diversifying our investment portfolio ......diversifying our investment portfolio, generating...

DIVERSIFYING OUR INVESTMENT PORTFOLIO,GENERATING SUSTAINED INCOME STREAMS

ANNUAL REPORT 2013

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Vision & Mession Page 01

About First Energy Bank Page 03

Board of Directors Page 04

Sharia’a Supervisory Board Page 08

Chairman’s Letter to Shareholders Page 10

Senior Management Page 12

Financial Highlights Page 16

Business Activities Page 18

Projects and Investments 0

Corporate Governance Page 25

Financial Statements Page 41

Risk and Capital Management Page 81

CONTENTS

FIRST ENERGY BANK ANNUAL REPORT 2013 1

First Energy Bank B.S.C.(c) is a closed joint stock company incorporated in the Kingdom of Bahrain with CR No.69089 and licensed as an Islamic wholesale bank by the Central Bank of Bahrain

VISION & MISSION

VISION: To become the pre-eminent Sharia’a-compliant investment bank in the energy sector with high professional standards and a commitment to delivering consistent returns to shareholders.

MISSION: To create and capture value in the global energy sector.

2 FIRST ENERGY BANK ANNUAL REPORT 2013

DIVERSIFYING OUR INVESTMENT PORTFOLIO, GENERATING SUSTAINED INCOME STREAMS


ABOUT FIRST ENERGY BANK

First Energy Bank B.S.C.(c) (“FEB” or the “Bank”) is an Islamic investment bank licensed by the Central

Bank of Bahrain and headquartered in Manama, Kingdom of Bahrain.

FEB’s founders believe that the global energy sector and the Middle East and North Africa (MENA) region

offer excellent opportunities for private equity and Islamic financial investment. First Energy Bank offers

investors unique and specialized opportunities that capitalize on the MENA region’s status as the center

for world energy.

The Bank focuses on investments in the production, transportation, storage and refining of hydrocarbons,

as well as oilfield services and energy sector technologies. FEB also explores new opportunities to invest

in the development of power generation capacity and renewable energy technologies.

FEB operates in accordance with Islamic Sharia’a principles as a financial partner in project development,

joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios.

FEB was established in June 2008, with an authorized share capital of US$2 billion, and a paid up

capital of US$1 billion consisting of 1 billion ordinary shares each with a par value of US$1. The bank’s

shareholders include a range of organizations and individuals with interests in the energy sector from the

Kingdom of Bahrain, the United Arab Emirates, Libya, the Kingdom of Saudi Arabia, and other countries

in the region.

In September 2013, FEB obtained the Licence of the Central Bank of UAE to establish a representative

office in Abu Dhabi. The objective of this office is to enhance business development and support the

implementation of the Bank’s strategy by developing and maintaining strategic relationships with

financial institutions, investment banks, public and private investment corporations in UAE and the rest

of MENA region and to support the head office activities, act as point of contact, source of information,

identify and provide new business opportunities and market research.


BOARD OF DIRECTORS

H. E. Khadem Abdulla Al Qubaisi Chairman

Abdulla A. Kareem Showaiter Board Member

Mohamed Badawy Al-Husseiny Board Member

Abdulmagid BreishVice Chairman

Sadoun Barghash Al SadounBoard Member

Ebrahim Hussain EbrahimBoard Member

H. E. Abdulla Saif Al Nuaimi Vice Chairman

Mohamed Ali Al FahimBoard Member

Adel Abdulaziz Al JabrBoard Member


H.E. KHADEM ABDULLA AL QUBAISI - Chairman

H. E. Khadem Al Qubaisi is the Managing Director of International Petroleum Investment Company (IPIC), a position he has held since May 2007. He is also the Chairman of Aabar Investment’s Board of Directors and the Chairman of various international companies involved in the oil and gas and petrochemical industries including NOVA Chemicals, CEPSA and Coastal Energy.

Mr Al Qubaisi also chairs the boards of Abu Dhabi National Takaful and Arabtec Holding. He is a member of the Board of ChemaWEyaat and the Emirates Investment Authority. Regionally, he chairs Bahrain’s First Energy Bank.

