Tangible fixed assets are stated at cost less by 22AThu

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									                                          A.F. FERGUSON & CO.
                                               CHARTERED ACCOUNTANTS
                                                  ______________
                                              KARACHI-LAHORE-ISLAMABAD




AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of The First MicroFinanceBank Limited (the Bank) as at
December 31, 2003 and the related profit and loss account, cash flow statement and statement of changes
in equity together with the notes forming part thereof, for the year ended December 31, 2003 and we state
that we have obtained all the information and explanations which, to the best of our knowledge and belief,
were necessary for the purposes of our audit.

It is the responsibility of the Bank's management to establish and maintain a system of internal control, and
prepare and present the above said statements in conformity with the approved accounting standards, the
requirements of the Companies Ordinance, 1984 and the Microfinance Institutions Ordinance, 2001. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the above said statements. An audit also includes
assessing the accounting policies and significant estimates made by management, as well as, evaluating
the overall presentation of the above said statements. We believe that our audit provides a reasonable
basis for our opinion and, after due verification, we report that:

 (a) in our opinion, proper books of account have been kept by the Bank as required by the Companies
     Ordinance, 1984;
 (b) in our opinion
     (i) the balance sheet and profit and loss account together with the notes thereon have been drawn up
         in conformity with the Companies Ordinance, 1984 and the Microfinance Institutions Ordinance,
         2001, and are in agreement with the books of account and are further in accordance with the
         accounting policies consistently applied, except for the change as stated in note 5.7 to the
         accounts with which we concur;

     (ii) the expenditure incurred during the year was for the purpose of the Bank's business; and
     (iii) the business conducted, investments made and the expenditure incurred during the year were in
           accordance with the objects of the Bank;
 (c) in our opinion and to the best of our information and according to the explanations given to us, the
     balance sheet, profit and loss account, cash flow statement and statement of changes in equity
     together with the notes forming part thereof conform with approved accounting standards as
     applicable in Pakistan, and give the information required by the Companies Ordinance, 1984 and the
     Microfinance Institutions Ordinance, 2001, in the manner so required and respectively give a true and
     fair view of the state of the Bank's affairs as at December 31, 2003 and of the profit, its cash flows and
     changes in equity for the year then ended; and

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


Chartered Accountants

Islamabad
THE FIRST MICROFINANCEBANK LIMITED
BALANCE SHEET AS AT DECEMBER 31, 2003

                                                         Note             2003          2002
ASSETS                                                                   Rupees        Rupees

Cash and balance with SBP/ NBP                             6          38,922,451       4,701,032
Balances with other banks                                  7         113,161,064      29,505,157
Investment                                                 8         907,050,350     759,488,493
Advances - net of provision                                9          64,115,551      17,609,001
Operating fixed assets                                    10          23,012,275      21,296,371
Other assets                                              11          43,118,227      39,754,362
                                                                   1,189,379,918     872,354,416

LIABILITIES

Deposits and other accounts                               12          392,047,913     64,418,695
Short term borrowing                                      13           25,000,000     15,000,000
Other liabilities                                         14           13,430,642      4,862,751
Deferred taxation                                         15           29,479,000     49,600,000
                                                                      459,957,555    133,881,446
NET ASSETS                                                            729,422,363    738,472,970

REPRESENTED BY:

Share capital                                             16          660,000,500    660,000,500
Statutory reserve                                                       1,603,525      1,157,143
Unappropriated profit                                                   6,013,218      4,339,285
                                                                      667,617,243    665,496,928

Surplus on remeasurement of investment                    17           54,998,554     69,361,069
Revolving Fund for Microcredit                            18            2,304,000            -
Deferred grant                                            19            4,096,952      3,325,687
Depositors Protection Fund                                20              405,614        289,286
                                                                      729,422,363    738,472,970

CONTINGENCIES AND COMMITMENTS                             21

The annexed notes form an integral part of these financial statements.




Chief Executive                 Chairman                   Director                 Director
THE FIRST MICROFINANCEBANK LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 2003
                                                                                      November 5,
                                                                   Year ended           2001 to
                                                                  December 31,        December 31,
                                                         Note         2003                2002
                                                                     Rupees              Rupees

Markup/return earned                                      22        67,719,715           46,518,698
Less: Markup on deposits/borrowings                       23        (5,518,216)          (1,030,265)
                                                                    62,201,499           45,488,433
Provision against non performing loans and advances       9              1,318,987          359,367
Net income after provisions                                         60,882,512           45,129,066

Fee, commission and brokerage income                                       268,886              -
Gain on sale of investment                                               3,097,411           14,804
Other income                                              24             2,622,016        3,137,173
                                                                         5,988,313        3,151,977

Administrative and other expenses                         25        62,216,914           38,545,329

Profit before taxation                                                   4,653,911        9,735,714

Provision for taxation                                    26             2,422,000        3,950,000

Profit after taxation                                                    2,231,911        5,785,714

Contribution to depositors protection fund                                111,596           289,286

Profit for the year after contribution                                   2,120,315        5,496,428

Un-appropriated profit brought forward                                   4,339,285               -

Profit available for appropriations                                      6,459,600        5,496,428

Appropriations

Transfer to statutory reserve                                             446,382         1,157,143
Un-appropriated profit carried forward                                   6,013,218        4,339,285

Earnings per share (Rupees)                               28                  0.03              0.11

The annexed notes form an integral part of these financial statements.




