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NETWORK LEASING CORPORATION LIMITED
Annual Report 1996
CONTENTS
Management				2
Directors' 'Report				3
Chief Executive's Review				5
Auditors' Report				18
Financial Statements				19
Pattern of Shareholding				31
Company Information				32
Notice of Annual General Meeting				33
MANAGEMENT
Board of Directors
Elias A Sattar
Musaret Siddiqi
Emile HJ Groot		Nominee, FMO (Netherlands Development
			Finance Company)
Khurshid Hadi		Nominee, First Leasing Corporation Ltd.
Yusuf A Sattar
Dr. Mahfooz Ali
Hanif A Sattar
Abdul Qayyum Bux
Asif Siddiqi
Executive Committee
Elias A Sattar
Zaigham M Rizvi		Saudi Pak Industrial & Agricultural
		Investment Company
Ariful Islam		Muslim Commercial Bank
Shahid Shaikh		First Leasing Corporation Ltd.
Musaret Siddiqi
Yusuf A Sattar
Asif Siddiqi
Management Team
Asif Siddiqi FCA		Managing Director & CEO
Yusuf A Sattar FCMA		Executive Director- Finance
Musaret Siddiqi FCA		Executive Director- Operations
Shahid A Khan		Marketing and Credit
Nadeem Ahmad MBA		Finance and Corporate Affairs
Adnan Naseem MBA		Client Services
DIRECTORS' REPORT
TO THE SHAREHOLDERS
The directors have pleasure in presenting to the shareholders the results and the Annual
Report for the year ended June 30, 1996.
Financials
Your directors are pleased to report an after tax profit of Rs. 10,058,139 for the
year ended June 30, 1996 and propose that profits be appropriated as under:
					1996	1995
					Rupees	Rupees
						(6 Months)
Operating profit					10,218,933	3,356,738
Taxation - current					160,794	873,000
					-----------	-----------
Profit after tax					10,058,139	2,483,738
Unappropriated profit brought forward					1,986,990	--
					-----------	-----------
					12,045,129	2,483,738
Appropriations:
Transfer to Special Reserve					2,011,628	496,748
Proposed dividend @ 10%					10,000,000	--
					-----------	-----------
Unappropriated profit carried forward					33,501	1,986,990
					===========	===========
Auditors
The retiring auditors Messrs Ford Rhodes Robson Morrow, Chartered
Accountants, being eligible, offer themselves for re-appointment.
Shareholding pattern
A statement reflecting the pattern of shareholding is attached to the Annual Report.
Acknowledgment
The directors wish to place on record their appreciation for the hard work put in and
dedication displayed by the staff and the management in performance of their duties.
On behalf of the Board
Elias A Sattar
Chairman
Karachi.
10 November 1996
These very small farmers of this village, about 20 kilometers from Moen Jo Daro in the
interior of Sindh, have gotten together and by sheer hard work and tenacity, are beginning
to turn their village into a better place for living, for themselves as well as for their future
generation.
Having an average land holding of about 10 acres and using the primitive methods of
farming, they had little hope of bettering their lives. They were persuaded by Salim (the
first son of the village to have qualified as a lawyer) to form an association and lease a
tractor.
Salim had realized that the ever increasing demand for food due to the population
pressure could only be met by increasing the yield. In order to do so, the farmers need to
have access to modern farming equipment and techniques.
The association has now used the tractor for about 12 months. The additional income
generated through the use of modern techniques has put some smile on the faces of
these farmers.
CHIEF EXECUTIVE'S REVIEW
Overview
The period under review is your company's first full year of commercial operations.
The Annual Report of June 30, 1995 covered an operational period of six months
from January to June 1995.
During the year ending June 30, 1996 the lease investments grew by 55% to over
Rs. 126 million and your company's after tax profit increased by over 100% to
Rs. 10 million.
