contentsmr. ayyaz ahmad chief financial officer & head of risk management mr. siddiqi anwar...

CONTENTS

Vision & Mission

Corporate Profile

Banking Products

Financial Highlights

AlBaraka Banking Group

Auditors’ Report

Balance Sheet

Profit & Loss Account

Cash Flow Statement

Statement of Changes in Equity

Notes to the Financial Statements

Annexure 1

Statement of Internal Controls

Risk Management Frame Work

1

2

3

4

5

6

8

9

10

11

12

46

47

47

1

F I N A N C I A L S T A T E M E N T S 2 0 0 6

To be a leading and diversified

International Islamic Bank,

offering a wide range of quality

products and services and

forming strategic alliance

for a competitive edge.

VISION

We strive to be a Premier Regional

Islamic Bank, dedicated to the

economic and social development

of our target markets, maximizing

our clients’ and shareholders’ value,

and focusing on the human resource

development in an environment

of creativity and innovation.

MISSION

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Mr. Mahmoud Jameel Hassoubah ChairmanMr. Adnan Ahmed Yousif Deputy ChairmanMr. Othman Ahmed Suliman Board MemberMr. Abdullahameed Mohideen Nazer Board MemberMr. Abdul Latif Abdul Rahim Janahi Board MemberMr. Moosa Abdulaziz Shehadah Board MemberMr. Ashraf Al Gamrawy Board Member

BOARD OF DIRECTORS

Mr. Moosa Abdulaziz Shehadah ChairmanMr. Abdulhameed Mohideen Nazer MemberMr. Ashraf Al Gamrawy Member

AUDIT COMMITEE

Mr. Othman Ahmed Suliman ChairmanMr. Adnan Ahmed Yousif Vice ChairmanMr. Abdul Latif Abdul Rahim Janahi MemberMr. Salah Ahmed Zainalabedin Member

EXECUTIVE COMMITTEE

CORPORATE PROFILE

SHARIA BOARDMr. Shaikh Dr. Abdul Sattar Abu-Guddah ChairmanMr. Shaikh Esam Mohammed Ishaq MemberMr. Waleed Abdul Munim Al-Mahmoud MemberMr. AlSayed Mohammad Muhyeeldin Shari’a Supervisor

Mr. Shafqaat Ahmed Regional General Manager &Country Head Pakistan

Mr. Ahmed Shuja Kidwai Area Manager-SouthMr. Amjad Ali Area Manager-CentralMr. Kaleem Iqbal Area Manager-NorthMr. Ayyaz Ahmad Chief Financial Officer &

Head of Risk ManagementMr. Siddiqi Anwar Jalal Country HR, IT & OPS ManagerMr. Naseer Ahmed Country Internal Audit ManagerMr. Arif Mehmood Ch. Country Credit ManagerMr. Syed Salman Ali Treasury ManagerMr. Waqas Bin Khalid Head of Compliance

MANAGEMENT PAKISTAN OPERATIONS

SHARIA ADVISORMr. Hassan Kaleem Sharia Advisor

EXTERNAL AUDITORSFord Rhodes Sidat Hyder & Co.(A Member of Ernst & Young International)

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FOR MORE DETAILS CONTACT OUR NEAREST BRANCH.

BANKING PRODUCTS

Commitment to Islamic ShariaStriving to develop and promote an integrated Islamic FinancialSystem. Compliance with the rules and principles of Islamic Shariais the core of the banking and financial activities of the Bank. To thisend, Albaraka has successfully sought the advice and expertise ofIslamic scholars acclaimed for their knowledge and piety from allover the Islamic world to guide its path and monitor its performance.The Banks’ activities and operations are regularly scrutinized by itsSharia Advisory Board.

SAVING AND CURRENT ACCOUNTS* No minimum balance* No limitation on number of withdrawals* In all major currencies

TERM DEPOSIT ACCOUNTS* No minimum balance* In all major currencies

KHAZANA ACCOUNTS* Minimum balance Rs. 250,000* Higher expected returns than saving accounts* Profit: Quarterly

INCENTIVE ACCOUNTS* Minimum balance Rs. 100,000* Higher expected returns than saving accounts* Profit: Half Yearly

MURABAHA INVESTMENT ACCOUNTS* Minimum balance Rs. 50,000* Joint or Pool Investment in Murabaha* Profit: Half Yearly

Deposit Accounts

SAFE DEPOSIT BOXES

* Available in different sizes.* Value insurance* Flexible hours

E - BANKING

* On-line Banking* ATM Cash withdrawal* Debit Cards

MURABAHA

IJARAH

ISLAMIC EXPORT FINANCING

IMPORT LETTERS OF CREDIT

CAR IJARAH

HOUSING MUSHARIKA

FOREX SALE & PURCHASE

LETTERS OF GUARANTEE

Financings & Ancillary Products

Other Services

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Credit RatingJCR-VIS credit rating company has assigned following credit ratings toAlbaraka Islamic Bank B.S.C. (E.C.)-Pakistan Branches:

Medium to long term entity rating: A (Single A)

Short term rating: A1 (A One)

FINANCIAL HIGHLIGHTS

2002

4,344.65

2003

6,627.22

2004

8,128.09

2005

10,311.83

2006

13,821.44

Deposits (Rupees in Million)

Financing (Rupees in Million)

2002

4,931.05

2003

5,982.14

2004

6,991.36

2005

7,418.13

2006

9,693.18

2002

8,225.61

2003

9,662.80

2004

11,939.50

2005

14,768.80

2006

18,868.26

Total Assets (Rupees in Million)

2002

1,000.26

2003

1,001.35

2004

1,504.81

2005

2,002.81

2006

2,036.39

Capital Deposits (Rupees in Million)

Albaraka Banking Group (ABG) is a leading international Islamic bank. The authorized capital of ABG is US$ 1.5 billion,while the equity amounts to about US$ 1.0 billion. Recent credit rating assigned by Standard & Poor’s Ratings Servicesto ABG is ‘BBB-/A-3’ for long term counter party credit. The Group has wide geographical presence covering threecontinents in ten diverse subsidiaries incorporated in Algeria, Bahrain, Egypt, Jordan, Lebanon, Pakistan, South Africa,Sudan, Tunisia and Turkey having overall 200 branches world wide . The subsidiaries of ABG are engaged in retail andcommercial banking, investment banking, treasury and fund management and have been in operation for an average of20 year with an excellent track record.The creation of Albaraka Banking Group was identified due to the need for a truly global Islamic banking service for Muslimsworldwide. Through the consolidation of subsidiaries under the banner of Albaraka Banking Group in Bahrain an entity hasbeen created that is fast establishing a name for itself in the Islamic banking world.The joining of the ten constituent banks under a single holding company, ABG, has not only established synergy effect onits financial strength and growth but has ideally placed it to take advantage of this growth by rapid emergence and overcoming the competitive challenges. ABG sees its mandate as the creation of an Islamic banking conglomerate that willprovide its customers worldwide with a growing array of products and services strictly in conformity with the principles ofthe Shari’a. The growth strategies of ABG are based on intimate and in-depth market knowledge in retail, commercial andinvestment banking garnered with the workmanship of its professional workforce.

The following are the principal subsidiaries of the ABG

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The AlBaraka Banking Group (ABG)

Financial Highlights-2006

Total AssetsNet incomeTotal Equity

7,626124

1,211

(US$ in Million)

ABG GROUP HEAD QUARTERS

AL BARAKATURK

PARTICIPATIONBANK

TURKEYABG 67.8%

BANQUEALBARAKAD’ ALGERIE

ALGERIAABG 55.9%

BANKET-TAMWEEL

AL-TUNISIAL SAUDITUNISIA

ABG 78.4%

JORDANISLAMIC

BANKJORDAN

ABG 55.5%

AL BARAKAISLAMIC BANK,

BAHRAIN

ABG 78.3%

AL BARAKA ISLAMIC

BANK PAKISTAN*

AL AMINBANK E.C.BAHRAIN

ABG 100%

EGYPTIANSAUDI

FINANCE BANKEGYPT

ABG 73.7%

AL BARAKABANK LTD.

SOUTH AFRICA

ABG 51.7%

AL BARAKA BANKLEBANON

ABG 96.3%

AL BARAKABANK

SUDAN

ABG 86.2%

*100% ho ld ing o f A lBaraka Is lamic Bank Bahra in

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AUDITORS’ REPORT TO THE DIRECTORS

Contd...

A Member of Ernst & Young International

We have audited the annexed balance sheet of ALBARAKA ISLAMIC BANKB.S.C.(E.C.) - Pakistan Branches as at December 31, 2006 and the related profit and lossaccount, cash flow statement and statement of changes in equity, together with the notesforming part thereof (hereinafter referred to as the “financial statements”) for the year thenended, in which are incorporated the unaudited certified returns from the branches exceptfor five branches which have been audited by us and we state that we have obtained all theinformation and explanations which, to the best of our knowledge and belief, were necessaryfor the purposes of our audit.

It is the responsibility of the bank’s management to establish and maintain a system ofinternal control and prepare and present the financial statements in conformity withapproved accounting standards and the requirements of the Banking Companies Ordinance,1962 (LVII of 1962) and the Companies Ordinance, 1984 (XLVII of 1984). Ourresponsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the International Standards on Auditing asapplicable in Pakistan. These standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of any materialmisstatement. An audit includes examining on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessing the accountingpolicies and significant estimates made by management, as well as, evaluating the overallpresentation of the financial statements. We believe that our audit provides a reasonablebasis for our opinion and after due verification, which in case of financings covered morethan sixty percent of total financings of the bank, we report that:

a) in our opinion proper books of account have been kept by the ALBARAKAISLAMIC BANK B.S.C. (E.C.) - Pakistan Branches as required by theCompanies Ordinance, 1984 (XLVII of 1984) and the returns referred to abovereceived from the branches have been found adequate for the purposes of our audit;

b) in our opinion:

i) the balance sheet and profit and loss account together with the notes thereonhave been drawn up in conformity with the Banking Companies Ordinance,1962, and the Companies Ordinance, 1984, and are further in accordance withaccounting policies consistently applied expect for the changes referred to inNote 6 to the financial statements with which we concur;

ii) the expenditure incurred during the year was for the purpose of the branches’business; and

Mall View Building4-Bank SquareP.O. Box No. 104Lahore - 54000Pakistan.

Phone : (92-42) 721 1531-38Fax : (92-42) 721 1530 & 39E-mail : [email protected] Office at Karachiwww.ey.com/pk

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iii) the business conducted, investments made and the expenditure incurredduring the year were in accordance with the objects of the branches and thetransactions of the branches which have come to our notice have beenwithin the powers of the branches;

c) in our opinion and to the best of our information and according to the explanationsgiven to us, the balance sheet, profit and loss account, cash flow statement andstatement of changes in equity together with the notes forming part thereof conformwith approved International Accounting Standards as applicable in Pakistan and givethe information required by the Banking Companies Ordinance, 1962 (LVII of1962), and the Companies Ordinance, 1984, in the manner so required and give atrue and fair view of the state of the branches’ affairs as at December 31, 2006 andits true balance of the profit , cash flows and changes in equity for the year thenended; and

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

CHARTERED ACCOUNTANTSLAHORE: March 22, 2007 (FORD RHODES SIDAT HYDER & CO.)

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Pakistan Branches

AlBaraka Islamic Bank B.S.C. (E.C.)(Incorporated in Bahrain with limited liability)

BALANCE SHEET AS AT DECEMBER 31, 2006

SHAFQAAT AHMEDRegional General Manager & Country Head

AYYAZ AHMADChief Financial Officer

ASSETSCash and balances with treasury banksBalances with other banksDue from financial institutionsInvestmentsFinancingsOperating fixed assetsDeferred tax assetsOther assets

LIABILITIESBills payableDue to financial InstitutionsDeposits and other accountsSub-ordinated loansLiabilities against assets subject to finance leaseDeferred tax liabilitiesOther liabilities

NET ASSETS

REPRESENTED BYHead office capital accountReservesUnremitted profit

(Deficit)/Surplus on revaluation of assets

CONTINGENCIES AND COMMITMENTS

Note

89

101112

13

151617

1819

20

21

22

3,355,669 4,259,426

- 1,182,737

9,693,182 71,418

-

305,830

18,868,262

155,680 1,895,027 13,821,441

- - 78,860

726,248 16,677,256 2,191,006

2,036,390 -

154,820 2,191,210

(204 2,191,006

-

2005 Rupees in '000

2006 Rupees in '000

The annexed notes 1 to 43 form an integral part of these financial statements.

