contentsmr. muhammad farrukh mansoor malik legal advisors bhatti law associates registered office...

1

Contents

1. Corporate Information 22. Vision & Mission Statement 33. President’s Message 54. Financial & Operational Highlights 75. Directors’ Report-English 86. Directors’ Report-Urdu 287. Shareholding Pattern 298. Statement of Compliance 309. Statement on Internal Controls 3610. Auditors’ Review Report to the Members 37

11. SME Bank Limited - Unconsolidated Financial Statementsa. Auditors’ Report to the Members 41b. Statement of Financial Position 44c. Profit and Loss Account 45d. Statement of Comprehensive Income 46e. Cash Flow Statement 47f. Statement of Changes in Equity 48g. Notes to the Financial Statements 49h. Notice of 16th Annual General Meeting 109

12. Consolidated Financial Statements a. Auditors’ Report to the Members 113b. Statement of Financial Position 115c. Profit and Loss Account 116d. Statement of Comprehensive Income 117e. Cash Flow Statement 118f. Statement of Changes in Equity 119g. Notes to the Financial Statements 120

13. SME Leasing Limiteda. Auditors’ Review Report to Members 187b. Auditors’ Report to the Members 100c. Balance Sheet 190d. Profit and Loss Account 191e. Statement of Comprehensive Income 192f. Cash Flow Statement 193g. Statement of Changes in Equity 194h. Notes to the Financial Statements 195

14. List of addresses of Head Office, SME Branches, Recovery Offices, Treasury, Audit Offices and SME Leasing Ltd 23515. Form of Proxy 239

2

Cor porate Infor mation

Board of Directors1. Mr. Muhammad Adnan Jalil2. Mr. Zarar Haider3. Mr. Badr-ul-Arifeen4. Mr. Ihsan ul Haq Khan5. Vacant6. Vacant7. Vacant

President and Chief Executive OfficerMr. Ihsan ul Haq Khan

Company SecretaryMr. Sajjad Ahmad Warraich

Chief Financial OfficerMr. Muhammad Farrukh Mansoor Malik

Legal AdvisorsBhatti Law Associates

Registered Office56-F, Nazim-ud-Din Road,F-6/1, Blue Area,IslamabadTel.: 051-9217000Fax: 051-9217001UAN: 111- 11 0-0 11Email: [email protected]: www.smebank.org

AuditorsM/s Grant Thornton Anjum Rahman302-B, 3rd Floor, Evacuee Trust ComplexAgha Khan Road, F-5/1, IslamabadPh# 92 51 2271906, 2274665 Fax 2273874

3

Vision Statement

We will be the leading institution for providing financial assistance for the development and support of Small and Medium Enterprises (SMEs) in Pakistan.

We will respond to the needs of Small and Medium Enterprises by providing them with necessary financial assistance and business support services in the form of short to long term funds.

Will, through support of SME sector, contribute to the growth of local entrepreneurs, develop export markets and provide employment opportunities in the country.

4

Mission Statement

To support and develop SME sector by providing necessary financial and technical assistance on a sustainable basis.

To enable SME sector to contribute to economic development through value addition and exports, promote entrepreneurship and create employment opportunities.

5

President ’s Message

It is my pleasure to present the 16th Annual Report of SME Bank for the year ended December 31, 2017.

Economic activity seems slightly vibrant while growth in energy sector remains contained, and SME sector bore the brunt of energy crisis due to lack of access to alternate energy. In the coming year, China-Pakistan Economic Corridor (CPEC) is one of the biggest and most significant projects for Pakistan and the region. As per this agreement, both Pakistan and China will allow banks to open branches in each other’s country. With the opening of Pakistani banks in China, the remittances / LCs which are presently routed though European banks, shall be done through Pakistan’s own banks.

On the other hand, opening of Chinese banks would facilitate Pakistani financial sector to link with world largest economy, this would also ease Chinese investments for the Economic Corridor through Pakistani banks. There will be urgent need for reforms in different sectors so that they are ready for taking advantage of economic corridor and facilitate in boosting investment in different corporate sectors of economy in Pakistan. In this context, small and medium sector will also grow and SME Bank will take part in financing these sectors.

SME Bank has continued to work with a limited equity base. Bank is operating with paid-up capital of Rs 2.39 billion since 2007 and State Bank has granted exemption to meet the requirement of minimum paid-up capital which otherwise should have been Rs 10 billion by the end of June 2017. In the shareholders’ meeting on October 7, 2009, it was advised that the Bank be recapitalized by increasing paid-up capital; management has approached Ministry of Finance for the same over the years.

With a network of 13 branches, Bank has very limited outreach. Bank’s Directors have authorised the opening of additional branches, however in-principle approval from State Bank is not forthcoming due to pending privatization.

Even under constrained circumstances, there is no let up in the Bank’s primary operations, albeit at a slower than desired pace for reasons stated. In these circumstances, we have been able to make disbursements of Rs 1,957 million during the year as compared to Rs 1,956 million in the previous year. Deposits have been increased by Rs 115 million and stood at Rs 5,344 million as on December 31, 2017 as compared to last year’s Rs 5,229 million.

As business and economic activities remained depressed, repayment commitments were dishonoured by many borrowers, however due to management’s focus and strenuous efforts by the field staff, non-performing portfolio decreased to Rs 505 million at the year-end December 31, 2017 from Rs 514 million of last year.

We are hopeful that process of privatization will complete soon and this will cause further expansion in business and enhance operations to the advantage of all stakeholders.

It is Management’s vision to build an image of SME Bank as the bank which is a friend of Small & Medium Enterprises; a bank totally trusted with their deposits, ability and resources to cater to their business needs. Customers will see SME Bank as the bedrock integral to their business growth and

6

sustainability and as a national institution ably playing its crucial role in the country’s economic growth and development.

On behalf of the management, I would like to take this opportunity to thank State Bank of Pakistan, Ministry of Finance and the Board of Directors for their continued support and guidance.

Ihsan ul Haq KhanPresident & CEO

7

Financial Highlightsfor the year 2017

Rs. (000)2017 2016 2015 2014 2013 2012

PROFITABILITY

Income

Total Income 674.0 662.3 753.2 876.3 741.1 808.6 Interest Income 649.3 615.1 705.3 788.8 715.2 790.3

Expenses

Total Expenses 1,395.0 1,119.2 1,027.8 1,254.6 1,167.3 1,184.5 Interest Expenses 520.4 441.2 436.3 542.6 477.9 534.0 Spread (Net interest income / Gross interest income) 0.2 0.3 0.4 0.3 0.3 0.3 Loss before tax (721.0) (456.8) (274.6) (378.3) (426.2) (375.9) Loss after tax (294.0) (199.2) (282.2) (387.1) (430.7) (384.5)

FINANCIAL POSITION

Shareholder's Funds 2,392.5 2,392.5 2,392.5 2,392.5 2,392.5 2,392.5 Net Equity (434.3) 20.6 356.3 689.4 1,004.1 1,344.7

Liabilities

Total Liabilities 11,429.4 9,357.6 8,260.2 4,611.0 6,019.7 7,623.4 Borrowing from financial institutions 5,308.3 3,460.3 2,888.7 776.2 1,749.0 3,566.6 Deposits 5,343.7 5,228.7 4,770.2 3,343.1 3,713.1 3,328.0

Assets

Total Assets 10,995.1 9,378.2 8,616.5 5,300.4 7,023.8 8,968.1 Advances (net of provisions) 2,505.5 2,771.7 2,751.7 2,928.7 2,852.4 2,855.0 Investment 6,911.3 4,869.5 4,117.5 1,446.5 2,653.4 4,662.7

RATIOS

Return on Assets -2.89% -2.21% -4.05% -6.28% -5.39% -4.76%Capital Adequacy Ratio (Required 10%) -13.65% -2.75% 6.79% 21.17% 30.37% 34.92%Earning/(Loss) per share (1.23) (0.83) (1.18) (1.62) (1.80) (1.61)

BUSINESS ACHIEVEMENTS

Recoveries of New portfolio 694.6 659.8 767.7 724.0 707.0 582.8 Advances disbursed during the Year 1,956.5 1,956.2 1,993.6 1,835.6 1,659.0 1,968.0 Number of SMEs Finances 397 481 447 552 579 652

OTHER INFORMATION

Number of Employees 497 490 495 462 477 491 Number of Banking branches 13 13 13 13 13 13 Total Branches/Recovery Offices 18 18 21 21 22 22

8

Directors ’ Repor t to the Shareholders

We are pleased to present the 16th annual report of SME Bank Limited with the audited accounts and auditors’ report thereon for the year ended December 31, 2017.

Economic ReviewAs opposed to the first half, the second one has been fraught with difficulties and uncertainties for the Banking sector, the main reason being political turmoil caused by the recent Supreme Court decision. The circumstances have wreaked havoc in the financial markets with no clear cut economic road map to tackle the challenges ahead, especially the burgeoning current account deficit and the recent devaluation of the rupee.

Even though the foreign exchange reserves have come under tremendous pressure, inflation has remained under control to-date. However, the recent devaluation of around 5% may turn things around on this front as well. However, with inflation clocking in at 3.85% for the first seven months, inflation is likely to be a non-factor till June 2018. SBP has raised the interest rate by 0.25 bps in January 2018 as a precautionary measure to stop the economy from overheating. CPEC does remain a decisive factor in the economic mix and with Pakistan almost out of the energy crisis that plagued the country for a decade, not everything looks as bad as some would have us believe. And with new elections just around the corner, a new era of certainty will be ushered in by the new Government.

The main challenges facing banks is the lack of credit uptake from the corporate sector and thus the lack of choice in terms of investment opportunities. It is a tricky situation for banks who will have to balance their books by keeping enough securities in hand to keep the interest income flowing while running the risk of facing an upward shift in the yield curve.

With GDP growth at 5.6%, Pakistan is still among the Top 3 economies in the region and if the next IMF program is negotiated smoothly without conceding too much ground on the policy framework, we do not see any problem with Pakistan achieving a 6% GDP growth rate.

Operational HighlightsThe Bank is operating with paid up capital of Rs 2.39 billion since 2007. State Bank has granted exemption to meet the requirement of minimum paid up capital of Rs 10 billion by December 31, 2017. Shareholders in their meeting on October 7, 2009, advised to recapitalize the bank by increasing its paid-up capital and management has approached Ministry of Finance for the same. The Board noted that in view of impending privatization of the bank, SBP’s constraints on business expansion, and very narrow equity base of less than Rs 2 billion, it is a challenge to operate the bank on self sustainable basis.

In view of restrictions placed by State Bank of Pakistan there was no change in branch network during the year 2017 and the Bank continued to operate with 13 commercial banking branches and five recovery offices.

9

Interest Rate ScenarioSBP discount rate at the beginning of the year 2017 was 6.25 percent. During the year there was no change in discount rate.

Credit RatingBank was assigned a long term as well as short term credit rating of B (Single B) by PACRA credit rating agency on November 09, 2017. The credit rating company has expressed that growth in the bank’s operations is restricted due to delay in injection of additional equity into the bank; that although the management is taking measures to improve business functions, operational sustainability is dependent upon equity injection by the primary sponsor.

Operational Results In the backdrop of narrow equity base and shortage of funds, management has been able to meet day to day liquidity needs and maintenance of statutory liquidity requirements (SLR) set by the State Bank of Pakistan. Despite enormous pressure of liquidity crunch, loans and advances portfolio stood at Rs 2,735 million. During the year under review income from SME lending operations decreased by an amount of Rs 17.410 million. The cost of deposits and borrowing increased by an amount of Rs 79.204 million. The average cost of deposits decreased to 5.56% as compared to 5.94% in 2016.

The bank has booked loss before tax of Rs 721 million during the year 2017 as compared to loss before tax of Rs 457 million in 2016, and Net loss of Rs 294 million as compared to Net loss of Rs 199 million in 2016. The reason for incurring losses were due to pending privatization, restructuring, limited outreach, inadequate level of equity and economic condition. In future, we expect to decrease the losses by enhancing revenues and reducing volume of our non-performing loans.

During the year 2017, the bank reversed net provision of Rs 16.877 million against non-performing loans as against reversal of provision of Rs 2.102 million in 2016. Loans and advances on account of the bank’s lending operation were Rs 2,735 million in 2017 to Rs 2,996 million in 2016.

The ongoing energy crisis seriously dampened the business activities in the country to a great extent, which in turn affected the repayment capacity and behaviour of the bank’s borrowers but despite these hindrances the management of the bank made persistent efforts to reduce the non-performing loans of the bank resulting in decrease from Rs 514 million on December 31, 2016 to Rs 505 million on December 31, 2017.

The deposits of the bank has been increased by Rs. 115 million and stand at Rs 5,344 million as on December 31,2017 as compared to last year Rs. 5,229 million as on December 31,2016, which is the highest ever. Bank has investment of Rs 215.46 million in SME Leasing Limited (SMEL) which is carried in these financial statements at Rs 128.495 million and has outstanding running finance exposure of Rs 110,352 million as at December 31, 2017. The company during the year has mainly focused on internal cash generation through recoveries from its portfolio and investing these to build-in new quality business. The company has managed to write fresh leases worth Rs 104 million.

Total recoveries aggregated to Rs 117 million (including Rs 39 million from non performing portfolio). The percentage of default in new business written over last 3 years has been negligible. Market value of

10

its share ranged between Rs 1.8 to Rs 6.9 per share over last 52 weeks .The Bank periodically reviews its investment in SMEL for evidence of any impairment. The recoverable amount of investment in SMEL is determined with reference to its value in use. The Bank uses present value techniques and financial projections of SMEL to calculate its value in use.

With regard to the exposure granted to SME Leasing Limited, SME Bank applied for exemption on per party exposure to SBP in 2015. SBP has granted relaxation to SME Bank Limited in single related party exposure limit under Prudential Regulation R-1 regarding the financing of Rs 150 million to SME Leasing Ltd for the period up to June 30, 2018, subject to the condition that exposure to related party be adjusted within the prescribed limit and a plan to this effect is required to be submitted to SBP, which was accordingly submitted. Paid-up CapitalThe Bank is operating with paid up capital of Rs 2.39 billion since 2007. In line with the SBP guidelines banks are required to raise paid up capital to minimum capital requirements of Rs 10 billion by December 31, 2016. However the State Bank of Pakistan has granted exemption to meet the requirements of minimum paid up capital till December 31, 2017, the bank has applied to SBP for extension in exemption till December 31, 2018.

Financial StatementsFinancial statements have been prepared in accordance with International Accounting Standards as applicable in Pakistan, SBP Prudential Regulations and Companies Ordinance 1984. The disclosures in notes to financial statements correspond to the requirement of law and guidelines issued by the regulatory authorities.

Internal Control over financial reportingThe board is fully committed to ensure the existence of an effective system of internal control in the bank and continuously reviews and evaluates the adequacy and integrity of those systems. However, the board recognizes that such systems are designed to manage rather than eliminate the risks identified to acceptable levels. Therefore, the systems implemented can provide only reasonable and not absolute assurance against the occurrence of any material misstatement and loss.

Whilst the Board has overall responsibility for the bank’s system of internal controls, it has delegated the implementation of these internal control systems to the management in order to identify risk and take action to mitigate the risk. These internal control systems are subject to the board’s regular review with a view towards appraising the effectiveness of these systems in the bank.

DepositsDespite all the impediments, the deposit portfolio of the Bank was increased to Rs. 5,344 million as on December 31, 2017, which is the highest ever.

Disbursements Liquidity constraints notwithstanding, the bank was able to achieve disbursement of Rs 1,957 million during the year as compared to Rs 1,956 million in the previous year. The number of clients served during the year was 397 and total number of outstanding borrowers stood at 1498 at the year end.

Leasing Business SME Leasing Limited, a subsidiary of the Bank incorporated in 2002, has posted a loss before tax of

11

Rs 22.175 million as compared to loss of Rs 13.056 million from last year. The increase in loss resulted from maturing leases, as pace of new leases written was slow and accelerated towards the year end and also due to certain non-recurring revenue in last year. Net equity of the company is 133 million (2016: Rs 157 million). PACRA has, assigned the long term entity rating at B+ (B positive) and short term at B with stable outlook. SME Leasing disbursed Rs74.56 million (2016: Rs 98.36 million) to 16 clients in 2017 (2016: 15). Outstanding lease portfolio stands at Rs 390 million with 206 clients.

Customer Complaint ManagementThe management believes in customer’s delight through better service delivery from all aspects and thus endeavour to promote a culture that values customer’s relationship and experience. A dedicated Vigilance Department is functioning to ensure timely resolution of complaints in order to foster customer confidence. It also coordinates with other functional divisions for improvement in SOPs and mechanism for facilitating the customers at SME bank.

A comprehensive Complaint Resolution Mechanism has been designed and is in place. It provides more than one channels to the clients for lodging their complaints to the bank. It outlines detail guidelines for receipt, recording, probing, resolving and responding to the complainants. Most of the complaints have been properly responded and ultimately resolved timely. An assessment survey also reflects the encouraging response from the banks’ customers.

Training & HR DevelopmentFor enhancement of skill/knowledge base of human capital available for specialised tasks, necessary training and skill development activities were carried out for the staff on the basis of training need assessment.

Information TechnologySME Bank has invested heavily in its Cyber Security infrastructure to enable itself for the launch of advanced Banking Services through non-traditional banking channels. SME Bank has established a state of art Cyber Security Operations Centre for continuous monitoring of its Cyber Traffic with capability to detect, withstand and respond to Cyber Security Incidents.

SME Bank has deployed advanced storage solutions, next generation firewall and servers etc. to power its proposed innovative offering with appropriate disaster recovery capability. Special focus has been given on training of IT resources to equip them with the latest trend and practices.

It is expected that these investments shall expedite the proposed launch of innovating Banking Products of SME Bank in the coming years.

Basel II & III In 2012, State Bank of Pakistan advised all banks to submit their information for Quantitative Impact Study (QIS) – Basel III. SME Bank has applied for exemption from submission of this statement on the basis of already granted exemption from Basel II; Now State Bank has granted exemption to the Bank from implementation of Basel II & III till its Restructuring/Privatization due to large investment required in software, human resource, training, etc.

Capital Adequacy ReturnBank is required to maintain CAR ratio at 10%. During the year ended on December 31, 2016 the CAR

12

of the bank has reduced from prescribed limit. Bank has applied for exemption from maintaining the CAR below benchmark. SBP has granted the exemption in meeting the minimum CAR requirements till December 31, 2017, the bank has applied to SBP for extension in exemption till December 31, 2018.

Income TaxesTax Department served notices regarding Income Tax pertaining to tax years 2003, 2004, 2005, 2008, 2010, 2012 and 2014. Bank has filed appeals with Appellate Tribunal for the tax years 2008 & 2010 among which tax demand for the tax year 2008 is in process for adjustment against tax refund for the tax year 2009. Whereas for the tax years 2003 and 2004 Tax Department has filed reference in The Islamabad High Court against decisions of the Appellate Tribunal & for the tax year 2005 tax department has filed an appeal with the Appellate Tribunal against the decision of CIRA. For the tax year 2012 appeal was filed by the bank with the Commissioner (Appeals) who remanded the case back to DCIR. The tax year 2014 is assessed u/s 122(1) / 122(5) of the ITO, 2001. Tax Years 2015, 2016 and 2017 deemed to be assessed u/s 120 of the ITO, 2001. Tax Department also served notices regarding FED/sales tax pertaining to the years 2008, 2009, 2010 and 2011-2012. Bank replied these notices and contested the cases resultantly tax year 2008 and 2010 have been remanded back for fresh consideration whereas the bank has filed appeals with the Appellate Tribunal Inland Revenue for rest of the cases.

Risk Management FrameworkTo comply with SBP guidelines on Risk Management, risk function of the Bank has been made more robust whilst the State Bank has exempted the Bank from implementation of Basel-II till its privatization. Risk Management Division (RMD) has been setup for preforming risk functions relating to various risk; particularly Credit Risk, Liquidity Risk, Interest Rate Risk & Operational Risk.

Moreover, lending decisions are subjected to extensive and diligent credit risk evaluation and assessment process. Obligor facility and guarantor internal credit risk rating system is in place and regular part of credit processing. Keeping in view the nature of SME lending, quick turnaround time and efficiency, credit risk managers/officers have been placed at branch level where ever feasible. Above a certain limit fixed, proposals are being reviewed at Head Office. Compliance with the State Bank’s regulations, policies and Bank’s own credit policies are ensured.

The management endeavors that bank’s operation and credit activities conform to the Prudential Regulations and SBP instructions are strictly followed and efforts are consistently made to incorporate good business practices for an effective risk management strategy.

Privatization of BankGoP decided to divest its equity stake in the Bank along with management control to a strategic investor through Privatization Commission (PC). Accordingly PC has appointed Financial Advisory Consortium (FCC) comprising of Elixir Securities Pakistan (Pvt) Limited, Bridge Factor (Pvt) Limited, KPMG Taseer Hadi & Co (financial and tax advisor) and Mohsin Tayebaly & Co. (Legal counsel) to conduct this transaction. The transaction structure was approved by PC board on January 17, 2017 and recommended to Cabinet Committee on Privatization (CCOP). CCOP approved the transaction structure in its meeting held on January 27, 2017. Thereafter PC invited Expression of Interest (EOI) on February 14, 2017, from reputed local and international investors who have an interest in entering the process towards acquiring strategic shareholding in SME Bank. Last date to receive Statement of Qualification (SOQ) is March 17, 2017.

13

Subsequently, based on SOQ’s received the Transaction Steering Committee of PC evaluated/assessed five interested parties for prequalification and forwarded its recommendation to PC Board for decision. PC board in its meeting held on 2nd November 2017 has pre-qualified 3 parties for due diligence and participation in bidding process.

Board of DirectorsBoard of Directors consists of seven directors nominated by the Federal Government; however, three positions two independent directors and one non-executive director remained vacant during the year. Board meets frequently and ensures to meet at least every quarter.

Board held five meetings during 2017; attendance of which is given hereunder:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 5Mr. Zarar Haider 5Mr. Ihsan ul Haq Khan 5Mr. Badr-ul-Arifeen 5 Board has constituted six sub-committees namely Audit Committee, Risk Management Committee, Human Resource Committee, Nomination Committee, Procurement Committee and Remuneration Committee.

Audit CommitteeThis committee consists of three non-executive directors and has been formed to assist the Board in fulfilling its statutory and fiduciary responsibilities. This committee is advisory in nature and does not perform any management function. It assists the Board in discharging its responsibilities and in complying with good governance. During the year 2017, four meetings of Board Audit Committee were held. Attendance in these meetings was as follows: Directors Meetings AttendedMr. Muhammad Adnan Jalil 4Mr. Badr-ul-Arifeen 4Mr. Zarar Haider 4

Risk Management Committee This Committee consists of two non-executive and one independent director and it assists the Board in measurement and mitigation of different risks. During the year 2017, four meetings of Board Risk Management Committee were held. Attendance in these meetings was as follows:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 4Mr. Badr-ul-Arifeen 4Mr. Zarar Haider 4

Human Resource CommitteeBoard Human Resource Committee comprising three directors has been formed to assist the Board

14

in all staff related matters, policies and benefits including compensation. During the year 2017, three meetings of Board Human Resource Committee were held. Attendance in these meetings was as follows:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 3Mr. Badr-ul-Arifeen 3Mr. Ihsan ul Haq Khan 3

Procurement CommitteeBoard Procurement Committee comprising three directors has been formed to prepare, review and recommend to the Board, Procurement related policies to ensure transparency in procurement transactions and in dealing with suppliers. During the year 2017, no meeting of Board Procurement Committee was held. Nomination CommitteeThis Committee consists of two non-executive directors and it assists the Board in identification and recommendation of independent directors on the Board. It meets on need basis. No meeting was held of Board nomination Committee during the year 2017.

Board Remuneration CommitteeThis Committee consisting of one independent and one non-executive director was formed as per instructions of SBP received vide BPRD circular # 2 of 2017 to assist the Board in development of the structure of compensation package of Executive Directors, CEO, Key Executives and any other employee or group of employees and subsequent improvements therein to encourage the culture of ‘pay for performance’. During the year 2017, one meeting of Board Remuneration Committee was held. Attendance in these meetings was as follows:

Directors Meetings AttendedMr. Muhammad Adnan Jalil 1Mr. Badr-ul-Arifeen 1

Performance Evaluation of BoardIn the light of SBP instructions, Framework for Performance Evaluation of Board has been put in place. Keeping in view size and operations of the Bank, In-house Approach and Quantitative Technique for annual performance evaluation of overall board, committees and individual directors has been adopted. Performance evaluation has been conducted accordingly for the year 2017.

Corporate Governance and Financial Reporting FrameworkSME Bank is committed to observe good corporate governance and has adopted the recently promulgated governance framework for public sector companies. The Directors have ensured that adequate arrangements are made to meet the financial recording and reporting parameters and are pleased to state that:

• proper books of accounts as required by Companies Ordinance have been maintained;• applicable international financial reporting standards have been followed in preparation of annual

accounts;• the accounts have been prepared on going concern basis and the Bank has adopted prudent

15

accounting policies and used sound accounting estimates;• Appropriate accounting policies have been consistently applied in preparation of financial

statements and accounting estimates. Any departure has been adequately disclosed and explained;• the financial statements prepared by the management of the Bank present fairly, state of affairs of

the Bank as at December 31, 2017, the results of its operations for the period then ended, cash flow and changes in equity;

• the appointment of chairman and other members of board and the terms of their appointment along with the fee/remuneration adopted are in the best interests of the Bank as well as in line with the best practices.

• appropriate systems of internal control have been put in place for managing significant risks, with adequate arrangements for its effective implementation, continuous review and monitoring;

• the Board of Directors is satisfied with Bank’s ability to continue as a going concern; on the basis explained in note 6.2.

• there are no outstanding statutory payments on account of taxes, duties and levies as on December 31, 2017, except as disclosed in the financial statements;

• the value of investments held for staff funds is reflected in note 33 of notes to the accounts;• Bank has complied with the provisions of Public Sector Companies (Corporate Governance) Rules,

2013 and there has been no material departure from the best practices of Corporate Governance. • Key Operating and financial data of last six years is available in annual Reports.

Shareholding PatternThe statement showing pattern of shareholding as at December 31, 2017, as required under Code of Corporate Governance is annexed.

Loss per shareThe basic and diluted after tax loss per share for the year 2017 is Rs. (1.23). (2016: Rs. (0.83)

AuditorsThe present auditors, M/s Grant Thornton Anjum Rehman, Chartered Accountants, have completed their assignment for the year ended December 31, 2017 and shall retire at the conclusion of 16th Annual General Meeting. Being eligible, they have offered themselves for reappointment. As advised by Board Audit Committee, Board recommends appointment of M/s Grant Thornton Anjum Rehman as auditors for the year 2018.

AppreciationWhile the Board appreciates the efforts of the management and staff trying to steer the Bank out of the current situation, it also highlights the need of more efforts for improving the recovery drive and for enhancing disbursements. The Board would also like to thank State Bank of Pakistan and other regulatory authorities for their continued support and guidance and the shareholders for the trust and confidence reposed in us.

_______________Chairman

(Of the meeting)

16Page 13 of 13

��

��

��

��

��

��

��

��

��

��

��

��

��

��¡��

��

�� ¢�� £��¤��¥��¦��§��¨��

©��ª«��¬�� ¢��¤�� ¡ ��®��£

¯°��±�� ²��³��´�µ��¶��

��

��

��·�¸��

17Page 12 of 13

��

��

��

��

� ��

�

��

� ��

�

��¡¢

� £¤� �¥��

�

��¦�� §��¨��©�� ª ��ª��

�

��«

��

�

��

� ��§��¬��¥��

�

��¥� ¤��®��¯��

�� °��¡��¢��±��

� �²�� £��®��³��§��²��´�� µ

��²�µ��¶��·��¸�§��¬��

� ��¹�� º¢��»��¼�� ²��¹��¼��½��¾�¿��

�� ª ��ÀÁª �§��ÂÃ�Ä��

� ��Å��Æ�Ç��ÈÉ��£¤� � �¦��¥� ¤��²��

��Ê��Ê��

� ��Ë� �� Å��§��¬��¥�� ½��©�¼��§��¨��

� �²��¶��Ì��¼�� Í��³��Î��Ï��Ð��¡��Ê��Ñ��µ�

��©��®

� �Ë��¡��Ò��¢�� £��£�¤��Ó��

� ��Ô��§��¶��§��

��Õ��Ð��¯�Ñ��¥��Å

� ��Ö ��¡��¡¢�¥��§��Ç��§�¥¦¢��§¨

18Page 11 of 13

��

��

��

��

��

��

��

��

��

�

� ��

��

��

��

��

�� ¡��¢�£�� ¤��

�� ¥��

��¦ �

��

��§��§�� ¨©��

� �� ª��§��«¬��®�� §�«¯��̈��

��ª�°�±��§�¤��§� ��§� ��

19Page 10 of 13

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

20

Page 9 of 13

� ��

��

��

��

��

��

�

��

��

��

��

��

��

��

��¡�¢��£¤� �� ¥� ��¦��

��¢§��¨��©�ª��¢��

�� ¢�� «� �

�� «� �

¢¡��¢¬��«� �

��® �

��

�

�� ̄�� °��±�� £¤� ��

��

��

��

�� ©�� ²�³�� ´µ�� £¤� �� ¥� ��¶��¢��

��·��¸�¹�º��·��°��©��»��

��·��¢��³��¼��°��¢��

��¨��©�ª��

21Page 8 of 13

��

��

��

��

� �

��

��

��

��

��

��

��

��

�� ¡��

�� ¢£��¤��¥��

�

��¦�� §�� ¨�

��¥��©��ª�� ¥��«��¥��

��¬��®��

�¯�� ¥�°�� ±��ª��

��

��

��²��³��´��¢��

�� ¢��

��

��µ��¶�� ·��¸�� ¸�� ¹�º»��¯�� ¼��

��¦�½�� ¾¿ �À �

Á� �� À ��Â��¯��Ã��¬��Ä��½��

¾� �

�� ´�� ¡�� Å��

�� Æ�� Ç�� Ä� �� Ä� ��

��È��Ç�� ·É�Ê��·É��¥��

22Page 7 of 13

��

��

��

��

��

��

��

� ��

��

��

�� ¡�

��¢��£��¤��

��

��¥�� ¦§��¨��©��ª«��¬��®��¯�°��

� ��±� �� ²�¤�� ³��´��µ�

�� ¬��£��¶�� ·��·�¤��

��¬��£��¤

��

�®��

��

�®��¸��¹�� ®�¨�º�

�� ®�� ®�� »��

��©�¼�� £��½��¾��

�®�� ¿��

��®��À��Á��

®��Â��©��Ã��©��

23Page 6 of 13

��

��

��

��

��

��

��

��

�� ¡��¢�£¤��

¥��¦��§�� ¨��¦��

�� ©��¨��

�ª��«�� ¬��®�®��®�¯�� ¬��

�� ¥�� °��¨��¢�� ±��

��

²��£¤��³�´��¬��µ��

��¶��

� ��

�� ·� �

�

��¸� ��³��¹��º§��»¼� °½� �¾��©��¨��¿��

��ª��¦�� ®��³��À��¨��Á��Â��Ã� ��³�·��

��¢��Ä��Ã��´��

��¡�� ¢£� ��¸��³��¤ �¡�®¢�¥��¦�§��¿��¨��¨Ã��

��©ª��Å��Æ«��ª� �� ¡��Á��¬��Ç®��¯��°��

��ÈÉ��

24Page 5 of 13

��

��

��

��

��

��

�� ¡¢�� £��

��¤��¥��¦�§��¤�� ¤��

��

��¨�©�¨�ª�� «�� ¬��®��

��

� �� ¯�� °��®��±�®��

��«��²��±��¡��¢��«��²��±��³´��£ �¤��¤

��

��¥�� µ�¦§��¶��·�� ¨��©��°��®��

��¸�ª��«��¬ ��³´��®��¯°��«��¹��±��«��º©�®��

��»¼��²��¤½´��¾��¢��³

��

25Page 4 of 13

��

��

��

� ��

��

��

�� ¡��¢£��¤��

��¡��¢£��¤��¥� �¦�� §

��¨��

��©�ª�� « �¬�� ®��¯�� ¡

¢£¢¨©�¤© ��¥ �¦��°�

§�±��¡��¢£��¤�� ¨��©�¢ª�²«¬®¯°�� ±³�²��´�³�

�´ ��´��µ¶

��

��·� ��¬¸�¹��¡��¢£��¤��µ��º�£�� »� �¦ �

�°�¼�¸ ��½��¶��· �� §��¸��«��¹º��§��»

¤�� »��¬��½�� ¡��¢£��· �� §

��· ��¥� ��¾��¼¿��¡��¢£��¤��§

��

�À�� ¢ �

Á½

Â

Ã��Ä�� ¬�� ¤��¾� �Å��Æ��¡��°�Ç�ÈÉ� �� Ê � � ��©�ª��¡��¢£

Ë�� Ì�Í��Î��ÏÐ�¿��¬�� ¾�� Ñ �ÈÉ��¬¸�¹��Ð��

��¸�³�¬�Ò��½��ÈÉ�¾��´

26Page 3 of 13

��

��

��

��

��

��

��¡��

��¢��¡��£��

�¤��¥�� ¦�§��§�� §��¨��©��ª��«��

�¬�® �¯°��±��£��²��£��³��

�� ³��´µ¶�·��¡��

�� ¸¹��

��

�º¶�� ¥��»��¦�° �¥��¼�½��¾��£�£��¿�� £��

��³��£�� À��½��Á��´��

�� Â�� Â��Ã��

��¡¢ ��Â��¡��

��Â��´�Ã��Ã��

Ä��£�� Å�ÆÇµ��È��¤�� ´µ¶��

��¥�¢��Â��¦§ �¨��©��Ã��¥�¢�Éª��

Ê«��¬��®�Ë�� ¯©�°��²��Ì��±��²³��´��µ

27Page 2 of 13

��

��

��

��

�� ¡��¢��£¤��¥

��¦��¡��¡��§��¨��¢��©��¦�� ª ��

�� «��¬®¯�°��±��²³��¡��¡��´��µ��¶��¬��¦��

��·¸�� µ�¹�º� �¬��»�¼��¹��½®��¾¿�� ¾��À��Á

��Â��À�Ã��Ä��Å�§��°��Æ�� Ç��¢��È��É��

��

��Ã��Ê��¾�� ª��

�� ¡�

��Ë� ��

�

��ª�Ì��

��

� ��ÍÎ

�

��»��¾��ÍÎ

�

��»��

��

��

� ��

��

�� ¡¢�£��¤�¥��¦�§��¨��§� �©ª��«¬��®�¯�

��°��±��

28Page 1 of 13

��

��

��

��

�� ¡��¢��£�¤�� ¥�

��¦�§��¡��¨��©ª��«� �¬�¤®��¯� ��°��±�� ²��³�¡�´�¬µ��

§��¶��·��¸¹��º�¡�»¼��»��½��¾�¿À��¬�¤��¡�ÁÂ�� Ã��Ä�

��«�Å�Æ��½��Ç��È��ÉÊË�ÌÍÎ

±��¼Ï �®Ð��ÑÀÒ�¡�Ó Ô��Õ��Ö�×�¡��ØÙ�Ú�Û�½��Ü�Ý��Þ��ßà��á��·�� â�Ï��

�¡��Ü�Ý��Î��ã��±�ä��å��æ�½�Òç��Ä�§��Ü�Ý��æ� â�Ï�¡��è�é�êë�¡

�°â��ì��í��î�±�ï��ðñ��ò��Ú��¡��ó�¬�� ôÜ�Ý��õ��½��¾�¡�ö÷Î�� ø��

��ùú��ûü��³��ý�¸¹��þ�Å�

��ÿ��±��~� �¬�°�}�¡�²|�{â�°[\�¬�²] �ò��±�^�_�`�ò��@�?�� Ã��>�©��=�<Ï�¬��

��;�:��±/��.��ê-�,�â�+��¡��Ï*��)��±�(��'��,�&�%��$�#�¬�"!��01�

��2�� )�ò��3

��4Î��ù!�©��5��6�7ë�¬��°8��±��9�|��ÉAB��â��ÉCD�¡��ÿ*��¬�E

�5��F�G�¡ H��ÉØI��ÿJ�K��L��±��M�ò��³�¡�ÉC�4�²��NÈ��³�¡�

��½��¡��O�¡��« P��\�K�Q�RST UVT WX�Y��Za��b��cÈ�"!¼d�¡�ef�� g�,h�i��

�è�(��ë�

29

Shareholding Patter n

The pattern of shareholiding as at December 31, 2017 is given below ;

Sr. # Categories of Shareholders No. of Share holders Shares held Percentage123

Federal GovernmentBanksIndividuals

167

224,615,978 14,634,715

7

93.886.12

-Total 14 239,250,700 100

Government of Pakistan is the only shareholder holding 10% or more voting interests.Position of shareholding by each director is as under:

Name of Directors Shares held

1 Mr. Muhammad Adnan Jalil 01

2 Mr. Ihsan ul Haq Khan 01

3 Mr. Muhammad Alamgir Chaudhry 01

4 Mr. Zarar Haider 01

5 Mr. Badr-ul-Arifeen 01

5 Mr. Majyd Aziz Balagamwala (retired since Jan 23, 2013) 01

7 Mr. Zahid Oosman (retired since March 06, 2014) 01

30

Statement of Compliancewith Public Sector Companies (Corporate Governance) Rules, 2013For the year ended December 31 , 2017

SCHEDULE I[See paragraph 2(1)]

SME Bank LimitedMinistry of FinanceYear ending December 31, 2017

I. This statement is being presented to comply with Regulation G-1 of the Prudential Regulations for Corporate/ Commercial Banking issued by the State Bank of Pakistan and the Public Sector Companies (Corporate Governance) Rules, 2013 (hereinafter called “the Rules”) issued for the purpose of establishing a framework of good governance, whereby a public sector company is managed in compliance with the best practices of public sector governance.

II. SME Bank Ltd (the Bank) has complied with the provisions of the Rules in the following manner:

Sr. No. Provision of the Rules Rule

No.Y N Remarks

Tick the relevant box

1. The independent directors meet the criteria of independence, as defined under the Rules.

2(d)

2. The Board has at least one-third of its total members as independent. At present the board includes:

Category Names Date of appointment

Independent Directors Mr. Muhammad Adnan Jalil 23-07-2012

Executive Directors Mr. Ihsan ul Haq Khan 02-06-2017

Non-Executive Directors

Mr. Zarar Haider

Mr. Badr-ul-Arifeen

16-07-2013

27-10-2015

3(2) Government of Pakistan has not nominated directors as a result of which three seats (2 independent & 1 non-executive director) are vacant. Although non-executive director was nominated but his appointment could not be operationalized awaiting SBP clearance.

3. The directors have confirmed that none of them is serving as a director on more than five public sector companies and listed companies simultaneously, except their subsidiaries.

3(5)

4. The appointing authorities have applied the fit and proper criteria given in the Annexure to the Rules in making nominations of the persons for election as board members under the provisions of the Act.

3(6) All the nominations on the Board of Directors are made by the GoP

5. The chairman of the board is working separately from the chief executive of the Bank.

4(1) The Bank currently does not have Chairman of the Board of Directors

6. The chairman has been elected by the board of directors except where Chairman of the board has been appointed by the Government.

4(4) The Bank currently does not have Chairman of the Board of Directors

31

7. The Board has evaluated the candidates for the position of the chief executive on the basis of the fit and proper criteria as well as the guidelines specified by the Commission.

5(2) Federal Government had re-appointed CEO and has later extended his re-appointment period.

8. a) The Bank has prepared a “Code of Conduct” to ensure that professional standards and corporate values are in place.

b) The Board has ensured that appropriate steps have been taken to disseminate it throughout the Bank along with its supporting policies and procedures, including posting the same on the Bank’s website. (www.smebank.org)

c) The Board has set in place adequate systems and controls for the identification and redressal of grievances arising from unethical practices.

5(4)

9. The Board has established a system of sound internal control, to ensure compliance with the fundamental principles of probity and propriety; objectivity, integrity and honesty; and relationship with the stakeholders, in the manner prescribed in the Rules.

5(5)

10. The Board has developed and enforced an appropriate conflict of interest policy to lay down circumstances or considerations when a person may be deemed to have actual or potential conflict of interests, and the procedure for disclosing such interest.

5(5)(b)(ii)

11. The Board has developed and implemented a policy on anti-corruption to minimize actual or perceived corruption in the Bank.

5(5)(b) (vi)

12. The Board has ensured equality of opportunity by establishing open and fair procedures for making appointments and for determining terms and conditions of service.

5(5)(c)(ii)

13. The Board has ensured compliance with the law as well as the Bank’s internal rules and procedures relating to public procurement, tender regulations, and purchasing and technical standards, when dealing with suppliers of goods and services.

5(5)(c)(iii)

14. The board has developed a vision or mission statement, corporate strategy of the Bank.

5(6)

15. The Board has developed significant policies of the Bank. A complete record of particulars of significant policies along with the dates on which they were approved or amended, has been maintained.

5(7)

16. The board has quantified the outlay of any action in respect of any service delivered or goods sold by the Bank as a public service obligation, and has submitted its request for appropriate compensation to the Government for consideration.

5(8) None

17. The Board has ensured compliance with policy directions requirements received from the Government.

5(11)

32

18.a) The board has met at least four times during the year.

b) Written notices of the board meetings, along with agenda and working papers, were circulated at least seven days before the meetings.

c) The minutes of the meetings were appropriately recorded and circulated.

6(1)

6(2)

6(3)

19. The Board has monitored and assessed the performance of seniormanagement on annual/half-yearly/quarterly basis and held them accountable for accomplishing objectives, goals and key performance indicators set for this purpose

8 Performance of management is assessed on quarterly basis while reviewing quarterly accounts.

20. The board has reviewed and approved the related party transactions placed before it after recommendations of the audit committee. A party wise record of transactions entered into with the related parties during the year has been maintained.

9

21. (a) The board has approved the profit and loss account for, and balance sheet as at the end of, the first, second and third quarter of the year as well as the financial year end.

(b) In case of listed PSCs, the Board has prepared half yearly accounts and undertaken limited scope review by the auditors.

(c) The Board has placed the annual financial statements on the Bank’s website.

10

22. All the board members underwent an orientation course arranged by the Bank to apprise them of the material developments and information as specified in the Rules.

11

23. a) The board has formed the requisite committees, as specified in the Rules.

b) The committees were provided with written term of reference defining their duties, authority and composition.

c) The minutes of the meetings of the committees were circulated to all the board members.

d) The committees were chaired by the following non-executive directors:

Committee Number of members Name of Chair

Audit Committee 3 Mr. Muhammad Adnan JalilRisk Management Committee 3 Mr. Zarar Haider

Human Resources Committee 3 Mr. Muhammad Adnan Jalil

Procurement Committee 3 No meeting was held during the

yearNomination Committee 2 No meeting was held during the

year

12

However, no meeting of procurement committee and nomination committee was held during the year as required by TOR of committee approved by Board.

33

24.The Board has approved appointment of Chief Financial Officer, Company Secretary and Chief Internal Auditor, by whatever name called, with their remuneration and terms and conditions of employment.

13

25.The Chief Financial Officer and the Company Secretary have requisite qualification prescribed in the Rules. 14

26.The Bank has adopted International Financial Reporting Standards notified by the Commission in terms of sub-section (1) of section 225 of the Act.

16

27.The directors’ report for this year has been prepared in compliance with the requirements of the Ordinance and the Rules and fully describes the salient matters required to be disclosed.

17

28.The directors, CEO and executives, or their relatives, are not, directly or indirectly, concerned or interested in any contract or arrangement entered into by or on behalf of the company except those disclosed to the company.

18

29.(a) A formal and transparent procedure for fixing the remuneration

packages of individual directors has been set in place and no director is involved in deciding his own remuneration.

(b) The annual report of the Bank contains criteria and details of remuneration of each director.

19

30.The financial statements of the company were duly endorsed by the chief executive and chief financial officer before consideration and approval of the audit committee and the Board.

20

31. The board has formed an audit committee, with defined and written terms of reference, and having the following members:

Name of mem-ber Category Professional

backgroundMr. Muhammad Adnan Jalil Independent Businessman

Mr. Badr-ul-Arifeen Non-Execu-tive

Deputy Secretary- Ministry of Finance

Mr. Zarar Haider Non-Execu-tive

Joint Secretary- Min-istry of Industries & Production

The chief executive and chairman of the Board are not members of the audit committee.

21(1)&

21(2)

32. (a) The chief financial officer, the chief internal auditor, and a representative of the external auditors attended all meetings of the audit committee at which issues relating to accounts and audit were discussed.

(b) The audit committee met the external auditors, at least once a year, without the presence of the chief financial officer, the chief internal auditor and other executives.

(c) The audit committee met the chief internal auditor and other members of the internal audit function, at least once a year, without the presence of chief financial officer and the external auditors.

(d) The audit committee shall appoint a secretary of the Committee, who shall circulate minutes of its meetings to the all members, directors and the chief financial officer, within fourteen days of the meeting.

21(3)

21(9)

Minutes of meetings have not been circulated within fourteen (14) days of the meetings.

34

33. (a) The board has set up an effective internal audit function, which has an audit charter, duly approved by the audit committee.

(b) The chief internal auditor has requisite qualification and experience prescribed in the Rules.

(c) The internal audit reports have been provided to the external auditors for their review.

22

34. The external auditors of the Bank have confirmed that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on Code of Ethics as applicable in Pakistan.

23(4)

35. The auditors have confirmed that they have observed applicable guidelines issued by IFAC with regard to provision of non-audit services

23(5)

Ihsan ul Haq Khan Muhammad Adnan JalilCEO Independent Director

35

Explanation for Non-Compliance with Public Sector Companies (Corporate Governance) Rules, 2013For the year ended December 31 , 2017

We confirm that all other material requirements envisaged in the Rules have been complied with except for the following, toward which reasonable progress is being made by the bank to seek compliance by the end of next accounting year:

Sr. No.

Rule/

sub-rule no.Reasons for non- compliance Future course of action

1. 3(2) Government of Pakistan has not nominated directors as a result of which two seats of independent directors are vacant.

Appointment by Federal Government is awaited

2. 3A(2) Government of Pakistan (GoP) has not nominated Directors to fill the casual vacancies.


3. 4(1) & 4(4) Government of Pakistan (GoP) has not nominated Chairman of Board of Directors.


4. 21(9) Minutes of meetings of the Audit Committee have not been circulated within a fourteen days (14) of the meetings to all members, directors and the CFO

Minutes are usually circulated within 14 days, however, we will ensure compliance in future.

Ihsan ul Haq Khan Muhammad Adnan JalilCEO Independent Director

36

The management of SME Bank recognizes its responsibility to establish and maintain a sound system of internal controls to provide reasonable assurance to achieve the following objectives.

• Efficiency and effectiveness of operations• Compliance with applicable laws and regulations• Reliability of financial reporting

The internal control system encompasses policies and procedures relating to all processes, products and activities of the Bank’s operations. The internal control policies and procedures are being reviewed by an independent internal audit function reporting directly to the Audit Committee of the Board of Director.

In management’s assessment, these systems, policies and procedures provide reasonable assurance as to the integrity and reliability of those controls and reports produced thereon. It recognizes the fact that these system are designed to mitigate and manage, rather than eliminate the risk of failure to achieve business objectives.

The board is fully committed to ensure the existence of an effective system of internal control and risk management and continuously reviews and evaluates the adequacy and integrity of those systems.

Internal Control over Financial Reporting (ICFR) aims to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the applicable financial reporting standards. We have endeavored to follow the guide-lines issued by State Bank of Pakistan on Internal Control.

State Bank of Pakistan has granted exemption to SME Bank Ltd from submitting Long Form Report by its Statutory Auditors, with the condition that if any material gap on bank’s ICFR are reported by its inspection team/or Board Audit Committee ,then this exemption will be revoked. The SBP also advised to submit the Annual Assessment report on efficacy of ICFR through Board Audit committee to OSED.

Moreover SBP also advised to apprise its Board of Directors to take ownership of ICFR and Board Audit Committee to monitor progress and submit a detailed quarterly progress report regarding bridg-ing of gaps to SBP

The Bank has revised the internal control policy in the year 2015 which emphasis that Management of the bank is responsible for maintaining a suitable system of ICFR that provides reasonable assurance regarding the reliability of financial reporting. The management should use a top down, risk-based approach, including the entity level and activity level controls in assessing financial reporting risks and the adequacy of controls

Chief Financial Officer

Statement of Inter nal ControlFor the year ended December 31 , 2017

37

Grant Thornton Anjum Rahman

302 B, 3rd Floor Evacuee Trust ComplexAga Khan Road, F-5/1Islamabad Pakistan

Chartered AccountantsMember of Grant Thornton International Ltd.

T: +92 51 2271906, 2274665F: +92 51 2273874www.gtpak.com

Review Report to the Members on Statement of Compliance with the Public Sector Companies (Corporate Governance) Rules, 2013We have reviewed the enclosed Statement of Compliance with the best practices contained in the Public Sector Companies (Corporate Governance) Rules, 2013 (the Rules) prepared by the Board of Directors of SME Bank Limited (“the Bank”) for the year ended December 31, 2017 to comply with Regulation G-1 of the Prudential regulation for Corporate/Commercial Banking issued by State Bank of Pakistan and the requirements of the provisions of Public Sector Companies (Corporate Governance) Rules, 2013.

The responsibility for compliance with the Rules is that of the Board of Directors’ of the Bank. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Bank’s compliance with the provisions of the Rules and report if it does not, and to highlight any non-compliance with the requirements of the Rules. A review is limited primarily to inquiries of the Bank’s personnel and review of various documents prepared by the Bank to comply with the Rules.

As a part of our audit of the financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an opinion on the effectiveness of such internal controls, the Bank’s corporate governance procedures and risks.

The Rules requires the Bank to place before the Audit Committee, and upon recommendation of the Audit Committee, place before the Board of Directors for their review and approval of its related party transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm’s length transactions and transactions which are not executed at arm’s length price and recording proper justification for using such alternate pricing mechanism. We are only required and have ensured compliance of this requirement to the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the Audit Committee. We have not carried out any procedures to determine whether the related party transactions were undertaken at arm’s length price or not. Moreover, the Rules also requires the Board of Directors to ensure compliance with the law as well as the Bank’s internal rules and procedures relating to public procurement, tender regulations, and purchasing and technical standards, when dealing with suppliers of goods and services, in accordance with the PPRA Rules. We have not carried out any procedures to verify the compliance with the above stated requirements of PPRA Rules.

Based on our review, nothing has come to our attention, which causes us to believe that the Statement of Compliance does not appropriately reflect the Bank’s compliance, in all material respects, with the best practices contained in the Rules as applicable to the Bank for the year ended 31 December 2017.

Further, we highlight instances of non-compliance with the requirements of the Rules as reflected in Schedule II to the Statement of Compliance.

GRANT THORNTON ANJUM RAHMANChartered AccountantsAudit Engagement Partner: Nadeem TirmiziIslamabadMarch 08, 2018

This page is intentionally left blank

39

SME BANK LIMITEDUNCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2017

41




T: +92 51 2271906, 2274665F: +92 51 2273874www.gtpak.com

Auditors ’ Repor t to the Members

We have audited the annexed unconsolidated statement of financial position of SME Bank Limited (the “Bank”) as at December 31, 2017 and the related unconsolidated profit and loss account, unconsolidated statement of comprehensive income, unconsolidated statement of changes in equity and unconsolidated cash flow statement, together with the notes forming part thereof (here-in-after referred to as the ‘financial statements’) for the year then ended, in which are incorporated the unaudited certified returns from the branches except for eight branches which have been audited by us and we state that except for the matters as stated in paragraphs ‘a’ and ‘b’ below, 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 Board of Directors to establish and maintain a system of internal control, and prepare and present the above financial statements in conformity with approved accounting standards and the requirements of the Banking Companies Ordinance, 1962 (LVII of 1962), and the Repealed Companies Ordinance, 1984 (XLVII of 1984) as directed by Securities and Exchange Commission of Pakistan (SECP) vide circular no. 23 dated October 04, 2017. Our responsibility is to express an opinion on these financial statements based on our audit.

Except for the matters as stated in paragraph ‘a’ and ‘b’ below, we conducted our audit in accordance with the International Standards on Auditing as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, which in case of loans and advances covered more than sixty percent of the total loans and advances of the Bank, we report that:

a) The Bank has investment in SME Leasing Limited (SMEL) which is carried in these financial statements at Rs. 128.495 million (net of provision of Rs. 86.962) and has outstanding running finance exposure of Rs. 110.352 million at the reporting date. SMEL continues to operate on a net loss basis and therefore the recoverability of investment and running finance exposure is doubtful of recovery. In the absence of detailed future projection of operations, we are unable to determine the extent of impairment against the current carrying values of investment and running finance and its possible effect on current year losses and accumulated losses; and

b) Deferred tax asset of Rs. 465.198 million has been recognized on the basis of expected net profits arising from future privatization of the Bank as described in Note 13.1 to the financial statements which we have not been able to verify.

c) Except for the possible effects of matters stated in paragraphs ‘a’ and ‘b’ above, in our opinion, proper books of account have been kept by the Bank as required by the Repealed Companies Ordinance, 1984 (XLVII of 1984), and the returns referred to above received from the branches have been found adequate for the purposes of our audit;

42



d) in our opinion, except for the possible effects of the matters stated in paragraphs ‘a’ and ‘b’ above:

(i) the unconsolidated statement of financial position and unconsolidated profit and loss account together with the notes thereon have been drawn up in conformity with the Banking Companies Ordinance, 1962 (LVII of 1962) and the Repealed Companies Ordinance, 1984 (XLVII of 1984), and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the Bank’s business; and

(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Bank and the transactions of the Bank which have come to our notice have been within the powers of the Bank;

e) Except for the possible effects of the matters stated in paragraphs ‘a’ and ‘b’ above, in our opinion and to the best of our information and according to the explanations given to us, the unconsolidated statement of financial position, unconsolidated profit and loss account, unconsolidated statement of comprehensive income, unconsolidated statement of changes in equity and unconsolidated cash flow statement together with the notes forming part thereof conform with the approved accounting standards as applicable in Pakistan, and give the information required by the Banking Companies Ordinance, 1962 (LVII of 1962) and the Repealed Companies Ordinance, 1984 (XLVII of 1984), in the manner so required and give a true and fair view of the state of the Bank’s affairs as at December 31, 2017 and its true balance of the loss, its comprehensive income, its cash flows and changes in equity for the year then ended; and

f) 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.

We draw attention to the following matters:

i. Note 6.2 to the financial statements which describes that during the current year, the Bank incurred a net loss of Rs. 294.022 million (2016: 199.242 million) resulting into accumulated losses of Rs. 3,005 million (2016: Rs. 2,591 million). As of December 31, 2017, the reporting date, the total liabilities of the Bank have exceeded its total assets by Rs. 434.345 million and, as of that date, the accumulated losses have surpassed the equity by Rs. 406.365 million. Due to cash deficit the Bank has not been able to meet the minimum capital requirement (MCR) of 10,000 Million for the year, falling short by Rs. 10,406 million (2016: Rs. 9,991 million). Based on the operational results the State Bank of Pakistan has waived the MCR of Rs. 10,000 million till December 31, 2017. The cash shortage has also not improved due to negligible government of Pakistan (GOP) budget allocation for the Bank. These conditions indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern;

ii. Note 11.2 to the financial statements, which describes in detail the transfer of outstanding loan portfolios of Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) to the “Federal Consolidated Fund” managed by the ministry of finance government of Pakistan – a related party;

43



iii. Note 12.2.1 to the financial statements, which describes in detail the sale of Bank’s properties to the ministry of finance government of Pakistan – a related party; and

iv. Note 14.2 to the financial statements, which describes in detail the status of possession of property at Lahore.

Our opinion is not qualified in respect of above matters.


44

UNCONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at December 31 , 2017

Badr-ul-ArifeenDirector

Ihsan ul Haq KhanPresident/CEO

Muhammad Adnan JalilDirector

Zarar HaiderDirector

AS AT DECEMBER 31, 20172017 2016

NoteASSETS

Cash and balances with treasury banks 7 435,791 560,802 Balances with other banks 8 11,321 4,226 Lendings to financial institutions 9 - 445,000 Investments 10 6,911,314 4,869,535 Advances 11 2,505,509 2,771,720 Operating fixed assets 12 64,251 101,859 Deferred tax assets - net 13 465,198 256,177 Other assets 14 601,710 368,896

10,995,094 9,378,215 LIABILITIES

Bills payable 15 92,554 95,443 Borrowings 16 5,308,315 3,460,326 Deposits and other accounts 17 5,343,655 5,228,716 Sub-ordinated loans - - Liability against assets subject to finance lease - - Deferred tax liabilities - - Other liabilities 18 684,915 573,082

11,429,439 9,357,567 NET (LIABILITIES)/ASSETS (434,345) 20,648

REPRESENTED BYShare capital 19 2,392,507 2,392,507 Reserves 20 206,526 206,526 Unappropriated loss 20 (3,005,398) (2,590,705)

(406,365) 8,328 (Deficit)/surplus on revaluation of assets - net of deferred tax 21 (27,980) 12,320

(434,345) 20,648

CONTINGENCIES AND COMMITMENTS 22

____________________Chief Financial Officer

________________ ____________ ____________ _____________President/CEO Director Director Director

UNCONSOLIDATED STATEMENT OF FINANCIAL POSITION SME BANK LIMITED

(Rupees in '000)

The annexed notes from 1 to 41 and annexure A form an integral part of these unconsolidated financialstatements.

