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Annual Report 2009

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Annual Report 20092

First page

Annual Report 2009 3

His Royal HighnessPrince Salman Bin Hamad Al Khalifa

Crown Prince & Deputy

Supreme Commander of Bahrain Defence Force

His MajestyKing Hamad Bin Isa Al Khalifa

King of Bahrain

His Royal HighnessPrince Khalifa Bin Salman Al Khalifa

Prime Minister

His Royal HighnessPrince Khalifa Bin Salman Al Khalifa

Prime Minister

His MajestyKing Hamad Bin Isa Al Khalifa

King of Bahrain

His Royal HighnessPrince Salman Bin Hamad Al Khalifa

Crown Prince & Deputy Supreme Commander of Bahrain Defence Force

Annual Report 20094


CONTENTS Page

1. Vision and Mission 7

2. Corporate Profile 8

3. Chairman’s Message 12

4. CEO’s Message 14

5. BOD Biographies 16

6. Executive Management 17

7. Corporate Governance 18

8. Financial Highlights 20

9. Shari’a Supervisory Report 24

10. Independent Auditors’ Report 26

11. Financial Statements 27

12. Public Disclosure 58

Annual Report 20096

Head Quarter of Liquidity Management Centre B.S.C. (c)


Liquidity Management Centre B.S.C.(c) (LMC) is an Islamic Investment Bank Incorporated in July 2002 and regulated by the Central Bank of Bahrain. It aims to provide optimal Islamic Financing and Investment solutions which contribute to growth of the Islamic capital market.

VISIONTo enable Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the Shari’a principles.

MISSIONFacilitating the investment of surplus funds with Islamic banks and financial institutions into quality short and medium term financial instruments structured in accordance with Shari’a principles.

LMC is committed to playing a key role in the creation of an active and geographically expansive Islamic inter-bank market which will assist Islamic financial institutions in managing their short-term liquidity. The establishment and depth of such inter-bank market will further accelerate the development process of the Islamic banking sector. In addition, LMC will attract assets from governments, financial institutions and corporates in both private and public sectors in many countries. The sourced assets will be securitized into readily transferable securities or structured into other innovative investment instruments.

Annual Report 20098

CORPORATE PROFILESHAREHOLDERS

SHAREHOLDER COUNTRY SHAREHOLDING (%)Bahrain Islamic Bank Kingdom of Bahrain 25%Dubai Islamic Bank United Arab Emirates 25%Islamic Development Bank Kingdom of Saudi Arabia 25%Kuwait Finance House State of Kuwait 25%

Bahrain Islamic Bank: Bahrain Islamic Bank was established in 1979 as the first Islamic commercial bank

in the Kingdom of Bahrain. The Bank has been maintaining its leading position in

the Islamic banking sector through adopting innovative Islamic investment and

financing products, supported by superior retail and corporate banking services.

The Bank is listed on the Bahrain Stock Exchange and the major shareholders are

leading local and regional financial institutions. The Bank operates under super-

vision and the regulatory framework of the Central Bank of Bahrain.

Dubai Islamic Bank: Dubai Islamic Bank (DIB) is a pioneering institution that has combined the best of

traditional Islamic values with the technology and innovation that characterise

the best of modern banking. since its formation in 1975 the DIB has established

itself as the undisputed leader in its field, setting the standards for others to fol-

low as the trend towards Islamic banking gathers momentum in the Arab world

and internationally

Islamic Development Bank: The Islamic Development Bank is a multi - national financial institution estab-

lished in pursuance of the Declaration of Intent issued by the Conference of

Finance Ministers of Muslim Countries held in Jeddah in Dhul Q’adah 1393H,

corresponding to December 1973. The purpose of the Bank is to foster the

economic development and social progress of member countries and Muslim

communities individually as well as jointly in accordance with the principles of

Shari’a.

Kuwait Finance House: Kuwait Finance House (KFH) was established in the State of Kuwait in 1977, as the

first bank operating in accordance with the Islamic Shari’a. KFH is now a market

leader not only in the Islamic banking industry, but also in the banking sector

as a whole, providing a wide range of Shari’a compliant products and services

covering banking, real estate, trade finance, investment portfolios and corporate,

commercial and retail financial markets.

30th Annual Report 2008

Kuwait Finance House K.S.C. and Subsidiaries


LMC TODAY

LMC plays an active role in the primary and secondary Islamic financing market delivering innovative, adaptable and tradable Islamic Shari’a compliant short term and medium term financial instruments to Islamic financial institutions. In addition, it provides Islamic advisory services, including but not limited to the areas of structured finance, project finance and corporate finance.

With an authorized capital of US$ 200 million and a paid up capital of US$ 51 million, LMC proudly shares a very close working relationship with each of its shareholders who are renowned in the Islamic Financial Market for their contri-bution to the industry, namely, Bahrain Islamic Bank B.S.C. (Kingdom of Bahrain), Dubai Islamic Bank P.J.S.C. (United Arab Emirates), Islamic Development Bank (Saudi Arabia) and Kuwait Finance House K.S.C. (State of Kuwait) each of whom today hold equal shares in LMC. The Bank has proven to be a leading arranger of sukuk instruments (Islamic bonds) having issued a number of innovative sukuks with recognised structures that have been reflected in other sukuks issued in the region. LMC has won the award of Euromoney as the best debt house in Bahrain “Best domestic Market Sukuk House” in 2005.

The Bank’s focus has not only been on bringing long term financing opportunities but also developing short term Shari’a compliant investment opportunities. The Bank has pioneered the structure of its Short Term Sukuk Program, a tradable low risk liquidity management product which provides investors with an opportunity to invest in short term sukuks. Monthly tenors are secured by a diverse portfolio of asset backed corporate and sovereign sukuk instruments arranged and administered by LMC and other recognized arrangers. The Short Term Sukuk Program is the first such repackaged Sukuk product to be offered into the Islamic banking market. At a total size of US$ 250 million, sustained growth is highly anticipated in the long term.

BUSINESS SERVICES AND PRODUCTS OFFERED

1. Short Term Investment Services LMC conducts extensive Sukuk asset sourcing and repacking as part of the offering, placement and administra-

tion of its Short Term Sukuk Program.

2. Structured Finance Services LMC’s structured finance services provide an end-to-end solution tailored to meet the needs of its clients in the

international market place comprising services including the following:

Finance Raising:• LMC has extensive experience in the structuring, issuance, marketing and post-issuance ad-ministration of tradable Islamic capital market instruments such as Sukuk. The approach centres on structuring attractive transactions in partnership with clients and placement agents. Its role includes being an arranger, struc-turing advisor, documentation agent and placement agent.

Private Equity Raising:• Conducts and coordinates with its client the modelling of transactions, identifying and resolving prospective legal and corporate issues arising from the equity offering, prepares offer documenta-tion and presentation materials, articulates all placement related activities and conducts the offering process. Throughout, Liquidity Management Centre is solely focussed on ensuring the successful completion of the equity raising transaction.

Annual Report 200910

Durrat Khaleej Al BahrainUS$ 152,500,000

Istisna’s Ijara Sukuk

EMAAR PropertiesUS$ 65,000,000

Ijara Sukuk

The Commercial RealEstate CompanyUS$ 100,000,000

Ijara Sukuk

Bahrain Financial HarbourUS$ 134,000,000

Istisna’s Ijara Sukuk

Bukhatir Investment Ltd.US$ 50,000,000

Investment Agency Sukuk

Kingdom of BahrainUS$ 250,000,000

Ijara Sukuk

Golden Falcon

US$ 140,000,000

Syndicated Ijara Facility

page 11

Al Ahlia Gulf Holding CompanyUS$ 200,000,000Musharaka Sukuk

Berber Cement CompanyUS$ 130,000,000 Investment Agency

Musharaka Sukuk

Republic of SudanEuro 68,000,000Sukuk Al Salam

BFH Asset Company

AED 367,300,000

Syndicated Investment Agency

(Wakala) Facility

First Islamic Investment BankEuro 76,000,000

Investment Agency Sukuk

Thani Investments LLCUS$ 100,000,000Musharaka Sukuk


3. Strategic Advisory ServicesThese services revolve around the provision of analysis and advice to clients in relation to their business develop-ment activities. The principal objective is to develop and evaluate strategic plans which meet the client’s needs. Ad-ditionally, LMC actively focuses in ensuring that its clients optimise their capital structures with a view to facilitating access to new and efficient sources of debt and/or equity and other forms of Islamic compliant transactions.

Portfolio Management:• Advise and manage fixed income investments which include Sukuks in various sectors through valuation tools and factors that influence sukuk yields. Plans also include equity investment portfolio management that maximizes returns through carefully examining markets and companies while adhering to Shari’a principles.

PRIMARY MARKET ARRANGEMENT TRACK RECORDBahrain – Golden Falcon Syndicated Ijara Facility – US $140 million closed in July 2009.1.

Bahrain – BFH Asset Company Syndicated Investment Agency (Wakala) Facility2. – AED 367.3 million closed in June 2009.

Sudan – Sudan Salam Sukuk – Euro$68 Million issued in November 20073.

UAE – Thani Investments Limited Sukuk – US$100 Million issued in November 20074.

UAE – Berber Investment Agency Sukuk – US$130 Million issued in September 20075.

KUWAIT – Lagoon City Sukuk – US$200 Million issued in December 20066.

UAE – Bukhatir Investments Limited Sukuk – US$50 Million issued in May 20067.

BAHRAIN - Bahrain Financial Harbour – Al Marfa’a Al Mali Sukuk US$134 Million issued in July 20058.

KUWAIT - The Commercial Real Estate Company Ijara Sukuk US$100 Million issued in May 20059.

BAHRAIN - Durrat Khaleej Al Bahrain Sukuk US$152.5 Million issued in January 200510.

BAHRAIN - FIRSAN Sukuk11. Euro76 Million issued in October 2004

UAE - EMAAR Sukuk US$65 Million issued in June 200412.

BAHRAIN – Bahrain Monetary Agency Ijara Sukuk US$250 Million issued in June 200313.

SECONDARY MARKET DEVELOPMENT ACTIVITIES

The initiative includes:

LMC plays an active role in the secondary Islamic financing market delivering innovative, adaptable and trad-•able Islamic Shari’a compliant short term, medium term and long term financial instruments to Islamic financial institutions. The Bank has pioneered the structure of its Short Term Sukuk Program, a tradable low risk liquidity management product which actively promotes the secondary market development activities.

Backed by its strong operating performance, LMC looks forward to entering a high growth phase. With its plans to increase its capital in the near future, LMC foresees itself equipped to harness further activities and expand its service offering to include a range of investment banking solutions including debt capital markets, asset management, eq-uity capital market and private equity in compliance with Islamic Shari’a principles.


CHAIRMAN’S MESSAGE

In the name of Allah, the Most Compassionate, the Most Merciful, Praise be to Allah who takes all things towards perfection; Prayers and peace be upon Mohammed, His Last Prophet.

I am pleased to present the Report of the Board of Directors of the Liquidity Management Centre B.S.C. (c) (“LMC” or the “Bank”) for the year ended 31st December 2009.

2009 RESULTS AND PERFORMANCE

1. As widely recognized, 2009 remained a relatively challenging year for the financial markets, witnessing moderately illiquid markets, distressed valuations with caution surfacing over capital markets and a definitive flight to quality. In the backdrop of these market conditions most of the Year saw Sovereign and Quasi-Sovereign Issuers predominantly replac-ing Corporate Issuers. Despite market volatility, LMC managed to secure a Quasi-Sovereign issuance and Restruc-turing mandates of some financing deals that helped contribute towards a net profit of US$ 3.201 million. In spite of the market conditions the Bank’s total operating income for the year was US$ 10.783 million (2008: US$ 12.942 million). The operating income resulted from :

a) the successful Sukuk investment activities, mainly through the Short Term Sukuk Program (“STS Program”) where it has proven to be, given current market conditions, a relatively superior instrument offering risk-adjusted re-turns.

b) Due to widening credit spreads, corporate issuance dried up thus having a negative impact on the fees income from advisory services. However, the Bank’s revenue stream benefited from its diversified investment policy.

c) Barring for the very low levels of LIBOR, during the year 2009, the returns from the Bank’s investments would have been higher.

2. The operating results were helped by prudent cost control reflecting the Bank’s operating expenses being lower at US$ 5.465 million in the year, compared to US $ 5.573 million in 2008.

3. Total assets increased from US$ 276.791 million in 2008 to US$ 298.403 million in 2009.

4. LMC has followed a conservative approach towards impairment provisioning for investments held by the Bank both on specific and overall levels.

Mohammed Tariq Chairman


The relative positive performance during 2009 was also a reflection of an opportunistic approach to deals as and when they appeared. Continued support from LMC’s shareholders has helped the Bank in maintaining its leading position for secondary market trading.

I look forward to 2010 with greater confidence as further diversification through cautiously exploring and engaging in new business lines and the increase in the Bank’s capital base will be helpful.

In closing, on behalf of the Board of Directors, I would like to thank the Government of the Kingdom of Bahrain repre-sented by the Central Bank of Bahrain and Ministry of Industry and Commerce for their continued commitment and support to the Islamic banking sector.

My appreciation is also due to our shareholders, Bahrain Islamic Bank, Dubai Islamic Bank, Islamic Development Bank, and Kuwait Finance House, whose commitment was and will continue to be crucial to our success.

Finally, I would also like to thank the management and the staff of the Bank, for their outstanding dedication and performance that contributed to the 2009 results.

Allah the Almighty is the Purveyor of all Success.

Mohammed TariqChairman of the Board


CEO’S MESSAGE

In the name of Allah, the Most Compassionate, the Most Merciful, Praise be to Allah who takes all things towards perfection; Prayers and peace be upon Mohammed, His Last Prophet.

Liquidity Management Centre B.S.C.(c) (LMC) started the 2009 year with hopes that the Islamic finance and capital markets would bounce back from the subprime crisis that affected the entire world. For most of 2009, market conditions made it difficult for the entire industry including LMC to post growth levels witnessed in the past. Moreover, the trickle down of the economic crisis was witnessed through decreased asset values, which still remained the main driver of an ongoing risk-averse environ-ment. Fortunately, we prepared for the worst and gradually witnessed a correction towards equilibrium. As such, LMC positioned itself accord-ingly and realized, despite the downturn in 2008 and a fragile 2009, a net profit of US$ 5.32 million before provision and US$3.20 million in 2009 after provision which demonstrates the bank’s conservative approach in current market conditions. More notably, total operating income stood at US$ 10.78 million.