   Chief Executive                 Chairman            Director                      Director
THE FIRST MICROFINANCEBANK LIMITED
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2003
                                                                                        November 5,
                                                                     Year ended           2001 to
                                                                    December 31,        December 31,
                                                               Note     2003                2002
CASH FLOWS FROM OPERATING ACTIVITIES                                   Rupees              Rupees
Profit before taxation                                                 4,653,911           9,735,714
Adjustment for non cash items
Depreciation                                                               6,457,736       2,978,785
Amortization of intangible assets                                            932,542         873,706
Provision for potential loan losses                                        1,318,987         359,367
Amortization of deferred costs                                             7,169,084       5,043,333
Amortization of grant                                                     (1,609,928)       (831,422)
Interest on treasury bills                                                  (381,801)       (904,818)
Gain on sale of investment                                                (3,097,411)        (14,804)
Amortization of premium on investment in Government securities             8,705,650       2,272,240
                                                                          19,494,859       9,776,387
                                                                          24,148,770      19,512,101
(Increase)/ decrease in operating assets
Other assets                                                                1,934,876    (23,574,993)
Advances                                                                 (47,825,537)    (17,968,368)
                                                                         (45,890,661)    (41,543,361)
Increase in operating liabilities
Deposits and other accounts                                              327,629,218      64,418,695
Other liabilities                                                          8,567,891       4,862,751
                                                                         336,197,109      69,281,446
Cash flows from operations                                               314,455,218      47,250,186
Income tax paid                                                           (7,049,902)     (3,399,370)
Net cash inflow from operating activities                                307,405,316      43,850,816
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed assets purchased                                                 (9,106,182)       (25,148,862)
Deferred costs paid                                                    (8,503,001)       (20,173,332)
Investment purchased                                                 (242,122,989)      (672,584,350)
Sale proceeds of investment                                             57,900,182        29,104,308
Net cash outflow from investing activities                           (201,831,990)      (688,802,236)
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of ordinary shares                                                         -      660,000,500
Short term borrowing                                                      10,000,000     15,000,000
Grant received                                                             2,304,000      4,157,109
Net cash inflow from financing activities                                 12,304,000    679,157,609
Increase in cash and cash equivalents                                    117,877,326     34,206,189
Cash and cash equivalents at the beginning of the year                    34,206,189            -
Cash and cash equivalents at the end of the year               30        152,083,515     34,206,189

The annexed notes form an integral part of these financial statements.


Chief Executive                             Chairman                Director            Director
(1,609,928)
(1,609,928)
THE FIRST MICROFINANCEBANK LIMITED
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003


                                                        Share            Statutory              Un-appropriated               Total
                                                        capital           reserve                    profit

                                                                                        Rupees

Balance as at November 5, 2001                                    -             -                             -                       -

Ordinary shares issued during the period               660,000,500              -                             -              660,000,500

Profit for the period after contributions                         -             -                      5,496,428               5,496,428

Transfer to statutory reserve                                     -       1,157,143                    (1,157,143)                    -

Balance as at December 31, 2002                        660,000,500        1,157,143                    4,339,285             665,496,928

Profit for the year after contribution                            -             -                      2,120,315               2,120,315

Transfer to statutory reserve                                     -         446,382                     (446,382)               -

Balance as at December 31, 2003                        660,000,500        1,603,525                    6,013,218             667,617,243


The annexed notes form an integral part of these financial statements.




        Chief Executive                        Chairman                              Director                     Director
THE FIRST MICROFINANCEBANK LIMITED

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003

1.    STATUS AND NATURE OF BUSINESS

      The First MicroFinanceBank Limited (the Bank) was incorporated on November 5, 2001 as
      a public company under the Companies Ordinance, 1984. The Bank received its certificate
      of commencement of business on February 14, 2002. The Bank's principal business is to
      provide microfinance services to the poor and under served segment of the society as
      envisaged under the Microfinance Institutions Ordinance, 2001. The Bank had 20 branches
      (2002: 8 branches) in operation as at December 31, 2003 and is licensed to operate
      nationwide.

2.    BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

      These financial statements have been presented in accordance with the BSD Circular No
      11 dated December 30 , 2003 issued by the State Bank of Pakistan (SBP).

3.    STATEMENT OF COMPLIANCE

      These financial statements have been prepared in accordance with the directives issued by
      the SBP, the requirements of the Microfinance Institutions Ordinance , 2001, the
      Companies Ordinance, 1984 and the Accounting Standards issued by the International
      Accounting Standards Committee and Interpretations issued by the Standards
      Interpretations Committee of IASC as adopted in Pakistan except where provisions of the
      Companies Ordinance, 1984 or the Prudential Regulations require otherwise in which case
      such provisions have been applied.

4.    BASIS OF MEASUREMENT

      These financial statements have been prepared under the historical cost convention as
      modified for the remeasurement of investment classified as available for sale to fair value
      and recognition of certain employee retirement benefits at present value.