Mr Al Qubaisi holds a B.Sc. in Economics. He was named in Gulf Magazine’s 2012 list of the Top 100 World’s Most Influential Arabs, and included in the Oil & Gas Power Middle East top 50 in 2011. In 2009, he was voted Arabian Businessman of the Year, and received the coveted #1 Award as the ICIS Power Player of the Year.

H.E. Khadem Al Qubaisi has over 20 years experience as a business leader, and has served as a key figure on various senior management teams across the energy and financial industries.

H.E. ABDULLA SAIF AL NUAIMI - Vice ChairmanH.E. Abdulla Saif Al Nuaimi, a national of the United Arab Emirates was born in UAE in 1969. He graduated in 1992 with a B.A. in Business Administration in Management from Emirates University, UAE.

After completing several graduate courses in the United States of America, he joined the Abu Dhabi Investment Authority (ADIA) as a Senior Analyst specializing in the US market from 1992 through 1997 he was responsible for analyzing US companies for investment opportunities and preparing recommendations for selling and buying shares.

In 1997, Abdulla Saif Al Nuaimi was seconded to the Privatization Committee for the Water & Electricity Sector in the Emirate of Abu Dhabi (PCWES) as a Director for the Independent Water and Power Producers Projects (IWPP). On the first of January 1999 after the issuance of the Transfer Scheme, H.E. Al Nuaimi became the Director of Privatization of ADWEA.

Along with his position as ADWEA Advisor and Director of Privatization H.E. Abdulla Saif Al Nuaimi is the Vice Chairman of TAQA where he has served as a director of the Board since 2005.

He is also the Chairman of Abu Dhabi Distribution Company, Abu Dhabi Water and Electricity Company, Abu Dhabi Transmission and Dispatch Company, Taweelah Asia Power Company, a board member of Federal Electricity & Water Authority and First Energy Bank.

Previously His Excellency has held the positions of Director General of ADWEA, Managing Director and Chief Executive Officer of TAQA, Chairman of Al Wathbah Central Services Company, and Board member of Abu Dhabi Sewerage Services Company, Oman Insurance Company and Madaares.

H.E. Al Nuaimi has more than 21 years of experience.

ABDULMAGID BREISH - Vice ChairmanMr. Abdulmagid Breish, a Libyan national, with over 37 years work experience in international banking industry, holds a B.A. in Political Sciences from the American University of Beirut. He also holds a Diploma in Financial Analysis & Policy from the IMF, Washington D.C., U.S.A. and is a Member of the Guild of International Bankers, U.K.

Mr. Breish started his banking career in 1975 with the Libyan Arab Foreign Bank in Tripoli, Libya. He then joined Arab Banking Corporation (ABC) B.S.C. in 1980 and served as Head of Business Development until 1985 before moving to Tokyo as the Chief Representative Officer of ABC in Japan. In 1988 Mr. Breish took over as Managing Director of ABC Investment & Services Co. (E.C.) the ABC Group’s Investment Bank in Bahrain. In 1991 he assumed the position of General Manager of ABC International Bank plc, and was appointed as the bank’s Chief Executive Officer in 1993. In November 2002, Mr. Breish was promoted to the position of Deputy Chief Executive and Chief Banking Officer of the ABC Group. In 2009, Mr. Breish retired from the ABC Group and established his own investment advisory consultancy “ABB Investment Consultants”. In 2013 Mr. Breish was appointed by The Libyan Investment Authority (LIA) as Chairman of the Board of Directors.


ABDULLA ABDULKARIM SHOWAITER - Board Member

Mr. Showaiter is the Deputy Chief Executive Officer of Emirates Islamic Bank with a total of 36 years of work experience. He is a Board member

in numerous financial institutions and companies such as Khaleeji Commercial Bank, Al Salam Bank - Sudan and Arab Drilling Workover

Company – Libya (ADWOC).

MOHAMED ALI AL FAHIM - Board Member

Mr. Al Fahim was born on 4 March 1976. He has a degree in Finance from the University of Suffolk, Boston (1999).

