MBSL by Virtuso Inc Associates.

Annual Report 2011

We are Solutions

We are Solutions... Obstacles, problems appear from nowhere when you least expect them. And, they come in different shapes, hues and in between. They, are not symetrical and sometimes the same that was solved sometime ago does not react positively to that ‘time tested’ formula... The shape does not fit the creavice of the same shape any more. And that type of issue demands creative thinking...how to fit the round pegs in square holes. You need people who think beyond the status quo. The people who will explore, imagine and discover....a new way...forward,

...and that’s us.

Foreword... We met the challenges of 2011 with strategies and actions that reflected our core strengths and values. We assure that your Company today, stands stronger and firmly rooted than ever before. In addition to providing financial services, we ventured keenly into advisory role for the needy entrepreneurs, because... thought leadership is our DNA. We do not always rely on existing solutions, but continually strive to find new and creative ways that can be adopted to solve the challenges and obstacles that growing companies experience in an ever vibrant and evolving competitive marketplace. We guide them discover their unique strengths and find their â&#x20AC;&#x2DC;nicheâ&#x20AC;&#x2122; in the corporate corridors, classy superstores or the hyperactive bazaar. If they have the will, we will provide them with the knowledge and the tools. Our professionals are both pioneers and stewards of the products and services we provide, and the industries we serve...because in the overall scheme of things, we believe that...

Markets change. Businesses evolve. Values endure.

Board of Directors and Staff

Following Pages

Business Profile

Corporate Profile

Vision, Mission and Values

Board of Directors

Our Products and Services

6 Financial Highlights

Chairman’s Review

14 Chairman’s Review - Sinhala

17 Chairman’s Review - Tamil

20 Message from Chairman Bank of Ceylon

22 Corporate Management

24 CEO’s Report

Corporate Reporting

Financial Reporting

Management Discussion & Analysis

Annual Report of the Board of Directors on the Affairs of the Company

88 Notes to the Financial Statements

114 Share & Debenture Information

Risk Management

Directors’ Responsibility for Financial Reporting

116

Decade at a Glance

Sustainability Report

Report of the Remuneration Committee

118

46 Corporate Governance

61 Directors’ Statement on Internal Control

Statement of Value Added

Audit Committee Report

119

71 Independent Auditors’ Report

72 Income Statement

Independent Assurance Report

Economic/ Financial Indicators

120 Contact Information

122 Our Team

Balance Sheet

127

Glossary of Financial Terms

74 Statement of Changes in Equity

75 Cash Flow Statement

76 Accounting Policies

128 Notice of Meeting Form of Proxy

Our

Vision

To be the most dependable and diversified Merchant Bank to the nation

Our To To To To To

Mission

enhance our clients' wealth through optimal and sustainable solutions, enhance shareholder value, enhance knowledge and skills of employees to facilitate service excellence foster mutually beneficial relationships with our business partners, remain focused on our responsibilities towards social and national development,

Our

Values

In all our endeavours we will uphold the accepted norms, ethics and best policies, Our quest for excellence will be guided by prudence and national interests, We will foster intrapreneurship amongst our employees and create an atmosphere where caring, openness and integrity will be valued.

Our Products & Services * Financial Lease * Hire Purchase * Operating Lease

* Bills Discounting * Cheque Discounting * Term Loans * Project Loans * Bank Guarantees * Personal Loans * Real Estate/Property Development

* Project Financing * Margin Trading Facilities * Debt & Equity Syndications * Project Structuring & Promotions * Corporate/Financial Restructuring * Feasibility Studies * Company/Business Valuations * Independent Opinions * Mergers and Acquisitions Management and Leverage Buy-outs * Employee Share Ownership Plans * Corporate & Business Plans * Consultancy Services * Structuring of Public Private Partnerships

* Structuring and Acting as Managers & Registrars to Public Share/Debt Issues * Listing through Introductions * Private Placement of Equity and Debt * Rights Issues, Share Splits & Stock Dividends * Mandatory Offers * Underwriting * Listing of Debentures/Bonds * Islamic Capital Market Products * Managing De-listings * Portfolio Management/Investment Plans for Corporates & Individuals * Asset Securitization * Trustee Services

* Incorporation of Companies * Share Ledger Management * Management of Dividend Payments * Acting as Registrars to Rights, Debt & Bonus Issues

LKR Mn

Total Assets

25,000

19,236

2,500

2,596

Income

2,332

LKR Mn 3,000

2,808

Accomplishm 14,424 15,000

500

7,589

10,000

1,000

6,803

1,500

11,832

1,648

1,444

20,000

2,000

5,000

10*

* Includes only continuing operations

11*

07 08 09 10 11

1,550

1,310

500

22.84

20.42

(Group)

1,000

Net Assets per Share

18.65

2,000

1,500

LKR

1,931

1,996

2,500

18.93

Interest Income

2,309

LKR Mn

21.47

ments 08

10*

11*

07 08 09 10 11

* Includes only continuing operations

Company 2011 2010 2011 LKR'000 LKR'000 LKR'000 Income 1,559,222 1,522,980 2,807,560 * Interest income 1,335,948 1,107,121 2,309,171 * Profit before taxation 443,367 650,708 591,043 * Net Profit after taxation 332,355 449,671 398,418 Profit attributable to equity holders of the parent 332,355 449,671 353,141 Total equity attributable to equity holders of the Company 2,842,798 2,679,193 3,082,790 Total liabilities 7,094,039 4,503,408 15,628,085 Total borrowings 6,325,869 3,896,512 11,501,394 Total assets 9,936,837 7,182,601 19,236,035 Total lending portfolio 7,638,959 5,383,538 12,667,040 Return on equity 11.69% 16.78% 11.46% Earnings per ordinary shares (LKR) 2.46 3.33 2.62 Net assets per ordinary shares (LKR) 21.06 19.85 22.84 Share price (LKR) 39.60 45.80 39.60

Group 2010 LKR'000

2,595,680 * 1,930,807 * 795,608 * 540,977 492,345

2,898,399 11,237,268 9,722,728 14,424,350 10,515,274

16.99%

3.65 21.47 45.80

* Includes only continuing operations

Chairman’s Review My Dear Shareholder, It is great to meet you once again to present your Company’s positive results of 2011. The year in general was conducive for business and we continued with a cohesive business plan, though yet diverging at times, to adapt to changes in the market place to capitalise on opportunities in core banking business that offered sustainable development. For me, and my colleagues of the Board and our staff, it was a synergistic harnessing of our collective imagination and expertise to bring these results to you. Since taking over the responsibilities of Chairman I laid the foundation for good governance and transparency as our ethos of operations, with prime responsibi lity to Shareholders, Company, Employees and Stakeholders, and of course with direct alignment to Government’s policy for national development. These are the fundamental principles that should govern any publicly or privately held organisation, but practiced only at several organizations. If applied entirely and sincerely, I believe, the results will be awesome. We pressed on our galloping run from 2010 into 2011 and reached several milestones with diversified, but carefully identified objectives, and continued 2011 with increasing top line to historic levels, exclusively in core banking businesses and raised the benchmark of efficiency to epic proportions that none can match. MBSL - Your Company During 2011, MBSL revenue rose to LKR 1.6 billion and the profit stood at LKR 332 million, while Group Revenue amounted to LKR 2.8 billion and the Group profits stood at LKR 353 million. These results were good, but there were many factors; some considered and some beyond our control, which hindered the bottom line we desired. One factor was the unexpected collapse of the stock market and our fee based income diminished due to handing over of the resurrected finance companies that we rescued. The other was our own branch expansion, which you know that, we had only eight branches by May 2010, but the capacity was lacking to compete effectively. Lending rates were reduced to remain in the competitive market. Although the interest margin thinned, it did result in an enhanced business portfolio. With the emergence of peace the climate for business changed for better and our presence closer to the customers became imperative. The opportunities were already there and, in order to be ‘in place and visible’, we had to ‘jump start’ a program to deploy ourselves rapidly into the market place. By the end of 2011 we were able to expand the network to 14 branches with an ambitious plan to set up at least 30 Branches during year 2012 and I am pleased to state that we achieved this task by 11th April. This exercise cost us considerably and obviously, the immediate returns will be low and slow. But, looking from hindsight, I am sure you will agree that this will auger very well for the Company’s book balance in the longer run. Our cumulative income will multiply in many folds during the years to come. The other factor that caused escalation of costs was the restructuring of the employee remuneration package, which they richly deserved in order to eliminate prevailing anomalies and the expansion of the corporate structure. These steps were taken after careful deliberation, considering the future betterment of the Company, shareholders, employees and the country. Instead of focusing on short - term satisfaction of generating higher profits, we are confident that the tangible long - range results will be far more attractive, and the opportunities will be immense. Group performance The entire Group is now galvanised into a centric policy and it is heartwarming to notice the success level rising at a steady rate as every member of the family began shouldering the wheel collectively.

' The opportunities were already there and, in order to be ‘in place and visible’, we had to ‘jump start’ a program to deploy ourselves rapidly into the market place...'

MBSL Insurance - a special note... I am also very pleased to state that the performance of our subsidiary MBSL Insurance was exceptionally remarkable. Within a short period they have raised the Company from dilapidated status to unprecedented profitability and especially the manner they have risen to the occasion is applaudable. We at the Board take pride in acknowledging this fact and also would like to record the astute and exemplary leadership of Mr. Sydney Gajanayake, and also in the same vein, our appreciation to those untiring young men and women for their relentless discharge of duties at an admirable pace. In the meantime, we have been able to successfully conclude a Private Placement of LKR 200 million, which will be an additional benefit towards the progress of the business. MBSL Savings Bank Although, we have been able to manage the liquidity crisis of the MBSL Savings Bank and sustain the customer confidence, the fast tracking of the resurrection could not be achieved within the expected time frame, due to inadequate capital requirement. In the meantime, we have been able to enter into a Memorandum of Understanding with a consortium led by M/s Navara Capital Limited to dispose our shareholding, who have confirmed to the Central Bank of Sri Lanka of their ability to meet the capital requirement as required by the Central Bank regulations. This transaction will not only contribute to the bottom-line of your company a sum of LKR 325 million, but also take care of the capital adequacy and the progress of the Savings Bank as well. Improving efficiency and performance As a measure of value addition to our services we took several strategic steps by setting up an Internal Audit Division, and employed an AGM to head this division in order to gauge our performance consistently. In addition to maintaining proper accounting this division will keep our books in strict adherence to statutory financial regulations to ensure good governance and transparency. Also, we have set up a Marketing Division as well and a DGM in charge of Marketing to devise methods to sell our products and services effectively in a hotly contested market place. We believe that these measures will help sustain profitability and continuity in a broader sense. It is true that as a business we must be profitable and sustain the momentum with care in application and of course, be vigilant for opportunities and the risks as well. At the same time we must be mindful of the bigger picture: the national perspective. To get closer to the needy who otherwise have no recourse I firmly believe that our efforts must be focused in an egalitarian manner thus the fruits of labour will benefit not only the shareholders and stakeholders, but will trickle down to the very grass roots of the nation. There are many people who have ideas and talent but neither collateral for financing nor infrastructure to take off. We focused into this segment as we noticed phenomenal promise. We have all assets that are necessary: be it project financing, knowledge dissipation, or corporate advisory, which they will need as they progress. From November 2010, a mere 43 personnel of Agro Development Financial Services (Pvt) Ltd, located at 13 places around the country, with whom we have a MOU for joint operations to uplift micro financing, reached almost 3,000 customers mainly in fishing, agriculture and small cottage industries disbursing over - LKR. 150 million. Amazingly, the recovery level, at the year - end stood at 100%, with no defaulters. From any perspective or yardstick these are very good statistics. We are keenly looking at this segment with plans to expand our services to a wider clientele of this sector. Be it a fisherman in Puttalum, a coconut cultivator in Kurunegala, a poultry farmer in Kundasale or a batik designer in Hikkaduwa, they are same to us: Important. They will be the new money in the emerging economy, and their contribution will be sizable. We are planning to be with them from the very start of their enterprise and will stand by them, come what may. With the prevailing peaceful environment this segment will grow faster than expected as the government’s domestic agenda is directly addressing this audience. The infrastructure development drive will generate more and more cottage industrialists who were denied opportunities due to vagaries of war. The Micro finance project was launched taking our obligations towards the nation’s development into account, and it had a direct impact on our bottom line in 2011. However, the value added to over three thousand downtrodden people will manifestly accrue to the real income of the economy in a broader and realistic perspective. Today people of these parts have emerged with either their traditional trade crafts or many new enterprises that will have a potential market place either locally or internationally. Our personnel will perpetually be with them solving their problems and assisting their growth as our policy is to make steady gains serving the entire nation while making reasonable profits from this promising and fast growing segment. 30 Branches: 30th Anniversary As we celebrate our 30th Anniversary in March 2012, our rapid branch expansion that took place was a culmination of a considered business plan executed with meticulous precision. It is imperative that we should be where the real action is: wide across the country. We now have put the mechanism in place to locate ourselves near the customer and several key centres are already identified for immediate deployment. We are also looking forward to rejuvenate an alliance we had with SBI Capital (a subsidiary of State Bank of India) to give a new lease of life to our Fee Based Income activities. Our joint operations will mainly focus on the short listed projects of the Government’s National Physical Plan to conduct feasibility studies and find investors. This will open doors for us to invest into government projects, and in addition to help the Macro - economy of the country in a more grand scale. These projects undoubtedly will assist the Government’s plans to elevate the income and living standards of the rural folks, who otherwise and by default depend on Government subsidies.

In this endeavour we wish to express our gratitude to the Secretary and the Officials of the Ministry of Finance for their unstinted support and working ‘hand - in - hand’ with us using our expertise and resources to help materilaise those projects. Social Responsibility This is one area we have been somewhat active but not enough, I believe. We have helped many causes but the engagement was, noticeably, few and far apart. It is time that we took steps to be of service to the nation purely as a socially responsible entity per se. Making profits and sharing dividends with the shareholder is the fundamental, but not the only purpose that a business venture should stand for. No doubt, you will agree with me that there are times that direct intervention on a national cause is a considered spending. As of late we have identified a rural hospital in Kabithigollawa (former Army Hospital), which was falling apart, to be transformed in to a full-scale central hospital for the people of that area. We have engaged competent personnel to execute this venture without delay. Also, plans are underway to identify several schools that are in dire need of uplifting. ‘Co – opertition’…we expect to be a profitable and also be a True Corporate Citizen. I also have another dream that I pursue relentlessly. I expect to see a day, which we in the business, compete fairly in the market place as adversaries, not as enemies. I expect to see the day that we all can cross check and cross deck our resources to elevate the financial industry to higher moral plateau. That is the day I believe, we all can say that we have come of age as a ‘Fair Trading Culture’. This I know is a lofty thought, but I hope that when honourable Business Captains can sit and achieve ‘meeting of minds through co - opertition’ my dream may well become a reality. In conclusion. As always our staff have measured up fully to the task and delivered tremendously. As it is my nature I always will fight their corner to give them encouragement, due recognition and look forward to see them excel in their career goals. I would like to take this moment to thank my colleagues of the Board for their immense wisdom helping me charting the Company’s path to success, the CEOs of the Group for their tenacity in directing staff to achieve desired results and our Shareholders; our greatest strength who have been with us through comfortable and difficult times without hesitation. I also would like to take this opportunity to thank the Chairman, the Board, and the Senior Officials of Bank of Ceylon for their sound advice and boundless support. My sincere gratitude is extended to the Merchant Bank Branch of the CBEU, who played a pivotal role in assisting the Company to achieve its goals. The unselfish manner they discharged their duties, I believe, is applaudable. As you know we are on a roll, and will continue further. I will do everything that is humanly possible, not only to make MBSL profitable, but also achieve revered status among the Sri Lankan corporate sector. Looking forward to meet you next year representing MBSL proudly, which indubitably will be a truly respected Corporate Citizen of Sri Lanka.

M.R.Shah Chairman

iNdm;s;=udf.a iudf,dapkh

jiytupd; kPsha;T vd; md;gpw;Fupa gq;FupikahsHfNs!

2011 k; Mz;bl;fhd ngUNgWfis Kd;itg;gjw;F cq;fis kPz;Lk; re;jpg;gijapl;L ehk; ngU kfpo;r;rp milfpd;Nwd;. nghJthf fle;j Mz;L tHj;jf eltbf;iffSf;F rhjfkhdnjhU Mz;lhfNt ,Ue;jJ. ehKk; cWjpahd jpl;lq;fSld;> re;ijapy; Vw;gl;L te;j Vw;wjho;TfisAk; ftdj;jpy; nfhz;l tz;zk;> epiyahd tsHr;rpia vkf;F ngw;Wj; je;j ekJ tq;fpr; nraw;ghLfs; ekf;F mspj;j tha;g;Gfis kpf rpwg;ghf gad;gLj;jp mjp $ba gad;fis mile;J nfhz;Nlhk;. FOf;fshf rpe;jpf;fg;gl;l tplaq;fs; epGzj;Jt mwpTld; rpwe;j Kiwapy; xd;wpizf;fg;gl;ljd; ntspg;ghlhfNt ehDk;> ,af;FdH rigAk; vkJ mYtyH FOTk; ,t;ntw;wpia fhz;fpd;Nwhk;. ehd; jiytuhf nghWg;Ngw;wJ Kjy; epWtdj;jpd; gq;F cupikahsHfs; kw;Wk; gzpGwpNthH cl;gl;l midtuJ eyidAk; ftdj;jpy; nfhz;lthW Njrpa mgptpUj;jpapd; ghy; mf;fiw nrYj;jp tUk; murpd; nfhs;iffSld; xd;wpize;jthW rpwe;j epHthfk;> xopTkiwtw;w jd;ik Nghd;w tplaq;fs; vkJ nraw;ghLfspd; Kf;fpa mk;rq;fshf njhlHe;Jk; ,Ug;gjw;Fj; Njitahd mbj;jyj;ij cUthf;f ehd; ghLgl;L te;Njd;. mur epWtdq;fsfl;Lk; my;yJ jdpahH Jiw epWtdq;fshfl;Lk;> mit ntw;wpfukhf nraw;gLtjw;F mDgtg+Ht epajpfs; rpy cs;sd. ,Ug;gpDk;> mtw;iw kpf nrhw;gkhd epWtdq;fNs gpd;gw;Wfpd;wd. mt;twpTiufs; rupahd Kiwapy; gpd;gw;wg;gl;lhy; gpuk;khz;lkhd ntw;wpfis milayhk; vd;gJ vd;Dila jplkhd ek;gpf;ifahFk;. 2010 Muk;gk; Kjy; 2011 Mz;bl;Fs; gpuNtrpg;gJ tiu ,Ue;j vk;Kila Ntfkhd ntw;wpg; gazj;ij njhlHe;jthW> ,dq;fhzg;gl;l ,yf;Ffis Nehf;fp ehk; tPW eil Nghl;Nlhk;. mt;ntw;wpg; gazj;ij 2011 Mz;L KOtJk; njhlHe;jthW tq;fpj;Jiwapd; fPo; kw;Wk; Nky; jsq;fspy; tuyhW fhzhj rhjidfis Gwpe;j tz;zk; nraw; jpwDf;fhd Gjpa tiutpsf;fzq;fis ehk; cUthf;fpNdhk;. MBSL - cq;fs; epWtdk; 2011 k; Mz;by; MBSL tUkhdk; & 1.6 gpy;ypadhf ,Ue;jJld; mt;thz;L ngw;w ,yhgk; & 332 kpy;ypadhf ,Ue;jJ. mNj Ntis FOkj;jpd; nkhj;j tUkhdk; &. 2.8 gpy;ypadhfTk; ,yhgk; &. 353 kpy;ypadhfTk; gjpthfpaJ.

,g;ngUNgWfs; XusT jpUg;jpfukhf ,Ue;j NghjpYk; ftdj;jpy; nfhs;s Ntz;ba rpy tplaq;fSk; ,Ue;jd. mt;tplaq;fs; njhlHghd fl;Lg;ghLfspy; rpy ek;Kila MSiff;F cl;gl;bUe;jJld; NkYk; rpy vk;Kila MSiff;F mg;ghl;gl;bUe;jd. ,jdhy; Vw;gl;l rpy jilfs; fhuzkhf ,f;fhyl;lj;jpy; ehk; vjpHghHj;jpUe;j tsHr;rpfis fPo; kl;l nraw;FOtpdhy; mila Kbahky; NghdJ. gq;Fr; re;ijapy; Vw;gl;l vjpHghuhj tPo;r;rp kw;Wk; ek;khy; kPl;fg;gl;L Gj;JapH mspf;fg;gl;l epjp epWtdq;fs; rpytw;iw kPs xg;gilj;jjd; fhuzkhf fl;lzk; t#opf;Fk; Jiwapy; ekf;F Vw;gl;l tUtha; ,og;G Mfpatw;iw mj;jilfspy; rpyjhf ,q;F Fwpg;gplyhk;. ,tw;Wld; kw;WnkhU Kf;fpa tplaj;ijAk; ,q;F Fwpg;gpl Ntz;Lk;. mJ> ekJ fpis tiyaikg;ig tpupthf;Ftjw;F ehk; Nkw;nfhz;l nraw;ghlhFk;. 2010 k; Mz;lstpy; vkf;F nrhe;jkhf ,Ue;j fpisfspd; vz;zpf;if ntWk; 8 Mf ,Ue;jij ePq;fs; mwptPHfs;. NkYk; nraw; jpwDld; ,j;Jiwapy; nraw;gLtjw;F ,t;ntz;zpf;if NghJkhdjhf ,Uf;ftpy;iy. ,j;Jld; Jiwapy; ePbj;jpUg;gjw;fhf vk;Kila tl;b tPjq;fis Fiwf;Fk; fl;lhaKk; vkf;F Vw;gl;l xU vjpHkiw epiyahFk;. ,jd; fhuzkhf tl;b msT rpwpjhd NghJk;> mjdhy; FOkj;jpd; xl;L nkhj;j tiuglk; NkYk; ftHr;rpfukhf khwpaJ vd;gijAk; ,q;F ftdj;jpy; nfhs;s Ntz;bAs;sJ.

ehl;by; rkhjhdk; Njhd;w Muk;gpj;jTld; tHj;jfj; JiwAk; Gj;JapH ngw Muk;gpj;jik fhuzkhf thbf;ifahsHfSf;F ,d;Dk; rkPgkhFtJ ekf;F rhj;jpakhapw;W. mjd; NghJ gy Gjpa tha;g;Gf;fSk; cUthfpajhy; rupahd ,lj;jpy; rupahd jUzj;jpy; vk;ik epiy epWj;jpf; nfhs;tJ ,d;wpaikahjjhfpaJ. ,jd; epkpj;jk; mtru jpl;lg; gzpnahd;iw nraw;gLj;JtJk; mtrpakhapw;W. 2012 Kbtpy; Fiwe;j gl;rk; 30 fpisfisNaDk; mikg;gJ vd;w ,yl;rpaj;Jld; 2011 Mz;bw;Fs; 14 Mf vkJ fpisfspd; vz;zpf;if caHj;jg;gl;lJ. vdpDk; ,j;jpl;lg; gzpf;fhf ehk; ngUksT epjpia nryT nra;a Ntz;bapUe;jJld; mjd; ngUNgWfis ehk; ngUtjw;Fk; rpy fhyk; nry;Yk; vd;gijAk; kWg;gjw;fpy;iy. ,Ue;j NghjpYk;> J}uNehf;Fld; Nkw;nfhs;sg;gl;l ,t;tpupthf;fy; nraw;ghL ePz;l fhy mbg;gilapy; vkJ epWtdj;jpd; gyj;ij NkYk; mjpfupf;fr; nra;Ak; vd;gjpy; khw;W fUj;J ,Uf;f KbahJ. NkYk; ,jd; fhuzkhf vjpHfhyj;jpy; vkJ tUkhdk; gy klq;F caHtilAk; vd;gJk; epr;rak;.

epjp nrytplg;gl;l kw;WnkhU gpupthf gzpahsH nfhLg;gdT nghjpia ,q;F Fwpg;gplyhk;. ,Ue;jhYk;> jw;NghJs;s rpy khw;wq;fi ,y;yhnjhopg;gjw;Fk;> vk;Kila epWtdf; fl;likg;ig NkYk; tpupthf;Ftjw;Fk;> vkJ gzpahsHfspd; ed;ikia fUj;jpy; nfhs;Sk; NghJk; ,k;Kd;ndLg;G xU fl;lha eltbf;if vd;gjpy; fUj;J NtWghL ,Uf;f KbahJ. NkYk;> mjpf ,yhgk; <l;lf; $ba Mdhy; FWq;fhy nraw;ghLfSf;F gjpyhf epWtdj;jpd;> mjd; gq;FjhuHfspd; kw;Wk; mjd; gzpahsHfspd; ePz;L epiyj;jpUf;ff; $ba vjpHfhy ed;ik fUjpNa ,k;KbTfs;> gythW MNyhridfs; nra;jjd; gpd; kpff; ftdkhf vLf;fg;gl;ld. ,jd; %yk; vjpHfhyj;jpy; ehk; milAk; ew;gad;fs; kpfTk; ftHr;rpfukhditahf ,Ug;gJ kl;Lkd;wp mit vz;zpf;ifapYk; mjpfkhtJk; jpz;zk;. FOkr; nraw;jpwd; xUq;fpizf;fg;gl;l xNu Fwpf;Nfhis Nehf;fkhff; nfhz;L jw;rkak; FOkk; KOtJk; jd;id jpir jpUg;gp ,Uj;jy; fhuzkhf ekJ ntw;wpapd; msTfs; njhlHr;rpahd tsHr;rpia fhl;b tUtJ vkf;F kpf kfpo;r;rpia jUfpd;wJ. MBSL ,d;#ud;]; gw;wpa xU tpNrlf; Fwpg;nghd;W… vkJ Jiz epWtdkhd MBSL ,d;#ud;]pd; fle;j epjp Mz;bl;fhd nraw;ghL ghuhl;Lk; tpjj;jpy; ,Ue;jikia ,q;F Fwpg;gpl;lhf Ntz;Lk;. kpfTk; gytPdkhd xU epWtdkhf ,Ue;j MBSL ,d;#ud;]; epWtdj;ij xg;gPl;L mbg;gilapy; FWfpa fhyj;jpw;Fs; xU ntw;wpfukhd fhg;GWjp epWtdkhf caHj;Jtjpy; mjd; mjpfhupfs; ntw;wp fz;Ls;sdH. Fwpg;ghf MBSL ,d;#ud;]pd; epiwNtw;w ,af;fdH jpU. rpl;dp f[dhaf;f mtHfspd; Kd;khjpupahd epHthfk; kw;Wk; mtUila kjpEl;gkk; kpf;f nraw;ghl;L Mw;wiy ehk; ghuhl;Lfpd;Nwhk;. mNj Nghd;W xg;Gtik mw;w <Lghl;Lld; me;epWtdj;jpd; ,sk; gzpahsHfs; nraw;gl;L tUk; tpjj;ijAk; ehk; ,q;F tpNrlkhf Fwpg;gpl tpUk;Gfpd;Nwhk;.

nraw;ghl;ilAk; nraw;jpwidAk; Nkk;gLj;jy;

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Kd;ndLf;fg;gl;l ,r;nraw;ghlhdJ> 2011 ekJ epjp nraw;ghLfspYk; Fwpg;gplj;jf;fNjhU khw;wj;ij NeubahfNt Vw;gLj;jpAs;sJ. ,j;Jld; nghUshjhu uPjpahf xJf;fg;gl;bUe;j RkhH 3000 NghJGwpe; ehk;j Ed; toq;gf pAs;s njhopyhd; mtutuJ .Gtpg; gpuNjrq;fSf;Nf cupj;jhd njhopy; nraw;ghLfspy; Nghd;Nw Gjpa NgUf;F jw; cjtp Mj;ekpjp jpUg; jpahdJ ehk; ngw;i wkahsHfs; Nkyjpf ,yhgkhFk; njhopy; jpl;lq;fspYk; <Lgl;L tUfpd;wdH. ,tHfsJ cw;gj;jpfSf;F cs;ehl;by; kw;Wkpd;wp ntsp ehLfspYk; re;ij tha;g;Gfis ngWk; ,Ug; lwpag; gl;Ls;sJ. Njrj;jpw;FmtutuJ ekf;Fs;s ghLfis gilapy; > g,j; njhopyhd; ikahsHfSf; jw;NghJ epiy ehk; Ed; epjpgJk; toq;fz; fpAs; s njhopyhd; ikahsHfs; Gtpg;flg; gpuNjrq; fSf;epiwNtw; Nf cupj;Wjk;hd mbg; njhopy; nraw; hLfspy; Nghd; Nw Gjpa Fj; rfy xj;L Jiog; GfisAk; vkJ epGzHfs; ehk;cs; njhlHe; J kw; toq; fp tUfpd; Nwhk; . njhopy; Njitahd jpl;lq;fspYk; <Lgl; tUfpd; wdH. ,tHfsJ cw;gj;Clhf jpfSf;F ehl;by; Wkpd; wp ntsp ehLfspYk; re;ij tha;g;Gfis ngWk; epiy ,Ug;gJk; fz;lwpag;gl;Ls;sJ. 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Nkw;gb jpl;lq;fspy; vkJ mDgt mwpitAk; <LgLj;Jtjw;fhd toptiffisAk; nra;J je;J vk;ikAk; mr;nraw;ghl;by; ,izj;J nfhz;l epjp mikr;rpd; nrayhsH kw;Wk; mt;tikr;rpd; rpNu~;l mjpfhupfSf;F vk;Kila tpNrl ed;wpfis njuptpj;Jf; nfhs;s ,r;re;jHg;gj;ij gad; gLj;jpf; nfhs;fpd;Nwhk;. r%f nghWg;G vd;Dila vz;zj;jpd; gb ehk; <L gl;L tUk; mk;rq;fspy; ek;Kila gq;fspg;G NghJkhdjhf ,y;yhj xU mk;rkhfNt ,ij ehd; fhz;fpd;Nwd;. gy nghJ ifq;fupaq;fSf;F ehk; Njhy; nfhLj;Js;Nshk; vd;w NghjpYk; mjd; msT NghJkhdjhf ,y;iy vd;gNjhL mitfSf;F ,ilNa ,Ue;j ,ilntspAk; kpfTk; mjpfk; vd;Nw ehd; fUJfpd;Nwd;. r%fj; njhz;bYk; <LgLk; xU epWtdk; vd;w nrhw;nwhlUf;F cz;ikahd nghUs; fw;gpj;jtHfshf ekJ nghJg; gzpfis tpupthf;Ftjw;F ,JNt ey;y jUzk; vd;W ehd; ek;Gfpd;Nwd;. ,yhgk; <l;LtJk; mij ek;kpy; KjyPL nra;Js;stHfspilNa gq;fpLtJk; xU tHj;jf epWtdk; vd;w mbg;gilapy; Kf;fpa nraw;ghLfshFk; vd;gjpy; re;Njfk; ,y;iy. ,Ue;j NghjpYk;> xU ntw;wpfukhd epWtdj;jpd; xNu Fwpf;Nfhs; ,yhgk; <l;Ltjhf khj;jpuk; ,Uj;jy; $lhJ vd;w vd;Dila fUj;ij ePq;fSk; Vw;gPHfs; vd ehd; jplkhf ek;Gfpd;Nwd;. nfgpjpnfhy;yhitapy; gy FiwghLfSld; ftiyf;fplkhd epiyapy; cs;s xU kUj;Jtrhiy vkJ ftdj;jpw;F nfhz;L tug;gl;Ls;sJ. Kd;G xU ,uhZt kUj;Jtkidahf ,Ue;j ,k;kUj;Jt epiyaj;ij rPuikj;J> etPd trjpfs; nfhz;lnjhU kUj;Jkidahf khw;wp ,g;gpuNjrtho; kf;fspd; gaDf;fhf ifaspf;fj; jpl;lkplg;gl;L mjw;fhd eltbf;iffs; Nkw;nfhs;sg;gl;L tUfpd;wd. NkYk;> ,J Nghd;w> rPuikg;Gj; Njitg;gLk; fpuhkg;Gu ghlrhiyfs; rpytw;iwAk; ,dq;fz;L mtw;iw rPuikj;J Nkk;gLj;jpf; nfhLf;fTk; ehk; jpl;lkpl;Ls;Nshk;. ,yhgk; <l;LtNjhL kl;Lkpd;wp ey;ynjhU epWtdkhtJk; ek;Kila Fwpf;NfhshFk;. ehd; ePz;l ehl;fshf fhZk; xU fdnthd;Wz;L. vk;Kila Jiwapy; tHj;jf eltbf;iffspy; <Lgl;Ls;s epWtdq;fs;; xUtiu xUtH vjpupfshf ghHf;fhky; rfhf;fshf ghHf;f Ntz;Lk; vd;gNj mf;fdthFk;. mJ Nghd;wnjhU kdg;ghq;F %yk; ek; midtuplKk; cs;s tsq;fis xUq;fpizf;fTk; ek;Kila jfty;fis gfpHe;J nfhs;sTk; mjd; Clhf tq;fpj; Jiwia jw;NghJ ,Ug;gij tpl xU gz;gl;l> caupa ,yl;rpaKs;snjhU Jiwahf khw;wTk; ehk; Kaw;rpf;fyhk;. mt;thwhd xU ehspNyNa> rpwg;ghdnjhU tHj;jf fyhrhuj;ij ehk; mile;Js;Nshk; vd;W ehk; ngUkpjk; nfhs;s ,aYk;. ,J mrhj;jpakhdnjhU Nguhir vd ehNd rpy Ntis vz;ZtJz;L. ,Ug;gpDk;> xj;Jiog;G %yk; vz;zq;fis ,uz;luf;fyg;gJ gw;wp ek; ehl;L tHj;jf [hk;gthd;fs; xd;whf mkHe;J Ngrj; jahuhFk; xU ehspy; ,f;fdT edthFk; vd ehd; ek;Gfpd;Nwd;. Kbthf… toik Nghy vkJ mYtyHfs; midtUk; jj;jkJ flikfis rpwg;ghf nra;Js;shHfs;. vd;Dila Rghtj;jpw;F Vw;wthW mtHfSf;F Cf;fk; mspg;gjw;fhfTk; jFjp tha;e;jtHfSf;Fupa me;j];j;Jf;fis mtHfs; ngw cjtp nra;tjw;fhfTk; ehd; vd;Wk; ghLgLNtd;. mNj Ntis ekJ FOkj;ij ntw;wpapd; ghijapy; top elj;jpa tz;zk; ntw;wp ,yf;Ffis milaj; Njitahd rfy tpj xj;Jiog;GfisAk; je;J tUk; ,af;FdH rigapd; vd;Dila rfhf;fSf;Fk; FOkj;jpd; epWtdq;fspd; epiwNtw;W mjpfhupfSf;Fk; vd;Dila cskhHe;j ed;wpfis njuptpj;Jf; nfhs;fpd;Nwd;. mj;Jld; kfpo;r;rpapy; Nghd;Nw Jf;fj;jpYk; mire;J nfhLf;fhJ vk;Kld; cWjpahf epd;W jaf;fkpd;wp rfy xj;Jiog;Gf;fisAk; je;J te;j gq;F cupikahsHfSf;Fk; vd;Dila tpNrl ed;wpfs; cupj;jhFk;. mNj Nghd;W> ,yq;if tq;fpapd; jiytH> ,af;FdH rig kw;Wk; me;epWtdj;jpd; mjpfhupfs; xj;jhirfSf;fhfTk; vd;Dia ed;wpfis njuptpf;f ,r;re;jHg;gj;ij gad; gLj;jpf; nfhs;fpd;Nwd;.

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NkYk; vk;Kila ,yf;Ffis mile;J nfhs;tjw;F jd;dyk; ghuhJ vy;iyfis mwpahJ jhuhskhd cjtpfis nra;j CBEU mikg;gpd; kHrd;l; Ngq;f; fpisf;Fk; vd;Dila ed;wpfs; cupj;jhFk;. ePq;fs; vy;NyhUk; mwpe;Js;sNj Nghd;W ek;Kila ,g;gazk; Kw;Wg;ngwhj xU gazkhFk;. MBSL FOkj;ij ,yhgk; <l;Lk; xU tHj;jf mikg;ghf khj;jpukd;wp ,yq;ifapy; tq;fpj; Jiwapy; ed;kjpg;G ngw;wnjhU epWtdkhf caHj;Jtjw;F kdpj Mw;wypd; vy;iyfSf;Nf ehd; nry;tjw;Fj; jahuhf ,Ug;gij ,q;F $wpf;nfhs;s tpUk;Gfpd;Nwd;. MBSL FOkj;ij gpujpepjpj;Jtk; nra;jthW mLj;j Mz;bYk; cq;fs; midtiuAk; re;jpg;gij ehd; vjpHghHj;jpUg;gNjhL mjd; NghJ ,yq;if tho; midtupdJjk; ngU kjpg;G ngw;w xU xg;gw;w epWtdkhf ek;Kila epWtdk; khwp ,Uf;Fk; vd jplkhf ek;Gfpd;Nwd;.

vk;. MH. ~h jiytH

Message from Chairman - Bank of Ceylon

It gives me great pleasure to report to the shareholders on the much improved performance of our subsidiary company Merchant Bank of Sri Lanka PLC. Thirty years ago, MBSL was incorporated to provide specialised merchant banking services to the Sri Lankan corporate sector and since then MBSL, whilst having been totally focused in that business has successfully diversified its portfolio into other sectors such as, Leasing, Hire-purchase and Trade Finance. I am proud to say that MBSL has today come a long way pioneering numerous products and services from capital funding, corporate advisory, trade financing to corporate secretarial services etc, and today they have expanded the parameters to include micro financing to the small and medium business entrepreneurs that will most decisively influence the overall national economy. Present and past Chairmen and the Boards of Directors have nurtured MBSL to what it is today and their exemplary efforts and transparent policies on good governance have been the epicentral fact of MBSL’s corporate success. The present Board has added a new dimension to MBSL’s corporate objectives, by expanding its services to the very grass roots of the nation who have had limited success due to the lack of financial support for their skills. The efforts of this overall scheme, not only enhance the income and lifestyle of the downtrodden people but will also help supply the consumer with quality produce. This will add a throbbing pulse to the already vibrant Sri Lankan economy. Yet another important factor that I must underline is the Management and the staff of MBSL. In the recent past, the management and staff have delivered unprecedented results by their sheer hard work and perseverance. In today’s competitive market this is no easy task, and I am certain that they will walk the distance with pride. As the parent what we value most is the manner in which they have conducted business in the market place. In addition to consolidating their corporate strength, they have reached out to salvage and restore ailing businesses, which otherwise could have caused an adverse impact on the financial industry. I together with my Board of Directors at Bank of Ceylon, am immensely proud of MBSL; for their success and the purpose they stand for. We know that at the age of dynamic thirty, their focus is sharp, resolve is steadfast and the commitment is total…and trust me, the best is yet to come. I am pleased to note that in the recent years, MBSL has contributed significant dividend income to the Bank of Ceylon and it has also added value to the strengthening of the asset base of Bank of Ceylon. I wish them every success for the future in achieving their business goals for they are not only a business enterprise, but also a pivotal cog in the national development drive.

Dr. Gamini Wickramasinghe Chairman Bank of Ceylon.

We know that at the age of dynamic thirty, their focus is sharp, resolve is steadfast and the commitment is totalâ&#x20AC;Ś and trust me, the best is yet to come.

Corporate Management Lakshman Kaluarachchi

Chief Executive Officer- (Acting) Mr. Kaluarachchi is a holder of a B.Com Special Degree from the University of Kelaniya and has over 26 years experience in a wide range of Finance activities including 17 years experience in Merchant Banking.

