100 266,100 Professional Fee Payable 595,121 350,000 Other Payables 4,087,843 759,910 Payable to suppliers 3,687,681 10,180,000 Withholding Tax payable 498,449 - 19,034,751 18,508,393
Annual Report 2013/14 | 89 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014
2014 2013 Rs. Rs.
27 Retirement Benefit Obligation Balance as at 1st of April 2013 4,423,733 3,984,852 Provision made during the year 2,456,452 438,881 Benefit paid by the plan (134,418) - Balance at the end of the year 6,745,767 4,423,733
The amount recognized in the Statement of Financial Position are as follows Present value of unfunded obligation - - Recognised liability for defined benefit obligation 6,745,767 4,423,733 6,745,767 4,423,733
Movement in the present value of the defined benefit Obligation Balance as at 1 st April 4,423,733 3,984,852 Current Service Cost 1,075,914 353,596 Interest Cost 442,373 398,485 Actuarial (Gains)/ Losses 938,165 (313,200) 6,880,185 4,423,733 Benefit paid by the plan (134,418) - Liability for Defined benefit obligation as at 31st March 6,745,767 4,423,733
Expense recognized in Statement of Comprehensive Income Current service cost 1,075,914 353,596 Interest cost 442,373 398,485 1,518,287 752,081
Expense recognized in Statement of Other Comprehensive Income Unrecognized net (gains) / Losses 938,165 (313,200) 938,165 (313,200)
The actuarial valuation was carried out by a professionally qualified actuary of Actuarial and Management Consultants (Pvt) Ltd for retirement gratuity for employees as at 31st March 2014.
2014 2013 (i) Discount Rate (per annum) : 10% 11.0% (ii) Rate of Salary Increase (per annum) : 10% 10.0% (iii) Age of Retirement (years) 60 60 (iv) Staff Turnover Factor (per annum) (%) : 0% 0%
90 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014
28 Deferred Tax Liability Deferred Tax is provided using the Liability Method, for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes at the rate of 28%.
2014 2013 Restated Rs. Rs.
Balance at the Beginning of the Year 17,214,887 12,025,097 Deferred Tax on revaluation 494,406 719,629 Origination/ (Reversal) during the year 520,870 4,470,161 Balance at the End of the Year 18,230,163 17,214,887
Deferred Tax Liability as at the year end is made up as follows, 2014 2013 Temporary Tax Effect on Temporary Tax Effect on Difference Temporary Difference Temporary Difference Difference
On Property, Plant & Equipment 5,828,798 1,632,063 (213,297) (59,723) On Leased Assets 6,820,272 1,909,676 7,505,233 2,101,465 On Investment Property 49,191,424 13,773,599 52,019,384 14,565,428 On revalued Building 21,134,595 5,917,687 16,980,616 4,754,572 On Retirement Gratuity Obligation (6,745,767) (1,888,815) (4,423,733) (1,238,645) General Provisions on impairment (11,121,596) (3,114,047) (10,386,464) (2,908,210) 65,107,726 18,230,163 61,481,739 17,214,887
2014 2013 Rs. Rs.
29 Stated Capital Balance at the beginning of the year (100,716,730 no. of Ordinary Shares) 125,857,930 125,857,930 Issue of shares during the year (5.035,836 number of Ordinary shares) 45,322,524 - Balance at the end of the year (105,752,566 no. of Ordinary Shares) 171,180,454 125,857,930
29.1 According to ordinary resolution adopted at an Extra Ordinary General Meeting held on 27th November 2013 company has issued 5,035,836 shares through a right issue for a consideration of Rs. 45,322,524/-.
30 Reserve fund The reserve fund is maintained in compliance with Direction No. 1 of 2003 Central Bank of Sri Lanka (Capital Funds) issued to finance Companies.