Mr. Al Fahim has around 15 years working experience; he commenced his professional career at Abu Dhabi National Oil Company (ADNOC), where

he worked from 2000 to 2008. His role as Head of Group Financing Department focused on the identification and pursuit of investment strategies

reflecting a balanced investment portfolio. During that time, Mr. Al Fahim also worked as a corporate finance consultant for KPMG-Dubai (2001-

2002) and for HSBC Bank at the Project and Export Finance Division-London (2006).

Since September 2008, Mr. Al Fahim has been Head of Finance at the Finance & Accounts Department of International Petroleum Investment

Company (IPIC).

Mr. AL Fahim represents IPIC as a board member on various boards of investee companies, including: EDP General and Supervisory Board, Aabar

Investments PJS, Arabtec Holdings PJSC, First Energy Bank, Unicredit Spa , Al Izz Islamic Bank, Depa Interiors and Oasis Investment Company.

SADOUN BARGHASH AL SADOUN - Board Member

Mr. Sadoun Worked in Several oil and gas companies such as: KNPC, Petromin and Saudi ARAMCO with a total experience of 33 years. He graduated

in 1980 as a Mechanical Engineer. Mr. Sadoun Joined MIDROC International Group (Owned by Sheikh Mohammed Al Amoudi) in 1989 and now

President of ABV Rock Group KB one of the major construction companies in KSA . He is also the Chairman of two oil and gas companies in Saudi

Arabia and member of the Board of directors in three different companies within the MIDROC Group.

MOHAMED AL HUSSEINY - Board Member

With 25 years experience and an international mandate, credited with developing and engaging in some of the most diverse investment, finance and globally important industries, Mr. Al-Husseiny has a pivotal role in advising and guiding in a Directorial capacity on several boards around the world. With Aabar Investments PJS since its inception Mr. Al-Husseiny has been Chief Executive Officer since 2009.

Mr. Al-Husseiny has spearheaded a platform of development within the oil and gas, aerospace, automotive and real-estate sectors, resulting in sustained revenue growth for the company and its partners.

Mr. Al-Husseiny’s other remits include Board memberships of First Energy Bank in Bahrain, 1MDB and Powertek Energy SDN. BHD. in Malaysia. Combining a career of multiple leadership roles and advisory positions, Mr. Al-Husseiny brings a plethora of knowledge and experience to the firms he is involved with.

Mr. Al-Husseiny is a member of the American Institute of Certified Public Accounts, and holds a Bachelor of Science in Accounting from Louisiana State University, and is a licensed as a Certified Public Accountant by the State of Texas.

Board of Directors (continued)


ADEL ABDULAZIZ AL JABR - Board Member

Mr. Al Jabr is a Board Member of Al Jabr Trading Company “premier regional leading group of companies in fields of Auto Motors (KIA), Real Estate,

Beverages, Home Appliances and Laundries”. He is also the General Manager of Al Jabr General Contracting Company “A leading company in the field of

Electro-Mechanical works in Saudi Arabia”, General Manager of Golden Chip Company “A newly established company that works in the field of smart

and plastic cards industry at K.S.A”. Mr. Al Jabr represents Al Jabr Group of Companies with a total experience of 24 years.

Mr. Al Jabr holds a Master Degree in BA from The University of Leicester - UK. He graduated as Electrical Engineer from King Fahd University of

Petroleum and Minerals - KSA in 1990.

EBRAHIM HUSSAIN EBRAHIM - Board Member

Mr. Ebrahim Husain Ebrahim was the Chief Executive Officer & Board Member of Khaleeji Commercial Bank until June 2012, and continued as Board

Member until July 2013. Prior to this, he was Chief Executive Officer of the Liquidity Management Centre. Previously, at the Arab Banking Corporation,

he held the positions of Vice President-Global Marketing Unit, Vice President-Treasury & Marketable Securities Department, and General Manager-ABC

Securities. He has also worked for BBK Financial Services Company, and Shamil Bank. Ebrahim is a Board Member of Bahrain Islamic Bank, Bahrain. He

holds an MBA from the University of Bahrain and a Bachelor’s degree in Economics from the University of Kuwait; and has over 32 years’ experience

in both conventional and Islamic banking


First Energy Bank is guided by a Sharia’a Supervisory Board consisting of three distinguished scholars, they review the Bank’s activities to ensure that all products and investment transactions comply fully with the rules and principles of Islamic Sharia’a.