45

UNCONSOLIDATED PROFIT AND LOSS ACCOUNTFor the year ended December 31 , 2017UNCONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED DECEMBER 31, 2017

NoteMark-up/return/interest earned 23 649,278 615,070 Mark-up/return/interest expensed 24 520,408 441,204 Net mark-up/interest income 128,870 173,866 Provision against non-performing loans and advances - net 11.5 (16,877) (2,102) Charge/(reversal) for diminution in the value of investments 10.4 70 (62,164) Bad debts written off directly - -

(16,807) (64,266) Net mark-up/interest income after provisions 145,677 238,132 NON MARK-UP/INTEREST INCOMEFee, commission and brokerage income 11,737 12,520 Dividend income 498 498 Income from dealing in foreign currencies - - Gain on sale of securities 25 10,009 32,733 Unrealized gain on revaluation of investments classified as held for trading - - Other income 26 2,494 1,519 Total non-markup/interest income 24,738 47,270

170,415 285,402 NON MARK-UP/INTEREST EXPENSES

Administrative expenses 27 840,252 740,332 Other provisions/write offs - against land 12.2.2 31,593 - - against other assets 14.4 19,577 1,888 Other charges 28 - - Total non-markup/interest expenses 891,422 742,220 LOSS BEFORE TAXATION (721,007) (456,818)

Taxation - Current 29 7,854 6,654 - Prior 29.3 (232,601) - - Deferred 13.2 (202,238) (264,230)

(426,985) (257,576) LOSS AFTER TAXATION (294,022) (199,242) Unappropriated loss brought forward (2,590,705) (2,296,206) Loss available for appropriation (2,884,727) (2,495,448)

Basic/diluted loss per share (Rupees) 30 (1.23) (0.83)


______________ __________ __________ __________President/CEO Director Director Director

SME BANK LIMITED

(Rupees in '000)2017 2016






46

UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended December 31 , 2017UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2017

NoteNet loss after taxation (294,022) (199,242)

(120,671) (95,257) Comprehensive loss transferred to equity (414,693) (294,499)

Net change on remeasurement of available for sale investment to fair value (47,083) (33,116)

13.2 6,783 (8,053) (40,300) (41,169)

Total comprehensive loss (454,993) (335,668)

___________________Chief Financial Officer

________________ __________ ___________ ___________President/CEO Director Director Director


Deferred tax

SME BANK LIMITED

2017 2016 (Rupees in '000)

Components of comprehensive income not reflected inequity

Items that will never be reclassified subsequently to profitand loss accountRecognition of net actuarial loss





47

UNCONSOLIDATED CASH FLOW STATEMENTFor the year ended December 31 , 2017UNCONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2017

2017 Note

CASH FLOW FROM OPERATING ACTIVITIESLoss before taxation (721,007) (456,818) Less: Dividend income (498) (498)

(721,505) (457,316) Adjustments for non-cash/other items Depreciation 26,848 30,398 Amortization 746 710 Reversal against non-performing advances (16,877) (2,102) Charge/(reversal) of provision for diminution in the value of investment 70 (62,164) Gain on sale of fixed asset (1,317) (260) Finance charges on leased assets - - Other provisions 51,170 1,888 Bad debts written off directly - -

60,640 (31,530) (660,865) (488,846)

(Increase)/decrease in operating assets Lendings to financial institutions 445,000 40,000 Advances 283,088 (17,908) Other assets (excluding advance taxation) (25,746) (19,313)

702,342 2,779 Increase/(decrease) in operating liabilities Bills payable (2,889) (18,664) Borrowings from financial institutions 1,847,989 571,641 Deposits 114,939 458,515 Other liabilities (excluding current taxation) (8,838) (9,392)

1,951,201 1,002,100 1,992,678 516,033

Income tax paid (1,898) (7,833) Net cash flow generated from operating activities 1,990,780 508,200 CASH FLOW FROM INVESTING ACTIVITIESNet investment in available-for-sale securities (1,588,932) (749,683) Net (investment)/disinvestment in held-to-maturity securities (500,000) 26,687 Dividend income received 498 498 Investment in operating fixed assets (23,336) (14,565) Sale proceeds from disposal of operating fixed assets 3,074 2,141 Net cash flow used in investing activities (2,108,696) (734,922) CASH FLOW FROM FINANCING ACTIVITIES - - Decrease in cash and cash equivalents (117,916) (226,722) Cash and cash equivalents at beginning of the year 565,028 791,750 Cash and cash equivalents at end of the year 31 447,112 565,028

___________________Chief Financial Officer

________________ ____________ ___________ ____________President/CEO Director Director Director

SME BANK LIMITED

(Rupees in '000)2016

The annexed notes from 1 to 41 and annexure A form an integral part of these unconsolidated financial statements.





48

UNCONSOLIDATED STATEMENT OF CHANGE IN EQUITYFor the year ended December 31 , 2017UNCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED DECEMBER 31, 2017

Share capital Statutory reserve

Unappropriated loss Total

(Rupees in '000)

Balance as at January 01, 2016 2,392,507 206,526 (2,296,206) 302,827 Total comprehensive income for the year ended December 31, 2016Net loss for the year ended December 31, 2016 - - (199,242) (199,242) Effect of recognition of actuarial loss - - (95,257) (95,257) Balance as at December 31, 2016 2,392,507 206,526 (2,590,705) 8,328 Total comprehensive income for the year ended December 31, 2017Net loss for the year ended December 31, 2017 - - (294,022) (294,022) Effect of recognition of actuarial loss - - (120,671) (120,671) Balance as at December 31, 2017 2,392,507 206,526 (3,005,398) (406,365)

The annexed notes from 1 to 41 and annexure A form an integral part of these unconsolidated financial statements.

_____________________Chief Financial Officer

_________________ ____________ _____________ ____________President/CEO Director Director Director

SME BANK LIMITED





49

Notes to the Unconsol idated Financial StatementsFor the year ended December 31 , 2017

1 GENERAL INFORMATION

1.1 SME Bank Limited (the Bank) is a public limited company incorporated in Pakistan on October 30, 2001 under the repealed Companies Ordinance, 1984 having its registered office at 56-F, Nazim-ud-Din Road, F-6/1, Blue Area Islamabad. The Bank obtained its business commencement certificate on April 16, 2005 which became effective from the date of its issue. The Bank is a Scheduled Commercial Bank engaged in the business of banking with the primary objective to support and develop Small and Medium Enterprise (SME) sector in Pakistan by providing necessary financial assistance and business support services on sustainable basis. The Bank is operating through a network of 13 commercial banking branches. Based on the latest credit rating report dated November 13, 2017 issued by Pakistan Credit Rating Agency Limited (PACRA), credit rating of the Bank was “B” (Single B) in the long term and “B” (Single B) in the short term.

In terms of the provisions of the State Bank of Pakistan BSD circular No. 7 of 2009, the Bank was required to increase its paid up capital (net of losses) as at December 31, 2016 up to Rs. 10 billion. The State Bank of Pakistan (SBP) has granted exemption vide SBP letter No. BPRD/BA&CPD/646/5111/2018 dated March 07, 2018 from meeting minimum capital requirement till June 30, 2018 or completion of restructuring/privatization of the Bank, whichever is earlier.

1.2 Amalgamation of defunct RDFC and SBFC The Federal Government promulgated the Regional Development Finance Corporation

(RDFC) and Small Business Finance Corporation (SBFC) Amalgamation and Conversion Ordinance, 2001 (the Ordinance 2001) setting forth the mechanism of amalgamation of defunct RDFC and SBFC. Both these entities were Development Financial Institutions (DFIs). In pursuance of the Ordinance 2001, Finance Division, Ministry of Finance issued an Order (SRO (1) 2001) dated December 29, 2001 setting forth the scheme of amalgamation of RDFC and SBFC with the Bank effective January 1, 2002. Pursuant to this scheme entire assets and liabilities of defunct RDFC and SBFC as at December 31, 2001 were transferred to the Bank at fair value. These two institutions stand dissolved and ceased to exist effective January 1, 2002. The Bank allotted its shares to the share holders of defunct RDFC and SBFC in proportion to their shareholding therein based on the fair value of net assets of defunct RDFC and SBFC on December 31, 2001.

2 BASIS OF PRESENTATION

2.1 These unconsolidated financial statements have been presented in accordance with the requirements of format prescribed by the State Bank of Pakistan’s BSD Circular No. 4 dated February 17, 2006.

2.2 These unconsolidated financial statements are separate financial statements of the Bank in which the investment in subsidiary is stated at cost and has not been accounted for on the basis of reported results and net assets of the investees which is done in consolidated financial statements.

50


2.3 Items included in the unconsolidated financial statements are measured using the currency of the primary economic environment in which the Bank operates. The unconsolidated financial statements are presented in Pakistani Rupee, which is the Bank’s functional currency. Figures have been rounded off to the nearest thousand of rupees, unless otherwise stated.

3 STATEMENT OF COMPLIANCE

3.1 During the year, the Companies Act 2017 (the Act) has been promulgated, however, Securities and Exchange Commission of Pakistan (SECP) vide its circular no. 23 of 2017 dated October 04, 2017 communicated Commission’s decision that the companies whose financial year closes on or before December 31, 2017 shall prepare their financial statements in accordance with the provisions of the repealed Companies Ordinance, 1984. Accordingly, these unconsolidated financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the repealed Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB), provisions of and directives issued under the repealed Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962 or directives issued by SECP and the State Bank of Pakistan (SBP). In case requirements differ, the provisions of and directives issued under the repealed Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 and the directives issued by SBP shall prevail.

International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”, International Accounting Standard 40, “Investment Property” and International Financial Reporting Standard 7,”Financial Instruments: Disclosure” are not applicable to banking companies in Pakistan. Accordingly, the requirements of these Standards have not been considered in the preparation of these unconsolidated financial statements. Accordingly, investments have been classified and valued in accordance with the requirements prescribed by the SBP through various circulars.

3.2 Standards, interpretations and amendments to approved accounting standards that are not yet effective

The following standards, amendments and interpretations of approved accounting standards are effective for accounting periods, beginning on or after January 01, 2018:

Effective date (annual periods beginning on or

after)IFRS 2 Share Based Payments - Amendments January 01, 2018IFRS 3 Business Consideration - Amendments January 01, 2018IFRS 4 Insurance Contracts January 01, 2018IFRS 9 Financial Instruments: Classification and Measurement July 01, 2018

51

IFRS 9 Financial Instruments: Classification and Measurement - Amendments

January 01, 2019

IFRS 11 Joint Venture - Amendments January 01, 2018IFRS 15 Revenue from Contract with Customers July 01, 2018IFRS 15 Revenue from contracts with customers’ on gross versus net

revenue presentation - AmendmentsJanuary 01, 2018

IAS 12 Income Taxes - Amendments July 01, 2018IAS 28 Investments in Associates and Joint Ventures - Improvements January 01, 2018IFRIC 22 Foreign Currency Transactions and Advance Consideration January 01, 2018IFRIC 23 ‘Uncertainty over Income Tax Treatments January 01, 2019

The above mentioned standards, amendments and interpretations to published standards and

new interpretation to existing standard are either not relevant to the Bank’s operations or are not expected to have significant impact on the Bank’s financial statements other than increase in disclosure in certain cases.

The SBP vide BPRD circular no. 2 dated January 25, 2018 has specified the new reporting format for the financial statements of banking companies. The new format has revised the disclosure requirements and will become applicable for the financial statements of the Bank for the year ending December 31, 2018.

Other than the aforesaid standards, interpretations and amendments, the International Accounting Standards Board (IASB) has also issued the following standards, which have not been adopted and are under consideration of relevant committee of the Institute of Chartered Accountants of Pakistan (ICAP):


after)IFRS 1 First Time Adoption of International Financial Reporting

StandardsJuly 01, 2009

IFRS 14 Regulatory Deferral Accounts January 01, 2016IFRS 16 Leases January 01, 2019IFRS 17 Insurance Contracts January 01, 2021

Implementation of IFRS 7 has been held in abeyance for Banks and non-banking finance

companies engaged in investment finance services, discounting services and housing finance services. The Implementation of IAS 39 and IAS 40 has been held in abeyance by the SBP for banks and DFIs.


52

3.3 Standards, interpretations and amendments to published approved accounting standards that are effective in the current year

There are certain other and amended standards, interpretations and amendments that are mandatory for the Bank’s accounting periods beginning on or after January 1, 2017 but are considered not to be relevant or do not have any significant effect on the Bank’s operations and therefore not detailed in these financial statements.

4 BASIS OF MEASUREMENT

4.1 These unconsolidated financial statements have been prepared under the historical cost convention as modified for certain investments which are carried at fair value, defined benefit pension and gratuity plans, unfunded compensated absences and benevolent fund which are carried at present value of defined benefit obligations net of fair value of plan assets, wherever applicable.

4.2 Use of critical accounting estimates and judgments

The preparation of unconsolidated financial statements in conformity with approved accounting standards as applicable in Pakistan requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The Bank uses estimates and assumptions concerning the future. The resulting accounting estimate will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are as follow:

i) Classification of investments (note 5.2)ii) Provision/impairment against investments (note 5.2), advances (note 5.4) and other

assets (note 5.6)iii) Valuation and impairment of available for sale securities (note 5.2 and 5.6)iv) Useful life and residual value of property and equipment and intangible assets (note

5.5)v) Taxation (note 5.8)vi) Staff retirement benefits (note 5.9)

5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The accounting policies adopted in the preparation of these unconsolidated financial statements are consistent with those of the previous financial year.

5.1 Cash and cash equivalents Cash and cash equivalents comprise of cash and balances with treasury banks, balances with

other banks and call money lendings.


53

5.2 Investments Investments other than those categorised as held-for-trading are initially recognised at fair

value which includes transactions costs associated with the investments. Investments classified as held-for-trading are initially recognised at fair value, and transaction costs are expensed in the profit and loss account.

All regular way purchases/sales of investment are recognised on the trade date, i.e., the date the Bank commits to purchase/sell the investments. Regular way purchases or sales of investment require delivery of securities within the time frame generally established by regulation or convention in the market place.

The Bank has classified its investment portfolio, except for investments in subsidiary into ‘held-for-trading’, ‘held-to-maturity’ and ‘available-for-sale’ as follows:

Held for trading These are securities which are acquired with the intention to trade by taking advantage of

short-term market/interest rate movements and are to be sold within 90 days. These are carried at market value, with the related unrealized gain/(loss) on revaluation being taken to profit and loss account.

Held to maturity These represent investments acquired by the Bank with the intention and ability to hold them

upto maturity. These are carried at amortized cost less impairment if any. Impairment in debt securities is determined in accordance with the requirements of Prudential Regulations issued by SBP.

Available for sale These are investments that do not fall under the held-for-trading or held-to-maturity categories.

These are carried at market value except in case of unquoted securities where market value is not available, which are carried at the lower of cost and break-up value less provision for diminution in value, if any. Surplus/(deficit) on revaluation is taken to ‘surplus/(deficit) on revaluation of assets’ account shown below equity. On derecognition or impairment in quoted available-for-sale investments, the cumulative gain or loss previously reported as ‘surplus/(deficit) on revaluation of assets’ below equity is included in the profit and loss account for the year.

Provision for diminution in values of securities (other than term finance certificates) is made after considering impairment if any in their values, where the decline in prices of available for sale equity securities is significant or prolonged, it is considered impaired and included in unconsolidated profit and loss account. Provision for diminution in the value of term finance certificates is made as per Prudential Regulations issued by SBP.

Held-for-trading and quoted available-for-sale securities are marked to market with reference to ready quotes on Reuters page (PKRV) or MUFAP or the Stock Exchanges, as the case may be.


54

Investment in subsidiary Investment in subsidiary is carried at cost less impairment, if any. However the investment in

subsidiary is not marked to market as per prudential regulations issued by SBP.

5.3 Agreements for sale and purchase of securities (repo and reverse repo) Securities sold under repurchase agreement (repo) are retained in the unconsolidated financial

statements as investments and a liability for consideration received is included in borrowings. The difference between sale and repurchase price is treated as mark-up expense and recognized over the period of contract.

Securities purchased under agreement to resell (reverse repo) are included in lendings to financial institutions. The difference between purchase and resale price is treated as mark-up income and recognized over the period of the contract.

5.4 Advances Advances are stated net off specific and general provisions. Provisions are made in accordance

with the requirements of Prudential Regulations issued by the SBP and charged to the profit and loss account. These regulations prescribe an age based criteria (as supplemented by subjective evaluation of advances by the banks) for classification of non-performing loans and advances and computing provision/allowance there against. Such regulations also require the Bank to maintain general provision/allowance against its Small Entity (SE) advances portfolio at specified percentage of such portfolio.

Advances are written off when there is no realistic prospect of recovery.

5.5 Capital work-in progress, operating fixed assets, intangibles, depreciation and amortization

Capital work-in-progress Capital-work-in progress is stated at cost less accumulated impairment losses, if any. These are

transferred to operating fixed assets as and when the assets are available for use.

Operating fixed assets-owned These are stated at cost less impairment loss and accumulated depreciation except for leasehold

land. Land is stated at cost less impairment, if any.

Maintenance and normal repairs are charged to unconsolidated profit and loss account as and when incurred. Major renewals and improvements are capitalized.

Depreciation Depreciation is charged on straight line method at the rates given in note 12.3, commencing

from the month in which the asset is available for use. No depreciation is charged in the month of disposal of the asset. The residual value, useful life and depreciation method is reviewed and adjusted, if appropriate, at each balance sheet date.


55

Gains or losses on disposal of property and equipment are taken to the unconsolidated profit and loss account.

Assets subject to finance lease Assets subject to finance lease are stated at cost less accumulated depreciation at the rates

similar to the bank’s owned assets and impairment loss (if any). The outstanding obligation under finance lease less financial charges allocated to future periods is shown as liability. Finance charges are calculated at interest rates implicit in the lease and are charged to unconsolidated profit and loss account in the period in which these are incurred.

Intangible assets An intangible asset is recognized only if it is identifiable, the Bank has control over the asset,

it is probable that economic benefits will flow to the enterprise and the cost of the asset can be measured reliably.

All intangible assets that meet the recognition criteria are initially measured at cost and are amortized on a straight line basis at the rate given in note 12.4 commencing from the month when these assets are available for use. Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. The residual value, useful life and amortization method is reviewed and adjusted, if appropriate, at each balance sheet date.

5.6 Impairment The carrying amount of assets are reviewed at each balance sheet date for impairment,

whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. If such indication exists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to their recoverable amount. The resulting impairment loss is taken to the unconsolidated profit and loss account. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying value that would have been determined net of depreciation/amortization, if no impairment loss had been recognized.

The available for sale equity investments are impaired when there has been a significant or prolonged decline in the value below its cost. Impairment loss is recognized in unconsolidated profit & loss account.

5.7 Deposits Deposits are recorded at the nominal values of proceeds received. Markup accrued on deposits

is recognised separately as part of other liabilities and is charged to unconsolidated profit and loss account on a time proportion basis.

5.8 Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax

is recognised in the unconsolidated profit and loss account, except to the extent that it relates to items recognised directly in other comprehensive income or below equity, in which case it is recognised in other comprehensive income or below equity.


56

Current Provision for current tax is the expected tax payable on the taxable profit for the year using

tax rates applicable at the date of unconsolidated statement of financial position and any adjustment to tax payable for previous years.

Deferred Deferred tax is accounted for using the balance sheet liability method in respect of all temporary

differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit at the rates that are expected to apply to the period when the differences reverse based on the tax rates that have been enacted. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax asset is reduced to the extent it is no longer probable that the related tax benefits will be realized.

The Bank also recognizes deferred tax asset/liability on deficit/surplus on revaluation of investments which is adjusted against the related deficit/surplus in accordance with the requirements of International Accounting Standard on ‘Income Taxes’ (IAS 12).

The Bank takes into account the current income tax law and decisions taken by the taxation authorities. Instances where the Bank’s views differ from the views taken by the income tax department at the assessment stage and where the Bank considers that its view on items of material nature is in accordance with law, the amounts are shown as contingent liabilities.

5.9 Staff retirement and other benefits The Bank operates following staff retirement and other benefit schemes for its employees:

Defined benefit plan - Pension and gratuity scheme Fully funded defined benefit pension and gratuity scheme for eligible employees. Contributions

are made in accordance with the actuarial valuation which is carried out periodically using ‘Projected Unit Credit Method’. All actuarial gains and losses are recognized immediately through other comprehensive income.

Benevolent fund The Bank also operates a contributory benevolent fund for all its eligible employees (defined

benefit scheme). Contributions to this fund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basis of actuarial advice using the Projected Unit Credit Method.

Compensated absences The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its


57

permanent and contractual employees. For its eligible employees, related provision is made in accordance with actuarial valuation. Provision for the year is charged to unconsolidated profit and loss account. The amount recognized in unconsolidated statement of financial position represents present value of defined benefit obligation.

Defined benefit plans are provided to employees of the Bank. Calculations in this respect require assumptions to be made of future outcomes, the principal ones being in respect of increase in remuneration, the expected long-term return on plan assets and the discount rate used to convert future cash flows to current values. Calculations are sensitive to changes in the underlying assumptions.

5.10 Revenue recognition

5.10.1 Advances

Advances disbursed by SME Bank Limited: Markup/interest on performing advances is recognized on a time proportion basis over the

term of loan and advances. Markup/interest/penal markup recoverable on non performing advances is recognized on receipt basis. Mark-up/interest on rescheduled/restructured advances and investments is recognised as permitted by the regulations of the SBP.

Advances disbursed by defunct RDFC and defunct SBFC : Advances and related markup are suspended. Markup/interest on advances is recognized on

receipt basis.

5.10.2 Return on investments Return on investments is recognized on a time proportion basis except on classified investment

which is recognized on receipt basis. Any premium paid or discount received on purchase of securities is amortized through unconsolidated profit and loss account over the remaining period of maturity on time apportionment basis.

5.10.3 Dividend income Dividend income is recognized when the Bank’s right to receive the dividend is established.

5.10.4 Interest, fee, brokerage and commission Interest, fee, brokerage and commission, profit on other investments, bank deposits and

staff loans is recognized on accrual basis. Income on non-funded facilities (fee, commission, documentation charges etc.) is recognized on receipt basis except commission on bank guarantees which is recognized on accrual basis.

5.11 Off setting Financial assets and liabilities are off set and the net amount is reported in the unconsolidated

statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or realize the asset and settle the liability simultaneously.


58

5.12 Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of

a qualifying asset as part of the cost of that asset are capitalized. Other borrowing costs are recognized as an expense in the period in which it incurs.

5.13 Provisions Provisions are recorded when the Bank has a present legal or constructive obligation as a

result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Provision for guarantee claims and other off balance sheet obligations is recognized when intimated and reasonable certainty exists to settle the obligations. Expected recoveries are recognized by debiting customer accounts. Charge to unconsolidated profit and loss account is stated net off expected recoveries.

5.14 Financial assets and liabilities All financial assets and financial liabilities are recognized at the time when the Bank becomes a

party to the contractual provisions of the instrument. A financial asset is derecognised where (a) the rights to receive cash flows from the asset have expired; or (b) the Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Bank has transferred substantially all the risks and rewards of the asset, or (ii) the Bank has neither transferred nor retained substantially all the risk and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Any gain or loss on derecognition of the financial assets and financial liabilities is taken to income currently.

5.15 Segment reporting A segment is the distinguishable component of the Bank that is subject to risks and rewards

that are different from those of other segments. A business segment is one that is engaged either in providing certain products or services, whereas a geographical segment is one engaged in providing products and services within a particular economic environment. Segment information is presented as per the Bank’s functional structure and the guidance of the State Bank of Pakistan. The Bank’s primary format of reporting is based on business segments:

5.15.1 Business segments

Trading and sales This segment undertakes the Bank’s treasury, money market and capital market activities.

Commercial banking It includes loans, deposits and other transactions with individuals/staff, small and medium

enterprises and corporate customers.

5.15.2 Geographical segments The Bank operates only in Pakistan.


59

5.16 Appropriation to reserves Dividend and appropriation to reserves (except appropriation required by law) after the

balance sheet date are recognized as liability in the Bank’s financial statement in the year in which these are approved.

6 FINANCIAL RESTRUCTURING AND GOING CONCERN ASSUMPTION

6.1 Current Status of Privatization of SME Bank Government of Pakistan (GOP) decided to divest its equity stake in the Bank along with

management control to a strategic investor through Privatization Commission (PC). Accordingly PC has appointed financial advisory consortium (FCC) comprising of Elixir Securities Pakistan (Pvt) Limited, Bridge Factor (Pvt) Limited, KPMG Taseer Hadi & Co (financial and tax advisor) and Mohsin Tayebaly & Co. (Legal counsel) to conduct this transaction. The transaction structure was approved by PC board on January 17, 2017 and recommended to Cabinet Committee on privatization (CCOP). CCOP approved the transaction structure in its meeting held on January 27, 2017. Thereafter PC invited Expression of Interest (EOI) on February 14, 2017, from reputed local and international investors who have an interest in entering the process towards acquiring strategic shareholding in SME Bank. Last date to receive Statement of Qualification (SOQ) is March 17, 2017. Salient features of the transaction structure are as follows:

i) SBP will issue a new banking license of specialized nature (with at least 60% advances for SME) to the investors.

ii) Investor to maintain MCR of Rs. 6 billion on staggered basis, 2 billion would be required to be injected upfront while 1 billion each year for next four years.

iii) SME Leasing limited, a majority owned listed subsidiary of SME Bank, would be the part of transaction on “as is basis”.

iv) The defunct SBFC and RDFC portfolios appearing in books of SME Bank will not be part of the transaction.

v) CDA plots in G-5/2 and G-7 Islamabad appearing in the books of the Bank will not be part of the transaction.

vi) The Bank can be used as a platform for delivering Digital Finance/Fintech/Branchless banking services, subject to fulfilment of applicable requirement of SBP.

vii) The SBP has offered a variety of incentives including youth business loans scheme, credit guarantee schemes, export finance schemes, refinancing facilities amongst others to promote SME financing. The potential investor will be able to avail these incentives offered by the SBP, subject to fulfillment of requisite operational requirements.

Subsequently, based on SOQ’s received the Transaction Steering Committee of PC evaluated/assessed five interested parties for prequalification and forwarded its recommendation to PC Board for decision. PC board in its meeting held on 2nd November 2017 has pre-qualified 3 parties for due diligence and participation in bidding process.


60

6.2 Going concern assumption and minimum capital requirement During the current year, the Bank incurred a net loss of Rs. 294.022 million (2016: 199.242

million) resulting into accumulated losses of Rs. 3,005 million (2016: Rs. 2,591 million). As of December 31, 2017, the reporting date, the total liabilities of the Bank have exceeded its total assets by Rs. 434.345 million and, as of that date, the accumulated losses have surpassed the equity by Rs. 406.365 million. Due to cash deficit the Bank has not been able to meet the minimum capital requirement (MCR) of 10,000 million for the year, falling short by Rs. 10,406 million (2016: 9,991 million). Based on the operational results the State Bank of Pakistan has waived MCR of Rs. 10,000 million till June 30, 2018 or completion of restructuring/privatization whichever is earlier. The cash shortage has also not improved due to negligible GoP budget allocation for the Bank. These conditions indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern and therefore, it may be unable to realize its assets and discharge its liabilities in the ordinary course of business. Having regard to the above, GoP being a majority shareholder with 93.88% (2016: 93.88%) shareholding in the Bank has invited expression of interest from reputed local and or international investors who have an interest in entering the process towards acquiring strategic shareholding in Bank with management control. As explained in note 6.1 potential buyers have been pre-qualified by PC and due diligence/bidding process has started. The management of the Bank strongly believes that the privatization process of the Bank will be completed in due course of time and will result into injection of fresh equity enabling the Bank to expand and finance its operations. Till the privatization of the Bank the ministry of finance, GoP, has given commitment to provide all necessary financial assistance to the Bank to support its operations. In view of above the management of the Bank believes that the use of going concern assumption in preparation of these unconsolidated financial statements is appropriate and, therefore, has prepared these unconsolidated financial statements on a going concern basis.


61

NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2017

2017 20167. Note (Rupees in '000)

In hand - local currency 112,204 71,994 In transit - local currency - -

National Prize Bonds 329 -

With State Bank of Pakistan (SBP) in:Local currency current accounts 7.1 296,841 453,489

With National Bank of Pakistan in:Local currency current accounts 26,417 35,319

435,791 560,802

7.12017 2016

8. BALANCES WITH OTHER BANKS Note (Rupees in '000)In Pakistan: On current accounts 500 482 On deposit accounts 8.1 20,821 13,744 Provision for doubtful balance with a bank 8.2 (10,000) (10,000)

11,321 4,226

8.18.2

2017 20169. LENDINGS TO FINANCIAL INSTITUTIONS Note (Rupees in '000)

Call money lendings - - Letter of placement - 445,000

9.1 - 445,000

9.1 PARTICULARS OF LENDING

In local currency 9.1.1 - 445,000 In foreign currencies - -

- 445,000

9.1.1

SME BANK LIMITED

Deposits with the SBP are maintained to comply with the statutory requirements issued from time to time.

These carry interest rate ranging from 3.75% to 4.00% (2016: 3.75 % to 4.00%) per annum.Provision for doubtful balance is in respect of deposit of Rs. 10 million with Indus Bank Limited which is underliquidation.

These lendings were carried at markup rate ranging from 6.15% to 6.30% per annum and had maturity periodupto 1 month.

CASH AND BALANCES WITH TREASURY BANKS


62

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

10IN

VEST

ME

NT

SN

ote

10.1

INVE

STM

EN

TS

BY T

YPE

S:Av

aila

ble-

for-s

ale

secu

ritie

sM

arke

t Tre

asur

y Bi

lls (M

TBs)

10.3

658,

759

1,534

,450

2,19

3,20

9

56

1,41

9

1,

733,

403

2,

294,

822

Pa

kist

an In

vest

men

t Bon

ds (P

IBs)

10.3

228,

390

3,82

5,87

9

4,05

4,26

9

656,

720

1,70

7,10

4

2,36

3,82

4

Fully

paid

ord

inar

y sh

ares

/mut

ual f

und

65,0

36

-

65,0

36

64,9

36

-

64,9

36

95

2,18

5

5,

360,

329

6,

312,

514

1,28

3,07

5

3,44

0,50

7

4,72

3,58

2

Hel

d-to

-mat

urity

secu

ritie

sTe

rm D

epos

it Re

ceip

ts (T

DRs

)10

.853

5,00

0

-

53

5,00

0

35

,000

-

35

,000

Certi

ficat

es O

f Inv

estm

ents

(CO

Is)

762

-

76

2

762

-

76

2

53

5,76

2

-

53

5,76

2

35

,762

-

35

,762

Inve

stm

ent i

n su

bsid

iary

SME

Lea

sing

Lim

ited

10.9

215,

457

-

215,

457

215,

457

-

21

5,45

7

Inve

stm

ents

at c

ost

1,703

,404

5,36

0,32

9

7,06

3,73

3

1,53

4,29

4

3,44

0,50

7

4,97

4,80

1

Less

: Pro

visio

n fo

r dim

inut

ion

in v

alue

of i

nves

tmen

ts10

.4(1

25,7

09)

-

(125

,709

)

(1

25,6

39)

-

(125

,639

)

Inve

stm

ents

net

of i

mpa

irmen

t1,5

77,6

95

5,

360,

329

6,

938,

024

1,

408,

655

3,

440,

507

4,

849,

162

N

et (d

efici

t)/su

rplu

s on

reva

luat

ion

of

ava

ilabl

e-fo

r-sale

-sec

uriti

es21

2,55

1

(2

9,26

1)

(26,

710)

6,

002

14

,371

20,3

73

T

otal

inve

stm

ents

1,5

80,2

46

5,

331,0

68

6,

911,3

14

1,

414,

657

3,

454,

878

4,

869,

535

2017

2016

(Rup

ees i

n '0

00)

(Rup

ees i

n '00

0)

Hel

d by

the

bank

G

iven

as

colla

tera

l

Tot

al

Held

by

the

bank

G

iven

as

colla

tera

l

Tota

l Notes to the Unconsol idated Financial StatementsFor the year ended December 31 , 2017

63

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2017

2017 201610.2 INVESTMENTS BY SEGMENTS: Note

Federal Government Securities:

- Market Treasury Bills (MTBs) 10.3 2,193,209 2,294,822 - Pakistan Investment Bonds (PIBs) 10.3 4,054,269 2,363,824

6,247,478 4,658,646

Fully paid up ordinary shares:

- Listed companies/mutual fund 10.6 17,493 17,493 - Unlisted companies 10.7 47,543 47,443

65,036 64,936 Subsidiary company:

SME Leasing Limited 10.9 215,457 215,457

Other investments:

- Certificates Of Investment (COIs) 762 762 - Term Deposit Receipts (TDRs) 10.8 535,000 35,000

535,762 35,762

Total investments at cost 7,063,733 4,974,801

Provision for diminution in value of investments 10.4 (125,709) (125,639) Investment (net of provision) 6,938,024 4,849,162

(Deficit)/surplus on revaluation of available for sale securities - net 21 (26,710) 20,373 Total investments 6,911,314 4,869,535

(Rupees in '000)


64


10.3 Principal terms of investments in Federal Government securities

Market Treasury Bills On maturityPakistan Investment Bond On maturity

Note 2017 201610.4 Particulars of provision for diminution in value of investments

Opening balance 125,639 187,803 Charge/(reversal) for the year 70 (62,164) Closing balance 125,709 125,639

10.4.1 Particulars of provision in respect of type and segment

Available-for-sale securities - Fully paid up ordinary shares - Quoted companies 16,912 16,912 - Unlisted companies 20,070 20,000 - Delisted companies 10.7.2 1,003 1,003

Held-to-maturity securities - Certificates of Investment 762 762 Investment in subsidiary - SME Leasing Limited 10.9 86,962 86,962

125,709 125,639

Market value Rating Market value Rating10.5 Quality of Available-for-sale securities Note (Rupees '000) (Rupees '000)

Market Treasury Bill 10.5.1 2,193,076 unrated 2,292,186 unratedPakistan Investment Bonds 10.5.1 4,024,063 unrated 2,382,102 unrated

Fully paid up ordinary shares 10.5.2PICIC Investment Fund Limited 1,838 3-Star 1,914 3-StarLotte Pakistan PTA Limited 572 unrated 664 unratedDewan Salman Fibre Limited 27 unrated 92 unratedPakistan Telecommunication Company Limited 112 unrated 148 unratedNishat Chunian Mills Limited 17 unrated 24 unratedCrescent Textile Mills Limited 1 unrated 1 unratedInvest Capital Investment Bank Limited 1,643 unrated 2,471 unratedISE Towers REIT Management Company Limited 18,000 unrated 18,000 unratedLSE Financial Services Limited 8,440 A/A-2 8,440 A/A-2News-v/s Credit Information Services (Pvt) Limited 30 unrated - unrated

30,680 31,754

6,247,819 4,706,042

Coupon/Mark up payment

at maturitysemi-annually

Principal payment

2017 2016

Market Treasury Bills and Pakistan Investment Bonds are securities eligible for re-discounting with the SBP.

Name of investment Maturity Rate per annum

January 2018 to March 2018July 2018 to April 2021

5.96% to 6.01% 6.42% to 12.52%

(Rupees in '000)


65


10.5.1 These are Government of Pakistan guaranteed securities.

10.5.2 Rating of these equity securities represent 'Entity/Funds Rating'.

10.5.3

10.6 Investments in listed companies/mutual fund

2017 20162017 2016 Name of company/mutual fund Note

137,668 137,668 18.12 PICIC Investment Fund Limited 2,494 2,494 79,775 79,775 10.15 Lotte Chemical Pakistan Limited 810 810 18,449 18,449 18.24 Dewan Salman Fibre Limited 336 336 8,600 8,600 68.20 Pakistan Telecommunication Company Limited 586 586

385 385 77.49 Nishat Chunian Mills Limited 30 30 18 18 34.84 Crescent Textile Mills Limited 1 1

1,117,876 1,117,876 11.84 Invest Capital Investment Bank Limited 13,236 13,236

17,493 17,493 Impairment in available for sale listed shares 10.6.1 (16,912) (16,912)

Investment in listed shares (net of impairment) 581 581 Surplus on revaluation of listed shares - (net) 3,629 4,730

Market value as on December 31 4,210 5,311

10.6.1 Impairment in available for sale listed share

PICIC Investment Fund Limited 2,215 2,215 Lotte Chemical Pakistan Limited 683 683 Dewan Salman Fibre Limited 310 310 Pakistan Telecommunication Company Limited 441 441 Nishat Chunian Mills Limited 27 27 Invest Capital Investment Bank Limited 13,236 13,236

16,912 16,912

10.7 Particulars of investments held in unlisted companies, fund and delisted companies

ISE Towers REIT Management Company Limited 10.7.1 18,000 18,000 10.7.1 8,440 8,440

AKD Venture Fund 10.7.1 20,000 20,000 News-v/s Credit Information Services (Pvt) Limited 10.7.1 100 100 Companies delisted from stock exchange 10.7.2 1,003 1,003

47,543 47,543

Securities have either been rated by 'The Pakistan Credit Rating Agency Limited' (PACRA) or 'JCR-VIS CreditRating Company Limited' (JCR-VIS). These ratings reflect independent credit risk assessment by respective creditrating entities.

(Rupees in '000)

Paid-up value per share/ average price per unit (Rs)

No. of ordinary shares/units

LSE Financial Services Limited


66


(Rupees)10.7.1 8% 2,000,000 10.00 20,000 Sohaib Umar

1% 3,034,603 5.93 18,000 12.13 Mian Ayyaz Afzal1% 843,975 10.00 8,440 18.29 Naveed Amin

1.46% 10,000 10.00 100 Not available

10.7.1.110.7.1.210.7.2

Mohib Exports Company Limited 4,600 23.81 109 Sunflow Citrus Limited 100,000 4.22 422 Tawakal Garments Company Limited 4,000 38.38 154 Tristar Shipping Lines Limited 5,000 23.56 118 Zahoor Textile Mills Limited 15,200 13.16 200

1,003

10.8

10.9 Subsidiary company

Name of Chief

executive

Particulars of investments in shares of companies delisted from stock exchange and are currently under liquidation:

(Rupees)

% age

Not available

Number of units

held

Investment in AKD Venture Fund being irrecoverable and impaired, is fully provided.

LSE Financial Services LimitedNews-v/s Credit Information

(Rupees in '000)

(Pvt) Limited

Company Limited

Not available

AKD Venture Fund

Total paidup value

SME Leasing Limited (SMEL) was incorporated on July 12, 2002 as a public limited company under the repealedCompanies Ordinance, 1984. Upto the year 2005, SMEL was a wholly owned subsidiary of the Bank, however, apublic offering of 10 million ordinary shares was made during the year 2006at an offer price of Rs. 11 per share. TheBank subscribed for 1,405,205 shares in SMEL out of 10,000,000 share offered by SMEL, resultantly banksshareholding reduced to 73.14%.SMEL is listed on Pakistan Stock Exchange Limited. This investment is designatedas a 'Strategic Investment' in terms of BPD Circular Letter No. 16 dated August 1, 2006. SMEL continue to operateon a net loss basis and the Bank maintains a provision of Rs. 86.962 million (2016: Rs. 86.962 million) against theaforesaid investment of Rs. 215.457 million. However, subsequent to current year end a further impairment of Rs.47.747 million has been recognized in this respect according to the recommendation of SBP.

Cost/Paid-up value per

share

Total paid up value

Cost/Paid-up value per

unit held

Number of

shares held

Break up value

(note 10.7.1.2)

(Rupees in '000)

Break up value per share is based on the audited financial statements of investees for the year ended June 30, 2017.

ISE Towers REIT Management

This represents investment in term deposit receipts (TDR) carrying markup ranging from 6% to 6.4 % (2016: 6.6%)per annum with maturities upto March 2018 (2016: January 2017). TDR of Rs. 35 million (2016: 35 million) wasunder lien at year end.


67

11.2 Assignment of Non-Performing Loan (NPL) portfolios of defunct SBFC & RDFC to National Bank of Pakistan (NBP)

The Board of Directors (BoD) through its resolution by circular No.10/circ/33 dated March 08, 2010 duly endorsed by the members in their meeting dated May 20, 2010 has approved the transfer and assignment of fully non- performing loan portfolios of defunct SBFC & RDFC to NBP on the basis of deferred transfer price. Subsequently transfer and assignment agreement was executed between the Bank and National Bank of Pakistan (NBP) at Karachi on July 01, 2010 (Effective date). According to the agreement, the transferor (SME) and the acquirer (NBP) acknowledge, declare and confirm the transfer, assignment and vesting of all rights, interests, privileges, title, powers and remedies in favour of the acquirer with respect to:

a)` the non-performing loans, collateral and the debtors;

b) all agreements, deeds, instruments and other documents relating to the non-performing loans, debtors and collateral and to which the transferor is, or legally deemed to be, a party or a beneficiary;

c) all legal proceedings by and against the transferor with respect to the non-performing loans, the debtors and collateral, which may be pending before any court, tribunal, arbitrator or authority, without being subject to any liabilities of the transferor to any person.


2017 2016

11. ADVANCES NoteLoans, cash credits, running finances, etc. - In Pakistan Extended by:

Defunct SBFC 11.2 4,374,964 4,375,964 Defunct RDFC 11.2 494,199 505,341 SME Bank Limited 2,735,344 2,995,996

Due from ex-employees 11.2 15,567 16,214 Due from employees 122,722 133,944

7,742,796 8,027,459 Net investment in finance lease - In Pakistan 11.3 1,253 1,253 Advances - gross 7,744,049 8,028,712

Provision for non-performing advances Specific provision (5,238,459) (5,244,601) General provision (81) (12,391)

11.5 (5,238,540) (5,256,992)

Advances - net of provision 2,505,509 2,771,720

11.1 Particulars of advances (Gross)

11.1.1 In local currency 7,744,049 8,028,712 In foreign currencies - -

7,744,049 8,028,712

11.1.2 Short term (upto one year) 1,490,809 1,388,256 Long term (over one year) 6,253,240 6,640,456

7,744,049 8,028,712

(Rupees in '000)


68

The agreed transfer price is an amount equal to 50% of the net recoveries.

Under the above referred arrangements, portfolio of defunct SBFC & RDFC outstanding as on June 30, 2010 (Except outstanding loans of RDFC where facility of Equity Participation Fund had also been extended) were transferred to NBP.

On request of the Bank’s management the decision to transfer of the portfolio was revisited by the BoD in its 65th meeting held on July 13, 2011 and resolved that the agreement of assignment of the old portfolio to NBP should be cancelled and Board’s pronouncement for revocation of agreement to Ministry of Finance a related party to arrange retrieval/restoration of old portfolio to the Bank in the interest of recovery of public funds.

In the meeting held on March 04, 2013 BoD reconsidered the position taken earlier on this matter on grounds of related cost of recovery and infrastructure on request of then management and decided that since the Bank is still on the privatization list, BoD would be able to decide on portfolio after Bank’s delisting from privatization.

The incumbent management has again reviewed the situation and noted that no comparative analysis/study pertaining to transfer of portfolio was conducted which could justify the decision of assigning old portfolio to NBP.

In view of the above, foregoing Board was requested in its 83rd meeting, held on August 30, 2014 and the management of the Bank was allowed to proceed further in pursuance of resolution/direction passed regarding the subject matter in 64th and 65th Meeting of BoD held on May 16, 2011 and July 13, 2011 respectively by overruling to verdict of BoD given on the issue in 75th Meeting of BoD held on March 04, 2013.

Cabinet Committee on Privatization (CCOP) in its meeting held on January 27, 2017 has approved the transaction structure of the Bank’s privatization. The transaction structure has excluded the above portfolios from the privatization transaction and the CCOP in above referred meeting has directed the Bank to remove the said portfolios from books of Bank and that all recoveries made by NBP from the loan portfolio shall be deposited in the Federal Consolidated Fund (FCF), a related party as being managed by Ministry of Finance (MoF).

Pursuant to above, being directed by MoF the management of the Bank has obtained an independent legal advice for defining the legal procedures for the implementation of the requirement of MoF. The legal advice proposed that the Bank may via a tri party novation agreement between SME, NBP and GoP through MoF, transfer and surrender any rights, obligations and liabilities on the remaining receivable assets in the loan portfolio to FCF against any consideration amount. The Novation agreement will further allow for any recoveries made by NBP in relation to the loan portfolio to be deposited directly in the FCF as the recoveries will no longer be an asset of the Bank.

In line with the steps proposed by the legal advisor the board of directors of the Bank in its meeting held on December 31, 2017 has approved the sale of fully non- performing loan portfolios of defunct SBFC & RDFC to MoF and NBP via a tri party novation agreement between SME, NBP and GoP through MoF at a value of Rs.100 as a sale consideration. Thereafter, the shareholders of the Bank in their meeting held on January 22, 2018 through their special resolution have also authorized the sale of the portfolios as approved by the board of directors of the Bank, however, the Allied Bank Limited carrying 0.33% holding in the Bank has opposed the resolution and required the sale of the portfolio at a fair market value (FMV). According to above majority decision of the shareholders both the portfolios have been transferred to the FCF and NBP against an aggregate sale consideration of Rs. 100 under a tri-party agreement (the Agreement) executed on February 23, 2018 between the Bank, NBP and the Federal Consolidated Fund (FCF). As of the date of the tri-party Agreement the Bank has transferred and surrendered all the recoveries, rights, obligation, claims and liabilities of the referred loan portfolios in favour of the FCF.

Till signing of tri party novation agreement non-performing loan portfolios of defunct SBFC and RDFC stands recognised in these unconsolidated financial statements. An income of Rs. 16.521 million has been incorporated against the recoveries of non-performing loan portfolios of defunct SBFC and RDFC since their transfer and assignment to NBP till June 30, 2017. The share of income of the Bank has been determined according to transfer price mechanism agreed between the Bank and NBP. The recoveries and expense made thereafter by the Bank from the borrowers of defunct SBFC & RDFC are recognized as payable/receivable to NBP, while the funds received by NBP to be apportioned in terms of this agreement have not been accounted for by the Bank.


69


11.3 NET INVESTMENTIN FINANCE LEASE

Lease rentals receivable 973 - - 973 973 - - 973 Residual value 280 280 280 - - 280 Minimum lease payments 1,253 - - 1,253 1,253 - - 1,253 Financial charges for future periods - - - - - - - - Present value of minimum lease payments 1,253 - - 1,253 1,253 - - 1,253

11.4

Provision Provision Domestic Overseas Total Required Held

Category of Classification

Other Assets Especially Mentioned 21,648 - 21,648 4 4 Substandard 15,225 - 15,225 32 32 Doubtful 18,529 - 18,529 268 268 Loss 5,341,582 - 5,341,582 5,238,155 5,238,155

5,396,984 - 5,396,984 5,238,459 5,238,459


Category of ClassificationOther Assets Especially Mentioned 8,767 - 8,767 25 25 Substandard 13,553 - 13,553 - - Doubtful 6,747 - 6,747 238 238 Loss 5,389,745 - 5,389,745 5,244,338 5,244,338

5,418,812 - 5,418,812 5,244,601 5,244,601

11.5 Specific General Total Specific General Total(Rupees in '000) (Rupees in '000)

Opening balance 5,244,601 12,391 5,256,992 5,251,998 8,174 5,260,172 Amounts written off - - - - - - Reversal of provision of transferred portfolio (1,575) - (1,575) (1,078) - (1,078) Charge/(reversal)Charge for the year 41,669 9 41,678 44,394 7,088 51,482 Reversal for the year (46,236) (12,319) (58,555) (50,713) (2,871) (53,584)

(4,567) (12,310) (16,877) (6,319) 4,217 (2,102) Closing balance 5,238,459 81 5,238,540 5,244,601 12,391 5,256,992

11.5.1

11.5.2 Specific General Total Specific General Total(Rupees in '000) (Rupees in '000)

In local currency 5,238,459 81 5,238,540 5,244,601 12,391 5,256,992 In foreign currencies - - - - - -

5,238,459 81 5,238,540 5,244,601 12,391 5,256,992

(Rupees in '000) (Rupees in '000)

Particulars of provisions against non-performingadvances

2017 2016

The FSV benefit availed in last years has been reduced by Rs. 34.424 million (net of FSV benefit availed during the year), which has resultedin increased charge for specific provision for the year by the same amount. The FSV benefit is not available for cash or stockdividend/bonus to employees. Had the FSV benefit not recognized, loss before and after tax for the year would have been lowered by Rs.34.424 million (2016: lowered by Rs. 84.362 million) (note 20.1).

Not later than one

year

Not later than one

yearTotalOver five

years

Later than one and less than five years

Total

Particulars of provision against non-performingloans and advances

2017

2017

Later than one and less

than five years

Classified Advances

Over five years

2016

20162017

Classified Advances

(Rupees in '000)

(Rupees in '000)

Advances include Rs. 5,396.984 million (2016: Rs. 5,418.812 million) which have been placed under non-performing status asdetailed below:

2016


70


2017 201611.6 Particulars of write off: Note

11.6.1 Against provisions - - Directly charged to Profit & Loss account - -

- -

11.6.2 Write offs of Rs. 500,000 and above 11.7 - - Write offs of below Rs. 500,000 - -

- -

11.7 Details of loan write off of Rs. 500,000 and above

11.8 2017 2016Note

Balance at beginning of the year 155,019 128,508 Loans granted/added during the year 41,187 65,382 Repayments - net (41,916) (38,871) Balance at end of the year 154,290 155,019

Debts due by subsidiary company:

Balance at beginning of the year 126,580 126,846 Loans granted/added during the year - net - - Repayments - net (16,228) (266) Balance at end of the year 110,352 126,580

264,642 281,599

12. OPERATING FIXED ASSETS

Capital work-in-progress 12.1 - 2,092 Property and equipment 12.2 126,759 131,093 Less: Provision held against property and equipment 12.2 (63,637) (32,044) Property and equipment - net 12.3 63,122 99,049 Intangible assets 12.4 1,129 718 Operating fixed assets 64,251 101,859

12.1 Capital work-in-progressAdvances to suppliers and contractors - 2,092

12.2 This includes costs of lands as detailed below:Land at G-5/2 12.2.1 52,673 52,673 Land at G-7 12.2.1 10,964 10,964 Land at Hattar 450 450

64,087 64,087 Provision held against lands 12.2.2 (63,637) (32,044) Net carrying value 450 32,043

(Rupees in '000)

(Rupees in '000)

In terms of sub-section 3 of Section 33-A of the Banking Companies Ordinance, 1962 the Statement in respect ofwritten-off loans or any other financial relief of five hundred thousand rupees or above allowed to a person(s)during the year ended December 31, 2017 is given at Annexure-A.

Particulars of loans and advances to directors, associated companies,etc.

Debts due by directors, executives or officers of the bank or any of themeither severally or jointly with any other persons:


71

12.2.1 This represents the aggregate cost of plots measuring 500 square yards and 4166.67 square yards located in Islamabad in sectors G-7 and G-5/2 respectively originally allotted to SBFC and RDFC respectively. Capital Development Authority (CDA) required payment of Rs. 3.637 million for AGR, delayed charges & extension surcharges. However, on receiving draft of the required amount, CDA returned the same in view of proposed privatization of the Bank. The management of the Bank has taken up the matter with the Privatization Commission (PC) Government of Pakistan.

Subsequent to the above, Cabinet Committee on Privatization (CCOP) in its meeting held on January 27, 2017 has approved the transaction structure of the Bank’s privatization. The transaction structure has excluded the above plots from the privatization transaction and the CCOP in above referred meeting has directed CDA and MoF for resolution of the matter by finalizing the status of rights and claims associated with the above plots so as to enable the Bank to accordingly adjust the books of accounts.

Thereafter PC through its letter No.F.NO.1/BKG/SME/PC/2015 dated November 24, 2017 has required the Bank to remove the referred plots from the balance sheet of the Bank by December 31, 2017. To implement the above MoF being the representative of Government of Pakistan (GoP), the majority shareholder of the Bank, has required the Bank’s management to transfer the above plots to MoF at a nominal value. Pursuant to above, being directed by MoF the management of the Bank has obtained an independent legal advice for defining the legal procedures for the implementation of the requirement of MoF. The legal advice proposed that the Bank may via a sale agreement, transfer all its rights, titles, claims and obligations of the Plots to MoF and or any other department, as the case may be, against any amount of sale consideration. The sale agreement will be made possible by authorization of the Bank through the passage of requisite board resolutions and shareholders’ special resolution; enabling the Bank to transfer all rights, titles, claims and obligations of Plots to MoF.

In line with the steps proposed by the legal advisor the board of directors of the Bank in its meeting held on December 31, 2017 has approved the sale of the Plots to MoF through a sale agreement at a value of Rs.100 as a sale consideration. Thereafter, the shareholders of the Bank in their meeting held on January 22, 2018 through their special resolution have also authorized the sale of the Plots as approved by the board of directors of the Bank, however, the Allied Bank Limited carrying 0.33% holding in the Bank has opposed the resolution and required the sale of the Plots at a fair market value (FMV). Although FMVs of the Plots have not been determined for sale in question but it is understood that the same are substantially higher than sale consideration agreed between the Bank and MoF. According to above majority decision of the shareholders both the Plots have been sold to MoF against an aggregate sale consideration of Rs. 100 under a sale agreement (the Agreement) executed on February 15, 2018 between the Bank and MoF.

The subsequent sale of Plots confirms the maximum value recovered was Rs. 100 being the sale consideration of these Plots. In view of above an adjustment of Rs. 31.593 million, representing the amount by which aggregate carrying value exceed the aggregate sale consideration of these Plots, has been recognized to bring the aggregate carrying value of these plots to Rs. 100.


12.2.1

2017 2016

12.2.2 Provision held against landOpening balance 32,044 32,044

Add: Charge for the year 31,593 - Closing balance 63,637 32,044

Provision against land at G-5/2 52,673 26,449

Provision against land at G-7 10,964 5,595 63,637 32,044

This represents the aggregate cost of plots measuring 500 square yards and 4166.67 square yards located in Islamabad in sectors G

7 and G-5/2 respectively originally allotted to SBFC and RDFC respectively. Capital Development Authority (CDA) required

payment of Rs. 3.637 million for AGR, delayed charges & extension surcharges. However, on receiving draft of the required

amount, CDA returned the same in view of proposed privatization of the Bank. The managementof the Bank has taken up the

matter with the Privatization Commission (PC) Government of Pakistan.

Subsequent to the above, Cabinet Committee on Privatization (CCOP) in its meeting held on January 27, 2017 has approved the

transaction structure of the Bank’s privatization. The transaction structure has excluded the above plots from the privatization

transaction and the CCOP in above referred meeting has directed CDA and MoF for resolution of the matterby finalizing the

status of rights and claims associated with the above plots so as to enable the Bank to accordingly adjust the books of accounts.

Thereafter PC through its letter No.F.NO.1/BKG/SME/PC/2015 dated November 24, 2017 has required the Bank to remove

the referred plots from the balance sheet of the Bank by December 31, 2017. To implement the above MoF being the

representative of Government of Pakistan (GoP), the majority shareholder of the Bank, has required the Bank’s managementto

transfer the above plots to MoF at a nominal value. Pursuant to above, being directed by MoF the management of the Bank has

obtained an independent legal advice for defining the legal procedures for the implementation of the requirement of MoF. The

legal advice proposed that the Bank may via a sale agreement, transfer all its rights, titles, claims and obligations of the Plots to

MoF and or any other department,as the case may be, against any amount of sale consideration. The sale agreementwill be made

possible by authorization of the Bank through the passage of requisite board resolutions and shareholders’ special resolution;

enabling the Bank to transfer all rights, titles, claims and obligations of Plots to MoF.

In line with the steps proposed by the legal advisor the board of directors of the Bank in its meeting held on December 31, 2017

has approved the sale of the Plots to MoF through a sale agreementat a value of Rs.100 as a sale consideration. Thereafter, the

shareholders of the Bank in their meeting held on January 22, 2018 through their special resolution have also authorized the sale

of the Plots as approved by the board of directors of the Bank, however, the Allied Bank Limited carrying 0.33% holding in the

Bank has opposed the resolution and required the sale of the Plots at a fair market value (FMV). Although FMVs of the Plots have

not been determined for sale in question but it is understood that the same are substantially higher than sale consideration agreed

between the Bank and MoF. According to above majority decision of the shareholders both the Plots have been sold to MoF

against an aggregate sale consideration of Rs. 100 under a sale agreement (theAgreement) executedon February 15, 2018 between

the Bank and MoF.

(Rupees in '000)

The subsequent sale of Plots confirms the maximum value recovered was Rs. 100 being the sale consideration of these Plots. Inview of above an adjustment of Rs. 31.593 million, representing the amount by which aggregate carrying value exceed theaggregate sale consideration of these Plots, has been recognized to bring the aggregate carrying value of these plots to Rs. 100.