5.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

5.1   Cash and cash equivalents

      Cash and cash equivalents comprise cash in hand, balances with SBP , NBP and balances
      held with other banks.
                                                  -2-


5.2   Investment

      Investments of the Bank are classified into the following categories:
      a) Held for trading
         These are investments acquired principally for the purpose of generating profit from
         short term fluctuations in price or dealer's margin. Securities held for trading are initially
         recognised at cost and subsequently re-measured at fair value based on quoted market
         prices. Unrealised gains and losses arising from changes in the fair value of securities
         classified as held for trading are charged to profit and loss account.
      b) Held to maturity
         These are investments with fixed or determinable payments and fixed maturity and the
         Bank has positive intent and ability to hold the investment till maturity. Held to maturity
         investments are carried at amortised cost using the effective yield method, less any
         provision for impairment.
      c) Available-for-sale
         Investment securities which may be sold in response to needs for liquidity or changes in
         interest rates, exchange rates or equity prices are classified as available-for-sale.
         Available-for-sale financial assets are initially recognised at cost and subsequently re-
         measured at fair value based on quoted bid prices.
         Unrealised gains and losses arising from changes in the fair value of securities classified
         as available-for-sale are kept in a surplus on remeasurement account and is shown
         below the shareholders' equity as required by the Prudential Regulations. When the
         securities are disposed off or impaired, the related accumulated fair value adjustments
         are included in the profit and loss as gains and losses from investment securities.
      Management determines the appropriate classification of its investments at the time of the
      purchase. All regular way purchases and sales of investment securities are recognised at
      trade date, which is the date that the Bank commits to purchase or sell the asset.


5.3   Advances
      These are stated net of provision for non-performing advances, if any. The outstanding
      principal of the advances, payments against which are overdue for 30 days or more are
      classified as non-performing and divided into following four categories:
      a) Other Assets Especially Mentioned (OAEM): These are advances in arrears (payments/
         instalments overdue) for 30 days or more but less than 90 days.
      b) Substandard: These are advances in arrears (payments/ instalments overdue) for 90
         days or more but less than 180 days.
                                                -3-



      c) Doubtful: These are advances in arrears (payments/ instalments overdue) for 180 days
         or more but less than 365 days.
      d) Loss: These are advances in arrears (payments/ instalments overdue) for 365 days or
         more.
      The Bank maintains a general provision equivalent to 2% of the net outstanding balance
      (advances net of specific provisions) for potential loan losses. In addition to general
      provision, specific provision for potential loan losses is made for all non-performing
      advances as follows:
         OAEM            Nil
         Substandard     20% of the outstanding principal net of cash collaterals.
         Doubtful        50% of the outstanding principal net of cash collaterals.
         Loss            100% of the outstanding principal net of cash collaterals.
      Non-performing advances are written off after one year from the last date of the default.
      However, the Bank continues its efforts for recovery of the written off balances.

5.4   Operating fixed assets and depreciation

      Tangible fixed assets are stated at cost less accumulated depreciation and impairment, if
      any. Depreciation is charged to income applying the straight line method at rates given in
      note 10.1. Full month's depreciation is charged in the month of addition while no
      depreciation is charged in the month of deletion. Major renewals and improvements are
      capitalized. Gain or loss on disposals is dealt with through the profit and loss account.

      Intangible assets are capitalized only to the extent that the future economic benefits can be
      derived by the Bank. Intangible assets are stated at cost less accumulated amortization.
      Amortisation is charged to income applying the straight line method at rates given in note
      10.2.

5.5   Deferred costs

      These costs are amortized using the straight line method over a period of four years starting
      from the year in which the cost is incurred.

5.6   Short term borrowings

      Loans and borrowings are recorded at the proceeds received. Finance charges are
      accounted for on accrual basis and are included in other liabilities to the extent of the
      amount unpaid.
                                                 -4-


5.7   Staff retirement benefits

      The main features of the schemes operated by the Bank for its employees are as follows:

      a) The Bank operates an approved non-contributory defined benefit gratuity fund for all
         employees with a qualifying service period of 5 years. Eligible employees are entitled to
         one month's basic salary for each completed year of service upon retirement. Annual
         provision has been made on the basis of actuarial valuation to cover obligations under
         the scheme for all employees eligible to gratuity benefits.
         The latest actuarial valuation of the Fund was carried out as at December 31, 2003. The
         Projected Unit Credit Method, using the following significant assumptions is used for the
         valuation of the scheme
            -    Discount Rate of 7 percent per annum
            -    Expected increase in salary levels of 7 percent per annum
            -    Expected return on Plan assets of 3.5 percent per annum.

         Consequent to the adoption of IAS 19, the actuarial valuation for the plan determined a
         transitional liability of Rs 0.235 million as at December 31, 2003. Which amount has
         been amortized on a straight line basis over a period of five years, with one fifth of the
         liability to be recognized each year, beginning the year ended December 31, 2003.
         Had there been no change in the policy, the profit before taxation would have been lower
         by Rs 568,340.
      b) The Bank also operates an approved defined contribution provident fund for all its
         eligible employees. Equal monthly contributions to the Fund are made by the Bank and
         the employees at the rate of 10 % of the basic salary.

5.8   Taxation

      Provision for current taxation is based on taxable income at current rates of taxation after
      taking into account tax credits, rebates and tax loss etc.
      Deferred tax is accounted for using the balance sheet liability method in respect of all
      significant temporary differences between the carrying value of assets and liabilities for
      financial reporting purposes and the corresponding tax bases of such assets and liabilities.
      Deferred tax assets are recognised only to the extent it is probable that future taxable profit
      will be available against which the deductible temporary differences, unused tax losses and
      tax credits can be utilised.

      Deferred tax is calculated at the rates that are expected to apply to the period when the
      differences reverse based on tax rates that have been enacted.

5.9   Capital reserve

      The Bank is required to maintain a statutory reserve to which an appropriation equivalent to
      20% of the annual after tax profit is made.
                                                -5-


5.10 Depositors protection fund

     The Bank contributes 5 percent of its annual after tax profit and profit earned on the
     investments of the Fund to the Depositors Protection Fund as required under the
     Microfinance Institutions Ordinance, 2001 .