Annual Report 2013/14 | 91 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014
31 Segment Reporting Rs. For the year ended 31st March 2014 Finance Hire Term Loan Unallocated Total Lease Purchase
Revenue 16,726,365 35,031,823 32,318,466 23,598,186 107,674,840 Investment Income 5,121,737 5,121,737 16,726,365 35,031,823 32,318,466 28,719,923 112,796,577 Percentage 15% 31% 29% 25% 100%
Expenditure Interest Expenses 3,014,525 6,313,643 5,824,626 5,176,075 20,328,870 Depreciation - - - 4,634,790 4,634,790 Unallocated Expenses 61,795,895 61,795,895 Total Expenses 3,014,525 6,313,643 5,824,626 71,606,760 86,759,554 Profit Before Taxation 13,711,840 28,718,179 26,493,840 (42,886,837) 26,037,023 VAT on Financial Institution (4,265,711) Profit on Ordinary Activities before Income Tax 21,771,312 Income Tax on Profit on Ordinary Activities 7,854,953 Profit After Income Tax 13,916,359
Rs. For the year ended 31st March 2013 Finance Hire Term Loan Unallocated Total Lease Purchase
Revenue 8,648,419 36,404,244 18,265,196 23,438,421 86,756,280 Investment Income 1,228,188 1,228,188 8,648,419 36,404,244 18,265,196 24,666,609 87,984,468 Percentage 10% 41% 21% 28% 100%
Expenditure Interest Expenses 1,129,822 4,755,821 2,386,151 3,222,426 11,494,220 Depreciation - - - 5,341,682 5,341,682 Unallocated Expenses - - - 35,001,759 35,001,759 Total Expenses 1,129,822 4,755,821 2,386,151 43,565,867 51,837,661 Profit Before Taxation 7,518,596 31,648,423 15,879,045 (18,899,258) 36,146,807 VAT on Financial Institution (4,682,293) Profit on Ordinary Activities Before Tax 31,464,514 Income Tax on Profit on Ordinary Activities (2,934,004) Profit After Tax 28,530,511
32 Capital Commitments On 12th September 2013, the Board of Directors has approved the purchase and implementation of the software, sbiCloud, for the Microfinance business, amounting to USD 151,210. However as at the reporting date the Company has not entered in to agreement with vendor other than that there are no material capital commitments which have been approved or contracted for as at the date of Statement of Financial Position.
33 Contingent Liabilities There are no material contingent liabilities which would require adjustments to or disclosures in the Financial Statements.
92 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014
34 Events Occurring After The Reporting Period No circumstance have arisen since the Balance Sheet date which would require adjustments to or disclosure in the financial statements.
35 Related Party Disclosures Transactions with Key Management Personnel According to Sri Lanka Accounting Standard (LKAS) 24 ‘Related Party Disclosures’, key management personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity and their close family members. Accordingly, the Board of Directors (including Executive and Non-Executive) and their close family members have been identified as key management personnel of the Company. Independent transaction with Key Management Personnel, and any transactions with their close family members are disclosed as follows,
(i) Loans to Directors No loans have been given to the Directors of the company.
(ii) Key Management Personnel Compensation The following are the details of Key Management Personnel compensation.
2014 2013 Rs. Rs.
Directors Emoluments Salary 726,742 1,916,133 Directors Fees 127,500 322,500
Transactions with Directors or Close Family Members Deposits kept by Directors - 8,212,000 Deposits kept by Directors’ close family members - 15,524,950
(iii) Other Transactions with Key Management Personnel Deposit kept by close family members of key Managers 4,750,000 -
(iv) Transactions with Related Parties
Name of the Company Names of Directors Nature of Amount and Relationship Transaction 2014 2013
BRAC International BV Sir. Fazle Hasan Abed Loan Received 395,060,688 - Dr. Mahabub Hossain Ms. Susan Davis Ms. Sylvia Borren M/s. Orangefield Trust (Netherlands) B.V.
BRAC Lanka (Guarantee) Limited Sir Fazle Hasan Abed Microfinance Loans introduce 732,148,869 Dr. Mahabub Hossain Settlement (250,160,040) Mr. Muhammad A Rumee Ali Loan Granted 79,000,000 - Mr. Faruque Ahmad Mr. S.N Kairy Mr. Tanwir Rahman
Seylan Bank PLC Mr. W. D. K. Jayawardena Loan Received 100,000,000 Mr. I. C. Nanayakkara
Annual Report 2013/14 | 93 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014
36 Maturity of Assets and Liabilities An analysis of the total assets employed and total liabilities as at the year end, based on the remaining period at the Balance Sheet date to the respective contractual maturity dates are given below.
Less than 3 - 12 1 - 3 Over 3 Months Months Years 3 Years Total Rs. Rs. Rs. Rs. Rs.