Ranjith Siriwardena

Deputy General Manager – Strategic Planning & Risk management/Head of Trade Finance Mr. Siriwardena holds a B.Sc (Business Administration) Degree from the University of Sri Jayawardenapura and is an Associate member of the Institute of Chartered Accountants of Sri Lanka. He has over 20 years experience in Merchant Banking, Strategic Planning and Risk Management.

A M A Cader

Deputy General Manager - Corporate Advisory & Capital Markets Mr. A M A Carder is a Fellow of The Chartered Institute of Management Accountants, London (FCMA). He also holds an MSc in Information Management from Sri Lanka Institute of Information Technology (SLIIT) and Masters in Business Studies (MBS) from University of Colombo. Mr Cader obtained Postgraduate Diplomas in Business Administration and Economic Development (University of Colombo). He has completed the Certificate and Diploma in Marketing at the Chartered Institute of Marketing, London and Post Graduate Diploma in Information Technology by SLIIT and CIMA London. Mr. Cader is a Fellow member of Certified Management Accountants of Sri Lanka an Associate member of the Institute of Financial Accountants of London. He presently functions as the Deputy General Manager – Corporate Advisory & Capital Markets as the Head of Division. He has an experience of over 21 years at Bank in Corporate Advisory, Capital Markets and Fund Management and 36 years of total experience in Financial Management, Service Marketing, Business Administration and Investment Banking.

Shyamalie Amaratunga

Deputy General Manager – Merger Implementation

Ms. Amaratunga holds a MBA from Postgraduate Institute of Management (PIM), Postgraduate Diploma Level Certificate for Modern Banking from PIM, and B.Com (Special) Degree from University of Sri Jayewardenepura. Her 21 years of experience in banking covers Treasury Management, Corporate and Retail Banking, Trade Finance, Recovery, CRM, Strategic Planning, Balanced Scorecard Performance Management, M&A Process Management and Financial Management.

Jude A R Gamalath Deputy General Manager – Group Marketing & Product Development Mr. Gamalath holds a Diploma in Marketing and a member of the Chartered Institute of Marketing (CIM-UK). Obtained an MBA from the University of Colombo and currently reading for his PhD in Economics at the University of Colombo, Department of Economics. He also counts for over 14 Years of experience in Brand Management, Marketing and Product Management in multiple industries.

Priyantha Herath

Marina Phillips

Assistant General Manager - Finance & Treasury Management

Assistant General Manager/ Company Secretary - MBSL Group

Mr. Herath is an Associate member of the Institute of Chartered Accountants of Sri Lanka and an Associate member of the Certified Management Accountants of Sri Lanka. He holds a B.Sc (Business Administration) Degree from the University of Sri Jayawardenapura and Master of Business Administration from University of Colombo, Sri Lanka. He counts over 12 years of experience in the field of finance.

Ms. Marina Phillips is an Attorney-at-Law, Notary Public with over 18 years of experience in all aspects of Corporate Secretarial practice. She is also widely experienced in Capital Market operations.

Amitha Samarasinghe

Assistant General Manager/ Group Human Resources Ms. Samarasinghe holds a Bachelor of Arts Degree from University of Peradeniya and a Diploma in Human Resources from the National Institute of Business Management. She is a member of the Institute of Personnel Management. She possesses over 25 years of experience in the field of Human Resource Management in diverse business such as manufacturing, service and banking.

Shalintha Fernando Assistant General Manager – Group Internal Audit Mr. Shalintha Fernando is a member of the Institute of Internal Auditors (U.S.A) and is a Certified Internal Auditor – (U.S.A). He counts over 13 years of experience in the field of internal auditing in local conglomerates, as well as multinational companies.

Senaka Uduwawala

Assistant General Manager – Leasing & Administration Mr. Uduwawala accounts for over 29 years of experience in the Banking industry. His area of speciality covers Credit and Branch operations.

Chief Executive Officer’s Report Since assuming the office of acting CEO, this is my first review of operations of your Company and it gives me immense pleasure to meet you at the annual general meeting. (AGM) Having served you from 1994, first as a Senior Manager and subsequently as an AGM and DGM – Leasing, it was an illuminating experience that expanded my horizons of business knowledge. As we all know Mr. Gamini Karunathilake, after a distinct stint of sixteen years relinquished duties at the end of 2011. He served with boundless spirit for the betterment of the Company and his knowledge inspired us in no small measure. The economic outlook Asian Development Bank (ADB) remains upbeat on Sri Lanka retaining its growth forecast unchanged for 2011 and 2012 though revising South Asian regions figure in its latest update. Accordingly ADB forecast that Sri Lanka would record second highest economic growth in Asia this year. Releasing its Asian Development Outlook Update, ADB indicated Sri Lanka’s 8% growth forecast for 2011 and 2012 is intact and is in line with its original estimate. This is on account of robust exports and tourism. ADB said favourable export prices kept growth brisk in Sri Lanka enjoying benefits of revival in tourism as well. The stable political climate has contributed immensely to this fact as it has created opportunities in all markets. Several segments of economy are performing well, encouraging increase in borrowings, capital enhancement and increased growth rate while maintaining inflation at a single digit rate. Devaluation of Sri Lankan Rupee also will expect to strengthen exports. The tasks we face are challenging, and demands more than the best we can do. They demand creative thinking and allow me to assure you that we are ‘up to speed’ to handle them. Your Company Your Company recorded its highest income of LKR 1.6 billion, an increase by 2% over the last year. Consequent to strategic expansion of investments and effective management of fiscal activities in 2011, your Company recorded a profit before tax of LKR 443.4 million. Total assets of the Company as at 31 December 2011 was LKR 10 billion reporting a growth of 38% compared to the previous year, and Total equity capital increased by 6% to LKR 2.8 billion. Most of the income realized from Leasing and hire purchase businesses, whilst income from investment in quoted shares was not as desired. Net interest income of LKR 790 million increased by 15% compared to LKR 688 million for 2010. This was direct result of reduced borrowing costs and increase in the investments in lending portfolio and other investments. Operating expenses increased significantly during the year with personnel and logistical costs due to business and branch expansion. These expenses were mandatory, as our business plans envisage getting closer to customers where it is absolutely necessary, and these expenses are carefully monitored to stay proportionately in line with our revenue. Provisions for loans reduced by 6% as a result of efficient recovery of non - performing loans. Our new scheme to assist entrepreneurs of the grass root level performed brilliantly and the zero default rate is encouraging. In addition, a general provision of 0.5% is provided annually until it reaches 2.5% of the net portfolio to meet the future contingencies, if the need should arrive. The Company’s Return on Equity stood at 11.69% and Price earnings ratio at the end of year was 16.09 compared to that of the previous year indicating an increase of 17%. Group performance Merchant Credit of Sri Lanka Limited - focused on the SME corporate sector. MCSL’s Leasing and hire purchase generated more than 56% of the total income generated by the company. Net Interest income has increased by 27%, which by any yardstick is a significant achievement. This was mainly due to increase in disbursements in core business areas and better management of cost of funds. MCSL has achieved LKR 120 million Profit after tax, which is the highest in their history surpassing the previous highest profit achievements.

' The tasks we face are challenging, and demands more than the best we can do. They demand creative thinking and allow me to assure you that we are ‘up to speed’ to handle them.'

MBSL Insurance recorded a noteworthy come back by contributing to the bottom line in year 2011 too and is on its way. MBSL Savings Bank Ltd was expected to break even in 2011, but still not fully on its own. The overall Group performance was not as expected but I am sure that during 2012 all issues will be addressed to increase profitability. Branch expansion Despite stiff competition all our Branches are performing well deploying efficient strategy to gain market share in those areas. Also, plans are already underway to double our network to get closer to the emerging markets and many new custom products are formulated to address the diverse needs of those markets. Our teams are encroaching into untapped areas and clienteles with great success. We will reap the dividends of these efforts in the near future. As you know we have products that assist our customers with funding options, but our services extend far more than that. We offer knowledge and advice to plan and organize or restructure businesses to stay healthy. We believe that our advisory role has immense potential in the modern context. In addition to funding customerâ&#x20AC;&#x2122;s needs, we will advice them how to generate high returns. In that context we have many faceted talent in abundance to assist customers to increase productivity and add value to their organisations. We are committed to enhance our customerâ&#x20AC;&#x2122;s wealth, which indubitably will contribute to the overall wealth of the nation, thus economy. Moving ahead... I take this moment to sincerely thank the Chairman and the Board of Directors for their vote of confidence in me for appointing to this esteemed post.This is not a single handed performance, but a collective of many enterprising personnel whom we are fortunate to have with us. I am certain that they will give me their best to take your Company forward. I also wish to thank Mr. Gamini Karunathilake, our former CEO on a personal note for the friendship extended to me whilst wishing him good health and success in his future endeavours. And, finally our shareholders and stakeholders who have stood with us always. I look forward to share your wisdom and support in the future.

Lakshman Kaluarachchi. Chief Executive Officer (Acting).

1 2 3

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Management Discussion & Analysis Economic Review Outlook of Sri Lankan economy in year 2011 represented favourable political and economic conditions and experienced a massive development in the country that emerged through the total eradication of civil strife two years ago.Young and better educated population, existing industrial base and access to natural resources also contributed to the favourable growth in economy paving path to long - term sustainable development in Sri Lanka. This lead to Sri Lanka being recognized as a growing economy that is moving toward a middle-income nation, successfully. The key factors that contributed to this strong performance were the peaceful domestic environment, improved investor confidence, favourable macroeconomic conditions, and of course, the gradual recovery of global economy from the recession. There were significant inflows of capital since the end of civil war. Capital market has improved due to free cross border capital flows (both in and out of Sri Lanka), easier equity market listing, fairer tax treatment of corporate debt securities, reduced tax burden on unit trusts and proposed expansion of pension funds to fund future retirement costs. These deepened Sri Lanka’s capital markets, which helped Sri Lankan businesses to grow, profitably. Government policy on interest and exchange rates and the development of the long - term debt market contributed positively in accelerating the country’s growth. During the year, commercial loans growth increased due to relatively low interest rate, and proactive economic growth prospects. Low interest rates resulted in an overall decrease in the market interest rates and improvements in the business appetite to make further investments and lower funding cost for borrowers while assuring a sound business environment. The favourable macroeconomic environment and the supportive supervisory and regulatory framework strengthened financial system’s stability and helped the financial sector to display an improved performance. Industry Overview

Leasing in Sri Lanka has emerged as a popular method of financing the acquisition of vehicles and plant and machineries, agricultural equipment for primarily commercial and personal usage. During the past few years it has recorded a remarkable growth and this upward movement will continue despite the recent changes in the economic environment that took place due to exchange rate fluctuations, rise in interest rates and fuel prices. Banking Sector also has entered in to leasing arrangements along with their other banking related activities due to higher interest margin available in the Leasing and Hire Purchase industry, thus making the industry further competitive. During the year, MBSL also performed well in par with the industry trend, expanding its operations and lending portfolio. During 2011 The Company opened three new branches in Batticaloa, Hatton and Chillaw, together with a ‘One Stop Shop’ opened in the Head Office ground floor. MBSL continued to expand its portfolio in Financial Leases, Operating Leases & Hire-purchases portfolio amidst turbulent and highly competitive market conditions and recorded a substantial increase of 43% during the year. A Corporate brand campaign was launched in the fourth quarter of 2011 followed by Product communications campaign to increase awareness, contributed to the highest ever disbursements in a month recorded in December 2011. The Company’s Performance Profitability Profit after tax MBSL has always maintained prudent growth and with no difference in 2011, earned an after tax profit of LKR. 332 million. Looking at the performance of the Company, one can see a strong organic growth in its business volume amidst highly competitive environment through Leasing, Hire Purchase,Trade Finance, Investments, Share issue management etc.The growth of MBSL was characterized by diversified sources of income across new products, new customers, and new locations while acquiring businesses from every business segments.

Income

(Group)

2,332

900 2,500

800

LKR Mn

Shareholders' Fund

3,200 2,800

(Company)

2,843

LKR Mn 3,000

2,679

(Group)

2,331

Net Profit

1,000

2,596

LKR Mn

2,808

Leasing has now become as an attractive mode of financing the acquisition of the assets around the world and great potential for growth as it is perceived as a useful financing tool for assisting Small and Medium Entrepreneurs.

353

500

229

224

300

264

400

1,500

1,600 1,200

1,000 800

200 500

400

100 0

07 08 09 10 11

1,680

2,000

1,565

492

600

1,648

2,000

1,444

2,400

700

10*

* Includes only continuing operations

11*

07 08 09 10 11

The Companyâ&#x20AC;&#x2122;s total asset value increased by 38% to a value of LKR 9,937 million in comparison to LKR 7,183 million in 2010. The Company successfully managed its asset mix to optimise asset growth and stability. With loans and advances distributed across the spectrum - from Retail, Micro, SME to Corporate â&#x20AC;&#x201C; the Company focused on the management of a quality portfolio while paying close attention to growth. Total lending portfolio comprising lease & hire purchase receivable, loans & advances, investment on securities & properties and government securities have increased by 41% compared to last year. In 2011 also Leasing division represented the highest contributor as against other portfolio

Profit Before Tax

(Company)

LKR Mn

1,000

Leasing Leasing division being the highest income earner of the Company for the year 2011 has performed remarkably well surpassing all budgetary targets set for the division in 2011. Year 2011, in general has been a record year for majority of the units in the backdrop of a highly conducive environment that prevailed in the country for Leasing & Hire purchase business. According to Motor Traffic Department there were over 500,000 new registrations for the year 2011. The main growth sectors were the construction & transport industry while a fair share of lending has gone to self - employment development as well. The corporate & the public sector have been equally serviced thus catering to the majority segments of the economy. The economic development of the country, which is on the fast track since end of war has helped achieving, desired targets with ease. At times the competition become fierce when the interest rates were at rock bottom, with commercial banks offering very low rates to capture business.The Leasing Division however, combated such scenarios to capture more business

Total Assets

(Group)

LKR LKR

25,000

19,236

LKR Mn

The Company recorded a 58% growth in the total liability during 2011 which stood at LKR 7,094 million compared to LKR 4,503 million in 2010. During the period Company issued unsecured redeemable debentures amounting to LKR 1,000 million to fund the cash flow requirements due to expansion of business.

900 800

20,000

(Group)

14,424

200

10,000

7,589

254

203

273

300

6,803

443

15,000

500

11,832

600

400

651

700

Net Assets per Share

22.84

The overall operating expenses for the year increased by a mere 18% to stand at LKR 630 million, where staff expenses and salaries affected the increase mainly. In appreciation of the employees contributions, Company revised their salaries. The increase in the number of employees due to expansion took place during the year also contributed to this increase. The Company had to make general provision for quoted shares amounting to LKR 71 million due to the poor performance in the stock market.

Shareholdersâ&#x20AC;&#x2122; funds grew by 6% during the year 2011, enhanced primarily by retained profits. The fund base grew from LKR 2,680 million to LKR 2,843 million during the year, giving more value to share holders. Net asset value per share was LKR 21.06 on 31st December 2011 while it was LKR 19.85 on 31st December 2010.

21.47

Operating Expenses

Shareholders' Fund

18.65

The Company managed to earn a net interest income of LKR 790 million, which is 15% more than the previous year, as a result of the skilful management of its margins and deposit mix.

The total leasing portfolio during the year under review increased by 43% from LKR 3,817 million in 2010 to LKR 5,467 million in 2011 with overall lending across the product spectrum increased due to the market awareness programs carried throughout the year coupled with the expansion of operations.

20.42

The overall income of the Company grew by 2% in 2011 compared to the previous year due to the increase in interest income from all sources of income except from bill discounting. The Company reported an interest income of LKR 421 million from finance lease during the year, which is 48% more than the previous year. This is mainly due to the increase in disbursements resulted through the widespread marketing campaign that took place during the year coupled with the rise in interest rates. Treasury bills and money market income grew by 50% which is a commendable performance considering the relatively stable interest rates witnessed during the year. Interest received from Margin trading too witnessed a notable growth representing 144 % increase in 2011 due to trade related income taking centre stage as local capital market started activities to pickup after a dismal year in 2009.

in the Company as a core sector by 62%. Loans and advances from Trade finance division contributed 25% while Investment in government securities contributed 10% to the total lending mix in 2011.

18.93

Income

5,000

100 0

07 08 09 10 11

while retaining the existing clientele. Towards the end of the year when the rates were on the rise, the Leasing Division capitalized by offering reasonable rates rather than offering high rates to expand the portfolio. During the latter part of the year the division did more business comparative to the first 6 months of the year though rates of interest were on an upward trend. It is noteworthy to state that there are more than 74 organizations fighting for a fair share of the business available with the lead role always taken by the commercial banks with their ability to offer very low rates as opposed to the others. We were able to expand our branch network to three more locations in 2011 with the first being opened at Batticaloa and the rest two at Chilaw and Hatton. With the addition of the customer service centers to three more locations the network increased to fourteen branches. The Leasing Division was originally assigned with a target of 3.0 billion but was later revised to 3.2 billion during mid year when there were clear signs that the division was performing well above the projected target. The division ended up with a total new business acquired during the year amounting to almost LKR 3.8 billion. However, the market share of MBSL in the leasing industry still remain below 1% with the statistics available during third quarter of the year. Plans are afoot to capture a 3% share of the market during year 2012 with a rapid branch expansion during the first 3 months of the year. More changes and improvements to the prevailing systems in practice will be incorporated during 2012 in order to make “service excellence” & “24 hour leasing” more real. Lease and Hire Purchase collections by far has been the best over the years and kept improving month by month over the past 3 years with many non - performing Lease & Hire Purchase contracts being settled in the process. The division also recorded a healthy NPA ratio of 4% at the end of the year down by 1.39% over the previous year. The division has not encouraged reschedulements of bad facilities as a policy but maintained good credit controls to avoid such requests. However, the endeavour anticipated to reach the industry average of 3%. Main area of focus had been credit control when granting new facilities over the past few years and the leasing division has especially focused on quality credit and not on the quantity it actually disbursed during 2011, which really paid rich dividends throughout the year. The bad debt provision budgeted at LKR 70.6 million ended with LKR 54.8 million, and the majority being shared between disposal and general provision. The specific provision was very minimal and negligible as against the budget. This was mainly due to healthy portfolio build up and recovery on time and the special recovery drive to collect rental arrears, which lasted during the entire year.

Operations will be further strengthened in 2012 to improve the NPA and to reduce the bad debt provisioning in 2012. The division also made policy changes in recovering overdue interest from leasing division which brought in a healthy income of LKR 93 million over the budget of LKR 65 million recording a surplus of LKR 28 million over the budget. While stressing the point that the contribution of the division reached LKR 336 million over the budget of LKR 250 million, the highest in the history of MBSL with a good surplus of LKR 86 million. Micro Finance MBSL Commenced providing Micro Lending Facilities to rural sector in November 2010 with the aim of making contribution to enhance the national production and to make the living of a large number of persons of the low income category better. This scheme is branded as “Siyath Saviya”. MBSL for this purpose joined hands with Agro Development Financial Services (Pvt.) Ltd (ADFSL) through a signing of memorandum of understanding. This affiliation allowed the Company to take the “Siyath Saviya” Micro Lending Facilities closer to the more rural areas through wide spread branch network of ADFSL in the areas of Kekirawa, Thambuttegama,Hingurakgoda,Wattegama,Badur aliya,Narammala, Ambalanthota,Bandarawela,Yakkalamulla ,Galnewa and Galenbindunuwewa. Although the facilities under this scheme are considered without being over depended on security/collateral the Company does a comprehensive evaluation of the project and the repayment capacity in order to ensure zero level default rates. The “Siyath Saviya” Loan scheme was launched at Kuda Galenbindunuwewa village in Galenbindunuwewa area to commemorate the assumption of office for the second term of his Excellency President Mahinda Rajapakse. Micro lending facilities were provided to the farmers of the said village for the purpose of the coconut cultivation. By December 2011 the loans scheme has been extended to the sectors of; * Vegetable/fruit cultivation * Dairy farming * Horticulture * Fishing industry * Tea and coconut cultivation * Small businesses * Brick /pottery industry

1,550 1,310

1,000

(Group)

1,081

1,200

1,000

800

721

1,931

1,996

Net Interest Income

1,400

2,000

1,500

LKR Mn

1,288

(Group)

628

Interest Income

2,500

649

LKR Mn

2,309

The Management is already looking into broad basing the facilities offered up to the requirement of land, vehicles, three-

600

400

500 200

07 08 09 10* 11*

* Includes only continuing operations

10*

11*

wheelers and other small commercial vehicles. One of our main initiative in February 2011 was to provide new fishing nets and related equipment to fishermen who were the members of Miridiya corporative society in Minneriya .133 fisher folks who fish in the tanks of Minneriya and Girithale benefitted by this scheme and by December 2011 had paid back 75% of their undertakings. The signs are very encouraging as the loan disbursements up to 31 December was LKR. 155 million and the number of borrowers amounted to 3,000. It is with pleasure we state that the borrowers have paid 99.81% the loans outstanding as at 31 December 2011. The commitment of field staff attached to the ADFSL and the proper evaluation helped this commendable achievement. Steps will be taken to provide more financial facilities to sectors screened after their social and environmental risks. Self - Help Groups (SHG) will be encouraged to use “Siyath Saviya” financial facilities to multiplying the loan portfolio. Trade Finance Business activities of the Trade Finance Division witnessed another successful year recording a higher disbursement compared to the previous year. Cumulative disbursements for the year reached LKR 853 million, which is 30.8% over the budgeted target of LKR 652 million. Total product portfolio of the division increased to LKR 1,765 million from LKR 1,652 million in the preceding year recording a portfolio growth of 6.8 % during the year under review. However, net portfolio increased only by LKR 113 million despite LKR 853 million disbursements achieved during the year, due to settlement of few large facilities by the customers for interest advantage. Term Loans and Bills Discounting portfolio formed a major source of revenue to the division. During the year the division recorded revenue of LKR 282 million, which is equivalent to 18.1% of the Company’s turnover. Out of the total annual disbursement of trade finance division, 8.3% was contributed by the branches, which was a significant improvement when compared with the previous year’s contribution. The Division made aggressive and effective recovery efforts to control and maintain NPL within the accepted level. Despite the efforts made during the year, one large facility amounting to LKR 150 million fell into NPL category in the last quarter resulting an increase in NPL. Nonetheless, the net increase in NPL was limited to LKR 94 million due to recovery of overdue facilities to the value of LKR 55 million during the year. Moreover, the division was able to reach several successful amicable settlements with past due customers avoiding further legal costs to the division. The division actively participated in disposing investment properties of the Company and as a result was able to dispose an investment property to the value of LKR 266.7 million during the year, thereby strengthening the Company’s bottom line and improving cash flows. An impressive growth of product portfolio is expected to achieve during the ensuing year with the planned activities to increase lending through the branch network. Significant infrastructure developments and human resource allocations have been made during the last quarter of the year in order to increase Trade finance activities through the Branch network. Furthermore, professional training and on the job training have been provided to newly recruited staff assigned to branches specifically to handle trade finance activities to harness the benefit created by increased demand for trade finance products and services that resulted through aggressive marketing activities undertaken by the Company. Corporate Advisory & Capital Markets The investment banking and advisory division of the Company contributed with many transactions reaching its completion during the year under review. Fee based income improved

with extra efforts on fee - based income, while margin trading income clinched a prominent portion from the fund based income. 2010 2011 Change LKR million LKR million % Fee based income Fund based income Total

32 238 270

32 140 (41) 172 (36)

Though the division couldn’t contribute the same as 2010, but backed LKR 172 million to the top-line in 2011. Capital gains of LKR 99 million and dividends of LKR 5 million were worthy on the division’s performance. Nevertheless, provisioning for the share portfolio from fall in value of securities increased, with the stock market downturn that was recorded in the second half of the year. The successful completion of The Finance Company PLC share issue brought stability to the financial services industry and to the Company in the light of its financial restructure. Fees generated from a Business Proposal to secure supplies in the mineral sands industry was a novelty for the division towards building Public Private Partnership models. Revival of SBI Capital Markets Limited business partnership with Merchant Bank of Sri Lanka PLC was a milestone in the Company’s history. This is anticipated to deliver more revenue in the future in the form of fee based income in addition to investments in equity and debt financing. Therefore, close monitoring of Government projects that SBI Capital Markets Limited could get involved by financing or in advisory capacity is the main aim for the revival of the strategic alliance. During the year, a restructuring plan was presented for an Activated Carbon Company and a valuation for a hotel chain was also carried out to increase revenue from fee based activities. Reports prepared for the independent opinions and mandatory offers also contributed in the division’s revenue. As Corporate Social Responsibility acts, the Company organised three seminars for the business community. The seminars on “How to take your Company Public and Success Stories of Listed Companies in the Share market”, “Implementation of International Financial Reporting Standards” were of great success. In addition, MBSL partook in the Investor Day in October as an educative session for new investors, school children and many other new entrants to the market. A local yogurt producer 'Ranwan' was restructured during the year and revenue to the division is expected from this assignment in 2012. A Situational Analysis was carried out for the Sri Lanka Cricket Board in the latter part of the year on a nationalistic perspective for Sri Lanka Cricket. This analysis report focused on the stern financial revival plans and other operational recommendations required for the Board to recover from its crisis situation and stressing on tourism related branding strategy for Sri Lanka Cricket. Corporate Secretarial Services During the year under review, the Corporate Secretarial Division functioned as Secretaries/Registrars to several subsidiaries of the MBSL Group & Bank of Ceylon. The Division also extended secretarial services to several external companies. The Services provided by the Division are; • Share Ledger Management • Payments of Dividends to Shareholders • Payment of Interest to Debenture holders • Coordinating the release of financial statements of the Company to regulatory authorities and share holders within stipulated time line • Incorporation of Companies • Registration of trade marks Also the Division continues to focus on providing Registrars activities to listed companies.

Group Marketing and Product Development Division

Subsidiaries and Associates

Group Marketing and Product Development Division was established in fourth quarter of 2011 with an objective of integrating the marketing activities across MBSL group of companies. The Division extends its services to all subsidiaries of MBSL while focusing on increasing the overall “brand equity”. While planning and executing the marketing strategy of the group, main functions of the Division include new product development, brand building, business/market expansion and promotional activities. A corporate brand campaign was launched in fourth quarter of 2011 followed by product communications to increase awareness, which resulted in highest ever disbursements in a month recorded in December 2011.

Merchant Credit of Sri Lanka Limited.

Further, a new area that is focused through the Division is to carry out joint activities within the MBSL group to establish synergies. To be in line with this, a new branch concept, “One Stop Shop (OSS)” was launched in December 2011. The first OSS was opened in the Head Office ground floor. OSS provides a broad array of services under one roof which includes some of the products and services of MBSL subsidiaries as well. The concept aims to differentiate MBSL branch network from traditional bank branch networks. Also Marketing department is geared to implement aggressive plans in 2012 to further expand the MBSL presence in the Market.

The company has achieved LKR 120 million, Profit after tax while achieving LKR 150 million of profit before tax which is the highest in the history surpassing the previous highest profit achievement of 2010.

IT Division

The cumulative income of LKR 993 million also shows 11% growth over the last year while leasing and hire purchase counts for more than 57% of the total income which are core businesses of the company. The core business income represents 94% of the total income of the company.

The Company’s IT Department plays a premier role in facilitating efficient and effective services to all departments thus providing ‘real time’ information to the top management whilst supporting existing product distribution and lending growth. In the view of an extensive expansion of branch network, the IT Steering Committee has recommended venturing into a fully automated core banking application system. This would enable better functional and operational controls; with high degree of system security features, securing statistical approach for making decisions based on risk management measurements. As an initial phase, KPMG Ford Rhodes Thornton & Co. would conduct a “Functional Requirement Specification” (FRS) study on the current activities and future requirements of the Company. Subsequently a “Request for Proposal” (RFP) would be submitted and upon, procedures will be formulated to evaluate a new core banking application system. The revolution in information technology compels to redefine the existing IT security practices. With the increased use of Information Technology, Company’s IT Division has formulated a well defined IT Security Policy and Procedure to protect and safe guard the important data and assets of the Company whilst undertaking to spread Information Security awareness among all staff. Also, as a physical security measures, CCTV Security Camera System has been implemented at all branches. During the year 2011, Company expanded its IT infrastructure with the addition of three more branches providing on-line access to the core banking system. Presently, the Company’s IT Division is preparing for an implementation of 8 new Branches and 8 Extension Offices.

Overall performance of the year Disbursements The Company has achieved the unprecedented land mark of LKR 3 billion for the first time in total disbursements for the company which is the highest in the history. It should be noted that there is a significant growth in leasing as a product. Effectively the portfolio of the company has grown by 27% compared to the last year. Profits

Even though there is a significant increase in income, profits of the company does not represent the same proportionally as the margins shrank during the year with reduction of interest rates and unavailable capital gains from share portfolio with mark to market losses. Income

Net Interest income has also increased by 27% from LKR. 367 million in 2010 to Rs. 466 million, which is a significant achievement.This was mainly due to increase in disbursements in core business areas and better management of cost of funds. Non Performing Advances The Non performing advances are stated at 9.2 % against the total portfolio up to the month of December 2011, counts for LKR 485 million in value compared to the Total Net outstanding amount of LKR 5.4 billion. Comparatively for the same period last year was at 9.77 % which is a 57 basis points reduction year on year. Review of operations Finance leasing and hire purchase businesses are the major areas of the business of MCSL and they represents 55% of the total accommodations granted at the end of 2011. The main core products of the company, Leasing and hire purchase generated the highest income of LKR 527 Million, which counts for more than 57% of the total income generated buy the company. Pawning is a new product which has launched by the company in 2009 and was developed in 2011 and has a portfolio of LKR 104 Million which is year on year growth of 100%, amounting to LKR 53 million has generated a cumulative income of more than LKR 14.3 Million compared to previous year LKR 6.7 million. Other achievements Merchant Credit of Sri Lanka Limited was recognized by The Institute of Chartered Accountants of Sri Lanka at their Annual Report competition for 2010 as one of the five companies to be complied among the Registered Finance Company category by awarding a certificate of compliance for the second consecutive year.

MBSL Insurance Company Limited.

Key Areas of Strategic Focus

Overall performance of the year Financial Results

MBSL Insurance is thinking beyond local boundaries and wants to be a global insurance player by year 2020. Therefore, in order to strengthen the mission towards the vision, the Company firstly planning to increase present network of 50 branches into 100 branches with the regional level decentralized operation of that new 50 branches, 25 units will be completed at the end of 2012.

It is noteworthy that both lines of business recorded high growth rates which are very significantly higher than the industry growth rate in Life and General Businesses. During the year ended 31st December 2011, MBSL Insurance was able to enjoy gross written premium in general business of LKR 680 million and life gross written premium of LKR 143.1 million recording growth of 43% in general business and 59% in life business respectively. The total top line achieved by the company was LKR. 823 million compared to LKR 565 million achieved in year 2011 which is 46% growth year to year. Performance in general insurance. Team General took the company general GWP up from LKR 475 million in year 2010 to LKR. 680 million in year 2011 which is a very strong indicator of future direction of the general insurance business towards the achieving LKR. 1 billion mark in year 2012. Motor class achieved highest growth of 36% rallying with non - motor growth of 60%. Within non motor classes miscellaneous class recorded 32% and fire and marine classes recorded a growth of 262% and 40% respectively. During the year under review combined ratio was 113% compared to 111% is a marginal increase mainly due to increase in administrative expenditure as a result of branch network expansion and more recruitment in underwriting and sales personnel. We were able maintain positive underwriting results even with rapid expansion of branch network despite the fact majority of the insurance firms in the industry were recorded negative underwriting results. General profit before tax was LKR.7.7 million which is commendable achievement after second year of acquisition of failed insurance company by providing provisions for previous years mismanaged business transactions. Performance in life insurance Team Life was not second to team general and recorded GWP of LKR.143.1 million compared to LKR.90 million in 2010. Companies flagship product 'Vinvida' contributed highest among other products which is a very unique products with the combination of investment, protection and retirement benefits contributing 85% of the total GWP and rest was contributed by 'Sisumina, Uththunga, Naya Sahana and Group life'. Financial Strength and Stability The Company took a bold step to increase its Share Capital by way of Private Placement in order to meet proposed minimum capital requirement and to divest shareholding of MBSL Bank as single shareholder. The Private Placement was fully subscribed demonstrating the confidence of the business community towards Company’s future prospects despite negative investment sentiment that prevailed during the period of last quarter of 2011. The strength and the stability further evident that close to 10% of the shareholding was purchased by MAS Holdings which is one of the largest apparel manufacturing company in the world and one of the privately owned blue chip company in Sri Lanka. It is vital important that insurance companies must have strong capital base and strong reinsurance panel to demonstrate ability to underwrite large risks and while MBSL Insurance qualifying both criteria over and above regulatory requirements and we are proud and boast ourselves, we are the only privately held insurance company that shareholder’s assets are more than LKR 1 Trillion.

Since the Company has identified Life Insurance as a potential contributor to the company’s growth and also with the vision of giving risk transfer mechanism to rural mass of less privilege at affordable cost, the rest of the branches will be established in rural areas in the island. With the 75 branches in 2012, we will continuously consolidate into a higher rank in the industry while focus of capturing sizable percentage of the market shares both Life and General Insurance as a composite insurance company. Further the Western Province operations will be further strengthened by introducing fully fledged City Office in addition to the existing branch network and Corporate Business Development Unit. We will continuously focus on our top line of business in coming years in order to capture sizable market share while maintaining a positive bottom line moderately. Therefore despite severe competition and the pressure in the short term on the underwriting results we will continuously engage in improving of risk and pricing functions in order to achieve our objective without compensating bottom line to top line. Lanka Securities (Pvt) Limited (LSL). Overall performance of the year Profitability Our associate company Lanka Securities (Pvt) Ltd, recorded a profit of LKR 155 million for the year 2011 despite the unexpected collapse in the stock market. Revenue & Expenses Revenue which represented brokerage income charged from clients for shares bought and sold on their behalf, amounted to LKR 333 million was 11% less than that of previous year mainly due to the poor performance in the stock market as we have stated above. Finance cost for the year decreased by 34% to LKR 1.3 million whilst the company recorded a favourable growth in its interest income by 76% to LKR 24 million at the end of year. The overall operating expenses for the year increased only by a mere 16 % to stood at LKR 210 million. This was mainly due to bad debts provision made during the year amounting to LKR 12.8 million in addition to the general increase in price levels. The corporate tax charge for LSL dropped by 46 % reflecting the reduction in taxable income. Share holders’ fund Share holder’s fund showed a slight growth of 9 % from LKR 419 Million to LKR 458 million in 2011, whilst paying a dividend amounting to LKR 116 million. Assets Total asset base increased by 1%, whereas long term investments increased by 632 % from LKR 16 million to LKR 114 million significantly during the year 2011. During the year Company invested in PPE mostly in computer and accessories amounting to LKR 17 million. Treasury bills investment has increased by 633% compared to last year end and trade receivable have increased by 74%.

Risk Management Composition of the Committee The following members served on the Integrated Risk Management Committee (IRMC) during the year under review. Mr V Kanagasabapathy Director Chairman Mr Gamini Karunathilake Chief Executive Officer (resigned w.e.f. 31 December 2011) Member Mr Lakshman Kaluarachchi Acting Chief Executive Officer Member Mr Ranjith Siriwardena Deputy General Manager – Strategic Planning & Risk Management /Trade Finance Member Mr Priyantha Herath Assistant General Manager - Finance and Member Treasury Management Mr Senaka Uduwawala Assistant General Manager - Leasing Member Ms Shyamalie Amaratunga Deputy General Manager – Merger Implementation Member Mr A M A Cader Deputy General Manager – Corporate Advisory and Capital Market Member The Company Secretary functions as the secretary to the Committee. The other senior management staff members are invited to attend the meeting when their presence is required. Role and scope of the Committee The primary purpose of the Integrated Risk Management Committee (IRMC) is to assist the Board in fulfilling its oversight responsibilities for all aspects of risk management practices adopted by the Company. The role and scope of the IRMC are as follows : - - - - - - -

To assess all risks faced by MBSL, through appropriate risk indicators and management information. To supervise broad risk categories, ie credit, market, liquidity, operational and strategic risks and work with key management personnel closely and make decisions on behalf of the Board within the frame work of the authority and responsibility a signed to the committee. To review the adequacy and effectiveness of all management level committees such as the credit committee and the asset and liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the Committee. To recommend prompt corrective action to mitigate the effects of specific risks whenever they rise beyond the prudent levels defined by the committee on the basis of Bank’s policies and regulatory and supervisory requirements. To recommend appropriate actions against officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the Committee, and /or as directed by the Director of the Department of Supervision of NonBank Financial Institutions of the Central Bank of Sri Lanka. To submit a risk assessment report after each meeting to the Board seeking the Board’s views, concurrence and/or specific directions. To establish a compliance function to assess the relevant establishment’s compliance with laws, regulations, directions, rules, regulatory guidelines, internal controls and approved policies on all areas of business operations.

Activities carried out by the IRMC under review are summarized below. •

Introduced a Risk Management Framework to achieve Company's objectives, set forth in following four categories:

• • • •

Strategic Operations Reporting Compliance

– – – –

Board of Directors

Integrated Risk Management Committee

high-level goals, aligned with and supporting its mission effective and efficient use of its resources timely and reliability of reporting compliance with applicable laws and regulations Board of Directors

Remuneration Committee

DGM - Risk Management Credit Committee

CEO

ALCO Senior Management Committee Investment Committee

Board of Directors

AGM - Group HR

• • • •

Formulated Credit Policy manual to improve the credit quality and apply uniform practices on evaluation and granting credits across the all branches. Strengthen the staff of risk management division with Head of the unit at DGM level on full time basis. Established Assets and Liability Management Committee (ALCO) with defined Terms of Reference reviewed the functions of ALCO. Investment Policy was reviewed and recommended for the approval of the Board.

The Company was in the process of establishing an independent Risk Management unit and introducing a formal Risk Management framework. The committee noted that in the absence of a formal mechanism to identify, assess, manage and mitigate the risk, the Company has been adopting informal practices and following control systems to mitigate the risk.

Risk

Risk mitigation action

Credit risk

• Centralised credit appraisal process • Segregation of credit execution and approvals • Established credit approval limits • Approval of high value facilities by the Board of Directors • Asset category base exposure limits • Single client exposure limits • Product based pricing • Close monitoring of performances • Maintaining healthy provisioning policy • Obtaining adequate collateral

The risk of possible loss being incurred as the result of a borrower or counter party failing to meet its financial obligations.

Market risk The risk of potential loss arising from adverse effects on interest rates, foreign-currency exchange rates, equity prices etc.

Liquidity risk The risk of MBSL being unable to fund assets or meet obligations at a reasonable level, in case of extreme market volatilities.

Operational risk The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Strategic risk The risk associated with business plans and strategies including plans for entering new business lines.

V. Kanagasabapathy Chairman Integrated Risk Management Committee

• • • • •

Matching the duration of the assets and liabilities and review by ALCO Timely re-pricing of products Maintaining healthy gearing ratio Scenario analysis and sensitivity analysis to assess the impact to earning due to interest rate changes Changes to investment limits base on market condition

• • • • • • • •

Monitor Balance Sheet liquidity and make improve ments to maintain healthy gearing ratio and review by ALCO Prepare projected cashflow statements regularly Daily monitoring of disbursement and collections Timely re-pricing of products Maintain additional lines of credit to use as a buffer Maintain strong institutional Rating Prepare gap anlysis and take prompt actions Close interaction between Finance division and business units for respective cash projections on continual basis

• Established processes with internal controls • Segregation of duties between front line employees and back office employees • Approved delegated authority limits • Computer generated MIS for management review on monthly basis • Conduct Senior management meetings on regular basis • Internal audit department • Maintain off-site data backup as per Disaster Recovery Plan requirement • Wide Area Network connection for all branch network to have real time data • Regular review on compliance with Statutory requirement and Central Bank Directions. • • • •

Preparation of Corporate Plan and monthly budget for the financial year Monthly review of the performance with the budget and take corrective actions Prepare detailed analysis on feasibility and profitability of new activities before implementation Review industry trends and take prompt actions to suit the Company.

