C O N T E N T S. Statement of Compliance with Best Practices of Corporate Governance

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2 C O N T E N T S Corporate Information Vision and Mission Statement Notice of Annual Review Meeting Directors Report Statement of Compliance with Best Practices of Corporate Governance Auditors Review Report on Statement of Compliance with Best Practices of Corporate Governance Auditors Report Balance Sheet Profit and Loss Account Cash Flow Statement Statement of Changes in Equity Notes to the Accounts Pattern of Certificate Holding

3 CORPORATE INFORMATION Board of Directors Mr. S. Ali Raza Mr. Shahid Anwar Khan Dr. Asif A. Brohi Mr. Tajammal H. Bokharee Mr. Muhammad Nusrat Vohra Mr. Wajahat Baqai Mr. Qamar Hussain Mr. Shafiq Khan Chairman Director Director Director Director Director Director Chief Executive Chief Financial Officer/ Company Secretary Audit Committee Auditors Mr. Abbas Azam Mr. Shahid Anwar Khan Dr. Asif A. Brohi Mr. Tajammal H. Bokharee M. Yousuf Adil Saleem & Co. (A member firm of Deloitte Touche Tohmatsu) Chairman Member Member Bankers Legal Advisor Shares Registrar Registered Office National Bank of Pakistan Al Baraka Islamic Bank Standard Chartered Bank Bank Alfalah Limited Habib Bank Limited Allied Bank Limited MCB Bank Limited First Women Bank Limited The Hongkong & Shanghai Banking Corp. Limited Cornelius Lane & Mufti Advocates and Solicitors NawaiWaqt House 4ShahraheFatima Jinnah, Lahore Tel : Fax : Hameed Majeed Associates (Pvt.) Limited H. M. House, 7 Bank Square, Lahore Tel: , Fax: th Floor, NBP RHQs Building, 26 Mc Lagon Road, Lahore Tel: , Fax: URL: info@nbmodaraba.com 2

4 VISION PRESERVE TO REPLACE RIBA DRIVEN INSTRUMENTS WITH ISLAMIC MODES OF FINANCING IN A MANNER TO ACHIEVE OPTIMUM CUSTOMER SATISFACTION BY DEVELOPING SUSTAINABLE AND DEPENDABLE RELATIONSHIPS TO BE AN INSTITUTION OF EXCELLENCE, WHICH WILL CREATE AND MAINTAIN AN ENVIRONMENT OF STATEOFART MANAGEMENT SYSTEM AND A HIGH STANDARD OF INTEGRITY, EFFICIENCY PROFESSIONALISM AND INNOVATION ATTAIN THE STATUS OF MOST PROFESSIONALLY AND PROFITABLY RUN MODARABA AMONG ITS COMPETITORS IT SHALL PLACE A SPECIAL EMPHASIS ON HUMAN RESOURCES DEVELOPMENT, DIGNITY, SECURITY, WELFARE OF PEOPLE WHO OPERATE AND WORK FOR THE MODARABA MISSION THE FUNDAMENTAL MISSION IS TO SEEK THE PLEASURE OF ALLAH THROUGH MAKING HUMBLE CONTRIBUTION IN THE TRANSFORMATION OF OUR MERCANTILE AND FINANCIAL SYSTEM AND BUSINESS DEALINGS IN ACCORDANCE WITH THE PRINCIPLES ENSHRINED IN THE SHARIA COMMITMENTS TO PROVIDE RIBA FREE INVESTMENT AND FINANCING OPPORTUNITIES TO THE INVESTORS, THE BUSINESS COMMUNITY AND INDUSTRY IN ALL BUSINESS DEALINGS OF MODARABA, THE RIGHTS OF ALLAH, THE RIGHTS OF ALL CERTIFICATE HOLDERS AND ALL OTHER RIGHTS SHALL BE SINCERELY SAFEGUARDED 3

5 NOTICE OF 5TH ANNUAL REVIEW MEETING rd Notice is hereby given that the 5 Annual Review Meeting of certificate holders of First National th Bank Modaraba will be held on Friday, October 3, 2008 at :00 a.m. at 4 Floor, NBP RHQs Building, 26 McLagon Road, Lahore to review the performance of the Modaraba for the year ended June 30, 2008 The certificate holders whose names appear on the Register of Certificate Holders of First National Bank Modaraba as on October 23, 2008 will be eligible to attend the Annual Review Meeting. The Certificate Transfer Book will remain closed from November 0, 2008 to November 0, 2008 (both days inclusive) for the purpose of entitlement of dividend. All transfers received in order, up to close of business on October 3, 2008 at our Registrar's Office, Hameed Majeed Associates (Pvt.) Limited, H.M House, 7 Bank Square, Lahore will be considered in time. By order of the Board Abbas Azam Company Secretary National Bank Modaraba Management Company Limited Managers of First National Bank Modaraba Lahore: October 08, 2008 Note: CDC account holders will have to follow the under mentioned guidelines: In case of individuals, the account holder and/ or person whose securities are in group account and their registration details are uploaded as per the Regulations, shall authenticate their identity by showing original National Identity Card (NIC) or original passport at the time of attending the meeting (CDC account holders are also requested to bring their participant ID number and account number in CDS). In case of corporate entity, board of directors' resolution/ power of attorney with specimen signature of the nominee shall be produced (unless it has been provided earlier) at the time of meeting. 4