72


SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

12.3

Prop

erty

and

equ

ipm

ent

Ow

ned

asse

tsLe

ase

hold

land

64

,087

-

-

-

64,0

87

32,0

44

-

31

,593

-

63

,637

45

0

-Le

ase

hold

impr

ovem

ents

31,2

11

-

7,

242

-

38,4

14

25,6

50

-

5,

558

(3

9)

31

,169

7,

245

33 1

/3(3

9)

-

-

Bu

ildin

gs15

,794

-

-

-

15,7

94

8,77

3

-

790

9,56

3

6,23

1

5

Offi

ce fu

rnitu

re a

nd fi

xtur

es9,

187

-

11

2

-

9,21

8

7,

527

-

53

5

(8

1)

7,

981

1,

237

20(8

1)

-

-

O

ffice

equ

ipm

ent

60,4

68

-

10

,495

-

70

,465

34

,549

-

6,66

1

(492

)

40

,718

29

,747

15

(498

)

-

-

Com

pute

r equ

ipm

ent

92,2

27

-

4,

362

-

96,1

27

85,9

35

-

5,

984

(4

62)

91,4

57

4,67

0

33

1/3

(462

)

-

-

Veh

icles

61,2

00

1,54

7

2,06

0

-

48

,521

40

,647

1,

547

7,

320

(1

4,53

5)

34

,979

13

,542

20

(16,

286)

-

-

-

33

4,17

4

1,

547

24

,271

-

34

2,62

6

23

5,12

5

1,

547

58

,441

(15,

609)

279,

504

63,1

22

(17,

366)

-

-

-

As

sets

hel

d un

der f

inan

ce le

ase

Veh

icles

1,54

7

(1

,547

)

-

-

-

1,54

7

(1

,547

)

-

-

-

-

20

335,

721

-

24

,271

-

34

2,62

6

23

6,67

2

-

26,8

48

(1

5,60

9)

27

9,50

4

63

,122

(1

7,36

6)

-

31

,593

-

COST

12.4

Inta

ngib

le a

sset

sCo

mpu

ter s

oftw

are

27,0

32

-

1,1

57

-

28

,189

26

,314

-

746

-

27

,060

1,1

29

33

1/3

Dep

reci

atio

n ra

te p

er

annu

m %

(Dis

posa

ls)Am

ortiz

atio

n ra

te p

er

annu

m %

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Addi

tions

/(d

ispo

sals)

As a

t

D

ecem

ber

31, 2

017

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Char

ge fo

r th

e ye

ar/

impa

irmen

t(D

ispo

sals)

As a

t

D

ecem

ber

31, 2

017

Adju

stm

ents

Adju

stm

ents

(Rup

ees '

000)

COST

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Addi

tions

/(d

ispo

sals)

DE

PRE

CIAT

ION

/ IM

PAIR

ME

NT

(Rup

ees i

n '0

00)

As a

t

D

ecem

ber

31, 2

017

Char

ge fo

r th

e ye

arT

rans

fer

As a

t Ja

nuar

y 01

, 20

17

AMO

RT

ISAT

ION

As a

t

D

ecem

ber

31, 2

017

Net

boo

k va

lue

as a

t Dec

embe

r 31

, 201

7

Net

boo

k va

lue

as a

t Dec

embe

r 31

, 201

7

73

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

Prop

erty

and

equ

ipm

ent

Adj

ustm

ents

Ow

ned

asse

tsLe

ase

hold

land

64,0

87

-

-

64,0

87

32,0

44

-

-

32,0

44

32,0

43

-

Leas

e ho

ld im

prov

emen

ts33

,101

36

8

-

31

,211

22

,183

5,

726

(1

71)

25,6

50

5,56

1

33 1

/3(1

70)

(2,0

88)

2,08

8

Build

ings

15,7

94

-

-

15,7

94

7,98

4

78

9

-

8,77

3

7,02

1

5O

ffice

furn

iture

and

fixt

ures

9,68

2

28

-

9,

187

7,51

7

53

2

(1

21)

7,52

7

1,66

0

20(1

22)

(401

)

401

Offi

ce e

quip

men

t60

,967

1,

066

60

,467

29

,542

6,

571

(4

46)

34,5

48

25,9

19

15

(447

)

(1

,119

)

1,

119

Co

mpu

ter e

quip

men

t93

,399

94

9

92

,227

79

,635

8,

420

(8

75)

85,9

35

6,29

2

33 1

/3(8

76)

(1,2

45)

1,24

5

Veh

icles

52,2

72

10,9

69

61,2

00

32,4

50

8,35

9

(138

)

40

,647

20

,553

20(2

,017

)

(24)

24

32

9,30

2

13

,380

-

33

4,17

3

211,

355

30,3

97

(1

,751

)

235,

124

99,0

49

(3

,632

)

(4,8

77)

4,

877

Ass

ets h

eld u

nder

fina

nce

lease

Veh

icles

1,54

7

-

-

1,

547

1,

546

1

-

1,

547

-

20

330,

849

13,3

80

-

335,

720

212,

901

30,3

98

(1

,751

)

23

6,67

1

99

,049

(3,6

32)

(4

,877

)

4,87

7

COST

Inta

ngib

le as

sets

Com

pute

r sof

twar

e26

,885

14

7

-

27

,032

25

,604

71

0

-

26,3

14

718

33 1

/3

(Rup

ees i

n '00

0)

Dep

recia

tion

rate

per

ann

um

%

Net

boo

k va

lue

as a

t Dec

embe

r 31

, 201

6

COST

DE

PRE

CIA

TIO

N/I

MPA

IRM

EN

TA

s at

Janu

ary

01,

2016

Add

ition

s/

(disp

osals

)

As a

t

D

ecem

ber

31, 2

016

As a

t Ja

nuar

y 01

, 20

16

Char

ge fo

r the

ye

ar(D

ispos

als)

As a

t

D

ecem

ber

31, 2

016

(Rup

ees '

000)

Am

ortiz

atio

n ra

te p

er a

nnum

%

AM

ORT

ISA

TIO

NA

s at

Janu

ary

01,

2016

Add

ition

sA

djus

tmen

tA

s at

Dec

embe

r 31

, 201

6

As a

t Ja

nuar

y 01

, 20

16

Char

ge fo

r the

ye

ar

As a

t

D

ecem

ber

31, 2

016

(Disp

osals

)N

et b

ook

valu

e as

at D

ecem

ber

31, 2

016


74

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201712.5

VehiclesToyota Corolla 1,530 1,530 - 153 As per Bank policy Mr. Masood MahmoodSuzuki Cultus 965 965 - 10 As per Bank policy Late Sikandar Ali AbbasiToyota Corolla 1,526 1,526 - 153 As per Bank policy Mr. Mubeen MuftiSuzuki Cultus 965 965 - 96 As per Bank policy Hafiz Muhammad Ashfaq Suzuki Cultus 965 965 - 96 As per Bank policy Mr. Dilbar HussainSuzuki Cultus 960 960 - 96 As per Bank policy Mr. Khalid Mustafa SiddiquiHonda City 1,473 1,473 - 147 As per Bank policy Mr. Sajjad Ahmed WarraichHonda City 951 951 - 95 As per Bank policy Ms. Farhat ZafarHonda City 972 972 - 97 As per Bank policy Syed Mohsin ZaidiHonda City 972 972 - 97 As per Bank policy Mr. Nadeem Ahmed KhanHonda Civic 2,060 309 1,751 1,648 As per Bank policy Mr. Tariq Mahmood MalikSuzuki Cultus 996 996 - 100 As per Bank policy Muhammad Hashim ChannaToyota Corolla 971 971 - 97 As per Bank policy Mr. Rehan Ahmed SiddiquiSuzuki Swift 980 980 - 98 As per Bank policy Mr. Shahid Zubair

16,286 14,535 1,751 2,983

1,080 1,074 6 91 2017 17,366 15,609 1,757 3,074 2016 3,632 1,751 1,881 2,141

12.6

(Rupees in '000)

Sale proceeds

Gross carrying amount of fully depreciated assets that are still in use was Rs. 197.829 million (2016: Rs. 150.361 million).

Other assets havingbook value of lessthan Rs. 250,000 orcost less than ofRs. 1,000,000which ever is less

Details of disposal of fixed assets:Book value

Particulars of assets Cost Mode of disposal Particulars of buyersAccumulated

depreciation


75

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

2017

2016

13D

EFE

RR

ED

TAX

ASS

ET

S - N

ET

Not

eD

efer

red

tax

asse

t aris

ing

in re

spec

t of:

Una

bsor

bed

depr

eciat

ion

and

amor

tizat

ion

63,9

57

51

,315

U

nuse

d ta

x lo

sses

402,

511

212,

915

13.1

466,

468

264,

230

Def

erre

d ta

x lia

bilit

y ar

isin

g in

resp

ect o

f:Su

rplu

s on

reva

luat

ion

of in

vest

men

t(1

,270

)

(8,0

53)

13

.246

5,19

8

25

6,17

7

13.1

Reco

gniz

edRe

cogn

ized

Rec

ogni

zed

Rec

ogni

zed

in p

rofit

and

in

in p

rofit

and

in

loss

acc

ount

Equ

itylo

ss a

ccou

ntE

quity

13.2

Rec

onci

liatio

n of

def

erre

d ta

x

Una

bsor

bed

depr

eciat

ion

and

am

ortiz

atio

n-

51

,315

-

51

,315

51

,315

12

,642

-

63

,957

U

nuse

d ta

x lo

sses

-

212,

915

-

212,

915

212,

915

189,

596

-

402,

511

-

264,

230

-

264,

230

264,

230

202,

238

-

466,

468

Surp

lus o

n re

valu

atio

n of

i

nves

tmen

t-

(8

,053

)

-

(8,0

53)

(8

,053

)

6,78

3

-

(1,2

70)

D

efer

red

tax

asse

t - n

et

-

256,

177

-

256,

177

256,

177

209,

021

-

465,

198

2017

2016

13.3

1,239

,918

1,

737,

055

13

.4D

efer

red

tax

asse

t not

reco

gniz

ed43

3,97

1

607,

969

(Rup

ees i

n '0

00)

The

Bank

has

reco

gniz

edth

ede

ferr

edta

xas

set

whi

chre

pres

ents

man

agem

ent’s

best

estim

ate

ofth

epr

obab

lebe

nefit

sex

pect

edto

bere

alize

din

futu

reye

ars

inth

efo

rmof

redu

ced

tax

liabi

lity

asth

eBa

nkw

ould

beab

leto

seto

ffth

epr

ofits

earn

edin

thos

eye

arsa

gain

stlo

sses

carr

iedfo

rwar

d.Th

eun

derly

ing

assu

mpt

ion

forr

ecog

nitio

nof

defe

rred

tax

asse

tis

base

don

the

expe

cted

priv

atiz

atio

nof

the

Bank

whi

chw

ould

resu

ltin

fres

heq

uity

injec

tion

from

the

new

stra

tegi

csh

areh

olde

roft

heBa

nkas

deta

iled

inN

ote

6.1

toth

efin

ancia

lsta

tem

ents

and,

invi

ewof

abov

e,th

em

anag

emen

tof

the

Bank

belie

ves

that

itis

prob

able

that

the

Bank

will

beab

leto

achi

eve

the

prof

itsan

d,co

nseq

uent

ly,th

ede

ferr

ed ta

x as

sets

will

be

fully

reali

zed

in fu

ture

.

(Rup

ees i

n '0

00)

Ded

uctib

le te

mpo

rary

diff

eren

ces f

or w

hich

no

defe

rred

tax

asse

t is r

ecog

nize

d du

e to

unc

erta

in ti

min

g of

futu

re ta

xabl

e pr

ofits

2017

2016

Balan

ce a

t Ja

nuar

y 1

Balan

ce a

t D

ecem

ber 3

1

(Rup

ees i

n '00

0)(R

upee

s in

'000

)

Bala

nce

at

Janu

ary

1Ba

lanc

e at

D

ecem

ber 3

1

Def

erre

dta

xas

set

aris

ing

inre

spec

t of:

Def

erre

dta

xlia

bilit

yar

isin

gin

resp

ect o

f:


76


2017 201614. OTHER ASSETS Note

Income/mark-up accrued in local currency 14.1 161,415 139,996 Advances, deposits, advance rent and other prepayments 60,316 50,964 Non banking asset acquired in satisfaction of claims 14.2 147,066 147,066 Due from benevolent fund - unsecured 33.4.2 1,593 1,658 Advance income tax 224,738 3,440 Receivable from NBP 11.2 339 4,690 Receivable from subsidiary company 975 994 Receivable from Equity Participation Fund - 2,561 Trading right entitlement certificate 14.3 21,560 21,560 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 5,148 6,048 Others 76,933 68,703

719,723 467,320 Less: Provision held against other assets 14.4 118,013 98,424 Other assets - net of provision 601,710 368,896

14.1

14.2

2017 201614.3 Trading right entitlement certificate (TREC) Note

Lahore Stock Exchange Limited 14.3.1 21,560 21,560 Islamabad Stock Exchange Limited 14.3.1 - -

21,560 21,560

14.3.1 In accordance with the requirements of the Stock Exchanges (Corporatization, Demutualization and Integration)Act 2012 (the Act), the Bank received equity shares and one Trading Right Entitlement certificate each in LahoreStock Exchange Limited (LSE) and Islamabad Stock Exchange Limited (ISE) in lieu of its membership cards inthese exchanges during the year ended December 31, 2012.

(Rupees in '000)

This balance has been arrived at after adjusting interest in suspense of Rs. 4,052.401 million (2016: Rs. 4,057.57million).

(Rupees in '000)

This includes Rs. 138.6 million being the successful bid made by SME Bank for acquiring Bungalow No. 45,Block-C/3, Gulberg III, Lahore mortgaged with the Bank as a security in a defaulted loan and Rs. 8.47 millionpertaining stamps/stamps duties for registration of sale certificate issued by the High Court to SMEBank/Auction Purchaser of Bungalow No. 45, Block-C/3, Gulberg III, Lahore. The auction was carried out onJune 30, 2015, subsequent to the auction, the Honourable Lahore High Court through its decision dated July 14,2015 allowed the Bank to adjust the bid price against its outstanding dues from the borrower against the financefacilities extended to the borrower, suspended mark-up and cost of funds. The auction was confirmed by theHigh Court on April 19, 2016, after hearing objection raised by the counter party. The sale certificate was issuedby the High Court on June 30, 2016, and the same has been registered with concerned registrar on July 28, 2016.Ownership of the house in record of Excise and Taxation Department has been transferred in name of SMEBank Ltd. The Bank applied for possession of the acquired house, which has been accepted by the court afterhearing both the parties. The court has issued order to bailiff for taking possession of the house to handover theBank. Possession of the said property has not yet been handed over to the Bank. At year end the market value ofthe property was Rs. 200.452 million (2016: Rs. 171.2 million).


77


2017 201614.4 Provision against other assets Note

Opening balance 98,424 96,496 Charge for the year 20,800 1,955 Reversals (1,223) (67)

19,577 1,888 Transferred to NBP 12 40 Closing balance 118,013 98,424 Provision balance is in respect of:Income/mark-up accrued in local currency:

Universal Leasing Limited 22 22 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 5,148 6,048 Other receivables - SME Portfolio 44,453 41,232 Legal charges recoverable from borrowers - SBFC & RDFC 22,598 22,630 LSE - TREC 14.3 21,560 5,390 Others 4,592 3,462

118,013 98,424

(Rupees in '000)

Based on the revalued assets and liabilities of LSE and ISE, a total of 843,975 ordinary shares of Rs. 10 each and3,034,603 ordinary shares of Rs. 10 each in the corporatized and demutualized LSE and ISE respectively wereallotted to the Bank in a dematerialized form. Out of the aforementioned, 337,590 ordinary shares in LSE and1,213,841 ordinary shares in ISE (i.e. 40 percent) have been received in the Bank’s CDC participant accountwhereas 506,385 ordinary shares in LSE and 1,820,762 ordinary shares in ISE (i.e. 60 percent) have been held inthe blocked sub accounts maintained under LSE and ISE participant ID with Central Depository Company ofPakistan Limited. The rights attached to 60% shares held in blocked account shall be dealt with in accordancewith the provisions contained in the Act. The blocked account shall be operated by the board of directors of thestock exchanges in the manner prescribed by the Securities and Exchange Commission of Pakistan.

In case of LSE, par value of shares received by the Bank was recognised during the year ended December 31,2012 as available for sale investment and the excess of value of shares over the carrying value of membershipcard in LSE was recognised as trading right. However in case of ISE, since the par value of shares received by theBank was more than the carrying value of membership card, investment in ISE has been recognised to the extentof the carrying value of membership card and trading right in ISE has been recognised at Nil value.

Pursuant to provisions of the Act the Bank’s trading rights in LSE and ISE have lapsed on August 26, 2014. Inview of above the SBP required the Bank to classify these rights under loss category due to remote chances oftheir recovery that resulted into recognition of 100% provision of gross carrying values of these rights. Themanagement of the Bank in collaboration with other financial institutions affected by the same cause is pursuingthe concerned authorities for the reinstatement of these rights.


78


2017 201615. BILLS PAYABLE Note (Rupees in '000)

In Pakistan 92,554 95,443 Outside Pakistan - -

92,554 95,443

16. BORROWINGSIn Pakistan 5,308,315 3,460,326 Outside Pakistan - -

5,308,315 3,460,326

16.1 Particulars of borrowings with respect to currenciesIn local currency 5,308,315 3,460,326 In foreign currencies - -

5,308,315 3,460,326

16.2 Details of borrowings secured/unsecured

Borrowings from State Bank of Pakistan - unsecured 16.2.1 14,269 31,515 Repurchase agreement borrowings - secured 16.2.2 5,294,046 3,428,811

5,308,315 3,460,326

16.2.1

16.2.2

2017 201617. DEPOSITS AND OTHER ACCOUNTS (Rupees in '000)

Customers

Fixed deposits 1,558,096 1,001,313 Savings deposits 2,356,370 2,861,928 Current accounts - non-remunerative 555,060 596,943 Margin accounts 49,831 33,730

4,519,357 4,493,914 Financial Institutions

Remunerative deposits 17.2 794,241 733,061 Non-remunerative deposits 30,057 1,741

5,343,655 5,228,716

17.1 Particulars of deposits

In local currency 5,343,655 5,228,716 In foreign currencies - -

5,343,655 5,228,716

17.2

These represent transactions with financial institutions for sale of Government Securities under re-purchaseagreement (REPO) in the inter bank money market at mark-up rates ranging from 5.95% to 6.25% (2016:6.10% to 6.25%) per annum for period upto three month (2016: upto two month). REPO transactions aresecured against investment of the Bank in Government securities.

This represents financing facility obtained from SBP under the scheme "Financing Facility For Storage ofAgri Produce (FFSAP)" vide SMEFD circular No. 08 dated June 04, 2010 & IH&SSMEFD circular No. 05dated Feb 23, 2015. These carry mark up rates of 2.50 % & 3.25% (2016: 2.50% & 3.25%) per annumrespectively and are repayable in quarterly instalments.

Remunerative deposits include Rs. 394.236 million (2016: Rs. 380.094 million) related to Equity ParticipationFund.


79


2017 201618. OTHER LIABILITIES Note

Mark-up/return/interest payable in local currency 78,453 50,284 Unearned commission on guarantees 1,547 1,367 Accrued expenses 13,156 8,783 Accounts payable 4,195 7,662 Sundry creditors 18.1 119,218 118,847 Branch adjustment account 2,321 1,099 Payable against employees' benefit plans

Defined benefit pension 33.1.2 333,420 211,427 Defined benefit funded gratuity scheme 33.2.2 6,952 67,626 Unfunded compensated absences 33.3.3 90,659 72,245

Security deposits against lease 280 280 Employees' VSS payments withheld 18.2 13,341 13,474 Payable to Equity Participation Fund - unsecured 1,817 - Income tax withheld payable 17,794 18,099 Others 1,762 1,889

684,915 573,082

18.1

18.2 Employees VSS payments of Rs. 13.341 million (2016: Rs. 13.474 million) has been withheld due to legal casespending in the courts against employees, filed by the Bank and customers.

This includes Rs. 90.6 million (2016: Rs. 90.6 million) payable either to SBP or FBR on VSS payments related topension on finalization of tax assessment of financial year 2009.

(Rupees in '000)


80


19. SHARE CAPITAL19.1 Authorized capital

2017 2016 2017 2016(Rupees in '000)

1,000,000,000 1,000,000,000 Ordinary shares of Rs. 10 each 10,000,000 10,000,000

19.2 Issued, subscribed and paid up capital2017 2016

Ordinary shares 152,853,153 152,853,153 Fully paid in cash 1,528,532 1,528,532 50,000,000 50,000,000 Issued as bonus shares 500,000 500,000 36,397,547 36,397,547 Issued for consideration other than cash 363,975 363,975

239,250,700 239,250,700 2,392,507 2,392,507

Number of19.3 Break-up of share capital is as follows: shares

Federal Government 224,615,978 93.88 2,246,160 2,246,160 National Bank of Pakistan 6,121,095 2.56 61,211 61,211 United Bank Limited 3,975,003 1.66 39,750 39,750 Habib Bank Limited 1,987,501 0.83 19,875 19,875 MCB Bank Limited 1,490,619 0.62 14,906 14,906 Allied Bank Limited 774,351 0.33 7,744 7,744 Industrial Development Bank Limited 286,146 0.12 2,861 2,861 Directors 7 - - -

239,250,700 100 2,392,507 2,392,507

Statutory Un-appropriated 2017 201620. RESERVES Reserve loss

Balance at beginning of the year 206,526 (2,590,705) (2,384,179) (2,089,680) Total comprehensive loss transferred

- (414,693) (414,693) (294,499) Balance at end of the year 206,526 (3,005,398) (2,798,872) (2,384,179)

20.1

21. 2017 2016Note (Rupees in '000)

(Deficit)/surplus on revaluation of available-for-sale securitiesFederal Government securities

- Market Treasury Bills (MTBs) (133) (2,635) - Pakistan Investment Bonds (PIBs) (30,206) 18,278

(30,339) 15,643 Fully paid up ordinary shares/units

- Listed companies/mutual funds 3,629 4,730 10.1 & 10.2 (26,710) 20,373

- Deferred tax asset/(liability) 13 (1,270) (8,053) (27,980) 12,320

(DEFICIT)/SURPLUS ON REVALUATION OF ASSETS - NET OF DEFERRED TAX

As at December 31, 2017, the Bank has availed net of tax benefit of Forced Sales Value (FSV) of Rs. 118.360 million(2016: Rs. 152.784 million) in respect of pledged stocks, mortgaged residential, commercial, industrial properties (landand building only) and plant and machinery under charge held as collateral against non-performing assets. Reserves andun-appropriated profit to that extent are not available for distribution by way of cash, stock dividend or bonus toemployees (note 11.5.1).

to equity

(Rupees in '000)

Number of shares

Percentage

Number of shares


81


2017 201622. CONTINGENCIES AND COMMITMENTS Note (Rupees in '000)

22.1 Transaction-related contingent liabilitiesGuarantees in favour of:

Government 22.1.1 232,807 153,246 Others - -

232,807 153,246

22.1.1

2017 2016(Rupees in '000)

22.2 Other Contingenciesa) 53,686 56,857 b)

- 49,800

c)

612,707 612,707

d)

6,163 6,163

e)

211,716 211,716 f)

34,506 -

The Bank and the income tax department have filed an appeal before the AppellateTribunal Inland Revenue against the appellate order of the Commissioner(Appeals), who had partly set aside the order of the Taxation officer, resulting intaxable income of Rs. 151.234 million and tax liability of Rs. 52.932 million againstthe declared tax loss of Rs. 23.489 million and tax liability of Rs. 4.249 million forthe tax year 2008. Without prejudice to the appeal, the demand has been paid by theBank; however no provision has been made in these financial statements as themanagement is confident of a favorable outcome.

Claims not acknowledged as debt from various borrowersDamages claim by borrower for delay in recording repayments received fromborrower, not acknowledged as debt.

Tax demands of Rs. 612.707 million raised by the Income Tax Authorities relatedto VSS staff cost (tax year-2005) has been decided in favour of the Bank. Howevertax authorities have filed appeal before ATIR against the decision of theCommissioner Income Tax (Appeals). The management of the Bank stronglybelieves and expects favourable outcome and therefore no provision has been madefor this effect in the financial statements.

The bank is in appeal before the Appellate Tribunal Inland Revenue against theamended assessment order for the tax year 2010, whereby the taxation officer hadassessed income of Rs. 636.499 million and tax liability of Rs. 222.774 million asagainst income of Rs. 7.559 million and tax liability of Rs. 3.947 million admitted bythe Bank. The CIR(A) decided the appeal partly in the Bank's favor while settingaside certain matters. The re-assessment has not yet been finalized by the taxationofficer.

This includes expired Letter of guarantees/performance aggregating to Rs. 30.057 million (2016: 18.866 million) forwhich formalities for return of original documents are in process.

Income tax amounting to Rs. 17.598 million was withheld from payment of VSS toemployees during the Tax Years 2005, 2006, 2008, 2009, 2010, 2011 and 2013against which some employees of different organizations including SME Bank ltdfiled writ in The Supreme Court of Pakistan wherein leave to appeal accepted andstatus quo was maintained. Accordingly Income Tax withheld was not depositedwith the Government Treasury. Meanwhile the tax authorities raised demand of Rs.52.104 million u/s 161/205 of ITO, 2001 on 20-Apr-2017 which consist of Rs.17.598 million and 34.506 million against principal and default surchargerespectively. The bank preferred an appeal before the Commissioner InlandRevenue (Appeals-I) who remanded the case back for fresh consideration of thefacts on merit. The provision of default surcharge Rs.34.506 million was not madeipso facto.


82


2017 2016(Rupees in '000)

g)

10,000 10,000

h) 129,070 130,310

22.3 Commitments in respect of forward lendingCommitments to extend credit 150,150 40,700

22.4 Commitments for the acquisition of operating fixed assets 6,619 13,963

22.5 Commitments against repo/reverse repo transactions

Sale and repurchase agreements 5,331,068 3,454,878 22.6 Other commitments

Undrawn facilities 161,346 106,375 22.7 Bills for collection

Payable in Pakistan 200 91

Back benefits and claims of staff/employees under litigation.

Damages claimed by an ex-employee of the RDFC involved in Ravi Securities (Pvt)

Limited and Taas Securities (Pvt) Limited affairs and a director of Ravi Securities

(Pvt) Limited and Taas Securities (Pvt) Limited not acknowledged as debt.


83


2017 201623. MARK-UP/RETURN/INTEREST EARNED (Rupees in '000)

On loans and advances to Customers

Extended by: Defunct RDFC 9,622 - Defunct SBFC 7,112 9,459 SME Bank Limited 244,690 262,100

261,424 271,559

Employees 5,785 5,660

Financial Institution - SME Leasing Limited - a subsidiary company 10,213 13,022

277,422 290,241

On investments in

Available for sale securities 345,751 288,864 Held to maturity securities 12,142 2,604

357,893 291,468

On deposits with financial institutions 145 114 On securities purchased under resale agreements 171 252 On clean lending 9,726 29,691 On call money lending 3,921 3,304

649,278 615,070

24. MARK-UP/RETURN/INTEREST EXPENSEDOn deposits 270,462 277,140 On securities sold under repurchase agreements 245,037 161,067 On SBP Refinance Scheme 655 192 Brokerage and commission 3,818 2,486 Bank charges 436 319

520,408 441,204

25. GAIN ON SALE OF SECURITIES

Federal Govt. Securities Market Treasury Bills 175 316 Pakistan Investment Bonds 9,734 30,382 Mutual Funds/Shares 100 2,035

10,009 32,733

26. OTHER INCOMEGain on sale of operating fixed assets 1,317 260 Fee on fund managed by the Bank - Equity Participation Fund (EPF) 1,073 1,134 Others 104 125

2,494 1,519


84


2017 201627. ADMINISTRATIVE EXPENSES Note (Rupees in '000)

Salaries, allowances, etc. 514,416 461,107 Charge for defined benefit plans

- pension fund and gratuity 33.1.4 95,779 50,365 - funded gratuity scheme 33.2.4 15,607 11,895 - unfunded compensated absences 33.3.4 6,718 6,879

Contribution to benevolent fund 33.4.3 511 - Non-executive directors' fees, allowances and other expenses 1,090 1,311 Rent, taxes, insurance, electricity, etc. 84,543 82,220 Legal and professional charges 19,919 18,191 Communications 5,608 6,047 Repairs and maintenance 24,740 28,368 Stationery and printing 5,343 4,634 Advertisement and publicity 371 929 Auditors' remuneration 27.1 900 900 Depreciation 12.3 26,848 30,398 Amortization 12.4 746 710 Recruitment expenses 134 91 Travel and transport 5,221 5,778 Vehicle running and maintenance expenses 6,373 6,044 Entertainment 3,142 3,021 Training 1,394 291 Books, subscription and newspapers 3,129 2,840 Other expenses 27.2 17,720 18,313

840,252 740,332

27.1 Auditors' remunerationAudit fee 800 800 Special certifications, half yearly review and audit of consolidated financial statements 100 100

900 900

27.2

2017 201628. OTHER CHARGES (Rupees in '000)

Penalties imposed by the State Bank of Pakistan - -

This includes security charges of Rs. 15.71 million (2016: Rs. 15.53 million) and NIFT charges of Rs. 1.33 million(2016: Rs. 1.33 million).


85


2017 201629. TAXATION Note

Current 29.2 7,854 6,654 Prior years 29.3 (232,601) - Deferred 13.2 (202,238) (264,230)

(426,985) (257,576)

29.1 Relationship between tax expense and accounting lossLoss before tax (721,007) (456,818)

Applicable tax rate (percentage) 35% 35%

2017 2016

Tax on loss (252,352) (159,886) Deferred tax asset recognised during the year (202,238) (264,230) Tax effect of income taxed at lower rate 109 332 Minimum tax 7,745 6,322 Prior year adjustment (232,601) - Other permanent differences 252,352 159,886

(426,985) (257,576)

29.2

29.3

2017 201630. BASIC/DILUTED LOSS PER SHARE

Net loss after tax for the year (294,022) (199,242)

Weighted average number of ordinary shares 239,250,700 239,250,700

Basic/diluted loss per share (1.23) (0.83) 2017 2016

31. CASH AND CASH EQUIVALENTS NoteCash and balances with treasury banks 7 435,791 560,802 Balances with other banks 8 11,321 4,226

447,112 565,028

2017 201632. STAFF STRENGTH

Permanent 178 180Temporary/on contractual basis 200 197Bank's own staff strength at end of the year 378 377Outsourced 119 113Total staff strength at end of the year 497 490

Average number of employees during the year 494 493

Provision for current year expenses is charged on minimum tax rate of 1% from January to June 2017 and 1.25% fromJuly to December 2017 of the turnover due to tax losses of the Bank for the year ended December 31, 2017.

(Rupees in '000)

Numbers

(Rupees in '000)

Rupees

(Rupees in '000)

Number of shares

(Rupees in '000)

In respect of income tax years 2003 and 2004 the tax authorities disallowed the Bank’s claims for provisions for baddebts and SBP’s share in profits of the Bank. Subsequently, the Appellate Tribunal Inland Revenue (ATIR) through itsorder dated February 10, 2011 has ruled in favor of the Bank which results in creation of refunds of Rs. 80.059 millionand Rs. 152.54 million for tax years 2003 and 2004 respectively. Thereafter, against the referred judgement of ATIR thetax authorities filed references before the Islamabad High Court which are pending adjudication to date. However, onJuly 28, 2017 the Bank after having received the appeal affect orders from the tax authorities has recognized the amountof refund in these unconsolidated financial statements. The management of the Bank is of the firm view, duly supportedby the tax consultant, that the Bank will be successful in the said references.


86

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201733. EMPLOYEE BENEFIT PLANS33.1 Defined benefit pension and gratuity33.1.1 General description

The scheme entitles the members to:-

-

2017 201633.1.2 The amounts recognised in the balance sheet for defined benefit pension:

Present value of defined benefit obligation 1,244,580 1,017,166 Fair value of plan assets (911,160) (805,739) Deficit 333,420 211,427

33.1.3 Movement in net liability recognised in the balance sheetOpening balance 211,427 112,383 Expense for the year 95,779 50,365 Other comprehensive income 93,918 87,102 Contribution to the fund (67,704) (41,433) Adjustment - 3,010 Closing balance 333,420 211,427

33.1.4 The amounts recognised in the profit and loss account

Current service cost 47,618 41,844 Net interest 16,870 8,521 Past service cost 31,291 - Expense for the year 95,779 50,365

The expense has been recognized in administrative expenses in profit and loss account.

33.1.5 Actual return on plan assets 57,469 55,977

2017 201633.1.6 Changes in present value of defined benefit obligation

Present value of obligation at the beginning of the year 1,017,166 834,743 Current service cost 47,618 41,844 Interest cost 95,693 74,631 Benefits paid (existing pensioners) (19,752) (11,021) Past service cost 31,291 - Actuarial loss 72,564 76,969 Present value of obligation at the end of the year 1,244,580 1,017,166

33.1.7 Changes in fair value of plan assetsFair value of opening plan assets 805,739 719,350 Expected return on plan assets 78,823 66,110 Contributions 67,704 41,433 Benefits paid (existing pensioners) (19,752) (11,021) Actuarial loss (21,354) (10,133) Fair value of closing plan assets 911,160 805,739

33.1.8 Break-up of category of assets (Rupees '000) % age (Rupees '000) % age

Term Deposits Receipts (TDRs) 896,774 98% 794,384 99%Bank deposit accounts 14,386 2% 11,355 1%

911,160 100% 805,739 100%

The Bank operates an approved defined benefit pension and gratuity scheme for all its eligible employees. Contributions are made inaccordance with the actuarial recommendations.

Gratuity payable to members who have completed a minimum of 5 years of service and total service on retirement or cessation ofservice or death is less than 10 years.Pension payable to members who have completed a minimum of 10 years of service with the Bank on retirement at age of sixty yearsor on completion of 25 years of service with the Bank or on permanent disability or on death during service.

(Rupees in '000)

The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund at the beginningof the period, for returns over the entire life of the related obligation.

(Rupees in '000)

2017 2016


87

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201733.1.9 Principal actuarial assumptions

2017 2016

Valuation discount rate - per annum 9.50% 9.50%Expected return on plan assets - per annum 9.50% 9.50%Salaries increase rate - per annum 7.50% 7.50%Pension indexation rate - per annum 5.50% 5.50%

Mortality rateAdjusted

SLIC2001-2005

Adjusted SLIC

2001-2005

33.1.10 Disclosure for current and previous four annual years2017 2016 2015 2014 2013

Deficit positionPresent value of obligation 1,244,580 1,017,166 834,743 721,255 617,807 Fair value of plan assets (911,160) (805,739) (719,350) (641,348) (539,194) Net defined benefit liability 333,420 211,427 115,393 79,907 78,613

Experience adjustmentRemeasurement (gain)/loss on obligation 72,564 76,969 24,565 (363) (119,517) Remeasurement (gain)/loss on plan asset 21,354 10,133 7,281 2,814 8,331 Other Comprehensive Income 93,918 87,102 31,846 2,451 (111,186)

33.1.11 Sensitivity analysis

Change in assumption

Increase in assumption

Decrease in assumption

AssumptionsDiscount rate 1% (148,396) 182,923 Salary rate 1% 88,456 (81,246) Withdrawal rate 10% (117) 115 Mortality age 1 year 20,229 (18,620)

33.1.12 Risks associated with defined benefit planInvestment risks:

Longevity risks:

Salary Increase risk:

Withdrawal risk:

33.1.13 The expected pension expense for the next financial year works out to Rs. 87.631 million (2016: Rs. 67.704 million).

33.1.14 Maturity Profile 2017 2016The weighted average duration of the obligation (in years) 13.01 13.07

Actuarial valuation is carried out annually. Latest actuarial valuation was carried out as at December 31, 2017 using Projected Unit CreditMethod. Significant actuarial assumptions used are as follows:

(Rupees in '000)

Impact on Defined Benefit Obligation

(Rupees in '000)

Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant. Sensitivityanalysis of discount rate, salary increase rate, withdrawal rate and mortality age is presented in the below tables:

The risk arises when the actual performance of the investments is lower than expectation and thus creating a shortfall in the fundingobjectives.

The risk arises when the actual lifetime of retirees is longer than expectation. This risk is measured at the plan level over the entire retireepopulation.

The most common type of retirement benefit is one where the benefit is linked with final salary. The risk arises when the actual increasesare higher than expectation and impacts the liability accordingly.

The risk of actual withdrawals varying with the actuarial assumptions can impose a risk to the benefit obligation. The movement of theliability can go either way.


88

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201733.2 Defined benefit - funded gratuity scheme

33.2.1 General description

2017 201633.2.2 The amounts recognised in the balance sheet

Present value of defined benefit obligation 77,987 67,626 Fair value of plan assets (71,035) - Net liability 6,952 67,626

33.2.3 Movement in net liability recognised in the balance sheetOpening balance of liability 67,626 53,821 Expense for the year 15,607 11,895 Other comprehensive income 4,282 10,317 Contribution to the fund (71,035) - Benefits paid during the year (9,528) (8,407)Closing balance of net liability 6,952 67,626

33.2.4 The amounts recognised in the profit and loss accountCurrent service cost 9,635 6,809 Net interest 5,972 5,086

15,607 11,895


33.2.5 Movement in payable to defined benefit funded gratuity scheme

Present value of obligation at the beginning of the year 67,626 53,821 Current service cost 9,635 6,809 Interest cost 5,972 5,086 Benefits paid (9,528) (8,407)Actuarial loss 4,282 10,317 Present value of obligation at the end of the year 77,987 67,626

33.2.6 Changes in fair value of plan assetsFair value of opening plan assets - - Expected return on plan assets - - Contributions 71,035 - Contributions on behalf of fund 9,528 - Benefits paid (9,528) - Actuarial loss - - Fair value of closing plan assets 71,035 -

33.2.7 Significant actuarial assumptions 2017 2016

Discount factor - per annum 9.50% 9.50%Salary increase rate - per annum (short term - 1 year) 7.50% 7.50%Salary increase rate - per annum (long term) 7.50% 7.50%


SLIC2001-2005

Adjusted SLIC

2001-2005

33.2.8 Disclosure for current and previous four annual years

2017 2016 2015 2014 2013Deficit positionPresent value of obligation 77,987 67,626 53,821 44,711 46,906 Fair value of plan assets (71,035) - - - - Net defined benefit liability 6,952 67,626 53,821 44,711 46,906 Experience adjustmentsRemeasurement (gain)/loss on obligation 4,282 10,317 9,533 (10,275) 2,497 Remeasurement (gain)/loss on plan asset - - - - -

4,282 10,317 9,533 (10,275) 2,497

The Bank operates a defined benefit funded gratuity scheme for all eligible employees. The gratuity fund has been established during thecurrent year.

(Rupees in '000)

(Rupees in '000)


89





AssumptionsDiscount rate 1% (8,242) 9,668 Salary rate 1% 10,172 (8,780) Withdrawal rate 10% 49 (50) Mortality age 1 Year (79) 79

33.2.10 Maturity profileParticulars Undiscounted payments

Year 1 3.645 Year 2 1.182 Year 3 8.115 Year 4 1.232 Year 5 1.212 Year 6 to Year 10 32.850 Year 11 and above 252.155


Longevity risks:

Salary increase risk:

Withdrawal Risk:

33.2.12 The expected gratuity expense for the next financial year works out to Rs. 10.893 million (2016: Rs. 12.937 million).

33.2.13 Maturity Profile 2017 2016

The weighted average duration of the obligation (in years) 13.01 13.07

33.3 Unfunded compensated absences33.3.1 General description

33.3.2 Principal actuarial assumptions

2017 2016

Discount factor - per annum 9.50% 9.50%Salaries increase rate - per annum 7.50% 7.50%


SLIC2001-2005

AdjustedSLIC

2001-2005

The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent employees.






Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant.Sensitivity analysis of discount rate, salary increase rate, withdrawal rate and mortality age is presented in the below tables:

(Rupees in '000)


(Rupees in millions)

Actuarial valuation was carried out as at December 31, 2017 using Projected Unit Credit Method. Significant actuarial assumptions usedwere as follows:


90


2017 201633.3.3 The amounts recognised in the balance sheet are as follows:

Present value of defined benefit obligation 90,659 72,245

33.3.4 Movement in liability recognized in the balance sheetBalance at beginning of the year 72,245 77,399 Expense for the year 6,718 6,879 Benefits paid during the year (10,775) (9,871) Actuarial loss/(gain) 22,471 (2,162) Closing net liability 90,659 72,245





AssumptionsDiscount rate 1% (5,863) 6,457 Salary rate 1% 6,969 (6,414)

33.3.6 Risks associated with defined benefit planLongevity risks:


Withdrawal risk:

33.3.7 The expected compensated absences expense for the next financial year works out to Rs. 12.270 million (2016: Rs. 7.230 million).33.3.8 Maturity profile 2017 2016

The weighted average duration of the obligation (in years) 13.01 13.07 33.4 Benevolent fund33.4.1 General description

33.4.2 Actuarial liability for active employees 14,521 3,151 17,672 13,712 2,876 16,588 Actuarial liability for beneficiaries 573 263 836 22 60 82 Total actuarial liability 15,094 3,414 18,508 13,734 2,936 16,670

Fair value of plan assets (15,546) (4,533) (20,079) (14,081) (4,247) (18,328) Funding surplus (452) (1,119) (1,571) (347) (1,311) (1,658) Receivable from fund - (22) (22) - - - Asset recognized in balance sheet (452) (1,141) (1,593) (347) (1,311) (1,658)

33.4.3

Expense for the year 236 275 511 (232) (688) (920) Funding surplus - - - - - -

236 275 511 (232) (688) (920)

Total

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to this fundwere made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basicsalary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basisof actuarial advice using the Projected Unit Credit Method.

2017 2016 Officers

Benevolent Fund




(Rupees in '000)

(Rupees in '000)

Officers Benevolent

Fund

Staff Benevolent

Fund


Sensitivity analysis is performed by changing only one assumption at a time while keeping the other assumptions constant. Sensitivityanalysis of discount rate and salary increase rate is presented in the below tables:

Staff Benevolent

Fund Total

The amount recognized in the profitand loss account is as follows:



91


33.4.4 Break-up of category of assets% age (Rupees in '000) % age

Term Deposits Receipts (TDRs) 19,922 99% 18,164 99%Bank deposit accounts 157 1% 164 1%

20,079 100% 18,328 100%





AssumptionsDiscount rate 1% (1,058) 1,159 Salary rate 1% - -



Withdrawal risk:



(Rupees in '000)



(Rupees in '000)



2017 2016


92


34. President/CEO

2017 2016 2017 2016 2017 2016

Fees - - 855 970 - - Managerial remuneration 7,986 7,682 - - 221,152 189,261 Charge for defined benefit plan 2,462 2,462 - - 96,914 37,870 Rent and house maintenance 4,392 4,225 - - 76,205 62,830 Utilities 799 768 - - 21,825 18,668 Medical 1,198 1,152 - - 27,054 24,047 Conveyance - - - - 8,911 7,678 Leave fare assistance 1,231 1,231 - - 13,669 12,785 Others 3,734 6,469 235 341 48,014 47,297

21,802 23,989 1,090 1,311 513,744 400,436

Number of persons 1 1 3 4 219 211

COMPENSATION OF DIRECTORS AND EXECUTIVESDirectors Executives

(Rupees in '000)

Executives mean employees, other than the chief executive and directors, whose basic salary exceeds five hundredthousand rupees in a financial year. The remuneration of directors has been fixed in accordance with the Article ofAssociation which include Rs. 25,000 and Rs. 15,000 for attending board meetings and meetings of committee of boardrespectively.


93

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

35FA

IR V

ALU

E O

F FI

NAN

CIAL

INST

RU

ME

NT

S

35.1

On

bala

nce

shee

t fin

anci

al in

stru

men

ts

Avai

labl

e fo

r sal

eH

eld

to

mat

urity

Hel

d fo

r tra

ding

Loan

s and

re

ceiv

able

s

Oth

er

finan

cial

as

sets

Oth

er

finan

cial

lia

bilit

ies

Tot

alLe

vel 1

Leve

l 2Le

vel 3

Ca

rryi

ng /

N

otio

nal

valu

eT

otal

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent s

ecur

ities

(T b

ills a

nd P

IBs)

6,24

7,47

8

-

-

-

-

-

6,24

7,47

8

-

6,21

7,13

9

-

-

6,

217,

139

O

rdin

ary

shar

es o

f list

ed c

ompa

nies

582

-

-

-

-

-

58

2

4,21

1

-

-

-

4,

211

Ord

inar

y sh

ares

of u

nlist

ed c

ompa

nies

26,4

69

-

-

-

-

-

26,4

69

-

-

-

26,4

69

26,4

69

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks-

-

-

-

32

3,58

7

-

32

3,58

7

-

-

-

32

3,58

7

32

3,58

7

- Bala

nces

with

oth

er b

anks

-

-

-

-

11,3

21

-

11,3

21

-

-

-

11,3

21

11,3

21

- Adv

ance

s-

-

-

2,

505,

509

-

-

2,

505,

509

-

-

-

2,

505,

509

2,

505,

509

- Oth

er a

sset

s-

-

-

-

16

5,97

1

-

16

5,97

1

-

-

-

16

5,97

1

16

5,97

1

- Oth

er In

vest

men

t (CO

I/TD

R)-

53

5,00

0

-

-

-

-

53

5,00

0

-

-

-

53

5,00

0

53

5,00

0

- Sub

sidiar

y

SME

Lea

sing

Lim

ited

-

-

-

-

128,

495

-

128,

495

-

-

-

128,

495

128,

495

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s pay

able

-

-

-

-

-

92,5

54

92,5

54

-

-

-

92,5

54

92,5

54

- Bor

row

ings

-

-

-

-

-

5,30

8,31

5

5,30

8,31

5

-

-

-

5,30

8,31

5

5,30

8,31

5

- Dep

osits

-

-

-

-

-

5,34

3,65

5

5,34

3,65

5

-

-

-

5,34

3,65

5

5,34

3,65

5

- Oth

er li

abili

ties

-

-

-

-

-

231,

942

231,

942

-

-

-

231,

942

231,

942

(Rup

ees i

n '0

00)

(Rup

ees i

n '0

00)

Thef

airva

lue

ofqu

oted

secu

rities

othe

rtha

nth

osec

lassif

iedas

held

tom

atur

ity,is

base

don

quot

edm

arke

tpric

e.Q

uote

dsec

uriti

escla

ssifi

edas

held

tom

atur

ityar

eca

rried

atco

st.

The

fair

valu

eof

unqu

oted

equi

tyse

curit

ies,

othe

r tha

n in

vest

men

ts in

subs

idiar

y, is

dete

rmin

ed o

n th

e ba

sis o

f low

er o

f cos

t and

bre

ak-u

p va

lue

of th

ese

inve

stm

ents

as p

er th

eir la

test

ava

ilabl

e au

dite

d fin

ancia

l sta

tem

ents

.

The

fair

valu

e of

unq

uote

d de

bt se

curit

ies, f

ixed

term

loan

s, ot

her a

sset

s, ot

her l

iabili

ties,

fixed

term

dep

osits

and

bor

row

ings

can

not

be

calcu

lated

with

suffi

cient

relia

bilit

y du

e to

the

abse

nce

of c

urre

nt a

nd a

ctiv

e m

arke

t for

th

ese

asse

ts a

nd li

abili

ties a

nd re

liabl

e da

ta re

gard

ing

mar

ket r

ates

for s

imila

r ins

trum

ents

.

BOO

K VA

LUE

FAIR

VAL

UE

In th

e op

inio

n of

the

man

agem

ent,

the

fair

valu

e of

the

rem

ainin

g fin

ancia

l ass

ets a

nd li

abili

ties a

re n

ot si

gnifi

cant

ly di

ffere

nt fr

om th

eir c

arry

ing

valu

es. S

ince

thes

e ar

e eit

her s

hort

term

in n

atur

e or

, in

the

case

of d

epos

its, a

re

freq

uent

ly pr

e-pr

iced.

2017

2017


94

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

On

bala

nce

shee

t fin

anci

al in

stru

men

ts (c

ontin

ued)

Ava

ilabl

e fo

r sa

leH

eld to

m

atur

ityH

eld fo

r tra

ding

Loan

s and

re

ceiv

ables

Oth

er

finan

cial

asse

ts

Oth

er

finan

cial

liabi

lities

Tota

lLe

vel 1

Leve

l 2Le

vel 3

Ca

rryin

g /

Not

iona

l va

lue

Tota

l

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent s

ecur

ities

(T b

ills a

nd P

IBs)

4,65

8,64

6

-

-

-

-

-

4,65

8,64

6

-

4,67

4,28

8

-

-

4,

674,

288

O

rdin

ary

shar

es o

f list

ed c

ompa

nies

582

-

-

-

-

-

58

2

5,31

2

-

-

-

5,

312

Ord

inar

y sh

ares

of u

nlist

ed c

ompa

nies

26,4

40

-

-

-

-

-

26,4

40

-

-

-

26,4

40

26,4

40

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks-

-

-

-

48

8,80

8

-

48

8,80

8

-

-

-

48

8,80

8

48

8,80

8

- Bala

nces

with

oth

er b

anks

-

-

-

-

4,22

6

-

4,

226

-

-

-

4,22

6

4,

226

- Len

ding

to fi

nanc

ial in

stitu

tions

-

-

-

445,

000

-

-

445,

000

-

-

-

445,

000

445,

000

- Adv

ance

s-

-

-

2,

771,

720

-

-

2,

771,

720

-

-

-

2,

771,

720

2,

771,

720

- Oth

er a

sset

s-

-

-

-

15

2,24

7

-

15

2,24

7

-

-

-

15

2,24

7

15

2,24

7

- Oth

er In

vest

men

t (CO

I/TD

R)-

35

,000

-

-

-

-

35

,000

-

-

-

35

,000

35

,000

- Sub

sidiar

y

SME

Lea

sing

Lim

ited

-

-

-

-

128,

495

-

128,

495

-

-

-

128,

495

128,

495

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s pay

able

-

-

-

-

-

95,4

43

95,4

43

-

-

-

95,4

43

95,4

43

- Bor

row

ings

-

-

-

-

-

3,46

0,32

6

3,46

0,32

6

-

-

-

3,46

0,32

6

3,46

0,32

6

- Dep

osits

-

-

-

-

-

5,22

8,71

6

5,22

8,71

6

-

-

-

5,22

8,71

6

5,22

8,71

6

- Oth

er li

abili

ties

-

-

-

-

-

200,

939

200,

939

-

-

-

200,

939

200,

939

On

bala

nce

shee

t fin

anci

al in

stru

men

ts

The

bank

mea

sure

s fair

valu

es u

sing

the

follo

win

g fa

ir va

lues

hier

arch

y th

at re

flect

s the

sign

ifica

nce

of th

e in

puts

use

d in

mak

ing

the

mea

sure

men

ts:

Leve

l 1: F

air v

alue

mea

sure

men

t usin

g qu

oted

pric

es (u

nadj

uste

d) in

act

ive

mar

kets

for i

dent

ical a

sset

s and

liab

ilitie

s.

Leve

l 2: F

air v

alue

mea

sure

men

ts u

sing

inpu

ts o

ther

than

quo

ted

price

s inc

lude

d w

ithin

leve

l 1 th

at a

re o

bser

vabl

e fo

r ass

et o

r liab

ility

, eith

er d

irect

ly (i.

e. as

pric

es) o

r ind

irect

ly (i.

e. de

rived

from

pric

es).

Leve

l 3: F

air v

alue

mea

sure

men

ts u

sing

inpu

ts fo

r the

ass

ets a

nd li

abili

ties t

hat a

re n

ot b

ased

on

obse

rvab

le m

arke

t dat

a (i.

e. un

obse

rvab

le in

puts

).

35.2

35.3

The

bank

's po

licy

is to

reco

gnise

tran

sfer

into

and

out

of t

he d

iffer

ent f

air v

alue

hier

arch

y lev

els a

t the

dat

e, th

e ev

ent o

r cha

nge

in c

ircum

stan

ces,

that

cau

sed

the

trans

fer o

ccur

red.

The

re w

ere

no tr

ansf

ers b

etw

een

level

1 an

d lev

el 2

durin

g th

e ye

ar.

Curr

ently

no

finan

cial i

nstru

men

ts a

re c

lassif

ied in

leve

l 3.

(Rup

ees i

n '00

0)(R

upee

s in

'000)

BOO

K V

ALU

EFA

IR V

ALU

E

2016

2016


95

SME BANK LIMITEDNOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201736. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES

The segment analysis with respect to business activity is as follows:

Trading & Commercial TotalSales Banking

Total income 382,228 291,788 674,016 Total expenses 390,866 1,004,157 1,395,023 Net loss before tax (8,638) (712,369) (721,007) Segment assets (gross) 7,886,495 8,663,228 16,549,723 Segment non performing loans - 5,396,984 5,396,984 Segment provision required 144,079 5,410,550 5,554,629 Segment liabilities 5,656,158 5,773,281 11,429,439 Segment Return on net Assets (ROA) (%) -0.11% -21.90%Segment cost of funds (%) 6.91% 17.39%

Trading & Commercial TotalSales Banking

Total income 357,951 304,389 662,340 Total expenses 266,775 852,383 1,119,158 Net income/(loss) before tax 91,176 (547,994) (456,818) Segment assets (gross) 6,155,049 8,738,212 14,893,261 Segment non performing loans - 5,418,812 5,418,812 Segment provision required 137,226 5,377,820 5,515,046 Segment liabilities 3,721,130 5,636,437 9,357,567 Segment Return on net Assets (ROA) (%) 1.52% -16.31%Segment cost of funds (%) 7.17% 15.12%

Assumptions used:

-

- Unallocatable liabilities representing 5.31% (2016: 5.59%) of the total liabilities have been allocated tosegments based on their respective incomes.

(Rupees in '000)

Unallocatable assets representing 5.02% (2016: 2.57%) of the total assets have been allocated to segmentsbased on their respective incomes.

2017

2016

(Rupees in '000)


96

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

1737

.R

ELA

TE

D P

ART

Y T

RAN

SACT

ION

S

37.1

Det

ails o

f bala

nces

out

stan

ding

at y

ear e

nd a

nd tr

ansa

ctio

ns w

ith re

lated

par

ties a

re a

s fol

low

s:

Key

Equ

ity

Em

ploy

ees

Key

Oth

erE

quity

E

mpl

oyee

sE

mpl

oyee

sM

anag

emen

tPa

rtici

patio

nbe

nefit

Prov

iden

t M

anag

emen

tE

mpl

oyee

sPa

rticip

atio

nbe

nefit

Prov

iden

t Pe

rson

nel

Fund

plan

sT

rust

Pers

onne

lFu

ndpl

ans

Trus

t

Balan

ces o

utst

andi

ng a

s at:

-In

vest

men

t in

subs

idiar

y21

5,45

7

-

-

-

-

-

215,

457

-

-

-

-

-

-

Adv

ance

s11

0,35

2

18

,241

136,

867

-

-

-

126,

580

15

,840

146,

536

-

-

-

-

Rece

ivab

les/m

arku

p97

5

7,

070

51

,256

-

1,593

-

994

7,

364

47,8

34

2,

561

1,

658

-

-D

epos

its56

9,

917

96

,934

394,

236

60

3,78

7

52

,518

1,

741

7,04

8

63

,979

380,

094

-

94

,959

-Pa

yabl

es/m

arku

p-

47

39

0

3,

073

453,

367

327

-

36

356

1,

211

35

1,29

8

59

6

Tran

sact

ions

dur

ing

the

year

end

ed

-N

et m

ark-

up/i

nter

est e

arne

d10

,213

63

4

5,

151

-

-

-

13,0

22

43

5

5,22

5

-

-

-

-

Net

mar

k-up

/int

eres

t exp

ense

d-

520

3,36

2

15,7

45

22

,451

6,

660

-

623

4,

362

14,6

24

-

6,

795

-

Tota

l deb

it in

runn

ing

finan

ce87

,952

-

-

-

-

-

10

8,94

9

-

-

-

-

-

-To

tal c

redi

ts in

runn

ing

finan

ce10

4,18

0

-

-

-

-

-

109,

215

-

-

-

-

-

-

Paym

ents

mad

e on

beh

alf o

f59

0

-

-

48

-

-

564

-

-

73

-

-

-

Paym

ents

rece

ived

from

590

-

-

5,49

9

-

-

56

4

-

-

-

-

-

-Re

mun

erat

ion

and

othe

rs-

68,9

77

42

6,09

9

-

-

-

-

58,2

11

38

1,36

9

-

-

-

-Co

ntrib

utio

n to

em

ploy

ees

ben

efit

plan

s-

-

-

-

15

9,46

6

-

-

-

-

-

60

,138

-

-

Char

ge fo

r the

yea

r rela

ting

to

em

ploy

ees b

enef

it pl

ans

-

-

-

-

118,

615

-

-

-

-

-

68,2

19

-

-Fe

e an

d co

mm

issio

n in

com

e-

-

-

1,073

-

-

-

-

-

1,

134

-

-

Amou

nt

(Rs.

in '0

00)

Prin

cipal

term

s of l

oan

facil

ity to

SM

EL

150

,000

Pr

incip

al te

rms o

f dep

osit

from

SM

EL

56

Prin

cipal

term

s of l

oan

facil

ity to

Key

Man

agem

ent

Per

sonn

el 1

1,69

9 Pr

incip

al te

rms o

f dep

osit

from

Equ

ity P

artic

ipat

ion

Fund

394

,236

Pr

incip

al te

rms o

f dep

osit

from

Em

ploy

ee b

enef

it pl

an

603

,787

Pr

incip

al te

rms o

f dep

osit

from

Em

ploy

ee p

rovi

dent

fund

52,5

18 4

% to

6.7

5%

Inte

rest

rate

1 ye

ar K

ibor

+ 3

.50%

N/A

3%

to 8

%3.

75%

Rem

uner

ativ

e de

posit

sRe

mun

erat

ive

depo

sits

The

Bank

has

relat

ed p

arty

relat

ions

hip

with

its m

ajorit

y sh

areh

olde

r (G

over

nmen

t of P

akist

an),

subs

idiar

y, di

rect

ors,

key

man

agem

ent p

erso

nnel

and

staf

f ret

irem

ent b

enef

it pl

an.

2017

2016

Subs

idia

ry

SME

L

(Rup

ees i

n '0

00)

(Rup

ees i

n '00

0)

Oth

er

Em

ploy

ees

Bank

ing

trans

actio

nsw

ithre

lated

parti

esar

eca

rried

outi

nth

eno

rmal

cour

seof

busin

essa

tagr

eed

term

s.Co

ntrib

utio

nto

and

accr

uals

inre

spec

tofs

taff

retir

emen

tben

efit

plan

are

mad

ein

acco

rdan

cew

ithac

tuar

ialva

luat

ions

(refe

rno

te33

toth

ese

unco

nsol

idat

edfin

ancia

lsta

tem

ents

for

the

deta

ilsof

plan

).Re

mun

erat

ion

toth

eex

ecut

ives

disc

lose

din

note

34to

thes

eun

cons

olid

ated

finan

cials

tate

men

tsar

ede

term

ined

inac

cord

ance

with

term

s of t

heir

appo

intm

ents

.

7.5%

Em

ploy

ees

Subs

idiar

y SM

EL

Non

-rem

uner

ativ

e de

posit

s

Ter

m

Rem

uner

ativ

e de

posit

s

Loan

facil

ities

(Hou

se b

uild

ing

loan

, hou

se b

uild

ing

loan

enh

ance

men

t, ca

r loa

n an

d em

erge

ncy

loan

)

Runn

ing

finan

ce fa

cilit

y (re

view

able

annu

ally)


97


38. CAPITAL ADEQUACY

2017 2016Regulatory capital base (Rupees in '000)Tier I capital Shareholders capital/assigned capital 2,392,507 2,392,507 Reserves 206,526 206,526 Unappropriated/unremitted profits (net of losses) (3,005,398) (2,590,705)

(406,365) 8,328 Less: Adjustments

Goodwill/intangible assets 1,129 718 Investment in equity of subsidiary 128,495 128,495 Deficit on revaluation of available for sale investments 27,980 -

157,604 129,213 Total tier I capital (563,969) (120,885) Tier II capital 81 12,391 Eligible tier III capital - - Total regulatory capital (a) (563,888) (108,494)

Risk-weighted exposures Book Value Risk Adjusted Book Value Risk Adjusted

Value ValueCredit riskBalance sheet items: Cash and other liquid assets 447,112 2,264 565,028 845 Investments/ lending to financial institutions 6,911,314 565,680 5,314,535 511,752 Loans and advances 2,505,509 1,505,252 2,771,720 1,668,549 Fixed assets 64,251 64,251 101,859 101,859

Deferred tax assets 465,198 465,198 256,177 256,177 Other assets 601,710 303,771 368,896 316,647

10,995,094 2,906,416 9,378,215 2,855,829 Off balance sheet itemsWeighted non-funded exposures 188,521 94,261 132,538 66,269

188,521 94,261 132,538 66,269

Credit risk-weighted exposures (b) 11,183,615 3,000,677 9,510,753 2,922,098

Market risk 1,131,523 1,022,592 Market risk-weighted exposures - 1,131,523 - 1,022,592

Total risk-weighted exposures (c) 4,132,200 3,944,690 Capital adequacy ratio credit risk [ (a) / (b) x 100 ] -18.79% -3.71%Total Capital adequacy ratio [ (a) / (c) x 100 ] -13.65% -2.75%

The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacy is asfollows:

2017 2016

State Bank of Pakistan (SBP) has granted exemption to the Bank vide letter No. BSD/SU-21/220/1624/2007 dated June 08,2007 from computing capital adequacy ratio under BASEL II till restructuring/privatization and has granted exemption fromimplementation of Basel III Capital Instructions till restructuring/privatization vide SBP letter #BPRD/BA&CPD/646/000886/16 dated January 12, 2016. Accordingly, the Bank computes capital adequacy ratio underBASEL I and SBP has allowed exemption in meeting the minimum CAR requirements of 10% till June 30, 2018 orcompletion of restructuring/privatization of the Bank, whichever is earlier vide SBP letter No.BPRD/BA&CPD/646/5111/2018 dated March 07, 2018.