Sustainability Report

Preserve: Customer Customer success is of paramount importance... At the macro scale…

Sustainable future… We have strong commitment to provide our customers with products and services of unrivalled quality, reliability and assurance, which results in improved efficiency and performance of their businesses. Through applying both our knowledge and experience, together with responsive service attitude of never letting customer down, we are able to develop innovative and seamlessly integrated success oriented solutions that our customers can depend upon. These solutions help increase customers’ productivity and profitability, thus showing that we are not just elevating businesses, but help accelerate the entire economy. Customer Centricity. Our unique customer centric framework is so designed that a constant interaction and dialogue between us keeps both parties ‘up to speed’ at all times. Periodic ‘Get together’ events have enormously helped us to address their needs and problems and the resulting trust and confidence has moved both MBSL and the customers forward. Integrated enterprise. Seamless integration between all parties is at the core of our operations. Be it funding or knowledge dissemination we have been and shall be with them through out. From mega scale projects to ‘home businesses’ our personnel, together with our strategic partners keep close contact with our customers as we try to ensure uninterrupted running of their businesses.

We have assisted our customers to elevate their businesses to public scale and increase workforce providing much sought employment in the country. In addition these have enhanced production and in some cases exports as well. While providing Capital Market services we also provide comprehensive knowledge through seminars and workshops to educate the business sector with proper methods as to improve their levels of production and services. Imparting knowledge... At the same time we work closely with our clients disseminating our knowledge through get together events and workshops to help them understand the modern day challenges before they are faced with them. We have conducted many seminars on leadership, good governance, public relations, proper accounting and responsibility sharing etc. These events were patronised by many types of customers who acknowledged that our efforts enlightening and encouraging. As a result they have reoriented some of their activities and have seen immediate results with high productivity ratio and greater employee participation. At the micro scale… In November 2010, MBSL commenced providing Micro Lending Facilities to rural sector with the aim of making a contribution to uplift the living standards of a large number of persons of below poverty line and thus, national production. This scheme, branded as ‘Siyath Saviya’ and MBSL for this purpose joined hands with Agro Development Financial Services (Pvt.) Ltd (ADFSL) through a signing of memorandum of understanding to take it across the country. The “Siyath Saviya” Loan scheme was launched at Kuda Galenbindunuwewa village in Galenbindunuwewa to commemorate the assumption of office for the second term of his Excellency President Mahinda Rajapakse. Micro Lending facilities were provided to the farmers of this village for the expansion of coconut cultivation. This affiliation helped the Company to take the ‘Siyath Saviya’ directly to the real rural areas through wide spread branch network of ADFSL in areas i.e: Kekirawa,Thambuttegama, Hingurakgoda, Wattegama, Baduraliya, Narammala, Ambalanthota, Bandarawela, Yakkalamulla,Galnewa and Galenbindunuwewa. The facilities under this scheme are considered strictly on non security /collateral basis, but on a comprehensive evaluation of the project and the repayment capacity in order to ensure successful recovery rate. By December 2011 the loans schemes were extended to many other sectors such as vegetable/fruit cultivation,dairy farming, horticulture, fishing industry, tea and coconut cultivation, home businesses and brick /pottery industry. The Company is studying possibilities to extend these facilities for three-wheelers and other small commercial vehicles as well.

development trickling to the very core of the nation

Preserve: Employee

Sustainability Report... cont'd/ We are as good as our personnel… The very success of MBSL Bank over the years has been its people. The Company recognises that employee engagement is the key success factor driven towards the positive mind set of employees who believe that they can make a difference in their working environment by adding dynamic values to the services provided by them. Hence the Bank employees work towards the achievement of mutual beneficial objectives, with personal goals aligned to overall business goals. The dedication and commitment by the MBSL Team has taken the Company to newer heights. The Company’s sterling performance would not have been possible if not for the concerted team effort that focused in achieving the Bank’s vision through applying the ideas of the mission that the Bank has identified. We recruit the best… Recruitment Policy has been re-designed giving due consideration to create equal opportunities in selecting people, maintaining the consistency and transparency in the selection process, which is available on-line and awareness is created among employees at recruitments and at promotions. As a policy, our aim is to first look internally to fill vacancies and if needed from external sources. The Company believes that internal career progression motivates the employees to develop competencies demand for future growth and employee sustainability & retention in the Company. In keeping with our recruitment policy, we have filled the following vacancies throughout the year. Grade Number Deputy General Manager 01 Manager 01 Deputy Manager 02 Assistant Manager 01 Executive 06 Management Trainees 14 Junior Executive 05 Staff Assistant 14 Office Assistant 06 Total 50 Gender-wise

Male Female

Age-wise

<25 25 31 35 41 46 51 56>

Service - wise Analysis of Employees

- - - - - -

30 35 40 45 50 56

<5 5 10 15 20 25>

- - - -

10 15 20 25

Our Equality Policy Gender - wise

7,719

7,502

8,000

6,871

10,000

7,862

LKR'000

(Company)

9,175

Revenue per Employee

Revenue per employee Net profit per employee Value added per employee Total Assets per employee

9,175 2,709 5,753 43,271

2011 LKR'000 7,719 1,645 3,629 49,192

The Company actively strives towards the creation of a culture of learning and nurturing people to understand the future objectives of the Company. Hence the Company utilizes training & development as a tool to create a high level functional capabilities and emotional balance.

6,000

4,000

2,000

Employee Productivity Indicators 2010 LKR' 000

07 08 09 10 11

The Company’s training needs analysis is based on the data gathered in respect of each and every employee from the Heads of the Departments. The annual training plan is prepared for the development of the work force in terms of co-banking, managerial, technical and specially in the areas of knowledge and skills development needed. Local Training A streamlined process of nominating employees for training in external institutions has been a regular practice at the Company. Such trainings are based on the needs of the Company and individual developments and 72 employees were nominated for such programmes during the year. We also conducted a series of training to enhance practical skills of sales & marketing workforce with the assistance of Sri Lanka Foundation Institute to further improve skill levels of the marketing staff. The Company posses highly experienced internal resource personnel in various specialised areas of Banking, who perpetually conduct a wide array of in-house training programmes. The Company is giving special emphasis on “Onthe-job-training” to new recruits under the guidance of experts specialized in respective areas. Overseas Training Overseas training opportunities are availed to those deserving employees with aspirations of furthering their career skills. Name Name of the Workshop /Programme

Country

Ms Chamathi Perera

Course on Advanced Contract Drafting, Negotiation and Dispute Management – 3/3/2011 to 4/3/2011

India

Ms Fahima Ishar

- Do -

India

Mr Charith Wijesuriya

Lending Strategies to MSEs” 4/7/2011 to 8/7/2011

India

Ms Chandima Weerasekera - Do -

India

Two Year Training Programme for Management Trainees : This programme is specially designed to serve the purpose of training and developing the Management Trainees recruited to the Company.They are envisaged to be engaged at managerial positions in the future. The Sri Lanka Foundation Institute was awarded to carry out this assignment with a collaboration of MBSL Bank. It is especially noteworthy to state that the institute has carefully and sufficiently added ‘quality value’ and meticulously blended the technical sessions accompanying soft skills in designing a two year programme.

endless options for career advancement...

Preserve: Employee

Sustainability Report... cont'd/

Bank’s Anniversary The Bank’s anniversary that falls on 4th March and the 29th Anniversary was celebrated with religious ceremonies invoking the blessings of all religions. The employees who completed 10 years and 20 years were recognised at this ceremony. Anniversary is an event that every member await with much enthusiasm for it is the day that they physically interact with distant branch companions once a year. It is the day they put all heartburns behind and engage in casual banter and make merry. This event has always helped to create an atmosphere of camaraderie. From Chairman and Board of Directors to the support staff rejoice at this event and all are looking forward to 30th Anniversary in 2012 with much fanfare and spirit. Welfare Activities : Monthly Meeting with the staff are held by the Departments and Branches where they discuss issues and find solutions pertaining to customer services, business development, general problem solving and grievances with greater effectiveness. The Company organizes different social activities including religious ceremonies and recreational programmes throughout the year to motivate the staff and promote interaction of families of staff members in the Company. The Welfare & Recreation Club of the Company organised the “Annual Get-Together” which was held on 9th December 2011 at Hotel Ramada. Recognition Every year the Company recognises the true performers and managerial prospects. In 2011 also we identified several and are hand picked for suitable career advancements. MBSL employees enjoying organic food produce...

Organic foods for employees... In order to provide our staff members and their families with nutritious food products MBSL Welfare & Recreation Club together with United Nation’s Development Program (UNDP) has initiated a program to sell indigenous and organic food item at very affordable rates. These produce are directly supplied by farmers and are branded as ‘Mihirasa’ and genuine treacle/ palmyrah products, varieties of organic rice, vegetables, grains and grams, fruits, sweetmeats, spices, dried fish products etc are available for purchase. Community relations - Scholarships for Ranaviru families. As a mark of gratitude for our fallen war heroes, In 2009 we joined hands with MCSL to establish a Trust Fund to help 50 children of those bereaved families. This fund will provide financial assistance to them until they complete their ordinary level examination. This gesture also is a part of our CSR activities to cultivate potential future human assets that will be useful to the nation’s needs. This is one of our corporate endeavours that will continue until the children sit for their G.C.E Ordinary Level examination.

rejoice... at the annual ‘Get Together’

Sustainability Report... cont'd/

Preserve: Community

assistance to whom, ...who needs assistance

Dissemination of knowledge

Assistance to terminally ill people

During 2011 the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) recognized Merchant Bank of Sri Lanka PLC as a Strategic Level training partner. We as a training partner, provide practical training to students of CA Sri Lanka, to groom future finance professionals, which in turn will assists the long term development of the accountancy profession in the country.

As a humane gesture, the Company donated medical supplies to the Cancer Hospital recently and also offered monetary assistance to an individual to support his medical treatment for speedy recovery.

Customer focused workshops We continued our closer interactive relationships with our customers with many seminars and workshops focusing on educating them to conduct their businesses with proper knowledge and understanding at different locations around the country.

Compliance with Regulatory Requirements The Company is fully committed to required regulatory directives and comply with the monthly and quarterly reporting requirements to Central Bank of Sri Lanka. The Company also adheres to Central Bank of Sri Lanka â&#x20AC;&#x201C; Direction No.5 on Finance Leasing (Reserve Fund) by maintaining a Reserve Fund equivalent to 7% of profit for the year. The Company also comply with tax and other reporting requirements set by the respective regulatory authorities.

We also conducted a Seminars and Practical session on Neuro Linguistic approach to leadership, How to take your company public and Success stories of Listed Companies in the Share Market and a session on IFRS Implementation. Helping Hands Master Samitha Yohan was elected to represent Sri Lanka at the Asia Inter cities Teenagers Mathematics Olympiad competition held in Nepal last year and was presented with a sponsorship for passage.

Sustainability Report... cont'd/

Preserve: Environment

The peak of â&#x20AC;&#x2DC;Pinnawala Water Fallâ&#x20AC;&#x2122; Balangoda - Bogawantalawa Road, Sri Lanka...

our efforts to protect, preserve and nurture environment and reduce waste of resources will continue with much more determination...

Respect for individuality Our core tradition of respecting individuality without discrimination as to race, religion or else is paramount and adherence to national traditions are always observed in all our endeavours. Every special event is graced by the blessings from all faiths and national traditions are upheld where appropriate. Environment relationsâ&#x20AC;ŚEffective waste management The environmentally sound initiatives we have established has become a complete success, as every member is now mindful of their obligations. The energy saving, waste minimizing and recycling efforts has become a second nature and the tangible results are heart warming. The new environment conscious culture and practices have now extended to their homesteads and neighbourhoods too. Their support, be it going green for official or personal purposes, automatic switch off of unused power sources, not only using trash bins for discards but constant clearing them for recycling and supporting every effort that will heal the impaired globe is showing significantly in the balance sheet. The upside of this ambitious venture is that the system is now performing on its own and breeding voluntary commitment from all sides.

Corporate Governance Corporate Governance which is identified as an integral part of business operations, encompasses key elements such as integrity, transparency, equity and adoption of highest standards of business ethics to benefit the interest of stakeholders. At MBSL, we endeavour to observe and maintain highest standards of corporate governance in all business transactions to meet stakeholder aspirations. The Board continuously emphasize on strong financial discipline in the interest of long term stability of the Company on the one hand and towards building long –term shareholder value on the other. The Board believes the Company has a sound corporate governance framework, good processes for the accurate and timely reporting of financial position and results of operations and an effective and vigorous system of internal control. The Company complies with Listing Rules issued by the Colombo Stock Exchange as well as the Finance Leasing (Corporate Governance) Direction No.4 of 2009 issued by the Central Bank of Sri Lanka under section 34 of the Finance Leasing Act No.56 of 2000.

Compliance with Listing Requirements on Corporate Governance Rules for Listed Companies issued by the Colombo Stock Exchange

CSE Rule No.

Governance Requirement

7.10.1

Non-Executive Directors Non-Executive Directors a. - -

The board of directors of a Listed Entity shall include at least, two non-executive directors; or such number of non-executive directors equivalent to one third of the total number of directors which ever is higher

Compliance status

All eight directors who comprise the Board are Non-executive Directors

b. The total number of directors is to be calcu lated based on the number as at the conclusion of the immediately preceding Annual General Meeting

c. any change occurring to this ratio shall be rectified within ninety (90) days from the date of the change.

7.10.2

Independent Directors

a. Where the constitution of the board of directors includes only two non-executive directors in terms of Rule 7.10.1 above, both such non-executive directors shall be “inde pendent “.In all other instances two or1/3rd of non-executive directors appointed to the board of directors which ever higher shall be “independent”

The board shall require each non-executive director to submit a signed and dated declaration annually of his/her independ ence or non-independence against the specified criteria.

Five out of the eight Directors are independent in terms of the criteria defined by CSE Rule 7.10.4 on Corporate Governance

All non-executive directors have submitted their declarations on Independence in conformity with Appendix 7A

CSE Rule No.

Governance Requirement

Compliance status

7.10.3

7.10.5

Disclosure relating to Directors a. The board shall make a determination annually as to the independence or non-independence of each non-executive director based on such declaration and other information available to the board and shall set out in the annual report the names of directors determined to be inde pendent

The Board reviewed the declarations on independence of directors and determined their independence.

b. In the event a director does not qualify as “ inde pendent” against any of the criteria set out below but if the board, taking into account all the circumstances, is of the opinion that the director is nevertheless “independent” the board shall specify the criteria not met and the basis for its determination in the annual report.

As the Board has adequate number of independent directors, there was no requirement to specify a director as independent beyond the criteria set out by the CSE.

c. In addition to disclosures relating to the independ ence of a director set out above, the board shall publish in its annual report a brief resume of each director on its board which includes information on the nature of his/her expertise in relevant func tional areas.

Resume of each Director is given on pages 8 and 9 of the Annual Report.

There were no new appointments to the Board during the year under review

Upon appointment of a new director to its board, the Entity shall forthwith provide to the Exchange a brief resume of such director for dissemination to the public. Such resume shall include informa tion on the matters itemized in paragraphs (a),(b) and (c) above.

Remuneration Committee a. Composition The Remuneration Committee shall comprise ; of a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its Board); or of non-executive directors a majority of whom shall be independent, which ever is higher.

Remuneration Committee consists of four Non-executive Directors, three of whom are independent.

One non-executive director shall be appointed as Chairman of the committee by the board of directors b. Functions The Remuneration Committee shall recommend the remuneration payable to the executive directors and Chief Executive Officer of the Listed Entity and/or equivalent position thereof, to the board of the Listed Entity which will make the final determination upon consideration of such recommendations.

Please refer the Report of the Remuneraton Committee on page 69 of the Annual Report

c. Disclosure in the Annual Report The annual report should set out the names of directors (or persons in the parent company’s committee in the case of a group company) comprising the remuneration committee, contain a statement of the remuneration policy and set out the aggregate paid to executive and non-executive directors.

The names of the members of the Remuneration Committee are given in the Report of the Remuneraation Committee on page 69. Fees paid to Directors are disclosed in Notes to Financial Statements on page 112 of the Annual Report.

Corporate Governance...cont’d/ CSE Rule No.

Governance Requirement

7.10.6

Audit Committee a. Composition The audit committee shall comprise; of a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its board); or of non-executive directors a majority of whom shall be independent, which ever shall be higher. One non-executive director shall be appointed as the Chairman of the committee by the board of directors

Compliance status/

The Audit Committee was reconstituted with Five Non- executive Directors with a view to ensure effective functioning of the Committee. The Chairman of the Committee is the alternate director and Chairman of the Audit Committee of the parent company. He is the only member on the Board having membership in a professional accounting body.

Unless otherwise determined by the audit committee, the Chief Executive Officer and the Chief Financial Officer of the Listed Entity shall attend audit committee meetings. The Chairman or one member of the committee should be a Member of a recognized professional accounting body. b. Functions Shall include, (i) Overseeing of the preparation, presentation, and adequacy of disclosures in the financial statements of a Listed Company, in accordance with Sri Lanka Accounting Standards. (ii) Overseeing of Entity’ s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements.

The functions of the Audit Committee are given in the Report of the Audit Committee on page 70.

(iii) Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate to meet requirements of the Sri Lanka Auditing Standards. (iv) Assessment of the independence and performance of the Entity’s external auditors. (v) To make recommendations to the board pertaining to appointment, re-appointment and removal of the external auditors. c. Disclosure in the Annual Report The names of the directors (or persons in the parent company’s committee in the case of a group company) comprising the audit committee should be disclosed in the annual report. The committee shall make a determination of the independence of the auditors and shall disclose the basis for such determination in the annual report. The annual report shall contain a report by the audit committee setting out the manner of compliance by the Entity in relation to the above, during the period to which the annual report relates.

The names of members of the Audit Committee and its Report are given on page 70. The Audit Committee reviews the performance of the external auditors and is of the view they are independent and do not have any interest in contracts of the company or its subsidiaries and / or its associate company.

finance leasing (corporate governance) direction n0.4 0f 2009 for registered finance leasing establishments

Section

Governance Requirement

The Responsibilities of the Board (1) The Board of Directors (hereinafter referred to the Board) shall strengthen the safety and soundness of the relevant establishment bya) approving and overseeing the relevant establishmentâ&#x20AC;&#x2122;s strategic objectives and corporate values and ensuring that such objectives and values are communicated throughout the relevant establishment; b) approving the overall business strategy of the relevant establishment, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least immediate next three years;

Compliance status

The Board is responsible for formulating overall strategies of the Company, reviewing & updating risk management mechanisms and ensuring adequacy and effectiveness of internal systems & controls.

The Board has also established appropriate processes to cover the following:

c) identifying risks and ensuring implementation of appropriate systems to manage the risks prudently;

(i) identification of key management personnel who could influence policy, direct initiatives , exercise control over business operations & activities and risk management.

d) approving policy of communication with all stake holders, including lenders, creditors, shareholders ad borrowers;

(ii) identification of authority and key responsibilities of the Board and those of the Senior Management

e) reviewing the adequacy and the integrity of the relevant establishment's internal control systems and management information systems;

(iii) oversight of affairs of the Company to assess the effectiveness of the Companyâ&#x20AC;&#x2122; s governance practices

f) identifying and designing key management personnel who are in a position to (i) significantly influence policy ;(ii) direct initiatives; and (iii) exercise control over business activities, operations and risk managements;

(iv) review of policy and progress towards corporate objectives

g) defining the areas of authority and key responsibilities for the Board and for the key management personnel

Since there was no recruitment policy in the Company focused on a succession plan, the Company has formulated a Board approved recruitment policy and subsequently recruited a team of management trainees together with officials to the Senior Management in order to outline a succession plan on a long term basis. Similarly over a period of time, recruitment to the senior management positions will be effected to address the short term succession plan.

h) ensuring that there is appropriate oversight of the affairs of the relevant establishment by key management personnel, that is consistent with the relevant establishmentâ&#x20AC;&#x2122;s policy; i) periodically assessing the effectiveness of its governance practices, including (i) the selection, nomination and election of directors and appointment of key management personnel; (ii) the management of conflicts of interests; and

(v) importance of adhering to regulatory requirements

(iii) the identification of weaknesses and implementation of changes where necessary; j)ensuring that the relevant establishment has an appropriate succession plan for key management personnel; k) meeting regularly with the key management personnel to review policies, establish lines of communication and monitor progress towards corporate objectives; l) understanding the regulatory environment m) exercising due diligence in the hiring and oversight of external auditors (2) The Board shall appoint the Chairman and chief executive officer (CEO)and define and approve the functions and responsibilities of the chairman and CEO in line with paragraph 7 of the Direction

Chairman and the Chief Executive Officer are appointed in terms of the paragraph 7 of the Direction.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status/

(3) There shall be procedure determined by the Board to enable directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the relevant establishment’s expense. The Board shall resolve to provide separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the relevant establishment.

The Company obtains independent professional advice where necessary.

(4) A Director shall abstain from voting on any Board resolution in relation to matter to which he or any of his relatives or a concern, in which he has substantial interest, is interested and he shall not be counted in the quorum for the relevant agenda item at the Board meeting.

No such circumstances arose in the Board during the financial year under review.

(5) The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the relevant establishment is firmly under its authority.

Matters to be referred to the Board are listed in the Delegated Authority Manual.

(6) The Board shall, if it considers that the relevant establishment is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to lenders and other creditors, forthwith inform the Director of the Department of Supervision of Non-Bank Financial Institutions of the situation of the relevant establishment prior to taking any decision or action.

N/A

(7) The Board shall include in the relevant establishment’s Annual Report, an annual corporate governance report setting out the compliance with this Direction.

Corporate Governance Report is included in the Annual Report in page 46.

(8) The Board shall adopt a scheme of self –assessment to be undertaken by each director annually, and maintain records of such assessment.

The Board has initiated action to adopt a scheme of self assessment

Meetings of the Board (1) The Board shall meet at least twelve times a financial year at approximately monthly intervals. Obtaining the Board’s consent through the circulation of written or electronic resolution/papers shall be avoided as far as possible.

The Board met twenty five times during the financial year under review.

(2) The Board shall ensure that arrangements are in place to enable all directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the relevant establishment.

Although the arrangements are in place, no such proposals have emerged.

(3) A notice of at least 7 days shall be given of a regular Board meeting to provide all directors an opportunity to attend. For other Board meetings, reasonable notice shall be given.

Adequate notice is given to Directors to attend regular meetings and reasonable notice for special meetings.

(4) A director who has not attended at least twothirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a director. Provided, that participation at the director’s meetings through an alternate director shall, however, be acceptable as attendance.

The attendance of Directors at meetings has been regular.

Section

Governance Requirement

Compliance status

(5) The Board shall appoint a company secretary whose primary responsibilities shall be to handle the secretarial services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

The Board has appointed the Company Secretary who carries out secretarial services to the Board and shareholder meetings and other functions specified in the statutes and other regulations.

(6) If the chairman has delegated to the company secretary the function of preparing the agenda for a Board meeting, the company secretary shall be responsible for carrying out such function.

The agenda for Board meetings are prepared by the Company Secretary under the advice of the Chairman.

(7) All directors shall have access to advice and services of the company secretary with a view to ensuring that Board procedures and all applicable laws, directions, rules and regulations are followed.

The Company Secretary provides all necessary assistance to directors.

(8) The company secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any director.

Minutes of Board meetings are available for inspection upon reasonable notice.

(9) Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes of Board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by the Board in its deliberations; (b) the matters considered by the Board; (c) the fact finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence; (d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations; (e) the Board’s knowledge and understanding of the risks to which the relevant establishment is exposed and an overview of the risk management measures adopted; and(f) the decisions and Board resolutions.

The Board minutes contain all relevant information and data considered by the Board for deliberations, explanations and confirmations given by officers of the Company relating to compliance with relevant laws and regulations, views and opinions expressed by directors on various aspects of matters which were deliberated including risk mitigation measures etc.

Composition of the Board (1)Subject to the transitional provisions contained herein, the number of directors on the Board shall not be less than 5 and not more than 9.

The Board including the Chairman, comprises of eight Non –executive Directors.

(2) Subject to paragraph 5(1) and the transitional provisions contained herein, the total period of service of a director other than a director who holds position of chief executive officer or executive director shall be inclusive of total period of service served by such director up to the date of this direction.

N/A

(3) Subject to the transitional provisions contained herein, an employee of a relevant establishment may be appointed, elected or nominated as a director of the relevant establishment (hereinafter referred to as an “executive director”) provided that a number of executive directors shall not exceed one-half of the number of directors of the Board. In such an event, one of the executive directors shall be the chief executive officer of the company.

The Company has not appointed any executive directors.

(4) Commencing 01.01.2013, the number of independent non-executive directors of the board shall be at least one fourth of the total number of directors.

Noted for compliance

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Compliance status

(5) In the event an alternate director is appointed to represent an independent non-executive director. The person so appointed shall also meet the criteria that apply to the independent non-executive director.

No alternate directors have been appointed to the Board.

(6) Non-Executive directors shall have necessary skills and experience to bring an objective judgment to bear on issues of strategy, performance and resources.

Directors qualifications and experience are given in pages 8 and 9.

(7) Commencing 01.01.2013, a meeting of the board shall not be duly constituted, although the number of directors required to constitute the quorum at such meeting is present, unless at least one third of the number of directors that constitute the quorum at such meeting are non-executive directors

Noted for compliance

(8)The independent non-executive directors shall be expressly identified as such in all corporate communications that disclose the names of directors of the relevant establishment. The relevant establishment shall disclose the composition of the board, by category of directors, including the names of the chairman, executive directors, non-executive directors and independent non-executive directors in the annual corporate governance report which shall be an integral part of its annual report.

Noted for compliance

(9) There shall be a formal, considered and transparent procedure for the appointment of new directors to the board. There shall also be procedures in place for the orderly succession of appointments to the board.

N/A

(10)All directors appointment to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

All directors appointed to fill casual vacancies on the Board (except nominee directors) are subject to election by shareholders at the general meeting following their appointment.

(11) If a director resigns or is removed from office, the Board shall announce to the shareholders and notify the Director of the Department of Supervision of Non-Bank Financial Institutions regarding resignation of the director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant directorâ&#x20AC;&#x2122;s disagreement with the Board ,if any.

There were no resignations from the directorate during the year under review.

Criteria to assess the fitness and propriety of directors

All the Directors are below the age of 70 years.

(1)Subject to the transitional provisions contained herein, a person over the age of 70 years shall not serve as a director of a relevant establishment. (2) A director of a relevant establishment shall not hold office as a director or any other equivalent position in more than 20 companies/societies/ bodies/corporate, including associate companies and subsidiaries of the relevant establishment. Provided that such director shall not hold office of a director or any other equivalent position in more than 10 companies that are classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No.15 of 1995.

Not relevant.

Section

Governance Requirement

Management functions delegated to the Board

Compliance status

(1) The Board shall not delegate any matters to a board committee, chief executive officer, executive directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

Complied with

(2) The Board shall review the delegation of processes in place on a periodic basis to ensure that they remain relevant to the needs of the relevant establishment.

The Board regularly reviews the delegation process.

The Chairman and the Chief Executive Officer (1) The roles of the chairman and the chief executive officer shall be separated and shall not be performed by the one and the same person after three years commencing from January 1, 2010.

The positions of the Chairman and the Chief Executive Officer are held by two different individuals.

(2) The chairman shall be a non-executive director. In the case where the chairman is not an independent non-executive director, the Board shall designate an independent non-executive director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the relevant establishmentâ&#x20AC;&#x2122;s Annual Report.

Complied with.

(3) The Board shall disclose in its corporate governance report, which shall be an integral part of its Annual Report, the name of the chairman and the chief executive officer and the nature of any relationship [including financial, business, family or other material /relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the Board.

The name of the chairman and the acting chief executive officer are stated in pages 8 and 22 of the Annual Report.

(4) The chairman shall : (a) provide leadership to the Board;

The Chairman ensures that all important matters concerning the Company are deliberated by the Board of Directors in a timely manner in order that the Board works effectively and discharges its responsibilities The Directors have continuous access to Companyâ&#x20AC;&#x2122;s information from a variety of sources. All relevant information and documents required by the Directors are provided for deliberations. The Directors dedicate adequate time to discharge their duties and responsibilities. The agenda for board meetings is prepared by the company secretary as directed by the chairman.

(b) ensure that the Board works effectively and discharges its responsibilities; and (c) ensure that all key issues are discussed by the Board in a timely manner. (5) The chairman shall be primarily responsible for the preparation of the agenda for each Board meeting. The chairman may delegate the function of preparing the agenda to the company secretary. (6) The chairman shall ensure that all directors are informed adequately and in a timely manner of the issues arising at each Board meeting. (7) The chairman shall encourage each director to make full and active contribution to the Boardâ&#x20AC;&#x2122;s affairs and take the lead to ensure that the Board acts in the best interests of the relevant establishment. (8) The chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relationships between executive and non-executive directors. (9) Subject to the transitional provisions contained herein, the chairman shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever.

The chairman briefs the directors of all issues arising at Board meetings sufficiently and on time. There are no executive directors on the Board at present.

The Chairman does not supervise the operations and business of the Company.

Corporate Governance...cont’d/ Section

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Compliance status

(10) The chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of the shareholders are communicated to the Board.

The Annual General Meeting (AGM), Annual Report and Interim Financial Statements of the Company are the principal means of communication with shareholders. The Board invites the shareholders to raise their concerns on the affairs of the Company at the AGM as a means of maintaining an appropriate dialogue with them. The external Auditors and Lawyers are also present at the AGM to answer any queries raised by shareholders.

(11) The chief executive officer shall function as the apex executive-in-charge of day-to-day management of the relevant establishment’s operations and business.

The acting chief executive officer is in charge of the Company’s day to day operations and business.

Board appointed Committees (1)Every relevant establishment shall have at least two board committees set out in paragraph 8(2) and 8(3) hereof. Each committee shall report directly to the board. Each committee shall appoint a secretary to arrange its meetings, maintain minutes, records and carryout such other secretarial functions under the supervision of the chairman of the committee. The board shall present a report on the performances, duties and functions of each committee, at the annual general meeting of the relevant establishment.

The Audit Committee, Remuneration Committee and the Integrated Risk Management Committee which are Board appointed sub committees, regularly report to the Board.

(2) Audit Committee The following shall apply in relation to the Audit Committee: a)The chairman of the committee shall be a nonexecutive director who possesses qualifications and experience in accountancy and/or audit.

The Chairman of the Audit Committee is a non-executive director with required qualifications & experience.

b) The majority of the board members appointed to the committee shall be non-executive directors.

Complied with.

c) The committee shall make recommendations on matters in connection with: (i) the appointment of the external auditor for audit services to be provided in compliance with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to external auditors from time to time, (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the external auditor, provided that the engagement of an audit partner shall not exceed five years, and that the particular audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

Complied with.

d) The committee shall review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

Complied with.

Section

Governance Requirement

Compliance status

e) The committees shall develop and implement a policy with the approval of the board on the engagement of an external auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditors independence or objectivity in relation to the provision of non-audit services, the committee shall consider:

The external auditors do not provide any non audit services to the Company.

(i)Whether the skills and experience of the auditor make it a suitable provider of the non-audit services; (ii))Whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and (iii)Whether the nature of the non-audit services, the related fee levels individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the external auditor. f) The committee shall, before the audit commences, discuss and finalize with the external auditors the nature and scope of the audit, including: (i) an assessment of the relevant establishment’s compliance with directions issued under the Act and the management’s internal controls over financial reporting; (ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and (iii) the coordination between auditors where more than one auditor is involved.

Complied with.

g) The committee shall review the financial information of the relevant establishment, in order to monitor the integrity of the financial statements of the relevant establishment, its Annual Report, accounts and periodical reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the relevant establishment's Annual Report and accounts and periodical reports before submission to the Board, the committee shall focus particularly on: (i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements.

The Committee reviews Company’s financial statements including the quarterly unaudited financial statements and the audited financial statements prior to recommending same to the Board for approval.

h)The committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary.

Necessity not arisen.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status

i) The committee shall review the external auditor's management letter and the management's response thereto

The external auditor’s management letter and the management response thereto were discussed by the Committee with external auditors in attendance. Please refer the Audit Committee report on page 70 for further details.

j) The committee shall take the following steps with regard to the internal audit function of the relevant establishment: (i)Review the adequacy of the scope, functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work; (ii) Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department; (iii)Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department; (iv)Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function;

The Audit Committee reviews the scope, functions and resources of the internal audit division periodically. The Committee also monitors and reviews the coverage of the annual audit plan, follow up action taken on recommendation of the internal audit etc. The Committee endeavours to ensure that the internal audit functions independently, impartially and professionally.

(v) Ensure that the committee is apprised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning; (vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care; k) The committee shall consider the major findings of internal investigations and management's responses thereto;

Significant findings of the Internal Audit are deliberated by the Committee with the Management and recommendations are referred to the Board.

l) The chief finance officer, the chief internal auditor and a representative of the external auditors may normally attend meetings. Other Board members and the chief executive officer may also attend meetings upon the invitation of the committee. However, at least once in six months, the committee shall meet with the external auditors without the executive directors being present.

Please refer the Audit Committee Report on page 70 for details.

m)The committee shall have: (i) explicit authority to investigate into any matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. n) The committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.

The Committee meets once a month with due notice of the agenda containing matters for discussion. Special meetings are also convened when required.

o) The Board shall, in the Annual Report, disclose in an informative way, (i) details of the activities of the audit committee; (ii) the number of audit committee meetings held in the year; and (iii) details of attendance of each individual member at such meetings.

Please refer page 60 of this report for details of attendance of each individual member at committee meetings.

p) The secretary to the committee (who may be the company secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings.

The company secretary records and maintains proceedings of committee meetings.

q)The committee shall review arrangements by which employees of the relevant establishment may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the relevant establishment's relations with the external auditor.

The Company has introduced a “whistle blowing policy” to enable employees to report any irregularities of the Company. In the event of any improprieties being reported, the Internal Audit is authorised to carry out an immediate inquiry into the matter and report its observations to the Chairman and the Audit Committee.

Section

Governance Requirement

Compliance status

(3) Integrated Risk Management Committee

Please refer the Report of the Integrated Risk Management Committee on pages 34 and 35 for details.

The following shall apply in relation to the Integrated Risk Management Committee: a) The committee shall consist of at least one non-executive director, chief executive officer and key management personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The committee shall work with key management personnel closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the committee. b) The committee shall assess all risks, i.e, credit, market, liquidity, operational and strategic risks to the relevant establishment on a monthly basis through appropriate risk indicators and management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on the relevant establishment basis and group basis. c) The Committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset –liability committee to address specific risks and to manage those risks within quantitative risk limits as specified by the committee. d) The committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the relevant establishment’s policies and regulatory and supervisory requirements. e) The Committee shall, at least quarterly, assess all aspects of risk management including updated business continuity plans. f) The committee shall take appropriate actions against officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central bank of Sri Lanka. g) The Committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions. h) The committee shall establish a compliance function to assess the relevant establishment’s compliance with laws, regulations, directions, rules , regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to the committee periodically. 9

Related Party Transactions (2) The Board shall take necessary steps to avoid any conflicts of interest that may arise from any transaction of the relevant establishment with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction: a)A subsidiary of the relevant establishment; b)Any associate company of the relevant establishment; c)A director of the relevant establishment;

Necessary steps are being taken to avoid any conflict of interest with related parties.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status

d)A key management personnel of the relevant establishment; e)A relative of a director or a key management personnel of the relevant establishment ;

(4)The Board shall ensure that the relevant establishment does not engage in transactions with a related party in a manner that would grant such party “more favourable treatment” than that is accorded to an unrelated comparable counterparty of the relevant establishment. For the purpose of this paragraph "more favourable treatment” shall mean:

Complied with

a) Granting of "total net accommodation” to a related party, exceeding a prudent percentage of the relevant establishment's regulatory capital, as determined by the Board. The "total net accommodation" shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the relevant establishment's share capital and debt instrument with a remaining maturity of 5 years.. b) Charging a rate of interest lower than the relevant establishment's best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty. outstanding in respect of each category of related parties as a percentage capital funds of the relevant establishment' c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extends beyond the terms granted in the normal course of business with unrelated parties; d) Providing or obtaining services to or from a related-party without a proper evaluation procedure; e) Maintaining reporting lines and information flows between the relevant establishment and any relate party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for performance of legitimate duties and functions.

Disclosures (1) The Board shall ensure that annual audited financial statements and periodical financial statements are prepared and published in accordance with the requirements of the regulatory and supervisory authorities and applicable accounting standards.

The annual audited financial statements and interim financial statements of the Company are published in compliance with accounting standards and applicable laws.

(2) The Board shall ensure that at least the following disclosures are made in the Annual Report:

Please refer Directors' responsibility for financial reporting on page 68.

a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements , inclusive of specific disclosures.

Section

Governance Requirement

Compliance status/ level of compliance

b) A report by the Board on the relevant establishment’s internal control mechanism that confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements.

Please refer page 61 for the relevant report by the Board.

c) The external auditors certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after 1 January 2011

Please refer page 63 for the external auditor’s certification.

d) Details of directors, including names, transactions with the relevant establishment.

Please refer pages 111 and 112 of the Annual report for details.

e) Fees/remuneration paid by the relevant establishment to the directors in aggregate, in the Annual Report s published after January 1,2011.

Please refer page 112 of the Annual Report for details.

f) Total net accommodation as defined in paragraph 9(7) outstanding in respect of each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage of capital funds of the relevant establishment.

Please refer Note 41 under Notes to the Financial Statements on page 111 of the Annual Report.

g) The aggregate values of remuneration paid by the relevant establishment to its key management personnel and the aggregate values of the transactions of the relevant establishment with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and borrowing through debt instruments or investments made in the relevant establishment.

Please refer Note 41 under Notes to the Financial Statements on page 111 of the Annual Report.

h) A report setting out the details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any non-compliance.

Please refer the Annual Report of the Board of Directors on the Affairs of the Company and the Statement of Directors’ Responsibilities for financial reporting on pages 65 and 68 respectively for details.

i) The external auditor’s certification of the compliance with the Act and directions issued by the Director of Department of Supervision of Non-Bank Financial Institutions in the annual corporate governance reports published after January 1, 2012.

Please refer page 71 of the Annual Report for the external auditor’s certification of compliance with the Act and the Directions.

Corporate Governance...contâ&#x20AC;&#x2122;d/

Attendance at Meetings of the Board & Sub-committees Meetings held during the FY 2011

Name of Director Board

Audit Committee

Remuneration Committee

Risk Committee

No. of Meetings Held M R Shah /NED

Ms. W A Nalani/NED

M S S Paramananda/NED

Lakshman Perera/NED

P G Rupasinghe/NED

V .Kanagasabapathy/NED

Prof. Ranjith Bandara/NED

Lalith De Silva /NED

Note: The Audit Committee was reconstituted in September 2011 and Mr. M S S Paramananda and Mr. P G Rupasinghe were appointed as members. NED

-Non Executive Director

Senior Management Committee The Senior Management Committee (SMC) consists of professionals possessing vast experience in their respective fields. The SMC Meetings are held on a regular basis. The representatives of the Companyâ&#x20AC;&#x2122;s Union also attend these Meetings by invitation. The SMC implements Board decisions, prepares the annual budget and monitors performance against the Budget, ensures Statutory & Regulatory compliance, evaluates risks and return on investments etc. several members of the SMC also serve on sub-committees of the SMC which operate under delegated authority of the Board. The Credit Committee evaluates credit proposals, conducts periodic reviews on the status of the lending portfolio to determine adequacy of provisioning, maintenance of solvency margins and ratios etc. The Asset & Liability Committee (ALCO), the Purchasing Committee and Training Committee are other sub committees of the SMC. Report from External Auditors The external auditors have performed procedures set out in Sri Lanka Standards on Related Services 4400 issued by the Institute of Chartered Accountants of Sri Lanka (SLSRS 4400), to meet the compliance requirement of the Corporate Governance directive. Their findings presented in their report dated 24 April 2012 addressed to the Board are consistent with the matters disclosed above and did not identify any inconsistencies to those reported above by the Board.

