T.C. ZIRAAT BANKASI, SKOPJE BRANCH

Financial Statements For the Year Ended December 31, 2007 and Independent Auditors’ Report

CONTENTS

Page Independent Auditors’ Report

1-2

Statement of Income

3

Balance Sheet

4

Statement of Changes in Equity

5

Statement of Cash Flows

6

Notes to the Financial Statements

7 - 34

INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND OWNER OF T.C. ZIRAAT BANKASI, SKOPJE BRANCH We have audited the accompanying financial statements (page 3 to 34) of T.C. Ziraat Bankasi, Skopje branch (hereinafter referred to as the “Bank”), which comprise the balance sheet as of December 31, 2007 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 Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting 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. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Bank’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (Continued)

INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND OWNER OF T.C. ZIRAAT BANKASI, SKOPJE BRANCH (Continued) Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of T.C. Ziraat Bankasi, Skopje branch as of December 31, 2007, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Deloitte DOO Skopje, Macedonia May 5, 2008

2

T.C. ZIRAAT BANKASI, SKOPJE BRANCH STATEMENT OF INCOME Year Ended December 31, 2007 (Expressed in thousands of Denars) Notes

2007

2006

Interest income Interest expense Net interest income

5 5

127,566 (8,688) 118,878

116,354 (7,317) 109,037

Fee and commission income Fee and commission expense Net fee and commission income

6a 6b

9,260 (4,663) 4,597

10,315 (4,163) 6,152

Foreign exchange gains, net Other operating income Loss on impairment and provisions, net of recoveries Other operating expenses

7

2,438 342

10,589 96

9 8

52 (55,576)

(8,154) (50,675)

70,731

67,045

(8,693)

(10,264)

62,038

56,781

Profit for the year before tax Income tax expense

10

Net profit for the year

The accompanying notes are an integral part of these financial statements.

These financial statements were adopted by the Bank’s management on February 29, 2008. Signed on behalf of T.C. Ziraat Bankasi, Skopje Branch,

Ismail Eroglu First Director General

Turhan Ademi Second Director General

3

T.C. ZIRAAT BANKASI, SKOPJE BRANCH BALANCE SHEET At December 31, 2007 (Expressed in thousands of Denars) Notes ASSETS Cash and balances with the Central Bank Placements with other banks Loans and advances to customers Other receivables Intangible assets Property and equipment

11 12 13 14 15 15

Total assets LIABILITIES AND EQUITY Liabilities Deposits from banks Deposits from customers Other liabilities

16 17 18

Total liabilities

2007

2006

443,498 441,086 694,253 571 175 81,782

351,993 508,690 679,960 442 217 86,001

1,661,365

1,627,303

109 640,033 6,043

1,357 654,221 19,757

646,185

675,335

903,549 46,967 64,664 1,015,180

855,287 38,450 58,231 951,968

19

Equity Permanent investment Reserves Accumulated profit

Total liabilities and equity CONTINGENT LIABILITIES

20

1,616,365

1,627,303

13,670

13,093

The accompanying notes are an integral part of these financial statements.

4

T.C. ZIRAAT BANKASI, SKOPJE BRANCH

STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2007 (Expressed in thousands of Denars)

Balance at January 1, 2006 Distribution of profit Net profit for the year Balance at December 31, 2006 Distribution of profit Net profit for the year Reconciliation with the new regulative of the Central Bank Other Balance at December 31, 2007

Permanent investments 813,484 41,803 -

Reserves Accumulated profit 31,073 50,630 7,377 (49,180) 56,781

Total 895,187 56,781

855,287

38,450

58,231

951,968

48,264 -

8,517 -

(56,781) 62,038

62,038

(2) 903,549

-

1,176 -

46,967

64,664

1,176 (2) 1,015,180

The accompanying notes are an integral part of these financial statements.

5

T.C. ZIRAAT BANKASI, SKOPJE BRANCH STATEMENT OF CASH FLOWS Year ended December 31, 2007 (Expressed in thousands of Denars)

Operating activities Profit before tax Adjustments for: Depreciation and amortization Loss on impairment and uncollectability Forex gains, net of forex losses on cash and cash equivalents Operating profit before changes in operating assets (Increase)/decrease in operating assets: Loans and advances to customers Other assets Increase/(decrease) in operating liabilities: Deposits from banks Deposits from customers Other liabilities Net cash from operating activities before income tax Income tax paid Cash flows from operating activities Investing activities Acquisition of fixed assets Cash flows from investing activities

2007

2006

70,731

67,045

7,100 9 (10,604) 67,236

5,984 8,309 (8,803) 72,535

(14,302) (129)

(24,441) 3,047

(1,248) (14,188) (12,153) 25,216 (10,256) 14,960

(3,284) 108,283 (450) 155,690 (12,470) 143,220

(1,663) (1,663)

(4,381) (4,381)

Net increase in cash and cash equivalents Forex gains, net of forex losses on cash and cash equivalents Cash and cash equivalents at beginning of year

13,297 10,604 860,683

138,839 8,803 713,041

Cash and cash equivalents at end of year

884,584

860,683

443,498 441,086 884,584

351,993 508,690 860,683

Cash and cash equivalents comprise: Cash and balances with Central Bank Time deposits with foreign banks up to 30 days

The accompanying notes are an integral part of these financial statements.

6

T.C. ZIRAAT BANKASI, SKOPJE BRANCH NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 1.

BANK’S ESTABLISHMENT AND OPERATING POLICY T.C. Ziraat Bankasi, Skopje Branch (further referred to as “the Bank”) was established on December 10, 1998. The Bank’s head offices are located at Zeleznicka No.8, Skopje, Republic of Macedonia. The Bank is a 100% owned subsidiary of T.C. Ziraat Bankasi Turkey (“TCZB”) Group (further referred to as “the Parent Bank”). The Bank is registered in accordance with the Macedonian legislation, and is licensed for performing all types of banking operations, combining the functions of commercial banking, savings deposits and investments, as well as banking services provided to citizens and enterprises in the domain of domestic and international payment operations. The total number of Bank’s employees as of December 31, 2007 is 31 (2006: 29).

