Restoring public con�dence by saving ailing businesses.

A N N U A L R E P O R T 2 0 0 9

Vision, Mission and Values 2

Financial Highlights 4

Board of Directors 6

Chairman’s Review 8

Senior Management 14

Chief Executive Of�cer’s Report 16

Management 21

Management Discussion & Analysis 24 Risk Management 30

Sustainability Report 34

Corporate Governance 42

Financial Information 44

Annual Report of the Board of Directors‘ on the Affairs of the Company 45 Directors’ Responsibilities 48

Audit Committee Report 49

Auditors’ Report 50

Income Statement 52

Balance Sheet 53 Statement of Changes in Equity 54

Cash Flow Statement 55

Accounting Policies 56

Notes to the Financial Statements 65

Share & Debenture Information 89

Decade at a Glance 91

Statement of Value Added 93

Economic/ Financial Indicators 94

Glossary of Financial Terms 95

Contact Information 96

Our Team 98

Notice of Meeting 102

Form of Proxy

Contents

i

We don’t make drama out of a crisis, but respond silently...

It has been a rough ride for financial businesses, the world over.

Besides driving the Company towards prosperity, we had to step in when some of the towering financial giants collapsed. A larger section of the nation, and may be some of you too, who had invested with them faced gloom when this misfortune befell.

The global economy itself had taken a severe pounding, and Sri Lanka too. Central Bank of Sri Lanka invited us to tug some these companies to safety. It was neither about profit nor safe strategies.

It was a considered risk that had to be taken...for if not, local financial crisis would have reached epic proportions.

It was a nation’s call...and for us at MBSL, ... the highest.

... we answered that call

Values

is to enhance our client’s wealth through optimal and sustainable solutions, to enhance shareholder value, to facilitate and motivate employees to give of their best,to foster mutually beneficial relationships with our business partners and to remain focused on our social responsibilities

at Merchant Bank, we uphold the accepted norms and ethics of the industry in all our endeavours. Our quest for innovation is guided by prudence and we also foster intrepreneurship amongst our employees and create an atmosphere where caring, sharing, openness and integrity is valued.

Our

VisionMission

Ouris to be the most innovative, dependable and diversified Merchant Bank

Our

2

* Financial Lease * Hire Purchase * Operating Lease

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

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

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

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

Our Products and Services

3

Leasing & Hire Purchase

Trade Finance

Corporate Advisory Services

Capital Market Activities

Corporate Secretarial Services

4

2009 2008 2009 2008 LKR’000 LKR’000 LKR’000 LKR’000

Income 1,155,731 1,035,227 2,385,842 1,647,537 Interest Income 982,545 967,304 1,995,648 1,549,921 Profit before Taxation 254,264 203,414 412,446 247,894 Net Profit after Taxation 200,978 205,078 338,852 242,986 Profit attributable to Equity Holders of the Parent 200,978 205,078 283,083 224,412 Shareholders’ Funds 2,330,772 1,679,794 2,570,787 1,837,704 Total Liabilities 3,248,153 3,088,334 9,053,862 5,579,116 Total Borrowings 2,733,145 2,698,109 7,800,181 5,025,802 Total Assets 5,578,925 4,768,128 11,832,472 7,589,028 Total Lending Portfolio 4,102,357 3,935,593 8,870,982 6,332,790 Return on Equity 11.10% 12.21% 13.81% 12.21% Earnings per Ordinary Shares (LKR) 2.19 2.28 3.09 2.49 Net assets per Ordinary Shares (LKR) 17.26 18.66 19.04 20.42 Share price 19.50 7.25 19.50 7.25

FinancialHighlights Company Group

Total Assets

LKR

. mn.

05 06 07 08 09

5,44

3 6,80

3 7,58

9

11,8

32

6,09

1

Turnover

LKR

. mn.

05 06 07 08 09

906

1,44

4

1,64

8

2,38

6

1,16

4

Net Assets per Share

LKR

.

05 06 07 08 09

15.2

4

18.9

3

20.4

2

19.0

4

16.6

9

Interest Income

LKR

. mn.

05 06 07 08 09

809

1,31

0

1,55

0

1,99

6

1,03

8

5

Group

Janaka Ratnayake

- holds a BSc (Hon) Degree from University of Sri Jayawardenapura and a Post Graduate Diploma in International Business Relations from the University of Moscow, USSR.

He has an MBA from San José Uni-versity, California USA and a MastersDegree in Business Studies from the University of Colombo.

He is the Chairman of the MBSL Group, City Housing & Real Estate Co. PLC and Trillium Residencies Ltd. He is also the Chairman/ Managing Director of Computer Island Group. He was awarded the ‘Entrepreneur of the Year 2000’ by Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL).

Ms. W A Nalani

- is a Fellow of the Institute of Bankers (Sri Lanka).She also holds a Degree in Bachelor of Arts (Economics) and a Degree in Bachelor of Philosophy (Economics). She is presently the Senior Deputy General Manager (Corporate & Offshore Banking) of Bank of Ceylon ,with over 34 years of diversified banking experience, managing the largest strategic business segment including Corporate and Offshore Banking Units and the Trade Finance Unit.

She joined the Board of Merchant Bank of Sri Lanka on 28.04.2006.

She is also an Alternate Director on the Board of Credit Information Bureau of Sri Lanka, Institute of Bankers of Sri Lanka and BOC Travels (Pvt) Ltd.

Ms. Nalani was a co-winner of the “Zonta Award for Excellence” in the Banking category for the year 2009.

J G B P Tissera

- is a Fellow member of the Association of International Accountants UK, Fellow member of the Association of Company Accountants, UK. He holds an Executive Diploma in Business Administration from the University of Colombo and also holds a Masters in Business Studies from the University of Colombo.

He had a distinguished career in the financial sector and has over 30 years senior executive experience with a wide and varied knowledge both in the public and private sector organizations and has worked overseas for over 9 years with a reputed firm of Chartered Accountants. He was the Director Supervision at the Securities Exchange Commission for more than 13 years where heobtained training in the field of capital markets and represented the Commission at overseas conferences.

Mr. Tissera presently is a Management Consultant for a group of Companies.

V Kanagasabapathy

- is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka. He holds a Masters Degree in Public Administration from the Harvard University. He is currently the Financial Management Advisor of the Ministry of Finance and Planning with over thirty five years of experience in the public service in several capacities.

He is the President of the Institute of Public Finance and Development Accountancy. He is also a member of the Governing Council of the Association of Accounting Technicians of Sri Lanka and Chairman of the Board of Directors of Distance Learning Centre.

He is on the directorate of several Public Enterprises and Government linked Companies such as Hotel Developers Lanka Ltd. and De La Rue Lanka Securities and Currency (Pvt) Ltd.

Board of Directors

6

M S S Paramananda

- Is an Accountant by profession having served the Sri Lankan government for over 25 years. Mr. Paramananda is a member of the Institute of Public Finance and Development Accountancy in Sri Lanka. He was responsible for the implementation and administration of the fiscal policy of the Government of Sri Lanka. He has specialised in foreign funding management and regulating financial policies of ministries and public enterprises.

His practical knowledge is enriched by hands - on engagements with ADB, JBIC funded development projects of the State.

P G Rupasinghe

- holds a Special Degree in Economics, a Post Graduate Diploma in Advanced Social Statistics from the University of Sri Jayawardenapura and a Masters Degree in Business Administration (MBA) from the Post Graduate Institute of Management (PIM).

Mr. Rupasinghe was a former Chairman of National Institute of the Business Management (NIBM) and a Consultant to the Industrial Development Authority of the Western Province. Mr. Rupasinghe has also functioned as a Senior Research Officer at DFCC Bank and has over 23 years experience in project appraisal, project monitoring, economic research, consultancy, planning & branch banking. He has 07 years of post graduate teaching experience in Economics, Accounting and Management at the Open University of Sri Lanka.

Mr. Rupasinghe is also a member of the Provincial Public Service Commission (WP). He is a Director & Trustee of the National Development Trust Fund under the Ministry of Finance and a member of the Na-tional Sports Council of Sri Lanka.

Lakshman Perera

- He is a Graduate of the University of Peradeniya and holds a Post Graduate Diploma in International Affairs and a Masters Degree in Business Administration. He played a pivotal role in partnering the progress and development of the Institute of Chartered Accountants of Sri Lanka as the Secretary and the CEO, for a period of over twodecades, to the position it holds today.

He also served the South Asian Federation of Accountants (SAFA) an apex body of SAARC, comprising of National Professional Accountancy Bodies in Bangladesh, Pakistan, India, Sri Lanka and Maldives as Executive Secretary for two terms and was responsible for networking the activities of SAFA during this period.

He was a Member of the Graduate Faculty Board of the University of Colombo and also functioned as a member of the Committee appointed by the Securities and Exchange Commission of Sri Lanka to formulate Corporate Governance Rules for listed companies.

He was a key player in establishing the Masters Degree Programme at the Institute of Chartered Accountants in collaboration with the University of Southern Queensland, Australia.

7

8

ReviewSince our inception, nearly 28 years ago, we considered external calamities as opportunities,viewing them as catalysts for internal adjustments.

Your Company has consistently demonstrated unique ability to remain flexible, yet strong, open to novelty whilst being in total control.

Once again, we managed to close a tough year quite successfully.

In fact, we look forward to more challenges in future as they bring the best in us, we never thought possessed...

Chairman’s

9

Dear shareholder,

It is with pleasure, that I write to you with the results of your Company for the year 2009.

Saddled between two diametrically opposite, but evenly negative environs: namely war and downturn, your Company not only performed successfully, but also enhanced brand visibility, adding more value to your stock.

As the global financial crisis started to reveal itself vividly, stock markets around the world began to fall, and large financial institutions collapsed. Governments of even the wealthiest nations had to come up with rescue packages to bail out their financial systems. The situation was so serious many nations whether wealthy and industrialised, or poor and developing, began sliding into recession.

With the end of civil conflict, Sri Lankan economy, which was gloomy, catapulted into one of the vibrant economies in Asia. The rejuvenated investor confidence from the world over augured well for the country as the much belated development programs got underway, heralding an era of rebuilding. The economic growth that slowed down in the first half of the year picked up in the second and inflation dwindled to a single digit.

The economy is expected to grow steadily in 2010 while imports and exports are expected to increase generating higher economic activity. Your Company will be able maximize gains from these opportunities for business development.

Rehabilitation of ailing companies:

Besides driving the Company towards prosperity, we had to step in when the catastrophes befell on others. But, I am glad that those events brought the best in us at a time when the odds were really against us.

We set out to restructure and rehabilitate ailing businesses to safeguard public depositors and also to secure hapless employees. Today, we are proud to have turned these, loss - making businesses around to be more viable entities recording profit, whilst managing liquidity issues successfully.

Calamity caused by these companies presented MBSL an opportunity to showcase its inherent strengths in restoring endangered businesses. This brought our core attributes to the fore to play the role of a Merchant Bank per se, to establish stability and help stabilise country’s financial system. Our timely commitment secured LKR 50 billion public deposits and over 5,000 employees who were destitute.

Despite the raging conflict during the early part of the year and the global economic melt-down which was beyond control, MBSL recorded it’s highest ever income of LKR 1.2 billion with a 11.6% increase over the past year and the Profit before Tax rose by 25%. Our subsidiary, MCSL also completed the year 2009 very successfully recording remarkable growth in all indicators. Revenue was increased by 34% to LKR 820 million, and the Deposit Base reached the LKR 3 billion mark, highlighting the customer confidence. MBSL Group collectively achieved substantial growth in revenue and profit.

Looking ahead…

Now that the country has settled down and on the mend, the entire world is looking towards us with envy. Sri Lankan Stock Exchange has become an attractive investment centre and all indices are showing growth and promise.

As a result, North and East have become the focal point of accelerated development and we foresee many opportunities. From macro to grass root level, investors will require funding for their enterprises, thus spells the business potential for MBSL in the near future: the most visible and respected merchant bank in the country. To make access easier to our potential customers, we have already started expansion of our branch network. We have already implemented our diversification plans.

10

Be it government sponsored or privately funded the need for cash infusion will be of paramount importance. Revival of north will require capital infusion, and MBSL with an extensive lending portfolio and expertise can be of immense assistance to the development drive of the nation.

We are also planning to actively promote our diversification plans to maximize future gains. As a pilot project of our diversification programme, we recently laid the foundation stone for a 3 star hotel project in the city of Nallur, in the Jaffna peninsula.

I am fully content that we have the right personnel, resources and the mechanisms to synergize the dynamics in a significant scale. I am optimistic that we will be able to post more sparking results this year, and look forward to meet you at our next general meeting.

Finally, I would like to thank my esteemed colleagues on the Board and Mr. Gamini Karunathilake CEO for their support, our staff for their diligence and especially our shareholders who kept their faith in us.

Janaka RatnayakeChairman

11

12

13

and respond with positive solutions...

CorporateManagementRanjith SiriwardenaDeputy DirectorStrategic Planning, & Risk Management.

- holds a B.Sc (Business Administration) Degree from the University of Sri Jayawar-denapura and is an Associate member of the Institute of Chartered Accountants of Sri Lanka. He has over 18 years experience in merchant bank-ing, strategic planning and risk management.

He also serves as a Director of Lanka Securities (Pvt) Limited and MBSL Savings Bank Limited.

Senaka UduwawelaAssistant Director - Leasing& Administration

- accounts for over 26 years of experience in the banking industry. His areas of speciality cover credit and branch opera-tions. He currently supervises collections and recoveries of the leasing division and branches.

A M A CaderDeputy DirectorCorporate Advisory & Capital Markets

- is a Fellow of the Chartered In-stitute of Management Accoun-tants FCMA,United Kingdom and holds two Post graduate Diplomas in Business Adminis-tration and Economics from the University of Colombo. He also holds a Post Graduate Diploma in Information Technology from CIMA and SLIIT. He has over 30 years experience in a wide range of Corporate Advisory/ Capital Market activities.

Gamini KarunathilakeChief Executive Officer

- is a professional banker with over 30 years of experience. He obtained a B.Com (Hon) Degree from the University of Sri Jayawar-denapura and MBA from the Post Graduate Institute of Management (PIM) of Sri Lanka. He is a fellow member of the Institute of Bankers of Sri Lanka, and was a visiting lecturer on ‘ Law and Practise of Banking’ for Bachelor of Com-merce and Economics Degree programmes and on ‘Banking and Finance’ for MSc. Management Programme at the University of Sri Jayawardenapura. He also served as a lecturer and Chief Examiner on ‘Law and Practice of Banking’ and ‘Practice of Banking’ at the Institute of Bankers of Sri Lanka. He is also a Director of Merchant Credit of Sri Lanka Ltd..

1

23

4

56

7

8

9

From left:1. A.M.A.Cader, 2. Gamini Karunathilake, 3. Ranjith Siriwardena, 4. Senaka Uduwawela,5. Marina Phillips, 6. Shyamalie Amaratunge, 7. Priyantha Herath, 8. Lakshman Kaluarachchi, 9. Amitha Samarasinghe.

14

Shyamalie AmaratungeDeputy DirectorTrade Finance

- holds a B.Com Special Degree and a Post Graduate Diploma on Modern Banking from the University of Sri Jayawardenapura and obtained an MBA from the Post Graduate Institute of Management of Sri Lanka. She also counts over 16 years experience in Trade Finance, Treasury Management, Strategic Planning, Balanced Score Card (BSC) Performance Management and accountancy.

Lakshman KaluarachchiDeputy DirectorLeasing

- is a holder of a B.Com Special Degree from the University of Kelaniya and has over 23 years experience in leasing and presently overlooks the marketing and branch operations.

Priyantha HerathAssistant DirectorFinance & Treasury Management

- is an Associate member of the Institute of Chartered Accountants of Sri Lanka and an Associate member of the Certified Management Accountants of Sri Lanka.

He holds a B.Sc (Business Administration) Degree from the University of Sri Jayawardenapura, and MBA from the University of Colombo,Sri Lanka.

He counts over 10 years of experience in the field of finance. He also serves as a Director of MBSL Insurance Company Limited.

Amitha SamarasingheAssistant Director - Group Human Resources

- holds a Bachelor of Arts Degree from University of Peradeniya and a Diploma in Human Resources from the National Institute of Business Management. She is a member of the Institute of Personal Management.

She possesses over 25 years of experience in the field of Human Resource Manage-ment in diverse businesses such as manufacturing, service and banking.

Marina PhillipsAssistant DirectorCompany Secretary -MBSL Group

- is an Attorney -at -Law, Notary Public,with over 16 years of experience in all aspects of corporate secretarial practise.

She is also widely experienced in capital market operations.

15

16

MBSL mounted strong resilience to the deteriorating economic environment and weakening currency.

We tested our strengthsin the toughest of conditions,and emerged strong.

Strategic Brand realignment, service differentiation,geographic diversification...and most importantly our true corporate citizenship, brought us and the customer more and more closer... and that helpedincrease business volume.

Mn.

Mn.

Mn.

17

Chief Executive Officer’s

Group Income

Group Net Profit

MBSL Total Revenue

MBSL Profit before Tax

Group Earnings per Share

Group Total Assets

LKR

LKR

LKR

LKR

LKR

LKR

Mn.

Mn.

2,386283

1,156

2543.09

11,832

Report

Direct interaction -

Staff members actively promoting our products

and services...

18

It is with great pleasure that I meet you once again, to illustrate the performance details of your Company in the year 2009.

As you are aware that in the global scenario, year 2009 dawned with uncertainty. Ramifications of global meltdown were still unfolding and cohesive solutions were few and far apart. Though there were no direct effect on Sri Lankan financial industry the adverse impact on the economy was somewhat unsettling. Many top dollar earning businesses such as tea, garments, gems and non - traditional exporters suffered heavily, and the dollar influx dwindled considerably. Raging conflict in the northern zone reached a critical stage where inflation rose and reserves declined. Financial flows to the private sector diminished mainly due to the drying – up of credit lines in the aftermath of global slowdown.

Sri Lanka faced a historic opportunity to evolve from a lower-income country mired in conflict, to a middle-income country in lasting peace. Until now, Sri Lanka’s growth had been constrained by three decades of conflict despite the country’s highly educated population. The ending of the armed conflict in 2009 provided an opportunity for the country to embark on reforms and work with the private sector to establish a more dynamic and vibrant economy.

With the end of conflict, vast areas in the North and East of the country, neglected for nearly a quarter-century, stand to receive a considerable positive stimulus. Peace is widely expected to inject new life into the tourism sector, which until now could not reap its full potential. The country also stands to attract more Foreign Direct Investment especially from the burgeoning business process-outsourcing sector (BPO), which holds considerable promise. Sri Lanka is on track to achieve most Millennium Development Goals by 2015, but will need to focus on achieving quality, relevance and sustainability in key public services.

Also, 2009 was an extremely challenging year for banking industry and the preven-tive measures taken over the past few years by the regulator helped to deal with situation when it occurred. Sri Lanka’s banks had a capital adequacy ratio of over 14% that helped to negate the shock. The situation during first two quarters was so tense; not only businesses, but also even general public were intensely watching the unfolding events. The incensed battle, security restrictions on movement, credit squeeze, reduced exports and imports, high tariff added with high interest rates, low repayment capacity virtually brought the country to a stand still.

Saddled within these constrains, your Company managed to perform beyond expectations. The year 2009 also revealed the real Brand Strength of MBSL. The opportunity came with a rather sad occurrence. The flimflam of several miscreant financiers shook the very fundamentals of corporate governance, and if you will, common decency too.

Central Bank of Sri Lanka sought the assistance of MBSL to play the role of the managing agent to several crisis ridden financial institutions. Plans were formulated to support restoration programs which, were successfully implemented under the guidance and supervision of MBSL.

Our action staved off the collapse of financial industry that could otherwise have snowballed into a nasty economic tsunami. We successfully turned several companies around that were on the brink of an abyss, back to sound financial footing. The moral satisfaction, besides professional fulfillment makes us content that we have acted decisively, and decently as our profession propagate. While we indulge ourselves with fulfillment, we believe that the glory rests entirely with you, the stakeholders of MBSL. You are the core strength that gave us confidence to move forward.

This exercise brought our corporate citizenship out in a specific relief

The public perception on MBSL escalated to a level of admiration as a savior. Despite the ongoing conflict during the early part of the year and uncontrollable global economic downturn, your Company recorded it’s highest ever income of LKR 1.2 billion with an 11.6% increase over

Helping hand -

Scholarship to the children of deceased war heros...

19

the past year and the profit before tax rose by 25%. Total Equity Capital escalated by 39% to record LKR 2.3 billion and Total Assets swelled to LKR 5.6 billion, recording 17% growth over the previous year. The Group in its entirety achieved substantial growth in revenue and profit. The income grew to LKR 2.4 billion; a 45% surge and the profit grew by 26% to LKR 283 million. Total Assets stood at LKR 11.8 billion registering a 60% growth over the last year.

The significant expansion of Group turnover in the year 2009 was due to addition of two subsidiaries to the Group in line with strategic direction of the Strategic Plan for 2010 - 2015. Bank diversified its business activities to the insurance industry by acquiring ABC Insurance Ltd, which was an “Ailing Company” with a view of rehabilitating it. During the year 2009, we streamlined its policies, procedures and products and converted to a profitable entity. This company is now ready to take-off and more benefits are expected during this year.

Your Company also made a strategic investment in Ceylinco Savings Bank, now known as MBSL Savings Bank, which was the only private sector savings bank in Sri Lanka registered under Banking Act as a Licensed Specialized Bank. This institution too was severely affected by the liquidity crises that arose due to loss of reputation during the 1st quarter of year 2009.

As noted above, your Company was able to arrest the situation immediately, with the support of the regulator; the Bank was converted into a viable entity within a short span of time. The bank is now on the path for sustainable growth, consciously seeking to meet regulatory compliances. We are confident that the bank will become a strong private sector savings bank under the umbrella of the MBSL Group. Human Resource Development is the bedrock of your Company, and strives to create a healthy work environment where all employees have fair opportunity to maximize their professional and personal potential. We have defined the HR Vision and Objective, based on the pertinent factors to develop our human resource base and to elevate your Company to be a role model in human resource evolution, and deploy competent personnel into work environments where they are motivated to achieve the organisational goals, whilst expanding their personal frontiers. The year under reference witnessed a new resurgence in the two major areas of Human resource development and its utilization. With the improved financial performance, your Company was able to adopt and implement staff development programs on a continuous and meaningful basis. Both, as a motivational measure and as a skill development process, arrangements were also made for the staff to undergo Foreign training programs in addition to local training programs.Continuation of bi-annual Performance Appraisal System also enabled to develop the staff on a more consequential basis as well as to implement and monitor the progress of Bank’s major work plans. The signing of the collective agreement with the Bank’s Union for a ‘Per-formance based Annual Increment’ formula was a significant event during the year.

Sri Lanka has now entered a low inflation, low interest regime that provide growth prospects for the economy. Imports and exports are expected to grow in the year 2010, generating higher economic activities and income. The average growth in broad money supply is also expected at 14.5%, a level sufficient to facilitate smooth function-ing of economic activities.

Your Company plans to intensify capital market operations to maximize on opportunities in the present surge in the Stock Market. Fee based activities are expected to generate substantial income to the Company’s bottom line.

Consequent to cessation of hostilities in the north and eastern region, a dramatic boom is expected with the restoration programs that are forthcoming. Economy at all levels will expand when new industries; be it macro or micro commerce. Needs for capital infusion, leasing, corporate advisory and secretarial services in these ventures will be astounding, and your Company is comfortably placed to assist them in these spheres of business.

Year 2009 was a fulfilling year professionally and morally. Our team performed as usually expected and beyond. Your Company also changed its character from a merchant banker to a more varied service provider. The diversification has moved us into new areas i.e. insurance, savings banking and to hospitality industry. The first step in that direction was the laying of foundation for a three star hotel in Jaffna peninsula.

Our decisive intervention prevented the domino effect that could have snowballed into an economic avalanche...

20

We will continue to extend our provincial reach through the expansion of our branch network, the most recent additions being the branches opened in Trincomalee and Ambalantota.

Our achievements would not have been possible if not for the stewardship of the Chairman, Mr. Janaka Ratnayake and the astute support of the Board of Directors. I offer my sincerest thanks to them for their prudent counsel in chartering your Company’s progress, and especially our shareholders for their confidence in us and my sincere gratitude is extended to our loyal customers for giving us an opportunity to serve them.

Finally, my staff that wholeheartedly challenged the impossible to finish the year 2009 in an astounding success. Their commitment not only beat the odds, but also brought out several performers who are assuredly leadership material, whose contributions will augur well for your Company in the years to come.

Gamini KarunathilakeChief Executive Officer

21

Management

Amitha Mihirun Ratnasiri Keerthi Snr. Manager Snr. Manager Snr. Manager Snr. Manager Trade Finance Legal Galle Kandy

Pathirana Ananda Sarath Lalangi Manager Manager Manager Manager Leasing Legal Leasing Corporate Advisory

Sanjaya Fahima Chinthaka Asela Snr. Manager Manager Manager Manager Leasing Legal IT Finance & Treasury

Saman Janaka Manager Manager Kurunegala Maharagama

22

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with carefully articulated solutions to restore ...

Management Discussion & Analysis

Profit(Group)

LKR

. Mn.

05 06 07 08 09

176

264

224

283

225

Turnover (Company)

LKR

. Mn.

05 06 07 08 09

539

873

1,03

5

1,15

6

704

24

Locally and globally, 2009 was the most critical year in the history of economics. The stress that global economy went through was so severe that many economies suffered tremendously from its rub off. Many businesses evaporated overnight and the loss of livelihood that resulted was catastrophic.

Sri Lanka was not spared from this shock and, added to that Sri Lanka had a raging war to comprehend with. The strains on the national coffers reached epic levels and the nation braced for tough times ahead. As if these troubles were not enough several miscreant activity that took place robbed the investors and some disappeared without trace.

The sum result was a bruised economy and shattered confidence.

However, by mid 2009 things started to look brighter. The bitter war was successfully ended and Sri Lanka emerged a promising spot for investment. World focus revitalized the stunted development and the influx of new money into the country cushioned some of the adverse effects created by the recession.

Amongst these positive and negative, though yet vibrant activities, your Company too had an eventful and also morally fulfilling year. We were smart enough to envisage such calamities far ahead and had put necessary mechanisms to negate ill effects to the minimum and sailed through without trouble posting LKR 1.2 billion for the year 2009. Our position was so strong we also could come to the fore to rescue several other institutions that were almost going belly up. The high watermark was our timely intervention to stem the ‘run – on’ on several financial institutions that could have snowballed into an avalanche.

The growth of the economy was 3.5% at the end of year 2009, and is expected to boom. The first two quarters were retarded, but the third did well above the second quarter. The fourth out performed the first three quarters. This achievement was mainly due to the end of civil conflict and the gradual recovery of world economic turmoil.

Strengthened by second tranche of IMF loan, together with net inflows from Treasury Bills and Treasury Bonds to the value of US $ 1,330, gross official reserves of the country surpassed USD 5.3 billion in November 2009 and stabilized exchange rates has resulted in steady inflow of FDIs to the country.

The external sector did well especially in the latter part of the year. The trade deficit decreased by 47.8% to US $ 3,122 million in 2009 in relation to the previous year largely due to the impact of the global financial crisis. The Increase of worker remittances by 14.1% also has backed the contraction of trade deficit. The cumulative exports recorded 12.7% decrease during last year, while the cumulative imports also diminished by 27.6% compared to the previous year.

The annual average inflation rate declined to 3.4% at the end of the year compared to 22.6% in the previous year. This is the lowest inflation recorded since 1985, and has created a positive outlook for the economy and will generate varied economic and social benefits. It will lead to promote economic growth and generate employment opportunities. Average Weighted Prime Lending rate also came down to 10.85% at the end of the year with the decline of yield on Government Securities.

Financial Review

GROUP

The group performance for the year ended 31 December is commendable as the Total Income for the first time recorded LKR 2.4 billion as against the LKR 1.6 billion in the previous year. This was mainly due to the acquisition of new two subsidiaries and LKR 446 million and LKR 307 million income was generated from MBSL Savings Bank and MBSL Insurance respectively. Group profit after tax also made another milestone recording LKR 283 million. This is a 26.1% growth as against the LKR 224 million for the previous year.

MBSL.MBSL recorded its all time high income for the year 2009 and it is 11.6% increase over the previous year’s income of LKR 1.03 billion. This achievement was possible due to prudent financial policies and proper business ethos.

Profitbefore Tax(Company)

LKR

. Mn.

05 06 07 08 09

187

273

203

25426

9

GroupEarnings per Share

LKR

.

05 06 07 08 09

2.80 2.

94

2.49

3.09

2.50

25

During the year, the company earned LKR 33 million from the business rehabilitation activities carried out by the Business Rehabilitation Unit. Having noticed the expertise displayed by the MBSL in managing F & G group, the Central Bank of Sri Lanka offered us the management of several ailing companies. Within less than twelve months of the undertaking, we were able to turn these companies around from dire straits.

Interest income of LKR 982 million represents 85% of the company’s total income and it is slightly above the previous year’s LKR 967 million.

Profit before tax indicate a 25% increase over the previous year even though the profit after tax recorded a marginal decrease of 2% over the previous year due to high income tax burden that prevailed in the country.

Earnings per Share The Earnings per Share (EPS) for the year is LKR 2.19, which is a decrease of 3.7% compared to the previous year. This is due to issue of 1 for 2 rights issue that was concluded in December 2009 and the time left was insufficient to generate an additional return for the increased capital. However, the Group Earnings per Share increased to LKR 3.09 from LKR 2.49 in 2009.

Net Interest Income Net interest income was LKR 398 million for the year, compared to LKR 420 million previous year. The marginal decrease of 5% compared to the previous year was primarily due to the increase in borrowing costs, as a result of strategic investments made during the year.