Directors’ Statement on Internal Control

The Board of Directors is pleased to present the Directors’ Statement on Internal Control in line with the Finance Leasing Direction No. 4 of 2009, section 10 (2) (b). RESPONSIBILITY The Board of Directors (“Board”) is responsible for the adequacy and effectiveness of Merchant Bank of Sri Lanka PLC’s (MBSL) system of internal controls. However, such a system is designed to manage the MBSL’s key areas of risk within an acceptable risk profile, rather than eliminate the risk of failure to achieve the policies and business objectives of MBSL. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by MBSL and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. The process is regularly reviewed by the Board and accords with the guidance for directors of Banks on the Directors’ Statement of Internal Control issued by the Institute of Chartered Accountants of Sri Lanka. As per the said guidance, significant processes affecting significant accounts of MBSL were assessed along with the key risk areas of MBSL. The management assists the Board in the implementation of the Board’s policies and procedures on risk and control by identifying and assessing the risks faced by MBSL and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks. The Board is of the view that the system of internal controls in place is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes is in accordance with relevant accounting principles and regulatory requirements. KEY FEATURES OF THE PROCESSES ADOPTED IN THE INTERNAL CONTROL SYSTEM ON FINANCIAL REPORTING The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following: •

Internal audit department established by the Board is to assist the Board to ensure that MBSL complies with policies and procedures, evaluate the effectiveness of the internal control system in place and highlights significant findings in respect of any non-compliance on an ongoing basis. Internal audits are carried out on all departments and branches, the frequency of which is determined by the level of risk assessed, to provide an independent and objective report on operational and management activities of these units and branches. The annual audit plan is reviewed and approved by the Audit Committee and the findings of the audits are submitted to the Audit Committee for review at their periodic meetings.

•

The Audit Committee of MBSL, review internal control issues identified by the internal audit division, external auditors, regulatory authorities and management, and evaluate the adequacy and effectiveness of the risk management and internal control systems. Further it highlights the areas that need more internal controls while suggesting improvements to existing internal controls. The minutes of the Audit Committee meetings are tabled to the Board on a periodic basis. Further details of the activities undertaken by the Audit Committee of MBSL are set out in the Audit Committee Report on page 70.

•

Operational committees are established by the Board with appropriate empowerment to assist the Board in ensuring the effectiveness of MBSL’s daily operations and that the MBSL’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved. These committees include the Credit Committee, the Senior Management Committee, the Purchasing Committee, the Investment Committee, and the Information Technology Steering Committee.

•

In assessing the internal control system, identified officers of MBSL collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of MBSL.These in turn were observed and checked by the Internal Audit department for effectiveness on an ongoing basis.

THE CONFIRMATION BY THE BOARD Based on the above processes, the Board confirms that the financial reporting system of MBSL has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

REVIEW OF THE STATEMENT BY EXTERNAL AUDITORS The external auditors have reviewed the above Directors’ Statement on Internal Control in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE) 3050 – Assurance Report for Banks on Directors’ Statement on Internal Controls issued by The Institute of Chartered Accountants of Sri Lanka. Based on the procedures performed, the external auditors have reported to the Board that nothing has come to their attention that causes them to believe that this Statement is inconsistent with their understanding of the process Board has adopted in the review of the design and effectiveness of the internal control of MBSL. The Independent Assurance Report of the Auditors confirming the above is given on Page 63 of this Annual Report. For and on behalf of the Board,

Mr. M.R. Shah

Prof. Ranjith Bandara

Mr. V. Kanagasabapathy

Chairman Director Chairman Audit Committee Colombo 30 March 2012.

Independant Assurance Report

Independent

Cor respondent Fir m to

SJMS Associates Chartered Accountants No. 02, Castle Lane, Colombo - 04. Sri Lanka. Tel: + 94 (11) 2 580409, 2 503262, Fax: +94 (11) 2 582452, Restructure & Corporate Recovery Tel: 5 364293, 5 444420, Fax: 5 364295, E-mail: sjms@sjmsassociates.com Website: www.sjmsassociates.lk

Independent Assurance Report To the Board of Directors of Merchant Bank of Sri Lanka PLC Introduction We were engaged by the Board of Directors of Merchant Bank of Sri Lanka PLC (“Bank”) to provide assurance on the Directors’ Statement on Internal Control (“Statement”) included in the annual report for the year ended 31st December 2011. Management’s responsibility Management is responsible for the sufficiency and reliability of internal controls in place at the bank as specified in the Finance Leasing Direction No. 4 of 2009, section 10 (2) (b). Management is also responsible to prepare and present the Statement in accordance with the “Guidance for Directors of Banks on the Directors’ Statement on Internal Control” issued in compliance with the section 3(8)(ii)(b) of the Banking Act Direction No. 11 of 2007, by the Institute of Chartered Accountants of Sri Lanka. Our responsibilities and compliance with SLSAE 3050 Our responsibility is to issue a report to the board on the Statement based on the work performed. We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Report for Banks on Directors’ Statement on Internal Control issued by the Institute of Chartered Accountants of Sri Lanka. Summary of work performed Our engagement has been conducted to assess whether the Statement is both supported by the documentation prepared by or for directors and appropriately reflects the process the directors have adopted in reviewing the system of internal control for the Bank. •

SLSAE 3050 does not require us to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Bank’s risk and control procedures.

•

SLSAE 3050 also does not require us to consider whether the processes described to deal with material internal control aspects of any significant problems disclosed in the annual report will, in fact, remedy the problems.

Our conclusion Based on the procedures performed, nothing has come to our attention that causes us to believe that the Statement included in the annual report is inconsistent with our understanding of the process the Board of Directors have adopted in the review of the design and effectiveness of internal control of the Bank.

SJMS Associates Chartered Accountants Colombo 30 March 2012

P. E. A. Jayewickreme. M. B. Ismail, Ms. A. M. J. Patrick, T. Krishnakumar, Ms. S. L . Jayasuriya, D. S. W. Andradi G. J. David, Ms. F. M. Marikkar, Ms. M. S. J. Henry, Ms. A. U. M. Keppetipola, R.H.M Minfaz, Ms S.Y. Kodagoda

65 Annual Report of the Board of Directors on the Affairs of the Company

88 Notes to the Financial Statements

114 Share & Debenture Information

Directorsâ&#x20AC;&#x2122; Responsibility for Financial Reporting

116

Decade at a Glance

Report of the Remuneration Committee

118

Statement of Value Added

Audit Committee Report

119

71 Independent Auditorsâ&#x20AC;&#x2122; Report

72 Income Statement

Economic/ Financial Indicators

120 Contact Information

122 Our Team

Balance Sheet

127

Glossary of Financial Terms

74 Statement of Changes in Equity

75 Cash Flow Statement

76 Accounting Policies

128 Notice of Meeting Form of Proxy

Annual Report of the Board of Directors on the Affairs of the Company The Directors have pleasure in presenting to the members their Report together with the Audited Financial Statements for the year ended 31 December 2011 of Merchant Bank of Sri Lanka PLC (MBSL), a public limited liability company incorporated on 04th March 1982 under the Companies Ordinance (Cap.145) and quoted in the Colombo Stock Exchange. The Company was re-registered on 4th May 2007 as required under the provisions of the Companies Act No.07 of 2007. The Audited Financial Statements of the Company and the Group included in this Annual Report have been prepared and presented with the relevant disclosures in accordance with the Sri Lanka Accounting Standards and other applicable regulatory requirements. RAM Ratings Lanka Limited has reaffirmed AA- rating with a stable outlook for the Company. PRINCIPAL ACTIVITIES MBSL is a registered finance leasing establishment under the provisions of the Finance Leasing Act No. 56 of 2000. MBSL has three subsidiaries and an associate company, namely, Merchant Credit of Sri Lanka Limited, MBSL Insurance Company Limited, MBSL Savings Bank Limited and Lanka Securities (Private) Limited respectively, which together constitute the Group. The principal activities of the Company are Leasing & Hire Purchase, Trade Finance, Corporate Advisory and Capital Market activities. The Company has also diversified its business activities to cover lending to SMEs mainly in the Agriculture Sector. There has been no material change to the activities of the Company or any of the subsidiaries during the period under review. REVIEW OF OPERATIONS A review of the operations of the MBSL during the financial year 2011 and results of those operations are contained in the Chairman’s Review (pages 10 to 19) the Acting Chief Executive Officer’s Report (pages 24 to 26) and Management Discussion and Analysis (pages 28 to 33). These reports form an integral part of the Annual Report. During the year under review, an aggressive growth plan was formulated to be implemented through an expanded branch network, strengthening the provincial presence of MBSL. Potential geographical locations were identified to increase the branch network to thirty branches. With the economy indicating stability and growth momentum, leasing and hire purchase continued to dominate our product portfolio during the year 2011 as well. Considering the increase in business activities, the Company is optimistic of good opportunities for lending in the foreseeable future. The Company also expanded micro credit lending to empower small and medium enterprises to enhance their contributions towards the national economy. Your Board of Directors decided to discontinue with the proposed amalgamation of MBSL with Merchant Credit of Sri Lanka Limited, Ceylease Financial Services Limited and MBSL Savings Bank Limited. The Central Bank of Sri Lanka which granted provisional approval for a Specialized Banking License to MBSL, required the discontinuation of its merchant banking activities, consequent to the merger. Being the pioneer in the industry, the Board of Directors did not consider appropriate to restrict its core merchant banking activities, the purpose for which it was initially established. Hence, the Board decided to set aside its earlier proposal for a merger with other entities and instead to continue MBSL with greater focus on merchant banking activities. STATED CAPITAL The Company’s Stated Capital stood at LKR 1,607,000,000.00 as at 31 December 2011. INFORMATION ON SHARES & DEBENTURES Information relating to holdings of shares and debentures is given on pages 114 and 115 of the Annual Report. FINANCIAL STATEMENTS The Audited Financial Statements of the Company and of the Group for the year ended 31 December 2011 duly signed by the Assistant General Manager, Finance & Treasury Management, the Acting Chief Executive Officer and two Directors of the Company, are given on pages 72 to 113 and form an integral part of the Annual Report of the Board. SIGNIFICANT ACCOUNTING POLICIES The accounting policies adopted by the Company and the Group in the preparation of the Financial Statements are given on pages 76 to 87. There has been no changes in the accounting policies adopted by the Company and the Group during the period under review. INCOME, PROFIT & APPROPRIATIONS Provided below is a summary of the Consolidated Financial Results of the Group operations.

2011 2010 Re-presented * LKR’000 LKR’000

Income Operating profit before taxation Taxation Loss from discontinued operations Net Profit after taxation Minority interest Equity holders of the parent Balance brought forward from previous year Adjustment due to change in depreciation method Profit available for appropriation Less: Appropriations Transfer to statutory reserve fund Transfer to investment fund Dividends on Ordinary Shares Dividends paid

2,807,560 591,043 (143,572) (49,053) 398,418 45,277 353,141 1,142,160 - 1,495,301

(35,545) (68,163)

(168,750)

2,595,680 795,608 (233,700) (20,931) 540,977 48,632 492,345 803,922 (9,962) 1,286,305 (42,895) -

(101,250)

Annual Report of the Board of Directors on the Affairs of the Company...cont’d/ INCOME, PROFIT & APPROPRIATIONS...cont'd/

2011 LKR’000

Balance carried forward

2010 LKR’000

1,222,843 1,142,160

Proposed dividend

168,750

*Comparative figures have been re - presented to reflect the results of discontinued operations as explained in Note 12 to the Financial Statements. POST BALANCE SHEET EVENTS No circumstances have arisen since the balance sheet date that would require adjustments to, or disclosure in the accounts, except those disclosed under Note 42 to the Financial Statements. DIVIDENDS Having satisfied the solvency test requirements under the Companies Act No.7 of 2007, the Directors recommend a first an final dividend of LKR 1.25 per share for the year 2011 (2010- LKR 1.25 per share) to be paid to holders of 135,000,000 ordinary shares issued by the Company. CORPORATE DONATIONS During the year under review, the Company has made donations amounting to LKR 61,000.00 (2010 – LKR 797,000.00) in terms of the resolution passed at the last Annual General Meeting. This amount excludes contributions towards the Company’s Corporate Social Responsibility initiatives. TAXATION The Company is liable for income tax at the rate of 28% and VAT on Financial Services at 12 %. STATUTORY PAYMENTS The Board of Directors confirms that to the best of their knowledge and belief, statutory payments to all relevant regulatory and statutory authorities have been paid by the Company. PROPERTY & EQUIPMENT The details of property and equipment of the Company are given on page 102 under Notes 24 to the Financial Statements. OUTSTANDING LITIGATIONS In the opinion of the Directors and the Company’s lawyers, pending litigation against the Company disclosed under Note 38.2 of the Financial Statements will not have a material impact on the financial position of the Company or on its future operations. GOING CONCERN After considering the Financial position, operating conditions, regulatory and other factors and such matters, required to be addressed in terms of the Finance Leasing (Corporate Governance) Direction No. 04 of 2009 issued by the Central Bank of Sri Lanka, and the continuing Listing Rules of the Colombo Stock Exchange of Corporate Governance, the Directors have a reasonable expectation that the Company possesses adequate resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial Statements. DIRECTORATE The names of the Board of Directors of the Company as at 31 December 2011 are given below and their attendance at the board meetings during the year is given on page 60 of the Annual Report. M R Shah(Chairman) Ms. W A Nalani M S S Paramananda Lakshman Perera P G Rupasinghe V Kanagasabapathy Prof. Ranjith Bandara Lalith De Silva

Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director

In terms of Article 88 of the Articles of Association of the Company Mr. P G Rupasinghe retires by rotation and being eligible, offers himself for re election. INTERESTS REGISTER In terms of the Companies Act No.7 of 2007, an Interests Register is maintained by the Company. Directors have made general declarations as provided for in section 192(2) of the Companies Act No.7 of 2007. Arising from these, details of contracts in which they have an interest are given under Note No. 41 to the Financial Statements on page Nos. 111 112 of the Annual Report, dealing with related party disclosures. DIRECTORS’ REMUNERATION Directors’ fees and emoluments paid during the year are as follows: Company Group LKR. LKR. Directors’ Fees and Emoluments

4.9 million

* Includes only fees and emoluments paid from continuing operations.

14.9 million*

Details of Directors’ fees and other emoluments paid during the year 2011 are provided under Note No. 41 to the Financial Statements on page 111. DIRECTORS’ INTEREST IN SHARES OF THE COMPANY None of the Directors of the Board held shares of the Company during the year under review. DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING The Statement of Directors’ Responsibility for financial reporting given on page 68 forms an integral part of the Annual Report of the Board of Directors. ENVIRONMENT The Company has used its best endeavours to comply with the relevant environmental laws and regulations. The Company has not engaged in any activity that is harmful or hazardous to the environment. CORPORATE GOVERNANCE The Company’s status of compliance with corporate governance principles and practices is set out in the Corporate Governance Report on pages 46 to 60 of the Annual Report. REPORT ON COMPLIANCE WITH PRUDENTIAL REQUIREMENTS, REGULATIONS, LAWS, INTERNAL CONTROL SYSTEMS AND PROCEDURES The Company has complied with all the regulatory and prudential requirements arising from the provisions of statutes applicable to the Company such as the Companies Act No.07 of 2007, Directions issued by the Department of Supervision of Non Bank Financial Institutions of the Central Bank of Sri Lanka, Sri Lanka Accounting and Auditing Standards Act. No.15 of 1995, Listing Rules of the Colombo Stock Exchange, Securities and Exchange Commission Act No.36 of 1987, Finance Leasing Act No.56 of 2000, Payment of Gratuity Act No.12 of 1983, Employees’ Provident Fund Act No.15 of 1958, Employees’ Trust Fund Act No.46 of 1980 etc. and amendments to such statutes. The Company has established and maintained an effective system of internal controls which is improved on a continuous basis based on the recommendations of the Internal Audit Division and the observations of the Central Bank of Sri Lanka and the external auditors during their inspections and audits. HUMAN RESOURCES The Company continued to implement appropriate Human Resource Management Policies to develop employees and optimize their contribution towards the achievement of corporate objectives. These policies and procedures ensure the equitable treatment of all employees which has resulted in high motivation. AUDITORS The Company’s Auditors, M/s SJMS Associates, Chartered Accountants were paid LKR 715,000.00 as Audit Fees for the year 2011 as authorized by the Board. (The Auditors were paid LKR 715,000.00 as Audit Fees for the year 2010). The retiring Auditors, M/s SJMS Associates, Chartered Accountants, have expressed their willingness to continue in office for the financial year 2012. A resolution to re-appoint M/s SJMS Associates and to authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting to be held on 20 June 2012. ANNUAL GENERAL MEETING The Annual General Meeting will be held at the Grand Ballroom, Galle Face Hotel, Colombo on 20 June 2012. The Notice of the Meeting relating to the Thirtieth Annual General Meeting is given on page 128. This Annual Report is signed for and on behalf of the Board of Directors by:

M R Shah Prof. Ranjith Bandara Ms. Marina Phillips Chairman Director Company Secretary Colombo 08 May 2012.

Directorsâ&#x20AC;&#x2122; Responsibility for Financial Reporting The Directors of the Company are responsible for the preparation and presentation of the Companyâ&#x20AC;&#x2122;s financial statements to the shareholders in accordance with the relevant provisions of the Companies Act No.07 of 2007 and other statutes which are applicable in the preparation of financial statements. The responsibilities of the External Auditors in relation to the Financial Statements are set out in the Auditorsâ&#x20AC;&#x2122; Report in page 71 of the Annual Report. The Financial Statements comprise of: *

A Balance Sheet, which presents a true and fair view of the state of affairs of the company and its subsidiaries as at 31 December 2011; and

* An Income Statement, which presents a true and fair view of the profit or loss of the Company and its subsidiaries for the year then ended. In preparing the financial statements of the Company and its subsidiaries for the year ended 31 December 2011, the Directors confirm that appropriate accounting policies have been selected and applied consistently. Reasonable and prudent judgments and estimates have been made and applicable accounting standards have been followed. The Directors are of the view that the Company and its subsidiaries have adequate resources to continue in business for the foreseeable future and have applied the going concern basis in the preparation of these financial statements. The Directors have also taken such reasonable steps to safeguard the assets of the Company and its subsidiaries to prevent and detect frauds and other irregularities. In this context, the Directors have given due consideration to the establishment of appropriate internal control systems. The Directors are responsible to ensure that the Company and its subsidiaries maintain sufficient accounting records enabling to disclose, with reasonable accuracy , the financial position of the entities and also to be able to ensure that the Financial Statements of the Company and its subsidiaries meet with the requirements of the Companies Act, Listing Rules of the Colombo Stock Exchange, Directions issued by the Central Bank of Sri Lanka and generally accepted accounting policies and principles. The Directors have provided the external auditors with every opportunity to carry out any reviews and tests which they consider appropriate and necessary for the performance of their responsibilities. The Directors also confirm to the best of their knowledge that all taxes, levies and financial obligations of the Company and the subsidiaries have been either paid or adequately provided for in the Financial Statements. The Directors are of the view that they have discharged their responsibilities as set in this Statement. By Order of the Board

Ms. Marina Phillips Company Secretary 27 April 2012

Report of the Remuneration Committee The Remuneration Committee consists of Mr. M R Shah (Chairman), Prof. Ranjith Bandara, Mr. Lakshman Perera and Mr. P G Rupasinghe, all of whom are Non executive Directors. The Committee held two meetings during the year under review. The Company had adopted a structured remuneration policy together with performance based incentive schemes, focusing on employee motivation and increasing business volumes. The salary anomalies which existed in the Company until 2009 have been rectified in 2010. There were no significant changes in the salary packages of employees of the Company in 2011. However with the aggressive expansion of the branch network and the resultant increase in business opportunities, the Company has taken steps to upgrade a section of employees in order to accommodate growing business volumes.

Mr. M R Shah Chairman

Audit Committee Report

The Audit Committee of the MBSL functions as a sub-committee of the Main Board, assists the Main Board in fulfilling its oversight responsibilities. The Committee was reconstituted during the year under review with five Non executive directors, namely Mr. V Kanagasabapathy (Chairman), Ms. W A Nalani, Prof. Ranjith Bandara, Mr. M S S Paramananda and Mr. Rupasinghe. The Chairman of the Audit Committee is a fellow of the Institute of Chartered Accountants of Sri Lanka. The Chief Executive Officer, Head of Finance and the Group Internal Auditor attend meetings by invitation. The Company Secretary is the Secretary to the Committee. A total of 16 meetings were held during the year 2011. Key Responsibilities of the Committee •

Reviewing and monitoring the adequacy and effectiveness of the internal control systems to ensure integrity of the financial statements

•

Evaluation of the independence and objectivity of the External Auditors and the effectiveness of the audit process

•

Review of performance of the Internal Audit Function, audit reports and follow up on recommendations

•

Review and recommendation of interim and annual financial statements of the Company

•

Ensuring Company’s compliance with statutory and regulatory requirements

Activities of the Committee during the year •

Reports received from the Internal Audit Division covering audits and investigations were reviewed and discussed with the Management and the recommendations made were followed up and implemented.

•

The quarterly and annual financial statements of the Company were reviewed and discussed with the Management and the External Auditors, prior to dissemination to the public, including the extent of compliance with Sri Lanka Accounting Standards and the adequacy of disclosures required by other applicable laws, rules and guidelines.

•

The Committee regularly discussed the performance and future prospects of the Company with the Management.

•

Risks attached to Company’s business and operations were deliberated and where necessary, risk mitigatory measures were recommended.

•

The report submitted by the Management on the state of compliance with the relevant laws, regulations and settlement of statutory payments was reviewed and discussed.

Internal Audit Function During the year, the Committee reviewed the performance of the internal audit function, the findings of the audits completed during the year and the Divisions’ resource requirements and also approved the Internal Audit Plan for the year 2012. External Auditors Prior to commencement of the Audit, the Audit Committee met with the External Auditors, M/s SJMS Associates to review and discuss the External Auditors’ Letter of Engagement including the scope of the audit, process and procedures. The Committee also discussed the Management Letter issued by the External Auditors and the Management response thereto. The Committee also met with the External Auditors to discuss all audit issues /concerns and agreed on their treatment. The Audit Committee has approved the extension of the period of engagement of the External Auditors by one year and recommended to the Board their re-appointment for the financial year ending 31 December 2012. The Audit Committee confirms that the responsibilities of the Audit Committee in terms of the Direction No.4 of 2009 on Corporate Governance issued by the Central Bank and the Listing Rules of the Colombo Stock Exchange have been complied with.

Mr. V Kanagasabapathy Chairman - Audit Committee 08 May 2012

Independent Auditors’ Report Independent

Cor respondent Fir m to

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF MERCHANT BANK OF SRI LANKA PLC

E-mail: sjms@sjmsassociates.com Website: www.sjmsassociates.lk

Report on the Financial Statements We have audited the accompanying financial statements of Merchant Bank of Sri Lanka PLC, and the consolidated financial statements of the Company and its subsidiaries, which comprise the balance sheet as at 31st December 2011, the income statement, the statement of changes in equity and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards.Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit. We therefore believe that our audit provides a reasonable basis for our opinion. Opinion - Company In our opinion, so far as appears from our examination, the Company has maintained proper accounting records for the year ended 31st December 2011, and the financial statements give a true and fair view of the Company’s state of affairs as at 31st December 2011, and of its profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards. Opinion – Group In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31st December 2011, and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and of its subsidiaries dealt with thereby, so far as concerns the shareholders of the Company. Report on Other Legal and Regulatory Requirements These financial statements of the Company and the group also comply with the requirements of Sections 151(2) and 153(2) to 153(7) of the Companies Act No. 07 of 2007.

SJMS ASSOCIATES Chartered Accountants Colombo 24 April 2012

Income Statement

Company

Group

For the year ended 31 December 2011 2010 Change 2011 2010 Change Re-presented* Note LKR ‘ 000 LKR ‘ 000 % LKR ‘ 000 LKR ‘ 000 % CONTINUING OPERATIONS INCOME 2 1,559,222 1,522,980 2 2,807,560 2,595,680 8 Interest income 3 1,335,948 1,107,121 21 2,309,171 1,930,807 20 Less: Interest expense 4 545,888 419,041 (30) 1,021,158 850,177 (20) Net interest income 790,060 688,080 15 1,288,013 1,080,630 19 Insurance premium income - - - 198,471 140,615 41 Fee and commission income 5 47,605 109,034 (56) 54,480 99,646 (45) Dividend income 14,460 8,481 70 7,229 11,425 (37) Other income 6 161,209 298,344 (46) 238,209 413,187 (42) Operating income 1,013,334 1,103,939 (8) 1,786,402 1,745,503 2 Less: OPERATING EXPENSES 7 Personnel expenses 8 229,809 174,893 (31) 472,898 365,929 (29) Premises, equipment and establishment expenses 50,462 44,486 (13) 89,795 74,840 (20) Fee and commission expenses 11,183 4,331 (158) 22,356 1,337 (1,572) Provision for staff retirement benefits 45,485 15,795 (188) 58,733 25,403 (131) Provision for loan losses 9 62,030 65,787 6 120,648 112,515 (7) Provision for fall in value of investments 71,298 - - 96,521 3,640 2,552 Value added tax on financial services 46,671 119,461 61 73,800 172,507 57 Other overhead expenses 113,277 111,117 (2) 320,856 276,363 (16) 630,215 535,870 (18) 1,255,607 1,032,534 (22) PROFIT FROM OPERATIONS 383,119 568,069 (33) 530,795 712,969 (26) Share of Associate Company’s profit before taxation 10 60,248 82,639 (27) 60,248 82,639 (27) PROFIT BEFORE TAXATION 443,367 650,708 (32) 591,043 795,608 (26) Less: Income tax expense 11 111,012 201,037 45 143,572 233,700 39 PROFIT FROM CONTINUING OPERATIONS 332,355 449,671 (26) 447,471 561,908 (20) DISCONTINUED OPERATIONS Loss from discontinued operations (net of income tax) 12 - - (49,053) (20,931) (134) PROFIT FOR THE YEAR 332,355 449,671 (26) 398,418 540,977 (26) Attributable to: Equity holders of the parent 332,355 449,671 (26) 353,141 492,345 (28) Minority interest - - 45,277 48,632 (7) PROFIT FOR THE YEAR 332,355 449,671 (26) 398,418 540,977 (26) BASIC / DILUTED EARNINGS PER SHARE (LKR.) 13 2.46 3.33 (26) 2.62 3.65 (28) BASIC / DILUTED EARNINGS PER SHARE CONTINUING OPERATIONS (LKR.) 13 2.46 3.33 (26) 2.87 3.76 (24) * Comparative figures are re - presented to reflect the results of the discontinued operation as explained in Note 12 to the Financial Statements. The Accounting Policies and Notes to the Financial Statements from page 76 to 113 form an integral part of the Financial Statements.

Balance Sheet

Company

Group

As at 31 December 2011 2010 Change 2011 2010 Change Note LKR ‘ 000 LKR ‘ 000 % LKR ‘ 000 LKR ‘ 000 % ASSETS Cash in hand and at bank 14 97,260 71,097 37 238,050 146,956 62 Other Investments 15 - - 250,000 - Government treasury bills/ bonds 16 871,088 279,765 211 1,670,391 1,626,575 3 Dealing securities 17 277,766 331,752 (16) 378,096 464,851 (19) Investment securities 18 10,024 10,024 - 10,034 10,044 (0) Bills receivable 19.1 632,128 619,395 2 632,357 619,624 2 Loans 19.2 1,539,704 947,639 62 3,253,646 3,340,952 (3) Lease / hire purchase receivable 19.3 5,467,127 3,816,504 43 8,781,037 6,554,698 34 Assets classified as held for sale 20 237,186 - - 2,708,372 257,041 954 Real estate stock - - - 28,157 30,288 (7) Other assets 20.1 311,402 211,567 47 744,053 610,870 22 Investment in associate 21 132,774 121,617 9 132,774 121,617 9 Investments in subsidiaries 22 259,524 446,710 (42) - - Investment properties 23 47,654 281,124 (83) 165,876 386,869 (57) Property and equipment 24 50,757 44,047 15 132,589 145,426 (9) Intangible assets 25 2,443 1,360 80 110,603 108,539 2 Total assets 9,936,837 7,182,601 38 19,236,035 14,424,350 33 LIABILITIES Deposits from customers 26 - - - 4,724,433 5,676,955 (17) Borrowings 27 5,014,069 3,179,712 58 5,465,161 3,311,089 65 Insurance provision - Life 28 - - - 106,682 66,937 59 Insurance provision - Non Life 29 - - - 328,252 252,774 30 Current tax liability 30 125,871 172,970 (27) 125,871 172,970 (27) Debentures 31 1,311,800 716,800 83 1,311,800 734,684 79 Deferred tax liability 32 74,834 20,994 256 74,834 20,994 256 Retirement benefit obligation 33 114,073 74,396 53 153,133 105,421 45 Other liabilities 34 453,392 338,536 34 793,869 895,444 (11) Liabilities directly associated with assets classified as held for Sale 35 - - - 2,544,050 - Total liabilities 7,094,039 4,503,408 58 15,628,085 11,237,268 39 EQUITY Stated capital 36 1,607,000 1,607,000 - 1,607,000 1,607,000 Statutory reserves 37.1 170,504 91,261 87 252,947 149,239 69 Retained earnings 37.2 1,065,294 980,932 9 1,222,843 1,142,160 7 Total equity attributable to the equity holders of the Company 2,842,798 2,679,193 6 3,082,790 2,898,399 6 Minority interest - - - 525,160 288,683 82 Total equity 2,842,798 2,679,193 6 3,607,950 3,187,082 13 Total liabilities and equity 9,936,837 7,182,601 38 19,236,035 14,424,350 33 Commitments and contingencies 38 48,793 7,117 586 101,155 36,967 174 Net assets value per ordinary share (LKR) 21.06 19.85 6 22.84 21.47 6 The Accounting Policies and Notes to the Financial Statements from page 76 to 113 form an integral part of the Financial Statements. These Financial Statements are in compliance with the requirements of the Companies Act No. 7 of 2007

Priyantha Herath Lakshman Kaluarachchi Asst. General Manager - Finance & Treasury Chief Executive Officer (Acting) The Directors are responsible for the preparation and presentation of these Financial Statements. Approved and signed for and on behalf of the Board M R Shah V Kanagasabapathy Chairman Director 24 April 2012, Colombo, Sri Lanka

Statement of Changes in Equity

Stated Statutory Retained Total Capital Reserves Earnings LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Company Balance as at 01.01.2010 1,607,000 59,784 663,988 2,330,772 Profit for the year - - 449,671 449,671 Transfers to statutory reserve fund - 31,477 (31,477) - Dividend paid - - (101,250) (101,250) Balance as at 31.12.2010 1,607,000 91,261 980,932 2,679,193

Profit for the Year - - 332,355 332,355 Transfers to statutory reserve fund - 23,265 (23,265) - Transfers to investment fund - 55,978 (55,978) - Dividend paid - - (168,750) (168,750) Balance as at 31.12.2011 1,607,000 170,504 1,065,294 2,842,798 Stated Statutory Retained Minority Total Capital Reserves Earnings Interest LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Group Balance as at 01.01.2010 1,607,000 106,344 803,922 207,823 2,725,089 Profit for the year - - 492,345 48,632 540,977 Adjustment due to change in depreciation method (Note 24 ) - - (9,962) (4,211) (14,173) Transfers to statutory reserve fund - 42,895 (42,895) - Rights issue - - - 32,428 32,428 Disposal of subsidiary - - - 4,011 4,011 Dividend paid - - (101,250) - (101,250) Balance as at 31.12.2010 (Restated) 1,607,000 149,239 1,142,160 288,683 3,187,082 Profit for the Year - - 353,141 45,277 398,418 Transfers to statutory reserve fund - 35,545 (35,545) - Transfers to investment fund 68,163 (68,163) - Share issue - - - 201,000 201,000 Dividend paid - - (168,750) (9,800) (178,550) Balance as at 31.12.2011 1,607,000 252,947 1,222,843 525,160 3,607,950 Statutory reserves represent the reserve fund of the company in terms of Direction No.05 of 2006 issued by the Central Bank of Sri Lanka under Section No.34 of the Finance Leasing Act No.56 of 2000 and the statutory reserve of the subsidiary, Merchant Credit of Sri Lanka represents its reseve fund in terms of Direction No.01 of 2003 issued by the Central Bank of Sri Lanka under Section No.46 of the Finance Companies Act No. 23 of 1991. Further this includes the investment fund account, which consist of the 8% of the profit calculated for the payment of Value Added Tax on financial services and 5% of the profit before tax calculated for payment of Income Tax purpose during the year.

Cash Flow Statement

Company

Group

For the year ended 31 December 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cash flow from operating activities Interest and commission receipts 1,122,110 1,023,330 2,405,357 2,150,877 Interest payments (490,069) (563,855) (1,007,326) (1,040,177) Receipts from other operating activities 175,669 306,825 431,500 600,866 Cash payments to employees and suppliers (327,853) (245,831) (750,029) (394,655) Payments for other operating activities (117,243) (186,791) (501,357) (690,580) Operating profit before changes in operating assets/liabilities 362,614 333,678 578,145 626,331 (Increase)/Decrease in operating assets Operating assets (78,724) (57,970) (408,587) (40,743) Funds advanced to customers (2,255,420) (1,281,181) (4,040,545) (2,165,801) Increase/(Decrease) in operating liabilities Operating liabilities 114,855 (48,644) 228,679 120,517 Deposits from customers - - 1,176,109 711,199 Net cash from operating activities before income tax (1,856,675) (1,054,117) (2,466,199) (748,497) Income tax paid (109,103) (46,623) (121,140) (60,949) Net cash inflow/(outflow) from operating activities (1,965,778) (1,100,740) (2,587,339) (809,446) Cash flows from investing activities Purchase of property & equipment (23,345) (18,327) (97,895) (55,399) Dividend received 44,790 33,110 37,483 35,506 Investments (598,492) (733,024) (2,480,102) (1,039,036) Proceeds from sale of property & equipment 167 7,940 27,096 30,353 Proceeds from sale of investments 949,538 872,427 2,806,140 1,100,244 Investments in subsidiary companies (50,000) (200,000) - Net cash inflow/(outflow) from investing activities 322,658 (37,874) 292,722 71,668 Cash flows from financing activities Proceeds from issue of shares - - 201,000 32,428 Dividend paid (168,750) (101,250) (179,570) (101,250) Cash inflow from long term borrowings 2,437,000 909,995 2,437,000 909,995 Repayment of long-term borrowings (894,143) (966,237) (909,076) (1,043,837) Cash inflow from short-term borrowings 6,930,672 3,643,962 7,218,172 3,693,962 Repayment of short-term borrowings (6,163,111) (2,474,773) (6,163,111) (2,454,773) Net cash inflow/(outflow) from financing activities 2,141,668 1,011,697 2,604,415 1,036,525 Net increase / (decrease) in cash and cash equivalents 498,548 (126,917) 309,798 298,747 Cash and cash equivalents at the beginning of the period ( Note 1 ) 286,082 412,999 1,677,374 1,378,627 Cash and cash equivalents at the end of the period ( Note 1 ) 784,630 286,082 1,987,172 1,677,374 Note 1 Reconciliation of cash and cash equivalents Government treasury bills 871,088 279,765 1,670,391 1,626,575 Cash in hand and at bank ( Note. 14 ) 97,260 71,097 238,050 146,956 Bank overdrafts ( Note. 27 ) (183,718) (64,780) (372,310) (96,157) Cash at banks and short-term deposits attributable to discontinued operation - - 451,041 784,630 286,082 1,987,172 1,677,374 The Accounting Policies and Notes to the Financial Statements from page 76 to 113 form an integral part of the Financial Statements.

Accounting Policies 1.

REPORTING ENTITY

Merchant Bank of Sri Lanka PLC is a public quoted company incorporated and domiciled in Sri Lanka. The registered office and principal place of business of the Company is located at the Bank of Ceylon Merchant Tower, No. 28, St Michael’s Road, Colombo 03. The shares of the Company are listed in the Colombo Stock Exchange. The staff strength of the Company and group as at 31st December 2011 was 202 and 941 respectively. (166 and 744 as at 31st December 2010) The Consolidated Financial Statements of the Bank for the year ended 31st December 2011 comprise the Bank (parent company) and its subsidiaries (together referred to as the ‘Group’ and individually as ‘Group entities’) and the company’s interest in its Associate Company. The Financial Statements of all companies in the Group have a common financial year which ends on December 31. In the opinion of the Directors, the Company’s parent enterprise and its ultimate parent enterprise is Bank of Ceylon. The consolidated financial statements for the year ended 31st December 2011 were authorized for issue on 24 April 2012 in accordance with the resolution of the Directors passed on 24th April 2012. 1.2

PRINCIPAL ACTIVITIES AND NATURE OF OPERATIONS

1.2.1 Company The principal activities of the Company are leasing and hire purchase, trade financing, corporate advisory services, capital market operations, fund management, corporate secretarial services and micro financing & agricultural credit facilities. 1.2.2 Subsidiaries The principal activities of the Company’s subsidiaries, namely, Merchant Credit of Sri Lanka Ltd, MBSL Savings Bank Ltd, and MBSL Insurance Company Ltd are leasing and hire purchase, trade financing, accepting of fixed deposits and certificates of deposit, real estate development, and banking and insurance services. 1.2.3 Associate The principal activities of the Company’s associate company, Lanka Securities (Pvt) Ltd, are trading in equity and debt securities, equity and debt security brokering and undertaking placement of equity and debt securities. There were no significant changes in the nature of the principal activities of the Company and Group during the financial year under review. 1.3

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The Board of Directors is responsible for the preparation and presentation of the financial statements of the Company and its subsidiaries as per the provisions of the Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards. The Board of Directors acknowledges this responsibility as set out in the ‘Annual Report of the Board of Directors on the affairs of the Company ’, ‘Directors’ Responsibility for financial reporting’ and in the statement following the Balance Sheet on pages 65, 68 and 73 respectively, of this Annual Report. These financial statements include the following components: •

An Income Statement providing information on the financial performance of the Company and the Group for the year under review (Refer page 72 of this Annual Report)

•

A Balance Sheet providing information on the financial position of the Company and the Group as at the year-end (Refer page 73 of this Annual Report)

•

A Statement of Changes in Equity depicting all changes in shareholders’ equity during the year under review (Refer page 74 of this Annual Report)

•

A Cash Flow Statement providing the information to the users, on the ability of the Company and the Group to generate cash and cash equivalents and the needs to utilize those cash flows (Refer page 75 of this Annual Report) and

•

Notes to the Financial Statements comprising Accounting Policies used and other Notes (Refer pages 76 to 113 of this Annual Report)

1.4

STATEMENT OF COMPLIANCE

The balance sheet, income statement, statement of changes in equity and cash flow statement, together with accounting policies and notes (the “financial statements”) of the Company and the Group are prepared in accordance with Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, and comply with the requirements of the Companies Act No 07 of 2007 and the Finance Leasing Act No 56 of 2000, the Finance Companies Act No 78 of 1988 and the Banking Act No 30 of 1988 and amendments thereto.

