annual report and accounts 2006 -...

EIIB

ANNUAL REPORT AND ACCOUNTS 2006

2 Chairman’s Statement4 Managing Director’s Statement6 Operating and Financial Review

12 Directors14 Report of the Directors16 Corporate Governance18 Report of the Sharia’a Supervisory Board19 Statement of Directors’ Responsibilities20 Independent Auditor’s Report22 Income Statement23 Balance Sheet24 Statement of Changes in Equity25 Cash Flow Statement26 Notes to the Financial Statementsibc Company Information

1EUROPEAN ISLAMIC INVESTMENT BANK PLC

Annual Report & Accounts 2006

2006 HIGHLIGHTS

■ FSA license and commencement of operations

■ Profit before tax of £1.9m on revenues of £7.8m

■ Eight sukuk and other term financing transactions

■ Announcement of two funds by our AssetManagement business

■ Bahrain office opened in December

OUR MISSION

EIIB is committed to excellence in thedelivery of Sharia’a compliant investmentbanking products and services

2 EUROPEAN ISLAMIC INVESTMENT BANK PLC


CHAIRMAN’S STATEMENT

In the name of Allah, the MostGracious, the Most Merciful

To the shareholders of the EuropeanIslamic Investment Bank plc

I am pleased to report to our shareholders onEuropean Islamic Investment Bank plc’s (EIIB)first full year results for the year to 31 December2006.

This has been a very fruitful year for the Bank as we received our FSA license and commencedoperations as the first independent Islamicinvestment bank operating in the City of London.

I am pleased to report that in our firstoperational period of less than nine months, we have generated a profit before tax of £1.9million on revenues of £7.8 million reflecting the progressive build of transaction flows, andthe effective utilisation of our capital toparticipate in trade finance syndications and thesecondary sukuk market. We participated in eightsukuk and other term financing transactions andalso announced the launch of two funds by ourAsset Management business in December 2006.Our Bahrain representative office was alsoopened at the end of the year.

EIIB is uniquely positioned to as the leading financial centre



With the rapid international growth of Islamicfinance, EIIB’s unique business model aims tobridge Western financial markets with those ofthe Islamic world and I believe that our businessperformance and transaction pipeline is alreadydemonstrating traction in this regard. I amconfident that we are uniquely positioned tobenefit from London’s position as the leadingfinancial center in the world as the city positionsitself as the global gateway for Islamic finance.

With our capabilities now largely in place, the year ahead will be one in which EIIB willdemonstrate the full capabilities of its team tostructure and distribute innovative andsophisticated products. A particular word ofappreciation is also due to the management and staff of the Bank who have put in place the building blocks that will deliver our successin the coming years. They should feel great pride in our achievements over the past year,and I am sure they share our excitement for the future.

Finally, I would like to thank the Board ofDirectors and Members of the Sharia’aSupervisory Board for their support and guidance throughout the year.

Adnan Ahmed YousifChairman

benefit from London’s positionin the world



MANAGING DIRECTOR’S STATEMENT

History and background

The Bank was established and incorporated on11 January 2005 with the objective of obtaininglicensing as the first independent FSA authorisedSharia’a compliant Islamic investment bank inthe UK. Subsequently, in the second quarter2005, we completed a private placement shareoffering that raised approximately £108 million,net of share issue costs. The remainder of 2005and the first half of the year under review, wereprincipally devoted to building a robustoperational and technology systemsinfrastructure, establishing a risk managementand compliance framework, finalising anoperational business plan and recruiting staff tofill key positions across the Bank. In December2005 the Bank also moved to its permanentoffices in the City of London.

We are pleased to report that followingcompletion of the above, we received our FSA authorisation on 8 March 2006 and wereshortly thereafter admitted to the London StockExchange’s Alternative Investment Market (AIM)on 17 May 2006 where we are now included in the AIM 100 index. The admission to AIMcoincided with an IPO raising approximately £73 million of capital, net of costs, giving theBank a capital base of £184 million.

Business overview

The financial performance of our business isdetailed in the Operating and Financial Review.However, we would like to comment withsatisfaction on the successful completion of thelicensing process in the early part of 2006 thatsaw us open our doors for business in April. Weare also pleased to report that in our operationalperiod of less than nine months, we havegenerated a profit before tax of £1.9 million,reflecting the progressive build of transactionflow and the effective utilisation of our capital to participate in trade finance syndications andthe secondary sukuk market. We continue to findthe UK a very supportive regulatory environmentfor Islamic finance as manifested in the strongcommitment of political and business leaders tomake London a global centre of excellence forthe industry.

2006 was primarily a year of completing theprocess of building the Bank’s infrastructure and establishing our presence in the Islamicmarketplace in the UK and overseas. TheBoard’s directive to management was to selectand implement a bespoke IT systems solution,as well as operational policies and proceduresthat would be robust and flexible, secure theBank’s assets and allow generation of responsive

EIIB has generated a profit before tax build of transaction flow and the effec

customer centric decision metrics. We aresatisfied with the success achieved in this regardwhich is manifested in our having delivered, by the year end, against the key product andbusiness roll-out milestones we had announcedat the time of our IPO. We would like tocommend the energy and dedication of all EIIBstaff as they ensured the successful completionof this phase of our operations. The Board isconfident that the people and systems neededto take our business forward are now in place.

The principal emphasis during the year was to ensure that our Treasury and Capital Marketbusiness teams and the middle and back officesupport functions were in place to supporttransactions. However, we have in parallelfocused on building our deal flows andcounterparty relationships so as to ensure that we enter the New Year with strongmomentum across all business lines. We havemade excellent progress in this regard and haveparticipated in selected primary capital markettransactions while actively trading in thesecondary market for quality sukuk issues. In 2007 we intend to further develop ourproprietary trading business while sourcing andsecuritising transactions on behalf of our clients.

The coming year will also see considerableactivity in our asset management business witha number of planned product launches to followon from the Pan-European Islamic Real EstateFund and the Secured Equity Fund announcedin December 2006.

John WeguelinManaging Director



of £1.9 million, reflecting the progressivetive utilisation of our capital.



OPERATING & FINANCIAL REVIEW

Introduction

While there is no statutory requirement toprepare an Operating and Financial Review(OFR), the Directors have followed theframework set out in the Accounting StandardsBoard’s Reporting Statement: Operating andFinancial Review as a guide to best practice, and as such the Directors believe they havedischarged their responsibilities under Section234ZZB of the Companies Act 1985 to providea balanced and comprehensive review of thedevelopment and performance of the business.

EIIB’s objectives and market environment

EIIB is the first independent Sharia’a compliantIslamic investment bank to be authorised by theFSA on 8 March 2006 in the UK and is listed on the Alternative Investment Market within theLondon Stock Exchange.

The Islamic financial services industry worldwide,including banking assets, is estimated at US$700billion, according to the Malaysia based IslamicFinancial Services Board and Saudi Arabia'sIslamic Development Bank. The industry began in the 1970s and has now grown to offer a range of Sharia’a compliant products rangingfrom mortgages and insurance to real estateinvestment trusts and corporate bonds. The current Muslim population worldwide isestimated at 1.3 billion of which approximately90 million live in Europe and Turkey. There is also a growing appetite amongst non-Muslimsfor ethical and environmentally friendly productsand we believe that Islamic financial productsalso have the characteristics to meet thisdemand.

EIIB has been established to bridge thegap between the financial markets of the Islamic world and those of western and OECD countries.



The Bank has been established to bridge the gap between the financial markets of the Islamicworld and those of western and OECD territories.It will aim to design and deliver a range of innovative products and services across multiple asset classes to the Islamic wholesale,institutional, and high net worth individualmarkets. EIIB aims to originate assets andSharia’a compliant structured products inWestern Europe and the UK for placement with institutional and high net worth investorsprimarily, though not exclusively in the MiddleEast. We believe that the Bank’s competitivepositioning is significantly enhanced by itsposition in London, which is the pre-eminentglobal financial centre with a robust and highlyrespected regulatory environment.

The key principles of Islamic banking are derivedfrom the Quran and are based on the avoidanceof:

• Interest • Uncertainty• Speculation• Unjust enrichment or unfair exploitation

The Bank’s Sharia’a Supervisory Boardcomprising eminent Islamic scholars is taskedwith ensuring that all products are structured to reflect these principles.

The establishment of Islamic finance in the UK has received considerable support from Her Majesty’s Government and regulators, with developments continuing in the tax andregulatory framework with a view to providing a level playing field for Islamic finance products.This is in line with a stated intention to developLondon as a centre of excellence for globalIslamic banking. Other significant developmentsthat are proposed include revisions to the taxlaws to allow domestic issuances of sukuks. We believe that these changes will be verysupportive of our business plans and will furtherfacilitate EIIB’s abilities to provide alternative

investment and financing opportunities to both investors and borrowers.

Based on the above and the robustmacroeconomic environment in the Middle East, the Directors project a favourable outlookfor the Bank’s activities for 2007.

Business objectives

The Directors have organised the operations of the Bank into three business units:

TREASURY AND CAPITAL MARKETS

EIIB’s Treasury quotes foreign exchange spot and the Islamic equivalent of forward foreignexchange prices in all major currencies andpromotes liquidity in the Islamic money markets.Indeed, the Bank is the first to actively quotetwo-way prices for sukuks in London. The unitmanages the short and medium term liquidityprofile of the Bank within the guidelines laiddown by the Financial Services Authority. Inaddition to being actively involved in Islamicinterbank commodity murabaha and wakalamoney markets transactions, it seeks to build a sustainable base of third party deposits byestablishing direct relationships.

The unit also oversees the day to daydevelopment of relationships with other financialinstitutions, whilst assuming responsibility forbringing together various parts of the EIIB teamto maximise cross selling potential of productsand services to our counterparts.

The Capital Markets unit’s remit is to cover a range of activities including, but not limited to term financing, sukuks securitisation andstructured trade finance. It will be involved in all aspects of the product value chain,including origination, structuring, underwritingand distribution. The Bank will aim to invest inmandated financing issues and to develop andmaintain an active secondary market in such




issues. The Islamic sukuk market has seensignificant growth in both the size and numberof obligors as well as the volume of trading onthe secondary market. Globally the issuance ofinternational sukuk was estimated at close toUS$20bn and at the year end the totaloutstanding issuances of international sukukswas about US$40bn. The increasing appetite of conventional investors for larger sukuk issueswill undoubtedly further drive liquidity in thesecondary sukuk market during 2007.

Structured trade finance provides tailor-madetrade finance solutions to our selected targetmarket in the GCC, North Africa, Europe andAsia. Transaction tenors typically range from 90 days to 3 years (with a maximum tenor of 5 years).