Sponsors & Shareholders
Your company's sponsors include Muslim Commercial Bank, Saudi Pak Industrial
& Agricultural Investment Company, FMO (Netherlands Development Finance
Company), Faysal Investment Bank, First Leasing Corporation and Industrial
Development Bank of Pakistan.
In addition, Crescent Investment Bank, Pak Libya Holding Company and National
Investment Trust hold equity in the company. The total number of individual
shareholders on June 30, 1996 was 3264.
Corporate Objectives
As stated in the previous Annual Report, this company was formed to provide lease
financing and developmental support services to the small and micro enterprises
(SME) and the cottage and small industries (csI), as its main business.
The reason for procuring this special niche was the result of our comprehensive
study of the economic activities in the country carried out by various sectors. The
surveys quite clearly indicated that the informal small business was the most
dynamic and vibrant sector of our economy. It provides employment to almost 80%
of our working population and produces goods and services for the vast majority of
the people.
We started with the belief that working with the SMEs and CSIs would not only be
economically viable for our company but would also strengthen the most productive
and promising sector of our economy, which works towards raising the income
levels of the people so that they may live their lives with certain amount of dignity.
We are happy to report that our beliefs have been vindicated. We are presently
Tariq started work young at age 14. He worked his way through different tyre repair
shops, petrol stations, stores, engineering work shops and the like. Having gained the
necessary skills in engineering work shops, he, along with this brothers started a small
repair shop in rented premises, in a small back alley in Nital Colony with a very small
investment.
The three brothers worked diligently over the one old lathe machine, repairing and
producing spare parts of motor cycles. As demand for their services and products grew,
they requested us to lease them a larger machine costing Rs. 40,000. This would not
only raise their income by over 50% but also generate employment for the youngest
brother, as he was at the age of entering the job market.
More over, once the second shift starts, Tariq will need to employ two additional workers.
working with hundreds of small and micro clients, spread over the length and breadth
of Pakistan.
They range from the small grocery store in a village run by a widow, to the home
operated art work studio run by a retired man and his two sons.
It has been the beginning of a just and equitable relationship, whereby we are
providing the clients with income generating assets and they are paying us rentals
on market based rates. In return for our respect towards our clients, they have
treated us with utmost affection. This has manifested itself in the remarkable rate
of our recoveries, which continues to be almost 100%.
Leasing Operations
Initial Steps
Ours being the first leasing company purposely formed with the objective of financing
the small and micro enterprises, faced foreseeable problems initially, in reaching
the target sector.
Lack of available data on micro enterprises and hence the question of
identification.
Mostly such units operate from very' small premises and are not visible to
the eye. In order to avoid harassment, no outside signs are displayed. This
problem was overcome by liaising with social organisations and small
business associations in the relevant areas for specific contacts.
In business districts where micro enterprises flourish traditionally, the
problem arose because of the entrepreneurs' apprehension of a new product
by a new company. Only repeated visits by the programme officers convinced
them of the genuine nature of our leasing company, plus of course a cup of
tea at our offices.
Another common apprehension was the sudden interest by an unknown
company in providing them with finance. Since time remembered, their need
was met by the local money lender and the suppliers. Continued interface
and dialogue about the recent establishment of the leasing sector in Pakistan
and targeting of the SME's gradually for overall economic development was
what finally dispelled their initial reserve.
In certain cases there was a genuine apprehension that borrowing money
on interest was against the tenets of Islam and hence could not be endorsed.
They were explained that leasing was introduced by the government as an
Islamic mode of financing, as it involves the payment of rentals on assets
leased and as such no loan was created.
Strategy for Business Development
Currently, we have various marketing units operating in different areas. Every month,
the localities assigned to each unit are revolved. The keyword to our market
approach is our accessibility to each and every business oriented activity. Hence,
no restriction on sector, gender, activity or amount. No minimum or maximum limits
ensure that the lease request is purely need oriented. The market approach with
each new area is to first observe and assess the business activity, formulate
linkages, establish contacts and thus having settled oneself as an environment
friendly individual, to introduce our programme.