2.

BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARATIVE FIGURES

2. 1.

Basis of Presentation of Financial Statements These financial statements have been prepared, in all material respects, in accordance with standards and interpretations approved by the International Accounting Standards Board, which are referred to as International Financial Reporting Standards (IFRS). These standards and interpretations were previously called International Accounting Standards (IAS). The presentation of financial statements in accordance with IFRS requires management to make best estimates and reasonable assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and their reported amounts of revenues and expenses during the reported period. These estimates and assumptions are based on the information available as of the date of the financial statements and the future actual results could differ from those estimates. The financial statements of the Bank are prepared in accordance with the accounting policies disclosed in Note 3 to the financial statements. The reporting currency used in these financial statements is Macedonian Denar.

2.2.

Standards and interpretations effective in the current period In the current year, the Bank has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after January 1, 2007, and the consequential amendments to IAS 1 Presentation of Financial Statements. The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Bank’s financial instruments and management of capital. Four Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment of Embedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Bank’s accounting policies.

7

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 2.

BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARATIVE FIGURES (Continued)

2.3.

Standards and Interpretations in issue not yet adopted At the date of authorization of these financial statements, the following Standards and Interpretations were in issue but not yet effective: • • • • • • • • • •

IAS 1 (Revised) Presentation of financial statements (effective for accounting periods beginning on or after January 1, 2009) IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after January 1, 2009); IFRS 8 Operating Segments (effective for accounting periods beginning on or after January 1, 2009); IFRS 3 (Revised) Business Combinations and IAS 27 (Amended) Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after July 1, 2009); IFRIC 13 Customer Loyalty Programmes (effective for accounting periods beginning on or after July 1, 2008); IFRIC 11 IFRS 2: Group and Treasury Share Transactions (effective March 1, 2007) Amendments to IFRS 2 Share Based Payment – Vesting Conditions and Cancellations (effective for accounting periods beginning on or after January 1, 2009); Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation (effective for accounting periods beginning on or after January 1, 2009); IFRIC 12 Service Concession Arrangements (effective January 1, 2008); IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective January 1, 2008).

The directors anticipate that all of the above Standards and Interpretations will be adopted in the Bank’s financial statements for the periods commencing January 1, 2008 (for Interpretations) and January 1, 2009 (for Standards), except for the IFRS 3 (revised) and IAS 27 (amended) for which the Management anticipate to become effective for the periods commencing July 1, 2009. The management anticipates that all of the above Standards and Interpretations will have no material impact on the financial statements of the Bank in the period of initial application. 2.4.

Critical accounting judgments and key sources of estimation uncertainty The preparation of the Bank’s financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The significant estimates and assumptions are as follows:

8

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 2.

BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARATIVE FIGURES (Continued)

2.4.

Critical accounting judgments and key sources of estimation uncertainty (Continued) Fair value It is a policy of the Bank to disclose the fair value information of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their recorded amounts. In the Republic of Macedonia, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. As a result of this, fair value cannot readily or reliably be determined in the absence of an active market. The Management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may have not been realized, it recognizes a provision. In the opinion of management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The carrying value less impairment provision of short term trade receivables and carrying value of short term trade payables are assumed to approximate their fair values, based on historical data and their relative short maturities. The fair value of other financial assets and liabilities for disclosures purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to Bank for similar financial instruments. Useful life of assets The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic, industry factors or local market. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. As an example, if the Bank was to shorten the average useful life by 10%, this would result in additional annual depreciation and amortization expense of approximately Denar 817 thousand. Impairment of financial assets The impairment for loans and advances to customers is based on estimated losses resulting from the inability of the third parties to comply with their contractual obligations. These estimations are based on the aging of analysis of the loans outstanding and the historical experience of the Bank, customer credit-worthiness and changes in our customer payment terms when evaluating the adequacy of the impairment loss for doubtful accounts. These involve assumptions about future behavior of the debtors and the resulting future cash collections. If the financial condition of the debtors were to deteriorate, actual impairment provisions of currently existing loans and advances to customers may be higher than expected and may exceed the level of the impairment losses recognized so far.

9

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1.

Income and Expense Recognition Interest income and interest expense, other operating income and expenses are accounted for on an accrual basis. Fee and commission receivable are recognized when earned. Loan origination fees are credited to income when the associated service is performed. According to IAS 18 “Revenue” and IAS 39 “Financial Instruments: Recognition and Measurement”, these fees are an integral part of generating an ongoing involvement with the resultant financial instrument and should be deferred and recognized as an adjustment to the effective yield. In the view of the management of the Bank, the impact of non-compliance with the requirement of IAS 18 and IAS 39 does not have a material impact on its overall financial position.

3.2.

Foreign Exchange Translation Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia (NBRM), which is the Central Bank of the Republic of Macedonia, at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated at the balance sheet date using official rates of exchange ruling on that date. Net foreign exchange gains or losses, resulting from foreign currency translation, are included in the statement of income in the period in which they arose.

3.3.

Loans originated by the Bank and Allowances for Loan Impairment Loans originated by the Bank are initially recognized at cost, when cash is advanced to customers. They are subsequently measured at amortized cost. Loans and advances to customers and financial institutions are stated net of losses for impairment. The determination of the allowance for impairment losses is based on an analysis of the loan portfolio and reflects the amount which, in the judgment of management, is adequate to provide for losses inherent in the loan portfolio. Specific provisions are made as a result of a detailed appraisal of risk assets. In addition, allowances are carried to cover potential risks, which although not specifically identified, are present in the loan portfolio judging by the previous experience. The total increase in the allowance for impairment losses is charged to the income statement and the total of the allowance is deducted in arriving at loans and advances to customers and banks. Management’s evaluation of the allowance is based on the Bank’s past experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

10

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.4.