ASSET MANAGEMENT

EIIB proposes to use Sharia’a complianttechniques to structure and distribute investmentproducts in the UK, Europe, the Middle East andAsia. The Bank will use its proprietary distributionnetwork as well as intermediaries such as banksand insurance companies to deliver a range ofinvestment products that in the coming year willinclude, but will not be limited to:

• Property investment funds• Structured product funds• Private equity funds

The clients’ investments will be managed in-house except where specialist fund managementexperience is required. EIIB will also work withother financial institutions to white label productsin response to specific demand.

CORPORATE FINANCE AND ADVISORY

EIIB will provide a range of Advisory andCorporate Finance Services including, but not limited to, the following:

• Advising on capital raising opportunities within the Islamic finance markets

• Advising on mergers and acquisitions• Cross-border private equityThis unit is presently actively targeting bespokeinvestment and acquisition opportunities for theBank’s clients.

Business Strategy and Results

The Bank’s operations commenced in April2006. The principal objective during the yearwas to put in place the building blocks ofbusiness for the future. The Directors arepleased to report that the Bank reported a profit before tax of £1.9 million which wasdriven by total operating income of £7.8 million.This is a very positive result considering that the Bank was only in licensed operation for nine months of the year and where considerablemanagement time was initially directed towards

…combining Islamic values with deliver a wide spectrum of risk



establishing the operational, IT and controlenvironment of the Bank.

Following the raising of capital through a private placement (£108 million) and an IPO(£73 million), the primary focus of EIIB Treasurywas on efficiently managing the Bank’s surplusliquidity. The maturity profile of assets throughthe first three quarters of the year was weightedtowards the short term, principally in moneymarket placements. However, as the Bank’sproprietary investment portfolio has grown insize as we have acquired sukuks from both theprimary and secondary markets, maturities areshifting to the longer term with more than 16%of assets now in the greater than 12 monthsbucket.

Our Capital Markets business used this initialbook building phase to establish EIIB’s brandrecognition as a provider of Sharia’a compliantfinancial solutions to Islamic borrowers as well as conventional borrowers wishing to access the Islamic investor universe. Looking forward,we will aim to grow our book by originatingtransactions in selected target markets andfurther develop our distribution and tradingactivities as a function of the above. The Bank’sdevelopment of this portfolio is also driven by an intention to securitise these assets in themedium term for sale to our investor base. Wehave focused on quality assets with competitiveyields and have ensured that the issuers fall

within the stringent risk diversification criteriaestablished by the Board. Our portfolio has beendiversified across sectors to the extent possibleand we have focused on transactions domiciledin the UAE, Saudi Arabia, Qatar, Malaysia, Kuwait,Turkey and Bahrain. A principal success has beenour appointment after the year end as amember of a syndicate of international banks to underwrite a financing by a leading Islamicfinancial institution in the Gulf.

Capital markets trading in the first half of theyear was constrained by a lack of suitable assetson the market and by the Bank’s tactical decisionto avoid concentrations of risk. While this lack of suitable assets was an initial constraint on the growth of this business, we can now reportthat we have seen considerably more activity inthe sukuk and term financing markets towardsthe end of 2006 and into the New Year. The firsttwo months of 2007 have seen sizeable issuesbeing brought to market that have been verywell received. We are therefore confident thatour capital markets business is now extremelywell positioned for the coming year.

The Bank intends to leverage its institutional and corporate relationships with a view towardssecuring a more active role in syndicatedfinancings. We anticipate a continuation of therecent trend for most asset backed issuances tooriginate from the Middle East and Malaysia andfor these to be weighted towards the real estate

international best practice, wemitigation and financing solutions




sector. However, we will continue to activelymanage our risk profile and will aim to minimise undue sectoral concentrations.

A significant contributor to the growth of ourbalance sheet have been the trade financetransactions entered into during the year, witheight transactions valued at approximately £30 million in our portfolio at the year end. A notable success was EIIB being mandated as a joint lead arranger during September 2006for a Turkish based corporate entity. A healthypipeline has been built for this business that we believe will contribute to the Bank’sperformance in 2007.

The asset management business is fully staffedand has focused during the year on developingproducts that meet specific investor appetite andrisk-reward profiles. These efforts were reflectedin our receiving Sharia’a approval for the Pan-European Real Estate Fund and the EIIB SecuredEquity Fund, which were both formally launchedin December 2006. The Bank intends to moveinto the capital raising phase for these funds inthe next few months and in parallel will progressthe sourcing of assets for these funds. A numberof additional products are also in the final stagesof development and will be ready for launchthrough 2007.

People

A significant differentiating factor for our businessis our ability to attract quality staff from theLondon market. As a start-up Islamic investmentbank in the City, we faced initial challenges insourcing individuals with the right profile and skill sets and as a result our recruitment planwas staggered through the year. However, all key areas have been staffed and operationalfrom the second half of the year, and with EIIB’s established presence and increasing brand recognition in the Islamic market placethis process is proving progressively easier tomanage.

The Islamic banking market is exceptionallycompetitive in terms of attracting and retainingtalent and we see this as a particular challengemoving forward. We are putting in place an EIIBemployee incentive plan designed to attract,incentivise and reward staff. When rolled out in2007 it will provide a mixture of cash and equityrewards that will be linked to the Bank's and theindividual’s performance.

Operational

The Bank has placed considerable emphasis on building an operational infrastructure that

EIIB received Sharia’a approval for the the EIIB Secured Equity Fund, which



is robust, scaleable and based on best practicethat will support the growth of the business. This is now in place and based on an IT bankingplatform that can address the Bank’s transactionprocessing and reporting requirements. TheDirectors are confident that the controls aroundthese systems and processes are adequate andeffective in protecting and safeguarding theBank’s assets. EIIB’s Internal Audit departmentwas set up in late 2006 and will, under thedirection of the Board’s Audit Committee, beresponsible to work with management to ensurethat key processes and controls are operatedeffectively and to provide independent appraisalsof systems of internal control, add value tobusiness initiatives and support development of a sound control culture throughout the Bank.

Risks

While we project a strong market environment in 2007, the principal risks that may affect ourbusiness other than those mentioned earlier,would be a sudden and sharp decline in oilprices or the real estate markets in the GCCcountries, or a further sell-off in the equitymarkets in these countries that may affect the level of liquidity or the valuation of assetsbased in the region. However, our strategy ofdiversification and building an asset base that

is progressively more weighted towards Europeand UK as well as a diverse investor base should mitigate the impact of these risks. We also believe that EIIB’s location in a wellregulated environment would likely be seen as a ‘safe haven’ for investors should such a seriesof economic events occur as noted above. A detailed explanation of the Bank’s approach to risk and capital management is set out in note 30 to the financial statements.

Key performance indicators

As this is the first year of operations, the Boardare of the view that management should aim to build the business while tracking performanceagainst indicators such as return on capitalemployed (ROCE), staff turnover and efficiency.As the business activities further develop, theBank will benchmark these key performanceindicators (KPI’s) against international Islamicbanking institutions. In this first year the bank is not disclosing numerical targets andperformance indicators as there is no relevantcomparative data for the prior year and 2006was not a full year of operations for all thebusinesses.

Pan-European Real Estate Fund andwere announced in December 2006.



Adnan Ahmed Yousif * Chairman of the Board of EIIB, CEOand Board Member of the AlBarakaBanking Group (ABG). He was ChiefExecutive Officer and Board Memberof the Bahrain Islamic Bank B.S.C.from 2002 to 2004, before which he was group Chief Executive Officerand Board Member of the AlBarakaBanking Group for two years. He hasalso held various senior positions atArab Banking Corporation includingExecutive Chairman of ABC IslamicBank; Senior Vice President and Headof Arab World Division, and Head of Global Marketing & FinancialInstitutions Division. He sits on theboards of several other Middle Eastbanks. His overall banking experiencespans more than 27 years. Hereceived the Islamic Banker of the Year award for 2004, and wasappointed Vice Chairman of the Union of Arab Banks in 2005.

Khalid A Al-Bassam* (1, 3)Chairman of the NominationCommittee, Deputy Chairman of theBoard of EIIB, Chairman of BahrainIslamic Bank B.S.C and ManagingDirector of Al Bassam InvestmentBank W.L.L. He was previously DeputyGovernor, Central Bank of Bahrain(CBB), and the Executive Director,Banking Operations at the CBB. He has also served as Vice Chairmanand Chairman of the ExecutiveManagement Committee of theBahrain Stock Exchange, and as Boardmember of the General Organisation

for Social Insurance (GOSI), as well as a member of the InvestmentCommittee of GOSI. He is also aBoard member and a member of the Audit Committee of the GulfInvestment Corporation, Kuwait, and a Board member of the LiquidityManagement Centre B.S.C., Bahrain.He received the Islamic Banker of theYear award in 2002 presented duringthe World Islamic BankingConference.

George K Morton* (1) Senior Independent Director. He waspreviously Senior Vice President andHead of International Division at ArabBanking Corporation B.S.C., Bahrain.He has also served as Executive VicePresident & Banking Group Head atGulf International Bank B.S.C., Bahrain,Group International Director at theForex Group, Hong Kong, DeputyGeneral Manager, National Bank of Bahrain B.S.C., Bahrain and as Vice President, Trade Finance &Correspondent Banking at the Bank ofNova Scotia, Toronto. His international,investment and commercial bankingexperience spans more than 30 years.

Shabir Randeree* (2, 3) Chairman of the RemunerationCommittee. He is the ManagingDirector of DCD London & MutualPLC. He is also a Director of IslamicBank of Britain Plc, and holds anumber of other directorships,including that of AlBaraka BankLimited, South Africa.

Hatem Abou Said* (2) Member of the Board of Directors ofthe Italo-Arab Chamber of Commerce.He set up and then served as GeneralManager of Arab Banking Corporation(Milan), Italy, and has also been theHead of Europe and Americas Divisionof Arab Banking Corporation, as well asa Director and Executive ManagementCommittee Member of BancoAtlantico (Spain), and as ExecutiveVice President and GroupAdministrative Officer of Arab BankingCorporation. He has previously servedas Chairman of the Board of Directorsof ABC Finanziaria, Rome, as Directorof La Rinascente SpA, Milan, as DeputyChairman and Director of Arab BankingCorporation Daus & Co. GmBH,Frankfurt and as Executive Chairman of the Board of Directors of ABCBanque Internationale De Monaco(S.A.M.), Principality of Monaco. Hisinternational, investment andcommercial banking experience spansmore than 40 years. In June 1989 he was awarded the honorary title of Cavaliere al Merito della RepublicaItaliana (Knight of the Order of Merit of the Italian Republic) by thePresident of Italy, in recognition of his service to the national economy

John Clouting* (1) Chairman of the Audit Committee. He is also a non-executive Director of Turkish Bank (UK) Limited. He was General Manager of JordanInternational Bank Plc between 2000and 2003, and General Manager of

Non-executive Directors

DIRECTORS



Turkish Bank (UK) Limited between1998 and 2000. Prior to this he held a number of senior positions at Jordan International Bank Plc, andother banks. He has over 35 yearsbanking experience.