6 . Financial Results: Year Ended June 30, 2008 DIRECTORS' REPORT Board of Directors of National Bank Modaraba Management Company Limited (NBMMCL), the management Company of First National Bank Modaraba (FNBM), is pleased to present the directors report on the 5th annual accounts of FNBM for the period ended June 30, These accounts have been audited by the statutory auditors of the Modaraba and are accompanied by their audit report. Year Ended June 30, 2007 Year Ended June 30, 2006 Year Ended June 30, 2005 ( Amounts in Rupees) 7 Months Ended June 30, 2004 Balance Sheet Size 2,778,74,825 2,20,495,83 2,074,594,990,206,08,90 390,605,324 Total Equity 306,473,205 33,090, ,362, ,022, ,393,33 Total Operating & Other Income 227,964, ,32,56 54,36,692 53,338,797 0,982,36 Operating & Financial Exp. 92,672,077 76,003,033 20,54,403 34,689,455 5,79,933 Profit for the period 35,29,99 46,29,528 33,820,289 8,649,342 5,90,428 Modaraba Co. s Management Fee 3,529,99 4,62,953 3,382,029,864,934 59,428 Net profit after tax 3,762,792 4,56,575 30,438,260 6,602,966 4,209,875 Earning per certificate Return on Assets (%) Return on Equity (%) Dividend Yield (%) Breakup value per certificate Sector Outlook: Fiscal year proved to be a difficult year for Pakistan, with several political and economic events transpiring unexpectedly. Financial sector in Pakistan continued declining trend during the period under review specially in the later half of the year. As a result of tight monetary controls implemented by the State Bank of Pakistan a sharp rise was witnessed in mark up rates. This increase in markup rates not only affected the credit demand in the market but also squeezed the borrowinglending spreads of the financial institutions. Modaraba sector being a small part of the financial sector of Pakistan was directly affected by the above measures. Modarabas heavily rely on the banks to meet their appetite for funds. As a result of rising trend in KIBOR the cost of funds of modarabas has increased which has disturbed their profitability. Another challenge faced by modrabas is direct competition with Islamic banks and Islamic banking divisions (IBDs) of conventional banks. In the presence of Islamic banks and IBDs of conventional banks it is becoming difficult for modarabas to increase their share in the market. With the consistent efforts of the Management of FNBM and providing quality service to its clients FNBM has succeeded in increasing its share in the market significantly during the period under review. 5

7 Review of Operations: Despite the fact that overall economic, political & law & order situation of the country have adversely effected the business industry, FNBM's marketing team, with their consistent efforts, managed to explore new business opportunities. Consequently, the size of balance sheet has increased by 26.23% as compared to the last year. The major product of the Modaraba is Ijarah finance. A growth has been recorded in Net Investment in Ijarah which increased by 2% from Rs..335 billion as on June 30, 2007 to Rs..493 billion at the end of current year. FNBM's Morabaha investments are also increased by 44% from Rs. 58 million as on June 30, 2007 to Rs.840 million at the end of current year. The total income of the Modaraba increased 2.7% from Rs.222 million in the last year to Rs.228 million in the current year.net profit decreased by 23.49% from Rs.4.57 million to Rs million. Decrease in net profit of the Modaraba is mainly because of downwards trend in the capital market of Pakistan which caused loss of Rs.4.07 million to the Modaraba as compared to the profit of Rs.7.95 million in the corresponding period. The Modaraba has managed to mobilize funds from various financial institutions at competitive rates. In addition, the Modaraba has been successful in raising substantial amount of funds through issuance of Certificates of Musharika (COMs). We believe in steady and sustainable growth backed by the policy of low risk. This policy has resulted into modest but sustainable profitability coupled with sound and healthy asset portfolio comprising of clients of good credit rating and lower level of risk. The asset portfolio is fairly diversified both in terms of sector, asset type and geographical dispersion. 3. Profit Distribution: The Board in its meeting held on October 08, 2008 has decided to distribute its profits, amounting to One rupee (0%) per certificate subject to Zakat and tax deduction at source as applicable. 4. Entity Rating: JCRVIS has upgraded long term entity rating by two notches to A+ (A plus) from A (A minus ) and short term entity rating to A from A2 in March, 2008 with a Stable outlook. These ratings are one of the highest in the entire Modaraba sector. This indicates low expectation of credit risk and strong capacity for timely payment of financial commitments. 5. Future Outlook: Financial sector in Pakistan is facing a lot of challenges in current scenario due to political instability, high rate of inflation, rising trend in mark up rates and poor law and order situation. FNBM plans to face these challenges by exploring new market opportunities to increase its market share and focusing on such market segments which have the capacity and financial strength to absorb the above factors. The objective of FNBM is to offer an alternative avenue of financial intermediation, to those who are interested in riba free financing/income. Modaraba can serve as a key element that can adequately cater corporate / consumer sector's financing requirements, while ensuring that it nurtures faith based system of financing consistent with the Shariah principles. 6. Corporate and Financial Reporting Framework: The financial statements, prepared by the management of the Modaraba, present fairly its state of affairs, the result of its operations, cash flows and changes in equity. Proper books of accounts of the Modaraba have been maintained. Accounting policies have been consistently applied in preparation of financial statements and accounting estimates are based on reasonable and prudent judgment. International Financial Reporting Standards, International accounting standards, and Islamic Financial Accounting Standards as applicable to Modarabas in Pakistan, have been followed in preparation of financial statements. The system of internal control, which is sound in design is in place and is being continuously reviewed by internal audit. The process of review will continue and any weakness in controls will be removed. 6