Property, Equipment and Intangible Assets Property, equipment and intangible assets are carried at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis at the following annual rates in order to write off the assets over their estimated useful lives:

Buildings Equipment and computers Intangible assets

2007 2.5% 10% - 25%% 20%

2006 2.5% 10% - 25% 20%

The calculation of depreciation and amortization expense on fixed assets commences on the date that such assets are placed into service. When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts. Any gains or losses on disposal are recognized in operating revenues or operating costs respectively. 3.5.

Cash and Cash Equivalents Cash and cash equivalents include cash on hand and nostro accounts which represent unrestricted demand deposits and placements with other banks and financial institutions, generally with a maturity less than one month, as well as unrestricted account balances with the Central Bank.

3.6.

Taxation Income tax is calculated and paid in accordance with the provisions of the Income Tax Law. The estimated tax on monthly profit is paid in advance as determined by the tax authorities. Final tax on profit at rate of 12% is payable based on the annual profit determined in the income statement, as adjusted for permanent differences that are defined by local tax rules. Deferred income tax is provided using the balance sheet liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values in the financial statements. Currently enacted tax rates or substantively enacted rates at the balance sheet date are used to determine deferred income tax. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences and the tax effects of income tax losses and credit available for carry-forward, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the tax loss/credit carry forwards can be utilized.

3.7.

Employment Benefits The Bank does not have defined benefit plans or share-based remuneration options as of December 31, 2007. The management believes that the present value of the future obligations to employees with respect to retirement benefits and jubilee awards are not materially significant as of December 31, 2007.

11

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS

4.1.

Financial Risk Management The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance. The Bank’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls and to monitor the risks. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. The Bank’s risk management organization structure ensures existence of clear lines of responsibility, efficient segregation of duties and prevention of conflicts of interest at all levels, including the Board of Directors, Executive and Senior Management, as well as between the Bank and the TCZB Group, its customers and any other stakeholders. The most important types of risk are credit risk, liquidity risk, market risk and operational risk.

4.2.

Credit Risk Credit risk relates to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Bank. The credit risk is the one of the major risks that the Bank is exposed to, and therefore the management carefully established the processes to manage this risk. Credit exposures arise principally in lending activities that lead to loans and advances. There is also credit risk in off-balance sheet financial instruments, such as guarantees and letters of credit.

4.2.1.

Credit Risk Measurement, Limits and Mitigation Policies Initially, when approving loans and loan commitments, different Credit Committees assess creditworthiness of the clients depending on the type and size of the exposure. The Board of Directors is regularly informed concerning the credit risk that Bank is exposed to. The credit risk management process is performed at different levels of the Bank: − The Board of Directors is responsible for the establishment and approval of the policies for control and management of the credit risk. The Board of Directors is also responsible for approval of the loans exceeding 25% of the guarantee capital of the Bank; − The Credit Committee is responsible for the supervisions of the entire credit activity of the Bank. The Credit Committee is also responsible for evaluation of the loans approved by the lower levels of responsibility, and for the approval of loans up to EUR 100,000; − The Consumer Loans Committee is responsible for the approval of consumer loans, not exceeding EUR 15,000. The Bank employs a range of practices to mitigate credit risk. Common practice is accepting suitable collateral for approved loans. The main collateral types for loans and other credit exposures are acceptance orders and salary restriction orders for the consumer loans and mortgages and other types of collateral for the loans approved to legal entities.

12

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.2.

Impairment Policies The internal rating systems focus more on credit-quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment. The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. The table below shows the Bank’s credit rating categories. Credit rating Risk category A

Mapping Satisfactory risk

Risk category B

Watch list

Risk category V

Watch list

Risk category G

Substandard

Risk category D

Substandard

The Risk category A (Satisfactory risk) includes exposures to debtors that are not likely to default in their payments, or debtors with delay up to 15 days, and exposures that are secured by firstclass collateral. The financial assets in this category also include the exposures to the Central Bank. The Risk category B (Watch list) includes exposures to debtors which repay their liabilities with a delay of 30 days, or occasionally 31 to 90 days, and exposures for which the Bank expects that the future cash flows will be sufficient for timely settlement of the obligations. The Risk category V (Watch list) includes exposures to debtors which repay their obligations of 31 to 90 days, or occasionally 91 to 180 days. This category also includes the debtors which are assessed to have inadequate cash flows to meet the timely repayment of the obligations, which have inadequate liquidity ratio, or debtors which exposures have been reprogrammed due to financial difficulties. The Risk category G (Substandard) includes exposures to debtors which repay their obligations with a delay of 91 to 180 day, or occasionally 181 to 365 days. These debtors are illiquid and insolvent, and the Bank expects to settle the debt through foreclosure procedure. The Risk category D (Substandard) includes exposures to debtors which repay their obligations with a delay of over 365 days, or do not repay the obligations at all. These debtors are usually under bankruptcy or liquidation procedure, with bad or without collateral. The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39. The criteria used for assessing impairment are the delinquency in contractual payments of principal or interest and the deterioration of the collateral. The delinquency in contractual payments includes cash flow difficulties, breach of loan covenants, initiation of bankruptcy proceedings and other financial and non-financial difficulties.

13

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.3.

Maximum exposure to credit risk before collateral held or credit enhancements In thousands of Denars December 31, December 31, 2007 2006 Credit risk exposure relating to on balance sheet Cash and balances with the Central Bank Placements with other banks Loans and advances to customers Other receivables

Credit risk exposure relating to off-balance sheet Guarantees Letters of credit

443,498 441,086 694,253 571 1,579,408

351,993 508,690 679,960 442 1,541,085

13,216 454 13,670

13,093 13,093

1,593,078

1,554,178

The main collateral types for loans and other credit exposures are acceptance orders and salary restriction orders for the consumer loans and mortgages and other types of collateral for the loans approved to legal entities. 4.2.4.

Loans and advances to customers Loans and advances are summarized below:

December 31, 2007 Retail loans Corporate Loans Total Due from banks

Allowance Allowance for individ. for other Total Gross impaired loans loans

Total Allowance for impairm.