Realizing the innovative nature of leasing with reference to the small and micro
businesses and the lack of their exposure to the formal financial sector, the
relationships are established gradually. Due emphasis is laid on Creating linkages
as it not only serves to dispel any apprehensions of the prospective clients but
also helps in the evaluation process.
A major hinderence in our activity is the lack of documentary evidence in support
of the given business. Mostly, the micro entrepreneurs are illiterate and hence unable
to record their transactions. Detailed scrutiny of their business activity and in-depth
questioning leads to the formulation of their financial statements i.e. current balance
sheet and income & expenditure account for previous years as well as an
assessment of the potential cash flow. These Financials are prepared by our
programme officers with the help of interviews with the clients. The cycle is:
Create awareness ...............			gives rise to genuine need .......			processing
time .................		correct evaluation.
Emphasis is laid on the productive nature of the asset i.e. it should either enhance
the income generation of the business or reduce its costs directly.
Where more than one asset is requested initially, prospective clients are encouraged
to start off with one and gradually enhance their capacity as they go along.
The sectors which we are engaged in currently include, health, education, fisheries,
agriculture, engineering, printing, garments, manufacturing, video recording, retail
stores (home & others), repair shops, distribution agents, retail kiosks and
professional work.
Health and education have been identified as the two key areas which not only
effect the present but coming generations as well. Consequently, considerable
efforts are directed towards these sectors in all lower income areas. Women and
children are the main beneficiaries in these sectors. Our portfolio includes primary
schools, high schools, technical training institutes, clinics, maternity homes and
small hospitals.
Orangi Town is one of the largest urban under developed area of Asia, with a population
of over 1.2 million. Surprisingly, however the literacy rate in Orangi is about 70%, which
is much higher than the country and even Karachi city's average.
The credit for this achievement goes to the Orangi community. The determination of the
people to provide education for their children lead to the establishment of community
based organisations which sponsored primary and secondary schools.
Faran School is a classic example. Founded on 5 April 1978 in rented premises which
had to be vacated soon after. The dedicated staff and parents erected huts on an open
plot, so as to continue with their aim of providing basic and functional education to their
children. The school witnessed untold difficulties in its initial stages, when even these
huts were dismantled.
However the will to survive endured. Today, Faran High School consists of 20 class
rooms with an equipped science laboratory and a computer training centre. In order to
provide technical education, Faran has leased equipment and computers.
The school has a population of over 2000 students with an almost equal ratio between
boys and girls. It runs in two shifts. Morning for boys and afternoon for girls.
Faran Educational Society is instrumental in the spread of education in the area through
the establishment of similar community based schools.
Recoveries
Our recoveries continue to be almost 100%. This has given us considerable strength.
However, our initial lease contracts have still another 2 years to go and therefore
the repayment pattern in the third year will be watched very carefully.
The instances of late payments have occurred in two areas. Some schools could
not make the repayments in time due to serious disturbances in Karachi last year
and had asked for more time. They are now making payments regularly. The other
was with the fishermen, who also have asked for more time. The reason being the
exceptionally poor fishing season for the last period i.e. September 1995 to April
1996. The fishermen have also started making the repayments.
The entire amount of the arrears of over 3 months was under Rs. 200,000 which is
0.16% of the total outstanding.
Women Division
In order to gain easier access and provide personalised service, the Women Division
is being developed for serving women entrepreneurs. This Division is to be managed
by an all female staff and has its own premises adjacent to the main offices.
This is a three tier programme:
Women with established businesses e.g. boutiques, bakeries, garments
(ladies / children wear ), stitching units, clinics, maternity homes, schools,
technical centres, catering etc. Also professional women such as lawyers,
doctors, teachers, accountants, journalists, consultants, and others, who
require financing for assets to be used in their profession.