Credit spreads tightened significantly in the 2nd half of 2009 but remained relatively wide especially for the non-sovereigns while risk appetite remained subdued. As a result Sukuk issuance in particular continued to decrease specifically during early 2009 answering to difficult credit markets. In line with market demand, LMC acting as man-dated lead arranger managed to successfully close a US$ 140 million Syndicated Ijara Facility in July for the Sovereign Wealth Fund of Bahrain.

Going forward in this challenging environment, we believe that the market has witnessed its correction and that the worst is over, barring any unexpected crises. This is especially true for the GCC capital markets where the adverse market conditions have been accounted for. The year 2010 needs to be approached with caution but will have the tendency to bring opportunities to prepared investors. Many indicators are currently attesting to a positive outlook for GCC. For example, Oil prices are stabilizing at around $70-80 per barrel, well above the average price anticipated by many GCC fiscal budgets for 2009.

In conclusion, 2009 continued to be a difficult year for investors. Despite our competitiveness, the market environ-ment significantly had an impact on our bottom line. However, given our track record and strong team here at LMC, we were equipped to handle the unexpected market change and were able to report relatively profitable results for the year. We are confident, as implemented in the past, that we have taken all necessary steps to prepare for another challenging year. We thank our team members, clients and more so our shareholders for their support during these extraordinary times and we will do all we can to lead our industry into the future.

Ahmed AbbasChief Executive Officer

Ahmed Abbas Chief Executive Officer


BOARD OF DIRECTORS

Emad Y. Al MonayeaDirector, Deputy Chairman

Abdul Wahab Essa Al RushoodDirector

Mohammed Tariq Chairman

Khalid Mohammed Al Dossari Director

Mubarak El-Tayeb El-AminDirector

Ali Ahmed A. Karim Director


BOARD OF DIRECTOR’S BIOGRAPHIES

Mohammed TariqChairmanMohammed Tariq has been a Director of Treasury Department in Islamic Development Bank (“IDB”) – Jeddah and recently has become an Advisor to the President of IDB Group to concentrate on some vital strategic issues. For the last two years Mr. Tariq has been the Chairman of the Board of the Directors in Liquidity Management Centre (“LMC”) – Bahrain. Mr. Tariq is a British national. He studied Mathematics at the University of London and worked for 22 years in the City of London in prestigious investment banks. As a Research Fellow he has written several research papers in Algebra and he has been a member of the Institute of Actuaries, Securities Institute and the London Stock Exchange.

Emad Y. Al MonayeaDeputy Chairman Mr. Emad AlMonayea is currently the Chairman and Managing Director of Liquidity Management House – Kuwait (Liquidity House), the wholly owned subsidiary of Kuwait Finance House. Mr. AlMonayea is also a Board Member in Gulf Investment House – Kuwait (GIH) and currently is the Deputy Chairman of the Board and the Chairman of the Executive Committee of Liquidity Management Centre in Bahrain. Mr. AlMonayea is a Kuwaiti national and holds a B.S. Degree from Kuwait University and has completed the Executive Finance Program of INSEAD, France.

Abdul Wahab Essa Al RushoodMemberMr. Al Rushood is a Group Treasurer at Kuwait Finance House (KFH). He is a Kuwaiti national and presently holds a board membership as a Vice Chairman in Liquidity Management House – Kuwait (Liquidity House), and board mem-ber in Kuwait Finance House (KFH), Malaysia and Liquidity Management Center (LMC), Bahrain. Mr. Al Rushood holds B.Sc. degrees in Mathematics from Western Oregon State College and University of Tampa, USA.

Mubarak El Tayeb El AminMemberMr. Mubarak El-Tayeb El-Amin is the General Manager – Finance of the International Islamic Trade Finance Corpora-tion (the ITFC) which is the trade financing and promotion arm of (IDB) Islamic Development Bank Group. Mr. El. Amin is a Sudanese national. He represented the IDB in the board of directors and establishment committees of a number of companies, Islamic banks, and financial institutions including ASIJ Cooperative Insurance Co. – Saudi Arabia, Emir-ates Finance House – UAE, Sham Bank – Syria, Liquidity Management Centre – Bahrain, and the International Islamic Financial Market (IIFM). Mr. El- Amin is a CPA who qualified under the jurisdiction of the State of Georgia – USA in 1990. He is a graduate of the University of Khartoum – Sudan with a B.Sc. (Honours) in Accounting.

Khalid Mohammed Al DossariMemberMr. Khalid Mohammed Al Dossari is a Chief Financial Officer in (BIsB) Bahrain Islamic Bank. He was a former Board Member as a Managing Director – Islamic Bank of Yemen and currently a member in Liquidity Management Centre – Bahrain. Mr. Al Dossari is a Bahraini national and holds Certified Public Accountants – CPA from Oregon Board of Accountancy, Executive Management Development Program from University of Virginia – Darden and an Associate Degree from University of Bahrain. Ali Ahmed A. KarimMemberMr. Ali Ahmed A. Karim is Acting General Manager of Treasury and Investment Department in Bahrain Islamic Bank (“BIsB”). Presently he is a board member of Al Dur Holding Company Ltd, Chairman of Executive Committee of Enjaz Real Estate Company B.S.C. (c) in addition to Liquidity Management Centre (“LMC”) – Bahrain. Mr. A. Karim also holds positions in various committees of BIsB. Mr. A. Karim is a Bahraini national and holds an AAD – Associated Account-ing Diploma from University of Bahrain and Intermediate Banking Diploma from Bahrain Institute of Banking and Finance. He has fifteen years of experience in a range of areas such as relationship management, corporate finance, Investment & treasury and syndication in both conventional and Islamic banking. He attended many prestigious workshops and training seminars in the Middle East, Europe and Asia.


EXECUTIVE MANAGEMENT

Abbas AhmadiChief Investment Officer

Amer SadiqExecutive Vice President

Structured Finance

Ahmed Abbas Chief Executive Officer

Hussain MerzaVice President

Financial Controls


CORPORATE GOVERNANCE

LMC acknowledges the importance of the Corporate Governance as an application of the best management practices that are directed towards achievement of corporate values, goals and objective and enhancing shareholders value coupled with high transparency and corporate responsibility. During 2009 , the Board conducted a thorough review of the Bank’s high level policies for corporate governance, internal control, risk management and compliance with the latest regulations and guidelines of the Central Bank of Bahrain (CBB).

THE BOARD OF DIRECTORS The Board is elected by the shareholders of the Bank in accordance with the provisions of the Article of Association of the Bank. The Board has six directors representing the interest of the Bank and it is highly responsible for the management and the performance and applies directions and policies in order to ensure strategic guidance of the Bank. The Board of Director is headed by the Chairman who is considered a dependant Director in accordance with the Central Bank’s guidelines and international best practices.

Board’s ResponsibilitiesThe Board of Directors is delegated with the responsibility to assist the board in carrying out its duties and enhance the effectiveness of the Board. It serves in monitoring the management in different manner as to ensure that the policies, performance and processes are in the right place which shows that it is operating effectively and taking the responsibility with regard to the financial report, internal control and the process of monitoring compliance with laws and regulations. Each Director is elected for a three years term renewable at annual meetings of the sharehold-ers of the Bank.

Board MeetingsIn accordance with the applicable regulations and Article of Association the Board of Directors is required to attend at least four times per year. In regular basis they have a close contact with the management and required to act within their authority primarily for the organization’s benefit.

BOARD COMMITTEES

Board of DirectorsBoard of Directors is responsible for the conduct of the general operations of its respective institution and each ex-ercises all the powers delegated by the Board of Governors under the Articles of Agreements. The Board has created four sub-committees to assist in carrying out its duties.

Executive CommitteeThe Executive Committee reviews the entire investment proposals and implements the group’s strategy and policies decided by Board of Directors. It also proposes new strategies and policies to the Board of Directors and acts as the principal forum in which members liaise through their representatives with the President, the Manager and each other.

Audit CommitteeThe Audit Committee is responsible for reviewing financial report, internal and external audit , internal control, proc-ess of monitoring compliance with procedures, policies and risk management systems.

Nomination and Remuneration CommitteeThe committee enables the Board to fulfill its responsibilities in setting the appropriate composition and evaluating the performance of the Board, individual directors and senior management. It is also responsible for the remunera-tion policies and public reporting of the Bank.


Risk Management CommitteeThe Committee is responsible in Identifying, monitoring and approving the risk management policies of the Bank to establish the appropriate approval level of decisions. The committee also provides a forum for “big-picture” analysis of future risks and critically assesses the Bank’s business strategies and plans from a risk perspective.

SHARI’ A SUPERVISORY BOARD

The Shari’ a Supervisory Board is entrusted to ensure the compliance aspects of the Bank’s products and instruments. They are also responsible for monitoring and approving the operations, investments and activities carried out by the Bank without violating the principles and provisions of Islamic Shari’ a . The views of the Shari’a advisor shall be bind-ing in the specific area of supervision.

Shari’a Board Members

1. Dr. Hussain Hamed Hassan

2. Dr. Abdul Sattar Abu Ghuddah

3. Dr. Ajeel Jassim Al-Nashmy

4. Shaikh Adnan Al Qattan

MANAGEMENTLMC boasts significant achievements in a span of seven years with a sound track record, acknowledged by industry leaders around the world. LMC is led by Mr. Ahmed Abbas , the Chief Executive Officer, and supported by a profes-sional technical and placement team and highly experienced and qualified management team. The management in LMC is responsible for working in an effective manner comprising legal and ethical manners and it aims to in-crease teamwork, commitment and achieving a successful decision making through its staff and business units in the Bank.

ORGANIZATIONAL STRUCTUREAs LMC cares about updating and maintaining its track record. The Board has defined the organization structure responsibilities and authorities for the management team and staff where they mainly respond to the changes and needs of the organization during the year and ensure the proper segregation of responsibilities, accountabilities and duties of the staff at all levels.

COMPLIANCEThe LMC conducts its business with separate compliance functions in handling its works under the regulatory re-quirements stipulated by the Central Bank of Bahrain. The Bank complies under many key regulations such as, Shari’a Compliance, Legal Compliance, Financial Accounting Standards and the Central Bank of Bahrain’s Regulations and Guidelines.


FINANCIAL HIGHLIGHTSFinancial Performance of Liquidity Management Centre B.S.C.(c) (“LMC”) for the year ended 31st December 2009

31-Dec-09USD ‘000

31-Dec-08USD ‘000

Balance Sheet Position Total Assets 298,403 276,791 Total Liabilities 236,427 220,481 Total Equity 61,976 56,310Profit & Loss Statement Operating Income 10,783 12,942 Net Profit Before Impairment Provision 5,318 7,369 Net Profit 3,201 1,042Cash Flow Statement Operating Cash Flow (1,964) 21,643 Investment Cash Flow (1,116) (197) Financing Cash Flow - (5,100)Performance Ratios (%) Return On Average Assets (%) 1.11 0.36 Return On Average Equity (%) 5.41 1.71Liquidity Ratio (%) Liquid Asset Ratio (%) 11.7 10.82Capital Adequacy Ratio (%) Capital Adequacy (%) 25.75 22.64

AssetsThe size of the Bank’s total assets grew by 7.8 % in 2009 amounting to USD 298 million compared to USD 277 million in 2008. The growth was mostly attributed to additional Ijara and Financing Receivables of USD 10 million and USD 15 million respectively during the year as well as the increase in the bank’s liquid assets which amounted to USD 34.9 million compared to USD 30 million in 2008.

LiabilitiesLMC’s obligations similarly increased for the year ended 2009 by 7.2 %. Even though the amount Due to STS investors declined during the year, Due to banks increased to reach USD 109 million portraying a 154 % increase compared to last year.

EquityMainly and subsequent to the net profit achieved of USD 3.2 million, LMC’s equity increased over last year as retained earnings showed a surplus of USD 2 million compared to last year’s deficit of USD 0.2 million. Reserves have also increased by 55% year on year.


FINANCIAL HIGHLIGHTS (continued)

Capital AdequacyFor the year ended 2009, LMC’s Capital Adequacy Ratio improved by 3% over last year’s ratio to reach 25.75%. The ratio remains amply above the regulatory minimum requirement of 12%.

ProfitabilityIn 2009 Investment banking fees augmented significantly to reach USD 5.4 million compared to only USD 1 million in the previous year. However, Operating income declined by almost USD 2.2 million since there were no fair value gains recognized this year compared to USD 6.2 million recognized last year. Consequently, Net income before provisions and impairment contracted by 28% to reach USD 5.3 million. It is worth noting that impairment provisions decreased in 2009 leading to achieving Net profit of USD 3.2 million for the year with a notable 207% increase over last year’s Net profit. The latter has resulted in an increase in profitability bringing ROAA to 1.1% and ROAE to 5.4% compared to 0.36% and 1.7% in 2008 respectively.

Cash FlowThe bank relied in 2009 on its solid cash balance to finance its operating and investing activities of USD 1.96 million and USD 1.1 million respectively. As a result, Net cash and cash equivalents declined to USD 26.9 million compared to USD 30 million in 2008.

LiquidityLiquid Assets grew significantly by 16% in 2009 to reach USD 34.9 million, compared to USD 30 million in 2008. This was attributed to an increase in cash and balances with banks, augmented money market dealings established during 2009 and additional liquidity enhancement activities. As a result, Liquid Asset Ratio increased from 10.8% to 11.7%.

EXTERNAL FACTORS AFFECTING THE BANK’S PERFORMANCE

There are many factors that affect the Bank's business and the results of its operations, some of which are beyond the

control of the Bank. The following is a description of some of the important factors that may cause the actual results

of the Bank's operations in future periods to differ materially from those currently expected or desired.

The Bank's future growth rates and success are in-part dependent on continued growth and success of inter-1.

national markets. Although the Bank’s dealings are concentrated in areas that are deemed very safe, as is the

case with most international operations, the success and profitability of the Bank's international business can be

subject to numerous risks and uncertainties such as local economic and labour conditions, stage of the business

cycle, political instability, a change in tax laws, new monetary policies affecting exchange rates along with other

economic structures, newly introduced or amended local and national government regulations.


Due to the Bank’s diversified portfolio, the profit margins realized by the Bank can vary somewhat among these 2.

products and services, its clientele and its geographic markets. Consequently, the overall profitability of the

Bank's operations in any given period is partially dependent on the product, clientele and geographic mix

reflected in that period's revenues.

