The year 2022 commenced with optimism gradually emerging out of the pandemic-led disruption restoring stability on many fronts. The COVID pandemic which dominated the operating environment for a prolonged period finally was behind us with normalcy returning to people's lives and the business environment. Nevertheless, the emerging financial crisis and political instability owing to soaring prices, shortage of essential items and crippling international debt triggered nationwide protests towards the end of the 1st quarter of the year once again affecting the business ecosystem. Against this backdrop, SDB bank continued its journey showing the same resilience and strength as before, navigating the Bank through a tumultuous time. Holding on to its inclusive and equitable ethos, the Bank continue to extend financial assistance to individuals and businesses that are at the bottom of the pyramid leveraging on its well-established cooperative network. I am pleased to state that the bank succeeded in delivering a commendable performance during the year despite numerous challenges that prevailed in the operating landscape, creating value for the progressive masses as well as the Bank contributing to the larger socio-economic development of the Country.

Macroeconomic Context

The hope of recovery that was presented at the onset of the year 2022 was short-lived as the operating environment was distressed by the economic collapse and political instability amidst the country's default on foreign debt. The growth momentum that was observed towards the end of 2021 dissipated rapidly driven by the spillover effects of these unprecedented developments that impacted several sectors leading to fuel shortages, power outages, widespread scarcity of key imported raw materials and other essentials, and the soaring cost of production, among other factors. The country recorded a negative GDP growth rate of 7.8 percent with a steady rise in inflation to historically high levels impacting the household purchasing power which was a heavy blow to the poorest and the most vulnerable segments of society. The supply- side disruption on the local and global front, administrative price adjustments, rapid depreciation of the Sri Lankan Rupee, and repressed demand amidst the delayed impact of large monetary accommodation during the COVID-19 pandemic contributed to the rising inflation. Meanwhile, the sharp rise in market interest rates resulted in a substantial decline in private-sector credit.

The high-interest rate environment severely impacted the SDB bank customer segment that comprise mainly of SMEs and MSMEs. Initially, the burden of high interest rates was borne by the Bank without passing it off to the consumers. However, as the interest rate continue to rise with heightening inflationary pressure, the bank was no longer able to absorb the interest rate changes which had to be passed on to the loan customers. Nevertheless, we were mindful of the cash flow constraints of the customers and continue to take measures to minimise the cash flow impact on them by maintaining a fixed interest rate on our terms loans and extending the tenure of the loans.

Aided by the exceptional planning and strategy devised by our senior management team, we worked together with our customer base in mutual partnership, making a sincere attempt to understand their financial concerns thereby guiding them towards making the right decisions in navigating this challenging phase. As a result, we were able to minimise the adverse impact of the crisis on our customers and ensure their progress continually building on the efforts we have made in 2021.

Bank Performance

Despite facing a turbulent moment in our political and economic history where the shockwaves of it are felt throughout, our prudent strategic positioning and vision enabled us to deliver exceptional value and performance to our stakeholders. As a development Bank, we remained well-positioned to continue our journey during the period demonstrating stability and resilience in creating value for the stakeholders, maintaining our performance within the industry parameters. This was made possible by the collaborative efforts of our customers and the SDB bank team that comprise of highly experienced and qualified professionals who are committed to empowering rural communities through financial inclusion.

The Bank demonstrated a resilient operating model registering 55% growth in gross income. The extreme volatility in the interest rate was well contained by the bank by maintaining its net interest income on par with the prior year. The expenses rose by 9% which is quite an achievement in the backdrop of an inflation rate in excess of 60% and rupee depreciation of 45%. The bank prudently took in an impairment provision of Rs. 1.9Bn an increase of more than Rs.1.25Bn when compared to the last year.

The Bank posted a modest after-tax profit of Rs.61 Mn and a total other comprehensive income of Rs. 292 Mn

Furthermore, SDB bank remains relatively insulated from currency fluctuation risks due to challenging market conditions considering its minimal exposure to foreign currency risks and exchange rate volatility. As a licensed specialised bank that is serving a domestic clientele, SDB bank remained greatly secured from external vulnerabilities during the period.