Sheikh Dr. Nizam Mohammed Saleh Yaqubi

Sheikh Dr. Nizam Mohammed Saleh Yaqubi is a well-known Sharia’a Scholar and is recognized internationally. He is on the Sharia’a Supervisory Board of many Islamic financial institutions such as The Accounting and Auditing Organization for Islamic Financial Institutions, Khaleeji Commercial Bank, Shamil Bank, Bahrain Islamic Bank, and Executive member of Gulf Finance House, Abu Dhabi Islamic Bank, and a member of the Sharia’a Supervisory Boards of many other leading Islamic banks. He has contributed to the creation of many AAOIFI Sharia’a standards, participated in many Islamic finance and banking conferences around the world.

Sheikh Dr. Nizam was awarded his Doctorate degree from Lahaye University in Holland. He is one of the pioneers in Islamic banking and he is a well-known Sharia’a scholar in all fields of Islamic Banking and Fiqh Al Mu’amalat.

Sheikh Dr. Mohamed Ali bin Ibrahim Elgari

Sheikh Dr. Elgari is an Islamic Economics Professor at the King Abdulaziz University in the department of Economics and Administration.

In addition to his position at the King Abdulaziz University, he is affiliated with a number of organizations and financial institutions. Among them being a member of the Sharia’a committees at the National Commercial Bank, Islamic Citibank, Arab National Bank and the Dow Jones Islamic Index. Sheikh Dr. Elgari is also on the editorial Boards of several Islamic journals, and an advisory member on the Harvard Series on Islamic Law. He also held the title of director of the Centre for Islamic Economics Research.

Sheikh Dr. Elgari has participated in various conferences and seminars, both locally and overseas. Extensive research in the field of Islamic economics and finance has lead to a number of his works published in recognized journals and presented at relevant conferences. Among them being topics on fiscal deficit in Islamic economics, setting up Sharia’a compliant credit cards and banking systems, role of Islamic mutual fund and risk management, and issues facing Islamic banks and investments.

Sheikh Dr. Elgari holds Ph.D. in Economics from the University of Berkley, California and he is an author of several books & research papers on Islamic Economics and Islamic Banking.

Sheikh Dr. Osama Mohammed Saad Bahar

Sheikh Dr. Bahar is a prominent, highly-respected Sharia’a scholar from Kingdom of Bahrain.

He is currently Head of the Sharia’a Compliance and Advisory at First Energy Bank, following earlier senior positions at Islamic banks in Bahrain including Head of Sharia’a Compliance at Al Salam Bank and before that, Sharia’a Compliance Officer at ABC Islamic Bank.

Sheikh Dr. Bahar is also a Member of the Sharia’a Supervisory Board of the Global Banking Corporation, International Investment Bank, Allianz Global Investors, International Tharawat and Family Bank; and Sharia’a Advisor for Sakana Holistic Housing Solutions and Reef (Real Estate Finance).

Sheikh Dr. Bahar was awarded his Doctorate degree from Lahaye University in Holland, his Master Degree from Al Emam Al Awzae University in Lebanon and his Bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies in Algeria.

SHARIA’A SUPERVISORY BOARD


CHAIRMAN’S LETTER TO SHAREHOLDERS


Dear Shareholders of First Energy Bank,

In the name of Allah, the beneficent, the merciful, prayers and peace upon the last apostle and messenger, our prophet Mohammed and his companions.

On behalf of the Board of Directors, it is my privilege to present the annual report and consolidated financial statements of First Energy Bank B.S.C. (“FEB”) for the year ended 31 December 2013. Despite challenges in the financial sector which continue to persist on a global front, the Bank remained resilient and focused towards growth.