A sharp downfall in oil prices can put a strain on local economies where the Bank concludes most of its business. 3.

Although oil prices seem to have stabilized relative to the bottom witnessed in Q1 2009, there is no guarantee

that a further deterioration in the global economy and trade can still manage to keep oil prices at a stable level

to comfortably service these economies.

Further deterioration in liquidity of the global economy and local banking institutions can cause immense 4.

depreciation in asset prices, further deleveraging and de-equitization which can affect the Bank’s balance

sheet.

The Bank’s profitability will be highly dependent on the upcoming economic performance and its recovery. Two 5.

key prerequisites for sustained economic rebound internally are an unclogging of monetary policy transmission

channels where banking activities can be heightened as a result, and a stabilization of real-estate activities. Fiscal

stimulus if conducted by local economies may temporarily boost GDP, but without these prerequisites, sustained

economic expansion can be affected.


SHARI’A SUPERVISORY BOARDOn the Liquidity Management Centre activities for the year ended on 31st December, 2009

In the name of Allah, the most compassionate and the most merciful

To M/s: The stakeholders of Liquidity Management Centre B.S.C. (Closed)

Thanks to all mighty Allah and prayers and peace be upon our last prophet Mohammed and his relatives and com-

rades,

Based on the standard principles and the assigning of Fatwa and Shari’a Supervisory Board to supervise the group’s

activities and investments, the Fatwa and Shari’a Supervisory Board present’s the following report:

1. Fatwas and Resolutions:The Board has answered the queries and questions received from the group’s management, and accordingly, the

Board issued the suitable fatwas and resolutions required, which the group abided to eventually.

2. Finance Structure and Documents Preparation:The Board has approved all the group’s finance structuring related transactions, and has reviewed and approved the

contracts and documents related to it.

3. Issuance of Sukuk / Syndications:The Board has reviewed the group’s preparations /co- preparations for the issuance of investment sukuk and syndi-

cated facilities and has approved those transaction documents and the letters of it’s issuance.

4. Product Development:The Board, in co-operation with the group’s management has developed a number of products.

5. Compliance and Legislative Auditing:The Board has legislatively audited some of the group’s accomplished transactions within the said year, and has com-

mented on them accordingly.

6. Reviewing of Books and Records:The Board reviewed a set of the group’s books, records and documents based on it’s own demand, and has received

the data and information in terms of enabling the board to perform the duty of supervisory and legislative audit-

ing.


7. Reviewing the Balance Sheet:The Board has reviewed the group’s balance sheet, the related statements and detailed notes. Accordingly, the board

concluded that this balance sheet, based on the data and information provided by the group’s management truly

represents the group’s assets and income.

The Board Overall Conclusion:The Board confirm that the group is the sole abided party toward the compliance of shari’a and committing on

executing the Boards’ fatwas within all the group’s activities, and based on the received transactions, collected data,

auditing, commenting and truthful response by the group in terms of abiding to the Board comments, the Board

according to it’s authorization has concluded that the group’s accomplished activities and transactions within the

said year are in total compliance with Islamic shari’a terms as well as the Board’s fatwas.

We all call Allah the almighty to realize for us the right guidance and the good achievements as he likes and

accepts.

Peace is upon all of you, as well as Allah’s mercy and blessings.

Dr. Shaikh Hussain Hamed HassanHead of Shari’a Supervisary Board

Dr. Shaikh Ajeel Al-NashmyMember

Dr. Shaikh Abdul Sattar Abu GhuddahMember


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OFLIQUIDITY MANAGEMENT CENTRE B.S.C. (c)

We have audited the accompanying consolidated balance sheet of Liquidity Management Centre B.S.C. (c) [the “Bank”] and its subsidiary [together the “Group”] as of 31 December 2009, and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These consolidated financial statements and the Group’s undertaking to operate in accordance with Islamic Shari’a rules and principles are the responsibility of the Group’s Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the Auditing Standards for Islamic Financial Institutions. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated finan-cial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2009, the results of its operations, its cash flows and changes in equity for the year then ended in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions and the Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Group.

We confirm that, in our opinion, proper accounting records have been kept by the Bank and the consolidated fi-nancial statements, and the contents of the Report of the Board of Directors relating to these consolidated financial statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that no viola-tions of the Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial Institutions Law, nor of the memorandum and articles of association of the Bank, have occurred during the year ended 31 December 2009 that might have had a material adverse effect on the business of the Bank or on its consolidated financial posi-tion and that the Bank has complied with the terms of its banking licence.

17 February 2010Manama, Kingdom of Bahrain


FINANCIAL STATEMENTS

CONTENTS

Con1. solidated Balance Sheet

Consolidated Statement of Income2.

Consolidated Statement of Cash Flows3.

Consolidated Statement of Changes in Equity4.

Notes to The Consolidated Financial Statements5.


The attached notes 1 to 25 form part of these consolidated financial statements

CONSOLIDATED BALANCE SHEET31 December 2009

Note 2009 2008

US$ 000 US$ 000ASSETSCash and balances with banks 3,676 1,149 Due from banks 23,200 15,000 Mudaraba receivable 3 8,000 - Ijarah receivables 4 10,000 - Murabaha receivables 5 - 13,807 Financing receivable 6 15,000 - Investments 7 231,396 242,598 Other assets 8 5,780 3,868 Equipment 1,351 369

TOTAL ASSETS 298,403 276,791 LIABILITIES AND EQUITYLIABILITIESDue to Short Term Sukuk - investors 9 123,584 161,748 Due to banks 109,205 42,997 Due to non bank - 13,604 Other liabilities 10 3,638 2,132

TOTAL LIABILITIES 236,427 220,481

EQUITYShare capital 11 51,000 51,000 Reserves 11 8,612 5,555 Retained earnings / (Accumulated deficit) 11 2,224 (245) Proposed appropriations 140 -

TOTAL EQUITY 61,976 56,310 TOTAL LIABILITIES AND EQUITY 298,403 276,791

Mohammed TariqChairman

Emad Al MonayeaDeputy Chairman

Ahmed AbbasChief Executive Officer


CONSOLIDATED STATEMENT OF INCOMEYear ended 31 December 2009

Note 2009 2008US$ 000 US$ 000

Income from investments 10,121 13,432 Income from Murabaha and due from banks 817 896 Income from financing receivable 626 - Income from Mudaraba 22 116 Income from Ijarah receivables 154 - Less: Return to Short Term Sukuk - investors (3,203) (7,714) Less: Return to banks (1,823) (712) Less: Return to non banks (223) (469) Less: Ijarah expense - net 12 (916) (49)

5,575 5,500

Investment banking fees 13 5,444 1,017 Fair value changes 14 - 6,213 Loss on held for trading investments (95) (322) Foreign exchange (loss) / gain (141) 534

OPERATING INCOME 10,783 12,942

Staff costs 3,795 4,303 Depreciation 134 89 General and administrative expenses 15 1,536 1,181

OPERATING EXPENSES 5,465 5,573

NET PROFIT FOR THE YEAR BEFORE IMPAIRMENT PROVISION 5,318 7,369

Specific impairment provision 16 1,807 5,627 Collective impairment provision 310 700

NET PROFIT FOR THE YEAR 3,201 1,042



CONSOLIDATED STATEMENT OF CASH FLOWSYear ended 31 December 2009

2009 2008US$ 000 US$ 000

OPERATING ACTIVITIESNet profit for the year 3,201 1,042 Adjustments for:

Depreciation 134 89 Amortisation of premium on investments (281) (286)Fair value changes - (6,213)Loss on held for trading investments 95 322 Specific impairment provision 1,807 5,627 Collective impairment provision 310 700 Directors’ remuneration 100 -

Operating profit before changes in operating assets and liabilities: 5,366 1,281 Changes in:

Mudaraba receivable (8,000) - Ijarah receivables (10,000) - Financing receivable (15,000) - Other assets (2,032) 6,325 Due to Short Term Sukuk - investors (38,164) (46,833)Due to banks 66,208 41,009 Due to non bank (13,604) (3,396)Other liabilities 1,506 (177)

Purchase of investments held to maturity (11,500) (13,069) Sale/redemption proceeds from investments held to maturity 25,226 38,969 Purchase proceeds of available-for-sale investments (29,357) (7,382) Sale/redemption of investment available-for-sale 28,030 6,013 Sale of trading investment 65 121 Purchase of trading investments (608) - Purchase of investment available-for-sale through statement of income - (862) Directors’ remuneration paid (100) (356)Net cash (used in) / from operating activities (1,964) 21,643 INVESTING ACTIVITYPurchase of equipment (1,116) (197)Net cash used in investing activity (1,116) (197)FINANCING ACTIVITIESDividend paid - (5,100)Net cash used in financing activities - (5,100)(DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (3,080) 16,346 Cash and cash equivalents at 1 January 29,956 13,610 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 26,876 29,956 Cash and cash equivalents at year end comprise of:

Cash and balances with banks 3,676 1,149 Murabaha receivables with original maturity of ninety days or less - 13,807 Due from banks with original maturity of ninety days or less 23,200 15,000

26,876 29,956



CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2009

Reserves Retained

Investment Foreign earnings /

Share Statutory General fair value exchange Total (Accumulated Proposed Total

capital reserve reserve reserve translations Reserves deficit) appropriations equity

US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000

Balance at 1 January 2009 51,000 1,930 1,930 2,199 (504) 5,555 (245) - 56,310

Cumulative changes in fair value* - - - 1,961 - 1,961 - - 1,961

Foreign currency translation - - - - 134 134 - - 134

Transfer to statement of income - - - - 370 370 - - 370

Directors’ remuneration - - - - - - (140) 140 -

Total income and expenses

recognised directly in equity - - - 1,961 504 2,465 (140) 140 2,465

Net profit for the year - - - - - - 3,201 - 3,201


recognised during the year - - - 1,961 504 2,465 3,061 140 5,666

Transfer to statutory reserve - 296 - - - 296 (296) - -

Transfer to general reserve - - 296 - - 296 (296) - -

Balance at 31 December 2009 51,000 2,226 2,226 4,160 - 8,612 2,224 140 61,976

Balance at 1 January 2008 51,000 1,930 1,930 448 - 4,308 10,026 - 65,334

Cumulative changes in fair value - - - (4,429) - (4,429) - -

(4,429)

Foreign currency translation - - - - (504) (504) - - (504)

Realised gain transferred to consolidated statement of income

- - - (33) - (33) - -

(33)

Total income and expenses recognised directly in equity

- - - (4,462) (504) (4,966) - -

(4,966)

Transfer of fair value gain to reserve - - - 6,213 - 6,213 (6,213) - -

Net profit for the year - - - - - - 1,042 - 1,042


recognised during the year - - - 1,751 (504) 1,247 (5,171) -

(3,924)

Dividend paid - - - - - - (5,100) - (5,100)

Balance at 31 December 2008 51,000 1,930 1,930 2,199 (504) 5,555 (245) - 56,310

* This represents movement in available for sale invesments through equity which consists of equities, funds and sukuks. The increase is due to increase of market value of certain sukuks.



1 INCORPORATION AND ACTIVITIES Liquidity Management Centre B.S.C. (c) (the “Bank”) is a closed joint stock company incorporated in the Kingdom of Bahrain on 31 July 2002 and registered with Ministry of Industry and Commerce under commercial registration (CR) number 49092. The Bank operates in the Kingdom of Bahrain (Bahrain) under wholesale banking license issued by the Central Bank of Bahrain (CBB). The Bank is engaged in the following activities:

- Facilitate creation of an Islamic inter-bank money market that will allow Islamic Financial Services Institutions (“IFSI”) to effectively manage their assets and liabilities.

- Provide short-term liquid, tradable asset backed treasury instruments (Sukuk) based on Islamic Shari’a principles where IFSI can invest their surplus liquidity.

- Provide short-term investment opportunities based on Islamic Shari’a principles.

The activities of the Bank and its wholly owned subsidiary (together the “Group”) are to carry out operations in accordance with the teachings of Islam (Shari’a). The Group’s Shari’a Supervisory Board is entrusted to ensure the Group’s adherence to Shari’a rules and principles in its transactions and activities.

The address of the Bank’s registered office is Building 852, Road 3618, Block 436, Seef district, Bahrain.

The Bank operates only in Bahrain. As of 31 December 2009, the total number of employees employed by the Group was 36 (2008: 33).

The consolidated financial statements were approved by the Board of Directors on17th February 2010. 2 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below: a. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for certain available-for-sale investments and trading investments that have been measured at fair value. The consolidated financial state-ments have been presented in United States Dollars (US Dollar), being the principal currency of the Group’s opera-tions. All the values are rounded to the nearest US Dollar thousand unless otherwise stated.

b. Statement of compliance The consolidated financial statements are prepared in accordance with the Financial Accounting Standards and interpretations issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Bank, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law. For matters which are not covered by AAOIFI standards, the Group uses the relevant International Financial Reporting Standards (the “IFRS”).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS31 December 2009


2 SIGNIFICANT ACCOUNTING POLICIES (continued)

c. Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its wholly owned subsidiary “The Short Term Sukuk Centre B.S.C. (closed)” (STSC). The financial statements of the subsidiary are prepared for the same reporting year as the Bank, using consistent accounting policies.

All intra- group balances, transactions, income and expenses and profit and losses resulting from intra- group trans-actions are eliminated in full.

Subsidiary is fully consolidated from the date of formation or acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that control ceases. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Ownership Ownership Year of Country of

for 2009 for 2008 incorporation incorporation

Held directly by the BankThe Short Term Sukuk Centre B.S.C. (c) 100% 100% 2003 Bahrain

d. Cash and cash equivalentsCash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash on hand, bal-ances with banks, murabaha receivables maturing with an original maturity of ninety days or less and due from banks with an original maturity of ninety days or less.

e. Murabaha receivables Murabaha receivables consist mainly of murabaha and international commodities stated net of deferred profits and provisions for impairment. The Group considers the promise made in the murabaha to the purchase orderer as ob-ligatory.

f. Ijarah receivableIjarah receivable is initially recognised at fair value of consideration given and subsequently remeasured at cost less impairment.

g. Mudaraba receivableMudaraba receivable is a partnership in which the Group contributes capital. These contracts are stated at the fair value of consideration given less any impairment in value.

h. Financing receivableThe financing receivable represents wakala financing to projects and is intially stated at fair value of consideration given and subsequently remeasured at cost less any impairment in value.




i. InvestmentsThe investments are classified either as trading, available-for-sale or held to maturity.All investments are initially recognised at cost, being the fair value of the consideration given including acquisition costs.