)

3,123,841 3,880,049

- 92,347 7,418,128 67,746

- 186,694

14,768,805

91,025 1,452,096

10,311,833 -

- 53,153 503,245 12,411,352 2,357,453

2,002,809 -

349,735 2,352,544 4,909 2,357,453

-

Restated

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Pakistan Branches


Profit / return on financings, investments and placements earned 23 1,111,711 661,674Return on deposits and other dues expensed 24 824,124 439,819

Net spread 287,587 221,855Provision against non-performing financings 25 (880) (59,899)Provision for diminution in the value of investments - - Bad debts written off directly - -

(880) (59,899)

Income after provisions 286,707 161,956

OTHER INCOME

Fee, commission and brokerage income 99,774 85,046Dividend income 11,038 36,652Income from dealing in foreign currencies 52,157 42,625Net Gain on sale of securities 26 1,775 290,729Unrealized loss on revaluation of investments classified as held for trading (21,424) (749)Other Income 27 2,565 25

Total non mark-up/interest income 145,885 454,328

432,592 616,284OTHER EXPENSES

Administrative expenses 28 261,067 222,174Other provisions / write offs (289) 2,831Other charges 29 1,391 3,709

Total non-markup expenses 262,169 228,714

170,423 387,570Extra ordinary/unusual items - -

PROFIT/(LOSS) BEFORE TAXATION 170,423 387,570

Taxation - Current 30 777 9,812 - Prior years - - - Deferred 30 25,707 32,188

26,484 42,000

PROFIT AFTER TAXATION 143,939 345,570Unremitted profit brought forward 349,735 152,020

Unremitted profit 493,674 497,590

Basic Earnings per share 31 - -

Diluted Earnings per share 31 - -

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006

Note 2005 Rupees in '000

2006 Rupees in '000




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Pakistan Branches


CASH FLOW FROM OPERATING ACTIVITIES

Profit before taxation 170,423 387,570

Dividend income (11,038) (36,652)

159,385 350,918

Adjustments:

Depreciation 17,896 16,829Amortization 1,835 1,633Provision against non-performing Financings 880 59,899(Gain) on sale of fixed assets (2,565) (25)Gain on sale of “available for sale” investments - (257,311)Other provisions (289) 2,831Unrealised remeasurement loss on "held-for-trading investments" 21,424 749

39,181 (175,395)

198,566 175,523

(Increase)/Decrease in operating assets

Held-for-trading securities (51,089) (11,960)Financings (2,275,934) (270,485)Other assets (excluding advance taxation) (129,224) (54,251)

(2,456,247) (336,696)Increase/(Decrease) in operating liabilities

Bills payable 64,655 (25,659)Borrowings from financial institutions 442,945 (168,113)Deposits 3,509,608 2,183,742Other liabilities (excluding current taxation) 223,003 179,577

4,240,211 2,169,547

1,982,530 2,008,374Income tax paid (7,310) (26,545)

Net cash generated from operating activities 1,975,220 1,981,829

CASH FLOW FROM INVESTING ACTIVITIES

Net investment in available-for-sale securities (55,000) 374,307Net investment in held-to-maturity securities (993,640) -Dividend Income 10,750 36,652Investments in operating fixed assets (23,774) (33,417)Sale proceeds of operating fixed assets disposed-off 2,936 25

Net cash (used in) / generated from investing activities (1,058,728) 377,567

CASH FLOW FROM FINANCING ACTIVITIES

Remittances received from head office - 489,770Remittances made to head office (338,854) (147,855)

Net cash (used in) / generated from financing activities (338,854) 341,915Effects of exchange rate changes on cash and cash equivalents 33,581 8,229

Increase in cash and cash equivalents 611,219 2,709,540

Cash and cash equivalents at beginning of the year 7,003,876 4,294,336

Cash and cash equivalents at end of the year 32 7,615,095 7,003,876

Note 2005 Rupees in '000

2006 Rupees in '000

CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006




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Pakistan Branches


2004 Rupees in '000

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2006

Head OfficeCapital Account

Rupees in '000

UnremittedProfit Total

Rupees in '000 Rupees in '000




Opening Balance January 01, 2005 1,504,810 152,020 1,656,830

Profit for the year - 345,570 345,570

Remittances made to head office - (147,855) (147,855)

Remittances received from head office 489,770 - 489,770

Exchange adjustments on revaluation of capital 8,229 - 8,229

Balance as on December 31, 2005 2,002,809 349,735 2,352,544

Profit for the year - 143,939 143,939

Remittances made to head office - (338,854) (338,854)

Exchange adjustments on revaluation of capital 33,581 - 33,581

Closing Balance December 31, 2006 2,036,390 154,820 2,191,210

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Pakistan Branches


NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2006

1. STATUS AND NATURE OF BUSINESS

AlBaraka Islamic Bank B.S.C. (E.C.) - Pakistan Branches (the Bank), operates as a branch of a foreign bank incorporatedand domiciled in Bahrain on February 21, 1984 and is a member of AlBaraka Banking Group. The Bank commencedits operations in Pakistan in December 1991. The Pakistan branches operate as scheduled Islamic Bank under a licenseissued by the State Bank of Pakistan (SBP) and are principally engaged in business of banking as defined in theBanking Companies Ordinance, 1962.

The Registered office of the Bank is situated at PICIC house, 14 Shahrah-e-Aiwan-e-Tijarat, Lahore and it presentlyoperates through 11 branches (2005: 9 branches) in Pakistan at Lahore, Karachi, Faisalabad, Islamabad and Rawalpindi.

2. BASIS OF PRESENTATION

These financial statements have been prepared in accordance with the requirements of the SBP.

The Bank provides financing mainly through Sharia compliant financial products. Murabaha transaction (which areaccounted for under the Islamic financial accounting standard - 1), the purchases, sales, rentals arising under thesearrangements are reflected in these financial statements.

3. STATEMENT OF COMPLIANCE

These financial statements have been prepared in accordance with the directives issued by the State Bank of Pakistan,the requirement of the Banking Companies Ordinance, 1962, Companies Ordinance, 1984, International FinancialReporting and Accounting Standards issued by the International Accounting Standard Board (IASB), and interpretationsissued by the International Financial Reporting Interpretations Committee of the IASB, as adopted in Pakistan.

The SECP has approved the adoption of International Accounting Standard 39, “Financial Instruments: Recognitionand Measurement” and International Accounting Standard 40, “Investment Property”. The requirements of thesestandards have not been taken into account for the purpose of these financial statements as the implementation ofthe said standards has been deferred by SBP, vide BSD circular number 10 dated August 26, 2002, for banks in Pakistantill further instructions. However, investments have been classified and valued in accordance with the requirements ofvarious circulars issued by SBP.

4. BASIS OF MEASUREMENT

These financial statements are prepared on the historical cost convention except for quoted investments which arestated on a marked to market basis, commitments in respect of forward exchange contractswhich are carried at fair value and certain staff retirement benefits being carried at present value.

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Pakistan Branches


5. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with approved accounting standards and statutory requirementsrequire the use of critical accounting estimates. It also requires management to exercise its judgments in the processof applying accounting policies. The areas involving a higher degree of judgment or complexity or areas whereassumptions and estimates are signif icant to the f inancial statements are disclosed below:

5.1 Investments

In accordance with BSD Circular No. 10, 11 and 14 dated July 13, 2004, August 04, 2004 and September 24, 2004respectively, issued by SBP, the Bank classifies its investment portfolio into “held-to-maturity”, “held-for-trading” and“available-for-sale” securities using the management’s judgments. In making judgments regarding “held-to-maturity”the Bank evaluates its intention and ability to hold such investments to maturity. Investments made by the bank whichit intends to hold for a period of less then 90 days is classified as “held-for-trading”. Investments not classified in theabove categories are classified as “available-for-sale”.

5.2 Impairment of equity investments

The Bank determines that available-for-sale or held-for-trading equity investments are impaired when there has beena significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolongedrequires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in unit prices.In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee,industry and sector performance, changes in technology and operational and financing cash flows.

5.3 Income taxes

In making the estimates for income taxes payable by the Bank, the management looks at the current income tax lawand the decisions of appellate authorities on certain issues in the past. There are various matters where Bank’s viewdiffers with the view taken by the income tax department and such amounts are shown as contingent liability.

5.4 Defined benefit plan

The cost of the defined benefit gratuity plan is determined using actuarial valuation. The actuarial valuation involvesmaking assumptions about discount rates, expected rates of return on assets, if any, future salary increases and mortalityrates. Due to the long term nature of these plans, such estimates are subject to significant uncertainty.

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Pakistan Branches


5.5 Operating fixed assets

Estimates with respect to residual values, depreciable lives and pattern of flow of economic benefits are based on theanalysis by the management. Further, the Bank reviews the value of the assets for possible impairment on an annualbasis. Any change in the estimates in the future might affect the carrying amount of respective items of operating fixedassets, with a corresponding effect on the depreciation charge and impairment.

5.6 Provision against non-performing financings

Apart from the provision determined on the basis of time-based criteria given in Prudential Regulations, the managementalso applies the subjective criteria of classification and accordingly the classification of financings is downgraded onthe basis of credit worthiness of the borrower, its cash flows, operations inaccount and adequacy of security in order to ensure accurate measurement of the provision.

6. CHANGES IN ACCOUNTING POLICIES

Following change in accounting policies has been made during the year due to amendments in and introduction of newfinancial standards and local regulations:

IFAS 1 “Murabaha”, introduced by the Institute of Chartered Accountants of Pakistan and notified for adoption bySecurities and Exchange Commission of Pakistan, vide SRO 865(1)/2005 dated August 24, 2005, by all financialinstitutions for the period beginning on or after January 01, 2006. Pursuant to requirements of the said standard, fundsdisbursed for purchase of goods are recorded as ‘Advance against Murabaha’. On culmination of murabaha transaction,i.e. sale of goods to the customer, murabaha financing is recorded at the invoiced amount and profit is recognized.Profit on that portion of sale revenue not due for payment is deferred and recognized as liability. Goods purchased bythe Bank but remained unsold, if any with the Bank at balance sheet date constitute Bank’s inventories and are measuredat lower of cost and net realisable value. Cost is determined on the first in first out basis. Net penalty imposed on laterealisation of murabahasreceivables is credited to charity fund payable account and recognised as liability.

Previously, murabaha financing were recorded at the cost of goods sold while profit on murabaha transactions wasrecognised on accrual basis over the period of murabaha and unrealised profit thereon was presented as other assets.As far as penalty imposed on late realisation of murabahas receivables was concerned, it was credited to income andremitted to head office of the Bank at Kingdom of Bahrain where it is transferred to charity fund constituted by Headoffice of the Bank.

This change in accounting policy is applied retrospectively.The effect of change on the current year financial statements is as follows:

2006 2005Rs. in ‘000’

Increase in murabaha financing 247,477 214,435Increase in murabaha receivable under Islamic export refinance 11,686 NilDecrease in other assets 66,171 63,598Increase in other liabilities 192,992 150,837Decrease in unremitted profit 12,636 NilDecrease in mark-up/profit earned during the year 12,636 Nil

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Pakistan Branches


7. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

7.1 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, balances with treasury banks and balances with other banks.

7.2 Revenue recognition

Income on murabaha is accounted for on culmination of murabaha transaction. However, profit not due for paymentin the current year is deferred by accounting for unearned murabaha income with a corresponding credit to deferredmurabaha income which is recorded as a liability. The same is then recognised as revenue on a time proportionatebasis.

Mark-up/return on financings other then murabaha and investments is recognized on an accrual basis except in caseof non-performing financings, which warrant carry forward in compliance with prudential regulations issued by SBP.

