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Network Leasing Corporation Limited

Annual Report 1998

CONTENTS

Management

Directors' Report

Operational Review

Auditors' Report

Financial Statements

Pattern of Shareholding

Company Information

Notice of the Annual General Meeting

MANAGEMENT

Board of Directors

Mohammed Elias Sattar

Musaret Siddiqi

Emile HJ Groot

Nominee, FMO (Netherlands Development

Finance Company)

Khurshid Hadi

Nominee, First Leasing Corporation Limited

Samina Hamid Khan

Nominee, Crescent Investment Bank Limited

Hanif A. Sattar

Abdul Qayyum Bux

Yusuf A. Sattar

Asif Siddiqi

Executive Management

Asif Siddiqi FCA

Managing Director & CEO

Yusuf A. Sattar FCMA

Executive Director - Finance

Musaret Siddiqi FCA

Executive Director - Operations

DIRECTORS' REPORT

TO THE SHAREHOLDERS

Your directors have pleasure in presenting to the shareholders the results and the Annual

Report for the year ended June 30, 1998.

Financials

The operating profit for the year ended June 30, 1998 was Rs. 8,364,603. Your directors

propose that profits be appropriated as under:

1998

1997

Rupees

Operating profit

8,364,603

10,223,540

Taxation - (net)

(260,738)

(311,364)

---------------

Profit after tax

8,103,865

9,912,176

Unappropriated profit brought forward

7,956,542

33501

---------------

16,060,407

9,945,677

Appropriations:

Transfer to special reserve

(1,620,773)

(1,989,135)

Dividend:

Interim paid (10%)

(10,000,000)

Final

---------------

Unappropriated profit carried forward

4,439,634

7,956,542

==========

The reason for decrease in the profit for the year under review is as follows:

* the World Bank loan disbursements which started during the year, were made on a

reimbursement basis. This necessitated obtaining fundings at higher markup rates than

being charged by the World Bank, which resulted in additional financial charges

amounting to Rs. 2,397,560. All temporary borrowings have however been repaid. The

benefit of the long term World Bank loan will be reflected in the next year's results.

Year 2000 computer problem

In accordance with the CLA's directive, we are reviewing the entire software. Since the

company started operations in 1995, our computer consultants advise us that systems

developed had a built-in provision for the year 2000. However, we are thoroughly examining

all programmes to determine if any measures would be necessary.

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 the

dedication displayed by the staff and the management in performance of their duties.

OPERATIONAL REVIEW

Overview

Network Leasing was formed to provide lease financing and developmental support

services to micro enterprises and cottage industries as its main business.

These enterprises form a vital part of the country's economy. They produce goods

and services for the vast majority of the people and at the same time provide

employment opportunities in urban as well as in rural areas.

Providing credit facilities to this sector is considered to be a sound economic and

business strategy, since it affords the financing institution the opportunity to spread

its risk over a considerably large number of clients, with small exposures.

We are happy to report that our micro leasing operations have progressed

reasonably well. During the month of June 98, disbursements were curtailed due

to the prevailing economic and political situation but normal operations were

resumed again in July 98. We are hopeful that in not too distant a future, the

economic environment in the country would begin to change for the better and we

will continue to expand our outreach for serving the micro enterprises.

Leasing Operations

We started our operations with the fishermen off the coastal areas, where we

financed small fishing boats. We then went to the rural areas and financed the

small farmers for acquiring tractors and agricultural implements. We are now

operational on a country wide scale.

Our clients include cottage industrial units, primary and secondary schools in lower

income areas, small hospitals and clinics, service and repair workshops, small

stores, upcoming professionals such as doctors, lawyers and engineers, small

fishermen and small farmers.

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. As mentioned earlier, our

portfolio includes primary schools, high schools, technical training institutes, clinics,

maternity homes and small hospitals.

The separate Women Division established last year is now functioning reasonably

satisfactorily.

Training of the programme officers has been a handicap, as the staff turnover in

this department is higher than normal. The work is undoubtedly tough and therefore

it is difficult to retain the young ladies.

Our endeavor during the period has been to reach the women at the grass root level.

We have succeeded to a certain extent by extending our reach to the main cities and

surrounding villages, but this process will take time since we accord high priority to the

clients' income generating capabilities in order to make the operation sustainable.

Our normal requirement for financing is that the lessee must have been in business

for 3 years. In case of Women Enterprises, this requirement is relaxed. Less than

3 years old and even new businesses are considered for financing. The recovery

rate so far is satisfactory.

Geographical Coverage

During the period under review, regular visits were made by our senior executives

as well as the programme officers to the villages and semi-urban areas in Sindh,

Punjab and NWFP.

The Lahore office has now been functioning for over a year and is generating

sufficient proposals each month. We have kept the disbursements at a low level in

order to see the recovery pattern, which so far has been reasonably satisfactory.

The Peshawar office is now in the process of being re-inforced and activated further

as we have received the CLA's permission.