Neither past due nor impaired

Past due but not impaired

Individ. impaired

640,670

2,880

26,919

670,469

(9,136)

(14,377)

(23,513)

646,956

47,461 688,131 441,086

407 3,287 -

1,589 28,508 -

49,457 719,926 441,086

(440) (9,576) -

(1,720) (16,097) -

(2,160) (25,673) -

47,297 694,253 441,086

1,129,217

3,287

28,508

1,161,012

(9,576)

(16,097)

(25,673)

1,135,339

Total net

14

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.4.

Loans and advances to customers (Continued)

December 31, 2006 Retail loans Corporate loans Total Due from banks

Allowance Allowance for individ. for other Total Gross impaired loans loans

Total Allowance for impairm.

Neither past due nor impaired

Past due but not impaired

Individ. impaired

652,619

2,192

28,927

683,738

(8,716)

(15,729)

(24,445)

659,293

20,429 673,048 508,690

194 2,386 -

956 29,883 -

21,579 705,317 508,690

(214) (8,930) -

(698) (16,427) -

(912) (25,357) -

20,667 679,960 508,690

1,181,738

2,386

29,883

1,214,007

(8,930)

(16,427)

(25,357)

1,188,650

Total net

(a) Loans and advances neither past due nor impaired In thousands of Denars Substandard Total

Satisfactory risk

Watch list

640,670 47,461 688,131 441,086

-

-

640,670 47,461 688,131 441,086

1,129,217

-

-

1,129,217

Satisfactory risk

Watch list

652,619 20,429 673,048 508,690

-

-

652,619 20,429 673,048 508,690

1,181,738

-

-

1,181,738

December 31, 2007 Retail loans Corporate loans Total Due from banks

In thousands of Denars Substandard Total

December 31, 2006 Retail loans Corporate loans Total Due from banks

15

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.4.

Loans and advances to customers (Continued) (b) Loans and advances past due but not individually impaired Loans and advances which are past due 90 days do not have an impaired treatment, except when exist information which is opposite. Gross amount of the loans are summarized bellow. Past due up to 15 days

December 31, 2007 Retail Loans Corporate Loans Total Due from banks

Past due 91-180 days

Past due 180-365 days

Past due over 1 year

Total

792 60 852 -

628 628 -

351 296 647 -

376 35 411 -

349 16 365 -

173 173 -

211 211 -

2,880 407 3,287 -

852

628

647

411

365

173

211

3,287

Past due Past due Past due 16-30 days 31-60 days 61-90 days

Past due 91-180 days

Past due 180-365 days

Past due over 1 year

Past due up to 15 days December 31, 2006 Retail Loans Corporate Loans Total Due from banks

Past due Past due Past due 16-30 days 31-60 days 61-90 days

Total

862 136 998 -

411 411 -

295 23 318 -

161 18 179 -

188 17 205 -

183 183 -

92 92 -

2,192 194 2,386 -

998

411

318

179

205

183

92

2,386

16

T.C. ZIRAAT BANKASI, SKOPJE BRANCH NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.5.

Concentration of risks of financial assets with credit risk exposure (a) Geographical sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorized by geographical region as of December 31, 2007. In this table, the Bank has allocated exposures to regions based on the country of domicile of the counterparties.

Macedonia

Turkey

In thousands of Denars Western Total European countries

December 31, 2007 Cash and balances with the Central Bank Placements with other banks Loans and advances to customers

413,053 694,253

2,933 -

27,512 441,086 -

443,498 441,086 694,253

1,107,306

2,933

468,598

1,578,837

Macedonia

Turkey

In thousands of Denars Western Total European countries

December 31, 2006 Cash and balances with the Central Bank Placements with other banks Loans and advances to customers

325,830 679,960

2,658 -

23,505 508,690 -

351,993 508,690 679,960

1,005,790

2,658

532,195

1,540,643

17

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.2.

Credit Risk (Continued)

4.2.5.

Concentration of risks of financial assets with credit risk exposure (Continued) (b) Industry sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorized by the industry sectors of the counterparties. In thousands of Denars Corporate Total

Financial institutions

Governmental institutions

149,768 99,557 441,086

159,170 -

-

-

149,768 159,170 99,557 441,086

-

-

650,408

43,845

694,253

690,411

159,170

650,408

43,845

1,543,834

Financial institutions

Governmental institutions

79,887 101,421 508,690

126,144 -

-

-

79,887 126,144 101,421 508,690

-

-

661,437

18,523

679,960

689,998

126,144

661,437

18,523

1,496,102

Retail

December 31, 2007 Treasury bills Government bonds Other cash balances Placements with other banks Loans and advances to customers

In thousands of Denars Corporate Total

Retail

December 31, 2006 Treasury bills Government bonds Other cash balances Placements with other banks Loans and advances to customers

18

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.3.

Market Risk The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices (such as interest rates, credit margins, foreign exchange rates and equity prices).

4.3.1.

Foreign Exchange Risk The main principle of the Bank’s currency risk management policy is to establish and maintain its total foreign currency receivables (foreign currency assets), at a minimum, in the amount of its total foreign currency payables (foreign currency liabilities). Likewise, this relation is maintained from the perspective of the maturities of foreign currency payables and receivables. Such a balance sheet relationship has ensured that the Bank has been able to cover forex losses arising on its liabilities by the forex gains arising on its receivables, even in an environment of frequent movements in foreign currency exchange rates. The following table summarizes the net foreign currency position of the Bank’s monetary assets and liabilities as of December 31, 2007: In thousands of Denars December 31, 2007

ASSETS Cash and balances with the Central bank Placements with other banks Loans and advances to customers Other receivables Total assets LIABILITIES Deposits from banks Deposits from customers Other liabilities Total liabilities Net currency position: As of December 31, 2007 As of December 31, 2006

Total foreign currencies

Local currency

Total

EUR

USD

Other currencies

77,015 290,825 100,061 3

12,932 58,329 -

6,786 91,932 -

96,733 441,086 100,061 3

346,765 594,192 568

443,498 441,086 694,253 571

467,904

71,261

98,718

637,883

941,525

1,579,408

109 357,050 2,948

68,178 3

9,266 -

109 434,494 2,951

205,539 3,092

109 640,033 6,043

360,107

68,181

9,266

437,554

208,631

646,185

107,797 226,366

3,080 (1,279)

89,452 101,884

200,329 326,971

732,894 538,779

933,223 865,750

19

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.3.