Trading investmentsThese are initially recognised at cost, being the fair value of the consideration given excluding acqusition costs. These are subsequently re-measured at fair value. All related realised and unrealised gains or losses are included in the consolidated statement of income.

Available-for-sale investments through equitySubsequent to initial recognition, these investments are re-measured at fair value with unrealised gains or loss rec-ognised directly in equity in “investment fair value reserve”, until the investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously recorded in equity is recognised in the consolidated statement of income.

Available-for-sale investments through statement of incomeSubsequent to initial recognition, those investments, which are financed by equity and classified as available-for-sale through statement of income, are re-measured at fair value and the resultant gains or losses are included in the con-solidated statement of income as “Fair value changes” provided that there are no investment account holders partici-pating in such investments or to the extent of the portion related to owners’ equity participating in the investments. Unrealised gains or losses are appropriated to ”Investment fair value reserve“ in consolidated statement of changes in equity in accordance with interpretation letter issued by AAOIFI. Upon realisation of these gains and losses, these are transferred to retained earnings.

Held-to-maturity investmentsInvestments which have fixed or determinable payments and where the Group has both the intent and ability to hold to maturity are classified as held to maturity. After initial measurement, these investments are carried at amor-tised cost less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such investment is recognised in the consolidated statement of income, when the investment is de-recognised or impaired.

j. EquipmentEquipment is initially recognised at cost. Depreciation is provided on the straight line method on all equipments over their estimated useful life. The estimated useful lives of the equipment for the calculation of depreciation is 3-5 years.

k. Fair valueFair value is determined for each investment individually in accordance with the valuation policies set out below: (i) For investments that are traded in organised financial markets, fair value is determined by reference to the

quoted market bid prices prevailing on the balance sheet date.




(ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with third parties that are either completed or are in progress. Where no recent significant transactions have been completed or are in progress, fair value is determined by reference to the current market value of similar investments. For others, the fair value is based on the net present value of estimated future cash flows, or other relevant valuation methods.

(iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of estimated future cash flows determined by the Group using current profit rates for investments with similar terms and risk characteristics.

(iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less provision for any impairment.

l. OffsettingFinancial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

m. Derecognition of financial instruments

Financial assetsA financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derec-ognised when:

(i) the right to receive cash flows from the asset have expired;

(ii) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or

(iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substan-tially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Financial liabilitiesA financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

n. ProvisionsProvisions are recognised when there is a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured.




o. Revenue recognition

Income from investments (sukuks, Ijarah receivable and Financing receivable)Income from investments is recognised on a time-apportioned basis over the period of investment. Income that is 90 days or more overdue is suspended until it is received in cash.

Income from Murabaha receivablesProfit from Murabaha receivables is recognised when the income is both contractually determinable and quanti-fiable at the commencement of the transaction. Such income is recognised on time-apportioned basis over the period of the transaction. Where the income from a contract is not contractually determinable or quantifiable, it is recognised when the realisation is reasonably certain or when actually realised. Income related to accounts that are 90 days overdue is suspended until it is received in cash.

Income from Mudaraba Income on mudaraba financing is recognised when the right to receive payment is established or on distribution by the mudarib. Income related to accounts that are 90 days overdue is suspended until it is received in cash.

Investment Banking FeesThese comprise fee for structuring, arranging and underwriting deals. Structuring and arranging fee income is recog-nised by reference to percentage of completion method, measured by reference to the percentage of cost incurred to date to estimated total cost. Underwriting and other fees are recognised when earned.

Return to Short Term Sukuk - investorsReturn to Short Term Sukuk - investors is recognised in accordance with the underlying contracts.

DividendDividend is recognised when the Group’s right to receive the payment is established.

p. Foreign currenciesTransactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into US Dollars at the rate of exchange ruling at the bal-ance sheet date. All differences are taken to the consolidated statement of income.

Translation gains or losses on non-monetary items are included in equity as “foreign exchange translations reserve”.

q. Impairment of financial assetsAn assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the consolidated in-come statement. Impairment is determined as follows:




(i) For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously recognised in the income statement.

(ii) For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset.

(iii) For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate.

r. Significant accounting judgments, estimates and assumptions In the process of applying the Group’s accounting policies, management has used its judgements and made esti-mates in determining the amounts recognised in the consolidated financial statements. The most significant use of judgements and estimates are as follows: Classification of investments Management decides on acquisition of an investment whether it should be classified as held to maturity, available-for-sale investments or trading investments. Fair valuation of investments The determination of fair values of unquoted investments requires management to make estimates and assump-tions that may affect the reported amount of assets at the date of consolidated financial statements. Impairment of available-for-sale investments The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgment.

Collective impairment provision Impairment is assessed collectively for losses on investments that are not individually significant and for individually significant investments where there is not yet objective evidence of individual impairment. Collective impairment is evaluated on each reporting date with each portfolio receiving a separate review. The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by tak-ing into consideration of the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Man-agement is responsible for deciding the length of this period which can extend for as long as one year. The impair-ment allowances is then reviewed by credit management to ensure alignment with the Bank’s overall policy. s. Zakah In accordance with its Articles of Association, the Group is not required to pay Zakah on behalf of its shareholders.




t. Fiduciary assets Assets held in a fiduciary capacity are not treated as assets of the Group. u. Employees’ end of service benefits Provision is made for leaving indemnity payable under the Bahraini Labour Law applicable to non-Bahraini employ-ees’ accumulated period of service at the balance sheet date. In addition, provision for indemnity is also made for Bahraini employees in accordance with the above guidelines. Bahraini employees of the Bank are covered by contributions made to the General Organisation of Social Insurance Organisation as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions, which are expensed when due.

v. Shari’a Supervisory Board The Group’s Shari’ah Supervisory Board consists of four members appointed by the general assembly. They review the Group’s compliance with general Shari’ah principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari’ah principles. w. Earnings prohibited by Shari’a The Group is committed to avoid recognising any income generated from non-Islamic source. Accordingly, all non-Is-lamic income is credited to a charity account where the Group uses these funds for various social welfare activities.

x. DividendDividend to shareholders is recognised as liability when it is approved by the shareholders.

y. Trade and settlement date accountingPurchases and sales of financial assets are recognised on the date i.e. the date that the Group commits to purchase or sell such asset.

3 MURABAHA RECEIVABLES

Mudaraba receivable is a short term receivable from a financial institution with an expected profit rate of 3% and matures on 6 January 2010.

4 IJARAH RECEIVABLESIjarah receivable from two parties whose terms are as follow:

1- US$ 5 million with a minimum expected profit rate of 8% and maturing on 26 August 2013

2- US$ 5 million with a profit rate of 7% and maturing on 27 July 2014



5. MURABAHA RECEIVABLES2009 2008

US$ ‘000 US$ ‘000International commodities Murabaha - 13,810 Deferred profits - 3

- 13,807 The Bank considers the promise made by the purchase orderer in the Murabaha contract as obligatory. The effective profit return for the year ended 31 December 2009 ranged between 0.25% to 0.8% per annum (2008: 1% to 6% per annum).

6. FINANCING RECEIVABLE

This is a syndicated financing transaction based on investment agency (wakala) agreement to finance a project in the Kingdom of Bahrain. The facility is collateralised by an ownership in the underlying companies and guaranteed by a bank incorporated in the Kingdom of Bahrain. The anticipated profit rate of the facility is EIBOR + 2.25% and maturing partly in March 2010 and remaining in March 2011.

7. INVESTMENTS2009 2008

US$ ‘000 US$ ‘000Investments held-to-maturity 187,073 200,519Available-for-sale investments

through statement of income 12,275 12,275Available-for-sale investments through equity 39,371 35,578Trading investments 541 93Impairment provision (7,864) (5,867)Total 231,396 242,598

2009 2008

PROVISIONS

Available Available

for-sale for-sale

Investments investments Investments investments

held-to- through -held-to through

maturity equity Total maturity equity Total

US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000

At 1 January 700 5,167 5,867 - - -

Charge for the year 310 1,687 1,997 700 5,167 5,867

At 31 December 1,010 6,854 7,864 700 5,167 5,867



7. INVESTMENTS (continued)

Available-for-sale investments through equity include an amount of US$ 13.7 million (2008: US$ 11.6 million) which are considered to be impaired and impairment charge has been taken in accordance with AAOIFI. In total an amount of US$ 4.4 million (2008: US$: 10.3 million) of investments in funds held as available for sale through equity have not been fairvalued as their fairvalued could not be reliably estimated.

Investments include an amount of US$ 201.2 million, net of provision, (2008: US$ 213.5 million) representing the underlying assets of the secured Short Term Sukuk Program (STS Program) of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The maturities of these investments range from 1 to 7 years and the effective profit rate on these investments ranged between 0.5% to 9.5% per annum (2008: 2.3% to 9.5% per annum).

During 2009 the Group entered into a long term financing arrangement with a third party international financial institution for which the Group’s investments amounting to US$ 83 million have been provided as collateral.

8. OTHER ASSETS

2009 2008

US$ ‘000 US$ ‘000

Accrued profit 1,907 2,394 Fee income receivable* 2,873 456 Prepaid expenses 121 44 Others 879 974

5,780 3,868

* The amount include a fee income receivable of US$ 2.8 million which is expected to be received during 2010. The Bank has obtained seven parcel of lands in Kuwait as a security for this fee receivable and title to these lands has been transferred to the beneficial interest of the Bank.

9. DUE TO SHORT TERM SUKUK - INVESTORS

Due to Sukukholders represent STS program Sukuk owned by the investors in the secured Short Term Sukuk Program (STS Program) of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The investors are the legal owners of the underlying investments of US$ 201.2 million (2008: US$ 213.5 million) of the STS program as disclosed in note 7. Returns paid to the Sukukholders during the year ranged between 0.75% to 5.5% per annum (2008: 1% to 6% per annum).



10. OTHER LIABILITIES2009 2008

US$ ‘000 US$ ‘000

Staff related payables 1,854 1,466Others 1,784 666

3,638 2,132

11 EQUITY (i) Share capital

2009 2008

US$ ‘000 US$ ‘000

Authorised:

200,000,000 ordinary shares of US$ 1 each 200,000 200,000

Issued, subscribed and fully paid:

51,000,000 ordinary shares of US$ 1 each 51,000 51,000

(ii) Statutory reserve In accordance with the requirements of the Bahrain Commercial Companies Law, 10% of the net profit is transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve total 50% of the paid up share capital. The reserve is not distributable but can be utilised for the purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and with the prior approval of the CBB.

(iii) General reserve In accordance with the Bank’s articles of association, the Group may transfer any amount, as approved by the direc-tors, out of net income for the year to the general reserve after appropriating statutory reserve. The general reserve is distributable, subject to the approval of CBB.

(iv) Investment fair value reserveInvestment fair value reserve represents unrealised gains and losses resulting from re-measurement of available-for-sale investments. This reserve is distributable upon value realisation, which takes place at the time of actual exit or derecognition of investments.



12 IJARAH EXPENSE - NET

2009 2008

US$ 000 US$ 000

Rental income 784 -

Ijarah expense (1,700) (49)

(916) (49)

13 INVESTMENT BANKING FEES2009 2008

US$ ‘000 US$ ‘000

Sukuk and islamic financing fees and commissions income 4,786 823

Others 658 194

5,444 1,017

14 FAIR VALUE CHANGES

2009 2008

US$ ‘000 US$ ‘000

Gain on available-for-sale investments

through statement of income - 6,213

- 6,213

15 GENERAL AND ADMINISTRATIVE EXPENSES2009 2008

US$ ‘000 US$ ‘000

Directors’ remuneration and related expenses(15.1) 196 20

Legal and professional fees 396 208

Advertising and marketing 56 37

Premises expenses 298 144

Others 590 772

1,536 1,181



15.1 DIRECTORS’ REMUNERATION AND RELATED EXPENSES

2009 2008

US$ ‘000 US$ ‘000

Board of Directors’ remuneration 2008 100 -

Board of Directors’ meeting related expenses 96 20

196 20

16 SPECIFIC IMPAIRMENT PROVISION

2009 2008

US$ ‘000 US$ ‘000

Available-for-sale investments through equity - net 1,687 5,167

Impairment provision on receivables 120 460

1,807 5,627

17 RELATED PARTY TRANSACTIONS

Related parties comprise shareholders, directors of the Group, close members of their families, entities owned or controlled by them and companies affiliated by virtue of common ownership or directors with that of the Group. All the financing transactions with related parties are performing and no provisions is required.

The balances of major transactions with related parties as follows:

Shareholders Shareholders

2009 2008

US$ ‘000 US$ ‘000

Cash and balances with banks 459 1,137

Murabaha receivables - 13,807

Due from banks 18,200 -

Other assets 53 20

Due to Short Term Sukuk - investors 95,096 108,006

Due to banks 72,474 16,794

Other liabilities 916 -



17 RELATED PARTY TRANSACTIONS (continued)

The income and expenses arising from dealing with related parties included in the consolidated statement of in-come are as follows:

Shareholders Shareholders2009 2008

US$ ‘000 US$ ‘000Income from Murabaha and

Due from bank 29 452

Return to Short Term Sukuk - investors 2,526 3,181

Return to banks 966 231

General and administrative expenses 20 238

Key management personnel are those who possess significant decision making and direction setting responsibilities and includes personnel manager level and above. Compensation of these key management personnel, consisting solely of short-term benefits, is as follows:

Short term employee benefits 2,311 1,595



18 MATURITY ANALYSIS OF ASSETS, LIABILITIES AND EQUITY

The table below shows an analysis of assets, liabilities and equity analysed according to when they are expected to be recovered or settled.

31 December 2009 Up to 1 to 3 3 to 6 6 months 1 to 3 Over No fixed

1month months months to 1 year years 3years maturity Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

ASSETS

Cash and balances with banks 3,676 - - - - - - 3,676

Due from bank 23,200 - - - - - - 23,200

Murabaha receivables 8,000 - - - - - - 8,000

Ijarah receivables - - - - - 10,000 - 10,000

Financing receivable - 7,500 - - 7,500 - - 15,000

Investments 16,640 6,610 17,433 27,141 129,562 28,499 5,511 231,396

Other assets 372 1,076 459 - - - 3,873 5,780

Equipment - - - - - - 1,351 1,351

Total assets 51,888 15,186 17,892 27,141 137,062 38,499 10,735 298,403

LIABILITIES AND EQUITY

Due to Short Term Sukuk - investors 111,053 12,531 - - - - - 123,584

Due to banks 67,360 13,021 1,654 - 27,170 - - 109,205

Other liabilities 1,348 77 234 971 - 1,008 - 3,638

Equity - - - - - - 61,976 61,976

Total liabilities and equity 179,761 25,629 1,888 971 27,170 1,008 61,976 298,403

Liquidity gap (127,873) (10,443) 16,004 26,170 109,892 37,491 (51,241)

Cumulative liquidity gap (127,873) (138,316) (122,312) (96,142) 13,750 51,241 -

The net funding requirement with respect to cumulative liquidity gap is managed through liquidity lines, amounting to US$ 115 million as at 31 December 2009, provided by the shareholders (US$115 million is utilised).