8 Board is satisfied with the Modaraba's ability to continue as going concern. There has been no material departure from the best practices of corporate governance, as detailed in the listing regulations. There are no statutory payments on account of taxes, duties, levies and charges, which are outstanding as on June 30, 2008 except those disclosed in the financial statements. During the year four (04) meetings of the Board of Directors were held. Attendance by each directors is as follows: Names of Directors: i. Mr. S. Ali Raza 4 ii. Mr. Shahid Anwar Khan 4 iii. Dr. Asif A. Brohi 4 iv. Mr. Wajahat Baqai 4 v. Mr. Qamar Hussain 3 vi. Mr. Tajammal H. Bokharee 4 vii. Mr. Muhammad Nusrat Vohra 4 viii. Mr. Shafiq Khan 4 No of Attendance Leave of absence was granted to directors who could not attend some of the Board meetings. The pattern of certificate holders is annexed. 7. Auditors: The present auditors Messrs M. Yousuf Adil Saleem & Co., Chartered Accountants, being due for retirement, have offered themselves for re appointment for the year ending June 30, Their appointment is subject to approval by the Registrar of Modaraba Companies and Modarabas. 8. Acknowledgement: The Board would like to take this opportunity of expressing gratitude and thanks to our valued customers for their patronage and support, the Securities and Exchange Commission of Pakistan, Karachi Stock Exchange, Lahore Stock Exchange and Modaraba Association of Pakistan for their continuance support and guidance. Special thanks to our certificate holders for the trust and confidence reposed in us and the Modaraba's staff for their commitment and dedicated services. For and on Behalf of the Board Shafiq Khan Chief Executive Officer Dated: October 08,

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11 REVIEW REPORT TO THE CERTIFICATE HOLDERS ON STATEMENT OF COMPLIANCE WITH THE BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE We have reviewed the Statement of Compliance with the best practices contained in the Code of Corporate Governance by the Board of Directors of National Bank Modaraba Management Company Limited ( the Management Company ) in respect of First National Bank Modaraba ( the Modaraba ) to comply with the Listing Regulations of the Karachi and Lahore Stock Exchanges in Pakistan where the Modaraba is listed. The responsibility for compliance with the Code of Corporate Governance is that of the Board of Directors of the Management Company. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Modaraba's compliance with the provisions of the Code of Corporate governance and report if it does not. A review is limited primarily to inquiries of the Modaraba personnel and review of various documents prepared by the Modaraba to comply with the Code. As part of our audit of financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We have not carried out any special review of the internal control system to enable us to express an opinion as to whether the Board's statement on internal control covers all controls and the effectiveness of such internal controls. Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance does not appropriately reflect the Modaraba's compliance in all material respects, with the best practices contained in the Code of Corporate Governance as applicable to the Modaraba for the year ended June 30, M. YOUSAF ADIL SALEEM & CO. (Chartered Accountants) Lahore: October 08,

12 AUDITORS' REPORT TO THE CERTIFICATE HOLDERS We have audited the annexed balance sheet of First National Bank Modaraba as at June 30, 2008 and the related profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof (hereinafter referred to as the financial statements), for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. These financial statements are the modaraba company's (National Bank Modaraba Management Company Limited) responsibility who is also responsible to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards as applicable in Pakistan and the requirements of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980 (XXXI of 980), and the Modaraba Companies and Modaraba Rules, 98. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any 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 policies and significant estimates made by the modaraba company, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that: (a) (b) (c) in our opinion, proper books of accounts have been kept by the modaraba company in respect of First National Bank Modaraba as required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980 (XXXI of 980), and the Modaraba Companies and Modaraba Rules, 98; in our opinion: (i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980 (XXXI of 980), and the Modaraba Companies and Modaraba Rules, 98, and are in agreement with the books of accounts and are further in accordance with the accounting policies consistently applied; (ii) the expenditure incurred during the year was for the purpose of the modaraba's business; and (iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects, terms and conditions of the modaraba; in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980 (XXXI of 980), and the Modaraba Companies and Modaraba Rules, 98, in the manner so required and respectively give a true and fair view of the state of the modaraba's affairs as at June 30, 2008 and of the profit, its cash flows and changes in equity for the year then ended; and (d) in our opinion, Zakat deductible at source under the Zakat and Ushr Ordinance, 980 (XVIII of 980) was deducted by the modaraba and deposited in the central Zakat fund established under section 7 of that Ordinance. Lahore M. YOUSAF ADIL SALEEM & CO. Date: October 08, 2008 (Chartered Accountants)