Assets Cash and Cash Equivalents 90,961,055 - - - 90,961,055 Fixed Deposits 4,168,574 - 392,190,000 - 396,358,574 Investment in Government Securities 14,796,665 - - - 14,796,665 Investment Securities - unquoted - - - 211,000 211,000 Rental Receivable on Hire-Purchase 96,746,848 6,299,954 851,671 2,238,466 106,136,939 Rentals Receivable on Lease 68,145,962 2,487,275 1,107,952 - 71,741,189 Rentals Receivable on Secured Loans 80,850,245 5,343,443 83,245,589 2,094,490 171,533,767 Loans against Fixed Deposits 258,081 - - - 258,081 Microfinance Group Loans 368,472,664 368,472,664 - - 736,945,328 Other Receivables - 3,332,159 3,354,330 - 6,686,489 Deposits and Prepayments - 1,471,190 - - 1,471,190 Inventory - 13,256,155 - - 13,256,155 Property, Plant and Equipment - - - 99,855,538 99,855,538 Intangible Assets - - - 1,072,834 1,072,834 Investment Property - - - 236,291,712 236,291,712 724,400,094 400,662,840 480,749,542 341,764,040 1,947,576,517
Liabilities Bank Overdraft 49,868,105 - - - 49,868,105 Deposits from Customers 6,570,837 86,156,200 17,673,050 1,260,000 111,660,087 Interest Bearing Loans and Borrowings - 272,157,894 395,060,688 - 667,218,582 Accrued Charges and Other Payables 1,977,626 3,751,392 1,159,166 12,146,567 19,034,751 Retirement Benefit Obligations - - 6,745,767 - 6,745,767 Deferred Tax Liabilities - - - 18,230,163 18,230,163 Microfinance Fund Account - - 2,583,200 2,583,200 Trade Payables 481,988,829 - - - 481,988,829 Income Tax Payable - 1,819,076 - - 1,819,076 540,405,397 363,884,561 420,638,671 34,219,930 1,359,148,560
94 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014 37 Financial Instruments 37.1 Credit Risk Sector wise analysis of Company’s Loan portfolio reflecting the exposure to credit risk in the various sectors of the economy is depicted below. 2014 2013 Rs. Rs.
Transport 349,669,976 288,937,092 Individual 736,945,328 - 1,086,615,304 288,937,092
Financial Instruments - Available for Sale Non Quoted Credit Information Bureau of Sri Lanka 11,000 11,000 The Finance House Association 200,000 200,000 211,000 211,000
37.2 Credit Risk Exposure to Credit Risk Carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was Loans and advances receivables by customers 1,086,615,304 288,937,092 1,086,615,304 288,937,092
37.3 Liquidity Risk The following are contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreement
31st March 2014 Carrying Contractual 6 months 6 - 12 1 - 2 2 - 5 Non -Derivative Financial Liabilities Amount cash flows or less Months years years
Secured Bank Loans 667,218,582 795,990,382 31,037,829 128,167,141 164,512,800 472,272,612 Accrued Charges and Other Payables 19,034,751 19,034,751 - - - - Other Financial liabilities due to customers 111,660,087 111,660,087 - - - - Trade payables 481,988,829 481,988,829 - - - - Bank Overdraft 49,868,105 49,868,105 - - - - 1,329,770,354 1,458,542,154 31,037,829 128,167,141 164,512,800 472,272,612
31st March 2013 Secured Bank Loans 1,880,386 2,303,062 816,395 405,455 1,081,212 - Accrued Charges and Other Payables 18,508,393 18,508,393 - - - - Other Financial liabilities due to customers 97,641,296 97,641,296 - - - - 118,030,075 118,452,750 816,395 405,455 1,081,212 -
Interest Rate Risk Profile At the reporting date, the interest profile of the Company interest bearing financial instrument was 2014 2013 Rs. Rs.
Fixed Rate Instruments Financial Assets 1,497,770,543 332,907,359 Financial Liabilities 777,913,332 97,641,296 2,275,683,875 430,548,655
Variable Rate Instruments Financial Assets - - Financial Liabilities 965,337 1,880,386 965,337 1,880,386
Annual Report 2013/14 | 95 NOTES TO THE FINANCIAL STATEMENTS
AS AT 31ST MARCH 2014 37.4 Fair Value Fair Value Versus carrying Amounts The fair value of financial assets and liabilities, together with the carrying amounts in the Statement of Financial position, are as follows.