5.11 Grants

     Grants for fixed assets are recorded as deferred revenue in the balance sheet and
     recognized as non-operating income on a systematic basis over the useful lives of the
     assets acquired from the grant proceeds.
     Grants to be utilized for providing loans are carried as a revolving fund. These grants are
     taken to income to the extent related loans are written off.
     Revenue grants are recognised as income in the year of receipt.

5.12 Revenue recognition

     Return on investment is recognized on accrual basis, using the effective interest rate
     method.
     Service charges/income on advances are collected with loan instalments. Due but unpaid
     service charges are accrued on overdue advances for periods up to 30 days. After 30 days,
     overdue advances are classified as non-performing and further accrual of unpaid service
     charges/income ceases. Accrued service charges on non-performing advances are
     reversed and credited to suspense account.
     Service charges on group loans are calculated using simple interest method on daily
     balances of the principal amount outstanding at the rate of 10 percent (2002:15 percent) per
     annum.
     Service charges on all other advances are calculated using fixed interest method on
     balance of the principal amount at the time of disbursement at rates ranging from 12
     percent to 16 percent per annum.

5.13 Foreign exchange rate

     Transactions in foreign currencies are translated into Rupees at exchange rate on the date
     of transaction. Assets and liabilities in foreign currencies are translated into Pak Rupees at
     the rate of exchange approximating those ruling at the balance sheet date.

5.14 Financial instruments

     Financial assets and financial liabilities are recognized when the Bank becomes a party to
     the contractual provisions of the instrument.

5.15 Related party transactions

     Prices for transactions with related parties are determined using the comparable
     uncontrolled price method except for those transactions which in exceptional circumstances
     are specifically approved by the Board.
                                                   -6-


                                                                 2003               2002
                                                                Rupees             Rupees
6.   CASH AND BALANCE WITH SBP / NBP

     Cash in hand - local currency                                3,785,326          1,221,768
     With the State Bank of Pakistan
     (local currency deposit account) - note 6.1                22,885,509           3,479,264
     With National Bank of Pakistan
     (local currency deposit account) - note 6.1                12,251,616                 -
                                                                38,922,451           4,701,032

6.1 This represents cash reserve maintained with SBP and its agent National Bank of Pakistan
    equivalent to 5% of the Bank's time and demand liabilities in accordance with Regulation No.
    6 of the Prudential Regulations.

7.   BALANCES WITH OTHER BANKS

     This represents balances with commercial banks in local currency deposit accounts held in
     Pakistan.

8.   INVESTMENT

     These represent investment in following government securities and are classified as
     available-for-sale financial assets.
                                                           2003              2002
     Pakistan Investment Bonds - note 8.1                 Rupees           Rupees

           10 Year                                             335,000,000        235,000,000
            5 Year                                             350,000,000        250,000,000
            3 Year                                              75,000,000        100,000,000
                                                               760,000,000        585,000,000

     Premium - net of amortization                              61,115,796         28,131,610
                                                               821,115,796        613,131,610
     Treasury bills                                                    -           28,995,814
                                                               821,115,796        642,127,424
     Surplus on remeasurement of investment - note 17           85,934,554        117,361,069
                                                               907,050,350        759,488,493
                                                     -7-


8.1   10 year bonds carry profit at the rate of 8% to 11% per annum payable on semi-annual basis and
      will mature in the year 2012/13.
      5 year bonds carry profit at the rate of 7 % to 11% per annum payable on semi-annual basis and
      will mature in the year 2007/8. These include bonds having par value of Rs. 25 million (2002: Rs.
      15 million) sold under repurchase agreement to a commercial bank as referred to in note 13.
      3 year bonds carry profit at the rate of 9% per annum payable on semi-annual basis and will
      mature in the year 2005.
8.2   Investments includes Rs 223,736 (2002: Nil) held for the purposes of the Depositors Protection
      Fund.
9.    ADVANCES- NET OF PROVISION
                                                                 2003                         2002
                                                     Number             Rupees         Number     Rupees
      Considered good                                 3256          63,957,042           713       17,968,368
      Considered doubtful - note 9.2                  302            1,836,863            -                -
                                                      3558          65,793,905           713       17,968,368
      Less:     General Provision - note 9.3                         1,308,481                        359,367
                Specific Provision - note 9.3                          369,873                             -
                                                                     1,678,354                        359,367
                                                                    64,115,551                     17,609,001
9.1   Advances include Rs 9,180,222 (2002: Rs 7,501,984) secured against cash collateral pledged
      with the Bank. All other advances are secured by personal guarantees.
9.2   Particulars of Non Performing Loans
      Advances include Rs 1,836,863 which as detailed below have been placed under non performing
      status.
                          Type                       Amount                 Provisions             Provisions
                                                    outstandin               required                 held
                                                     Rupees                                         Rupees
                     OAEM                            786,981                    0%                    Nil
                     Sub-Standard                    516,892                   20%                   103,378
                     Doubtful                        532,990                   50%                   266,495
                     Total                          1,836,863                                        369,873
9.3   Particulars of provision against Non Performing Loans
                                         2003                                           2002
                                        Rupees                                         Rupees
                         Specific        General      Total             Specific       General       Total
      Opening                       -     359,367    359,367                                   -             -
      Charge for
      the year               369,873      949,114   1,318,987                      -   359,367       359,367
      Closing                369,873    1,308,481   1,678,354                      -   359,367            -
                                                                                                     359,367