Operating Expenses As against previous year, the operating expenses excluding provisioning for loan losses increased marginally 7.2 % in 2009. The main contributory factors for this increase were increase of value added tax on financial services and provision for retirement benefit obligation. Personnel costs also have increased due to the ongoing processes adopted for consolidating current human resource. Increase in other expenses is in line with the increase income of the company. However, your Company reviews and carefully adopts cost optimization mechanisms in line with its revenue.

Provision for Bad and Doubtful DebtsDuring last year MBSL changed its provisioning policy of leasing to comply with the Central Banks direction No. 2 of 2006, and there were no significant impact to the brought forward provisions. In addition to the provisions required by the Central Bank, a general provision of .5% is provided annually until it reaches 2.5% of the net portfolio to meet the future contingencies, which might arise due to the market uncertainties.

Your Company’s main policy is to increase its disbursements while maintaining a healthy portfolio. During the year the lending portfolio increased by 4.2%, representing 73.5% of the total assets. The total provision as at the end of 2009 stood at 6.5% of the total portfolio compared to 8% of the previous year.

TaxationThe Bank’s corporate tax expense for the year was LKR 53 million against the marginal reversal in the previous year. Main reason for this was decrease in leasing disbursements compared to hire purchase disbursements.

Shareholder Equity and ReturnsTotal equity of the Shareholders increased by 38.8% to LKR 2.33 billion as a result of 1 for 2 rights issue offered during the year. The Company’s Return on Equity decreased to 11.1 % compared with 12.21 % in 2008 and Directors have recommended LKR 0.75 as dividends for the year ended 31 December 2009. Price earnings ratio at the end of year was 8.89 adding a substantial value to the shareholders’ investments.

Dividend DistributionDirectors have recommended LKR 0.75 per share first and final dividend for the year 2009. The dividend payout as a percentage of the Company’s own profit after tax is 50.4%. The Directors have recommended this dividend taking into consideration the sustained profitability and liquidity of the Company.

ShareholdersFund (Company)

LKR

. Mn.

05 06 07 08 09

1,27

4

1,56

5

1,68

0

2,33

1

1,41

6

Total Assets(Company)

LKR

. mn.

05 06 07 08 09

3.,2

73

4,40

4 4,76

8

5,57

9

3,50

4

26

LEASING & HIRE PURCHASELeasing and Hire-purchase businesses represent the largest segment of assets of the bank, with their contributions directly aligned to our profitability. Leasing Department contributed 69% to the total revenue of the bank. The disbursements increased to LKR 1.2 billion ensur-ing sustained growth in revenue. This indeed is a significant achievement in the context of the unfavorable domestic & global environments that prevailed throughout the year 2009.

Our loyal client base has always been the catalyst that was intrinsic to establish our winning formula. MBSL Leasing is well known for its hallmark customer service and majority of our business stems from personal endorsements and referrals. However, we are content that we are the most preferred choice and will continue to be. Despite these detrimental effects, the global crisis’s impact on the leasing industry in general, and which in turn hit the financial markets across board, MBSL still managed to ascend in an upward curve, in comparison to the previous year.

Today, there are over 100 institutions engaged in leasing in one form or another. We as a pioneer, having gained deep insight into the business needs & aspirations of our clientele and people, were able to look beyond and link with them in a sustained business process.

Leasing division performed well amidst turbulent market conditions and continued to expand its portfolio in Financial Leases, Operating Leases & Hire-purchases. The demand for second-hand vehicles has increased due to the high cost of unregistered Japanese vehicles, resulting a remarkable increase in the Hire-purchase portfolio. There is a significant drop in registration of new vehicles that resulted is clearly listed below:

Comparison of Vehicle RegistrationType of Vehicle 2008 2009 Change

Motor cars 20,200 5,342 (14,858)Motor bicycles 155,952 128,872 (22,080)Buses 1,180 695 (485)Dual purpose vehicles 2,856 1,296 (1,560)Lorries 13,664 7,710 ( 5,954)Ambulances & Hearses 162 86 (76)Lorry trailers 106 111 5Prime movers 106 181 75Land vehicles 3,633 2,182 (1,451)Hand tractors 20,724 10,580 (10,144)Motor tricycles 44,805 36,434 (8,371)Land vehicle trailers 1,775 1,383 (392)Total 265,163 194,872 (70,291) The competition among leasing companies is becoming increasingly intensified. Some of the major players have established tie-ups with importers, thus placing themselves in an advanta-geous position.

As commercial banks have access to low cost funds, they market very aggressively offering lower rates. Besides this advantage, the recoveries and the monitoring of the large portfolios are much easier for them as they have the control of their customer’s current account facilities as a fall - back option.

Until very recently, the entire leasing industry faced many difficulties due to the high cost of funds. This resulted a negative growth in the entire industry during this period as against the previous financial year. The escalating cost of funds affected most of the leasing companies who were not privileged to access low cost funds.

TRADE FINANCEThe total credit portfolio of the Trade Finance Division rose by 126% compared to the year ended 2008. The Trade Finance Division’s portfolio comprises of Bills Discounting Facili-ties, Term Loans, Cheques Discounting Facilities and Personal Loans .The turnover of Trade Finance division during 2009 is LKR 246 million. In the year 2009 the division had more focus and emphasis on enhancement of new businesses as well as recovery of non-performing advances, and reports that significant amount of non - performing loans were recovered during this period. The division has been able to dispose some of its properties acquired through legal actions at a net gain of LKR 46 million.

27

The Trade Finance Division continues to make significant contributions towards the profitability of your Company and to develop the Trade Finance portfolio with strict evaluation guidelines. In addition to these measures, prudent provisioning has been the focus on all on-going businesses. The division is expected to bring more results in the coming year owing to enhancement of credit portfolio, recovery of balance non-performing loans and on realization of investment in properties.

CORPORATE ADVISORY & CAPITAL MARKETThough the Corporate Advisory & Capital Markets Division (CA&CM) is functioning in a very dynamic environment in its core activities, the division recorded impressive results during the year 2009 recording a total revenue of LKR 44 million with a profit growth of 100 percent in keep-ing with the right balance between the division’s fee based and fund based activities.

Among the key projects concluded during the year by the division, the Initial Public Offering of Renuka Agri Foods Ltd, “a local global success story” was oversubscribed by more than 12 times which was the first ever IPO after eighteen months lapse of IPOs in the Colombo bourse. Investor categories ranged from high-net-worth investors with strategic interest and retailers with a capital gain motive.

A Business plan consultancy was carried out for a local budget airline to develop turnaround strategies and to provide a future direction for the senior management of the Airline. At present the division is carrying out another Business Plan for a public utility entity for a time span of five years. With the upturn in the capital market and deal flows improving, the division was able to conclude two independent advisory reports and a mandatory offer successfully. The CA&CM continued to conduct several awareness programs on diverse topics of interest on rehabilitation of ailing businesses, ethics and governance and cost management strategies. Many participants from different segments of the Corporate to general public attended the seminars.

Under fund based fee income the division enhanced its margin trading loan facilities to many prospective clients with the upturn in the share markets. With post war developments reviving in the country, the Colombo Stock Exchange was considered as one of the world’s best perform-ing markets and with this upward trend, division reported an impressive realised return of 23.72 percent on its share portfolio. However, with the unrealised gains division recorded a total return of 33 percent on the same share portfolio. The improvement in stock exchange is further evident by the analysing the past one year trend of All Share Price Index (ASPI) and Millanka Price Index (MPI) which stood at 3,385.55 and 3,849.38 respectively as at 31 December 2009. Midcap Index also followed the same trend reporting a growth rate of 125% during the period in discussion. The following graph details the ASPI, MPI and the Midcap Index. Future FocusTo face the challenges in the new era in a stronger manner and to be successful in vibrant market conditions the division improved its strengths from one level to higher levels. The future targets were set, based on increase in its income base through several projects. Among these projects in hand there are several initial public offerings lined up in the capital market activities and many other structuring businesses. In addition to fee - based income CA&CM is also anticipating a bumper harvest from Colombo Stock Exchange. Further, MBSL expects to introduce an investment plan for institutional investors as well as to retail investors. The investment plans will differ based on their risk appetite and risk profile of the clients. The division is quite confident that the core competen-cies of the professionals attached to the division are well poised to capture the future opportunities arise in the fields of capital markets and corporate advisory in a balanced manner.

FUND MANAGEMENTThe Company’s Treasury Management Division raises funds from equity and debt market for its funding requirements. In December 2009, 1 for 2 rights issue was made and fully subscribed. This resulted a reduction in company’s borrowing cost substantially as it was utilised to settle a part of high interest bearing borrowings. However, total borrowings marginally increased due to the strategic investments and increase in the lending portfolio.

 

02. 0

1.20

09

08.0

2.20

05

03.0

4.20

06

20.0

8.20

06

26.0

5.20

07

05.1

0.20

07

07.0

8.20

08

17.1

1.20

08MPI ASPI MID CAP

8,000.00

7,000.00

6,000.00

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

0

28

During the year most of the high interest bearing borrowings was replaced with low interest borrowings and at the end of the year the debt equity ratio was 1.17 times.

CORPORATE SECRETARIALIn addition to providing secretarial services to the Company, the division also extends its services to the subsidiaries of Bank of Ceylon (BOC) and to those of MBSL including the recently acquired companies: MBSL Insurance Co. Ltd and MBSL Savings Bank Limited. The Division has also extended its services to many external clients during the year.

Amongst the more significant activities carried out by the Division during the year under review are; functioning as registrars and secretaries for the MBSL Rights Issue held in December, acting as registrars for BOC Debenture Issue of 2008/2013, management of share ledgers including the payment of dividends to shareholders of Merchant Bank of Sri Lanka PLC and Property Development PLC, to name a few.

Whilst actively striving to expand its clientele, the Division also intends to make use of opportu-nities created by the positive trends in the present Stock Market with the aim of increasing the overall revenue of the Company.

SUBSIDIARIES AND ASSOCIATESMerchant Credit of Sri Lanka LimitedThe company’s first subsidiary Merchant Credit of Sri Lanka, which is jointly owned by BOC and MBSL performed well during the year expanding its business activities in leasing & hire purchase, trade finance and real estate businesses. The total income grew by 33.9% to LKR 820 million from LKR 612 million in the previous year. MCSL has registered Profit after tax of LKR 70.8 million recording 86.9% increase over the previous year.

MBSL Savings Bank LimitedYour Company acquired 78% equity stake of Ceylinco Savings Bank in April 2009 at the time when it was experiencing great financial difficulties and was renamed MBSL Savings Bank. Hav-ing accepted the challenge, MBSL management turned the position of the company around and for the year ended 31 December 2009 recorded a net profit of LKR 40 million compared to the loss of LKR 371.9 million made in the previous year.

MBSL Insurance Company Limited ABC Insurance Company Limited was acquired in April 2009 and renamed as MBSL Insurance Company Limited. Customer base has increased significantly with the relaunch of new identity and, as a result number of insurance policies has increased significantly in both life and general insurance.

Lanka Securities (Pvt) LimitedMBSL holds 29% of its associate, Lanka Securities (Pvt) Limited, and the other investors i.e. BOC and First Capital Pakistan owns 20% and 51% respectively. It engages in stock brokering activates and their performance of the year is commendable as the stock market activities out performed during the latter part of the year. The income of the company grew by 35.5% to LKR 121 million while profit after tax recorded 117% growth over the last year reaching LKR 62.5 million.

Expansion of branch networkWe at MBSL are optimistic that we could expand our business by increasing the distribution network. Our initial plan was to increase branch network to 10 during the year. However, after a careful study of the prevailing market behaviour and macro economic conditions of the country, we opened our 7th Branch, the Colombo City Office in August last year to increase the speed and efficiency of our customer service. Opening of this new City branch has brought many busi-ness opportunities and increased easy accessibility for our customers. Negombo branch, which was opened in the latter part of the previous year also, was able to become profitable during the year. MBSL opened its latest, the Trincomalee branch in January 2010 and is expected to capitalise on post war opportunities.

Diversification into new areasAlthough 2009 was a very stressful year for most of the businesses, MBSL used this opportu-nity to venture into new areas such as insurance and retail banking through acquisition of ailing

Chairman, Mr. Janaka Ratnayake opening the City

Branch with CEO, Mr. Gamini Karunathilake...

29

companies. ABC Insurance Company was a registered insurance company to do both general and life insurance. This company was undergoing financial difficulties and MBSL acquired the same recognising the ability of reviewing its business with the existing merchant banking expertise and business opportunities available within the group.

Ceylinco Savings Bank was a licensed Specialized bank operating under the troubled Ceylinco group and this bank was about to be liquidated as a result of the demand for withdrawal of the entire deposit base due to loss of public confidence. MBSL acquired this bank opening a path to access public deposits. With these two acquisitions, MBSL subsidiaries expanded to three. Since acquisition, these companies have been turned around and have started making profits, yet again endorsing MBSL’s finest management practices.

Information TechnologyHaving understood the strength of Information Technology in business and overall context, we paid close attention on developing ICT contribution in both value addition as well as security aspects. In year 2009 ICT focus was mainly concentrated on high availability of system resources with the implementation of three new servers with virtualization capability.

The Objective was to fully utilise the unused hardware resources of modern server architecture in 64-bit computing environment. Simultaneously software systems were upgraded to respective latest versions available in the industry. The Data centre was restructured to accommodate new servers and environment was designed to support servers to run 24 by 7 operations.

As an improvement, information super highway links were upgraded to 4 MB links each. Further, internal branch communication links were upgraded wherever necessary. The core application was enriched with additional features to facilitate management to make decisions and to develop businesses in a competitive and real – time environment. In addition to that, several new satellite applications were developed to enhance businesses opportunities in capital market. All workstations were brought into a single compatible environment. The newly opened branches too were linked with core application system to provide each user to work on an identical business model.

Focus: 2010Having completed 2009 successfully, we are now focused on extending growth to 2010 and beyond. For that every member from the top management down is committed on a single - minded philosophy: Sustained growth.

In that endeavour, human and technical resources are inter - aligned to withstand any and every calamity that we may have to face. We are confident that our strength lies in our ingenuity to spot opportunities and threats, well in advance and to mobilise our forces in order to maximise gains.

Risk Management

30

OverviewRisk management is plays a pivotal role in our business planning process and is strongly supported by the Senior Manage-ment and the Board of Directors. The primary objectives of the risk management are to protect the Bank’s financial strength and reputation, while ensuring that capital is well deployed to support business activities and grow shareholder value. Fur-ther, the business mix of Leasing and Hire Purchase, Trade Finance, Investments and Corporate Advisory provides a certain amount of risk diversification. The Bank’s risk management framework is based on the following principles.

– Protection of financial strength – Protection of reputation – Risk transparency – Management accountability – Independent oversight

Risk Management OversightThe prudent taking of risk on business opportunities in line with our strategic priorities is fundamental to our business as the leading Merchant Bank. To meet the challenges in fast changing financial market with new players and innovative products, we established and continuously strengthen our risk function, which is independent of but closely interacts with, the sales and trading functions to ensure the appropriate flow of information.

Risks arise in all our business activities cannot be completely eliminated, but we work to effectively manage the risk in our internal control environment. Risk management oversight is performed at several levels of the Bank, in order to ensure that risks are managed within limits set in a transparent and timely manner. Key responsibilities to manage risk lies with following management bodies and committees:

– Board of Directors responsible to shareholders for the strategic direction, supervision and control of the Group and for defining the Bank’s overall tolerance for risk. – Audit Committee is responsible for assisting the Board of Directors of the Bank in fulfilling their oversight responsibilities by monitoring management’s approach with respect to financial reporting, internal controls, accounting, and regulatory compliance. Additionally, the Audit Committee is responsible for monitoring the independence and the performance of the internal and external auditors. – Internal auditors are responsible for assisting the Board of Directors, the Audit Committee and the Management by providing an objective and independent evaluation of the effectiveness of processes and controls and, compliance on operation activities. – Chief Executive Officer and Senior Management Committee is responsible for actively managing the Bank’s businesses and its risk profile to ensure that risk and return are balanced and appropriate with current market conditions.

Risk CategoriesThe Bank is exposed to many risks and identified them under the following seven major risk categories: – Market risk – the risk of loss arising from adverse changes in interest rates, equity prices and commodity prices etc. – Credit risk – the risk of loss arising from adverse changes in the creditworthiness of counterparties. – Expense risk – the risk that the businesses are not able to cover their ongoing expenses with ongoing income excluding expense and income items already captured by the other risk categories.

– Liquidity and funding risk – the risk that the Bank is unable to fund assets or meet obligations at a reasonable price in the case of extreme market disruptions. – Operational risk – the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. – Strategy risk – the risk that the business activities are not responsive to changes in industry trends. – Strategy and Reputational risk – the risk of outcome of strategic decisions or developments and the risk that the Bank’s market acceptability or damage to our standing in the market.

Market Risk The term market risk refers to the risk of potential loss arising from adverse effects on interest rates, foreign-currency exchange rates, equity prices, and other relevant market rates and prices. At MBSL, the primary market risk is the adverse change in the interest rates. The interest rate risk exposure is managed by matching the duration of the assets and liabilities enabling to minimize the risk exposure. The mismatch risk resulting from having assets and liabilities that mature at different intervals is managed through Gap analysis.

The scenario analyses are used to estimate the potential immediate loss after stressing market parameters. These changes are modeled on past extreme events and hypothetical scenarios.

31

Liquidity and Funding RiskLiquidity and funding risk is the risk of MBSL being unable to fund assets or meet obligations at a reasonable level, in case of extreme market disruption situations. This risk is managed at the Company level, in line with our general governance principles, which allow us to specifically, tailor the approach to the individual cash flow structure within the business units. The Bank monitors the identification and measurement of this risk and works in partnership with all business units to foster sound liquidity management practices.

Credit Risk Credit risk is the possible loss being incurred as the result of a borrower or counterparty failing to meet its financial obligations. In the event of a default, a bank generally incurs a loss equal to the amount owed by the debtors, less a recovery amount resulting from foreclosure, liquidation of collateral or restructuring of the company. The credit risks taken on by the Bank are mostly collateralised and primarily of an operational risk nature.

A system of individual credit limits is the traditional means of managing credit risk and preventing risk concentrations. A set of credit limits is in place to address concentration issues in the Portfolio. The next aspect of the credit risk management frame-work at MBSL is a healthy credit risk provisioning methodology.

The business units of Bank manage credit risks through a credit appraisal and approval process,ongoing client performance monitoring and a credit quality reviewing process. Credit appraisals are prepared by experienced credit officers, based on analysis and evaluation of debtors’ creditworthiness and the type of credit transaction. Credit decisions are taken on a trans-action-by-transaction basis by Credit Committee and Board of Directors at levels appropriate to the amount and complexity of the transactions, as well as to overall exposures to borrowers and their related entities.

Operational and Legal RiskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The primary aim of operational risk management is the early identification, prevention and mitigation of operational risks, as well as in timely and meaningful management reporting.

Responsibility for operational risk management essentially lies with the business units. Senior Managers meetings take place regularly to achieve this common understanding of priorities and to foster the dialogue between the management and the business units. Knowledge and experience is shared throughout the Company to ensure a coordinated approach. Development of specific operational risk management tools began with the common definition of risk indicators at all business units. Statistical and qualitative analyses show the relevance and usefulness of individual indicators as early warning signals. The analysis of internal and external audit reports indicates that most of the audit points are of operational nature. The Bank is therefore working on improving this indicator, allowing for judgment on the respective business units’ progress in the opera-tional area.

While each business units has its own self-sufficient and specialised Legal and compliance set-up, assistance of external counsel is obtained where necessary; to make sure the proper management of the legal risk arises from inadequate documentation, inability to meet regulations, insufficient authority of customers and uncertainty in the enforcement of contracts etc.

Strategy and Reputation RiskManagement risks are difficult to quantify. While management of strategy risk is at the Board of Directors and Senior Manage-ment levels, a process has been implemented to widely capture and manage reputational risk. Strategy risk is the risk deals with changing in the business activities and its options, based on a ‘what-if’ analysis. Strategy is doing the right thing at the right time with proper and timely implementation, compatible with statutory requirements and the industry trends.

Reputation risk is the aggregation of the outcome of all risks plus other internal and external factors based on market or service image. Reputation risk may arise from a variety of sources, including the nature or purpose of a proposed transaction or service, the identity or activity of a controversial potential client, the regulatory or political climate in which the business will be transacted or significant public attention surrounding the transaction itself. Where the presence of these or other factors gives rise to potential reputation risk, the relevant business proposal or service is required to be submitted through a review process, which involves a vetting of the proposal by senior management and the Board of Directors.

32

33

and help rise on their own and proceed ...with vigor.

Continuing sustainability of the organization.

Dear Stakeholder,Having seen the back of terrorism and destruction mid last year, I feel privileged to leave a note in our Sustainability Report, promising you more and more value in the future to your stake at MBSL. We are living in turbulent times and only decisive action will propel us forward. Your Company has engaged talented personnel to scout the fields well ahead before the perils occur and plan counter action to stay afloat. Last year we did just that and also ventured into salvage others who had perished due to ill informed decisions and malpractices.

Despite that the first part of the year was not conducive for businesses due to the negative impact of world economic crisis and the intensified internal battle against terrorism, we did better throughout the year as we had adopted preemptive actions. After the end of battle in mid May 2009 our position was strengthened further, fueled by the gradual recovery of world economy.

We rejuvenated the fundamental principles our business’s of sustainability, optimizing our economic, social and environmental responsibilities through our business priorities while consolidating our vision ‘to be the most innovative, dependable and diversified merchant bank’. In this regard our prime aim is to satiate our customers by providing value added and innovative services. Even in tough economic conditions we are mind full to be profitable for our sharehold-ers while promising a sustainable future for our employees.

We, being a merchant bank always act as a responsible corporate citizen understanding the importance of securing and developing the economy and social wellbeing. We also have been able to secure interests of the stakeholders of troubled finance companies and banks by being the appointed managing agents by the Central Bank of Sri Lanka.

I take this opportunity to thank my team for their dedication to make MBSL a sustainable and socially responsible organization.

Gamini KarunathilakeChief Executive Officer

CEO, Mr. Gamini Karunathilake awarding the first lease to a customer at the new City Branch - Kolluptiya.

34

Sustainability Report

IntroductionOur corporate culture is based on a set of values that are intrinsic to good governance: Account-ability and transparency. Ours is an open book that conforms to Global Reporting Initiatives (GRI) Guidelines. And what follows is some of the performance activities we were engaged during year 2009.

Customer RelationsEmployee RelationsCommunity RelationsInvestor RelationsEnvironmental RelationsSupplier Relations

‘ If we hire people who are smarter than us, we will become a Company of giants... if not will become dwarfs.’

- David Ogilvy.

35

CUSTOMER RELATIONSEasy Access with new City BranchAs MBSL Head Office is situated inside the most high security zone in Colombo our visitors had to undergo countless difficulties such as security checks, and lack of parking space, if they tried to visit us. We were on the look out for a suitable place that is convenient for our customers and finally found one in Kollupitiya and opened our New City Branch in October 2009. The relief and appreciation by customers was amply demonstrated by the disbursement of LKR 52 million within the first three months of operations of this branch. 24 Hours serviceWe understand the urgent financial needs of our customers and are ready to provide them with a speedy service around the clock. To facilitate this commitment we have launched ‘24 hour customer service’ where a customer can obtain leasing or hire purchase facility within 24 hours in any of our branches. This was very well recognized by our long - standing customers and has helped to retain the customers within the company.

Insurance on behalf of customersTime is absolutely vital for customers especially for those who manage their own businesses. For them wasting time is anathema, as it is loss of business opportunity. Also customers find it is inconvenient to bear the insurance premium, which is mandated to be paid annually.

Having identified this issue, we launched a special product which has insurance ‘in – built’ to the leasing or hire purchase agreement, where the premium is paid by MBSL. No longer the customer is expected to seek an insurer. This feature has become very popular among customers especially those individuals and budding entrepreneurs.

Vehicle registration on behalf of customersWith the aim of ensuring a better customer satisfaction, the registration of vehicles under leasing or hire purchase are handled by us, minimizing the hassles that have to be faced by our customers.

EMPLOYEE RELATIONSIt is a fact that our success, depend on our service. The quality our service will propel the curve high in our performance chart. In order to achieve that, Human Resource Development is the most critical focal point within the Bank and the Bank seeks to create a healthy work environ-ment where all employees have the equal opportunity to maximize their personal potential. Therefore, we have defined our HR Vision and Objectives accordingly.

HR Vision:To create an environment in the Bank, with a view to develop ‘cutting – edge’ human resource base to elevate the Bank to be a role model in human resource development, management and utilization.

HR Objective:To deploy a group of competent personnel into a work environment in which they can expand their true potential to achieve organisational goals, as well as fulfilling their personal ambitions.

Human Capital Analysis

Age-wise 51-60 41-50 31-40 *Below 30 11 46 35 55 Senior Senior Junior Clerical & Others Management Executive Executive Allied Management Management

8 24 64 44 7

Revenue per Employee(Company))

LKR

.000

05 06 07 08 09

4,41

8

6,87

0

7,50

1 7,86

2

5,77

3

Profit per Employee(Company))

LKR

.000

05 06 07 08 09

1,29

8

1,87

7

1,48

6

1,36

7

1,71

7

36

Employee Productivity (LKR’ 000) 2008 2009

Revenue per employee 7,501 7,862 Net profit per employee 1,486 1,367Value added per employee 2,605 2,687Total Assets per employee 34,552 37,952Total Employees 138 147

Recruitment & Selection Since the performance of the employees is directly linked to profitability of the organisation, it is imperative that an organisation makes the correct decisions in talent scouting. With this in mind an exacting and meticulous Recruitment & Selection Process has been set in place with the aim of skimming off the cream of the job market.

The prospective candidates are subjected to a selection process consisting of interviews in several stages and in order to maintain unbiased fair play, we have introduced separate interview panels at each grade and stage of recruitment.

The Scheme of recruitment process, which is guided by the Recruitment & Selection Proce-dure, has clearly specified the Educational/Professional qualifications and experience required for each post in the Bank. This has helped the Bank to maintain consistency and transparency in the selection process.

Training & DevelopmentThe year under review witnessed a new resurgence in the two major areas of human resources development and utilization. With the improved financial performance, the Bank was able to adopt and implement staff development programs on a more continuous and meaningful basis. With Awareness Programs conducted on quality and productivity enhancement and organising several business improvement seminars/workshops were, major aspects of human resource development and utilization.

Both as a motivational measure and as a skills development process, arrangements were also made for the staff to attend cost-effective foreign training programs in addition to nominating them for local training sessions.

• Awareness ProgramsThe presentations made by the prominent resource personnel in the field of development of personnel at the Staff Monthly Gatherings were very successful and were extremely useful for both personal and professional commitments of employees.

• Workshops organised during the yearThe periodic Workshop / Seminar aimed at upgrading the knowledge levels of the staff were continued and seven workshops were held during the year.

• Participation in the Local Training Programs Sixty staff members attended 25 Training Programs/Conferences organized by the local training institutions during the year under review, which in fact would benefit the individual as well as the organization.

Open to new ideas and methods -

in many instances even Senior Management participate at our seminars conducted for staff members.

37

Overseas Training Programs Attended By The Staff - 2009 Duration Name Of The Workshop/Program Conducted By

25/02/2009 to 10/03/2009 Corporate Management AOTS, Nagoya, Japan for Sri Lanka

15/06/2009 - 19/06/2009 Lending Strategies to SMEs NIBM, India

22/06/2009 - 26/06/2009 Emotional Intelligence for NIBM, India Leadership Competence

25/11/2009 to 08/12/2009 Corporate Management AOTS, Nagoya, Japan for Sri Lanka

Performance oriented Culture and RewardsContinuation of Performance Appraisal System biannually also enabled to develop the staff on a more meaningful basis as well as to implement and monitor the Bank’s major work plans.

As per the Performance Based Annual Increment Scheme, Annual Increments of the staff are linked to the following factors: Performance of the Organisation, Divisional Performance, Individual Performance Cost of Living

The Bank continued with the staff incentive scheme, which has helped to enhance staff performance, to reach Bank’s business and administrative targets.

Building Relationship & EntertainingTo strengthen and build teamwork and promote closer staff interaction, an outing to “Cin-namon Lodge” (Habarana) was organised through the MBSL Welfare & Recreation Club. 90% of our staff members and their families participated in this event. The renewal of the Collective Agreement with the non-executive staff has assisted to maintain a closer rapport with the CBEU. For first time in the Bank’s history, the Bank entered into a Collective Agreement with the employees in the grades of Junior Executive, Executive, Assistant Manager and Deputy Manager.

On Thursday 4th March 2009, the Bank’s 27th Anniversary and the Monthly Gathering of March were held together. An employee with 20 years of service and eleven employees with 10 years of service were felicitated at this function. Short religious ceremonies, and worship services for all faiths followed the celebrations.

COMMUNITY RELATIONS

1. Honors to war heroes – scholarship for Ranawiru families

We hold the invaluable contributions and supreme sacrifices made by the armed forces to secure the sovereignty of the country and to bring the entire nation under single flag, very close to our hearts. As a tribute to our heroes a scholarship program was initiated by the MBSL to provide financial assistance to 30 children of deceased war heroes. This also will help to inculcate valuable future minds that can help to develop the economy of the country.

Under this scheme, a trust has been established from the contributions made by MBSL, MCSL and its staff who contributed their four days salaries. Each child will get LKR 1,000 per month until they finish their Advanced Level of schooling.

2. Securing future minds and employments- Ceylinco Sussex College The Ceylinco Sussex College is a privately owned premier international college. CSC faced a critical financial situation in 2009 consequent to the crisis at Ceylinco group. The recovery of the monies invested by The Finance Company, who were responsible for

Periodic family outings and Annual Get together have

helped to create harmony with meeting of minds...