Semi-skilled women engaged in income generation activity from their homes;
"The Invisible Women". They have no access to funds for either fixed or
working capital purposes, and are at the mercy of unscrupulous money
lenders. The added burden is of the exploitative middle men who buy the
goods from such women at the rock bottom prices. The women suffer on all
accounts i.e. lack of business and marketing techniques, lack of access to
formal sector funds and direct approach to the market place. They are unable
to upgrade their skills and hence their earning capacity.
For such women, in addition to financing assets, it is essential to organize
periodic training sessions, where due emphasis is put on the necessary
elements.
In this category are also placed those women who have recently acquired a
particular skill from a polytechnic or a training institution. They now have to
Unable to continue his education, Mustafa joined his father in running the small store
adjacent to the Karachi Harbour at Kaemari. The store dealt in oils for fuel and repair
works, to the heavy vehicle traffic there.
Over the years Mustafa learnt the trade and gradually took over the management of the
shop from his father
Being an enterprising young man, he realized the potential in keeping a photocopy
machine at his store. This would cater to the people who had to go far for getting copies
made of shipping documents. The additional income would come in very handy. He thus
approached us for leasing a photocopy machine for Rs. 45,000.
Mustafa has a smile for us, whenever we pay him a visit.
learn how to actually go about employing their skill in an income generating
activity.
We have so far, financed women engaged in making ice lollies, stitching
garments, embroidery works, home grocery stores, food processing and
professional work.
Cases in process include women engaged in activities ranging from making
leather waste goods, block printing, detergent making, candle making,
cosmetics and food processing. The asset cost is in the range of Rs. 5000
to Rs. 40,000.
We are in the process of developing training programmes which will be
conducted in various locations. The skills identified for development will be
in accordance with the needs of the local environment.
We feel that such programmes will serve the dual purpose of helping us to
identify and reach such women and help in the expansion and development
of their business. Likewise, we will also learn from dealing more closely with
them.
The unskilled woman.
At the grass root level, there are innumerable unskilled women. Special
efforts will be made to attract and conduct extra training programmes for
them on a periodic basis. They being completely new to any income
generation activity, we will endeavour to identify simple trades, take them on
market surveys and give them some very basic training in cash management.
Geographical Expansion
Lahore Office
Our Lahore Office has been established and is now fully functional.
The small enterprise sector is very active in the Punjab. Considerable economic
activity is being carried on in the urban as well as the rural areas, especially in and
around Lahore, Sialkot, Gujranwala, Faislabad, Gujrat, Wazirabad and several other
places.
The Lahore Office over a period of time will cater to the needs of these areas. The
initial response has been overwhelming but we are adopting a cautious approach
in order to build the business gradually.
Peshawar Office
The Peshawar office is under establishment and will start operation as soon as we
receive the necessary permission from the State Bank of Pakistan.
Resource Mobilisation
After utilizing our own capital, we first arranged credit lines from ANZ Grindlays
Bank and Pak Libya Holding Company. Since our normal lease period is 3 years,
we requested the two lenders for long term funds, to which, both very kindlyagreed.
In March 1996 the Swiss Agency for Development & Cooperation (SDC), the
Government of Switzerland extended a five year credit, for small and micro
enterprises, with one year grace period for capital and six month's grace for mark-
up. SDC very kindly, are also providing technical assistance over a two year period,
for institutional strengthening and capacity building.
We have recently started negotiations with an investment bank for raising sufficient
funds on the basis of securitization of our receivables. The amount raised will be
adequate for our short term needs since the average amount of our lease
disbursement is rather modest. Negotiations are continuing with the World Bank
and the Asian Development Bank for long term credits (upto 10 years), under their
small and micro enterprise allocations for Pakistan. We will be entitled to formally
apply for these multilateral funds once we complete the first two years of operations.
Human Resource Development
Being a service oriented institution, our main strength lies with the dedicated men
and women who are working with us. Their well being, their professional
advancement and development is vital for the organization's success.
Since the opportunities for training to deal with small entrepreneurs are not available
in Pakistan, arrangements have been made through the good offices of FMO to
train our staff in the Philippines and Indonesia.