FINANCIAL HIGHLIGHTS FOR YEAR-END 2013

2013 was another profitable year for the Bank. I am pleased to report that FEB has achieved a net profit of $40.1 million, after provisions of $9.8 million, compared to $37.0 million in 2012. The Bank’s operating profit increased to $64.3 million in 2013 as compared to $61.2 million in 2012, which includes a gain of $21.7 million, resulted from converting an associate to a subsidiary by exercising its equity conversion option. The increase in operating profit was largely due to enhanced income from Ijarah assets as well as capital gains from securities.

Total assets stood at $1.42 billion at the end of the year compared to the $1.40 billion at the end of 2012. FEB’s capital adequacy ratio continues to be strong at 82% compared with a minimum regulatory requirement of 12%.

INVESTMENTS UPDATE

FEB’s investment portfolio continued to grow and be profitable during 2013.. I am pleased to inform you that MENAdrill which is the first and principal investment of the Bank continues to operate as a profitable and cash generating entity. Both the Jack up rigs are operating satisfactorily under contracts with Pemex, the national oil and gas company in Mexico.

In terms of new investments, the Bank together with Borealis AG formed a joint venture in Bulgaria, called FEBORAN AD in the 4th Quarter of 2013. The joint-venture company purchased 20.3% of the shares of Neochim AD which is Bulgaria’s leading producer and distributor of fertilizers; it operates one ammonia plant, two nitric acid plants and an ammonium nitrate plant in Dimitrovgrad in southern Bulgaria. This investment in Neochim extends the FEB investment portfolio into Europe and also into petrochemicals.

In addition to the Bank’s investment in Neochim, the other noteworthy transaction was in December 2013, when the Bank signed a Euro 25 million Murabaha facility with Kore Coal Finance B.V., established in the Netherlands and a subsidiary of Sapinda Holding B.V. This transaction is in line with the Bank’s long term commitment to seize attractive and income generating opportunities and diversify in asset classes which can generate sustained income streams.

WAY FORWARDI am confident that FEB given its established base will continue to perform well in 2014. The Bank will continue pursuing its investment strategy targeting a balanced portfolio that achieves an acceptable return on investments in addition to providing capital growth and value to its shareholders.

Finally, I would like to place on record that the financial success of the Bank in 2013 would not have been possible without the dedication and commitment shown by the Bank’s management and staff. I would like also to take this opportunity to express my gratitude to our highly esteemed and respected shareholders for their continuous support and commitment to the Bank.

Yours truly,

Khadem Abdulla Al QubaisiChairman of the Board of Directors


MOHAMED SHUKRI GHANEM - Chief Executive Officer

Ghanem brings to First Energy Bank (“FEB” or the “Bank”) over 14 years of extensive experience in the regional financing market and in global energy issues. He is responsible for the overall management of the organisation in line with the organisations strategic plan and also responsible for monitoring organisational performance against the strategic plan, working with staff to stay on target and looking ahead to the long term development of the organisation operationally and strategically.

In addition to the CEO role, he has the overall responsibility for the investment and investment placement functions at FEB, including the design and implementation of investment processes for all clients as well as marketing and product placement. He provides high level strategic investment advice including the investment processes and the additional asset classes and investment vehicles across the entire client base. He is also responsible for expanding the client base by ensuring the investment strategy is solid and sustainable.

Prior to joining FEB, Ghanem worked at Arab Banking Corporation (BSC) (“ABC”) as part of the North African business development team at the Global Project and Structured Finance division. He was responsible for the development and origination of advisory assignments throughout North Africa for the corporation, covering the oil, oil field, natural gas and power generation segments of the energy market.

Ghanem also worked with GED Handles G.m.b.H., Vienna in the risk and asset management in the energy and metals sectors. He worked in the trading department as a Senior Trader specializing in oil futures and options.

Ghanem holds a Bachelor of Arts (Major in Business) from Webster University (School of Business and Technology) in Vienna and holds an MBA from Glamorgan University.

SENIOR MANAGEMENT


KALYAN SUNDERAM - Chief Risk Officer

Senior international banker with over thirty eight years of comprehensive financial services experience in domestic and international banking and

government finance.

Prior work experience primarily with HSBC, Bank of Bahrain & Kuwait, Province of Nova Scotia, Canada, and Bahraini Saudi Bank in successively senior

management positions.