Uninterrupted opportunities

- children participating at the Ranaviru Scholarship Awards

Ceremony

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Watershed year -

MBSL diversifying into new ventures - Chairman,Mr. Janaka Ratnayake and CEO, Mr. Gamini Ka-runathilake meeting managements of newly acquired companies...

Seminar conducted by MBSL.

College Network development became doubtful. Further, MBSL wished to secure the future of over 5000 students scattered around the country. The school network was about to come to an end, and if allowed there was no viable option for these affected students as this was the only school that offered local curriculum in English medium. We have always recognized the importance of the education of younger generation and decided to undertake the manage-ment of this college. Also there were considerable academic/ non - academic staff at that time and their employment was at risk as the country was recoiling from the global economic shock. The decision taken by MBSL to manage this collage helped to secure not only the continu-ance of education for the students, but also employment of the staff and the well being of their families, whilst safeguarding the public depositors of TFC.

3. Rehabilitating ailing businesses. Securing interests of the public and the industry – Business rehabilitationFinancial sector is the backbone of an economy and any lapse of this would bring the roof down on any country. During year 2009 financial position of some finance institutions fell in to the fire from the frying pan and the business community feared that this would blow up the entire economy. Industry experts thought that it is not possible to save these companies from succumbing to liquidation. The monies of the public including disable persons and elders were at high risk, and job insecurity spread among the thousands of employees of these companies.

MBSL understood the domino effect that was about to happen to the economy, and took over the management of following companies.

The Finance Company PLCAsian Finance Company LtdCeylinco realty investmentF & G group Ceylinco Savings BankCeylinco Building Society

We acquired the majority share holding of Ceylinco Savings Bank and ABC Insurance Company Ltd to restore public confidence whilst diversifying MBSL Group in to new areas. MBSL have been able to turn these companies around to profit making within six months.This exercise has underlined the ability of MBSL to manage crisis situations. We have been able to secure a sizable portion of public deposits in the affected finance companies, and their operations have begun to continue as normal. Employment of thousands peoples and the survival of their families are now fully assured.

4. SeminarsDuring the year under review corporate advisory division of MBSL conducted series of seminars to educate the public and the professionals in the finance field to address the new developments in the economic climate. These seminars were well attended and focused on the following areas.

1. Importance of Ethics and Governance under the current business environment 2. Cost Management Strategies in an Economic Crisis

2. Sharing Experiences on Rehabilitation of ailing businesses

The response from the audience during these seminars was immense and it was a good sign of understanding the themes of respective sessions. INVESTOR RELATIONSReturn for equity holdersHaving recognised the value of our shareholders we have earned an 11.1% return on equity for the year under review and over the last few years MBSL has paid attractive dividends to the shareholders. Due to the good will that has been earned by the Bank more than 8 time price earnings multiples have been determined by the market for our shares.

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Commitment to lendersWe are aware of the importance of lenders and have developed a sound and long standing relationship with them. MBSL has been able to raise funds even without collateral due to close bond that has been maintained. Our timely settlement of loan installments with due interest has earned us their vote of confidence.

ENVIRONMENT RELATIONS

Effective waste managementSafeguarding the environment is a prime responsibility of any and every citizen. As a corporate citizen, we have implemented a proper waste management system. It is a common human weakness to litter without heed to environment. As a simple measure we have placed dustbins in suitable places for anyone within the premises to dispose their waste, and also for staff to be rid of unnecessary paper that pile up on desks. In a completely computerized workplace use of paper must be kept at minimal.

This may sound as uninspiring, but with proper program urging people to use them produced desired results. This also taught us a valuable lesson that, ‘you don’t have to shout to get a message across’. A simple concept, executed correctly will do the job. To minimize the wastage of natural resources, we send all the waste papers for re-cycling process.

Minimize wastageWith the aim of minimizing the use of natural resources, MBSL staff is encouraged to use, used paper whenever possible for internal purposes and to take print outs on both sides using “Duplex” method. This process has helped not only to secure natural resources but also to minimize cost of paper to the company. Further we have implemented on-line credit approval to reduce the use of paper, ink and electricity.

Energy savingsTo lessen the burden on national power grid, we use energy savings lamps at our Head office and branches. Also we use centralised air-conditioning, which save electricity considerably.

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ConserveEnvironmentllyEnergyFriendly

COMPLIANCE WITH REGULATORY REQUIREMENTS

The Company abides fully with all required regulatory directives and complies with the monthly and quarterly reporting requirements of the Central Bank of Sri Lanka. The Company also adheres to the Central Bank of Sri Lanka - Direction No. 5 of 2006 on Finance Leasing (Reserve Fund) by maintaining a Reserve Fund equivalent to 7 percent of profits for the year.

The Company also complies with Tax and other reporting requirements set by the respective regulatory authorities.

41

Manage Rcycle

Waste Waste

42

Corporate Governance There is great emphasis placed by the regulatory bodies as well as companies on business ethics and corporate governance in the recent times. The collapse of several established finan-cial institutions perceived by many as stable organizations has heightened the importance of conforming to good practices of corporate governance. Your Company recognizes the impor-tance of earning and retaining the trust of shareholders through a strong commitment to sound principles of corporate governance.

MBSL has complied with the Corporate Governance Rules of the Colombo Stock Exchange and most of the provisions of the Finance Leasing (Corporate Governance) Direction No.4 of 2009 issued by the Central Bank of Sri Lanka.

The Board of Directors

The Board is responsible for formulating, implementing and monitoring of the Company’s strate-gic direction, approval of major investments and divestments, annual budget, and ensuring the safety and soundness of the Company through implementation of appropriate systems for risk management and internal control. The Board also bears ultimate responsibility for the integrity of financial information. The Directors collectively and individually demonstrate high standard of integrity and independence of judgment on various issues from strategy to performance. Also the Board seeks professional advice from independent external professionals when required.

The Chairman overseas good governance of the Company’s affairs and monitors the satisfac-tory performance of duties and responsibilities allocated to the members of the Board. The Chairman sets out the Agenda and leads the Board Meetings ensuring effective control of Company’s affairs.

The Directors have access to Company’s information from a variety of sources. All relevant infor-mation and documents required by Directors are provided in a timely manner for deliberations of the Board. Minutes of all the meetings are properly recorded and circulated among Directors. The Board of MBSL, including the Chairman, consisted of eight Directors as at 31 December 2009, all of whom were Non –Executive Directors. Brief profiles of the Directors are given on pages 06 to 07 Each Non executive Director on the Board has submitted a signed and dated declaration as at 31 December 2009 indicating the status of conformity with the Corporate Governance Rules of the CSE which were applicable as at that date. On perusal of the declara-tions, the Board noted that the Chairman, Mr. Janaka Ratnayake, Dr. Ranjith Bandara, Messrs. M S S Paramananda, Lakshman Perera, J G B P Tissera and P G Rupasinghe are independent directors while Ms. W A Nalani and Mr. V Kanagasabapathy are non -Independent directors as per the specified criteria defining independence.

Ms. W A Nalani - employee of Bank of Ceylon, which holds 72% in MBSL V Kanagasabapathy- Alternate Director of Bank of Ceylon, which holds 72% in MBSL Attendance at Meetings held during FY ended 31December 2009

Director Directors’ Meetings Audit Committee Meetings

No. of #No. of No. of #No. of meetings meetings meetings meetings attended held attended held

Janaka Ratnayake /NED/** 18 18 Ms.W A Nalani /NED/ * 14 18 9 11Ranjith Bandara /NED/** Note 1 08 18 4 11M S S Paramananda /NED/** Note 1 12 18 3 11Lakshman Perera /NED/** 18 18 J G B P Tissera /NED/** 18 18 11 11P G Rupasinghe /NED/** 18 18 V .Kanagasabapathy /NED/* Note 2 17 18 10 11

# Number of meetings held during the period the director held officeNED - Non Executive Director** - Independent Director* - Non Independent Director

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Note 1 The Audit Committee was reconstituted and Mr. M S S Paramananda was appointed in place of Dr. Ranjith Bandara from October.2009.

Note 2 The Audit Committee appointed Mr. V Kanagasabapathy, a Chartered Accountant, to the Audit Committee in February2009 in compliance with the requirement to have one member of the committee who is a member of a professional accounting body.

Other Committees of the Board

The Board has delegated certain of its responsibilities to the Audit Committee and Compensa-tion & Corporate Governance Committee

The Audit Committee

The Audit Committee comprises of four members namely Ms. W A Nalani (Chairperson), Messrs. M S S Paramananda, J G B P Tissera and V Kanagasabapathy. A detailed report of the Audit Committee is given on page 49.

Compensation & Corporate Governance Committee

The Compensation & Corporate Governance Committee consists of four Non-executive Direc-tors, three of whom are independent and is chaired by Mr. Janaka Ratnayake. The other mem-bers of the Board are Messrs. Lakshman Perera, P G Rupasinghe and V Kanagasabapathy. The Committee periodically reviews the requirements of the CSE Rules on Corporate Governance and the level of compliance with such rules by the Company to ensure that MBSL continuously strives to observe good governance by adopting best practices and business ethics in conduct-ing affairs of the Company.

The Committee is also responsible for recommending the remuneration package of the Chief Executive Officer and other members of the Senior Management. The performance of the CEO and the Senior Management is reviewed by the Committee against the set objectives and goals. It also determines the compensation policy for all levels of executives. The remuneration policy of the Company is based on the performance of the individual, division and the Company. In-dividual performance of every staff member is measured on an appraisal system by comparing achievements against targets and divisional objectives.

The Senior Management Committee

The Senior Management Committee (SMC) which is headed by the Chief Executive Officer, consists of professionals with expertise in varied disciplines. The SMC assists the Board in the formulation and implementation of strategies, evaluation of new investments, HR policies, iden-tification of business risk, monitoring of performance against the budget, financial and compli-ance matters. Several sub-committees consisting of members of the SMC also functions under delegated authority of the Board. The Credit Committee evaluates credit proposals, conducts periodic reviews on the status of the lending portfolio to determine adequacy of provision-ing, maintenance of solvency margins and ratios etc. Purchasing Committee is authorised to recommend capital expenditure over LKR 20,000. Incentive Committee ensures the accurate application of guidelines in terms of the Company’s Incentive payment policy in making actual payments to employees for a given period. Training Committee identifies and nominates staff members for local and overseas training programmes referred to by the Human Resources De-partment. Investment Committee provides guidance on stock market investments.

Relations with Shareholders The Board considers the Annual General Meeting (AGM) an opportunity to communicate with shareholders and encourages their participation in the affairs of the Company. The Board readily answers questions raised by shareholders at General Meetings and maintains an appropriate dialogue with them when necessary. Apart from the Board of Directors, external Auditors and lawyers are also present at the AGM to answer any queries from the shareholders.

Going Concern

Since the Company has adequate resources to continue operation for a foreseeable future, the “ Going Concern Basis” has been adopted in the preparation of the financial statements.

44

FinancialFinancial Information 44

Annual Report of the Board of Directors‘ on the Affairs of the Company 45 Directors’ Responsibilities 48

Audit Committee Report 49

Auditors’ Report 50

Income Statement 52

Balance Sheet 53 Statement of Changes in Equity 54

Cash Flow Statement 55

Accounting Policies 56

Notes to the Financial Statements 65

Share & Debenture Information 89

Decade at a Glance 91

Statement of Value Added 93

Economic/ Financial Indicators 94

Glossary of Financial Terms 95

Contact Information 96

Our Team 98

Notice of Meeting 102

Form of Proxy

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

45

The Board of Directors of Merchant Bank of Sri Lanka PLC has pleasure in presenting to the members their Annual Report on the affairs of the Company. The audited financial statements of the Company and the audited consolidated financial statements for the financial year ended 31st December 2009, and the Report of the Auditors thereon are also included in this Report. The financial statements were accepted and ap-proved by the Board of Directors on 31 March 2010. The details contained in this Report provide the relevant information required by the Com-panies Act No.7 of 2007, the Rules of the Colombo Stock Exchange and Finance Leasing (Corporate Governance) Direction No. 4 of 2009.

Merchant Bank of Sri Lanka PLC is a public listed company on the Colombo Stock Exchange. The Company has been reaffirmed AA – rating with a stable outlook by RAM Ratings Lanka Limited.

PRINCIPAL ACTIVITIES OF THE COMPANY AND OF ITS SUBSIDIARIESThe principal activities of Company, its subsidiaries and associates namely, Merchant Credit of Sri Lanka Limited, MBSL Savings Bank Limited, MBSL Insurance Company Limited, Lanka Securities (Private) Limited and Ceylinco Investment Company Limited (which together constitute the MBSL Group) are leasing & hire purchase, trade financing, fee and fund based activities, real estate, public deposits, pawning, personal banking, corporate and retail credit, stock broking, and investments.

In April 2009, MBSL became the Managing Agent of MBSL Savings Bank Limited, a licensed specialized bank ( formerly known as Ceylinco Savings Bank Limited ) on a mandate received from the Central Bank. The Bank was facing serious liquidity issues following the financial crisis in the Ceylinco Group at that time. MBSL infused new capital of LKR 100 million to mitigate liquidity problems and stabilize the Bank. MBSL holds 78.3% of the Savings Bank at present. The rehabilitating and restructuring efforts of MBSL has helped to gain investor confidence and the Savings Bank has made a steady progress in performance within a short period of time. Measures are being taken to improve the liquidity position of the Savings Bank to meet the capital adequacy requirements in terms of Directions issued by the Central Bank.

In April 2009, MBSL also acquired 100% of MBSL Insurance Company Limited( formerly known as ABC Insurance Company Limited) for LKR 38.6 million. This troubled insurance company was also confronted with liquidity problems prior to its acquisition by MBSL. In August 2009, MBSL infused additional capital of LKR 100 million to strengthen and stabilize the Company, which also helped to further restore customer confidence. The company engages in life and general insurance business.

In August 2009, consequent to an invitation from the Board of Ceylinco Investment Company Limited (CICL) to strengthen the the stability of the company in the aftermath of the Golden Key crisis, MBSL made an investment by injecting fresh capital and acquired 46.35% of the company representing 500,000 ordinary shares. Mr. Janaka Ratnayake, the Chairman of MBSL is also a Director /shareholder of CICL which is an investment company with shareholdings in several quoted companies including The Finance Company PLC.

Consequent to this transaction, in October 2009, the Supreme Court made an order restricting transfer of shareholdings in Ceylinco Group of companies, which had retrospective effect from 28 October 2008. This transaction is before court pending a decision on the ownership structure of CICL.

REVIEW OF OPERATIONSA review of the operations of the MBSL during the financial year 2009 and results of those operations are contained in the Chairman’s Review (pages 08 to 11), the Chief Executive Officer’s Report (pages 16 to 20), and Management Discussion and Analysis (pages 24 to 29). These reports form an integral part of the Annual Report.

The Company raised LKR 540 million from the Rights Issue held in December 2009 to settle part of the short term borrowings and to expand its lending portfolio. The Company has already settled short term borrowings of LKR 332 million from proceeds of the Rights Issue.

During the year under review, MBSL was appointed as the managing agent of several ailing finance companies by the Central Bank of Sri Lanka to provide overall guidance to the management in order to restore public confidence and return to normal business operations. Considering this unenviable task as a part of its social responsibility, MBSL extended its expertise to several troubled finance companies at a time when most companies were facing serious liquidity issues due to pressure from depositors to withdraw their investments. MBSL has successfully managed to regain public confidence whilst improving existing systems, procedures and controls to enhance profitability and productivity of these companies.

STATED CAPITALThe Company’s Stated Capital as at 01 December 2009 was LKR 1,067 million. Consequent to the Rights Issue held in December 2009, the Stated Capital has increased to LKR 1,607 million.

SHAREHOLDING AND SHARE INFORMATIONThe Company had 8,676 registered shareholders as at 31 December 2009. The distribution of shareholding and details of the 20 largest shareholders, share performance and valuation information are given on pages 89 and 90.

FUTURE DEVELOPMENTSAn overview of the future developments of the Company is given in the Chairman’s Review (pages 08 to 11), the Chief Executive Officer’s Report (Pages 16 to 20), and Management Discussion and Analysis (pages 24 to 29).

FINANCIAL STATEMENTSThe audited financial statements of the Company and of the Group for the year ended 31 December 2009 have been prepared in line with applicable accounting standards and regulatory and statutory requirements, inclusive of specific disclosures. The said audited financial state-ments duly signed by the Assistant Director, Finance & Treasury Management, the Chief Executive Officer and two of the Directors of the Company, are given on pages 52 to 88 and form an integral part of the Annual Report of the Board.

SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted by the Company in the preparation of the financial statements and the impact of changes in the Sri Lanka Accounting Standards made during the year, are given on pages 56 to 64.

Annual Report of the Board of Directors on the Affairs of the Company...cont’d

46

TURNOVER, PROFIT & APPROPRIATIONSProvided below is a summary of the consolidated financial results of the Group operations during the year ended 31 December 2009.

2009 2008 LKR’000 LKR’000

Turnover 2,385.8 1,647.5Profit before taxation 412.4 247.9Taxation 73.6 4.9Operating profit after taxation 338.9 243.0Minority interest 55.8 18.6Transfer to retained earnings 170.4 116.1

DIVIDENDS The Board of Directors have recommended the declaration by shareholders at the Annual General Meeting of a final dividend of LKR 0.75 per share to be paid on the 135,000,000 ordinary shares in issue.

The Board of Directors has ensured due compliance with the provisions of the Companies Act No.7 of 2007 pertaining to the Company’s solvency position with regard to the above dividend.

CORPORATE DONATIONSDuring the year the Company has made donations amounting to LKR 93,000.00 (2008 – LKR 430,000.00) in terms of the resolution passed at the last Annual General Meeting. This amount excludes contributions towards the Company’s Corporate Social Responsibility initiatives.

TAXATIONThe Company is liable for income tax at the rate of 35% and VAT on Financial Services at 20%.

STATUTORY PAYMENTSThe Board of Directors confirms that to the best of their knowledge and belief, statutory payments to all relevant regulatory and statutory authorities have been paid by the Company.

PROPERTY, PLANT & EQUIPMENTThe details of property, plant and equipment of the Company are given under Note 20 on page 76.

DEBENTURES

The total value of Debentures issued by the Company as at 31 December 2009 amounted to LKR 1.0 billion details of which are given under Note 27 A to the financial statements on page 79.

OUTSTANDING LITIGATIONIn the opinion of the Directors and the Company’s lawyers, pending litigation against the Company disclosed under Note 33.2 of the financial statements will not have a material impact on the financial position of the Company or on its future operations.

EVENTS AFTER THE BALANCE SHEET DATENo circumstances have arisen since the balance sheet date, which would require adjustments to, or disclosure in, the accounts, except those disclosed under Note 38 to the financial statements.

THE BOARD OF DIRECTORSThe Board assumes overall responsibility to the shareholders for setting the direction of the Company through the establishment of policies and key strategic objectives and ensuring that their implementation is in line with the Company’s vision and values. The Directors are accountable for proper guidance of the Company’s affairs and share collective responsibility in ensuring the highest standards of ethics and integrity in the conduct of business of the Company. The Board also bears ultimate responsibility for maintaining the integrity of financial information and the effectiveness of the Company’s systems of internal control and risk management.

The Board has also appointed Board sub-committees, namely the Audit Committee and the Compensation & Corporate Governance Com-mittee, to ensure oversight, control over certain affairs of the Company conforming to corporate governance standards of the Central Bank of Sri Lanka, the Listing Rules of the Colombo Stock Exchange by adopting the best practices. It is the considered view of the Board that the Company has taken necessary precautions to safeguard the interests of its stakeholders. Please refer page 42 for the Report on Corporate Governance for further details.

The Directors of the Company as at 31 December 2009 were:

Janaka Ratnayake -ChairmanMs. W A NalaniRanjith BandaraM S S ParamanandaLakshman PereraJ G B P TisseraP G RupasingheV Kanagasabapathy

There were no changes to the Directorate of the Company during the year under review.

47

INTERESTS REGISTERIn terms of the Companies Act No.7 of 2007, an Interests Register is maintained by the Company. All the Directors have made general declara-tions as provided for in section 192(2) of the Companies Act No.7 of 2007. Note No 37 to the financial statements dealing with related party disclosures includes details of their interests in transactions of the Company.

Directors’ RemunerationDirectors’ fees and emoluments paid during the year are as follows: Company Group LKR. LKR.

Directors’ Fees and Emoluments 5.7 million 7.3 million

Details of Directors’ fees and emoluments paid during the year 2009 are provided under Note No 37 to the financial statements on page 88 In recognition of the extraordinary work undertaken by the Chairman in connection with the restructuring of sick companies which is outside the scope of normal duties of a director, the Board approved a monthly payment of LKR 250,000 for the Chairman, Mr. Janaka Ratnayake from June 2009. However this payment was discontinued at the request of the Chairman, with effect from November 2009.

DIRECTORS INTEREST IN SHARES OF THE COMPANYExcept for Mr. J G B P Tissera who was allotted 1,000 ordinary shares in the Rights Issue held in December 2009, none of the other Directors of the Company have acquired shares of the Company during the year under review.

Name of Director No. of shares No. of shares held as at 01.01.2009 held as at 31.12.2009 J G B P Tissera 2,000 3,000 DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTINGThe Directors are responsible for the preparation of the financial statements of the Company to reflect a true and fair view of its state of affairs. The Directors are of the view that these financial statements have been prepared in conformity with the requirements of Sri Lanka Accounting and Auditing Standards, Companies Act No. 7 of 2007, and the Listing Rules of the Colombo Stock Exchange. The statement of Directors’ Responsibilities given on page 48 forms an integral part of the Annual Report of the Board of Directors.

RELATED PARTY TRANSACTIONSThe Directors have also disclosed the transactions, if any, that could be classified as related party transactions in terms of Sri Lanka Accounting Standard 30, Related Party Disclosures (revised 2005), which is adopted in the preparation of the financial statements. Those transactions disclosed by the Directors are given in Note 37 to the financial statements forming part of the Annual Report of the Board.

ENVIRONMENTThe Company has used its best endeavours to comply with the relevant environmental laws and regulations. The Company has not engaged in any activity that is harmful or hazardous to the environment.

CORPORATE GOVERNANCEIn the management of the Company, the Directors have placed emphasis in conforming to the best corporate governance practices and procedures. Accordingly, systems and structures have been introduced / improved from time to time to enhance risk management measures and to improve accountability and transparency.

In March 2007, the Colombo Stock Exchange (CSE) introduced mandatory rules on Corporate Governance for listed companies. The rules mandated the listed companies to conform to those rules relating to the composition of the Board and the Board Sub Committees. Every listed company was required to comply with the rules from the financial year commencing on or after 1st April 2008. The Company’s status of compliance with these rules is stated in the Corporate Governance Report on pages 42 to 43.

COMPLIANCE WITH LAWS AND REGULATIONSMBSL as a listed company has at all times ensured that it complied with the applicable laws and regulations including the listing rules of the Colombo Stock Exchange. The respective divisional heads responsible for compliance, table a report on compliance at every monthly meet-ing of the Board of Directors.

AUDITORSThe Company’s Auditors during the period under review were M/s SJMS Associates, Chartered Accountants. The Board has authorized the payment of LKR 650,000.00 as Audit Fees for the year 2009 on the recommendation of the Audit Committee. (The Auditors were paid LKR 538,000.00 as Audit Fees for the year 2008).

The retiring Auditors, M/s SJMS Associates, Chartered Accountants, have expressed their willingness to continue in office for the financial year 2010. The Audit Committee has recommended that they be re-appointed as Auditors.

A resolution to re-appoint M/s SJMS Associates and to authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting to be held on 16 June 2010.

For and on behalf of the Board

Janaka Ratnayake J G B P Tissera Ms. M PhillipsChairman Director Company Secretary

Colombo31 March 2010

Directors’ Responsibilities

48

The following statement sets out the responsibilities of Directors in relation to the financial statements of the Company. This report is prepared with the view to distinguish the respective responsibilities of the Directors and the Auditors, which are set out in their report appearing on page 50.

The Companies Act No.7 of 2007 requires that the Directors prepare for each financial year and place before a General Meet-ing, Financial Statements comprising, an Income Statement which presents a true and fair view of the profit and loss of the Company and its subsidiaries for the financial year and a Balance Sheet, which represents a true and fair view of the state of affairs of the Company and its subsidiaries as at the end of the financial year.

In preparing the financial statements, appropriate accounting policies have been selected and applied consistently. Reason-able and prudent judgments and estimates have been made and applicable accounting standards have been followed.

The Directors are of the view that the Company and its subsidiaries have adequate resources to continue in business for the foreseeable future, the financial statements continue to be prepared on the same basis.

The Directors are responsible to ensure that the Company and its subsidiaries maintain sufficient accounting records enabling to disclose, with reasonable accuracy, the financial position of the entities and also to be able to ensure that the Financial State-ments of the Company and its subsidiaries meet with the requirements of the Companies Act, Listing Rules of the Colombo Stock Exchange, Directions issued by the Central Bank of Sri Lanka and generally accepted accounting policies and principles.

The Directors are responsible for taking reasonable measures to safeguard the assets of the Company and the subsidiaries in that context to give proper consideration to the establishment of appropriate internal control systems with the view to pre-venting or for the detection of fraud and other irregularities.

The Directors have provided the external auditors with every opportunity to carry out any reviews and inspections, which they consider appropriate for the purpose of enabling them to form their opinion on the Financial Statements.

The Directors also confirm to the best of their knowledge, all taxes, statutory levies and financial obligations of the Company and the subsidiaries have been either paid or adequately provided for in the Financial Statements.

The Directors are of the view that they have discharged their responsibilities as set out in this Statement.

By Order of the Board

Ms. M PhillipsCompany Secretary31 March 2010

Audit Committee Report

The Audit Committee consists of four Non-executive directors two of whom are independent while the others are non-independent. One member is a Chartered Accountant with experience in financial auditing and accounting. The Chief Executive Officer, Head of Finance and Deputy Director of Strategic Planning & Risk Management attend the meetings by invitation. The other members of the Senior Management participate as and when required. The Company Secretary functions as the Secretary to the Audit Committee. The Minutes of the Audit Committee Meetings are submitted for review to the Board of Directors. The Board is constantly updated with the decisions and recommenda-tions of the Audit Committee The Audit Committee met 11 times during the year under review.

The primary objective of the Audit Committee is to assist the Board of Directors of the Company to effectively discharge its responsibilities relating to financial and connected matters of the Company. The functions of the Audit Committee include:

• Review of internal and external audit reports and follow up on recommendations • Review the efficiency of internal control systems and risk management procedures • Ensure Company’s financial statements are in conformity with Sri Lanka Accounting Standards and adherence to statutory and regulatory compliance • Review and recommend the Annual and Interim Financial Statements of the Company • Ensure availability of a sound financial reporting system to provide timely and reliable information to the Board of Directors, Regulatory Authorities and shareholders

The internal audit function is outsourced to a reputed Audit firm. The internal audit reports with management responses to audit observations are circulated to the Audit Committee for review and recommendations. The internal audit function covers the review of the effectiveness of internal controls, operational and business risks, compliance with statutory requirements and company policies and operational efficiencies with recommendation for remedial action.

As far as the Directors are aware and according to the Auditor’s written confirmation, the external Auditors are independent and they do not have any interest in contracts with the Company or its subsidiaries and associates.

The Committee has recommended to the Board of Directors that M/s SJMS Associates, Chartered Accountants, be re-appointed as external Auditors of the Company for the ensuing financial year subject to the approval of the shareholders at the Annual General Meeting.

Ms. W A NalaniChairperson-Audit Committee31 March 2010

49

Independent Correspondent Fi rm to

SJMS Associates Chartered Accountants

No. 02, Castle Lane,Colombo - 04. Sri Lanka.

Tel: + 94 (11) 2 580409, 2 503262,Fax: +94 (11) 2 582452,

Restructure & Corporate RecoveryTel: 5 364293, 5 444420, Fax: 5 364295,

E-mail: sjms@sjmsassociates.comWebsite: www.sjmsassociates.lk

P. E. A. Jayewickreme. M. B. Ismail, Ms. A. M. J. Patrick, T. Krishnakumar, Ms. S. L . Jayasuriya, D. S. W. Andradi

G. J. David, Ms. F. M. Marikkar, Ms. M. S. J. Henry, Ms. A. U. M. Keppetipola

Auditors’ Report

50

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

Report on the Financial StatementsWe have audited the accompanying financial statements of Merchant Bank of Sri Lanka PLC, the consolidated financial state-ments of the bank and its subsidiaries which comprise the balance sheet as at December 31, 2009 and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of OpinionOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in ac-cordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

Opinion - Company In our opinion, so far as appears from our examination, the bank maintained proper accounting records for the year ended December 31, 2009 and the financial statements give a true and fair view of the bank’s state of affairs as at December 31, 2009 and of its profits and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Opinion – Group MBSL Insurance Company Limited (Formally known as ABC Insurance Company Limited)The Company has not recognised a foreign facultative reinsurance payable amounting to Rs. 53,520,000 as of 31 December 2009 arising on the reinsurance obtained in respect of a specific insurance policy in which the premium is long overdue as at the year end. The directors have not recognised such payable since they are of the view that such payable does not arise until the Company receives full settlement from the debtor, based on a clause in the reinsurance contract. However, in our view, based on the facts and legal action taken by the creditor the payable needs to be provided as of 31st December 2009. As a result the reinsurance creditor should be recognised and the loss for the year should be increased by the above amount.

In our opinion except for the effects on the financial statements of the matter referred to in the preceding paragraph, the con-solidated financial statements give a true and fair view of the state of affairs as at 31st December 2009 and the profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards of the bank and of its subsidiary dealt with thereby so far as concerns the shareholders of the bank.

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Emphasis of Matter – GroupWithout qualifying our opinion on the group financial statements we draw attention to the following matters. MBSL Insurance Company Limited We draw attention to Note 13.2 in the financial statements which explains the basis on which the financial statements of MBSL Insurance Company Limited are prepared on a going concern basis.