Peshawar and the surrounding sub-urban areas and the villages offer good potential

for micro leasing. The response we have had so far is encouraging and in the

coming months we hope to increase our activity in the NWFP.

Since we started our operations from Karachi, a large number of our clients are

urban based. The cottage and small industries are in the sub-urban areas and

agriculture and fisheries based clients are rural. As we expand our outreach to

more agricultural based activities, the proportion of the rural clients will increase.

During the period under review, a considerable amount of time was spent by the

senior and middle management on identifying areas and products for rural micro

leasing. Pilot projects have already been started with the leasing of tube well and

other small agriculture related implements.

Institutional Development

The internal systems and control for monitoring the clients were further

strengthened during the period. Since the number of clients had increased, a

number of tasks that were previously done manually, had to be computerised.

Special emphasis was laid on the recovery systems and client monitoring. In-house

expertise on the legal matters and procedures was improved by developing a legal

section. Due to the increase in the number of clients, the number of late payers

and problem cases naturally increased. In order to cope with that, additional staff

was hired and trained.

Support and Training of the Clients

Assisting the client in preparing the financial statements is now standardized.

Our staff prepare the client's financial statements for the last 3 years, with the

help of the information and figures provided by the client. This procedure is followed

in each and every case where the clients cannot prepare the statements

themselves. In cases where the clients have a little knowledge but have not prepared

the accounts, our staff help them prepare the statements.

Some basic documents for clients on cash handling, costing and marketing have

been prepared but we have not had the time to start the training courses. We hope

to do that in the next financial year.

Recoveries

The rental recovery continue to be satisfactory. The overdue rental position of

over 3 months on 30 June 98, according to the Prudential Regulations was 0.44%

of the total portfolio. The provision for potential lease losses was however increased

as a prudent measure.

Most of the over dues are with prior arrangement, such as the fishermen and

some primary schools, and are recoverable eventually. There were 2 willful default

cases. Both lessees have been take to the banking court. We are reasonably hopeful

that in the end the amounts will be recovered. In five other cases the assets were

repossessed and sold in the open market.

Resource Mobilisation

In September 1997, the World Bank started our participation in the Microenterprise

10 year loan. The validity of the Loan expired on 31 March 1998. We have utilized

US$ 1.7 million. The Asian Development Bank Loan (FSIL) disbursements started

in October 1998. This is a 15 years loan with a 3 year grace period. Locally, we

have obtained a term loan from Oman International Bank.

Liaison with other Microcredit Institutions

* Grameen Bank- Bangladesh

Due to the kindness of Professor Muhammad Yunus, the founder of Grameen

Bank, we have established a learning relationship with this profoundly humane

institution.

We have made several visits to Grameen Bank at the invitation of Professor

Muhammad Yunus.

Meeting the Grameen members in the villages is an extremely fulfilling yet

humbling experience. In the process, we learnt a great deal about the Grameen

methodology, systems and procedures.

* Microcredit Summit

"The time has come to recognize microcredit as a powerful tool in the struggle

to end poverty and economic dependence.

We have assembled to launch a global campaign to reach 100 million of the

world's poorest families, especially the women of those families, with credit for

self-employment and other financial and business services, by the year 2005."

This declaration was adopted at' the first ever Microcredit Summit held in

Washington DC in February 1997. The Summit goal is supported by the World

Bank, the regional Development Banks, the UN agencies, the US and other

governments and private commercial and humanitarian institutions.

It was heartening to see the thousands of delegates from some 124 countries,

so enthusiastically committed to the goal of the Summit.

Efforts have already been initiated by the World Bank, the UN and other

development institutions to mobilise the sum of US$ 22 billion needed to provide

credit to the 100 million poorest families around the world.

We were again invited to attend the first follow-up Microcredit meeting held in

New York in June 1998. Mr. Yusuf Sattar represented the company.

Network Leasing is a member of the Council of Practitioners of the Microcredit

Summit Secretariat, Washington, DC.

* DFID (The British Government) is supporting a newly established micro leasing

company in Tanzania. Through the Springfield Development Centre, England,

it invited Network Leasing to provide operational advice to the Tanzanian

company. DFID have appreciated the humble contribution made by NLC.

* St. Mary's University of Maryland USA, is conducting a study on micro finance

and is using NLC as one of the examples of micro credit delivery system.

* SDC (the Government of Switzerland) in its quarterly development journal

published in Geneva, have featured NLC's micro leasing operations as one of

the main events.

Input at the Policy Level

* The Pakistan Development Forum 1998 meetings were held in Islamabad this

year instead of the usual venue, Paris. The World Bank Group (including IFC)

presided over the meeting which was attended by the IMF, the Asian

Development Bank, the European, the U.S. and the Japanese Government

representatives as well as the Government of Pakistan.

The World Bank Group had kindly invited Network Leasing to participate in the

deliberations of the meetings. Mr. Asif Siddiqi represented the company and

presented a paper on micro enterprise development. The paper was distributed

among the participants through the kind courtesy of SDC (the Government of

Switzerland).