13 BALANCE SHEET AS AT JUNE 30, 2008 ASSETS Current Assets June 30 June Note Rupees Rupees Bank balances 3 2,264,803 6,794,280 Advances, prepayments and other receivables 4 9,497,00 50,09,560 Accrued profit 5 29,79,250 9,829,293 Shortterm investments 6 39,33,377 28,53,349 Shortterm morabaha investment secured 7 660,947, ,566,025 Shortterm musharaka investment unsecured 8 00,000,000 Current portion of noncurrent assets 9 637,86, ,635,37,599,575,729,238,069,644 NonCurrent Assets Net investment in ijarah 0 965,093, ,364,786 Longterm morabaha investment secured 97,32,492 27,434,272 Longterm musharaka investment secured 2 2,94,80 4,000,000 Longterm loans and deposits 3,205,28 933,72 Deferred cost 4 839,83 2,839,949 Fixed assets 5.,997, ,450,79,399, ,426,69 Total Assets 2,778,974,825 2,20,495,83 LIABILITIES Current Liabilities Creditors, accrued and other liabilities 6 54,402,389 47,585,066 Shortterm finance secured 7 76,502, ,582,772 Shortterm certificates of musharakaunsecured 8 229,900,000 56,700,000 Current portion of longterm liabilities 9 639,537, ,83,65,640,34,624,233,699,453 LongTerm Loans, Deposits and Deferred Liabilities Longterm security deposits 20 9,87,833 67,77,63 Longterm certificates of musharakaunsecured 2 02,300,000 Longterm finance secured ,500, ,500,008 Deferred morabaha income 23 50,488,59 7,434,272 Total Liabilities 2,472,50,620,888,405,364 NET ASSETS 306,473,205 33,090,449 REPRESENTED BY Capital and reserves Certificate capital ,000, ,000,000 Reserves 56,473,205 63,090,449 CONTINGENCIES AND COMMITMENTS 25 The annexed notes from to 39 form an integral part of these financial statements. 306,473,205 33,090,449 CHIEF EXECUTIVE OFFICER DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 08,

14 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2008 For the year For the year ended June 30, ended June 30, Note Rupees Rupees INCOME Income from ijarah 47,908,47 43,029,578 Profit on morabaha investment 76,40,247 67,302,362 Profit on musharaka investment 6,374,886 3,392,262 Profit on bank deposits 28,43 02,384 (Loss) / gain on shortterm investments 26 (4,070,770) 7,946,950 Other income 27,22, , ,964, ,32,56 EXPENDITURES Finance costs 28 76,240,53 6,884,206 Operating expenses 29 6,43,924 4,8,827 92,672,077 76,003,033 35,29,99 46,29,528 Modaraba company's management fee 3,529,99 4,62,953 PROFIT FOR THE YEAR 3,762,792 4,56,575 Unappropriated profit brought forward 49,24,4 4,000,88 Profit available for appropriation 80,976,933 82,57,456 Appropriation : Transfer to statutory reserve 6,352,558 8,303,35 Profit distribution for the year ended June 30, Rs..2 per certificate 30,000,000 25,000,000 36,352,558 33,303,35 Unappropriated profit carried forward 44,624,375 49,24,4 EARNINGS PER MODARABA CERTIFICATE BASIC AND DILUTED The annexed notes from to 39 form an integral part of these financial statements. CHIEF EXECUTIVE OFFICER DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 08,

15 CASH FLOW STATEMENT FOR THE YEAR ENDED JUNE 30, 2008 CASH FLOWS FROM OPERATING ACTIVITIES Note Rupees Rupees Profit for the year 3,762,792 4,56,575 Adjustments for: Depreciation / amortization 64,367 54,306 Amortization of deferred costs 2,000,36 2,000,36 Loss / (gain) in value of shortterm investments 3,00,943 (4,908,84) Loss / (gain) on sale of shortterm investments 2,980,954 (930,36) Finance costs 76,240,53 6,884,206 Profit on bank deposits (28,43) (02,384) Dividend income (,92,27) (2,08,405) Gain on disposal of fixed assets (37,83) 82,362,82 56,376,34 24,24,974 97,892,889 Decrease / (increase) in advances, prepayments and other receivables 30,337,748 (22,52,055) Increase in accrued profit (0,05,026) (4,92,2) (Increase) / decrease in shortterm morabaha investment (5,952,286) 8,99,953 (Increase) / decrease in shortterm musharaka investment (00,000,000) 30,000,000 Increase in investment in ijarah (57,588,654) (42,940,362) Increase in longterm morabaha investment (43,000,000) (2,206,464) Decrease / (Increase) in longterm musharaka investment 3,058,99 (4,000,000) Increase in security deposits against ijarah 47,527,347 54,962,377 Increase / (decrease) in creditors, accrued and other liabilities 2,70,842 (4,662,74) (433,497,830) (96,99,386) Cash (used in) / generated from operations (29,372,856) 00,973,503 Finance costs paid (8,593,673) (5,704,784) Income taxes paid (60,792) (272,45) Dividend income received 2,238,730,833,405 Profit received on bank deposits 379,482 9,37 (79,036,253) (50,24,53) Net cash used in operating activities (398,409,09) (49,50,650) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (,958,655) (20,000) Proceeds on disposal of fixed assets 545,000 Longterm loans and deposits (409,546) (9,694) Shortterm investments (25,549,959) 2,469,882 Net cash (used in) / from investing activities (27,373,60) 2,230,88 CASH FLOWS FROM FINANCING ACTIVITIES Longterm finance obtained 600,000, ,000,000 Payment of longterm finances (60,66,666) (308,499,263) Shortterm certificate of musharaka net 73,200,000 56,700,000 Longterm certificate of musharaka 02,300,000 Increase / (Decrease) in shortterm finance net 286,99,458 (76,962,67) Profit distribution to the modaraba certificate holders (30,000,000) (25,000,000) Net cash from financing activities 43,252,792 2,238,570 NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 5,470,523 (6,68,892) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,794,280 3,476,72 CASH AND CASH EQUIVALENTS AT END OF YEAR 3 2,264,803 6,794,280 The annexed notes from to 39 form an integral part of these financial statements. For the year ended June 30, 2008 For the year ended June 30, 2007 CHIEF EXECUTIVE OFFICER DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 08,