1.5

COMPARATIVE INFORMATION

The accounting policies adopted by the Group are applied consistently with those of the previous financial years. However, wherever the presentation or classification of items in the financial statements is amended, comparative amounts are also reclassified to conform to the current year’s presentation. 1.6

CHANGES TO THE ACCOUNTING POLICIES

There were no changes to the accounting policies adopted by the Group during the year under review. New Accounting Standards issued but not effective as at Balance Sheet Date The Institute of Chartered Accountants of Sri Lanka has issued a new volume of Sri Lanka Accounting Standards which have become applicable for financial periods beginning on or after 1st January 2012. Accordingly, these Standards have not been applied in preparing these financial statements as they were not effective for the year ended 31st December 2011. These Sri Lanka Accounting Standards comprise Accounting Standards prefixed both Sri Lanka Financial Reporting Standards (corresponding to International Financial Reporting Standards) and LKAS (corresponding to International Accounting Standards). Application of Sri Lanka Accounting Standards prefixed Sri Lanka Financial Reporting Standards and LKAS for the first time shall be deemed an adoption of Sri Lanka Financial Reporting Standards. The said new / revised standards have become applicable to the Company from 1st January 2012 and accordingly the reporting framework for the year ending 31st December 2012 will be LKAS / SLFRS. Given the complexities and technical expertise required in the process of convergence, the Company carried out an initial impact analysis with the assistance of an external consultant based on the 2010 balances. Using the same methodology the Company has extended its impact analysis to 2011 to approximately assess the potential impact on the financial statements had these said standards been applied for the year ended 31st December 2011. As this is only a preliminary assessment of the potential effects of these Standards, it is based on a few assumptions and approximation. Below table sets out the key impact areas for the Company in 2012 with the adoption of LKAS/SLFRS.

Accounting Standard

Key requirement in the Standard

Preliminary assessment of potential impact for MBSL

LKAS 32 - “Financial Instruments: Presentation”

For the purpose of measuring a financial asset LKAS 39 requires the financial assets to be classified into the following four categories and subsequently measured as follows;

Impact from categorisation / measurement of investments

LKAS 39 - “Financial Instruments: Recognition and Measurement” SLFRS 7 - “Financial Instruments: Disclosures”

- Fair value through profit and loss - measured at fair value with changes in fair value taken to Income Statement

The categorisation of investments in the Company will determine whether and where the re-measurement will be recognised in the Company's Financial Statements.

- Available-for-sale investments - measured at fair value with changes in fair value taken to the Other Comprehensive Income Statement.

Based on our initial assessment of potential impact on subsequent measurement, equity as at 31st December 2011 has been decreased by LKR 38.93 million.

- Held to maturity investments -measured at amortised cost; and

The above quantification has been based on few initial assumptions and the Company is in the process of refining the same to arrive at more accurate results.

- Loans and receivables - measured at amortised cost using effective interest method Financial liabilities are subsequently measured at amortized cost except certain financial liabilities which are presented at fair value.

Impact from measurement of borrowings Based on our preliminary assessment of potential impact on subsequent measurement, equity as at 31st December 2011 has been increased by LKR 6.46 million. The above quantification has been based on few initial assumptions and the Bank is in the process of refining the same to arrive at more accurate results.

SLFRS 1 – “First-time adoption of Sri Lanka Accounting Standards (SLFRSs)”

This Standard applied to the Company when it first applied SLFRS /LKAS. The opening SLFRS statements of financial position at the date of transition to SLFRSs need to be prepared. The same accounting policies should be used in its opening SLFRS Statements of financial position and throughout all periods presented in its first SLFRS financial statements.

The Company is in the process of preparing the financial statements under SLFRS and will provide an explanation how the transition from SLAS to SLFRSs affected its reported financial position, financial performance and cash flows.

Accounting Policies In addition to the above, there may be some impact with the adoption of other new / revised accounting standards which have become effective from 1st January 2012, and the Company does not expect any material impact. The Company will also experience changes in presentation and disclosure requirements under the new / revised accounting standards from the year ending 31st December 2012 onwards. 1.7

BASIS OF PREPARATION

1.7.1 Basis of measurement These financial statements have been prepared on an accrual basis under historical cost convention and applied consistently with no adjustment being made for inflationary factors affecting the financial statements except the dealing securities, which are stated at lower of cost and market value on an aggregate portfolio basis. Assets and liabilities are grouped by their nature and are listed in an order that reflect their relative liquidity. An analysis regarding recovery or settlement within 12 months after the Balance Sheet date (current) and more than 12 months after the Balance Sheet date (non–current) is presented in note 39. The accounting principles are applied consistently other than where specially disclosed with due regard to prudence, materiality and substance over form criteria as explained in Sri Lanka Accounting Standard No. 03- Presentation of Financial Statements (Revised 2005). Where appropriate, the accounting policies are disclosed in the succeeding notes. 1.7.2 Functional and presentation currency. The financial statements are presented in Sri Lankan rupees, which is the Group’s functional currency. All the financial information presented in Sri Lankan rupees has been rounded to nearest thousands, unless otherwise stated. There were no change in the Group’s presentation and functional currency during the year under review. 1.7.3 Significant accounting judgments, estimates and assumptions. The preparation of financial statements requires the management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to an accounting estimate are recognised in the period in which the estimate is revised and in any future periods affected. The key items which involve these judgments, estimates and assumptions are discussed below:

(a) Defined benefit plans

The cost of the defined benefit plan is determined using an actuarial valuation which involves making assumptions about discount rates, future salary increases and mortality rates. Due to the nature of these plans being long-term, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date. See Note 33.2 for the assumptions used.

(b) Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of “the value in use” of the cash-generating units to which goodwill has been allocated. The “value in use” calculation requires the directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Estimation of expected future cash flows and selection of discount rates require a high degree of judgment and hence, are subject to uncertainty.

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profits will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax planning strategies. 1.7.4 Materiality and aggregation Each material class of similar items is presented separately in the financial statements. Items of dissimilar nature or function are presented separately unless they are immaterial, in accordance with Sri Lanka Accounting Standard No.03 - Presentation of Financial Statements. 1.7.5 Offsetting Assets and liabilities, and income and expenses, are not offset unless required or permitted by a Sri Lanka Accounting Standard. 1.8 SIGNIFICANT ACCOUNTING POLICIES 1.8.1 Basis of consolidation The financial statements of all the entities controlled by the Company are consolidated in the Group’s financial statements in terms of the Sri Lanka Accounting Standard No. 26 (Revised) - Consolidated and Separate Financial Statements, and proportionate share of the profit/loss of its associates in terms of Sri Lanka Accounting Standard No. 27 - Investment in Associates.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. (a) Subsidiaries Subsidiaries are the entities that are controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control is effectively transferred to the Company until the date that control effectively ceases. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Minority interests represent the share of profit or loss and net assets not owned, directly or indirectly by the company and are presented separately in the consolidated income statement and consolidated balance sheet within equity, separately from the equity attributable to the equity-holders of the parent Company. Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the Minority interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the Minority interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. (b)

Associate

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The consolidated financial statements include the company’s share of the total recognised gains and losses of the associates under the equity method, from the date that significant influence effectively commences until the date that significant influence effectively ceases. Under the equity method, investment in the Associate is carried in the Balance Sheet at cost plus post-acquisition changes in the Company’s share of net assets of the Associate, less any impairment in the value of individual investments. 1.8.2 Transactions eliminated on consolidation All intra-group balances, transactions and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with Associate are eliminated to the extent of the Group’s interest in Associate. Unrealised losses are eliminated in the same way as unrealised gains. 1.8.3 Going concern The company’s management has made an assessment of the company’s ability to continue as a going concern and is satisfied that the company has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the company’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. 1.8.4 Foreign currency transactions Transactions in foreign currencies are initially recorded using the exchange rate of the functional currency ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to Sri Lankan rupees at the middle rate of exchange ruling at that date. Non-monetary items denominated in foreign currencies that are stated at historical cost at the balance sheet date are translated to Sri Lankan rupees at the foreign exchange rate ruling at the date of the initial transaction. Exchange differences arising on settlement of monetary items and retranslation of monetary items, are recognised in profit or loss in the year in which they arise. 1.9

ASSETS AND BASIS OF THEIR VALUATION

1.9.1 Cash and cash equivalents Cash and cash equivalents include cash in hand, demand deposits and short-term highly liquid investments which are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value. There were no cash and cash equivalent balances held by the Group companies that were not available for use by the Group. 1.9.2 Investments/Securities (a)

Investment in Treasury bills and bonds

Investment in treasury bills and treasury bonds are reflected at the value of bills / bonds purchased and the discount/premium accrued thereon. Discount received / premium paid is taken to the income statement based on the pattern reflecting a constant periodic rate of return.

Accounting Policies...cont’d/ (b)

Dealing securities

Dealing securities are marketable securities acquired and held with the intention of resale over a short period of time. Such securities are stated at the lower of cost and market value on an aggregate portfolio basis in accordance with Sri Lanka Accounting Standard No.22 - Accounting for Investments. (c)

Investment securities

Investment securities are acquired and held for yield or capital growth in the medium / long term with the positive intent and ability to hold until maturity. Such securities are carried at cost. Changes in market values of these securities are not taken into account, unless it is considered to be a diminution in value which is other than temporary. (d)

Investment in subsidiaries

Investment in subsidiaries is stated at cost in the Company’s financial statements in accordance with the Sri Lanka Accounting Standard No 26 - Consolidated and Separate Financial Statements. (e)

Investment in associate

Investment in associate is accounted under the equity method in the consolidated and separate financial statements. Under the equity method, the investments in Associate is initially accounted for at cost, and the carrying amount is adjusted for post acquisition changes in the Group’s share of net assets of the Associate less any impairment in the Group’s net investment in the Associate. (f) Non - current assets held for sale Non - current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Non - current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. 1.9.3 Loans and advances to customers Loans and advances to customers are stated in the balance sheet at the recoverable amount represented by the gross value of the outstanding balance adjusted for provision of loan losses and interest in suspense (interest that is not accrued to revenue). (a)

Non - performing loans

Loans, advances and finance leases that are 06 months or more in arrears of due capital and / or interest are classified as Non Performing Loans (NPL). Provision for possible loan losses are made on the basis of a continuous review of all advances to customers, in accordance with the directions issued by the Central Bank of Sri Lanka, and Sri Lanka Accounting Standard No. 33 - Revenue Recognition and Disclosures in the Financial Statements of the Finance Companies. (b)

Provision for loan losses

Full provision has been made for all the loans and advances outstanding for more than 6 months, net of the realisable value on securities. Provisions for loans are made after giving credit to the forced sale value (FSV) of the mortgaged immovable property by applying the Haircut Discount rate on the forced sale value according to their age of the debt as given below. Age of arrears Haircut % (discount rate) 3 months to 1 year 0% 1 – 2 years 20% 2 – 3 years 25% 3 – 4 years 30% 4 – 5 years 35% 5 years above 40% or at discretion of management 1.9.4 Leased assets and Hire Purchase assets. (a) Rental receivable on Leased assets and Hire Purchase assets Assets leased to customers, which transfer substantially all the risks and rewards associated with ownership other than legal title, are accounted as finance leases in accordance with Sri Lanka Accounting Standard No. 19 - Leases (Revised 2005) and reflected in the balance sheet as balance capital recoverable after deducting unearned interest income, rental collections and provision for doubtful debts. Assets hired to customers under the hire purchase agreements, which transfer the risks and rewards incidental to ownership as well as the legal title at the end of such contractual period are classified as hire purchase receivables. Such assets are accounted for in a similar manner as finance leases.

(b) Provision for loan losses on rental receivables A specific provision for possible losses is made on the amount of outstanding rental receivable net of realisable security value (net exposure at risk) in accordance with the directions issued by the Central Bank of Sri Lanka and disclosures are made as required by the Sri Lanka Accounting Standard No. 33 on Revenue Recognition and Disclosure in the Financial Statements of Finance Companies. Such provisions are subject to the minimum of: * Twenty percent (20%) on all receivables (net of unearned income) which are in arrears for a period of 6 to 12 months. * Fifty percent (50%) on all receivables (net of unearned income) which are in arrears for a period of 12 to 18 months. * Hundred percent (100%) on all receivables (net of unearned income) which are in arrears for a period of 18 months or more. * Hundred percent (100%) on all receivables where installments are not paid on a monthly basis, whenever the company has realized that installments will not be paid on the due dates. 1.9.5 Bills Receivable Bills receivable are reflected at the value of the bills initially paid to the customers and the discount / premium accrued thereon. Discount is taken to the income statement based on a pattern reflecting a constant periodic rate of return. (a) Provision for bills receivable Bills receivable outstanding for more than 6 months are provided in full after deducting the realisable value on securities. 1.9.6 General provision In addition to the specific provision made, a further general provision is made as a measure of prudence against potential credit losses that are specifically not identified. This general provision will be created by providing annually a minimum 0.5% of the aggregate value of net loan portfolio (i.e. leasing, hire purchase, bills receivable & loans) after the specific provisions, subject to a cumulative general provision not exceeding 2.5% of the net portfolio. This provision can be utilised in unexpected situations with the approval of Board of Directors. 1.9.7 Property & Equipment Property and equipment are stated at cost less subsequent accumulated depreciation and any subsequent accumulated impairment losses. The cost of property and equipment is the cost of purchase or construction of the assets and all such expenditure incidental to bringing the asset to its present condition and location. All items of property and equipment are initially recorded at cost. The Group revalues land at least once in every five years for disclosure purpose. Items of property and equipment are derecognised upon disposal or when no future economic benefits are expected from their use. Any gain or loss arising on de-recognition of an asset is included in the income statement in the year the asset is derecognised. (a) Depreciation Provision for depreciation is calculated by using a straight-line method on the cost of all property and equipment, other than freehold land, in order to write off such amounts over the estimated useful economic lives of such assets. The estimated useful lives of such assets are as follows:

Motor vehicles Computers & accessories Building Other assets

04 - 05 years 04 - 05 years 20 years 07 - 08 years

The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. 1.9.8 Intangible assets 1.9.8.1 Basis of recognition. Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the asset will flow to the entity and the cost of the assets can be measured reliably in accordance with Sri Lanka Accounting Standard No. 37 - Intangible Assets. Accordingly, these assets are stated in the balance sheet at cost less accumulated amortisation and impairment losses. (a) Goodwill Goodwill arising on the acquisition represents the excess of the cost of the acquisition over the Groupâ&#x20AC;&#x2122;s interest in the fair value of the acquireeâ&#x20AC;&#x2122;s identifiable assets, liabilities and contingent liabilities at the date of acquisition. Upon transition to revised Sri Lanka Accounting Standard No. 25 - Business Combinations, goodwill will no longer be amortised. Instead, goodwill will be tested for impairment annually and assessed for any indication of impairment at each reporting date to ensure that its carrying amount does not exceed its recoverable amount. If an impairment loss is identified, it will be recognised immediately in the income statement.

Accounting Policies...cont’d/ (b) Computer software All computer software costs incurred which are not integrally related to associated hardware which can be clearly identified, reliably measured, and it is probable that they will lead to future economic benefits, are classified as intangible assets in the balance sheet and stated at cost less accumulated amortisation and any accumulated impairment loss. (c) Subsequent expenditure Subsequent expenditure on an intangible asset is capitalised only when it increases the future economic benefits embodied in these assets. All other expenditure is expensed as incurred. (d) Amortisation The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expenses category consistent with the function of the intangible asset. The estimated useful life of software is four years. 1.9.9 Investment properties Investment properties are properties held either to earn rental income or for capital appreciation or for both. (a) Basis of recognition Investment property is recognised if it is probable that future economic benefits that are associated with the investment property will flow to the company and cost of the investment property can be measured reliably. (b) Measurement An investment property is measured initially at its cost. The cost of a purchased investment property comprises of its purchase price and any directly attributable expenditure.The Company adopts the cost model for subsequent measurement of investment properties in accordance with Sri Lanka Accounting Standard No. 40 - Investment Property (Revised 2005). Accordingly, land classified as investment property is stated at cost, and buildings classified as investment property are stated at cost less any accumulated depreciation and any accumulated impairment losses. Provision for depreciation is made over the period of 20 years at the rate of 5% per annum using the straight-line method for buildings classified as investment property. Land is not depreciated. The Group revalues investment properties at least once in every five years for disclosure purpose. 1.9.10 Impairment Non - financial assets The group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. Asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered as impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Previously recognised impairment losses other than in respect of goodwill, are reversed only if there has been an increase in the recoverable amount of the asset. Such increase is recognised to the extent of the carrying amount had no impairment losses been recognised previously. 1.10. LIABILITIES AND PROVISIONS. (a)

Borrowings

Borrowings include Call money borrowings, Commercial papers, Bank overdrafts and long term borrowings from financial institutions and are shown at the gross value of the outstanding balance. (b) Debentures These represent the funds borrowed by the Company for long term funding requirements. These liabilities are recorded in the balance sheet at amounts expected to be payable at the Balance Sheet date. (c)

Provisions for liabilities

Provisions are recognised when the Company / Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the outflow of economic benefits will be required to settle the obligation and a reliable estimate can

be made of the amount of the obligations in accordance with Sri Lanka Accounting Standard No. 36 - Provisions, Contingent Liabilities and Contingent Assets. (d)

Defined contribution plan – Employees’ Provident Fund and Employees’ Trust Fund

Employees are eligible for Employees’ Provident Fund contributions and Employees’Trust Fund contributions in line with respective statutes and regulations. The Company / Group and employees contribute 12% and 8% of gross emoluments of employees to Employees’ Provident Fund. The Company / Group contributes 3% of gross emoluments of employees to the Employees’ Trust Fund. (e)

Defined benefit plan – Gratuity

Gratuity is a defined benefit plan. Provision has been made in the accounts for retiring gratuities. An actuarial valuation of the retirement benefit is performed by a qualified actuary as at the balance sheet date using the projected unit credit (PUC) method in terms of Sri Lanka Accounting Standard No 16 (Revised 2006) - Employee Benefits. The provision is not externally funded. Actuarial gains or losses are recognized in the Income Statements in the period in which they arise. The past service cost is recognized as an expense on a straight line basis over the period until the benefits become vested. However, as per the payment of Gratuity Act No.12 of 1983, the liability arises only upon completion of five years of continued service. (f)

Commitments and contingencies

All discernible risks are accounted for in determining the amount of all known liabilities.The Company’s share of any contingencies and capital commitments of a Subsidiary or an Associate for which the Company is also liable severally or otherwise is included with appropriate disclosures. Contingent liabilities are possible obligations whose existence will be confirmed only by occurrence or non-occurrence of uncertain future events not wholly within the control of the entity or present obligations where the transfer of economic benefit not probable or cannot be reliably measured. Contingent liabilities are disclosed as a note to the financial statement, unless the possibility of an outflow of resources embodying economic benefits is remote. 1.11 INCOME STATEMENTS 1.11.1 Revenue recognition (a) Interest income Interest income is recognised on accrual basis except for the interest receivable on term loans. Interest ceased to be taken into revenue when the recovery of interest and / or principal is in arrears for six months or more. Interest receivable on advances classified as non-performing is accounted for on cash basis. Interest falling due on non-performing advances is credited to interest in suspense account. In addition, interest accrued up to 6 months on such non-performing advances is also eliminated from the interest income and transferred to interest in suspense. (b)

Income from Finance Lease and Hire Purchase

The excess of aggregate lease contracts receivable over the cost of the leased assets constitutes the total unearned income at the commencement of the lease contract. The unearned income is recognised as income over the term of the lease commencing from the month the lease is executed in proportion to the declining investment in lease. Non- performing leases are those where the rentals are overdue for 6 months or more. Lease income accrued is suspended from the date on which a lease is classified as non-performing and credited to the interest in suspense. Thereafter such income is recognised on cash basis. Income from hire purchase is recognised in the same way income from finance lease is recognised. (c) Income from discounting of bills of exchange and cheques Interest income from discounted trade bills and cheques is recognized proportionately from the date of discount to the maturity date. (d) Dividend income on shares Dividend income from shares is recognised when the company’s right to receive the payment is established. (e) Fees and commission income Fees and commission income including insurance agency commission and commission on bank guarantees are recognised as the related services are performed. (f)

Overdue interest

Default charges for late payment of finance lease and hire purchase rentals, and for delayed redemption of bills of exchange, are recognised as income on collection.

Accounting Policies...contâ&#x20AC;&#x2122;d/ (g) Share issue management fee Income from management of initial public offerings and private placement of shares of clients is recognised on an accrued basis. (h) Management fees Fee received from the companies which are managed by Merchant Bank of Sri Lanka has been classified as consultancy fees and are recognized in the income statement on an accrual basis. (i)

Interest income from loans and margin trading.

Interest income from staff loans and margin trading is recognised on an accrual basis. However income from term loans and personal loans are recognised on a cash basis. (j)

Gain / Loss on sale of equity investments and PPE

Gain / Loss on sale of equity investments and PPE is accounted for in the income statement, after deducting from the net sales proceeds on disposal of the carrying amount of such assets. 1.11.2 Expenditure recognition Expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in running the business and in maintaining property and equipment in a state of efficiency has been charged to the income statement. (a) Interest expenses In terms of the provisions of Sri Lanka Accounting Standard No 33 - Revenue Recognition and Disclosures in the Financial Statements of Finance Companies, interest and other expenses payable are recognised on an accrual basis. (b)

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that normally take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are substantially ready for their intended use or sale. Income earned from temporarily investing specific borrowings pending their expenditure on a qualifying asset is deducted from the borrowing costs eligible to be added to the carrying amount. All other borrowing costs are recognised in profit or loss in the year in which they are incurred in accordance with Sri Lanka Accounting Standard No. 20 - Borrowing Costs. (c)

Income taxes

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement. (c.i) Current tax Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current as well as prior years. The tax rates and tax laws used to compute the amount are those that are enacted or subsequently enacted by the Balance Sheet date. Accordingly, provision for taxation is made based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto, at the rates specified in Note 11 to the financial statements. (c.ii) Deferred tax Deferred tax is provided on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all temporary differences, except: *

Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profits nor taxable prof its or loss; and

In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised, except: *

Where the deferred tax assets relating to the deductible temporary difference arises from the initial recognition of an as set or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and

In respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the assets are realised, or the liabilities are settled, based on tax rates and tax laws that have been enacted or substantially enacted at the balance sheet date in accordance with Sri Lanka Accounting Standard No 14. - Income Taxes. (c.iii) Value Added Tax on Financial services. The bases for the computation of value added tax on financial services is the accounting profit before income tax adjusted for the economic depreciation, computed on prescribed rates and emoluments of employees based on “Value addition attributable method”. (c.iv) Withholding tax on dividends, distributed by the Company, Subsidiaries and Associates • • 1.12

Withholding tax on dividends distributed by the Company Withholding tax that arises from the distribution of dividends by the Company is recognized at the time the liability to pay the related dividend is recognized. Withholding tax on dividends distributed by the Subsidiaries and Associates Dividends received by the company from its subsidiaries and associates, have attracted a 10% deduction at source. CASH FLOW STATEMENT

The cash flow statement has been prepared by using the “direct method” of preparing cash flows in accordance with the Sri Lanka Accounting Standard No. 09 – Cash Flow Statements, whereby gross receipts and gross cash payments on operating activities, investing activities and financing activities are recognised. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and treasury bills net of outstanding bank overdrafts. 1.13

SEGMENTAL INFORMATION

The Group’s internal organization and management is structured based on individual products and services, which are similar in nature and process and where the risk and return are similar. The primary segments represent this business structure. The secondary segments are determined based on the Group’s geographical spread of operations. The geographical analysis of turnover and profits are based on location of customers and assets respectively. The activities of each of the reported business segments of the Company and the group are detailed in Note 40. 1.14 EVENTS AFTER THE BALANCE SHEET DATE Events after the Balance Sheet date are those events, favourable and unfavourable, that occur between the Balance Sheet date and the date when the Financial Statements are authorized for issue. All material events that occurred after the balance sheet date have been considered, and appropriate disclosures are made in Note 42 to the financial statements, where necessary. 1.15 SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL INSURANCE COMPANY LIMITED 1.15.1 Non - Life Insurance Business (a) Gross Written Premium Premium is generally recognised as written upon inception of the policy. Upon inception of the contract, premium is recorded as written and is earned primarily on a pro-rata basis over the term of the related policy coverage . However, for those contracts for which the period of risk differs significantly from the contract period, premium is earned over the period of risk in proportion to the amount of insurance protection provided. (b) Reinsurance Premium Reinsurance Premium expense is accounted for in the same accounting period as the Gross Written Premium to which it relates or in accordance with the pattern of reinsurance services received. (c) Unearned Premium Unearned premium is the portion of gross written premium and reinsurance premium written in the current year in respect of risk related to subsequent periods. Unearned premium is calculated on the 1/24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act, No. 43 of 2000.

Accounting Policies...contâ&#x20AC;&#x2122;d/ (d)

Unexpired Risk

Provision is made where appropriate for the estimated amount required over and above unearned premiums to meet future claims and related expenses on the business in force as at the reporting date. (e) Deferred Acquisition Expenses Acquisition costs, represents commissions and other underwriting expenses, which vary with and are directly related to the production of business, are deferred and amortized over the period in which the related written premium is earned. Reinsurance Commission is also treated in the same manner with deferred acquisition costs and it is calculated on the 24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act No. 43 of 2000 (f)

Premiums Receivable

Collectability of premiums and other debts are reviewed on an ongoing basis. Debts that are known to be uncollectible are written off. A provision for doubtful debts is raised when some doubt as to collection exists. (g) Reinsurance Receivable Reinsurance assets include the balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the Balance Sheet unless a right to offset exists. If a reinsurance asset is impaired, the company reduces the carrying amount accordingly and recognizes a loss in the statement of income. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after he initial recognition of the reinsurance asset, that the company may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amount that company will receive from the reinsurer. (h) Claims Claims expense and a liability for outstanding claims are recognised in respect of direct and inward reinsurance business. The liability covers claims reported but not yet reported claims(IBNR) and the anticipated direct and indirect costs of settling those claims. Claims outstanding are assessed by review of individual claim files and estimating changes in the ultimate costs of settling claims,IBNRs and settlement costs using statistics based on past experience and trends. Actuarial valuations are performed on an annual basis. While the Directors consider that the provision for claims is fairly stated on the basis of information currently available, the ultimate liability will vary as a result of subsequent information and events. This may result in adjustments to the amounts provided. Such amounts are reflected in the financial statements for that period. The methods used and the estimates made are reviewed regularly. 1.15.2 Life Insurance Business (a) Gross Written Premiums Premium from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, is recognised as revenue when cash is received from the policyholder. Benefits and expenses are provided against such revenue to recognise profits over the estimated life of the policies. Moreover, for single premium contracts, premium is recorded as income when received with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments. (b)

Reinsurance Premium

Outward reinsurance premiums are recognised when payable. Reinsurance recoveries are credited to match the relevant gross claims. (c) Benefits, losses and expenses Death claims are recorded on the basis of notifications received. Surrenders, maturities and annuity payments are recorded when due. Claims payable include direct costs of settlement. Interim payments and surrenders are accounted for only at the time of settlement. (d)

Actuarial valuation for long-term insurance provision

The directors agree to the long term-insurance provision for the Company at the year-end on the recommendations of the Consultant Actuary following his annual investigation of the life insurance business. The actuarial valuation takes into account all liabilities and is based on assumptions recommended by the Consultant Actuary. 1.16 SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL SAVINGS BANK LIMITED. (a) Non - performing loans and advances The loans and advances are classified as Non-Performing Advances (NPA) based on the period in arrears of due capital and/ or interest, Credit facilities repayable in monthly installments when more than 02 months principal and / or interest in arrears are recognized as Non-Performing, in accordance with the criteria set out in Directions issued by the Central Bank of Sri Lanka on â&#x20AC;&#x153; Classification of Loans and Advances, income recognition and provisioning.

Provision for possible loan losses are made on the basis of a continuous review of all loans and advances to customers in accordance with the Sri Lanka Accounting Standard 23 - Revenue Recognition and Disclosures in the Financial Statements of the Banks, and Directions issued by the Central Bank of Sri Lanka and disclosed in the financial statements of the Group. (b)

Provision for loan losses

(b.i)

Specific provisions for loan losses are made as follows:

In accordance with the Directions issued by the Central Bank of Sri Lanka on “Classification of Loans and Advances,Income Recognition and Provisioning” specific provisions on NPL are made as follows. Period outstanding

Category of NPA Credit quality

Sub-standard Doubtful Loss

5-11 Months 11-17 Months > 17 Months

Minimum specific Provision Requirements 20% 50% 100%

The provision made relates to all categories of Loans and Advances identified as substandard, doubtful and loss. Where necessary specific provisions have been made over and above the minimum percentages stipulated above, on a case by case basis. Values assigned to collateral held for non-performing loans secured by properties are determined based on the realisable values of the properties, being the forced sale value provided by independent parties/valuers. (b.ii) General Provision The Direction issued by the Monetary Board of the Central Bank of Sri Lanka on 8th May 2008, in terms Section 46 of the Banking Act No 30 of 1988, as amended, in “Requirement to Maintain a General Provision for Advances” requires all licensed specialized banks to maintain a general provision of 1% of the total on-balance sheet performing loans and advances, net of interest in suspense and credit facilities secured by cash deposits, gold or Government securities with the same bank. The Direction referred to above was replaced by the Direction issued on 27th September 2010, thereby the banks are required to make general provision of 0.5% of total outstanding on-balance sheet performing loans and total outstanding of special mention on-balance sheet credit facilities commencing on 1st January 2012. According to the said Direction, banks shall reduce the existing general provision requirements of 1% to 0.5% at a rate of 0.1 per quarter during the five quarters commencing 1st October 2010. 1.16.1 Revenue recognition on non-performing loans When an advance is classified as non-performing Loans and Advances if due capital and/or interest were in arrears for more than 2 months the interest ceases to be accrued and is taken to income thereafter on cash basis in accordance with directions issued by the Central Bank of Sri Lanka. 1.16.2 Liabilities and provisions (a) Deposits from customers Deposits include savings deposits, term deposits, deposits redeemable at call and certificates of deposits. They are brought to account at the gross value of the outstanding balance. Interest paid is charged to the Income statement. (b)

Securities sold under Re-purchase agreements

Securities sold under agreements to re-purchase are recorded separately in the Financial Statements. The difference between the sale and the purchase price represents interest expense, which is recognised in the Income statement over the period of the re-purchase agreements. 1.16.3 Revenue recognition (a) Interest income Interest income from loans and advances is recognized on an accrual basis. Interest ceases to be accrued when the recovery of interest or principal is in arrears for more than two (2) months. Interest on non-performing advances is accounted for on a cash basis. Interest on Non-Performing debts is credited to the ‘Interest in suspense account’ which is netted in the Balance Sheet against the relevant balance. Interest income from investments is recognised on an accrual basis.

Notes to the Financial Statements Company

Group

For the year ended 31 December 2011 2010 2011 2010 Re-presented* LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 2 INCOME Interest income (Note 03) 1,335,948 1,107,121 2,309,171 1,930,807 Fee & commission income (Note 05) 47,605 109,034 54,480 99,646 Dividend income 14,460 8,481 7,229 11,425 Other income (Note 06) 161,209 298,344 238,209 413,187 Insurance income - - 198,471 140,615 1,559,222 1,522,980 2,807,560 2,595,680 3 INTEREST INCOME Gross earnings under Finance leases 420,553 283,693 609,141 385,340 Hire purchase 491,465 480,565 830,011 787,425 Loans 149,280 132,419 446,490 412,343 Bills discounting 67,164 68,550 67,164 68,550 Treasury bills and bonds 44,076 29,308 111,583 116,829 Overdue interest 118,294 94,699 184,274 139,718 Others 45,116 17,887 60,508 20,602 1,335,948 1,107,121 2,309,171 1,930,807 4 INTEREST EXPENSES Customer deposits - - 432,394 424,382 Borrowings 543,721 416,336 575,558 421,006 Cash margins 1,302 1,456 1,302 1,456 Overdraft and others 865 1,249 11,904 3,333 545,888 419,041 1,021,158 850,177 5 FEE AND COMMISSION INCOME Insurance commission 14,770 12,875 22,262 6,109 Commission on bank guarantee 2,206 1,541 2,206 1,541 Fee and consultancy income 30,629 94,618 30,012 91,996 47,605 109,034 54,480 99,646 6 OTHER INCOME Proceeds from lease contracts written-off 5,271 5,323 20,557 10,091 Gain on sale of quoted investments 99,129 215,282 114,953 280,711 Gain on sale of un-quoted investments - 25,629 - 21,463 Service charges on hire-purchase 8,922 14,527 8,922 14,103 Gain on disposal of Leased/Hire purchased assets 691 172 691 172 Miscellaneous income 8,452 3,355 53,566 32,292 Income from seminars 1,318 512 1,318 512 Gain/(Loss) on disposal of fixed assets (2,329) 5,336 (251) 5,540 Gain/(Loss) on sale of real estate - - (1,302) (560) Gain on sale of treasury bills/bonds 5,713 22,315 5,713 34,170 Gain on disposal of Investment properties 34,042 5,893 34,042 14,693 161,209 298,344 238,209 413,187 7 OPERATING EXPENSES Operating expenses, among others, include the following: Legal expenses 3,365 7,974 4,335 12,237 Depreciation of property and equipment 12,152 8,927 34,168 39,255 Amortization of intangible assets 904 656 1,744 2,278 Depreciation of investment properties 762 853 3,285 3,073 Directors’ emoluments (Note 7.1) 4,949 4,568 14,883 9,975 Auditors’ remuneration (Note 7.2) 1,077 859 2,168 1,771 Donations 61 797 211 1,242 7.1 Directors’ emoluments Emoluments to the Chairman 772 498 3,012 1,378 Emoluments to Non-Executive Directors 4,177 4,070 11,871 8,597 4,949 4,568 14,883 9,975 7.2 Auditors’ remuneration Statutory Audit Services 715 715 1,712 1,577 Audit Related Services 362 144 456 194 1,077 859 2,168 1,771 * Comparative figures are re - presented to reflect the results of the discontinued operation as explained in Note 12 to the Financial Statements.

Company

Group

For the year ended 31 December 2011 2010 2011 2010 Re-presented* LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

8 PERSONNEL EXPENSES Salary 185,143 127,820 391,338 285,544 Defined contribution plan - EPF 16,533 11,459 35,975 27,074 Defined contribution plan - ETF 4,133 2,864 9,706 5,840 Bonus 24,000 32,750 35,879 47,471 229,809 174,893 472,898 365,929 9 PROVISION FOR LOAN LOSSES Specific provision/ (reversal) on bills receivable (383) (1,910) (383) (1,910) General provision / (reversal) on bills receivable (10) 4,591 (10) 4,591 Specific provision on loans and advances 1,930 1,307 19,586 11,609 General provision on loans and advances 5,728 7,009 5,728 7,009 Specific provision on lease/hire-purchase receivable 22,448 30,558 51,415 44,596 General provision on lease receivable 32,317 24,232 44,205 30,232 Total provisions made during the year 62,030 65,787 120,541 96,127 Written off - - 107 16,388 62,030 65,787 120,648 112,515 10 SHARE OF ASSOCIATE COMPANY’S PROFIT BEFORE TAXATION Name of the Company Holding % Lanka Securities (Pvt) Ltd 29 60,248 82,639 60,248 82,639

11 INCOME TAX EXPENSE 11.1 (a) Current tax expense Income tax on profit for the year 57,172 128,913 86,877 162,076 Under-provision in the previous years - 74,846 2,855 74,346 57,172 203,759 89,732 236,422 (b) Deferred tax expense Provision / (Reversal) of deferred taxation (Note 32.1) 53,840 (2,722) 53,840 (2,722) Total income tax expense 111,012 201,037 143,572 233,700 11.2 Reconciliation of accounting profit and taxable income: Accounting profit 443,367 650,708 591,043 795,608 Add: Disallowed expenses 1,424,255 1,181,133 2,176,493 1,335,941 Less:- Capital allowance and other income 1,767,013 1,395,602 2,553,398 1,551,158 Adjusted trade profit 100,609 436,239 214,138 580,391 Less:-Tax savings on the utilisation of tax losses/ qualifying payments 84,903 152,711 142,028 203,509 Add: Tax loss on Leasing business 148,540 - 189,046 Taxable income 164,246 283,528 261,156 376,882 Income tax charged at: Income tax at 28% 45,989 99,235 75,694 131,909 Social responsibility levy at 1.5% 690 1,489 690 1,978 Notional tax credit (4,897) (3,226) (4,897) (3,226) Current & deferred tax share of associate company 15,390 31,415 15,390 31,415 Deferred tax charge / (reversal) 53,840 (2,722) 53,840 (2,722) Under provision in the previous years - 74,846 2,855 74,346 Total income tax expense 111,012 201,037 143,572 233,700 11.3 The applicable tax rate for the Company and the Group is at 28.00% * Comparative figures are re - presented to reflect the results of the discontinued operation as explained in Note 12 to the Financial Statements.

Notes to the Financial Statements ...cont’d/ 12

DISCONTINUED OPERATIONS In October 2011, the company accepted an offer made by a consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the company’s 68% holding in MBSL Savings Bank Limited comprising 87,185,520 o rdinary voting shares and 100,000,000 ordinary non-voting shares at a price of Rs. 3.75 per voting share and Rs. 2.35 per non voting share, subject to the approval of the Central Bank. In January 2012, the Monetary Board granted approval to the consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the company’s holding in MBSL Savings Bank Limited for a consideration of Rs. 562 Mn, out of which Rs. 100 million was paid in October 2011. The Company executed a share transfer agreement on 30 March 2012 for this transaction.

2011 2010 LKR ‘ 000 LKR ‘ 000 Total income 373,608 394,374 Total expense 422,661 415,305 Results of Operating Activities before tax (49,053) (20,931) Income tax expense - - Results of Operating Activities (49,053) (20,931) Basic / Diluted earnings / (loss) per share (0.36) (0.16) Cash flows from (used in) discontinued operation Net cash used in operating activities (60,586) (215,799) Net cash from investing activities 6,733 27,322 Net cash from financing activities 60,066 159,228 Net cash generated from discontinued operation 6,213 (29,249) 13 13.1 BASIC / DILUTED EARNINGS PER ORDINARY SHARE Basic Earnings Per Share (EPS) has been calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Company Group For the year ended 31 December 2011 2010 2011 2010 Profit attributable to ordinary shareholders (LKR ‘000) 332,355 449,671 353,141 492,345 Number of ordinary shares used as denominator (‘000) 135,000 135,000 135,000 135,000 Basic / Diluted Earnings per ordinary share (LKR) 2.46 3.33 2.62 3.65 13.2 BASIC / DILUTED EARNINGS PER ORDINARY SHARE FROM CONTINUING OPERATIONS Profit attributable to ordinary shareholders (LKR ‘000) 332,355 449,671 387,621 507,057 Number of ordinary shares used as denominator (‘000) 135,000 135,000 135,000 135,000 Basic / Diluted Earnings per ordinary share (LKR) 2.46 3.33 2.87 3.76 13.3 DIVIDEND PER SHARE Final dividend proposed (LKR’ 000) 168,750 168,750 168,750 168,750 Dividend per ordinary share (LKR) 1.25 1.25 1.25 1.25

The directors recommended a final dividend of LKR 1.25 per share for the year ended 31 December 2011 for approval by the share holders’ at the Annual General Meeting to be held on 20 June 2012. As stipulated by SLAS 12 (revised) Events occurring after the balance sheet date, this proposed dividend is not recognized as a liability as at 31 December 2011.