Yusef Rabah Abu Khadra* (1,2)Formerly a Member of theManagement Committee of InvestcorpBank E.C. in Bahrain and latterly an Executive Director of InvestcorpSecurities in London. He has alsoserved with Morgan Stanley in London and New York, and has held a number of positions in financialservices based in the Middle East andSwitzerland. His banking experiencespans nearly 35 years.

Abed Alzeera (2)Chairman of the Board ExecutiveCommittee, is a prominent Bahrainibanker and Chief Executive Officer of International Investment Bank (IIB). He has 25 years of internationalbanking experience with majorfinancial institutions in the Kingdom of Bahrain and the United ArabEmirates, including American ExpressBanking Corporation, Arab BankingCorporation (ABC), StandardChartered Bank, and First IslamicInvestment Bank (now Arcapita). He is a founding shareholder and the keypromoter of International InvestmentBank, which is an Islamic investmentbank established in the Kingdom ofBahrain. He was also instrumental insetting up ABC’s Representative Office

in Abu Dhabi in 1996, where heserved as Vice President and ChiefRepresentative.

Salman Abbasi* (3)Joined Investcorp as a member of the Management Committee in early1988 and was General Manager ofInvestcorp Bahrain from then until2004 when he retired. He wasassociated with Chase ManhattanBank, N.A. from 1967 serving for 20 years in a variety of positions both at the head office in New York and overseas. His most recentposition, prior to joining Investcorp in 1988, was Vice President and Chief Executive, responsible formanaging all Chase business in Africaand the Middle East. He also servedconcurrently as a Director on theboards of Saudi Investment Bank and Chase Bank Cameroon. Hestarted his banking career with ArabBank, where he worked in Jordan and Qatar. His total banking careerexceeds 40 years.

John WeguelinManaging Director and Chief Executiveof EIIB. Until 2003, he was ManagingDirector of Bank of America SecuritiesLimited in London, and ChiefOperating Officer and ChiefAdministration Officer of Bank ofAmerica NA for Europe, Middle Eastand Africa.

Atif RazaFinance Director and Chief OperatingOfficer. A chartered accountant, he was previously with UnicornInvestment Bank in Bahrain, as itsChief Financial Officer. Prior to that he served as CFO for Citicards UK, aCitigroup franchise and earlier as CFOfor Saudi American Bank (SAMBA) aCitigroup managed franchise in SaudiArabia.

Executive Directors

(1) Member of the audit committee(2) Member of the remuneration committee(3) Member of the nomination committee* Independent Director



REPORT OF THE DIRECTORS

The Directors of European Islamic Investment Bank Plchave pleasure in presenting their second annual report,together with the audited financial statements, for the yearended 31 December 2006.

PRINCIPAL ACTIVITIESEuropean Islamic Investment Bank Plc was incorporated inthe United Kingdom on 11 January 2005, and commencedfull banking operations in April 2006. The Bank is the firstindependent Sharia’a compliant Islamic investment bank inthe United Kingdom to be regulated by the FSA. The Bankaims to provide Sharia’a compliant investment bankingservices in the United Kingdom, Continental Europe, theMiddle East and selected other markets.

FINANCIAL RESULTSThe financial statements for the reporting year ended31 December 2006 are shown on pages 22 to 44. Theprofit for the period after taxation amounts to £1,224,838.

DIVIDENDThe Directors are of the view that income generated should be retained in the development of the business and consequently the Directors do not recommend thepayment of a dividend.

DIRECTORSThe Directors serving at the date of this report are shownon page 12 and 13, other than those shown below, allserved throughout the year.

Christophe Balet resigned 25 January 2006

Abed Alzeera appointed 24 March 2006

Salman Abbasi appointed 24 March 2006

Michael Carter resigned 31 March 2006

Tony Ellingham resigned 2 June 2006

Atif Raza appointed 20 June 2006

DIRECTORS’ INTERESTSThe Directors who held office at the end of the financialyear had the following beneficial interests in the ordinaryshares of the Bank according to the register of Directors’interests. The table shows number of shares held andpercentage of total shares in issue at that time:

Interest at start

Class of Interest at end of year or date

share of year of appointment

Adnan Ahmed Yousif Ordinary 1p 2,000,000 0.11% 2,000,000 0.13%

Khalid A Al-Bassam Ordinary 1p 1,000,000 0.05% 1,000,000 0.07%

George K Morton Ordinary 1p 1,000,000 0.05% 1,000,000 0.07%

Shabir Randeree Ordinary 1p 1,524,783 0.08% 1,000,000 0.07%

Hatem Abou Said Ordinary 1p 1,000,000 0.05% 1,000,000 0.07%

Abed Alzeera Ordinary 1p 400,000 0.02% - -

John Weguelin Ordinary 1p 210,000 0.01% - -

During the year Shabir Randeree purchased 524,783 shareswith a nominal value of £5,248. Abed Alzeera purchased400,000 shares with a nominal value of £4,000, and JohnWeguelin purchased 210,000 shares with a nominal valueof £2,100. On 10 and 11 January 2007 John Weguelinpurchased a further 100,000 shares with a nominal valueof £1,000. None of the other Directors who held office atthe end of the financial year had any other disclosableinterest in the shares of the Bank.

According to the register of Directors’ interests, no rights to subscribe for shares in or debentures of the Bank weregranted to any of the Directors or their immediate families,or exercised by them, during the financial year.

SHARE CAPITALDuring the year, the Bank issued 301,125,531 ordinaryshares of 1p for 25p per share raising proceeds of£72,915,918 net of share issue costs. The terms of the share issue were finalised on 11 April 2006. At the reporting date the Issued Share Capital, fully paid,amounted to £18,255,625.

SHARIA’A SUPERVISORY BOARD MEMBERSThe Sharia’a Supervisory Board members are as follows: • Justice (rtd) Muhammad Taqi Usmani – Chairman• Dr. Abdul Sattar Abu Ghuddah• Dr. Abdul Latif M. Al Mahmood• Sheikh Nizam Yacouby



ZAKAHZakah is an annual amount to be paid by Muslims tocharity out of their savings. The Directors calculate that thezakah contribution payable by shareholders on their shareof the Bank’s earnings is 0.25p per share or £2.54 perthousand shares held based on the net assets method as detailed in the Accounting, Auditing and GovernanceStandards 2004-5 of the Accounting and AuditingOrganisation for Islamic Financial Institutions.

POLITICAL CONTRIBUTIONS AND CHARITABLEDONATIONSThe Bank made no political contributions or charitabledonations during the year.

POLICY AND PRACTICE ON PAYMENT OF CREDITORSThe Bank follows “The Better Payment Practice Code”published by the Department of Trade and Industry,regarding the making of payments to suppliers.

The Bank’s policy is to agree terms of payment withsuppliers and these normally provide for settlement within30 days after the date of the invoice, except where otherarrangements have been negotiated. It is the policy of theBank to abide by the agreed terms of payment, provided the supplier performs according to the terms of the contract.

EVENTS SINCE THE BALANCE SHEET DATEThe Directors confirm there are no significant events arisingsince the balance sheet date that should be reported toshareholders.

GOING CONCERNIn approving the financial statements the Directors havereviewed the business activities and financial position of the Bank, and have a reasonable expectation that the Bankhas adequate resources to continue in operational existencefor the foreseeable future. For this reason the Directorscontinue to adopt the going concern basis in preparing the financial statements.

AUDITORSResolutions concerning the re-appointment of Ernst &Young LLP as auditors and authorising the Directors to settheir remuneration will be proposed at the annual generalmeeting.

DIRECTORS’ STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORSThe Directors who were members of the Board at the time of approving the Directors’ report are listed on page12 and 13. Having made enquiries of fellow Directors andof the Bank’s auditors, each of the Directors confirms that:

• to the best of each Director’s knowledge and belief,there is no information relevant to the preparation of the report of which the Bank’s auditors are unaware; and

• each Director has taken all the steps a Director mightreasonably be expected to have taken to be aware ofrelevant audit information and to establish that theBank’s auditors are aware of that information

By order of the Board

Mohammed Abdul Mohaimin Chowdhury Company Secretary

9 March 2007

Registered Office:131 Finsbury PavementLondon EC2A 1NT



CORPORATE GOVERNANCE

COMPLIANCE WITH THE COMBINED CODEThe Board considers that good corporate governance iscentral to achieving the Bank’s objectives and has appliedthese principles in drawing up the Bank’s risk managementframework taking into consideration The Combined Code on Corporate Governance June 2006 annexed to the UKListing Authority rules (The Combined Code). The Bank hascomplied with these requirements since its admission to AIM.

THE BOARD AND ITS COMMITTEESThe Bank is led by a Board comprising non-executive andexecutive Directors with wide experience of Islamic andconventional banking. The appointment of Directors isconsidered by the nominations committee and then theBoard. Following the provisions in the Articles of Association,all Directors must stand for re-election by the shareholdersat the first Annual General Meeting following theirappointment and following that meeting must stand forre-election by the shareholders, at least every three years.Executive Directors normally retire at age 65, as required by their service agreements. Independent non-executiveDirectors are appointed for three-year renewable terms,which may be terminated by giving three months notice.

The Board is required to meet at least four times a year, in 2006 there were six Board meetings. The Board has a programme designed to enable the Directors to reviewcorporate strategy and the operations and results of thebusiness and to discharge their duties within a frameworkof prudent and effective controls relating to the assessmentand management of risk.

The matters specifically referred to the Board for decisioninclude the approval of the annual report and financialstatements; the payment of dividends; the long-termobjectives of the Bank; the strategies necessary to achievethese objectives; the Bank’s budgets and plans; significantcredit exposures; significant capital expenditure items;significant investments and disposals; the organisationalstructure of the Bank; the arrangements for ensuring thatthe Bank manages risk effectively; any significant change in accounting policies or practices; the appointment of theBank’s main professional advisers; and the appointment ofsenior executives within the organisation.

The Board has delegated to the Committees of the Bankthe power to make decisions on operational matters,including those relating to credit, liquidity, operational and market risk, within an agreed framework.

All Directors have access to the services of the CompanySecretary, and independent professional advice is availableto the Directors at the Bank’s expense, where they judge it necessary to discharge their duties as Directors.