98


39. RISK MANAGEMENT

39.1 Credit risk

39.1.1 Segment by class of business

Contingencies andCommitments

(Rupees (Rupees (Rupees in '000) in '000) in '000)

Chemical and pharmaceuticals 172,470 2.2% 707 0.0% - - Agriculture, forestry, hunting and fishing 244,178 3.2% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 407,278 5.3% 84,375 1.6% - - Cement 20,268 0.3% 241,380 4.5% - -

70,005 0.9% 13,050 0.2% - - Automobile and - - transportation equipment 48,818 0.6% 11 0.0% - - Financial 110,352 1.4% 824,298 15.4% 5,331,068 76.8%Insurance - 0.0% 2,472 0.1% - - Electronics and electrical - appliances 34,843 0.5% 902 0.0% - -

357,210 4.6% - - - - Power (electricity), gas, water - and sanitary 83,742 1.1% 9 0.0% - - Wholesale and trade 1,725,291 22.3% - - - - Transport, storage, and - - communication 45,115 0.6% - - - - Individuals 1,644,361 21.1% 2,130,884 39.9% 440,566 6.4%Services 240,045 3.1% - - 10,000 0.1%Government - - - - 1,097,899 15.8%Others 2,531,020 32.7% 2,045,567 38.3% 60,505 0.9%

7,744,049 100% 5,343,655 100% 6,940,038 100%

39.1.2 Segment by sector

Public/Government - - 1,334,924 25% 1,097,899 16%Private 7,744,049 100% 4,008,731 75% 5,842,139 84%

7,744,049 100% 5,343,655 100% 6,940,038 100%

Construction

Footwear and leather garments

Credit risk represents the accounting loss that would be recognised at the reporting date if counter parties failed completely toperform as contracted. The Bank is not exposed to major concentration of credit risk. Written procedures for credit and riskmanagement functions have been developed and implemented. Credit evaluation system comprise of well designed loanapproval and review responsibilities and it is ensured that Bank's credit-granting activities conform to the established strategy,prudential regulations and SBP instructions are strictly followed. To ensure that credit granting activities are adequatelydiversified, besides fixing limits on individual credit, it is ascertained that there is no concentration in a particular industry oreconomic sector, geographical region and specific product. Special attention is placed on such non-performing loans and aSpecial Assets Management Division follows up and recovers all such loans. Recovery against certain specific non-performingloans has been outsourced to National Bank of Pakistan.

2017

Deposits Advances (Gross)

Percentage Percentage Percentage


99


Segment by class of business



Chemical and pharmaceuticals 171,398 2.1% 1,439 0.0% - - Agriculture, forestry, - hunting and fishing 247,941 3.1% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 438,029 5.5% 87,270 1.7% - - Cement 20,268 0.3% 100,000 1.9% - -

70,656 0.9% 787 0.0% - - Automobile and - - transportation equipment 67,225 0.8% 567 0.0% - - Financial 126,580 1.6% 730,097 14.0% 3,454,878 71.3%Insurance - 2,983 0.1% - - Electronics and electrical - appliances 39,166 0.5% 1,145 0.0% - -

353,596 4.4% - - - - Power (electricity), gas, water - and sanitary 91,816 1.1% 1,653 0.0% - - Wholesale and trade 1,936,293 24.1% - - - - Transport, storage, and - - communication 48,293 0.6% - - - - Individuals 1,655,802 20.6% 2,159,978 41.3% 277,385 5.7%Services 317,849 4.0% - - 10,000 0.2%Government - - - 983,832 20.3%Others 2,434,747 30.3% 2,142,797 41.0% 120,711 2.5%

8,028,712 100% 5,228,716 100% 4,846,806 100%

Segment by sector

Public/Government - - 2,417,416 46% 983,832 20%Private 8,028,712 100% 2,811,300 54% 3,862,974 80%

8,028,712 100% 5,228,716 100% 4,846,806 100%

Construction

2016

Advances (Gross) Deposits




100


Specific Specific 39.1.3 Provisions Provisions

Held Held

Chemical and pharmaceuticals 98,027 95,311 99,369 95,199 Agriculture, forestry, hunting and fishing 203,971 203,276 203,286 203,286 Mining & quarrying 9,053 9,053 9,053 9,053 Textile 343,646 342,355 364,613 356,223 Cement 20,268 20,268 20,268 20,268 Footwear and leather garments 60,075 58,179 59,801 58,988 Automobile and transportation equipment 13,514 8,251 16,311 9,054 Electronics and electrical appliances 13,712 11,812 13,561 12,119 Construction 70,411 68,631 70,501 67,882 Power (electricity), gas, water and sanitary 7,153 5,534 13,415 10,731 Wholesale and trade 1,374,232 1,331,679 1,356,714 1,325,011 Transport, storage and communication 654 654 654 654 Individuals 1,521,582 1,521,582 1,522,309 1,522,309 Services 73,837 51,510 72,332 36,985 Others 1,586,849 1,510,364 1,596,625 1,516,839

5,396,984 5,238,459 5,418,812 5,244,601

39.1.4 - -

Public/Government - - - - Private 5,396,984 5,238,459 5,418,812 5,244,601

5,396,984 5,238,459 5,418,812 5,244,601

Details of non-performing advances andspecific provisions by class of businesssegment

Details of non-performing advances andspecific provisions by sector

2017 2016

(Rupees in '000)

Classified Advances

Classified Advances


101


Contingenciesand

commitments39.1.5 Geographical Segment Analysis

Pakistan (721,007) 10,995,094 (434,345) 6,940,038 Asia Pacific (including South Asia) - - - - Europe - - - - United States of America and Canada - - - - Middle East - - - - Others - - - -

(721,007) 10,995,094 (434,345) 6,940,038

Contingenciesand

commitments

Pakistan (456,818) 9,378,215 20,648 4,846,806 Asia Pacific (including South Asia) - - - - Europe - - - - United States of America and Canada - - - - Middle East - - - - Others - - - -

(456,818) 9,378,215 20,648 4,846,806

39.2 Market risk

Loss before taxation

2016

Net assets employed

Total assets employees

2017

(Rupees in '000)

Market risk is the risk that the value of on and off-balance sheet positions of the Bank will be adversely affected bymovements in interest rates, foreign exchange rates and equity prices resulting in a loss to earnings and capital. TheBank's interest rates exposure comprises those originating from investing and lending activities. The Asset and LiabilityCommittee of the Bank monitors and manages the interest rate risk with the objective of limiting the potential adverseeffect on the profitability of the Bank.

Net assets employed

Total assets employed

(Rupees in '000)



102


39.2.1 Foreign exchange risk

Presently the Bank does not deal in foreign exchange.

Net foreigncurrencyexposure

(Rupees in '000)

Pakistan rupee 10,995,094 11,429,439 6,940,038 - United States dollar - - - - Great Britain pound - - - - Deutsche mark - - - - Japanese yen - - - - Euro - - - - Other currencies - - - -

10,995,094 11,429,439 6,940,038 -


(Rupees in '000)


9,378,215 9,357,567 4,846,806 -

39.2.2 Equity position riskThe Bank's exposure in equity market is classified in available for sale category with the intent to earn profit based onfundamentals.

Assets Off-balance sheet items

2017

2016

Assets Liabilities Off-balance sheet items

Liabilities


103

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

1739

.2.3

Mis

mat

ch o

f int

eres

t rat

e se

nsiti

ve a

sset

s and

liab

ilitie

s

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stT

otal

finan

cial

rate

inst

rum

ents

On-

bala

nce

shee

t fin

anci

al in

stru

men

tsAs

sets

Cash

and

bala

nces

with

trea

sury

ban

ks43

5,79

1

-

-

-

-

-

-

-

-

-

435,

791

Ba

lance

s with

oth

er b

anks

1.99%

11,3

21

6,

557

1,36

9

93

9

390

43

7

-

83

1,

046

-

500

Le

ndin

g to

fina

ncial

inst

itutio

ns-

-

-

-

-

-

-

-

-

-

-

In

vest

men

ts6.

96%

6,91

1,314

1,79

6,07

3

94

7,27

0

3,82

5

25

8,68

8

2,12

4

36

6,92

4

3,39

9,87

1

8,

044

-

128,

495

A

dvan

ces

9.69

%2,

505,

509

102,

189

25

1,26

0

568,

461

82

1,99

6

35,8

33

68

6,65

0

25,3

90

9,

270

4,46

0

-

O

ther

ass

ets

165,

971

-

-

-

-

-

-

-

-

-

16

5,97

1

10,0

29,9

06

1,90

4,81

9

1,

199,

899

573,

225

1,

081,

074

38,3

94

1,

053,

574

3,42

5,34

4

18

,360

4,46

0

73

0,75

7

Liab

ilitie

sBi

lls p

ayab

le92

,554

-

-

-

-

-

-

-

-

-

92,5

54

Bo

rrow

ings

from

fina

ncial

inst

itutio

ns6.

05%

5,30

8,31

5

4,

065,

178

1,23

1,19

9

2,

331

4,46

9

3,

938

1,20

0

-

-

-

-

D

epos

its a

nd o

ther

acc

ount

s5.

56%

5,34

3,65

5

1,

294,

039

880,

805

67

4,07

1

425,

120

6,

900

-

-

1,42

7,77

2

-

63

4,94

8

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t t

o fin

ance

leas

e-

-

-

-

-

-

-

-

-

-

-

O

ther

liab

ilitie

s23

1,942

-

-

-

-

-

-

-

-

-

23

1,94

2

10,9

76,4

66

5,35

9,21

7

2,

112,

004

676,

402

42

9,58

9

10,8

38

1,

200

-

1,42

7,77

2

-

95

9,44

4

On-

balan

ce sh

eet g

ap

(946

,560

)

(3

,454

,398

)

(9

12,1

05)

(1

03,1

77)

65

1,48

5

27,5

56

1,

052,

374

3,42

5,34

4

(1

,409

,412

)

4,

460

(228

,687

)

Off-

bala

nce

shee

t fin

anci

al in

stru

men

tsCo

mm

itmen

ts to

ext

end

cred

it31

1,496

31

1,49

6

-

-

-

-

-

-

-

-

-

Com

mitm

ents

aga

inst

repo

bor

row

ing

5,33

1,068

4,09

0,31

5

1,

240,

753

-

-

-

-

-

-

-

-

Off-

balan

ce sh

eet g

ap5,

642,

564

4,40

1,81

1

1,

240,

753

-

-

-

-

-

-

-

-

Tota

l Yiel

d/ In

tere

st R

isk S

ensit

ivity

Gap

(7,8

56,2

09)

(2,1

52,8

58)

(103

,177

)

651,

485

27

,556

1,05

2,37

4

3,

425,

344

(1,4

09,4

12)

4,46

0

-

Cu

mul

ativ

e Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(7

,856

,209

)

(10,

009,

067)

(1

0,11

2,24

4)

(9,4

60,7

59)

(9

,433

,203

)

(8

,380

,829

)

(4,9

55,4

85)

(6

,364

,897

)

(6,3

60,4

37)

-

39

.2.3

.1Re

conc

iliat

ion

of a

sset

s and

liab

ilitie

s exp

osed

to y

ield/

inte

rest

rate

risk

with

tota

l ass

ets a

nd li

abili

ties

(R

upee

s in

'000

)

(R

upee

s in

'000

)To

tal f

inan

cial a

sset

s as p

er n

ote

39.2

.310

,029

,906

To

tal f

inan

cial l

iabili

ties a

s per

not

e 39

.2.3

10

,976

,466

A

dd n

on-fi

nanc

ial a

sset

s:A

dd n

on-fi

nanc

ial li

abili

ties:

O

pera

ting

fixed

ass

ets

64,2

51

Oth

er li

abili

ties

452,

973

Def

erre

d ta

x as

sets

465,

198

Oth

er a

sset

s43

5,73

9

Balan

ce a

s per

Bala

nce

Shee

t10

,995

,094

Ba

lance

as p

er B

alanc

e Sh

eet

11,4

29,4

39

39.2

.3.2

Yiel

d ris

k is

the

risk

of d

eclin

e in

ear

ning

s due

to a

dver

se m

ovem

ent o

f the

yiel

d cu

rve.

39.2

.3.3

Inte

rest

rate

risk

2017

Exp

osed

to Y

ield

/Int

eres

t ris

k

(Rup

ees i

n '0

00)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

gesi

nth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

ets

ofRs

.10,

029.

91m

illio

n(2

016:

Rs.8

,803

.53

mill

ion)

,the

finan

ciala

sset

sw

hich

wer

esu

bjec

tto

inte

rest

rate

risk

amou

nted

toRs

.9,2

99.1

5m

illio

n(2

016:

Rs.7

,961

.5m

illio

n).I

nves

tmen

tsan

dot

her

asse

tsam

ount

ing

toRs

.6,2

90.3

4m

illio

n(2

016:

Rs.4

,723

.1m

illio

n)re

spec

tively

are

guar

ante

edby

the

Gov

ernm

ento

fPa

kist

an. A

n A

sset

s Liab

ility

Com

mitt

ee o

f the

Ban

k m

eets

per

iodi

cally

and

ens

ures

that

the

inve

stm

ents

are

mad

e in

an

appr

opria

te m

anne

r to

miti

gate

any

inte

rest

rate

and

liqu

idity

risk

.

Ove

r 1 to

3

mon

ths

Ove

r 3 to

6

mon

ths

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sU

pto

1 m

onth

Ove

r 2 to

3

year

sO

ver 3

to 5

ye

ars

Ove

r 5 to

10

year

sAb

ove

10

year

sNotes to the Unconsol idated Financial StatementsFor the year ended December 31 , 2017

104

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17M

ism

atch

of i

nter

est r

ate

sens

itive

ass

ets a

nd li

abili

ties

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stfin

ancia

lra

tein

stru

men

tsO

n-ba

lanc

e sh

eet f

inan

cial

inst

rum

ents

Asse

tsCa

sh a

nd b

alanc

es w

ith tr

easu

ry b

anks

560,

802

-

-

-

-

-

-

-

-

-

56

0,80

2

Balan

ces w

ith o

ther

ban

ks2.

14%

4,22

6

2,

153

511

35

0

146

16

3

-

31

39

0

-

482

Le

ndin

g to

fina

ncial

inst

itutio

ns6.

61%

445,

000

44

5,00

0

-

-

-

-

-

-

-

-

-

Inve

stm

ents

7.14

%4,

869,

535

49,0

97

44

2

2,29

3,16

5

-

26

9,46

3

3,94

9

2,

008,

186

116,

738

-

12

8,49

5

Adv

ance

s9.

95%

2,77

1,72

0

14

3,16

5

383,

125

67

4,89

1

1,09

7,79

8

50

,629

366,

881

32

,791

17,4

07

5,

033

-

Oth

er a

sset

s15

2,24

7

-

-

-

-

-

-

-

-

-

152,

247

8,

803,

530

639,

415

384,

078

2,96

8,40

6

1,09

7,94

4

320,

255

37

0,83

0

2,

041,

008

13

4,53

5

5,

033

842,

026

Liab

ilitie

sBi

lls p

ayab

le95

,443

-

-

-

-

-

-

-

-

-

95,4

43

Bo

rrow

ings

from

fina

ncial

inst

itutio

ns6.

07%

3,46

0,32

6

3,

024,

318

408,

837

4,

344

8,55

7

9,

131

3,93

9

1,

200

-

-

-

Dep

osits

and

oth

er a

ccou

nts

5.94

%5,

228,

716

1,53

1,84

2

71

1,30

0

232,

754

41

5,97

1

11,6

38

3,

765

-

1,68

9,03

2

-

63

2,41

4

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t to

fina

nce

lease

-

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

200,

939

-

-

-

-

-

-

-

-

-

20

0,93

9

8,98

5,42

4

4,

556,

160

1,

120,

137

23

7,09

8

42

4,52

8

20

,769

7,70

4

1,

200

1,68

9,03

2

-

928,

796

On-

balan

ce sh

eet g

ap

(181

,894

)

(3,9

16,7

45)

(736

,059

)

2,73

1,30

8

67

3,41

6

299,

486

36

3,12

6

2,03

9,80

8

(1

,554

,497

)

5,

033

(86,

770)

O

ff-ba

lanc

e sh

eet f

inan

cial

inst

rum

ents

Com

mitm

ents

to e

xten

d cr

edi t

147,

075

14

7,07

5

-

-

-

-

-

-

-

-

-

Co

mm

itmen

ts a

gain

st re

po b

orro

win

g3,

454,

878

3,04

4,75

4

41

0,12

4

Off-

balan

ce sh

eet g

ap3,

601,

953

3,19

1,82

9

41

0,12

4

-

-

-

-

-

-

-

-

Tota

l Yiel

d/ In

tere

st R

isk S

ensit

ivity

Gap

(7,1

08,5

74)

(1

,146

,183

)

2,73

1,30

8

673,

416

299,

486

36

3,12

6

2,

039,

808

(1

,554

,497

)

5,03

3

-

-Cu

mul

ativ

e Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(7

,108

,574

)

(8

,254

,757

)

(5

,523

,449

)

(4

,850

,033

)

(4

,550

,547

)

(4

,187

,421

)

(2

,147

,613

)

(3

,702

,110

)

(3

,697

,077

)

-

Re

conc

iliat

ion

of a

sset

s and

liab

ilitie

s exp

osed

to y

ield/

inte

rest

rate

risk

with

tota

l ass

ets a

nd li

abili

ties

(Rup

ees i

n '00

0)(R

upee

s in

'000)

Tota

l fin

ancia

l ass

ets

8,80

3,53

0

To

tal f

inan

cial l

iabili

ties a

s per

not

e 40

.2.3

8,

985,

424

A

dd n

on-fi

nanc

ial a

sset

s:A

dd n

on-fi

nanc

ial li

abili

ties:

O

pera

ting

fixed

ass

ets

101,

859

Oth

er li

abili

ties

372,

143

D

efer

red

Tax

Ass

ets

256,

177

Oth

er a

sset

s21

6,64

9

Balan

ce a

s per

Bala

nce

Shee

t9,

378,

215

Balan

ce a

s per

Bala

nce

Shee

t9,

357,

567

Y

ield

risk

is th

e ris

k of

dec

line

in e

arni

n gs d

ue to

adv

erse

mov

emen

t of t

he y

ield

curv

e.In

tere

st ra

te ri

s k

(Rup

ees i

n '00

0)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

gesi

nth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

ets

ofRs

.8,8

03.5

3m

illio

n(2

015:

Rs.8

,294

.89

mill

ion)

,the

finan

ciala

sset

swhi

chw

ere

subj

ect

toin

tere

stra

teris

kam

ount

edto

Rs.7

,961

.5m

illio

n(2

015:

Rs.7

,685

.22

mill

ion)

.In

vest

men

tsan

dot

her

asse

tsam

ount

ing

toRs

.4,7

23.1

mill

ion

(201

5:Rs

.3,9

96.4

mill

ion)

resp

ectiv

elyar

egu

aran

teed

byth

eG

over

nmen

t of P

akist

an. A

n A

sset

s Liab

ility

Com

mitt

ee o

f the

Ban

k m

eets

per

iodi

cally

and

ens

ures

that

the

inve

stm

ents

are

mad

e in

an

appr

opria

te m

anne

r to

miti

gate

any

inte

rest

rate

and

liqu

idity

risk

.

2016 Exp

osed

to Y

ield/

Inte

rest

risk

Upt

o 1

mon

thO

ver 1

to 3

m

onth

sO

ver 3

to 6

m

onth

s

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sO

ver 2

to 3

ye

ars

Ove

r 3 to

5

year

sO

ver 5

to 1

0 ye

ars

Abo

ve 1

0 ye

ars

Tota

lNotes to the Unconsol idated Financial StatementsFor the year ended December 31 , 2017

105

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

UN

CON

SOLI

DAT

ED

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

1739

.3Li

quid

ity R

isk

39.3

.1M

atur

ities

of A

sset

s and

Lia

bilit

ies

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5T

otal

Upt

o 1 m

onth

to 3

to 6

mon

ths t

o 1

to 2

to 3

to

5to

10m

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s

(R

upee

s in

'000

)As

sets

Cas

h an

d ba

lance

s with

trea

sury

ban

ks43

5,79

1

38

5,33

7

11

,063

1,12

2

2,97

8

-

-

-

35

,291

-

Bala

nces

with

oth

er b

anks

11,3

21

7,05

7

1,36

9

939

390

437

-

83

1,04

6

-

L

endi

ng to

fina

ncial

inst

itutio

ns-

-

-

-

-

-

-

-

-

-

I

nves

tmen

ts6,

911,3

14

1,79

6,07

3

947,

270

3,82

5

258,

688

2,12

4

366,

924

3,39

9,87

1

136,

539

-

A

dvan

ces

2,50

5,50

9

91,9

36

28

2,71

3

59

9,07

4

55

2,06

5

28

6,44

5

50

8,45

5

13

2,83

4

47

,527

4,46

0

O

pera

ting

fixed

ass

ets

64,2

51

1,

596

3,

187

4,

690

9,

255

17

,325

15,2

04

8,

377

4,

167

450

D

efer

red

tax

asse

ts -

net

465,

198

-

-

-

-

465,

198

-

-

-

-

Oth

er a

sset

s60

1,710

115,

004

7,19

8

236,

991

151,

821

138

313

274

89,9

71

-

10

,995

,094

2,39

7,00

3

1,

252,

800

846,

641

97

5,19

7

771,

667

89

0,89

6

3,54

1,43

9

31

4,54

1

4,

910

Liab

ilitie

s B

ills p

ayab

le92

,554

80,1

71

-

-

-

-

-

-

12

,383

-

Bor

row

ings

from

fina

ncial

inst

itutio

ns5,

308,

315

4,

065,

178

1,

231,

199

2,

331

4,

469

3,

938

1,

200

-

-

-

Dep

osits

and

oth

er a

ccou

nts

5,34

3,65

5

1,64

3,89

2

885,

872

674,

998

427,

871

6,90

0

-

-

1,70

4,12

2

-

L

iabili

ties a

gain

st a

sset

s sub

ject

to

fina

nce

lease

-

-

-

-

-

-

-

-

-

-

Def

erre

d ta

x lia

bilit

ies-

-

-

-

-

-

-

-

-

-

O

ther

liab

ilitie

s68

4,91

5

22

0,16

9

1,

959

1,

036

2,

155

67

2

2

1,

283

45

7,63

9

-

11,4

29,4

39

6,

009,

410

2,11

9,03

0

67

8,36

5

434,

495

11

,510

1,20

2

1,

283

2,17

4,14

4

-

N

et a

sset

s(4

34,3

45)

(3

,612

,407

)

(866

,230

)

168,

276

540,

702

760,

157

889,

694

3,54

0,15

6

(1,8

59,6

03)

4,91

0

Shar

e ca

pita

l2,

392,

507

Rese

rves

206,

526

Una

ppro

priat

ed p

rofit

(3,0

05,3

98)

Def

icit o

n re

valu

atio

n of

ass

ets

(27,

980)

(4

34,3

45)

39.4

Ope

ratio

nal R

isk

Ope

ratio

nal r

isk is

the

risk

of lo

ss re

sulti

ng fr

om in

adeq

uate

or f

ailed

inte

rnal

proc

esse

s, pe

ople

and

syst

em o

r fro

m e

xter

nal e

vent

s.

Liqu

idity

risk

refle

cts

anen

terp

rise's

inab

ility

inra

ising

fund

sto

mee

tcom

mitm

ents

.In

orde

rto

avoi

dliq

uidi

tyris

k,th

eBa

nkha

sa

polic

yto

main

tain

suffi

cient

liqui

dity

.To

close

lyw

atch

liqui

dity

posit

ion,

the

Ass

ets L

iabili

ty C

omm

ittee

mee

ts p

erio

dica

lly to

ens

ure

that

ade

quat

e liq

uidi

ty is

main

tain

ed to

mee

t any

futu

re fi

nanc

ial o

blig

atio

n.

Ope

ratio

nalr

isksa

rem

anag

edth

roug

hBa

nk-w

ide

orlin

eof

busin

esss

pecif

icpo

licies

and

proc

edur

es,c

ontro

lsan

dm

onito

ring

tool

s.E

xam

ples

ofth

ese

inclu

depe

rson

nelm

anag

emen

tpra

ctice

s,da

tare

conc

iliat

ion

proc

esse

s, fr

aud

man

agem

ent u

nits

, tra

nsac

tion

proc

essin

g m

onito

ring

and

analy

sis a

nd b

usin

ess c

ontin

uity

plan

ning

.

2017

Inco

mpl

iance

with

the

BSD

circu

larlet

ter

No.

03of

2011

date

dFe

brua

ry22

,201

1,all

asse

tsan

dlia

bilit

iesw

ithco

ntra

ctua

lmat

uriti

esha

vebe

enre

porte

das

pert

heir

rem

ainin

gm

atur

ities

,and

whe

reco

ntra

ctua

lm

atur

ities

are

nota

vaila

ble,

such

asse

tsan

dlia

bilit

iesha

vebe

enre

porte

das

pert

heir

expe

cted

mat

uriti

es,d

eter

min

edon

the

basis

ofbe

havi

orst

udy

ofpr

evio

ussix

year

s'hi

stor

icda

taun

derv

olat

ility

met

hodo

logy

.Th

ese

base

s hav

e als

o be

en a

ppro

ved

by th

e A

sset

and

Liab

ility

Com

mitt

ee (A

LCO

) of t

he B

ank.

Abov

e 10

ye

ars


106

SME

BAN

K LI

MIT

ED

Not

es to

the

Fina

ncia

l Sta

tem

ents

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17M

atur

ities

of A

sset

s and

Lia

bilit

ies

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5To

tal

Upt

o 1

mon

thto

3to

6m

onth

s to

1to

2to

3

to 5

to 1

0m

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s

(R

upee

s in

'000)

Asse

ts C

ash

and

balan

ces w

ith tr

easu

ry b

anks

560,

802

487,

602

15,3

04

1,13

6

3,01

5

-

-

-

53

,745

-

B

alanc

es w

ith o

ther

ban

ks4,

226

2,

635

51

1

35

0

14

6

16

3

-

31

39

0

-

L

endi

ng to

fina

ncial

inst

itutio

ns44

5,00

0

44

5,00

0

-

-

-

-

-

-

-

-

I

nves

tmen

ts4,

869,

535

49

,097

44

2

2,

293,

165

-

269,

463

3,94

9

2,00

8,18

6

245,

233

A

dvan

ces

2,77

1,72

0

90,8

61

309,

642

620,

245

671,

445

357,

514

493,

582

152,

791

70,6

07

5,

033

O

pera

ting

fixed

ass

ets

101,

859

2,59

3

7,25

6

7,40

8

10,4

32

12,8

79

11,4

77

14

,497

3,27

4

32,0

43

D

efer

red

tax

asse

ts25

6,17

7

-

-

-

-

25

6,17

7

-

-

-

-

O

ther

ass

ets

368,

896

110,

174

5,94

6

5,44

8

153,

592

104

239

299

93,0

94

-

9,37

8,21

5

1,18

7,96

2

33

9,10

1

2,92

7,75

2

83

8,63

0

896,

300

509,

247

2,

175,

804

466,

343

37

,076

Li

abili

ties

Bill

s pay

able

95,4

43

82,6

74

-

-

-

-

-

-

12,7

69

-

Bor

row

ings

from

fina

ncial

inst

itutio

ns3,

460,

326

3,

024,

318

40

8,83

7

4,

344

8,

557

9,

131

3,

939

1,

200

-

-

D

epos

its a

nd o

ther

acc

ount

s5,

228,

716

1,

873,

705

71

3,59

0

23

6,02

4

41

6,90

3

12

,938

3,

765

-

1,97

1,79

1

-

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t

to fi

nanc

e lea

se-

-

-

-

-

-

-

-

-

-

D

efer

red

tax

liabi

lities

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

573,

082

187,

217

1,49

8

1,19

1

1,86

7

807

2

1,57

1

378,

929

-

9,35

7,56

7

5,16

7,91

4

1,

123,

925

241,

559

42

7,32

7

22,8

76

7,

706

2,77

1

2,

363,

489

-

Net

ass

ets

20,6

48

(3,9

79,9

52)

(7

84,8

24)

2,68

6,19

3

411,

303

873,

424

501,

541

2,17

3,03

3

(1,8

97,1

46)

37,0

76

Sh

are

capi

tal

2,39

2,50

7

Rese

rves

206,

526

Una

ppro

priat

ed p

rofit

(2,5

90,7

05)

Su

rplu

s on

reva

luat

ion

of a

sset

s12

,320

20,6

48

Ope

ratio

nal R

isk

Ope

ratio

nal r

isk is

the

risk

of lo

ss re

sulti

ng fr

om in

adeq

uate

or f

ailed

inte

rnal

proc

esse

s, pe

ople

and

syst

em o

r fro

m e

xter

nal e

vent

s.2016

Ope

ratio

nalr

isks

are

man

aged

thro

ugh

Bank

-wid

eor

line

ofbu

sines

ssp

ecifi

cpo

licies

and

proc

edur

es,c

ontro

lsan

dm

onito

ring

tool

s.E

xam

ples

ofth

ese

inclu

depe

rson

nelm

anag

emen

tpra

ctice

s,da

tare

conc

iliat

ion

proc

esse

s, fr

aud

man

agem

ent u

nits

, tra

nsac

tion

proc

essin

g m

onito

ring

and

analy

sis a

nd b

usin

ess c

ontin

uity

plan

ning

.

Inco

mpl

iance

with

the

BSD

circu

larlet

ter

No.

03of

2011

date

dFe

brua

ry22

,201

1,all

asse

tsan

dlia

bilit

iesw

ithco

ntra

ctua

lmat

uriti

esha

vebe

enre

porte

das

per

their

rem

ainin

gm

atur

ities

,and

whe

reco

ntra

ctua

lm

atur

ities

are

nota

vaila

ble,

such

asse

tsan

dlia

bilit

iesha

vebe

enre

porte

das

per

their

expe

cted

mat

uriti

es,d

eter

min

edon

the

basis

ofbe

havi

orst

udy

ofpr

evio

ussix

year

s'hi

stor

icda

taun

der

volat

ility

met

hodo

logy

.Th

ese

base

s hav

e als

o be

en a

ppro

ved

by th

e A

sset

and

Liab

ility

Com

mitt

ee (A

LCO

) of t

he B

ank.

Abo

ve 1

0 ye

ars


107


Unaudited Audited2017 2016

40 EMPLOYEES PROVIDENT FUND TRUST

Size of the fund 224,945 212,701 Cost of investments made 169,064 156,248 Percentage of investments made 75% 73%Fair value of investments 173,677 159,205 Breakup of investments is as follows:

Term Deposits Receipts (TDRs) 116,546 69% 61,289 39% 52,518 31% 94,959 61% 169,064 100% 156,248 100%

41 DATE OF AUTHORIZATION


_______________ ___________ __________ __________President/CEO Director Director Director

These unconsolidated financial statements were authorized for issue by the Board of Directorsof the Bank on March 08, 2018.

(Rupees in '000)

2017

Bank deposit

All the investments out of provident fund trust have been made in accordance with section 218of the Companies Act, 2017 and rules formulated for this purpose.

2016

PercentagePercentage(Rupees in '000)

(Rupees in '000)






108


1Im

ran

Hill

Top

Hot

elA

bdul

lah K

han

6,38

4

173

936

7,49

3

-

-

665

665

Li

aqat

road

, Gaw

alman

di R

awalp

indi

.

2A

l-Kha

lil C

NG

Mian

Ajm

al Sh

ah K

akak

hel

31

261

510

802

-

-

510

510

3M

ir E

nter

prise

sA

ijaz

Ahm

ed M

ir-

1,47

5

-

1,

475

-

1,16

9

-

1,

169

4Sa

leem

Boo

k Ce

nter

Ch

. Ali

Muh

amm

ad-

261

404

665

-

26

1

40

9

67

0

5Ra

zzaq

Zar

ri H

ouse

Ali

Ahm

ad39

9

55

1

47

99

7

-

485

47

53

2

R/o

Eid

Gah

, Sha

hdar

a To

wn,

Lah

ore.

6H

ajver

y E

lectri

c St

ore

Jalee

l ur R

ehm

an-

1,18

7

262

1,44

9

-

81

5

22

5

1,

040

Tot

al6,

814

3,

908

2,

159

12

,881

-

2,

730

1,8

56

4,58

6

Muh

amm

ad H

ussa

in

(812

02-1

0788

05-9

)

Ann

ex-A

refe

rred

toN

ote

11.7

toth

ese

finan

cials

tate

men

ts,i

nte

rmso

fsub

sect

ion

3of

sect

ion

33-A

ofth

eBa

nkin

gCo

mpa

nies

Ord

inan

ce19

62th

est

atem

enti

nre

spec

tofw

ritte

nof

floa

nsor

any

othe

rfin

ancia

lreli

efof

Rs. 5

00,0

00 o

r abo

ve a

llow

ed to

:

Sr.

No

Nam

e an

d Ad

dres

s of B

orro

wer

N

ame

of In

divi

dual

/ Pa

rtner

/Dire

ctor

s (w

ith N

IC

No.

)

Fat

her's

/Hus

band

's

Nam

e

Out

stan

ding

Lia

bilit

ies a

t beg

inni

ng o

f yea

r P

rinci

pal

writ

ten-

off

Inte

rest

/ M

ark-

upw

ritte

n-of

f

Oth

er

finan

cial

re

lief/

wai

ver

prov

ided

TO

TAL

Pr

inci

pal

Inte

rest

/ M

ark-

up

Oth

ers

Tot

al

(Rup

ees i

n '0

00)

Muh

amm

ad R

azza

q (3

5202

-243

2990

-9)

Atiq

ue u

r Reh

man

(3

5201

-195

9054

-5)

Shop

#26

2-B

Mul

tan

Road

Opp

.Be

nzFa

ctor

y La

hore

.

Mian

Fer

oz S

hah

Kak

akhe

l (1

7101

-077

0531

-3)

Main

Mar

dan

Road

,Sa

rdhe

riBa

zar,

Char

sadd

a.

Shah

zad

Mir

(423

01-1

0489

74-9

)Pl

ot#

2-B-

13Co

mm

ercia

lAre

aN

azim

abad

2K

arac

hi.

Muh

amm

ad S

aleem

(3

5202

- 247

6044

-9)

107-

A,

Kac

haRa

shid

Road

,E

yeH

ospi

tal,

Dat

a D

arba

r, La

hore

.

109

SMEBL: HO: CS: 2018/ 24 / 1882

NOTICE OF 16th ANNUAL GENERAL MEETINGTo

All Members of the Bank M/s Grant Thornton Anjum Rahman Notice is hereby given that 16th Annual General Meeting of SME Bank Limited will be held on Thurs-day, March 29, 2018 at 4:00 pm at Registered Office, SME Bank Ltd., 56-F, Nazimuddin Road, Blue Area, F-6/1, Islamabad to transact the following:

Ordinary Business:

1. To confirm the minutes of 11th Extra-ordinary General Meeting of shareholders of the Com-pany held on January 22, 2018.

2. To receive, consider and adopt the Audited Financial Statements of the Bank and Consolidat-ed Statements for the year ended 31st December 2017, together with notes thereto, along with Directors’ and Auditors’ Reports to the shareholders, Statement of Compliance with Public Sector Companies (Corporate Governance) Rules and Review Report thereon by the Auditors.

3. Review of Contents of Annual Report 2017. 4. To appoint Auditors and to fix their remuneration for the year ending December 31, 2018. 5. To transact any other business with the permission of the Chair.

By Order of the Board

Islamabad Sajjad Ahmad WarraichDated: March 08, 2018 Company Secretary

(Cell # 0300-5599658) Notes:

1. A Member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote for him/her at the meeting. A proxy must be a member of the company. However, an association (whether body corporate or not) being a member of the Company may appoint as its proxy one of its officers though not a member of the Company. (Form of Proxy is at-tached)

2. An instrument of the proxy and the Power of Attorney or other Authority (if any) under which it is signed or a notarially certified copy of such Power of Attorney or Authority in order to be valid must be duly signed and deposited at registered office of the Company not less than 48 hours before the time of holding the meeting.

111

SME BANK LIMITEDCONSOLIDATED FINANCIAL STATEMENTS


113




T: +92 51 2271906, 2274665F: +92 51 2273874www.gtpak.com

Auditors ’ Repor t to the Members

We have audited the annexed consolidated financial statements comprising consolidated statement of financial position of SME Bank Limited (the Bank) and its subsidiary company (collectively referred as “the Group”) as at December 31, 2017 and the related consolidated profit and loss account, consolidated statement of comprehensive income, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the ‘consolidated financial statements’) for the year then ended. These consolidated financial statements include unaudited certified returns from the branches, except for 8 branches which have been audited by us. We have also expressed separate opinions on the financial statements of the Bank and its subsidiary company namely SME Leasing Limited.

These consolidated financial statements are responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on audit.

Our audit was conducted in accordance with the International Standards on Auditing and accordingly included such test of accounting records and such other auditing procedures as we considered necessary in the circumstances.

a) Deferred tax asset of Rs. 465.198 million has been recognized on the basis of expected net profits arising from future privatization of the Bank as described in Note 14.1 to the consolidated financial statements which we have not been able to verify.

In our opinion, except for the possible effects on the consolidated financial statements of the matter described in paragraph ‘a’ above, the consolidated financial statements present fairly the financial position of the Bank and its subsidiary company as at December 31, 2017 and the results of their operations for the year then ended.

We draw attention to the following matters:i. Note 7.2.1 to the consolidated financial statements which describes that during the current year, the

Bank incurred a net loss of Rs. 294.022 million (2016: 199.242 million) resulting into accumulated losses of Rs. 3,005 million (2016: Rs. 2,591 million). As of December 31, 2017, the reporting date, the total liabilities of the Bank have exceeded its total assets by Rs. 429.589 million and, as of that date, the accumulated losses have surpassed the equity by Rs. 401.609 million. Due to cash deficit the Bank has not been able to meet the minimum capital requirement (MCR) of 10,000 Million for the year, falling short by Rs. 10,464 million (2016: Rs. 9,991 million). Based on the operational results the State Bank of Pakistan has waived the MCR of Rs. 10,000 million till June 30, 2018 or completion of restructuring/privatization whichever is earlier. The cash shortage has also not improved due to negligible government of Pakistan’s (GoP) budget allocation for the Bank. These conditions indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern;

ii. Note 7.2.2 to the consolidated financial statements, which indicates that SME Leasing Limited has incurred loss of Rs. 22.510 million (2016: Rs. 13.382 million) for the year ended December 31, 2017, resulting in accumulated loss of Rs. 235.216 million (2016: Rs. 211.511 million) as at balance sheet date and as of that date the Company’s current liabilities exceed its current assets by Rs. 50.273 million (2016: Rs. 59.915 million). These conditions, along with other matters as set forth

114



in the above referred note; indicate the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern.

iii. Note 12.2 to the consolidated financial statements, which describes in detail the transfer of outstanding loan portfolios of Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) to the “Federal Consolidated Fund” managed by the ministry of finance government of Pakistan – a related party;

iv. Note 13.2.1 to the consolidated financial statements, which describes in detail the sale of Bank’s properties to the ministry of finance government of Pakistan – a related party; and

v. Note 15.2 to the consolidated financial statements, which describes in detail the status of possession of property at Lahore.



115

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at December 31 , 2017

2017 2016Note

ASSETSCash and balances with treasury banks 8 435,879 560,882 Balances with other banks 9 13,080 26,665 Lendings to financial institutions 10 - 445,000 Investments 11 6,782,819 4,741,040 Advances 12 2,859,442 3,132,360 Operating fixed assets 13 70,751 110,506 Deferred tax assets - net 14 465,198 256,177 Other assets 15 597,476 369,842

11,224,645 9,642,472 LIABILITIES

Bills payable 16 92,554 95,443 Borrowings 17 5,308,688 3,460,699 Deposits and other accounts 18 5,343,599 5,226,975 Sub-ordinated loans - - Liability against assets subject to finance lease 19 - 601 Deferred tax liabilities - - Other liabilities 20 909,393 809,646

11,654,234 9,593,364 NET (LIABILITIES)/ASSETS (429,589) 49,108

REPRESENTED BYShare capital 21 2,392,507 2,392,507 Reserves 22 234,660 234,660 Unappropriated loss 22 (3,070,476) (2,638,446)

(443,309) (11,279) Non-controlling interest 24 41,700 48,067

(401,609) 36,788 (Deficit)/surplus on revaluation of assets - net of deferred tax 23 (27,980) 12,320

(429,589) 49,108

CONTINGENCIES AND COMMITMENTS 25


________________ ____________ ____________ _____________President/CEO Director Director Director

SME BANK LIMITEDCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2017

(Rupees in '000)

The annexed notes from 1 to 44 and annexure A form an integral part of these consolidated financial statements.





116

CONSOLIDATED PROFIT AND LOSS ACCOUNTFor the year ended December 31 , 2017CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED DECEMBER 31, 2017

NoteMark-up/return/interest earned 26 665,865 634,645 Mark-up/return/interest expensed 27 520,604 441,366 Net mark-up/interest income 145,261 193,279

Provision against non-performing loans and advances-net 12.5 (18,203) (2,965) Charge/(Reversal) for diminution in the value of investments 11.4 70 (3,885) Bad debts written off directly - -

(18,133) (6,850) Net mark-up/interest income after provisions 163,394 200,129 NON MARK-UP/INTEREST INCOMEFee, commission and brokerage income 11,737 12,520 Dividend income 498 695 Income from dealing in foreign currencies - - Gain on sale of securities 28 10,009 34,302 Unrealized gain on revaluation of investments classified as held for trading - - Other income 29 3,057 4,571 Total non-markup/interest income 25,301 52,088

188,695 252,217 NON MARK-UP/INTEREST EXPENSESAdministrative expenses 30 880,708 777,853 Other provisions/write offs - against land 13.2.2 31,593 - - against other assets 15.4 19,577 2,519 Other charges 31 - - Total non-markup/interest expenses 931,878 780,372 LOSS BEFORE TAXATION (743,183) (528,155) Taxation - Current 32 8,188 6,979 - Prior (232,601) - - Deferred (202,238) (264,230)

(426,651) (257,251) LOSS AFTER TAXATION (316,532) (270,904) Attributable to: Equity holders of the Bank (310,486) (267,310) Non-controlling interest (6,046) (3,594) Loss available for appropriation (316,532) (270,904) Basic/diluted loss per share (Rupees) 33 (1.30) (1.12)


______________ __________ __________ __________President/CEO Director Director Director

(Rupees in '000)


SME BANK LIMITED

2017 2016





117

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended December 31 , 2017CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2017

NoteNet loss after taxation (316,532) (270,904)

(121,865) (95,189) Comprehensive income transferred to equity (438,397) (366,093)

Net change on remeasurement of available for sale investment to fair value (47,083) (35,386)

14.2 6,783 (8,053) (40,300) (43,439)

Total comprehensive income (478,697) (409,532)

Attributable to: Equity holders of the Bank (472,330) (405,122) Non-controlling interest (6,367) (4,410)

(478,697) (409,532)


________________ ____________ ___________ ___________President/CEO Director Director Director

Recognition of net actuarial loss

Components of comprehensive income not reflected in equity

Deferred tax

The annexed notes from 1 to 44 and annexure A form an integral part of these consolidated financialstatements.

SME BANK LIMITED

2017 2016 (Rupees in '000)

Items that will never be reclassified subsequently to profitand loss account





118

CONSOLIDATED CASH FLOW STATEMENTFor the year ended December 31 , 2017CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2017

2017 Note

CASH FLOW FROM OPERATING ACTIVITIESLoss before taxation (743,183) (528,155) Less: Dividend income (498) (695)

(743,681) (528,850) Adjustments for non-cash/other items Depreciation 28,360 32,157 Amortization 982 879 Reversal against non-performing advances (18,203) (2,965)

Charge/(reversal) of provision for diminution in the value of investment 70 (3,885) Gain on sale of fixed asset (1,863) (3,312) Finance charges on leased assets 11 119 Other provisions 51,170 2,519

- - 60,527 25,512

(683,154) (503,338) (Increase)/decrease in operating assets Lendings to financial institutions 445,000 40,000 Advances 291,121 37,438 Other assets (excluding advance taxation) (25,341) (16,946)

710,780 60,492 Increase/(decrease) in operating liabilities Bills payable (2,889) (18,664) Borrowings from financial institutions 1,847,989 571,641 Deposits 116,624 458,223 Other liabilities (excluding current taxation) (17,357) (32,815)

1,944,367 978,385 1,971,993 535,539

Income tax paid (2,218) (8,144) Net cash flow generated from operating activities 1,969,775 527,395 CASH FLOW FROM INVESTING ACTIVITIESNet investment in available-for-sale securities (1,588,932) (748,503) Net (investment)/disinvestment in held-to-maturity securities (500,000) 26,687 Dividend income received 498 695 Investment in operating fixed assets (23,447) (15,844) Sale proceeds from disposal of operating fixed assets 4,130 5,194 Net cash flow used in investing activities (2,107,751) (731,771) CASH FLOW FROM FINANCING ACTIVITIESPayment of lease obligation (612) (1,493) Net cash flow used in financing activities (612) (1,493) Decrease in cash and cash equivalents (138,588) (205,869) Cash and cash equivalents at beginning of the year 587,547 793,416 Cash and cash equivalents at end of the year 34 448,959 587,547


________________ ____________ ___________ ____________President/CEO Director Director Director

SME BANK LIMITED

2016(Rupees in '000)

Bad debts written off directly






119

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended December 31 , 2017

CON

SOLI

DAT

ED

ST

ATE

ME

NT

OF

CHAN

GE

S IN

EQ

UIT

YFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017 S

hare

Cap

ital

Sta

tuto

ry

rese

rve

Res

erve

ag

ains

t fut

ure

loss

es

Una

ppro

pria

ted

loss

S

ub T

otal

(Rup

ees i

n '0

00)

Bala

nce

as a

t Jan

uary

01,

2016

2,39

2,50

7

227,

019

7,64

1

(2

,275

,929

)

351,

238

52,4

77

40

3,71

5

T

otal

com

preh

ensi

ve in

com

e fo

r the

yea

r en

ded

Dec

embe

r 31,

2016

Net

loss

for t

he y

ear e

nded

Dec

embe

r 31,

201

6-

-

-

(267

,310

)

(267

,310

)

(3,5

94)

(2

70,9

04)

Su

rplu

s on

reva

luat

ion

of in

vest

men

t-

-

-

-

-

(833

)

(833

)

Effe

ct o

f rec

ogni

tion

of a

ctua

rial g

ain-

-

-

(95,

207)

(95,

207)

17

(9

5,19

0)

Ba

lanc

e as

at D

ecem

ber 3

1, 20

162,

392,

507

22

7,01

9

7,

641

(2,6

38,4

46)

(11,2

79)

48,0

67

36

,788

Tot

al c

ompr

ehen

sive

inco

me

for t

he y

ear

ende

d D

ecem

ber 3

1, 20

17N

et lo

ss fo

r the

yea

r end

ed D

ecem

ber 3

1, 2

017

-

-

-

(3

10,4

86)

(3

10,4

86)

(6

,046

)

(316

,532

)

Effe

ct o

f rec

ogni

tion

of a

ctua

rial l

oss

-

-

-

(1

21,5

44)

(1

21,5

44)

(3

21)

(1

21,8

65)

Ba

lanc

e as

at D

ecem

ber 3

1, 20

172,

392,

507

22

7,01

9

7,

641

(3,0

70,4

76)

(443

,309

)

41,7

00

(4

01,6

09)

The

anne

xed

note

s fro

m 1

to 4

4 an

d an

nexu

re A

form

an

inte

gral

part

of th

ese

cons

olid

ated

fina

ncial

stat

emen

ts.

____

____

____

____

____

_Ch

ief F

inan

cial

Offi

cer

____

____

____

____

___

____

____

____

_

____

____

____

____

____

____

Pres

iden

t/CE

OD

irect

or

Dire

ctor

Dire

ctor

SME

BAN

K LI

MIT

ED

Attri

buta

ble

to sh

areh

olde

rs o

f the

Gro

up N

on-

cont

rolli

ng

inte

rest

T

otal

Ihsa

n ul

Haq

Kha

nPr

esid

ent/

CE

OM

uham

mad

Adn

an Ja

lilD

irect

orZ

arar

Hai

der

Dire

ctor

Bad

r-ul

-Arif

een

Dire

ctor

120

Notes to the Consol idated Financial StatementsFor the year ended December 31 , 2017

1. GENERAL INFORMATION

1.1 The Group

1.1.1 The Group comprises of SME Bank (Private) Limited (the Bank) and SME Leasing Limited (SMEL).

1.1.2 SME Bank Limited SME Bank Limited (the Bank) is a public limited company incorporated in Pakistan on October

30, 2001 under the Companies Ordinance, 1984 having its registered office at 56-F, Nazim-ud-Din Road, F-6/1, Blue Area Islamabad. The Bank obtained its business commencement certificate on April 16, 2005 which became effective from the date of its issue. The Bank is a Scheduled Commercial Bank engaged in the business of banking with the primary objective to support and develop Small and Medium Enterprise (SME) sector in Pakistan by providing necessary financial assistance and business support services on sustainable basis. The Bank is operating through a network of 13 commercial banking branches. Based on the latest credit rating report dated November 13, 2017 issued by PACRA Credit Rating Company Limited, credit rating of the Bank was “B” (Single B) in the long term and “B” (Single B) in the short term.

In terms of the provisions of the State Bank of Pakistan BSD circular No. 7 of 2009, the Bank was required to increase its paid up capital (net of losses) as at December 31, 2016 up to Rs. 10 billion. The State Bank of Pakistan (SBP) has granted exemption vide SBP letter No. BPRD/BA&CPD/646/5111/2018 dated March 07, 2018 from meeting Minimum Capital requirement (MCR) till June 30, 2018 or completion of restructuring/privatization of the Bank, whichever is earlier.

Amalgamation of defunct RDFC and SBFC The Federal Government promulgated the Regional Development Finance Corporation

(RDFC) and Small Business Finance Corporation (SBFC) Amalgamation and Conversion Ordinance, 2001 (the Ordinance 2001) setting forth the mechanism of amalgamation of defunct RDFC and SBFC. Both these entities were Development Financial Institutions (DFIs). In pursuance of the Ordinance 2001, Finance Division, Ministry of Finance issued an Order (SRO (1) 2001) dated December 29, 2001 setting forth the scheme of amalgamation of RDFC and SBFC with the Bank effective January 1, 2002. Pursuant to this scheme entire assets and liabilities of defunct RDFC and SBFC as at December 31, 2001 were transferred to the Bank at fair value. These two institutions stand dissolved and ceased to exist effective January 1, 2002. The Bank allotted its shares to the share holders of defunct RDFC and SBFC in proportion to their shareholding therein based on the fair value of net assets of defunct RDFC and SBFC on December 31, 2001.

1.1.3 SME Leasing Limited SME Leasing Limited (SMEL) was incorporated in Pakistan on July 12, 2002 as an unlisted

public company and acquired the status of a listed company on December 13, 2006. The Bank (the Holding Company) holds 73.14% (December 31, 2015: 73.14%) shares of SMEL. SMEL is listed on Pakistan Stock Exchange (formerly Lahore Stock Exchange) and its registered office is situated at 56-F, Nazim-ul-Din Road F-6/1, Blue Area, Islamabad. The core objective of the SMEL is to extend lease and working capital financing facilities to small and medium enterprises of the country.

121


2. BASIS OF CONSOLIDATION

These consolidated financial statements include the financial statements of the Bank and SMEL (collectively referred to as “ the Group”).

The assets and liabilities of the SMEL have been consolidated on a line by line basis and the carrying value of investment held by the Bank is eliminated against the SMEL’s equity held by the Bank in the consolidated financial statements.

Non-controlling interest is that part of the net results of operations and of net assets of SMEL attributable to the interest which are not owned by the Bank. Non controlling interest is presented as separate item in these consolidated financial statements.

Material intra-group balances and transactions have been eliminated.

3. BASIS OF PRESENTATION

3.1 These consolidated financial statements have been presented in accordance with the requirements of format prescribed by the State Bank of Pakistan’s BSD Circular No. 4 dated February 17, 2006.

3.2 Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the Group operates. The consolidated financial statements are presented in Pak. Rupee, which is the Group’s functional currency. Figures have been rounded off to the nearest thousand of rupees unless otherwise stated.

4. STATEMENT OF COMPLIANCE

4.1 During the year, the Companies Act 2017 (the Act) has been promulgated, however, Securities and Exchange Commission of Pakistan (SECP) vide its circular no. 23 of 2017 dated October 04, 2017 communicated Commission’s decision that the companies whose financial year closes on or before December 31, 2017 shall prepare their financial statements in accordance with the provisions of the repealed Companies Ordinance, 1984. Accordingly, these consolidated financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB), provisions of and directives issued under the Repealed Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962 and directives issued by SECP and the State Bank of Pakistan (SBP). In case requirements differ, the provisions of and directives issued under the Repealed Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 and the directives issued by the SBP shall prevail.

International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”, International Accounting Standard 40, “Investment Property” and International Financial Reporting Standard 7,”Financial Instruments: Disclosure” are not applicable to banking companies in Pakistan. Accordingly, the requirements of these Standards have not been considered in the preparation of these consolidated financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by the SBP through various circulars.

122

4.2 Standards, interpretations and amendments to approved accounting standards that are not yet effective

The following standards, amendments and interpretations of approved accounting standards are effective for accounting periods, beginning on or after January 01, 2018:

Effective date (accounting

periods beginning on or after)

IFRS 2 Share Based Payments - Amendments January 01, 2018IFRS 3 Business Consideration - Amendments January 01, 2018IFRS 4 Insurance Contracts January 01, 2018IFRS 9 Financial Instruments: Classification and Measurement July 01, 2018IFRS 9 Financial Instruments: Classification and Measurement -

AmendmentsJanuary 01, 2019

IFRS 11 ‘Joint Venture - Amendments January 01, 2018IFRS 15 ‘Revenue from Contract with Customers July 01, 2018IFRS 15 ‘Revenue from contracts with customers’ on gross versus

net revenue presentation - AmendmentsJanuary 01, 2018

IAS 12 ‘Income Taxes - Amendments July 01, 2018IAS 28 ‘Investments in Associates and Joint Ventures - Improve-

mentsJanuary 01, 2018

IFRIC 22 ‘Foreign Currency Transactions and Advance Consider-ation

January 01, 2018

IFRIC 23 ‘Uncertainty over Income Tax Treatments January 01, 2019

The above mentioned standards, amendments and interpretations to published standards and new interpretation to existing standard are either not relevant to the Bank’s operations or are not expected to have significant impact on the Bank’s financial statements other than increase in disclosure in certain cases.

The SBP vide BPRD circular no. 2 dated January 25, 2018 has specified the new reporting

format for the financial statements of banking companies. The new format has revised the disclosure requirements and will become applicable for the financial statements of the Bank for the year ending December 31, 2018.

Other than the aforesaid standards, interpretations and amendments, the International Accounting Standards Board (IASB) has also issued the following standards, which have not been adopted and are under consideration of relevant committee of the Institute of Chartered Accountants of Pakistan (ICAP):


123


after)IFRS 1 First Time Adoption of International Financial Reporting

StandardsJuly 01, 2009

IFRS 14 Regulatory Deferral Accounts January 01, 2016IFRS 16 Leases January 01, 2019IFRS 17 Insurance Contracts January 01, 2021

Implementation of IFRS 7 has been held in abeyance for Banks and non-banking finance companies engaged in investment finance services, discounting services and housing finance services. The Implementation of IAS 39 and IAS 40 has been held in abeyance by the SBP for banks and DFIs.

4.3 Standards, interpretations and amendments to published approved accounting standards that are effective in the current year

There are certain other and amended standards, interpretations and amendments that are mandatory for the Bank’s accounting periods beginning on or after January 1, 2016 but are considered not to be relevant or do not have any significant effect on the Bank’s operations and therefore not detailed in these financial statements.

5 BASIS OF MEASUREMENT

5.1 These consolidated financial statements have been prepared under the historical cost convention as modified for certain investments which are carried at fair value, and defined benefit pension and gratuity plan, defined benefit funded gratuity scheme (SME), defined benefit unfunded gratuity scheme (SMEL), unfunded compensated absences and benevolent fund which are carried at present value of defined benefit obligations net of fair value of plan assets, wherever applicable.

5.2 Use of critical accounting estimates and judgments The preparation of consolidated financial statements in conformity with approved accounting

standards as applicable in Pakistan requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The Bank uses estimates and assumptions concerning the future. The resulting accounting estimate will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are as follow:

i. classification of investments (note 6.2)ii. provision/impairment against investments (note 6.2), advances (note 6.4) and other

assets (note 6.6)iii. valuation and impairment of available for sale securities (note 6.2 and 6.6)iv. useful life and residual value of property and equipments, intangible assets (note 6.5)


124

v. taxation (note 6.8)vi. staff retirement benefits (note 6.9)

6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The accounting policies adopted in the preparation of these unconsolidated financial statements are consistent with those of the previous financial year.

6.1 Cash and cash equivalents Cash and cash equivalents comprise of cash and balances with treasury banks, balances with

other banks and call money lendings. 6.2 Investments Investments other than those categorised as held-for-trading are initially recognised at fair

value which includes transactions costs associated with the investments. Investments classified as held-for-trading are initially recognised at fair value, and transaction costs are expensed in the profit and loss account.

All regular way purchases/sales of investment are recognised on the trade date, i.e., the date the Group commits to purchase/sell the investments. Regular way purchases or sales of investment require delivery of securities within the time frame generally established by regulation or convention in the market place.

The Group has classified its investment portfolio into ‘held-for-trading’, ‘held-to-maturity’ and ‘available-for-sale’ as follows:

Held for trading These are securities which are acquired with the intention to trade by taking advantage of

short-term market/interest rate movements and are to be sold within 90 days. These are carried at market value, with the related unrealized gain/(loss) on revaluation being taken to profit and loss account.

Held to maturity These represent investments acquired by the Group with the intention and ability to hold

them upto maturity. These are carried at amortized cost less impairment if any. Impairment in debt securities is determined in accordance with the requirements of Prudential Regulations issued by SBP.

Available for sale These are investments that do not fall under the held-for-trading or held-to-maturity categories.

These are carried at market value except in case of unquoted securities where market value is not available, which are carried at lower of cost and break-up value less provision for diminution in value, if any. Surplus/(deficit) on revaluation is taken to ‘surplus/(deficit) on revaluation of assets’ account shown below equity. Provision for diminution in value of investments in respect of unquoted shares is calculated with reference to book value of the same. On derecognition or impairment in quoted available-for-sale investments, the cumulative gain or loss previously reported as ‘surplus/(deficit) on revaluation of assets’ below equity is included in the profit and loss account for the period.

Provision for diminution in values of securities (other than term finance certificates) is made after considering impairment if any in their values, where the decline in prices of available


125

for sale equity securities is significant or prolonged, it is considered impaired and included in consolidated profit and loss account. Provision for diminution in the value of term finance certificates is made as per Prudential Regulations issued by SBP.

Held-for-trading and quoted available-for-sale securities are marked to market with reference to ready quotes on Reuters page (PKRV) or MUFAP or the Stock Exchanges, as the case may be.

Investment in subsidiary Investment in subsidiary is carried at cost less impairment, if any. However the investment in

subsidiary is not marked to market as per prudential regulations issued by SBP. 6.3 Agreements for sale and purchase of securities (repo and reverse repo) Securities sold under repurchase agreement (repo) are retained in the consolidated financial

statements as investments and a liability for consideration received is included in borrowings. The difference between sale and repurchase price is treated as mark-up expense and recognized over the period of contract.