Most recent position prior to joining FEB in March 2010 was Chief Risk Officer & Deputy CEO of Bahraini Saudi Bank for 6 years.

Kalyan brings to FEB wide ranging experience in all major segments including: commercial retail banking, wholesale investment banking, Islamic

finance, treasury capital markets, public private partnerships, government infrastructure financings, strategy formulation and execution, gained in

developed and emerging regional markets. His functional specialization is all aspects of Risk Management.

As Chief Risk Officer at FEB, he is responsible for the ongoing development, installation, and maintenance of an integrated enterprise risk management

framework (ERM) within FEB. In addition to his risk related responsibilities, Kalyan is also a member of the Executive Management team vested with

responsibility for executing the strategy approved by the Board.

He has been actively involved in teaching risk to professionals in Bahrain through his collaboration with the Bahrain Institute of Banking & Finance

(BIBF) in the design and content creation of the Fundamentals of Financial Risk Management program (Level I and Level II). His commitment to

ensuring best practices in risk management regionally and globally is derived from his involvement with the Professional Risk Managers’ International

Association (PRMIA) as the first Regional Director of the Bahrain Chapter and an active member of the Education Committee. He is also an

independent non-executive Director of National Finance House B.S.C. Bahrain.

His qualifications include: MBA, Syracuse University, NY; ACIB (London); CFA; PRM.

DAVID HUDSON - Head of Legal & Compliance

David, an English solicitor, brings to FEB over 27 years of international legal and advisory experience in different areas of the banking industry.

David advises the CEO and senior management on legal matters. He also oversees FEB’s compliance function, reporting to the Board Audit & Risk

Committee and (at the functional level) advising senior management and other staff on compliance issues.

Prior to joining FEB, David was a senior counsel and group compliance officer for Arab Banking Corporation (BSC) and manager of Norton Rose’s

Bahrain office.

David holds a Bachelor of Laws from the University of Bristol and a Diplôme d’Etudes Supérieures Universitaires from Université Aix-

Marseille (France).

EIHAB ABDUL LATIF AHMAD - Corporate Secretary / MLRO

Eihab brings to First Energy Bank over 19 years of regional legal and compliance experience.

Eihab is the Corporate Secretary of FEB and is responsible for providing wide range of services to the Bank including, but not limited to, Board

Secretary function, legal and compliance advisory services to the Board of Directors, the focal point of communication with the Board of Directors,

Senior Management and Shareholders, providing advice on Corporate Governance principles and practices. He is also approved by the Central Bank of

Bahrain as the Money Laundering Reporting Officer (MLRO) to handle all anti money laundering and anti terrorism issues within the bank.


Prior to joining FEB, Eihab worked at the International Investment Bank as Head of Legal & Compliance.

Eihab holds a LL.B – Faculty of Law from the University of Khartoum, Sudan, Sudanese Board of Law Practicing and a Certificate of Certified

Compliance Officer (CCO) from the American Academy of Financial Management – Dubai, UAE.

ESAM EBRAHIM AL MAHMEED - Head of Treasury and Financial Institutions

Over 27 years of comprehensive financial services experience in international, Islamic and investment banking.

Prior work experience primarily with Arcapita Bank, Arab Banking Corporation, The Arab Investment Company and Arab Insurance Group in successively

senior management positions.

Esam brings to FEB extensive finance and investment banking experience especially in Islamic finance both syndication and Sukuk, treasury money

and capital markets, Ijara debt financings, outsourcing investment opportunities, strong global network in the banking community and proven

leadership capabilities to build and lead a professional team to contribute to the overall objective of the bank. His commitment to ensuring best

practices in treasury and building up business relationships with major financial institutions in the regional and global financial markets to achieve

the overall objective of FEB.

As Head of Treasury and Financial Institutions at FEB, he is responsible for all banking relationships with all financial institutions, enhancing and

strengthening the existing as well as to continuously look for potential relationships for FEB. At the same time, managing the overall treasury

department activities in terms of liquidity management to support the ongoing needs and expansion of the bank as well as the Sukuk portfolio

to contribute to the bottom line of FEB. Esam is a member of FEB’s senior management team and Vice Chairman of the Asset and Liability

Committee (ALCO).