The Board will, at least annually, review and approve its composition and charter in order to set the riskmanagement framework of the Bank. To assist the Boardin executing its risk management function, it will reviewand approve the composition and charters of the followingBoard sub-committees:

AUDIT COMMITTEEThe Audit Committee comprises John Clouting (chairman),Khalid A Al-Bassam, George K Morton and Yusef Rabah AbuKhadra. In discharging its duties, the committee is requiredto review the auditors’ remuneration and, in discussion with them, to assess their independence and recommendtheir re-appointment at the Annual General Meeting. The committee will also review the financial statementspublished in the name of the Board and the quality andacceptability of the related accounting policies, practicesand financial reporting disclosures; the scope of work of the internal auditor, reports from the internal auditor andthe adequacy of resources; the effectiveness of the systemsfor internal control, risk management and compliance withfinancial services legislation and regulations; procedures bywhich staff may raise concerns in confidence; the results ofthe external audit and reports from the external auditor andtheir findings on accounting and internal control systems.The chairman of the committee has held a meeting withthe auditors, without executives present, and a meetingwith the internal auditor alone.

NOMINATION COMMITTEEThe Nomination Committee, comprising Khalid A Al-Bassam(chairman), Shabir Randeree and Salman Abbasi, reviews the composition of the Board, taking into account the skills,knowledge and experience of Directors and considers andmakes recommendations to the Board on potentialcandidates for appointment as Directors. The committeewill also make recommendation to the Board concerningthe re-appointment of any independent non-executiveDirector by the Board at the conclusion of his or herspecified term; the re-election of any Director by theshareholders under the retirement provisions of the articlesof association; any matters relating to the continuation inoffice of a Director; and the appointment of any Director to executive or other office, other than the positions ofChairman and Managing Director, the recommendation for which would be considered at a meeting of the non-executive Directors regarding the position of ManagingDirector, and all the Directors regarding the position ofChairman. The Nomination Committee evaluates, at leastannually, the performance of the Board, its committees and individual directors and makes appropriaterecommendations to the Board.



REMUNERATION COMMITTEEThe Remuneration Committee, which comprises ShabirRanderee (chairman), Hatem Abou Said, Yusef Rabah AbuKhadra and Abed Alzeera, reviews the remuneration policyfor senior management, to ensure that members of theexecutive are provided with appropriate incentives toencourage them to enhance the performance of the Bankand that they are rewarded for their individual contributionto the success of the organisation. It will be made aware of, and advise on, major changes to employee benefitsschemes and it also agrees the policy for authorising claimsfor expenses from the Managing Director and the Chairman.

All the non-executive Directors are invited to attendmeetings if they wish, and they receive the minutes andhave the opportunity to comment and have their viewstaken into account before the committee’s decisions areimplemented.

BOARD EXECUTIVE COMMITTEEThe Board Executive Committee (BEC) comprises AbedAlzeera (chairman), George K Morton, Hatem Abou Said,Shabir Randeree and Yusef Rabah Abu Khadra. The BECassists the Board in fulfilling its risk managementresponsibilities; these responsibilities include determiningthe Bank’s risk profile and ensuring that managementremains within the Board determined risk appetite.Meetings are held at least quarterly and include theManaging Director and Head of Risk Management bystanding invitation. The terms of reference include reviewingcapital adequacy, liquidity, credit risk, market risk,operational risk and anti-money laundering assessmentsand approvals under Board delegated authority.

EXECUTIVE MANAGEMENT COMMITTEEIn addition the Bank has an Executive ManagementCommittee to assist the Managing Director in performing his duties.

The Executive Management Committee comprises theManaging Director, Finance Director, the Head of RiskManagement, the Head of Asset Management, the Head of Treasury and Capital Markets, the Head of CorporateFinance, the Bahrain Manager, the Head of HumanResources and the Head of Legal, Sharia’a and Compliance.Specifically, the committee considers the development andimplementation of strategy, operational plans, policies andbudgets; the monitoring of operating and financialperformance; the assessment and control of risk; theprioritisation and allocation of resources; and the monitoringof competitive forces in each area of operation. Thecommittee, assisted by its sub-committees: the riskmanagement, IT, human resources and asset and liabilitycommittees, also supports the Managing Director in

ensuring the development, implementation andeffectiveness of the Bank’s risk management frameworkand the clear articulation of the Bank’s risk policies, and inreviewing the Bank’s aggregate risk exposures andconcentrations of risk. The committee may have specificpowers delegated to it by the Board from time to time andfollowing the exercise of these powers, it reports to theBoard.

MEETINGS AND ATTENDANCEMain Board Audit Remuneration Nomination

Committee Committee Committee

NO. OF MEETINGS IN YEAR 6 3 4 1

Adnan Ahmed Yousif 5

Khalid A Al-Bassam 6 3 1

George K Morton 5 3

Shabir Randeree 6 4 1

Hatem Abou Said 6 4

Abed Alzeera (1) 4

John Clouting 6 3

Yusef Rabah Abu Khadra 5 2 3

Salman Abbasi (2) 3

John Weguelin 6

Atif Raza (3) 3

Michael Carter (4) 2 1

Christophe Balet (5) 1

Tony Ellingham (6) 3

(1) appointed 24 March 06; (2) appointed 24 March 06;

(3) appointed 20 June 06; (4) resigned 31 March 2006;

(5) resigned 25 January 06; (6) resigned 2 June 06.

SHAREHOLDERSUnder The Combined Code the Board appoints one of the independent non-executive Directors to be the SeniorIndependent Director. The Senior Independent Director,George K Morton, is available to shareholders if they haveconcerns which contact through the normal channels ofchairman, managing director or finance director has failedto resolve or for which such contact is appropriate. TheBoard ensures the Directors develop an understanding ofthe views of major shareholders by encouraging them tomeet major shareholders and attend shareholder meetings;making them aware of views and feedback received fromshareholders; and providing them with analysts’ andbrokers’ briefings on the Bank.



REPORT OF THE SHARIA’A SUPERVISORY BOARDFor the period 1 January 2006 to 31 December 2006

In the name of Allah, The Most Gracious, The Most Merciful

To the Shareholders of European Islamic Investment Bank plc

Assalamu Alaikum Wa Rahmat Allah Wa Barakatuh

In compliance with our letters of appointment with EuropeanIslamic Investment Bank plc (EIIB) we are required to submitthis report.

Through our Sharia’a Audit Committee, we have reviewedthe principles and the contracts relating to the transactionsconducted by EIIB during the period 1 January 2006 to31 December 2006 (the ‘Period’). We have conducted ourreview to form an opinion as to whether EIIB has compliedwith Sharia’a rules and principles and also with the specificfatwas, rulings and guidelines issued by us.

EIIB’s management is responsible for ensuring that EIIBconducts its business in accordance with Sharia’a rules andprinciples. It is our responsibility to form an independentopinion, based on our review of the operations of EIIB, and to report to you.

We conducted our review which included examining, on a test basis, each type of transaction, the relevant documentationand procedures adopted by EIIB for the transaction. Wesuggested some minor amendments in the procedures for the future, to make the record more accurate, but they did not affect the validity of the transactions from a Sharia’a pointof view. Based on this we are of the opinion that the contracts,transactions and dealings entered into by EIIB during thePeriod that were reviewed are in compliance with Sharia’arules and principles.

We beg Allah the Almighty to grant us all success andstraight-forwardness.

Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh

Signed on behalf of the Sharia’a Supervisory Board ofEuropean Islamic Investment Bank plc

Justice (rtd.) Muhammad Taqi UsmaniChairman

16 February 2007



STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for the Annual Report and thefinancial statements in accordance with applicable UnitedKingdom law and those International Financial ReportingStandards (IFRS) as adopted by the European Union.

The Directors are required to prepare financial statementsfor each financial year which present fairly the financialposition of the Bank and the financial performance andcash flows of the Bank for that period. In preparing thosefinancial statements, the Directors are required to:

• select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in AccountingEstimates and Errors and then apply them consistently;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparableand understandable information

• provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient toenable the users to understand the impact of particulartransactions, other events and conditions on the Bank’sfinancial position and financial performance; and

• state that the Bank has complied with IFRSs, subject to any material departures disclosed and explained inthe financial statements.

The Directors are responsible for keeping proper accountingrecords which disclose with reasonable accuracy at anytime the financial position of the Bank and to enable themto ensure that the financial statements comply with theCompanies Act 1985 and Article 4 of IAS Regulation. Theyare also responsible for safeguarding the assets of the Bankand hence for taking reasonable steps for the preventionand detection of fraud and other irregularities.



INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF EUROPEAN ISLAMIC INVESTMENT BANK PLC

We have audited the financial statements of European IslamicInvestment Bank plc for the year ended 31 December 2006which comprise the Income Statement, the Balance Sheet,the Statement of Changes in Equity, the Cash Flow Statementand the related notes 1 to 30. These financial statementshave been prepared under the accounting policies set outtherein.

This report is made solely to the Bank's members, as abody, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that wemight state to the Bank's members those matters we arerequired to state to them in an auditors' report and for noother purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone otherthan the Bank and the Bank's members as a body, for ouraudit work, for this report, or for the opinions we haveformed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORSThe directors’ responsibilities for preparing the financialstatements in accordance with applicable United Kingdomlaw and International Financial Reporting Standards (IFRSs)as adopted by the European Union are set out in theStatement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements inaccordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and are properlyprepared in accordance with the Companies Act 1985. We also report to you whether the information given in thedirectors' report is consistent with the financial statements.

In addition we report to you if, in our opinion, the Bank hasnot kept proper accounting records, if we have not receivedall the information and explanations we require for ouraudit, or if information specified by law regarding directors’remuneration and other transactions is not disclosed.

We read the directors’ report and consider the implicationsfor our report if we become aware of any apparentmisstatements within it.

BASIS OF AUDIT OPINIONWe conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by theAuditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes anassessment of the significant estimates and judgementsmade by the directors in the preparation of the financialstatements, and of whether the accounting policies areappropriate to the Bank’s circumstances, consistentlyapplied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence togive reasonable assurance that the financial statements arefree from material misstatement, whether caused by fraudor other irregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentation ofinformation in the financial statements.

OPINIONIn our opinion:

• the financial statements give a true and fair view, inaccordance with IFRSs as adopted by the EuropeanUnion, of the state of the Bank's affairs as at 31December 2006 and of its profit for the year thenended;

• the financial statements have been properly prepared in accordance with the Companies Act 1985; and

• the information given in the Directors' Report isconsistent with the financial statements.

Ernst & Young LLPRegistered auditor1 More London PlaceLondon SE1 2AF

9 March 2007



22 Income Statement23 Balance Sheet24 Statement of Changes in Equity25 Cash Flow Statement26 Notes to the Financial Statementsibc Company Information



INCOME STATEMENT for the year ended 31 December 2006

Notes For the period11 Jan 2005 to

31 Dec 2006 31 Dec 2005

£ £

Income

Income from financing and investing activities 4 8,092,184 3,840,502

Returns to financial institutions and customers 5 (174,056) -

Net margin 7,918,128 3,840,502

Foreign exchange losses 6 (131,005) -

Trading income 7 53,942 -

Total operating income 7,841,065 3,840,502

Expenses

Staff costs 8 (3,756,742) (1,138,753)

Depreciation and amortisation 17, 18 (247,195) (11,955)

Other operating expenses 9 (1,948,746) (850,000)

Total operating expenses (5,952,683) (2,000,708)

Operating profit before tax 10 1,888,382 1,839,794

Tax 11 (663,544) (533,678)

Profit for the period 1,224,838 1,306,116

Attributable to equity holders of the Bank 1,224,838 1,306,116

Earnings per share - basic and diluted 12 0.07p 0.11p

The notes on pages 26 to 44 form an integral part of the financial statements.