Securities purchased under agreement to resell (reverse repo) are included in lendings to financial institutions. The difference between purchase and resale price is treated as mark-up income and recognized over the period of the contract.

6.4 Advances Advances are stated net off specific and general provisions. Provisions are made in accordance

with the requirements of Prudential Regulations issued by the SBP and charged to the profit and loss account. These regulations prescribe an age based criteria (as supplemented by subjective evaluation of advances by the Group) for classification of non-performing loans and advances and computing provision/allowance there against. Such regulations also require the Group to maintain general provision/allowance against its Small Entity (SE) advances portfolio at specified percentage of such portfolio.

Advances are written off when there is no realistic prospect of recovery.

6.5 Capital work-in progress, operating fixed assets, intangibles, depreciation and amortization

Capital work-in-progress Capital-work-in progress is stated at cost less accumulated impairment losses, if any. These are

transferred to operating fixed assets as and when the assets are available for use.

Operating fixed assets-owned These are stated at cost less impairment loss and accumulated depreciation except for leasehold

land. Land is stated at cost less impairment, if any.

Maintenance and normal repairs are charged to consolidated profit and loss account as and when incurred. Major renewals and improvements are capitalized.

Depreciation Depreciation is charged on straight line method at the rates given in note 13.3, commencing


126

from the month in which the asset is available for use. No depreciation is charged in the month of disposal of the asset. The residual value, useful life and depreciation method is reviewed and adjusted, if appropriate, at each balance sheet date.

Gains or losses on disposal of property and equipment are taken to the consolidated profit and loss account.

Assets subject to finance lease Assets subject to finance lease are stated at cost less accumulated depreciation at the rates

similar to the Group’s owned assets and impairment loss (if any). The outstanding obligation under finance lease less financial charges allocated to future periods is shown as liability. Finance charges are calculated at interest rates implicit in the lease and are charged to consolidated profit and loss account in the period in which these are incurred. Leased assets are depreciated on a basis similar to owned assets.

Intangible assets An intangible asset is recognized only if it is identifiable, the Group has control over the asset,

it is probable that economic benefits will flow to the enterprise and the cost of the asset can be measured reliably.

All amortizable intangible assets that meet the recognition criteria are initially measured at cost and are amortized on a straight line basis at the rate given in note 13.4 commencing from the month when these assets are available for use while no amortization is charged in the month in which the assets are disposed of.. Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. The residual value, useful life and amortization method is reviewed and adjusted, if appropriate, at each balance sheet date.

6.6 Impairment The carrying amount of assets are reviewed at each balance sheet date for impairment,

whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. If such indication exists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to their recoverable amount. The resulting impairment loss is taken to the consolidated profit and loss account. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying value that would have been determined net of depreciation/amortization, if no impairment loss had been recognized.

The available for sale equity investments are impaired when there has been a significant or prolonged decline in the value below its cost. Impairment loss is recognized in consolidated profit & loss account.

6.7 Deposits Deposits are recorded at the nominal values of proceeds received. Markup accrued on deposits

is recognised separately as part of other liabilities and is charged to consolidated profit and loss account on a time proportion basis.

6.8 Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax

is recognised in the consolidated profit and loss account, except to the extent that it relates to


127

items recognised directly in other comprehensive income or below equity, in which case it is recognised in other comprehensive income or below equity.

Current Provision for current tax is the expected tax payable on the taxable profit for the year using tax

rates applicable at the date of consolidated statement of financial position and any adjustment to tax payable for previous years.

Deferred Deferred tax is accounted for using the balance sheet liability method in respect of all temporary

differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit at the rates that are expected to apply to the period when the differences reverse based on the tax rates that have been enacted. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax asset is reduced to the extent it is no longer probable that the related tax benefits will be realized.

The Bank also recognizes deferred tax asset/liability on surplus on revaluation of investments which is adjusted against the related surplus in accordance with the requirements of International Accounting Standard on ‘Income Taxes’ (IAS 12).

The Group takes into account the current income tax law and decisions taken by the taxation authorities. Instances where the Group’s views differ from the views taken by the income tax department at the assessment stage and where the Group considers that its view on items of material nature is in accordance with law, the amounts are shown as contingent liabilities.

6.9 Staff retirement and other benefits The Group operates following staff retirement and other benefit schemes for its employees:

Defined benefit plan- Pension and gratuity scheme Fully funded defined benefit pension and gratuity scheme for eligible employees. Contributions

are made in accordance with the actuarial valuation which is carried out periodically using ‘Projected Unit Credit Method’. All actuarial gains and losses are recognized immediately through other comprehensive income.

Defined benefit funded gratuity scheme The Bank operates a defined benefit funded gratuity scheme for its contractual employees.

The obligation under the defined benefit unfunded gratuity scheme is recognized on the basis of actuarial valuation using the ‘Projected Unit Credit Method’.

Defined benefit unfunded gratuity scheme SMEL operates an unapproved and unfunded gratuity scheme covering all of its permanent

employees who have completed the qualifying period under the scheme. The scheme is administered by the trustees and contributions therein are made in accordance with the actuarial recommendations.

The valuation in this regard is carried out at each year end, using the ‘Projected Unit Credit Method’ for the valuation of the scheme. Remeasurement of the defined benefit liability, which


128

comprises of actuarial gains and losses are recognized immediately in other comprehensive income based on actuarial gain and losses.

SMEL detemines the net interest expense/(income) on the net defined benefit liability/(asset) for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual year to the net defined benefit liability/(asset) during the year as a result of contribution and benefit payments. Net interest expense and other expense related to defined benefit plans are recognized in profit and loss account.

Benevolent fund The Bank also operates a contributory benevolent fund for all its eligible employees (defined

benefit scheme). Contributions to this fund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2% of basic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made on the basis of actuarial advice using the Projected Unit Credit Method.

Compensated absences

The Bank The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its

permanent and contractual employees. For its eligible employees, related provision is made in accordance with actuarial valuation. Provision for the year is charged to consolidated profit and loss account. The amount recognized in consolidated statement of financial position represents present value of defined benefit obligation.

Defined benefit plans are provided to employees of the Bank. Calculations in this respect require assumptions to be made of future outcomes, the principal ones being in respect of increase in remuneration, the expected long-term return on plan assets and the discount rate used to convert future cash flows to current values. Calculations are sensitive to changes in the underlying assumptions.

SMEL SMEL accounts for its laibility towards accumulating compensated absences, when the

employees render services that increase their entitlement to future compensated absences.

Defined contribution plan SMEL operates an approved defined contributory provident fund for all its permanent

employees at the rate of 8% of basic salary. The contribution are recognized as employee benefit expense when they become due.

Staff retirement are payable to employees on completion of the prescribed qualifying period of services under the scheme.

6.10 Net investment in lease finance

Leases where the Group transfers substantially all the risks and rewards incidental to ownership of the leased assets to the lessees, are classified as finance leases.


129

The leased asset is derecognized and the present value of the lease receivable is recognized on the balance sheet. The difference between the gross lease receivables and the present value of the lease receivables is recognized as unearned finance income. A receivable is recognized at an amount equal to the present value of the minimum lease payments under the lease agreements, including guaranteed residual value, if any.

Each lease payment received is applied against the gross investment in the finance lease receivable to reduce both the principal and the unearned finance income. The finance income is recognized in the profit and loss account on a basis that reflects a constant periodic rate of return on the net investment in the finance lease.

Initial direct costs incurred by the Group in negotiating and arranging finance leases are added to finance lease receivables and are recognized as an expense in the profit and loss account over the lease term on the same basis as the finance lease income.

6.11 Revenue recognition

6.11.1 Advances

Advances disbursed by SME Bank Limited: Markup/ interest on performing advances is recognized on a time proportion basis over the

term of loan and advances. Markup/ interest/ penal markup recoverable on non performing advances is recognized on receipt basis. Mark-up / interest on rescheduled / restructured advances and investments is recognised as permitted by the regulations of the SBP.

Advances disbursed by defunct RDFC and defunct SBFC : Advances and related markup are suspended. Markup/ interest on advances is recognized on

receipt basis.

6.11.2 Return on investments Return on investments is recognized on a time proportion basis except on classified investment

which is recognized on receipt basis. Any premium paid or discount received on purchase of securities is amortized through consolidated profit and loss account over the remaining period of maturity on time apportionment basis.

6.11.3 Dividend income Dividend income is recognized when the Group’s right to receive the dividend is established.

6.11.4 Interest, fee, brokerage and commission Interest, fee, brokerage and commission, profit on other investments, bank deposits and

staff loans is recognized on accrual basis. Income on non-funded facilities (fee, commission, documentation charges etc.) is recognized on receipt basis except commission on bank guarantees which is recognized on accrual basis.

6.11.5 Leasing income SMEL follows the finance lease method in accounting for the recognition of lease income.

Under this method, the unearned lease income i.e. the excess of gross lease rentals and the estimated residual value over the cost of the leased assets is deferred and taken to income over the term of the lease contract, so as to produce a systematic return on the net investment


130

in finance lease. Unrealized lease income is held in suspense account, where necessary, in accordance with the requirements of the NBFC Regulations.

Front-end fees and documentation charges are taken to income when realized. Unrealized lease income and unrealized income on loans and finances is held in suspense

account, where necessary, in accordance with requirements of the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (NBFC Regulations).

6.12 Off setting Financial assets and liabilities are off set and the net amount is reported in the consolidated

statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or realize the asset and settle the liability simultaneously.

6.13 Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of

a qualifying asset as part of the cost of that asset are capitalized. Other borrowing costs are recognized as an expense in the period in which it incurs.

6.14 Provisions Provisions are recorded when the Group has a present legal or constructive obligation as a

result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Provision for guarantee claims and other off balance sheet obligations is recognized when intimated and reasonable certainty exists to settle the obligations. Expected recoveries are recognized by debiting customer accounts. Charge to consolidated profit and loss account is stated net off expected recoveries.

6.15 Financial assets and liabilities All financial assets and financial liabilities are recognized at the time when the Group becomes

a party to the contractual provisions of the instrument. A financial asset is derecognised where (a) the rights to receive cash flows from the asset have expired; or (b) the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Group has transferred substantially all the risks and rewards of the asset, or (ii) the Group has neither transferred nor retained substantially all the risk and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Any gain or loss on derecognition of the financial assets and financial liabilities is taken to income currently.

6.16 Segment reporting A segment is the distinguishable component of the Group that is subject to risks and

rewards that are different from those of other segments. A business segment is one that is engaged either in providing certain products or services, whereas a geographical segment is one engaged in providing products and services within a particular economic environment. Segment information is presented as per the Group functional structure and the guidance of the State Bank of Pakistan. the Group primary format of reporting is based on business segments:


131

6.16.1 Business segments

Trading and sales This segment undertakes the Group’s treasury, money market and capital market activities.

Commercial banking It includes loans, deposits and other transactions with individuals/ staff, small and medium

enterprises and corporate customers.

Other leasing operations This segment includes the Group’s leasing activities.

6.16.2 Geographical segments The Group operates only in Pakistan.

6.17 Appropriation to reserves Dividend and appropriation to reserves (except appropriation required by law) after the

balance sheet date are recognized as liability in the Group financial statement in the year in which these are approved.

7 FINANCIAL RESTRUCTURING AND GOING CONCERN ASSUMPTION

7.1 Current Status of Privatization of SME Bank GOP on decided to divest its equity stake in the Bank along with management control to

a strategic investor through Privatization Commission (PC). Accordingly PC has appointed financial advisory consortium (FCC) comprising of Elixir Securities Pakistan (Pvt) Limited, Bridge Factor (Pvt) Limited, KPMG Taseer Hadi & Co (financial and tax advisor) and Mohsin Tayebaly & Co. (Legal counsel) to conduct this transaction. The transaction structure was approved by PC board on January 17, 2017 and recommended to Cabinet Committee on Privatization (CCOP). CCOP approved the transaction structure in its meeting held on January 27, 2017. Thereafter PC invited Expression of Interest (EOI) on February 14, 2017, from reputed local and international investors who have an interest in entering the process towards acquiring strategic shareholding in SME Bank. Last date to receive Statement of Qualification (SOQ) was March 17, 2017. Salient features of the transaction structure are as follows:

i) SBP will issue a new banking license of specialized nature (with at least 60% advances for SME) to the investors.

ii) Investor to maintain MCR of Rs. 6 billion on staggered basis, Rs. 2 billion would be required to be injected upfront while Rs. 1 billion each year for next four years.

iii) SME Leasing limited, a majority owned listed subsidiary of SME Bank, would be the part of transaction on “as is basis”.

iv) The defunct SBFC and RDFC portfolios appearing in books of SME Bank will not be part of the transaction.

v) CDA plots in G-5/2 and G-7 Islamabad appearing in the books of the Bank will not be part of the transaction.


132

vi) The Bank can be used as a platform for delivering Digital Finance/Fintech/Branch less banking services, subject to fulfilment of applicable requirement of SBP.

vii) The SBP has offered a variety of incentives including youth business loans scheme, credit guarantee schemes, export finance schemes, refinancing facilities amongst others to promote SME financing. The potential investor will be able to avail these incentives offered by the SBP, subject to fulfillment of requisite operational requirements.

Subsequently, based on SOQs received the Transaction Steering Committee of PC evaluated/assessed five interested parties for prequalification and forwarded its recommendation to PC Board for decision. PC board in its meeting held on 2nd November 2017 has pre-qualified 3 parties for due diligence and participation in bidding process.

7.2 Going concern assumption and minimum capital requirement

7.2.1 The Bank During the current period the Bank has incurred a net loss after tax of Rs. 294.022 million

(2016: 199.242 million) and as of the reporting date the accumulated losses stood at Rs. 3.005 billion (2016: 2.591 billion). The Bank, due to cash deficit, is short by Rs. 10.406 billion (2016: 9.991 billion) in meeting the minimum capital requirements (MCR) of Rs. 10 billion which has been waived by SBP valid till June 30, 2018 or completion of restructuring/privatization whichever is earlier. and further due to the reason that during the last few years GoP’s budget allocation for the Bank has remained negligible. These conditions indicate the existence of material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern and therefore, it may be unable to realize its assets and discharge its liabilities in the ordinary course of business. Having regard to the above, GoP being a majority shareholder of the Bank with 94% of shares has invited expression of interest from reputed local and or international investors who have an interest in entering the process towards acquiring strategic shareholding in Bank with management control. As explained in note 6.1 potential buyers have been pre qualified by PC and due diligence/bidding process has started. The management of the Bank strongly believes that the privatization process of the Bank will complete in due course of time that will result into injection of fresh equity enabling the Bank to expand and finance its operations. In view of above the management of the Bank believes that the use of going concern assumption in preparation of these financial statements is appropriate.

7.2.2 SME Leasing limited (SMEL) - Subsidiary Company SMEL has been incurring losses since year ended December 31, 2009 which has resulted in

erosion of equity. During the year ended December 31, 2017, the Company has incurred a loss of Rs. 22.51 million (2016: Rs. 13.382 million) which has further increased accumulated losses to Rs. 235.215 million (2016: Rs. 211.511 million) as at the year end. Further, the net assets of the Company amounting to Rs. 133.251 million (2016: Rs. 156.956 million) includes non-performing leases and loans and finances, net of provisions of Rs. 142.755 million (2016: Rs. 163.531 million).

Further SMEL is dependent on the running finance facility granted by the holding company. The revised prudential regulation of State Bank of Pakistan (SBP) applicable from June 2015 has restricted the exposure by bank to a related party to the extent of 7.5% of its equity. However, the holding company has applied and obtained relaxation of the aforesaid


133

requirement in respect of its financing to SMEL by State Bank of Pakistan, which will expire on June 2018.

The above factors indicate the existence of a material uncertainty which may cast significant doubt on SMEL’s ability to continue as a going concern and SMEL may not be able to realize its assets and discharge its liabilities in the normal course of business. However, the financial statements of SMEL for current year consolidated in these consolidated financial statement have been prepared on going concern basis considering the factors mentioned below:

- The Holding Company (the Bank) has granted a short term running finance facility to SMEL amounting to Rs. 150 million (facility renewed on April 19, 2017) out of which Rs. 110.352 million has been utilized as at December 31, 2017 (2016: Rs. 104.838 million). The said facility can be extended to the extent of Rs. 300 million as per the stand-by agreement for finance facility. The Bank has obtained relaxation from the State Bank of Pakistan from the requirements of related party exposure limits in order to continue its support towards SMEL. Further, the Bank has been in the list of privatization by Government of Pakistan. Upon successful completion of privatization of the Bank, the majority shareholding in SMEL will be taken over by the acquirer of the Bank.

- The management of SMEL has prepared cash flow projections which reflect that based on financial support by the parent company SMEL will be able to continue its business on going concern basis in the foreseeable future.

- Concerted efforts are being made for the recovery of non-performing leases and loans and finances and in this respect during the year Rs. 39.588 million (2016: Rs. 54.104 million) has been recovered.

- Efforts are also being made by the management of SMEL to reduce the overall cost of SMEL.

Based on the above mentioned financial measures and the concerted operational measures being taken by SMEL, the management is confident of the profitable operations in the foreseeable future and therefore, has prepared the financial statements on going concern basis.


134

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2017

2017 20168. CASH AND BALANCES WITH TREASURY BANKS Note (Rupees in '000)

In hand - local currency 112,270 72,050 In transit - local currency - -

National Prize Bonds 329 -

With State Bank of Pakistan (SBP) in:Local currency current accounts 8.1 296,863 453,513

With National Bank of Pakistan in:Local currency current accounts 26,417 35,319

435,879 560,882

8.1

2017 20169. BALANCES WITH OTHER BANKS Note (Rupees in '000)

In Pakistan: On current accounts 2,177 22,782 On deposit accounts 9.1 20,903 13,883 Provision for doubtful balance with a bank 9.2 (10,000) (10,000)

13,080 26,665

9.19.2

2017 201610. LENDINGS TO FINANCIAL INSTITUTIONS Note (Rupees in '000)

Call money lendings - - Letter of placement - 445,000

10.1 - 445,000

10.1 PARTICULARS OF LENDING

In local currency 10.1.1 - 445,000 In foreign currencies - -

- 445,000

10.1.1

SME BANK LIMITED

Deposits with the SBP are maintained to comply with the statutory requirements issued from time to time.

These carry interest rate ranging from 3.5% to 4.00% (2016: 3.75 % to 4.00%) per annum.

Provision for doubtful balance is in respect of deposit of Rs. 10 million with Indus Bank Limited which is underliquidation.

These lendings were carried at markup rate ranging from 6.15% to 6.30% per annum and had maturity periodupto 1 month.


135

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

11IN

VEST

ME

NT

SN

ote

11.1

INVE

STM

EN

TS

BY T

YPE

S :

Avai

labl

e-fo

r-sal

e se

curit

ies

Mar

ket T

reas

ury

Bills

(MTB

s)11

.365

8,75

9

1,5

34,4

50

2,

193,

209

561,

419

1,73

3,40

3

2,29

4,82

2

Paki

stan

Inve

stm

ent B

onds

(PIB

s)11

.322

8,39

0

3,

825,

879

4,

054,

269

65

6,72

0

1,

707,

104

2,

363,

824

Fu

lly p

aid o

rdin

ary

shar

es/m

utua

l fun

d65

,036

-

65

,036

64

,936

-

64

,936

952,

185

5,36

0,32

9

6,31

2,51

4

1,

283,

075

3,

440,

507

4,

723,

582

H

eld-

to-m

atur

ity se

curit

ies

Term

Dep

osit

Rece

ipts

(TD

Rs)

11.8

535,

000

-

535,

000

35,0

00

-

35,0

00

Ce

rtific

ates

of I

nves

tmen

ts (C

OIs

)76

2

-

762

76

2

-

762

535,

762

-

535,

762

35,7

62

-

35,7

62

In

vest

men

ts a

t cos

t1,4

87,9

47

5,

360,

329

6,

848,

276

1,

318,

837

3,

440,

507

4,

759,

344

Le

ss: P

rovi

sion

for d

imin

utio

n in

valu

e o

f inv

estm

ents

11.4

(38,

747)

-

(3

8,74

7)

(38,

677)

-

(3

8,67

7)

In

vest

men

ts n

et o

f im

pairm

ent

1,449

,200

5,36

0,32

9

6,80

9,52

9

1,28

0,16

0

3,44

0,50

7

4,72

0,66

7

Net

(def

icit)/

surp

lus o

n re

valu

atio

n of

a

vaila

ble-

for-s

ale-s

ecur

ities

232,

551

(29,

261)

(2

6,71

0)

6,00

2

14,3

71

20

,373

Tot

al in

vest

men

ts

1,451

,751

5,33

1,068

6,78

2,81

9

1,

286,

162

3,

454,

878

4,

741,

040

Tot

al

(Rup

ees i

n '0

00)

(Rup

ees i

n '00

0)

Hel

d by

the

bank

G

iven

as

colla

tera

l T

otal

H

eld b

y th

e ba

nk

Giv

en a

s co

llate

ral

2017

2016


136

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2017

2017 201611.2 INVESTMENTS BY SEGMENTS: Note

Federal Government Securities:- Market Treasury Bills (MTBs) 11.3 2,193,209 2,294,822 - Pakistan Investment Bonds (PIBs) 11.3 4,054,269 2,363,824

6,247,478 4,658,646

Fully paid up ordinary shares:- Listed companies/mutual fund 11.6 17,493 17,493 - Unlisted companies 11.7 47,543 47,443

65,036 64,936 Other investments:

- Certificates of Investment (COIs) 762 762 - Term Deposit Receipts (TDRs) 11.8 535,000 35,000

535,762 35,762

Total investments at cost 6,848,276 4,759,344

Provision for diminution in value of investments 11.4 (38,747) (38,677)

Investment (net of provision) 6,809,529 4,720,667

(Deficit)/surplus on revaluation of available for sale securities - net 23 (26,710) 20,373 Total investments 6,782,819 4,741,040

(Rupees in '000)


137

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201711.3 Principal terms of investments in Federal Government securities

Market Treasury Bills On maturityPakistan Investment Bonds On maturity

2017 201611.4 Particulars of provision for diminution in value of investments Note

Opening balance 38,677 42,562 Charge/(reversal) for the year 70 (3,885) Closing balance 38,747 38,677

11.4.1 Particulars of provision in respect of type and segmentAvailable-for-sale securities -Fully paid up ordinary shares - Quoted Companies 16,912 16,912 - Unlisted Shares 20,070 20,000 - Delisted Companies 11.7.2 1,003 1,003

Held-to-maturity securities - Certificates of Investment 762 762

38,747 38,677

Market value Rating Market value Rating

11.5 Quality of Available-for-sale securities NoteMarket Treasury Bill 11.5.1 2,193,076 unrated 2,292,186 unratedPakistan Investment Bonds 11.5.1 4,024,063 unrated 2,382,102 unrated

Fully paid up ordinary shares 11.5.2PICIC Investment Fund Limited 1,838 3-Star 1,914 3-StarLotte Pakistan PTA Limited 572 unrated 664 unratedDewan Salman Fibre Limited 27 unrated 92 unratedPakistan Telecommunication Company Limited 112 unrated 148 unratedNishat Chunian Mills Limited 17 unrated 24 unratedCrescent Textile Mills Limited 1 unrated 1 unratedInvest Capital Investment Bank Limited 1,643 unrated 2,471 unratedISE Towers REIT Management Company Limited 18,000 unrated 18,000 unratedLSE Financial Services Limited 8,440 A/A-2 8,440 A/A-2News-v/s Credit Information Services (Pvt) Limited 30 unrated - unrated

30,680 31,754 6,247,819 4,706,042

11.5.1 These are Government of Pakistan guaranteed securities.

11.5.2 Rating of these equity securities represent 'Entity/Funds Rating'.

11.5.3

(Rupees in '000)

Name of investment Maturity Rate per annum

Market Treasury Bills and Pakistan Investment Bonds are securities eligible for re-discounting with the SBP.

(Rupees in '000)

(Rupees in '000)

January 2018 to March 2018July 2018 to April 2021

5.96% to 6.01% 6.42% to 12.52%

Coupon/Mark up payment

Principal payment

at maturitysemi-annually

2017 2016

Securities have either been rated by 'The Pakistan Credit Rating Agency Limited' (PACRA) or 'JCR-VIS Credit Rating CompanyLimited' (JCR-VIS). These ratings reflect independent credit risk assessment by respective credit rating entities.


138


11.6 Investments in listed companies/mutual fund

2017 20162017 2016 Name of company/mutual fund Note

137,668 137,668 18.12 PICIC Investment Fund Limited 2,494 2,494 79,775 79,775 10.15 Lotte Chemical Pakistan Limited 810 810 18,449 18,449 18.24 Dewan Salman Fibre Limited 336 336 8,600 8,600 68.20 Pakistan Telecommunication Company Limited 586 586

385 385 77.49 Nishat Chunian Mills Limited 30 30 18 18 34.84 Crescent Textile Mills Limited 1 1

1,117,876 1,117,876 11.84 Invest Capital Investment Bank Limited 13,236 13,236

17,493 17,493 Impairment in available for sale listed shares 11.6.1 (16,912) (16,912) Investment in listed shares (net of impairment) 581 581 Surplus on revaluation of listed shares - (net) 3,629 4,730 Market value as on December 31 4,210 5,311

11.6.1 Impairment in available for sale listed sharesPICIC Investment Fund Limited 2,215 2,215 Lotte Chemical Pakistan Limited 683 683 Dewan Salman Fibre Limited 310 310 Pakistan Telecommunication Company Limited 441 441 Nishat Chunian Mills Limited 27 27 Invest Capital Investment Bank Limited 13,236 13,236

16,912 16,912

11.7

11.7.1 18,000 18,000 11.7.1 8,440 8,440

AKD Venture Fund 11.7.1 20,000 20,000 News-v/s Credit Information Services (Pvt) Limited 11.7.1 100 100 Companies delisted from stock exchange 11.7.2 1,003 1,003

47,543 47,543

(Rupees)11.7.1 8% 2,000,000 10.00 20,000 Not

available Sohaib Umar

1% 3,034,603 5.93 18,000 12.13 Mian Ayyaz Afzal1% 843,975 10.00 8,440 18.29 Naveed Amin

1.46% 10,000 10.00 100 Not available

11.7.1.110.7.1.2

Paid-up value per

share/ average

price per unit (Rs)

Particulars of investments held in unlisted companies, fund and delistedcompanies

Total paid up value

Break up value per share is based on the audited financial statements of investees for the year ended June 30, 2017.

ISE Towers REIT Management

Number of units held

AKD Venture Fund

Not available

Name of Chief

executive

(Rupees in '000)

Company Limited

(Pvt) Limited

LSE Financial Services Limited

gCompany LimitedLSE Financial Services Limited

News-v/s Credit Information Services

No. of ordinary shares/units

% age

Management has fully provided the investment in AKD Venture Fund as irrecoverable and impaired.

(Rupees in '000)

Cost/Paid-up value per unit

held

Break up value (note

10.7.1.2)


139


11.7.2 Particulars of investments in shares of companies delisted from stock exchange and are currently under liquidation.

Mohib Exports Company Limited 4,600 23.81 109 Sunflow Citrus Limited 100,000 4.22 422 Tawakal Garments Company Limited 4,000 38.38 154 Tristar Shipping Lines Limited 5,000 23.56 118 Zahoor Textile Mills Limited 15,200 13.16 200

1,003 11.8

Cost/Paid-up value per share

(Rupees)

Total paid up value

This represents investment in term deposit receipts (TDR) carrying markup ranging from 6% to 6.4 % (2016: 6.6%) per annumwith maturities upto March 2018 (2016: January 2017). TDR of Rs. 35 million (2016: 35 million) was under lien at year end.

Number of shares

held(Rupees in

'000)


140

12.2 Assignment of Non-Performing Loan (NPL) portfolios of defunct SBFC & RDFC to National Bank of Pakistan (NBP)

The Board of the Bank through its resolution by circular No.10/circ/33 dated March 08, 2010 duly endorsed by the members in their meeting dated May 20, 2010 has approved the transfer and assignment of fully non- performing loan portfolios of defunct SBFC & RDFC to NBP on the basis of deferred transfer price. Subsequently transfer and assignment agreement was executed between the Bank and National Bank of Pakistan at Karachi on July 01, 2010 (Effective date). According to the agreement, the transferor (SME) and the acquirer (NBP) acknowledge, declare and confirm the transfer, assignment and vesting of all rights, interests, privileges, title, powers and remedies in favour of the acquirer with respect to:

a) the non-performing loans, collateral and the debtors;

b) all agreements, deeds, instruments and other documents relating to the non-performing loans, debtors and collateral and to which the transferor is, or legally deemed to be, a party or a beneficiary;

c) all legal proceedings by and against the transferor with respect to the non-performing loans, the debtors and collateral, which may be pending before any court, tribunal, arbitrator or authority, without being subject to any liabilities of the transferor to any person.


Under the above referred arrangements, portfolio of defunct SBFC & RDFC outstanding as on June 30, 2010 (Except outstanding loans of RDFC where facility of Equity Participation Fund had also been extended) were transferred to NBP.

On request of the Bank’s management the decision to transfer of the portfolio was revisited by the BoD in


2017 201612. ADVANCES Note

Loans, cash credits, running finances, etc. - In Pakistan Extended by:

Defunct SBFC 12.2 4,374,964 4,375,964 Defunct RDFC 12.2 494,199 505,341 SME Bank Limited 2,708,512 2,957,392

Due from ex-employees 12.2 15,567 16,214 Due from employees 124,606 135,305

7,717,848 7,990,216 Net investment in finance lease - In Pakistan 12.3 536,313 556,641 Advances - gross 8,254,161 8,546,857 Provision for non-performing advances Specific provision (5,394,638) (5,402,106) General provision (81) (12,391)

12.5 (5,394,719) (5,414,497) Advances - net of provision 2,859,442 3,132,360

12.1 Particulars of Advances (Gross)12.1.1 In local currency 8,254,161 8,546,857

In foreign currencies - - 8,254,161 8,546,857

12.1.2 Short term (upto one year) 1,567,110 1,796,235 Long term (over one year) 6,687,051 6,750,622

8,254,161 8,546,857 12.2

a) the non-performing loans, collateral and the debtors;

(Rupees in '000)

Assignment of Non-Performing Loan (NPL) portfolios of defunct SBFC & RDFC to National Bank ofPakistan (NBP)The Board of the Bank through its resolution by circular No.10/circ/33 dated March 08, 2010 duly endorsedby the members in their meeting dated May 20, 2010 has approved the transfer and assignment of fully non-performing loan portfolios of defunct SBFC & RDFC to NBP on the basis of deferred transfer price.Subsequently transfer and assignment agreement was executed between the Bank and National Bank ofPakistan at Karachi on July 01, 2010 (Effective date). According to the agreement, the transferor (SME) and theacquirer (NBP) acknowledge, declare and confirm the transfer, assignment and vesting of all rights, interests,privileges, title, powers and remedies in favour of the acquirer with respect to:

b) all agreements, deeds, instruments and other documents relating to the non-performing loans, debtors andcollateral and to which the transferor is, or legally deemed to be, a party or a beneficiary;


c) all legal proceedings by and against the transferor with respect to the non-performing loans, the debtors andcollateral, which may be pending before any court, tribunal, arbitrator or authority, without being subject to anyliabilities of the transferor to any person.

Under the above referred arrangements, portfolio of defunct SBFC & RDFC outstanding as on June 30, 2010(Except outstanding loans of RDFC where facility of Equity Participation Fund had also been extended) weretransferred to NBP.

On request of the Bank's management the decision to transfer of the portfolio was revisited by the BoD in its65th meeting held on July 13, 2011 and resolved that the agreement of assignment of the old portfolio to NBPshould be cancelled and Board’s pronouncement for revocation of agreement to Ministry of Finance a relatedparty to arrange retrieval/restoration of old portfolio to the Bank in the interest of recovery of public funds.


141

its 65th meeting held on July 13, 2011 and resolved that the agreement of assignment of the old portfolio to NBP should be cancelled and Board’s pronouncement for revocation of agreement to Ministry of Finance a related party to arrange retrieval/restoration of old portfolio to the Bank in the interest of recovery of public funds.

In the meeting held on March 04, 2013 the Board of Directors reconsidered the position taken earlier on this matter on grounds of related cost of recovery and infrastructure on request of then management and decided that since the Bank is still on the privatization list, BoD would be able to decide on portfolio after Bank’s delisting from privatization.

The incumbent Management has again reviewed the situation and noted that no comparative analysis/study pertaining to transfer of portfolio was conducted which could justify the decision of assigning old portfolio to NBP.

In view of the above, foregoing Board was requested in its 83rd meeting, held on August 30, 2014 and the management of the Bank was allowed to proceed further in pursuance of resolution/direction passed regarding the subject matter in 64th and 65th Meeting of the Board of Directors held on May 16, 2011 and July 13, 2011 respectively by overruling to verdict of the Board of Directors given on the issue in 75th Meeting of Board of Directors held on March 04, 2013.

Cabinet Committee on Privatization (CCOP) in its meeting held on January 27, 2017 has approved the transaction structure of the Bank’s privatization. The transaction structure has excluded the above portfolios from the privatization transaction and the CCOP in above referred meeting has directed the Bank to remove the said portfolios from the books of SME Bank and that all recoveries made by NBP from the loan portfolio shall be deposited in the Federal Consolidated Fund (FCF), a related party as being managed by Ministry of Finance (MoF).

Pursuant to above, being directed by MOF the management of the Bank has obtained an independent legal advice for defining the legal procedures for the implementation of the requirement of MOF. The legal advice proposed that the Bank may via a tri party novation agreement between SME, NBP and GoP through MoF, transfer and surrender any rights, obligations and liabilities on the remaining receivable assets in the loan portfolio to the FCF against any consideration amount. The Novation agreement will further allow for any recoveries made by NBP in relation to the loan portfolio to be deposited directly in the FCF as the recoveries will no longer be an asset of Bank.

In line with the steps proposed by the legal advisor the board of directors of the Bank in its meeting held on December 31, 2017 has approved the sale of non- performing loan portfolios of defunct SBFC & RDFC to FCF and NBP via a tri party novation agreement between SME, NBP and GoP through MoF at a value of Rs.100 as a sale consideration. Thereafter, the shareholders of the Bank in their meeting held on January 22, 2018 through their special resolution have also authorized the sale of the portfolios as approved by the board of directors of the Bank, however, the Allied Bank Limited carrying 0.33% holding in the Bank has opposed the resolution and required the sale of the portfolio at a fair market value (FMV). According to above majority decision of the shareholders both the portfolios have been transferred to the FCF and NBP against an aggregate sale consideration of Rs. 100 under a tri-party agreement (the Agreement) executed on February 23, 2018 between the Bank, NBP and the FCF. As of the date of the tri-party Agreement the Bank has transferred and surrendered all the recoveries, rights, obligation, claims and liabilities of the referred loan portfolios in favour of the Federal Consolidated Fund.

Till signing of tri party novation agreement non-performing loan portfolios of defunct SBFC and RDFC stands recognised in these consolidated financial statements. An income of Rs. 16.521 million has been incorporated against the recoveries of non-performing loan portfolios of defunct SBFC and RDFC since their transfer and assignment to NBP till June 30, 2017. The share of income of the Bank has been determined according to transfer price mechanism agreed between the Bank and NBP. The recoveries and expense made thereafter by the Bank from the borrowers of defunct SBFC & RDFC are recognized as payable/receivable to NBP, while the funds received by NBP to be apportioned in terms of this agreement have not been accounted for by the Bank.


142


12.3 NET INVESTMENT IN FINANCE LEASE

Lease rentals receivable 73,373 325,363 - 398,736 55,896 356,672 - 412,568 Residual value 6,580 205,247 211,827 21,112 199,583 - 220,695 Minimum lease payments 79,953 530,610 - 610,563 77,008 556,255 - 633,263 Financial charges for future periods (12,917) (61,333) - (74,250) (11,333) (65,289) - (76,622) Present value of minimum lease payments 67,036 469,277 - 536,313 65,675 490,966 - 556,641

12.4


Category of ClassificationOther Assets Especially Mentioned 24,416 - 24,416 4 4 Substandard 20,980 - 20,980 530 530 Doubtful 18,872 - 18,872 439 439 Loss 5,630,131 - 5,630,131 5,393,665 5,393,665

5,694,399 - 5,694,399 5,394,638 5,394,638


Category of ClassificationOther Assets Especially Mentioned 15,348 - 15,348 25 25 Substandard 14,955 - 14,955 1,234 1,234 Doubtful 23,689 - 23,689 238 238 Loss 5,685,856 - 5,685,856 5,400,609 5,400,609

5,739,848 - 5,739,848 5,402,106 5,402,106

12.5 Specific General Total Specific General Total(Rupees in '000) (Rupees in '000)

Opening balance 5,402,106 12,391 5,414,497 5,410,366 8,174 5,418,540 Amounts written off - - - - - - Reversal of provision of transferred portfolio (1,575) - (1,575) (1,078) - (1,078) Charge/(Reversal)Charge for the year 48,296 9 48,305 49,341 7,088 56,429 Reversal for the year (54,189) (12,319) (66,508) (56,523) (2,871) (59,394)

(5,893) (12,310) (18,203) (7,182) 4,217 (2,965) Closing balance 5,394,638 81 5,394,719 5,402,106 12,391 5,414,497

12.5.1

12.5.2 Specific General Total Specific General Total(Rupees in '000) (Rupees in '000)

In local currency 5,394,638 81 5,394,719 5,402,106 12,391 5,414,497 In foreign currencies - - - - - -

5,394,638 81 5,394,719 5,402,106 12,391 5,414,497

Particulars of provision against non-performingadvances

Later than one and less than five years

Over five years Total

Not later than one

year

Not later than one

year

Advances include Rs. 5,694.399 million ( 2016: Rs. 5,739.85 million) which have been placed under non-performing status asdetailed below:

Over five years Total


Later than one and less

than five years

2016

2017Classified Advances

20162017

Classified Advances

(Rupees in '000)

(Rupees in '000)

Particulars of provisions against non-performingadvances

2017 2016

The FSV benefit availed in last years has been reduced by Rs. 34.424 million (2016: Rs.84.362 million) and reduced by 28.757 million (2016:increased by 31.548 million) for the Bank and SMEL respectively (net of FSV benefit availed during the year), which has resulted in netincreased charge for specific provision for the year ended by the same amount. The FSV benefit is not available for cash or stockdividend/bonus to employees. Had the FSV benefit not recognized, Group's loss before and after tax for the year ended would have beenlower by Rs. 63.181 million (2016: lower by Rs. 52.814 million) (note 22.1).

2017 2016


143


2017 201612.6 Particulars of Write Off: Note12.6.1 Against provisions 12.5 - -

Directly charged to Profit and Loss account - - - -

12.6.2 Write Offs of Rs. 500,000 and above 12.7 - - Write Offs of below Rs. 500,000 - -

- -

12.7 Details of loan write off of Rs. 500,000 and above

12.8 2017 2016Note

Balance at beginning of the year 155,019 128,508 Loans granted/added during the year 41,187 65,382 Repayments - net (41,916) (38,871) Balance at end of the year 154,290 155,019

13. OPERATING FIXED ASSETSCapital work-in-progress 13.1 - 2,092 Property and equipment 13.2 132,948 139,194 Less: Provision held against property and equipment 13.2 (63,637) (32,044) Property and equipment - net 13.3 69,311 107,150 Intangible assets 13.4 1,440 1,264 Operating Fixed Assets 70,751 110,506

13.1 Capital work-in-progressAdvances to suppliers and contractors - 2,092

- 2,092 13.2 This includes costs of lands as detailed below:

Land at G-5/2 13.2.1 52,673 52,673 Land at G-7 13.2.1 10,964 10,964 Land at Hattar 450 450

64,087 64,087 Provision held against lands 13.2.2 (63,637) (32,044) Net carrying value 450 32,043

13.2.1 This represents the aggregate cost of plots measuring 500 square yards and 4166.67 square yards located inIslamabad in sectors G-7 and G-5/2 respectively originally allotted to SBFC and RDFC respectively. CapitalDevelopment Authority (CDA) required payment of Rs. 3.637 million for AGR, delayed charges & extensionsurcharges. However, on receiving draft of the required amount, CDA returned the same in view of proposedprivatization of the Bank. The management of the Bank has taken up the matter with the Privatization Commission(PC) Government of Pakistan.

(Rupees in '000)

(Rupees in '000)

In terms of sub-section 3 of Section 33-A of the Banking Companies Ordinance, 1962 the Statement in respect ofwritten-off loans or any other financial relief of five hundred thousand rupees or above allowed to a person(s) duringthe year ended December 31, 2017 is given at Annexure-A.

Particulars of loans and advances to directors,associated companies, etc.Debts due by directors, executives or officers of the bank orany of them either severally or jointly with any otherpersons:


144


2017 201613.2.2 Provision held against land

Opening balance 32,044 32,044 Add: Charge for the year 31,593 - Closing balance 63,637 32,044

Provision against land at G-5/2 52,673 26,449 Provision against land at G-7 10,964 5,595

63,637 32,044

(Rupees in '000)

Subsequent to the above, Cabinet Committee on Privatization (CCOP) in its meeting held on January 27, 2017 hasapproved the transaction structure of the Bank’s privatization. The transaction structure has excluded the aboveplots from the privatization transaction and the CCOP in above referred meeting has directed CDA and MoF forresolution of the matter by finalizing the status of rights and claims associated with the above plots so as to enablethe Bank to accordingly adjust the books of accounts.

Thereafter PC through its letter No.F.NO.1/BKG/SME/PC/2015 dated November 24, 2017 has required the Bankto remove the referred plots from the balance sheet of the Bank by December 31, 2017. To implement the aboveMoF being the representative of Government of Pakistan (GoP), the majority shareholder of the Bank, has requiredthe Bank’s management to transfer the above plots to MoF at a nominal value. Pursuant to above, being directed byMoF the management of the Bank has obtained an independent legal advice for defining the legal procedures for theimplementation of the requirement of MoF. The legal advice proposed that the Bank may via a sale agreement,transfer all its rights, titles, claims and obligations of the Plots to MoF and or any other department, as the case maybe, against any amount of sale consideration. The sale agreement will be made possible by authorization of the Bankthrough the passage of requisite board resolutions and shareholders’ special resolution; enabling the Bank to transferall rights, titles, claims and obligations of Plots to MoF.

In line with the steps proposed by the legal advisor the board of directors of the Bank in its meeting held onDecember 31, 2017 has approved the sale of the Plots to MoF through a sale agreement at a value of Rs.100 as a saleconsideration. Thereafter, the shareholders of the Bank in their meeting held on January 22, 2018 through theirspecial resolution have also authorized the sale of the Plots as approved by the board of directors of the Bank,however, the Allied Bank Limited carrying 0.33% holding in the Bank has opposed the resolution and required thesale of the Plots at a fair market value (FMV). Although FMVs of the Plots have not been determined for sale inquestion but it is understood that the same are substantially higher than sale consideration agreed between the Bankand MoF. According to above majority decision of the shareholders both the Plots have been sold to MoF against anaggregate sale consideration of Rs. 100 under a sale agreement (the Agreement) executed on February 15, 2018between the Bank and MoF.

The subsequent sale of Plots confirms the maximum value recovered was Rs. 100 being the sale consideration ofthese Plots. In view of above an adjustment of Rs. 31.593 million, representing the amount by which aggregatecarrying value exceed the aggregate sale consideration of these Plots, has been recognized to bring the aggregatecarrying value of these plots to Rs. 100.


145

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

13.3

Prop

erty

and

equ

ipm

ent

Ow

ned

asse

tsLe

ase

hold

land

64

,087

-

-

-

64

,087

32

,044

-

31

,593

63,6

37

450

-

Leas

e ho

ld im

prov

emen

ts31

,962

-

7,

242

-

39,1

65

26,3

97

-

5,56

2

(39)

31,9

20

7,24

5

33

1/3

(39)

-

-

Build

ings

25,3

08

-

-

-

25

,308

13,0

36

-

1,26

5

14,3

01

11

,007

5

Offi

ce fu

rnitu

re a

nd fi

xtur

es10

,695

-

20

0

-

10

,814

8,46

2

-

68

1

(8

1)

9,06

2

1,75

2

20

(81)

-

-

Offi

ce e

quip

men

t61

,648

-

10

,495

-

71,6

45

35

,367

-

6,

742

(4

92)

41

,617

30,0

28

15(4

98)

-

-

Com

pute

r equ

ipm

ent

93,6

56

-

4,38

5

-

97,5

79

87

,139

-

6,

107

(4

62)

92

,784

4,79

5

33

1/3

(462

)

-

-

Veh

icles

66,8

18

3,69

0

2,06

0

-

54,6

18

45

,563

2,81

3

7,89

6

(15,

688)

40

,584

14,0

34

20(1

7,95

0)

-

-

-

354,

174

3,69

0

24,3

82

-

36

3,21

6

24

8,00

8

2,

813

59

,846

(16,

762)

29

3,90

5

69,3

11

(19,

030)

-

-

-

As

sets

hel

d un

der f

inan

ce le

ase

Veh

icles

3,69

0

(3

,690

)

-

-

2,70

6

(2,8

13)

107

-

-

-

20

-

-

-

35

7,86

4

-

24,3

82

36

3,21

6

25

0,71

4

-

28,3

60

(1

6,76

2)

293,

905

69

,311

(1

9,03

0)

-

31

,593

-

COST

13.4

Inta

ngib

le a

sset

sCo

mpu

ter s

oftw

are

28,5

39

-

1,1

57

-

29

,696

27,2

74

-

982

-

28

,256

1,440

33 1

/3

Adju

stm

ents

(Dis

posa

ls)N

et b

ook

valu

e as

at

Dec

embe

r 31,

2017

Amor

tizat

ion

rate

per

an

num

%(R

upee

s '00

0)

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Addi

tions

/(d

ispo

sals)

As a

t

D

ecem

ber

31, 2

017

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Char

ge fo

r th

e ye

ar

As a

t

D

ecem

ber

31, 2

017

Net

boo

k va

lue

as

at D

ecem

ber 3

1, 20

17

Dep

reci

atio

n ra

te p

er

annu

m %

(Rup

ees '

000)

Adju

stm

ents

As a

t

D

ecem

ber

31, 2

017

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Char

ge fo

r th

e ye

ar/

impa

irmen

t

AMO

RT

ISAT

ION

COST

DE

PRE

CIAT

ION

/ IM

PAIR

ME

NT

As a

t Ja

nuar

y 01

, 20

17T

rans

fer

Addi

tions

/(d

ispo

sals)

(Dis

posa

ls)As

at

Dec

embe

r 31

, 201

7Notes to the Consol idated Financial StatementsFor the year ended December 31 , 2017

146

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

Prop

erty

and

equ

ipm

ent

Leas

e ho

ld la

nd

64,0

87

-

-

-

64

,087

32

,044

-

-

-

32,0

44

32,0

43

-

Leas

e ho

ld im

prov

emen

ts33

,886

-

368

-

31,9

62

22,9

24

-

5,

766

(2

05)

26

,397

5,

565

33 1

/3(2

04)

(2,0

88)

2,08

8

Build

ings

25,3

08

-

-

-

25,3

08

11

,771

-

1,

264

-

13

,035

12,2

73

5O

ffice

furn

iture

and

fixt

ures

11,4

96

-

49

6

-

10

,695

9,17

3

-

58

6

(895

)

8,46

3

2,23

2

20(8

96)

(4

01)

401

O

ffice

equ

ipm

ent

62,2

97

-

1,

084

-

61

,647

30,4

45

-

6,65

3

(613

)

35,3

66

26

,281

15

(615

)

(1,1

19)

1,

119

Com

pute

r equ

ipm

ent

95,0

72

-

1,

042

-

93

,656

81,0

42

-

8,55

4

(1,2

12)

87,1

39

6,

517

33

1/3

(1,2

13)

(1

,245

)

1,

245

V

ehicl

es56

,522

1,

733

10

,969

-

66,8

18

36

,406

1,12

6

8,55

8

(503

)

45,5

63

21

,255

20

(2,3

82)

(2

4)

-

24

348,

668

1,73

3

13,9

59

-

35

4,17

3

22

3,80

5

1,

126

31

,381

(3,4

28)

248,

007

10

6,16

6

(5

,310

)

(4,8

77)

-

4,87

7

A

sset

s held

und

er fi

nanc

e lea

seV

ehicl

es5,

423

(1,7

33)

-

-

3,

690

3,05

6

(1

,126

)

776

-

2,

706

98

4

2035

4,09

1

-

13,9

59

35

7,86

3

22

6,86

1

-

32,1

57

(3

,428

)

25

0,71

3

107,

150

(5,3

10)

(4

,877

)

-

4,87

7

COST

(Disp

osals

)

Inta

ngib

le as

sets

Com

pute

r sof

twar

e27

,692

-

847

-

28,5

39

26

,396

-

87

9

-

27,2

75

1,

264

33

1/3

Dep

recia

tion

rate

per

an

num

%

As a

t

D

ecem

ber

31, 2

016

(Rup

ees i

n '00

0)

(Rup

ees i

n '00

0)

Adj

ustm

ents

AM

ORT

ISA

TIO

NA

s at

Janu

ary

01,

2016

Tran

sfer

Add

ition

sA

djus

tmen

tA

s at

Dec

embe

r 31

, 201

6

As a

t Ja

nuar

y 01

, 20

16Tr

ansf

erCh

arge

for t

he

year

Net

boo

k va

lue

as

at D

ecem

ber 3

1,

2016

Am

ortiz

atio

n ra

te p

er

annu

m %

COST

DE

PRE

CIA

TIO

N/

IMPA

IRM

EN

TA

s at

Janu

ary

01,

2016

Tran

sfer

Add

ition

s/(d

ispos

als)

As a

t

D

ecem

ber

31, 2

016

As a

t Ja

nuar

y 01

, 20

16Tr

ansf

erCh

arge

for t

he

year

/im

pairm

ent

(Disp

osals

)A

s at

Dec

embe

r 31

, 201

6

Net

boo

k va

lue

as

at D

ecem

ber 3

1,

2016


147

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201713.5

VehiclesToyota Corolla 1,530 1,530 - 153 As per Bank policy Mr. Masood MahmoodSuzuki Cultus 965 965 - 10 As per Bank policy Late Sikandar Ali AbbasiToyota Corolla 1,526 1,526 - 153 As per Bank policy Mr. Mubeen MuftiSuzuki Cultus 965 965 - 96 As per Bank policy Hafiz Muhammad Ashfaq Suzuki Cultus 965 965 - 96 As per Bank policy Mr. Dilbar HussainSuzuki Cultus 960 960 - 96 As per Bank policy Mr. Khalid Mustafa SiddiquiHonda City 1,473 1,473 - 147 As per Bank policy Mr. Sajjad Ahmed WarraichHonda City 951 951 - 95 As per Bank policy Ms. Farhat ZafarHonda City 972 972 - 97 As per Bank policy Syed Mohsin ZaidiHonda City 972 972 - 97 As per Bank policy Mr. Nadeem Ahmed KhanHonda Civic 2,060 309 1,751 1,648 As per Bank policy Mr. Tariq Mahmood MalikSuzuki Cultus 996 996 - 100 As per Bank policy Muhammad Hashim ChannaToyota Corolla 971 971 - 97 As per Bank policy Mr. Rehan Ahmed SiddiquiSuzuki Swift 980 980 - 98 As per Bank policy Mr. Shahid ZubairSuzuki Cultus 570 570 - 400 Tender Mr. Muneeb SuhailSuzuki WagonR 1,094 583 511 656 Company Policy Mr. Osama Iqbal

17,950 15,688 2,262 4,039

1,080 1,075 5 91 2017 19,030 16,763 2,267 4,130 2016 5,310 3,428 1,882 2,525

13.6

Details of disposal of fixed assets:

Other assets havingbook value of lessthan Rs. 250,000 orcost less than ofRs.1,000,000 whichever is less

(Rupees in '000)

Sale proceeds

Accumulated depreciation Particulars of buyers

Gross carrying amount of fully depreciated assets that are still in use was Rs. 205.308 million (2016: Rs. 157.817 million).

Book value

Particulars of assets Cost Mode of disposal


148

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

2017

2016

14.

DE

FER

RE

D T

AX A

SSE

T -

NE

TN

ote

Def

erre

d ta

x as

set a

risin

g in

resp

ect o

f:U

nabs

orbe

d de

prec

iatio

n an

d am

ortiz

atio

n63

,957

51

,315

U

nuse

d ta

x lo

sses

402,

511

212,

915

14.1

466,

468

264,

230

Def

erre

d ta

x lia

bilit

y ar

isin

g in

resp

ect o

f:Su

rplu

s on

reva

luat

ion

of in

vest

men

t(1

,270

)

(8,0

53)

14

.246

5,19

8

25

6,17

7

14

.1

Reco

gniz

edRe

cogn

ized

Rec

ogni

zed

Rec

ogni

zed

in p

rofit

and

in

in p

rofit

and

in

loss

acc

ount

Equ

itylo

ss a

ccou

ntE

quity

14.2

Rec

onci

liatio

n of

def

erre

d ta

x

Una

bsor

bed

depr

eciat

ion

and

am

ortiz

atio

n-

51

,315

-

51

,315

51

,315

12,6

42

-

63,9

57

Unu

sed

tax

loss

es-

21

2,91

5

-

212,

915

21

2,91

5

189,

596

-

402,

511

-

264,

230

-

26

4,23

0

264,

230

20

2,23

8

-

46

6,46

8

Surp

lus o

n re

valu

atio

n of

i

nves

tmen

t-

(8

,053

)

-

(8,0

53)

(8

,053

)

6,

783

-

(1,2

70)

D

efer

red

tax

asse

t - n

et

-

256,

177

-

25

6,17

7

256,

177

20

9,02

1

-

46

5,19

8

2017

2016

14.3

1,340

,595

1,

833,

214

14

.4D

efer

red

tax

asse

t not

reco

gniz

ed46

9,20

8

64

1,62

5

Ded

uctib

le te

mpo

rary

diff

eren

ces f

or w

hich

no

defe

rred

tax

asse

t is r

ecog

nize

d du

e to

unc

erta

in ti

min

g of

futu

re ta

xabl

e pr

ofits

2016

Balan

ce a

t Ja

nuar

y 1

Balan

ce a

t D

ecem

ber 3

1Ba

lanc

e at

Ja

nuar

y 1

2017

(Rup

ees i

n '00

0)(R

upee

s in

'000

)D

efer

red

tax

asse

tar

isin

gin

resp

ect o

f:

Def

erre

dta

xlia

bilit

yar

isin

gin

resp

ect o

f:

(Rup

ees i

n '0

00)

The

Bank

has

reco

gniz

edth

ede

ferr

edta

xas

setw

hich

repr

esen

tsm

anag

emen

t’sbe

stes

timat

eof

the

prob

able

bene

fits

expe

cted

tobe

reali

zed

infu

ture

year

sin

the

form

ofre

duce

dta

xlia

bilit

yas

the

Bank

wou

ldbe

able

tose

toff

the

prof

itsea

rned

inth

ose

year

saga

inst

loss

esca

rried

forw

ard.

The

unde

rlyin

gas

sum

ptio

nfo

rrec

ogni

tion

ofde

ferr

edta

xas

seti

sba

sed

onth

eex

pect

edpr

ivat

izat

ion

ofth

eBa

nkw

hich

wou

ldre

sult

infr

esh

equi

tyin

jectio

nfr

omth

ene

wst

rate

gic

shar

ehol

dero

fthe

Bank

asde

taile

din

Not

e7.

1to

the

cons

olid

ated

finan

cials

tate

men

tsan

d,in

view

ofab

ove,

the

man

agem

ento

fth

eBa

nkbe

lieve

sth

atit

ispr

obab

leth

atth

eBa

nkw

illbe

able

toac

hiev

eth

epr

ofits

and,

cons

eque

ntly,

the

defe

rred

tax

asse

ts w

ill b

e fu

lly re

alize

d in

futu

re.

(Rup

ees i

n '0

00)

Bala

nce

at

Dec

embe

r 31


149


2017 201615. OTHER ASSETS Note

Income/mark-up accrued in local currency 15.1 161,424 140,000 Advances, deposits, advance rent and other prepayments 66,968 58,045 Non banking asset acquired in satisfaction of claims 15.2 147,066 147,066 Due from benevolent fund - unsecured 33.4.2 1,593 1,658 Advance Taxation 216,523 - Receivable from NBP 12.2 339 4,690 Receivable from Equity Participation Fund - 2,561 Trading right entitlement certificate 15.3 21,560 21,560 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 5,148 6,048 Others 76,933 68,703

717,194 469,971 Less: Provision held against other assets 15.4 119,718 100,129 Other assets - net of provision 597,476 369,842

15.1

15.2

2017 201615.3 Trading right entitlement certificate (TREC) Note

Lahore Stock Exchange Limited 15.3.1 21,560 21,560 Islamabad Stock Exchange Limited 15.3.1 - -

21,560 21,560

15.3.1

This balance has been arrived at after adjusting interest in suspense of Rs. 4,052.401 thousand (2016: Rs. 4,057.57 million).

(Rupees in '000)

In accordance with the requirements of the Stock Exchanges (Corporatization, Demutualization and Integration) Act 2012(the Act) during the year 2012, the Bank received equity shares and one Trading Right Entitlement certificate each in lieuof its membership cards in Lahore Stock Exchange Limited (LSE) and Islamabad Stock Exchange Limited (ISE) in lieu ofits membership cards in these exchanges during the year ended December 31, 2012.

(Rupees in '000)

This includes Rs. 138.6 million being the successful bid made by SME Bank for acquiring Bungalow No. 45, Block-C/3,Gulberg III, Lahore mortgaged with the Bank as a security in a defaulted loan and Rs. 8.47 million pertaining stamps /stamps duties for registration of sale certificate issued by the High Court to SME Bank/ Auction Purchaser of BungalowNo. 45, Block-C/3, Gulberg III, Lahore. The auction was carried out on 30 June 2015, subsequent to the auction, theHonourable Lahore High Court through its decision dated 14 July 2015 allowed the Bank to adjust the bid price against itsoutstanding dues from the borrower against the finance facilities extended to the borrower, suspended mark-up and costof funds. The auction was confirmed by the High Court on April 19, 2016 after hearing objection raised by the counterparty. The sale certificate was issued by the High Court on June 30, 2016 and the same has been registered with concernedregistrar on July 28, 2016. Ownership of the house in record of Excise and Taxation Department has been transferred inname of SME Bank Ltd. The Bank applied for possession of the acquired house, which has been accepted by the courtafter hearing both the parties. The court has issued order to bailiff for taking possession of the house to handover theBank. Possession of the said property has not yet been handed over to the Bank. The market value of property is Rs.200.452 million (December 2016: Rs. 171.2 million).

Based on the revalued assets and liabilities of LSE and ISE, a total of 843,975 ordinary shares of Rs. 10 each and 3,034,603ordinary shares of Rs. 10 each in the corporatized and demutualized LSE and ISE respectively were allotted to the Bank ina dematerialized form. Out of the aforementioned, 337,590 ordinary shares in LSE and 1,213,841 ordinary shares in ISE(i.e. 40 percent) have been received in the Bank’s CDC participant account whereas 506, 385 ordinary shares in LSE and1,820,762 ordinary shares in ISE (i.e. 60 percent) have been held in the blocked sub accounts maintained under LSE andISE participant ID with Central Depository Company of Pakistan Limited. The rights attached to 60% shares held inblocked account shall be dealt with in accordance with the provisions contained in the Act. The blocked account shall beoperated by the Board of Directors of the stock exchanges in the manner prescribed by the Securities and ExchangeCommission of Pakistan.