The Group expects that all the short-term liabilities will be rolled over upon maturity. Also, as set out in note 7, the Group has other financing arrangements in place to manage the liquidity gap.



18 MATURITY ANALYSIS OF ASSETS, LIABILITIES AND EQUITY (continued)

31 December 2008Up to

1 monthUS$ ‘000

1 to 3monthsUS$ ‘000

3 to 6 monthsUS$ ‘000

6 months to1 year

US$ ‘000

1 to 3years

US$ ‘000

Over3 years

US$ ‘000

No fixed maturityUS$ ‘000

TotalUS$ ‘000

ASSETSCash and balances with banks 1,149 - - - - - - 1,149

Due From bank 15,000 - - - - - - 15,000

Murabaha receivables 13,807 - - - - - - 13,807

Investments - 981 - 12,778 111,402 115,694 1,743 242,598

Other assets 621 1,137 655 - - - 1,455 3,868

Equipment - - - - - - 369 369

Total assets 30,577 2,118 655 12,778 111,402 115,694 3,567 276,791

LIABILITIES AND EQUITYDue to Short Term Sukuk - investors

154,744 7,004 - - - - - 161,748

Due to banks 31,340 11,608 49 - - - - 42,997

Due to non bank - 13,604 - - - - - 13,604

Other liabilities 657 553 - - - - 922 2,132

Equity - - - - - - 56,310 56,310

Total liabilities and equity 186,741 32,769 49 - - - 57,232 276,791

Liquidity gap (156,164) (30,651) 606 12,778 111,402 115,694 (53,665)

Cumulative liquidity gap (156,164) (186,815) (186,209) (173,431) (62,029) 53,665 -

The net funding requirement with respect to cumulative liquidity gap is managed through a committed liquidity lines, amounting to US$ 115 million, provided by the shareholders (US$ 108 million is utilised).



19 RISK MANAGEMENT

IntroductionRisk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to credit risk, liquidity risk and market risk, the latter being divided into trading and non-trading risks. It is also subject to operating risks.

The independent risk control process does not include business risks such as changes in the environment, technol-ogy and industry. They are monitored through the Group’s strategic planning process.

Risk management structureThe Board of Directors is ultimately responsible for identifying and controlling risks; however; there are separate in-dependent bodies responsible for managing and monitoring risks.

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

The Board has delegated the oversight responsibilities of risk management to the Risk Management Committee and senior management (comprising the Chief Executive Officer and Senior Managers). They are responsible to carry out the policies laid down by the Board by ensuring that there are adequate and effective operational procedures, internal controls and systems for measuring, monitoring and controlling risks.

Risk Management Committee In line with the Group’s expansion and growth plans, the Board established a Risk Management Committee (RMC) to further strengthen the Group’s risk management process. The RMC has the overall responsibility for the develop-ment of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fun-damental risk issues, managing and monitoring relevant risk decisions. All the members of this Committee are from the Board. The RMC meets quarterly with the objective of assisting the Board in carrying out its responsibilities in relation to managing the Group’s range of inter-related risks in an integrated manner. The Committee is supported by the Group’s risk management function which assists with the establishment of policies on credit, liquidity, market and operational risk, reviews compliance with and set risk limits approved by the Board and identifies emerging risk issues. The RMC is responsible to provide oversight and management of all risks in the Group and to ensure that there is an ongoing process to continuously manage the Group’s risks proactively.

The following are management committees that support the risk management of the Group:

Risk Management ْ UnitThe Risk Management Unit (RMU) is responsible for implementing and maintaining risk related procedures to ensure an independent control process. The RMU is a management committee set up to centralise the management of risks and to assist senior management and the risk committees in the controlling, monitoring and reporting of risks.

Asset/liability management committeeThe Asset/Liability Management Committee is responsible for the Group’s asset and liability management, pricing and funding strategies, management of market and liquidity risks, as well as ensuring that investments are made in accordance with the policies approved by the Board of Directors.



19 RISK MANAGEMENT (continued)

Credit risk committeeThe Credit Risk Committee is responsible for the management of credit risk. Overseeing the management of opera-tional risk is the Internal Audit Department which regularly reports to the Audit Committee to provide independent assurance that risks have been identified and there are sufficient and effective controls on all aspects of the Group’s operations.

Internal AuditRisk management processes throughout the Group are audited annually by the internal audit function that examines both the adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Commit-tee.

Risk measurement and reporting systems Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to ac-cept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Credit Risk Credit risk is the risk that any counterparty, to a financial instrument, will fail to fulfill an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting trans-actions with specific counterparties, and assessing the creditworthiness of counterparties. In addition to monitoring credit limits, the Group manages the credit exposure by entering into collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. According to the terms of the STS program, the Sukukholders bear the credit risk arising from investments on account of default. However, the Bank bears the risk of a rating downgrade of its holding in sukuk assets.

The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral reviews. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a perceived risk rating. Risk ratings are sub-ject to regular revision. The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action.




Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the Group’s financial assets. The maximum expo-sure is shown gross, before the effect of migration through the use of master netting and collateral agreements.

Gross Gross

maximum maximum

exposure exposure

2009 2008

US$ ‘000 US$ ‘000

Cash and balances with banks 3,676 1,149 Due from banks 23,200 15,000 Mudaraba receivable 8,000 - Ijarah receivables 10,000 - Murabaha receivables - 13,807 Financing receivable 15,000 - Investments 205,233 218,250 Other assets 5,606 3,744 Total 270,715 251,950

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentra-tions of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location.




The concentrations of assets and liabilities analyzed by geographic regions and industry sectors are as below:

2009 2008

Assets Liabilities Assets Liabilities

US$ ‘000 US$ '000 US$ '000 US$ '000

Geographic region:Bahrain 126,182 73,280 83,031 115,176

GCC countries 126,390 95,136 152,331 93,154

Others 18,143 65,290 16,588 10,038

270,715 233,706 251,950 218,368

Industry sector:Banks and financial institutions 59,973 230,318 57,445 201,378

Government 21,593 - 4,896 -

Real estate 142,182 3,353 145,013 3,351

Construction and building materials 26,337 - 26,466 -

Others 20,630 35 18,130 13,639

270,715 233,706 251,950 218,368

As at 31 December 2009, exposures to banks and non banks which exceed 15% of the Group’s consolidated capital base amounted to US$ 189 million (2008: US$ 183 million).

The Group’s credit risk are managed due to the nature of its financial assets which are asset backed and/or asset based. It is the Group’s policy to maintain consistent perceived risk ratings across the investment portfolio. This facili-tates management focus on the applicable risks and the comparison of investment exposures across all lines of busi-ness, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The at-tributable risk ratings are assessed and updated regularly. The Group’s holdings are perceived to be rated investment grade or better.




These risk ratings used by the Group are defined as follows:

High investment grade: These borrowers are internally rated between AAA and A-. These are of high credit quality and considered as low risk.

Investment grade: These borrowers are rated internally between BBB+ and BBB-. These are of good credit quality and considered higher risk than the high grade borrowers.

Unrated: These borrowers are not rated internally. They are higher risk than investment grade but full repayments are expected.

Past due or individually impaired: These borrowers are expected to be total loss.

The table below shows the credit quality by class of financial asset, based on the Group’s credit rating system.

Neither past due nor impairedHigh

Investment Investmentgrade grade Unrated Total2009 2009 2009 2009

US$ '000 US$ '000 US$ ‘000 US$ ‘000Cash and balances with banks 1,046 1,778 852 3,676 Due from banks 5,000 18,200 - 23,200 Mudaraba receivable - - 8,000 8,000 Ijarah receivable - - 10,000 10,000 Murabaha receivables - - - - Financing receivable - - 15,000 15,000 Investments 111,067 68,463 21,623 201,153 Other assets 617 4,412 577 5,606

117,730 92,853 56,052 266,635




Neither past due nor impaired

High

Investment Investment

grade grade Unrated Total

2008 2008 2008 2008

US$ '000 US$ '000 US$ '000 US$ '000

Cash and balances with banks 4 1,137 8 1,149

Due from banks 15,000 - - 15,000

Murabaha receivables - 13,807 - 13,807

Investments 127,703 61,282 12,961 201,946

Other assets 1,147 1,656 941 3,744

143,854 77,882 13,910 235,646

Past due but not impaired financial assetsThe following is aging analysis of past due but not impaired assets per class of financial assets:

Less than 30 31 to 61 to More than

days 60 days 90 days 91 days TotalUS$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

31 December 2009Held to maturity - - - - -Other assets - - - - -

Total - - - - -

31 December 2008

Held to maturity 1,650 - - - 1,650 Other assets 313 73 - - 386

Total 1,963 73 - - 2,036




Financial assets whose terms have been renegotiatedThe financial asset whose terms were renegotiated during the year amounted to US$ 11.55 million (2008: nil).

Collateral and other credit enhancementsThe amount and type of collateral depends on an assessment of the credit risk of the counterparty. The types of collateral mainly include charges over real estate properties.

Management monitors the market value of collateral during its review of the adequacy of the allowance for impair-ment losses.

Liquidity RiskLiquidity risk is the risk that an institution will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to cease immedi-ately. For STS Program the Bank manages liquidity risk by entering into liquidity support agreements with the share-holders. Also refer note 7 for additional liquidity lines entered into by the Group

The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undis-counted repayment obligations.

Less than 3 3 to 12 1 to Over

On demand months months 5 years 5 years Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

31 December 2009

Due to Short Term

Sukuk - investors - 123,674 - - - 123,674

Due to banks - 80,475 1,645 27,173 - 109,293

Investment related

commitment 580 - - - - 580

Ijara commitment - - 5,667 22,668 5,667 34,002

Total undiscounted

financial liabilities 580 204,149 7,312 49,841 5,667 267,549




On Less than 3 to 12 1 to 5 Over

demand 3 months months years 5 years Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

31 December 2008

Due to Short Term

Sukuk - investors - 162,047 - - - 162,047

Due to banks - 41,601 1,507 - - 43,108

Due to non bank - 13,691 - - - 13,691

Investment related

commitment 1,080 - - - - 1,080

Ijara commitment - - 1,892 31,565 6,313 39,770

Total undiscounted financial liabilities

1,080 217,339 3,399 31,565 6,313 259,696

Market riskMarket risk is the risk of loss arising from the adverse movement in the level of market prices or rates. The market risk components are foreign exchange risk, profit rate risk and equity risk. The Group’s policy guidelines for market risk have been vetted by the Board of Directors in compliance with the rules and guidelines provided by the Central Bank of Bahrain.

The Group’s principal investments activity focuses on the GCC countries, a region whose dynamics the Group com-prehends well and where the Group has a better understanding of the inherent risks. Investments are made after rigorous qualitative and quantitative analysis, and where the desired risk-return objectives are met. A healthy diversi-fication across industry sectors is maintained within the investments.

i. Foreign exchange riskThis risk refers to the adverse exchange rate movements on foreign currency positions taken by the Group. Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group considers United States Dollar as its functional currency. At the balance sheet date, the Group does not have any material assets / liabilities in foreign currencies.

ii. Profit rate riskProfit rate risk refers to the potential impact on the Group’s net income or net income margin of equity caused by unex-pected changes in rate of returns. Profit rate risk is mitigated by adopting the floating-profit rate approach through close monitoring of the secondary market trading of bonds and prevailing market expectations on profit rates and yields. The Group’s policy is to measure and manage its profit rate sensitivity positions to ensure that the Group’s profit rates are optimised and its long-run earning power sustained. The Group reviews the volatility of its assets and liabilities portfolio using appropriate tools and techniques.




ii. Profit rate risk (continued)

The effect on income solely due to reasonably possible immediate and sustained changes in profit return rates, affecting both floating rate assets and liabilities and fixed rate assets and liabilities are as follows:

2009 2008

US$ ‘000 US$ ‘000

Change in Effect on Effect on

rate net profit net profit

1% (286) 359 (1%) 286 (359)

iii. Equity riskEquity risk refers to the adverse movements in the price of equities on equity positions. Equity position is marked to the market prices and monitored by the Risk Management Unit and reported to the Risk Management Committee. Risks arising from dealing and investment activities are managed by the establishment of limits that include trading limits, counterparty limits, as well as product and sub-product limits, i.e. permissible acquisition of BBB rated sukuk and above.

Equity price risk arises from the change in fair values of equity investments. The Bank has investments of US$ 5.5 million (2008: US$ 1.7 million) whose fair values are determined through equity indices.

The effect on net income/loss and equity (as a result of a change in the fair value of equity instruments held for trading at 31 December 2009 and 31 December 2008) due to a reasonably possible change in equity indices, with all other variables held constant, is as follows:

Market indicesChange in Effect on Effect on Effect on Effect on

equity price net income equity net income equity% US $ ‘000 US $ '000 US $ ‘000 US $ ‘000

2009 2009 2008 2008

Dubai International

Financial Exchange (20) (19) (256) (19) (235)Saudi Stock Exchange (TADAWUL) (20) - (108) - (114)Bahrain Stock Exchange (20) (90) (737) - -

The Group has US$ 4.4 million (2008: US$ 10.3 million) of investments in funds held as available for sale through equity have not been revalued as their fair value could not be reliably estimated.




Operational RiskThis risk is defined as the risk of loss arising from inadequate or failed internal processes, people and systems and external events. In managing this risk, a dedicated team has been established within the Bank to undertake the identification, assessment and measurement, establishing a control framework, monitoring and reporting of operational risks.

20 SEGMENTAL INFORMATION

The activities of the Group are performed on an integrated basis. Therefore, any segmentation of operating income, expenses, assets and liabilities is not relevant. As such, operating income, expenses, assets and liabilities are not segmented.

The Group operates solely in the Kingdom of Bahrain and, as such, no geographical segment information is pre-sented.