MBSL Savings Bank Limited • MBSL Savings Bank Limited has failed to maintain a Capital Adequacy Ratio of not less than 10% in relation to total risk weighted assets with core capital constituting not less than 5% in relation to total risk weighted assets as per the Direction No, 10 of 2007 issued by the Central Bank of Sri Lanka. This factor raises substantial doubt that the MBSL Savings Bank Limited will be able to continue as a going concern.

• Representations made by the Directors that the MBSL Savings Bank Limited has no contingent liability on the assurance by Ceylinco Shriram Securities Holdings Limited to shareholders of MBSL Savings Company Limited on the issue of shares during the 2008, more fully explained in Note No. 14.7 to the financial statements.

Report on Other Legal and Regulatory RequirementsMBSL Savings Bank Limited had failed to comply with the following directions issued by the Central Bank of Sri Lanka.

• Direction No. 8 of 2007 on Maximum Amount of Accommodation, as per the said direction the Bank is permitted to grant maximum amount of accommodation up to thirty percent (30%) of its capital base to any single company. During the year, the MBSL Savings Bank Limited granted a syndicate loan facility of Rs. 50 Mn irrespective of the limits permitted by the said direction.

• Minimum percentage of investments in equity of Public companies, where the Bank is permitted to invest in equity capital of any public company up to ten percent (10%) of its capital funds. However, the MBSL Savings Bank Limited had invested in equity capital of a Quoted Public Company in excess of 10% of its capital funds.

• The Bank is required to maintain minimum average monthly liquid assets of not less than 20% of its total monthly deposit liabilities. However, the MBSL Savings Bank Limited had failed to maintain minimum liquid assets percentage of 20% throughout the year.

Further, the MBSL Savings Bank Limited faces a serious loss of capital situation in terms of Section 220 of the Companies Act No. 07 of 2007.

Except for the effect of the matters discussed above, these financial statements of the bank and group also comply with the requirements of sections 151(2) and 153(2) to 153(7) of the Companies Act No. 07 of 2007.

These financial statements of the company provide the information required by the Finance Leasing Act No. 56 of 2000.

SJMS ASSOCIATESChartered AccountantsColombo 31 March 2010

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Company GroupIncome Statement

For the year ended 31 December 2009 2008 Change 2009 2008 Change Note LKR ’000 LKR ’000 % LKR ’000 LKR ’000 % INCOME 1 1,155,731 1,035,227 11.6 2,385,842 1,647,537 44.8Interest income 2 982,545 967,304 1.6 1,995,648 1,549,921 28.8Less: Interest expense 3 584,247 547,386 -6.7 1,274,896 921,486 -38.4Net interest income 398,298 419,918 -5.1 720,752 628,435 14.7Insurance premium income - - 120,465 - Fee and commission income 4 76,632 43,590 75.8 78,390 51,928 51.0Dividend income 21,260 5,582 280.9 4,076 5,627 -27.6Other income 5 75,294 18,751 301.5 187,263 40,061 367.4Operating Income 571,484 487,841 17.1 1,110,946 726,051 53.0

Less: OPERATING EXPENSES 6 Personnel expenses 132,539 114,095 -16.2 303,541 179,192 -69.4Premises, equipment and establishment expenses 36,648 32,238 -13.7 79,846 53,127 -50.3Fee and commission expenses 4,465 3,196 -39.7 6,885 7,903 12.9Provision for staff retirement benefits 8,993 7,560 -19.0 14,540 9,447 -53.9Provision for loan losses 7 74,436 47,903 -55.4 28,750 99,250 71.0Reversal of provision for fall in value of investments (42,771) (7,020) 509.3 (46,580) (5,073) 818.2Value added tax on financial services 53,833 34,233 -57.3 81,389 48,906 -66.4Other overhead expenses 77,577 68,693 -12.9 258,629 101,876 -153.9 345,720 300,898 -14.9 727,000 494,628 -47.0 PROFIT FROM OPERATIONS 225,764 186,943 20.8 383,946 231,423 65.9 Share of profits of Associate Company 8 28,500 16,471 73.0 28,500 16,471 73.0 PROFIT BEFORE TAXATION 254,264 203,414 25.0 412,446 247,894 66.4Less: Income tax expenses 9 53,286 (1,664) -3,302.7 73,592 4,908 -1,399.4PROFIT AFTER TAXATION 200,978 205,078 -2.0 338,854 242,986 39.5 Attributable to: Equity holders of the parent 200,978 205,078 -2.0 283,083 224,412 26.1 Minority interest - - 55,771 18,574 200.3 PROFIT FOR THE YEAR 200,978 205,078 -2.0 338,854 242,986 39.5 BASIC EARNINGS PER SHARE (LKR.) 10 2.19 2.28 -3.7 3.09 2.49 23.9

The Accounting Policies and Notes to the financial statements from page 56 to 88 form an integral part of the financial statements.

Balance Sheet Company Group

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As at 31 December 2009 2008 Change 2009 2008 Change Note LKR ’000 LKR ’000 % LKR ’000 LKR ’000 % ASSETS Cash in hand and at bank 11 39,511 38,236 3.3 145,518 39,733 266.2Government Treasury bills 12 387,847 131,084 195.9 1,291,653 446,084 189.6Dealing securities & Investments 13 217,429 51,505 322.2 333,444 55,649 499.2Investment securities 14 10,024 5,024 99.5 15,159 5,034 201.1Bills receivable 15.1 446,346 329,320 35.5 446,575 329,549 35.5Loans 15.2 697,015 478,149 45.8 2,989,240 1,342,942 122.6Lease / hire purchase receivable 15.3 2,958,996 3,128,124 -5.4 5,035,167 4,660,299 8.0Investment in real estate - - - 28,643 31,159 -8.1Other assets 16 144,180 131,467 9.7 787,198 207,986 278.5Investments in associates 17 95,022 82,977 14.5 95,022 82,977 14.5Investments in subsidiary 18 259,524 20,918 1,140.7 - - -Investment properties 19 283,764 339,087 -16.3 391,729 339,087 15.5Property, plant and equipment 20 37,844 30,519 24.0 150,924 44,466 239.4Intangible assets 21 1,423 1,718 -17.2 122,200 4,063 2,907.6Total Assets 5,578,925 4,768,128 17.0 11,832,472 7,589,028 55.9 LIABILITIES Deposits from customers 22 - - - 4,897,367 2,199,270 122.7Interest bearing borrowings: Non-current 23.1 84,375 380,665 -77.8 84,375 380,665 -77.8 Current 23.2 1,574,610 1,173,284 34.2 1,648,795 1,301,707 26.7Insurance provision - Life 24 - - 41,336 - Insurance provision - Non Life 25 - - 181,569 - Current tax liability 26 45,511 37,873 20.2 45,511 37,873 20.2Debentures 27 1,074,160 1,144,160 -6.1 1,169,644 1,144,160 2.2Deferred tax liability 28 23,716 31,295 -24.2 23,716 31,295 -24.2Retirement benefit obligation 29 58,601 50,612 15.8 79,652 63,975 24.5Other liabilities 30 387,180 270,445 43.2 881,897 420,171 109.9Total Liabilities 3,248,153 3,088,334 5.2 9,053,862 5,579,116 62.3 Equity Stated capital 31 1,607,000 1,067,000 50.6 1,607,000 1,067,000 50.6 Statutory reserve fund 32.2 59,784 45,716 30.7 106,344 83,658 27.1Retained earnings 32.3 663,988 567,078 17.1 857,443 687,046 24.8 Total equity attributable to equity holders of the company 2,330,772 1,679,794 38.8 2,570,787 1,837,704 39.9Minority Interest - - - 207,823 172,208 20.7 Total equity 2,330,772 1,679,794 38.8 2,778,610 2,009,912 38.2 Total liabilities and equity 5,578,925 4,768,128 17.0 11,832,472 7,589,028 55.9 Commitments and contingencies 33.1 32,568 38,426 -15.2 143,442 52,176 174.8 Net assets value per ordinary share 17.26 18.66 -7.5 19.04 20.42 -6.7 The Accounting Policies and Notes to the financial statements from page 56 to 88 form an integral part of the financial statements. These financial statements are in compliance with the requirements of the Companies Act, No. 7 of 2007. Priyantha Herath Gamini Karunathilake Assistant Director - Finance & Treasury Management Chief Executive Officer

The Directors are responsible for the preparation and presentation of these Financial Statements. Approved and signed for and on behalf of the Board.

Janaka Ratnayake Ms. W A Nalani Chairman Director 31 March 2010.Colombo. Sri Lanka.

Statement of Changes in Equity

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For the year ended 31 December 2009 Stated Statutory Accumulated Total Capital Reserves Profit/(Loss) LKR ’000 LKR ’000 LKR ’000 LKR ’000Company Balance as at 01.01.2008 1,067,000 31,361 466,355 1,564,716Net Profit for the period - - 205,078 205,078Transfers to reserve fund - 14,355 (14,355) - Dividend paid - - (90,000) (90,000)Balance as at 31.12.2008 1,067,000 45,716 567,078 1,679,794 Net profit for the period - - 200,978 200,978 Transfers to reserve fund - 14,068 (14,068) - Right issue 540,000 - - 540,000 Dividend paid - - (90,000) (90,000)Balance as at 31.12.2009 1,607,000 59,784 663,988 2,330,772 Group Balance as at 01.01.2008 1,067,000 65,427 570,865 1,703,292 Net profit for the period - - 224,412 224,412 Transfers to Statutory reserve/Reserve fund - 18,231 (18,231) - Dividend paid - - (90,000) (90,000)Balance as at 31.12.2008 1,067,000 83,658 687,046 1,837,704 Net profit for the period - - 283,083 283,083 Transfers to Statutory reserve/Reserve fund - 22,686 (22,686) - Right issue 540,000 - - 540,000 Dividend paid - - (90,000) (90,000)Balance as at 31.12.2009 1,607,000 106,344 857,443 2,570,787 Statutory reserves represent the reserve fund of the Company in terms of Direction No. 05 of 2006 issued by Central Bank of Sri Lanka under Section No. 34 of the Finance Leasing Act No. 56 of 2000 and Statutory reserve of the Subsidiary, Merchant Credit of Sri Lanka in terms of Direction No. 01 of 2003 issued by Central Bank of Sri Lanka under Section No. 46 of the Finance Act No. 23 of 1991.

Cash Flow StatementCompany Group

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For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Cash flow from operating activities Interest and commission receipts 764,393 911,025 1,642,032 1,392,231 Interest payments (429,952) (498,596) (821,630) (691,983)Receipts from other operating activities 75,294 18,750 337,875 44,626 Cash payments to employees and suppliers (194,669) (172,553) (443,894) (312,479)Payments on other operating activities (95,586) (73,189) (444,173) (197,500)

Operating profit before changes in operating assets 119,480 185,437 270,210 234,895 (Increase)/Decrease in operating assets: Operating assets 7,859 (36,106) (280,060) (59,179) Funds advanced to customers (166,764) (210,776) (741,080) (619,987)Increase/(Decrease) in operating liabilities Operating liabilities 116,735 (10,576) 325,100 19,987 Deposits from customers - - 1,115,366 385,941 Net cash from operating activities before income tax 77,310 (72,021) 689,536 (38,343)Income tax paid (24,316) (17,327) (37,251) (26,646)Net cash inflow/(outflow) from operating activities 52,994 (89,348) 652,285 (64,989) Cash flows from investing activities Purchase of property, plant & equipment (14,266) (13,441) (51,056) (19,665)Dividend received 26,733 5,582 9,549 5,627 Purchase of Investments (384,635) (35,882) (664,042) (44,022)Proceeds from sale of property, plant & equipment 810 309 10,620 375 Proceeds from sale of investments 329,971 58,542 415,914 58,738 Investment in subsidiary companies (238,605) - - - Net cash and cash equivalents on acquisition of subsidiaries - - 261,376 - Net cash inflow/(outflow) from investing activities (279,992) 15,110 (17,639) 1,053 Cash flows from financing activities

Proceeds from issue of Shares 540,000 - 540,000 Payment of dividends (90,000) (90,000) (111,640) (90,000)Cash inflow from long term borrowings 151,885 428,914 151,885 428,914 Repayment of long term borrowings (687,113) (449,702) (726,287) (474,470)Proceeds from short term borrowings 1,592,582 2,519,584 1,592,582 2,519,584 Repayment of short term borrowings (801,505) (2,192,454) (930,104) (2,223,855)Net cash inflow/(outflow) from financing activities 705,849 216,342 516,436 160,173 Net increase / (decrease) in cash and cash equivalents 478,851 142,104 1,151,082 96,237 Cash and cash equivalents at beginning of the period (Note. 1) (65,852) (207,956) 227,545 131,308

Cash and cash equivalents at end of the period (Note. 1) 412,999 (65,852) 1,378,627 227,545 Note 1. Reconciliation of cash and cash equivalents Government Treasury Bills 387,847 131,084 1,291,653 446,084 Cash in hand and at bank (Note. 11) 39,511 38,236 145,518 39,733 Bank overdrafts (Note. 23.2) (14,359) (235,172) (58,544) (258,272) 412,999 (65,852) 1,378,627 227,545

Accounting Policies

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1. REPORTING ENTITYMerchant Bank of Sri Lanka PLC is a public quoted company incorporated and domiciled in Sri Lanka. The registered office and principal place of business of the company is located at the Bank of Ceylon Merchant Tower, No. 28, St Michael’s Road, Colombo 03. The shares of the Company are listed in the Colombo Stock Exchange.

The consolidated financial statements of the Company for the year ended 31 December 2009 comprise the Company (Parent company), and its subsidiary (together referred to as the “Group”) and the Company’s interest in associate company.

In the opinion of the Directors, company’s parent enterprise and its ultimate parent enterprise is Bank of Ceylon.

The financial statements for the year ended 31 December 2009 were authorised for issue on 31 March 2010, in accordance with the resolution of the Directors passed on 31 March 2010.

2. PRINCIPAL ACTIVITIES AND NATURE OF OPERATION2.1 CompanyThe principal activities of the company are leasing and hire purchase, trade financing, corporate advisory services, capital market operations, fund management and corporate secretarial services.

2.2 Subsidiary The principal activities of the Company’s subsidiary companies, namely, Merchant Credit of Sri Lanka Ltd, MBSL Savings Bank and MBSL Insurance Company Ltd, are leasing and hire purchase, trade financing, acceptance of fixed deposits and certificates of deposits and real estate development, banking and insurance services respectively.

The company obtained 100% controlling interest of MBSL Insurance Company Ltd, on 07th April 2009 and 78% controlling interest of MBSL Savings Bank Limited on 30 April 2009.

2.3 Associate The principal activities of the Company’s associate company, namely, Lanka Securities (Pvt) Ltd, are trading in equity and debt securities, equity and debt security brokering and placement of equity and debt securities.

3. BASIS OF PREPARATION3.1 Statement of complianceThe balance sheet, income statement, changes in equity and cash flows, together with accounting policies and notes (the “financial state-ments”) have been prepared in accordance with: the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, Companies Act No. 07 of 2007 and Finance Leasing Act No. 56 of 2000, Finance Companies Act No. 78 of 1988, Banking Act No. 30 of 1988 and Insurance Industry Act No. 43 of 2000.

3.2 Basis of measurementThese financial statements have been prepared on an accrual basis under the historical cost convention and applied consistently with no adjustment being made for inflationary factors affecting the financial statements except dealing securities which are stated at lower of cost and market value on aggregate portfolio basis. Assets and liabilities are grouped by nature and listed in an order that reflect their relative liquidity. The accounting principles are applied consistently other than where specially disclosed with due regard to prudence, materiality and substance over form criteria as explained in Sri Lanka Accounting Standard No. 03 on Presentation of Financial Statements (Revised 2005). Where appropriate, the accounting policies are disclosed in the succeeding notes.

3.3 Functional and presentation currencyThe financial statements are presented in Sri Lankan Rupees, which is the Group’s functional currency. All the financial information presented in Sri Lanka Rupees has been rounded to nearest thousand, unless otherwise stated.

3.4 Use of estimates and judgmentsThe preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to an accounting estimate are recognised in the period in which the estimate is revised and in any future periods affected.

3.5 Comparative informationThe accounting policies have been consistently applied by the Group and consistent with those used in the previous year. Comparative information is reclassified where necessary to comply with the current presentation.

4. MATERIALITY AND AGGREGATIONEach material class of similar items is presented separately in the financial statements. Items of dissimilar nature or function statements are presented separately unless they are immaterial in accordance with the Sri Lanka Accounting Standard No. 03 (Revised 2005) on Presentation of Financial Statements.

5. SIGNIFICANT ACCOUNTING POLICIESThe accounting policies set out below has been applied consistently to all periods presented in these financial statements. The accounting poli-cies of the Company have been consistently applied by Group entities where applicable and any deviations have been disclosed accordingly.

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5.1 Basis of ConsolidationAll entities which are controlled by the Company are consolidated in the group’s financial statements. The Group’s financial statements comprises of: consolidation of the financial statements of the company, its subsidiary in terms of the Sri Lanka Accounting Standard No. 26 (Revised) on Consolidated and Separate Financial Statements and proportionate share of the profit/loss of its associate in terms of Sri Lanka Accounting Standard No. 27 ( Revised 2005) on Investment in Associates

5.1.1 SubsidiariesSubsidiaries are the entities that are controlled by the Company. The financial statements of subsidiaries are fully included in consolidated financial statements from the date on which control is effectively transferred to the Company until the date that control effectively ceases. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The consolidated financial statements are prepared to common financial year ending 31 December and subsidiaries in the Group also have a common financial year ending 31 December. Accounting Policies of subsidiaries largely conform to those used by the Company for similar transactions and events in similar circumstances.

Minority interests represent the share of profit or loss and net assets not owned, directly or indirectly, by the Company and are presented separately in the consolidated income statement and consolidated balance sheet within equity, separately from the equity attributable to the equity holders of the parent company.

5.1.2 AssociatesAssociates are the entities in which the Company has significant influence, but control, over the financial and operating policies. The consoli-dated financial statements include the company’s share of the total recognised gains and losses of associates under the equity method, from the date that significant influence effectively commences until the date that significant influence effectively ceases.

Under equity method, investments in the Associates are carried in the balance sheet at cost plus post-acquisition changes in the Company’s share of net assets of the associates.

The reporting date of the Associates and the Company are identical and the Associates’ accounting policies largely conform to those used by the Company for identical transactions and events in similar circumstances. 5.1.3 Transactions eliminated on consolidationAll intra-group balances and transactions and any unrealised gains arising from intra-unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no sufficient evidence of impairment. 5.2 Summary of significant accounting policiesThe principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.

The Directors have made an assessment of the Group’s ability to continue as a going concern in the foreseeable future, and they do not intend to liquidate, cease or curtail the trading.

5.3 Foreign currency transactions The consolidated financial statements of the Company are presented in Sri Lankan Rupees, which is the Company’s functional and presenta-tion currency. Transactions in foreign currencies are initially recorded using closing exchange rate of the functional currency ruling at the date of transaction.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to Sri Lankan Rupees at the middle rate of exchange ruling at that date.

Non-monetary items denominated in foreign currencies that are stated at historical cost at the balance sheet date are translated to Sri Lankan Rupees at the foreign exchange rate ruling at the date of the initial transaction.

Exchange differences arising on settlement of monetary items and re - translation of monetary items, are recognised in profit or loss in the year in which they arise.

6. ASSETS AND BASIS OF THEIR VALUATION6.1 Cash and cash equivalentsCash and cash equivalents include cash in hand, demand deposits and short-term highly liquid investments, which are readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

The cash flow has been prepared by using the “Direct Method” of preparing cash flows. For the purpose of cash flow statement, cash and cash equivalents consists of cash in hand, Treasury Bills and net of outstanding bank overdrafts.

6.2 Investments/Securities6.2.1 Investment in Treasury Bills held to maturity.Investment in Treasury Bills held to maturity is reflected at the value of bills purchased and the discount/premium accrued thereon. Discount received/premium paid is taken to the income statement based on the pattern reflecting a constant periodic rate of return.

Accounting Policies...cont’d

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

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

6.2.4 Investment in subsidiaryInvestment in subsidiary is stated at cost in the Company’s financial statements in accordance with the Sri Lanka Accounting Standard No. 26 (Revised 2005) on consolidated and separate financial statements.

6.2.5 Investment in associatesInvestment in associates is accounted for at cost in the Company’s financial statements and under the equity method in the consolidated financial statements.

Under the equity method, the investments in Associates is initially accounted for at cost and the carrying amount is adjusted for post acquisi-tion changes in the group’s share of net assets of the Associates less any impairment in the Group’s net Investment in Associates.

6.2.6 Other investmentsThese are acquired and held for yield or capital growth in the medium to long term. Such securities are at cost. Changes in market values of these securities are not taken into account, unless there is a diminution in value, which is other than temporary.

6.3 Loans and advances to customersLoans and advances to customers are stated in the balance sheet at the recoverable amount represented by the gross value of outstanding balance adjusted for provision of loan losses and interest in suspense (Interest that is not accrued to revenue).

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

6.3.2 Provision for loan lossesFull provision has been made for all the loans and advances outstanding for more than 6 months, net of the realisable value on securities.

Provisions for loans are made after giving credits to the forced sale value (FSV) of the mortgaged immovable property by applying the hair – cut rate on the Forced Sale Value according to their age of the debt as given below:

Age of arrears Haircut % (discount rate)

3 months to 1 year 0% 1 – 2 years 20% 2 – 3 years 25% 3 – 4 years 30% 4 – 5 years 35% 5 years above 40% or at discretion of management

6.4 Rental Receivable on Leased Assets and Hire Purchase Assets Assets leased to customers, which transfer substantially all the risks and rewards associated with ownership other than legal title, are accounted as finance leases in accordance with the Sri Lanka Accounting Standard No. 19 on Leases (Revised 2005) and reflected in the balance sheet at balance capital recoverable after deducting unearned interest income, rental collections and provision for doubtful debts.

Assets hired to customers under the hire purchase agreements, which transfer the risks and rewards incidental to ownership as well as the legal title at the end of such contractual period are classified as hire purchase receivables. Such assets are accounted for in a similar manner as finance leases.

6.4.1 Provision for loan losses on rental receivablesA specific provision for possible losses is made on the amount of outstanding rental receivable net of realisable security value (net exposure at risk) in accordance with the directions issued by Central Bank of Sri Lanka. Such provisions are subject to minimum of:

* Twenty per cent (20%) on all receivables (net of unearned income), which are in arrears for a period of 6 to 12 months.

* Fifty per cent (50%) on all receivables (net of unearned income), which are in arrears for a period of 12 to 18 months.

* One Hundred per cent (100%) on all receivables (net of unearned income), which are in arrears for a period 18 months or more.

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6.5 Bills of exchangeBills receivable are reflected at the value of the bills initially paid to the customers and the discount/premium accrued thereon. Discount is taken to the income statement based on a pattern reflecting a constant periodic rate of return.

6.5.1 Provision for bills receivableBills of Exchange outstanding for more than 3 months are provided in full after deducting the realisable value on securities.

6.6 General provision In addition to the specific provision made, a further general provision is made, as a measure of prudence against potential credit losses espe-cially not identified. This general provision will be created by providing annually a minimum 0.5% of the aggregate value of net loan portfolio (i.e. leasing, hire purchase, bills of exchange & loans) after the specific provisions, subject to the cumulative general provision not exceeding 2.5% of the net portfolio. This provision can be utilised in unexpected situations with the approval of Board of Directors.

6.7 Property & EquipmentProperty and equipment are stated at cost less subsequent accumulated depreciation and any subsequent accumulated impairment losses. All items of property and equipment are initially recorded at cost.

Items of property and equipment are de - recognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de - recognised of the asset is included in the income statement in the year the asset is de - recognised. 6.7.1 DepreciationProvision for depreciation is calculated by using a straightline method on the cost of all property and equipment, other than freehold land, in order to write off such amounts over the estimated useful economic life of such assets.

The estimated useful lives of such assets are as follows:

Motor vehicles 04 years Computers & accessories 04 years Building 20 years Other assets 08 years

Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is de - recognised.

6.7.2 Operating lease assetsOperating lease assets consist of motor vehicles. These assets are depreciated over the period of the lease.

6.8 Intangible assets6.8.1 Basis of recognitionIntangible asset is recognised if it is probable that the future economic benefits that are attributable to the asset will flow to the entity and the cost of the assets can be measured reliably in accordance with the Sri Lanka Accounting Standard No. 37 on Intangible Assets. Accordingly, these assets are stated in the balance sheet at cost less accumulated amortisation and impairment losses.

6.8.2. (a) GoodwillGoodwill arising on the acquisition represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities at the date of acquisition. Upon transition to revised Sri Lanka Accounting Standard No. 25 on “Business Combinations”, goodwill will no longer be amortised. Instead, goodwill will be tested for impairment annually and assessed for any indication of impairment at each reporting date to ensure that its carrying amount does not exceed its recoverable amount. If an impairment loss is identified, it will be recognised immediately in the income statement.

6.8.2. (b) Computer softwareAll computer software costs incurred which are not integrally related to associated hardware which can be clearly identified, reliably measured and it’s probable that they will lead to future economic benefits, are classified as intangible assets in the balance sheet and stated at cost less accumulated amortisation and any accumulated impairment loss.

6.8.3 Subsequent expenditureSubsequent expenditure on intangible asset is capitalised only when it increases the future economic benefits embodied in these assets. All other expenditure is expensed as incurred.

6.8.4 Amortisation The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expenses category consistent with the function of intangible asset. The estimated useful life of software is four years.

6.9 Investment properties Investment properties are properties held either to earn rental income or for capital appreciation or for both.

Accounting Policies...cont’d

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6.9.1 Basis of recognitionInvestment property is recognised if it is probable that future economic benefits that are associated with the investment property will flow to the Company and cost of the investment property can be measured reliably.

6.9.2 MeasurementAn investment property is measured initially at its cost. The cost of a purchased investment property comprises of its purchase price and any directly attributable expenditure. The Company applies the cost model for investment properties in accordance with the Sri Lanka Accounting Standard No. 40 on Investment Property (revised 2005). Accordingly, land classified as investment property is stated at cost and buildings classified as investment property are stated at cost less any accumulated depreciation and any accumulated impairment losses. Provision for depreciation is made over the period of 20 years at the rate of 5% per annum using the straightline method for buildings classified as invest-ment property and the land is not depreciated.

6.10 Impairment 6.10.1 Financial assetsIn addition to the provision made for possible loan losses based on the parameters and directives for the specific and general provisions on loans and advances by the Central Bank of Sri Lanka, the Company reviews its loans and advances portfolio at each reporting date to assess whether a further allowance for impairment should be provided in the income statement. The judgment by the management is required in the estimation of these amounts and such estimates are based on assumptions about a number of factors through actual results may differ, result-ing in future changes to the provisions.

6.10.2 Non financial assetsThe Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered as impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Previously recognised impairment losses other than in respect of goodwill, are reversed only if there has been an increase in the recoverable amount of the asset. Such increase is recognised to the extent of the carrying amount had no impairment losses been recognised previously.

7. LIABILITIES AND PROVISIONS7.1 Provisions for liabilitiesProvisions are recognised when the Company/Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obliga-tions, in accordance with the Sri Lanka Accounting Standard No. 36 on Provisions, Contingent Liabilities and Contingent Assets.

7.2.1 Defined contribution plan – Employees’ Provident Fund and Employees’ Trust FundEmployees are eligible for Employees’ Provident Fund contributions and Employees’ Trust Fund contributions in line with respective statutes and regulations. The Company/Group and employees contribute 12% and 8% respectively of gross emoluments of employees to Employees’ Provident Fund. The Company/Group contributes 3% of gross emoluments of employees to the Employees’ Trust Fund.

7.2.2 Defined benefit plan - GratuityGratuity is a defined benefit plan. Provision has been made in the accounts for retiring gratuities. An actuarial valuation of the retirement benefit is performed by a qualified actuary as at the balance sheet date using the projected unit credit (PUC) method in terms of the Sri Lanka Accounting Standard No. 16 (Revised 2006) on “Employee Benefits”. The provision is not externally funded.

However, as per the Payment of Gratuity Act No. 12 of 1983, the liability only arises upon completion of five years of continued service.

7.3 Commitments and contingenciesAll discernible risks are accounted for in determining the amount of all known liabilities. Company’s share of any contingencies and capital com-mitments of a subsidiary or an associate for which the Company is also liable severally or otherwise, is included with appropriate disclosures.

Contingent liabilities are possible obligations whose existence will be confirmed only by occurrence or non-occurrence of uncertain future events not wholly within the control of the entity or present obligations where the transfer of economic benefit not probable or cannot be reliably measured. Contingent liabilities are recognised in the balance sheet unless they are remote.

8. INCOME STATEMENTS8.1 Revenue recognition8.1.1 Interest incomeInterest receivable is recognised on accrual basis except for the interest receivable on term loans. Interest cease to be taken into revenue when the recovery of interest and/or principal is in arrears for six months or more. Interest receivable on advances classified as non-performing is accounted for on cash basis. Interest falling due on non-performing advances is credited to interest in suspense account. In addition, interest accrued up to 6 months on such non-performing advances is also eliminated from the interest income and transferred to interest in suspense.

8.1.2 Income from Finance Lease and Hire Purchase The excess of aggregate lease contract receivable over the cost of the leased assets constitutes the total unearned income at the commence-ment of the lease contract.

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The unearned income is recognised as income over the term of the lease commencing from the month the lease is executed in proportion to the declining investment in lease.

Non - performing leases are those where the rentals are overdue for 6 months or more. Lease income accrued is suspended from the date on which a lease is classified as non-performing and credited to the interest in suspense. Thereafter such income is recognised on cash basis. Income from hire purchase is recognised as same way income from finance lease is recognised. 8.1.3 Income from discounting of bills of exchange and chequesInterest income from discounted trade bills and cheques are recognized proportionately from the date of discount to the maturity date.