16 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED JUNE 30, 2008 The changes in equity are as follows: Certificate capital Statutory reserve Net unrealized gain / (loss) in the value of securities available for sale Unappropriated profit Total reserves Total equity rupees Balance as at June 30, ,000,000 0,250,220 (5,888,65) 4,000,88 45,362, ,362,450 Profit for the year ended June 30, ,56,575 4,56,575 4,56,575 Transfer to statutory reserve 8,303,35 (8,303,35) Net unrealized gain in the value of securities available for sale Profit distribution for the year ended June 30, Rs. per modaraba certificate.,2,424,2,424,2,424 (25,000,000) (25,000,000) (25,000,000) Balance as at June 30, ,000,000 8,553,535 (4,677,227) 49,24,4 63,090,449 33,090,449 Profit for the year ended June 30, ,762,792 3,762,792 3,762,792 Transfer to statutory reserve 6,352,558 (6,352,558) Net unrealized loss in the value of securities available for sale Profit distribution for the year ended June 30, Rs..20 per modaraba certificate. (8,380,036) (8,380,036) (8,380,036) (30,000,000) (30,000,000) (30,000,000) Balance as at June 30, ,000,000 24,906,093 (3,057,263) 44,624,375 56,473, ,473,205 Statutory reserve represents profit set aside to comply with the Prudential Regulations for Modarabas issued by the Securities and Exchange Commission of Pakistan. The annexed notes from to 39 form an integral part of these financial statements. CHIEF EXECUTIVE OFFICER DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 08,

17 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2008 GENERAL INFORMATION..2 First National Bank Modaraba ("the Modaraba") is a multi purpose, perpetual and multi dimensional Modaraba formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980 and rules framed thereunder and is managed by National Bank Modaraba Management Company Limited (a wholly owned subsidiary of National Bank of Pakistan), incorporated in Pakistan under the Companies Ordinance, 984 and registered with Registrar of Modaraba Companies. The registered office of the Modaraba is situated at 5th floor, National Bank of Pakistan, Regional Headquarters Building, 26 Mc Lagon Road, Lahore. The Modaraba is listed on Karachi and Lahore stock exchanges. The Modaraba commenced its business operations on December 04, 2003 and is currently engaged in various Islamic modes of financing and businesses including Ijarah, Musharaka and Morabaha arrangements. These financial statements are presented in Pak Rupees, which is the Modaraba's functional and presentation currency. 2 SIGNIFICANT ACCOUNTING POLICIES 2. Statement of compliance These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 980, Modaraba Companies and Modaraba Rules, 98 and Prudential Regulations issued by the Securities and Exchange Commission of Pakistan (the Modaraba Regulations). Approved accounting standards comprise of such International Financial Reporting Standards ("IFRSs") as notified under the provisions of the Companies Ordinance, 984 and made applicable to Modarabas under Modaraba Companies and Modaraba (Flotation and Control) Ordinance,980. Wherever, the requirements of relevant laws or directives issued by the Securities and Exchange Commission of Pakistan and the requirements of 'the Modaraba Regulations' differ from the requirements of these standards, the requirements of the relevant laws, directives and regulations take precedence. 2.2 Initial application of a standard or an interpretation Amendment to IAS "Presentation of Financial Statements Capital Disclosures", introduces new disclosures about the level of an entity's capital and how it manages capital. Adoption of this amendment has only resulted in additional disclosures given in note 30 to the financial statements. 2.3 IFRS that are implemented but have no impact on the financial statements of the Modaraba The following standards, interpretations and amendments of approved accounting standards are effective for accounting periods beginning from the dates specified below. These standards are either not relevant to the Company's operations or are not expected to have significant impact on the Company's financial statements other than increase in disclosures in certain cases: Revised IAS Presentation of financial statements (effective for annual periods beginning on or after 0 January 2009). Revised IAS 23 Borrowing costs (effective from 0 January 2009). IAS 29 Financial Reporting in Hyperinflationary Economies (applicable for period beginning from 28 April 2008). 6

18 IAS 32 (amendment) Financial instruments: Presentation and consequential amendment to IAS Presentation of Financial Statements (effective for annual period beginning on or after 0 January 2009). IFRS 2 (amendment) Sharebased payments (effective for annual periods beginning on or after 0 January 2007). IFRS 3 (amendment) Business Combinations and consequential amendments to IAS 27 Consolidated and separate financial statements, IAS 28 Investment in associates and IAS 3 Interest in Joint Ventures. (effective prospectively to business combination on or after 0 January 2007) IFRS 5 Non current assets held for sale and discontinued operation (applicable for periods beginnings from 0 January 2007). IFRS 6 Exploration for and evaluation of mineral of mineral resources (applicable for periods beginnings from 0 January 2007). IFRS 7 Financial Instruments: Disclosures (applicable for periods beginnings from 28 April 2008). IFRS 8 Operating Segments (effective from 0 January 2009). IFRIC 2 Service Concession Arrangements (effective for annual periods beginning on or after 0 January 2008). IFRIC 3 Customer Loyalty Programmes (effective for annual periods beginning on or after 0 July 2008). IFRIC 4 IAS 9 The Limit on Defined Benefit Asset, Minimum Funding Requirements and their interaction (effective for annual periods beginning on or after 0 January 2008). IFRIC 5 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 0 January 2009). IFRIC 6 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 0 October 2008). IFAS 2 Ijarah (effective for annual periods beginning on or after 0 July 2007) New Islamic Financial Accounting Standard ("IFAS")2 The Islamic Financial Accounting Standard ("IFAS") 2 'Ijarah' issued by the Institute of Chartered Accountants of Pakistan was promulgated by the Securities and Exchange Commission of Pakistan ("SECP") vide an SRO dated May 22, As per the above SRO, this IFAS has to be followed for the purposes of preparation of the financial statements of Modarabas while accounting for the 'Ijarah' (lease) transaction. Ijarah has been defined in the above IFAS as 'a contract whereby the owner of an asset other than consumable, transfers its usufruct to another person for an agreed period for an agreed consideration'. These transactions have to comply with the shariah essentials in order to qualify as an 'Ijarah' arrangement. Under the above IFAS2, the 'Ijarah' transactions shall be accounted for in the following manner in the books and records of the Modaraba: Muj'ir (lessors) shall present the assets subject to Ijarah in their balance sheet according to the nature of asset, distinguished from the assets in own use. 7