Esam holds a BBA from Saint Edward’s University, Austin – Texas, USA.

KHALED HEJRES - Head of Operations & Support Services

Khaled brings to First Energy Bank over 23 years of experience in retail, wholesale and investment banking sectors.

Khaled is mainly responsible for planning, directing and controlling FEB’s support and back office functionalities involving Human Resources,

Administration, Information Technology, IT Security and Operations ensuring efficient processing and implementation of robust banking

technologies.

Prior to joining FEB, Khaled worked at First Real Estate Company as Chief Operating Officer. Khaled holds a Bachelor of Arts Degree (Economics) from

University of Pune, India and holds an Advanced Diploma in Banking from Bahrain Institute of Banking & Finance.

OSAMA BAHAR - Head of Sharia’a Compliance & Advisory

Osama brings to First Energy Bank 20 years of experience in the field of Sharia’a compliance and advisory.

He is primarily responsible for providing Sharia’a guidelines and assisting the business lines in structuring the Sharia’a compliant offerings. The Head

of Sharia’a Compliance and Advisory is also a primary liaison between the Bank and the Sharia’a Supervisory Board (SSB).

Prior to FEB, he worked at Al Salam Bank as Head of Sharia’a Compliance.

Osama holds a PhD from Lahaye University - Holland and a bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies

in Algeria, as well as Masters Degree in Islamic Studies from Al Emam Al Awzae University in Beirut.

Senior Management (continued)


TARUN PURI - Head of Investments & Structured Finance

Tarun joined First Energy Bank in August 2009 and leads the Investment team which is responsible for originating / executing equity investments which includes acquisitions and developing projects. In addition, his team is also responsible for originating, structuring /executing any Islamic financing transaction and managing the entire equity investments portfolio of FEB.

Tarun has been instrumental in playing a key role in development, operation and financing of MENAdrill Investment Company which is the first and principal investment of the Bank and a major contributor to its profitability. In addition, during last year he has successfully led the deal team to originate the recently completed part acquisition of Neochim and structuring the Islamic financing for Kore Coal Finance B.V.

Prior to joining FEB, he was previously with Gulf International Bank (“GIB”) in Bahrain for more than 6 years and has overall more than 23 years of banking experience covering Project Finance, Syndications, Corporate & Investment Banking. As Head of Project Finance at GIB, he was responsible for origination, underwriting and structuring project finance deals covering various sectors including Power, Petrochemicals, Oil &Gas, Telecoms, Aviation and Shipping mainly within the GCC. Before moving to Bahrain, Tarun worked for many years in Singapore covering the Asian markets in Syndications, Project & Structured Finance in various senior roles at two major multinational banking institutions namely The Bank of Nova Scotia and Mizuho Corporate Bank.

Tarun has a Bachelor of Economics (Honours) from Hindu College, University of Delhi and a Masters in Business Administration (MBA) from Boston College, USA.

YOUSIF AHMED EBRAHIM - Chief Financial Officer

Yousif has over 20 years of experience in the banking industry, mainly in the fields of internal audit and financial control. He is primarily responsible for directing and overseeing the financial and fiscal management of the Bank.

His responsibilities include contributing to the Bank’s strategy planning, leading and directing the budget process, maintaining appropriate accounting framework and establishing effective system of cost management and internal control.

Prior to joining First Energy Bank, he worked for Gulf International Bank as Vice President, Internal Audit as well as PricewaterhouseCoopers, Audit & Business Assurance Services.

Yousif is a Certified Public Accountant (USA) and a member of the American Institute of Certified Public Accountant.

YOUSSEF EL HABETY - Chief Representative - Abu Dhabi

Youssef brings to First Energy Bank over 16 years of experience in the field of international trade finance, project and structured finance, portfolio investments as well as marketing.

Youssef is currently responsible of FEB’s Representative Office in Abu Dhabi. He is primarily responsible for managing large investment projects for FEB with an objective to maximize revenue and asset growth opportunities, by sourcing, transacting and developing deals across MENA Region, he also assist Executive Management in establishing and coordinating the development of FEB’s global strategy and oversee strategic and governance process.