Company Loans and Other Financial Total Carrying Fair Value 31st March 2014 Receivables Liabilities Amount Rs. Rs. Rs. Rs.
Secured Bank Loans - 667,218,582 667,218,582 667,218,582 Rental Receivable on Hire-Purchase 106,136,939 - 106,136,939 106,136,939 Rentals Receivable on Lease 71,741,189 - 71,741,189 71,741,189 Rentals Receivable on Secured Loans 908,737,176 - 908,737,176 908,737,176 Accrued Charges and Other Payables - 19,034,751 19,034,751 19,034,751 Fixed Deposit Liability due to Customers - 111,660,087 111,660,087 111,660,087 Trade Payables - 481,988,829 481,988,829 481,988,829 1,086,615,304 1,279,902,249 2,366,517,554 2,366,517,554
Company Loans and Other Financial Total Carrying Fair Value 31st March 2013 Receivables Liabilities Amount Rs. Rs. Rs. Rs.
Secured Bank Loans - 1,880,386 1,880,386 1,880,386 Rental Receivable on Hire-Purchase 153,639,556 - 153,639,556 153,639,556 Rentals Receivable on Lease 48,622,160 - 48,622,160 48,622,160 Rentals Receivable on Secured Loans 86,675,376 - 86,675,376 86,675,376 Accrued Charges and Other Payables - 18,508,393 18,508,393 18,508,393 Fixed Deposit Liability due to Customers - 97,641,296 97,641,296 97,641,296 Bank Overdrafts - - - - 288,937,092 118,030,075 406,967,167 406,967,167
38 Prior Year Adjustments (A) Prior year adjustments has been made in relation to the Fixed deposit Interest expense and Fixed deposit liabilities to confirm with the current year’s presentation and classifications.
(B) As per LKAS 19 - “Employee Benefits” (Bound Volume - 2011), Finance Companies with less than 100 employees had an option to value its Retirement benefit obligation (RBO) using the ‘Formula Method’.But with the implementation of LKAS 19 “Employee Benefits” (Bound Volume - 2013) this option has been withdrawn. Therefore,company has retrospectively valued the RBO using Project Unit Credit method using an actuarial valuer which has resulting the following RBO & taxation related restatements
(C) Prior year adjustment has been made in relation to the error in computing temporary differences of deferred tax as at 31st March 2013.
Statement of Comprehensive Income For the year ended 31.03.2013 As previously Adjustments As Re-stated reported Rs. Rs. Rs.
Interest Expense on Fixed Deposit A 12,630,448 (1,556,853) 11,073,595 Retirement Benefit Expense B 616,882 135,199 752,081 Tax Expense B/C 4,838,365 (7,772,370) (2,934,005) Defined benefit plan Actuarial Gain/(Loss) B 414,119 (100,919) 313,200
96 | BRAC Lanka Finance PLC AS AT 31ST MARCH 2014 Statement of Financial Position As at 31.03.2013 As at 31.03.2012 As previously Adjustments As Re-stated As previously Adjustments As Re-stated reported reported Rs. Rs. Rs. Rs. Rs. Rs.
Retained Earnings A/B/C 214,933,509 (1,982,400) 212,951,109 210,688,334 4,469,235 215,157,569 Overall impact on total equity 214,933,509 (1,982,400) 212,951,109 210,688,334 4,469,235 215,157,569
Fixed Deposit A 104314714 (6,673,418) 97,641,296 57,642,145 (5,116,565) 52,525,580 Retirement Benefit Obligation B 3,540,285 883,448 4,423,733 3,337,522 647,330 3,984,852 Deferred Tax B/C 9,442,517 7,772,370 17,214,887 - - - Overall impact on total liabilities 117,297,516 1,982,400 119,279,916 60,979,667 (4,469,235) 56,510,432
Prior year adjustment has been made in relation to the error in computing temporary differences of deferred tax as at 31st March 2013.
The effect of this applications has been accounted for retrospectively. Since the adjustments to the statement of financial position as at1st of April 2012 is immaterial, three statement of financial position have not been presented.