150


2017 201615.4 Provision against other assets

Opening balance 100,129 97,570 Charge for the year 20,800 2,586 Reversals (1,223) (67)

19,577 2,519 Transferred to NBP 12 40 Closing balance 119,718 100,129 Provision balance is in respect of:Income/mark-up accrued in local currency:Receivable from Universal Leasing Limited 22 22 Receivable from Speedway Fondmetall Pakistan Limited 19,640 19,640 Receivable against factorized portfolio 5,148 6,048 Other receivables - SME Portfolio 44,453 41,232 Legal charges recoverable from borrowers - SBFC & RDFC 22,598 22,630 Trading right entitlement certificate - TREC 21,560 5,390 Others 6,297 5,167

119,718 100,129

(Rupees in '000)

In case of LSE, par value of shares received by the Bank was recognised during the year ended December 31, 2012 asavailable for sale investment and the excess of value of shares over the carrying value of membership card in LSE wasrecognised as trading right. However in case of ISE, since the par value of shares received by the Bank was more than thecarrying value of membership card, investment in ISE has been recognised to the extent of the carrying value ofmembership card and trading right in ISE has been recognised at Nil value.

Pursuant to provisions of the Act the Bank’s trading rights in LSE and ISE have lapsed on August 26, 2014. In view ofabove the SBP required the Bank to classify these rights under loss category due to remote chances of their recovery thatresulted into recognition of 100% provision of gross carrying values of these rights. The management of the Bank incollaboration with other financial institutions affected by the same cause is pursuing the concerned authorities for thereinstatement of these rights.


151


2017 201616. BILLS PAYABLE Note (Rupees in '000)

In Pakistan 92,554 95,443 Outside Pakistan - -

92,554 95,443 17. BORROWINGS

In Pakistan 5,308,688 3,460,699 Outside Pakistan - -

5,308,688 3,460,699 17.1 Particulars of borrowings with respect to currencies


5,308,688 3,460,699 17.2 Details of borrowings secured/unsecured

Borrowings from State Bank of Pakistan - unsecured 17.2.1 14,269 31,515 Repurchase agreement borrowings - secured 17.2.2 5,294,046 3,428,811 Long tern finance - secured 17.2.3 373 373

5,308,688 3,460,699 17.2.1

17.2.2

17.2.3

2017 201618. DEPOSITS AND OTHER ACCOUNTS Note (Rupees in '000)

CustomersFixed deposits 1,558,096 1,001,313 Savings deposits 2,356,370 2,861,928 Current accounts - non-remunerative 555,060 596,943 Margin accounts 49,831 33,730

4,519,357 4,493,914 Financial Institutions

Remunerative deposits 18.2 794,241 733,061 Non-remunerative deposits 30,001 -

5,343,599 5,226,975 18.1 Particulars of deposits


5,343,599 5,226,975 18.2

These represent transactions with financial institutions for sale of Government Securities under re-purchase agreement(REPO) in the inter bank money market at mark-up rates ranging from 5.95% to 6.25% (Dec 31, 2016: 6.10% to 6.25%) perannum for period upto three month (Dec 31, 2016: upto two month). REPO transactions are secured against investment ofthe Bank in Government securities.

Remunerative deposits include Rs. 394.236 million (Dec 31, 2016: Rs. 380.094 million) related to Equity Participation Fund.

This represents financing facility obtained from State Bank of Pakistan under the scheme "Financing Facility For Storage ofAgri Produce (FFSAP)" vide SMEFD circular No. 08 dated June 04, 2010 & IH&SSMEFD circular No. 05 dated Feb 23,2015. These carries revised mark up rate of 2.50 % & 3.25% respectively and is repayable in quarterly instalments.

This represents balance due against financing facilities amounting to Rs. 0.373 million (2016: Rs. 0.373 million) fromNational Energy Conservation Centre (Enercon) by SMEL. The facilities from Enercon have been obtained under anagreement whereby they have agreed to provide funds to SME Leasing for granting lease/finance facility to its customersfor procuring and using energy efficient equipments. The facility carries mark-up at the rate of 5% per annum payable onquarterly basis subject to the condition that the SMEL will provide lease/finance facility to its customers at a preferentialmark-up rate.


152


19. LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE

Not later than one year - - - 607 6 601

- - - - - - Over five years - - - - - -

- - - 607 6 601

2017 201620. OTHER LIABILITIES Note

Mark-up/return/interest payable in local currency 78,396 50,250 Unearned commission on guarantees 1,547 1,367 Accrued expenses 13,635 9,289 Income tax payable - 4,761 Accounts payable 4,197 7,662 Sundry creditors 20.1 119,218 118,847 Branch adjustment account 2,321 1,099 Payable against employees' benefit plans

Defined benefit pension The Bank 36.1.2 333,420 211,427

Defined benefit unfunded gratuity scheme The Bank 36.2.2 6,952 67,626 SMEL 36.5.2 6,911 5,153

Unfunded compensated absences The Bank 36.3.3 90,659 72,245 SMEL 2,379 2,102 Payable on termination/maturity of lease 321 316 Security deposits against lease 211,827 220,696 Employees' VSS payments withheld 20.2 13,341 13,474 Payable to Equity Participation Fund - unsecured 1,817 - Income tax withheld payable 17,794 18,099 Others 4,658 5,233

909,393 809,646

20.1

20.2

Principal outstanding

Minimum lease

payments

Financial charges for

future periods

Principal outstanding

Minimum lease

payments

Later than one year andnot later than five years

(Rupees in '000)(Rupees in '000)

Employees VSS payments of Rs. 13.341 million (December 31, 2016: Rs. 13.474 million) has been withheld due to legalcases pending in the courts against employees, filed by the Bank and ex-employees.

2017 2016

This represened liability against vehicle lease agreements of SMEL with leasing companies & commercial banks.Monthly lease rentals were payable including financial charges at 14.39% to 15.10% (2015: 14.39% and 15.10%) perannum. These finance lease arrangement have matured in the year 2017. The purchase option was available with theGroup at the time of payment of the last installment or surrender of deposit money under the lease agreements.

This includes amount of Rs. 90.6 million (December 31, 2016: Rs. 90.6 million) payable either to SBP or FBR on VSSpayments related to pension on finalization of tax assessment of financial year 2009.

Financial charges for

future periods

(Rupees in '000)


153


21. SHARE CAPITAL21.1 Authorized Capital

2017 2016 2017 2016(Rupees in '000)

1,000,000,000 1,000,000,000 Ordinary shares of Rs. 10 each 10,000,000 10,000,000

21.2 Issued, subscribed and paid up capital2017 2016

Ordinary shares

152,853,153 152,853,153 Fully paid in cash 1,528,532 1,528,532 50,000,000 50,000,000 Issued as bonus shares 500,000 500,000 36,397,547 36,397,547 Issued for consideration other than cash 363,975 363,975

239,250,700 239,250,700 2,392,507 2,392,507

Number of21.3 Break-up of share capital is as follows: shares

Federal Government 224,615,978 93.89 2,246,160 2,246,160 National Bank of Pakistan 6,121,095 2.56 61,211 61,211 United Bank Limited 3,975,003 1.66 39,750 39,750 Habib Bank Limited 1,987,501 0.83 19,875 19,875 MCB Bank Limited 1,490,619 0.62 14,906 14,906 Allied Bank Limited 774,351 0.32 7,744 7,744 Industrial Development Bank Limited 286,146 0.12 2,861 2,861 Directors 7 - - -

239,250,700 100 2,392,507 2,392,507

Statutory Un-appropriated 2017 201622. RESERVES Reserve loss

Balance at beginning of the year 227,019 7,641 (2,638,446) (2,041,269) Total comprehensive loss transferred to equity - - (432,030) (362,517) Balance at end of the year 227,019 7,641 (3,070,476) (2,403,786)

22.1

23. 2017 2016Note (Rupees in '000)

(Deficit)/Surplus on revaluation of available-for-sale securitiesFederal Government securities

- Market Treasury Bills (MTBs) (133) (2,635) - Pakistan Investment Bonds (PIBs) (30,206) 18,278

(30,339) 15,643 Fully paid up ordinary shares/units

- Listed companies/mutual funds 3,629 4,730 11.1 & 11.2 (26,710) 20,373

- Deferred tax liability 14 (1,270) (8,053) (27,980) 12,320

(DEFICIT)/SURPLUS ON REVALUATION OFASSETS - NET OF DEFERRED TAX

Number of shares

Number of shares

Percentage

(Rupees in '000)

As at December 31, 2017, the Bank and SMEL has availed net of tax benefit of Forced Sales Value (FSV) of Rs. 118.360and 133.981 million respectively (2016: Rs. 152.784 and 162.738 million) in respect of pledged stocks, mortgagedresidential, commercial, industrial properties (land and building only) and plant and machinery under charge held ascollateral against non-performing assets. Reserves and un-appropriated profit to that extent are not available fordistribution by way of cash, stock dividend or bonus to employees (note 12.5.1).


154

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201724. NON-CONTROLLING INTEREST- (NCI)

SME Leasing Limited2017 2016

NCI Percentage 26.859% 26.859%

2017 2016ASSETSCurrent assetsCash and bank balances 1,903 2,519 Advances 2,804 2,668 Deposits, prepayments and other receivables 956 1,544 Accrued interest on loans 9 4 Current maturity of non-current assets 107,009 407,980

112,681 414,715 Non-current assetsLong term finances and loans 64,099 7,253 Net investment in finance leases 293,177 71,987 Long term deposits and prepayments 1,187 1,164 Fixed assets 6,500 8,648

364,963 89,052

Total Assets 477,644 503,767

LIABILITIESCurrent liabilitiesAccrued and other liabilities 3,698 4,166 Accrued mark-up on borrowings 919 960 Short term borrowings 110,352 104,839 Current maturity of non-current liabilities 4,048 190,076 Provision for compensated absences 2,379 2,102 Provision for taxation - net 8,215 8,201

129,611 310,344 Non-current liabilitiesLiabilities against assets subject to finance lease - - Long term deposits 207,872 31,314 Deferred liabilities 6,911 5,153

214,783 36,467

Total liabilities 344,394 346,811 NET ASSETS 133,250 156,956

Carrying Amount of NCIAdjustments: 35,790 42,157 Share premium specifically allocable to NCI 5,910 5,910 Carrying Amount of NCI 41,700 48,067

The following table summarises the information relating to the subsidiary (SME Leasing) having the NCI

(Rupees in '000)


155


2017 2016

Revenue 27,363 37,415

Loss for the year (22,510) (13,382) Other comprehensive income (1,195) 68 Total comprehensive income (23,705) (13,314)

Loss attributable to NCI (6,046) (3,594)

(321) (816)

Cash flows from operating activities (6,462) 16,425

Cash flows from investment activities 945 8,699

Cash flows from financing activities, before dividends to NCI (613) (1,493)

Cash flows from financing activities-cash dividends to NCI - -

Net (decrease)/increase in cash and cash equivalents (6,130) 23,632

SME Leasing Limited has its principal place of business in Pakistan.

(Rupees in '000)

Other comprehensive income allocated to NCI


156


2017 201625. CONTINGENCIES AND COMMITMENTS (Rupees in '000)

25.1 Transaction-related contingent liabilitiesGuarantees in favour of:

Government 25.1.1 232,807 153,246 Others - -

232,807 153,246

25.1.1

2017 2016(Rupees in '000)

25.2 Other Contingenciesa) 53,686 56,857 b)

- 49,800

c)

612,707 612,707

d)

6,163 6,163

e)

211,716 211,716 f)

34,506 -

The Bank and the income tax department have filed an appeal before the AppellateTribunal Inland Revenue against the appellate order of the Commissioner (Appeals),who had partly set aside the order of the Taxation officer, resulting in taxable incomeof Rs. 151.234 million and tax liability of Rs. 52.932 million against the declared taxloss of Rs. 23,489 thousand and tax liability of Rs. 4.249 million for the tax year 2008.Without prejudice to the appeal, the demand has been paid by the Bank; however noprovision has been made in these financial statements as the management is confidentof a favorable outcome.

Claims not acknowledged as debt from various borrowersDamages claim by borrower for delay in recording repayments received fromborrower, not acknowledged as debt.

Tax demands of Rs. 612.707 million raised by the Income Tax Authorities related toVSS staff cost (tax year-2005) has been decided in favour of the Bank. However taxauthorities have filed appeal before ATIR against the decision of the CommissionerIncome Tax (Appeals). The management of the Bank strongly believes and expectsfavourable outcome and therefore no provision has been made for this effect in thefinancial statements.

The bank is in appeal before the Appellate Tribunal Inland Revenue against theamended assessment order for the tax year 2010, whereby the taxation officer hadassessed income of Rs. 636.499 million and tax liability of Rs. 222.774 million asagainst income of Rs. 7.559 million and tax liability of Rs. 3.947 million admitted bythe Bank. The CIR(A) decided the appeal partly in the Bank's favor while setting asidecertain matters. the re-assessment has not yet been finalized by the taxation officer.

This includes expired Letter of guarantees/performance aggregating to Rs. 30.057 million ( Dec 31 2016: 18.866 million) for whichformalities for return of original documents are in process.

Income tax amounting to Rs. 17.598 million was withheld from payment of VSS toemployees during the Tax Years 2005, 2006, 2008, 2009, 2010, 2011 and 2013 againstwhich some employees of different organizations including SME Bank ltd filed writ inThe Supreme Court of Pakistan wherein leave to appeal accepted and status quo wasmaintained. Accordingly Income Tax withheld was not deposited with theGovernment Treasury. Meanwhile the tax authorities raised demand of Rs. 52.104million u/s 161/205 of ITO, 2001 on 20-Apr-2017 which consist of Rs. 17.598 millionand 34.506 million against principal and default surcharge respectively. The bankpreferred an appeal before the Commissioner Inland Revenue (Appeals-I) whoremanded the case back for fresh consideration of the facts on merit. The provision ofdefault surcharge Rs.34.506 million was not made ipso facto.


157


2017 2016(Rupees in '000)

g)

10,000 10,000 h) 129,070 130,310

25.3 Commitments in respect of forward lendingCommitments to extend credit 150,150 40,700 Commitments for lease disbursement 9,750 2,300

25.4 Commitments for the acquisition of operating fixed assets 6,619 13,963 25.5 Commitments against repo/reverse repo transactions

Sale and repurchase agreements 5,331,068 3,454,878 25.6 Other commitments

Undrawn facilities 161,346 106,375

25.7 Bills for collectionPayable in Pakistan 200 91

Back benefits and claims of staff/employees under litigation.

Damages claimed by an ex-employee of the RDFC involved in Ravi Securities (Pvt)Limited and Taas Securities (Pvt) Limited affairs and a director of Ravi Securities (Pvt)Limited and Taas Securities (Pvt) Limited not acknowledged as debt.


158


2017 201626. MARK-UP/RETURN/INTEREST EARNED (Rupees in '000)

On loans and advances to customers 266,212 281,023 On investment in finance lease to customers 21,883 23,067

288,095 304,090 On loans and advances to employees 5,910 5,702

294,005 309,792 On investments in

Available for sale securities 345,751 288,864 Held to maturity securities 12,142 2,604

357,893 291,468 On deposits with financial institutions 149 138 On securities purchased under resale agreements 171 252 On clean lending 9,726 29,691 On call money lending 3,921 3,304

665,865 634,645

27. MARK-UP/RETURN/INTEREST EXPENSEDOn deposits 270,462 277,140 On securities sold under repurchase agreements 244,977 161,056 On SBP Refinance Scheme 655 192 Brokerage and commission 3,921 2,564 Bank charges 589 414

520,604 441,366

28. GAIN ON SALE OF SECURITIES

Federal Govt. SecuritiesMarket Treasury Bills 175 316 Pakistan Investment Bonds 9,734 30,382 Mutual Funds/Shares 100 3,604

10,009 34,302

29. OTHER INCOME

Gain on sale of operating fixed assets 1,863 3,312 Fee on fund managed by the Bank -EPF 1,073 1,134 Others 121 125

3,057 4,571


159


2017 201630. ADMINISTRATIVE EXPENSES Note (Rupees in '000)

Salaries, allowances, etc. 537,665 483,030 Charge for defined benefit plans

- pension fund and gratuity 36.1.4 95,779 50,365 - unfunded gratuity scheme - the Bank 36.2.4 15,607 11,895 - unfunded gratuity scheme - SMEL 36.5.5 1,200 1,191 - unfunded compensated absences 36.3.4 6,718 6,879

Contribution to benevolent fund 36.4.3 511 - Non-executive directors' fees, allowances and other expenses 1,855 1,761 Rent, taxes, insurance, electricity, etc. 89,491 86,663 Legal and professional charges 22,795 20,914 Communications 6,370 6,938 Repairs and maintenance 25,227 28,872 Finance charges on leased assets 11 119 Stationery and printing 6,291 5,374 Advertisement and publicity 618 1,163 Auditors' remuneration 30.1 1,385 1,367 Depreciation 13.3 28,360 32,157 Amortization 13.4 982 879 Recruitment expenses 134 91 Travel and transport 6,645 6,857 Vehicle running and maintenance expenses 6,830 6,265 Entertainment 3,142 3,021 Training 1,541 305 Books, subscription and newspapers 3,162 2,872 Other expenses 30.2 18,389 18,875

880,708 777,853

30.1 Auditors' remunerationAudit fee 1,100 1,100

150 150 Out-of-pocket expenses 135 117

1,385 1,367

30.2

2016 201531. OTHER CHARGES (Rupees in '000)

Penalties imposed by the State Bank of Pakistan - -

Special certifications, half yearly review and audit of consolidatedfinancial statements

This includes Security charges of Rs. 15.71 million (2016: Rs. 15.53 million) and NIFT charges of Rs. 1.33 million(2016: Rs. 1.33 million).


160


2017 201632. TAXATION

Current 32.2 8,188 6,979 Prior years 32.3 (232,601) - Deferred 14.2 (202,238) (264,230)

(426,651) (257,251)

32.1 Relationship between tax expense and accounting lossLoss before tax (743,183) (528,155)

Applicable tax rate (percentage) 35% 35%

2017 2016

Tax on loss (260,114) (184,854) Deferred tax asset recognised during the year (202,238) (264,230) Tax effect of income taxed at lower rate 109 332 Minimum tax 8,079 6,647 Prior years adjustment (232,601) - Other permanent differences 260,114 184,854

(426,651) (257,251)

32.2

32.3

2017 201633. BASIC/DILUTED LOSS PER SHARE

Net loss after tax for the year (310,486) (267,310)

Weighted average number of ordinary shares 239,250,700 239,250,700

Basic/diluted loss per share (1.30) (1.12) 2017 2016

34. CASH AND CASH EQUIVALENTS NoteCash and balances with treasury banks 8 435,879 560,882 Balances with other banks 9 13,080 26,665

448,959 587,547

2017 201635. STAFF STRENGTH

Permanent 178 180Temporary/on contractual basis 233 233Daily wagers 3 2Bank's own staff strength at end of the year 414 415Outsourced 119 113Total staff strength at end of the year 533 528Average number of employees during the year 531 532

(Rupees in '000)

Numbers

(Rupees in '000)

Rupees

(Rupees in '000)

Number of shares

(Rupees in '000)

Provision for current year expenses is charged on minimum tax rate of 1% from January to June 2017 and 1.25% from July toDecember 2017 of the turnover due to tax losses of the Group for the year ended December 31, 2017.In respect of income tax years 2003 and 2004 the tax authorities disallowed the Bank’s claims for provisions for bad debts andSBP’s share in profits of the Bank. Subsequently, the Appellate Tribunal Inland Revenue (ATIR) through its order datedFebruary 10, 2011 has ruled in favor of the Bank which results in creation of refunds of Rs. 80.059 million and Rs. 152.54million for tax years 2003 and 2004 respectively. Thereafter, against the referred judgement of ATIR the tax authorities filedreferences before the Islamabad High Court which are pending adjudication to date. However, on July 28, 2017 the Bank afterhaving received the appeal affect orders from the tax authorities has recognized the amount of refund in these unconsolidatedfinancial statements. The management of the Bank is of the firm view, duly supported by the tax consultant, that the bank willbe successful in the said references.


161

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201736. EMPLOYEE BENEFIT PLANS36.1 Defined benefit pension and gratuity36.1.1 General description

The scheme entitles the members to:-

-

2017 201636.1.2 The amounts recognised in the balance sheet for defined benefit pension:

Present value of defined benefit obligation 1,244,580 1,017,166 Fair value of plan assets (911,160) (805,739) Deficit 333,420 211,427

36.1.3 Movement in net liability recognised in the balance sheetOpening balance 211,427 112,383 Expense for the year 95,779 50,365 Other comprehensive income 93,918 87,102 Contribution to the fund (67,704) (41,433) Adjustment - 3,010 Closing balance 333,420 211,427

36.1.4 The amounts recognised in the profit and loss account

Current service cost 47,618 41,844 Net interest 16,870 8,521 Past service cost 31,291 - Expense for the year 95,779 50,365


36.1.5 Actual return on plan assets 57,469 55,977

2017 201636.1.6 Changes in present value of defined benefit obligation

Present value of obligation at the beginning of the year 1,017,166 834,743 Current service cost 47,618 41,844 Interest cost 95,693 74,631 Benefits paid (existing pensioners) (19,752) (11,021) Past service cost 31,291 - Actuarial loss 72,564 76,969 Present value of obligation at the end of the year 1,244,580 1,017,166

36.1.7 Changes in fair value of plan assetsFair value of opening plan assets 805,739 719,350 Expected return on plan assets 78,823 66,110 Contributions 67,704 41,433 Benefits paid (existing pensioners) (19,752) (11,021) Actuarial loss (21,354) (10,133) Fair value of closing plan assets 911,160 805,739

36.1.8 Break-up of category of assets (Rupees in '000) % age (Rupees in '000) % age

Term Deposits Receipts (TDRs) 896,774 98% 794,384 99%Bank deposit accounts 14,386 2% 11,355 1%

911,160 100% 805,739 100%

The Bank operates an approved defined benefit pension and gratuity scheme for all its eligible employees. Contributions are made inaccordance with the actuarial recommendations.

Gratuity payable to members who have completed a minimum of 5 years of service and total service on retirement or cessation ofservice or death is less than 10 years.

Pension payable to members who have completed a minimum of 10 years of service with the Bank on retirement at age of sixtyyears or on completion of 25 years of service with the Bank or on permanent disability or on death during service.

(Rupees in '000)

The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund at thebeginning of the period, for returns over the entire life of the related obligation.

(Rupees in '000)

2017 2016


162

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201736.1.9 Principal actuarial assumptions

2017 2016

Valuation discount rate - per annum 9.50% 9.50%Expected return on plan assets - per annum 9.50% 9.50%Salaries increase rate - per annum 7.50% 7.50%Pension indexation rate - per annum 5.50% 5.50%


SLIC2001-2005

Adjusted SLIC

2001-2005

36.1.10 Disclosure for current and previous four annual years2017 2016 2015 2014 2013

Deficit positionPresent value of obligation 1,244,580 1,017,166 834,743 721,255 617,807 Fair value of plan assets (911,160) (805,739) (719,350) (641,348) (539,194) Net defined benefit liability 333,420 211,427 115,393 79,907 78,613

Experience adjustmentRemeasurement (gain)/loss on obligation 72,564 76,969 24,565 (363) (119,517) Remeasurement (gain)/loss on plan asset 21,354 10,133 7,281 2,814 8,331 Other Comprehensive Income 93,918 87,102 31,846 2,451 (111,186)





AssumptionsDiscount rate 1% (148,396) 182,923 Salary rate 1% 88,456 (81,246) Withdrawal rate 10% (117) 115 Mortality age 1 year 20,229 (18,620)


Longevity risks:

Salary Increase risk:

Withdrawal risk:

33.1.13 The expected pension expense for the next financial year works out to Rs. 87.631 million (2016: Rs. 67.704 million).


(Rupees in '000)



(Rupees in '000)


The risk arises when the actual lifetime of retirees is longer than expectation. This risk is measured at the plan level over the entireretiree population.

The most common type of retirement benefit is one where the benefit is linked with final salary. The risk arises when the actualincreases are higher than expectation and impacts the liability accordingly.


Actuarial valuation is carried out annually. Latest actuarial valuation was carried out as at December 31, 2017 using Projected UnitCredit Method. Significant actuarial assumptions used are as follows:


163


36.2 Defined benefit - funded gratuity scheme

36.2.1 General description

2017 201636.2.2 The amounts recognised in the balance sheet

Present value of defined benefit obligation 77,987 67,626 Fair value of plan assets (71,035) - Net liability 6,952 67,626

36.2.3 Movement in net liability recognised in the balance sheetOpening balance of liability 67,626 53,821 Expense for the year 15,607 11,895 Other comprehensive income 4,282 10,317 Contribution to the fund (71,035) - Benefits paid during the year (9,528) (8,407)Closing balance of net liability 6,952 67,626

36.2.4 The amounts recognised in the profit and loss accountCurrent service cost 9,635 6,809 Net interest 5,972 5,086

15,607 11,895


36.2.5 Movement in payable to defined benefit funded gratuity scheme

Present value of obligation at the beginning of the year 67,626 53,821 Current service cost 9,635 6,809 Interest cost 5,972 5,086 Benefits paid (9,528) (8,407)Actuarial loss 4,282 10,317 Present value of obligation at the end of the year 77,987 67,626

36.2.6 Changes in fair value of plan assetsFair value of opening plan assets - - Expected return on plan assets - - Contributions 71,035 - Contributions on behalf of fund 9,528 - Benefits paid (9,528) - Actuarial loss - - Fair value of closing plan assets 71,035 -

36.2.7 Significant actuarial assumptions 2017 2016

Discount factor - per annum 9.50% 9.50%Salary increase rate - per annum (short term - 1 year) 7.50% 7.50%Salary increase rate - per annum (long term) 7.50% 7.50%


SLIC2001-2005

Adjusted SLIC

2001-200536.2.8 Disclosure for current and previous four annual years

2017 2016 2015 2014 2013Deficit positionPresent value of obligation 77,987 67,626 53,821 44,711 46,906 Fair value of plan assets (71,035) - - - - Net defined benefit liability 6,952 67,626 53,821 44,711 46,906 Experience adjustmentsRemeasurement (gain)/loss on obligation 4,282 10,317 9,533 (10,275) 2,497 Remeasurement (gain)/loss on plan asset - - - - -

4,282 10,317 9,533 (10,275) 2,497

(Rupees in '000)

The Bank operates a defined benefit funded gratuity scheme for all eligible employees. The gratuity fund has been established duringthe current year.

(Rupees in '000)


164





AssumptionsDiscount rate 1% (8,242) 9,668 Salary rate 1% 10,172 (8,780) Withdrawal rate 10% 49 (50) Mortality age 1 Year (79) 79

33.2.10 Maturity profileParticulars Undiscounted payments

Year 1 3.645 Year 2 1.182 Year 3 8.115 Year 4 1.232 Year 5 1.212 Year 6 to Year 10 32.850 Year 11 and above 252.155


Longevity risks:


Withdrawal Risk:

33.2.12 The expected gratuity expense for the next financial year works out to Rs. 10.893 million (2016: Rs. 12.937 million).

33.2.13 Maturity Profile 2017 2016

The weighted average duration of the obligation (in years) 13.01 13.07

36.3 Unfunded compensated absences36.3.1 General description

36.3.2 Principal actuarial assumptions

2017 2016

Discount factor - per annum 9.50% 9.50%Salaries increase rate - per annum 7.50% 7.50%


SLIC2001-2005

AdjustedSLIC

2001-2005

Actuarial valuation was carried out as at December 31, 2017 using Projected Unit Credit Method. Significant actuarial assumptionsused were as follows:

The Bank provides compensated absences, an unfunded scheme, as per entitlement to all its permanent employees.




(Rupees in '000)

(Rupees in millions)






165


2017 201636.3.3 The amounts recognised in the balance sheet are as follows:


36.3.4 Movement in liability recognized in the balance sheetBalance at beginning of the year 72,245 77,399 Expense for the year 6,718 6,879 Benefits paid during the year (10,775) (9,871) Actuarial loss/(gain) 22,471 (2,162) Closing net liability 90,659 72,245





AssumptionsDiscount rate 1% (5,863) 6,457 Salary rate 1% 6,969 (6,414)



Withdrawal risk:

33.3.7 The expected compensated absences expense for the next financial year works out to Rs. 12.270 million (2016: Rs. 7.230 million).33.3.8 Maturity profile 2017 2016

The weighted average duration of the obligation (in years) 13.01 13.07 36.4 Benevolent fund36.4.1 General description

36.4.2 Actuarial liability for active employees 14,521 3,151 17,672 13,712 2,876 16,588 Actuarial liability for beneficiaries 573 263 836 22 60 82 Total actuarial liability 15,094 3,414 18,508 13,734 2,936 16,670

Fair value of plan assets (15,546) (4,533) (20,079) (14,081) (4,247) (18,328) Funding surplus (452) (1,119) (1,571) (347) (1,311) (1,658) Receivable from fund - (22) (22) - - - Asset recognized in balance sheet (452) (1,141) (1,593) (347) (1,311) (1,658)

36.4.3

Expense for the year 236 275 511 (232) (688) (920) Funding surplus - - - - - -

236 275 511 (232) (688) (920)


The amount recognized in the profit and loss account is as follows:

The Bank also operates a contributory benevolent fund for all its eligible employees (defined benefit scheme). Contributions to thisfund were made equally by the Bank and employees till March 2002. Thereafter it is wholly contributed by the Bank at the rate of 2%of basic salary with a ceiling of Rs. 200 per month per employee. Annual contribution towards the defined benefit scheme are made onthe basis of actuarial advice using the Projected Unit Credit Method.

2017 2016 Officers

Benevolent Fund

Staff Benevolent

Fund Total

Officers Benevolent

Fund

Staff Benevolent

Fund Total

(Rupees in '000)



(Rupees in '000)





166


33.4.4 Break-up of category of assets% age (Rupees in '000) % age

Term Deposits Receipts (TDRs) 19,922 99% 18,164 99%Bank deposit accounts 157 1% 164 1%

20,079 100% 18,328 100%





AssumptionsDiscount rate 1% (1,058) 1,159 Salary rate 1% - -



Withdrawal risk:


36.5 SMEL operates following staff retirement and other benefits schemes for its employees

36.5.1 Principal actuarial assumptions 2017 2016Valuation discount rate 8.25% 9.50%Expected long term rate of increase in salary level 8.25% 9.50%

2017 201636.5.2 Liability in balance sheet


36.5.3 Movement in liability during the year Opening balance 5,153 4,891 Charged to profit and loss account 1,200 1,191 Remeasurements loss chargeable in other comprehensive income 1,194 (68) Benefits paid during the year (636) (861) Closing balance 6,911 5,153

36.5.4 Reconciliation of the present value of defined benefit obligationsPresent value of obligations as at January 01 5,153 4,891 Current service cost 741 745 Interest cost 459 446 Benefits paid during the year (636) (861) Remeasurements loss chargeable in other comprehensive income 1,194 (68) Present value of obligations as at December 31 6,911 5,153

36.5.5 Charge for the yearCurrent services cost 741 745 Interest cost 459 446

1,200 1,191


SMEL operates an unapproved and unfunded gratuity scheme for all its permanent employees. Number of employees covered underthe scheme are 33 (2016: 28). The latest actuarial valuation of the gratuity scheme was carried out as at December 31, 2017 using theProjected Unit Credit Method. The following significant assumptions were used for valuation of the scheme:

(Rupees in '000)


2017 2016Rupees in '000)



(Rupees in '000)



167


2017 2016

36.5.6 Re-measurements recognised in other comprehensive income(11) (4)

Experience adjustment 1,205 (64) Total re-measurements recognised in other comprehensive income 1,194 (68)


36.5.8 Discount rate effect (Rupees in '000) Rate effectOriginal liability 6,911 8.3%1% increase 6,360 9.3%1% decrease 7,556 7.3%

Salary increase rate effectOriginal liability 6,911 8.3%1% increase 7,558 9.3%1% decrease 6,347 7.3%

36.5.9 Maturity profile 2017 2016

The weighted average duration of the obligation (in years) 9 11

36.5.10 Disclosure for current and previous four annual periods2017 2016 2015 2014 2013

Present value of defined benefit obligation 6,911 5,153 4,891 4,606 3,674 Experience adjustments on plan liabilities (loss)/gain 1,205 (64) (210) 35 (513)

Sensitivity analysis has been performed by varying one assumption keeping all other assumptions constant and calculating the impacton the present value of the defined benefit obligations under the employee benefit schemes. The increase/(decrease) in the presentvalue of defined benefit obligations as a result of change in each assumption is summarized below:

The sensitivity analysis prepared presented above may not be representative of the actual change in the defined benefit obligation as itis unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

(Rupees in '000)

(Rupees in '000)

Actuarial gains on obligation


168


37. President/CEO

2017 2016 2017 2016 2017 2016

Fees - - 1,620 1,420 - - Managerial remuneration 7,986 7,682 - - 226,526 195,424 Charge for defined benefit plan 2,462 2,462 - - 97,739 38,830 Rent and house maintenance 4,392 4,225 - - 78,892 65,356 Utilities 799 768 - - 21,825 18,668 Medical 1,198 1,152 - - 27,591 24,681 Conveyance - - - - 8,911 7,678 Leave fare assistance 1,231 1,231 - - 14,021 13,115 Others 3,734 6,469 235 341 48,317 47,737

21,802 23,989 1,855 1,761 523,822 411,489 Number of persons 1 1 9 10 224 219

COMPENSATION OF DIRECTORS AND EXECUTIVESDirectors Executives

(Rupees in '000)

Executives mean employees, other than the chief executive and directors, whose basic salary exceeds five hundredthousand rupees in a financial year. The remuneration of directors has been fixed in accordance with the Article ofAssociation which include Rs. 25,000 and Rs. 15,000 for attending board meetings and meetings of committee of boardrespectively.


169

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

38FA

IR V

ALU

E O

F FI

NAN

CIAL

INST

RU

ME

NT

S

38.1

On

bala

nce

shee

t fin

anci

al in

stru

men

ts

Not

eAv

aila

ble

for s

ale

Hel

d to

m

atur

ityH

eld

for

tradi

ngLo

ans a

nd

rece

ivab

les

Oth

er

finan

cial

as

sets

othe

r fin

anci

al

liabi

litie

sT

otal

Leve

l 1Le

vel 2

Leve

l 3

Carr

ying

/ N

otio

nal

Valu

eT

otal

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent s

ecur

ities

(T b

ills a

nd P

IBs)

6,24

7,47

8

-

-

-

-

-

6,

247,

478

-

6,21

7,13

9

-

-

6,

217,

139

Ord

inar

y sh

ares

of l

isted

com

pani

es58

2

-

-

-

-

-

582

4,

211

-

-

-

4,21

1

O

rdin

ary

shar

es o

f unl

isted

com

pani

es26

,469

26

,469

-

-

26

,469

26

,469

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks38

.2-

-

-

-

32

3,60

9

-

32

3,60

9

-

-

-

32

3,60

9

32

3,60

9

- B

alanc

es w

ith o

ther

ban

ks38

.2-

-

-

-

13

,080

-

13

,080

-

-

-

13

,080

13

,080

- L

endi

ng to

fina

ncial

inst

itutio

ns38

.2-

-

-

-

-

-

-

-

-

-

-

-

- A

dvan

ces

38.2

-

-

-

2,85

9,44

2

-

-

2,

859,

442

-

-

-

2,85

9,44

2

2,

859,

442

- Oth

er a

sset

s38

.2-

-

-

-

16

5,00

5

-

16

5,00

5

-

-

-

16

5,00

5

16

5,00

5

-O

ther

Inve

stm

ent (

COI/

TDR)

38.2

-

535,

000

535,

000

535,

000

535,

000

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s Pay

able

-

-

-

-

-

92,5

54

92,5

54

-

-

-

92,5

54

92,5

54

- Bor

row

ings

-

-

-

-

-

5,30

8,68

8

5,

308,

688

-

-

-

5,30

8,68

8

5,

308,

688

- Dep

osits

-

-

-

-

-

5,34

3,59

9

5,

343,

599

-

-

-

5,34

3,59

9

5,

343,

599

- Oth

er L

iabili

ties

-

-

-

-

-

235,

262

235,

262

-

-

-

235,

262

235,

262

(Rup

ees i

n '0

00)

(Rup

ees i

n '0

00)

The

fair

valu

e of

quo

ted

secu

rities

oth

er th

an th

ose

class

ified

as h

eld to

mat

urity

, is b

ased

on

quot

ed m

arke

t pric

e. Q

uote

d se

curit

ies c

lassif

ied a

s held

to m

atur

ity a

s car

ried

at c

ost.

The

fair

valu

e of

unq

uote

d eq

uity

secu

rities

, oth

er

than

inve

stm

ents

in a

ssoc

iates

and

subs

idiar

ies, i

s det

erm

ined

on

the

basis

of t

he b

reak

-up

valu

e of

thes

e in

vest

men

ts a

s per

their

late

st a

vaila

ble

audi

ted

finan

cial s

tate

men

ts.

The

fair

valu

e of

unq

uote

d de

bt se

curit

ies, f

ixed

term

loan

s, ot

her a

sset

s, ot

her l

iabili

ties,

fixed

term

dep

osits

and

bor

row

ings

can

not

be

calcu

lated

with

suffi

cient

relai

bilit

y du

e to

the

abse

nce

of c

urre

nt a

nd a

ctiv

e m

arke

t for

thes

e as

sets

and

liab

ilitie

s and

relia

ble

data

rega

rdin

g m

arke

t rat

es fo

r sim

ilar i

nstru

men

ts.

BOO

K VA

LUE

FAIR

VAL

UE

In th

e op

inio

n of

the

man

agem

ent,

the

fair

valu

e of

the

rem

ainin

g fin

ancia

l ass

ets a

nd li

abili

ties a

re n

ot si

gnifi

cant

ly di

ffere

nt fr

om th

eir c

arry

ing

valu

es. S

ince

thes

e ar

e eit

her s

hort

term

in n

atur

e or

, in

the

case

of d

epos

its, a

re

freq

uent

ly pr

e-pr

iced.

2017

2017


170

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

On

bala

nce

shee

t fin

anci

al in

stru

men

ts (c

ontin

ued)

Ava

ilabl

e fo

r sa

leH

eld to

m

atur

ityH

eld fo

r tra

ding

Loan

s and

re

ceiv

ables

Oth

er

finan

cial

asse

ts

Oth

er

finan

cial

liabi

lities

Tota

lLe

vel 1

Leve

l 2Le

vel 3

Ca

rryin

g/

Not

iona

l V

alue

Tota

l

Fina

ncial

ass

ets m

easu

red

at fa

ir va

lue

- Inv

estm

ents

Gov

ernm

ent s

ecur

ities

(T b

ills a

nd P

IBs)

4,65

8,64

6

-

-

-

-

-

4,

658,

646

-

4,67

4,28

9

-

-

4,

674,

289

Ord

inar

y sh

ares

of l

isted

com

pani

es58

2

-

-

-

-

-

582

5,

312

-

-

-

5,31

2

O

rdin

ary

shar

es o

f unl

isted

com

pani

es26

,440

-

-

-

-

-

26

,440

-

-

-

26

,440

26

,440

Fina

ncial

ass

ets n

ot m

easu

red

at fa

ir va

lue

- Ban

k ba

lance

s with

trea

sury

ban

ks-

-

-

-

48

8,83

2

-

48

8,83

2

-

-

-

48

8,83

2

48

8,83

2

- B

alanc

es w

ith o

ther

ban

ks-

-

-

-

26

,665

-

26

,665

-

-

-

26

,665

26

,665

- L

endi

ng to

fina

ncial

inst

itutio

ns-

-

-

44

5,00

0

-

-

44

5,00

0

-

-

-

44

5,00

0

44

5,00

0

- A

dvan

ces

-

-

-

3,13

2,36

0

-

-

3,

132,

360

-

-

-

3,13

2,36

0

3,

132,

360

- Oth

er a

sset

s-

-

-

-

15

1,25

7

-

15

1,25

7

-

-

-

15

1,25

7

15

1,25

7

-O

ther

Inve

stm

ent (

COI/

TDR)

-

35,0

00

-

-

-

-

35,0

00

-

-

-

35,0

00

35,0

00

Fina

ncial

liab

ilitie

s not

mea

sure

d at

fair

valu

e

- Bill

s Pay

able

-

-

-

-

-

95,4

43

95,4

43

-

-

-

95,4

43

95,4

43

- Bor

row

ings

-

-

-

-

-

3,46

0,69

9

3,

460,

699

-

-

-

3,46

0,69

9

3,

460,

699

- Dep

osits

-

-

-

-

-

5,22

6,97

5

5,

226,

975

-

-

-

5,22

6,97

5

5,

226,

975

- Oth

er L

iabili

ties

-

-

-

-

-

204,

755

204,

755

-

-

-

204,

755

204,

755

On

Bala

nce

shee

t fin

anci

al in

stru

men

ts

The

bank

mea

sure

s fair

valu

es u

sing

the

follo

win

g fa

ir va

lues

heir

arch

y th

at re

flect

s the

sign

ifica

nce

of th

e in

puts

use

d in

mak

ing

the

mea

sure

men

ts.

Leve

l 1: F

air v

alue

mea

sure

men

t usin

g qu

oted

pric

es (u

nadj

uste

d) in

act

ive

mar

kets

for i

dent

ical a

sset

s and

liab

ilitie

s.Le

vel 2

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

oth

er th

an q

uote

d pr

ices i

nclu

ded

with

in le

vel 1

that

are

obs

erva

ble

for a

sset

or l

iabili

ty, e

ither

dire

ctly

(i.e.

as p

rices

) or i

ndire

ctly

(i.e.

deriv

ed fr

om p

rices

). Le

vel 3

: Fair

valu

e m

easu

rem

ents

usin

g in

puts

for t

he a

sset

s and

liab

ilitie

s tha

t are

not

bas

ed o

n ob

serv

able

mar

ket d

ata

(i.e.

unob

serv

able

inpu

ts).

38.2

38.3

The

bank

's po

licy

is to

reco

gnise

tran

sfer

into

and

out

of t

he d

iffer

ent f

air v

alue

heira

rchy

leve

ls at

the

date

, the

eve

nt o

r cha

nge

in c

ircum

stan

ces,

that

cau

sed

the

trans

fer o

ccur

red.

The

re w

ere

no tr

ansf

ers b

etw

een

level

1 an

d lev

el 2

durin

g th

e ye

ar.

Curr

ently

no

finan

cial i

nstru

men

ts a

re c

lassif

ied in

leve

l 3.

(Rup

ees i

n '00

0)(R

upee

s in

'000)

BOO

K V

ALU

EFA

IR V

ALU

E20

1620

16


171


39. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIES The segment analysis with respect to business activity is as follows:

Trading & Commercial Other Leasing TotalSales Banking Operations

Total income 382,228 281,575 27,363 691,166 Total expenses 390,866 1,004,157 39,326 1,434,349 Net loss before tax (8,638) (722,582) (11,963) (743,183) Segment Assets (gross) 7,671,038 8,543,686 635,472 16,850,196 Segment non performing loans - 5,396,984 297,415 5,694,399 Segment provision required 57,117 5,410,550 157,884 5,625,551 Segment liabilities 5,656,158 5,773,225 224,851 11,654,234 Segment Return on net Assets (ROA) (%) -0.11% -23.06% -2.50%Segment cost of funds (%) 6.91% 17.39% 17.49%

Trading & Commercial Other Leasing TotalSales Banking Operations

Total income 357,951 291,367 37,415 686,733 Total expenses 325,054 852,383 37,451 1,214,888 Net income/ (loss) before tax 32,897 (561,016) (36) (528,155) Segment assets (gross) 5,939,592 8,607,198 682,976 15,229,766 Segment non performing loans - 5,418,812 321,036 5,739,848 Segment provision required 50,265 5,377,820 159,209 5,587,294 Segment liabilities 3,721,130 5,652,997 219,237 9,593,364 Segment Return on net Assets (ROA) (%) 0.56% -17.37% -0.01%Segment cost of funds (%) 8.74% 15.08% 17.08%

Assumptions used:

-

- Unallocatable liabilities representing 7.05% (2016: 7.84%) of the total liabilities have been allocated tosegments based on their respective incomes.

(Rupees in '000)

Unallocatable assets representing 4.92% (2016: 2.53%) of the total assets have been allocated to segmentsbased on their respective incomes.

2017

2016

(Rupees in '000)


172

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

40.

RE

LAT

ED

PAR

TY

TR

ANSA

CTIO

NS

40.1

Det

ails o

f bala

nces

out

stan

ding

at p

erio

d en

d an

d tra

nsac

tions

with

relat

ed p

artie

s are

as f

ollo

ws:

Key

Oth

erE

quity

E

mpl

oyee

sE

mpl

oyee

sK

eyO

ther

Equ

ity

Em

ploy

ees

Em

ploy

ees

Man

agem

ent

Em

ploy

ees

Parti

cipa

tion

bene

fitPr

ovid

ent

Man

agem

ent

Em

ploy

ees

Parti

cipat

ion

bene

fitPr

ovid

ent

Pers

onne

lFu

ndpl

ans

Tru

stPe

rson

nel

Fund

plan

sTr

ust

Balan

ces o

utst

andi

ng a

s at

-A

dvan

ces

18,2

41

13

8,75

1

-

-

-

15,8

40

147,

897

-

-

-

-

Rece

ivab

les/m

arku

p7,

070

51

,256

-

1,593

-

7,

364

47,8

34

2,

561

1,65

8

-

-

Dep

osits

9,91

7

96,9

34

394,

236

60

3,78

7

52

,518

7,04

8

63

,979

380,

094

-

94

,959

-Pa

yabl

es/m

arku

p47

390

3,

073

45

3,36

7

32

7

36

35

6

1,

211

351,

298

59

6

Tran

sact

ions

dur

ing

the

year

end

ed-

Net

mar

k-up

/int

eres

t ear

ned

634

5,27

6

-

-

-

43

5

5,26

7

-

-

-

-N

et m

ark-

up/i

nter

est e

xpen

sed

520

3,36

2

15

,745

22,4

51

6,66

0

623

4,

362

14

,624

-

6,79

5

-Pa

ymen

ts m

ade

on b

ehalf

of

-

-

48

-

-

-

-

73

-

-

-Pa

ymen

ts re

ceiv

ed

-

-

5,

499

-

-

-

-

-

-

-

-

Rem

uner

atio

n an

d ot

hers

74,0

81

44

4,24

4

-

-

-

62

,987

39

8,51

6

-

-

-

-Co

ntrib

utio

n to

em

ploy

ees b

enef

it pl

ans

-

-

-

160,

677

-

-

-

-

61,1

26

-

-Ch

arge

for t

he y

ear r

elatin

g to

-

-

-

-

-

-

-

em

ploy

ees b

enef

it pl

ans

-

-

-

119,

815

-

-

-

-

69

,410

-

-

Fee

and

com

miss

ion

inco

me

-

-

1,0

73

-

-

-

-

1,13

4

-

-

Re

mun

erat

ion

of C

hief

Exe

cutiv

e of

ficer

, Dire

ctor

s and

Exe

cutiv

es is

disc

lose

d in

not

e 37

to th

e co

nsol

idat

ed fi

nanc

ial st

atem

ents

. Am

ount

(Rs.

in '0

00)

Prin

cipal

term

s of l

oan

facil

ity to

Key

Man

agem

ent

Per

sonn

el11

,699

Pr

incip

al te

rms o

f dep

osit

from

Equ

ity P

artic

ipat

ion

Fund

394,

236

Pr

incip

al te

rms o

f dep

osit

from

Em

ploy

ee b

enef

it pl

an60

3,78

7

Prin

cipal

term

s of d

epos

it fr

om E

mpl

oyee

pro

vide

nt fu

nd52

,518

2017

2016

(Rup

ees i

n '0

00)

(Rup

ees i

n '00

0)

Staf

f Loa

ns fa

ciliti

es (H

ouse

bui

ldin

g lo

an &

enh

ance

men

t, ca

r loa

n an

d em

erge

ncy

loan

)Re

mun

erat

ive

depo

sits

3.75

%Re

mun

erat

ive

depo

sits

Rem

uner

ativ

e de

posit

s 4

% to

6.7

5%7.

50%

3%

to 8

%

Ter

mIn

tere

st ra

te


173

SME BANK LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 201741. CAPITAL ADEQUACY

2017 2016Regulatory capital base (Rupees in '000)Tier I capital Shareholders capital/assigned capital 2,392,507 2,392,507 Reserves 234,660 234,660 Non-controlling interest 41,700 48,067 Unappropriated/unremitted profits (net of losses) (3,070,476) (2,638,446)

(401,609) 36,788 Less: Adjustments

Goodwill/intangible Assets 1,440 1,264 Deficit on revaluation of available for sale investments 27,980 -

29,420 1,264 Total tier I capital (431,029) 35,524 Tier II capital 81 12,391 Eligible tier III capital - - Total regulatory capital (a) (430,948) 47,915

Risk-weighted exposures Book Value Risk Adjusted Book Value Risk Adjusted

Value ValueCredit riskBalance sheet items: Cash and other liquid assets 448,959 2,616 587,547 5,333 Investments/ lending to financial institutions 6,782,819 565,680 5,186,040 511,752 Loans and advances 2,859,442 1,684,427 3,132,360 1,840,841 Fixed assets 70,751 70,751 110,506 110,506

Deferred tax assets 465,198 465,198 256,177 256,177 Other assets 597,476 307,752 369,842 321,033

11,224,645 3,096,424 9,642,472 3,045,642 Off balance sheet itemsWeighted Non-funded exposures 188,521 94,261 132,538 66,269

188,521 94,261 132,538 66,269

Credit risk-weighted exposures (b) 11,413,166 3,190,685 9,775,010 3,111,911

Market risk 1,131,523 1,022,592 Market risk-weighted exposures - 1,131,523 - 1,022,592

Total risk-weighted exposures (c) 4,322,208 4,134,503 Capital adequacy ratio credit risk [ (a) / (b) x 100 ] -13.51% 1.54%Total Capital adequacy ratio [ (a) / (c) x 100 ] -9.97% 1.16%

The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacyis as follows:

2017 2016

State Bank of Pakistan (SBP) has granted exemption to the Bank vide letter No. BSD/SU-21/220/1624/2007 datedJune 08, 2007 from computing capital adequacy ratio under BASEL II till restructuring/privatization and has grantedexemption from implementation of Basel III Capital Instructions till restructuring/privatization vide SBP letter #BPRD/BA&CPD/646/000886/16 dated January 12, 2016. Accordingly, the Bank computes capital adequacy ratiounder BASEL I and SBP has allowed exemption in meeting the minimum CAR requirements of 10% till June 30,2018 or completion of restructuring/privatization of the Bank, whichever is earlier vide SBP letter No.BPRD/BA&CPD/646/5111/2018 dated March 07, 2018.



174


42. RISK MANAGEMENT

42.1 Credit risk

42.1.1 Segment by class of business



Chemical and pharmaceuticals 177,002 2.1% 707 0.0% - - Agriculture, forestry, hunting and fishing 245,741 3.0% - - - - Mining & quarrying 9,053 0.1% - - - - Textile 494,745 6.0% 84,375 1.6% - - Cement 20,268 0.3% 241,380 4.5% - -

82,662 1.0% 13,050 0.2% - - Automobile and - - transportation equipment 162,818 2.0% 11 0.0% - - Financial - 0.0% 824,242 15.4% 5,331,068 76.7%Insurance - 0.0% 2,472 0.1% - - Electronics and electrical - appliances 34,843 0.4% 902 0.0% - -

364,832 4.4% - - - - Power (electricity), gas, water - and sanitary 83,742 1.0% 9 0.0% - - Wholesale and trade 1,738,257 21.1% - - - - Transport, storage, and - - communication 50,855 0.6% - - - - Individuals 1,644,361 19.9% 2,130,884 39.9% 440,566 6.3%Services 456,552 5.5% - - 10,000 0.1%Government - - - - 1,097,899 15.8%Others 2,688,430 32.6% 2,045,567 38.3% 70,255 1.0%

8,254,161 100% 5,343,599 100% 6,949,788 100%

42.1.2 Segment by sector

Public/Government - - 1,334,924 25% 1,097,899 16%Private 8,254,161 100% 4,008,675 75% 5,851,889 84%

8,254,161 100% 5,343,599 100% 6,949,788 100%

Construction

Footwear and leather

Credit risk represents the accounting loss that would be recognised at the reporting date if counter parties failedcompletely to perform as contracted. The Group is not exposed to major concentration of credit risk. Writtenprocedures for credit and risk management functions have been developed and implemented. Credit evaluationsystem comprise of well designed loan approval and review responsibilities and it is ensured that Group's credit-granting activities conform to the established strategy, prudential regulations and SBP instructions are strictlyfollowed. To ensure that credit granting activities are adequately diversified, besides fixing limits on individualcredit, it is ascertained that there is no concentration in a particular industry or economic sector, geographicalregion and specific product. Special attention is placed on such non-performing loans and a Special AssetsManagement Division follows up and recovers all such loans. Recovery against certain specific non-performingloans has been outsourced to National Bank of Pakistan.

2017

Deposits Advances (Gross)



175


Segment by class of business



Chemical and pharmaceuticals 253,369 3.0% 1,439 0.0% - - Agriculture, forestry, hunting and fishing 249,423 2.9% - 0.0% - - Mining & quarrying 9,053 0.1% - - - - Textile 491,800 5.8% 87,270 1.7% - - Cement 20,268 0.2% 100,000 1.9% - -

82,528 1.0% 787 0.0% - - Automobile and transportation equipment 184,184 2.2% 567 0.0% - - Financial - 0.0% 728,356 13.9% 3,454,878 71.3%Insurance - - 2,983 0.1% - - Electronics and electrical appliances 39,166 0.5% 1,145 0.0% - -

364,250 4.3% - - - - Power (electricity), gas, water and sanitary 131,686 1.5% 1,653 0.0% - - Wholesale and trade 1,991,265 23.3% - - - - Transport, storage, and communication 80,295 0.9% - - - - Individuals 1,655,802 19.4% 2,159,978 41.3% 277,385 5.7%Services 386,275 4.5% - - 12,300 0.3%Government - - - - 983,832 20.3%Others 2,607,493 30.5% 2,142,797 41.0% 120,711 2.5%

8,546,857 100% 5,226,975 100% 4,849,106 100%

Segment by sector

Public/Government - - 2,471,992 47% 983,832 20%Private 8,546,857 100% 2,754,983 53% 3,865,274 80%

8,546,857 100% 5,226,975 100% 4,849,106 100%

Construction

2016

Advances (Gross) Deposits




176


Specific Specific 42.1.3 Provisions Provisions

Held Held

Chemical and pharmaceuticals 99,933 97,217 121,744 105,524 Agriculture, forestry, hunting and fishing 205,453 204,583 204,768 204,593 Mining & quarrying 9,053 9,053 9,053 9,053 Textile 378,655 355,887 389,353 364,181 Cement 20,268 20,268 20,268 20,268 Sugar - - - - Footwear and leather garments 71,728 60,408 71,454 61,163 Automobile and transportation equipment 77,537 64,286 84,870 65,828 Electronics and electrical appliances 13,712 11,812 13,561 12,119 Construction 73,986 71,461 73,733 70,541 Power (electricity), gas, water and sanitary 7,153 5,534 47,809 10,731 Wholesale and trade 1,381,850 1,337,352 1,380,471 1,334,600 Transport, storage and communication 4,977 1,607 17,967 10,754 Individuals 1,521,582 1,521,582 1,522,309 1,522,309 Services 164,250 102,336 88,420 47,370 Others 1,664,262 1,531,252 1,694,068 1,563,072

5,694,399 5,394,638 5,739,848 5,402,106

42.1.4 Details of non-performing advances - - and specific provisions by sectorPublic/Government - - - - Private 5,694,399 5,394,638 5,739,848 5,402,106

5,694,399 5,394,638 5,739,848 5,402,106

Details of non-performing advances andspecific provisions by class of businesssegment

2017 2016

Classified Advances

Classified Advances

(Rupees in '000)


177


Contingenciesand

commitments42.1.5 Geographical Segment Analysis

Pakistan (743,183) 11,224,645 (429,589) 6,949,788 Asia Pacific (including South Asia) - - - - Europe - - - - United States of America and Canada - - - - Middle East - - - - Others - - - -

(743,183) 11,224,645 (429,589) 6,949,788

Contingenciesand

commitments

Pakistan (528,155) 9,642,472 49,108 4,849,106 Asia Pacific (including South Asia) - - - - Europe - - - - United States of America and Canada - - - - Middle East - - - - Others - - - -

(528,155) 9,642,472 49,108 4,849,106

42.2 Market risk


2016

Net assets employed

Total assets employees

2017

(Rupees in '000)

Market risk is the risk that the value of on and off-balance sheet positions of the Group will be adverselyaffected by movements in interest rates, foreign exchange rates and equity prices resulting in a loss to earningsand capital. The Group's interest rates exposure comprises those originating from investing and lendingactivities. The Asset and Liability Committee of the Bank monitors and manages the interest rate risk with theobjective of limiting the potential adverse effect on the profitability of the Bank.

Net assets employed

Total assets employed

(Rupees in '000)



178


42.2.1 Foreign exchange risk

Presently the Bank does not deal in foreign exchange.


(Rupees in '000)


11,224,645 11,654,234 6,949,788 -


(Rupees in '000)


9,642,472 9,593,364 4,849,106 -

42.2.2 Equity position riskThe Group's exposure in equity market is classified in available for sale category with the intent to earn profitbased on fundamentals.

Assets Off-balance sheet items

2017

2016

Assets Liabilities Off-balance sheet items

Liabilities


179

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

42.2

.3M

ism

atch

of i

nter

est r

ate

sens

itive

ass

ets a

nd li

abili

ties

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stT

otal

finan

cial

rate

inst

rum

ents

On-

bala

nce

shee

t fin

anci

al in

stru

men

tsAs

sets

Cash

and

bala

nces

with

trea

sury

ban

ks43

5,87

9

-

-

-

-

-

-

-

-

-

43

5,87

9

Balan

ces w

ith o

ther

ban

ks1.9

9%13

,080

6,63

9

1,

369

939

39

0

437

-

83

1,

046

-

2,

177

Lend

ing

to fi

nanc

ial in

stitu

tions

-

-

-

-

-

-

-

-

-

-

-

Inve

stm

ents

6.96

%6,

782,

819

1,79

6,07

3

94

7,27

0

3,82

5

25

8,68

8

2,12

4

36

6,92

4

3,39

9,87

1

8,

044

-

-

Adv

ance

s9.