9.4   Advances include Rs 2,304,000 (2002:Rs nil) against revolving fund for microcredit.
                                                                           -8-


                                                                                                                 2003           2002
10.   OPERATING FIXED ASSETS                                                                                    Rupees         Rupees

      Tangible assets - note 10.1                                                                               20,155,816      17,801,545

      Intangible assets - note 10.2                                                                              2,856,459       3,494,826
                                                                                                                23,012,275      21,296,371

10.1 Tangible assets
                                Cost at      Additions     Cost at     Accumulated Depreciation/ Accumulated                   Net book   Depreciation/
                               January 1,   (deletions) December 31,   depreciation/ amortisation   depreciation/              value at   amortisation
                                 2003       during the      2003       amortisation    for the      amortisation             December 31,   rate per
                                               year                    at January 1,    year      at December 31,                2003        annum
                                                                            2003                       2003                                    %

                                                              (R       u          p        e      e        s)

      Office equipment          4,721,381    3,354,157    8,075,538              637,893       1,463,889         2,101,782       5,973,756      25
      Furniture and fixtures    3,904,809    1,308,600    5,213,409              529,868        902,611          1,432,479       3,780,930      20
      Computer equipment        9,398,140    3,696,250   13,094,390         1,566,274          3,532,486         5,098,760       7,995,630      33
      Vehicles                  2,756,000     453,000     3,209,000              244,750        558,750           803,500        2,405,500      20
      Total      2003          20,780,330    8,812,007   29,592,337         2,978,785          6,457,736         9,436,521      20,155,816
      Total      2002                 -     20,780,330   20,780,330                   -        2,978,785         2,978,785      17,801,545

10.2 Intangible assets

      Computer software         4,368,532     294,175     4,662,707              873,706        932,542          1,806,248       2,856,459      20

      Total      2002                 -      4,368,532    4,368,532                   -         873,706           873,706        3,494,826

      Grand total              25,148,862    9,106,182   34,255,044         3,852,491          7,390,278        11,242,769      23,012,275
                                                 -9-


                                                                  2003                  2002
11.   OTHER ASSETS                                               Rupees                Rupees

      Deposits                                                     188,700                63,600
      Prepayments                                                2,405,073             3,979,666
      Advances                                                     532,654             2,259,086
      Income tax receivable                                      2,620,272             1,049,370
      Interest accrued on investment and bank accounts          16,899,649            17,166,688
      Grant receivable from State Bank of Pakistan (SBP)         2,381,193                   -
      Markup accrued on advances                                 1,626,770               105,953
      Deferred costs-note 11.1                                  16,463,916            15,129,999
                                                                43,118,227            39,754,362

11.1 Deferred costs

      Preliminary expenses                                       6,670,431             6,670,431
      Office setup costs                                        22,005,902            13,502,901
                                                                28,676,333            20,173,332
      Less: Amortization
              Balance at beginning of the year                   5,043,333                    -
              For the year                                       7,169,084             5,043,333
                                                                12,212,417             5,043,333
                                                                16,463,916            15,129,999

                                                                  2003                  2002
12.   DEPOSITS AND OTHER ACCOUNTS                      Number    Rupees      Number    Rupees

      Demand liabilities
        Current deposits                                 4836   30,299,438     1276    7,980,675

         PLS deposits                                    5125 327,307,899      1444 41,985,032
                                                         9961 357,607,337      2720 49,965,707
      Time liabilities
         Term deposits                                    190   34,440,576       53 14,452,988
                                                        10151 392,047,913      2773 64,418,695

      Deposits include Rs 22,912,447 (2002: Rs 1,626,210 ) due to an associated undertaking.

                                                                  2003                  2002
12.1 Particulars of ownership                          Number    Rupees      Number    Rupees

      Individual depositors                              9919 236,584,048      2745 41,581,542
      Institutional depositors
         Corporations/ firms                              220 128,210,448        25 18,986,045
         Banks and financial institutions                  12 27,253,417          3 3,851,108
      Total                                             10151 392,047,913      2773 64,418,695
                                               -10-


13.    SHORT TERM BORROWING

       This represents borrowing from a commercial bank and carries markup @ 2.5 % per
       annum. The borrowing is secured against Pakistan Investment Bonds sold under
       repurchase agreement and will mature on January 5, 2004.

                                                                         2003            2002
14.    OTHER LIABILITIES                                                Rupees          Rupees

       Retention money                                                    464,444      1,024,625
       Accrued liabilities                                              5,619,539      2,827,091
       Accrued markup on deposits - note 14.1                           2,523,320        354,050
       Markup in suspense account                                         642,907          -
       Contribution payable to gratuity fund - note 14.2                  566,000        650,000
       Other payables                                                   3,614,432          6,985
                                                                       13,430,642      4,862,751

14.1   Accrued markup on deposits includes Rs 37,309 (2002:Rs 4,345) payable to an
       associated undertaking.
                                                             2003
14.2   Payable to gratuity fund                             Rupees
       Movement in net liability recognized
       Liability at beginning of the year                                 650,000
       Expense for the year                                             1,066,000
       Contributions                                                   (1,150,000)
       Liability at end of the year                                       566,000

       Reconciliation of balance payable to gratuity fund
       Present value of defined benefit obligation                      2,114,000
       Fair value of plan assets                                       (1,169,000)
       Actuarial losses not recognized                                   (191,000)
       Transitional liability not recognized                             (188,000)
                                                                          566,000

15.    DEFERRED TAXATION

       The net balance for deferred taxation is in respect of following temporary differences:

                                                                         2003            2002
                                                                        Rupees          Rupees
       Remeasurement of investment to fair value                       30,936,000     48,000,000
       Accelerated tax depreciation                                     1,750,000      2,160,000
       Provision against loan losses                                     (604,000)      (150,000)
       Deferred costs                                                  (2,603,000)      (410,000)
                                                                       29,479,000     49,600,000
                                                  -11-


                                                                   2003             2002
16.   SHARE CAPITAL                                               Rupees           Rupees

      Authorized
      100,000,000 ordinary shares of Rs 10 each                1,000,000,000    1,000,000,000

      Issued, subscribed and paid-up
      66,000,050 ordinary shares of Rs 10 each
      fully paid in cash - note 16.1                             660,000,500      660,000,500

16.1 Share capital was issued, subscribed and paid up by the following:

      Associated undertakings:
         Aga Khan Rural Support Programme                        300,000,000      300,000,000
         Aga Khan Fund for Economic Development                  200,000,000      200,000,000
         International Finance Corporation (IFC)                 160,000,000      160,000,000

      Others                                                             500              500
                                                                 660,000,500      660,000,500

17.   SURPLUS ON REMEASUREMENT OF INVESTMENT

      Surplus on remeasurement of
      investment to fair value                                    85,934,554      117,361,069
      Less: Deferred tax thereon                                  30,936,000       48,000,000
                                                                  54,998,554       69,361,069

18.   REVOLVING FUND FOR MICROCREDIT

      This represents a grant of US $ 40,000 from CitiGroup Foundation received through Aga
      Khan Foundation, USA as a revolving fund for microcredit to uplift the poor in Pakistan.
      Under the grant agreement , the Bank will receive an annual grant of US $ 40,000 during
      four years period upto 2006. Advances against this revolving fund outstanding at the year
      end have been disclosed separately in note 9.
                                                                   2003              2002
19.   DEFERRED GRANT                                              Rupees           Rupees

      Grant received from IFC - note 19.1                          4,157,109        4,157,109
      Grant receivable from ADB/ SBP - note 19.2                   2,381,193              -
      Less: Amortization:
               Balance at beginning of the year                      831,422              -
               For the year - note 24                              1,609,928          831,422
                                                                   2,441,350          831,422
                                                                   4,096,952        3,325,687
                                                 -12-

19.1 The Bank received a grant of US$ 70,000 from IFC for the purpose of acquisition of an
     interim banking software solution for the Bank's operations. The grant is amortized over a
     period of five years on straight line basis.
19.2 This represents grant received subsequent to year end date for institutional support under
     the Microfinance sector development program. The Bank is entitled to avail this grant upto
     Rs 16.5 million by December 31, 2006. The grant is available for procurement of fixed
     assets and is reimbursed by SBP upon submission of statement of expenditure.

                                                                   2003              2002
                                                                  Rupees            Rupees
20.   DEPOSITORS PROTECTION FUND
      Balance at beginning of the year                               289,286               -
      Interest earned                                                 12,729               -
      Less: Amortization of premium                                   (7,997)              -
      Contribution for the year                                      111,596           289,286
      Balance at end of the year                                     405,614           289,286

21.   CONTINGENCIES AND COMMITMENTS

      Capital commitments                                                 -          1,361,768

                                                                                 November 5,
                                                                Year ended         2001 to
                                                               December 31,      December 31,
                                                                   2003              2002
22.   MARKUP/ RETURN EARNED                                       Rupees            Rupees
      Mark up on advances                                          8,677,704           822,845
      Income on investment in Government securities               66,284,433        29,446,098
      Less: Amortisation of premium                                8,705,650         2,272,240
                                                                  57,578,783        27,173,858
      Income on PLS bank deposits                                  1,463,228        18,521,995
                                                                  67,719,715        46,518,698
23.   MARKUP ON DEPOSITS / BORROWINGS
      Deposits                                                     5,176,946           812,910
      Borrowings                                                     341,270           217,355
                                                                   5,518,216         1,030,265
24.   OTHER INCOME
      Revenue grant - note 24.1                                      288,000         2,251,431
      Amortization of deferred grant - note 19                     1,609,928           831,422
      Documentation fee                                              724,088            54,320
                                                                   2,622,016         3,137,173

24.1 The Bank received US$ 5,000 from Citigroup Foundation through Aga Khan Foundation,
     USA for setting up and maintaining a Management Information System. Under the grant
     agreement the Bank will receive annual grant of US $ 5,000 for four years period upto 2006.
The Bank received US$ 5,000 from Citigroup Foundation through Aga Khan Foundation,
USA for setting up and maintaining a Management Information System. Under the grant
agreement the Bank will receive annual grant of US $ 5,000 for four years period upto 2006.
                                                  -13-

                                                                             November 5,
                                                              Year ended       2001 to
                                                             December 31,    December 31,
                                                                 2003            2002
25.   ADMINISTRATIVE AND OTHER EXPENSES                         Rupees          Rupees