Annual Report 2013/14 | 97 SHAREHOLDERS’ INFORMATION
01 SHAREHOLDINGS The 20 largest shareholders of the Company as at 31st March were as follows:
Name of Shareholder 2014 2013 No. of Shares (%) No. of Shares (%) 1 BRAC Lanka Investments (Private) Limited 62,745,908 59.33 - - 2 LOLC Micro Investments Limited 37,029,733 35.02 - - 3 Mr. W. A. S. P. De Saram 928,035 0.88 368,210 0.37 4 Mrs. S. N. Mayadunne 421,926 0.40 450,000 0.45 5 Mrs. S. P. Wewegama 344,960 0.33 - - 6 Mrs. C. H. Hapangama 344,960 0.33 264,400 0.26 7 Miss. H. D. Mallawarachchi 200,000 0.19 200,000 0.20 8 Mrs. A. Mayadunne 200,000 0.19 200,000 0.20 9 Ms. C. Mallawarachchi 200,000 0.19 - - 10 Mr. P. S. Panduwawala 160,000 0.15 - - 11 Mrs. D. D. Jayawardena 150,000 0.14 650,000 0.65 12 Mr. W. S. D. Lowe 128,500 0.12 - - 13 Commercial Bank of Ceylon PLC/Sithijaya Fund Limited 127,470 0.12 - - 14 Mr. U. G. R. S. H. Dharmasiri 117,240 0.11 - - 15 Mr. G. K. Rajakaruna 110,000 0.10 - 16 Mrs. C. Kalansooriya 100,000 0.09 17 Mr. J. P. Hapangama 94,620 0.09 18 Mr. J. G. D. Jinadasa 90,000 0.09 19 Mr. A. N. Mallawarachchi 85,760 0.08 20 Mrs. M. M. M. Panduwawala 65,820 0.06 103,644,932 98.01 - - OTHERS 2,107,634 1.99 - - TOTAL 105,752,566 100.00 - -
02 PUBLIC HOLDING As at 31st March 2014, 5.65% (2012/2013 – 34.56 %) of the issued ordinary shares were held by the public.
03 ANALYSIS OF SHAREHOLDING AS AT 31ST MARCH
2014 2013 Range No. of No. of Shares % of Shares No. of No. of Shares % of Shareholders Shareholders Shares 1 - 1,000 517 173,571 0.16 559 229,091 0.23 1,001 - 10,000 197 688,700 0.65 304 1,073,863 1.06 10,001 - 100,000 52 1,681,563 1.59 91 3,159,729 3.14 100,001 - 1,000,000 13 3,433,091 3.25 24 7,273,930 7.22 Over 1,000,000 - Shares 2 99,775,641 94.35 11 88,980,117 88.35 781 105,752,566 100.00 989 100,716,730 100.00
98 | BRAC Lanka Finance PLC 04 CATEGORIES OF SHAREHOLDERS
2014 2013 No. of Holders No. of Shares % No. of Holders No. of Shares %
Individuals 761 5,715,313 5.40 964 85,614,971 85.00 Institutions 20 100,037,253 94.60 25 15,101,759 15.00 781 105,752,566 100.00 989 100,716,730 100.00
05 MARKET INFORMATION ON ORDINARY SHARES OF THE COMPANY
As at 31st March 2014 As at 31st March 2013
Market price per share as at the last trading date Rs. 7.50 Rs. 5.80
Highest during the year Rs. 9.00 Rs. 10.50
Lowest during the year Rs. 5.40 Rs. 4.00
Earnings per share Rs. 0.14 Rs. 0.28
Net asset per share Rs. 5.56 Rs. 5.25
06 RELATED PARTY TRANSACTIONS EXCEEDING 10% OF EQUITY AND 5% OF TOTAL ASSETS 1. On the 17th of March 2014, the Company obtained 2. On 16th May 2014, the Company obtained a loan of a 3 year loan of USD 2Mn from BRAC International USD 4Mn from BRAC International Holdings BV at Holdings BV at an interest rate of 7% to expand an interest rate of 7% for a period of three years to its Microfinance business operations. BRAC expand its Microfinance business operations. BRAC International Holdings BV is the ultimate holding International Holdings BV is the ultimate holding company of BRAC Lanka Finance PLC. company of BRAC Lanka Finance PLC.
On the 21st March 2014, the Company obtained a This borrowing has been made by the Company loan of Rs 100 Mn from Seylan Bank PLC at an interest under its External Commercial Borrowing Scheme. rate of 9.5% against the foreign currency received. The foreign currency received has been placed with Seylan Bank as a fixed deposit bearing an interest of 4% to the Company.
The Company engaged in the transaction of obtaining a SLR loan against the USD deposit as a mechanism of hedging against foreign currency exposure.