07%

2,85

9,44

2

11

5,98

7

265,

813

47

6,34

9

851,

706

82

,797

760,

395

29

2,66

5

9,27

0

4,

460

-

O

ther

ass

ets

165,

005

-

-

-

-

-

-

-

-

-

165,

005

10

,256

,225

1,91

8,69

9

1,

214,

452

481,

113

1,

110,

784

85,3

58

1,

127,

319

3,69

2,61

9

18

,360

4,46

0

60

3,06

1

Liab

ilitie

sBi

lls p

ayab

le92

,554

-

-

-

-

-

-

-

-

-

92

,554

Borr

owin

gs fr

om fi

nanc

ial in

stitu

tions

6.05

%5,

308,

688

4,06

5,55

1

1,

231,

199

2,33

1

4,

469

3,93

8

1,

200

-

-

-

-

Dep

osits

and

oth

er a

ccou

nts

5.56

%5,

343,

599

1,

294,

039

880,

805

67

4,07

1

425,

120

6,

900

-

-

1,42

7,77

2

-

63

4,89

2

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t to

fina

nce

lease

-

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

235,

262

-

-

-

-

-

-

-

-

-

235,

262

10

,980

,103

5,35

9,59

0

2,

112,

004

676,

402

42

9,58

9

10,8

38

1,

200

-

1,

427,

772

-

96

2,70

8

On-

balan

ce sh

eet g

ap

(723

,878

)

(3,4

40,8

91)

(897

,552

)

(195

,289

)

681,

195

74

,520

1,12

6,11

9

3,

692,

619

(1,4

09,4

12)

4,46

0

(3

59,6

47)

O

ff-ba

lanc

e sh

eet f

inan

cial

inst

rum

ents

Com

mitm

ents

to e

xten

d cr

edit

311,4

96

311,

496

-

-

-

-

-

-

-

-

-

Com

mitm

ents

aga

inst

repo

bor

row

ing

5,33

1,068

4,09

0,31

5

1,

240,

753

-

-

-

-

-

-

-

-

Off-

balan

ce sh

eet g

ap5,

642,

564

4,40

1,81

1

1,

240,

753

-

-

-

-

-

-

-

-

TTot

al Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(7

,842

,702

)

(2

,138

,305

)

(1

95,2

89)

68

1,19

5

74,5

20

1,

126,

119

3,69

2,61

9

(1

,409

,412

)

4,

460

-

Cu

mul

ativ

e Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(7

,842

,702

)

(9

,981

,007

)

(1

0,17

6,29

6)

(9,4

95,1

01)

(9,4

20,5

81)

(8,2

94,4

62)

(4,6

01,8

43)

(6,0

11,2

55)

(6,0

06,7

95)

-

42

.2.3

.1Re

conc

iliat

ion

of a

sset

s and

liab

ilitie

s exp

osed

to y

ield/

inte

rest

rate

risk

with

tota

l ass

ets a

nd li

abili

ties

(R

upee

s in

'000

)

(R

upee

s in

'000

)To

tal f

inan

cial a

sset

s as p

er n

ote

42.2

.310

,256

,225

Tota

l fin

ancia

l liab

ilitie

s as p

er n

ote

42.2

.3

10,9

80,10

3

A

dd n

on-fi

nanc

ial a

sset

s:A

dd n

on-fi

nanc

ial li

abili

ties:

O

pera

ting

fixed

ass

ets

70,7

51

Oth

er li

abili

ties

674,

131

D

efer

red

tax

asse

ts46

5,19

8

O

ther

ass

ets

432,

471

Ba

lance

as p

er B

alanc

e Sh

eet

11,2

24,6

45

Balan

ce a

s per

Bala

nce

Shee

t11

,654

,234

42

.2.3

.2Y

ield

risk

is th

e ris

k of

dec

line

in e

arni

ngs d

ue to

adv

erse

mov

emen

t of t

he y

ield

curv

e.42

.2.3

.3In

tere

st ra

te ri

sk

2017

Exp

osed

to Y

ield

/Int

eres

t ris

k

(Rup

ees i

n '0

00)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

ges

inth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

ets

ofRs

.10,

256.

22m

illio

n(2

016:

Rs.9

,057

.20

mill

ion)

,the

finan

ciala

sset

sw

hich

wer

esu

bjec

tto

inte

rest

rate

risk

amou

nted

toRs

.9,6

53.0

8m

illio

n(2

016:

Rs.8

,322

.28

mill

ion)

.Inv

estm

ents

and

othe

ras

sets

amou

ntin

gto

Rs.6

,290

.34

mill

ion

(201

6:Rs

.4,7

23.1

mill

ion)

resp

ectiv

elyar

egu

aran

teed

byth

eG

over

nmen

tof

Paki

stan

. An

Ass

ets L

iabili

ty C

omm

ittee

of t

he B

ank

mee

ts p

erio

dica

lly a

nd e

nsur

es th

at th

e in

vest

men

ts a

re m

ade

in a

n ap

prop

riate

man

ner t

o m

itiga

te a

ny in

tere

st ra

te a

nd li

quid

ity ri

sk.

Ove

r 1 to

3

mon

ths

Ove

r 3 to

6

mon

ths

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sU

pto

1 m

onth

Ove

r 2 to

3

year

sO

ver 3

to 5

ye

ars

Ove

r 5 to

10

year

sAb

ove

10

year

sNotes to the Consol idated Financial StatementsFor the year ended December 31 , 2017

180

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

Mis

mat

ch o

f int

eres

t rat

e se

nsiti

ve a

sset

s and

liab

ilitie

s

Effe

ctiv

eN

on-in

tere

st

Yiel

d/be

arin

gIn

tere

stfin

ancia

lra

tein

stru

men

tsO

n-ba

lanc

e sh

eet f

inan

cial

inst

rum

ents

Asse

tsCa

sh a

nd b

alanc

es w

ith tr

easu

r y b

anks

560,

882

-

-

-

-

-

-

-

-

-

56

0,88

2

Ba

lance

s with

oth

er b

anks

2.14

%26

,665

2,

292

51

1

35

0

14

6

16

3

-

31

390

-

22

,782

Le

ndin

g to

fina

ncial

inst

itutio

ns6.

61%

445,

000

445,

000

-

-

-

-

-

-

-

-

-

Inve

stm

ents

7.14

%4,

741,

040

49

,097

442

2,29

3,16

5

-

26

9,46

3

3,

949

2,

008,

186

11

6,73

8

-

-

Adv

ance

s9.

37%

3,13

2,36

0

299,

121

539,

082

596,

344

1,14

5,83

1

78,2

52

394,

504

56,7

86

17

,407

5,03

3

-

Oth

er a

sset

s15

1,25

7

-

-

-

-

-

-

-

-

-

151,

257

9,05

7,20

4

795,

510

540,

035

2,88

9,85

9

1,14

5,97

7

347,

878

398,

453

2,06

5,00

3

134,

535

5,03

3

734,

921

Liab

ilitie

sBi

lls p

ayab

le95

,443

-

-

-

-

-

-

-

-

-

95,4

43

Borr

owin

gs fr

om fi

nanc

ial in

stitu

tions

6.07

%3,

460,

699

3,

024,

691

40

8,83

7

4,

344

8,

557

9,

131

3,

939

1,

200

-

-

-

D

e pos

its a

nd o

ther

acc

ount

s5.

94%

5,22

6,97

5

1,53

1,84

2

711,

300

232,

754

415,

971

11,6

38

3,76

5

-

1,

689,

032

-

630,

673

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t to

fina

nce

lease

601

60

1

-

-

-

-

-

-

-

-

-

O

ther

liab

ilitie

s20

4,75

5

-

-

-

-

-

-

-

-

-

204,

755

8,98

8,47

3

4,55

7,13

4

1,12

0,13

7

237,

098

424,

528

20,7

69

7,70

4

1,20

0

1,68

9,03

2

-

93

0,87

1

O

n-ba

lance

shee

t gap

68

,731

(3

,761

,624

)(5

80,1

02)

2,

652,

761

72

1,44

9

32

7,10

9

39

0,74

9

2,

063,

803

(1

,554

,497

)5,

033

(1

95,9

50)

Off-

bala

nce

shee

t fin

anci

al in

stru

men

tsCo

mm

itmen

ts to

ext

end

cred

it14

7,07

5

14

7,07

5

-

-

-

-

-

-

-

-

-

Co

mm

itmen

ts a

gain

st re

po b

orro

win

g3,

454,

878

3,

044,

754

41

0,12

4

O

ff-ba

lance

shee

t gap

3,60

1,95

3

3,19

1,82

9

410,

124

-

-

-

-

-

-

-

-

TTot

al Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(6

,953

,453

)(9

90,2

26)

2,

652,

761

72

1,44

9

32

7,10

9

39

0,74

9

2,

063,

803

(1

,554

,497

)5,

033

-

Cu

mul

ativ

e Y

ield/

Inte

rest

Risk

Sen

sitiv

ity G

ap(6

,953

,453

)

(7,9

43,6

79)

(5

,290

,918

)

(4,5

69,4

69)

(4

,242

,360

)

(3,8

51,6

11)

(1

,787

,808

)

(3,3

42,3

05)

(3

,337

,272

)

Reco

ncili

atio

n of

ass

ets a

nd li

abili

ties e

xpos

ed to

yiel

d/in

tere

st ra

te ri

sk w

ith to

tal a

sset

s and

liab

ilitie

s(R

upee

s in

'000)

(

Rupe

es in

'000

)To

tal f

inan

cial a

sset

s9,

057,

204

To

tal f

inan

cial l

iabili

ties

8,98

8,47

3

Add

non

-fina

ncial

ass

ets:

Add

non

-fina

ncial

liab

ilitie

s:

Ope

ratin

g fix

ed a

sset

s11

0,50

6

Oth

er li

abili

ties

604,

891

D

efer

red

Tax

Ass

ets

256,

177

O

ther

ass

ets

218,

585

Balan

ce a

s per

Bala

nce

Shee

t9,

642,

472

Balan

ce a

s per

Bala

nce

Shee

t9,

593,

364

Y

ield

risk

is th

e ris

k of

dec

line

in e

arni

n gs d

ue to

adv

erse

mov

emen

t of t

he y

ield

curv

e.In

tere

st ra

te ri

s k

(Rup

ees i

n '00

0)

Inte

rest

rate

risk

isth

eris

kth

atth

eva

lue

offin

ancia

lins

trum

entw

illflu

ctua

tedu

eto

chan

gesi

nth

em

arke

tint

eres

trat

es.O

utof

tota

lfin

ancia

lass

etso

fRs.

9,05

7.2

mill

ion

(201

5:Rs

.8,6

44.5

7m

illio

n),t

hefin

ancia

lass

ets

whi

chw

ere

subj

ectt

oin

tere

stra

teris

kam

ount

edto

Rs.8

,322

.28

mill

ion

(201

5:Rs

.8,1

04.9

3m

illio

n).I

nves

tmen

tsan

dot

hera

sset

sam

ount

ing

toRs

.4,7

23.1

mill

ion

(201

5:Rs

.3,9

96.4

1m

illio

n)re

spec

tively

are

guar

ante

edby

the

Gov

ernm

ent o

f Pak

istan

. An

Ass

ets L

iabili

ty C

omm

ittee

of t

he B

ank

mee

ts p

erio

dica

lly a

nd e

nsur

es th

at th

e in

vest

men

ts a

re m

ade

in a

n ap

prop

riate

man

ner t

o m

itiga

te a

ny in

tere

st ra

te a

nd li

quid

ity ri

sk.

2016 Exp

osed

to Y

ield/

Inte

rest

risk

Upt

o 1

mon

thO

ver 1

to 3

m

onth

sO

ver 3

to 6

m

onth

s

Ove

r 6

mon

ths t

o 1

year

Ove

r 1 to

2

year

sO

ver 2

to 3

ye

ars

Ove

r 3 to

5

year

sO

ver 5

to 1

0 ye

ars

Abo

ve 1

0 ye

ars

Tota

lNotes to the Consol idated Financial StatementsFor the year ended December 31 , 2017

181

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

42.3

Liqu

idity

Ris

k

42.3

.1M

atur

ities

of A

sset

s and

Lia

bilit

ies

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5T

otal

to 3

to 6

mon

ths t

o 1

to 2

to 3

to

5to

10m

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s

(R

upee

s in

'000

)As

sets

Cas

h an

d ba

lance

s with

trea

sury

ban

ks43

5,87

9

385,

425

11

,063

1,12

2

2,

978

-

-

-

35,2

91

-

B

alanc

es w

ith o

ther

ban

ks13

,080

8,81

6

1,

369

939

39

0

437

-

83

1,04

6

-

L

endi

ng to

fina

ncial

inst

itutio

ns-

-

-

-

-

-

-

-

-

-

I

nves

tmen

ts6,

782,

819

1,79

6,07

3

94

7,27

0

3,82

5

25

8,68

8

2,12

4

36

6,92

4

3,39

9,87

1

8,

044

-

Adv

ance

s2,

859,

442

105,

734

29

7,26

6

506,

962

58

1,77

5

333,

409

58

2,20

0

400,

109

47

,527

4,46

0

O

pera

ting

fixed

ass

ets

70,7

51

1,

723

3,44

1

5,

071

10,0

16

18

,259

15,9

15

9,

596

6,05

5

67

5

Def

erre

d ta

x as

sets

- ne

t46

5,19

8

-

-

-

-

465,

198

-

-

-

-

O

ther

ass

ets

597,

476

10

5,82

3

7,19

8

23

6,99

1

155,

581

1,

325

313

27

4

89,9

71

-

11

,224

,645

2,

403,

594

1,

267,

607

75

4,91

0

1,

009,

428

82

0,75

2

965,

352

3,80

9,93

3

187,

934

5,13

5

Li

abili

ties

Bill

s pay

able

92,5

54

80,1

71

-

-

-

-

-

-

12

,383

-

Bor

row

ings

from

fina

ncial

inst

itutio

ns5,

308,

688

4,06

5,55

1

1,

231,

199

2,33

1

4,

469

3,93

8

1,

200

-

-

-

Dep

osits

and

oth

er a

ccou

nts

5,34

3,59

9

1,

643,

836

885,

872

67

4,99

8

427,

871

6,

900

-

-

1,70

4,12

2

-

L

iabili

ties a

gain

st a

sset

s sub

ject

to

fina

nce

lease

-

-

-

-

-

-

-

-

-

-

Def

erre

d ta

x lia

bilit

ies-

-

-

-

-

-

-

-

-

-

O

ther

liab

ilitie

s90

9,39

3

224,

440

3,

395

3,42

6

4,

675

19,8

87

30

,784

158,

236

46

4,55

0

-

11,6

54,2

34

6,01

3,99

8

2,12

0,46

6

680,

755

437,

015

30,7

25

31,9

84

158,

236

2,18

1,05

5

-

Net

ass

ets

(429

,589

)

(3

,610

,404

)

(8

52,8

59)

74

,155

572,

413

79

0,02

7

933,

368

3,

651,

697

(1,9

93,1

21)

5,13

5

Sh

are

capi

tal

2,39

2,50

7

Rese

rves

234,

660

U

napp

ropr

iated

pro

fit(3

,070

,476

)

Non

-con

trolli

ng in

tere

st

41,7

00

D

efici

t on

reva

luat

ion

of a

sset

s(2

7,98

0)

(4

29,5

89)

42.4

Ope

ratio

nal R

isk

Ope

ratio

nal r

isk is

the

risk

of lo

ss re

sulti

ng fr

om in

adeq

uate

or f

ailed

inte

rnal

proc

esse

s, pe

ople

and

syst

em o

r fro

m e

xter

nal e

vent

s .

Liqu

idity

risk

refle

cts

anen

terp

rise's

inab

ility

inra

ising

fund

sto

mee

tco

mm

itmen

ts.I

nor

der

toav

oid

liqui

dity

risk,

the

Bank

has

apo

licy

tom

ainta

insu

fficie

ntliq

uidi

ty.T

oclo

sely

wat

chliq

uidi

typo

sitio

n, th

e A

sset

s Liab

ility

Com

mitt

ee m

eets

per

iodi

cally

to e

nsur

e th

at a

dequ

ate

liqui

dity

is m

ainta

ined

to m

eet a

ny fu

ture

fina

ncial

obl

igat

ion.

Ope

ratio

nalr

isksa

rem

anag

edth

roug

hBa

nk-w

ide

orlin

eof

busin

ess

spec

ific

polic

iesan

dpr

oced

ures

,con

trols

and

mon

itorin

gto

ols.

Exa

mpl

esof

thes

ein

clude

pers

onne

lman

agem

entp

ract

ices,

data

reco

ncili

atio

n pr

oces

ses,

frau

d m

anag

emen

t uni

ts, t

rans

actio

n pr

oces

sing

mon

itorin

g an

d an

alysis

and

bus

ines

s con

tinui

ty p

lanni

ng.

2017

Inco

mpl

iance

with

the

BSD

circu

larlet

terN

o.03

of20

11da

ted

Febr

uary

22,2

011,

allas

sets

and

liabi

lities

with

cont

ract

ualm

atur

ities

have

been

repo

rted

aspe

rthe

irre

main

ing

mat

uriti

es,a

ndw

here

cont

ract

ualm

atur

ities

are

nota

vaila

ble,

such

asse

tsan

dlia

bilit

iesha

vebe

enre

porte

das

pert

heir

expe

cted

mat

uriti

es,d

eter

min

edon

the

basis

ofbe

havi

orst

udy

ofpr

evio

ussix

year

s'hi

stor

icda

taun

der

volat

ility

met

hodo

logy

. The

se b

ases

hav

e als

o be

en a

ppro

ved

by th

e A

sset

and

Liab

ility

Com

mitt

ee (A

LCO

) of t

he B

ank.

Abov

e 10

ye

ars

Upt

o 1

mon

th


182

SME

BAN

K LI

MIT

ED

NO

TE

S T

O T

HE

CO

NSO

LID

ATE

D F

INAN

CIAL

ST

ATE

ME

NT

SFO

R T

HE

YE

AR E

ND

ED

DE

CEM

BER

31,

2017

Mat

uriti

es o

f Ass

ets a

nd L

iabili

ties

Ove

r 1O

ver 3

Ove

r 6O

ver 1

Ove

r 2O

ver 3

Ove

r 5To

tal

Upt

o 1

mon

thto

3to

6 m

onth

s to

1to

2to

3

to 5

to 1

0m

onth

sm

onth

s ye

arye

ars

year

sye

ars

year

s

(R

upee

s in

'000)

Ass

ets

Cas

h an

d ba

lance

s with

trea

sury

ban

ks56

0,88

2

487,

682

15,3

04

1,13

6

3,01

5

-

-

-

53

,745

-

B

alanc

es w

ith o

ther

ban

ks26

,665

25,0

74

511

350

146

16

3

-

31

390

-

Len

ding

to fi

nanc

ial in

stitu

tions

445,

000

44

5,00

0

-

-

-

-

-

-

-

-

Inv

estm

ents

4,74

1,04

0

49

,097

44

2

2,

293,

165

-

26

9,46

3

3,

949

2,

008,

186

11

6,73

8

A

dvan

ces

3,13

2,36

0

24

6,81

7

46

5,59

9

54

1,69

8

71

9,47

8

38

5,13

7

52

1,20

5

17

6,78

6

70

,607

5,

033

Ope

ratin

g fix

ed a

sset

s11

0,50

6

2,75

4

7,

577

7,

890

11

,396

14

,808

13

,406

17

,358

3,

274

32,0

43

Def

erre

d ta

x as

sets

256,

177

-

-

-

-

256,

177

-

-

-

-

Oth

er a

sset

s36

9,84

2

109,

956

5,94

6

5,44

8

153,

592

104

62

7

68

7

93

,482

-

9,

642,

472

1,36

6,38

0

49

5,37

9

2,

849,

687

88

7,62

7

92

5,85

2

53

9,18

7

2,

203,

048

33

8,23

6

37

,076

Li

abili

ties

Bill

s pay

able

95,4

43

82

,674

-

-

-

-

-

-

12,7

69

-

Bor

row

ings

from

fina

ncial

inst

itutio

ns3,

460,

699

3,02

4,69

1

40

8,83

7

4,

344

8,

557

9,13

1

3,

939

1,

200

-

-

Dep

osits

and

oth

er a

ccou

nts

5,22

6,97

5

1,

871,

964

713,

590

236,

024

416,

903

12,9

38

3,76

5

-

1,97

1,79

1

-

Liab

ilitie

s aga

inst

ass

ets s

ubjec

t

to fi

nanc

e lea

se60

1

350

25

1

-

-

-

-

-

-

-

D

efer

red

tax

liabi

lities

-

-

-

-

-

-

-

-

-

-

Oth

er li

abili

ties

809,

646

31

3,29

5

60

,091

8,

403

9,

046

11,7

62

10,9

58

12,0

09

384,

082

-

9,59

3,36

4

5,

292,

974

1,

182,

769

248,

771

434,

506

33,8

31

18

,662

13,2

09

2,

368,

642

-

Net

ass

ets

49,1

08

(3

,926

,594

)

(687

,390

)

2,

600,

916

45

3,12

1

89

2,02

1

52

0,52

5

2,

189,

839

(2

,030

,406

)

37,0

76

Shar

e ca

pita

l2,

392,

507

Re

serv

es23

4,66

0

Una

ppro

priat

ed p

rofit

(2,6

38,4

46)

Non

-con

trolli

ng in

tere

st

48,0

67

Su

rplu

s on

reva

luat

ion

of a

sset

s12

,320

49

,108

Ope

ratio

nal R

iskO

pera

tiona

l risk

is th

e ris

k of

loss

resu

lting

from

inad

equa

te o

r fail

ed in

tern

al pr

oces

ses,

peop

le an

d sy

stem

or f

rom

ext

erna

l eve

nts.

2016

Ope

ratio

nalr

isks

are

man

aged

thro

ugh

Bank

-wid

eor

line

ofbu

sines

ssp

ecifi

cpo

licies

and

proc

edur

es,c

ontro

lsan

dm

onito

ring

tool

s.E

xam

ples

ofth

ese

inclu

depe

rson

nelm

anag

emen

tpr

actic

es, d

ata

reco

ncili

atio

n pr

oces

ses,

frau

d m

anag

emen

t uni

ts, t

rans

actio

n pr

oces

sing

mon

itorin

g an

d an

alysis

and

bus

ines

s con

tinui

ty p

lanni

ng.

Abo

ve 1

0 ye

ars

Inco

mpl

iance

with

the

BSD

circu

larlet

terN

o.03

of20

11da

ted

Febr

uary

22,2

011,

allas

sets

and

liabi

lities

with

cont

ract

ualm

atur

ities

have

been

repo

rted

aspe

rthe

irre

main

ing

mat

uriti

es,

and

whe

reco

ntra

ctua

lmat

uriti

esar

eno

tava

ilabl

e,su

chas

sets

and

liabi

lities

have

been

repo

rted

aspe

rthe

irex

pect

edm

atur

ities

,det

erm

ined

onth

eba

sisof

beha

vior

stud

yof

prev

ious

sixye

ars'

hist

oric

data

und

er v

olat

ility

met

hodo

logy

. The

se b

ases

hav

e als

o be

en a

ppro

ved

by th

e A

sset

and

Liab

ility

Com

mitt

ee (A

LCO

) of t

he B

ank.


183


Un-audited Audited2017 2016

43 EMPLOYEES PROVIDENT FUND TRUSTSize of the fund 229,560 216,957 Cost of investments made 173,788 160,508 Percentage of investments made 76% 74%Fair value of investments 178,401 163,465

Breakup of investments is as follows:

Percentage Percentage

Term Deposits Receipts (TDRs) 116,546 67% 61,289 38%Mutual Funds 4,576 3% 3,999 3%

52,666 30% 95,220 59% 173,788 100% 160,508 100%

44 DATE OF AUTHORIZATION


_______________ ___________ __________ __________President/CEO Director Director Director

Bank deposit accounts

All the investments out of provident fund trust have been made in accordance with section 218 of theCompany Act, 2017 and rules formulated for this purpose.

These consolidated financial statements were authorized for issue by the Board of Directors of the Bank onMarch 08, 2018.

(Rupees in '000)

2017 2016(Rupees in

'000)(Rupees in

'000)






184

1Im

ran

Hill

Top

Hot

elA

bdul

lah K

han

6,38

4

173

936

7,49

3

-

-

665

665

Li

aqat

road

, Gaw

alman

di R

awalp

indi

.

2A

l-Kha

lil C

NG

Mian

Ajm

al Sh

ah K

akak

hel

31

261

510

802

-

-

510

510

3M

ir E

nter

prise

sA

ijaz

Ahm

ed M

ir-

1,47

5

-

1,

475

-

1,16

9

-

1,

169

4Sa

leem

Boo

k Ce

nter

Ch

. Ali

Muh

amm

ad-

261

404

665

-

26

1

40

9

67

0

5Ra

zzaq

Zar

ri H

ouse

Ali

Ahm

ad39

9

55

1

47

99

7

-

485

47

53

2

R/o

Eid

Gah

, Sha

hdar

a To

wn,

Lah

ore.

6H

ajver

y E

lectri

c St

ore

Jalee

l ur R

ehm

an-

1,18

7

262

1,44

9

-

81

5

22

5

1,

040

Tot

al6,

814

3,

908

2,

159

12

,881

-

2,

730

1,8

56

4,58

6

Muh

amm

ad H

ussa

in

(812

02-1

0788

05-9

)

Ann

ex-A

refe

rred

toN

ote

11.7

toth

ese

finan

cials

tate

men

ts,i

nte

rmso

fsub

sect

ion

3of

sect

ion

33-A

ofth

eBa

nkin

gCo

mpa

nies

Ord

inan

ce19

62th

est

atem

enti

nre

spec

tofw

ritte

nof

floa

nsor

any

othe

rfin

ancia

lreli

efof

Rs. 5

00,0

00 o

r abo

ve a

llow

ed to

:

Sr.

No

Nam

e an

d Ad

dres

s of B

orro

wer

N

ame

of In

divi

dual

/ Pa

rtner

/Dire

ctor

s (w

ith N

IC

No.

)

Fat

her's

/Hus

band

's

Nam

e

Out

stan

ding

Lia

bilit

ies a

t beg

inni

ng o

f yea

r P

rinci

pal

writ

ten-

off

Inte

rest

/ M

ark-

upw

ritte

n-of

f

Oth

er

finan

cial

re

lief/

wai

ver

prov

ided

TO

TAL

Pr

inci

pal

Inte

rest

/ M

ark-

up

Oth

ers

Tot

al

(Rup

ees i

n '0

00)

Muh

amm

ad R

azza

q (3

5202

-243

2990

-9)

Atiq

ue u

r Reh

man

(3

5201

-195

9054

-5)

Shop

#26

2-B

Mul

tan

Road

Opp

.Be

nzFa

ctor

y La

hore

.

Mian

Fer

oz S

hah

Kak

akhe

l (1

7101

-077

0531

-3)

Main

Mar

dan

Road

,Sa

rdhe

riBa

zar,

Char

sadd

a.

Shah

zad

Mir

(423

01-1

0489

74-9

)Pl

ot#

2-B-

13Co

mm

ercia

lAre

aN

azim

abad

2K

arac

hi.

Muh

amm

ad S

aleem

(3

5202

- 247

6044

-9)

107-

A,

Kac

haRa

shid

Road

,E

yeH

ospi

tal,

Dat

a D

arba

r, La

hore

.


185

SME LEASING LIMITEDFINANCIAL STATEMENTS


187

Grant Thornton Anjum Rahman1st & 3rd Floor, Modern Motors HouseBeaumont Road, Karachi 75530


T +92 21 3567 2951-56F +92 21 3568 8834www.gtpak.com

REVIEW REPORT TO THE MEMBERS ON THE STATEMENT OF COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE AND PUBLIC SECTOR COMPANIES (CORPORATE GOVERNANCE) RULES, 2013We have reviewed the enclosed Statement of Compliance with the best practices contained in the Code of Corporate Governance and Public Sector Companies (Corporate Governance) Rules, 2013 (both herein referred to as ‘Codes’) prepared by the Board of Directors of SME Leasing Limited (the Company) for the year ended December 31, 2017 to comply with the requirements of Listing Regulation of Pakistan Stock Exchange where the Company is listed and the provisions of Public Sector Companies (Corporate Governance) Rules, 2013.

The responsibility for compliance with the Codes is that of the Board of Directors of the Company. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Company’s compliance with the provisions of the Rules and report if it does not and to highlight any non-compliance with the requirements of the Codes. A review is limited primarily to inquiries of the Company’s personnel and review of various documents prepared by the Company to comply with the Codes.

As a part of our audit of the financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an opinion on the effectiveness of such internal controls, the Company’s corporate governance procedures and risks.

The Codes requires the Company to place before the Audit Committee, and upon recommendation of the Audit Committee, place before the Board of Directors for their review and approval its related party transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm’s length transactions and transactions which are not executed at arm’s length price and recording proper justification for using such alternate pricing mechanism. We are only required and have ensured compliance of this requirement to the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the Audit Committee. We have not carried out any procedures to determine whether the related party transactions were undertaken at arm’s length price or not.

Moreover, the Public Sector Companies (Corporate Governance) Rules 2013, requires the Board to ensure compliance with the law as well as the Bank’s internal rules and procedures relating to procurement, tender verification, purchasing and technical standards when dealing with suppliers of goods and services in accordance with Public Procurement Regulatory Authority Rules. We hereby only performed our procedures to client’s compliance with above mentioned rules on a test basis as a part of our audit of the financial statements of the Company.

Based on our review, nothing has come to our attention which causes us to believe that the ‘Statement of Compliance’ does not appropriately reflect the Company’s compliance, in all material respects, with the best practices contained in the Codes as applicable to the Company for the year ended December 31, 2017 except for the non-compliance of serial no. 22 as explained in the enclosed Statement of Compliance.

Other matter

Since the guidelines were amended by SECP on 29th January 2018 as Public Sector Companies (Corporate Governance Compliance) Guidelines, 2018, therefore the Statement of Compliance prepared by the management is in accordance with the Public Sector Companies (Corporate Governance Compliance) Guidelines, 2013.

Karachi Grant Thornton Anjum RahmanDate: January 29, 2018 Chartered Accountants Muhammad Shaukat Naseeb Engagement Partner

188

Grant Thornton Anjum Rahman1st & 3rd Floor, Modern Motors HouseBeaumont Road, Karachi 75530


T +92 21 3567 2951-56F +92 21 3568 8834www.gtpak.com

Auditors ’ Repor t to The Members

We have audited the annexed statement balance sheet of SME Leasing Limited (the Company) as at December 31, 2017 and the related profit and loss account, statement of comprehensive income, statement of cash flows and statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the ‘financial statements’), for the year then ended 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 Company’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 and the requirements of the Companies Ordinance, 1984. 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 accounts have been kept by the Company 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 are in agreement with the books of accounts and are further in accordance with the accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the Company’s business; and

(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Company;

(c) in our opinion and to the best of our information and according to the explanations given to us, balance sheet, profit and loss account, statement of comprehensive income, statement of cash flows 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, in the manner so required and respectively give a true and fair view of the state of the Company’s affairs as at December 31, 2017 and of the loss, its comprehensive loss, its cash flows and changes in equity for the year then ended; and

189Chartered AccountantsMember of Grant Thornton International Ltd.

Auditors ’ Repor t to The Members

(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

We draw attention to the note 1.2 to the financial statements which states that the Company incurred loss of Rs. 22.510 million (2016: Rs. 13.382 million) for the year ended December 31, 2017, resulting in accumulated loss of Rs. 235.216 million (2016: Rs. 211.511 million) as at balance sheet date and as of that date the Company’s current liabilities exceed its current assets by Rs. 50.273 million (2016: Rs. 59.915 million). These conditions, along with other matters as set forth in the above referred note; indicate the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern.


Karachi Grant Thornton Anjum RahmanDate: February 7, 2018, 2013 Chartered Accountants

Muhammad Shaukat Naseeb Engagement Partner

190

BALANCE SHEETAs at December 31 , 2017BALANCE SHEET

2017 2016 Note Rupees Rupees

ASSETS

5 1,902,743 2,519,445 6 2,803,744 2,668,119 7 956,092 1,543,998 9,337 3,752 8 76,300,747 75,424,525

Total current assets 81,972,663 82,159,839

9 64,098,814 69,285,407 10 323,885,669 342,509,622

Long-term deposits and prepayments 11 1,186,898 1,164,435 12 6,500,443 8,647,726

395,671,824 421,607,190 Total assets 477,644,487 503,767,029

13 3,697,937 4,166,310 14 918,407 959,922 15 110,351,822 104,838,931

Current maturity of non current liabilities 16 6,673,233 21,806,739 17 2,379,069 2,102,277

8,215,355 8,200,925 Total current liabilities 132,235,823 142,075,104

10 205,246,756 199,583,501 18 6,911,306 5,152,857

212,158,062 204,736,358 344,393,885 346,811,462 133,250,602 156,955,567

FINANCED BYAuthorized share capital100,000,000 (2016: 100,000,000) 1,000,000,000 1,000,000,000 ordinary shares of Rs. 10 eachIssued, subscribed and paid-up share capital 19 320,000,000 320,000,000 Reserves 48,466,329 48,466,329 Accumulated loss (235,215,727) (211,510,762)

Total shareholder's equity 133,250,602 156,955,567

Contingencies and commitments 20

The annexed notes from 1 to 36 form an integral part of these financial statements.

Chief Executive Officer Chief Financial Officer Director

Non-current assets

Fixed assetsTotal non-current assets

Long term finances and loansNet investment in leases

Current maturity of non current assets

SME LEASING LIMITED

AS AT DECEMBER 31, 2017

Cash and bank balances

Accrued interest on loan

AdvancesDeposits, prepayments and other receivables

Current assets

LIABILITIESCurrent liabilities

Total non-current liabilitiesTotal liabilitiesNET ASSETS

Taxation net

Long-term depositsDeferred liabilities

Provision for compensated absences

Non-current liabilities

Accrued and other payablesMark-up accrued on borrowingsShort term borrowings

Dilshad Ali AhmadDirector

Liaquat AliChief Financial Officer

Mir Javed HashmatChief Executive Officer

191

PROFIT AND LOSS ACCOUNTFor the year ended December 31 , 2017

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2017

2017 2016

Note Rupees Rupees REVENUE

21 26,671,176 32,531,160

Profit on bank account/return on investment 22 4,154 1,790,051 Other income 23 687,352 3,093,906

691,506 4,883,957

27,362,682 37,415,117

24 40,548,391 38,111,121 25 10,317,635 13,224,768

50,866,026 51,335,889

(23,503,344) (13,920,772)

PROVISIONS10.4 (3,065,489) (4,473,394) 9.4 1,739,041 3,609,532

(1,326,448) (863,862)

(22,176,896) (13,056,910)

26 (333,598) (325,312)

(22,510,494) (13,382,222)

27 (0.70) (0.42)


Operating loss before provisions


Provision for loans and receivablesProvision for potential lease losses

Loss per share-basic and diluted

Total provisions

LOSS BEFORE TAXATION

Taxation

-Current

LOSS AFTER TAX

SME LEASING LIMITED

Total expenses

Total Revenue

Income from leasing operations

Other operating income

EXPENSESAdministrative Finance cost




192

STATEMENT OF COMPREHENSIVE INCOMEFor the year ended December 31 , 2017

SME LEASING LIMITEDSTATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED DECEMBER 31, 2017

Note 2017 2016Rupees Rupees

Loss after taxation (22,510,494) (13,382,222)

Other Comprehensive income

Surplus on revaluation of available-for-sale investment - net - -

Actuarial (loss)/ gain on defined benefit obligation 18 (1,194,471) 67,827 (1,194,471) 67,827

Items not to be reclassified to profit or loss in subsequent years - -

Total comprehensive loss for the year (23,704,965) (13,314,395)



Items to be reclassified to profit or loss in subsequent years




193

STATEMENT OF CASH FLOWSFor the year ended December 31 , 2017SME LEASING LIMITEDSTATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2017

2017 2016Note Rupees Rupees

CASH FLOW FROM OPERATING ACTIVITIES Loss before taxation (22,176,896) (13,056,910)

Adjustment for: Depreciation 24 1,750,080 1,928,441 Gratuity expense 18.2 1,200,314 1,190,713 Finance Cost 25 10,306,292 13,106,021 Profit on bank accounts/ return on investments (128,999) (66,060) Gain on disposal of available for sale investment 22 - (1,569,478) Dividend 22 - (196,624) Financial charges on leased assets 25 11,343 118,747 Gain on disposal of property and equipment 23 (545,867) (3,051,795) Provision for other receivable - 630,770 Provision for potential lease losses 10.4 (3,065,489) (4,473,394) Provision for loans and receivables 9.4 1,739,041 3,609,532

11,266,715 11,226,873 Operating loss before working capital changes (10,910,181) (1,830,037)

Movement in working capital(Increase) / decrease in operating assets

Accrued interest on loan (5,585) 10,091 Net investment in lease 20,167,640 40,783,976 Finances and loans 3,932,525 14,828,512 Deposits, prepayments & other receivables 587,906 (1,618,216) Long-term deposits and prepayments (22,463) 378,887 Advances (135,625) (184,025)

24,524,398 54,199,225 (Decrease) / increase in operating liabilities

Accrued and other payables (468,373) (1,900,433) Provision for compensated absences 276,792 1,032,376

(191,581) (868,057) Cash generated from operations 13,422,636 51,501,131

Financial charges paid (10,194,779) (13,317,528) Interest income received 134,756 66,060 Gratuity paid (636,336) (860,734) Taxes paid (319,168) (311,101) Long term deposits paid/ (used-in) (8,868,945) (20,652,659)

(19,884,472) (35,075,962) (6,461,836) 16,425,169

CASH FLOW FROM INVESTING ACTIVITIES Capital expenditure (111,129) (1,280,792) Proceeds from disposal of fixed Assets 1,056,021 384,000 Proceeds from asset held for sale - 6,650,000 Proceeds from disposal of investment available for sale - 2,749,479 Dividend income - 196,624

944,892 8,699,311

CASH FLOW FROM FINANCING ACTIVITIES Lease rentals paid (612,649) (1,492,651)

Net cash from financing activities (612,649) (1,492,651) Net decrease in cash and cash equivalents (6,129,593) 23,631,829

Cash and cash equivalents at beginning of the year (102,319,486) (125,951,315) Cash and cash equivalents at end of the year 30 (108,449,079) (102,319,486)



Net cash from operating activities

Net cash from investing activities




194

STATEMENT OF CHANGES IN EQUITYFor the year ended December 31 , 2017

Share premium

Statutory reserve

Reserve against future losses

Accumulated loss

Surplus/deficit on revaluation of available for sale investment

Balance as at January 01, 2016 320,000,000 10,000,000 28,019,277 10,447,052 (198,196,367) 3,103,091 173,373,053

Total Comprehensive income for the year ended December 31, 2016

Loss for the year after taxation - - - - (13,382,222) - (13,382,222)

Other comprehensive incomeSurplus on revaluation of available-for -sale investments - Net - - - - - (3,103,091) (3,103,091) Actuarial gain on obligation - - - - 67,827 - 67,827 Balance as at December 31, 2016 320,000,000 10,000,000 28,019,277 10,447,052 (211,510,762) - 156,955,567

Balance as at January 01, 2017 320,000,000 10,000,000 28,019,277 10,447,052 (211,510,762) - 156,955,567

Total Comprehensive income for the year ended December 31, 2017

Loss for the year after taxation - - - - (22,510,494) - (22,510,494)

Other comprehensive income

Actuarial loss on obligation - - - - (1,194,471) - (1,194,471)

Balance as at December 31, 2017 320,000,000 10,000,000 28,019,277 10,447,052 (235,215,727) - 133,250,602



---------------------------------------------------- Rupees ---------------------------------------------------------------

Revenue reservesTotal

shareholders' equity

SME LEASING LIMITEDSTATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED DECEMBER 31, 2017

Issued, subscribed

and paid-up share capital

Capital reserves




195

1 LEGAL STATUS AND NATURE OF BUSINESS

1.1 SME Leasing Limited (the Company) was incorporated in Pakistan on July 12, 2002 as an unlisted public company and acquired the status of a listed company on December 13, 2006. The Company is a subsidiary of SME Bank Limited (the Holding Company), who holds 73.14% (December 31, 2016: 73.14%) of the Company’s shares. At the time of incorporation, the Company was a wholly owned subsidiary of SME Bank Limited, whereby under an arrangement the assets and liabilities of the leasing division of SME Bank Limited were transferred to the Company on January 28, 2003. The Company is listed on Pakistan Stock Exchange formerly Lahore Stock Exchange and its registered office is situated at 56-F, Nazim-ul-Din Road F-6/1, Blue Area, Islamabad. The core objective of the Company is to extend lease and working capital financing facilities to small and medium enterprises of the country. The Company obtained license of non deposit taking NBFC and as per section 4(Schedule I) of NBFC Regulations 2008, a non deposit taking NBFC shall have minimum equity of Rs 50 million. The Company being non deposit taking NBFC has complied with said requirement of NBFC Regulations 2008. The PACRA Credit Rating Agency has assigned a long term rating of B+ (2016: BB+) and a short-term rating of B (2016: B) to the Company in the month of July 2017.

1.2 The Company has been incurring losses since year ended December 31, 2009 which has resulted in erosion of equity. During the year ended December 31, 2017, the Company has incurred a loss of Rs. 22.510 million (2016: Rs. 13.382 million) which has further increased accumulated losses to Rs. 235.215 million (2016: Rs. 211.511 million) as at the year end. Further, the net assets of the Company amounting to Rs. 133.251 million (2016: Rs. 156.956 million) includes non-performing leases and loans and finances, net of provisions of Rs. 142.755 million (2016: Rs. 163.531 million).

Further the Company is dependent on the running finance facility granted by the holding company. The revised prudential regulation of State Bank of Pakistan (SBP) applicable from June 2015 has restricted the exposure by bank to a related party to the extent of 7.5% of its equity. However, the holding company has applied and obtained relaxation of the aforesaid requirement in respect of its financing to the Company by State Bank of Pakistan, which will expire on June 2018.

The above factors indicate the existence of a material uncertainty which may cast significant doubt on the Company’s ability to continue as a going concern and the Company may not be able to realize its assets and discharge its liabilities in the normal course of business. However, these financial statements have been prepared on going concern basis considering the factors mentioned below:

- The Holding Company has granted a short term running finance facility to the Company amounting to Rs. 150 million (facility renewed on April 19, 2017) out of which Rs. 110.352 million has been utilized as at December 31, 2017 (2016: Rs. 104.838 million). The said facility can be extended to the extent of Rs. 300 million as per the stand-by agreement for finance facility. Holding company has applied for relaxation to the State Bank of Pakistan from the requirements of related party exposure limits in order to continue its support towards the Company. Further, holding company has been in the list of privatization by Government of Pakistan. Upon successful completion of privatization of the parent company, the majority shareholding in SME Leasing Limited will be taken over by the acquirer of SME Bank.

Notes to the Financial StatementsFor the year ended December 31 , 2017

196

- The management of the Company has prepared cash flow projections which reflect that based on financial support by the parent company the Company will be able to continue its business on going concern basis in the foreseeable future.

- Concerted efforts are being made for the recovery of non-performing leases and loans and finances and in this respect during the year Rs. 39.588 million (2016: Rs. 54.104 million) has been recovered.

- Efforts are also being made by the management to reduce the overall cost of the Company.

Based on the above mentioned financial measures and the concerted operational measures being taken by the Company, the management is confident of the profitable operations in the foreseeable future and therefore, has prepared the financial statements on going concern basis.

2 BASIS OF PREPARATION 2.1 Statement of compliance These financial statements have been prepared in accordance with approved accounting

standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as are notified under the Companies Ordinance, 1984, the provisions of and directives issued under the Companies Ordinance, 1984, the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the NBFC Rules), and the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (the NBFC Regulations). In case where requirements differ, the provision or directives issued under the Companies Ordinance, 1984, NBFC Rules, 2003 and NBFC Regulations, 2008 shall prevail.

The Companies Ordinance, 1984 was repealed by enactment of the Companies Act, 2017 (the Act) on May 30, 2017. However, as allowed by Securities & Exchange Commission of Pakistan (the Commission) vide its Circular No. 17 of 2017 dated July 20, 2017, companies whose financial year closes on or before June 30, 2017 shall prepare their financial statements in accordance with the provisions of the repealed Companies Ordinance, 1984. In continuation to the above mentioned Circular, the Commission in view of the difficulties faced by the companies to comply with the provisions of the Act has advised vide Circular No. 23/2017 dated October 04, 2017 that the companies whose financial year closes on or before December 31, 2017 shall prepare their financial statements in accordance with the provisions of the repealed Companies Ordinance, 1984. Therefore, these financials statements for the year ended December 31, 2017 have been prepared in accordance with the requirements of the International Financial Reporting Standards and provisions of and directives issued under the Companies Ordinance, 1984. In case the requirements differ, the provisions of and directives issued under the Companies Ordinance, 1984 shall prevail.

2.2 Basis of measurement These financial statements have been prepared under the historical cost convention, except

that defined benefit liability which is carried at present value. These financial statements are prepared on accrual and cash basis of accounting.


197

2.3 Functional and presentation currency These financial statements are presented in Pakistan Rupees, which is the Company’s functional

and presentation currency. The figures are rounded off to the nearest rupee.

2.4 Critical accounting estimates and judgments The preparation of financial statements in conformity with approved accounting standards

as applicable in Pakistan requires management to make judgments, estimates and associated assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The judgments, estimates and associated assumptions are based on historical experiences, current trends and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the estimates.

Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods.

The significant judgments made by the management in applying the accounting policies and the key sources of estimating uncertainty were the same as those applied to financial statements for the year ended December 31, 2016.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are described in the following:

- Provision for current and deferred taxation and recognition and measurement of deferred tax assets and liabilities (notes 4.14 and 26).

- Classification and provision of net investment in finance lease and loans and finances (notes 4.6,4.7, 9 and 10).

- Determination and measurement of useful life and residual value of operating fixed assets (note 4.2 and 12).

- Staff retirement benefits (note 4.5 and 18).- Staff compensated absences (note 17).

3 STANDARDS, AMENDMENTS AND INTERPRETATIONS TO APPROVED

ACCOUNTING STANDARDS 3.1 Standards, amendments and interpretations to the published standards that are

relevant to the Company and adopted in the current year The Company has adopted the following new standards, amendments to published standards

and interpretations of IFRSs which became effective during the current year.

Standard or Interpretation Effective DateIAS 7 - Disclosure Initiative (Amendments to IAS 7) January 1, 2017IAS 12 - Recognition of Deferred Tax Assets for Unrealized Losses(Amendments to IAS 12)

January 1, 2017

IFRS 12 - Annual Improvements to IFRS 2014-2016 January 1, 2017


198

Adoption of the above revisions, amendments and interpretations of the standards have no significant effect on the amounts for the year ended December 31, 2016 and 2017.

3.2 Standards, amendments to published standards and interpretations that are effective but not relevant

‘The other new standards, amendments to published standards and interpretations that are mandatory for the financial year beginning on January 01, 2017 are considered not to be relevant or to have any significant effect on the Company’s financial reporting and operations and are therefore not presented here.

3.3 ‘Standards, amendments and interpretations to the published standards that are relevant but not yet effective and not early adopted by the Company

‘The following new standards, amendments to published standards and interpretations would be effective from the dates mentioned below against the respective standard or interpretation.

Standard or Interpretation Effective DateIFRS 1 and IAS 28 - Annual Improvements to IFRSs 2014-2016 January 1, 2018IFRS 16 - Leases January 1, 2019IFRS 15 - Revenue from Contracts with Customers July 1, 2018IFRS 9 - Financial Instruments July 1, 2018IFRIC 23 - Uncertainty over Income Tax Treatments January 1, 2019Annual Improvements to IFRSs 2015 - 2017 Cycle January 1, 2019IFRS 9 - Prepayment Features with Negative Compensation (Amendments to IFRS 9)

January 1, 2019

The Company is in the process of assessing the impact of these Standards, amendments and interpretations to the published standards on the financial statements of the Company.

3.4 Standards, amendments and interpretations to the published standards that are not yet notified by the Securities and Exchange Commission of Pakistan (SECP)

Following new standards have been issued by the International Accounting Standards Board (IASB) which are yet to be notified by the SECP for the purpose of applicability in Pakistan.

Standard or Interpretation IASB effective date (Annual periods beginning on or after)

IFRS 14 - Regulatory Deferral Accounts January 1, 2016IFRS 16 - Leases January 1, 2019IFRS 17 - Insurance Contracts January 1, 2021

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these financial statements are

set out below. These policies have been consistently applied in preparation of these financial statements, unless otherwise stated.

4.1 Cash and cash equivalents Cash and cash equivalents comprise of cash balances and balances in current and savings

bank accounts. Short term running finance that are repayable on demand and form an integral


199

part of the Company’s cash management, are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

4.2 Fixed assets

4.2.1 Property and equipment These are stated at cost less accumulated depreciation and impairment losses, if any.

Depreciation is charged to profit and loss accounts by using the straight line method at the rates specified in note 12.1 after taking into account residual value, if any. Depreciation on additions is charged from the month the assets are put to use while no depreciation is charged in the month in which the assets are disposed off. The residual values, useful lives and depreciation methods are reviewed and adjusted, if appropriate, at each balance sheet date.

Subsequent costs are included in the assets’ carrying amounts or recognized as a separate asset, as appropriate, only when it is probable that future benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other subsequent costs including repairs and maintenance are charged to the profit and loss account as and when incurred.

Gains or losses on sale of assets are charged to the profit and loss account in the period in which they arise.

4.2.2 Intangible These are stated at cost less accumulated amortization and impairment losses, if any.

Amortization is charged using the straight line method over its estimated useful life at the rate specified in note 12.3 after taking into account residual value, if any. The residual values, useful lives and amortization methods are reviewed and adjusted, if appropriate at each balance sheet date.

Amortization on additions is charged from the month the assets are put to use while no amortization is charged in the month in which the assets are disposed off.

Gain and losses on disposal of such assets, if any, are included in the profit and loss account.

4.3 Assets acquired under finance lease The Company accounts for assets acquired under finance lease by recording the asset and

related liability. The amounts are determined on the basis of lower of their fair value of assets and present value of minimum lease payments at the inception of lease. Financial charges are allocated to accounting periods in a manner so as to provide a constant periodic rate of charge on the outstanding liability. Leased assets are depreciated on a basis similar to owned assets.

4.4 Assets held for sale Non current assets, or disposal groups comprising assets and liabilities, are classified as held-

for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognized in profit or loss account.


200

4.5 Staff retirement benefits

Defined contribution plan The Company operates an approved defined contributory provident fund for all its permanent

employees. Monthly contributions are made to the fund equally by the Company and the employees at the rate of 8 % of basic salary. The contributions are recognized as employee benefit expense when they become due.

Staff retirement benefits are payable to employees on completion of the prescribed qualifying period of service under the scheme.

Employees’ compensated absences The Company accounts for its liability towards accumulating compensated absences, when the

employees render service that increase their entitlement to future compensated absences.

Defined benefit plan The Company operates an unapproved and unfunded gratuity scheme covering all of its

permanent employees who have completed the qualifying period under the scheme. The scheme is administered by the trustees and contributions therein are made in accordance with the actuarial recommendations.

The valuation in this regard is carried out at each year end, using the Projected Unit Credit Method for the valuation of the scheme. Remeasurement of the defined benefit liability, which comprises of actuarial gains and losses are recognized immediately in other comprehensive income based on actuarial gains and losses.

The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual year to the net defined benefit liability (asset), taking into account and change in the net defined benefit liability (asset) during the year as a result of contribution and benefit payments. Net interest expense and other expense related to defined benefit plans are recognized in profit and loss account.

4.6 Net investment in lease finance Leases where the Company transfers substantially all the risks and rewards incidental to

ownership of the leased assets to the lessees, are classified as finance leases.

The leased asset is derecognized and the present value of the lease receivable is recognized on the balance sheet. The difference between the gross lease receivables and the present value of the lease receivables is recognized as unearned finance income. A receivable is recognized at an amount equal to the present value of the minimum lease payments under the lease agreements, including guaranteed residual value, if any.

Each lease payment received is applied against the gross investment in the finance lease receivable to reduce both the principal and the unearned finance income. The finance income is recognized in the profit and loss account on a basis that reflects a constant periodic rate of return on the net investment in the finance lease.


201

Initial direct costs incurred by the Company in negotiating and arranging finance leases are added to finance lease receivables and are recognized as an expense in the profit and loss account over the lease term on the same basis as the finance lease income.

4.7 Provision for potential lease losses and doubtful loans and receivables Specific provision for potential lease losses and doubtful loans and receivables are made based

in the appraisal of each lease or loan on the basis of the requirements of the NBFC Regulations.

4.8 Financial assets and liabilities All the financial assets and financial liabilities are recognized at the time when the Company

becomes a party to the contractual provisions of the instrument and derecognized when the Company losses control of contractual rights that comprises the financial assets and in the case of financial liabilities when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on derecognition of financial assets and financial liabilities is taken to profit and loss account directly.

Financial assets carried at balance sheet date includes cash and bank balances, long term finances and loans, net investment in finance leases, deposits and other receivables.

Financial liabilities carried at balance sheet date includes short term borrowing, long term finances, liabilities against assets subject to finance lease, accrued and other payables.

4.9 Investments All investments are initially recognized at cost, being the fair value of the consideration given

and include transaction costs except for held for trading investments in which case transaction costs are charged to the profit and loss account. All purchase and sale of investments that require delivery within the required time frame established by regulations or market convention are accounted for at the trade date. Trade date is the date when the Company commits to purchase or sell the investments. These are recognized and classified as follows:

Investment at fair value through profit or loss (held for trading) At the time of acquisition, quoted investments which are acquired principally for the purpose

of generating profit from short term fluctuations in price or are part of portfolio for which there is a recent actual pattern of short term profit taking are classified as held for trading.

Subsequent to initial recognition these are premeasured at fair value by reference to quoted market prices with the resulting gain or loss being included in net profit or loss for the period in which it arises.

Available-for-sale These are stated at fair value, with any resultant gain or loss being recognized directly in

equity. Gains or losses on revaluation of available-for-sale investments are recognized directly in equity until the investments are sold or other wise disposed off, or until the investments are determined to be impaired, at which time cumulative gain or loss previously reported in the equity is included in current year’s profit and loss account.

All investments classified as available-for-sale are initially recognized at cost inclusive of transaction costs and subsequently quoted investments are marked to market using the last quoted rate at the close of the financial year.


202

Held to maturity At the time of acquisition, investments with fixed maturity, where management has both the

intent and the ability to hold to maturity, are classified as held to maturity.

Subsequently, these are measured at amortized cost less provision for impairment in value, if any amortised cost is calculated by taking into account any discount or premium on acquisition by using the effective yield method.

The difference between the redemption value and the purchase price of the held to maturity investments is amortized and taken to the profit and loss account over the term of the investment.

These are reviewed for impairment at year end and any losses arising from impairment in values are charged to the profit and loss account.

4.10 Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market.

These are initially recognized at fair value plus any related transaction costs directly attributable to the acquisition. Subsequent to initial recognition, they are carried at amortized cost.

4.11 Impairment The carrying value of the Company’s assets are reviewed at each balance sheet date to determine

whether there is any indication of impairment. If such an indication exists, the recoverable amount of such asset is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in the profit and loss account.

4.12 Derivative financial instruments Derivative financial instruments are initially recognized at fair value on the date on which

the derivative contract is entered into and are subsequently premeasured at fair value. All derivative financial instruments are carried as assets when fair value is positive and liabilities when fair value is negative. Any change in the fair value is recognized in the profit and loss account.

4.13 Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are only offset and the net amount reported in the

balance sheet when there is a legally enforceable right to set off the recognized amount and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously.

4.14 Taxation Taxation charge in the profit and loss account comprises of current and deferred tax.

Current Provisions for current taxation is based on taxability of certain income streams of the Company

under presumptive / final tax regime and minimum tax under section 113 of the Income Tax Ordinance, 2001, wherever applicable, at the applicable tax rates and remaining income


203

streams chargeable at current rate of taxation under the normal tax regime after taking into account tax credits and tax rebates available, if any.

Deferred Deferred tax is provided using the balance sheet liability method, providing for temporary

differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

4.15 Provisions A provision is recognized in the balance sheet when the Company has legal or constructive

obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provision are reviewed at each balance sheet date and are adjusted to reflect the current best estimate.

4.16 Long term finances Long term finances are initially recognized at cost being the fair value of the consideration

received together with the associated transaction cost.

Subsequently, these are carried at amortized cost using effective interest method. Transaction cost relating to the long term finance is being amortized over the period of agreement using the effective interest method.

4.17 Revenue recognition- The Company follows the finance lease method in accounting for the recognition of

lease income. Under this method, the unearned lease income i.e. the excess of gross lease rentals and the estimated residual value over the cost of the leased assets is deferred and taken to income over the term of the lease contract, so as to produce a systematic return on the net investment in finance lease. Unrealized lease income is held in suspense account, where necessary, in accordance with the requirements of the NBFC Regulations.

- Front-end fees and documentation charges are taken to income when realized.

- Income on investments is accounted for on accrual basis.

- Dividend income is recognized when the right to receive the dividend is established.

- Income on loans and finances is accounted for on accrual basis using effective interest method.

- Unrealized lease income and unrealized income on loans and finances is held in suspense account, where necessary, in accordance with requirements of the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (NBFC Regulations).


204

- Profit on bank deposit and short term placements is accrued on a time proportion basis.

- Gain or loss arising on sale of investments are taken to income in the period in which they arise.

4.18 Earnings / (loss) per share The Company presents basic and diluted earnings / (loss) per share (EPS) for its shareholders.

Basic EPS is calculated by dividing the profit or loss attributable to ordinary share holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effect of all dilutive potential ordinary shares, if any.

4.19 Dividend distribution and transfer between reserves Dividend distribution (including stock dividend) to the Company’s shareholders and transfer

between reserves, except appropriations which are required under law, are recognized in the financial statements in the period in which such dividends are declared or such transfers between reserves are made.

4.20 Capital and Revenue reserves

Share premium The share premium was recorded in the year 2006 on issue of shares in accordance with

requirements of the Companies Ordinance, 1984. This premium is available for restrictive use as per section 83 of the Companies Ordinance 1984.

Statutory reserves In accordance with the requirements of the NBFC Regulations, an amount of not less than 20

%of after tax profits shall be transferred to statutory reserve till such time when the reserve equals the amount of paid-up capital, and thereafter a sum of not less than 5 percent shall be transferred. Consequently, during the current year the Company has transferred an amount of Rs. Nil (2016: Rs. Nil) to its statutory reserve.

Reserve against future losses This reserve represents amounts set aside in view of the risks associated with the economic

cyclical nature of the business and is recognized as an appropriation of retained earnings. Any credits resulting from reduction of such amounts result in an increase in unappropriated profit and are not included in the determination of profit and loss for the period. The amount to be set aside against future losses is determined at the rate of 0.5 % of the outstanding balance of the regular portfolio of leases and loans and receivables as at each year end. No such reserve has been created by the Company for the year ended December 31, 2017.