8.1.4 Dividend income on sharesDividend income from shares is recognised when the Company’s right to receive the payment is established.

8.1.5 Fees and commission incomeFees and commission income including insurance agency commission, commission on bank guarantees are recognised as the related services are performed.

8.1.6 Overdue interestDefault charges for late payments of finance lease and hire purchase rentals and for delayed redemption of bills of exchange are recognised as income on collection.

8.1.7 Share issue management feeIncome from management of initial public offering and private placement of shares of clients are recognised on an accrued basis.

8.1.8 Management feesFee received from the companies, which are managed by Merchant Bank of Sri Lanka has been classified as consultancy fees and recognised in the income statement on an accrual basis.

8.1.8 Interest income from loans and margin tradingInterest income from personal loan, staff loan and margin trading are recognised on accrual basis. However income from term loans is recog-nised on cash basis.

9. EXPENDITURE RECOGNITION Expenses are recognised in the income statement on the basis of direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in running the business and in maintaining property and equipment in a state of efficiency has been charged to the income statement.

In terms of the provisions of the Sri Lanka Accounting Standard No. 33 on Revenue Recognition and Disclosures in the Financial Statements of Finance Companies, interest and other expenses payable are recognised on an accrual basis.

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

9.2 Income tax expensesIncome tax expense comprising of current and deferred tax expenses is recognised in the income statement.

9.2.1 Current taxCurrent tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current as well as prior years. The tax rates and tax laws used to compute the amount are those that are enacted or subsequently enacted by the balance sheet date. Accordingly, provision for taxation is made based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto, at the rates specified in Note No 9 to the financial statements.

9.2.2 Deferred taxDeferred tax is provided on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all temporary differences, except:

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

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

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Accounting Policies...cont’d

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

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

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

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the assets are realised, or the liabilities are settled, based on tax rates and tax laws that have been enacted or substantially enacted at the balance sheet date in accordance with the Sri Lanka Accounting Standard No. 14 on Income Taxes.

9.2.3 Value Added Tax on Financial Services.The basis for the computation of value added tax on financial services is the accounting profit before income tax adjusted for the economic depreciation, computed on prescribed rates and emoluments of employees based on “Value addition attributable method”.

10. SEGMENTAL INFORMATIONThe Company’s internal organisation and management is structured based on individual products and services, which are similar in nature and process and where the risk and return are similar. The primary segments represent this business structure. The secondary segments are determined based on the Company’s geographical spread of operations. The geographical analysis of turnover and profits are based on location of customers and assets respectively. The activities of each of the reported business segments of the Company and the Group are detailed in Note No. 36.

11. EVENTS AFTER THE BALANCE SHEET DATE All material events occurring after the balance sheet date are considered and where necessary adjustments are made to the financial statements.

12. DIRECTORS RESPONSIBILITY STATEMENT.The Directors acknowledge the responsibility for true and fair presentation of the financial statements in accordance with the books of accounting and Sri Lanka accounting standards.

13. SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL INSURANCE COMPANY LTD

13.1 Non-life Insurance Business13.1.1 Gross Written Premium

Premium is generally recognised as written upon inception of the policy. Upon inception of the contract, premium is recorded as written and is earned primarily on a pro rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs significantly from the contract period, premium is earned over the period of risk in proportion to the amount of insurance protection provided.

Reinsurance PremiumReinsurance premium assumed is estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. This premium is charged over the terms of the related reinsurance contracts.

Unearned PremiumUnearned premium is the portion of gross written premium and reinsurance premium written in the current year in respect of risk related to subsequent periods. Unearned premium is calculated on the 24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act, No. 43 of 2000.

Unexpired RiskProvision is made where appropriate for the estimated amount required over and above unearned premiums to meet future claims and related expenses on the business in force as at 31st December.

Deferred Acquisition ExpensesDeferred acquisition expenses represent commission related to unearned premium and is calculated on the 24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act No. 43 of 2000.

Premiums ReceivablesAccording to the Premium Payment Warranty (PPW) ruling by the Insurance Board of Sri Lanka (IBSL), all policies issued and not recovered over 60 days are cancelled.

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Reinsurance ReceivableReinsurance assets include the balances due from both insurance and reinsurance companies for paid and unpaid losses and loss adjustment expenses. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the balance sheet unless a right to offset exists.

ClaimsProvisions for anticipated losses are posted if the future premiums and proportional investment income in a portfolio will probably not be sufficient to cover the expected claims and costs. Whilst the directors consider that the provision for claims related reinsurance recoveries are fairly stated on the basis of information currently available, the ultimate liability will vary as a result of subsequent information and events. This may result in adjustments to the amounts provided. Such amounts are reflected in the financial statements for that period. The methods used and the estimates made are reviewed regularly.

13.1.2 Life Insurance BusinessGross Written PremiumsPremium from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, is recognised as revenue when cash is received from the policyholder. Benefits and expenses are provided against such revenue to recognise profits over the estimated life of the policies. Moreover, for single premium contracts, premium is recorded as income when received with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.

Reinsurance PremiumReinsurance premium expenses are accrued on active policies.

Benefits, Losses and ExpensesDeath claims are recorded on the basis of notifications received. Surrenders, maturities and annuity payments are recorded when due. Claims payable includes direct costs of settlement.

Interim payments and surrenders are accounted for only at the time of settlement.

Actuarial Valuation for Long - Term Insurance ProvisionThe Directors agree to the long term insurance provision for the Company at the year - end on the recommendations of the Consultant Actuary following his annual investigation of the life insurance business. The actuarial valuation takes into account all liabilities and is based on assump-tions recommended by the Consultant Actuary.

13.2 Going ConcernDuring the year ended 31 December 2009 the Company reported a loss of Rs. 66,354,000(2008 - Rs. 86,158,000) and at the balance sheet date the company had accumulated losses of Rs. 340,944,000 (2008 - Rs. 274,590,000).

The Company’s solvency margin as stipulated in Regulation of Insurance Industry Act No. 43 of 2000, Rule 2004, is appropriately met, subject to clearance from the Insurance Board of Sri Lanka (IBSL) on a payable to a reinsurance creditor. The Directors have not recognised this liability based on a clause in the reinsurance contract.

These financial statements have been prepared on the basis of the Company being going concern, on a written undertaking given by the parent company Merchant Bank of Sri Lanka PLC that sufficient funds will be infused to meet the solvency margin requirement, in the event IBSL requires the recognition of the payable to the reinsurer.

14. SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL SAVINGS BANK LTD.

14.1 Non-performing loans and advancesThe loans and advances are classified as Non-Performing Advances (NPA) based on the period in arrears of due capital and/or interest. Credit facilities repayable in monthly installments when more than 2 months principal and/or interest in arrears are recognised as non - performing.

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

14.2 Provision for loan losses14.2.1 Specific Provisions for losses on loans and lease receivables are made as follows:Bank makes specific provisions in respect of loans and advances, based on period in arrears, on the following basis:

Period outstanding Category of NPA Minimum specific Credit Quality Provision Requirements 2-8 Months Sub-Standard 20% 8-11 Months Doubtful 50% > 11 Months Loss 100%

The provision made relates to all categories of loans and advances identified as substandard, doubtful and loss. Values assigned to collateral held for non-performing loans secured by properties are determined based on the realisable values of the properties, being the forced sale value provided by independent parties/valuers.

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14.3 Revenue recognition on non - performing loansWhen an advance is classified as non-performing interest ceased to be recognised on loans and advances, due to capital and/or interest is in arrears for more than 2 months, interest is taken to Income on cash basis thereafter.

Liabilities and provisions 14.4 Deposits from customers Deposits include non - interest bearing deposits, savings deposits, term deposits, deposits redeemable at call and certificates of deposits. They are brought to account at the gross value of the outstanding balance. Interest paid is charged to the Income Statement.

14.5 Securities sold under Repurchase AgreementsSecurities sold under agreements to re-purchase are recorded separately in the financial statements. The difference between the sale and the purchase price represents interest expense, which is recognised in the income statement over the period of the repurchase agreements.

14.6 Revenue recognition14.6.1 Interest incomeInterest income from loans and advances is recognised on an accrual basis. Interest ceases to be accrued when the recovery of interest or principal is in arrears for more than two (2) months. Interest on non-performing advances is accounted for on a cash basis.

Interest on non - performing debts is credited to the ‘Interest in suspense account’, which is netted in the balance sheet against the relevant balance. Interest income from investments is recognised on an accrual basis.

14.7 The prospectus published by the Bank with regard to the share issue made during the year 2008 included a statement stating the Ceylinco Shriram Securities Holding (Pvt) Ltd had given an assurance to prospective shareholders to buy back the shares after 36 months from the allotment date at LKR 16 per share.

The Boards of Directors confirm that there is no contingent liability to the Bank, from the assurance given by the aforementioned company.

The Central Bank of Sri Lanka (CBSL) issued the circular dated 11th December 2006, on “Minimum Capital Requirement of Licensed Specialised Banks” requiring all licensed Specialised Banks to maintain a capital of LKR 1.5 billion. However, CBSL has decided to grant time untill 31 December 2012 for MBSL Savings Bank Ltd, to comply with the minimum capital requirement.

15. New Accounting Standards issued but not effective as at the Balance Sheet dateSri Lanka Accounting Standard No. 44 on Financial Instruments: Presentation and Sri Lanka Accounting Standard No. 45 Financial Instruments: Recognition and Measurement which are applicable to the financial statements covering annual periods beginning on or after 01 January 2011, and not yet effective for the period ended December 2009, has not been applied in preparing these consolidated financial statements.

Company Group

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1 INCOME For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Interest income (Note 2) 982,545 967,304 1,995,648 1,549,921 Fee & commission income (Note 4) 76,632 43,590 78,390 51,928 Dividend income 21,260 5,582 4,076 5,627 Other income (Note 5) 75,294 18,751 187,263 40,061 Insurance Premium Income - - 120,465 - 1,155,731 1,035,227 2,385,842 1,647,537 2 INTEREST INCOME Gross earnings under Finance leases 312,154 366,410 467,148 507,138 Operating leases - 231 - 231 Hire purchase 383,638 313,972 700,638 524,949 Loans 95,210 89,237 407,683 184,823 Bills discounting 71,264 51,022 71,264 51,022 Treasury bills and money market 26,081 16,492 176,224 90,903 Overdue Interest 79,068 75,455 150,081 136,370 Others 15,130 54,485 22,610 54,485 982,545 967,304 1,995,648 1,549,921 3 INTEREST EXPENSES Customer deposit interest - - 667,814 343,786 Debenture interest 237,314 246,731 246,547 246,731 Long term borrowings 87,631 130,523 87,631 141,400 Short term borrowings 256,605 155,680 269,523 174,834 Interest on cash margin 1,270 2,930 1,270 2,930 Overdraft and other interest 1,427 11,522 2,111 11,805 584,247 547,386 1,274,896 921,486 4 FEE AND COMMISSION INCOME Insurance commission 15,157 13,263 17,580 20,138 Commission on bank guarantee 2,893 1,460 2,980 1,460 Fee and Consultancy income 58,582 28,867 57,830 30,330 76,632 43,590 78,390 51,928 5 OTHER INCOME Proceeds from written-off lease contracts 5,350 5,366 5,350 11,849 Gain on sale of quoted investments 10,909 1,876 35,508 1,876 Service charges on hire purchase 8,261 6,851 17,318 14,332 Gain on disposal of leased/hire purchased assets 467 1,085 467 1,085 Miscellaneous income 2,119 2,259 11,926 3,062 Seminar income 649 1,005 649 1,005 Gain on disposal of fixed assets 810 309 5,896 363 Gain on sale of real estate - - (196) 6,489 Gain on sale of Treasury Bills/Bonds - - 34,283 - Gain on disposal of properties 46,729 - 76,062 - 75,294 18,751 187,263 40,061

6 OPERATING EXPENSES Operating expenses include the following: Legal expenses 4,891 4,977 9,340 5,103 Personnel cost (Note 6.1) 132,539 114,095 303,541 179,192 Depreciation of property, plant and equipment 6,668 6,205 29,795 11,306 Amortisation of intangible assets 569 527 1,972 1,813 Depreciation of investment properties 970 1,025 3,005 1,025 Directors’ emoluments (Note 6.2) 5,705 3,039 7,307 3,441 Auditors’ remuneration 650 538 1,379 805 Donations 93 430 96 492

6.1 Personnel cost Salary 103,584 92,573 252,368 149,125 Defined contribution plan - EPF 9,122 8,063 20,551 13,294 Defined contribution plan - ETF 2,281 2,016 3,091 3,324 Bonus 17,552 11,443 27,531 13,449 132,539 114,095 303,541 179,192

Notes to the Financial Statements

Company Group

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For the year ended 31 December 2009 2008 2009 2008 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 0006.2 Directors’ emoluments Emoluments of Chairman 3,677 1,626 4,341 1,851 Emoluments of Non-Executive Directors 2,028 1,413 2,966 1,590 5,705 3,039 7,307 3,441 7 PROVISION FOR LOAN LOSSES Specific provision on bills receivable (reversals) 910 (1,000) 910 (1,000) General provision on bills receivable 2,094 (473) 2,094 (473) Specific provision on loans and advances 2,501 903 (87,624) 4,983 General provision on loans and advances 9,434 4,799 3,354 4,799 Specific provision on lease/hire purchase receivable 67,845 51,161 70,342 92,745 General provision on lease receivable (8,348) (7,487) (6,993) (7,487) Total provisions made during the year 74,436 47,903 (17,917) 93,567 Write-off - - 46,667 5,683 74,436 47,903 28,750 99,250 8 SHARE OF ASSOCIATE COMPANY’S PROFIT BEFORE TAXATION Name of the Company Percentage holding % Lanka Securities (Pvt) Ltd. 29 28,500 16,471 28,500 16,471

9. INCOME TAX EXPENSE 9.1 (a) Current tax expense Income tax on profit for the year 57,354 40,763 71,118 47,335 (Over provision)/under provision in previous year 3,511 (17,492) 10,053 (17,492) 60,865 23,271 81,171 29,843 9.1 (b) Deferred tax expenses Reversal of deferred taxation (7,579) (24,935) (7,579) (24,935) Total income tax expense 53,286 (1,664) 73,592 4,908 9.2 Reconciliation of accounting profit and taxable income: Accounting profit 254,264 203,414 412,446 247,894 Add: Disallowed expenses 1,165,252 65,085 1,636,677 85,597 Less:- Capital allowance and other income 1,206,288 119,116 1,728,380 165,607 Adjusted trade profit 213,228 149,383 320,743 167,884 Less:-Tax savings on the utilization of tax losses/ qualifying payments 74,630 52,416 76,360 52,416 Taxable Income 138,598 96,967 244,383 115,468 Income Tax charged at Standard rate 35% 48,509 33,938 62,069 40,413 SRL 1.5% 728 509 932 606 Current & Deferred tax share of associate company 10,982 8,119 10,982 8,119 Notional Tax Credit (2,865) (1,803) (2,865) (1,803) Deferred tax charge / (reversal) (7,579) (24,935) (7,579) (24,935) (Over Provision) / Under provision in previous year 3,511 (17,492) 10,053 (17,492) Total Income Tax expense 53,286 (1,664) 73,592 4,908 9.3 The applicable tax rates for the Company and Group would be at 35.00%

10. Earning / dividend per ordinary Share10.1 Earnings per Ordinary Share Basic earnings per share (EPS) has been calculated by dividing the profit attributable to equity holders of the Bank, by the weighted average number of ordinary shares in issue during the year. Profit attributable to ordinary shareholders 200,978 205,078 283,083 224,412 Number of ordinary shares used as denominator ‘000 91,603 90,000 91,603 90,000 Basic earnings per ordinary share (LKR) 2.19 2.28 3.09 2.49

Notes to the Financial Statements...cont’d

Company Group

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For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 10.2 Dividend per share Final dividend proposed (LKR’ 000) 101,250 90,000 101,250 90,000 Dividend per ordinary share (LKR) 0.75 1.00 0.75 1.00 The Directors recommended a final dividend of LKR 0.75 per share for the year ended 31 December 2009 for approval by the share holders’ at the Annual General Meeting to be held on 08 June 2010. As stipulated by SLAS 12 (Revised) Event occurring after the Balance Sheet Date, this proposed dividend is not recognised as a liability as at 31 December 2009. However, for the purpose of computing Dividend per Share, the proposed final dividend has been taken into consideration.

11 CASH IN HAND AND AT BANK Cash in hand 135 135 10,340 497 Cash at bank 39,376 38,101 135,178 39,236 39,511 38,236 145,518 39,733 12 GOVERNMENT TREASURY BILLS Treasury bills 387,847 131,084 1,100,653 181,084 Treasury bills - Re-purchase agreements - - 191,000 265,000 387,847 131,084 1,291,653 446,084

13 DEALING SECURITIES Company For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value13.a Quoted Shares Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Bank, Finance and Insurance Hatton National Bank PLC - Voting 33,900 5,041 5,771 - - - Hatton National Bank PLC - Non Voting - - 20,000 1,119 640 National Development Bank PLC 31,000 4,811 6,386 20,000 4,403 1,720 Commercial Bank of Ceylon PLC - Voting 11,000 1,854 2,085 6,800 958 456 Commercial Bank of Ceylon PLC - Non-Voting - - 69,300 6,212 3,326 Development Finance Corporation of Ceylon 100,000 15,365 16,700 77,100 12,133 4,086 Seylan Bank PLC - Non Voting - - 200,000 2,607 1,200 Pan Asia Banking Corporation PLC 68,000 1,144 1,411 20,000 256 205 Kshatriya Holdings PLC - - 2,200 20 7 Janashakthi Insurance Co. PLC - - 495,000 5,940 2,846 Central Finance Co. PLC 2,000 619 635 Nation Trust Bank PLC 50,000 1,796 1,838 Nation Trust Bank PLC - W2010 50,000 431 413 Sampath Bank PLC 10,000 1,736 2,043 Ceylon Investment Co. PLC 35 6 9 Lanka Orix Leasing Co. PLC 25,400 2,939 3,480 Lanka Ventures PLC 40,000 566 690 36,308 41,461 33,648 14,486 Diversified Holdings John Keells Holdings PLC 75,000 10,670 12,863 95,566 9,004 4,778 Hayleys PLC 15,000 2,494 2,576 6,000 841 516 Richard Pieris & Co. PLC 150,000 5,655 5,850 12,425 966 280 The Bukit Darah Co. PLC - - - 200 383 122 18,819 21,289 11,194 5,696 Services John Keells Ltd 23,700 3,578 3,626 - - - 3,578 3,626 - - Information & Technology E-Channelling PLC 20,000 237 195 - - - 237 195 - -

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For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value Shares LKR ’000 LKR ’000 Shares LKR ’000 LKR ’000 Beverages, Food & Tobacco Distilleries Co. of Sri Lanka PLC 117,300 12,181 12,346 42,500 4,731 2,146 Lanka Milk Foods (CWE) PLC 22,000 1,428 1,425 10,000 487 318 Bairaha Farms PLC - - - 45,900 770 367 Cargills (Ceylon) PLC 5,000 311 326 - - - Ceylon Tobacco Co. PLC 10,000 1,784 1,850 - - - The Lion Brewery Ceylon PLC 5,000 422 408 - - - Coco Lanka PLC 10,000 397 483 - - - Kotmale Holdings PLC 50,000 837 800 - - - Renuka Agri Food PLC 1,339,300 3,013 3,013 - - - 20,373 20,651 5,988 2,831 Hotels and Travel Asian Hotels & Properties PLC 30,000 2,081 2,835 40,000 2,254 990 Keells Hotels PLC 59,800 794 1,346 34,800 293 174 Stafford Hotels PLC 41,600 1,120 1,144 8,200 108 74 Ceylon Hotels Corporation PLC 25,100 665 596 100 1 1 The Fortress Resorts PLC 70,000 891 858 14,900 112 64 Rivarina Hotels PLC 42,200 2,865 2,870 5,000 228 142 Marawila Resorts PLC 915,900 6,012 5,266 - - - Eden Hotel Lanka PLC 315,800 8,274 8,132 - - - Galadari Hotels (Lanka) PLC 31,600 499 474 - - - Hotel Developers (Lanka) PLC 3,000 411 354 - - - Hotel Reefcomber PLC 23,100 52 49 - - - Serendib Hotels PLC 10,000 674 663 - - - Serendib Hotels PLC- Non-Voting 84,700 3,341 3,324 - - - Taj Lanka Hotels PLC 4,600 107 107 - - - Tangerine Beach Hotels PLC 10,000 707 653 - - - Hotel Services Ceylon PLC 3,562,500 58,998 67,688 - - - 87,491 96,359 2,996 1,445 Manufacturing ACL Cables PLC 26,500 1,871 2,034 10,000 743 300 ACL Plastics PLC 5,000 330 370 11,100 420 305 Ceylon Grain Elevators PLC 40,000 563 570 10,000 148 65 Pelwatte Sugar Industries PLC - - 5,500 226 59 Caltex PLC 12,200 1,443 1,729 20,800 2,244 1,914 Tokyo Cements Co. (Lanka) PLC 50,000 869 988 30,000 598 218 Royal Ceramic Lanka PLC 40,000 1,851 2,660 13,700 639 384 Lanka Cement PLC 55,000 1,978 1,279 - - - Lanka Tiles PLC 15,000 734 998 - - - Dipped Products PLC 13,500 1,272 1,161 - - - Lankem Ceylon PLC 96,400 3,912 4,338 - - - Lanka Walltile PLC 21,200 973 1,214 - - - Hayleys Mgt Knitting Mills PLC 258,100 9,661 9,034 - - - Richard Pieris Exports PLC 5,000 129 139 - - - 25,586 26,514 5,018 3,245 Trading Brown & Co. PLC 22,900 1,347 1,706 - - - C.W.Mackie & Co. PLC 25,000 834 900 - - - Tess Agro PLC 175,000 327 263 - - - 2,508 2,869 - - Telecommunication Dialog Telekom PLC 310,000 4,643 2,248 440,000 11,847 2,640 Sri Lanka Telecom PLC 24,900 1,136 1,145 20,200 702 626 5,779 3,393 12,549 3,266

Notes to the Financial Statements...cont’d

69

For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value Shares LKR ’000 LKR ’000 Shares LKR ’000 LKR ’000 Power and Energy Lanka IOC PLC - - - 22,000 623 335 Vallibel Power Erathna PLC - - - 4,450,000 11,863 14,685 Hemas Power PLC 59,600 1,316 1,162 - - - 1,316 1,162 12,486 15,020 Health Care The Lanka Hospital Corporation PLC - - - 47,500 1,361 570 Nawaloka Hospitals PLC 200,000 623 620 209,900 649 378 Asiri Hospitals PLC 20,000 172 205 - - 795 825 2,010 948 Land and Property Colombo Land & Development Co. PLC 40,000 289 260 175,000 804 630 The Colombo Fort Land & Building Co. PLC 15,000 441 469 - - Ceylinco Seylan Developments PLC - - - 10,000 91 45 Colombo Land & Development Co. PLC- W 25,000 101 98 - - - Ct Land Development PLC 51,100 1,174 1,111 - - City Housing & Real Estate Co. PLC 10,000 346 213 - - - Overseas Realty (Ceylon) PLC 15,000 221 233 - - - 2,572 2,384 895 675 Motors Diesel & Motor Engineering Co PLC - - - 6,022 706 373 - 706 373 Chemical & Pharmaceuticals Chemical Industries (Colombo) PLC 132,500 8,101 8,348 74,000 3,656 2,128 Chemical Industries (Colombo) PLC - Non Voting 77,800 2,959 3,054 55,800 2,024 1,102 11,060 11,402 5,680 3,230 Plantation Balangoda Plantations PLC - - - 10,000 426 120 Kotagala Plantation PLC - - - 10,000 680 170 Kegalle Plantations PLC 5,000 171 168 - - - Agalawatte Plantation PLC 10,000 238 218 - - - Maskeliya Plantations PLC 10,200 211 189 - - - - 620 575 - 1,106 290 Total gross carrying value of dealing securities 217,042 232,705 94,276 51,505 Provision for fall in value of dealing securities ( Note 13.1 ) - - 42,771 Total net carrying value of dealing securities 217,042 232,705 51,505 51,505 13.b Listed Debentures Bank of Ceylon 3,700 387 387 - - - Total net carrying value of listed debentures - 387 387 - - - Total net carrying value of dealing securities and investments 217,429 233,092 51,505 51,505

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Group For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value 13.c Quoted Shares Shares LKR ’000 LKR ’000 Shares LKR ’000 LKR ’000 Bank, Finance and Insurance Hatton National Bank PLC - Voting 33,900 5,041 5,771 - - - Hatton National Bank PLC -Non Voting - - - 20,000 1,119 640 National Development Bank PLC 31,000 4,811 6,386 20,000 4,403 1,720 Commercial Bank of Ceylon PLC -Voting 11,000 1,854 2,085 6,800 958 456 Commercial Bank of Ceylon PLC - Non-Voting - - - 69,300 6,212 3,326 Development Finance Corporation of Ceylon 100,000 15,365 16,700 77,100 12,133 4,086 Seylan Bank PLC - Non Voting - - - 200,000 2,607 1,200 Pan Asia Banking Corporation PLC 68,000 1,144 1,411 20,000 256 205 Central Securities PLC - - - 2,200 20 7 Janashakthi Insurance Company PLC 205,000 2,460 1,947 885,000 10,620 5,089 Central Finance Co. PLC 2,000 619 635 - - - Nation Trust Bank PLC 110,000 3,844 4,028 - - - Nation Trust Bank PLC - W2010 50,000 431 413 - - - Sampath Bank PLC 10,000 1,736 2,043 - - - Ceylon Investment Co PLC 35 6 9 - - - Lanka Orix Leasing Co. PLC 25,400 2,939 3,480 - - Lanka Ventures PLC 45,000 652 776 - - - 40,902 45,684 38,328 16,729 Diversified Holdings John Keells Holdings PLC 75,026 10,672 12,863 133,592 12,277 6,679 Hayleys PLC 15,000 2,494 2,576 6,000 841 516 Richard Pieris & Co. PLC 150,000 5,655 5,850 12,425 966 280 The Bukit Darah Co. PLC - - - 200 383 122 18,821 21,289 14,467 7,597 Services John Keells PLC, 23,700 3,578 3,626 3,578 3,626 - - Information & Technology E-Channelling PLC 20,000 237 195 237 195 - - Beverages, Food & Tobacco Distilleries Co. of Sri Lanka PLC 129,800 13,436 13,662 42,500 4,731 2,146 Lanka Milk Foods (CWE) PLC 22,000 1,428 1,425 10,000 487 318 Bairaha Farms PLC - - - 45,900 770 367 Cargills (Ceylon) PLC 5,000 311 326 - - Ceylon Tobacco Co. PLC 10,000 1,784 1,850 - - The Lion Brewery Ceylon Ltd PLC 5,000 422 408 - - Coco Lanka PLC 10,000 397 483 - - Kotmale Holdings PLC 50,000 837 800 - - Renuka Agri Food PLC 1,350,200 3,038 3,013 - - Nestlé Lanka PLC 1,000 329 31 - - 21,982 21,998 5,988 2,831 Hotels and Travel Asian Hotels & Properties PLC 30,000 2,081 2,835 40,000 2,254 990 Keells Hotels PLC 59,800 794 1,346 34,800 293 174 Stafford Hotels PLC 41,600 1,120 1,144 8,200 108 74 Ceylon Hotels Corporation PLC 25,100 665 596 100 1 1 The Fortress Resorts PLC 70,000 891 858 14,900 112 64 Rivarina Hotels PLC 42,200 2,865 2,870 5,000 228 142 Marawila Resorts PLC 915,900 6,012 5,266 Eden Hotel Lanka PLC 841,100 21,869 21,724 - - Galadari Hotels (Lanka) PLC 31,600 499 474 - - Hotel Developers (Lanka) PLC 3,000 411 354 - - Hotel Reefcomber PLC 23,100 52 49 - - Serendib Hotels PLC 10,000 674 663 - - Serendib Hotels PLC - Non-Voting 84,700 3,341 3,324 - - Taj Lanka Hotels PLC 4,600 107 107 - - Tangerine Beach Hotels PLC 10,000 707 653 - - Hotel Services Ceylon PLC 7,476,875 123,308 142,061 - - 165,396 184,324 2,996 1,445