The Bank follows the finance method in recognizing income on ijarah contracts. Under this method the unearned incomei.e. the excess of aggregate ijarah rentals over the cost of the assets under ijarah facility is deferred and then amortizedover the term of ijarah, so as to produce a constant rate of return on net investment in the ijarah. Ijarah processing feeis recognized on receipt basis.

Commission and fees are recognized as income at the time of affecting the transaction to which they relate, exceptfor commission on letters of guarantee, which is accounted for on time proportionate basis.Dividend income is recognized when the right to receive is established.

7.3 Financings

Financings are financial products originated by the Bank and principally comprise of murabaha, ijarah, export refinance(conventional) and musharaka financing. These are stated at cost except for murabaha which is accounted for at grossreceivable net of general and specific provisions.

Provision for non-performing financings is determined in line with the Prudential Regulations issued by the SBP andwhere such provision is considered necessary, the same is charged to profit and loss account.

Financings are written off, when there are no realistic prospects of recoveries.

The Bank has created a general provision on consumer finance in order to comply with the requirements of the PrudentialRegulations for Consumer Finance as issued by SBP. These require that the Bank should maintain a general provisionat an amount equal to 1.5% of the fully secured portfolio and 5% of the unsecured portfolio to protect the Bank fromany risks associated with the cyclic nature of this business.

7.4 Investments

The management determines the appropriate classification of its investments at the time of purchase and classifiesthese investments as held for trading, available for sale or held to maturity. These are initially recognized at cost.

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Pakistan Branches


Held for trading

These are securities which are either acquired for generating profit from short term fluctuations in market prices ordealer’s margin or are securities included in a portfolio in which a pattern of short term profit taking exists.

Held to maturity

These are securities with fixed or determinable payments and fixed maturity that the Bank has the positive intent andability to hold to maturity.

Available for sale

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

In accordance with the requirements of the SBP, quoted securities other than those classified as held to maturity andinvestments in subsidiaries and associates, if any, are stated at market value. Investments in subsidiaries, associatedand joint venture companies are stated at cost. Provision is made for any impairment in value.

Surplus / (deficit) arising on revaluation of the Bank’s held for trading investment portfolio is taken to the profit and lossaccount. The surplus / (deficit) arising on revaluation of quoted securities classified as available for sale is kept in“Surplus / (Deficit) on Revaluation of Securities account” and is shown in the balance sheet below equity. The surplus/ (deficit) arising on these securities is taken to the profit and loss account when actually realized upon disposal.

Provision for diminution in the value of securities (except debentures, sukuks, participation term certificates and termfinance certificates) is made after considering impairment, if any, in their value. Provision for diminution in value ofdebentures, sukuks, participation term certificates and term finance certificates are made in accordance with therequirements of the Prudential Regulations issued by the SBP.

Profit and loss on sale of investments is recognized in the period of sale.

7.5 Fixed assets and depreciation

Tangible

Fixed assets are stated at cost less accumulated depreciation and impairment losses, if any. Depreciation is chargedover the estimated useful lives of the assets at the rates stated in note 12.2 using the straight-line method.

Full year's depreciation is charged on additions made before June 30, while half year's depreciation is provided onassets acquired thereafter. Likewise in respect of the assets disposed off before June 30, no depreciation is chargedwhile half year's depreciation is recorded in respect of assets disposed thereafter.

Normal repairs and maintenance are charged to the profit and loss account as and when incurred. Major renewals andimprovements are capitalized.

Gains or losses on disposal of fixed assets are included in profit and loss account.

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Pakistan Branches


The Bank assesses at each balance sheet date, whether there is any indication that an asset may be impaired. If suchindication exists, the carrying amounts of such assets are reviewed to assess, whether they are recorded in excessof their recoverable amounts. Where carrying values exceed the estimated recoverable amounts, assets are writtendown to their recoverable amounts.

Residual value, useful life and depreciation method are reviewed and adjusted, if appropriate, at each financial yearend.Capital work in progress is stated at cost.

Intangible

Intangible assets are carried at cost less accumulated amortization and impairment losses, if any. The cost of theintangible assets is amortized over the useful lives of the related assets at the rate stated in note 12.3 using the straight-line method.

The Bank assesses at each balance sheet date, whether there is any indication that an asset may be impaired. If suchindication exists, the carrying amounts of such assets are reviewed to assess, whether they are recorded in excessof their recoverable amounts. Where carrying values exceed the estimated recoverable amounts, assets are writtendown to their recoverable amounts.

7.6 Taxation

Current

Provision for current taxation is based on taxable income at the current rates of taxation after taking into account taxcredits and rebates available, if any.

Deferred

Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between thetax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilitiesare recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporarydifferences and unused tax losses to the extent that where it is probable that future taxable profits will be availableagainst which the asset can be utilized. Deferred tax asset is reduced the extent that it is no longer probable that relatedtax benefits will be realized.

Deferred tax liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled,based on the tax rates (and tax laws) that have been enacted or subsequently enacted at the balance sheet date.

7.7 Staff retirement benefits

Defined benefit plan

The Bank operates an approved funded gratuity scheme for the employees eligible under the scheme. Contributionsto the fund are made based on actuarial recommendations. The most recent actuarial valuation was carried out as atDecember 31, 2006 using the projected unit credit actuarial cost method.

Actuarial gains/losses in excess of 10 percent of the present value of the defined benefit obligation or 10 percent ofthe fair value of the plan assets, whichever is higher, at the end of the previous reporting period are recognized overthe average future working lives of the employees participating in the scheme.

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Defined contribution plan

The Bank also operates an approved provident fund scheme for all employees eligible under the scheme. The Bankand its employees both make equal monthly contributions at the rate of 10 percent of the basic salary.

7.8 Foreign currency transactions

Foreign currency transactions are recorded at rates in effect at the date of transaction whereas foreign currency balancesare translated into rupees at the rates of exchange approximating to those ruling at the balance sheet date. All forwardforeign exchange contracts are revalued using forward exchange rates applicable to their respective remaining maturities.Exchange gains and losses are included in profit and loss account.

7.9 Offsetting of financial assets and liabilities

Financial assets and financial liabilities are offset and the net amount is reported in balance sheet, when there is alegally enforceable right to set off the recognized amount and the Bank intends to either settle on a net basis, or torealize the asset and settle the liability simultaneously.

7.10 Provision

Provisions are recognised when the Bank has a legal or constructive obligation as a result of past events, it is probablethat an out flow of resources will be required to settle the obligation and reliable estimate of the amount can be made.Provisions are reviewed at each balance sheet date and are adjusted to reflect current best estimate.

7.11 Financial Instruments

All the financial asset and financial liabilities are recognized at the time when the Bank becomes a party to the contractualprovisions of the instrument. Any gain or loss on derecognition of the financial asset and financial liabilities is taken toincome currently.

7.12 Inventories

Murabaha transaction are entered into on customer order basis, therefore, in normal circumstances there is no inventory.However, if any, inventory remains unsold by the Bank at period end will be measured at lower of cost and net realisablevalue. Cost is determined on first in first out basis.

7.13 Related party transactions

The Bank enters into transactions with major shareholders, directors, senior management and their related concernsin the ordinary course of business at prices and rates of return determined using approved methods.

7.14 Segment reporting

Gross income on corporate finance consists income of Government securities (sukuk) and for the calculation of expensesrelated to segment calculation is made taking into account weighted average cost of funds.

Gross income for retail banking consists of net return on financings to retails customers and SMEs treated as retail,plus fees related to traditional retail services. To calculate net return for retail banking, the Bank takes the profit earnedon its financings to retail customers less the weighted average cost of funding of the financings including profit distributedagainst deposits and due to financial institutions (from whatever

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source – retail or other deposits).

Similarly, gross income for commercial banking consists of the net return on financings to corporate (plus SMEs treatedas corporate), interbank and sovereign customers, plus fees related to traditional commercial banking services includingcommitments, guarantees, bills of exchange, net income (e.g. from coupons and dividends) on securities held in thebanking book. The calculation of net return is based on profit earned on financing to corporate, interbank and sovereigncustomers less the weighted average cost of fundings for these financings (from whatever source).

For trading and sales, gross income consists of profits / losses on instruments held for trading purposes (i.e. the mark-to market book), net of funding cost, plus fees from wholesale broking.

For other business lines, gross income consists primarily of net fees / commissions earned in each of these businesses.Payment and settlement consists of fees to cover provision of payment / settlement facilities for counterparties.

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9. BALANCES WITH OTHER BANKS

Note 2006 2005

In PakistanOn current accounts 20,382 20,126On deposit accounts (9.1) 4,028,276 3,450,977

4,048,658 3,471,103Outside Pakistan

On current accounts 9,716 11,546On deposit accounts (9.2) 201,052 397,400

210,768 408,946

(32) 4,259,426 3,880,049

Note 2006 2005

8. CASH AND BALANCES WITH TREASURY BANKS

In handLocal currency 143,689 138,529Foreign currencies 51,499 33,616

195,188 172,145With State Bank of Pakistan in:

Local currency current account (8.1) 960,209 788,137Local currency capital deposit account (8.2) 155,655 155,655

1,115,864 943,792

Foreign cash reserve account - non-remunerative (8.3) 158,366 149,285Foreign currency capital deposit account (8.2) 1,880,735 1,847,154Foreign currency deposit account (8.4) 5,516 11,465

2,044,617 2,007,904

(32) 3,355,669 3,123,841

8.1 This represents current account maintained with SBP under the requirements of section 22 of the Banking Companies Ordinance, 1962.

8.2 This represents deposit with the State Bank of Pakistan under section 13(3) of Banking Companies Ordinance, 1962.

8.3 This represents mandatory reserves maintained with the State Bank of Pakistan against FE-25 deposi tsas per the requirements of SBP's BSD circular No. 18 dated March 31, 2001.

8.4 The profit on this account ranges from 2% to 2.5% (2005: 2% to 2.5%)

Rupees in '000Rupees in '000


9.1 This represents balances with local banks on profit and loss sharing basis. The expected profit on these accounts rangesfrom 1% to 9.85% per annum (p.a.) (2005: 2% to 9% p.a.), while maturity of these ranges from one day to 3 months.

9.2 This represents nostro accounts maintained with foreign banks outside Pakistan. Profit on these ranges from 2.9% to 5.23%p.a. (2005: 1.01% to 3.5% p.a.)

Note 2006 2005

10.2 Investments by segments:

Federal Government Securities-WAPDA Sukuk Bonds 765,867 -

Fully paid-up ordinary shares/units-Listed (10.2.1) 119,276 68,187-Unlisted (10.2.2) 79,447 24,447

198,723 92,634Other investmentsTerm deposit receipt 244,971 -Total investment at cost 1,209,561 92,634

Less: Provision for diminution in value of investment (10.3) 4,447 4,447Investments (Net of Provisions) 1,205,114 88,187

(Deficit) on revaluation of Held-for-trading securities (10.2.1) (22,173) (749)Surplus/(Deficit) on revaluation of Available-for-sale securities (204) 4,909

(22,377) 4,160Total Investments at market value 1,182,737 92,347

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10. INVESTMENTS

2006 2005Note Held by Given as Total Held by Given as Total

bank collateral bank collateral

10.1 Investments by types

Held-for-trading securitiesFully paid up ordinary shares-listed 119,276 - 119,276 68,187 - 68,187

Available-for-sale securities

National Investment Trust Units 40,000 - 40,000 20,000 - 20,000United Composite Islamic Funds (UCIF) Units 25,000 - 25,000 - - -Meezan Islamic Income Funds (MIIF) Units 10,000 - 10,000 - - -Fully paid up ordinary shares

- unquoted 4,447 - 4,447 4,447 - 4,44779,447 - 79,447 24,447 - 24,447

Held-to-maturity securitiesTerm deposit receipt (10.1.1) 244,971 - 244,971 - - -WAPDA Sukuk Bonds (10.1.2) 765,867 - 765,867 - - -

1,010,838 - 1,010,838 - - -Investment at cost 1,209,561 - 1,209,561 92,634 - 92,634

Less: Provision for diminution in value of investments (10.3) 4,447 - 4,447 4,447 - 4,447

Investments (net of provisions) 1,205,114 - 1,205,114 88,187 - 88,187

Deficit on revaluation of Held-for-tradingsecurities (10.5) (22,173) - (22,173) (749) - (749)(Deficit)/surplus on revaluation of available

for sale securities (21) (204) - (204) 4,909 - 4,909(22,377) - (22,377) 4,160 - 4,160

Total Investments at market value 1,182,737 - 1,182,737 92,347 - 92,347

10.1.1 This represents one year term deposit placed with Head office and profit on which ranges from 6.15% to 6.25% p.a. (2005: 4.60%to 6.25% p.a.)