21 FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instrumentsFinancial assets and financial liabilities carried on the consolidated balance sheet include cash and balances with bank, murabaha receivables, ijarah receivable, mudaraba receivable, due from banks, financing receivable, inves-tments, a portion of other assets, due to short term sukuk - investors, due to banks, due to non banks and a portion of other liabilities.

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair value estimates.

The estimated fair value of the Group financial instruments are not significantly different from the carrying value as of 31 December 2009 and 31 December 2008 except for available-for-sale investments amounting to US$ 4.4 million (2008: US$ 10.3 million) are carried at cost less impairment due to lack of suitable methods for arriving at a reliable fair value for these investments.

22 CAPITAL ADEQUACY

The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic condi-tions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.




22 CAPITAL ADEQUACY (continued)The classification of the Group’s capital in accordance to the regulatory requirements is as follows:

2009 2008US$ '000 US$ '000

Tier 1 Capital 58,140 53,070Tier 2 Capital 86 -Total Deductions - -Total Eligible Capital 58,226 53,070

The Bank obtained exemption from the Central Bank of Bahrain for certain large exposures which are otherwise required to be deducted from the total eligible capital for capital adequecy purposes.

To assess its capital adequacy requirements in accordance to the CBB requirements, the Group adopts the standard-ized approach for its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardized Measurement Approach for its Market Risk.

Total Credit Risk Weighted Assets 200,024 216,266Total Market Risk Weighted Assets 1,600 88Total Operational Risk Weighted Assets 24,459 18,026

Total Regulatory Risk Weighted Assets 226,083 234,380Capital Adequacy Ratio 25.75% 22.64%

23 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

During the year there were no earnings realised by the Group from transactions which were not permitted by Shari’a.

24 COMMITMENTS

The Group has the following commitments:2009 2008

US$ '000 US$ ‘000Investment related commitment 580 1,080

Ijara commitment 26,525 26,525

The Ijara commitment represents Ijara agreement entered with certain financial institutions for the Group's Head-quarter.

25 SOCIAL RESPONSIBILITYThe Group discharges its social responsibilities through donations to charitable causes and organisations.


PUBLIC DISCLOSUREBasel ll, Pillar lll Disclosures

31st December 2009 (unaudited)

CONTENTS Page

1. Background 57

2. Capital Adequacy 57

3. Risk Management 59

3.1 Bank wide Risk Management objectives 59 3.2 Strategies, Processes and internal controls 60 3.3 Structure and Organization of Risk Management Function 61 3.4 Risk Measurement and Reporting System 61 3.5 Credit Risk 61 3.6 Market Risk 69 3.7 Operational Risk 71 3.8 Equity Positions in the Banking Book 73 3.9 Liquidity Risk 74 3.10 Profit Rate Risk 76 3.11 Corporate Govrnance and Transperancy 79


1 BACKGROUND The Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”) requirements outlined in its Public Disclosure Module (“PD”), Section PD-1: Annual Disclosure requirements, CBB Rule Book, Volume II for Islamic Banks. Rules concerning the disclosures under this section are applicable to Liquidity Management Centre B.S.C. (c) (the ”Bank”) being a locally incorporated Bank with a Wholesale Islamic Investment Banking license, and its subsidiary together known as (the “Group”).

The Board of Directors seeks to optimize the Bank’s performance by enabling the various group business units to realize the Group’s business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and the Group risk policy framework.

2 CAPITAL ADEQUACY

The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that it maintains healthy capital ratios in order to support its business and to maximize shareholders’ value.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities.

The Bank’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business. Current and future capital requirements are determined on the basis of growth expectations of the business and future sources and uses of funds. To assess its capital adequacy requirements in accordance with CBB regulations, the Group adopts the Standardized Approach for its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardized Measurement Approach for its Market Risk.

Table – 1. Capital Structure (PD-1.3.12, 1.3.13,1.3.15) *The following table summarizes the eligible capital after deductions for Capital Adequacy Ratio (CAR) calculation

Tier 1 Tier 2USD’000 USD’000

Components of capitalIssued and fully paid ordinary shares 51,000 - General reserves 2,226 - Legal / statutory reserves 2,226 - Other reserves 140 - Retained profit brought forward 2,224 - Unrealized gains arising from fair valuing equities- through income of statement- (45% only) 2,983 - Less: - Unrealized gross losses arising from fair valuing equity securities 2,659 - Tier 1 Capital before PCD deductions 58,140 - Unrealized gains arising from fair valuing equities - though equity (45% only) 86 Tier 2 Capital before PCD deductions 86 Total available capital 58,226 Tier 1 and Tier 2 eligible capital 58,140 86 TOTAL ELIGIBLE CAPITAL 58,226

Basel ll, Pillar lll Disclosuresfor the year ended 31st December 2009 (unaudited)


2 CAPITAL ADEQUACY (continued)

* For the purposes of guidance we have cross referenced every table with the relevant para number of the Central Bank of Bahrain’s Public Disclosures Module.

Table – 2. Capital requirement by type of Islamic financing contracts (PD-1.3.17)

The following table summarises the amount of exposures subject to standardized approach of credit risk and related capital requirements by type of Islamic financing contracts;

Amount ofexposures

Risk weighted

assets Capital

requirementsUSD’000 USD’000 USD’000

Type of Islamic Financing Contracts

Due from bank 23,200 4,640 557

Mudaraba 8,000 1,600 192

Ijarah 10,000 - -

Financing receivables 15,000 15,000 1,800

Investment in Sukuk 206,612 132,509 15,901

262,812 153,749 18,450

Table – 3. Capital requirement for Market Risk (PD-1.3.18)

The following table summarises the amount of exposures subject to standardized approach of market risk and relatedcapital requirements

Self Financed

USD’000

Market Risk - Standardised Approach

Foreign exchange risk 128

Total of Market Risk - Standardised Approach 128

Multiplier 12.5

1,600

Eligible Portion for the purpose of the calculation 100%

RWE to be used in CAR Calculation 1,600

TOTAL MARKET RISK EXPOSURES 1,600

The minimum capital requirement for the above Market risk exposure is USD 192 thousand.



2 CAPITAL ADEQUACY (continued)

Table – 4. Capital Requirements for Operational Risk (PD-1.3.19) & (PD-1.3.30 (a & b)) The following table summarises the amount of exposures subject to basic indicator approach of operational risk and related capital requirements;

Capital charge USD’000

Indicators of operational riskAverage Gross income 13,045

Multiplier 12.5

163,063

Eligible Portion for the purpose of the calculation 15%

TOTAL OPERATIONAL RISK EXPOSURE 24,459

The minimum capital requirement for the above Operational risk exposure is USD 2,935 thousand.

Table – 5. Capital Adequacy Ratios (PD-1.3.20)The following table summarises the Capital Adequacy Ratios for total capital and Tier 1 capital;

Total capitalratio

Tier 1 capitalratio

Top consolidated level 25.75% 25.72%

3 RISK MANAGEMENT

3.1 BANK-WIDE RISK MANAGEMENT OBJECTIVES

Risk management is an integral part of the Group’s decision-making process. The management committee and executive committees guide and assist with overall management of the Group’s balance sheet risks. The Group manages exposures by setting limits/strategies approved by the Board of Directors.

The risk management philosophy of the Bank is to identify, capture, monitor and manage the various dimensions of risk with the objective of protecting asset values and income streams such that the interest of the Bank’s shareholders are safeguarded, while maximizing the returns intended to optimize the Bank’s shareholder return while maintaining risk exposure within self-imposed parameters.




3.1 BANK-WIDE RISK MANAGEMENT OBJECTIVES (continued)

In addition to satisfying the minimum regulatory capital requirements of CBB, the Bank seeks to constantly identify and quantify, to the extent possible, the various risks that are inherent in the normal course of its business and maintain appropriate internal capital levels and consequently has developed an ICAAP framework. The objective of the Bank’s ICAAP is to ensure that adequate capital is retained at all times to support the risks the Bank undertakes in the course of its business.

3.2 STRATEGIES, PROCESSES & INTERNAL CONTROLS

3.2.1 Credit Risk Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial loss. The Group controls credit risk by monitoring credit exposures, and continually assessing the creditworthiness of counterparties.

3.2.2 Market Risk The Bank proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques. The Bank carries out stress testing to assess the impact of adverse market conditions on its market risk sensitive portfolio.

3.2.3 Operational Risk The Bank has established a self assessment process necessary for identifying and measuring its operational risks. In addition to that, the Bank has conducted a Risk and Control Self Assessment (“RCSA”) exercise, which has undertaken the Bank’s business lines and their critical activities.

The Bank has established a clear segregation of duties, through documentation and implementation of policies and procedures. This ensures objectivity, security and avoids conflicts of interest. Maker checker concept and dual eye principles are applied across the Bank, where possible.

3.2.4 Equity Risk in the Banking Book Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the value of individual stocks. The equity price risk exposure arises from the Group’s investment portfolio. The Group manages and monitors its equity risk using investment limits.

3.2.5 Profit Rate Risk Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments. The Group measures the profit rate risk by carrying out re-pricing gap analysis. This is further supported by limits put in place by the Bank.

All the above strategies used have been effective throughout the reporting period.




3.3 STRUCTURE & ORGANIZATION OF RISK MANAGEMENT FUNCTION

Risk Management Structure includes all levels of authorities, organizational structure, people and systems required for the smooth functioning of risk management processes in the Bank. The responsibilities associated with each level of risk management structure and authorities include the following:

a. The Board retains ultimate responsibility and authority for all risk matters, including:

b. Delegating authority to Executive Committee, Investment and Credit Committee, the Chief Executive Officer and further delegation to the management to approve and review.

3.4 RISK MEASUREMENT AND REPORTING SYSTEM

Based on risk appetite of LMC, the Bank has put in place various limits. These limits have been approved by the Board of Directors. Any limit breaches are reported to the respective senior management committees and the Board by the Credit and Risk Management Department (“CRMD”). The limits are reviewed and revised at least on annual basis or when is deemed required.

The Bank has developed a risk reporting process that generates various types of reports which has enhanced the monitoring process of the Bank.

3.5 CREDIT RISK

3.5.1 IntroductionCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending and investment activities. The Group controls credit risk by monitoring credit exposures, and continually assessing the creditworthiness of counterparties. Financing contracts are mostly secured by collateral in form of mortgage financed or other tangible and intangible securities.

Board of Director

Risk Management Committee

Credit and Risk Division

Risk Department

Market Risk

Compilance Department

Operational Risk

CEO

Credit Department

Credit Risk




3.5 CREDIT RISK (continued)3.5.2 Past Due and Impaired Islamic Financing The Group defines non-performing facilities as the facilities that are overdue for period of 90 days or more. These exposures are placed on a non-accrual status with income only being recognized to the extent that it is actually received. It is the Group’s policy that when an exposure is overdue for a period of 90 days or more, the whole financing facility extended is considered as past due, not only the overdue installments/payments.

3.5.3 External Credit Assessment Institutions The Bank relies on external ratings for rated counterparties and issuances. The Bank uses Standard & Poor’s, Fitch, Moody’s and Capital Intelligence ratings for such counterparties. These ratings are used for risk assessment and calculation of risk weighted equivalents.

3.5.4 Concentration Risk Concentration risk is the credit risk stemming from not having a well diversified credit portfolio, i.e. being overexposed to a single customer, industry sector or geographic region. As per CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s prior approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15% of the regulatory capital base.

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

3.5.5 Credit Risk Mitigation Credit risk mitigation refers to the use of a number of techniques, like collaterals to mitigate the credit risks that the Bank is exposed to. Credit risk mitigants reduce/transfer the credit risk by allowing the Bank to protect itself and reduce its loss in case of non-performance by counterparty.

Generally, the Bank participates in syndicated credit facilities/ extends credit facilities only where supported by adequate tangible collateral security and/or audited financials. Facilities may be considered without adequate tangible collateral security, when audited financials reveal satisfactory financial position/repayment ability and the facilities are properly structured and supported by assignments, guarantees, etc. as appropriate.

The majority of the Bank’s portfolio is backed by real estate properties and collateral is for the entire sukukholders and its not specific to the bank.




3.5 CREDIT RISK (continued)

3.5.5 Credit Risk Mitigation (Continued)

3.5.5.1 General Policy Guidelines of Collateral Management

Acceptable Collaterals: The Bank has developed guidelines for acceptable collaterals. Assets offered by obligor must meet the following criteria to quantify as acceptable collateral:

a. Assets must be maintaining their value, at the level prevalent at inception, until maturity date of the facility granted (over collateralization).

b. Such assets should be convertible into cash, if necessary. c. There should be a reasonable market for the assets (marketability).d. The Bank should be able to enforce its rights over the asset if necessary (enforceability).

Ownership: Prior to valuation or further follow up on the offered collateral, Credit Administration ensures satisfactory evidence of the borrower’s ownership of the assets through though due diligence.

Valuation: All assets offered as collateral are valued by a reputable external appraisers (real estate related collateral).

a. Valuation of Shares: shares are valued at the quotes available from stock exchanges.

b. Valuation of Funds: funds are valued based on NAV received from fund manager.

3.5.5.2 Custody/ Collateral Management The assets, or title to the asset, are maintained in the Bank’s custody or with custodian approved by the Bank. The Credit Administration Department obtain confirmation of the assets held with each custodian.

3.5.6 Counterparty Credit Risk The Bank has adopted the Standardized Approach to allocate capital for counterparty credit risk. The Bank has put in place an internal counterparty limit structure which is based on internal/external ratings for different types of counterparties and in line with CBB guidelines.





3.5.6 Counterparty Credit Risk (Continued)

Table – 6. Credit Risk Exposure (PD-1.3.23 (a))The following table summarises the amount of gross funded credit exposure and average gross funded exposures over the period allocated in own capital. The average gross funded exposure is calculated on month end balances.

Own capital

Total grosscredit

exposureUSD’000

Averagegross

exposureover the

periodUSD’000

FundedCash and balances with banks 3,676 2,674

Due from banks 23,200 12,683

Mudaraba receivable 8,000 8,000

Ijarah receivables 10,000 5,714

Murabaha receivables - 3,452

Financing receivable 15,000 15,000

Available-for-sale investments - Sukuk 19,170 19,924

Held to Maturity investments - Sukuk 186,063 181,220

Other assets 5,606 4,665

Total 270,715 253,332

Unfunded / commitmentsIjara commitment 26,525 26,525

Investment commitment 580 580

Total 27,105 27,105

The Group holds a collateral of USD 2,570 thousand (after applying 30% haircut) against a fee income receivable

under other assets of USD 2,800 thousand, which the Group will release upon receipt of the amount receivable.