Market Risk (Continued)

4.3.1.

Foreign Exchange Risk (Continued) (a) Foreign currency sensitivity analysis The currency risk management, performed by monitoring the assets and liabilities in foreign currencies, is supplemented by conducting sensitivity analysis of the Bank’s foreign currencies assets and liabilities. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. In thousands of Denars Change in exchange rate December 31, 2007 ASSETS Cash and balances with the Central Bank Placements with other banks Loans to customers Other assets Total assets

+10%

-10%

443,498 441,086 649,253 571

9,673 44,109 10,006 -

(9,673) (44,109) (10,006) -

1,579,408

63,788

(63,788)

LIABILITIES Deposits from banks Deposits from customers Other liabilities

109 640,033 6,043

(11) (43,449) (295)

11 43,449 295

Total liabilities

646,185

(43,755)

43,755

20,033 32,696

(20,033) (32,696)

Increase/(decrease) in profit: as of December 31, 2007 as of December 31, 2006

At 31 December2007, if the local currency had weakened 10% against the foreign currencies with all other variables held constant, the profit for the year would have been Denar 20,033 thousand higher (2006 - Denar 32,696 thousand). Conversely, if the denar had strengthened 10% against the foreign currencies with all other variables held constant, the profit for the year would have been Denar 20,033 thousand lower (2006 - Denar 32,696 thousand). The lower sensitivity of the Bank’s assets and liabilities in case of change in foreign exchange rates compared to the previous year is a result of the lower open net currency position as of December 31, 2007.

20

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.3.

Market Risk (Continued)

4.3.2.

Interest rate risk The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flow. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Board of Directors sets limits on the level of mismatch of interest rate rerating that may be undertaken and monitors this on a regular basis. The Bank strives to maintain the interest margin at the same level. However, the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation. The table below summarizes the Bank’s interest bearing and non-interest bearing assets and liabilities as of December 31, 2007.

Interest bearing ASSETS Cash and balances with the Central Bank Placements with other banks Loans to customers Other assets

In thousands of Denars Non-interest bearing Total

360,755 424,409 649,253 -

82,743 16,677 571

443,498 441,086 649,253 571

1,434,417

99,991

1,534,408

LIABILITIES Deposits from banks Deposits from customers Other liabilities

201,220 -

109 438,813 6,043

109 640,033 6,043

Total liabilities

201,220

444,965

646,185

(344,974) (341,144)

888,223 865,750

Total assets

INTEREST SENSITIVITY GAP as of December 31, 2007 as of December 31, 2006

1,233,197 1,206,894

The following is a summary of interest rates on major financial instruments: In foreign currency Assets Obligatory reserve with Central bank Placements with banks Loans to enterprises Loans to individuals Liabilities Short term deposits from banks Demand deposits from customers Time deposits up to one year Long term deposits

-

1%-2.5% p.a. 2.5%-3% p.a.

In Denars

2% p.a. 3.55%-5.26% p.a. 9%-12% p.a. 7%-14% p.a. 0% p.a. - 2% p.a. 5%-6.5% p.a. 6.5%-8% p.a.

21

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.3.

Market Risk (Continued)

4.3.2.

Interest Rate Risk (Continued) (a) Interest rate sensitivity analysis The sensitivity analysis has been determined based on the Bank’s exposure to interest rates for the financial instruments at the balance sheet date. For variable rate financial instruments, the analysis is prepared assuming the amount outstanding at the balance sheet date was outstanding for the whole year. A 0.5 percentage point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. In thousands of Denars Change in interest rate December 31, 2007 ASSETS Cash and balances with the Central Bank Placements with other banks Loans to customers Other assets

+0.5 p.p

-0.5 p.p

443,498 441,086 649,253 571

1,804 2,122 3,471 -

(1,804) (2,122) (3,471) -

1,579,408

7,397

(7,397)

LIABILITIES Deposits from banks Deposits from customers Other liabilities

109 640,033 6,043

(1,006) -

1,006 -

Total liabilities

646,185

(1,006)

1,006

Total assets

Increase/(decrease) in profit as of December 31, 2007 as of December 31, 2006

6,391 6,034

(6,391) (6,034)

If the interest rate had been 0.5 percentage point higher and all other variables were held constant, the Bank’s profit for the year ended December 31, 2007 would increase by Denar 6,391 thousand (2006: Denar 6,034 thousand). For a 0.5 percentage points decrease the Bank’s profit for the year ended December 31, 2007 and December 31, 2006 would decrease for the same amounts. The Bank’s sensitivity to the interest rate risk has not changed significantly for the year ended December 31, 2007 as compared to the year ended December 31, 2006.

22

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.4.

Liquidity Risk Liquidity risk is defined as the current or prospective risk to earnings and capital arising from the institution’s inability to meet its liabilities when they come due without incurring unacceptable losses. The consequence may be the failure to meet obligations to repay depositors and fulfill commitments to lend.

4.4.1.