10.1.2 These certificates are issued by the WAPDA First Sukuk Company Limited (WFSCL) under a Sukuk Al-ijara agreement. Themanagement intends to hold it uptil its maturity. These certificates carry profit linked with six months KIBOR plus 35 basis points.Both principal and profit payments are secured against unconditional and irrevocable first demand guarantee from the Governmentof Pakistan.



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10.2.1 Details of investment in listed companies:

2006 2005 2006 2005 Rupees in ‘OOO

Ordinary shares of Market Market Rs. 10 each Name of company Cost value Cost value

250,000 250,000 Pakistan Telecommunication Ltd-A. 14,280 11,075 17,241 16,350150,000 - Fauji Cement Company Ltd. 4,650 4,275 - -100,000 - D G Khan Cement Company Ltd. 7,565 6,296 - -200,000 - Pakistan Cement Co. Ltd. 3,700 2,120 - -350,000 250,000 Maple Leaf Cement Company Ltd. 12,693 6,090 10,698 9,938240,000 - Sui Southern Gas Piplines Ltd. 8,479 5,640 - -300,000 300,000 Pakistan PTA Ltd. 2,730 1,470 2,730 2,415

- 200,00 HUB Power Company Ltd. - - 3,624 4,800- 150,000 Fauji Fertilizer Bin Qasim Ltd. - - 4,650 5,722

110,000 50,000 Pakistan Petroleum Ltd. 26,672 25,520 10,426 10,513100,000 150,000 Oil and Gas Development Co. Ltd. 13,158 11,470 18,818 17,70050,000 - Engro Chemical Pakistan Ltd. 10,773 8,450 - -50,000 - Pakistan State Oil Co. Ltd. 14,579 14,700 - -

119,279 97,106 68,187 67,438

10.2.2 Details of investment in unlisted companies / mutual funds: No. of Note Shares/ Cost as on

Unit Dec. 31, 06 Name of Chief ExecutiveShareholding less than 10% - unlisted: Rs. in ‘000’

National Investment Trust Units 887,309 40,000 Mr. Tariq Iqbal KhanUnited Composite Islamic Funds(UCIF) Units 250,000 25,000 Mr. Mir Muhammad AliMeezan Islamic Income Funds (MIIF) Units 200,000 10,000 Mr. Irfan SiddiqueCrown Textile Limited (10.2.3) 444,656 4,447

79,447

10.2.3 This represents investment in Crown Textiles Limited of Rs. 4.447 million (2005:Rs. 4.447 million) comprising of 444,656 (2005: 444,656) ordinaryshares of Rs. 10 each.

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Note 2006 2005

10.3 Particulars of provision

Opening balance 4,447 4,447Charge for the year - - Reversals - -

Closing balance 4,447 4,447

10.3.1 Particulars of provision in respect of type and segment

Available-for-sale securitiesCrown Textile Limited (Textile)444,656 (2005:444,656) ordinary shares of Rs. 10 each 4,447 4,447

4,447 4,447

2006 200510.4 Quality of available-for-sale securities Amount Rating Amount Rating

National Investment Trust Units 39,796 4-Star 24,909 AA(f)United Composite Islamic Fund (UCIF) Units 25,000 Unrated - -Meezan Islamic Income Fund (MIIF) Units 10,000 Unrated - -

74,796 24,909

10.5 Unrealized loss on revaluation of investments classified as held for trading

Unrealized loss on revaluation of investments classified as held for trading is given in note 10.2Restated

11. FINANCINGS 2006 2005In PakistanMurabaha financing 5,159,410 4,605,833Export refinance (Islamic) - Murabaha financing 989,721 5,000Export refinance (conventional) 1,259,463 1,495,069Musharaka financing 568,695 19,500Payment against guarantees 15,624 5,674

7,992,913 6,131,076Net Investment in Ijarah financing - in Pakistan (11.2) 1,581,681 1,044,192Bills discounted and purchased (excluding treasury bills) Payable outside Pakistan 301,445 434,745Financings - gross 9,876,039 7,610,013 Provision for non-performing financings (11.4) 177,647 189,124 General provision against consumer financings (11.5) 5,210 2,761

182,857 191,885Financings - net of provision 9,693,182 7,418,128

11.1 Particulars of Financings (Gross)11.1.1 In local currency 9,344,599 6,686,350

In foreign currencies 531,440 923,6639,876,039 7,610,013

11.1.2 Short term (for up to one year) 8,749,152 5,888,788Long term (for over one year) 1,126,887 1,721,225

9,876,039 7,610,013




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2006

Classified Financings Specific Provision Required Specific Provision Held

Domestic Overseas Total Domestic Overseas Total Domestic Overseas TotalCategory of classification

Substandard 17,227 - 17,227 1,889 - 1,889 1,889 - 1,889

Doubtful 4,650 - 4,650 2,325 - 2,325 2,325 - 2,325

Loss 224,949 - 224,949 173,433 - 173,433 173,433 - 173,433

246,826 - 246,826 177,647 - 177,647 177,647 - 177,647

2005

Classified Financings Specific Provision Required Specific Provision Held

Domestic Overseas Total Domestic Overseas Total Domestic Overseas TotalCategory of classification

Substandard - - - - - - - - -

Doubtful - - - - - - - - -

Loss 279,803 - 279,803 189,124 - 189,124 189,124 - 189,124

279,803 - 279,803 189,124 - 189,124 189,124 - 189,124

Rupees in '000

11.2 Net investment in finance lease2006 2005

Not later Later than one Over five Total Not later Later than one Over five Totalthan one year & less than years than one year & less than years

five years five years

Ijarah rentals receivable 545,457 1,156,531 32,917 1,734,905 402,779 696,760 - 1,099,539

Residual value 12,689 151,878 - 164,567 8,127 102,375 - 110,502

Minimum lease payments 558,146 1,308,409 32,917 1,899,472 410,906 799,135 - 1,210,041

Profit for future periods 144,880 171,450 1,461 317,791 78,669 87,180 - 165,849

Present value of minimum ijarah rentals receivables 413,266 1,136,959 31,456 1,581,681 332,237 711,955 - 1,044,192


11.3 Financings include Rs.246,826 thousands (2005:Rs. 279,803 thousands) which have been placed under non-performing status as detailed below:

Rupees in '000

11.4 Particulars of provision against non-performing financings-specific

Opening balance 189,124 133,690Charge for the year 22,099 62,937

Reversals (23,668) (4,785)Amounts written off (11.6) (9,908) (2,718)Closing balance 177,647 189,124

11.4.1 Particulars of provision against non-performing financings

In local currency 177,647 189,124In foreign currencies - -

177,647 189,12411.5 Particulars of general provision against consumer financings

Opening balance 2,761 1,014Charge for the year 2,449 1,747

Amounts written off - -Closing balance (11.5.2) 5,210 2,761

11.5.1 Particulars of provision against non-performing financings

In local currency 5,210 2,761In foreign currencies - -

5,210 2,761

11.5.2 This represents general provision against consumer finance maintained at the amount of 1.5% against fully secured performing portfolio and 5% of unsecured performing portfolio as required by the prudential regulations issued by SBP.

11.6 Particulars of write offs

11.6.1 Against provisions 9,908 2,718Directly charged to profit and loss account - -

9,908 2,718

11.6.2 Write offs of Rs. 500,000 and above (11.7) 9,908 2,718Write offs of below Rs. 500,000 - -

9,908 2,71811.7 Details of loan write off of Rs. 500,000 and above

In terms of sub-section (3) of Section 33A of the Banking Companies Ordinance, 1962 the Statement in respect of written-off loans or any otherfinancial relief of five hundred thousand rupees or above allowed to a person(s) during the year ended 31st December 2006 is given at Annexure-1.

11.8 Particulars of loans and Financings to directors, associated companies, etc.

Debts due by directors, executives or officers of the bank or any ofthem either severally or jointly with any other persons Balance at beginning of year 37,391 33,398 Loans granted during the year 36,300 17,545 Repayments (22,085) (13,552) Balance at end of year 51,607 37,391

12. OPERATING FIXED ASSETS

Capital work-in-progress - advances to suppliers - 1,600Property and equipment (12.1) 65,914 60,607Intangible assets (12.2) 5,504 5,539

71,418 67,746

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Note 2006 2005Rupees in '000Rupees in '000



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12.1 Operating fixed assets

Cost DepreciationOpening Closing Opening Closing Book value

Balance as Balance as Balance as For Balance as closing asat Jan 01, Additions/ at Dec 31, at Jan 01, the at Dec 31, at Dec 31, Rate

Particulars 2006 (Deletions) 2006 2006 Year 2006 2006 %

Furniture and fixture 13,694 2,832 16,526 6,736 1,332 8,068 8,458 10

Computer and officeequipments 56,303 7,404 63,707 34,557 8,707 43,264 20,443 20

Vehicles 28,484 8,146 27,859 19,536 4,296 15,432 12,427 20(8,771) (8,400)

Leasehold improvements 37,976 5,192 43,168 15,021 3,561 18,582 24,586 10

2006 136,457 23,574 151,260 75,850 17,896 85,346 65,914(8,771) (8,400)

Furniture and fixture 10,168 3,526 13,694 5,640 1,096 6,736 6,958 10

Computer and officeequipments 44,699 11,749 56,303 27,018 7,684 34,557 21,746 20

(145) (145)Vehicles 24,962 3,522 28,484 14,759 4,777 19,536 8,948 20

Leasehold improvements 24,894 13,082 37,976 11,749 3,272 15,021 22,955 10

2005 104,723 31,879 136,457 59,166 16,829 75,850 60,607(145) (145)

Particulars of assets Cost Accumulated Book Sale Profit Mode of Particular of buyersDepreciation Value Proceeds Disposal

Vehicle

Mercedes 5,100 5,100 - 1,275 1,275 As per Bank Mr. Shafqaat Ahmed

policy (Employee)

Honda Civic 1,236 865 371 450 79 Negotiation Mr. Nadeem Amjad

(Employee)

Suzuki Khyber 450 450 - 250 250 Negotiation Mr. Azhar Butt

Zahid Auto Workshops

Waris road Lahore

Toyota Corolla 859 859 - 542 542 Negotiation Mr. Tariq Saleem

(Employee)

Suzuki Cultus 563 563 - 280 280 Negotiation Mr. Tariq Rashid

(Employee)

Suzuki Cultus 563 563 - 139 139 As per bank Mr. Hanif Ashraf

policy (Employee)

Rupees in '000

12.1.1 Included in cost of property and equipment are fully depreciated items still in use having cost of Rs. 37.661 million (2005: 38.07 million).

12.1.2 Detail of disposals of operating fixed assets

Rupees in '000

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12.2 Intangible assets

Cost AMORTIZATIONOpening Closing Opening Closing Book value

Balance as Balance as Balance as For Balance as closing asat Jan 01, Additions at Dec 31, at Jan 01, the at Dec 31, at Dec 31, Rate

Particulars 2006 2006 2006 Year 2006 2006 %

Computer software 8,276 1,800 10,076 2,737 1,835 4,572 5,504 20

2006 8,276 1,800 10,076 2,737 1,835 4,572 5,504

Computer software 3,699 4,577 8,276 1,104 1,633 2,737 5,539 20

2005 3,699 4,577 8,276 1,104 1,633 2,737 5,539


Rupees in '000

12.3 Residual value of items of operating fixed assets are considered to be insignificant.Restated

Note 2006 2005

13. OTHER ASSETS

Profit / return on financings, investment and placement accrued in local currency (13.1.1) 104,150 70,396Profit / return on financings, investment and placement accrued in foreign currency - 5,780Advances, deposits, advance rent and other prepayments 90,648 58,815Advance against murabaha 50,000 -Advance taxation (payments less provisions) 53,695 47,162Unrealized gain on forward foreign exchange contracts 2,266 631Stationary and stamps 1,028 1,072Receivable from defined benefit plan (34.4) 489 -Others 8,415 8,026

310,691 191,882

Less: Provision held against other assets (13.2) (4,861) (5,188)

Other Assets (Net of Provision) 305,830 186,694

13.1.1 Income/mark-up accrued is net of income/mark-up suspended amounting to Rs.6.849 (2005: 12.917) million and includes income/mark-up accrued on conventional export refinance amounting to 16.054(2005:27.353) million, which is non-islamic as per sharia advisor.