3.5.6 Counterparty Credit Risk (Continued)

Table – 7. Credit Risk – Geographic Breakdown (PD-1.3.23(b))

The following table summarises the geographic distribution of exposures, broken down into significant areas by major types of credit exposure;

Own capital*Geographic area

Bahrain USD’000

GCC USD’000

Others USD’000

Total USD’000

Cash and balances with banks 1,920 - 1,756 3,676 Due from banks 23,200 - - 23,200 Mudaraba receivable 8,000 - - 8,000 Ijarah receivables 10,000 - - 10,000 Financing Receivable 15,000 - - 15,000 Available-for-sale investments - Sukuk - 19,170 - 19,170 Held to Maturity investments - Sukuk 66,621 103,528 15,914 186,063 Other assets 1,441 3,692 473 5,606

Total 126,182 126,390 18,143 270,715

* Geographical distribution of exposure into significant areas by major type of credit exposure is based on counterparty/obligor country of incorporation.





Table – 8. Credit Risk – Industry Sector Breakdown (PD-1.3.23(c)) The following table summarises the distribution of exposures by industry, broken down into major types of credit exposure;

Own capitalIndustry sector

Banks and Construction

financial and building

institutions Government Real estate materials Others Total

USD’000 USD’000 USD’000 USD’000 USD’000 USD’000

Funded

Cash and balances with banks 3,676 - - - - 3,676

Due from banks 23,200 - - - - 23,200

Mudaraba receivable 8,000 - - - - 8,000

Ijara receivables - 10,000 - - - 10,000

Financing receivable - - 15,000 - - 15,000

Available-for-sale investments - Sukuk 5,712 - 13,458 - - 19,170

Held to Maturity investments - Sukuk 18,825 16,313 109,737 25,860 15,328 186,063

Other assets 560 280 3,987 477 302 5,606

Total 59,973 26,593 142,182 26,337 15,630 270,715

Unfunded / commitments

Ijara commitment 26,525 - - - - 26,525

Investment commitment - - 580 - - 580

Total 26,525 - 580 - - 27,105

Table – 9. Credit Risk – Intra-group transactions (PD-1.3.23(d))The balances of major transactions with the subsidiary are as follows:

Own capitalBalance

as of31 December 2009

USD’000

Balance sheet

Investment in the Short Term Sukuk Centre 101,300

Payable to the Short Term Sukuk Centre (91)

Fee receivable from the Short Term Sukuk Centre 4,409

Total 105,618





The income and expenses arising from dealing with the subsidiary included in the consolidated statement of income are as follows:

Year ended31 December 2009

Statement of income USD’000

Income from investment in the Short Term Sukuk Centre 967

Agency Fee Income 5,973

Total 6,940

Table – 10. Credit Risk – Concentration of Risk (PD-1.3.23(f)) The following table summarises the disclosure for concentration of risk to individual counterparties;

Own capitalUSD’000

Counterparties

Counterparty # 1 * 32,579












Total 189,141

* The exposure is in excess of the 15% individual obligor limit




3.5 CREDIT RISK (continued) Table – 11. Credit Risk – Residual Contractual Maturity Breakdown (Own Capital) (PD-1.3.23(g)) The following table summarizes the residual contractual maturity of own capital breakdown of the whole credit portfolio, broken down by major types of credit exposure;

Own capitalMaturity breakdown

Up to OneMonth

USD’000

1-3month

USD’000

3-6month

USD’000

6-12month

USD’000

1-3years

USD’000

3-5 years

USD’000

5-10years

USD’000

No fixedmaturityUSD’000

TotalUSD’000

Cash and balances with banks 3,676 - - - - - - - 3,676

Due from Banks 23,200 - - - - - - - 23,200

Mudaraba receivable 8,000 - - - - - - - 8,000

Ijara receivables - - - - - 10,000 - - 10,000

Financing receivable - 7,500 - - 7,500 - - - 15,000

Available-for-sale investments - Sukuk - 5,218 - 1,632 12,320 - - - 19,170

Held to Maturity investments - Sukuk 15,000 - 13,668 17,000 113,160 27,235 - - 186,063

Other assets 372 1,076 459 - - - - 3,699 5,606

Total 50,248 13,794 14,127 18,632 132,980 37,235 - 3,699 270,715

Table – 12. Credit Risk – Impaired Loans, Past Due Loans and Allowances (Own capital by industry and geographic sector) (PD-1.3.23(h&i))

The following table summarises the own capital impaired financing contracts and allowances disclosed by major industry and geographic sector;

Own capital

ImpairedIslamic

financingcontractsUSD’000

Aging of Past Due Allowances

Balance at the beginning

of the yearUSD’000

Charges during the

yearUSD’000

Balance at the end of

yearUSD’000

Less than 90 days

USD’000

3 monthsto 1 yearUS$ 000

1 year to3 years

US$ 000

Banks and financial institutions (GCC countries) 6,868 1,700 1,700 68 2,040 680 2,720

General allowances (not specific to a geographic area)* - - - - 700 310 1,010

Total 6,868 1,700 1,700 68 2,740 990 3,730

* General allowance represents collective impairment provision against exposures which, although not specifically identified, have a greater risk of default then when originally granted.





Table – 13. Credit Risk – Restructured Islamic financing contracts (PD-1.3.23(j))

The following table summarises the restructured islamic financing contracts, provisions and the effect on present and future earnings

Own capital

Impact of restructured Islamic financing contracts on

Balance Present andas of future

31 December 2009 Provisions

earnings

USD’000 USD’000 USD’000

Held to Maturity investments - Sukuk 11,551 - 1,026*

Total 11,551 - 1,026

* The balance is the additional profit of USD 1,026 thousand due to increase in profit rate from, 6 month LIBOR + 3%, to fixed rate of 6% in year 4, 7% in year 5 and 8% in year 6 which is an extended one year to the maturity of the facilitiy.

3.6 MARKET RISK Market risk is the risk that arises from fluctuations in market risk factors that include, inter alia, profit rates, currency risk and equity prices and will have a negative impact on the bank income and/or will decrease the value of its.portfolios.

Profit Rate Risk Profit rate risk arises from a) mismatch of maturities of assets and liabilities b) Basis Value Risk c) Profit rate curve risk. The bank measures profit rate risk through the following methodologies: a) Gap analysis: where the assets and liabilities are classified into time bands based on the maturity in case of fixed rate instruments or re-pricing dates for floating rate instruments. b) Economic value of equity-duration gap: this measures the loss in value of the portfolio due to change in profit rates.

The Bank manages such risk by ensuring that minimum maturity mismatch is achieved between its assets and liabilities and through fixed rates on its assets and liabilities. Financial controls department monitors profit rate risk regularly and submits monthly report to the Asset Liability Committee.




3.6 MARKET RISK (Continued)

Currency risk Currency risk represents fluctuations in exposures held by the group in currencies other than the US dollar. The Group may engage, in normal course of business, in transactions denominated in currencies other than its functional currency.

Equity Price Risk The Bank has guidelines in place to manage equity price risk. Examples of these guidelines include:

a) Equity investment is managed at the preacquisition stage by understanding its performance through different scenarios.

b) Specific deal structure to maximise investment rate of return.

c) Portfolio approach through geographical and industrial diversification.

3.6.1 Market Risk Strategy The Bank’s Board is responsible for approving and reviewing (at least annually), the risk strategy and significant amendments to the risk policies. The Banks senior management is responsible for implementing the risk strategy approved by the Board, and continually enhancing the policies and procedures for identifying, measuring, monitoring and controlling risks.

In line with the Bank’s risk management objectives and risk tolerance levels, the specific strategies for market risk management include:

1. The Bank shall manage its market risk exposure by evaluating each new product/ activity with respect to the market risk introduced by it;

2. The Bank shall proactively measure and continually monitor the market risk in its portfolio;

3. The Bank shall at all time hold sufficient capital in line with the CBB Pillar 1 regulatory capital requirements;

4. The Bank shall establish a limit structure to monitor and control the market risk in its portfolio. These limits shall include position limits and maturity limits;

5. The Bank shall carry out stress testing periodically using the worst case scenarios to assess the effects of changes in the market value due to changing market conditions;

6. The Bank shall mainly match the amount of floating rate assets with floating rate liabilities; and

7. The Bank shall clearly identify the foreign currencies in which it wishes to deal in and actively manage its market risk in all foreign currencies in which it has significant exposure.

3.6.2 Limits Monitoring The Treasury Department and Risk & Compliance Department monitor the risk limits for each transaction, ensure that the limits are well within set parameters and report periodically to top management.




3.6.3 Breach of Limits In case limits are breached, an approval from the concerned department (Executive Committee and Risk Management Committee) is obtained and accordingly the Board will be advised. The limits are revised at least annually or when deemed required.

Table – 14. Market Risk Capital Requirements (PD-1.3.27 (b)) The following table summarizes the capital requirement by each category of market risk;

Foreign exchange

risk USD’000

Foreign exchange risk capital requirements 192 Maximum value 209 Minimum value 187

3.7 OPERATIONAL RISK

3.7.1 Introduction Operational risk is the risk of loss arising from inadequate information systems, technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems that may result in unexpected losses or damage Bank’s reputation.

3.7.2 Sources of Operational risk The different sources of operational risks faced by the Bank can be classified broadly into the following categories.

People Risk which arises due to staffing inadequacy, unattractive remuneration structure, lack in staff development policies, lack in procedures for appointment, unhealthy professional working relationship and unethical environment.

Processes Risk which arises due to inadequate general controls, inadequate application controls, improper business and market practices and procedures, inappropriate/inadequate monitoring and reporting.

Systems (Technology) Risk which arise due to integrity of information - lacking in timelines of information, omission and duplication of data; hardware failures due to power surge, obsolescence, low quality programmes.

3.7.3 Operational Risk Management Strategy As a strategy the Bank has identified the sources of operational risks in coordination with each business unit. The Bank has carried out Risk and Control Self-Assessments (“RCSA”) to identify the operational risks it is exposed to.




3.7 OPERATIONAL RISK (continued)

3.7.3 Operational Risk Management Strategy (continued)

The Bank on a continuous basis:

a. assesses the effectiveness of controls associated with identified risks.

b. regularly monitors operational risk profiles and material exposures to losses.

c. identifies stress events and scenarios to which it is vulnerable and assess their potential impact, and the probability of aggregated losses from a single event leading to other risks.

3.7.4 Operational Risk Monitoring and Reporting The internal monitoring and reporting process ensures a consistent approach for providing pertinent information to Senior Management for the quick detection and correction of deficiencies in the policies, processes and procedures for managing operational risk through ongoing, periodic reviews.

The objective of the reporting process is to ensure relevant information is provided to senior management and the Board to enable the proactive management of operational risk. The process ensures a consistent approach for providing information that enables appropriate decision making and action taking.

3.7.5 Operational Risk Mitigation and ControlThe business units, in consultation with Risk and Compliance Department will determine all material operational risks and decide the appropriate procedures to be used to control and/or mitigate the risks.

For those risks that cannot be controlled, the business units in conjunction with Risk and Compliance Department will decide whether to accept the risks, reduce the level of business activity involved, transfer the risk outside the Bank or withdraw from the associated activity completely. Risk and Compliance Department facilitates the business units in co-developing the mitigation plans.

3.7.6 Business Continuity Plan The Bank has developed a comprehensive business continuity plan detailing the steps to be taken in the event of extreme conditions to resume the Bank’s operations with minimum delay and disturbance. Elements of contingency plans and disaster recovery processes include operating systems, physical space, telecommunications and resources.

Risk and Compliance Department ensures that the BCP is kept up to date and will be tested once a year in a simulated environment to ensure that it can be implemented in emergency situations and that the management and staff understand how it is to be executed. Results of this testing conducted by Risk and Compliance Department is evaluated by the Credit Manager and presented to the Executive Committee/Board for evaluation.

The plan is reviewed periodically to assess and incorporate changes in the business and market conditions.




3.8 EQUITY POSITIONS IN THE BANKING BOOK

Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The equity price risk exposure arises from the Group’s investment portfolio. The equity position that the Group is holding is for capital gain purposes.

The accounting policies, including valuation methodologies and their related key assumptions, are disclosed in the consolidated financial statements.

Table – 15. Equity Position Risk in Banking Book (PD-1.3.31 (b) (c) & (f))

The following table summarises the amount of total and average gross exposure of equity based financing structures by types of financing contracts and investments.

Total * Average Riskgross gross Publicly weighted Capital

exposure exposure traded assets RequirementUSD’000 USD’000 USD’000 USD’000 USD’000

Equity investments 27,606 25,064 5,511 39,589 4,751

Total 27,606 25,064 5,511 39,589 4,751

* Average Balances are computed based on month end balances.

Table – 16. Equity Gains or losses in Banking Book (PD-1.3.31 (d) and (e))The following table summarizes the cumulative realized and unrealized gains or (losses) during the year;

USD’000Cumulative realized gains (losses) arising from sales or

liquidations during year 65 Total unrealized gains (losses) recognized in

the balance sheet but not through P&L (1,123)Unrealized losses included in Tier One Capital (1,314)Unrealized gain included in Tier Two Capital* 191

* This unrealised gain is discounted by 55% before including it in Tier Two capital.




3.9 LIQUIDITY RISK

3.9.1 IntroductionThe liquidity risk is defined as “the risk that the Bank will be unable to meet its obligations as they come due because of an inability to obtain adequate funding or to liquidate assets”.

3.9.2 Sources of Liquidity Risk

The sources of liquidity risk can broadly be categorized in the following:

a. Funding Risk is the risk of not being able to fund net outflows due to unanticipated withdrawal of credit lines;

b. Call Risk is the risk of crystallization of a contingent liability; and

c. Event Risk is the risk of rating downgrades or other negative public news leading to a loss of market confidence in the Bank.

3.9.3 Bank’s Funding Strategy The Board reviews the funding strategy on an annual basis and amends the existing strategy, as deemed required. For this purpose, all business units advise the Treasurer of their projected liquidity requirements and contributions at the start of each year as part of annual budgeting process.

The funding strategy highlights any anticipated liquidity shortfalls, the funding requirements to finance these shortfalls and their impact on the balance sheet. The strategy also includes a liquidity contingency plan that deals with stressed scenarios and outlines an action plan that can be taken in the event of a loss of market liquidity.