      Staff salaries and benefits                              27,330,874     12,260,388
      Leave encashment - note 25.1                                749,192            -
      Contribution to Provident Fund                            1,298,367        610,475
      Contribution to Gratuity Fund - note 25.2                   947,550        650,000
      Training and capacity building                               50,791         48,277
      Rent rates and taxes                                      4,081,534      3,019,244
      Utilities                                                 1,521,560        654,708
      Communications                                            1,600,879        917,654
      Travel and transportation                                 2,977,510      2,672,497
      Insurance                                                   544,884        105,771
      Printing, stationary and periodicals                        999,127        629,791
      Repair and maintenance                                    1,218,879        319,320
      IT supplies and software                                    498,139      1,991,597
      Professional services                                       275,215      3,265,181
      Auditors' remuneration -note25.3                            819,290        653,465
      Depreciation                                              6,457,735      2,978,785
      Amortization of intangible assets                           932,542        873,706
      Amortization of deferred costs                            7,169,084      5,043,333
      Advertisement and business promotions                       438,970      1,110,656
      Office security                                           1,054,126        337,764
      Other expenses                                            1,250,666        402,717
                                                               62,216,914     38,545,329

25.1 Leave encashment was provided as a policy exception during the year ended December
     31, 2003. Half of the employees' leaves outstanding at year end were encashed and the
     balance was carried forward to 2004, which can be utilized or will lapse.

                                                                 2003
25.2 Charge for the defined benefit plan                        Rupees

      Current service cost                                        968,000
      Interest cost                                                71,000
      Expected return on plan assets                              (20,000)
      Recognized transitional liability                            47,000
                                                                1,066,000

      Less: Charged to AKRSP for employees on secondment          118,450

      Expense for the year                                        947,550
                                                 -14-


                                                                              November 5,
                                                               Year ended       2001 to
                                                              December 31,    December 31,
                                                                  2003            2002
                                                                 Rupees          Rupees
25.3 Auditors' remuneration

      Audit fee                                                   450,000         450,000
      Fee for review of half yearly accounts, special
      certifications and advisory services                        190,000         122,500
      Tax services                                                140,310          71,235
      Out of pocket expenses                                       38,980           9,730
                                                                  819,290         653,465

26.   PROVISION FOR TAXATION
      Current taxation
      - for the year                                             4,400,000      2,350,000
      - prior period                                             1,079,000            -
                                                                 5,479,000      2,350,000
      Deferred tax
      - for the year                                            (2,263,000)     1,600,000
      - prior period                                              (794,000)           -
                                                                (3,057,000)     1,600,000
                                                                 2,422,000      3,950,000

26.1 Relationship between tax expense and accounting profit

      Profit before tax                                          4,653,911      9,735,714

      Tax at applicable tax rate                                 1,908,000      4,186,000

      Tax effect of amounts that are
       not deductible for tax purposes                              60,000         49,000

      Prior period tax provision/ short charge                    285,000        (285,000)

      Tax effect of deferred tax accounted for on
       enacted reduced rate for subsequent years                  169,000             -

                                                                 2,422,000      3,950,000
                                                                     -15-

27. MATURITIES OF ASSETS AND LIABILITIES
                                        Total        Upto one           Over one     Over six      Over one      Over five      2002
                                                      month            month upto   months upto    year upto      years
                                        2003                           six months    one year     five years.
                                       Rupees                                 Rupees                                            Rupes
   Assets
   Interest Earning
       Balance with SBP/ NBP           35,137,125     35,137,125               -            -             -             -       3,479,264
       Balances with other banks      113,161,064    113,161,064               -            -             -             -      29,505,157
       Investment                     907,050,350            -                 -            -     486,184,150   420,866,200   759,488,493
       Advances - net of provision     64,115,551      1,777,551        50,727,000   11,591,000        20,000           -      17,609,001
   Non-Interest Earning
      Cash                               3,785,326     3,785,326               -            -             -             -       1,221,768
      Other assets                      26,654,311           -          20,907,612    5,746,699           -             -      24,624,363
      Operating fixed assets            23,012,275           -                 -            -       7,995,630    15,016,645    21,296,371
      Deferred costs                    16,463,916           -                 -            -      16,463,916           -      15,129,999
                                     1,189,379,918   153,861,066        71,634,612   17,337,699   510,663,696   435,882,845   872,354,416
   Liabilities

   Interest Bearing
       Deposits and other accounts    392,047,913    360,528,913        10,756,000    9,760,000    11,003,000           -      64,418,695
       Short term borrowing            25,000,000     25,000,000               -            -             -             -      15,000,000
   Non-Interest Bearing
      Other liabilities                13,430,642        566,000        12,864,642          -             -             -       4,862,751
      Deferred taxation                29,479,000            -                 -            -             -      29,479,000    49,600,000
                                      459,957,555    386,094,913        23,620,642    9,760,000    11,003,000    29,479,000   133,881,446
   Net assets                         729,422,363    (232,233,847)      48,013,970    7,577,699   499,660,696   406,403,845   738,472,970

   Represented by:
   Share capital                      660,000,500                                                                             660,000,500
   Statutory reserve                    1,603,525                                                                               1,157,143
   Unappropriated profit                6,013,218                                                                               4,339,285
   Surplus on remeasurement of
     Investment                        54,998,554                                                                              69,361,069
   Revolving Fund for MicroCredit       2,304,000                                                                                     -
   Deferred grant                       4,096,952                                                                               3,325,687
   Depositors Protection Fund             405,614                                                                                 289,286
                                      729,422,363                                                                             738,472,970
                                               -16-


                                                                                    November 5,
                                                                     Year ended       2001 to
                                                                    December 31,    December 31,
                                                                        2003            2002
28.   EARNINGS PER SHARE

      Profit for the period - after tax                  Rupees        2,231,911      5,785,714
      Weighted average number of ordinary shares         Number       66,000,050     51,145,255
      Basic earnings per share                           Rupees              0.03          0.11

      There is no dilutive effect on the basic earnings per share of the Bank.