13.2 PROVISION AGAINST OTHER ASSETS

Opening balance 5,188 2,357Charge for the year 252 2,831Reversals (541) -Amount written off (38) -

Closing balance 4,861 5,188

2006 2005Rupees in '000Rupees in '000

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14. CONTINGENT ASSETS

There were no contingent assets of the bank as at December 31, 2006 (2005: Nil).

Note 2006 200515. BILLS PAYABLE

In Pakistan 150,112 77,833Outside Pakistan 5,568 13,192

155,680 91,02516. DUE TO FINANCIAL INSTITUTIONS

In Pakistan 1,895,027 1,452,091Outside Pakistan - 5

1,895,027 1,452,09616.1 Particulars of borrowings with respect to currencies

In local currency 1,895,027 1,452,091In foreign currencies - 5

1,895,027 1,452,09616.2 Details of borrowings

Secured:Borrowings from State Bank of Pakistan Under export refinance scheme - conventional (16.2.1) 1,163,868 1,447,082 Under Islamic export refinance scheme (16.2.2) 731,159 5,000Unsecured:Overdrawn nostro accounts - 14

1,895,027 1,452,096

16.2.1 The bank has entered into agreements for financing with State Bank of Pakistan (SBP) for extending export refinance to customers.This is secured against demand promissory notes and undertakings of the bank. Mark-up rate ranges from 6.5% to 7.5% (2005:4.5% to 7.5%) per annum, which is payable quarterly or upon maturity of loans, whichever is earlier.

16.2.2 This represents musharaka contribution by State Bank of Pakistan against Islamic export refinance scheme. Expected profit rate ofwhich is 6.5% per annum.

17. DEPOSITS AND OTHER ACCOUNTS

CustomersFixed deposits 4,601,519 4,421,144Saving deposits 3,341,230 3,742,147Current accounts -non-remunerative 1,209,114 1,018,823Margin accounts 148,273 105,252

9,300,136 9,287,366Financial institutionsRemunerative deposits 4,520,565 1,022,045Non-remunerative deposits 740 2,422

4,521,305 1,024,467

13,821,441 10,311,833

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Note 2006 200517.1 Particulars of deposits

In local currency 12,751,343 9,129,046In foreign currencies 1,070,098 1,182,787

13,821,441 10,311,833

18. DEFERRED TAX LIABILITIES

Deferred credits arising due toNet investment in ijarah financing 99,951 55,697Deferred debits arising in respect ofAccelerated depreciation of operating fixed assets (779) (2,544)Unused tax losses (20,312) -

78,860 53,153

Restated2006 2005

19. OTHER LIABILITIES

Return on deposits and other dues payable in local currency (19.1) 254,427 162,035Return on deposits and other dues payable in foreign currency 7,869 8,130Unearned commission 22,651 7,917Accrued expenses 10,679 12,420Advance payments from customers 4,818 3,946Inter branch adjustment 407 -Unremitted head office expenses 6,538 6,538Payable to defined benefit plan - 16,640Security deposits against ijarah financing 178,534 110,502Accounts payable 22,345 19,520Excise duty/Income tax withheld 6,653 3,420Deferred income on murabaha (19.2) 192,992 150,837Charity Fund payable (19.3) 12,636 -Unrealized loss on forward exchange contracts 1,436 362Other payables 4,263 978

726,248 503,245

19.1 This includes markup payable on conventional export refinance to Rs. 13,304 thousands (2005: 20,900 thousands)19.2 Deferred income on murabaha

Opening balance 150,837 106,836Income during the year 501,167 334,359Recongnized during the year 459,012 290,358Closing balance 192,992 150,837

19.3 Charity Fund payable

Opening Balance - -Additions during the period 12,636 -Payments during the period - -Closing Balance 12,636 -

This represents net overdue income on murabaha financing as referred in note 6. Such income is to be remitted to head office wherethe fund account is maintained, as permitted by State Bank of Pakistan vide its letter No. IBD-Sd/25/22/2007 dated January 18, 2007.



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Note 2006 200520. HEAD OFFICE CAPITAL ACCOUNT

Capital held as: 1. Interest free deposit in cash in Pak Rupees (8.2) 155,655 155,655 2. Interest free deposit in approved foreign exchange :

i) Revalued remittance from head office - opening balance (20.1) 1,847,154 1,682,129 ii) Revaluation surplus allowed by the State Bank 33,581 165,025

1,880,735 1,847,154(20.2) 2,036,390 2,002,809

20.1 This represents an amount of US dollar 30.893 (2005: US dollar 30.893) million deposited with the State Bank of Pakistan in compliancewith sub section (3) of section 13 of the Banking Companies Ordinance, 1962.

20.2 In accordance with the requirements of BSD Circular no. 6 dated Oct 28, 2005, the Bank was required to increase its capital to Rs3 billion by December 31, 2006. However, the Bank has been granted specific exemption in this regard till September 30, 2007 fromState Bank of Pakistan vide its letter no. BSD/SU-1/608/219 dated January 26,2007.

21. (DEFICIT)/SURPLUS ON REVALUATION OF ASSETS(Deficit)/surplus on revaluation of available-for-sale securitiesNational Investment Trust Units (204) 4,909

22. CONTINGENCIES AND COMMITMENTS

22.1 Direct credit substitutes - Guarantees of Indebtedness i) Government 874,967 542,883 ii) Financial institutions 13,266 64,938 iii) Others 656,002 243,072

1,544,235 850,89322.2 Transaction-related contingent liabilities

i) Letters of credit 1,285,093 971,310 ii) Other - Shipping Guarantees 34,306 154,950 1,319,399 1,126,260

22.3 Trade-related contingent liabilities i) Acceptances 1,324,529 1,239,606

22.4 Other contingenciesThis represents additional income tax liability amounting to Rs. 7.698 (2005: Rs. 32.125) million in respect of income years from2000 to 2001 not acknowledged by the Bank. Moreover, the income Tax Department has also filed appeals against assessment ordersin respect of these years issued by CIT (Appeals). Appeals filed by the Bank and the Department to the Income Tax Tribunal arepending for decision. Management of the Bank has evaluated after consulting their income tax advisor that appeals are likely to bedecided in favour of Bank and hence no provision has been made for the same in these financial statements.

22.5 Commitments in respect of forward exchange contractsPurchase 559,546 99,554Sale 603,726 342,424

The bank utilizes foreign exchange instruments to meet the needs of its customers, generates trading revenues and as part of itsasset and liability management to hedge its own exposure to currency risk. At the year end, all foreign exchange contracts have aremaining maturity of less than one year.

22.6 Other CommitmentsThe bank makes commitments to extend credit in the normal course of its business but these being revocable commitments do notattract any significant penalty or expense if the facility is unilaterally withdrawn.

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Note 2006 200523. PROFIT/RETURN ON FINANCINGS, INVESTMENTS

AND PLACEMENTS EARNED

a) On loans and Financings (other than murabaha) to: i) Customers 292,758 228,091 ii) Financial institutions 348 399

293,106 228,490b) On murabaha to: i) Customers 430,503 282,910 ii) Financial institutions 28,510 7,448

(23.1) 459,013 290,358c) On investments in: Held to maturity securities 73,587 -d) On deposits with financial institutions 286,005 142,826

1,111,711 661,674

23.1 Murabaha sale price 17,790,486 15,809,258Less: Purchase price 17,289,318 15,474,899

501,168 334,359Add: Deferred murabaha income as on January 01 150,837 106,836Less: Deferred murabaha income as on December 31 192,992 150,837

459,013 290,358

23.2 Before adoption of IFAS-1, up to the year ended December 31, 2005, shariah non-compliant income used to be included in currentincome and transferred to Head Office as part of remittance of profit where it was bifurcated and accounted for as charity. As aconsequence, shariah non-compliant income, included in the income for the year ended December 31, 2005 could not be separated.

24. RETURN ON DEPOSITS AND OTHER DUES EXPENSED

Deposits 728,201 365,060Other short term borrowings: on conventional export refinance 81,017 74,759 on Islamic export refinance 14,906 -

95,923 74,759824,124 439,819

25. PROVISION AGAINST NON-PERFORMING FINANCINGS

Provision against non performing financings (1,569) 58,152Provision against consumer financings 2,449 1,747

880 59,89926. NET GAIN ON SALE OF SECURITIES

Ordinary shares of listed companies 1,775 33,418National investment trust units - 257,311

1,775 290,72927. OTHER INCOME

This represents profit on disposal of operating fixed assets.

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Note 2006 200528. ADMINISTRATIVE EXPENSES

Salaries, allowances, etc (28.1) 106,304 87,377Staff medical 4,429 3,777Charge for defined benefit plan 8,606 5,181Charge for defined contribution plan 5,012 3,908Rent, taxes, insurance, electricity, etc 43,512 37,359Legal and professional charges 2,432 6,540Fee and subscription 2,988 2,450Communications 15,232 13,691Repairs and maintenance 8,710 6,475Stationery and printing 7,568 6,769Advertisement and publicity 1,762 2,571Auditors’ remuneration (28.2) 951 848Depreciation (12.2) 17,896 16,829Amortization (12.3) 1,835 1,633Bank charges 3,968 4,704Traveling and conveyance 18,437 13,022Entertainment 3,671 2,863Security services 3,898 2,907Brokerage commission 492 716Other expenditure 3,364 2,554

261,067 222,174

28.1 This includes remuneration of sharia advisor desk amounting to Rs. 1.702 million (2005: Rs. 0.692 million).

2006 200528.2 AUDITORS’ REMUNERATION

Audit fee 550 540Special certifications and sundry advisory services 300 210Out of pocket expenses 101 98

951 84829. OTHER CHARGES

Penalties imposed by State Bank of Pakistan 1,391 3,709

30. TAXATION

For the year - current 777 9,812Deferred tax 25,707 32,188

26,484 42,00030.1 Relationship between tax expense and accounting profit

Accounting profit before taxation 170,423 387,570

Tax at applicable tax rate of 35% (2005: 38%) 59,648 147,277Tax effect of permanent differences (33,164) (105,277)Tax charge for the year 26,484 42,000

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31. BASIC EARNINGS PER SHARE

Albaraka Islamic Bank B.S.C (E.C.)- Pakistan branches, being branches of a foreign entity do not have share capital. Therefore, nofigures of basic and diluted earning per share have been reported in these financial statements.

Note 2006 2005

32. CASH AND CASH EQUIVALENTSCash and balance with treasury banks (8) 3,355,669 3,123,841Balance with other banks (9) 4,259,426 3,880,049Overdrawn accounts (16.2) - (14)

7,615,095 7,003,876

2006 200533. STAFF STRENGTH

Permanent 238 208Temporary/on contractual basis 68 44Daily wagers - -Bank’s own staff strength at the end of the year 306 252Outsourced - -Total staff strength 306 252

34. DEFIND BENEFIT PLAN

34.1 General descriptionThe Bank operates an approved funded gratuity for the employees eligible under the scheme. Benefits under the gratuity schemeare payable upon attainment of normal retirement age, which is 59 years or earlier cessation of services due to death, resignationor termination. The benefit is equal to one month last drawn gross salary for each completed year of service up to a maximum oftwenty years subject to a minimum of three years of service.