4.21 Segment reporting Operating segments are reported in a manner consistent with the internal reporting structure.

Management monitors operating results of its business units separately for the purpose of making decisions regarding resources allocation and performance assessment. Segment results, assets and liabilities include item directly attributable to segment as well as those that can be allocated on a reasonable basis.


205

SME LEASING LIMITEDNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017


5 CASH AND BANK BALANCES

Balances with State Bank of Pakistan in current account 21,642 23,431 Balances with banks:

- in current accounts 5.1 1,733,001 2,300,218 - in saving accounts 5.2 81,688 139,384

Cash in hand 66,412 56,412 1,902,743 2,519,445

5.1 These include balance with related party amounting to Rs. 0.056 million (2016: Rs. 0.210 million)

5.2 These carry profit rate of 3.5% per annum ( 2016: 4% per annum )2017 2016

6 ADVANCES - considered good Note Rupees Rupees

Advances to:- employees 6.1 805,048 719,487 - others 1,998,696 1,948,632

2,803,744 2,668,119

6.1


7 DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES Security deposits against assets acquired under - 428,600 - lease arrangementsPrepayments 847,129 1,070,812 Advance payment to provident fund 43,963 - Other receivable 1,769,706 1,749,292

2,660,798 3,248,704 Less: Provision for other receivables 7.1 (1,704,706) (1,704,706)

956,092 1,543,998

7.1 Provision for other receivables

Balance at the beginning of the year 1,704,706 1,073,936 Provision for the year - 630,770 Balance at the end of the year 1,704,706 1,704,706

8 CURRENT MATURITY OF NON CURRENT ASSET

Current portion of : - Long term finances and loans 9 10,517,139 11,002,112 - Net investment in finance leases 10 65,783,608 64,422,413

76,300,747 75,424,525

These represents interest free advances given to employees against salaries. These are recovered throughmonthly deductions from salaries over a period of one year from the date of disbursement.


206



9 LONG TERM FINANCES AND LOANS - Secured

Related parties - considered good-employees 9.1 & 9.2 1,884,251 1,361,073

Others Customers

-considered good 9.3 18,135,402 17,873,824 -considered doubtful 65,384,674 70,101,955

83,520,076 87,975,779 Less: Provision for doubtful finances and loans - net 9.4 (10,788,374) (9,049,333)

72,731,702 78,926,446

74,615,953 80,287,519 Less: Current maturityRelated parties - employees (390,984) (250,000) Other than related parties - customers (10,126,155) (10,752,112)

(10,517,139) (11,002,112)

9.5 64,098,814 69,285,407

9.1 Movement in loan to employees

Opening balance at the beginning of the year 1,361,073 613,458 Disbursements 523,178 963,500 Repayments - (215,885) Closing balance at the end of the year 1,884,251 1,361,073

9.2

9.3

2017 20169.4 Provision for doubtful finances and loans - net Rupees Rupees

Balance at the beginning of the year 9,049,333 5,439,801 Provision for the year 2,201,274 3,740,916 Reversal for the year (462,233) (131,384)

1,739,041 3,609,532 Balance at the end of the year 10,788,374 9,049,333

9.5 This includes non performing loans of Rs. 54.601 million (2016: Rs. 62.032 million)

These represent housing loans and car loans given to employees. These loans are recovered throughdeduction from salaries over varying periods up to a maximum period of 20 years. These loans aregranted to the employees in accordance with their terms of employment. The housing loans are securedby registered mortgage in favor of the Company. Car loans are secured by the title of car in theCompany's name .These loans carry mark-up at 5% to 7% (2016: 5% to 7 %) per annum.

These represent loans to customers for a period of three to five years on mark-up basis and are securedby way of hypothecation of stock and immovable property. The rate of mark-up ranges from 9.5% to27% (2016: 11.5% to 27.02%) per annum.


207



10 NET INVESTMENT IN FINANCE LEASES

Net investment in finance leases 10.1 389,669,277 406,932,035 Current portion shown under current assets (65,783,608) (64,422,413)

323,885,669 342,509,622

10.1 Net investment in finance leases

10.1.1

10.1.2

10.2

10.3

The internal rate of return (IRR) on lease contract receivable ranges from 9.5% to 27.02% perannum (2016: 8.42% to 28.01% per annum).

These represent interest free security deposits received against lease contracts and are refundable /adjustable at the expiry / termination of the respective leases. The amount is net of securitydeposit held against matured leases amounting to Rs. 139.817 million (2016: Rs. 147.31 million).

Lease rentals received during the year aggregate to Rs. 117.180 million (2016: Rs. 145.305 million).Lease disbursed during the year amounts to Rs. 74.558 million (2016: Rs. 80.226 million).

Based on the NBFC Regulation, the aggregate net exposure in finance lease against which incomesuspension is required amounted to Rs. 152.253 million (2016: Rs. 250.01 million).

This include amount receivable in respect of non performing leases of Rs. 236.198 million (2016:Rs. 263.436 million)

Total Total

Note

397,763,577 325,363,245 72,400,332 411,595,179 356,671,501 54,923,678

10.2 211,546,756 205,246,756 6,300,000 220,415,701 199,583,501 20,832,200

609,310,333 530,610,001 78,700,332 632,010,880 556,255,002 75,755,878

(20,861,514) (7,944,790) (12,916,724) (19,615,984) (8,282,519) (11,333,465)

(53,389,040) (53,389,040) - (57,006,870) (57,006,870) - (74,250,554) (61,333,830) (12,916,724) (76,622,854) (65,289,389) (11,333,465) 535,059,779 469,276,171 65,783,608 555,388,026 490,965,613 64,422,413

10.4 (145,390,502) (145,390,502) - (148,455,991) (148,455,991) -

389,669,277 323,885,669 65,783,608 406,932,035 342,509,622 64,422,413

20162017

Net Investment in Finance leases

----------------------------------------------------------Rupees--------------------------------------------------

Later than one but less than

five year

Not later than one year

Later than one but less than

five year

Not later than one year

Minimum Lease paymentsAdd : Residual Value of Leased Assets

Gross Investment in Leases

Unearned lease IncomeMarkup held in Suspense Account

Provision for potential lease losses


208



10.4 Provision for potential lease losses

Balance at the beginning of the year 148,455,991 152,929,385

Provision for the year 4,425,231 1,205,348 Reversed during the year 10.4.1 (7,490,720) (5,678,742) Net charge (3,065,489) (4,473,394) Balance at the end of the year 145,390,502 148,455,991

10.4.1 This includes amount written off amounting to Rs. Nil (2016: Rs. 248,876).


11 LONG TERM DEPOSITS AND PREPAYMENTS

Other deposits 782,222 782,222 Prepayments 404,676 382,213

1,186,898 1,164,435

12 FIXED ASSETS

Property and equipment 12.1 6,189,293 8,100,442 Intangible assets 12.3 311,150 547,284

6,500,443 8,647,726


209

SME

LE

ASIN

G L

IMIT

ED

NO

TE

S T

O T

HE

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

12.1

Prop

erty

and

equ

ipm

ent

BOO

K VA

LUE

%O

wne

d

Furn

iture

and

fixt

ures

1,508

,383

88,4

95

-

1,596

,878

2093

5,00

3

146,

047

-

-

1,081

,050

515,

828

Off

ice

equi

pmen

t1,1

79,8

64

-

-

1,1

79,8

64

1581

8,56

8

80,6

85

-

-

899,

253

28

0,61

1

Build

ing

impr

ovem

ents

750,

933

-

-

75

0,93

3

33.3

374

7,53

3

3,40

0

-

-

750,

933

-

Off

ice

prem

ises

9,51

4,19

0

-

-

9,

514,

190

5

4,26

2,70

8

47

5,71

0

-

-

4,

738,

418

4,77

5,77

2

Com

pute

rs1,4

29,4

36

22

,634

-

1,4

52,0

70

33

.33

1,204

,127

123,

020

-

-

1,327

,147

124,

923

Ow

ned

Veh

icle

s5,

618,

150

2,14

3,00

0

(1

,664

,100)

6,

097,

050

204,

916,

658

575,

633

(1,15

3,46

7)

1,266

,067

5,60

4,89

1

49

2,15

9

20,0

00,9

56

2,25

4,12

9

(1

,664

,100)

20

,590

,985

12,8

84,5

97

1,404

,495

(1

,153,

467)

1,2

66,0

67

14

,401

,692

6,18

9,29

3

Leas

ed

Veh

icle

s2,

143,

000

-

(2,14

3,00

0)

-

20

1,158

,917

107,

150

-

(1,2

66,0

67)

-

-

22

,143,

956

2,

254,

129

(3

,807

,100)

20,5

90,9

85

14,0

43,5

14

1,511

,645

(1

,153,

467)

-

14,4

01,6

92

6,18

9,29

3

BOO

K V

ALU

E

%O

wne

d

Furn

iture

and

fixt

ures

1,81

4,21

4

46

8,70

0

(774

,531

)

1,

508,

383

20

1,65

5,63

1

53

,903

(7

74,5

31)

-

935,

003

57

3,38

0

Off

ice

equi

pmen

t1,

329,

903

18,8

10

(1

68,8

49)

1,17

9,86

4

1590

3,08

4

82,1

14

(166

,630

)

-

81

8,56

8

361,

296

Build

ing

impr

ovem

ents

784,

969

-

(3

4,03

6)

750,

933

33.3

374

0,86

0

40,7

09

(34,

036)

-

74

7,53

3

3,40

0

Off

ice

prem

ises

9,51

4,19

0

-

-

9,

514,

190

5

3,78

6,98

8

47

5,72

0

-

-

4,

262,

708

5,25

1,48

2

Com

pute

rs1,

672,

825

93,2

82

(3

36,6

71)

1,42

9,43

6

33.3

31,

406,

819

133,

979

(336

,671

)

1,

204,

127

225,

309

Ow

ned

Veh

icle

s4,

250,

184

1,73

2,50

0

(3

64,5

34)

5,61

8,15

0

203,

956,

369

198,

699

(364

,534

)

1,

126,

124

4,91

6,65

8

70

1,49

2

19,3

66,2

85

2,31

3,29

2

(1

,678

,621

)

20,0

00,9

56

12

,449

,751

985,

124

(1,6

76,4

02)

1,12

6,12

4

12

,884

,597

7,11

6,35

9

Leas

ed

Veh

icle

s3,

875,

500

(1,7

32,5

00)

-

2,14

3,00

0

201,

509,

940

775,

101

-

(1,1

26,1

24)

1,15

8,91

7

98

4,08

3

23

,241

,785

58

0,79

2

(1

,678

,621

)

22,1

43,9

56

13,9

59,6

91

1,76

0,22

5

(1,6

76,4

02)

-

14

,043

,514

8,

100,

442

------

------

------

------

------

( R

u p

e e

s ) --

------

------

------

------

----

------

------

------

------

------

------

-----

( R u

p e

e s

) ----

------

------

------

------

------

------

-

Janu

ary

01,

2016

For t

he y

ear

On

disp

osal

Tran

sfer

Dec

31,

201

6A

s at D

ec 3

1,

2016

As a

t Jan

uary

01

, 201

6A

dditi

ons/

tra

nsfe

r D

elet

ion

As a

t Dec

31,

20

16D

epre

ciat

ion

Rate

ACCU

MU

LAT

ED

DE

PRE

CIAT

ION

C O

S T

ACC

UM

ULA

TED

DE

PRE

CIA

TIO

N

For t

he

year

On

disp

osal

Tra

nsfe

rAs

at D

ec 3

1, 20

17As

at D

ec 3

1,

2017

------

------

------

------

---- (

R u

p e

e s

) ----

------

------

------

-----

----

------

------

------

------

------

------

-- ( R

u p

e e

s ) -

------

------

------

------

------

------

----

C O

S T

As a

t Ja

nuar

y 1,

2017

Addi

tions

/ tra

nsfe

r D

elet

ion

As a

t Dec

31,

2017

Dep

reci

atio

n R

ate

Janu

ary

1, 20

17Notes to the Financial StatementsFor the year ended December 31 , 2017

210

SME

LE

ASIN

G L

IMIT

ED

NO

TE

S T

O T

HE

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

12.2

Parti

cula

rs o

f dis

posa

l of p

rope

rty a

nd e

quip

men

t

Cost

WD

VSa

le P

roce

edG

ain

on d

ispo

sal

Mod

e of

dis

posa

lPa

rticu

lars

of b

uyer

s

Ow

ned

vehi

cles

570,

100

-

40

0,00

0

40

0,00

0

Te

nder

Mr.

Mun

eeb

Suha

il

Ow

ned

vehi

cles

1,09

4,00

0

51

0,53

3

656,

400

145,

867

Com

pany

pol

icyM

r. O

sam

a Iq

bal/

Chief

Fin

ancia

l Offi

cer

Dec

embe

r 31,

2017

1,664

,100

510,

533

1,0

56,4

00

545,

867

Dec

embe

r 31,

201

61,

678,

617

2,21

9

38

4,00

0

38

1,78

1

12.3

Inta

ngib

le a

sset

s

At Ja

nuar

y 1,

2017

Addi

tions

As a

t D

ecem

ber 3

1, 20

17

As a

t Jan

uary

1,

2017

Char

ge fo

r the

yea

rAs

at D

ecem

ber

31, 2

017

1,507

,142

-

1,507

,142

95

9,85

8

236,

134

1,1

95,9

92

31

1,150

33

%

At J

anua

ry 1

, 20

16A

dditi

ons

As a

t D

ecem

ber 3

1,

2016

At J

anua

ry 1

, 201

6Ch

arge

for t

he y

ear

At D

ecem

ber 3

1,

2016

807,

142

70

0,00

0

1,50

7,14

2

791,

642

168,

216

95

9,85

8

547,

284

33

%

------

------

------

------

------

---- (

Rup

ees)

-----

------

------

------

------

-----

Softw

are

licen

ses a

nd

licen

ses

2017

2016

Amor

tizat

ion

rate

(%)

Softw

are

licen

ses a

nd

licen

ses

Net

boo

k va

lue

at

Dec

embe

r 31,

20

16

Am

ortiz

atio

n ra

te (%

)

Net

boo

k va

lue

at

Dec

embe

r 31,

2017

Accu

mul

ated

am

ortiz

atio

nCo

st

Cost

Acc

umul

ated

am

ortiz

atio

n


211



13 ACCRUED AND OTHERS PAYABLES

Accrued liabilities 479,059 505,935 Rentals received in advance - 317,928 Payable on termination / maturity of leases 320,750 316,120 Insurance payable 2,380,823 2,683,735 Unclaimed dividend 20,629 20,629 Sales tax payable 2,360 - Others 494,316 321,963

3,697,937 4,166,310

14 ACCRUED MARK-UP ON BORROWINGS

Interest accrued on: - Short term borrowings 14.1 918,407 959,922

14.1 The amount represents accrued interest payable to the holding company.

15 SHORT TERM BORROWING

2017 201616 CURRENT MATURITY OF Note Rupees Rupees

NON-CURRENT LIABILITIES

Long term finance 16.1 373,233 373,233 Liabilities against assets subject to finance lease - 601,306 Long term deposits 10.1 6,300,000 20,832,200

6,673,233 21,806,739

16.1

The Company has a running finance facility available from the holding company amounting to Rs. 150million (2016: Rs.150 million) at mark-up rates ranging between 9.96% to 9.97% (2016: 9.96% to10.71%) per annum. Above arrangements are secured by way of hypothecation of the Company'sspecific leased assets and related receivables of the Company. Further, the said facility can be extendedto the extent of Rs. 300 million (2016: Rs. 300 million) as per the stand-by agreement for finance facility.

This represents balance due against financing facilities amounting to Rs. 0.373 million (2016: Rs. 0.373million) from National Energy Conservation Centre (Enercon). The facilities from Enercon have beenobtained under an agreement whereby they have agreed to provide funds to the Company for grantinglease / finance facility to its customers for procuring and using energy efficient equipments. The facilitycarries mark-up at the rate of 5% per annum payable on quarterly basis subject to the condition that theCompany will provide lease /finance facility to its customers at a preferential mark-up rate.


212


2017 201617 PROVISION FOR COMPENSATED ABSENCES Note

Changes in present value of defined benefit obligationsPresent value of defined benefit obligations- Opening 2,102,277 1,069,901 Current service cost 856,037 674,304 Past service cost (credit) - 1,029,358 Interest cost on defined benefit obligation 144,819 66,808 Benefits paid (1,155,733) (803,641) Remeasurement- Actuarial gains from changes in financial assumptions (3,799) - - Experience adjustments 435,468 65,547 Present value of defined benefit obligations- Closing 2,379,069 2,102,277

Expenses to be charged to Profit and Loss account

Current service cost 856,037 674,304 Past service cost - 1,029,358 Experience adjustments 435,468 65,547 Actuarial gains from changes in financial assumptions (3,799) - Interest cost on defined benefit obligation 144,819 66,808 Expense chargeable to profit and loss account 24.1 1,432,525 1,836,017

Changes in net liability

Balance sheet liability- Opening 2,102,277 1,069,901 Expenses chargeable to Profit and loss account 1,432,525 1,836,017 Benefits paid (1,155,733) (803,641) Balance sheet liability- Closing 2,379,069 2,102,277

18 DEFFERED LIABILITIES

Principal actuarial assumptions

2017 2016

Valuation Discount rate 8.25% 9.50%Expected long term rate of increase in salary level 8.25% 9.50%

The Company operates an unapproved and unfunded gratuity scheme for all of its permanentemployees. Number of employees covered under the scheme are 33 (2016: 28).

The latest actuarial valuation of the gratuity scheme was carried out on December 31, 2017 by NaumanAssociates using the Projected Unit Credit Method. The following significant assumptions were used forvaluation of the scheme:

---------------Rupees---------------


213


2017 201618.1 Liability in balance sheet Note Rupees Rupees

Present value of defined benefit obligation 18.2 6,911,306 5,152,857

18.2 Movement in liability during the year

Balance as at January 01, 2017 5,152,857 4,890,705 Charged to profit and loss account 1,200,314 1,190,713 Remeasurements chargeable in other comprehensive income 1,194,471 (67,827) Benefits paid during the year (636,336) (860,734) Balance as at December 31, 2017 6,911,306 5,152,857

18.3 Reconciliation of the present value of defined benefit obligations

Present value of obligations as at January 01, 2017 5,152,857 4,890,705Current service cost 741,019 744,679Interest cost 459,295 446,034Benefits paid during the year (636,336) (860,734) Remeasurements loss / (gain) chargeable in other comprehensive income 1,194,471 (67,827)Present value of obligations as at December 31, 2017 6,911,306 5,152,857

18.4 Charge for the year

Current services cost 741,019 744,679 Interest cost 459,295 446,034

1,200,314 1,190,713

18.5 Re-measurements recognized in other comprehensive incomeActuarial losses gains on obligation (10,435) (3,674) Experience adjustment 1,204,906 (64,153) Total re-measurements recognized in other comprehensive income 1,194,471 (67,827)

18.6 Sensitivity analysis

Discount rate effect Rupees Rate effect

Original liability 6,911,306 8.3%1% increase 6,359,977 9.3%1% decrease 7,555,894 7.3%

Sensitivity analysis has been performed by varying one assumption keeping all other assumptionsconstant and calculating the impact on the present value of the defined benefit obligations under theemployee benefit schemes. The increase / (decrease) in the present value of defined benefit obligationsas a result of change in each assumption is summarized below:


214


Salary increase rate effect Rupees Rate effectOriginal liability 6,911,306 8.3%1% increase 7,558,397 9.3%1% decrease 6,347,314 7.30%

18.7 Maturity profile 2017 2016

The weighted average duration of the obligation (in years) 9 11

19 ISSUED, SUBSCRIBED AND PAID-UP SHARE CAPITAL

2017 2016 2017 2016Rupees Rupees

10,100,000 10,100,000 Ordinary shares of Rs. 10 each issued as fully paid in cash 101,000,000 101,000,000

19,900,000 19,900,000

199,000,000 199,000,000

2,000,000 2,000,000 20,000,000 20,000,000

32,000,000 32,000,000 320,000,000 320,000,000

19.1

20 CONTINGENCY AND COMMITMENTS

20.1 Contingencies

2017 201620.2 Commitments Note Rupees Rupees

20.2.1 Lease disbursements 20.2.1 9,750,000 2,300,000

20.2.1.1

20.2.2 Commitments in respect of rent agreement are as follows:2017 2016

Rupees Rupees Not later than one year 2,177,549 1,981,474 Later than one year but not later than five years 684,342 622,125

2,861,891 2,603,599

There are no contingencies as at year end except disclosed in Note 26.2 of the financialstatements(2016: Nil)

This represents those lease and finances which have been approved by the Company as at the year end.

(Number of shares)

The sensitivity analysis prepared presented above may not be representative of the actual change in thedefined benefit obligation as it is unlikely that the change in assumptions would occur in isolation ofone another as some of the assumptions may be correlated.

At December 31, 2017, The holding company and its nominees hold 73.14% (2016: 73.14%) ordinaryshares of the Company.

Ordinary shares of Rs. 10 eachissued as fully paid forconsideration other than cash

Ordinary shares of Rs 10 eachissued as fully paid bonus shares


215



21 INCOME FROM OPERATIONSLeasesIncome from finance leases 21,883,371 23,066,962

Income on finances and loans to customers 4,787,805 9,464,198 26,671,176 32,531,160

22 PROFIT ON BANK ACCOUNTS / RETURN ON INVESTMENTS

Profit on redemption of Namco Mutual Fund - 1,569,478 Profit on bank accounts 4,154 23,949 Dividend income - 196,624

4,154 1,790,051 23 OTHER INCOME

Income from financial assetsMark-up on loans to employees 124,845 42,111 Income from non-financial assetsGain on disposal of fixed assets 12.2 545,867 3,051,795 Other income 16,640 -

687,352 3,093,906 2017 2016

24 ADMINISTRATIVE EXPENSES Note Rupees Rupees

Salaries, allowances and other benefits 24.1 24,449,178 23,113,976 Directors' fee 24.3 765,000 450,000 Rent 3,001,764 2,608,283 Electricity, gas and water 1,030,929 957,054 Telephone and postage 762,157 891,216 Repairs and maintenance 487,388 503,857 Books and periodicals 33,410 31,758 Vehicle running 456,948 221,205 Advertising 246,550 233,623 Training and development 146,583 14,300 Travelling, conveyance and entertainment 1,424,057 1,078,632 Printing and stationery 948,269 740,157 Auditors' remuneration 24.4 485,000 467,325 Depreciation and amortization 12.1 & 12.3 1,750,080 1,928,441 Legal and professional 2,875,624 2,723,275 Insurance 915,213 877,347 Commission and brokerage charges 102,916 77,850 Provision for other receivable - 630,770 Miscellaneous 667,325 562,052

40,548,391 38,111,121


216



24.1 Salaries allowance and other benefits include:

Staff gratuity fund 18 1,200,314 1,190,713 Staff provident fund 574,748 591,606 Compensated absences 17 1,432,525 1,836,017

24.2 Remuneration of Chief Executive Officer, Directors and Executives

Managerial remuneration 2,640,000 2,733,930 2,590,000 3,573,430 Housing and utilities 1,320,000 1,366,965 1,080,000 1,445,537 Provident fund - 218,714 - 284,652 Medical and other perquisites 264,000 273,393 259,000 374,831 Gratuity 352,000 254,165 352,000 323,140 Leave encashment 176,000 127,083 165,000 218,393 Leave fare assistance 352,000 - 330,000 - Others - - - 57,500

5,104,000 4,974,250 4,776,000 6,277,483

Number of persons 1 4 1 7

24.3

24.4 Auditors' remuneration 2017 2016Rupees Rupees

Annual audit 250,000 250,000 Half yearly review 50,000 50,000 Other certifications 50,000 50,000 Out of pocket expenses 135,000 117,325

485,000 467,325 25 FINANCE COST

Mark-up on short term borrowings 10,153,264 13,010,647 Lease finance charges 11,343 118,747 Bank charges 153,028 95,374

10,317,635 13,224,768

This represents remuneration paid to the non-executive directors of the Company for attending meetingsof the Board and Board's committees.

The Chief Executive Officer and certain executives were also provided with free use of Company ownedand maintained cars in accordance with their terms of employment.

---------------------- (Rupees) ----------------------

The aggregate amount charged in the financial statements, including all benefits, to the Chief ExecutiveOfficer and Executives of the Company are as follows:

2017 2016 Chief

Executive Officer

Chief Executive Officer Executives Executives


217


26 TAXATION

26.1 Current tax liability

26.2 Current status of tax assessments

26.3

27 LOSS PER SHARE - BASIC AND DILUTED 2017 2016Rupees Rupees

Loss after taxation attributable to ordinary shareholders (22,510,494) (13,382,222)

Weighted average number of outstanding ordinary shares 32,000,000 32,000,000

2017 2016Rupees Rupees

Loss per share - basic and diluted (0.70) (0.42)

27.1

28 TRANSACTIONS WITH RELATED PARTIES

The related parties comprises of The Holding Company, key management personnel, non- executivedirectors and contributory employee plan:

The income tax assessments of the Company for tax year 2012 has been selected for tax audit u/s 214 Cof Income tax ordinance 2001.

In respect of Tax year 2012, the tax authorities have served order under section 122(1) read with section177(1) and 214C of the Income Tax Ordinance, 2001 disallowing expenses relating to depreciationallowance, markup on loan to employees and financial cost and creating tax demand of Rs. 3.8 million.The Company filed an appeal before the Commissioner Inland Revenue (Appeals-II) against the saidorder who decided all the issues in favor of the Company except for initial allowance on leased asset.Company has filed second appeal and the appeal has not yet been fixed for hearing.

Deferred tax asset of Rs. 100.677 million (2016: Rs. 96.159 million) has not been recognized as theCompany does not foresee future taxable profits against which unused tax losses will be utilized.

(Number of shares)

No figure for diluted earnings per share has been presented as the Company has not issued anyinstrument which would have an impact on earnings per share when exercised.

In respect of minimum tax for the year ended December 31, 2015, the tax authorities have served orderunder section 124 of Income Tax Ordinance, 2001 for additional amount of minimum tax of Rs. 0.14million payable due to restatement of turnover of the Company. The Company has filed application forrectification in the order on the issue of incorrect value of turnover for the purpose of charging minimumtax under section 113 and tax credit not allowed. No action has been taken by the tax officer yet.

Provision for the current year income tax has been made under the provisions of minimum tax underSection 113 of the Income Tax Ordinance, 2001 (Ordinance).


218



Balances

SME Bank Limited (holding company)Short term borrowing 15 110,351,822 104,838,931

Staff Provident Fund(Payable)/receivable from staff provident fund 7 43,963 -

Transactions

SME Bank Limited (holding company)Mark up expense for the period 25 10,158,795 13,010,647 (Utilization)/Repayment of short term borrowing facility (5,512,891) (24,227,593) Rent expense 423,288 425,000 Total rentals receivables (for the entire lease period) - -

Key management personnelKey management remuneration 6,503,388 6,381,780 Post retirement benefits 461,375 497,400

Staff Provident FundCompany's contribution towards provident fund 574,748 591,602

29 PROVIDENT FUND

Size of the fund (Net assets) 4,614,643 4,255,720 Cost of Investment made 4,575,869 3,999,253 Percentage of investment made 99.16% 93.97%Fair value of investments 4,590,796 4,164,395

All the investments of the Provident Fund are kept in mutual funds.

2017 201630 CASH AND CASH EQUIVALENTS Note Rupees Rupees

Cash and bank balances 5 1,902,743 2,519,445 Short term borrowings 15 (110,351,822) (104,838,931)

(108,449,079) (102,319,486)

Investments out of provident fund have been made in accordance with the provisions of the section 218of the Companies Act, 2017 and the rules formulated for this purpose.


219


31 FINANCIAL RISK MANAGEMENT

Introduction and overview

The Company has exposure to the following risks from financial instruments:

- credit risk- liquidity risk- market risk

31.1 Risk management framework

31.2 Credit risk

31.2.1 Management of credit risk

The Company's policy is to enter into financial contracts in accordance with the internal risk managementpolicies and the requirements of the NBFC Rules and Regulations. The Company attempts to controlcredit risk by monitoring credit exposures, limiting transactions with specific counter parties, andcontinually assessing the credit worthiness of counter parties.

This note presents information about the Company’s exposure to each of the above risks, the Company’sobjectives, policies and processes for measuring and managing it.

Company's Board of directors has overall responsibility for the establishment and oversight of theCompany's risk management framework. The Board has established the Risk Management Committee,which is responsible for developing and monitoring the Company’s risk management policies. Thecommittee reports regularly to the Board of Directors on its activities.

The Company’s risk management policies are established to identify and analyze the risks faced by theCompany, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Riskmanagement policies and systems are reviewed regularly to reflect changes in market conditions and theCompany’s activities. The Company, through its training and management standards and procedures, aimsto develop a disciplined and constructive control environment in which all employees understand theirroles and obligations.

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and causethe other party to incur a financial loss, without taking into account the fair value of any collateral.Concentration of credit risk arises when a number of counter parties are engaged in similar businessactivities or have similar economic features that would cause their ability to meet contractual obligationsto be similarly affected by changes in economics, political or other conditions. Concentrations of creditrisk indicate the relative sensitivity of the Company's performance to developments affecting a particularindustry.

The Company's audit committee oversees how management monitor compliance with the Company's riskmanagement policies and procedures, and review the adequacy of the risk management framework inrelation to the risks faced by the Company. The Company's audit committee is assisted in its oversight byinternal audit. Internal audit undertakes both regular and adhoc reviews of risk management controls andprocedures, the result of which are reported to the audit committee.


220


31.2.2 Exposure to credit risk

Bank balances 1,769,919 1,881,101 2,463,033 2,439,602 Advances 2,803,744 2,803,744 2,668,119 2,668,119 Accrued interest on working capital loans 9,337 - 3,752 - Net investment in finance lease 389,669,277 389,669,277 406,932,035 406,932,035 Long term finances and loans 74,615,953 74,615,953 80,287,519 80,287,519 Short term and long term 2,142,990 2,142,990 2,531,514 2,531,514 - deposits

471,011,220 471,113,065 494,885,972 494,858,789

31.2.3 Credit ratings and Collaterals

Ratings 2017 2016

A1+ 4.84% 29.44%A-1+ 90.67% 70.56%Others 4.49% 0.00%

100% 100%

31.2.4 Description of Collateral held

The Company's leases are secured against assets leased out. In a few leases additional collateral isalso obtained.

Details of exposures and the collateral as at December 31, 2017 against them are as follows:

Net Lower ofExposure collateral

and grossexposure

Rupees Rupees Lease Finance - Regular 144,497,576 144,497,576 - Non Performing net of provision 245,171,701 245,171,701

389,669,277 389,669,277 Working Capital Finance - Regular 18,212,233 18,212,233 - Non Performing net of provision 54,519,469 54,519,469

72,731,702 72,731,702

------------------------------------- (Rupees) -------------------------------------

Details of the credit ratings of balances with the banks (including profit receivable) as at 31 Decemberwere as follows:

Maximum exposure

Balance sheet2016

In summary, compared to the maximum amount included in the balance sheet, the maximum exposure tocredit risk as at December 31, 2017 is as follows:

2017Balance sheet Maximum

exposure


221


Settlement risk

31.2.5 Impairment losses and past due balances

Not past due 158,452,045 17,974,372 140,477,673 - 1 - 179 days 8,781,109 238,619 8,542,490 - 180 days - 1 year 9,476,514 - 9,476,514 - More than 1 year 285,691,311 65,307,085 376,563,102 (156,178,876)

462,400,979 83,520,076 535,059,779 (156,178,876)

Not past due 115,955,066 17,630,587 98,324,479 - 1 - 179 days 53,013,277 264,285 52,748,992 - 180 days - 1 year 2,201,888 - 2,201,888 - More than 1 year 315,922,884 70,080,907 402,112,667 (156,270,690)

487,093,115 87,975,779 555,388,026 (156,270,690)

31.2.6 Concentration of credit risk - gross investment in finance lease

The management of the Company follows two sets of guidelines. Internally, it has its own policies andprocedures duly approved by the Board of Directors whereas externally it adheres to the regulationsissued by the SECP. The operating policy defines the extent of fund based exposures with reference to aparticular sector or group of leases.

2016Total Loans and

receivablesNet investment in finance lease

Impairment recognized

--------------------------------------- (Rupees) -----------------------------------------

-------------------------------------- (Rupees) ------------------------------------

To reduce the exposure to credit risk the Company has developed a formal approval process wherebycredit limits are applied to its customers. The management continuously monitors the credit exposuretowards the customers and makes provision against those balances considered doubtful of recovery (andalso obtains security / advance payments, wherever considered necessary). Cash is held only with

This risk is addressed more or less in accordance with the parameters set out in the credit riskmanagement above.

Settlement risk is the risk of loss due to the failure of an entity to honor its obligations to deliver cash orother assets as contractually agreed on sale.

The Company seeks to manage its credit risk through diversification of financing activities to avoidundue concentration of credit risk with individuals or groups of customers in specific locations orbusiness sectors. It also obtains collaterals when appropriate.

2017Total Loans and

receivablesNet

investment in Impairment recognized


222


Rupees Percentage Rupees Percentage

Cargo Carriers 57,941,411 8.08 28,855,377 3.87 Chemicals 15,270,451 2.13 10,131,737 1.36 Communication 32,915,215 4.59 6,802,623 0.91 Confectionary 16,783,257 2.34 10,440,318 1.40 Construction And Building Pro 18,055,160 2.52 11,271,745 1.51 Dates 5,357,055 0.75 565,867 0.08 Education 33,737,331 4.70 24,560,264 3.29 Engineering 77,940,599 10.87 21,151,793 2.84 Entertainment 24,273,002 3.38 47,063,784 6.31 Film Processing 66,686,496 9.30 58,643,945 7.86 Fisheries 15,371,041 2.14 1,285,857 0.17 Food And Beverages 29,677,637 4.14 51,478,238 6.90 Furniture 5,998,129 0.84 1,971,122 0.26 Garments 26,028,752 3.63 45,408,420 6.09 Gems & Jeweler 4,151,522 0.58 13,917,062 1.87 Health Care 38,614,096 5.38 70,301,198 9.43 Leather & Tannery 2,319,558 0.32 15,364,218 2.06 Miscellaneous 24,753,223 3.45 65,080,809 8.73 Oil & Gas 26,645,421 3.72 49,338,622 6.62 Pharma 8,636,214 1.20 14,180,800 1.90 Plastic 11,660,678 1.63 14,571,380 1.95 Printing & Packaging 43,063,932 6.00 53,162,277 7.13 Public Transport Services 95,227,881 13.28 112,232,630 15.05 Rubber 25,485,294 3.55 230,036 0.03 Textile 10,570,723 1.47 17,731,083 2.38

717,164,078 100 745,741,205 100

31.3 Liquidity risk

31.3.1 Management of liquidity risk

Details of the composition of leases and loans and finances portfolio of the Company are given below:

2017 2016

Liquidity risk is the risk that the Company will encounter difficulty in meeting its financial obligations asthey fall due. Liquidity risk arises because of the possibility that the Company could be required to payits liabilities earlier than expected or may face difficulty in raising funds to meet commitments associatedwith financial liabilities as they fall due.

The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always havesufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, withoutincurring unacceptable losses or risking damage to the Company's reputation. Due to nature of thebusiness, the Company maintains flexibility in funding by maintaining committed credit lines available.The Company’s liquidity management involves projecting cash flows and considering the level of liquidassets necessary to fulfill its obligation; monitoring balance sheet liquidity ratios against internal andexternal requirements and maintaining debt financing plans.


223


31.3.2 Maturity analysis for financial liabilities

Financial LiabilitiesAccrued and other liabilities 3,697,937 3,697,937 3,697,937 - Short term borrowings 110,351,822 110,351,822 110,351,822 - Long term finances - secured 373,233 373,233 373,233 Long term deposits 211,546,756 211,546,756 6,300,000 205,246,756 Markup accrued 918,407 918,407 918,407

326,888,155 326,888,155 121,641,399 205,246,756

Financial LiabilitiesAccrued and other liabilities 4,166,310 4,166,310 4,166,310 - Short term borrowings 104,838,931 104,838,931 104,838,931 - Long term finances - secured 373,233 373,233 373,233 Long term deposits 220,415,701 220,415,701 189,101,696 31,314,005 Liabilities against asset subject to finance lease 601,306 607,199 607,199 - Markup accrued 959,922 959,922 959,922

331,355,403 331,361,296 300,047,291 31,314,005

31.4 Market risk

The Company is exposed to interest rate and other price risk only.

31.4.1 Management of market risk

-------------------------------------- (Rupees) ------------------------------------

2016 Total Contractual

cash flow Up to one year Two to five

years --------------------------------------- (Rupees) -----------------------------------------

The objective of market risk management is to manage and control market risk exposures withinacceptable parameters, while optimizing the return on risk. The Company manages the market risk bymonitoring exposure on marketable securities by following internal risk management policies andregulations laid down by the Securities and Exchange Commission of Pakistan.

Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreignexchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) willeffect the Company’s income or the value of its holdings of financial instruments. The objective ofmarket risk management is to manage and control market risk exposures within acceptable parameters,while optimizing the return on risk.

The table below analyses the Company's financial liabilities into relevant maturity groupings based onthe remaining period at the balance sheet date to maturity date and represents the undiscounted cashflows. The amounts in the table are the gross nominal undiscounted cash flows (including interestpayments).

2017 Total Contractual

cash flow Up to one

year Two to five

years


224


31.4.2 Interest rate risk

2017 2016Fixed rate instruments Rupees Rupees

Financial assetsNet investments in finance lease 9.5% to 27% 389,669,277 406,932,035 Long term finance and loans 9.5% to 27% 74,615,953 80,287,519

464,285,230 487,219,554

Financial liabilitiesLong term finance - 373,233 373,233 Liabilities against assets subject to finance lease 15.01% - 601,306

373,233 974,539

Variable rate instruments

Financial assetsBank balances 3.50% 81,688 139,384

81,688 139,384

Financial liabilitiesShort term borrowings 9.96% to 9.97% 110,351,822 104,838,931

110,351,822 104,838,931

31.4.3 Fair value sensitivity analysis for fixed rate instruments

31.4.4 Cash flow sensitivity analysis for variable rate instruments

Carrying amount

The Company does not account for any fixed rate financial assets and liabilities at fair value throughprofit and loss. Therefore, a change in interest rates at the reporting date would not affect profit andloss account.

A change of 100 basis points in interest rates at the reporting date would have increased / (decreased)profit or loss by Rs. 1.035 million (2016: Rs. 1.047 million). This analysis assumes that all other variables,remain constant. The analysis is performed on the same basis which were used for the year ended 31December 2016.

The sensitivity analysis prepared as of December 31, 2017 is not necessarily indicative of the impact onthe Company's net assets of future movements in interest rates and profit for the year and assets /liabilities of the Company.

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuatebecause of changes in market interest rates. Majority of the interest rate exposure arises on investmentin finance lease, finance and loans, investment in government securities, bank balances and borrowingfrom banks. The Company carries a mix of fixed and floating rate financial instruments.

At 31 December, details of the interest rate profile of the Company's interest bearing financialinstruments were as follows:


225


31.4.5 Interest rate gap position

Yield / interest rate sensitivity position for on balance sheet financial instruments based on the earlier of contractual re-pricing ormaturity date is as follows:

%Financial assets

Cash and bank balances 3.5 81,688 81,688 - - Long term finances and loans 9.5-27 74,615,953 17,974,372 (5,963,966) 62,605,547 Net investment in finance lease 9.5-27 389,669,277 140,477,673 (189,376,261) 438,567,865 Total financial assets as on 31 December 2016 464,366,918 158,533,733 (195,340,227) 501,173,412

Financial liabilitiesShort term borrowings 9.96-9.97 110,351,822 - 110,351,822 - Long term finances 373,233 373,233 - - Total financial liabilities as on 31 December 2015 110,725,055 373,233 110,351,822 - On balance sheet gap 353,641,863 158,160,500 (305,692,049) 501,173,412 Total interest rate sensitivity gap 353,641,863 158,160,500 (147,531,549) 353,641,863

%Financial assetsCash and bank balances 4 139,384 139,384 - - Long term finances and loans 11.5-27.2 80,287,519 57,870,383 15,164,186 7,252,950 Net investment in finance lease 8.42-28.01 406,932,035 279,618,645 54,411,206 72,902,184 Total financial assets as on 31 December 2015 487,358,938 337,628,412 69,575,392 80,155,134

Financial liabilitiesShort term borrowings 9.96-10.71 104,838,931 - 104,838,931 - Long term finances 373,233 373,233 - - Liabilities against asset subject to finance lease 14.39-23 601,306 28,360 572,946 -

Total financial liabilities as on 31 December 2015 105,813,470 401,593 105,411,877 - On balance sheet gap 381,545,468 337,226,819 (35,836,485) 80,155,134 Total interest rate sensitivity gap 381,545,468 337,226,819 301,390,334 381,545,468

Upto three months

More than three months and up to one

year

More than one year

2017Effective

mark-up / interest / profit rate

Total Exposed to mark-up / interest / profit rate Upto three

months More than

three months and up to one

year

More than one year

-------------------------------- (Rupees) ---------------------------------

-------------------------------- (Rupees) ---------------------------------

2016Effective

mark-up / interest / profit rate

Total Exposed to mark-up / interest / profit rate


226


31.5 Price risk

32 CAPITAL RISK MANAGEMENT

32.1

32.2

2017 2016(Rupees)

Total debt 373,233 373,233 Total equity 133,250,602 156,955,567 Total capital employed 133,623,835 157,328,800

Gearing ratio 0.28% 0.24%

32.3 Financial risk management objectives and policies

32.4 Fair value and risk management

The table below analyses recurring fair value measurements for financial assets and financialliabilities. These fair value measurements are categorized into different levels in the fair valuehierarchy based on the inputs to valuation techniques used. The different levels are defined asfollows:

Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuatebecause of changes in market prices (other than those arising from interest risk or currency risk)whether those changes are caused by factors specific to the individual financial instrument or itsissuer, or factors affecting all similar financial instruments traded in the market. Presently, theCompany is not exposed to equity securities price risk as the Company does not hold any equitysecurities as at December 31, 2017.

The Company's prime objective when managing capital is to safeguard its ability to continue as agoing concern in order to provide adequate returns for shareholders and benefits for otherstakeholders and to maintain an optimal capital structure to reduce its cost of capital.

Consistent with others in the industry, the Company monitors capital on the basis of the gearingratio. This ratio is calculated as total debt divided by total capital employed:

The Company finances its operations through equity, borrowings and management of its workingcapital with a view to maintaining an appropriate mix between various sources of finance tominimize liquidity risk. Taken as a whole, the Company's risk arising from financial instruments islimited as there is no significant exposure to price and cash flow risk in respect of such instruments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. Fair value of underlyingfinancial assets are determined based on requirements of Regulation 66 of Non-Banking FinanceCompanies and Notified Entities Regulations, 2008 and directives if any, issued by the Securitiesand Exchange Commission of Pakistan. Fair value of debt instruments other than GovernmentSecurities, which are unlisted or listed but not traded regularly on stock exchange be valued at ratesnotified by Mutual Funds Association of Pakistan. The fair value of financial assets traded in activemarket i.e. listed securities are based on the quoted market price at determined by stock exchange inaccordance with its regulations.


227

SME

LE

ASIN

G L

IMIT

ED

NO

TE

S T

O T

HE

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

Leve

l 1 —

Quo

ted

mar

ket p

rices

in a

n ac

tive

mar

ket (

that

are

una

djus

ted)

for i

dent

ical a

sset

s or l

iabili

ties.

Leve

l 2 —

Valu

atio

n te

chni

ques

(for

whi

ch th

e lo

wes

t lev

el in

put t

hat i

s sig

nific

ant t

o th

e fa

ir va

lue

mea

sure

men

t is d

irect

ly or

indi

rect

ly ob

serv

able)

.Le

vel 3

— V

aluat

ion

tech

niqu

es (f

or w

hich

the

low

est l

evel

inpu

t tha

t is s

igni

fican

t to

the

fair

valu

e m

easu

rem

ent i

s uno

bser

vabl

e).

As a

t Dec

embe

r 31,

201

7, th

e Co

mpa

ny h

eld th

e fo

llow

ing

class

es o

f fin

ancia

l ins

trum

ents

mea

sure

d at

fair

valu

e:

Dec

embe

r 31,

2017

Cash

and

ca

sh

equi

vale

nt

Loan

s and

re

ceiv

able

s

Oth

er

finan

cial

lia

bilit

ies

Tot

alLe

vel 1

Leve

l 2Le

vel 3

Tot

al

Fina

ncia

l ass

ets n

ot m

easu

red

at fa

ir va

lue

Cash

and

ban

k ba

lance

51,9

02,7

43

-

-

1,902

,743

-

-

-

-

Adv

ance

s6

2,80

3,74

4

-

2,

803,

744

-

-

-

-

Dep

osits

, pre

paym

ents

and

oth

er re

ceiv

ables

7-

956,

092

-

95

6,09

2

-

-

-

-

Long

term

fina

nces

and

loan

s and

acc

rued

9 i

nter

est t

here

on-

74,6

15,9

53

-

74

,615

,953

Net

inve

stm

ent i

n fin

ance

leas

es10

-

38

9,66

9,27

7

-

389,

669,

277

-

-

-

- 1,9

02,7

43

46

8,04

5,06

6

-

469,

947,

809

-

-

-

-

Fina

ncia

l lia

bilit

ies n

ot m

easu

red

at fa

ir va

lue

Acc

rued

and

oth

er li

abili

ties

13-

-

3,

697,

937

-

-

-

-

- A

ccru

ed m

ark-

up o

n bo

rrow

ings

14-

-

91

8,40

7

-

-

-

-

- Sh

ort t

erm

bor

row

ings

1511

0,35

1,822

-

-

-

-

-

- Pr

ovisi

on fo

r com

pens

ated

abs

ence

s17

-

-

2,37

9,06

9

-

-

-

-

-

Long

term

fina

nces

16-

-

37

3,23

3

-

-

-

-

- Lo

ng te

rm d

epos

its10

-

-

205,

246,

756

-

-

-

-

-

Def

erre

d lia

bilit

ies18

-

-

6,91

1,306

-

-

-

-

- 11

0,35

1,822

-

219,

526,

708

-

-

-

-

-

32.5

The

Com

pany

has

not

disc

lose

d th

e fa

ir va

lues

for t

hese

fina

ncial

inst

rum

ents

, bec

ause

their

car

ryin

g am

ount

s are

reas

onab

le ap

prox

imat

ion

of fa

ir va

lue.

32.6

Carr

ying

am

ount

Fair

valu

e

Forf

inan

ciali

nstru

men

tsth

atar

ere

cogn

ized

atfa

irva

lue

ona

recu

rrin

gba

sis,t

heCo

mpa

nyde

term

ines

whe

ther

trans

fers

have

occu

rred

betw

een

Leve

lsin

the

hier

arch

yby

re-a

sses

sing

cate

goriz

atio

n(b

ased

onth

elo

wes

tlev

elin

putt

hati

ssig

nific

antt

oth

efa

irva

lue

mea

sure

men

tas

aw

hole)

atth

een

dof

each

repo

rting

perio

d.Th

eCo

mpa

ny’s

polic

yis

tore

cogn

ize

trans

fers

into

and

trans

fers

outo

ffair

valu

ehi

erar

chy

levels

asof

the

date

ofth

eev

ento

rcha

nge

incir

cum

stan

ces

that

caus

edth

etra

nsfe

r.D

urin

gth

eye

aren

ded

Dec

embe

r31,

2017

,the

rew

ere

notra

nsfe

rsbe

twee

nLe

vel1

,Lev

el2

orLe

vel3

offa

irva

lue

mea

sure

men

ts.


228

SME

LE

ASIN

G L

IMIT

ED

NO

TE

S T

O T

HE

FIN

ANCI

AL S

TAT

EM

EN

TS

FOR

TH

E Y

EAR

EN

DE

D D

ECE

MBE

R 3

1, 20

17

Dec

embe

r 31,

2017

Cash

and

ca

sh

equi

vale

nt

Loan

s and

re

ceiv

able

s

Oth

er

finan

cial

lia

bilit

ies

Tot

alLe

vel 1

Leve

l 2Le

vel 3

Tot

al

Fina

ncia

l ass

ets n

ot m

easu

red

at fa

ir va

lue

Cash

and

ban

k ba

lance

52,

519,

445

-

-

2,

519,

445

-

-

-

-

Adv

ance

s6

2,66

8,11

9

-

2,

668,

119

-

-

-

-

Dep

osits

, pre

paym

ents

and

oth

er re

ceiv

ables

7-

1,54

3,99

8

-

1,

543,

998

-

-

-

-

Long

term

fina

nces

and

loan

s and

acc

rued

9 i

nter

est t

here

on-

80,2

87,5

19

-

80,2

87,5

19

N

et in

vest

men

t in

finan

ce le

ases

10-

406,

932,

035

-

406,

932,

035

-

-

-

-

2,51

9,44

5

491,

431,

671

-

493,

951,

116

-

-

-

-

Fina

ncia

l lia

bilit

ies n

ot m

easu

red

at fa

ir va

lue

Acc

rued

and

oth

er li

abili

ties

13-

-

4,

166,

310

4,16

6,31

0

-

-

-

- A

ccru

ed m

ark-

up o

n bo

rrow

ings

14-

-

95

9,92

2

959,

922

-

-

-

-

Shor

t ter

m b

orro

win

gs15

104,

838,

931

-

104,

838,

931

-

-

-

-

Prov

ision

for c

ompe

nsat

ed a

bsen

ces

17-

-

2,

102,

277

2,10

2,27

7

-

-

-

- Lo

ng te

rm fi

nanc

es16

-

-

373,

233

37

3,23

3

-

-

-

- Li

abili

ties a

gain

st a

sset

s sub

ject t

o fin

ance

leas

e-

-

60

1,30

6

601,

306

-

-

-

-

Long

term

dep

osits

10-

-

19

9,58

3,50

1

199,

583,

501

-

-

-

-

Def

erre

d lia

bilit

ies18

-

-

5,15

2,85

7

5,

152,

857

-

-

-

-

104,

838,

931

-

212,

939,

406

31

7,77

8,33

7

-

-

-

-

Carr

ying

am

ount

Fair

valu

e


229


33 SEGMENT INFORMATION

Finance Loans and Investment Others Totallease receivables

Segment revenue 21,883,371 4,787,805 4,154 687,352 27,362,682 Segment profit 24,948,860 3,048,764 4,154 687,352 28,689,130 Segment result 28,689,130

Unallocated cost

Finance cost 10,317,635 Administrative and operating expenses 40,548,391

50,866,026

Loss before tax (22,176,896) Taxation (333,598) Loss after tax (22,510,494)

Other informationSegment assets 389,669,277 72,731,702 - - 462,400,979 Unallocated assets 15,243,508 15,243,508 Total assets 477,644,487

Segment liabilities 214,248,329 - - - 214,248,329 Unallocated liabilities 130,145,556 130,145,556 Total liabilities 344,393,885

Net assets 133,250,602

Capital expenditure - - - 111,129 111,129

33.1 Revenue reported above represents revenue from external customers. There are no intersegment sales.

33.2 Revenue from finance lease includes income from finance lease operations and gain/loss on termination oflease. Revenue from loans and receivable includes mark-up income on loans to customers and employees,and revenue from investments include gain on disposal of investments, dividend income and mark-up ongovernment securities.

2017

------------------------------------------------ (Rupees) -----------------------------------------

A segment is a distinguishable component of the Company that is engaged in business activities from whichthe Company earns revenues and incur expenses and its results are regularly reviewed by the Company'schief operating decision maker to make decisions about resources to be allocated to the segment and assessits performance. Further, discrete financial information is available for each segment.

The Company's reportable segments under IFRS 8 are therefore finance lease, loans and receivables, andinvestments. Other operations, which are not deemed by the management to be sufficiently significant todisclose as separate items are reported under Others.

All assets and liabilities are allocated to reportable segments other than assets and liabilities not directlyrelated to the particular segment.


230


Finance Loans and Investment Others Totallease receivables

Segment revenue 23,066,962 9,464,198 1,790,051 3,093,906 37,415,117 Segment profit 27,540,356 5,854,666 1,790,051 3,093,906 38,278,979 Segment result 38,278,979

Unallocated cost

Finance cost 13,224,768 Administrative and operating expenses 38,111,121

51,335,889

Loss before tax (13,056,910) Taxation (325,312) Loss after tax (13,382,222) Other informationSegment assets 406,932,035 78,926,446 - - 485,858,481 Unallocated assets 17,908,548 17,908,548 Total assets 503,767,029

Segment liabilities 223,733,484 - - - 223,733,484 Unallocated liabilities 123,077,978 123,077,978 Total liabilities 346,811,462

Net assets 156,955,567 Capital expenditure - - - 1,280,792 1,280,792

34 COMPARATIVE FIGURES

8 & 10 263,436,478

8 & 9 62,032,457

10 & 16 168,269,496

Comparative figures have been reclassified for the purposes of better comparison and presentation as follows:

NoteNature of reclassification

Reclassification from

Reclassification to Rupees in million

Long-term depositsCurrent Maturity of Non Current

AssetsLong-term deposits

Net Investment in Leases

Current Maturity of Non Current

Net Investment in Leases

Long Term Finances & Loans

Current Maturity of Non Current

Long Term Finances & Loans

2016

-------------------------------------------------- (Rupees) ----------------------------------------


231



35 NUMBER OF EMPLOYEES

36 DATE OF AUTHORISATION FOR ISSUE


These financial statements were authorized for issue on 29th January, 2018 by the Board of Directors of theCompany.

The number of employees as on the year end were 33 (2016: 38) and average number of employees duringthe year were 35 (2016: 40).




233

BRANCH NETWORK

235

56-F, Nazim-ud-Din Road,F-6/1, Blue Area,

Islamabad.Ph.# (051) 9217000, Fax.# (051)9217001

UAN: 111 11 00 11Website: www.smebank.org

HEAD OFFICE

SME Bank LtdLahore Main Branch84-B-1, Gulberg - IIIGhalib MarketLAHORE. PH # (042) 35772130, 35772015Fax # (042) 35772178UAN # (042) 111-11-00-11

SME Bank LtdAlamgir Building Ground Floor17-Edwards Road(Mouj Darya Road)LAHORE CITY.PH # (042) 37220663, 37221008, 37046217-9Fax (042) 37220663

SME Bank Ltd923 Block-B, Maulana Shaukat Ali Road,Faisal Town,LAHORE.PH # (042) 35218601-5,Fax # (042) 35218603

SME Bank Ltd56-F, Nazim-ud-Din Road,F-6/1, Blue Area,ISLAMABAD. PH # (051) 9219260, 9213478, 9213743Fax # (051) 9213742UAN # (051) 111-11-00-11

SME Bank LtdState Life Building, Ground Floor, 34-The Mall, PESHAWAR PH # (091) 5262780, 5285939, 5262779Fax # (091) 285177UAN (091) 111-11-00-11

SME Bank Ltd26-27-J,Trust Plaza, G.T. Road,GUJRANWALA. PH # (055) 9220767, 9200443Fax # (055) 9200243UAN # (055) 111-11-00-11

BRANCH NETWORK

236

SME Bank LtdJunaid Plaza, Iqbal Road,Near Committee Chowk,RAWALPINDI.PH # (051) 5553902, 5553922

SME Bank LtdKarachi Main BranchB/9-B/3, Near Post Office, S.I.T.EKARACHI.Ph # 32587144-6Fax # (021) 32587144-46UAN # (021) 111-11-00-11

SME Bank LtdFederal B-Area BranchS 4 & S 5, Latif TerracePlot # St-4-D, Block 20,FEDERAL B-AREA KARACHIPH # (021) 36800771-3Fax # (021) 36366947UAN # (021) 111-11-00-11

SME Bank LtdPlot # LS-4, Sector 12,Orangi TownKARACHI.PH # (021) 36653424-5Fax # (021) 36653425

SME Bank LtdP-341-B, Peoples Colony No.1,Satyana Road, FAISALABAD. PH # (041) 9220481-4,Fax # (041) 9220483UAN # (041) 111-11-00-11

SME Bank LtdGround Floor, Al-Amin Building, Opp. SCCI Paris Road, SIALKOT. PH # (052) 4266055, 9250566-7Fax # (052) 4265041UAN # (052) 111-11-00-11

SME Bank LtdPlot# 1-6/28 (404)M.A. Jinnah Road, QUETTA.PH # (081) 2836816Fax # (081) 2836817

237

SME Bank Limited56-F, Nazim-ud-Din Road,F-6/1, Blue Area,ISLAMABADPh.# (051) 9217000

SME Bank Limited17-E Edwards Road,LAHOREPH.#(042) 37312078, 37355358

SME Bank LimitedAwan Huts, Lala Rukh ColonyMansehra RoadABBOTTABADPH.#(0992) 9310159

SME Bank Limited801-802, 8th Floor, Park Avenue24-A, Block PECHS, Shahrah-e-Faisal KARACHIPH.#(0213) 4538041-4533886

SME Bank LimitedB # 104, Akhuwat Nagar, Airport RoadSUKKURPH.#(071) 5804556-7

RECOVERY OFFICES

238

KARACHI801-802, 8TH Floor, Park Avenue

24-A, Block PECHShahrah-e-Faisal

KARACHI (EAST).PH#(021) 34382310, 34382311

LAHOREIst Floor, Alamgir Building

17 - Edward (Syed Mouj Darya) Road LAHORE

PH # (042) 37232736

KARACHI801-802, 8TH Floor

Park Avenue24-A, Block PECH

Shahrah-e-FaisalKARACHI (EAST).PH#(021) 34383100

(A Wholly owned subsidiary)

HEAD OFFICEOffice # 304, 3rd Floor

Business ArcadeShahrah-e-Faisal

KARACHIPH # (021) 34322128-9Fax # (021) 34322082

TREASURY OFFICE

AUDIT OFFICES

SME LEASING LTD.

239

FORM OF PROXY

I/We __________________________________ of_________________________________ being

a member of SME BANK LIMITED, hereby appoint ___________________________________

or failing him____________________________________ of ____________________________

as my/our proxy, to vote for me/us and on my/our behalf at the 16th Annual General Meeting of the

Bank to be held on March 29, 2018 at 4:00 pm and at any adjournment thereof.

As witness my/our hand the _____________ day of ______________________ signed by the said

______________________________ in the presence of ________________________________.

Revenue Stamps:

Signature: _________________________

Name: ____________________________

Designation: _______________________

Address: __________________________

__________________________

Witness: Signature: _______________________

Name: _______________________

Signature: _______________________

Name: _______________________

Notes:

1. A proxy must be a member of the Bank. However, an association (whether body corporate or not) being a member of the Bank may appoint as its proxy one of its officers though not a member of the Bank. 2. Proxy form, in order to be valid, must be duly signed and deposited at registered office of the Bank not less than 48 hours before the time of holding the meeting.

240

AFFIX CORRECT POSTAGE

The Company Secretary

SME Bank Ltd.56-F, Nazim-ud-Din Road,F-6/1, Blue Area, Islamabad.

contentsmr. muhammad farrukh mansoor malik legal advisors bhatti law associates registered office...

Documents