BALANCE SHEETat 31 December 2006

Notes 31 Dec 2006 31 Dec 2005restated

£ £

Assets

Cash and balances with banks 811,416 435,706

Collateral deposits 26 235,732 -

Due from financial institutions 13 164,896,947 111,214,717

Financing arrangements 14 30,582,012 -

Available for sale securities 15 33,443,122 -

Fair value of foreign exchange agreements 16 2,444,554 -

Plant and equipment 17 347,644 96,493

Intangibles assets 18 1,081,739 336,214

Other assets 19 2,435,991 327,451

Total assets 236,279,157 112,410,581

Liabilities

Due to financial institutions 20 47,505,774 -

Due to customers 21 895,638 -

Fair value of foreign exchange agreements 16 7,821 -

Other liabilities 22 1,534,516 721,141

Current tax 11 500,332 533,678

Deferred tax 11 131,099 -

Total liabilities 50,575,180 1,254,819

Shareholders' equity

Share capital 27 18,255,625 15,244,370

Share premium account 27 164,229,939 94,325,276

Fair value reserve (12,541) -

Retained earnings 3,230,954 1,586,116

Total equity attributable to the bank's equity holders 185,703,977 111,155,762

Total equity and liabilities 236,279,157 112,410,581


John Weguelin Atif RazaManaging Director Finance Director



STATEMENT OF CHANGES IN EQUITY for year ended 31 December 2006

Share Share Fair Retainedcapital premium value earnings

account reserve Total

£ £ £ £ £

Balance at 11 January 2005 - - -

Share issue 15,244,370 98,870,591 114,114,961

Transaction costs of share issue (4,545,315) (4,545,315)

Share award 280,000 280,000

15,244,370 94,325,276 - 280,000 109,849,646

Profit for the period 1,306,116 1,306,116

Balance at 31 December 2005 15,244,370 94,325,276 - 1,586,116 111,155,762

Balance at 1 January 2006 15,244,370 94,325,276 1,586,116 111,155,762

Share issue 3,011,255 72,270,127 75,281,382

Transaction costs of share issue (2,365,464) (2,365,464)

Share award 420,000 420,000

18,255,625 164,229,939 - 2,006,116 184,491,680

Profit for the year 1,224,838 1,224,838

Net unrealised loss on available for sale securities (12,541) (12,541)

Net income recognised for the year (12,541) 1,224,838 1,212,297

Balance at 31 December 2006 18,255,625 164,229,939 (12,541) 3,230,954 185,703,977




CASH FLOW STATEMENT for the year ended 31 December 2006

Year ended For the period31 Dec 2006 11 Jan 2005

to 31 Dec 2005(restated)

£ £

Cash flows from operating activities

Operating profit on ordinary activities before tax 1,888,382 1,839,794

Adjusted for:

Fair value of foreign exchange agreements (2,436,733) -

Depreciation and amortisation 247,195 11,955

Charges for share awards 420,000 280,000

Net increase in operating assets:

Collateral deposits (235,732) -

Due from financial institutions (53,682,230) (111,214,717)

Financing arrangements (30,582,012) -

Available for sale securities (33,461,039) -

Other assets (2,108,540) (327,451)

Net increase in operating liabilities:

Due to financial institutions 47,505,774 -

Due to customers 895,638 -

Other liabilities 813,375 721,141

Net cash outflow from operating activities (70,735,922) (108,689,278)

Taxation

Corporation tax paid (560,416) -

Cash flow from investing activities

Purchase of plant and equipment (307,986) (98,368)

Purchase of intangible assets (935,884) (346,294)

Net cash outflow from investing activities (1,243,870) (444,662)

Cash flows from financing activities

Net proceeds from issue of share capital 72,915,918 109,449,646

Net increase in cash and cash equivalents 375,710 435,706

Cash and cash equivalents at the beginning of the year 435,706 -

Cash and cash equivalents at the end of the year 811,416 435,706




NOTES TO THE FINANCIAL STATEMENTSfor the year ended 31 December 2006

1 PRINCIPAL ACTIVITIES AND DEFINITIONS ANDDATE OF APPROVAL OF THE FINANCIAL STATEMENTS

European Islamic Investment Bank plc was incorporated as the first independent, UK based Islamic investment bank managed on a wholly Sharia’a compliant basis. Theactivities of the Bank are focused on servicing clients inEurope, the Middle East and Asia through the provision of a range of services encompassing asset management andprivate banking, trading and investing in Islamic securities,treasury services and structured products, and providingcorporate finance and advisory services.

EIIB is a Bank incorporated in the UK which was establishedon 11 January 2005 and received authorisation from theFSA on 8 March 2006 to carry on its proposed activities as an investment bank.

The following terms are used in the financial statements:

Murabaha is a sale of goods at a cost plus an agreedprofit mark up under which a party (the seller) purchasesgoods at a cost price from a supplier and sells the goodsto another (the buyer) at a cost plus an agreed mark up.Commodity murabaha, whereby metals are bought andsold on a commodity exchange are a common form ofIslamic financing transaction.

Mudaraba is a partnership in profit wherein one party(the rab al-maal) provides capital and the other party (themudarib) provides the labour or expertise to undertake abusiness or activity. Profits are shared on a pre-agreedratio but losses are borne by the rab al-maal only.

Sukuks are certificates of equal value representingundivided shares in ownership of tangible assets, usufructand services or (in the ownership of) the assets ofparticular projects or special investment activities. Sukuksare usually tradable and yield periodic profit distributions.

Wakala means agency and can be used in an arrangementwhereby one party (the principal) places funds with another(the agent) for investment by the agent on the principal’sbehalf in return for an agreed fee or commission.

The financial statements of European Islamic Investment Bankplc for the year ended 31 December 2006 were authorisedfor issue by the Board of Directors on 9 March 2007.

2 ACCOUNTING POLICIES

2.1 Adoption of International Financial Reporting Standards

The Bank’s financial statements have been prepared inaccordance with IFRSs as adopted by the EU as they applyto the financial statements of the Bank for the year ended31 December 2006. The following new standards and

interpretations have been issued: IFRS 7 FinancialInstruments: Disclosures and amendment to IAS 1Presentation of financial statements – capital disclosureswhich have been adopted; and IFRS 8, IFRIC 8, IFRIC 9,IFRIC 10 and IFRIC 11, which have not been adopted. Theaccounting pronouncements which have not been adoptedwould have had no effect on the reported income or netassets of the bank.

The Bank prepared its first set of financial statements to 31 December 2005 in accordance with UK GenerallyAccepted Accounting Principles (UK GAAP).The transition toIFRSs has had no material impact on the Bank’s profit andequity as previously reported in the financial statements forthe period ended 31 December 2005. Consequently nomaterial adjustments were required to the profit and equityas previously reported under UK GAAP to comply withthose now reported under IFRS; and thereforereconciliations of the UK GAAP and IFRS figures have notbeen provided.

Where required, the comparative amounts have beenrestated to comply with IFRS presentation; the only balancesaffected by this change Plant and equipment and Intangibleassets were shown in the financial statements at 31 December 2005 under one heading Tangible assetsand are now shown separately. The Bank has changed thepresentation of its Cash Flow Statement separating themovement in Cash and balances with banks from balancesDue from financial institutions. In the financial statements at31 December 2005 these two items had been combined.

2.2 Accounting convention

The financial statements have been prepared under thehistorical cost accounting convention, except for financialassets and liabilities stated at their fair value comprising:available for sale securities and the fair value of foreignexchange agreements.

2.3 Accounting judgements and estimates

In applying accounting policies, management has toexercise its judgement and make estimates in determiningthe amounts recognised in the financial statements. Themost significant are set out below.

Fair value of financial instrumentsAll financial instruments are recognised initially at fair value. The fair value of financial instruments is usually the transaction price, that is, the actual consideration paidor received. Following initial recognition fair value is basedon quoted prices for instruments traded in active marketswhere the fair value of financial instruments cannot betaken or derived from active markets, valuations willnormally be based on one or more of the following:




• Current fair values of other instruments that aresubstantially the same

• Expected cash flows discounted at rates applicable for similar items

• Recent third party market transactions

• Other valuation models

The Directors consider the fair value of the financial assetsand liabilities held at amortised cost to be equal to thecarrying value of those assets and liabilities in the balancesheet as at 31 December 2006.

Provisions for impairment of financial assetsThe Bank will make provisions for impairment of financialassets under the terms of its Credit Risk Policy. The Bankwill make appropriate specific provisions on any non-performing assets. The Bank considers any assets to benon-performing where a payment of profit or principal is more than 60 days past due, unless there are earlierindications that the obligor is in financial difficulty. The level of provision will be an estimate of the future cash flow likely to be realised and will be based on a number of factors. Such forward-looking estimates will be reviewedfrom time to time and revised where necessary.

The Directors consider that none of the Bank’s assetsrequired impairment provisions as at 31 December 2006.

2.4 Summary of significant accounting policies

1 Foreign currencyThe financial statements are presented in sterling, which isthe Bank’s functional and presentation currency; transactionsin foreign currencies are initially recorded at the rate ofexchange ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies areretranslated into the functional currency at the balance sheetdate. Non-monetary assets and liabilities are translated intosterling at the effective historical rate used on the date ofinitial recognition.

2 Revenue recognitiona Wakala, murabaha and mudaraba income and expenseWakala, murabaha and mudaraba are Islamic financingtransactions. Wakala and mudaraba derive income andexpense in the form of profit and loss sharing agreements;murabaha is a contract for sale or purchase of goods wherethere is an agreed mark-up and deferred settlement. Incomeand expense for all these arrangements is recognised on atime-apportioned basis over the periods of the contracts. Thecalculation of income and expense includes any fees andincremental costs that are directly attributable to the financialinstrument and are an integral part of the purchase or sale.

b Trading incomeTrading income consists of realised profits and losses onAvailable for sale securities.

c Fee incomeFees for commitments and financing activities are deferredand recognised over the life of the financial instrument towhich they relate as an adjustment to the effective yield onthe asset.

3 Cash and cash equivalentsThe captions Cash and cash equivalents and Cash andbalances with banks represent cash and current accountbalances with banks and clearing exchanges, all held ininterest-free accounts.