34.2 Principal actuarial assumptionsThe latest actuarial valuation had been carried out as at December 31, 2006 by using projected unit credit actuarial cost method.The significant assumptions used for actuarial valuation are as follows:

Note 2006 2005Discount rate 10.0% p.a 10.0% p.aExpected rate of salary increases 10.0% p.a 10.0% p.aExpected return on plan assets 10.0% p.a 6.47% p.a

2006 200534.3 Reconciliation of (receivable from)/payable to defined benefit plan

Present value of defined benefit obligations (34.3.1) 35,966 31,563Fair value of plan assets (34.3.2) (24,186) (3,295)Net actuarial (losses) not recognized (12.269) (11,628)

(489) 16,64034.3.1 Present value of defined benefit obligations

As at January 1 31,563 20,876Current service cost 5,546 3,723Interest cost 3,156 1,461Benefits paid (5,363) (1,715)Actuarial loss 1,064 7,218As at December 31 35,966 31,563



Number Number

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2006 2005

34.3.2 Fair value of plan assets

As at January 1 3,295 4,401Expected return on plan assets 213 199Contributions 26,223 -Benefits paid (5,363) (1,715)Actuarial (loss)/ gain (182) 410As at December 31 24,186 3,295

34.4 Movement in payable to defined benefit plan

Opening balance 16,640 11,459Charge for the year 9,094 5,181Contribution to fund made during the year (26,223) -Closing balance (489) 16,640

2006 2005

% %34.5 Composition of plan assets

Term finance certificate 1,335 6% 1,362 41%Bank deposit account (34.5.1) 22,851 94% 1,933 59%

24,186 100% 3,295 100%

34.5.1 This includes khazana account maintained with the bank.

34.6 Charge for defined benefit plan

Current service cost 5,546 3,723Interest cost 3,156 1,461Expected return on plan assets (213) (199)Actuarial gains and losses - recognized 605 195

9,094 5,180

34.7 Actual return on plan assets 254 569

35. DEFINED CONTRIBUTION PLAN

The Bank operates an approved provident fund scheme for all its permanent employees, which are administered by a board of trustees.Equal monthly contributions are made by the Bank and employees to the fund at the rate of 10 percent (2005: 10 percent) of basicsalaries of employees. The contribution made by the bank during the year is Rs. 5,012 (2005: 3,908) thousands.




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38. SEGMENT DETAILS WITH RESPECT TO BUSINESS ACTIVITIESThe segment analysis with respect to business activity is as follows:-

2006 Rupees in ‘OOO’

Corporate Trading & Retail Commercial Payment &Finance Sales Banking Banking Settlement

Total Income 73,587 350,374 92,804 753,007 9,249Total expenses 49,901 266,567 56,252 730,074 1,892Net income 23,686 83,807 36,552 22,933 7,357Segment assets (gross) 765,867 4,769,188 917,059 12,593,797 -Segment non-performing loans - - 98,865 147,961 -Segment provision required - - 64,410 113,237 -Segment liabilities - - 13,914,446 2,609,712 153,098Segment return on net assets (ROA) (%) 10.19% 9.86% 11.11% 10.98% -Segment cost of funds (%) 6.72% 6.72% 6.72% 5.65% -

2005 Rupees in ‘OOO’

Total Income - 505,425 101,231 501,229 8,867Total expenses - 184,438 47,628 495,323 1,793Net income - 320,987 53,603 5,906 7,074Segment assets (gross) - 3,987,271 1,402,715 9,567,581 -Segment non-performing loans - - 118,565 161,238 -Segment provision required - - 70,848 118,276 -Segment liabilities - - 10,356,921 1,972,148 81,921Segment return on net assets (ROA) (%) - 18.63% 6.48% 6.36% -Segment cost of funds (%) - 4.32% 4.32% 8.76% -

37. FAIR VALUE OF FINANCIAL INSTRUMENTS

2006 2005

Book value Fair value Book value Fair valueAssetsCash balances with treasury banks 3,355,669 3,355,669 3,123,841 3,123,841Balances with other banks 4,259,426 4,259,426 3,880,049 3,880,049Investments 1,182,737 1,203,123 92,347 92,347Financings 9,693,182 9,500,190 7,418,128 7,418,128Other assets 156,416 156,416 134,625 134,625

18,647,430 18,474,824 14,648,990 14,648,990LiabilitiesBills payable 155,680 155,680 91,025 91,025Borrowings 1,895,027 1,895,027 1,452,096 1,452,096Deposits and other accounts 13,821,441 13,821,441 10,311,833 10,311,833Other liabilities 525,035 525,035 361,221 361,221

16,397,183 16,397,183 12,216,175 12,216,175Off-balance sheet financial instrumentsForward purchase of foreign exchange 559,546 559,546 99,554 99,554Forward sale of foreign exchange 603,726 603,726 342,424 342,424

Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable willing parties in an arms’s length transaction.

36. COMPENSATION OF DIRECTORS AND EXECUTIVES

Regional General Manager Executives

2006 2005 2006 2005

Managerial remuneration 3,840 3,336 18,756 14,522 Charge for defined benefit plan 439 380 2,088 1,769 Contribution to defined contribution plan 340 295 1,505 1,285 Rent and house maintenance 1,530 1,330 7,135 5,783 Utilities 513 515 1,957 1,639 Medical 45 45 555 507 Others 45 45 420 419

6,752 5,946 32,416 25,924

Number of persons 1 1 19 19

Regional general manager and some of the executives have been provided with free use of bank maintained cars.



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39. ASSUMPTION USED:

-Unallocated assets and liabilities representing 19% and 2%(2005: 22% and 2%) respectively, have been included in commercialbanking segment, as the said segment’s income has the maximum share in the total income of the Bank.

-Adminstrative expenses have been allocated on the basis of total income of the segment.

40. RELATED PARTY TRANSACTIONS

Related parties comprise major shareholder, directors of the Bank, close members of their families, entities owned or controlled bythem and companies affiliated by virtue of shareholding in common with that of the Bank. Related parties also comprise of branchesof the bank out side Pakistan, key management personal and employee funds. The significant balance with related parties at 31December were as follows:

2006 2005

Regional RegionalGeneral Other General Other

Manager & related Manager & relatedExecutives parties Executives parties

Assets

Investments - 244,971 - -Balance with banks - - - 290,292Income/ Mark-up accrued in local currency - - - 1,534

Liabilities

Deposits 53,494 44,021 12,168 20,666Mark-up/ Return payable 1,412 612 157 587

Other significant transactions with related 2006 2005 parties during the year were as follows:

Funds placed during the year - 582,721

Fund withdrawn during the year 52,450 292,140

Deposits received during the year 278,940 152,345

Deposits withdrawn during the year 326,557 156,132

Profit remitted during the year 338,854 147,855

Mark-up/ return expensed 4,574 3,159

Mark-up/ return earned 15,823 7,829

Transactions entered into with key management personal as per their terms of employment are excluded from related party transactions.

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41. CAPITAL ADEQUACYThe risk weighted assets to capital ratio, calculated in accordance with the State Bank’s guidelines on capital adequacy was as follows:

2006 2005Regulatory Capital BaseTier I Capital Shareholders capital/assigned capital 2,036,390 2,002,809 Reserves Unappropriated / Unremitted profits (net of losses) 154,820 349,735 Less: Adjustments - -Total Tier I Capital 2,191,210 2,352,544

Tier II Capital Subordinated debt (up to 50% of total Tier I Capital) General provisions subject to 1.25% of Total Risk Weighted Assets 5,210 - Revaluation reserve (204) 2,455Total Tier II Capital 5,006 2,455

Eligible Tier III Capital - -Total Regulatory Capital (a) (20.2) 2,196,216 2,354,999

2006 2005Risk weighted exposures

Risk RiskBook Adjusted Book AdjustedValue Value Value Value

Credit riskBalance sheet items: Cash and other liquid assets (41.1) 7,860,066 900,879 7,003,881 776,008 Money at call - - - - Investments 840,663 54,898 24,909 12,455 Financings 9,693,182 8,851,237 7,418,128 6,681,173 Fixed assets 71,418 71,418 67,746 67,746 Other assets 305,830 252,135 186,694 202,768

18,771,159 10,130,567 14,701,358 7,740,150Off balance sheet items: Loan repayment guarantees and acceptances 1,324,529 1,324,529 1,205,256 1,205,256 Purchase and resale agreements - - - - Performance bonds etc 1,578,541 739,483 928,001 464,001 Revolving underwriting commitments - - - - Standby letters of credit 1,285,093 630,515 932,671 466,335 Outstanding foreign exchange contracts: -Purchase 559,546 2,238 99,554 398 -Sale 603,726 2,415 342,424 1,370

5,351,435 2,699,180 3,507,906 2,137,360Credit risk-weighted exposures 12,829,747 9,877,510

Market riskGeneral market risk 179,413 205,343Specific market risk 97,106 67,438Market risk-weighted exposures 276,519 272,781Total risk weighted exposures (b) 13,106,266 10,150,291

Capital adequacy ratio [ (a) / (b) x 100) 16.76% 23.20%

41.1 This includes term deposit with head office amount to Rs. 244,971 in ‘000’ (2005: Nil) which has been classified as held-to-maturityinvestments as referred in note 10.


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42. RISK MANAGEMENT

The management recognizes all risks inherent in its business processes and comprehensive measures are taken toidentify and mitigate these risks. In compliance with State Bank of Pakistan guidelines, the Bank has formulated a RiskManagement Policies and Procedures Manual duly approved by its Head office. The Manual covers all areas of risksincluding credit, market, liquidity and operational risks, and has been communicated down-the-line for due implementation.

A separate Risk Management Division, independent from the business units, has been set up to perform all tasksnecessary to identify, monitor and mitigate the risks arising from various activities, in line with the approved Manual.

42.1 Credit Risk

Credit risk is the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreedterms. The credit risk management process in the Bank is geared towards the assessment of risk both at the portfoliolevel as well as the transaction level. Limits have been set relating to group and industry to monitor portfolio concentrationsand to encourage diversification. Cases on a transaction level are monitored on a sample basis to ensure compliancewith risk management policies and procedures. Quarterly credit risk reviews are carried out to assess the position ofthe Bank with respect to the above-mentioned factors, and key risk areas are highlight for necessary action.

Credit Manual, duly approved by the Head office, explicitly spells out various components of the credit granting process,including appraisal, sanctioning and review procedures, in order to instill prudence in all financing activities. Past dueaccounts are treated in line with the State Bank of Pakistan rules and regulations. However, periodic Watch Lists areprepared by the Credit Administration Department to proactively monitor accounts with early warning indicators.

Various credit mitigates are used to protect against potential credit losses. Great care is taken to ensure that all legaland operational requirements are in place to allow smooth liquidation/processing in case of a default. All exposuresof the Bank are rated internally to assess their level of inherent risk. The Bank has recently revamped its internal riskrating system in an effort to align it with the Basel II requirements, in order to produce more objective and risk-sensitiveratings.

In order to monitor the credit exposure taken by the Bank in various economic segments, mechanism is in place toensure that the exposures are within the tolerable limits and inline with the risk appetite of the bank and the creditportfolio remains well diversified.

2006 2005Rupees in ‘000’ Rupees in ‘000’

Maximum amount under credit riskexposure-without taking into account collaterals 15,441,175 11,577,218

Maximum amount under credit riskexposure - taking into account collaterals 5,747,993 4,159,090

42.1.1 SEGMENTAL INFORMATION

Segmental information is presented in respect of the class of business and geographical distribution of Advances,Deposits, Contingencies and Commitments.