Acknowledgement 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 thousands of

small shareholders 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 are grateful to SDC (the Government Switzerland), the World Bank Group, the

Asian Development Bank and the Ministry of Finance, the Government of Pakistan

for their kindness and the support extended to us.

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.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Network Leasing Corporation Limited

as at June 30, 1998 and the related profit and loss account and cash flow statement,

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 accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the

company's business; and

(iii) the business conducted, investments made and the expenditure incurred

during the year were in accordance with the objects of the company;

given to us, the balance sheet, profit and loss account and the cash flow

statement, together with the notes forming part thereof, give the information

required by the Companies Ordinance, 1984 in the manner so required and

respectively give a true and fair view of the state of the company's affairs as at

June 30, 1998 and of the profit and of the cash flows for the year then ended; and

(d) in our opinion 7akat deductible at source under the Zakat and Ushr Ordinance,

1980 was deducted by the company and deposited in the Central 7akat Fund

established under section 7 of that Ordinance.

sd/-

Karachi

Ford Rhodes Robson Morrow

October 27, 1998

Chartered Accountants

BALANCE SHEET AS AT JUNE 30, 1998

Note

1998

1997

Rupees

TANGIBLE FIXED ASSETS

16,103,559

13,122,339

INVESTMENT IN LEASES

Minimum lease payments receivable

202,001,408

168,267,152

Residual value of leased assets

31,202,912

19,424,790

---------------

Installment contract receivable

233,204,320

187,691,942

Unearned finance income

(44,972,065)

(40,708,906)

---------------

Net investment in leases

188,232,255

146,983,036

Less: Current maturity of net investment in leases

(73,845,024)

(53,418,443)

---------------

114,387,231

93,564,593

Less: Provision for potential lease losses

(1,882,323)

(1,102,373)

---------------

112,504,908

92,462,220

LONG TERM DEPOSITS

294,505

199,490

DEFERRED COSTS

1,370,369

3,177,473

CURRENT ASSETS

Current maturity of net investment in leases

73,845,024

53,418,443

Short term investments

700,000

Advances, deposits, prepayments and

other receivables

15,796,524

7,329,612

Cash and bank balances

15,169,263

13,184,263

---------------

105,510,811

74,632,318

---------------

235,784,152

183,593,840

==========

SHARE CAPITAL AND RESERVES

Share capital

100,000,000

Reserves

10,557,918

12,454,053

---------------

110,557,918

112,454,053

LONG TERM FINANCES

69,869,437

28,408,119

OBLIGATIONS UNDER FINANCE LEASE

347,608

18,554

LONG TERM DEPOSITS

24,500,543

17,319,237

CURRENT LIABILITIES

Current maturity of long term liabilities

23,907,598

15,672,397

Short term running finances

4,161,404

Creditors, accrued and other liabilities

6,408,081

4,744,546

Unclaimed dividend

192,967

815,530

---------------

30,508,646

25,393,877

COMMITMENTS

---------------

235,784,152

183,593,840

==========

The annexed notes form an integral part of these accounts

The auditors' report is annexed hereto

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED JUNE 30, 1998

Note

1998

1997

Rupees

INCOME

Income from leasing operations

35,135,742

29,475,036

Other Income

2,295,908

2,188,004

---------------

37,431,650

31,663,040

EXPENDITURE

Direct cost of leases

3,339,141

1,864,996

Administrative and operating expenses

13,332,620

11,100,035

Financial charges

9,708,471

6,196,275

Amortization of deferred costs

1,807,104

1,807,111

Provision for potential lease losses

879,711

471,083

---------------

29,067,047

21,439,500

---------------

Operating profit for the year

8,364,603

10,223,540

Taxation

Current

521,683

311,364

Prior

(260,945)

---------------

260,738

311,364

---------------

PROFIT FOR THE YEAR

8,103,865

9,912,176

Unappropriated profit brought forward

7,956,542

33,501

---------------

Profit available for appropriation

16,060,407

9,945,677

Appropriations

Transfer to special reserve

1,620,773

1,989,135

Interim dividend 10% (1997: Nil) per share

10,000,000

---------------

11,620,773

1,989,135

---------------

Unappropriated profit carried forward

4,439,634

7,956,542

==========

The annexed notes form an integral part of these accounts

CASH FLOW STATEMENT

FOR THE YEAR ENDED JUNE 30, 1998

1998

1997

Note

Rupees

CASH FLOW FROM OPERATING ACTIVITIES

Cash generated from operations

16,444,646

26,644,172

Income tax paid

(4,298,461)

(654,026)

Interest / mark-up paid

(7,104,607)

(5,362,392)

Interest / mark-up received

880,127

2,222,219

Long term deposits

(66,650)

(46,175)

---------------

(10,589,591)

(3,840,374)

---------------

Net cash generated from operating activities