However, for the purpose of computing dividend per share, the proposed final dividend has been taken into consideration. Company Group As at 31 December 2011 2010 2011 2010 LKR'000 LKR'000 LKR'000 LKR'000 14 CASH IN HAND AND AT BANK Cash in hand 316 259 6,771 11,809 Cash at bank 96,944 70,838 231,279 135,147 97,260 71,097 238,050 146,956 15 OTHER INVESTMENTS Fixed deposits - - 225,000 Debentures - - 25,000 - - 250,000 16 GOVERNMENT TREASURY BILLS / BONDS Treasury bills / bonds 871,088 279,765 1,560,046 1,626,575 Treasury Bills - Re - Purchase agreements - - 110,345 871,088 279,765 1,670,391 1,626,575

2011 2010 Company No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value As at 31 December Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 17 DEALING SECURITIES 17.a. Quoted Shares Bank, Finance and Insurance Hatton National Bank PLC - - - 5,500 Hatton National Bank PLC-Non Voting 102,300 13,886 8,511 75,100 National Development Bank PLC 50,100 8,705 6,919 14,600 Commercial Bank of Ceylon PLC 14,600 1,528 1,460 14,300 Development Finance Corporation of Ceylon 21,600 2,406 2,439 61,800 Seylan Bank PLC 99,700 8,762 6,740 37,900 Pan Asia Banking Corporation PLC 66 2 2 333 Janashakthi Insurance Company PLC 442,000 8,732 6,630 805,100 People’s Leasing Finance PLC 35,700 2,376 1,274 - Nations Trust Bank PLC 61,400 5,062 3,500 61,400 Nanda Finance PLC 27,500 610 338 - Sampath Bank PLC 15,000 4,141 2,925 - Commercial Bank of Ceylon PLC-Non Voting 90,000 7,927 6,705 - Lanka Orix Leasing Co. PLC 60,000 7,638 4,998 - Lanka Ventures PLC 587,400 25,943 22,439 - Ceylinco Insurance Co PLC - - - 13,800 CF Venture Fund PLC - - - 537,000 Seylan Merchant Bank PLC - - - 50,000 Seylan Merchant Bank PLC-Non Voting - - - 1,600,000 SMB Leasing PLC W2016 1,340,000 2,029 938 1,600,000 SMB Leasing PLC W2015 - - - 2,000,000 99,747 75,817

818 15,291 3,560 2,503 6,883 3,207 7 11,413 - 5,062 - - - - - 3,143 11,099 82 1,465 - 1,818 66,351

2,199 16,116 5,103 3,717 12,372 3,707 17 12,882 5,121 5,258 10,203 95 1,600 960 1,600 80,950

Diversified Holdings John Keells Holdings PLC - - - 135,300 25,670 40,374 Browns Investment PLC 1,571,800 8,091 6,602 - - Richard Pieris & Company PLC - - - 1,854,200 9,984 19,469 The Colombo Fort Land & Building PLC 92,900 7,685 4,552 - - Expo Lanka PLC 100,000 1,208 900 - - Hemas Holdings PLC 297,500 12,604 9,818 - - Vallibel One Limited 261,000 6,525 6,212 - - Free Lanka Capital Holdings PLC 698,900 3,472 2,167 - - CT Holdings PLC 20,000 4,206 3,580 22,200 2,360 4,056 Colombo Dockyard PLC - - - 5,300 1,488 1,458 43,791 33,830 39,502 65,356 Information & Technology PC House PLC - - - 400,000 4,400 4,520 - - 4,400 4,520 Beverages, Food & Tobacco Distilleries Co of Sri Lanka PLC 81,000 13,951 11,915 129,800 18,476 23,091 Lanka Milk Foods (CWE) PLC - - - 81,903 8,285 9,255 Bairaha Farms PLC 10,000 3,084 2,103 - - The Lion Brewery Ceylon PLC 42,300 10,422 8,037 - - Coco Lanka PLC - - - 105 5 7 27,457 22,055 26,765 32,353 Hotels and Travel Asian Hotels & Properties PLC 110,900 9,105 8,473 65,900 10,821 12,785 Keells Hotels PLC - - - 883,333 18,285 17,667 Stafford Hotels PLC - - - 22,800 631 1,395 Ceylon Hotels Corporation PLC - - - 55,100 1,841 2,011 The Fortress Resorts PLC - - - 120,000 1,939 2,472 Confifi Hotel Holdings PLC 2,300 721 533 - - Marawila Resorts PLC - - - 6,300 41 93 Eden Hotel Lanka PLC 100,000 2,842 3,800 270,800 7,130 15,598 Galadari Hotels (Lanka) PLC - - - 167,900 6,336 6,011 Amaya Leisure PLC 16,700 2,006 1,361 - - Aitken Spence Hotel Holdings PLC 14,000 1,586 973 - - Hotel Services Ceylon PLC 2,669,400 57,877 54,189 2,992,300 64,884 77,800 74,137 69,329 111,907 135,832

Notes to the Financial Statements ...cont’d/ 2011 2010 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value As at 31 December Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Manufacturing ACL Cables PLC 300 27 22 4,900 397 417 Abans Electricals PLC 6,100 1,576 1,160 - - Pelwatte Sugar Industries PLC 41,600 1,799 978 30,800 1,122 844 Hayleys Exports PLC 2,400 100 86 62,600 2,738 2,567 Printcare PLC 25,000 1,293 923 - - Tokyo Cement Co.(Lanka) PLC - - - 6,250 186 344 Tokyo Cement Co.(Lanka) PLC - Non Voting 40,400 1,672 1,232 7,500 - 302 Royal Ceramic Lanka PLC 10,000 1,598 1,415 - - Lanka Cement PLC 60,400 2,106 1,196 60,400 2,106 1,691 Orient Garments PLC 5,000 189 156 - - Lake House Printers and Publishers PLC 3,600 493 488 - - Textured Jersey PLC 60,800 816 620 - - Piramal Glass Company PLC 986,300 10,827 7,792 - - Ceylon Leather Products PLC 10,000 1,004 996 113,600 10,748 10,519 Central Industries PLC 36,000 2,793 3,035 200,100 15,529 18,009 26,293 20,097 32,825 34,693 Trading Brown & Company PLC - - - 93,100 10,803 22,986 Ceylon Foreign Trades PLC 930,400 9,573 8,746 - - C.W.Mackie & Co. PLC - - - 300 13 26 Tess Agro PLC - - - 2,900 5 8 9,573 8,746 10,821 23,020 Telecommunication Dialog Axiata PLC - - - 103,600 898 1,222 Sri Lanka Telecom PLC - - - 24,900 1,136 1,220 - - 2,034 2,443 Power and Energy Lanka IOC PLC - - - 108,300 2,296 2,047 Hemas Power PLC 21,400 616 571 - - Laugfs Gas PLC - - - 166,100 3,820 4,302 Laugfs Gas PLC - Non Voting - - - 227,100 3,407 4,201 Pan Asian Power PLC - - - 1,876,600 5,630 5,630 616 571 15,153 16,180 Health Care Nawaloka Hospitals PLC - - - 100,000 360 370 Asiri Hospitals PLC - - - 260,200 2,325 2,290 - - 2,685 2,660 Land and Property York Arcade PLC - - - 25,000 745 603 Onally Holdings PLC 8,700 714 632 - - Colombo Land PLC 100,000 7,028 5,490 - - CT Land Development PLC 8,100 227 234 33,500 770 938 East West Properties PLC - - - 1,200 16 15 Overseas Realty (Ceylon) PLC 483,500 7,976 6,769 383,500 6,808 5,868 15,945 13,126 8,339 7,424 Chemical & Pharmaceuticals Chemical Industries (Colombo) PLC - - - 5,000 302 704 Chemical Industries (Colombo) PLC - Non Voting 10,000 908 770 9,600 374 959 Chemanex PLC 1,000 159 120 1,000 159 122 Haycarb PLC 30,200 5,282 4,681 30,200 5,282 5,089 6,349 5,571 6,117 6,874 Plantation Kegalle Plantations PLC - - - 600 44 97 Balangoda Plantations PLC 22,800 1,545 657 - - Maskeliya Plantations PLC 4,000 130 80 4,000 130 111 1,675 737 174 208 Footwear & Textile Hayleys MGT Knitting Mills PLC - - - 4,000 148 128 - - 148 128 Investment Trust Envi.Resources PLC 83,300 2,594 1,574 - - Renuka Holding PLC 356,446 27,409 19,212 - - 30,003 20,787 - Motors Sathosa Motors PLC 20,000 7,511 5,200 - - United Motors Lanka PLC 10,000 1,590 1,460 - - 9,101 6,660 - Unit Trusts Namal Acquity VF 28,300 2,715 2,547 28,300 2,715 2,547 2,715 2,547 2,715 2,547

2011 2010 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value As at 31 December Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Total gross carrying value of dealing securities 347,402 279,872 329,936 415,186 Provision for fall in value of dealing securities ( Note 17.1 ) 71,298 - - Total net carrying value of dealing securities 276,104 279,872 329,936 415,186 17.b. Listed debentures Bank of Ceylon 8,700 1,083 1,045 8,700 1,083 1,175 Seylan Bank Debenture - 1 2,000 215 200 2,000 215 200 Seylan Bank Debenture - 2 3,400 364 340 3,400 364 340 Seylan Bank Debenture - 3 - - - 1,500 154 150 Total net carrying value of listed debentures 1,662 1,585 1,816 1,865 Total net carrying value of dealing securities and investments 277,766 281,457 331,752 417,051 Group 17.c. Quoted Shares Bank, Finance and Insurance Hatton National Bank PLC - - - 14,800 2,893 4,195 Hatton National Bank PLC-Non Voting 126,150 17,201 10,521 75,100 15,291 16,116 National Development Bank PLC 50,100 8,705 6,919 14,600 3,560 5,103 Commercial Bank of Ceylon PLC 14,600 1,528 1,460 14,300 2,503 3,717 Commercial Bank of Ceylon PLC-Non Voting 131,526 11,538 9,799 - - DFCC PLC 21,600 2,406 2,439 61,800 6,883 12,372 Seylan Bank PLC 209,566 19,024 14,167 168,500 16,943 16,479 Seylan Bank PLC - Non Voting - - - 41,700 2,120 2,043 Pan Asia Banking Corporation PLC 66 2 2 2,833 108 147 Janashakthi Insurance Company PLC 518,800 10,376 7,797 805,100 11,413 12,882 People’s Leasing Finance PLC 35,700 2,376 1,274 - - Nations Trust Bank PLC 61,400 5,062 3,500 72,500 5,947 6,047 Nations Trust Bank PLC -W2010 - - - 20,000 644 1,152 Nanda Finance PLC 27,500 610 338 - - Sampath Bank PLC 15,000 4,141 2,925 - - Lanka Orix Leasing Co. PLC 60,000 7,638 4,998 - - Lanka Ventures PLC 640,400 28,143 24,463 - - Ceylinco Insurance Co PLC - - - 14,300 3,257 5,449 CF Venture Fund PLC - - - 760,000 15,566 14,390 Seylan Merchant Bank PLC 43,600 3,823 2,987 86,800 168 132 Seylan Merchant Bank PLC-Non Voting 72,500 3,100 2,233 1,600,000 1,465 1,600 Merchant Bank of Sri Lanka PLC - - - 17,000 917 779 Seylan Development PLC - - - 10,000 218 168 SMB Leasing PLC W2016 3,237,600 3,927 938 1,600,000 - 960 SMB Leasing PLC W2015 1,897,600 2,878 1,328 2,000,000 1,818 1,600 DFCC Bank PLC 4,300 617 485 - - Amana Takaful PLC 36,900 74 89 195,800 655 587 Asia Capital PLC 1,100 76 71 12,200 558 573 First Capital Holdings PLC 27,800 596 448 95,000 1,742 1,805 People’s Merchant Bank PLC 42,500 904 672 6,200 200 182 Union Bank of Colombo PLC 137,200 4,262 2,607 - - Chilaw Finance PLC 3,300 107 74 - - HNB Assurance PLC 22,466 1,689 1,281 - - Singer Finance PLC 700 18 19 - - 140,821 103,834 94,869 108,478 Diversified Holdings John Keells Holdings PLC 13,368 3,076 2,275 167,926 35,240 50,110 Browns Investment PLC 1,571,800 8,091 6,602 - - Richard Pieris & Company PLC 121,300 1,576 1,092 1,854,200 9,984 19,469 The Colombo Fort Land & Building PLC 92,900 7,685 4,552 - - Expo Lanka PLC 100,000 1,208 900 - - Hemas Holdings PLC 344,700 14,867 11,375 3,900 183 174 Vallibel One PLC 261,000 6,525 6,212 - - Free Lanka Capital Holdings PLC 1,096,800 5,577 3,440 - - CT Holdings PLC 20,000 4,206 3,580 32,200 4,016 5,883 Colombo Dockyard PLC 6,100 1,817 1,457 - - CW Mackie PLC 33,100 3,504 2,962 - - Aitken Spence PLC 6,100 891 763 - - 59,023 45,210 49,423 75,636

Notes to the Financial Statements ...cont’d/

As at 31 December

2011 2010 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000

Information & Technology E-Channeling PLC - - - 13,300 301 293 PC House PLC - - - 483,100 5,314 5,459 - - 5,615 5,752 Beverages, Food & Tobacco Distilleries Co of Sri Lanka PLC 81,000 13,951 11,915 129,800 18,476 23,091 Lanka Milk Foods (CWE) PLC - - - 81,903 8,285 9,255 Bairaha Farms PLC 24,200 7,333 5,089 - - The Lion Brewery Ceylon PLC 42,300 10,422 8,037 63,000 12,197 11,661 Coco Lanka PLC 3,500 230 193 5,105 263 329 Kotmale Holdings PLC - - - 228,200 5,774 9,858 Three Acre Farms PLC 7,200 911 748 - - 32,847 25,982 44,995 54,194 Hotels and Travel Asian Hotels & Properties PLC 152,900 13,243 11,682 68,900 11,283 13,367 Keells Hotels PLC 269,900 5,730 3,644 1,286,633 26,848 25,733 Stafford Hotels PLC - - - 22,800 631 1,395 Ceylon Hotels Corporation PLC - - - 55,100 1,841 2,011 The Fortress Resorts PLC - - - 123,700 2,022 2,548 Confifi Hotel Holdings PLC 2,300 721 533 - - Marawila Resorts PLC 50 1 1 11,300 122 167 Eden Hotel Lanka PLC 131,100 4,744 4,982 312,300 9,775 17,988 Galadari Hotels (Lanka) PLC - - - 219,100 8,455 7,844 Amaya Leisure PLC 16,700 2,006 1,361 4,214 337 383 Aitken Spence Hotel Holdings PLC 14,000 1,586 973 - - Hotel Services Ceylon PLC 2,680,250 58,203 54,411 3,027,150 65,821 78,706 Amaya Leisure PLC 14 1 1 - - The Lighthouse PLC 4,900 321 262 4,600 305 290 Mahaweli Reach Hotels PLC - - - 8,100 306 284 Renuka Hotels PLC 70,719 5,253 3,812 - - Hotel Sigiriya PLC 1,800 162 133 - - 91,971 81,794 127,746 150,716 Manufacturing ACL Cables PLC 300 27 22 4,900 397 417 Abans Electricals PLC 9,500 2,370 1,806 - - Pelwatte Sugar Industries PLC 68,400 2,925 1,608 30,800 1,122 844 Hayleys Exports PLC 2,400 100 86 62,600 2,738 2,567 Printcare PLC 25,000 1,293 923 - - Tokyo Cement Co. (Lanka) PLC 5,600 354 246 6,250 186 344 Tokyo Cement Co(Lanka) PLC-Non Voting 40,400 1,672 1,232 7,500 - 302 Royal Ceramic Lanka PLC 10,000 1,598 1,415 - - Lanka Cement PLC 60,400 2,106 1,196 60,400 2,106 1,691 Lanka Tiles PLC - - - 2,400 241 322 Lanka Walltile PLC - - - 2,000 212 278 Orient Garments PLC 5,000 189 156 - - Lake House Printers and Publishers PLC 3,600 493 488 - - Textured Jersey PLC 60,800 816 620 - - Piramal Glass Company PLC 1,086,300 11,797 8,582 200,000 788 1,560 Ceylon Leather Products PLC 12,000 1,279 1,195 245,800 22,813 22,761 Central Industries PLC 240,100 18,633 20,240 431,700 33,503 38,853 Raigam Wayamba Salterns PLC. - - - 47,500 118 190 Bogala Graphite PLC 12,100 811 472 - - Laxapana Batteries PLC 1,300 15 15 - - 46,477 40,301 64,224 70,129 Trading Brown And Company PLC 2,900 767 681 109,300 14,046 26,986 C.W.Mackie & Co. PLC - - - 300 13 26 Tess Agro PLC - - - 139,900 380 378 Ceylon & Foreign Trades PLC 1,241,500 12,814 11,670 100,000 703 770 Odel PLC 20,000 927 648 - - 14,508 12,999 15,142 28,160 Telecommunication Sri Lanka Telecom PLC - - - 24,900 1,136 1,220 Dialog Axiata PLC 33,100 332 261 103,600 898 1,223 332 261 2,034 2,443

2011 2010 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value As at 31 December Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Power and Energy Lanka IOC PLC - - - 108,300 2,296 2,047 Hemas Power PLC 78,200 2,328 2,094 15,000 487 443 Laugfs Gas PLC 91,000 4,589 3,458 166,100 3,820 4,302 Laugfs Gas PLC - Non Voting - - - 227,100 3,407 4,201 Pan Asian Power PLC - - - 1,905,800 5,718 5,718 6,917 5,552 15,728 16,711 Health Care Nawaloka Hospitals PLC - - - 470,000 1,826 1,739 Asiri Hospitals PLC - - - 295,200 2,640 2,598 Asiri Surgical Hospital PLC - - - 39,900 359 347 - - 4,825 4,684 Land and Property York Arcade PLC - - - 45,800 1,368 1,104 Onally Holdings PLC 8,700 714 632 - - - Colombo Land PLC 100,000 7,028 5,490 20,000 505 388 CT Land Development PLC 8,100 227 234 33,500 770 938 East West Properties PLC 12,700 616 319 1,200 16 15 Overseas Realty (Ceylon) PLC 503,600 8,429 7,052 403,500 7,258 6,174 Lankem Development PLC 5,500 183 90 - - 17,196 13,818 9,917 8,619 Chemical & Pharmaceuticals Chemical Industries (Colombo) PLC - - - 45,000 5,883 6,332 Chemical Industries (Colombo) PLC - Non Voting 10,000 908 770 9,600 374 959 Chemanex PLC 1,000 159 120 1,000 159 121 Haycarb PLC 30,200 5,282 4,681 30,200 5,282 5,088 Colombo Dockyard PLC - - - 3,900 3,686 6,349 5,571 15,598 16,186 Plantation Kahawatta Plantations PLC Kegalle Plantations PLC - - - 600 44 97 Balangoda Plantations PLC 22,800 1,545 657 - - Maskeliya Plantations PLC 4,000 130 80 4,000 130 111 Balangoda Plantations PLC - - - 21,500 1,412 1,234 Kotagala Plantations PLC - - - 12,300 1,183 1,437 Agalawatta Plantation PLC 3,400 180 170 - - Horana Plantation PLC 11,600 772 438 - - 2,627 1,345 2,769 2,879 Footwear & Textile Hayleys MGT Knitting Mills PLC - - - 65,600 2,330 2,100 - - 2,330 2,100 Investment Trust Environment Resources Investments PLC 141,300 7,193 3,901 35,000 4,137 3,007 Renuka Holding PLC 356,446 27,409 19,212 - - Equity One PLC 30,900 2,255 1,573 40,600 3,244 2,274 Equity Two PLC 18,200 539 442 Touchwood Investment PLC 62,500 1,906 1,344 25,000 864 708 Gurdian Capital Partners PLC 4,500 783 625 - - 39,546 26,655 8,784 6,431 Motors Sathosa Motors PLC 21,900 8,252 5,694 - - United Motors Lanka PLC 10,000 1,590 1,460 - - 9,842 7,154 - Unit Trusts Namal Acquity VF 28,300 3,140 2,850 28,300 3,140 2,952 First Capital Asset Management Ltd 4,725 5,000 5,119 - - 8,140 7,969 3,140 2,952 Total gross carrying value of dealing securities 476,595 378,443 467,139 556,070 Less: Cost of dealing securities of MBSL Savings Bank - - 23,317 Add: Market value of dealing securities of MBSL Savings Bank - - 22,853 Total gross carrying value of dealing securities 476,595 378,443 466,675 556,070 Provision for fall in value of dealing securities ( Note 17.1 ) 100,161 - 3,640 Total net carrying value of dealing securities 376,434 378,443 463,035 556,070 17.d Listed debentures Bank of Ceylon 8,700 1,083 1,045 8,700 1,083 1,175 Seylan Bank Debenture - 1 2,000 215 200 2,000 215 200 Seylan Bank Debenture - 2 3,400 364 340 3,400 364 340 Seylan Bank Debenture - 3 - - - 1,500 154 150 Total net carrying value of listed debentures 1,662 1,585 1,816 1,865 Total net carrying value of dealing securities and investments 378,096 380,028 464,851 557,935

Notes to the Financial Statements ...cont’d/ Company

Group

2011 2010 2011 2010 As at 31 December LKR’000 LKR’000 LKR’000 LKR’000

17.1 Provision for fall in value of dealing securities Balance as at 01 January Add: Provision / (reversal) for the year Balance as at 31 December

- 71,298 71,298

- 3,640 - 96,521 - 100,161

3,640 3,640

18 INVESTMENT SECURITIES 18. a. Company 2011 2010 No of Cost Market No of Cost Market Shares Value/ Shares Value/ Directors’ Directors’ Valuation Valuation LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Mega Containers Limited 1,000,000 10,000 5,000 1,000,000 10,000 5,000 Ceylinco Investment Company Limited (Note 18.1) 500,000 5,000 5,000 500,000 5,000 5,000 Credit Information Bureau of Sri Lanka Limited 240 24 24 240 24 24 15,024 10,024 - 15,024 10,024 Provision for fall in value of investment securities (Note 18.2 ) (5,000) - - (5,000) Total net investment in investment securities 10,024 10,024 - 10,024 10,024 18. b. Group 2011 2010 No of Cost Market No of Cost Market Shares Value/ Shares Value/ Directors’ Directors’ Valuation Valuation LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Mega Containers Limited 1,000,000 10,000 5,000 1,000,000 10,000 5,000 Ceylinco Investment Company Limited (Note 18.1) 500,000 5,000 5,000 500,000 5,000 5,000 Credit Information Bureau of Sri Lanka Limited 340 34 34 440 44 44 San Michele Limited - - - 50,000 500 15,034 10,034 15,544 10,044 Provision for fall in value of investment securities (Note 18.2 ) (5,000) - (5,500) - Total net investment in investment securities 10,034 10,034 10,044 10,044 18.1 Although the company has acquired 46.35% equity capital of Ceylinco Investment Company Limited, the investment has not been classified as an associate company due to pending court decision on the ownership structure of the company. 18.2 Movement in provision for fall in value of investment securities Company Group 2011 2010 2011 2010 LKR’000 LKR’000 LKR’000 LKR’000 Balance on 1 January 5,000 5,000 5,500 5,500 Transferred to Assets held for sale - - (500) Balance as at 31 December 5,000 5,000 5,000 5,500 According to share valuation carried out by the Company’s Corporate Finance Division, the value of an ordinary share of Mega Containers Ltd as of 31 December 2011 based on the net asset value method was LKR.18.57 The percentage of shares held by Merchant Bank of Sri Lanka PLC in Mega Containers Limited was 6.80% as at 31 December 2011. However, the Directors are of the view that the provision made in year 2004 for fall in value of investments should remain unchanged as of 31 December 2011.

Company As at 31 December

2011 2010 LKR’000 LKR’000

Group

2011 2010 LKR’000 LKR’000

19.1 BILLS RECEIVABLE Bills discounted 661,621 649,442 662,122 649,943 Less: Deferred income 4,101 4,262 4,101 4,262 657,520 645,180 658,021 645,681 Less: Loan loss provision (Note 19.1.1) 25,392 25,785 25,664 26,057 632,128 619,395 632,357 619,624 19.1.1 Movement in provision for bills receivable Specific provision Balance on 1 January 11,809 13,719 11,854 13,764 Add : Amount provided/(reversed) (383) (1,910) (383) (1,910) Balance on 31 December 11,426 11,809 11,471 11,854 General provision Balance on 1 January 13,976 9,385 14,203 9,612 Add: Amount provided / (reversed) (10) 4,591 (10) 4,591 Balance on 31 December 13,966 13,976 14,193 14,203 Total provision 25,392 25,785 25,664 26,057 19.2 LOANS Term loans 1,056,694 676,871 2,494,592 2,301,620 Personal loans 36,382 22,932 36,382 22,932 Cheque discounting 40,082 82,394 40,082 82,394 Commercial papers - - - 68,208 Pawning - - 104,457 108,369 Real estate loans - - 9,486 12,382 Loans against fixed deposits - - 165,848 159,546 Housing loans - - - 402,961 Micro Finance 132,597 - 132,597 Margin trading 236,846 165,299 236,846 165,299 Staff loans 85,760 41,142 129,103 106,377 Textile debt recovery fund 1,735 1,735 1,735 1,735 Susahana loan scheme 1,742 1,742 1,742 1,742 1,591,838 992,115 3,352,870 3,433,565 Less: Loan loss provision (Note 19.2.1) 52,134 44,476 99,224 92,613 Loans and advances after provision 1,539,704 947,639 3,253,646 3,340,952 19.2.1 Movement in provision for Loan losses Specific provision Balance on 1 January 16,184 14,877 59,433 44,838 Less: Transferred to Assets held for sale - - 13,815 Add : Amount provided/(reversed) 1,930 1,307 19,586 11,609 Add : Provision from the discontinued operation - - - 2,986 Balance on 31 December 18,114 16,184 65,204 59,433 General provision Balance on 1 January 28,292 21,283 33,180 26,171 Less: Transferred to Assets held for sale - - 4,888 Add : Amount provided 5,728 7,009 5,728 7,009 Balance on 31 December 34,020 28,292 34,020 33,180 Total provision 52,134 44,476 99,224 92,613

Notes to the Financial Statements ...cont’d/ As at 31 December

Company

Group

2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

19.3 LEASE AND HIRE PURCHASE RECEIVABLE 19.3 a. Finance leases/hire purchase receivable within one year from balance sheet date Total Lease rental receivable 7,388,150 5,280,026 11,726,071 8,995,381 Less:Lease rental receivable after one year 3,693,094 3,061,520 6,520,548 5,387,315 Lease rental receivable within one year from the balance sheet date 3,695,056 2,218,506 5,205,523 3,608,066 Less :Unearned lease income 813,438 695,649 1,285,904 1,170,880 Loan loss provision 158,216 109,909 183,391 136,318 2,723,402 1,412,948 3,736,228 2,300,868 19.3.b Finance leases/hire purchase receivable after one year from balance sheet date Lease rental receivable after one year from the balance sheet date 3,693,094 3,061,520 6,520,548 5,387,315 Less :Unearned lease income 791,237 506,290 1,246,019 929,945 Loan loss provision 158,132 151,674 229,720 203,540 2,743,725 2,403,556 5,044,809 4,253,830 Net investment in leases and hire purchase 5,467,127 3,816,504 8,781,037 6,554,698 19.3.c Movement in the provision for bad and doubtful lease and hire purchase receivable: Specific provision Balance on 1 January 172,272 141,714 233,245 310,230 Less: Transferred to Assets held for sale - - 25,381 Add : Amount provided 22,448 30,558 51,415 44,596 Less: Written-off - 135,386 Add: Provision from the discontinued operation - - - 13,805 Balance on 31 December 194,720 172,272 259,279 233,245 General provision Balance on 1 January 89,311 65,079 106,613 76,264 Less: Transferred to Assets held for sale - - (3,014) Add : Amount provided / (reversed) 32,317 24,232 44,205 30,232 Add: Provision from the discontinued operation - - - 117 Balance on 31 December 121,628 89,311 153,832 106,613 Total provision 316,348 261,583 413,111 339,858 19.4 Non-performing loans and advances Net exposure on non-performing loans and advances as at 31 December, before discounting the value of the securities ` obtained is given below: Bills receivable 236,199 139,755 236,199 139,755 Loans and advances 363,694 118,540 670,568 409,290 Lease / Hire purchase receivable 232,774 217,180 409,787 555,265 Gross non-performing loans and advances 832,667 475,475 1,316,554 1,104,310 Less: Provision for bad and doubtful debts 393,874 331,844 537,999 458,528 Net exposure 438,793 143,631 778,555 645,782 Percentage of net non-performing loans 10.37% 8.32% 9.97% 10.06% Percentage of net exposure 5.74% 2.67% 6.15% 6.14% 19.5 Concentration of Credit Risk Sector wise analysis of the loans and advances portfolio reflecting the exposure to credit risk in the various sectors are given below:

Company Group 2011 2010 2011 2010 LKR ‘ 000 % LKR ‘ 000 % LKR ‘ 000 % LKR ‘ 000 % Tourism & allied 502,038 6 708,373 12 660,316 5 793,751 7 Industrial 185,067 2 137,746 2 933,551 7 697,640 6 Agricultural & fishing 487,772 6 958,958 17 1,016,918 8 1,400,164 13 Commercial trading 1,328,913 17 618,639 11 1,554,696 12 916,870 8 Import & export 58,537 1 313,514 5 59,183 0 313,514 3 Property development 250,570 3 85,275 1 253,335 2 85,275 1 Financial 195,128 2 67,472 1 197,281 1 67,472 1 Manufacturing 1,647,119 21 1,178,771 21 1,665,295 13 1,178,771 11 Housing & construction 715,597 9 105,011 2 1,069,556 8 793,564 7 Transport 1,800,906 22 1,093,736 19 2,600,785 20 2,430,276 22 Others 861,186 11 447,887 8 3,194,123 24 2,296,505 21 Total loans & advances 8,032,833 100 5,715,382 100 13,205,039 100 10,973,802 100

Company

Group

As at 31 December 2011 2010 2011 2010 LKR’000 LKR’000 LKR’000 LKR’000 20 ASSETS CLASSIFIED AS HELD FOR SALE Investment in MBSL Savings Bank Ltd Note 20 a. 237,186 - - Assets classified as held for sale during the year Note 20 b. - - 2,708,372 Non current assets classified as held for sale 257,041 Balance as at 31 December 237,186 - 2,708,372 257,041 20 a. In October 2011, the company accepted an offer made by a consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the company’s 68% holding in MBSL Savings Bank Limited comprising 87,185,520 ordinary voting shares and 100,000,000 ordinary non-voting shares at a price of Rs. 3.75 per voting share and Rs. 2.35 per non voting share, subject to the approval of the Central Bank. In January 2012, the Monetary Board granted approval to the consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the company’s holding in MBSL Savings Bank Limited for a consideration of Rs. 562 million, out of which Rs. 100 million was paid in October 2011. The Company executed the share transfer agreement on 30th March 2012 for this transaction. In accordance with SLAS 38, Non Current Assets held for sale and discontinued operations the Company classified the investment in MBSL Savings Bank Limited as assets held for sale and the directors are of the view that the Company will be able to sell above investment by year 2012. 20 b. Assets classified as held for sale in the Group The major classes of assets of MBSL Savings Ltd classified as held for sale Group are as follows: 2011 LKR’000 Cash in hand and at bank 49,602 Government treasury bills 424,704 Dealing securities 11,472 Investment securities 10 Loans 815,441 Lease / hire purchase receivable 1,012,065 Real Estate Stock 237,281 Other assets 113,681 Property, plant and equipment 44,116 2,708,372 20.1 OTHER ASSETS Company Group 2011 2010 2011 2010 LKR’000 LKR’000 LKR’000 LKR’000 Amounts due from subsidiary companies 5,693 5,175 - ACT on dividends 32,826 32,826 32,826 32,826 Insurance receivable 16,884 27,225 236,122 171,974 Economic Service Charge 39,288 15,697 55,073 74,270 Interest receivable 16,507 10,015 41,716 67,414 Other debtors and receivables 25,516 46,597 25,516 46,597 Advance payments 15,990 14,403 50,212 37,264 Others 158,698 59,629 302,588 180,525 311,402 211,567 744,053 610,870 21 INVESTMENTS IN ASSOCIATE COMPANY Company/Group 2011 2010

Country of Principal No. of Holding Incorporation activity Shares %

Net asset Value LKR ‘ 000

Directors’ Net asset Directors’ Valuation Value Valuation LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

Unquoted Lanka Securities (Pvt) Limited Sri Lanka Share Brokering 5,067,750 29.00% 132,774 132,774 121,617 121,617

Balance at the end of the year

132,774

121,617

21.1 Movement in investments in Associate company 2011 2010 LKR'000 LKR'000 Net asset as at 1 January 121,617 95,022 Add: Profit accruing to the Group (After tax) 44,858 53,961 Less: Dividend received 33,701 27,366 Net asset as at 31 December 132,774 121,617

INVESTMENTS IN ASSOCIATE COMPANY ...Cont’d/ Company/Group 2011 2010

Notes to the Financial Statements ...cont’d/

Country of Principal No. of Holding Incorporation activity Shares %

Net asset Directors’ Net asset Directors’ Company/Group Value Valuation Value Valuation 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

LKR ‘ 000 LKR‘000 21.2 Summarised Financial Information of Associate company For the year ended 31 December Income 332,567 372,808 Less :Expenses 124,817 87,847 Profit before taxation 207,750 284,961 Less :Income tax expense 53,069 98,890 Net profit for the period 154,681 186,071 Total Assets as at 31 December 711,358 705,854 Total Liabilities as at 31 December 253,515 286,483 22

INVESTMENTS IN SUBSIDIARIES Company As at 31 December 2011 2010

Country of

Incorporation

Principal activity

No. of Holding %

Cost

Directors’

Cost Directors’

Valuation Valuation

LKR’000 LKR’000 LKR’000 LKR’000

Unquoted

Merchant Credit

of Sri Lanka Ltd

MBSL Savings Bank

Ltd

Voting Sri Lanka

Note -1

5,099,977

Voting Sri Lanka

Note -2

87,185,520

51.00

20,918

68.00

Non-voting 100,000,000 -

MBSL Insurance Ltd

Voting Sri Lanka

20,918

87,186

150,000

238,606

188,606

259,524

446,710

78.02 238,606

Balance at the end of the year 259,524

Insurance 237,848,702

20,918

Note-1 Activities of a registered finance company

Note-2 Activities of a specialized licensed bank

Company

22 a. Investment in MBSL Savings Bank Ltd

Balance at 01 January

Investments in non-voting shares

Less: Disposal of voting shares

Less: Assets classified as Held For Sale

Balance at 31 December

2011

No. of Shares

LKR’000

187,185,520

237,186

- - 187,185,520

No. of Shares 100,000,000

100,000

100,000,000

150,000

12,814,480

12,814

237,186

2010 LKR’000

187,185,520

237,186

22 b. Investment in MBSL Insurance Ltd

Balance as at 01 January

187,848,702

188,606

137,848,702

Investments in voting shares

50,000,000

50,000

50,000,000

Balance as at 31 December

237,848,702

238,606

187,848,702

138,606 50,000 188,606

INVESTMENT PROPERTIES Company Group

As at 31 December

2011 2010 LKR ‘ 000

LKR ‘ 000

2011 2010

LKR ‘ 000

Cost as at 1 January

Additions /Improvements

Disposals

Cost as at 31 December

284,775

286,914

394,775

2,659

15,000

2,659

(235,185)

(4,798)

(235,185)

(4,798)

49,590

284,775

174,590

394,775

396,914

Accumulated depreciation as at 01 January

Charge for the year

Disposals

Accumulated depreciation as at 31 December

Net book value as at 31 December

3,651

3,150

7,906

5,185

762

853

3,285

3,073

(2,477)

(352)

(2,477)

(352)

1,936

3,651

8,714

7,906

47,654

281,124

165,876

386,869

23.1 Investment Properties held by the Company As at 31 December 2011 Cost/Carrying amount Fair Value Building Extent Land Building Total Land Building Total sq.ft perches LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 No. 64 & 66, Nonagama Road, - 16.61p 1,750 - 1,750 13,000 N/A 13,000 Pallegama, Embilipitiya. Lot No. 2 & 3, - 20.4p 714 - 714 1,000 N/A 1,000 of Muttuweowita. No 300/8, Thalawathugoda Road, 2,478 16.15p 2,465 2,635 5,100 13,727 1,000 14,727 Madiwela, Kotte. No 385/1, Kotte Road, 2,896 19.01p 2,958 1,730 4,688 3,343 1,955 5,298 Pitakotte. No 116,116/1,118,120, - 12.35P 1,249 - 1,249 1,249 N/A 1,249 1st Cross Street, Colombo 01. No 43.45.49.51 & 53, - 7.5P 9,950 - 9,950 75,000 N/A 75,000 New Olcott Mawatha, Colombo 11. No 102 & 104, Dam Street, 7,925 1R-10.7P 17,970 4,989 22,959 44,065 11,964 56,029 Colombo 12.(Note. 23.1.a) Kumbuththukuliya watte, Bangadeniya Road, Puttalam. - 2.0A 600 - 600 3,400 N/A 3,400 Mirissawelawatta hena; Thekka watta Dambadeniya - 1A-0R-28.0P 162 - 162 600 N/A 600 Rukgahakottunuwa, Gehenuwala, Meepe - 38.33P 2,418 - 2,418 890 N/A 890 40,236 9,354 49,590 156,274 14,919 171,193 23.1.a The company has entered in to an agreement with 71 tenants to sell the lease hold rights of the property at No. 102 & 104, Dam Street, Colombo 12 subject to the approval of Urban Development Authority (UDA). The date of the completion of this sale and the execution of the Deed of Transfer in favour of the purchaser in respect of lease hold rights of the premises shall be fixed subsequent to the registration of the said premises as a Condominium unit and upon a Condominium Deed of Declaration being executed and obtaining all necessary approvals from the UDA for such registration within five years from the execution of said agreement. The MBSL shall expeditiously affect the Transfer Deeds contemplated by the agreement after having obtained the registration of the Condominium Plan and the Condominium Declaration and any other statutory approval from UDA and upon the balance payment of the purchase consideration settled in full. The company has already received advance / part payments amounting to LKR 26, 560,976.90 from tenants. 23.1.b The fair value of the investment properties as at 31 December 2011 was based on market valuations carried out in the year 2010 by Mr D N Dhammika Baranage RICS (UK), DIV AIS (SL) and Mr H A W Perera B.Sc. Estate Mgt & Valuation (Special) who is an independent valuers not connected with the Company. The Directors have reviewed the values of the investment properties as at 31.12.2011 and concluded that there was no impairment. 23.2 Investment Property held by Subsidiary Company - Merchant Credit of Sri Lanka Ltd. Cost/Carrying amount Fair Value Building Extent Land Building Total Land Building Total sq.ft perches LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 No 50/21, Old Kesbawa Road, 44,877 2A 1R 04.35P 65,604 44,396 110,000 136,600 92,475 229,075 Raththanapitiya, Boralesgamuwa. Alankare, in Angamu Koraleof Dewanedi 5,936 01A -01R-00.5P 2,445 10,555 13,000 4,010 17,309 21,319 Hathpattuwa,Kurunegala District. No 498, Homagama Road, Athurugiriya. 00A -00R-21.75P 2,000 - 2,000 2,610 - 2,610 70,049 54,951 125,000 143,220 109,784 253,004 Total Investment Property held by Group 110,285 64,305 174,590 299,494 124,703 424,197 Professional valuation has been carried out by Mr. A G Gunarathna, B.Sc(Estate Management and Valuation), F.I.V (Sri Lanka), Incor porated valuer, on the basis of Market Approach (Direct Comparison Method) on 23rd and 24th July 2009.