Liquidity Management The main objective of the Bank’s liquidity management is to maintain adequate liquid assets, primarily cash and cash equivalents, to enable normal business operation of the Bank. The Bank is exposed to daily calls on its available cash resources from deposits, current accounts, and loan withdrawals. The Bank does not seek to maintain cash resources to meet all of these needs, estimating that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. On a daily basis, the Bank’s management reviews the Report on the Balance of its Giro Deposit Accounts. The Management empirically through a historic review, determines the critical days affecting the Bank’s liquidity, or otherwise, the significant dates upon which funds are to be used. Based upon the identification of accessible funds and the determined, daily cash needs, a decision is made regarding the appropriate use of funds. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. The Bank manages its liquidity risk through the constant monitoring of the maturities of its asset and liability components. The table below summarizes assets and liabilities of the Bank into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. In thousands of Denars Up to 1Month

1 Month to 3 Month

3 Months to 1 year

1 year to 5 year

Over 5 years

Total

344,191 441,086

99,307 -

-

-

-

443,498 441,086

31,256 571 -

55,639 -

217,544 -

389,814 -

175 81,782

694,253 571 175 81,782

Total assets

817,104

154,946

217,544

389,814

81,957

1,661,365

Liabilities Deposits from banks Deposits from customers Other liabilities Equity

109 571,270 6,043 -

19,760 -

48,059 -

944 -

1,015,180

109 640,033 6,043 1,015,180

Total liabilities and equity

577,422

19,760

48,059

944

1,015,180

1,661,365

Net liquidity gap: As of December 31, 2007 As of December 31, 2006

239,682 190,186

135,186 131,125

169,485 208,388

388,870 336,051

Assets Cash and cash equivalents Placements with other banks Loans and advances to Customers Other receivables Intangible assets Property and equipment

(933,223) (865,750)

-

Items with indefinite maturities are included in the “over 5 years” category.

23

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.4.

Liquidity Risk (Continued)

4.4.2.

Contractual maturity analysis for financial liabilities (undiscounted cash flow) The table below presents the cash flows payable by the Bank by remaining contractual maturities of financial liabilities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Deposits from banks Deposits from customers Other liabilities

Deposits from banks Deposits from customers Other liabilities

4.4.3.

In thousands of Denars December 31, 2007 Over 5 Total years

Up to 1Month

1 Month to 3 Month

3 Months to 1 year

1 year to 5 year

109 570,568 6,043

20,107 -

49,171 -

1,058 -

-

109 640,904 6,043

576,720

20,107

49,171

1,058

-

647,056

In thousands of Denars December 31, 2006 Over 5 Total years

Up to 1Month

1 Month to 3 Month

3 Months to 1 year

1 year to 5 year

1,357 591,181 19,757

11,653 -

50,447 -

2,450 -

-

1,357 655,731 19,757

612,295

11,653

50,447

2,450

-

676,845

Off-balance sheet items Guarantees and letters of credit are included below based on the earliest contractual maturity date.

Guarantees Letters of credit

Guarantees Letters of credit

In thousands of Denars December 31, 2007 Over 5 Total years

Up to 1Month

1 Month to 3 Month

3 Months to 1 year

1 year to 5 year

620 -

3,465 454

7,815 -

1,316 -

-

13,216 454

620

3,919

7,815

1,316

-

13,670

In thousands of Denars December 31, 2006 Over 5 Total years

Up to 1Month

1 Month to 3 Month

3 Months to 1 year

1 year to 5 year

-

4,794 -

8,050 -

249 -

-

13,093 -

-

4,794

8,050

249

-

13,093

24

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.5.

Fair Value of Financial Instruments The fair value of financial assets and financial instruments are determined as follows: • the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets is determined with reference to quoted market prices; • the fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.

4.5.1.

Carrying Amount to Fair Value The following table presents the carrying amount of the financial assets and financial liabilities compared to their fair value as of December 31, 2007 and 2006:

December 31, 2007 Carrying Fair value amount

In thousands of Denars December 31, 2006 Carrying Fair value amount

Financial assets Cash and balances with the Central Bank Placements with other banks Loans and advances to customers Other receivables

443,498 441,086 694,253 571

443,444 441,086 694,253 571

351,993 508,690 679,960 442

351,932 508,690 679,960 442

1,579,408

1,579,354

1,541,085

1,541,024

109 640,033 6,043

109 640,033 6,043

1,357 654,221 19,757

1,357 654,221 19,757

646,185

646,185

675,335

675,335

Financial liabilities Deposits from banks Deposits from customers Other liabilities

4.5.2.

Assumptions used in determining fair value of financial assets and financial liabilities Considering the fact that sufficient market experience, stability and liquidity do not exist for the purchase and sale of financial assets or liabilities, given that published market information is not readily available for the purposes of disclosure the fair value information of the aforementioned financial assets and liabilities, the Bank used the valuation technique using discounted cash flow analyses. Such valuation technique applied interest rate for the financial instruments with similar characteristics in order to provide reliable estimates of prices obtained in actual market transactions.

25

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 4.

FINANCIAL INSTRUMENTS (Continued)

4.5.

Fair Value of Financial Instruments (Continued)

4.5.2.

Assumptions used in determining fair value of financial assets and financial liabilities (Continued) The Bank grants the financial instruments at variable interest rates, whereby the contractual interest rates are not materially different from the market interest rates at the date of the financial statements. Consequently, the carrying amount of the loans and deposits approximates their carrying amount at the date of the financial statements. The carrying amounts of the cash held with banks, the receivables and other payables approximates their fair value taking into consideration that they will mature shortly.

5.

INTEREST INCOME AND EXPENSE

a.

Interest income expense by source/recipients Interest income In thousands of Denars Year ended December 31, 2007 2006 Other banks Enterprises Government and local authorities Individuals

32,124 3,046 9,545 82,851

27,551 1,568 5,004 82,231

127,566

116,354

Interest expense In thousands of Denars Year ended December 31, 2006 2007 Enterprises Banks Individuals

6,873 455 1,360

5,672 608 1,037

8,688

7,317

26

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 5.

INTEREST INCOME AND EXPENSE (Continued)

b.

Interest income and expense by product Interest income In thousands of Denars Year ended December 31, 2007 2006 Placements with other banks Cash and cash equivalents Loans and advances to customers

24,634 16,730 86,202

17,231 15,324 83,799

127,566

116,354

Interest expense In thousands of Denars Year ended December 31, 2007 2006 Deposits from non-financial institutions Deposits from banks and other financial institutions

6.

FEE AND COMMISSION INCOME AND EXPENSE

a.

Fee and commission income

8,233 455

6,709 608

8,688

7,317

In thousands of Denars Year ended December 31, 2007 2006 Domestic payment transfers International payment transfers Other

b.