4 Financial instrumentsa Recognition of financial instrumentsFinancial instruments are recognised in the balance sheeton the trade date, that is, the date on which the Bankcommits to buy or sell the financial instrument. All financialinstruments are recognised initially at fair value. In the caseof financial instruments not recognised at fair value throughthe income statement, that value will include direct costs ofacquisition or issue.

b Foreign exchange commitmentsThe valuation of forward foreign exchange commitmentsheld at fair value through the income statement isrecognised in the balance sheet under Fair value of foreignexchange agreements on either the asset or liability side of the balance sheet dependent on whether the valuationis positive or negative respectively. Revaluation gains andlosses are included in the income statement under Foreignexchange losses.

c Due from financial institutions, Financing arrangements,Due to financial institutions and Due to customersFinancial assets included within Due from financialinstitutions and Financing arrangements, as well as financialliabilities included within Due to financial institutions andDue to customers comprise non-derivative financial assetswith fixed or determinable repayments that are not quotedin an active market. Financial assets included under thesecaptions are initially recognised at fair value plus any directlyrelated transaction costs. They are subsequently measuredat amortised cost less any impairment losses. At eachreporting date the Bank reviews the carrying values of its financial assets; a financial asset is considered to beimpaired if there is objective evidence of events since initialrecognition of the asset that will adversely affect the amountor timing of future cash flows from the asset. The amount of the impairment loss will be the difference between thecarrying value of the financial asset and the present value




of the estimated future cash flows. The amount of theimpairment loss will be recognised in the income statement,and the carrying value of the financial asset will be writtendown and the impairment loss provision will be recognisedin a reserve for that purpose. Where subsequent eventsindicate that the impairment loss provision is not required or not required in full the loss provisions made above will be reversed.

d Available for sale securitiesDuring 2006 the Bank did not run a trading book, Theintent to hold the securities and the illiquid nature of thesukuk market make the designation as available for sale(AFS) as the most appropriate. The Bank disposes ofpositions from time to time to rebalance the portfolio, to reduce exposures to concentration risk, or where itbelieves market conditions would merit such a sale.

AFS securities are recognised at cost at the point ofacquisition. Cost being the fair value of the investmentincluding any acquisition charges. AFS securities are thencarried in the balance sheet at fair value. Income accrualson AFS securities are recognised in the income statement.Changes in the fair value are recognised directly in equity in the Fair value reserve in the accounting period in whichthey arise. Where the value of a security is considered to be impaired, the losses are recognised in the incomestatement; otherwise, the gains and losses previouslyrecognised in equity are recognised through the incomestatement when the investment matures or is sold; theseare included under Trading income. Fair value gains andlosses are recognised in equity net of any tax effect.

5 Plant and equipmentPlant and equipment is stated at cost less accumulateddepreciation and impairment losses if any. Depreciation is provided on a straight line basis over estimated useful life as follows:

Leasehold improvements 5 yearsFixtures, fittings and office equipment 5 yearsComputer hardware 3 years

6 Intangible assetsIntangible assets consist of computer licences and software development costs including capitalised staff costs. Intangible assets are stated at cost less accumulatedamortisation and impairment losses if any. Amortisation isprovided on a straight line basis over a current estimateduseful life of five years.

7 Impairment of non-financial assetsAt each reporting date the Bank reviews the carrying valuesof its non-financial assets, specifically Plant and equipmentand Intangible assets above, to determine whether there is

any indication that these assets have suffered an impairmentloss. If any such indication exists the recoverable amount ofthe asset is estimated in order to determine the extent ofany impairment loss. The recoverable amount for Plant andequipment and Intangible assets is based on the continuinguse of the assets in the business.

8 Operating leasesOperating lease rentals are charged to the incomestatement on a straight line basis over the period of thelease. The charge in respect of the premises is after takinginto account the rent free period.

9 Pension costsThe Bank operates a defined contribution pension scheme for all staff. The cost of the scheme is equal to the contributions payable to the scheme for the accountingperiod and is recognised within Staff costs in the incomestatement. The Bank has no further obligation once thecontributions have been paid.

10 Share-based paymentsThe Bank made a share-based award to non-executiveDirectors and other staff whereby shares were granted inlieu of annual fees. The fair value of the shares allotted isexpensed on a straight-line basis over the vesting period.

11 TaxationTax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statementexcept to the extent that it relates to items recogniseddirectly in shareholders’ equity, in which case it isrecognised in shareholders’ equity.

a Current taxCurrent tax is provided on taxable profits at the current rate.

b Deferred taxDeferred tax is recognised on temporary differencesbetween the carrying amount of assets and liabilities in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent it is probable that future taxable profits will beavailable against which deductible temporary differencescan be utilised.

12 Segmental reportingA business segment is separately distinguishablecomponent of the Bank’s activities and is the primarysegmental measure used by the Bank, and follows the way in which the business is managed. The secondarysegmental breakdown is geographic, based on the locationof the Bank’s counterparties.




3 SEGMENTAL INFORMATION

The Bank manages its activities primarily by class of business and the risks and returns are affected predominantly bydifferences in the products and services provided. The Bank does not consider any of the business segments to havebeen operative in 2005, and therefore presents no comparative data. For management purposes the Bank operatesthree business units or segments, as set out in the Operating and Financial Review, namely Treasury and CapitalMarkets, Asset Management and Corporate Finance and Advisory. The Treasury and Capital Markets unit became fullyactive in April 2006 following FSA authorisation. The majority of the cost base, and the assets and liabilities of the Bankhave been deployed in support of that business unit. The other two business units were established in the year but didnot commence trading and their combined costs amounted to less than 5% of total costs, consequently the Bank isnot presenting an analysis of business broken down by primary segment.

Secondary reporting segment – GeographicalThe following table presents revenues and total assets regarding the Bank’s geographical segments for the year ended31 December 2006.

Europe GCC countries Turkey Asia Total

£ £ £ £ £

Operating income 4,057,369 3,268,393 408,610 106,693 7,841,065

Segment assets 67,764,569 143,423,159 18,208,598 5,223,144 234,619,470

Unallocated assets 1,659,687

Total assets 236,279,157

Segment liabilities 5,252,060 43,221,774 - - 48,473,834

Unallocated liabilities 2,101,346

Total liabilities 50,575,180

4 INCOME FROM FINANCING AND INVESTING ACTIVITIESYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Due from financial institutions – wakala and murabaha 6,576,126 3,840,502

Financing arrangements – mudaraba and murabaha 761,171 -

Available for sale securities – sukuks 754,887 -

8,092,184 3,840,502

5 RETURNS TO FINANCIAL INSTITUTIONS AND CUSTOMERSYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Due to financial institutions – murabaha 167,184 -

Due to customers – murabaha 6,872 -

174,056 -




6 FOREIGN EXCHANGEYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Net losses on translation of transactions denominated in foreign currencies (2,567,727) -

Net gains on forward foreign exchange agreements 2,436,722 -

(131,005) -

7 TRADING INCOMEYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Available for sale securities – sukuks 53,942 -

8 STAFF COSTS, DIRECTORS’ EMOLUMENTS, NUMBER OF EMPLOYEES AND SHARE AWARDS

Year ended For the period31 Dec 2006 11 Jan 2005 to

31 Dec 2005

£ £

Staff costs

Directors’ salaries and fees 728,663 541,696

Directors’ pension contributions 29,454 12,853

Staff salaries 1,512,802 216,966

Staff pension contributions 89,592 13,316

Incentive payments 653,166 -

Social security costs 277,393 36,623

Sharia’a Supervisory Board fees 167,400 136,334

Recruitment costs 204,834 162,733

Other staff costs 93,438 18,232

3,756,742 1,138,753

Total of Directors’ emoluments 867,302 554,549

Included in Directors’ emoluments in respect of shares issued to Directors 280,000 266,667

Amounts in respect of highest paid Director

Emoluments 254,500 105,250

Pension contributions 18,625 8,750

273,125 114,000




8 STAFF COSTS, DIRECTORS’ EMOLUMENTS, NUMBER OF EMPLOYEES AND SHARE AWARDS continued

Number Number

Number of employees at year end 36 8

Average number of employees 20 6

Share awardIn February 2005 12,000,000 ordinary 1p shares were issued to Directors and other staff at par in lieu of salaries forthe 36 months from that point. They are deemed to have been issued at a premium of 7p per share under IFRS 2Share-based Payment. The fair value of the shares is being amortised over the 36 month vesting period. This gave riseto a fair value charge in the income statement of £420,000 in 2006 (2005: £280,000). The unamortised amount ofthe premium at the end of 2006 was £140,000 (2005: £560,000).

9 OTHER OPERATING EXPENSESYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Rent and other occupancy costs 403,253 72,494

Advertising and market development 371,567 26,654

Legal and professional fees 543,260 445,335

Communications and IT costs 233,039 71,697

Consultancy 157,981 83,650

Other operating charges 239,646 150,170

1,948,746 850,000

10 OPERATING PROFIT BEFORE TAXYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Operating profit before tax is stated after charging:

Auditors’ remuneration:

Audit 175,000 11,750

Recruitment 22,500 -

Other services 26,670 126,841

Rentals paid under operating leases: premises 206,205 59,709

The Bank’s auditors were also paid £140,000 in the year ended 31 December 2006 in connection with work related to the IPO. This figure is included within Transaction costs of share issue which have been deducted from the sharepremium. Recruitment costs above relate to services provided by an overseas member practice of Ernst & Young Global.




11 TAXATIONYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Tax on profit on ordinary activities charged in the income statement

Current year tax 505,707 533,678

Adjustment to prior year tax 26,738 -

Current tax 532,445 533,678

Deferred tax for the year 81,326 -

Prior year’s deferred tax adjustment 49,773 -

Deferred tax 131,099 -

Tax charge in the income statement 663,544 533,678

Reconciliation of the total tax charge

Profit before tax 1,888,382 1,839,794

UK corporation tax at the standard rate (30%) 566,515 551,938

Expenses not deductible for tax purposes 20,518 11,503

Unrecognised deferred tax liability - (29,763)

Adjustments to prior year’s tax 76,511 -

Tax charge in the income statement 663,544 533,678

Current year's tax 505,707 533,678

Current tax credit related to items charged to equity (5,375) -

Current tax payable in the balance sheet 500,332 533,678

Origination of temporary differences 131,099 -

Deferred tax payable in the balance sheet 131,099 -

12 EARNINGS PER SHARE

Basic earnings per share is calculated by dividing profit for the year by the weighted average number of ordinary sharesoutstanding during the year. There are currently no instruments in issue which would dilute earnings per share.