Notes to the Financial Statements ...cont’d/ 24

PROPERTY AND EQUIPMENT 24.a Company Land Building Motor Computer Office 2011 2010 Vehicles Equipment Equipment Total Total & Furniture LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cost Balance as at 01 January 9,961 2,943 16,535 61,759 40,392 131,590 123,886 Additions during the year - - 7,501 6,940 6,917 21,358 17,734 Disposals during the year - - (6,846) - - (6,846) (10,030) Balance as at 31 December 9,961 2,943 17,190 68,699 47,309 146,102 131,590 Accumulated Depreciation Balance as at 01 January - 724 4,511 53,559 28,749 87,543 86,042 Charge for the year - 147 5,058 4,337 2,610 12,152 8,927 Disposals (4,350) - - (4,350) (7,426) Balance as at 31 December - 871 5,219 57,896 31,359 95,345 87,543 Net book value as at 31.12.2011 9,961 2,072 11,971 10,803 15,950 50,757 Net book value as at 31.12.2010 9,961 2,219 12,024 8,200 11,643 44,047 24 b. Group Cost Balance as at 01 January 9,961 2,943 45,494 207,406 143,466 409,270 372,169 Additions during the year - - 14,623 21,528 29,306 65,457 51,674 Disposals during the year - - (9,547) (135) (60) (9,742) (14,573) Transfer to Non Current Assets Held For Sale - (12,155) (95,194) (35,098) (142,447) Balance as at 31 December 9,961 2,943 38,415 133,605 137,614 322,538 4 09,270 Accumulated Depreciation Balance as at 01 January - 724 17,787 149,675 81,485 263,844 221,245 Prior year adjustment - - 954 11,323 1,896 - 14,173 Charge for the year - 147 9,341 13,237 11,443 34,168 39,255 Disposals - - (7,008) - (55) (7,063) (10,829) Transfer to Non Current Assets Held For Sale - (6,354) (73,657) (20,989) (101,000) Balance as at 31 December - 871 14,720 100,578 73,780 189,949 263,844 Net book value as at 31.12.2011 9,961 2,072 23,695 33,027 63,834 132,589 Net book value as at 31.12.2010 9,961 2,219 26,753 46,408 60,085 145,426 Market value of the lands of the company as at 31.12.2011 was LKR 34,400,000.00 as per the valuation carried out in the year 2010 by Mr. D N Baranage RICS (UK), DIV AIV (SL). Based on the assessment of potential impairment carried out internally by the Board of Directors as at 31 December 2011, no provision was required to be made in the financial statements as at the Balance Sheet date. Adjustment due to Change in depreciation method The Management has identified that the MBSL Savings Bank’s depreciation policy which has been adopted since inception needs to be changed to reflect the actual useful life of the assets. Accordingly Bank changed it’s accounting policy from reducing balance to straight line method with effect from 01.01.2011. The effect of this change has been accounted retrospectively as per the SLAS 10, “ Accounting policies, changes in Accounting Estimates and Errors” and the effect of re-statement is summarized below, 2011 2010 2011 2010 Impact on profit and loss LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Current year additional depreciation charge - - 3,540 Adjustment to retained earnings b/f from 2010 - - 14,173 - 25 INTANGIBLE ASSETS Cost as at 1 January 19,642 19,049 150,212 148,626 Additions and improvements during the year 1,987 593 3,808 1,586 Cost as at 31 December 21,629 19,642 154,020 150,212 Accumulated amortization as at 1 January 18,282 17,626 41,673 26,426 Share of goodwill on disposal of investment in subsidiary - - - 12,969 Amortization for the year 904 656 1,744 2,278 Accumulated amortization as at 31 December 19,186 18,282 43,417 41,673 Net book value as at 31 December 2,443 1,360 110,603 108,539 Intangible assets include followings (at cost) Computer Software 21,629 19,642 47,552 30,775 Goodwill - - 106,468 119,437 21,629 19,642 154,020 150,212

26 DEPOSITS FROM CUSTOMERS Group As at 31 December 2011 2010 LKR ‘ 000 LKR ‘ 000 Time deposits 4,724,433 5,182,822 Savings and other deposits - 494,133 4,724,433 5,676,955 27 BORROWINGS Company Group As at 31 December 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Call money borrowings 968,383 150,030 1,230,883 250,030 Commercial papers 2,377,368 2,428,159 2,377,368 2,428,159 Overdrafts 183,718 64,780 372,310 96,157 Long-term borrowings 1,484,600 536,743 1,484,600 536,743 5,014,069 3,179,712 5,465,161 3,311,089 28 Insurance Provision - Life

This note indicates the liability on account of policyholders which has been actuarially valued and claims/benefits due to life policy holders, which remain unclaimed to the balance sheet date. Group As at 31 December 2011 2010 LKR ‘ 000 LKR ‘ 000 Insurance provision - Life 28 a & 28 b 105,978 66,365 Unclaimed benefits 704 572 106,682 66,937 28 a. Insurance provision - Life Long-term insurance contract liabilities included in the Life Insurance Fund result primarily from traditional non-participating life nsurance products. Short-duration contract liabilities are primarily accident and health insurance products. The insurance provision has been established based upon the following: - Interest rates which vary by product and as required by regulations issued by the Insurance Board of Sri Lanka. - Mortality rates based on published mortality tables adjusted for actual experience as required by regulations issued by the Insurance Board of Sri Lanka. - Surrender rates based upon actual experience by geographic area and modified to allow for variations in policy form. The valuation of the insurance provision – life insurance business, as at 31 December 2011 was made by Mr. M Poopalanathan of Actuarial & Management Consultants (Pvt) Limited for and on behalf of MBSL Insurance Company Ltd. In accordance with the consultant actuary’s report, the reserve for the year amounts to LKR 105,978,000.00 (2010 - LKR 66,365,000). In the opinion of consultant a ctuary, the reserve is adequate to cover the liabilities pertaining to the life insurance business. Further, the actuary has estimated that the solvency margin required under the relevant regulation of Insurance Industry Act, No 43 of 2000 at LKR 4,787,000.00 (2010 LKR 32,000,000.00). This solvency margin is maintained in the long-term insurance fund. 28 b. Movement in Insurance Provision Fund Group 2011 2010 LKR ‘ 000 LKR ‘ 000 Balance as at 1 January 66,365 41,336 Increase in Life Fund 39,613 25,029 Balance as at 31 December 105,978 66,365 29 Insurance provision - Non-Life This note details the provisions related to the non-life insurance. Refer accounting policy 1.15.1(d) on page 86. The reserve for net unearned premium indicates the amount of premium (net of reinsurance) which is attributable to policies written as at 31 December 2011, but covering periods after 31 December 2011. The reserve for net deferred acquisition cost refers to the commission adjustment (net of reinsurance) linked to the above reserve. The reserve for gross outstanding claims refer to the amount of claims which remain unclaimed as at 31 December 2011. This reserve includes a reserve for claims incurred but not reported (IBNR). Reserve for net unearned premium 29 a 293,141 188,504 Reserve for net deferred acquisition cost 29 b (14,596) (11,717) Reserve for gross outstanding claims 29 c 49,707 75,987 Balance as at 31 December 328,252 252,774 29 a. Reserve for Net Unearned Premium Balance as at 1 January 188,504 157,059 Increase during the year 104,637 31,445 Balance as at 31 December 293,141 188,504

29 b. Reserve for Net Deferred Acquisition Cost Balance as at 1 January (11,717) (11,080) Increase / (Decrease) during the year (2,879) (637) Balance as at 31 December (14,596) (11,717)

Notes to the Financial Statements ...cont’d/ 29 c. Reserve for Gross Outstanding Claims

Group 2011 2010 LKR ‘ 000 LKR ‘ 000

Balance as at 1 January 64,943 30,479 Claims incurred during the year 315,563 242,814 Claims paid during the year (338,608) (208,350) Balance as at 31 December 41,898 64,943 IBNR & IBNER claims reserve as at 1 January 11,044 5,111 Increase in IBNR & IBNER claims reserve (3,235) 5,933 IBNR & IBNER claims reserves as at 31 December 7,809 11,044 Total Gross Outstanding Claims 49,707 75,987 Directors are of the opinion that the total of future claims and related expenses will not exceed the unearned premium and premium related to unexpired risks. IBNR/IBNER claims reserves are determined based on information currently available. However, it is inherent to the nature of the business that the ultimate liability may vary as a result of subsequent developments. The incurred but not reported (IBNR) claim reserve and incurred but not enough reported (IBNER) claim reserve have been actuarially computed by Mr.N.K. Parikh of M/s K.A. Pandit Consultants & Actuaries. The valuation is based on internationally accepted actuarial methods, and is performed on an annual basis. 29 d. General Insurance Technical Reserve 2011 2010 LKR ‘ 000 LKR ‘ 000 General insurance provision 328,252 252,774 Reinsurance receivable on outstanding claims (5,285) (18,833) 322,967 233,941 30 Current tax liability Company Group As at 31 December 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

Balance on 1 January Add: Provision for taxation Less : Paid / Sett off during the year Balance as at 31 December

172,970 41,782 88,881 125,871

45,511 169,622 42,163 172,970

172,970 45,511 128,182 202,285 175,281 74,826 125,871 172,970

DEBENTURES Company 31.a Company Investor Purpose of Security Interest Allotment Term of Interest rate 2011 2010

debenture payable date redemption frequency 2011 2010 LKR ‘ 000 LKR ‘ 000 Employees’ Trust Fund Board To replace short-term Nil Bi Annually 10-Jan-10 10-Jan-11 11.24% 50,000 Unlisted Debenture money market 10-Jan-10 10-Jul-11 11.24% 25,000 borrowings. 10-Jan-10 10-Jan-12 9.51% 11.24% 25,000 25,000 10-Jan-10 10-Jul-12 9.51% 11.24% 25,000 25,000 10-Jan-10 10-Jan-13 9.51% 11.24% 25,000 25,000 10-Jan-10 10-Jul-13 9.51% 11.24% 25,000 25,000 10-Jan-10 10-Jan-14 9.51% 11.24% 25,000 25,000 National Savings Bank To replace short-term Nil Bi Annually 05-Dec-09 05-Dec-11 10.39% 330,000 Unlisted Debenture money market borrowings. Ceylon Hospital PLC To fund the Nil Bi Annually 31-Mar-10 31-Mar-13 9.51% 11.64% 6,800 6,800 leasing business Asian Alliance Insurance PLC To fund the Nil Bi Annually 31-Mar-10 31-Mar-13 13.00% 13.00% 80,000 80,000 leasing business Sri Lanka Insurance To fund the Nil Bi Annually 31-Aug-10 31-Aug-13 13.00% 13.00% 100,000 100,000 Corporation Ltd leasing business Unsecured Redeemable To fund the Nil Bi Annually 16-Nov-11 16-Nov-14 11.60% 731,880 Listed Debentures leasing business 16-Nov-11 16-Nov-15 11.80% 268,080 16-Nov-11 16-Nov-14 9.76% 40 1 ,311,800 716,800

31 .b Debentures held by Subsidiary Company MBSL Savings Bank Group 2011 2010 Investor Purpose of Security Interest Allotment Term of debenture payable date redemption frequency LKR ‘ 000 LKR ‘ 000 Unsecured subordinated Enhancement Nil - - - - 17,884 redeemable of Leasing and Housing Loan Portfolio - 17,884 Total debentures held by Group 1,311,800 734,684

DEFERRED TAXATION Company Group 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

Deferred tax liability 74,834 20,994 74,834 20,994 74,834 20,994 74,834 20,994

32.1 Deferred tax liability Company Group As at 31 December 2011 2010 2011 2010 Temporary Tax Temporary Tax Temporary Tax Temporary Tax Difference Effect Difference Effect Difference Effect Difference Effect LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 As at beginning of the year 74,979 20,994 67,761 23,716 74,979 20,994 67,761 23,716 Amount originating/(reversing) during the year 192,285 53,840 (9,722) (2,722) 192,285 53,840 (9,722) (2,722) Effect of change of tax rate - - 16,940 - - - 16,940 267,264 74,834 74,979 20,994 267,264 74,834 74,979 20,994 Deferred tax liability consisted of the following: Leased assets (700,094) (196,026) (391,829) (109,712) (700,094) (196,026) (391,829) (109,712) Retirement gratuity 114,074 31,941 74,396 20,831 114,074 31,941 74,396 20,831 Fixed assets (5,666) (1,587) (5,450) (1,526) (5,666) (1,587) (5,450) (1,526) Tax losses 324,422 90,838 247,904 69,413 324,422 90,838 247,904 69,413 (267,264) (74,834) (74,979) (20,994) (267,264) (74,834) (74,979) (20,994) Carried forward tax loss of the Company as at 31 December 2011 was LKR 531,255,984 (31 December 2010 LKR 458,470,158). It would c reate a deferred tax asset of LKR 148,751,675. Recognition of the total unutilized tax loss would result in an additional credit of LKR 148,751,675 to the income statement which will cause wide fluctuations in the income statement this year. Therefore, a deferred tax asset of LKR 90,838,186 was created after considering only 60% of accumulated tax loss. 33 RETIREMENT BENEFIT OBLIGATION Company Group Re - presented* 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Present Value of unfunded Obligation 114,073 74,396 153,133 105,421 Balance as at 31 December 114,073 74,396 153,133 105,421 33.1 Movement in present value of the defined benefit obligations Balance on 1 January 74,396 58,601 105,421 79,652 Add: Current service cost 7,503 6,015 9,119 6,911 Interest cost 8,570 8,900 8,836 9,120 Recognition of actuarial loss/(gain) 29,412 880 40,778 9,372 Add: Pre-payments 514 - 514 Less : Payments made during the year 6,322 - 7,083 887 Transfer to Assets classified as Held for sale/ discontinued operation expenses - - (4,452) 1,253 Balance as at 31 December 114,073 74,396 153,133 105,421 33.2 R etirement benefit expense is calculated as follows: Current service cost 7,503 6,015 9,119 6,911 Interest cost 8,570 8,900 8,836 9,120 Recognition of actuarial loss/(gain) 29,412 880 40,778 9,372 Retirement benefit expense for the year 45,485 15,795 58,733 25,403 As at 31 December 2011 the Group’s gratuity liability, execpt MBSL Savings Bank, was actuarially valued under the projected unit credit method by Chartered Actuary Mr. M. Poopalanathan and MBSL Savings Bank’s gratuity liability was valued under the same way by Mr. Piyal S. Goonetilleke on the same date. The liability is not externally funded. Principal assumptions used were as follows: Discount rate 9.55% 9.55% Salary increase 10% 10% The company will continue in business as a going concern Company Group 34 OTHER LIABILITIES 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Accruals 271,036 126,648 548,900 572,052 Prepaid loan installments 52,712 28,648 52,712 34,198 Cash margin 55,840 121,391 55,840 121,391 Others 73,804 61,849 136,417 167,803 453,392 338,536 793,869 895,444

LIABILITIES DIRECTLY ASSOCIATED WITH ASSETS CLASSIFIED AS HELD FOR SALE Deposits from customers 2,213,871

Borrowings Retirement benefit obligation Other liabilities

148,264 5,630 176,285

2,544,050 36 STATED CAPITAL As at 31 December

Issued and fully paid

No of shares in issue

1,607,000

1,607,000 1,607,000

1,607,000

135,000,000 135,000,000 135,000,000 135,000,000

* Comparative figures are re - presented to reflect the results of the discontinued operation as explained in Note 12 to the Financial Statements.

Notes to the Financial Statements ...cont’d/

37 RESERVES Company Group As at 31 December 2011 2010 2011 2010 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 37.1 Statutory reserves Opening balance 91,261 59,784 149,239 106,344 Add: Transfer during the year 23,265 31,477 35,545 42,895 Transfers to investment fund 55,978 - 68,163 Closing balance 170,504 91,261 252,947 149,239 37.2 Retained earnings Opening balance 980,932 663,988 1,142,160 803,922 Less: Dividend paid 168,750 101,250 168,750 101,250 Less: Transfer to reserves 23,265 31,477 35,545 42,895 Less: Transfers to investment fund 55,978 - 68,163 Add: Profit for the year 332,355 449,671 353,141 492,345 Less: Adjustment due to change in depreciation method (Note 24) 9,962 Closing balance 1,065,294 980,932 1,222,843 1,142,160 38 COMMITMENTS AND CONTINGENCIES 38.1 Contingent Liabilities Guarantees to the customers 48,793 7,117 88,660 36,967 Financial Commitments - - 12,495 - Total commitments and contingencies 48,793 7,117 101,155 36,967 In the normal course of business, the Company makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers. Even though these obligations may not be recognized on the balance sheet, they do contain credit risk and ‘therefore form part of the overall risk of the Company. No material losses are anticipated as a result of these transactions.

38.2 Pending Litigations In the normal course of business, the Company incurs certain contingent liabilities with legal recourse to its customers and would be party to litigation due to its operations. No

Case No.

Remarks

D.C Col 17969 / MR

The Plaintiff claims damages in the sum of LKR 25 Million for unlawful repossession of his vehicle by the Bank.

S.C Appeal 81 / 2010

The Bank obtained possession of the subject Mortgage Property through Writ of Ejectment Occupants, obtained a stay order and took possession. Bank filed special Leave to Appeal.

D.C Kandy 487 / SPL

Declaration of Title sought to set aside the judgment on the Title Deed in favour of MBSL( Bank has already disposed the property )

D.C Colombo 19426 / L

Owner of the property denies having placed the signature on the Bond

D.C Kandy 14789 / P

A Third Party claims an interest in Mortgaged property and has filed a Partition case adding the bank also as a party.

D.C Empilipitiya 9473 / L

Seeks the declaration of Title on the property that was mortgaged to the Bank. Bank acquired ownership through a Court auction. Seeks damages in the Sum of LKR. 500,000

C.A Res 198 / 07

Restitio in integrum Action to set aside the judgment of Commercial High Court dated 01 /09 /2003 which was in favour of the Bank Restraining order against the Bank in operation.

D.C Negombo 7300 / L

Declaration of Title sought by petitioner through an injunction. Enjoining Order Dissolved.

D.C Mt.Lavinia 2357 / 07/ L

Third party seeks a declaration of title on the property that was mortgaged to the Bank by the Borrower where judgment has been entered in favour of the Bank.

D.C Colombo 19433 / L

Plaintiff Denies the transfer of the property to MBSL (his value of the property claimed) Judgment in favour of the Bank. Plaintiff has Appealed.

43156 / MR Colombo

This Case has been filed against MBSL for releasing the leasing article to the third party who was authorized in writing by the lessee to receive the certificate of registration etc. from MBSL. After releasing the vehicle the lessee filed this case against MBSL claiming damages thus disputing his own letter of authority. The lessee in fitting a losing battle as his own signature has now been referred to the Examiner in to Questioned Documents by Court.

Case No.

4124 / M Gampaha

The lessee / Plaintiff filed this action claiming damages for wrongful re-possession of the vehicle. However the injunction sought by the lessee / plaintiff preventing MBSL from disposing the vehicle in issue was disallowed.

23840 /M DC-A’pura

The lessee / Plaintiff filed this action claiming damages for wrongful re-possession of the vehicle and a declaration that the MBSL has violated the provision of the Lease Agreement and MBSL has violated the provisions of the Lease Agreement and MBSL is in the process of filling answer.

CA Application No. 810 /2003 [HC (Civil) Case No. 15/2002/2]

This is an Application where seeking Writs of Certiorari and Mandamus challenging, inter alia, the decision of the Controller of Exchange with regard to the validity of the transfer of ordinary shares held by MBSL in a Sri Lankan Company to a non resident for a sum of LKR 40 Million.

Remarks

MATURITY ANALYSIS Definition of Maturity An analysis of assets and liabilities of the Company as at 31 December 2011, based on the remaining period at the Balance Sheet date to the respective contractual maturity dates are given below:

39.1 Company 39.1.a Assets Total As at 31 December Up to 1 month to 3 month 1 year More than 2011 2010 1 month 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Interest earning assets Government treasury bills and other securities - 450,000 184,949 236,139 871,088 279,765 Loans and advances 1,271,783 228,079 166,672 505,262 36 2,171,832 1,567,034 Leases & hire purchase rentals receivable 258,834 276,535 2.188.033 2.741.607 2,118 5,467,127 3,816,504 1,530,617 954,614 2.354.705 3.431.818 238,293 8,510,047 5,663,303 Non interest earning assets Cash in hand and at bank 97,260 97,260 71,097 Investment securities 10,024 10,024 10,024 Dealing securities 277,766 277,766 331,752 Investments in associate 132,774 132,774 121,617 Investments in subsidiaries 259,524 259,524 446,710 Investment properties 47,654 47,654 281,124 Assets classified as Held for Sale 237,186 237,186 Property and equipment 50,757 50,757 44,047 Intangible assets 2,443 2,443 1,360 Other assets 278,810 32,592 311,402 211,567 653,836 32,592 237,186 110,878 392,298 1,426,790 1,519,298 Total Assets 2,184,453 987,206 2,591,891 3.542.696 630,591 9,936,837 7,182,601 Percentage 21.98% 9.93% 26.08% 35.65% 6.36% 39.1.b Liabilities Total As at 31 December Up to 1 month 3 month 1 year More than 2011 2010 1 month to 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Interest-bearing Liabilities Customers’ deposits - - - - - - Borrowings 1,141,604 562,344 1,854,820 1,455,301 5,014,069 3,179,712 Debentures and other securities 25,000 - 25,000 1,261,800 1,311,800 716,800 1,166,604 562,344 1,879,820 2,717,101 - 6,325,869 3,896,512 Non-Interest bearing Liabilities Current tax liability - - 125,871 - - 125,871 172,970 Deferred tax liability - - - 74,834 - 74,834 20,994 Retirement benefit obligation - - - 114,073 - 114,073 74,396 Other liabilities 265,935 85,164 102,293 - - 453,392 338,536 265,935 85,164 228,164 188,907 - 768,170 606,896 Shareholders’ Fund - - - - 2,842,798 2,842,798 2,679,193 Total liabilities and shareholders’ funds 1,432,539 647,508 2,107,984 2,906,008 2,842,798 9,936,837 7,182,601 Percentage 14.42% 6.52% 21.21% 29.24% 28.61%

Notes to the Financial Statements ...cont’d/ 39.2 Group 39.2.a Assets Total

As at 31 December 2011

Up to

1 month

3 months

1 year

to 3 months

to 1 year

to 5 years

More than

2011

2010

1 month

5 years

LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000

Government treasury bills

and other securities

110,346

489,614

266,867

545,090

35,000

190,000

25,000

274,320

422,273

1,888,741

Loans and advances

Leases & Hire purchase rentals receivable

1,288,397

1,670,391 1,626,575

Other Investments

258,474

12,272

328,732

446,878

2,912,833

5,090,477

2,117

1,727,475

1,245,812

3,791,973

7,549,308

272,863

250,000

3,886,003 3,960,576 8,781,037 6,554,698 14,587,431 12,141,849

Non-Interest earning assets

Cash in hand and at bank

Investment securities

Dealing securities

238,050 - 322,470

41,135

14,491

- 10,034 -

Investments in associate

Investments in subsidiaries

Investment properties

Investment in real estate

Assets classified as Held for Sale

464,851

132,774

121,617

132,774

165,876

386,869

14,361

79,257

110,603

Other assets

146,956

13,796

Percentage

378,096

2,708,372

Property and equipment

Total assets

10,044

Intangible assets

10,034

47,654

238,050

118,222

53,332 -

28,157

30,288

2,708,372

257,041

132,589

145,426

110,603

108,539

744,053

610,870

301,831

283,701

115,738

36,903

5,880

862,351

324,836

2,970,619

298,812

191,986

4,648,604 2,282,501

2,589,826

1,570,648

6,762,592

7,848,120

464,849

19,236,035 14,424,350

13.46%

8.17%

35.16%

40.80%

2.42%

39.2.b Liabilities

As at 31 December 2011

Up to

1 month

3 month

1 year

to 3 months

to 1 year

to 5 years

More than

2011

2010

1 month

LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000

5 years

Interest-bearing liabilities

Customers’ deposits

Interest bearing borrowings

Debentures and other securities

448,845

558,641

3,240,527

476,420

4,724,433 5,676,955

1,380,196

599,844

1,967,320

1,517,801

5,465,161 3,311,089

25,000

1,261,800

5,232,847

3,256,021

25,000 1,854,041

- 1,158,485

1,311,800

734,684

11,501,394 9,722,728

Non Interest bearing liabilities

Current tax liability

Deferred tax liability

Retirement benefit obligation

125,871 - 2,033

- 74,834 127,630

Long-term insurance fund

Non-Life insurance reserve

328,252

357,709

203,565

215,867

16,728

Other liabilities

Liabilities directly associated with

assets classified as Held for Sale

2,544,050

125,871

74,834

172,970

20,994

23,470

153,133

105,421

106,682

66,937

328,252

252,774

793,869

895,444

2,544,050

357,709

203,565

2,887,821

547,444

130,152

4,126,691 1,514,540 3,082,790 2,898,399

Shareholders’ fund

3,082,790

Minority interest

525,160

Total liabilities and shareholders’ funds

2,211,750

1,362,050

8,120,668

3,803,465

3,738,102

Percentage

11.50%

7.08%

42.22%

19.77%

525,160

288,683

19,236,035 14,424,350

19.43%

Notes

Matured loans & advances and lease & hire purchase rentals receivable have been classified into “up to 1 month category”. However, a major part of this

has been provided for bad and doubtful debts, whereas un-matured loans & advances and lease & hire purchase rentals receivable have been classified

according to the respective contractual maturity dates. Loans and advances are shown net of interest in suspense and provision for bad and doubtful debts.

Total shareholders’ funds are classified into over 5 years category” since no contractual date of maturity can be identified.

40 SEGMENT REPORTING

40.1 Company Leasing Trade Corporate Money Eliminations / Total Finance Advisory Market Unallocated For the year ended 31 December 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue from external customers Interest 89,939 67,870 245,935 229,048 36,201 14,839 49,460 29,308 2,394 1,734 423,929 342,799 Lease income 912,019 764,322 - - - - - - - - 912,019 764,322 Commission 14,770 12,875 2,206 1,541 - - - - - - 16,976 14,416 Others 14,885 21,459 34,077 8,823 135,551 256,045 5,713 47,944 16,072 67,172 206,298 401,443 Total revenue from external customers 1,031,613 866,526 282,218 239,412 171,752 270,884 55,173 77,252 18,466 68,906 1,559,222 1,522,980 Inter-segment revenue - - - - - - - - - - - Segment results 336,218 244,150 46,138 31,354 (4,470) 156,686 55,173 77,252 10,308 141,266 443,367 650,708

Profit before interest, tax and associate company’s profit 929,007 987,110 Interest expense (545,888) (419,041) Income from associate company 60,248 82,639 Income tax expense (111,012) (201,037) Net profit for the year 332,355 449,671 Other information Segment assets 5,634,697 3,977,281 1,764,799 1,652,056 525,949 565,794 1,040,834 360,877 578,260 58,266 9,544,539 6,614,274 Investment in associate /subsidiaries - - - - - - - 392,298 568,327 392,298 568,327 Total assets 5,634,697 3,977,281 1,764,799 1,652,056 525,949 565,794 1,040,834 360,877 970,558 626,593 9,936,837 7,182,601 Segment liabilities 100,356 72,164 50,122 132,165 1,029 6,533,532 3,992,379 409,000 306,700 7,094,039 4,503,408 Total liabilities 100,356 72,164 50,122 132,165 1,029 - 6,533,532 3,992,379 409,000 306,700 7,094,039 4,503,408 Information on cash flows Cash flows from operating activities (1,391,133) (711,488) (268,533) (181,308) (70,312) 14,485 (18,671) (88,047) (217,129) (75,297) (1,965,778) (1,100,740) Cash flows from investing activities - - - - 386,656 172,512 (40,820) (200,000) - - 345,836 (27,488) Cash flows from financing activities - - - - - - 2,141,668 1,011,697 - - 2,141,668 1,011,697 Capital expenditure - - - - - - - - (23,178) (13,456) (23,178) (10,386)

40.2 Group

Leasing Trade Corporate Money Insurance Eliminations / Total Finance Advisory Market Unallocated For the year ended 31 December 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue from external customers Interest 89,939 67,870 559,113 488,458 36,201 14,839 78,491 107,947 43,289 29,425 12,031 6,226 819,064 714,766 Lease income 1,490,107 1,216,042 - - - - - - - - - - 1,490,107 1,216,042 Commission 14,770 12,875 2,206 1,077 - - - - - - - - 16,976 13,952 Premium received - - - - - - - - 198,471 140,615 - - 198,471 140,615 Others 56,168 53,105 36,860 6,910 135,550 254,905 5,713 59,799 23,806 25,903 24,845 109,683 282,942 510,305 Total revenue from external customers 1,650,984 1,349,892 598,179 496,445 171,751 269,744 84,204 167,746 265,566 195,943 36,876 115,909 2,807,560 2,595,680 Inter-segment revenue - - - - - - - - - - - - - Segment results 385,312 415,119 76,199 (9,700) (4,470) 156,686 79,881 74,440 7,160 9,978 46,961 149,085 591,043 795,608 Profit before interest,tax and associate company’s profit 1,551,953 1,563,146 Interest expense Financing costs (1,021,158) (850,177) Income from associate company 60,248 82,639 Loss from discontinued operations (49,053) (20,931) Income tax expense (143,572) (233,700) Minority interest (45,277) (48,632) Net profit for the year 353,141 492,345 Other information Segment assets 9,960,672 6,732,890 4,222,450 3,940,214 537,431 565,794 1,886,652 1,467,731 1,003,570 632,413 1,492,486 963,691 19,103,261 14,302,733 Investment in Associate - - - - - - - - - - 132,774 121,617 132,774 121,617 Total assets 9,960,672 6,732,890 4,222,450 3,940,214 537,431 565,794 1,886,652 1,467,731 1,003,570 632,413 1,625,260 1,085,308 19,236,035 14,424,350 Segment liabilities 2,989,900 2,100,330 1,482,037 1,436,755 1,029 - 9,219,605 6,368,924 610,180 493,928 1,325,334 837,331 15,628,085 11,237,268 Total liabilities 2,989,900 2,100,330 1,482,037 1,436,755 1,029 - 9,219,605 6,368,924 610,180 493,928 1,325,332 837,331 15,628,085 11,237,268 Information on cash flows Cash flows from operating activities (2,673,486) (1,249,298) (618,368) (250,650) (70,312) 14,485 917,663 499,541 1,897 223,005 (144,733) (46,529) (2,587,339) (809,446) Cash flows from investing activities - - - - 393,500 225,609 - - (29,979) (142,335) - 13,440 363,521 96,714 Cash flows from financing activities - - - - - - 2,403,415 881,697 201,000 - - 154,828 2,604,415 1,036,525 Capital expenditure - - - - - - - (19,622) (5,840) (51,177) (19,206) (70,799) (25,046)

Notes to the Financial Statements ...cont’d/ 40.3 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 40.3 a Company Western Sothern Central North North North Eastern Total Central Western LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue Leasing 440,789 117,516 109,235 77,939 226,307 22,545 37,282 1,031,613 Trade Finance 264,150 406 7,834 5,404 3,673 124 627 282,218 Corporate Advisory 171,752 - - - - - - 171,752 Money market 55,173 - - - - - 55,173 Others 14,501 619 761 416 1,243 306 620 18,466 946,365 118,541 117,830 83,759 231,223 22,975 38,529 1,559,222 Assets Leasing 2,503,273 590,370 592,595 416,685 1,172,461 152,119 207,194 5,634,698 Trade Finance 1,662,498 3,455 43,653 19,520 21,292 1,238 13,143 1,764,799 Corporate Advisory 525,949 - - - - - - 525,949 Money market 1,040,834 - - - - - - 1,040,834 Others 911,117 12,577 13,885 7,994 16,189 2,931 5,865 970,558 6,643,671 606,402 650,133 444,199 1,209,942 156,288 226,202 9,936,837 Liabilities Leasing 51,057 11,759 8,260 5,281 13,860 6,601 3,538 100,356 Trade Finance 45,023 2,982 1,984 4 337 31 (239) 50,122 Corporate Advisory 1,029 - - - - - - 1,029 Money market 6,533,532 - - - - - - 6,533,532 Others 407,641 - 1,351 - - 8 0 409,000 7,038,282 14,741 11,595 5,285 14,197 6,640 3,299 7,094,039 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 40.3 b Group Western Sothern Central/ North North North Eastern Total Sabara- Central Western gamuwa LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue Leasing 735,204 179,115 223,111 77,939 366,915 31,418 37,282 1,650,984 Trade Finance 447,108 7,416 49,456 5,404 86,810 1,358 627 598,179 Corporate Advisory 171,751 - - - - - - 171,751 Money market 78,682 431 2,679 - 2,398 14 - 84,204 Others 296,716 779 1,608 416 1,990 313 620 302,442 1,729,461 187,741 276,854 83,759 458,113 33,103 38,529 2,807,560 Assets Leasing 4,963,098 914,274 1,185,836 434,267 1,978,258 277,745 207,194 9,960,672 Trade Finance 3,393,627 70,669 272,383 30,382 418,231 24,016 13,142 4,222,450 Corporate Advisory 537,431 - - - - - - 537,431 Money market 1,886,652 - - - - - - 1,886,652 Others 2,434,943 42,092 41,768 10,170 75,043 18,951 5,863 2,628,830 13,215,751 1,027,035 1,499,987 474,819 2,471,532 320,712 226,199 19,236,035 Liabilities Leasing 2,352,260 63,238 326,251 5,281 228,585 10,747 3,538 2,989,900 Trade Finance 1,262,042 6,853 99,002 4 112,916 1,459 (239) 1,482,037 Corporate Advisory 1,029 - - - - - - 1,029 Money market 9,219,605 - - - - - - 9,219,605 Others 1,541,555 158,595 46,917 - 82,783 105,664 - 1,935.514 14,376,491 228,686 472,170 5,285 424,284 117,870 3,299 15,628,085

RELATED PARTY DISCLOSURE

The Company carried out transactions in the ordinary course of business with parties who are defined as related parties in Sri Lanka Accounting Standard 30 (revised 2005)- Related Party disclosures, the details of which are reported below. 41 a. Transactions with key management personal (KMP) According to Sri Lanka Accounting Standard (revised 2005) “related party disclosures”, Key Management Personnel are those having authority and responsibility for planning and directing and controlling the activities of the entity. Accordingly, the directors of the Company (including Executive and non-executive directors) and their immediate family members have been classified as KMP of the Company. Therefore, officers who are only directors of the Subsidiaries and not of the Company have been classified as KMP of that respective subsidiary only. 41 b. Compensation paid to KMP Company Group Short term benefit (LKR. 000’) 4,949 14,883* * Includes only compensation paid from continuing operations. 41 c. Directors Interest in Contracts/Transactions with Related Parties Mr M R Shah, Ms. W A Nalani, Mr. M S S Paramananda, Mr. Lakshman Perera, Mr. P G Rupasinghe, Mr. V Kanagasabapathy, Prof. Ranjith Bandara and Mr. Lalith De Silva were Directors of the Company as at 31.12.2011 Related party transactions Company

Name of the Director

Position

Relationship

Nature of transaction

Bank of Ceylon

Mr M R Shah

Nominee Director of BOC on the Board of MBSL as Chairman

BOC holds 72% of the share capital of MBSL

Ms W A Nalani

General Manager of BOC and Nominee Director of BOC on the Board of MBSL

Mr V Kanagasabapathy

Alternate Director of BOC and Nominee Director of BOC on the Board of MBSL

BOC has advanced loans and granted normal banking facilities including a Term Loan of LKR 800 million, O/D facility of LKR 110 million Money Market Loan Facility of LKR 100 million balances of which as at 31.12.2011 are Term Loan Facility LKR 595.32 million and O/D balance of LKR 183.72 Mn. There is no balance against the Money Market Loans.MBSL acts as Registrars to BOC Debenture Issue of 2008/2013 and has received a fee of LKR 360,000.00 and LKR 383,815.00 as reimbursable expenses.

Mr M R Shah

Director

MBSL holds 51% of the ordinary share capital of MCSL

MBSL provided secretarial services to MCSL and has received a fee of LKR 190,500.00 and LKR 12,539.20 as reimbursable expenses.

MBSL holds 78.02% of the ordinary share capital of MBSL Insurance Company Limited

MBSL provided secretarial services to MBSL insurance and has received a fee of LKR 360,000.00 and LKR 383,815.00 as re-imbursable expenses. Further MBSL has received LKR 600,000.00 as consultancy Income and LKR 14.77Mn as Insurance Agency Commission. The outstanding Insurance Agency Commission is LKR3,603,665.11

MBSL holds 29% of the ordinary share capital of LSL

MBSL provided secretarial services to Lanka Securities (Pvt) Limited and has received a fee of LKR 103,400.00 and LKR 12,900.80 as re-imbursable expenses. MBSL has received LKR 33.70 million as dividends from Lanka Securities (Pvt) Limited.

Merchant Credit of Sri Lanka Limited

Mr Lalith De Silva Prof. Ranjith Bandara

MBSL Insurance Company Limited

Lanka Securities (Pvt) Limited

Chairman Director

Mr V Kanagasabapathy (Resigned w.e.f. 01.01.2011)

Director

Mr M R Shah

Chairman

Prof. Ranjith Bandara

Director

Mr P G Rupasinghe

Director

Mr Lakshman Perera

Director

Mr M R Shah

Director

Notes to the Financial Statements ...contâ&#x20AC;&#x2122;d/ Related party transactions...cont'd/ Company MBSL Savings Bank Limited

Name of the Director

Position

Relationship

Nature of transaction

Mr M R Shah

Chairman

MBSL holds 68% of the Ordinary share capital of MBSL Savings Bank Limited

LKR 100 million as a Fixed Deposit.

Prof. Ranjith Bandara

Director

Mr P G Rupasinghe

Director

Mr M S S Paramananda

Director

Credit Information Bureau of Sri Lanka Limited

Ms W A Nalani

Director

MBSL has invested LKR 23,300.00 in shares of CRIB and LKR 13,500.00 was received as dividend. MBSL obtained services of the CRIB for a fee of LKR 2,524,396

BOC Travels (Pvt) Ltd

Ms W A Nalani

Director

MBSL Provided secretarial services to BOC Travels (Pvt) Ltd and has received a fee of LKR 71,000.00 and LKR 42,067.00 as re-imbursable expenses.

Hotels Colombo (1963) Limited

Ms W A Nalani

Director

MBSL Provided secretarial services to Hotels Colombo (1963) Limited and has received a fee of LKR 95,000.00 and LKR 44,969.60 as re-imbursable expenses.

BOC Property Development and Management Company Limited

Ms W A Nalani

Director

BOC PDML provided rent and maintenance services to MBSL Head Office and during the year Company has paid LKR. 28.39 million for those services. MBSL provided secretarial services to BOC PDML and has received a fee of LKR. 85, 000.00

Sri Lanka Foundation

Prof. Ranjith Bandara

Chairman

Sri Lanka Foundation provided training to MBSL staff members amounting to LKR. 3.06 million.

Directors fees and emoluments paid by the Company â&#x20AC;&#x2DC;LKR Mr. M R Shah Chairman 772,500 Ms. W.A. Nalani

Director

472,500

Prof. Ranjith Bandara

Director

702,000

Mr. M.S.S. Paramananda

Director

544,500

Mr. Lakshman Perera

Director

679,607

Mr. P.G. Rupasinghe

Director

625,500

Mr. V. Kanagasabapathy

Director

679,500

Mr. Lalith De Silva

Director

472,500

4,948,607

EVENTS AFTER THE BALANCE SHEET DATE No circumstances have arisen since the Balance Sheet date which would require adjustments to or disclosure in the Financial Statements other than those disclosed below.