Under the technical assistance programme of SDC' our staff at various levels are
periodically being trained at Planters Development Bank, Manila. Similar
programmes will soon start with Bank Dagang Bali. These two very fine institutions
have been in micro finance business for over two decades. In addition, the staff
are trained in house on an on-going basis and are encouraged to attend the relevant
seminars and meetings in Pakistan.
Networking with other Micorcredit related Institutions.
Grameen Bank- Bangladesh
In November 1995 we established our first contact with Grameen Bank,
when we visited Bangladesh.
Professor Mohammad Yunus, the founder of Grameen Bank, very kindly
offered us his cooperation in familiarising us with the Grameen credit
operations. Visits were arranged for us to study their workings in the
villages. It was an extremely re-assuring experience to witness the
viability of credits as small as Taka 100 (apx. Rs. 85)
Again in September 1996, during the Microcredit Summit Preparatory
Meetings in Washington, Professor Yunus re-iterated his genuine desire
to extend to us all cooperation in the fields of credit evaluation, monitoring,
documentation and dissemination of best practices. Grameen Bank is
also considering the possibility of introducing the leasing instrument in
the urban and semi urban areas of Bangladesh.
Women's World Banking (WWB)
WWB works with the UN agencies around the world for providing linkages
for financing women enterprises.
They found that our company was probably the only institution in the world
that was using the leasing instrument for collateral free credit to the micro
enterprises.
In a report prepared for UNDP on the financial instruments development
in Africa, WWB have used Network Leasing as an example of microcredit
delivery system.
Microcredit Summit
With the support of various governments, the UN agencies, the World Bank,
Citibank, private associations and Grameen Bank, the first ever Microcredit Summit
is due to be held in February 1997. The goal of the Summit is to identify and adopt
ways and means for providing credit for self employment to 100 million of the very
small entrepreneurs throughout the world, by the year 2005. The estimated amount
for such credit over the next ten years is USS 22 billion.
A preparatory meeting of microcredit practioners and other institutions connected
with micro finance was held in Washington DC in September 1996. The purpose of
the meeting was to get the input from all the concerned entities in order to draw up
a practical plan for raising the funds and reaching the 100 million micro
entrepreneurs. The deliberations of the preparatory meeting are being documented
to be finalised at the Summit in February 1997.
As a microcredit practitioner, our company has joined the Council of Practitioners
of the Summit.
Our endeavour at the preparatory meeting was to highlight the role that the leasing
instrument can play in the collateral free financing for the very small entrepreneurs.
A great deal of input for the Summit goal as well as the detailed methodology has
come from Professor Yunus of Grameen Bank.
Acknowledgment with gratitude
We deeply value the kindness and greatly appreciate the support extended to us
by the sponsoring institutions, the other institutional equity holders and the lenders.
We also acknowledge with deep gratitude the participation of the general public in
our venture. Our special thanks to our clients, for it is they who we owe our
operations to and the service of whom is our objective.
We take this opportunity to thank the Corporate Law Authority for their continued
support and understanding. Our thanks also to the State Bank of Pakistan for their
valuable advice and guidance.
Asif Siddiqi
Karachi.
10 November 1996
F I N A N C I A L S
AUDITORS' REPORT TO THE MEMBERS
We have audited the annexed balance sheet of Network Leasing Corporation
Limited as at June 30, 1996 and the related profit and loss account and statement
of changes in financial position, together with the notes forming part thereof, for
the year then ended and we state that we have obtained all the information and
explanations which to the best of our knowledge and belief were necessary for the
purposes of our audit and after due verification thereof, we report that:
(a) in our opinion, proper books of account have been kept by the company as
required by the Companies Ordinance, 1984;
(b) in our opinion:
(i) the balance sheet and the profit and loss account together with the
notes thereon have been drawn up in conformity with the Companies
Ordinance, 1984 and are in agreement with the books of account
and are further in accordance with the accounting policies
consistently applied, except for the change as stated in note 2.2 with