3.9.4 Liquidity Risk Strategy The Bank monitors the liquidity position by comparing maturing assets and liabilities in different time buckets of up to 1 month, 1-3 months, 3-6 months, 6 months to 1 year, 1-3 years, 3-5 years, 5-10 years and no fixed maturity. The Bank carries out stress testing periodically using the worst case scenarios to assess the effects of changes in market conditions on the liquidity of the Bank.

The Banks has established a contingency liquidity plan to meet urgent liquidity requirements in stressed conditions that addresses how funding liquidity would be managed if either their specific financial conditions were to decline or broader conditions created a liquidity problem. The plan is reviewed and updated regularly. The Treasury Department, in conjunction with Risk and Compliance Department periodically reviews/updates (at least annually) the liquidity risk strategy before presenting to the Excom and the Board for approval.




3.9 LIQUIDITY RISK (continued)

The Bank uses a combination of different limits to ensure that liquidity is managed and controlled in an optimal manner. The Bank has set the following limits for monitoring liquidity risks:

a. Liquidity Gap limits; and

b. Liquidity Ratio limits.

3.9.5 Contingency Funding Plan The Bank has developed a contingency funding plan which details procedures to be followed by the Bank, in the event of a liquidity crisis or a situation where the Bank faces stressed liquidity conditions. The contingency funding plan is an extension of day to day liquidity management and involves maintenance of an adequate amount of liquid assets and management of access to funding resources. The Asset Liability Committee members discuss and monitor the situation over regular time-intervals to ensure sufficient liquidity in the Bank.

The group’s funding guidelines include

• Themobilizationandplacementsofshort-termfunds,MudarabaandMurabahatransactionswillbetheresponsibility of the Treasury;

• AllfundingobjectiveswouldbealignedtothestrategicobjectivesoftheBank;

• Thecomposition,characteristicsanddiversificationoftheBank’sfundingstructurewillbemonitoredbyCreditand Investment Committee and executed by the Treasury;

• Treasurywillmaintainthecounterpartyrelationshipstoobtainthenecessarylinesoffunding;

• CreditandInvestmentCommitteewillmonitortheconcentrationoffundingsourcesacrossproductsandcounterparties and effect measures to mitigate undue concentrations; and

• Treasurywillimplementthedealswithintheapprovedguidelines,includingtheapprovedproductsandthecounterparties.




Table – 17. Equity Position in Banking Book Liquidity Ratios (PD-1.3.37) The following table summarizes the liquidity ratios;

31 December 31 December 31 December 31 December 31 December2009 2008 2007 2006 2005

(Audited) (Audited) (Audited) (Audited) (Audited)Short term assets

(maturity of less than 1 year) / Short term liabilities (maturity of less than 1 year) 0.5 0.2 0.2 0.2 1

Commodities Murabaha /

Total Assets - 5% 4% 14% 13%

Liquid Assets / Total Assets 12% 11% 5% 14% 14%

Liquid Assets / Total Assets * 33% 40% 29% 22% 14%

Due to Short Term Sukuk -

investors/ Total Assets 41% 58% 71% 72% 78%

* The management evidenced that certain sukuk are tradable or liquid and the ratio is calculated after including the tradable sukuk as liquid assets.

3.10 PROFIT RATE RISK

3.10.1 Introduction Profit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the sources of finance.

3.10.2 Sources of Profit Rate Risk The different profit rate risks faced by the Bank can be classified broadly into the following categories.

a. Re-pricing risk which arises from timing differences in the maturity (for fixed rate) and re-pricing (for floating rate) of assets, liabilities and off balance sheet positions. As profit rates vary, these re-pricing mismatches expose the Bank’s income and underlying economic value to unanticipated fluctuations




3.10.2 Sources of Profit Rate Risk (Continued)

b. Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on the Bank’s income and/or underlying economic value.

c. Basis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise to unexpected changes in the cash flows and earnings spread between assets, liabilities, and off balance sheet instruments of similar maturities or re-pricing frequencies.

d. Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets financed by the liabilities, when the return on assets is under performing as compared with competitors rates.

3.10.3 Profit Rate Risk Strategy The fair value of financial assets may be affected by current market forces including profit rates. The Bank recognizes income on certain of its financial assets on a time-apportioned basis. As a strategy the Bank:

a. has identified the profit rate sensitive products and activities it wishes to engage in;

b. has established a limit structure to monitor and control the profit rate risk of the Bank;

c. measures profit rate risk through establishing maturity/re-pricing schedule that distributes profit rate sensitive assets, liabilities and off-balance sheet items in pre-defined time bands according to their maturity; and

d. makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book.

3.10.4 Profit Rate Risk Measurement Tools

The Bank uses the following tools for profit rate risk measurement in the banking book:

a. Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities of the banking book in absolute terms; and

b. Basis Point Value (“BPV”) analysis which is the sensitivity measure for all profit rate priced products and positions. The BPV is the change in net present value of a position arising from a 1 basis point shift in the yield curve. This quantifies the sensitivity of the position or portfolio to changes in profit rates.

3.10.5 Profit Rate Risk Monitoring and Reporting The Financial Controls Department monitors these limits regularly. The Chairman of Credit and Investment Committee reviews the results of gap limits and exceptions, if any, and recommends corrective action to be taken according to authority parameters approved by the Executive Committee.




3.10 PROFIT RATE RISK (continued)

3.10.5 Profit Rate Risk Monitoring and Reporting (Continued)

Table – 18. Profit Rate Risk in Banking Book (PD-1.3.40 (b)) The following table summarises the effect on the value of assets, liabilities and economic capital for a benchmark change of 200bp in profit rates;

Effect onEffect on Effect on value ofvalue of value of Economic

Asset Liability CapitalUSD’000 USD’000 USD’000

Upward rate shocks: 3,554 4,126 (572)Downward rate shocks: (3,554) (4,126) 572

Table – 19. Quantitative Indicators of Financial Performance and Position (PD-1.3.9 (b))

The following table summarises the basic quantitative indicators of financial performance for the past 5 years;

31 December 31 December 31 December 31 December 31 December2009 2008 2007 2006 2005

(Audited) (Audited) (Audited) (Audited) (Audited)

Return on average equity 5% 2% 18% 15% 10%

Return on average assets 1% 0% 4% 4% 3%

Cost to Income Ratio 70% 92% 28% 32% 53%




3.11 CORPORATE GOVERNANCE AND TRANSPARENCY

Table – 20. Corporate Governance and Transparency – Board Members’ Profile (PD-1.3.10(b)) The following table summarises the information about the profession, business title, experience in years and the qualifications of each Board member;

Name of Board Member

Profession Business Title Ex/not Ex Dep/Indep

Experience in years

Qualification

Mohammed Tariq Banker ChairmanDependent / Not Executive

31Mathematics at the University of London.

Emad Al Monayea Banker

Deputy Chairman, Chairman of Executive Committee and Nomination and RemunerationCommittee

Dependent / Not Executive

26Bachelor’s Degree from Kuwait University.

Khalid Al Dossari Banker Board Member, Chairman of the Audit Committee and RiskManagement Committee


27

Certified Public Accountants, CPA, from Oregon Board of Accountancy, Associate Degree from University of Bahrain.

Ali AhmedA. Kareem Banker

Board Member, Member of the Executive Committee and Nomination & RemunerationCommittee

Dependent /Not Executive

15

AAD – Associated Accounting Diploma from University of Bahrain and Intermediate Banking Diploma from Bahrain Institute of Banking and Finance.

Abdul Wahab Al Rushood Banker

Board Member, Member of the Audit Committee and RiskManagement Committee


23

Bachelor’s Degree in Mathematics from Western Oregon State College and University of Tampa , USA.

Mubarek El Tayeb El Amin Banker

Board Member, Member of the Executive Committee and Nomination and RemunerationCommittee


27

Certified Public Accountants, CPA, from state of Georgia, Bachelor’s Degree in Accounting from University of Khartoum, Sudan.

No Board member has more than one Directorship of a Retail Bank and a Wholesale Bank.

Remuneration of Board Members and Shari’a Board Members is approved in the AGM after being discussed at the Board level. For all Bank staff there is a performance bonus scheme. Performance bonus is based on staff performance and recommendation of respective departmental heads. The Nomination and Remuneration Committee empowered by the Board approves all fixed and performance bonus schemes for staff and Management.




3.11 CORPORATE GOVERNANCE AND TRANSPARENCY (continued) Table – 21. Corporate Governance and Transparency – Board Committees Profile (PD-1.3.10(b)) The following table summarizes the information about Board Committees, their members and objectives;

Board Committee Members Objective

Board of Directors Chairman Mohammed Tariq

Members• Emad Al Monayea• Abdul Wahab Al Rushood• Mubarek El Tayeb El Amin• Khalid Al Dossari• Ali Ahmed A.Karim

The Board of Directors is responsible for overseeing the management and business affairs of the Bank and making all major policy decisions of the Bank.

Shari’a Supervisory Board Chairman Dr. Hussain Hamed Hassan

Members

• Dr. Abdul Sattar Abu Ghuddah

• Dr. Ajeel Al Nashmi

• Shaikh Adnan Al Qattan

The Shari’a Supervisory Board is an independent body of specialised jurists in Shari’a compliant banking. The Shari’a Supervisory Board is entrusted with the duty of directing, reviewing and supervising the activities of the Group in order to ensure that the Bank is in compliance with Shari’a rules and AAOIFI. The Fatwas and rulings of the Shari’a Supervisory Board is binding on the Bank.

Executive Committee Chairman Emad Al Monayea Members

• Mubarek El Tayeb El Amin

• Ali Ahmed A. Karim

• Ahmed Abbas

The Executive Committee of the Board Considers specific matters delegated to it by the full Board and make recommendations thereon to the Board or decisions based on authorities specifically delegated by the Board. Responsibilities and authorities of the committee are reviewed annually by the Board of Directors.




3.11 CORPORATE GOVERNANCE AND TRANSPARENCY (continued)

Table – 21. Corporate Governance and Transparency – Board Committees Profile (PD-1.3.10(b)) (continued)

Board Committee Members Objective

Audit Committee ChairmanKhalid Al Dossari

Assists the Board in discharging its oversight responsibilities relating to the integrity of the Bank’s financial statements and financial reporting process and the Bank’s systems of internal accounting and financial controls, the annual independent audit of the Bank’s financial statements and all matters related to external and internal auditors, compliance by the Banks with legal and regulatory requirements and compliance with the Bank’s code of conduct.

Member• Abdul Wahab Al Rushood

Nomination and Remuneration Committee

Chairman Emad Al Monayea

Members • Mubarak El Tayeb El Amin • Ali Ahmed A. Karim • Ahmed Abbas

Responsible for identifying individuals to become Board members, developing procedure for remuneration policy for the Board senior management, ensure that compensation offered is competitive, in line with the market and consistent with the responsibilities assigned, leads the Board in its annual review of the Board performance, and recommend to the Board the remuneration policy and special compensation plans.

Risk and Compliance Committee

ChairmanKhalid Al Dossari

Member • Abdul Wahab Al Rushood

Assist the Board in discharging its oversight responsibilities related to establishment of an effective Risk Management and Compliance Framework





BASIC ORGANIZATION STRUCTURE

Board of Director

Chief Executive Officer

Support Services Division Investment Division Structured Finance DivisionCredit & Risk Division

Shair’a Supervisory Board

Shari’a Compliance Unit

Nomination & RemunerationCommittee

Credit Investment Committee

Management Committee

Risk Management Committee

Executive Committee

Audit Committee

Internal Audit Function

There are no restrictions on the transfer of funds or regulatory capital within the group and all investments are made fully complying with the Central Bank of Bahrain approval instructions.

Table – 22. Corporate Governance and Transparency – Executive Members’ Profile (PD-1.3.10(b))

The following table summarizes the information about the profession, business title, experience in years and the qualifications of each Executive member;

Name of Executive Member

Designation Profession Business Title Experience in year

Qualification

Ahmed Abbas CEO Banker Chief Executive Officer

23 Years Bachelor’s Degree in Business and Finance from University of Bahrain

Abbas Ahmadi CIO Banker Chief Investment Officer

29 Years MBA in Management from Henley Management College (UK)

Amer Sadiq EVP - StructuredFinance

Banker Executive VicePresident

13 Years Bachelor’s Degree in Accounting from University of Denver, Colorado, USA

Hussain Merza VP - FinancialControls

Banker Vice President 8 Years ACCA, Bachelor’s Degree in Accounting from University of Bahrain, CIPA




3.11 CORPORATE GOVERNANCE AND TRANSPARENCY (continued) Table – 23. Corporate Governance and Transparency – Board Committees Profile (PD-1.3.10(b))The following table summarizes the information about Board Committees, their members and objectives;

Management Committee Members Objective

Management Committee

ChairmanAhmed AbbasChief Executive Officer

Members• Abbas Ahmadi Chief Investment Officer

• Amer Sadiq Structured Finance

• Hussain Merza Financial Controls

• Leena Sharif Credit & Risk Management

• Faten Amin HR & Administration

• Nadia Jabur Legal Affairs

The Bank has established key management committees to oversee particular aspects of the business.





Management Committee Members Objective

Credit & Investment Committee (CICOM)

Chairman Ahmed AbbasChief Executive Officer

Members• Abbas Ahmadi Chief Investment Officer

• Amer Sadiq Structured Finance

• Leena Sharif Credit & Risk Management

• Hussain Merza Financial Controls

• Nadia Jabur Legal Affairs

The Credit & Investment Committee is established to oversee an efficient and comprehensive due diligence transition of an investment transaction from the point of origination to the point of closing, including all internal and external approval requirements and financial and legal due diligence. The CICOM also ensures that management’s handling of credit risk complies with Board decisions about acceptable levels of risk and minimum pricing levels. The functions of the committee with regard to credit activities include appraisal and approval of credit applications based on limits set by the Board. The Committee also monitors and reviews non-performing portfolio and ensures that adequate loss provisions are held against delinquent accounts in accordance with the guidelines issued by the Central Bank of Bahrain and the Board and, provides monthly reporting to the Board.The responsibilities of the ALCO is being carried out by the CICOM

New product information, Banks new announcement and information related to stakeholders are made available in timely manner through various channels of communication which may include publications, website, direct mailers, electronic mail and local media.

In addition, the Consolidated Financial Statement of at least past 3 years are available in the Bank’s website.

Table – 24. Sharia Supervisory Board

USD’000Setting fees charged during the year 60

Expenses related to the Board meetings 4

Total 64