In October 2011, the company accepted an offer made by a consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the companyâ&#x20AC;&#x2122;s 68% holding in MBSL Savings Bank Limited comprising 87,185,520 ordinary voting shares and 100,000,000 ordinary non-voting shares at a price of Rs. 3.75 per voting share and Rs. 2.35 per non voting share, subject to the approval of the Central Bank. In January 2012, the Monetary Board granted approval to the consortium of investors led by M/s Navara Capital (Pvt) Ltd to purchase the companyâ&#x20AC;&#x2122;s holding in MBSL Savings Bank Limited for a consideration of Rs. 562 Mn, out of which Rs. 100 Mn was paid in October 2011. The Company executed the share transfer agreement on 30 March 2012 for this transaction.

The Company opened 8 new branches and 8 service centres on 11th April 2012, in different parts of Sri Lanka, to expand business activities of the Company.

The Directors recommended a final dividend of LKR. 1.25 per share for the year ended 31 December 2011 for approval by the shareholders at the Annual General Meeting to be held on 20 June 2012.

Share & Debenture Information

1. Stock Exchange Listing The issued ordinary shares of Merchant Bank of Sri Lanka PLC are listed on the Colombo Stock Exchange 2. Ordinary Shareholders as at 31 December 2011 Resident Non - Resident Total Range of No.of No.of % No.of No.of % of No.of No.of % of Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding 1 - 1,000 1,001 - 10,000 10,001 - 100,000 100,001 - 1,000,000 1,000,001 & Above TOTALS

7,822 1,931 296 26 0 10,075

2,059,761 6,383,788 7,976,512 5,767,631 0 22,187,692

1.53 4.73 5.91 4.27 0.00 16.44

172 37,162 132 594,039 70 2,491,513 20 4,602,848 3 105,086,746 397 112,812,308

0.03 7,994 2,096,923 1.55 0.44 2,063 6,977,827 5.17 1.84 366 10,468,025 7.76 3.41 46 10,370,479 7.68 77.84 3 105,086,746 77.84 83.56 10,472 135,000,000 100.00

Individual Company Total Range of No.of No.of % No.of No.of % of No.of No.of % of Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding 1 - 1,000 1,001 - 10,000 10,001 - 100,000 100,001 - 1,000,000 1,000,001 & Above TOTALS

7,958 2,088,016 2,038 6,859,868 348 9,640,825 41 8,740,979 3 105,086,746 10,388 132,416,434

1.55 5.08 7.14 6.47 77.84 98.08

36 8,907 25 117,959 18 827,200 5 1,629,500 0 0 84 2,583,566

0.01 7,994 2,096,923 1.55 0.09 2,063 6,977,827 5.17 0.61 366 10,468,025 7.76 1.21 46 10,370,479 7.68 0.00 3 105,086,746 77.84 1.92 10,472 135,000,000 100.00

• The percentage of shares held by the public as at 31 December 2011 was 27.86. (31 December 2010 - 27.86%) • The Total Number of Shareholders as at 31 December 2011 was 10,472 (31 December 2010 – 11,507) • The number of Shares in issue as at 31 December 2011 were 135,000,000 3. Book Value as at 31 December

2011

2010

Net Asset per share

21.06

19.85

28.00 (25/11/2011) 58.00 (10/02/2011) 39.60 (30/12/2011)

16.75 (13/01/2010) 59.70 (23/09/2010) 45.80 (31/12/2011)

4. Share Prices (LKR) Lowest Highest Last Transaction 5. Share Trading No. of Transactions No. of Shares traded Value of Shares traded

20,772 33,613,600 1,568,639,620

43,787 84,879,700 2,942,506,810

6. Earnings as at 31 December (LKR) Earnings per share Price earning ratio

2.46 16.09

3.33 13.75

7. Performance at the Colombo Stock Exchange (a) Market Capitalisation of MBSL Value (LKR) Rank (b) Price Movement All Share price Index Milanka Price Index MBSL Midcap Index

5,346,000,000 88

6,156,000,000 69

6,074.42 5,229.16 10,131.77

6,635.87 7,061.46 12,257.07

8. Directors Shareholding The number of Shares held by the Directors as at

31/12/2011

31/12/2010

Mr. M R Shah Ms. W A Nalini Mr. M S S Paramananda Mr. Lakshman Perera Mr. P G Rupasinghe Mr. V Kanagasabapathy Prof. Ranjith Bandara Mr. Lalith De Silva

Nil Nil Nil Nil Nil Nil Nil Nil

9. Shares held by CEO (Mr. Gamini Karunathilake retired w.e.f 01.01.2012)

Nil

10. Major Shareholders as at 31 December 2011 Name of the Shareholder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Bank of Ceylon No. 01 Account Bank of Ceylon A/C Ceybank Unit Trust DFCC Vardena Bank Ltd/ Mr. E P I Fernando Dr. S Yaddehige Mr. M M Udeshi Merrill J Fernando & Sons (Pvt) Ltd Mr. M Premjayanth Mr. N Balasingam Mr. C P De Silva Mr. A Chelliah Thurston Investments Limited Chemanex PLC A/C No 1 Bartleet Produce Marketing (Pvt) Ltd Waldock Mackenzie Ltd/Mr. L P Hapangama Seylan Bank Limited/Dinesh Nagendra Sellamuttu Mr. C R D Fernando Gnanam Imports (Pvt) Ltd Commercial Bank of Ceylon PLC/W T L Anandawansa Seylan Bank Limited/Priyani Dharshani Ratnagopal DFCC Vardena Bank Ltd/Sithlanka (Pvt) Ltd

2011

97,392,136 6,443,410 1,251,200 672,700 570,876 526,165 500,001 381,400 335,000 333,800 325,000 300,000 300,000 300,000 286,301 268,300 259,800 255,010 238,100 235,000

72.14 4.77 0.93 0.50 0.42 0.39 0.37 0.28 0.25 0.25 0.24 0.22 0.22 0.22 0.21 0.20 0.19 0.19 0.18 0.17

2010 97,392,136 2,386,410 282,400 * - 887,276 538,065 551,001 698,800 - 333,800 - 210,000 - 261,500 286,301 - - - - 235,000 **

% 72.14 2.1 0.21 0.65 0.40 0.41 0.52 0.25 0.16 0.19 0.21 0.17

* In 2010 – First Capital Markets Limited/ Mr. E P I Fernando ** In 2010 – Sithlanaka (Private) Limited 11. Debentures as at 31 December 2011 Unsecured Redeemable Unlisted Debentures of LKR 100/- each The Debentures were categorized as Types A, B C, and D as described below; 1. Type A 2. Type B 3. Type C4. Type D-

3 year debentures carrying a Fixed Interest rate of 13% payable bi annually 4 year debentures carrying a Fixed Interest rate of 13% payable bi annually 3 year debentures carrying a Floating Interest rate payable bi annually 4 year debentures carrying a Floating Interest rate payable bi annually

The Bank has issued 1,800,000 unsecured redeemable three year debentures (Type A) of LKR 100/- each carrying a Fixed Interest Rate of 13% to the value of LKR 180.0 Mn in the year 2010. The Bank has also issued 68,000 unsecured redeemable four year debentures (Type D) of LKR 100/- each carrying a Floating Interest Rate to the value of LKR 6.8 Mn in the year 2010. The Bi Annual Interest rate for these debentures was 9.34% during 2011. Floating rates of interest is calculated bi annually on the basis that the effective rate of interest per annum in respect of Debentures of Type C and D is equivalent to one and half percentage points (1.5%) above the simple average of the six (06) months Weighted Average Treasury Bill Rate (before withholding tax) at the last four (04) primary auctions held prior to the date of determination/ renewal of the Interest Rate. Unsecured Redeemable Listed Debentures of LKR 100/- each The Debenture issue which was held in November 2011 fully subscribed and the Debentures were catergorised as Types A, B & C. 1. Type A – 3 year debentures carrying a Fixed Interest rate of 11.6% payable bi-annually 2. Type B – 4 year debentures carrying a Fixed Interest rate of 11.8% payable bi-annually 3. Type C – 3 year debentures carrying a Floating Interest rate payable bi-annually The Bank has issued 7,318,800 unsecured redeemable three year debentures (Type A) of LKR 100/- each carrying a Fixed Interest Rate of 11.6% to the value of LKR 731,880,000 and 2,680,800 unsecured redeemable four year debentures (Type B) of LKR 100/- each carrying a Fixed Interest Rate of 11.8% to the value of LKR 268,080,000. The Bank has also issued 400 unsecured redeemable three year debentures (Type C) of LKR 100/- carrying a Floating Interest Rate to the value of LKR 40,000/Floating rate of interest is calculated bi-annually on the basis that the effective rate of interest per annum in respect of Debentures of Type C is equivalent to one point six percent (1.6%) above the simple average of six months weighted average Treasury Bill rate (before withholding tax) at the last four (04) primary auctions as announced/published by the Central Bank of Sri Lanka immediately prior to the date of determination/renewal of the interest rate.

Decade at a Glance Company For the year ended 31 December 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 Operating Results Income

1,155,731

1,035,227

872,598

704,355

539,001

434,969

386,645

346,641

Interest expenses

1,559,222 1,522,980 545,888

419,041

584,247

547,386

333,204

189,017

185,914

148,969

150,565

196,135

Operating expenses & provisions

630,215

535,870

345,720

300,898

273,261

257,190

188,207

163,370

176,480

149,252

60,248

82,639

28,500

16,471

7,136

11,033

22,450

5,340

16,271

5,821

Profit before income tax

443,367

650,708

254,264

203,414

273,269

269,181

187,330

127,970

75,871

7,075

Income tax on profit

111,012

201,037

53,286

(1,664)

34,799

59,638

28,903

3,204

4,378

Profit after income tax

332,355

449,671

200,978

205,078

238,470

209,543

158,427

124,766

71,493

7,075

Net profit for the year

332,355

449,671

200,978

205,078

238,470

209,543

158,427

124,766

71,493

7,075

Share of Associate Company

Balance Sheet Information Assets

Government Treasury Bills and Bonds

871,088

279,765

387,847

131,084

41,735

Investments on Securities & Properties

335,444

622,900

511,217

395,616

410,456

185,641

121,930

Loans and advances

2,171,832 1,567,034

1,143,361

807,469

570,618

485,594

629,908

Lease receivable

5,467,127 3,816,504

2,958,996

3,128,124

Property & Equipment

- 193,516

3,154,198 2,628,564 2,117,444

2,214

577

56,219

76,655

88,656

203,413

461,447

481,588

640,435

1,764,896 1,399,246 1,091,034

50,757

44,047

37,844

30,519

24,517

26,344

29,232

31,361

25,115

Investments in associate & Subsidiary companies

392,298

568,327

354,546

103,895

95,543

51,944

55,365

40,213

44,463

36,395

Other Assets

648,291

284,024

185,114

171,421

107,015

125,610

125,501

98,655

88,564

107,714

TOTAL ASSETS

9,936,837 7,182,601 5,578,925 4,768,128

30,441

4,404,082 3,503,697 3,272,896 2,475,441 2,128,209 2,165,651

Liabilities Debentures

1,311,800

716,800

1,074,160

1,144,160

1,327,510 1,260,600 1,400,600

Borrowings

5,014,069 3,179,712

1,658,985

1,553,949

1,079,083

400,370

242,000

157,735

98,258

201,258

606,896

515,008

390,225

432,773

426,481

356,092

273,398

263,759

219,695

7,094,039 4,503,408

3,248,153

3,088,334

2,839,366 2,087,451 1,998,692

2,842,798 2,679,193 2,330,772 1,679,794

1,564,716 1,416,246 1,274,204

Other liabilities & Deferred Taxation Net Assets

768,170

1,303,350 1,150,000 1,200,000

1,734,483 1,512,017 1,620,953 740,958

616,192

544,698

Capital Employed Stated Capital

1,607,000 1,607,000

1,607,000

1,067,000

Retained Profit/(Loss) & Reserve fund

1,235,798 1,072,193

723,772

612,794

1,067,000 1,067,000 1,067,000 497,716

349,246

207,204

617,000 2,070,000 2,070,000 123,958 (1,453,808) (1,525,302)

2,842,798 2,679,193 2,330,772 1,679,794 1,564,716 1,416,246 1,274,204 740,958 616,192 544,698

Ratios and Related Information

Company For the year ended 31st December 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Operating Ratios Return on Net Assets - %

11.69%

16.78%

8.62%

12.21%

15.24%

14.80%

12.43%

16.84%

11.60%

1.30%

Net Profit - %

21.32%

29.53%

17.39%

19.81%

27.33%

29.75%

29.39%

28.68%

18.49%

2.04%

Cost to Income Ratio - %

49.03%

42.58%

54.95%

53.30%

41.14%

42.32%

46.73%

51.36%

49.19%

61.46%

Income Growth - %

2.38%

31.78%

11.64%

18.64%

23.89%

30.68%

23.92%

12.50%

11.54%

-18.51%

Profit Growth - %

-26.09%

123.74%

-2.00%

-14.00%

13.80%

32.26%

26.98%

74.51%

910.50%

-113.38%

Assets Growth - %

38.35%

28.75%

17.00%

8.27%

25.70%

7.05%

32.21%

16.32%

-1.73%

-8.72%

Net Assets Growth - %

6.11%

14.95%

38.75%

7.35%

10.48%

11.15%

71.97%

20.25%

13.13%

1.32%

Gearing Ratios Debt to Equity - Times

2.23

1.45

1.17

1.61

1.54

1.17

1.29

1.97

(11.14)

(8.62)

Interest Cover - Times

1.81

2.55

1.44

1.37

1.82

2.42

2.01

1.86

1.50

1.04

Liquidity Ratios Quick Ratio - Times

1.38

0.93

1.04

1.19

1.57

0.91

1.61

2.62

2.85

2.19

Investors Ratios Market value of a voting share - LKR.

39.60

45.80

19.50

7.25

14.25

16.25

14.25

9.25

9.00

6.00

Basic earnings per share - LKR.

2.46

3.33

1.49

2.28

2.65

2.33

1.76

2.08

0.55

0.05

Net assets value per share - LKR.

21.06

19.85

17.26

18.66

17.39

15.74

14.16

12.35

4.74

4.19

Price earnings ratio - Times

16.09

13.75

13.09

3.18

5.38

6.97

8.10

4.45

16.36

120.00

6.11%

0.83%

Earning yield - %

6.21%

7.27%

7.64%

31.45%

18.60%

14.33%

12.35%

22.49%

Dividend per share - LKR.

1.25

0.75

1.00

0.75

0.50

Dividend Cover - Times

1.97

2.66

1.98

2.28

2.65

2.33

2.35

4.16

Dividend yield ratio - %

3.16%

2.73%

3.85%

13.79%

7.02%

6.15%

5.26%

5.41%

Dividend Payout ratio - %

50.81%

37.54%

50.34%

43.86%

37.74%

42.92%

42.61%

24.04%

Group For the year ended 31 December

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000 LKR.000

Operating Results Income

2,807,560* 2,595,680*

2,332,321

1,647,537

905,927

776,966

759,131

683,967

Interest expenses

1,021,158*

850,177*

1,274,896

921,486

658,647

440,614

368,701

316,227

352,091

416,419

Operating expenses & provisions

1,255,607* 1,032,534*

727,000

494,628

464,824

429,735

332,336

320,244

327,848

232,656

Share of Associate Company

1,443,925 1,163,678

60,248

82,639

28,500

16,471

7,136

11,033

22,450

5,340

16,271

5,821

Profit before income tax

591,043*

795,608*

358,925

247,894

327,590

304,362

227,340

145,835

95,463

40,713

Income tax on profit

143,572*

233,700*

73,592

4,908

38,134

59,737

30,037

6,945

3,187

4,634

Profit after income tax

398,418

540,977

285,333

242,986

289,456

244,625

197,303

138,890

92,276

36,079

Minority interest Net profit for the year

45,277

48,632

55,771

18,574

24,984

19,693

21,050

7,116

11,083

14,212

353,141

492,345

229,562

224,412

264,472

224,932

176,253

131,774

81,193

21,867

Balance Sheet Information Assets Government Treasury Bills and Bonds

1,291,653

446,084

362,499

323,054

485,110

239,041

411,332

236,000

892,052

768,975

430,930

452,165

230,839

183,766

143,860

148,082

351,086

Loans and advances

3,886,003 3,960,576

3,435,815

1,672,490

887,570

805,632

725,016

742,370

820,513

967,780

Lease receivable

8,781,037 6,554,698

5,035,167

4,660,299

Investments on Securities & Others

1,670,391 1,626,575 582,163

4,814,920 4,471,315 3,615,485

2,994,126 2,595,780 2,087,155

Property & Equipment

132,589

145,426

150,924

44,466

37,360

43,528

49,446

47,342

42,438

Investments in associate

132,774

121,617

95,022

82,977

74,625

31,026

34,447

19,295

23,545

15,477

4,051,078 1,123,406

1,054,916

251,782

173,608

185,807

349,255

127,360

110,747

254,011

Other Assets/ Assets classified as Held for Sale TOTAL ASSETS

19,236,035 14,424,350 11,832,472 7,589,028

43,863

6,802,747 6,091,201 5,442,525 4,313,394 4,152,437 3,955,372

Liabilities Deposits from customers

4,724,433 5,676,955

4,897,367

2,199,270

1,813,329 2,142,949 1,848,626

1,587,357 1,766,390 1,499,140

Debentures

1,311,800

734,684

1,169,644

1,144,160

1,327,510 1,260,600 1,400,600

1,303,350 1,150,000 1,200,000

Borrowings

5,465,161 3,311,089

1,733,170

1,682,372

1,240,575

490,384

242,000

157,735

98,258

211,258

Other liabilities & Deferred Taxation

4,126,691 1,514,540

1,307,202

553,314

564,407

539,798

466,051

347,907

359,634

357,330

Minority Interest Net Assets

15,628,085 11,237,268 9,107,383 5,579,116 525,160

288,683

207,823

172,208

3,082,790 2,898,399 2,517,266 1,837,704

4,945,821 4,433,731 3,957,277 3,396,349 3,374,282 3,267,728 113,859

96,728

89,612

80,294

1,703,292 1,528,820 1,371,389

153,634

128,650

820,317

688,543

607,350

Capital Employed

Stated Capital

1,607,000

1,067,000

Retained Profit/(Loss) & Reserve fund

1,475,790

1,291,399

910,266

770,704

3,082,790 2,898,399 2,517,266 1,837,704

1,067,000 1,067,000 1,067,000 636,292

461,820

304,389

1,703,292 1,528,820 1,371,389

617,000 2,070,000 2,070,000 203,317 (1,381,457) (1,462,650) 820,317

688,543

607,350

Ratios and Related Information

Group For the year ended 31st December

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Operating Ratios Return on Net Assets - %

11.46%

16.99%

9.12%

12.21%

15.53%

14.71%

12.85%

16.06%

11.79%

3.60%

Net Profit - %

14.19%

20.84%

12.23%

14.75%

20.05%

21.02%

21.78%

17.88%

12.16%

5.27%

Cost to Income Ratio - %

58.13%

52.50%

70.44%

55.15%

45.21%

46.64%

53.93%

51.27%

46.53%

62.66%

11.29% *

41.56%

14.10%

24.08%

28.45%

16.60%

2.35%

10.99%

1.81%

50.52%

155.76%

-221.75%

Income Growth - %

8.16% *

Profit Growth - %

-20.37%

96.93%

17.43%

-16.05%

18.33%

23.98%

42.06%

Assets Growth - %

33.36%

21.90%

55.92%

11.56%

11.68%

11.92%

26.18%

3.88%

4.98%

8.12%

6.36%

15.14%

36.98%

7.89%

11.41%

11.48%

67.18%

-19.14%

42.15%

10.19%

Net Assets Growth - %

Gearing Ratios Debt to Equity - Times

3.73

3.34

3.10

2.73

2.57

2.55

3.72

(34.23)

(19.26)

Interest Cover - Times

1.58

1.94

1.28

1.27

1.50

1.69

1.62

1.46

1.27

1.10

Liquidity Ratios Quick Ratio - Times

0.93

0.69

0.85

0.87

1.00

0.70

0.87

1.03

1.00

1.38

Investors Ratios Market value of a voting share - LKR. Basic earnings per share - LKR. Net assets value per share - LKR.

39.60

45.80

19.50

7.25

14.25

16.25

14.25

9.25

9.00

2.62

3.65

1.70

2.49

2.94

2.50

2.80

2.63

1.62

6.00 0.44

22.84

21.47

18.65

20.42

18.93

16.99

21.74

13.67

5.30

-1.48

Price earnings ratio - Times

15.11

12.55

11.47

2.91

4.85

6.50

5.09

3.52

5.56

13.64

Earning yield - %

6.62%

7.97%

8.72%

34.34%

20.63%

15.38%

19.65%

28.43%

18.00%

7.33%

Dividend per share - LKR.

1.25

0.75

1.00

1.07

0.60

Dividend Cover - Times

2.09

2.92

2.27

2.49

2.94

2.50

2.61

4.39

Dividend yield ratio - %

3.16%

2.73%

3.85%

13.79%

7.02%

6.15%

7.53%

6.49%

47.11%

34.25%

44.12%

40.16%

34.01%

40.10%

38.30%

22.81%

Dividend Payout ratio - % * Include only continuing operations

Statement of Value Added

Value Added

2011 LKR Mn

Value Allocation

2010 LKR Mn

Payments

Gross Value added 1,619 1,605 to Employees 22% Cost of borrwoings & support services (824) (584) 31% Provision for bad debts & investments (62) (66) Dividends to 733 955 Shareholders 2% Value Allocated Government Tax 22% Payments to Employees 230 175 Depreciation 23% Dividends to share holders 169 101 Government Tax 158 320 Retained Depreciation 13 10 Retained 163 349 733 955 Sources of income Sources & Utilization of Income 2011 2010 LKR Mn LKR Mn 1% Interest Income Sources of Income 4% 10% Fee & Commission 3% Interest Income 1,336 1,107 Income Fee & Commision income 48 109 Other Income 161 298 Other Income Dividend Income 14 8 Dividend Income Share of profit of Associate Company 60 83 82% 1,619 1,605 Share of Profit of Utilization of Income Associate Company Payment to lenders 546 419 Payments to employees 230 175 Support services 278 165 Utilisation of Income Depreciation & Amortization 13 10

Provisions for bad debts & Investments Government Taxes Dividends Retained Profit

62 66 158 320 169 101 163 349 1,619 1,605

Payments to lenders Payments to Employees 10%

34%

Support services Depreciation & Amortization

10%

10% 4%

17%

14%

Provisions for bad debts & Investments Government Taxes Dividends Retained Pofit

Economic / Financial Indicators

2011 2010 GDP Growth Rate 8.4 8.0 Inflation- Annual Average Rate 6.7 6.2 Exchange Rate US $ 113.90 110.10 Yen 1.46 1.33 S. Pound 177.6 173.4 Euro 150.08 146.86 Rate of Change against LKR % US $ 2.5% -2.9% Yen 9.6% 4.5% S. Pound 2.4% -7.1% Euro 2.2% -13.7% Interest Rate T-Bills Rate : 3-Months 8.68% 7.24% 6-Months 8.71% 7.35% 12-Months 9.31% 7.55% Overnight repurchase rate 7% 7.25% Commercial Bank AWDR* 7.24% 6.23% Commercial Bank AWLR** 15.35% 13.60% Stock Market ( as at year end) ASPI 6,074.40 6,635.87 MPI 5,229.16 7,061.46 MBSL Midcap 10,131.77 12,257.07 Change in API % -8.46% 96.01% Change in MPI % -25.95% 83.44% Change in MIDCAP % -17.34% 70.37% Market capitalization LKR ( Billion) 2,213.90 2210.45 Annual Turnover LKR (Billion) 546.25 570.30 * AWDR (Avaerage Weighted Deposit Rate) ** AWLR (Avaerage Weighted Lending Rate)

Contact @ MBSL CORPORATE

TELEPHONE

FAX

E-MAIL

General

4711711 2565636

2565666

mbslbank@mbslbank.com

Mr. Lakshman Kaluarachchi Chief Executive Officer (Acting)

4711700

4711704

lakshmank@mbslbank.com

CORPORATE SECRETARIAL SERVICES Ms. K. Jayathilake Company Secretary

4711766

4711704

STRATEGIC PLANNING & RISK MANAGEMENT Mr. Ranjith Siriwardena Deputy General Manager

4711762

ranjiths@mbslbank.com

HUMAN RESOURCES & ADMINISTRATION Ms. Amitha Samarasinghe Assistant General Manager

4711712

amithas@mbslbank.com

karnikaj@mbslbank.com

LEASING

4711722 (Hot Line) 4711703

Mr. Senaka Uduwawala Assistant General Manager Mr. Sanjaya Ranathunga Senior Manager Mr. Ananda Attanayake Manager (Legal) Mr. Sarath Ediriarachchi Manager Mr. Priyalal Pathirana Manager

4711751

senakau@mbslbank.com

4711734

sanjayar@mbslbank.com

4711750

anandaa@mbslbank.com

4711733

sarathe@mbslbank.com

4711797

priyalalp@mbslbank.com

TRADE FINANCE Mr. Ranjith Siriwardena Deputy General Manager Mr. Amitha Athulathmudali Senior Manager Ms. Mihirun Jayasinghe Senior Manager (Legal) CORPORATE ADVISORY & CAPITAL MARKETS Mr. A M A Cader Deputy General Manager Ms. Lalangi Goonawardena Manager Ms. Fahima Ishar Manager (Legal) Mr. Hemendra Wijekoon Manager (Portfolio & Investments) FINANCE & TREASURY MANAGEMENT Mr. Priyantha Herath Assistant General Manager Mr. Ruwan Piyadasa Manager INFORMATION TECHNOLOGY Mr. Senthilkumar Sevagan Acting Manager INTERNAL AUDIT Mr. Shalintha Fernando Assistant General Manager Mr. Lakshman Perera Manager

4711762

4711759

4711739

ranjiths@mbslbank.com

4711709

amithaa@mbslbank.com

4711781

mihirunj@mbslbank.com

4711769

4711741

cader@mbslbank.com

4711746

lalangig@mbslbank.com

4711747

fahimat@mbslbank.com

4711761

hemendraw@mbslbank.com

4711749

4711765

ruwanp@mbslbank.com

4711732

4711711

priyanthah@mbslbank.com

4711714

senthilk@mbslbank.com

4711764

shalinthaf@mbslbank.com

4711763

lakshmanp@mbslbank.com

MERGER IMPLEMENTATION Ms. Shyamalie Amaratunga Deputy General Manager

4711706

shyamalia@mbslbank.com

GROUP MARKETING & PRODUCT DEVELOPMENT Mr. Jude Gamalath Deputy General Manager

4711726

judeg@mbslbank.com

BRANCH OFFICES

TELEPHONE

FAX

E-MAIL

Galle Mr. Rathnasiri Mayakaduwa Senior Manager

091-4924312 091-2234751 091-4924913

091-2234750

ratnasirim@mbslbank.com

Kandy Mr. Keerthi Ramanayake Senior Manager

0812224820 081-4481702 0812224818 081-2224819

081-4481701

keerthir@mbslbank.com

Kurunegala Mr. Saman Pathmadeera Manager

037-4692006 037-2224215 037-2223916 037-4939836

037-4692006 037-2224215 037-2223916

samanp@mbslbank.com

Maharagama Mr. Janaka Fernando Manager

0114-306096 0114-306097 0112-745431

0112-745451

janakaf@mbslbank.com

Anuradhapura Mr. Rangana Sampath Branch Manager

025-4580507 025-2234485

025-4580508

ranganas@mbslbank.com

Negombo Ms. Anoma Vanhoff Manager

031-4933922 031-4932230

031-2228466

anomav@mbslbank.com

City Mr. Roshan Henadeera Officer - In Charge

0114-361571 0114-361581

0112-328688

roshanm@mbslbank.com

Trincomalee Mr. Chareendra De Silva Branch Manager

026-4928888 026-4595151

026-2226784

chareendrad@mbslbank.com

Ambalantota Mr. Nirmalath Fernando Manager

047-4933661 047-4933660

047-2225610

nirmalatha@mbslbank.com

Vavunia Mr.R. Saravanan Manager

024-4925475 024-4588685

024-2226108

saravananr@mbslbank.com

Batticaloa Mr.P. Nivaraj Branch Manager

065-4926799 065-4926787

065-2228575

nivarajp@mbslbank.com

Chilaw Mr. Shyaman Karunanayake Branch Manager

032-4928791 032-4928790 032-4928793

032-2224033

shyamank@mbslbank.com

Hatton Mr. Chaminda Amarasinghe Branch Manager

051-4924641 051-4924642

051-2224375

chamindaa@mbslbank.com

Our Team Chairman’s & CEO’s Office

Maleesha, Shyamalie (DGM), Fareesha, Sriyani

Corporate Secretarial

Roshini, Marina (AGM), Dinuka,Darshani

Finance & Treasury Standing (Left): Ruwan (Manager), Priyantha (AGM) Seated: Lasitha, Nadhuni, Prabath, Chaminda, Agra, Nimali, Sandamali, Nadeesha, Leonard, Suganya, Dilip, Geethanjalie, Gayan Standing (Far Right): Ajantha, Wasantha, Liyanage,Shrimali, Harshana, Ushantha

Human Resources

Nirmala, Harshani, Judith, Amitha (AGM) Amanda, Nishantha

Information Technology

Damitha, Senthil (Manager), Deshapriya, Chinthaka (Manager), Prasanna, Risintha, Roshan, Amila

Group Internal Audit Chamara, Janaka, Nishani, Lakshman (Manager), Hansini, Shalintha (AGM), Sanjeewa, Sampath, Jeewani,Pradeep, Thushara, Lakshika

Marketing

Administration

Lalith, Athula, Jayarathna, Dhammika (Dep. Mgr), Chandrakumara, Sagara, Mahinda, Amarasinghe, Tharanga

Jude (DGM) , Kosala,Madonna, Suranga, Udaya

Leasing

Janaka, Devika, Madhawa, Munasinghe, Hemali, Krishani

Sanjaya (Snr. Manager), Ajith, Sangeeth, Niluka, Chinthka, Chintha

Niranjala, Bhashini, Lakshman DGM - Leasing( ActingCEO), Senaka (AGM)

Leasing

Chamara, Nimashi, Janithri, Sanjeev,

Micro Finance

Legal

Chrishanthi, Chandima, Charith Nimali, Sivapalan (Manager), Subhani, Premalal, Ananda (Manager), Chamathi

Trade Finance

Monika, Mihirun (Senior Manager), Janith, Bhagya, Sunil, Priyaratne, Nirani, Amitha (Snr. Mgr),Ranjith (DGM), Shanaka, Madusha, Sadathana, Senaka

Leasing

Isanka, Premalal, (Manager), Sulani, Chandima, Chandana, Lasantha, Chandima, Pathirana (Manager) Sarath (Manager)

Corporate Advisory & Capital Markets

Anuradhapura

Seated: Hemendra (Manager), Lalangi (Manager), Jayawardena, Cader (DGM), Fahima, (Manager) Dayani, Ruweena, Standing: Hijas, Nadeeraka, Karthigan, Angelo, Dishan

Ambalantota

Thilina, Chamara, Emil, Rangana, Pradeep,Buddhika, Asanka, Nishantha

Batticaloa

Christable, Janarthanan, Nivaraj (Br. Manager), Chaminda,Srilaxshan, Jashitha

Chilaw

City

Narmada, Rachitha, Roshan (Br. Manager),Indika, Dinesh, Nishani

Galle

From Left: Nirmalath (Manager), Pramod Bhagya, Navoda, Madushan

Chaminda, Damith, Shanaka, Shyaman (Br. Manager), Nimantha

Hatton Nilanga, Dayani, Vinitha, Erani, Vajira, Ratnasiri (Snr. Manager) Roshan, Indika

Drashani, Lakmal, Sanjeewa, Pushpkumar, Seated: Chaminda (Br, Manager)

Kurunegala

Kandy

Keerthi (Snr. Manager), Priyanga, Sanjeewa, Milinda, Janaka, Shashikala, Dasanthi, Asanthi, Kaushalya, Susil

Maharagama

Viranga, Janaka (Manager), Uthpala, Chathura, Kosala, Chamara

Trincomalee

Seated: Lakmal, Sampath, Nishantha, Saman (Manager), Susantha, Jude, Sulakshi, Standing: Dinusha, Kamal, Hasintha, Chandani

Negombo

Anoma (Manager), Viraj, Pradeep, Dinithi, Dilanga, Asanka

Vavuniya

Prasad, Balajanarthan, Saravanan (Manager), Thusijanthan Siyahul Haq, Chareendra, (Br. Manager) Reyaz, Kalpa

Glossary of Financial Terms Associate Company A company other than a subsidiary in which a holding company has a participating interest and exercises a significant influence over its operating and financial policies. Discounting of Bills of Exchange To advance cash on a bill of exchange prior to its maturity after deducting a sum for interest. Capital Reserves The profits of a company that for various reasons are not regarded as distributable to shareholders as dividends. These include gains on the revaluation of capital assets and share premium. Contingent Liabilities Conditions or situations prevailed as at the balance sheet date, the financial effects of which are to be determined by future events which may or may not occur. Corporate Governance The process by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others. Cost method A method of accounting whereby the investment is recorded at cost. The income statement reflects income from the investment only to the extent that the investor Receives distributions from accumulated net profits of the investee arising subsequent to the date of acquisition. Cost to Income Operating expenses excluding provision for bad & doubtful debts as a percentage of total operating income net of interest cost. Deferred Tax Sum set aside for tax in the accounts of an organization that will become payable in a period other than that under review. Gross Dividend Portion of current and retained earnings, inclusive of tax withheld, distributed to shareholders. Earnings per Share Profit after tax divided by the number of ordinary shares in issue. Equity method A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The income statement reflects the investor’s share of the results of operations of the investee. Finance Lease A contract whereby a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortise the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risks and rewards of ownership to the lessee. Floating Rate Note A debt security carrying a floating rate of interest which is reset at regular intervals, typically quarterly or half-yearly, in relation to some predetermined reference rate, typically Guarantee A promise made for fee by a third party (guarantor), who is not a party to the contract between two others, that the guarantor will be liable if one of the parties fails to fulfill the contractual obligations. Interest Earning Assets Assets, which earn interest – the total of Advances, Bills, Leases, Government Bills & Bonds, Call Money and Placements with other institutions. Interest in Suspense Interest income of Non Performing Loans; these are accrued but not considered as profits.

Market Capitalisation The market value of a company at a given date obtained by multiplying the share price by the number of issued shares. Net Assets per Share Net assets (total assets less total liabilities) divided by the number of ordinary shares in issue. This represents the theoretical value per share if the company is broken up. Net Interest Income The difference between what a bank earns on assets such as loans and securities and what it pays on liabilities such as deposits, refinance funds and inter-banking borrowings. Operating Lease Any form of lease other than finance lease, i.e., one that does not transfer all the benefits and risks of ownership to the lessee. Portfolio A combination of income generating assets such as loans, finance leases, investment securities and bills discounted. Post Balance Sheet Events Significant events that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors. Price Earnings Ratio Market price of an ordinary share divided by annual earnings per share. Provisions for Bad & Doubtful Debts Specific provisions made for possible loan losses according to the period of non-performance and the exposure over the collateral. Related Party An individual, partnership of company that has the ability to control or exercise significant influence over another organization. REPOs Repurchase Agreements : The securities sold to creditors (who lend money for funding purposes), with the intention of buying them back at a set price. Return on Average Assets (ROAA) Profit after tax as a percentage of Average Assets. Return on Equity (ROE) Profit after tax as a percentage of Average Equity. Return on shareholders’ Funds Profit after tax divided by average shareholders’ funds (total of share capital and reserves). Return on Total Assets Profit after tax divided by average total assets. Revenue Reserves Reserves which may be distributed to shareholders as dividends. Segment Reporting Segment reporting indicates the contribution to the revenue derived from business segments such as banking operations, leasing operations, stock broking & securities dealings, property and insurance. Shareholders’ Funds Shareholders’ funds consist of issued and fully paid ordinary share capital plus capital and revenue reserves. Subsidiary Company A company is a subsidiary of another company if the parent company holds more than 50% of the nominal value of its equity capital or holds some shares in it and controls the composition of its board of directors. Value Added Value added is the wealth created by providing banking services less the cost of providing such services. The value added is allocated among the employees, the providers of capital, to government by way of taxes and retained for expansion and growth.

Notice of Meeting

NOTICE IS HEREBY GIVEN that the Thirtieth Annual General Meeting of Merchant Bank of Sri Lanka PLC will be held at the Grand Ballroom, Galle Face Hotel, Colombo on 20 June 2012 at 10 30 h for the following purposes; 1.

To receive and consider the Annual Report of the Board of Directors and the Audited Financial Statements of the Company for the year ended 31 December 2011 together with the Report of the Auditors thereon.

To declare a final dividend of LKR 1.25 per ordinary share for the year ended 31 December 2011 as recommended by the Directors.

To re-elect Mr. P G Rupasinghe as a Director pursuant to his retirement by rotation in terms of article 88 of the Articles of Association of the Company.

To re-appoint M/s SJMS Associates, Chartered Accountants, as the Companyâ&#x20AC;&#x2122;s Auditors for the ensuing year and to authorise the Directors to determine their remuneration.

To authorize the Directors to determine donations for the year 2012.

By Order of the Board of MERCHANT BANK OF SRI LANKA PLC

Company Secretary Colombo 08 May 2012. NOTES:

1. A Form of Proxy is attached hereto, for use if necessary, in which event, it should be completed and returned to the Registered Office of the Company not less than 48 hours before the time appointed for the holding of the meeting.

2. A Shareholder entitled to attend and vote is entitled to appoint a Proxy to attend and vote instead of him/her. A proxy need not be shareholder.

3. The instrument appointing a proxy may be by writing under the hand of the appointer or of his/her Attorney, duly authorized in writing, or if such appointer is a corporation under its common seal or the hand of its Attorney or duly authorized person. The instrument appointing a proxy should be deposited together with the proxy at the Registered Office of the Company

Form of Proxy

I/We………………………………………………………………………………………………….................................................. of…………………………………....……………………………………………………………….................................................. being a member/members of the Merchant Bank of Sri Lanka PLC, hereby appoint............................................... ………………………………………………………………………………………………………................................................of ………………………………………………………………………………………………….......................................................or failing him/her any one of the Directors as *my/our Proxy, to represent * me/us, to speak and to vote on *my/ our behalf at the Annual General Meeting of the Company to be held at the Grand Ballroom, Galle Face Hotel, Colombo on 20 June 2012 and at any adjournment thereof and at every poll which may be taken in consequence thereof. *I/We the undersigned hereby authorize my/our Proxy to vote on *my/our behalf in accordance with the preference indicated below:

1. To receive and consider the audited financial statements for the year ended 31 December 2011 and the Auditors’ Report thereon

2. To declare a final dividend of LKR 1.25 per ordinary share

3. To re-elect Mr. P G Rupasighe as a Director

4. To re-appoint M/s SJMS Associates as the Company’s Auditors

For

Against

5. To authorize the Directors to determine donations For the financial year 2012

Signed this……………..day of………………Two Thousand and Twelve.

………………………….. Signature Notes 1. * Please delete the inappropriate words. 2. A proxy so appointed shall have the right to vote on a show of hands or on a poll and to speak at the Meeting

Mr. Lakshman Kaluarachchi lakshmank@mbslbank.com Group Hed of Legal / Company Secretary : Ms. Karnika Dayanganie Jayatilake