2006 2005

thousands thousands

Weighted average number of shares for basic earnings per share 1,725,187 1,139,227




13 DUE FROM FINANCIAL INSTITUTIONS

Average 2006 Average 2005

Yield £ Yield £

Murabaha placements 5.02% 148,797,797 4.62% 101,214,717

Wakala placements 4.93% 16,099,150 4.40% 10,000,000

5.01% 164,896,947 4.62% 111,214,717

14 FINANCING ARRANGEMENTS


Yield £ Yield £

Mudaraba and other agreements

Central governments 5.79% 5,097,074 - -

Financial institutions 6.46% 7,645,611 - -

Other counterparties 6.40% 17,839,327 - -

6.31% 30,582,012 - -

15 AVAILABLE FOR SALE SECURITIES


Yield £ Yield £

Sukuks

Central governments 6.08% 5,148,045 - -

Financial institutions 5.83% 14,570,062 - -

Other counterparties 6.28% 13,725,015 - -

6.05% 33,443,122 - -

16 FAIR VALUE OF FOREIGN EXCHANGE AGREEMENTS

NotionalAssets Liabilities Amount2006 2006 2006

£ £ £

Foreign exchange commitments used for matching currency exposures

Maturing in 0-3 months 1,666,578 - 48,669,424

Maturing in 3-6 months 318,383 7,821 10,251,847

Maturing in 6-9 months 459,593 - 13,234,112

2,444,554 7,821 72,155,383

The Bank had no positions in forward foreign exchange agreements in 2005.




17 PLANT AND EQUIPMENTLeasehold Furniture Computer

improvements and fixtures hardware Total

£ £ £ £

Cost

At 1 January 2006 36,715 40,538 21,115 98,368

Additions 125,209 55,072 127,705 307,986

At 31 December 2006 161,924 95,610 148,820 406,354

Depreciation

At 1 January 2006 612 676 587 1,875

Charge for the year 11,460 13,950 31,425 56,835

At 31 December 2006 12,072 14,626 32,012 58,710

Net Book Value

At 31 December 2006 149,852 80,984 116,808 347,644

At 31 December 2005 36,103 39,862 20,528 96,493

18 INTANGIBLE ASSETS

£ £

Cost

At 1 January 2006 346,294

Additions: Externally acquired 807,719

Capitalised staff costs 128,165

935,884

At 31 December 2006 1,282,178

Amortisation

At 1 January 2006 10,080

Charge for the year 190,359

At 31 December 2006 200,439

Net Book Value

At 31 December 2006 1,081,739

At 31 December 2005 336,214

Intangible assets consist of the costs of computer licences and software development including capitalised staff costs.




19 OTHER ASSETS2006 2005

£ £

Accrued income receivable 2,205,606 243,135

Sundry debtors 124,063 58,949

Prepayments 106,322 25,367

2,435,991 327,451

20 DUE TO FINANCIAL INSTITUTIONS


Yield £ Yield £

Commodity murabahas 4.96% 47,505,774 - -

21 DUE TO CUSTOMERS


Yield £ Yield £

Commodity murabahas 5.34% 895,638 - -

22 OTHER LIABILITIES

2006 2005

£ £

Accrued returns payable 72,390 -

Accrued expenses 1,168,529 611,036

Deferred income 121,485 -

Social security and PAYE payable 146,355 60,105

Sundry creditors 25,757 50,000

1,534,516 721,141




23 MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below shows an analysis of assets and liabilities analysed between those expected to be recovered or settledwithin more or less than twelve months of the balance sheet date.

Less than More than12 months 12 months Total

2006 2006 2006

£ £ £

Assets

Cash and balances with banks 811,416 - 811,416

Collateral deposits 235,732 - 235,732

Due from financial institutions 164,896,947 - 164,896,947

Financing arrangements 28,033,475 2,548,537 30,582,012

Available for sale securities - 33,443,122 33,443,122

Fair value of foreign exchange agreements 2,444,554 - 2,444,554

Plant and equipment - 347,644 347,644

Intangible assets - 1,081,739 1,081,739

Other assets 2,435,991 - 2,435,991

Total assets 198,858,115 37,421,042 236,279,157

Liabilities

Due to financial institutions 47,505,774 - 47,505,774

Due to customers 895,638 - 895,638

Fair value of foreign exchange agreements 7,821 - 7,821

Other liabilities 1,534,516 - 1,534,516

Current tax 500,332 - 500,332

Deferred tax - 131,099 131,099

Total liabilities 50,444,081 131,099 50,575,180

24 PENSION COMMITMENTS

The Bank provides for a defined contribution scheme for all staff. The assets of the scheme are held separately fromthose of the Bank in independently administered funds. An unsettled amount of £23,992 (2005: £26,169) wasincluded in Accrued expenses.

25 COMMITMENTS UNDER OPERATING LEASES

There is a commitment at the year end under a non-cancellable operating lease for the Bank’s main premises at4th Floor, 131 Finsbury Pavement, London EC2A 1NT for a five-year period from 27 December 2005 to 27 December2010, at an annual rental of £267,498 net of VAT with a fifteen-month rent free period. Future minimum rentals are as follows:

2006 2005

£ £

Within one year 200,624 -

One to five years 802,494 1,003,118

1,003,118 1,003,118




26 CONTINGENT LIABILITIES AND COMMITMENTS

The Bank has pledged cash collateral of £235,732 (2005: £nil) as security against rental payments on its premises. This amount is included under Collateral Deposits.

27 SHARE CAPITAL AND SHARE PREMIUM

Authorised £

5,000,000,000 ordinary shares of £0.01 each 50,000,000

Number of shares Share capital Share premium

£ £

Allotted, called up and fully paid

At 1 January 2006 1,524,437,000 15,244,370 94,325,276

Share issue 301,125,531 3,011,255 72,270,127

Less share issue costs (2,365,464)

At 31 December 2006 1,825,562,531 18,255,625 164,229,939

During the year the Bank issued 301,125,531 new ordinary shares with a nominal value of £0.01 and a price of £0.25per share under an initial public offering raising £72,915,918 net of share issue costs.

28 ASSETS AND LIABILITIES IN FOREIGN CURRENCY

The Bank manages its exposure to foreign exchange rate fluctuations by matching assets with liabilities in the samecurrency as far as possible, with similar maturities and the use of appropriate off-balance sheet instruments.

31 Dec 2006 31 Dec 2005

£ £

Denominated in sterling 123,010,274 112,410,581

Denominated in currencies other than sterling 113,268,883 -

Total assets 236,279,157 112,410,581

Denominated in sterling 7,426,518 1,254,819

Denominated in currencies other than sterling 43,148,662 -

Total liabilities 50,575,180 1,254,819

29 RELATED PARTY DISCLOSURES

29.1 Compensation of key management personnelYear ended For the period

31 Dec 2006 11 Jan 2005 to 31 Dec 2005

£ £

Short term employee benefits 587,302 168,590

Post employment pension benefits 29,454 12,853

Share-based payments 280,000 266,667

896,756 448,110




29.2 Other Directors’ interests

The Bank enters into transactions, arrangements and agreements involving Directors and their relatedconcerns in the ordinary course of business, all suchbusiness is conducted on an arms-length basis.

At the year end the Bank had outstanding contractswith the following companies in which non-executiveDirectors have interests as follows: CapitalManagement House BSC (CMH), Bahrain Islamic BankBSC (BIB) and International Investment Bank BSC(IIB). Khalid A Al Bassam is Chairman of CMH and BIB, Abed Alzeera is the Chief Executive Officer of IIB.

The transactions outstanding at the year end, and themaximum value of these transactions and their naturewas as shown below

• CMH: an exchange of deposits of £13,000,000against a fixed amount of US dollars and murabahareceivables of £7,645,611 on which there wasunsettled income accrued of £4,920. The exchangeof deposits is included under Fair value of foreignexchange agreements. The fair value of the contractin the financial statements is £2,899.

• The Bank had an outstanding amount due to BIB under a murabaha agreement of £5,097,074.

• The Bank had an outstanding amount due to IIBunder a murabaha arrangement of £2,548,537, as well as a murabaha receivable of £5,097,074 on which there was unsettled income accrued of£24,421

No provisions were taken against any of thesepositions and all were settled in 2007.

As at 31 December 2006 the Bank had liabilities to Directors and related parties as follows:

• Murabaha agreement with Adnan Ahmed Yousif of £194,219

• Murabaha agreement with the spouse of Atif Razaof £236,946

Former Directors, Christophe Balet and Michael Carterwere the registered holders of 3.48% and 3.34%respectively of the issued shares of the Bank prior to the initial public offering during the year. ChristopheBalet and Michael Carter resigned on 25 January 2006and 31 March 2006, respectively.

The Bank retains MCB Capital WLL (‘MCB’) (formerlyIslamic Joint Venture Partners BSC) to handle investorrelations in the Gulf region on a retainer of £5,000 permonth; the Bank paid MCB £20,000 for services inconnection with the initial public offering and £22,500in connection with other marketing services, the latteramount was outstanding at year end. MCB was arelated party during the year by virtue of the fact thattwo Directors of MCB, Christophe Balet and MichaelCarter, hold beneficial interests in MCB and also servedon the Board of the Bank.

30 RISK MANAGEMENT

30.1 Introduction

Risk is inherent in the Bank’s activities and is identified,measured, monitored and managed subject to risk limits and strong controls. The process of riskmanagement is critical to the Bank’s continuingprofitability with ultimate responsibility residing with the Board of Directors.

The Bank is exposed to credit risk, liquidity risk, market risk and operational risk.

1 StructureThe Board of Directors is ultimately responsible formanaging the risk profile of the Bank and ensuring astrong control environment. The Board has establishedindependent bodies tasked with for managing andmonitoring risks within the Bank.

a Board of DirectorsThe Board of Directors is responsible for the overall risk management approach and for approving the riskappetite, strategies and principles.

b Board Executive CommitteeThe Board Executive Committee is a sub-committee of the Board of Directors which assists the Board infulfilling its risk management responsibilities from day to day. The committee’s responsibilities includesdetermining the Bank’s risk profile, ensuring thatexposures taken on by management remain within theBoard determined risk appetite by assessing, reviewing,and approving all exposures that are within itsdelegated authority.

c Risk Management CommitteeThe Risk Management Committee assists the ExecutiveManagement Committee and the Board of Directors in




managing and controlling risk in all areas of the Bank,through proactive identification, measurement, control,monitoring, and reporting of:

• Credit risk• Market risk• Operational risk• Anti-Money Laundering risk (AML)

d Asset and Liability CommitteeThe Asset and Liability Committee (ALCO) isconstituted to assist the Executive ManagementCommittee and the Board in proactively managing the capital, assets and liabilities of the Bank. It is alsomandated to manage the risk-reward relationship thatexists between solvency, liquidity and profit rate risk.

e Internal Audit Internal Audit’s primary role is to provide assurance to the Audit Committee and the Board that the riskmanagement, internal control, corporate governanceand other key business processes and controls, asappropriate, are operating effectively and meeting the ongoing and changing needs of the Bank. Thesecondary role of Internal Audit is to work withmanagement to provide independent appraisals of systems of internal control, add value to businessinitiatives and support development of a sound controlculture throughout the Bank.