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42.1.1.1 Segments by class of businessContingencies &

Financings (Gross) Deposits Commitments

Rupees Percent Rupees Percent Rupees PercentAgriculture, forestry, hunting and fishing 10,765 0.11% 6,461 0.05% - 0.00%Mining and quarrying 1,435 0.01% 358,807 2.60% - 0.00%Textile 4,448,526 45.04% 409,441 2.96% 1,084,915 25.90%Chemical and pharmaceuticals 326,914 3.31% 885,295 6.41% 503,471 12.02%Cement 767 0.01% 9,712 0.07% 103,367 2.47%Sugar 170,886 1.73% 7,000 0.05% 4,642 0.11%Footwear and leather garments 583,946 5.91% 39,262 0.28% 130,552 3.12%Automobile and transportation equipment 261,490 2.65% 35,597 0.26% 295,675 7.06%Electronics and electrical appliances 33,564 0.34% 13,834 0.10% 12,178 0.29%Construction 213,081 2.16% 96,270 0.70% 327,695 7.82%Power (electricity), gas, water, sanitary 673 0.01% 58,657 0.42% 46,040 1.10%Wholesale and retail trade 115,937 1.17% 36,247 0.26% 14,158 0.34%Exports/Imports 101,606 1.03% 62,538 0.45% 54,668 1.31%Transport, storage and communication 280,156 2.84% 143,801 1.04% 61,511 1.47%Financial 90,837 0.92% 4,521,305 32.71% 56,587 1.35%Insurance - 0.00% 8,681 0.06% - 0.00%Services 137,680 1.39% 548,396 3.97% 52,216 1.25%Individuals 374,896 3.80% 3,896,519 28.19% 5,091 0.12%Others 2,722,880 27.57% 2,683,618 19.42% 1,435,397 34.27%

9,876,039 100% 13,821,441 100% 4,188,163 100%

2006Rupees in '000

42.1.1.1 Segments by class of businessContingencies &


Rupees Percent Rupees Percent Rupees PercentAgriculture, forestry, hunting and fishing 28,487 0.39% 19,502 0.19% 40,364 1.25%Mining and quarrying - 0.00% 346,205 3.36% - 0.00%Textile 3,798,593 51.36% 302,152 2.93% 1,179,473 36.67%Chemical and pharmaceuticals 663,675 8.97% 609,901 5.91% 533,293 16.58%Cement 1,833 0.02% 236 0.00% 200 0.01%Sugar 168,531 2.28% 6,630 0.06% 1,529 0.05%Footwear and leather garments 397,397 5.37% 44,506 0.43% 169,681 5.27%Automobile and transportation equipment 301,044 4.07% 61,581 0.60% 196,605 6.11%Electronics and electrical appliances 106,482 1.44% 175,321 1.70% 10,125 0.31%Construction 197,957 2.68% 4,589 0.04% 118,821 3.69%Power (electricity), gas, water, sanitary 6.342 0.09% 1,624,182 15.75% 38,222 1.19%Wholesale and retail trade 244,400 3.30% 5,275 0.05% - 0.00%Exports/Imports 88,824 1.20% 47,155 0.46% 911 0.03%Transport, storage and communication 96,162 1.30% 61,153 0.59% 47,803 1.49%Financial 55,235 0.75% 1,024,467 9.93% 56,672 1.76%Insurance 208 0.00% 10,692 0.10% - 0.00%Services - 0.00% - 0.00% - 0.00%Individuals 221,847 3.00% 3,522,610 34.16% 5,315 0.17%Others 1,018,561 13.77% 2,445,676 23.72% 817,745 25.42%

7,395,578 100% 10,311,833 100% 3,216,759 100%

2005Rupees in '000

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42.1.1.2 Segment by sectorContingencies &


Rupees Percent Rupees Percent Rupees PercentPublic / Governmet - - 1,181,437 9% - -

Private 9,876,039 100% 12,640,004 91% 4,188,163 100%

9,876,039 100% 13,821,441 100% 4,188,163 100%

2006Rupees in '000

42.1.1.3 Segment by sectorContingencies &


Rupees Percent Rupees Percent Rupees PercentPublic / Government - - 2,824,760 27% - -

Private 7,610,013 100% 7,487,073 73% 3,216,759 100%

7,610,013 100% 10,311,833 100% 3,216,759 100%

2005Rupees in '000

42.1.1.4 Details of non-performing Financings and specific provisions by class of business segment

Specific SpecificClassified provisions Classified provisionsFinancings held Financings held

Agriculture, forestry, hunting and fishing 3,565 3,565 6,910 3,486Textile 111,943 72,621 109,532 87,024Chemical and pharmaceuticals 31,818 29,367 33,581 28,387Power (electricity), gas, water, sanitary 425 425 - -Others 99,075 71,669 129,780 70,227

246,826 177,647 279,803 189,124

42.1.1.5 Details of non-performing Financings and specific provisions by sector

Public/ Government - - - -Private 246,826 177,647 279,803 189,124

246,826 177,647 279,803 189,124

2005Rupees in '000

2006Rupees in '000

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2006 2005

42.1.1.6 GEOGRAPHICAL SEGMENT ANALYSIS Rupees in ‘000Pakistan

Profit before taxation 170,423 387,570

Total assets employed 18,868,262 14,768,805

Net assets employed 2,191,006 2,357,453

Contingencies and commitments 4,188,163 3,216,759

Total assets employed include intra group items of Rs. 244,971 (2005:Rs.290.292) million.

42.2 Market risk

Market risk is the risk of losses in on-and off-balance sheet positions of the Bank due to movement in market prices, such as profitrates, equity prices and exchange rates.

The basic objective of effective market risk management is to minimize the risk of losses resulting from adverse movements in these prices. This isachieved by setting instrument-specific exposure limits, counterparty limits and stop loss limits etc. Furthermore, policies are in place to monitortransactions that result in excess over limits. All these activities are performed in line with the Risk Management Policies and Procedures Manual.The quarterly market risk review assesses the position of Bank portfolios with regards to various market risks, and identifies key risk areas andremedial measures.

For the purpose of calculating capital requirement for market risk, the bank has adopted the Standardized Approach.

42.2.1 Foreign exchange risk

Foreign exchange transactions carried out by the Bank as part of its overall banking activity exposes it to foreign exchange risk due to movementin exchange rates.

As a policy stance, all foreign currency exposures of the Bank are taken to execute customer’s requirements and/or to square Bank’s own position.No exposures are allowed purely for trading purposes. The policy also specified permitted currencies in which the Bank can take exposure as wellas the maximum tenure for foreign currency transactions. Limits have been set with regard to net open position, currency-wise holdings, transactionamounts and stop loss positions, to safeguard against adverse movements in exchange rates.

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Foreign exchange risk

2006

Net foreignAssets Liabilities * Off-balance Net currency

sheet items exposure

United States Dollar 2,972,997 2,878,008 (48,965) 46,024 Great Britain Pound 52,350 55,369 12,005 8,986 Euro 46,947 24,007 (6,127) 16,813 Japanese Yen 6,307 - - 6,307 Deutsche Mark - 19 - (19)ACU Dollar 3,408 - - 3,408Swiss Frank 791 - - 791Foreign Currency 3,082,800 2,957,403 (43,087) 82,310Pakistan Rupees 15,785,462 15,910,859 43,087 (82,310)

18,868,262 18,868,262 - -

2005

Net foreignAssets Liabilities * Off-balance Net currency

sheet items exposure

United States Dollar 3,291,486 2,898,115 (288,587) 104,744 Great Britain Pound 60,117 108,829 56,061 7,349 Euro 14,206 35,095 35,159 14,270 Japanese Yen 5,186 - - 5,186 Deutsche Mark - - - -ACU Dollar 6,355 - - 6,355 Foreign Currency 3,377,350 3,042,079 (197,367) 137,904 Pakistan Rupees 11,391,455 11,726,726 197,367 (137,904)

14,768,805 14,768,805 - -

Rupees in '000

Rupees in '000

Currency risk is the risk that the value of the financial instrument will fluctuate due to changes in foreign exchange rates. Hedgingtransactions are used to manage risk in other currencies.

Liabilities include head office capital account, unremitted profit and surplus/(deficit) on revaluation of assets amounting to Rs 2,191,006thousands (2005:Rs. 2,357,453 thousands).

42.2.2 Equity position risk

The Bank has exposure in stock market equities in its trading book, which gives rise to this risk due to movement in share prices.

The equity position risk of the Bank in the trading book revolves around the investment in listed shares/securities, duly approved bythe Shari’ah Advisor. Limit for the maximum stock market exposure has been set by the Head Office, in order to monitor and managethe size of the risk taken by the Bank. Even within the approved limit, all decisions with regard to taking or selling off an investmentis made with the approval of the Regional Credit Committee.

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2006Exposed to Yield/ Interest risk

42.2.3 Mismatch of interest rate sensitive assets and liabilitiesTotal Non-interest

Effective Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 b e a r i n gYield/ Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above f inancial

interest Month Months Months Year Years Years Years Years 10 Years instruments

On-balance sheet financial instruments

AssetsCash and balances with treasury banks - 3,355,669 - - - - - - - - - 3,355,669Balances with other banks 9.03% 4,259,426 4,229,328 - - - - - - - - 30,098Lending to financial institutions - - - - - - - - - - - -Investments 9.81% 1,182,737 - - - 243,640 - - - 750,000 - 189,097Financing 10.11% 9,693,182 1,865,597 2,581,252 2,939,061 1,363,242 880,915 - - - - 63,115Other assets - 156,416 - - - - - - - - - 156,416

18,647,430 6,094,925 2,581,252 2,939,061 1,606,882 880,915 - - 750,000 - 3,794,395LiabilitiesBills payable - 155,680 - - - - - - - - - 155,680Borrowings 7.50% 1,895,027 254,731 542,523 1,097,773 - - - - - - -Deposits and other accounts 7.46% 13,821,441 9,725,771 859,658 2,026,898 - - - - - - 1,209,114Sub-ordinated loans - - - - - - - - - - - -Liabilities against assets subject to finance lease - - - - - - - - - - - -Other liabilities - 525,035 - - - - - - - - - 525,035

16,397,183 9,980,502 1,402,181 3,124,181 - - - - - - 1,889,829On-balance sheet gap 2,250,247 (3,885,577) 1,179,071 (185,610) 1,606,882 880,915 - - 750,000 - 1,904,566

Off-balance sheet financial instruments

Forward Foreign exchange contracts- Purchase 559,546 - - - - - - - - - 559,546Forward Foreign exchange contracts- Sale 603,726 - - - - - - - - - 603,726Off-balance sheet gap (44,180) - - - - - - - - - -(44,180)

Total Yield/interest Risk Sensitivity Gap (3,885,577) 1,179,071 (185,610) 1,606,882 880,915 - - 750,000 -

Cumulative Yield/interest Risk Sensitivity Gap (3,885,577) (2,706,506) (2,892,116) (1,285,234) (404,319) (404,319) (404,319) 345,681 345,681

Reconciliation with total assets Reconciliation with total liabilities

Balance as per balance sheet 18,868,262 Balance as per balance sheet 16,677,256Less: Non financial assets Less: Non financial liabilities Operating fixed assets 71,418 other liabilities 201,213 Other assets 149,414 Deferred tax 78,860

18,647,430 16,397,183


Mismatch of interest rate sensitive assets and liabilitiesTotal Non-interest

Effective Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 b e a r i n gYield/ Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above f inancial

interest Month Months Months Year Years Years Years Years 10 Years instruments


AssetsCash and balances with treasury banks - 3,123,841 - - - - - - - - - 3,123,841Balances with other banks 7.88% 3,880,049 3,848,377 - - - - - - - - 31,672Lending to financial institutions - - - - - - - - - - - -Investments - 92,347 - - - - - - - - - 92,347Financings 9.73% 7,418,128 1,451,004 2,016,308 2,062,299 931,403 801,866 - - - - 91,651Other assets - 134,625 - - - - - - - - - 249,930

14,648,990 5,299,381 2,016,308 2,062,299 931,403 801,866 - - - - 3,589,441LiabilitiesBills payable - 91,025 - - - - - - - - - 91,025Borrowings 3.50% 1,452,096 195,192 415,717 841,187 - - - - - - -Deposits and other accounts 3.04% 10,311,833 6,144,093 642,645 360,600 2,037,998 - - - - - 1,126,407Sub-ordinated loans - - - - - - - - - - - -Liabilities against assets subject to finance lease - - - - - - - - - - - -Other liabilities - 328,682 - - - - - - - - - 328,682

12,183,636 6,339,285 1,058,362 1,201,787 2,037,998 - - - - - 1,546,204On-balance sheet gap 2,465,354 (1,039,904) 957,946 860,512 (1,106,595) 801,866 - - - - 2,043,237Total Yield/interest Risk Sensitivity Gap (1,039,904) 957,946 860,512 (1,106,595) 801,866 - - - -Cumulative Yield/interest Risk Sensitivity Gap (1,039,904) (81,958) 778,554 (328,041) 473,825 473,825 473,825 473,825 473,825

Reconciliation with total assets Reconciliation with total liabilities

Balance as per balance sheet 14,768,805 Balance as per balance sheet 12,411,352Less: Non financial assets Less: Non financial liabilities Operating fixed assets 65,746 other liabilities 174,563 Other assets 52,069 Deferred tax 53,153

14,648,990 12,183,636

Yield/Profit rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. Yield risk is the risk of decline in earnings due to adverse movement of the yield curve. The bank is expected to both profit rate risk and yield risk as result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or reprice in the given period, the bank manages this risk by matching the repricing of assets and liabilities through risk management strategies.