19 Costs, including depreciation on the assets given on Ijarah, incurred in earning the Ijarah income shall be recognized as an expense. The above IFAS is operative for financial statements covering the period beginning on or after July 0, 2007 and is required to be followed on those Ijarah which commence after the above mentioned date. The Modaraba Association of Pakistan ("MAP") has applied to Securities and Exchange Commission of Pakistan for deferment of the effective date of the said IFAS. SECP vide its letter No.SC/M/MAP/2008 dated February 25, 2008 has informed that the deferment is under consideration. MAP is following up the matter with SECP and it is expected that the requisite deferment will be granted, therefore, till the resolution of the matter Modaraba has not adopted the said standard. During the year Modaraba disbursed lease finance amounting to Rs. 650 million. There will be no significant impact on the profit for the year and the assets of the Modaraba if this standard is made applicable on the financial statements of the Modaraba. Currently the financial information of Modaraba relating to Ijara transanctions has been prepared under the requirements of IAS7 "Leases". 2.4 Basis of preparation These financial statements have been prepared under the historical cost convention modified by: investments carried at fair value in accordance with the requirements of International Accounting Standard39 " Financial Instruments: Recognition and Measurement " accounting for morabaha investment as directed by IFAS. 2.5 The principal accounting policies adopted are set out below: 2.5. Significant estimates The preparation of financial statements in conformity with International Financial Reporting Standards ("IFRSs") and International Accounting Standards ("IASs") ("the Standards") requires management to make judgments, estimates and assumptions that affect application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under circumstances, results of which form the basis of making judgment about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which estimates are revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of the standards that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in the ensuing paragraphs. Fixed assets The Modaraba reviews the useful lives of fixed assets on regular basis. Any change in the estimates in future years might affect the carrying amounts of the respective items of fixed assets with a corresponding effect on the depreciation charge and impairment Ijarah accounting The Modaraba provides assets to its clients under ijarah agreements as approved by the Religious Board. These ijarah are recorded in the books of accounts as finance lease in line with International Accounting Standard 7 "Leases" as the "ijarah" arrangements approved by the Religious Board significantly resemble the "Finance Lease" as per IAS7. Amount due from lessees under finance leases are recorded as receivables at the amount of the net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the net investment outstanding in respect of the leases. 8

20 Net investment in ijarah is stated at present value of minimum ijarah payments. Impairment losses on nonperforming ijarah are recognized at higher of provision required in accordance with the Prudential Regulations for Modarabas or at a level which in the judgment of the management is adequate to provide for the potential ijarah losses. These losses can be reasonably anticipated as the difference between the carrying amount of receivables and present value of expected cash flows discounted at the rates implicit in the ijarah agreement Creditors and other liabilities Creditors and other liabilities are measured at cost which is the fair value of the consideration to be paid in the future for goods and services received whether billed to the Modaraba or not Provisions Provisions are recognized when the Modaraba has a present, legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. However, provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates Fixed assets Fixed assets are stated at cost less accumulated depreciation and impairment in value, if any. Asset's residual values, if significant and their useful lives reviewed and adjusted, if appropriate, at each balance sheet date. When parts of an item of fixed assets have different useful lives, they are recognized as separate items of fixed assets. Repair and maintenance are charged to income during the period in which these are incurred. Major renewals and improvements are capitalized. Depreciation is charged to income applying the straightline method over the estimated useful life. In respect of additions and disposals during the year, depreciation is charged from the month of acquisition and up to the month preceding the disposal respectively. Gains or losses on disposal of fixed assets are taken to profit and loss account Intangible Assets Expenditure incurred on intangible asset is capitalized and stated at cost less accumulated amortization and any identified impairment loss. Intangible assets are amortized using the straight line method over a period of 3 years Investments All investments, other than "investments at fair value through profit or loss", are initially recognized on tradedate at cost, comprising of fair value of consideration and transaction cost directly attributable to cost. Its classification is made on the basis of intended purpose of holding such investment. The subsequent measurement on the balance sheet date is carried out on the following basis: Available for sale financial assets Investment securities held by the Modaraba which may be sold in response to needs for liquidity or changes in interest rates or equity prices are classified as available for sale. These are initially recognized at fair value plus transaction cost and subsequently remeasured at fair value. The investment for which quoted market price is not available, are measured at costs as it is not possible to apply any other valuation methodology. Gains and losses arising from remeasurement at fair value is recognized directly in the equity under fair value reserve until sold, collected or otherwise disposed off at which time, the cumulative gain or loss previously recognized in equity is included in profit and loss account. 9