Notes to the Financial Statements...cont’d

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For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value Shares LKR ’000 LKR ’000 Shares LKR ’000 LKR ’000 Manufacturing ACL Cables PLC 26,500 1,871 2,034 10,000 743 300 ACL Plastics PLC 5,000 330 370 11,100 420 305 Ceylon Grain Elevators PLC 40,000 563 570 10,000 148 65 Pelwatte Sugar Industries PLC - - - 5,500 226 59 Sierra Cables PLC - - - - - - Caltex PLC 12,200 1,443 1,729 20,800 2,244 1,914 Tokyo Cements Co .(Lanka) PLC 50,000 869 988 30,000 598 218 Royal Ceramic Lanka PLC 40,000 1,851 2,660 13,700 639 384 Lanka Cement PLC 55,000 1,978 1,279 - - - Lanka Tiles PLC 15,000 734 998 - - - Dipped Products PLC 13,500 1,272 1,161 - - - Lankem Ceylon PLC 96,400 3,912 4,338 - - - Lanka Walltile PLC 21,200 973 1,214 - - - Hayleys Mgt Kinitting Mills PLC 834,100 30,067 29,194 - - - Richard Pieris Exports PLC 5,000 129 139 - - - 45,992 46,674 - 5,018 3,245 Trading Brown And Company PLC 22,900 1,347 1,706 - - - C.W.Mackie & Co. PLC 25,000 834 900 - - - Tess Agro PLC 175,000 327 263 - - - 2,508 2,869 - - - Telecommunication Dialog Telekom PLC 310,000 4,643 2,248 440,000 11,847 2,640 Sri Lanka Telecom PLC 24,900 1,136 1,145 20,200 702 626 5,779 3,393 12,549 3,266 Power and Energy Lanka IOC PLC 12,500 228 216 22,000 623 335 Vallibel Power Erathna PLC - - - 4,450,000 11,863 14,685 Hemas Power PLC 59,600 1,316 1,162 - - 1,544 1,378 12,486 15,020 Health Care The Lanka Hospital Corporation PLC - - - 47,500 1,361 570 Nawaloka Hospitals PLC 200,000 623 620 209,900 649 378 Asiri Hospitals PLC 20,000 172 205 - - 795 825 2,010 948 Land and Property Colombo Land & Development Company PLC 40,000 289 260 175,000 804 630 The Colombo Fort Land & Building Company PLC 15,000 441 469 - - - Ceylinco Seylan Developments PLC - - - 10,000 91 45 Colombo Land & Development Company PLC- W 25,000 101 98 - - Ct Land Development PLC 51,100 1,174 1,111 - - - Ceylinco Housing & Real Estate Co. PLC 10,000 346 213 - - - Overseas Realty (Ceylon) PLC 40,000 544 621 - - - 2,895 2,772 895 675 Motors Diesel & Motor Engineering Co. PLC - - - 6,022 706 373 - 706 373 Chemical & pharmaceuticals Chemical Industries (Colombo) PLC 132,500 8,101 8,348 74,000 3,656 2,128 Chemical Industries (Colombo) PLC - Non Voting 77,800 2,959 3,054 55,800 2,024 1,102 11,060 11,402 5,680 3,230 Construction and Engineering Colombo Dockyard PLC 11,400 2,043 2,790 - - 2,043 2,790 - -

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For the year ended 31 December 2009 2008 No. of Cost Market No. of Cost Market Ordinary Value Ordinary Value Shares LKR ’000 LKR ’000 Shares LKR ’000 LKR ’000 Plantation Balangoda Plantations PLC - - - 10,000 426 120 Kotagala Plantation PLC - - - 10,000 680 170 Kegalle Plantations PLC 5,000 171 168 - - - Agalawatte Plantation PLC 10,000 238 218 - - - Maskeliya Plantations PLC 10,200 211 189 - - - Kahawatta Plantation PLC 198,100 6,218 6,141 - - - 6,838 6,716 - 1,106 290 Total gross carrying value of dealing securities 330,370 355,935 - 102,229 55,649 - Less: Cost of dealing securities of MBSL Savings Bank 20,858 - - - Add: Market value of dealing securities of MBSL Savings Bank 23,545 - - Total gross carrying value of dealing securities 333,057 - - - Provision for fall in value of dealing securities (Note 13.1) - 46,580 Total net carrying value of dealing securities 333,057 355,935 55,649 55,649 13.d Listed debentures Bank of Ceylon 3,700 387 387 - - Total net carrying value of listed debentures 387 387 - - Total net carrying value of dealing securities and investments 333,444 356,322 55,649 55,649

13.1 Provision for fall in value of dealing securities Company Group 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Balance on 01 January 42,771 17,791 46,580 17,791 Add: Provision/(Reversal) for the year (42,771) 24,980 (46,580) 28,789 Balance as at 31 December - 42,771 - 46,580

14 INVESTMENT SECURITIES 14.a Company 2009 2008 Cost Market Cost Market Value/ Value Directors’ Directors’ Valuation Valuation LKR’ 000 LKR’ 000 LKR’ 000 LKR’ 000 MEGA Containers Ltd, 10,000 5,000 10,000 5,000 Ceylinco Investment Company Ltd, (Note 14.1) 5,000 5,000 - - Credit Information Bureau of Sri Lanka Ltd, 24 24 24 24 15,024 10,024 10,024 5,024 Less: Provision for fall in value of investment securities (Note 14.2) (5,000) (5,000) Total net investment in investment securities 10,024 10,024 5,024 5,024 14.b Group 2009 2008 Cost Market Cost Market Value/ Value Directors’ Directors’ Valuation Valuation LKR’ 000 LKR’ 000 LKR’ 000 LKR’ 000 MEGA Containers Ltd, 10,000 5,000 10,000 5,000 Ceylinco Investment Company Ltd, (Note 14.1) 5,000 5,000 - - Credit Information Bureau of Sri Lanka Ltd, 44 44 34 34 San Michele Limited 500 - - - Capital Reach Holdings Ltd, 5,115 5,115 - - 20,659 15,159 10,034 5,034 Less: Provision for fall in value of investment securities (Note 14.2 ) (5,500) - (5,000) - Total net investment in investment securities 15,159 15,159 5,034 5,034

Notes to the Financial Statements...cont’d

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14.1 Although we have acquired 46.35% equity capital of Ceylinco Investment Co. Ltd, it has not been classified as an associate company due to pending court decision on the ownership structure of the company. 14.2 Movement in provision for fall in value of investment securities Company Group 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Balance on 1 January 5,000 37,000 5,000 37,000 On acquisition - - 500 - Add: Provision for the year - - - - Less: Reversed during the year - (32,000) - (32,000) Balance as at 31 December 5,000 5,000 5,500 5,000 According to share valuation carried out by the Bank’s Corporate Finance Division the value of an ordinary share of Mega Containers Ltd, as of 31 December 2009 based on the net asset value method was LKR.14.49. However, the Directors’ are of the view that the provision made in year 2004 for fall in value of investments should remain unchanged as of 31 December 2009. Company Group 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’00015.1 Bills receivable Bills discounted 474,830 352,461 475,331 352,962 Less: Deferred income 5,380 3,041 5,380 3,041 469,450 349,420 469,951 349,921 Less: Loan loss provision (Note 15.1.1) 23,104 20,100 23,376 20,372 446,346 329,320 446,575 329,549 15.1.1 Movement in provision for bills receivable Specific provision Balance on 1 January 12,809 13,809 12,854 13,854 Add : Amount provided/(reversed) 910 (1,000) 910 (1,000) Less: Amount written-off - - - - Balance on 31 December 13,719 12,809 13,764 12,854 General provision Balance on 1 January 7,291 7,764 7,518 7,991 Add: Amount provided/(Reversed) 2,094 (473) 2,094 (473) Less: Amount written-off - - - - Balance on 31 December 9,385 7,291 9,612 7,518 Total Provision 23,104 20,100 23,376 20,372 15.2 Loans Term loans 547,907 386,352 1,748,038 910,609 Personal loans 25,220 24,327 25,220 24,327 Cheque discounting 50,767 44,064 50,767 44,064 Commercial papers - - 450,000 180,787 Pawning - - 75,305 - Real estate loans - - 21,603 27,725 Loans against fixed deposits - - 132,487 121,147 Housing Loans - - 384,279 - Margin trading 75,827 19,581 75,827 19,581 Staff loans 29,512 22,634 92,781 47,608 Textile debt recovery fund 2,102 3,936 2,102 3,936 Susahana loan scheme 1,840 2,021 1,840 2,021 733,175 502,915 3,060,249 1,381,805 Less: Loan loss provision (Note 15.2.1) 36,160 24,766 71,009 38,863 Loans and advances after provision 697,015 478,149 2,989,240 1,342,942

15.2.1 Movement in provision for loan losses Specific provision Balance on 1 January 12,917 12,014 27,014 24,301 On acquisition - - 105,989 - Add : Amount provided/(Reversed) 2,501 903 (87,624) 4,983 Less: Amount written-off 541 - 541 2,270 Balance on 31 December 14,877 12,917 44,838 27,014 General provision Balance on 1 January 11,849 7,050 11,849 7,050 On acquisition - - 10,968 - Add : Amount provided 9,434 4,799 3,354 4,799 Less: Amount written-off - - - - Balance on 31 December 21,283 11,849 26,171 11,849 Total provision 36,160 24,766 71,009 38,863

Company Group

74

15.3 Lease and Hire purchase rental receivable For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’00015.3.a Finance leases/Hire purchase receivable within one year from balance sheet date Total Lease rental receivable 4,142,251 4,460,180 7,241,181 6,653,367 Less: Lease rental receivable after one year 2,195,819 2,447,329 3,866,142 3,633,385 Lease rental receivable within one year from the Balance Sheet date 1,946,432 2,012,851 3,375,039 3,019,982 Less : Unearned lease income 551,191 575,270 1,009,438 859,901 Loan loss provision 122,605 125,091 186,033 198,626 1,272,636 1,312,490 2,179,568 1,961,455 15.3.b Finance leases/Hire purchase receivable after one year from balance sheet date Lease rental receivable after one year from the balance sheet date 2,195,819 2,447,329 3,866,142 3,633,385 Less : Unearned lease income 425,271 479,602 810,082 695,571 Loan loss provision 84,188 152,093 200,461 238,970 1,686,360 1,815,634 2,855,599 2,698,844 Net investment in leases and Hire purchase 2,958,996 3,128,124 5,035,167 4,660,299 15.3.c Movement in the provision for bad and doubtful lease and hire purchase receivable: Specific provision Balance on 1 January 203,757 152,596 364,169 308,763 On acquisition - - 5,607 - Add : Amount provided 67,845 51,161 70,342 92,745 Less: Written-off 129,888 - 129,888 37,339 Balance on 31 December 141,714 203,757 310,230 364,169 General provision Balance on 1 January 73,427 80,914 73,427 80,914 On acquisition - - 9,830 - Add : Amount provided / (reversed) (8,348) (7,487) (6,993) (7,487) Less: Amount reversed - - - - Balance on 31 December 65,079 73,427 76,264 73,427 Total provision 206,793 277,184 386,494 437,596 15.4 Non-performing loans and advances Net exposure on non-performing loans and advances as at December 31, before discounting the value of the securities obtained is given below: Bills receivable 117,547 118,630 117,547 118,630 Loans and advances 57,381 116,687 355,931 243,278 Lease/Hire purchase receivable 282,266 340,621 674,730 585,760 Gross non-performing loans and advances 457,194 575,938 1,148,208 947,668 Less: Provision for bad and doubtful debts 266,057 322,050 480,879 496,831 Net exposure 191,137 253,888 667,329 450,837 Percentage of net non-performing loans 10.47% 13.53% 12.83% 13.88% Percentage of net exposure 4.66% 6.45% 7.88% 7.12%

15.5 Concentration of Credit Risk Sector- wise analysis of the loans and advances portfolio reflecting the exposure to credit risk in the various sectors are given below: Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 % LKR ’000 % LKR ’000 % LKR ’000 % Concentration of credit risk Tourism & allied 25,036 0.57 - 0.00 190,165 2.12 145,082 2.12 Industrial 129,144 2.96 100,846 2.37 400,412 4.47 305,486 4.47 Agriculture & fishing 99,926 2.29 112,182 2.63 528,356 5.90 403,097 5.90 Commercial trading 1,954,944 44.75 1,223,872 28.75 1,868,421 20.87 1,425,470 20.87 Import & export 39,164 0.90 63,329 1.49 82,749 0.92 63,132 0.92 Property development 161,211 3.69 16,920 0.40 22,109 0.25 16,868 0.25 Share market 89,832 2.06 77,102 1.81 100,745 1.13 76,861 1.13 Manufacturing 122,317 2.80 290,696 6.83 379,559 4.24 289,789 4.24 Housing & construction 61,144 1.40 258,011 6.06 485,191 5.42 370,439 5.42 Transport 1,509,600 34.56 1,208,206 28.38 3,349,339 37.42 2,555,323 37.42 Others 176,096 4.03 906,476 21.29 1,545,091 17.26 1,178,074 17.25 Total loans & advances 4,368,414 100.00 4,257,640 100.00 8,951,861 100.00 6,829,621 100.00

Notes to the Financial Statements...cont’d

Company Group

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16 OTHER ASSETS For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Amounts due from subsidiary company 11,815 613 - - ACT on dividend 33,550 50,956 33,550 50,956 Insurance receivable 26,185 23,474 30,431 23,474 Economic Service Charges 13,236 13,759 65,452 44,995 Interest receivable 10,976 - 10,976 - Short term investments held for sale - - 276,801 - Others 48,418 42,665 369,988 88,561 144,180 131,467 787,198 207,986

17 INVESTMENTS IN ASSOCIATE COMPANY Company/Group For the year ended 31 December 2009 2008 Country of Principal No. of Holding Net Asset Directors’ Net asset Directors’ Incorporation Activity Shares % Value Valuation Value Valuation LKR ’000 LKR ’000 LKR ’000 LKR ’000 Unquoted Lanka Securities (Pvt) Ltd, Sri Lanka Share Brokering 4,054,200 29.00% 95,022 95,022 82,977 82,977 Balance at the end of the year 95,022 95,022 82,977 82,977 17.1 Movement in investments in Associate Company Company / Group For the year ended 31st December 2009 2008 LKR’ 000 LKR’ 000 Net asset as at 1 January 82,977 74,625 Add: Profit accruing to the Group (After tax) 17,518 8,352 Less: Dividend received 5,473 - Net asset as at 31 December 95,022 82,977 18 INVESTMENTS IN SUBSIDIARY COMPANY For the year ended 31 December 2009 2008

Country of Principal No. of Holding % Cost Directors’ Cost Directors’ Incorporation Activity Shares Valuation Valuation LKR ’000 LKR ’000 LKR ’000 LKR ’000 Unquoted Merchant Credit of Sri Lanka Ltd Sri Lanka Note -1 2,099,989 51.00 20,918 20,918 20,918 20,918 MBSL Savings Bank Sri Lanka Note -2 100,000,000 78.00 100,000 100,000 - - MBSL Insurance Ltd, Sri Lanka Insurance 137,848,702 100.00 138,606 138,606 - - Balance at the end of the year 259,524 259,524 20,918 20,918

Note-1: Activities of a registered finance company Note-2: Activities of a specialised licensed bank

19 INVESTMENT PROPERTIES Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Cost as at 1 January 341,520 341,572 341,520 341,572 Additions /Improvements - 398 110,000 398 Disposals (54,606) (450) (54,606) (450) Cost as at 31 December 286,914 341,520 396,914 341,520 Accumulated depreciation as at 31 December 2009 3,150 2,433 5,185 2,433 Net book value as at 31 December 283,764 339,087 391,729 339,087 Accumulated Depreciation Balance as at 01 January 2,433 1,408 2,433 1,408 Charge for the year 970 1,025 3,005 1,025 Disposals (253) - (253) - Balance as at 31 December 3,150 2,433 5,185 2,433

76

19.1 Investment Property held by the company As at 31 December 2009 Cost/Carrying amount Fair Value Building Extent Land Building Total Land Building Total sq.ft perches LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 No. 64 & 66, Nonagama Road, 16.61P 1,750 - 1,750 3,000 N/A 3,000 Pallegama, Embilipitiya. Lot No. 2 & 3 - acquired by RDA 20.4P 714 - 714 1,000 N/A 1,000 of Muttuweowita. No. 300/8, Thalawathugoda Road, 2,478 16.15P 2,465 2,635 5,100 2,422 2,590 5,012 Madiwela, Kotte. No. 385/1, Kotte Road, 2,896 19.01P 2,958 1,730 4,688 3,343 1,955 5,298 Pita kotte. No. 19, Galle Road, 961 2R-00.00P 2,878 111 2,989 5,600 216 5,816 Angoda, Bentota. No. 116,116/1,118,120, 12.35P 1,249 - 1,249 1,249 N/A 1,249 1st Cross Street, Colombo 01. sold 90% No. 43.45.49.51 & 53, 9.76p 9,950 - 9,950 35,000 N/A 35,000 New Olcott Mawatha, Colombo 11. No. 102 & 104, Dam Street, 8,525 1R-10.7P 19,571 2,538 22,109 44,065 11,964 56,029 Colombo 12. Kumbuththukuliya Watte, Bangadeniya Road, Puttalam. 2.0A 600 - 600 2,000 N/A 2,000 Mirissawelawatta hena; Thekka Watta, Dambadeniya - 1A-0R-28.0P 162 - 162 2,560 N/A 2,560 Rukgahakottunuwa, Gehenuwala, Meepe - 38.33P 2,418 - 2,418 890 N/A 890 No 299 Union Place Colombo 02 10,456 50.00P 225,085 10,100 235,185 216,000 9,344 225,344 269,800 17,114 286,914 317,129 26,068 343,198 The fair value of the investment properties as 31 12 2007 was based on market valuations carried out by Mr D N Dhammika Baranage, RICS (UK), DIV (SL) who is an independent valuer not connected with the Company. The Directors have reviewed values of the investment properties as at 31 12 2009 and concluded that there were no impairment. 19.2 Investment Property held by Subsidiary As at 31 December 2009 No 50/21, Old Kesbewa Road, 44,877 2A 1R 04.35P 65,604 44,396 110,000 136,600 92,475 229,075 Raththanapitiya, Boralesgamuwa. 65,604 44,396 110,000 136,600 92,475 229,075

Total Investment Property held by Group 335,404 61,510 396,914 136,600 118,543 572,273 The fair value of the investment properties as 31 12 2007 was based on market valuations carried out by Mr D N Dhammika Baranage RICS (UK), DIV (SL) Who is independent valuer not connected with the company. The directors have reviewed values of the investment prop-erties as at 31 12 2009 and concluded that there were no impairment.

20 PROPERTY, PLANT AND EQUIPMENT 20.a Company Land & Motor Computer Office 2009 2008 Building Vehicles Equipment Equipment Total Total & Furniture LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Cost Balance as at 01 January 12,904 14,501 52,894 32,864 113,163 102,156 Additions during the year - 7,703 4,962 1,328 13,993 12,207 Disposals during the year - (3,210) (60) - (3,270) (1,200) Balance as at 31 December 12,904 18,994 57,796 34,192 123,886 113,163 Accumulated Depreciation Balance as at 01 January 430 8,947 47,952 25,315 82,644 77,639 Charge for the year 147 2,612 2,451 1,458 6,668 6,205 Disposals - (3,210) (60) - (3,270) (1,200) Balance as at 31 December 577 8,349 50,343 26,773 86,042 82,644 Net book value as at 31.12.2009 12,327 10,645 7,453 7,419 37,844 Net book value as at 31.12.2008 12,474 5,554 4,942 7,549 30,519

Notes to the Financial Statements...cont’d

77

20.a Group Land & Motor Computer Office 2009 2008 Building Vehicles Equipment Equipment Total Total & Furniture LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Cost Balance as at 01 January 12,904 22,917 73,390 53,973 163,184 146,109 On acquisition - 25,208 94,503 53,208 172,919 - Additions during the year - 15,634 22,706 12,443 50,783 18,412 Disposals during the year - (14,649) (60) (8) (14,717) (1,337) Balance as at 31 December 12,904 49,110 190,539 119,616 372,169 163,184 Accumulated Depreciation Balance as at 01 January 430 15,884 63,928 38,476 118,718 108,749 On acquisition - 8,775 53,077 21,412 83,264 Charge for the year 147 6,099 14,624 8,925 29,795 11,306 Disposals - (10,468) (60) (4) (10,532) (1,337) Balance as at 31 December 577 20,290 131,569 68,809 221,245 118,718 Net book value as at 31.12.2009 12,327 28,820 58,970 50,807 150,924 Net book value as at 31.12.2008 12,474 7,033 9,462 15,497 44,466

21 INTANGIBLE ASSETS Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000

Cost as at 1 January 18,775 17,541 28,030 26,777 On acquisition - - 885 - Goodwill on acquisition - - 119,437 - Additions and improvements during the year 274 1,234 274 1,253 Cost as at 31 December 19,049 18,775 148,626 28,030 Accumulated amortization as at 1 January 17,057 16,530 23,967 22,154 Acquisition - - 487 - Amortisation for the year 569 527 1,972 1,813 Accumulated amortisation as at 31 December 17,626 17,057 26,426 23,967 Net book value as at 31 December 1,423 1,718 122,200 4,063

22 CUSTOMER DEPOSITS Group For the year ended 31 December 2009 2008 LKR ’000 LKR ’000 Time deposits 4,897,367 2,199,270 4,897,367 2,199,270

23 INTEREST BEARING BORROWING 23.1 Non-current borrowings Company/Group 2009 2008 Lending institution Purpose of Interest Period loan Service From to frequency LKR ’000 LKR ’000

Bank of Ceylon To fund the expansion Monthly 23 Jul 08 23 Jul 10 26,250 270,645 of the leasing portfolio Hatton National Bank PLC To fund the expansion Quarterly 19 Mar 07 13 Mar 12 115,625 190,625 of the leasing portfolio DFCC Vardhana Bank To fund the expansion Monthly 2 Jun 08 Fully Settled - 83,333 of the leasing portfolio DFCC Bank To fund the expansion Monthly 19 Mar 07 19 Apr 11 93,750 156,250 of the leasing portfolio 235,625 700,853

Less: Amount payable within one year (Note 23.2) 151,250 320,188 Total non - current borrowings 84,375 380,665

78

23.2 Current borrowings For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Call money borrowings - 235,511 30,000 340,834 Commercial papers 1,409,001 382,413 1,409,001 382,413 Overdrafts 14,359 235,172 58,544 258,272 Long term loan payable within one year (Note 23.1) 151,250 320,188 151,250 320,188 1,574,610 1,173,284 1,648,795 1,301,707 24. Long term insurance fund “Long term insurance contract liabilities included in the Life Insurance Fund, result primarily from traditional non-participating life insurance products. Short duration contract liabilities are primarily accident and health insurance products. The insurance provision has been established based upon the following:“ - Interest rates that do not vary by product or year of assurance. - Mortality rates based on published mortality tables. - Surrender rates based upon actual experience by geographic area and modified to allow for variations in policy form. “The valuation of the insurance provision – Life Insurance business, as at 31 December 2009 was made by Mr. R. Kahakachchi for and on behalf of Actuarial & Management Consultants (Pvt) Limited. In accordance with the consultant actuary’s report, a sum of Rs. 41,336,000 (2008 - Rs. 28,842,000) is included as policy holders’ liability in the Life Insurance provision.“ 25. Non-Life insurance reserve The non-life insurance provision as shown in the balance sheet represents the following: 2009 LKR ’000 Premium Unearned premium - Gross 168,911 - Reinsurance (11,665) - Net 157,247 Deferred acquisition expenses (11,080) 146,167 Claim reserve Claims outstanding 30,291 Claims incurred but not reported (IBNR) 5,111 Claim reserve 35,402 Insurance provision 181,569 Note: Directors are in the opinion that the total of future claims and related expenses will not exceed the unearned premium and premium related to unexpired risks. 26. Current tax liability Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000

Balance on 1 January 37,873 54,472 37,873 54,472 Add: Provision for taxation 49,883 15,152 49,883 15,152 Less : Set-off against ESC/ACT & payments 42,245 31,751 42,245 31,751 45,511 37,873 45,511 37,873

Notes to the Financial Statements...cont’d

79

27 A. DEBENTURES Company Company

For the year ended 31 December 2009 2008Investor Purpose of Security Interest Allotment Term of Interest rate debenture payable date redemption frequency 2009 2008 LKR ’000 LKR ’000 ETF To replace short term Treasury Annually 10 Jan 08 10 Jan 10 22.22% 22.96% 430,000 430,000 Unlisted money market guaranteeDebenture borrowings National Savings Bank To replace short term Nil Bi Annually 05 Dec 09 05 Dec 11 12.29% 22.19% 330,000 400,000 Unlisted money market Note 27 A.1 Debenture borrowings . Unsecured Redeemable To replace short term Nil Bi Annually 31 Mar 07 31 Mar 10 17.00% 17.00% 14,160 14,160 Unlisted Public money market Note 27 A.2 Debentures borrowings Employees’ Provident FundBoard Unlisted To fund the Nil Bi Annually 05-Oct-07 05-Oct-10 17.85% 17.85% 300,000 300,000Debenture leasing business Note 27 A.1 1,074,160 1,144,160

27 A.1 Interest rates are renewed bi annually based on the Treasury Bill rate. 27 A.2 Unsecured redeemable transferable debentures The Company issued 141600 unsecured redeemable four year debentures of LKR 100/= each to the value of LKR 14.16 million on 31 May 2007. The debentures Interest rates are renewed yearly based on the Treasury Bill rate. Debenture LKR ’000 Interest Payable Interest Rate Interest Frequency Option Rate Public A 610 Biannually Fixed Rate 15.41% Public B 8,190 Annually Fixed Rate 16.00% Public C 270 Biannually Floating Rate 16.33% Public D 5,090 Annually Floating Rate 17.00% 14,160 27 B. Debentures held by Subsidiary Company MBSL Savings Bank Group For the year ended 31 December Investor Purpose of Security Interest Allotment Term of Interest rate debenture payable date redemption 2009 2008 Frequency LKR ’000 LKR ’000

Unsecured Redeemable unlisted Nil Quarterly 31 Dec 04 31 Dec 09 14.00% 2,500 - Unsecured Redeemable unlisted Nil Note 27 B.1 92,984 - 95,484 -

Total debentures held by Group 1,169,644 1,144,160

27 b.1 Unsecured subordinated redeemable debentures MBSL Savings Bank issued 881,840 unsecured subordinated redeemable five year debentures of LKR 100/= each to the value of LKR 88 million in 15 September 2006.

Debenture LKR ’000 Interest Payable Interest Rate Interest Frequency Option Rate

Debenture Maturity 5,213 Maturity Fixed 16.00% Debenture Maturity 79,250 Maturity Fixed 15.50% Debenture Monthly 2,830 Monthly Fixed 13.00% Debenture Quarterly 691 Quarterly Fixed 13.25% Debenture Annually 5,000 Annually Fixed 14.00% 92,984

Company Group

80

28 DEFERRED TAXATION For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Deferred tax liability 23,716 31,295 23,716 31,295 23,716 31,295 23,716 31,295 28.1 Deferred tax liability Company Group For the year ended 31 December 2009 2008 2009 2008 Temporary Tax Temporary Tax Temporary Tax Temporary Tax Difference Effect Difference Effect Difference Effect Difference Effect LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 As at beginning of the year 89,414 31,295 160,657 56,230 89,414 31,295 160,657 56,230 Amount originating/(reversing) during the year (21,653) (7,579) (71,243) (24,935) (21,653) (7,579) (71,243) (24,935) As at end of the year 67,761 23,716 89,414 31,295 67,761 23,716 89,414 31,295 Deferred tax liability is consisted of followings: Leased assets (412,479) (144,368) (337,998) (118,299) (412,479) (144,368) (337,998) (118,299) Retirement gratuity 58,601 20,510 56,230 19,681 58,601 20,510 56,230 19,681 Fixed assets 3,341 1,169 (1,033) (362) 3,341 1,169 (1,033) (362) Tax losses 282,779 98,973 193,387 67,685 282,779 98,973 193,387 67,685 (67,758) (23,716) (89,414) (31,295) (67,758) (23,716) (89,414) (31,295) Carried forward tax loss as at 31 December 2009 amounted to LKR 780,628,620 (31 December 2008 LKR 855,258,620) It would create a deferred tax asset of LKR 299,314,396. Recognition of the total unutilised tax loss would result in additional credit of LKR 299,314,396 to the income statement which will cause wide fluctuation in the income statement this year. Therefore deferred tax asset of LKR 98,972,501 was created after considering projected taxable profit of LKR 807,938,787 for next three years 29 RETIREMENT BENEFIT OBLIGATION Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Balance on 1 January 50,612 45,085 63,975 56,971 On acquisition - - 4,068 - Add: Provision for the year 29.1 8,993 7,560 14,540 9,447 Less : Payments made during the year 1,004 2,033 2,931 2,443 Balance as at 31 December 58,601 50,612 79,652 63,975

29.1 Retirement benefit expense plan for year ending 31.12.2009 is calculated as follows Company Group 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Current service cost at 01.01.2009 3,064 2,688 7,170 2,688 Interest cost at 31.12.2009 6,321 5,419 6,472 5,419 Recognition of actuarial loss/(gain) (392) (547) 898 1,340 Retirement benefit expense for the year 8,993 7,560 14,540 9,447 As at 31 December 2009 the gratuity liability was actuarially valued under the projected unit credit method by Mr. Piyal S Goonetilleke of Piyal S Goonetilleke Associates. The liability is not externally funded. The valuation is performed on an annual basis. Principal assumptions used are as follows: 2009 2008 Discount rate 14% 11% Salary increase 14% 14% Labour turnover rates Age 20 25 30 35 40 45 50 55 60 Turnover rate 10% 10% 10% 5% 3% 1% 1% 1% 0%

Notes to the Financial Statements...cont’d

Company Group

81

30 OTHER LIABILITIES For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Accruals 293,686 150,708 671,777 274,158 Prepaid loan installments 16,928 19,581 25,451 19,581 Cash margin 11,730 27,102 11,730 27,102 Others 64,836 73,054 172,939 99,330 387,180 270,445 881,897 420,171 31 STATED CAPITAL Issued and fully paid 1,607,000 1,067,000 1,607,000 1,067,000 The Bank raised LKR 540 million in December 2009 by way of a right issue, in the proportion of 1 new share for every 2 shares held at a price of LKR 12 per share. 32 RESERVES For the year ended 31 December 32.1 Statutory reserves Opening balance 45,716 31,361 83,658 65,427 Add: Transfer during the year 14,068 14,355 22,686 18,231 Closing balance 59,784 45,716 106,344 83,658 32.2 Retained earnings Opening balance 567,078 466,355 687,046 570,865 Less: Dividend paid 90,000 90,000 90,000 90,000 Less: Transfer to reserves 14,068 14,355 22,686 18,231 Add: Profit for the year 200,978 205,078 283,083 224,412 Closing balance 663,988 567,078 857,443 687,046

33 COMMITMENTS AND CONTINGENCIES Company/ Group 33.1 Contingent Liabilities Guarantees to the customers 32,568 38,426 143,442 52,176 Total commitments and contingencies 32,568 38,426 143,442 52,176 In the normal course of business, the Bank makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers. Even though these obligations may not be recognised on the balance sheet, they do contain credit risk an are therefore form part of the overall risk of the Bank. No material losses are anticipated as a result of these transactions.