Mr W.D.K Jayawardena and Mr. I.C. Nanayakkara, who are Directors of the Company are also on the Board of Seylan Bank PLC.
Annual Report 2013/14 | 99 BRANCH NETWORK
Office Name Office Type Address
Colombo Head office Branch No. 25, C.W.W Kannangara Mawatha, Colombo - 7
Kandy Branch Office No. 83/2/1/1, Aniyawaththa, Kandy.
Kalmunai Branch Office No. 411/02, Main Road, Pandirupu 02, Kalmunai.
Habaraduwa Service Center Dikkumbura Road, Habaraduwa.
Hikkaduwa Service Center No. 144, Baddegama Road, Kirihandigoda, Hikkaduwa.
Beliaththa Service Center No. 25, Matara Road, Beliaththa.
Dikwella Service Center No. 3, Mudiyanselage Waththa, Dikwella, Matara.
Mahara Service Center 415/2, Parakrama Waththa, Kirillawala, Kadawatha.
Dambulla Service Center No. 12, Nissanka Mawatha, Dambulla.
Udapalatha Service Center No. 227/15, 1st Lane, Jayamalapura, Gampola.
Mullipothana Service Center 98/11/R, Galmatiyawa, Thambalagamuwa.
Eravur Town Service Center Forkar Road, Eravur 06.
Lankapura Service Center No. 67, BOP 314, Thambala, Polonnaruwa.
Weliweriya Service Center No. 392/5, Biyagama Road, Weliweriya.
100 | BRAC Lanka Finance PLC NOTICE OF MEETING
NOTICE IS HEREBY GIVEN THAT THE FIFTY THIRD NOTE: ANNUAL GENERAL MEETING of the Company will be 1. A member entitled to attend and vote at the Meeting held on Tuesday, 30th September 2014 at 10.00 a.m. in is entitled to appoint a Proxy to attend and vote the Auditorium of Lanka ORIX Leasing Company PLC, instead of him/her. A Proxy need not be a member of 100/1, Sri Jayawardenapura Mawatha, Rajagiriya for the the Company. following purposes: 2. The completed Form of Proxy should be received by 1. To receive and consider the Report of the the Company at its Secretariat office, LOLC Corporate Directors and Statement of Accounts for the year Services (Pvt) Ltd, 100/1, Sri Jayawardenapura ended 31st March, 2014 with the Report of the Mawatha Rajagiriya, not later than 10.00 am on 28th Auditors thereon. September 2014.
2. To re-appoint as auditors KPMG, Chartered 3. A Form of Proxy accompanies this Notice. Accountants at a remuneration to be agreed by the Directors.
3. To approve by special resolution the amending of the articles by deleting the existing articles and adopting the attached articles instead.
By order of the Board BRAC LANKA FINANCE PLC
Ms. Chrishanthi Emmanuel Director - LOLC Corporate Services (Pvt) Ltd Secretaries
27th August 2014 Rajagiriya (in the greater Colombo)
Annual Report 2013/14 | 101 NOTES
102 | BRAC Lanka Finance PLC BRAC LANKA FINANCE PLC FORM OF PROXY
I/We …………………..……………....……………………..……………………………………………………………………………. of ...……………..…………………………………………………………………………………………………………………….…… being a member/members of the above named Company hereby appoint …………...…………………………………....
....…………………….…..……………………………………………………………………………………………………………….. of ……………………………………………………………………………...... whom failing;
Muhammad Abdul (Rumee) Ali of Bangladesh or failing him Ishara Chinthaka Nanayakkara of Colombo or failing him Shib Narayan Kairy of Bangladesh or failing him Waduthantri Dharshan Kapila Jayawardena of Colombo or failing him Shameran Abed of Bangladesh or failing him Ravindra Dhammika Tissera of Colombo or failing him Sameer Ahmad of Bangladesh or failing him Syed Afzal Hassan Uddin of Bangladesh as my/our proxy to represent me/us and vote on my/our behalf at the Fifty Third Annual General Meeting of the Company to be held on Tuesday, 30th September 2014 and at any adjournment thereof and at every poll which may be taken in consequence of the aforesaid Meeting. For Against
1. To receive and consider the Report of the Directors and Statement of Accounts for the year ended 31st March, 2014 with the Report of the Auditors thereon.