966 6,631 1,663

796 7,835 1,684

9,260

10,315

Fee and commission expense In thousands of Denars Year ended December 31, 2007 2006 Domestic payment transfers International payment transfers Other

3,857 574 232

3,154 559 450

4,663

4,163

27

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 7.

FOREIGN EXCHANGE GAINS, NET In thousands of Denars Year ended December 31, 2007 2006 Foreign exchange gains: - unrealized - realized Foreign exchange losses: - unrealized - realized

8.

26,657 16,898 43,555

30,286 15,904 46,190

(35,202) (5,915) (41,117)

(27,963) (7,638) (35,601)

2,438

10,589

OTHER OPERATING EXPENSES In thousands of Denars Year ended December 31, 2007 2006 Wages and salaries Membership fees Administrative and marketing costs Maintenance Depreciation and amortization Rents Insurance premium Other

9.

31,739 39 10,886 2,105 7,100 1,461 1,481 765

28,263 23 10,496 2,154 5,984 1,451 1,248 1,056

55,576

50,675

ALLOWANCES FOR IMPAIRMENT AND PROVISIONS Movements in the balance of allowances for impairment and uncollectability and provisions

Loans to customers

In thousands of Denars Year ended December 31, 2007 Contingent liabilities Total

Balance, January 1, 2006 Loss on impairment Collected bad and doubtful receivables Accrued penalties on bad and doubtful receivables

17,199 8,167 (155)

Balance, January 1, 2007 Loss on impairment Collected bad and doubtful receivables Accrued penalties on bad and doubtful receivables

25,357 36 (61) 341

-

341

Balance, December 31, 2007

25,673

179

25,852

146

64 142 206 (27) -

17,263 8,309 (155) 146 25,563 9 (61)

28

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 10.

INCOME TAX EXPENSE Income tax expense is accounted for as prescribed by Macedonian Law. Statutory income taxes are calculated by applying 12% tax rate to taxable income in 2007 (2006: 15%). The tax charge for the year can be reconciled to the profit per the statement of income as follows: In thousands of Denars Reconciliation of effective tax rate

Profit before tax Income tax at statutory tax rate of 12% (2006: 15%) Tax effect of income and expenses that are not recognized/deductible in determining taxable profit Decrease in taxable profit based on qualifying capital expenditure

Effective tax rate

11.

2007

2006

70,731

67,045

8,488

10,057

205 -

525 (318)

8,693

10,264

12.29%

15.31%

CASH AND BALANCES WITH CENTRAL BANK In thousands of Denars December 31, December 31, 2007 2006 Cash on hand Current account held with the Central Bank Treasury bills Government bonds Demand deposits held with domestic banks in foreign currency Obligatory reserves held with the Central Bank in foreign currency Foreign currency accounts at call held with foreign banks

35,003 21,341 149,768 159,170

44,541 21,710 79,887 126,144

31

17

47,740

53,532

30,445

26,162

443,498

351,993

Treasury bills in the amount of Denar 149,768 thousand (2006 - Denar 79,887 thousand) are issued by the Central Bank with maturity of 28 days. Depending on terms of agreements, interest rates on these securities range from 4.74% to 4.89% per annum. Government bonds in the amount of Denar 159,170 thousand (2006 – Denar 126,144 thousand) are issued by the Government of the Republic of Macedonia with maturity of 92 and 93 days. Depending on terms of agreements, interest rates on these securities range from 4.99% to 5.19% per annum. As of December 31, 2007 the major part of foreign currency accounts at call with foreign banks in the amount of Denar 16,254 thousand (2006 – Denar 14,873 thousand) relates to funds held with related banks.

29

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 11.

CASH AND BALANCES WITH CENTRAL BANK (Continued) Obligatory reserves held with the Central Bank in foreign currency in the amount of Denar 47,740 thousand (2006 - Denar 53,532 thousand) represent the minimum deposits set aside in accordance with the Central Bank Decision on the “Obligatory Reserves of Banks to be Held with the Central Bank.” The obligatory reserve is to be calculated on the basis of the average amount of depositrelated balances in foreign currencies existing during one calendar month. The deposit with the Central Bank earns no interest.

12.

PLACEMENTS WITH OTHER BANKS As of December 31, 2007 the time deposits up to one month with foreign banks of Denar 441,086 thousand represent deposits held with Western European banks. The interest rate of these time deposits ranges from 3.50% to 6.15% (2006 – from 3.55% to 5.26%) per annum.

13.

LOANS AND ADVANCES TO CUSTOMERS

Enterprises Citizens Allowances for impairment and uncollectability

December 31, 2007 Up to Over one year one year Total

In thousands of Denars December 31, 2006 Up to Over one year one year Total

49,457 266,001 315,458

49,457 670,469 719,926

21,579 338,623 360,202

345,115 345,115

21,579 683,738 705,317

(11,019) (14,654)

(25,673)

(18,499)

(6,858)

(25,357)

304,439

694,253

341,703

338,257

679,960

404,468 404,468

389,814

Corporate loans in Denars and denominated in foreign currency bear the fixed interest rate ranging from 9% to 12% (2006 - from 9% to 12%) per annum. Consumer loans (denominated in foreign currency and in Denars) represent loans with maturity from 3 to 5 years and bear fixed interest rate at 12% (2006 - 12%) per annum. The respected consumer loans are primarily collateralized by acceptance orders and salary restriction orders.

14.

OTHER RECEIVABLES In thousands of Denars December 31, December 31, 2007 2006 Prepaid expenses Other

478 93

390 52

571

442

30

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 15.

PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS

Buildings Cost or valuation Balance, January 1, 2006 Additions Disposals Balance, January 1, 2007 Additions Write-off Reconciliation to new regulations of the Central Bank Balance, December 31, 2007 Accumulated depreciation and amortization Balance, January 1, 2006 Charge for the year Disposals Balance, January 1, 2007 Charge for the year Write-off Reconciliation to new regulations of the Central Bank Balance, December 31, 2007 Net book value as of December 31, 2007 December 31, 2006

Equipment

In thousand of Denars Total Intangible assets

81,230 -

28,286 4,381 (251)

109,516 4,381 (251)

4,026 -

81,230 121 -

32,416 1,542 (318)

113,646 1,663 (318)

4,026 -

81,351

1,987 35,627

1,987 116,978

519 4,545

4,057 2,031 -

17,946 3,862 (251)

22,003 5,893 (251)

3,718 91 -

6,088 2,033 -

21,557 4,978 (318)

27,645 7,011 (318)

3,809 89 -

8,121

858 27,075

858 35,196

472 4,370

73,230 75,142

8,552 10,859

81,782 86,001

175 217

As of December 31, 2007 the Bank does not have any property pledged as collateral.

16.

DEPOSITS FROM BANKS As of December 31, 2007 the deposits from banks in the amount of Denar 109 thousand (2006 – Denar 1,357 thousand) entirely relate to non-interest bearing demand deposits from domestic banks in foreign currency.

31

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 17.

DEPOSITS FROM CUSTOMERS In thousands of Denars December 31, December 31, 2007 2006 Demand deposits in Denars: - enterprises - individuals - foreign entities Demand deposits in foreign currency: - enterprises - foreign entities - individuals - other clients Time deposits in Denars: - enterprises - individuals Time deposits in foreign currency: - enterprises - individuals - foreign entities Long-term deposits in Denars: - individuals Long-term deposits in foreign currency: - individuals - foreign entities

76,755 19,300 40,287

49,134 7,227 28,009

27,258 259,639 67,759 999

53,108 275,679 46,851 672

63,558 5,482

98,152 706

705 57,836 18,476

18,601 53,070 20,806

2

1

1,034 943 640,033

1,239 966 654,221

Demand deposits in Denars from foreign entities mainly refer to customers’ current accounts bearing interest at 2 percent per annum. Demand deposits in foreign currency from citizens represent non-interest bearing deposits. The Bank calculates interest in the range from 1 to 1.25 percent per annum on demand deposits in foreign currency from enterprises. The Bank calculates annual interest of 2 percent on Denar demand deposits from enterprises. The Bank calculates interest on short-term deposit in Denars in the range from 5 to 6.5 percent per annum, and in foreign currency in the range from 1 to 2.5 percent per annum. Long-term deposits in foreign currency bear interest in the range from 2.5 to 3 percent per annum.

32

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 18.

OTHER LIABILITIES In thousands of Denars December 31, December 31, 2007 2006 Income tax payable Unrealized transfers and payments upon loans Trade payables Other taxes payable Provisions Other

19.

912 3,401 1,102 439 179 10

2,475 14,099 2,497 439 206 41

6,043

19,757

EQUITY Permanent investment in the amount of Denar 903,548 thousand was made by TCZB Group. During 2007 the TCZB Group increased the permanent investment in the Bank by the amount of Denar 48,264 thousand. The increase of the permanent investment was made trough capitalization of prior year profits, in accordance with the Board of Directors decision of TCZB Group dated July 18, 2007. The relevant change in the Permanent investment was registered in the Central Depositary of the Republic of Macedonia on August 13, 2007 with decision No. 30120070010571. In accordance with the Board of Directors decision of TCZB Group dated July 18, 2007 the Bank transferred Denar 8,517 thousand from prior year profit to reserves. The Board of Directors of TCZB group, passed a Decision, dated June 27, 2007 on the transformation of the legal status of the Bank from branch to joint stock company. The Central Bank approved the transformation with a decision dated December 10, 2007. The transformation was registered with the Central Registry of the Republic of Macedonia on March 13, 2008 (Note 23).

20.

CONTINGENT LIABILITIES a. Guarantees and letters of credit The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements are generally extend for a period of up to one year. The contractual amounts of contingent liabilities are set out in the following table by category. In thousands of Denars December 31, December 31, 2007 2006 Guarantees - in Denars - in foreign currency Letters of credit in foreign currency

4,383 8,833 454

4,634 8,459 -

13,670

13,093

As of December 31, 2007 the provision for contingent liabilities amounts to Denar 179 thousand (2006 - Denar 206 thousand) (Note 18).

33

T.C. ZIRAAT BANKASI, SKOPJE NOTES TO THE FINANCIAL STATEMENTS December 31, 2007 20.

CONTINGENT LIABILITIES (Continued) b. Compliance with Regulatory Requirements The Bank is required to maintain certain operating ratios with respect to its activities as prescribed by the National Bank of the Republic of Macedonia. All of the requirements of the National Bank of the Republic of Macedonia Regulations were fully adhered to by the Bank as of December 31, 2007.

21.

TAXATION RISK The tax authorities may at any time inspect the books and records within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The Bank's management is not aware of any additional circumstances, which may give rise to a potential material liability in this respect.

22.

RELATED PARTY TRANSACTIONS TC Ziraat Bankasi, Turkey is the sole owner of the Bank. The overall control of the Bank is with the Board of Directors ("the Managing Board") who is appointed by the Parent Bank. The Bank grants loans to and collect deposits from customers and banks to which it is related. The directors consider that these transactions are on a normal commercial basis and in the normal course of business. As of December 31, 2007 the total gross exposure to such customers was: - loans to key management personnel in the amount of Denar 1,406 thousand (2006: Denar 959 thousand); - foreign currency accounts held with banks related to the Bank in the amount of Denar 16,255 thousand (2006: Denar 14,873 thousand).

23.

SUBSEQUENT EVENTS On March 13, 2008 the transformation of the Bank from branch to joint stock company was registered with the Central Registry of the Republic of Macedonia with decision No. 30120080005236. The share capital of the Bank, after the transformation, consists of 903,548 ordinary shares with a nominal value of Denar 1,000. The single shareholder of the Bank is TC Ziraat Bankasi, Turkey. The Banks new name is Ziraat Banka AD, Skopje.

24.

EXCHANGE RATES Official exchange rates for major currencies used in the translation of the balance sheet items denominated in foreign currencies, were as follows:

EUR USD

2007

In Denars 2006

61.2016 41.6564

61.1741 46.4496

34