Strategic Measures

Our core strategy continued to be focused on SME and MSME customers, with special emphasis on women-owned and led enterprises, in line with our drive towards inclusive banking. Holding firmly to this strategic objective, during the year we took a closer look at our strategy and the customer segments that A notable initiative in this regard is the launching of the Forest

Restoration Project in Ududumbara, a pilot initiative to research the potential of financing nature based solutions. This program saw the planting of a large number of new trees and will continue to be an ongoing project with over 25 hectares of land demarcated for reforestation supported by the Bank. This ongoing initiative has so far supported families in the surrounding communities and is expected to further contribute to positive social and environmental progress. Besides, we proactively seek opportunities to promote sustainable solutions to overcome the nation's present crisis through renewable energy and energy efficiency. For this purpose, SDB bank has collaborated with Hayleys Fentons, one of Sri Lanka's leading engineering solutions providers.

Digital Drive

Digital inclusivity remains a key strategic priority in emerging as a futuristic, value-based, tech- savvy, contemporary bank. Therefore, we have made every effort to empower our customers with multiple digital transaction solutions and value-added services thereby providing easy accessibility to the masses for our banking services predominantly consist of SMEs, Cooperatives and individuals we were serving thereby making an effort to identify better ways of serving them under the current operating landscape. We contemplated portfolio diversification in minimising our risks and reviewed our portfolio from every aspect focusing on specific areas that required finetuning to better serve the customer segments. In doing so, we worked closely in collaboration with our customer segments to better understand their financial distress and deliver financial solutions in navigating these challenging times. Further, we constantly strive to cater to the ever-changing customer needs, providing mentorship and knowledge sharing on specific areas such as value chain management and financial management in strengthening their financial literacy.

Sustainability

As responsible corporate citizen, we understand the need to make our business more sustainable in making a difference to the business and the planet and remain cognizant of the impact of our operations on the environment and society.

Therefore, weconsistently strive to become a more sustainable bank, adopting a sustainable business model that addresses these environmental, social and governance concerns that may arise from our business activities. This commitment is reflected in our financial activities where we give preference to supporting businesses and initiatives that take a sustainable approach over those that do not. through digital channels. To this end, we have acquired UPay, a next-generation digital banking platform and launched the SDB Mobile app. Going forward, we will continue to make investments to strengthen our digital banking platform to provide an enhanced customer experience.

Future Outlook

We believe that the SDB bank is currently well positioned financially and in terms of expertise and other resources to drive the economic development of Sri Lanka. Despite a bumpy road ahead, we are optimistic of our ability to emerge out of these challenges and have taken a closer look at our strategy and the way we do things making adjustments where necessary to craft a future-ready organisation.

In the 25 years of our journey, we have succeeded in fulfilling a noble cause uplifting rural communities and sustaining financial and digital inclusivity. Going forward, we will continue to make a further difference by working together with our customer segments and like-minded partners and embracing opportunities for creating a greater impact over the coming years. Joining hands with global financers and organisations that share the same vision for an empowered and equitable society, we look forward to developing Sri Lanka's SME sector and creating new economic opportunities for Sri Lankans.

Note of Appreciation

I would like to take this opportunity to express my sincere gratitude to Dr P. A. Kiriwandeniya, founder leader of the SANASA Movement in Sri Lanka, for his dedication to develop a new social order in Sri Lanka by revamping the Cooperative societies. I would also like to thank the Chairman and the Board of Directors for their guidance and direction in driving out strategic objectives during a turbulent period. My heartfelt appreciation also goes to our dedicated SDB bank team who worked tirelessly to deliver a superior service to the customers amidst unprecedented obstacles. Last but not the least, I would also like to take this opportunity to thank all our stakeholders, customers, shareholders, business partners and regulators for their continued faith and loyalty. As we step on to a new financial year, we remain optimistic and confident of our ability to create value for the stakeholders having resolutely navigated through a momentous year of Sri Lanka.

Priyantha Talwatte
Chief Executive Officer

12 April 2023
Colombo, Sri Lanka