2. To re-appoint as auditors KPMG, Chartered Accountants at a remuneration to be fixed by the Directors.
3. To amend the Articles of Association of the Company by adopting the Articles tabled.
dated this …………………. day of ……………………….. 2014
……………………………………… Signature of Shareholder
NOTE: 1. a proxy need not be a member of the company 2. Instruction as to completion appear on the reverse hereof
Annual Report 2013/2014 INSTRUCTIONS AS TO COMPLETION
1. Please return the completed Form of Proxy after filling in legibly your full name and address, signing on the space provided and filling in the date of signature.
2. The completed Form of Proxy should be deposited at the Secretariat office of the Company, LOLC Corporate Services (Pvt) Ltd, 100/1 Sri Jayawardenapura Mawatha, Rajagiriya not less than 48 hours before the time appointed for the holding of the Meeting.
BRAC Lanka Finance PLC CORPORATE INFORMATION
Name of Company (appointed on 12th September 2013) BRAC Lanka Finance PLC I. C. Nanayakkara - Non-Executive Director Date of Incorporation (appointed Chairman on 12th September 2013 and 13th January 1961 resigned as Chairman on 16th July 2014) S. B. Abed - Committee Chairman, Legal Form A Public Quoted Company with Limited Liability Non-Executive Director Company Registration No Integrated Risk Management Committee PB 263 PQ (appointed on 12th September 2013) R. D. Tissera - Committee Chairman, Stock Exchange Listing The Ordinary shares of the Company are listed on the Non-Executive Director Colombo Stock Exchange of Sri Lanka S. N. Kairy - Non-Executive Director S. Ahmad - Independent Director Directors A. R. Sikder - Chief Executive Officer (appointed w.e.f. 29th August 2013) U. Suraweera - General Manager M. A. (Rumee) Ali - Non-Executive Chairman I. C. Nanayakkara - Non-Executive Director Registered Office S. N. Kairy - Non-Executive Director No. 25, C W W Kannangara Mawatha, W. D. K. Jayawardena - Non-Executive Director Colombo 07, Sri Lanka. S. B. Abed - Non-Executive Director Tel : +94 11 2686523-6 R. D. Tissera - Non-Executive Director Fax : +94 11 2698614 S. Ahmad - Independent Director Company Secretaries S. A. H. Uddin - Independent Director (resigned w.e.f. 7th October 2013) (resigned w.e.f. 29th August 2013) Nanayakkara Management Services (Private) Limited Dr. S. P. Jayawardane - Non-Executive Chairman No. 1017, Sinharamulla, Kelaniya. Mr. L. A. Mallawarachchi - Managing Director (Appointed w.e.f. 7th October 2013 & stepped down Mrs. G. P. Mallawarachchi - Executive Director w.e.f. 3rd June 2014) Mrs. C. Mallawarachchi - Executive Director Miss Chrishanthi S. Emmanuel, FCIS, FCCS Mr. J. O. M. Gamage - Independent Director (appointed w.e.f. 3rd June 2014) Mr. K. L. J. N. Perera - Independent Director L O L C Corporate Services (Pvt) Ltd Audit Committee Auditors (appointed on 12th September 2013) KPMG R. D. Tissera - Non-Executive Director Chartered Accountants S. A. H. Uddin - Independent Director Lawyers (appointed Chairman on 16th July 2014) Mr. I. W. Gunawardana, Attorney-at-Law S. Ahmad - Committee Chairman, No. 133, St. Sebastian Street, Colombo 12 Independent Director Mr. Priyadarshana B Rajakarunaratne, Attorney-at-Law (appointed Chairman on 12th September 2013 and No. 75, Kurunduwatta Road, Pitakotte resigned as Chairman on 16th July 2014) Registrars S. N. Kairy - Committee Chairman, SSP Corporate Services (Pvt) Ltd Non-Executive Director 101, Inner Flower Road, Colombo 3, Sri Lanka. (resigned on 29th August 2013) Bankers K. L. J. N. Perera - Committee Chairman, Commercial Bank of Ceylon PLC Independent Director People’s Bank Mr. J. O. M. Gamage - Independent Director Seylan Bank PLC Remuneration Committee Hatton National Bank PLC (appointed Chairman on 16th July 2014) Bank of Ceylon S. A. H. Uddin - Committee Chairman, Independent Director Designed & produced by REDWORKS Digital plates & Printed by Printage (Pvt) Ltd