21 Financial assets at fair value through profit and loss These are investments designated at fair value through profit or loss at inception. These are initially measured at fair value and changes on remeasurement are taken to profit and loss account. Held to maturity investments Held to maturity investments are financial assets with fixed or determinable payments and fixed maturity that the Modaraba has the positive intent and ability to hold to maturity. These are initially recognized at cost inclusive of transaction cost and are subsequently carried at amortized cost using effective interest rate method. Derecognition All investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Modaraba has transferred substantially all risks and rewards of ownership Receivables Other receivables are carried at original invoice amount less an estimate made for doubtful receivables based on review of outstanding amounts at the year end. Balances considered bad and irrecoverable are written off when identified Morabaha investment Morabaha investments are stated net of provision. Provision is recognized in accordance with Prudential Regulations for Modarabas or on the estimate of management, whichever is higher. Morabaha receivable is recorded by the Modaraba at the invoiced amount and disclosed as such in the balance sheet. Purchases and sales under morabaha and the resultant profit is accounted for on the culmination of morabaha transaction. However, the profit on that portion of sales revenue not due for payment is deferred by accounting for by a debit to "Unearned morabaha income " account with the corresponding credit to "Deferred morabaha income" account and shown in the balance sheet as liability Musharaka investment Musharaka investments are stated net of provision. Provision is recognized in accordance with Prudential Regulations for Modarabas or on the estimate of management, whichever is higher Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and balances with banks Impairment The Modaraba assesses at each balance sheet date whether there is any indication that assets, except deferred tax assets, may be impaired. If such indication exists, the carrying amounts of such assets are reviewed to assess whether they are recorded in excess of their recoverable amount. Where carrying values exceed the respective recoverable amount, assets are written down to their recoverable amounts and the resulting impairment loss is recognized in profit and loss account. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. Where impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised recoverable amount but limited to the extent of initial cost of the asset. Reversal of impairment loss is recognized as income. The gain or loss on disposal of an assets represented by the difference between the sale proceeds and the carrying amount of the asset is recognized as an income. 20

22 2.5.3 Financial instruments Financial assets and liabilities are recognized when the Modaraba becomes a party to contractual provisions of the instrument and derecognized when the Modaraba loses control of the contractual rights that comprise the financial asset and in case of financial liability when the obligation specified in the contract is discharged, cancelled or expired. Other particular recognition methods adopted by the Modaraba are disclosed in the individual policy statements associated with each item of financial instruments. Gain or losses if any, on realization or settlement / subsequent measurement and derecognition of financial assets and liabilities are included in net profit and loss in the period in which it arises Offsetting of financial assets and financial liabilities A financial asset and a financial liability is offset and the net amount reported in the balance sheet, if the Modaraba has a legal enforceable right to setoff the transaction and also intends either to settle on a net basis or to realize the asset and settle the liability simultaneously Revenue recognition i ii iii iv v vi Revenue is recognized on the following basis: For ijarah transactions, the unearned finance income is deferred and amortized to income over the term of ijarah, applying the annuity method to produce a constant rate of return on the net investment in ijarah. Unrealized ijarah income on potential lease losses is excluded from the income from ijarah operations in accordance with the requirements of Prudential Regulations for Modaraba issued by Securities and Exchange Commission of Pakistan. Profit on morabaha investment is recognized on prorata accrual basis, calculated on number of days funds are utilized. Return on deposits with bank is recognized on accrual basis. Profit on investment under musharaka arrangements is recognized on accrual basis and additional profit, if any, is recognized on declaration by the investee company in accordance with terms of issue. Dividend income is recognized when the right to receive dividend is established. Income from fee and commission is recognized as and when it becomes due Borrowing costs Borrowing costs are recognized as an expense in profit and loss account in the period in which they are incurred Taxation Current Under the current tax law, the income of nontrading Modarabas is exempt from Income Tax provided that they distribute ninety percent of its profits as cash dividend to the certificate holders out of current year's total profit after appropriating statutory reserves. Where such profit is not distributed, provision for tax is made on taxable income at the current tax rates applicable to Modaraba after taking into account the available tax exemptions and tax credits, if any. Deferred Deferred tax is provided using the liability method for all temporary differences at the balance sheet date between tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 2

23 2.5.8 Profit distribution Deferred income tax asset is recognized for all deductible temporary differences and carry forward of unused tax losses, if any, to the extent that it is probable that taxable profit will be available against which temporary differences and tax losses can be utilized. Deferred income tax assets and liabilities are measured at the tax rate that are expected to apply to the period when the assets realized or the liabilities settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. Profit distribution is recognized in the period in which it is distributed. Related party transactions Transactions with related parties are priced on arm's length basis. determined on commercial terms and conditions. Deferred costs Deferred costs is amortized over the period of five years. June 30 June BANK BALANCES Note Rupees Rupees Current accounts profit bearing Current accounts non profit bearing Profit & loss sharing account Prices for these transactions are 3.,570,52 6,058, ,65 629,62 06,46 2,264,803 6,794, The balances in profit bearing accounts carry profit ranging between.50% to 2.00% (June 30, 2007:.50% to 2.00%) per annum. 4 ADVANCES, PREPAYMENTS AND OTHER RECEIVABLES Advances for ijarahsecured, considered good 4,36,52 43,028,445 Prepayments 229,294 49,28 Receivables from sale of sharesunsecured, considered good 2,897,902 Other advances and receivablesunsecured, considered good 4,558,745 3,86,67 Dividend receivable 80, ,603 Tax deducted at source 84,994 24,202 Income tax refundable 53,330 53,330 Advance Income Tax 54,26 54,26 9,497,00 50,09,560 5 Accrued profit Accrued profit on : Morabaha investment 6,865,87 0,029,032 Musharaka investment 2,09,63 93,572 Ijarah 0,735,4 9,58,545 Bank deposits 27,075 88,44 29,79,250 9,829,293 6 SHORTTERM INVESTMENTS 6. Financial assets at fair value through profit and loss Available for sale financial assets 7,078,369 6,023, ,253,008 2,29,76 39,33,377 28,53,349 Detail of shortterm investments is given in "Annexure " which is an integral part of these financial statements. This represents fund set aside by the Modaraba to comply with the requirements of the Registrar Modarabas for the issuance of certificates of musharaka. This fund is maintained at minimum of 5.00% of the certificates of musharaka outstanding at any month end. 22