33.2 Pending Litigations In the normal course of business, the Bank incurs certain contingent liabilities with legal recourse to its customers and would be party to litigation due to its operations. Action Case No. Value - LKR Position as at 31 December 2009

Chanmugam Vs. MBSL D.C. Colombo 17969/MR 25,000,000 Further Trial - Plaintiff claims unlawful repossession of his vehicle by the Bank.P. D. L. Amarawathy Vs. MBSL and others(CHK Lanka) D.C. Colombo 19426/L 6,000,000 Owner of the property denies the signature on the mortgage bond

H. S. S. Wijesekera Vs. MBSL and others (Jayasumana Wijesekara) D.C. Colombo 19433/L 80,000,000 Judgment delivered in favour of the Bank. Plaintiff denies the transfer of the property to MBSL (his value of the property is claimed). F. D. V. Perera CA (PHC) APN/81/2006 (HC 40/97) 9,950,000 Bank obtained possession through write off ejectment. Occupants obtained a stay order and took possession. Bank has appealed against his order.

82

Action Case No. Value - LKR Position as at 31 December 2009

Vincent Hettiarachchi Vs. MBSL D.C. Kandy 487/SPL 4,000,000 Declaration of title sought to set aside the title deed in favour of MBSL (Bank has already disposed the property)S. S. Samaranayake Vs. MBSL and others (G. S. N. Peiris) D.C. Kandy 14789/P 1,000,000 Third party claims an interest in the mortgage property.Rev. Indraratne Thero D.C. Embilipitiya 9473/L 500,000 Seeks a declaration of title on the property that was mortgaged and subsequently owned by the Bank through court auction.K. J. P. K. Perera CA (RES) 198/2007 CA 198/07 13,990,000 A Restitutio-in-Integrum action to set aside the judgement of commercial high court dated 01,09.2003 which was in favour of the Bank.P. E. Peiris and another D.C. Nugegoda L/18/08 (D.C. Mt. Lavinia 2357/07/L) 5,500,000 Third party seeks a declaration of title on the property that was mortgage to the Bank by the borrower where judgment has been entered in favour of the bank. 145,940,00034 MATURITY ANALYSIS Definition of Maturity An analysis of assets and liabilities based on the remaining period at the balance sheet date to the respective contractual maturity dates. 34.1 Company 34.1.a Assets For the year ended 31 December Up to 1 month 3 month 1 year More than 2009 2008 1 month to 3 months to 1 year to 5 years 5 years LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Interest earning assets Government treasury bills and other securities - - 387,847 - - 387,847 131,084 Loans and advances 657,902 61,565 76,250 347,644 - 1,143,361 807,469 Leases & Hire purchase rentals receivable 239,831 192,467 840,338 1,686,360 - 2,958,996 3,128,124 897,733 254,032 1,304,435 2,034,004 - 4,490,204 4,066,677 Non-Interest earning assets Cash in hand and at bank 39,511 - - - - 39,511 38,236 Investment securities - - 10,000 - 24 10,024 5,024 Dealing securities 217,429 - - - - 217,429 51,505 Investments in associate - - - - 95,022 95,022 82,977 Investments in subsidiaries - - - - 259,524 259,524 20,918 Investment properties - - - 283,764 - 283,764 339,087 Property, plant and equipment - - - 37,844 - 37,844 30,519 Intangible assets - - - 1,423 - 1,423 1,718 Other assets 110,630 33,550 - - - 144,180 131,467 367,570 33,550 10,000 323,031 354,570 1,088,721 701,451 Total assets 1,265,303 287,582 1,314,435 2,357,035 354,570 5,578,925 4,768,128 Percentage 22.68% 5.15% 23.56% 42.25% 6.37% An analysis of total assets employed as at 31.12.2009 based on the remaining period at the balance sheet date to the respective contractual maturity dates.

Notes to the Financial Statements...cont’d

83

34.1.bLiabilities

For the year ended 31 December Up to 1 month 3 month 1 year More than 2009 2008 1 month to 3 months to 1 year to 5 years 5 years LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Interest bearing liabilities Customers deposits - - - - - Borrowings 133,866 283,312 1,157,432 84,375 - 1,658,985 1,553,949 Debentures and other securities 430,000 14,160 300,000 330,000 - 1,074,160 1,144,160 563,866 297,472 1,457,432 414,375 - 2,733,145 2,698,109 Non-Interest Bearing Liabilities Current tax liability - - 45,511 - - 45,511 37,873 Deferred tax liability - - - 23,716 - 23,716 31,295 Retirement benefit obligation - - - 58,601 - 58,601 50,612 Other liabilities 143,489 59,107 184,584 - - 387,180 270,445 Total Liabilities 143,489 59,107 230,095 82,317 - 515,008 390,225 Shareholders’ Fund - - - - 2,330,772 2,330,772 1,679,794 Total liabilities and shareholders’ funds 707,355 356,579 1,687,527 496,692 2,330,772 5,578,925 4,768,128 Percentage 12.68% 6.39% 30.25% 8.90% 41.78% An analysis of total liabilities as at 31.12.2009 based on the remaining period at the balance sheet date to the respective contractual maturity dates.

34.2 Group 34.2.a Assets For the year ended 31 December Up to 1 month 3 month 1 year More than 2009 2008 1 month to 3 months to 1 year to 5 years 5 years LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Government Treasury bills and other securities - 462,598 818,126 10,929 - 1,291,653 446,084 Loans and advances 1,056,717 212,573 340,933 1,589,319 236,273 3,435,815 1,672,491 Leases & Hire purchase rentals receivable 332,687 448,692 1,398,189 2,855,599 - 5,035,167 4,660,299 1,389,404 1,123,863 2,557,248 4,455,847 236,273 9,762,635 6,778,874 Non-Interest earning assets Cash in hand and at bank 145,518 - - - - 145,518 39,733 Investment securities - - 15,115 - 44 15,159 5,034 Dealing securities 255,692 77,752 - - - 333,444 55,649 Investments in associate - - - - 95,022 95,022 82,977 Investments in subsidiaries - - - - - - - Investment properties - - - 391,729 - 391,729 339,087 Investment in real estate - - 14,085 14,558 - 28,643 31,159 Property, plant and equipment 448 1,343 4,028 80,098 65,007 150,924 44,466 Intangible assets - - 2,763 119,437 122,200 4,063 Other assets 149,721 185,436 417,472 34,569 - 787,198 207,986 551,379 264,531 450,700 523,717 279,510 2,069,837 810,154 Total assets 1,940,783 1,388,394 3,007,948 4,979,564 515,783 11,832,472 7,589,028 Percentage 16.40% 11.73% 25.42% 42.08% 4.36% An analysis of total assets employed as at 31.12.2009 based on the remaining period at the balance sheet date to the respective contractual maturity dates.

84

34.2.b Liabilities For the year ended 31 December Up to 1 month 3 month 1 year More than 2009 2008 1 month to 3 months to 1 year to 5 years 5 years LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Interest bearing liabilities Customers deposits 592,049 1,063,561 2,414,641 720,026 107,090 4,897,367 2,199,270 Interest bearing borrowing 207,735 283,629 1,157,432 84,374 1,733,170 1,682,372 Debentures and other securities 436,400 14,160 300,000 419,084 1,169,644 1,144,160 1,236,184 1,361,350 3,872,073 1,223,484 107,090 7,800,181 5,025,802 Non-Interest bearing liabilities Current tax liability - - 45,511 - - 45,511 37,873 Deferred tax liability - - - 23,716 - 23,716 31,295 Retirement benefit obligation - 927 66,795 11,930 79,652 63,975 Long-term insurance fund - - 41,336 - - 41,336 - Non-Life insurance reserve - - 181,569 - - 181,569 - Other liabilities 200,215 136,468 357,904 187,293 17 881,897 420,171 Total liabilities 200,215 136,468 627,247 277,804 11,947 1,253,681 553,314 Shareholders’ fund - - - - 2,570,787 2,570,787 1,837,704 Minority interest - - - - 207,823 207,823 172,208 Total liabilities and shareholders’ funds 1,436,399 1,497,818 4,499,320 1,501,288 2,897,647 11,832,472 7,589,028 Percentage 12.14% 12.66% 38.03% 12.69% 24.50% An analysis of total liabilities as at 31.12.2009 based on the remaining period at the balance sheet date to the respective contractual maturity dates. Notes: Matured loans & advances and lease & hire purchase rentals receivable have been classified into “up to 1 month category” (however, major part of this has been provided for bad and doubtful debts), where as unmatured loans & advances and lease & hire purchase rentals receivable have been classified according to the respective contractual maturity dates.

Loans and advances are shown net of interest in suspense and provision for bad and doubtful debts.

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

35 LOANS TO EXECUTIVES Company Group For the year ended 31 December 2009 2008 2009 2008 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Balances on 1 January 20,566 17,241 45,456 39,611 Add : Disbursed during the year 10,235 10,235 26,629 26,629 Less :Recoveries during the year (6,910) (6,910) (20,784) (20,784) Balance as at 31 December 23,891 20,566 51,301 45,456

Notes to the Financial Statements...cont’d

85

36 SEGMENT REPORTING 36.1 Company Leasing Trade Corporate Money Eliminations / Total Finance Finance Market Unallocated For the year ended 31 Dec. 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000Revenue from external customers Interest 55,965 64,299 194,935 199,971 8,189 4,724 26,025 16,492 1,639 1,205 286,753 286,691 Lease income 695,792 680,613 - - - - - - - - 695,792 680,613 Commissions 15,157 13,263 2,893 1,460 - - - - - - 18,050 14,723 Others 15,312 13,302 48,494 16 36,222 33,789 18,360 - 36,748 6,093 155,136 53,200 Total revenue from external customers 782,226 771,477 246,322 201,447 44,411 38,513 44,385 16,492 38,387 7,298 1,155,731 1,035,227 Inter-segment revenue - - - - - - - - - - - - Segment results 111,611 138,931 73,874 75,566 41,262 20,511 48,890 15,093 (21,373) (46,687) 254,264 203,414 Profit from operations 225,764 186,943 Income from associate company 28,500 16,471 Income tax expense (53,286) 1,664 Net profit for the year 200,978 205,078 Other Information Segment assets 3,004,036 3,160,104 1,326,600 1,108,471 309,270 90,115 446,678 180,570 137,795 124,973 5,224,379 4,664,233 Investment in associate/subsidiaries - - - - - - - - - - 354,546 103,895 Unallocated assets - - - - - - - - - - - - Total assets 3,004,036 3,160,104 1,326,600 1,108,471 309,270 90,115 446,678 180,570 137,795 124,973 5,578,925 4,768,128 Segment liabilities 50,444 62,318 29,186 30,377 - 48 2,995,271 2,847,940 173,252 147,651 3,248,153 3,088,334 Unallocated liabilities - - - - - - - - - - - - Total liabilities 50,444 62,318 29,186 30,377 - 48 2,995,271 2,847,940 173,252 147,651 3,248,153 3,088,334 Information on Cash flows Cash flows from operating activities 258,628 187,034 (284,779) (210,876) (7,017) 8,689 161,459 64,469 (75,297) (138,664) 52,994 (89,348)Cash flows from investing activities - - 62,582 - (90,513) 28,242 (238,605) - - - (266,536) 28,242 Cash flows from financing activities - - - - - - 705,849 216,342 - - 705,849 216,342 Capital expenditure - - - - - - - - (13,456) (13,132) (13,456) (13,132) The Company applies Sri Lanka Accounting Standard No. 28 “Reporting Financial Information by Segment” for financial statements.

36.2 Group Leasing Trade Corporate Money Insurance Eliminations / Total Finance Finance Market Unallocated For the year ended 31 Dec. 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue from external customers Interest 69,733 64,299 481,766 296,652 8,189 4,724 144,696 90,904 26,493 - 14,278 1,205 745,155 457,784 Lease income 1,250,493 1,092,137 - - - - - - - - - - 1,250,493 1,092,137 Commissions 15,672 13,263 2,980 1,460 - - - - - - 3,403 - 22,055 14,723 Premium received - - - - - - - - 120,465 - - - 120,465 - Others 38,272 34,921 48,520 6,533 42,256 33,789 64,690 - - - 53,936 7,650 247,674 82,893 Total revenue from external customers 1,374,170 1,204,620 533,266 304,645 50,445 38,513 209,386 90,904 146,958 - 71,617 8,855 2,385,842 1,647,537 Inter-segment revenue - - - - - - - - - - - - Segment results 328,062 288,024 60,573 6,760 41,262 20,511 35,057 5,627 17,130 - (69,637) (73,028) 412,446 247,894 Profit from operations 383,946 231,423 Income from associate company 28,500 16,471 Income tax expense (73,592) (4,908)Minority interest (55,771) (18,574)Net profit for the year 283,083 224,412 Other Information Segment assets 5,080,919 4,692,279 3,511,979 1,813,865 332,815 90,115 1,246,109 499,724 449,365 - 1,116,263 410,068 11,737,450 7,506,051 Investment in associate - - - - - - - - - - - - 95,022 82,977 Unallocated assets - - - - - - - - - - - - - - Total assets 5,080,919 4,692,279 3,511,979 1,813,865 332,815 - 90,115 1,246,109 499,724 449,365 - 1,116,263 410,068 11,832,472 7,589,028 Segment liabilities 1,438,956 1,453,884 993,203 605,453 - 48 5,226,660 3,108,131 311,822 - 1,083,221 411,600 9,053,862 5,579,116 Unallocated liabilities - - - - - - - - - - - - - Total liabilities 1,438,956 1,453,884 993,203 605,453 - 48 5,226,660 3,108,131 311,822 - 1,083,221 411,600 9,053,862 5,579,116 Information on Cash Flows Cash flows from operating activities 642,747 467,211 (1,103,166) (819,976) (7,017) 8,689 1,242,748 440,944 27,491 - (150,518) (161,857) 652,285 (64,989)Cash flows from investing activities - - 62,582 - (90,513) 28,242 (195,930) (7,899) (14,718) - 261,376 - 22,797 20,343 Cash flows from financing activities - - - - - - 416,436 160,173 100,000 - - - 516,436 160,173 Capital expenditure - - - - - - - - (128) - (40,308) (19,290) (40,436) (19,290) The Company applies Sri Lanka Accounting Standard No. 28 “Reporting Financial Information by Segment” for financial statements.

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36.3 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 36.3 a Company Western Southern Central North Central North Western Total LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Revenue Leasing 331,300 99,200 106,420 59,013 185,961 781,894 Trade Finance 232,531 221 9,353 393 3,214 245,712 Corporate Finance 43,762 - - - - 43,762 Money Market 44,385 - - - - 44,385 Others 39,955 - - 23 - 39,978 691,933 99,421 115,773 59,429 189,175 1,155,731 Assets Leasing 1,531,346 356,446 376,137 24,592 715,515 3,004,036 Trade Finance 1,234,882 8,913 39,275 28,055 15,475 1,326,600 Corporate Finance 309,270 - - - - 309,270 Money Market 777,345 4,024 11,767 25 8,063 801,224 Others 128,372 2,406 1,906 1,665 3,446 137,795 3,981,215 371,789 429,085 54,337 742,499 5,578,925 Liabilities Leasing 28,706 10,764 4,101 991 5,882 50,444 Trade Finance 20,881 3,869 2,050 36 2,350 29,186 Corporate Finance - - - - - - Money Market 2,995,271 - - - - 2,995,271 Others 168,522 218 1,441 1,878 1,193 173,252 3,213,380 14,851 7,592 2,905 9,425 3,248,153 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 36.3 b Group Western Sothern Central North Central North Western Total LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Revenue Leasing 712,912 139,768 190,966 59,013 271,178 1,373,838 Trade Finance 458,520 2,397 33,857 393 37,489 532,656 Corporate Finance 49,796 - - - - 49,796 Money Market 189,476 1,196 11,890 - 6,823 209,386 Others 218,518 103 921 23 601 220,166 1,629,223 143,464 237,634 59,429 316,091 2,385,842 Assets Leasing 2,871,348 502,104 663,961 24,592 1,018,914 5,080,919 Trade Finance 3,086,239 16,719 139,706 28,055 241,259 3,511,979 Corporate Finance 332,815 - - - - 332,815 Money Market 1,222,230 4,024 11,767 25 8,063 1,246,109 Others 1,597,458 6,656 21,797 1,665 33,074 1,660,650 9,110,091 529,503 837,231 54,337 1,301,310 11,832,472 Liabilities Leasing 740,230 144,583 268,532 991 284,621 1,438,956 Trade Finance 693,999 10,668 89,515 36 198,985 993,203 Corporate Finance - - - - - - Money Market 5,226,660 - - - - 5,226,660 Others 1,340,628 4,146 19,821 1,878 28,570 1,395,043 8,001,517 159,396 377,868 2,905 512,176 9,053,862

Notes to the Financial Statements...cont’d

Transactions with Bank of Ceylon (BOC)

Merchant Credit of Sri Lanka Ltd (MCSL

MBSL Insurance Company Limited

MBSL Savings Bank Limited

Lanka Securities (Private) Limited

Mr. Janaka Ratnayake

Ms. W A Nalani.

Mr. V Kanagasabapathy

Mr. Janaka Ratnayake

Dr. Ranjith Bandara

Mr. Janaka Ratnayake (appointed w.e.f.07.04.2009) Dr. Ranjith Bandara (appointed.w.e.f. 07.04.2009) (vacated office w.e.f 28.12.2009) Mr. J.G.B.P. Tissera (appointed w.e.f. 07.04.2009)

Mr. Janaka Ratnayake (appointed w.e.f. 07.05.2009) Dr. Ranjith Bandara (appointed.w.e.f. 07.05.2009) (vacated office w.e.f 27.11.2009) Mr. Lakshman Perera (appointed.w.e.f07.05.2009) Mr. P.G. Rupasinghe (appointed.w.e.f 07.05.2009)

Mr. Janaka Ratnayake (appointed.w.e.f 15.10.2009)

Nominee Director of BOC on the Board of MBSL as Chairman

Senior Deputy General Manager of BOC and Nominee Director of BOC on the Board of MBSL. Nominee Director of BOC on the Board of MBSL

Chairman/Director

Director

Chairman/Director

Director

Director

Chairman/Director

Director

Director

Director

Director

BOC holds 72% of the share capital of MBSL.

MBSL holds 51% of the ordinary share capital of MCSL.

MBSL holds 100% of the ordinary share Capital of MBSL Insurance Co. Ltd

MBSL holds 78 % of the ordinary share Capital of MBSL Savings Bank Ltd

MBSL holds 29% of the ordinary share capital of Lanka Securities (Pvt) Ltd

BOC has advanced loans and grant-ed normal banking facilities including a bank loan of LKR 390 million, O/D facilities amounting to LKR 50 million, revolving money market loan facility of LKR 100 million balances of which as at 31.12.2009 are -bank loan LKR 26 million , There are no balances against O/D facilities and revolving money market loans. The Interest paid on loans is LKR 30 Mn

MBSL acts as registrars to the Debenture Issue of 2008/2013 and has received a fee of LKR 240,000 and LKR325,254 as reimbursable expenses

MBSL provided secretarial services to MCSL and has received a fee of LKR160,500.and LKR 89,956 as reimbursable expenses. A fee of LKR 420,000/- was also received for provision of IT services. Further, LKR1,350,000 received for manage-ment consultancy services.

MBSL provided secretarial services to MBSL Insurance Co. Ltd and has received a fee of LKR 433,900and LKR37,232.90 as reimbursable expenses. Further LKR1,200,000 was received for management consultancy services. MBSL has paid insurance rentals of LKR 1.5 Mn. to MBSL Insurance

MBSL provided secretarial services to MBSL Savings Bank Ltd and has received a fee of LKR 70,000 and LKR19,217 as re-imbursable expenses. Further LKR1,200,000 was received for management consultancy services.

MBSL provided secretarial services to LSL and has received a fee of LKR 103,040 and LKR 30,793.50 as re-imbursable expenses

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37 DIRECTORS INTEREST IN CONTRACTS/TRANSACTIONS WITH RELATED PARTIES Directors Interest in Contracts/Transactions with Related Parties Mr. Janaka Ratnayake, Ms. W. A. Nalani, Dr. Ranjith Bandara, Mr. M. S. S. Paramananda, Mr. Lakshman Perera , Mr. J. G. B. P. Tissera, Mr. P. G. Rupasinghe and Mr. V. Kanagasabapathy were Directors of the Company during the period under review. Mr. Janaka Ratnayake who was appointed to the Board w.e.f. 11 February 2008 acts as the Chairman of the Company. There were no changes to the Directorate of the Company during the year under review. COMPANY NAME OF DIRECTOR POSITION RELATIONSHIP NATURE OF TRANSACTION

88

In addition the Directors of the Company are also Directors of the following Entities with which the Company had transactions in the normal course of business:- COMPANY NAME OF DIRECTOR RELATIONSHIP NATURE OF TRANSACTION Investments in Companies

Professional Services

Directors fees and emoluments paid by the Company

NAME OF DIRECTOR POSITION DIRECTORS’ FEES AND EMOLUMENTS LKR

Mr. Janaka Ratnayake Chairman 3,677,840

Ms. W. A. Nalani Director 311,250

Dr. Ranjith Bandara Director 156,000

Mr. M. S. S. Paramananda Director 207,000

Mr. Lakshman Perera Director 303,000

Mr. J. G. B. P. Tissera Director 384,000

Mr. P. G. Rupasinghe Director 288,000

Mr. V. Kanagasabapathy Director 378,000

38. Events after the Balance Sheet date

No circumstances have arisen since the Balance Sheet date which would require adjustments to or disclosure in the Financial Statements.

Notes to the Financial Statements...cont’d

Credit Information Bureau of Sri Lanka Ltd (CRIB).

Ceylinco Investment Company Limited

BOC Travels (Pvt) Ltd

Ms. W A Nalani

Mr. Janaka Ratnayake(appointed.w.e.f 26.08.2009)

Ms. W.A. Nalani

Alternate Director

Director

Alternate Director

MBSL has invested LKR 23,300/- in shares of CRIB and LKR of 14,400/- was received as dividends. MBSL obtained services of the CRIB for a fee of LKR 522,824/-.

MBSL has invested LKR 5,000,000/- in Ceylinco Investment Com-pany Limited (CICL) and holds 46.35% of the ordinary share capital of CICL.

MBSL provided secretarial services to BOCTL and received a fee of LKR69,932 and LKR15,975.50 as reimbursable expenses

Share & Debenture Information

89

SHARE & DEBENTURE INFORMATION

1. Stock Exchange ListingThe issued ordinary shares of Merchant Bank of Sri Lanka PLC are listed on the Colombo Stock Exchange.

2. Ordinary Shareholders as at 31 December 2009

Resident Non - Resident Range of No. of No. of No. of No. of % of Shareholding Shareholders Shares % of Shareholders Shares Shareholding 1 - 1,000 6,257 1,529,999 1.13 28 5,586 0.001,001 - 10,000 1,955 6,397,188 4.74 11 41,943 0.0310,001 - 100,000 376 9,903,287 7.34 6 173,197 0.13100,001 - 1,000,000 37 9,794,504 7.26 2 714,000 0.531,000,001 - & Above 3 104,066,396 77.09 1 2,373,900 1.76TOTALS 8628 131,691,374 97.55 48 3,308,626 2.45 Individual Company Range of No. of No. of No. of No. of % of Shareholding Shareholders Shares % of Shareholders Shares Shareholding 1 - 1,000 6,149 1,509,028 1.12 136 26,557 0.021001-10,000 1,885 6,109,727 4.53 81 329,404 0.2410,001-100,000 339 8,721,598 6.46 43 1,354,886 1.00100,001-1,000,000 26 5,946,407 4.40 13 4,562,097 3.381,000,0001-& Above - 0 0.00 4 106,440,296 78.84TOTALS 8,399 22,286,760 16.51 277 112,713,240 83.49

The percentage of shares held by the public as at 31 December 2009 was 27.86.%. (31 December 2008 - 23.99%). The Total Number of Shareholders as at 31 December 2009 was 8,676 (31.12.2008 - 7,836).

3. Book Value (as at 31 December) 2009 2008

Net Assets per share 17.26 18.66 4. Share Prices (LKR) Lowest 7.75 (08.01.2009) 7.00 (08.12.2008) Highest 32.00 (07.10.2009) 18.00 (07.03.2008) Last Transaction 19.50 (30.12.2009) 7.25 (31.12.2008)

5. Share Trading No. of transactions 14,243 2,979 No. of shares traded 26,989,500 5,488,900 Value of shares traded (LKR) 639,407,375 77,639,925

6. Earnings as at 31 December (LKR) Earnings per share 2.19 2.28 Price earning ratio 8.90 3.18 7. Performance at the Colombo Stock Exchange As at 30 December 2009

(a) Market Capitalisation of MBSL Value LKR 2,632,500,000 652,500,000 Rank 71 102 (b) Price Movement All Share Price Index 3,385.55 1,503.02 Milanka Price Index 3,849.38 1,631.34 MBSL Midcap Index 7,194.32 3,191.15

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8. Shareholding of the Directors in MBSL 31.12.2009 31.12.2008

Janaka Ratnayake (Chairman) Nil Nil Ms. W.A. Nalani Nil Nil Dr. Ranjith Bandara Nil NilM.S.S. Paramananda Nil Nil Lakshman Perera Nil Nil J.G.B.P.Tissera 3,000 2,000 P.G. Rupasinghe Nil Nil V. Kanagasabapathy Nil Nil

9. MAJOR SHAREHOLDERS AS AT 31 DECEMBER 2009 Name of the Shareholder 2009 % 2008 %1 Bank of Ceylon No. 1 Account 97,392,136 72.14 68,400,000 76.002 Bank of Ceylon A/C Ceybank Unit Trust 4,512,110 3.34 5,012,640 5.573 Green Care International Limited 2,373,900 1.76 _ -4 Prime Lands (Pvt) Ltd 2,162,150 1.60 _ -5 Distilleries Company of Sri Lanka Limited 959,911 0.71 959,911 1.076 Employees Trust Fund Board 955,314 0.71 636,876 0.717 Waldock Mackenzie Limited/ Mr. Lalith Prabash Hapangama 764,700 0.57 850,100 0.948 Mr. A. Singh 575,000 0.43 - -9 Mr. T. D.D. Dissanayake 528,600 0. 39 - -10 Mr. M. Premjayanth 479,801 0.36 250,001 0.2811 Mr. B. A. Mahipala 450,000 0.33 - -12 Merril J Fernando & Sons (Pvt) Limited 438,465 0.32 - -13. Mr. D. N . Sellamuttu 400,765 0.30 177,177 0.2014. Pan Asia Banking Corporation PLC -Mr. Moraji Meghj 307,000 0.23 - -15. Mr. M.M. Udeshi 288,476 0.21 133,883 0.1516 Mr.R. Veerasuntharam 250,000 0.19 249,100 0.2817 Mr. A. M. Weerasinghe 234,750 0.17 156,500 0.1718 Sampath Bank Limited - Account No.3 207,600 0.15 174,000 0.1919 Mr. D.K. Weeratunga 200,000 0.15 - -20 Mr.A.P.Somasiri 200,000 0.15 - - 10. Unsecured Redeemable three year Unlisted Debentures 2007/2010

The company issued 141,600 unsecured redeemable three year debentures of LKR 100 each to the value of LKR 14.16 million in the year 2007. The debentures have fixed and floating interest rate options as stated below:

Payment Period Type Interest Interest Rate Rate 2009 2008Fixed Annual B 16.00% 16.00% Bi- annual A 15.41% 15.41% Floating Annual D 17.00% 17.00%Bi- Annual C 16.33% 16.33%

The basis of calculating the floating rate of interest, for the period ending 31 March 2010, remains unchanged as per the debenture prospectus.

Floating rates of interest are fixed annually by giving an effective rate equivalent to three percentages points (3%) above the simple average of the one year Weighted Average Treasury Bill Rate (before withholding tax) at last four (04) primary auctions held prior to 31 March of the year, subject to a floor of 13% per annum and a cap of 17% per annum.

These Debentures are redeemable in March 2010.