The position of on-balance sheet financial instruments is based on the earlier of the contractual repricing or maturity date and for off-balance sheet instrument is based on settlement dates

Interest rate risk is the risk that the value of the financial instrument will fluctuate due to changes in the market interest rates.

Rupees in '000

Rupees in '000

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Pakistan Branches


42.3.2 Maturities of assets and liabilities2005

Exposed to Yield/ Interest risk

Total Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5

Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above Month Months Months Year Years Years Years Years 10 Years


AssetsCash and balances with treasury banks 3,123,841 1,121,032 - - - - - - 2,002,809 -Balances with other banks 3,880,049 3,880,049 - - - - - - - -Lending to financial institutions - - - - - - - - - -Investments 92,347 87,438 - - - - 24,909 - - -Financings 7,418,128 1,450,032 2,006,411 2,062,299 359,174 379,502 569,253 377,022 - -Other assets 186,694 38,193 52,312 92,653 15,986 16,890 25,336 8,922 - -Operating fixed assetrs 67,746 - - - - - - 67,746 - -Deferred tax assets - - - - - - - - - -

14,768,805 6,556,744 2,058,723 2,154,952 375,160 396,392 619,498 453,690 2,002,809 -LiabilitiesBills payable 91,025 91,025 - - - - - - - -Borrowings 1,452,096 195,192 415,717 841,187 - - - - - -Deposits and other accounts 10,311,833 7,270,590 642,645 360,600 1,074,779 281,140 421,710 260,369 - -Sub-ordinated loans - - - - - - - - - -Liabilities against assets subject to finance lease - - - - - - - - - -Other liabilities 503,245 49,936 16,607 55,080 42,720 30,333 45,499 105,569 6,664 -Deferred tax liabilities 53,153 - - - - - 53,153 - - -

12,411,352 7,606,743 1,074,969 1,256,867 1,117,499 311,473 520,362 365,938 6,664 -Net assets 2,357,453 (1,049,999) 983,754 898,085 (742,339) 84,919 99,136 87,752 1,996,145 -

Share capital/ Head office capital account 2,002,809Unappropriated/ Unremitted profit 349,735(Deficit) on revaluation of assets 4,909

2,357,453

The above maturity profile has been prepared in accordance with IAS-30: ‘Disclosure in the financial statements of banks and similar financial institutions’ based on contractual maturities. However, current and saving deposits do not have any contractual maturity.

42.3 Liquidity risk

This is the risk of loss due to the inability of the bank to meet its obligations without incurring large or unacceptable costs.

The mandate for continuous and effective liquidity management in the bank lies with the Asset and Liability Management Committee (ALCO). The asset and liability position, both in local and foreign currencies, is monitored on a daily basis, to assess the appropriatenessof sources and application of funds, the adequacy of various reserve requirements, and to ensure Shari’ah compliance. In addition, liquidity risk reviews are prepared on a quarterly basis to assist the ALCO in its decision making process.


42.3.1 Mismatch of interest rate sensitive assets and liabilitiesTotal

Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above Month Months Months Year Years Years Years Years 10 Years


AssetsCash and balances with treasury banks 3,355,669 1,319,279 - - - - - - 2,036,390 -Balances with other banks 4,259,426 4,259,426 - - - - - - - -Lending to financial institutions - - - - - - - - - -Investments 1,182,737 98,434 - 15,867 243,640 - 74,796 - 750,000 -Financings 9,693,182 1,865,597 2,581,252 2,939,061 482,327 477,405 715,630 473,333 158,577 -Other assets 305,830 106,416 - - 136,165 488 - 53,695 9,066 -Operating fixed assets 71,418 - - - - - - 32,870 38,548 -Deferred tax assets - - - - - - - - - -

18,868,262 7,649,152 2,581,252 2,954,928 862,132 477,893 790,426 559,898 2,992,581 -LiabilitiesBills payable 155,680 155,680 - - - - - - - -Borrowings 1,895,027 254,731 542,523 1,097,773 - - - - - -Deposits and other accounts 13,821,441 9,725,771 859,658 463,389 1,381,147 406,138 609,207 376,131 - -Sub-ordinated loans - - - - - - - - - -Liabilities against assets subject to finance lease - - - - - - - - - -Other liabilities 726,248 235,566 76,490 140,689 63,930 69,733 74,043 52,495 13,302 -Deferred tax liabilities 78,860 - - - - 31,544 47,316 - - -

16,677,256 10,371,748 1,478,671 1,701,851 1,445,077 507,415 730,566 428,626 13,302 -Net assets 2,191,006 (2,722,596) 1,102,581 1,253,077 (582,945) (29,522) 59,860 131,272 2,979,279 -

Share capital/ Head office capital account 2,036,390Unappropriated/ Unremitted profit 154,820(Deficit) on revaluation of assets (204)

2,191,006

Rupees in '000

Rupees in '000

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Pakistan Branches


42.4 Operational Risk

This is the risk of losses resulting from inadequate or failed internal processes, people and systems, orfrom external events.

By its very nature, operational risk is inherent in all business activities of the Bank and hence its identification and managementis not limited to a particular department/division. The operational manuals of each business activity identify key operational issuesand define procedures to minimize these risks. Prudent and proactive operational risk management is achieved by adopting anintegrated approach whereby all Bank personnel are responsible for identifying, evaluating, reporting and mitigating such risksinherent in their respective lines of activities, in accordance with their operational manuals. Furthermore, key oversight functionsof the Bank such as Risk Management, internal Audit and Compliance work in conjunction to ensure that operational policies andprocedures are being observed in letter and spirit.

Like all modern-day institutions, the Bank relies heavily on computer systems to handle critical electronic data and to support itsdaily operations. The necessity of ensuring continuity in these IT-related operations is a source of considerable operational risk,which is mitigated through the development of a Disaster Recovery Plan (DRP). The DRP outlines standard operating proceduresto be followed in case of an unforeseen disaster, interruption or breakdown in the IT systems of the bank, thereby ensuring continuityin Bank’s business and in meeting customer needs.

The Bank recognizes that the field of sophisticated and structured operational risk management is in a state of evolution. In linewith the latest research and development in this area, the Bank plans to establish systems and procedures to employ various toolssuch as key r isk indicators and operat ional r isk inventory for the measurement and quanti f icat ion.

42.4 Shariah non-compliance risk

Shariah Non-compliance risk arises due to the lack of awareness amongst the staff while process a particular transaction whichmay result in reputational loss to the bank, as well as, reversal of income of the bank in respect of that transaction.

The risk is covered by carrying out extensive shariah training and orientation and frequent reviews by the sharia desk of the Bank.

43. GENERAL

43.1 These financial statements have been prepared using the revised format of financial statements prescribed in BSD Circular no. 4dated February 17, 2006 issued by the State Bank of Pakistan. The revised format for presentation of financial statements isapplicable for annual financial statements prepared by banks for periods commencing from January 01, 2006.

43.2 Figures have been rounded off to the nearest thousand rupees, unless otherwise stated.

43.3 Corresponding figures have been reclassified, wherever necessary details of which are as follows:

- Murabaha financing has been grossed up by Rs. 214,435 thousands, other assets have been reduced by Rs. 63,598 thousandsand liability has been increased by Rs. 150,837 thousands.

- Unrealized gain / loss on forward exchange contracts have been grossed up on assets side and liability side by Rs. 361,887thousands.

43.4 In general captions in respect of which there are no amounts, have not been reproduced in these accounts except in case ofbalance sheet and profit and loss account.

43.5 These financial statements were authorized for issue on 22 March, 2007.



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Annexure 1

Sr. Name and Name of individuals/ Father's/ Outstanding liability at start of year Principal Mark-up Other Total

No. address of the partners/ directors Husband's Principal Mark-up Others Total written-off written-off financial relief (9+10+11)borrower (with NIC No.) name provided

1 2 3 4 5 6 7 8 9 10 11 12

Rupees in '000

1 Sawan Impex P-9 1st Floor,

Cotton Plaza,Yarn Market,Faisalabad.

S/o Sheikh MuhammadZaki

24,908

24,908

25,147

25,147

38

38

9,908

9,908

201

201

38

38

10,147

10,147

201

201

Ahsan Jamal33100-4231824-3

STATEMENT SHOWING WRITTEN-OFF LOANS OR ANY OTHER FINANCIAL RELIEFOF FIVE HUNDERED THOUSAND RUPEES OR ABOVE PROVIDED

DURING THE YEAR ENDED DECEMBER 31,2006

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STATEMENT OF INTERNAL CONTROLS

It is the responsibility of the management to established the sound system of internal controls. The prime objectives of these controls areeffectiveness and efficiency of the operations, timeliness and reliability of financial and non-financial reporting, safe guarding and properutilization of assets and adherence to the internal policies procedures and external regulatory statues.

The evaluation of internal control system is an on going process and management regularly reviews the system for improvement. Immediateand appropriate actions are taken to mitigate the risks which are inherent to the banking business operations keeping in mind the costeffectiveness of the controls implemented.

The internal controls are reviewed by the internal auditors as well as external auditors. Management is committed to respond on therecommendations for improvement in internal control system by prompt and effective implications. Management has established a wellstructured system of internal controls with segregation of duties and different level of authorities, roles and responsibilities.

The internal control system is effectively and efficiently implemented. However, there are certain inherent limitations which hinder the smoothworking of the system. It can therefore only provide reasonable but no absolute assurance against material misstatement or loss.

In view of the above and based on the supervision, management believes that the internal controls are in place and operating effectivelyfor the year under review. During the year under review the manuals covering all the areas of banking operations are being implementedand are under continuous monitoring.

RISK MANAGEMENT FRAMEWORK

The risk management framework of the Bank is focused on the timely identification, measurement, monitoring and management of variousrisks to which the Bank is exposed, and the Risk Management Policies and Procedures Manual, duly approved by the Head Office, is themanifestation of this framework. The Manual has been communicated to all concerned business units for implementation and integrationwith existing policies and procedures. All key business areas such as credit, treasury and general banking are comprehensively coveredunder the Manual, which has been designed to ensure that all risk takers in the banks are fully aware of the techniques of identifying therisk factors allied with the banking activities, and the remedial measures necessary to mitigate such risks. In addition, a dedicated RiskManagement Division, equipped with the desired level of expertise, has the responsibility of assessing and monitoring the risk profile of thebank both at the portfolio as well as the transactional level.

The framework also recognizes and places due emphasis on the unique nature of risks pertaining to Islamic financial products and services,and ensures stringent Shari’ah compliance in all business activities of the Bank.

Apart from the monitoring and management of risks under normal state of affairs, the Bank also conducts periodic stress tests to assessthe resilience of its credit, investment, foreign exchange portfolios and liquidity position under exceptional but plausible circumstances.

For mitigating operational risk, policies and procedural manuals have been implemented. Revised comprehensive policies for know YourCustomer (KYC) and Anti Money Laundering have been implemented. Furthermore, policies and procedures relating to disaster recoveryand business continuity are also in place to ensure rapid recovery and timely resumption of all critical business functions following a wide-scale, regional disruption.

Although a new entrant in the area of consumer banking, the Bank places great importance on the pre, as well as post, disbursement riskissues relating to this area. In this regard, more comprehensive and elaborate policies and procedures have been formulated.

We believe that with the gradual but efficient implementation of the risk management framework, the overall risk management activities ofthe bank would become in line with the guidelines issued by State Bank of Pakistan. Continuous measures are being taken by the managementto fully implement the applicable portion of these guidelines, and the process is expected to be completed by December 31, 2007.

contentsmr. ayyaz ahmad chief financial officer & head of risk management mr. siddiqi anwar...

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