24 June 30 June SHORTTERM MORABAHA INVESTMENT SECURED Note Rupees Rupees Shortterm morabaha investment 64,960, ,008,047 Add : unearned morabaha income 23 8,986,720 6,557, ,947, ,566,025 These represent investments under Morabaha arrangements on deferred payment basis at specified profit margins. These carry profit at the rate ranging from.23% to 9.45% (June 30, 2007:.73% to 5.35%) per annum. These are secured against charge over fixed and current assets, personal guarantees of the directors of customer companies, demand promissory notes and post dated cheques varying from case to case basis. 8 SHORTTERM MUSHARAKA INVESTMENT UNSECURED It is unsecured investment with a financial institution under musharaka arrangement. It carries profit at the rate of 4.55% (June 30, 2007: Nil) per annum. 9 CURRENT PORTION OF NONCURRENT ASSETS Net investment in ijarah 0 527,495, ,635,697 Longterm morabaha investment secured 80,880,268 4,697,437 Longterm musharaka investment secured 2 29,000,000 4,000,000 Longterm loans and deposits 3 440,33 302, ,86, ,635,37 0 NET INVESTMENT IN IJARAH Minimum ijarah rentals receivable 0.,55,567,269,372,439,99 Add: residual value 239,858,693 83,279,598 Gross investment in ijarah 0.2,755,425,962,555,79,57 Less: unearned finance income 262,836, ,79,034 Net investment in ijarah 0.3,492,589,37,335,000,483 Less: current portion 9 527,495, ,635, ,093, ,364, Minimum ijarah rentals receivable Due within one year Due after one year but not later than five years 676,424,9 564,46, ,42, ,977,96,55,567,269,372,439, Gross investment in ijarah Due within one year Due after one year but not later than five years 78,225,85 58,538,62,037,200, ,8,355,755,425,962,555,79,57 23

25 Net investment in ijarah Due within one year Due after one year but not later than five years General description of significant ijarah arrangements June 30 June 30 Rupees Rupees 527,495, ,635, ,093, ,364,786,492,589,37,335,000,483 The Modaraba has entered into various ijarah arrangements at profit rates ranging from 5.00% to 8.35% (June 30, 2007: 5.00% to 4.26%) per annum. The arrangements are for three to five years period. These are secured against assets under ijarah, personal / corporate guarantees, promissory notes given by lessees and other collaterals. Facilities extended to National Bank of Pakistan during the year amounting to Rs million (June 30, 2007: Rs million). Note LONGTERM MORABAHA INVESTMENT SECURED Longterm morabaha investment 98,000,000 55,000,000 Add: unearned morabaha income 23 80,20,760 4,3, ,20,760 69,3,709 Less: current portion 9 80,880,268 4,697,437 97,32,492 27,434,272 These represent investment under morabaha arrangements on deferred payment basis at a specified profit margin. These carry profit at the rate ranging from.23% to 9.45% (June 30, 2007: 2.02% to 2.83%) per annum and are secured against charge over fixed and current assets, personal guarantees of the directors of customer companies, demand promissory notes and post dated cheques varying from case to case basis. 2 LONGTERM MUSHARAKA INVESTMENT SECURED Longterm musharaka investment Less: current portion 4,94,80 45,000, ,000,000 4,000,000 2,94,80 4,000,000 These represent investment under musharaka arrangements. These carry profit at the rate ranging from 2.00% to 6.05% (June 30, 2007: 2.02% to 2.83%) per annum and are secured against first hypothecation over current assets. The arrangements are for two to five years period. 3 LONGTERM LOANS AND DEPOSITS Loans to employeessecured 3.,605,76,96,25 Deposits with Central Depository Company Pakistan Limited 39,500 39,500,645,26,235,75 Less: current portion of loans to employees 9 440,33 302,003,205,28 933,72 3. These loans are given to employees of the Modaraba for purchase of vehicles. These carry profit at the rate of 5.00% (June 30, 2007: 5.00%) per annum. Maximum aggregate balance due from employees at the end of any month during the year was Rs.,72,408 (June 30, 2007: Rs.,253,658). 4 DEFERRED COST Preliminary expenses 2,839,949 4,840,085 Less: amortized during the year 29 2,000,36 2,000,36 839,83 2,839, These represent preliminary expenses incurred before December 04, These are amortized over the period of five years from the month of occurrence on equal monthly basis. 24