Decade at a Glance

91

Company For the year ended 31 December 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Operating Results Income 1,155,731 1,035,227 872,598 704,355 539,001 434,969 386,645 346,641 425,384 399,064 Interest expenses 584,247 547,386 333,204 189,017 185,914 148,969 150,565 196,135 252,379 272,005 Operating expenses & provisions 345,720 300,898 273,261 257,190 188,207 163,370 176,480 149,252 226,948 468,365 Share of Associate Company 28,500 16,471 7,136 11,033 22,450 5,340 16,271 5,821 1,066 (1,327)Profit before income tax 254,264 203,414 273,269 269,181 187,330 127,970 75,871 7,075 (52,877) (342,633)Income tax on profit 53,286 (1,664) 34,799 59,638 28,903 3,204 4,378 - - - Profit after income tax 200,978 205,078 238,470 209,543 158,427 124,766 71,493 7,075 (52,877) (342,633)Minority interest - - - - - - - - - - Net profit for the year 200,978 205,078 238,470 209,543 158,427 124,766 71,493 7,075 (52,877) (342,633) Balance Sheet Information Assets Government Treasury Bills and Bonds 387,847 131,084 41,735 - 193,516 2,214 577 56,219 50,251 157,769 Investments on Securities & Properties 511,217 395,616 410,456 185,641 121,930 76,655 88,656 203,413 203,970 269,937 Loans and advances 1,143,361 807,469 570,618 485,594 629,908 461,447 481,588 640,435 716,282 801,916 Lease receivable 2,958,996 3,128,124 3,154,198 2,628,564 2,117,444 1,764,896 1,399,246 1,091,034 1,091,576 1,325,945 Property, Plant & Equipment 37,844 30,519 24,517 26,344 29,232 31,361 25,115 30,441 33,232 44,586 Investments in Associate & Subsidiary companies 354,546 103,895 95,543 51,944 55,365 40,213 44,463 36,395 34,222 108,483 Other Assets 185,113 171,421 107,015 125,610 125,501 98,655 88,564 107,714 242,988 175,004 TOTAL ASSETS 5,578,925 4,768,128 4,404,082 3,503,697 3,272,896 2,475,441 2,128,209 2,165,651 2,372,521 2,883,640 Liabilities Deposits from customers - - - - - - - - Debentures 1,074,160 1,144,160 1,327,510 1,260,600 1,400,600 1,303,350 1,150,000 1,200,000 1,375,000 1,425,000 Borrowings 1,658,984 1,553,949 1,079,083 400,370 242,000 157,735 98,258 201,258 197,274 519,810 Other liabilities & Deferred Taxation 515,008 390,225 432,773 426,481 356,092 273,398 263,759 219,695 262,624 348,330 3,248,153 3,088,334 2,839,366 2,087,451 1,998,692 1,734,483 1,512,017 1,620,953 1,834,898 2,293,140 Minority Interest - - - - - - - - - - Net Assets 2,330,772 1,679,794 1,564,716 1,416,246 1,274,204 740,958 616,192 544,698 537,623 590,500

Capital Employed Stated Capital 1,607,000 1,067,000 1,067,000 1,067,000 1,067,000 617,000 2,070,000 2,070,000 2,070,000 2,070,000 Retained Profit/(Loss) & Reserve Fund 723,772 612,794 497,716 349,246 207,204 123,958 (1,453,808) (1,525,302) (1,532,377) (1,479,500) 2,330,772 1,679,794 1,564,716 1,416,246 1,274,204 740,958 616,192 544,698 537,623 590,500

Ratios and Related Informations Company For the year ended 31st December 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Operating Ratios Return on Net Assets - % 11.10% 12.21% 15.24% 14.80% 12.43% 16.84% - - - - Net Profit - % 17.39% 19.81% 27.33% 29.75% 29.39% 28.68% 18.49% 2.04% -12.43% -85.86%Cost to Income Ratio - % 54.95% 53.30% 41.14% 42.32% 46.73% 51.36% 49.19% 61.46% 85.66% 125.81%Income Growth - % 11.64% 18.64% 23.89% 30.68% 23.92% 12.50% 11.54% -18.51% 6.60% -26.37%Profit Growth - % -2.00% -14.00% 13.80% 32.26% 26.98% 74.51% 910.50% -113.38% -84.57% 327.94%Assets Growth - % 17.00% 8.27% 25.70% 7.05% 32.21% 16.32% -1.73% -8.72% -17.72% -26.59%Net Assets Growth - % 38.75% 7.35% 10.48% 11.15% 71.97% 503.12% 28.00% 2.70% -25.24% -257.36% Gearing Ratios Debt to Equity - Times 1.17 1.61 1.54 1.17 1.29 1.97 (11.14) (8.62) (9.04) (13.10)Interest Cover - Times 1.44 1.37 1.82 2.42 2.01 1.86 1.50 1.04 0.79 (0.26) Liquidity Ratios Quick Ratio - Times 1.04 1.19 1.57 0.91 1.61 2.62 2.85 2.19 1.27 1.26 Investors Ratios Market value of a voting share - LKR. 19.50 7.25 14.25 16.25 14.25 9.25 9.00 6.00 7.50 2.75 Basic earnings per share - LKR. 2.19 2.28 2.65 2.33 2.52 2.49 1.43 0.14 (1.06) (6.86)Net assets value per share - LKR. 17.26 18.66 17.39 15.74 20.24 14.79 (3.67) (5.14) (5.24) (4.19)Price earnings ratio - Times 8.89 3.18 5.38 6.98 5.66 3.71 6.31 42.15 (7.10) (0.40)Earning yield - % 11.25% 31.43% 18.59% 14.33% 17.66% 26.92% 15.85% 2.37% -14.09% -249.31%Dividend per share - LKR. 0.75 1.00 1.00 1.00 0.75 0.50 - - - - Dividend Cover - Times 1.98 2.28 2.65 2.33 2.35 4.16 - - - - Dividend yield ratio - % 3.85% 13.79% 7.02% 6.15% 5.26% 5.41% - - - - Dividend Payout ratio - % 34.18% 43.89% 37.74% 42.95% 29.80% 20.08% - - - -

Decade at a Glance...cont’d

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Group For the year ended 31 December 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Operating Results Income 2,385,842 1,647,537 1,443,925 1,163,678 905,927 776,966 759,131 683,967 671,792 595,825 Interest expenses 1,274,896 921,486 658,647 440,614 368,701 316,227 352,091 416,419 405,076 378,943 Operating expenses & provisions 727,000 494,628 464,824 429,735 332,336 320,244 327,848 232,656 294,046 535,366 Share of Associate Company 28,500 16,471 7,136 11,033 22,450 5,340 16,271 5,821 1,066 (1,327)Profit before income tax 412,446 247,894 327,590 304,362 227,340 145,835 95,463 40,713 (26,264) (319,811)Income tax on profit 73,592 4,908 38,134 59,737 30,037 6,945 3,187 4,634 3,370 1,200 Profit after income tax 338,854 242,986 289,456 244,625 197,303 138,890 92,276 36,079 (29,634) (321,011)Minority interest 55,771 18,574 24,984 19,693 21,050 7,116 11,083 14,212 13,888 10,330 Net profit for the year 283,083 224,412 264,472 224,932 176,253 131,774 81,193 21,867 (43,522) (331,341) Balance Sheet Information Assets Government Treasury Bills and Bonds 1,291,653 446,084 362,499 323,054 485,110 239,041 411,332 236,000 165,750 124,850 Investments on Securities & Others 768,975 430,930 452,165 230,839 183,766 143,860 148,082 351,086 286,428 432,485 Loans and advances 3,435,815 1,672,490 887,570 805,632 725,016 742,370 820,513 967,780 878,804 951,573 Lease receivable 5,035,167 4,660,299 4,814,920 4,471,315 3,615,485 2,994,126 2,595,780 2,087,155 1,890,013 1,993,436 Property, Plant & Equipment 150,924 44,466 37,360 43,528 49,446 47,342 42,438 43,863 46,667 57,915 Investments in Associate & Subsidiary companies 95,022 82,977 74,625 31,026 34,447 19,295 23,545 15,477 13,304 87,565 Other Assets 1,054,916 251,782 173,608 185,807 349,255 127,360 110,747 254,011 377,483 196,956 TOTAL ASSETS 11,832,472 7,589,028 6,802,747 6,091,201 5,442,525 4,313,394 4,152,437 3,955,372 3,658,449 3,844,780 Liabilities Deposits from customers 4,897,367 2,199,270 1,813,329 2,142,949 1,848,626 1,587,357 1,766,390 1,499,140 1,078,211 744,282 Debentures 1,169,644 1,144,160 1,327,510 1,260,600 1,400,600 1,303,350 1,150,000 1,200,000 1,375,000 1,425,000 Borrowings 1,733,170 1,682,372 1,240,575 490,384 242,000 157,735 98,258 211,258 197,274 454,367 Other liabilities & Deferred Taxation 1,253,681 553,314 564,407 539,798 466,051 347,907 359,634 357,330 356,399 535,032 9,053,862 5,579,116 4,945,821 4,433,731 3,957,277 3,396,349 3,374,282 3,267,728 3,006,884 3,158,681 Minority Interest 207,823 172,208 153,634 128,650 113,859 96,728 89,612 80,294 66,082 57,094 Net Assets 2,570,787 1,837,704 1,703,292 1,528,820 1,371,389 820,317 688,543 607,350 585,483 629,005 Capital Employed Stated Capital 1,607,000 1,067,000 1,067,000 1,067,000 1,067,000 617,000 2,070,000 2,070,000 2,070,000 2,070,000 Retained Profit/(Loss) & Reserve fund 963,787 770,704 636,292 461,820 304,389 203,317 (1,381,457) (1,462,650) (1,484,517) (1,440,995) 2,570,787 1,837,704 1,703,292 1,528,820 1,371,389 820,317 688,543 607,350 585,483 629,005 - - - - - - - - - -

Ratios and Related Informations Group For the year ended 31st December 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Operating Ratios Return on Net Assets - % 13.81% 12.21% 15.53% 14.71% 12.85% 16.06% - - - - Net Profit - % 14.20% 14.75% 20.05% 21.02% 21.78% 17.88% 12.16% 5.27% -4.41% -53.88%Cost to Income Ratio - % 67.04% 55.15% 45.21% 46.64% 53.93% 51.27% 46.53% 62.66% 75.72% 97.92%Income Growth - % 44.81% 14.10% 24.08% 28.45% 16.60% 2.35% 10.99% 1.81% 12.75% -22.95%Profit Growth - % 39.45% -16.05% 18.33% 23.98% 42.06% 50.52% 155.76% -221.75% -90.77% 558.94%Assets Growth - % 55.92% 11.56% 11.68% 11.92% 26.18% 3.88% 4.98% 8.12% -4.85% -18.27%Net Assets Growth - % 39.89% 7.89% 11.41% 11.48% 67.18% 835.99% 42.15% 10.19% -25.45% -224.32% Gearing Ratios Debt to Equity - Times 3.03 2.73 2.57 2.55 2.55 3.72 (34.23) (19.26) (16.08) (20.02)Interest Cover - Times 1.32 1.27 1.50 1.69 1.62 1.46 1.27 1.10 0.94 0.16 Liquidity Ratios Quick Ratio - Times 0.85 0.87 1.00 0.70 0.87 1.03 1.00 1.38 0.82 2.10 Investors Ratios Market value of a voting share - LKR. 19.50 7.25 14.25 16.25 14.25 9.25 9.00 6.00 7.50 2.75 Basic earnings per share - LKR. 3.09 2.49 2.94 2.50 2.80 2.63 1.62 0.44 (0.87) (6.63)Net assets value per share - LKR. 19.04 20.42 18.93 16.99 15.24 13.67 (2.23) (3.85) (4.29) (3.42)Price earnings ratio - Times 6.31 2.91 4.85 6.50 5.09 3.52 5.56 13.64 (8.62) (0.41)Earning yield - % 15.85% 34.39% 20.62% 15.38% 19.65% 28.43% 18.00% 7.33% -11.60% -241.09%Dividend per share - LKR. 0.75 1.00 1.00 1.00 0.75 0.50 - - - - Dividend Cover - Times 2.80 2.49 2.94 2.50 2.61 4.39 - - - - Dividend yield ratio - % 3.85% 13.79% 7.02% 6.15% 5.26% 5.41% - - - - Dividend Payout ratio - % 24.27% 40.10% 34.03% 40.01% 26.79% 19.01% - - - -

Statement of Value Added

Retained 28%

Payments to Employees34%

Depreciation2%

Government Tax13%

Dividends toShareholders23%

Dividend Income2%

Other Income6%

Fee & Commission Income7%

Interest Income85%

Retained Profit 10%

Dividend8%

Government Taxes4%

Provision forBad Debts & Investments3%

Depreciation1%

Support Services13%

Payments to Employees11%

Payments to Lenders50%

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Value Added Year 2009 Year 2008 LKR Mn LKR MnIncome 1,156 1,035 Cost of borrwoings & support services (734) (634)Provision for bad debts & investments (31) (41) 391 360 Value Allocated Payments to employees 133 114 Dividends to shareholders 90 90 Government taxes 49 33 Depreciation 8 8 Retained 111 115 391 360 - Sources & Utilization of Income Year 2009 Year 2008 LKR Mn LKR MnSources of Income Interest income 983 967Fee & Commision income 77 43Other income 75 19Dividend income 21 6 1,156 1,035 Utilization of Income Payment to lenders 584 547Payments to employees 133 114Support services 150 87Depreciation 8 8Provisions for bad debts & Investments 31 41Government taxes 49 33Dividends 90 90Retained profit 111 115 1,156 1,035

Economic/Financial Indicators

2009 2008

GDP Growth Rate 3.5% 6%

Inflation- Annual Average Rate 3.4% 22.6%

Exchange Rate US $ 115.15 114.03 Yen 1.26 1.27 S. Pound 183.41 164.95 Euro 165.39 161.17

Rate of Change against LKR %

US $ 0.98 4.32 Yen -0.79 29.59 S. Pound 11.19 -24.60 Euro 2.62 -0.28

Interest Rate T-Bills Rate : 3 Months 7.67 17.33 6 Months 8.65 18.49 12 Months 9.32 19.08

Overnight repurchase rate 8.39 13.04Commercial Bank AWDR 8.01 11.63Commercial Bank AWPLR 10.85 18.2

Stock Market ( as at year end) ASPI 3,385.55 1,503.02MPI 3,849.38 1,631.34MBSL Midcap 7,194.32 3,191.15Change in API % 125.25 -40.85Change in MPI % 135.96 -50.44Change in MIDCAP % 125.45 -25.97Market capitalization LKR ( Billion) 1,092.14 488.81Annual Turnover LKR (Billion) 142.5 77.03

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Glossary of Financial Terms

Associate companyA company other than a subsidiary in which a holdingcompany has a participating interest and exercises asignificant influence over its operating and financial policies.Discounting of Bills of ExchangeTo advance cash on a bill of exchange prior to its maturityafter deducting a sum for interest.Capital ReservesThe profits of a company that for various reasons are notregarded as distributable to shareholders as dividends.These include gains on the revaluation of capital assets andshare premium.Contingent LiabilitiesConditions or situations prevailed as at the balance sheetdate, the financial effects of which are to be determined byfuture events which may or may not occur.Corporate GovernanceThe process by which corporate entities are governed. It isconcerned with the way in which power is exercised overthe management and direction of entity, the supervision ofexecutive actions and accountability to owners and others.Cost methodA method of accounting whereby the investment isrecorded at cost. The income statement reflects incomefrom the investment only to the extent that the investorreceives distributions from accumulated net profits of theinvestee arising subsequent to the date of acquisition.Cost to IncomeOperating expenses excluding provision for bad & doubtfuldebts as a percentage of total operating income net ofinterest cost.Deferred taxSum set aside for tax in the accounts of an organizationthat will become payable in a period other than that underreview.Gross DividendPortion of current and retained earnings, inclusive of taxwithheld, distributed to shareholders.Earnings Per ShareProfit after tax divided by the number of ordinary shares inissue.Equity methodA method of accounting whereby the investment is initiallyrecorded at cost and adjusted thereafter for the postacquisition change in the investor’s share of net assets ofthe investee. The income statement reflects the investor’sshare of the results of operations of the investee.Finance LeaseA contract whereby a lessor conveys to the lessee the rightto use an asset for rent over an agreed period of time whichis sufficient to amortise the capital outlay of the lessor.The lessor retains ownership of the asset but transferssubstantially all the risks and rewards of ownership to thelessee.Floating rate noteA debt security carrying a floating rate of interest which isreset at regular intervals, typically quarterly or half-yearly, inrelation to some predetermined reference rate, typically

GuaranteeA promise made for fee by a third party (guarantor), whois not a party to the contract between two others, that theguarantor will be liable if one of the parties fails to fulfill thecontractual obligations.Interest Earning AssetsAssets, which earn interest – the total of Advances, Bills,Leases, Government Bills & Bonds, Call Money andPlacements with other institutions.Interest in SuspenseInterest income of Non Performing Loans; these areaccrued but not considered as profits.

Market capitalisationThe market value of a company at a given date obtained bymultiplying the share price by the number of issued shares.Net Assets Per ShareNet assets (total assets less total liabilities) divided by thenumber of ordinary shares in issue. This represents thetheoretical value per share if the company is broken up.Net Interest IncomeThe difference between what a bank earns on assets suchas loans and securities and what it pays on liabilities suchas deposits, refinance funds and inter-banking borrowings.Operating LeaseAny form of lease other than finance lease, i.e., one thatdoes not transfer all the benefits and risks of ownership tothe lessee.PortfolioA combination of income generating assets such as loans,finance leases, investment securities and bills discounted.Post balance sheet eventsSignificant events that occur between the balance sheetdate and the date on which financial statements areapproved by the Board of Directors.Price Earnings RatioMarket price of an ordinary share divided by annualearnings per share.Provisions for Bad & Doubtful DebtsSpecific provisions made for possible loan losses accordingto the period of non-performance and the exposure overthe collateral.Related partyAn individual, partnership of company that has the abilityto control or exercise significant influence over anotherorganization.REPOsRepurchase Agreements : The securities sold to creditors(who lend money for funding purposes), with the intentionof buying them back at a set price.Return on Average Assets (ROAA)Profit after tax as a percentage of Average Assets.Return on Equity (ROE)Profit after tax as a percentage of Average Equity.Return on shareholders’ fundsProfit after tax divided by average shareholders’ funds (totalof share capital and reserves).Return on Total AssetsProfit after tax divided by average total assets.Revenue ReservesReserves which may be distributed to shareholders asdividends.Segment ReportingSegment reporting indicates the contribution to therevenue derived from business segments such as bankingoperations, leasing operations, stock broking & securitiesdealings, property and insurance.Shareholders’ FundsShareholders’ funds consist of issued and fully paidordinary share capital plus capital and revenue reserves.Subsidiary CompanyA company is a subsidiary of another company if the parentcompany holds more than 50% of the nominal value of itsequity capital or holds some shares in it and controls thecomposition of its board of directors.Value AddedValue added is the wealth created by providing bankingservices less the cost of providing such services. The valueadded is allocated among the employees, the providersof capital, to government by way of taxes and retained forexpansion and growth.

95

Contact @ MBSL

96

CORPORATE TELEPHONE FAX E-MAIL

General 4711711 2565636 2565666 mbslbank@mbslbank.comMr. Janaka Ratnayake Chairman Mr. Gamini KarunathilakeChief Executive Officer 4711700 4711704 gaminik@mbslbank.com

CORPORATE SECRETARIAL SERVICES Ms. Marina PhillipsCompany Secretary 4711766 marinap@mbslbank.com

STRATEGIC PLANNING & RISK MANAGEMENT Mr. Ranjith SiriwardenaDeputy Director 4711762 ranjiths@mbslbank.com

GROUP HUMAN RESOURCES & ADMINISTRATION Ms. Amitha SamarasingheAssistant Director 4711712 amithas@mbslbank.com

LEASING Mr. Lakshman KaluarachchiDeputy Director 4711703 Hot Line: 4711722 lakshmank@mbslbank.com 4711759 Mr. Senaka UduwawalaAssistant Director 4711751 senakau@mbslbank.comMr. Ananda AttanayakeManager (Legal) 4711750 anandaa@mbslbank.comMr. Sanjaya RanathungaSenior Manager 4711734 sanjayar@mbslbank.comMr. Sarath EdiriarachchiManager 4711733 sarathe@mbslbank.comMr. Priyalal PathiranaManager 4711797 priyalalp@mbslbank.com TRADE FINANCE Ms. Shyamalie AmaratungaDeputy Director 4711706 4711739 shyamalia@mbslbank.comMr. Amitha AthulathmudaliSenior Manager 4711709 amithaa@mbslbank.comMs. Mihirun JayasingheSenior Manager (Legal) 4711781 mihirunj@mbslbank.com

CORPORATE ADVISORY & CAPITAL MARKETS Mr. A. M. A. CaderDeputy Director 4711769 4711741 cader@mbslbank.comMs. Lalangi GoonawardenaManager 4711746 lalangig@mbslbank.comMs. Fahima IsharManager (Legal) 4711747 fahimat@mbslbank.com

FINANCE & TREASURY MANAGEMENT Mr. Priyantha HerathAssistant Director 4711749 4711765 priyanthah@mbslbank.comMr. Asela WijayabandaraManager 4711732 aselaw@mbslbank.com

INFORMATION TECHNOLOGY Mr. Chinthaka ElvitigalaManager 4711771 4711714 chinthakae@mbslbank.com

97

BRANCH OFFICES

GalleMr. Ratnasiri Mayakaduwa 091-2234751Senior Manager 091-4924912/3 091-2234750 ratnasirim@mbslbank.com

KandyMr. Keerthi Ramanayake 081-4481702Senior Manager 081-2224818-20 081-4481701 keerthir@mbslbank.com

KurunegalaMr. Saman Pathmadeera 037-4692006Manager 037-4939836 037-2223916 samanp@mbslbank.com

MaharagamaMr. Janaka Fernando 2745431Manager 4306096/7 2745451 janakaf@mbslbank.comAnuradhapuraMr. Pradeep Jayasekera 025-4580507Manager 025-2234485 025-4580508 pradeepj@mbslbank.com

NegomboMs. Anoma Van Hoff 031-4933922Manager 031-4932230 031-2228466 anomav@mbslbank.com

CityMs. Devika Perera 4361571Manager 4361581 2301151 devikap@mbslbank.com

TrincomaleeMr. Chareendra de Silva 026-4928888Manager 026-4595151 026-2226784 chareendrad@mbslbank.com Ambalantota Mr Nirmalath Fernando 0474933660, nirmalatha@mbslbank.com

Manager 0474933661 0776308166

98

Vajira Jude Thilina Lalangi Dilip Wood Nisansala Marina Asanka Leonard Jayaratne Chandrakumara

Nirmala Chintha Dayani Chaminda Lakmal Bashini Nishantha Asanka Kumarini Kamal Chamathi Sanjeewa

Chandima Isanka Kalana Asela Niranjala Susantha Chandani Hasintha Sriyani Asanka Nirani Mahinda

Sulani Ruweena Premalal Athula Senaka Shyaman Pradeep Anoma Viranga Dilanga Shiranthi Ruwan

Tharanga Chamara Lasitha Roshan Premalal Shanaka Ajith Mihirun Udaya Pathirana Chrishanthi Sanjaya

Kaushalya Priyantha Nimali Cader Buddhika Jayawardena Gamini Saman Fahima Janith Chandima Hewasagara

Ou

rTeam

99

Vajira Jude Thilina Lalangi Dilip Wood Nisansala Marina Asanka Leonard Jayaratne Chandrakumara

Nirmala Chintha Dayani Chaminda Lakmal Bashini Nishantha Asanka Kumarini Kamal Chamathi Sanjeewa

Chandima Isanka Kalana Asela Niranjala Susantha Chandani Hasintha Sriyani Asanka Nirani Mahinda

Sulani Ruweena Premalal Athula Senaka Shyaman Pradeep Anoma Viranga Dilanga Shiranthi Ruwan

Tharanga Chamara Lasitha Roshan Premalal Shanaka Ajith Mihirun Udaya Pathirana Chrishanthi Sanjaya

Kaushalya Priyantha Nimali Cader Buddhika Jayawardena Gamini Saman Fahima Janith Chandima Hewasagara

100

Amitha Niduka Nishantha Susil Chaminda Roshini Wasantha Chandana Indika Judith Damitha Nilanga

Chandima Gayan Sandamali Amila Dayani Lalith Munasinghe Vinitha Roshan Ratnasiri Rupika Roshan

Ananda Tharanga Chinthaka Darshika Sarath Keerthi Dhammika Sangeeth Piyaratne Darshani Senthil Erani

Kosala Janaka Shyamalie Janaka Niluka Prabath Madhawa Madusha Chathura Monika Amarasinghe Danushka

Charith Hemali Chinthaka Lasantha Deshapriya Shashikala Sunil Senaka Hansini Amitha

Lakshman Hijas Nishani Ajantha Priyanga Ranjith Dishan Rangana Suranga Devika Pradeep Emil

101

Amitha Niduka Nishantha Susil Chaminda Roshini Wasantha Chandana Indika Judith Damitha Nilanga

Chandima Gayan Sandamali Amila Dayani Lalith Munasinghe Vinitha Roshan Ratnasiri Rupika Roshan

Ananda Tharanga Chinthaka Darshika Sarath Keerthi Dhammika Sangeeth Piyaratne Darshani Senthil Erani

Kosala Janaka Shyamalie Janaka Niluka Prabath Madhawa Madusha Chathura Monika Amarasinghe Danushka

Charith Hemali Chinthaka Lasantha Deshapriya Shashikala Sunil Senaka Hansini Amitha

Lakshman Hijas Nishani Ajantha Priyanga Ranjith Dishan Rangana Suranga Devika Pradeep Emil

102

Notice of Meeting

NOTICE IS HEREBY GIVEN that the Twenty Eighth Annual General Meeting of Merchant Bank of Sri Lanka PLC will be held at the Grand Ballroom, Galle Face Hotel, Colombo at 10.30 h on 16 June 2010 for the following purposes;

1. To receive and consider the Annual Report of the Board of Directors and the Audited Financial Statements of the Company for the year ended 31 December 2009 together with the Report of the Auditors thereon.

2. To declare a final dividend of LKR 0.75 per ordinary share for the year ended 31 December 2009 as recommended by the Directors.

3. To re-elect Mr. M S S Paramananda as a Director pursuant to his retirement by rotation in terms of article 88 of the Articles of Association of the Company.

4. To re-appoint M/s SJMS Associates, Chartered Accountants, as the Company’s Auditors for the ensuing year and to authorise the Directors to determine their remuneration.

5. To authorize the Directors to determine donations for the year 2010.

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

Mrs. M PhillipsCompany Secretary

Colombo 24 May 2010.

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

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

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

103

Form of Proxy

I/We……………………………………………………………………………………......................................................................of………………………………………………………………………………………....................................................................... being a member/members of the Merchant Bank of Sri Lanka PLC, hereby appoint ……………………………………………..……………………………………………................of…………………………………………………………………………………….........................................................................................................................................................................................orfailing him/her any one of the Directors as *my/our Proxy, to represent * me/us, to speak and to vote on *my/our behalf at the Annual General Meeting of the Company to be held at the Grand Ballroom, Galle Face Hotel, Colombo on 16 June 2010 and at any adjournment thereof and at every poll which may be taken in consequence thereof. *I/We the undersigned hereby authorize my/our Proxy to vote on *my/our behalf in accordance with the preference indicated below:

For Against 1. To receive and consider the audited financial statements for the year ended 31 December 2009 and the Auditors’ report thereon

2. To declare a final dividend of LKR 0.75 per ordinary share

3. To re-elect Mr. M S S Paramananda as a Director

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

5. To authorize the Directors to determine donations for 2010

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

………………………….. Signature

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

104

Corporate InformationName of Company: Merchant Bank of Sri Lanka PLC Co. Reg No : P Q 10Legal Form: A public listed company incorporated on 4 March 1982 and registered under the Companies Act No. 07 of 2007.

Registered Of�ce:Bank of Ceylon Merchant Tower 28. St. Michael’s Road, Colombo 3. Tel : 4 711711 / 2 565636. Fax : 2565666, 4-711739 / 759.E-mail : mbslbank@mbslbank.com http : www.mbslbank.com

Directorate:Janaka Ratnayake (Chairman) Ms. W A Nalani M S S ParamanandaLakshman Perera J G B P TisseraP G RupasingheY Kanagasabapathy

Chief Executive Of�cer:Gamini KarunatihilakeTel: 4 711700 Fax: 471104E-mail: gaminik@mbslbank.com

Company Secretary:Ms. Marina PhillipsTel: 4 711766. e-mail : marinap@mbslbank.com

Subsidiary Companies:Merchant Credit of Sri Lanka Limited11th �oor, Bank of Ceylon Merchant Tower28, St. Michaels’s Road, Colombo 3Tel:2301501/2356700. Fax:4627850 E-mail:mcsl@mcsl.lk www.mcsl.lk

MBSL Insurance Company LimitedNo. 388, Galle Road, Colombo 03Tel; 4739900 . Fax: 2574499E-mail: info@mbslinsurance.lk www.mbslinsurance.lk

MBSL Savings Bank LimitedNo. 03, Deal Place, Colombo 03.Tel; 2374000. Fax; 2374044 E-mail:savingsbank@mbslsavingsbank.comwww.mbslsavingsbank.com

Associate CompanyLanka Securities (Private) Limited228/2, Galle Road, Colombo 04Tel: 4706757/2554942. Fax: 4706767 E-mail:lankasec@sltnet.lk www.Isl.lk

AuditorsMessrs. SJMS Associates(Independent Correspondent Firm to Deloitte Touche Tohmatsu)Chartered Accountants2, Castle Lane, Colombo 4

LawyersMessrs. Julius & CreasyAttorneys-at-Law, Solicitors & Notaries Public41, Janadhipathi MawathaColombo 1

Principal BankerBank of Ceylon

BranchesGalle 34. Wackwella Road, Galle Tel: 091 2234751, 091 4924912 - 3. Fax: 091 2234750E-mail: galle@mbslbank.com

Kandy 132-1/1. D. S. Senanayake Veediya, KandyTel: 081 2224818 - 20, 081 4481702. Fax:081 4481701E-mail: kandy@mbslbank.com

Kurunegala No. 40. Kandy Road, KurunegalaTel: 037 2224215, 037- 4692006, 037-4939836Fax: 037 2223916E-mail:kurunegala@mbslbank.com

Maharagama No. 159. Avissawella Road. MaharagamaTel: 011 4306096-7, 011 2745431. Fax: 011 2745451E-mail: maharagama@mbslbank.com

Anuradhapura No. 7B. Maithreepala Senanayake MawathaAbhaya Pedesa. AnuradhapuraTel: 025 4580507/ 025 2234485. Fax: 025 4580508E-mail: anuradhapura@mbslbank.com

Negombo No. 616. Colombo Road, Kurana, NegomboTel: 031 4933922, 031 4932230. Fax: 031 2228466E-mail: negombo@mbslbank.com

City No. 388. Galle Road. Colombo 3Tel: 4361571,4361581. Fax; 2301151E-mail: city@mbslbank.com

Trincomalee No. 53.North Coast Road. TrincomaleeTel; 026-4928888. Fax: 026-2226784E-mail: trincomalee@mbslbank.com

Ambalantota No. 133. Main Street. Ambalantota.Tel: 047 – 4933660 / 1. Fax: 047 – 2225610E-mail : ambalantota@mbslbank.com

&

Assistance