2 Measurement and reportingThe risks within the Bank are measured and quantifiedusing statistical and non-statistical methods. All possiblelosses are calculated using assumptions by the Bank’smanagement based on consideration of the economicenvironment in which the Bank operates and potentialstress scenarios in the Islamic banking market.

Monitoring and controlling risks of the Bank primarilyrelies on the establishment of limits. These limits reflect the business strategy, risk appetite and marketenvironment in which the Bank operates and its overallrisk capacity in relation to capital and regulatory exposurelimits set by the UK Financial Services Authority.

Information is compiled by the Risk Managementdepartment from all business areas and is thenpresented to the Executive Management Committee and Board on a monthly basis. The Risk Report includesdetailed reporting of credit exposures for internal ratings,geographical regions, industry, asset maturities andmarket risk exposures for foreign exchange, money and capital market instruments.

Daily reports on credit usage and position risk aredistributed by the Risk Management department to senior management.

3 Risk mitigationThe Bank cannot use conventional derivative products to mitigate currency and profit rate risk. Consequentlypart of its overall risk management framework the Bankutilises Sharia’a compliant products to hedge currencyrisk and is in the process of developing profit ratehedging products.

4 Concentration riskConcentrations arise when a number of counterpartiesare engaged in similar business activities, or activities inthe same geographic regions, or have similar economicfeatures that would cause their ability to meetcontractual obligations to be similarly affected by a change in economic, political or other conditions.

In order to avoid excessive concentration the Bank hasspecific guidelines and limits in place to restrict Group,Obligor and Country exposures. As yet no industry sectorlimits have been put in place, however all exposures aremonitored from month to month.




30.2 Credit risk

Credit risk is the risk that the Bank’s customers, clients or counterparties will not be able or willing to repay capital and/or profit or otherwise not meet their contractual obligations under credit facilities or in respect of other agreements.

The Bank has a rigorous credit quality check for all customers, clients or counterparties and all are assigned an internalrisk rating which governs the amount of credit that can be made available. These ratings are subject to regular review and adjusted to reflect changes to the portfolio or expected probabilities of default.

1 Exposure

The table below shows the maximum exposure to credit risk for the components of the balance sheet.

31 Dec 2006 31 Dec 2005

£ £


Collateral deposits 235,732 -

Due from financial institutions 166,014,844 111,214,717

Wakala 16,106,073 10,000,000

Murabaha 149,908,771 101,214,717

Financing arrangements 31,146,874 -

Available for sale securities 33,966,050 -

Fair value of foreign exchange agreements 2,444,554 -

Total credit exposure 234,619,470 111,650,423

2 Geographical regions

The Bank’s financial assets can be analysed by the following geographical regions:

31 Dec 2006 31 Dec 2005

£ £

GCC Countries 143,423,159 20,000,000

Bahrain 69,343,132 10,000,000

UAE 41,699,543 10,000,000

Kuwait 24,398,566 -

Saudi Arabia 5,151,503 -

Qatar 2,830,415 -

Europe 67,764,569 91,650,423

Turkey 18,208,598 -

Asia 5,223,144 -





3 Industry Sector

An industry sector analysis of the Bank's financial assets is as follows:

31 Dec 2006 31 Dec 2005

£ £

Financial services 186,876,859 111,650,423

GCC Banks 116,490,148 20,000,000

European and other banks 70,386,711 91,650,423

Manufacturing 12,945,732 -

Government 10,446,138 -

Real Estate 10,622,166 -

Other Financial 5,162,526 -

Construction 3,314,206 -

Textile 2,655,765 -

Food 2,596,078 -


4 Credit quality

The credit quality of financial assets is managed by the Bank using internal credit ratings which are mapped to approvedECAI’s ratings; such as Fitch, Moody’s and Standard & Poor’s. The table below shows the credit quality of the portfolio asat 31 December 2006 based on the Bank’s credit rating system.

Investment Grade Non-investment Grade

£ £


Due from financial institutions 153,828,004 12,186,840

Financing arrangements 15,594,040 15,552,834

Available for sale securities 33,966,050 -

Fair value of foreign exchange agreements 2,444,554 -


5 Aged analysis of past due and impaired loans

No past due loans or advances were evident during 2006. Therefore no impairment provision for any exposure in theportfolio was required.




30.3 Liquidity risk

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due and stresscircumstances. To limit this risk the Bank manages its cash flows on a daily basis and maintains a portfolio of liquidassets which consists of cash and short-term bank deposits. Liquidity risk management is the responsibility of ALCO.

The Bank manages its liquidity within the Financial Services Authority’s prudential limits of 0% for sight and -5% sight to 1 month. The ratios at the year end were:

Sight Sight to 1 month

31 December 2006 18% 122%

Liquidity is managed based on contractual cash flows. At 31 December 2006 the Bank had the following liquidityprofile which includes forward foreign exchange commitments:

Liquidity profileForeign currency amounts in sterling equivalents.

Liquidity profile (£000)CASH F LOW BAND

0-1 2-3 4-6 7-12 1-5 5-10Total months months months months years years

GBP

Assets 192,906 117,667 9,828 30,964 34,447 - -

Liabilities 5,464 5,025 240 199 - - -

Net 187,442 112,642 9,588 30,765 34,447 - -

US dollars

Assets 118,399 50,893 4,405 12,229 11,619 34,235 5,018

Liabilities 109,457 81,194 5,571 9,939 12,753 - -

Net 8,942 (30,301) (1,166) 2,290 (1,134) 34,235 5,018

Euros

Assets 4,077 45 - 45 90 3,897 -

Liabilities 3,357 3,357 - - - - -

Net 720 (3,312) - 45 90 3,897 -

As at 31 December 2006, the Bank had no contingent liabilities or other commitments outstanding in financialinstruments other than those included above or in note 26.




30.4 Market risk – non-trading

1 Profit rate risk

Profit rate risk arises from the possibility that changes in the profit rates will affect future cash flows or the fair value of financial instruments. Positions are monitored on a monthly basis and no hedging instruments are currently used.

The Bank manages profit rate risk by using maturity buckets to calculate the net profit rate gap whilst considering variable,fixed and non-sensitive rates of return.

Profit rate profile (£000)RATE PROF I LE BAND

0-1 2-3 4-6 7-12 2-5 over 5Total months months months months years years

Assets

Fixed Rate Items 199,972 94,238 12,608 24,391 32,743 33,178 2,814

Variable Rate Items 28,951 18,643 3,833 6,475 - - -

Non Rate Sensitive 1,047 1,047 - - - - -

Total assets 229,970 113,928 16,441 30,866 32,743 33,178 2,814

Liabilities

Fixed Rate Items 48,401 47,503 704 194 - - -

Variable Rate Items - - - - - - -

Non Rate Sensitive 185,704 - - - - - 185,704

Total liabilities 234,105 47,503 704 194 - - 185,704

Net Gap 66,425 15,737 30,672 32,743 33,178 (182,890)

Cumulative Gap 66,425 82,162 112,834 145,577 178,755 (4,135)

2 Market risk

While EIIB does not hold or trade in interest rate based products, the fair value of financial instruments held by the Bankwill be affected by current market forces including interest rates. The table below sets out the sensitivity of the Bank’sincome statement to changes in the interest rate environment assuming that all other price risks are held constant.

Profit rate sensitivity may be measured by discounting the current portfolios projected net margin which the Bankcalculated to have an economic value (EV) of £7,321,000 as at 31 December 2006. Sensitivity to changes in rates canthen be calculated to reflect the effect of rate changes on the EV and the current net margin as shown in the table below.

Change in rates basis points -100 bp -50 bp -25 bp +25 bp +50 bp +100 bp

Change in EV £000 (1,582) (791) (395) 395 791 1,582

% of net margin -21% -10% -5% 5% 10% 21%

Effect on net margin £000 (1,663) (792) (396) 396 792 1,663




3 Currency risk

Currency risk is the risk that the value of a financialinstrument will fluctuate due to changes in foreignexchange rates. The Board has set limits on positionsand these positions are monitored daily to ensurepositions are maintained within the established limits.

The Bank does not take significant currency positions as all positions other than the functional currency arecovered on a back-to-back basis. Small residual currencyexposures remain well within the Board approved limits.

30.5 Market risk – trading

The Bank had no trading portfolio during year-ended 31 December 2006.

30.6 Operational risk

Operational risk is the risk of loss arising from systemfailure, human error, fraud or external events. Whencontrols fail to perform operational risks can causedamage to reputation, have legal or regulatoryimplications or lead to financial loss. The Bank, while not eliminating all operational risks, has implemented arobust control framework and through monitoring andresponding to potential threats, is able to significantlymitigate these risks.

Controls include effective segregation of duties, access,authorisation and reconciliation procedures, staffeducation and assessment processes, including the use of internal audit.

Risk matrices have been developed for each departmentwhich form part of our quality self-assessment process.

30.7 Capital management and risk

The primary objective of the management of capital is to ensure that the Bank complies with the prudentialrequirements of the FSA, which has set an overallminimum risk asset ratio of 16% for EIIB. As at 31December 2006 the Bank’s risk asset ratio was 190%.The Bank has complied with FSA prudential capitalrequirements throughout the year. The current level of capital will be required to support the business as it grows.

Capital and risk-asset-reward management are theresponsibility of ALCO, which will assign capital and risklimits to the various areas of the Bank’s business as thatbusiness develops. Currently capital is not a constrainton growth.

COMPANY INFORMATION

Registered No. 5328847

DirectorsAdnan Ahmed Yousif ChairmanKhalid A Al-Bassam Deputy ChairmanGeorge K Morton Senior Independent DirectorShabir RandereeHatem Abou SaidJohn CloutingYousef Rabah Abu KhadraAbed AlzeeraSalman AbassiJohn Weguelin Managing DirectorAtif Raza Finance Director

SecretaryM A Mohaimin Chowdhury

Registered office131 Finsbury PavementLondon EC2A 1NT

RegistrarsCapita IRG plcThe Registry34 Beckenham RoadBeckenhamKent BR3 4TU

AuditorsErnst & Young LLP1 More London PlaceLondon SE1 2AF

Nominated broker and advisorEvolution Securities Ltd100 Wood StreetLondon EC2V 7AN

BankersLloyds TSB Bank plc25 Gresham StreetLondon EC2V 7HN

EUROPEAN ISLAMIC INVESTMENT BANK PLC

131 FINSBURY PAVEMENT, LONDON EC2A 1NT

TELEPHONE 020 7847 9900 FAX 020 7847 9901

EIIB

annual report and accounts 2006 -...

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