29.   RELATED PARTY TRANSACTIONS
                                                                       Rupees         Rupees
      Profit on deposits of an associated undertaking,
      Aga Khan Rural Support Programme (AKRSP)                           213,667         40,838

      Costs charged to AKRSP for employees on secondment                 867,848            -

                                                                       1,081,515         40,838

      Certain vehicles and equipment of AKRSP are being used by the Bank for which capital
      cost has not been charged by AKRSP. The Bank provides free services in respect of
      recovery of loans on behalf of AKRSP in areas where branches of the Bank are operating.


                                                                        2003           2002
30.   CASH AND CASH EQUIVALENTS                                        Rupees         Rupees

      Cash and bank balances with SBP / NBP                           38,922,451      4,701,032
      Balances with other banks                                      113,161,064     29,505,157
                                                                     152,083,515     34,206,189
ember 31,
                                                                                                         -17-

31.   FINANCIAL INSTRUMENTS


                                       Effective                                Interest bearing                                             Non interest bearing                                 Total
                                     yield/interest    Upto one            One to          Over five         Sub total          Upto one       One to Over           Sub total           2003               2002
      Financial assets                    rate           year            five years          years                                year           five      five
                                                                                                                                                years     years
                                           %                                                                                     Rupees
      Cash and balance with SBP
        and NBP                           1-2          35,137,125              -                 -            35,137,125         3,785,326        -        -         3,785,326         38,922,451           4,701,032
      Balances with other banks           1-3         113,161,064              -                 -           113,161,064               -          -        -               -          113,161,064          29,505,157
      Investment                       3.45 -10.4             -        486,184,150       420,866,200         907,050,350               -          -        -               -          907,050,350         759,488,493
      Advances - net of provision       10 - 16        64,095,551           20,000               -            64,115,551               -          -        -               -           64,115,551          17,609,001
      Other assets                                            -                -                 -                   -          24,249,238        -        -        24,249,238         24,249,238          17,395,327
                                                      212,393,740      486,204,150       420,866,200       1,119,464,090        28,034,564        -        -        28,034,564      1,147,498,654         828,699,010



      Financial liabilities

      Deposits and other accounts       2 - 3.5       381,044,913        11,003,000                -         392,047,913               -          -        -               -          392,047,913          64,418,695
      Short term borrowing                2.5          25,000,000               -                  -          25,000,000               -          -        -               -           25,000,000          15,000,000
      Other liabilities                                       -                 -                  -                 -          13,430,642        -        -        13,430,642         13,430,642           4,862,751
      Depositors Protection Fund                              -                 -                  -                 -             405,614        -        -           405,614            405,614             289,286

      Off-balance sheet items

      Commitments                                             -                 -                  -                 -                 -          -        -               -                  -             1,361,768
                                                      406,044,913        11,003,000                -         417,047,913        13,836,256        -        -        13,836,256        430,884,169          85,932,500

31.1 Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Bank's credit risk is primarily attributable to its
     advances and its balances at banks. The credit risk on liquid funds is limited because the counter parties are banks with reasonably high credit ratings. The Bank has an effective loan disbursement
     and recovery monitoring system which allows it to evaluate borrowers credit worthiness and identify potential problem loans. A provision for potential loan losses is maintained as required by
     Prudential Regulations. Maximum amount of financial assets which are subject to credit risk amount to Rs 201,337,153 (2002: Rs 53,258,482).


31.2 Liquidity risk is the risk that the Bank will encounter difficulty in raising funds to meet its net funding requirements. The Bank attempts to manage this risk by having adequate credit lines in place
     and maintaining sufficient liquidity at branch level to meet anticipated funding requirements.

31.3 Interest rate risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market interest rate. The Bank's interest rate exposure stems mainly from investing activity.
     This risk is managed by regular review of investment portfolio of government securities.

31.4 The carrying values of all financial assets and liabilities reflected in the financial statements approximate their fair value. Fair value is determined on the basis of objective evidence at each balance
     sheet date.
                                           -18-


32. REMUNERATION OF DIRECTORS AND EXECUTIVES

                                   President/ Chief Executive                  Executives
                                      2003            2002             2003            2002
                                     Rupees          Rupees           Rupees          Rupees

   Managerial remuneration             999,996         999,996       5,629,200        3,050,973
   Contribution to
    provident fund                     100,001         100,001         478,928          169,464
   Rent and house
    maintenance                        349,998         399,996       2,005,968        1,220,368
   Utilities                           100,008         100,008         562,932          305,110
   Medical                              52,998           6,000         263,700            7,150
   Leave encashment                         -              -           262,780               -
   Others                                   -              -           104,500           46,000
                                     1,603,001       1,606,001       9,308,008        4,799,065

                      Number                   1                1               6                3

   The Executives are also provided with free use of Company owned and maintained cars in
   accordance with their entitlement as per rules of the Company. The Chief Executive is also
   entitled to the free use of the Company owned and maintained car, however the Chief
   Executive has availed only actual fuel cost.

                                                                       2003            2002
33. NUMBER OF EMPLOYEES                                               Rupees          Rupees

   Number of employees at year end                                      123             96

34. CORRESPONDING FIGURES

   Corresponding figures have been reclassified in line with requirements pertaining to the
   format of accounts notified by BSD circular 11 dated December 30 , 2003.

35. DATE OF AUTHORIZATION FOR ISSUE

   These financial statements were authorized for issue by the Board of Directors of the Bank
   on ________________.




   Chief Executive                  Chairman                        Director                Director

								
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