Prior to FEB, Youssef worked for the Libyan Investment Authority as Head of energy and renewable team he also worked for Arab Banking Corporation as a Representative & Head of Marketing team in Libya.

Youssef holds B.Sc Degree in Political Science, B.A Degree in Business Administration and Higher PG. Diploma in Business Management form London School of Business & Finance.


In 2013, FEB recorded consolidated net profit of USD 40.1 million, after provision for impairment of USD 9.8 million, as compared to a net

profit of USD 37.0 million in 2012. Gross income increased by 5% to USD 64.3 million in 2013 as compared to USD 61.2 million in 2012.

The increase was primarily a result of income on investment in Ijarah assets, income from securities and share of results of associates. Prior

year income included an exceptional, non-recurring profit of USD 21.7 million arising from the Bank exercising its equity conversion option

on a murabaha financing facility extended to Menadrill Investment Company which resulted in conversion of the associate into a 59.44%

owned subsidiary. FEB’s core expenses continued to be tightly controlled and hence; total expenses of USD 14.4 million for the year were

28% low on the prior year.

Following are the key highlights of the financial results:

Amounts in USD ‘000

2013 2012 2011 2010 2009

• Gross Income 64,279 61,163 25,493 41,391 47,410

• Operating Expenses (14,363) (20,062) (20,689) (24,119) (24,476)

• Impairment Allowances (9,828) (4,077) (1,260) (27,396) (8,734)

• Net (Loss) / Income 40,088 37,024 3,544 (10,124) 14,200

• Total Assets 1,417,239 1,400,464 1,230,697 1,199,844 1,233,919

• Total Equity 1,196,325 1,159,579 1,042,702 1,039,086 1,054,677

• EPS (basic) in US Cents 4.0 3.7 0.4 -1.0 1.4

• Return on Average Assets 2.9% 2.7% 0.3% -0.9% 1.3%

• Return on Average Equity 3.4% 3.6% 0.3% -0.1% 1.4%

• Net Income Margin 62% 61% 14% -24% 30%

• Operating Expenses to Gross Income Ratio 22.34% 32.80% 81.16% 58.27% 51.63%

• Total Expenses to Gross Income Ratio 37.63% 39.47% 86.10% 124.46% 70.05%

FINANCIAL HIGHLIGHTS

Net (Loss)/Income (US$ Mn)Gross Income (US$ Mn)

EPS (basic) (US Cents) Net income margin

Total Equity

(US$ Mn)Total Assets (US$ Mn)

64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009



Total Equity


64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009




Total Equity


64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009



Total Equity


64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009

MENADRILL INVESTMENT COMPANY


PROJECT DEVELOPMENT The Middle East and North Africa (MENA) region is the world’s major holder of various energy related resources. Developing and producing these resources and converting them to the products needed by the global economy require substantial investments in the energy sector and at different levels of the value chain. FEB utilizes its strength to develop industrial projects drawing on all its available resources along with aligning itself with strategic partners that it has access to in the energy industry. FEB’s unique strength in this field comes from its strong and diversified shareholder base combined with the management team’s experience in the industry. In order to capture and maximize value for FEB’s investors, the project development process starts from the early stage of conceptualizing the business idea and developing it to achieve a successful business.Building on FEB’s financial strength, experience, and strong balance sheet, the project development line enjoys the support of a range of other complementing products and services including financial advisory and structured finance, which are essential elements to develop a successful project.

PRIVATE EQUITYFEB offers its clients direct investments in private equity opportunities that it identifies on a global basis. The investment strategy is based on two

pillars. The first is to identify and invest in regional entities where FEB has a strong presence. FEB would add value through various activities including

increased capitalization, financial restructuring, and effective market expansion utilizing the Bank’s extensive network and expertise in these fields. The

second investment route is to identify opportunities in the international market. These opportunities are required to have distinct areas of strengths

such as technology, technical expertise, know how, superior assets class, etc. FEB capitalizes on its effective network and marketing capabilities to

maximize the value of the investment in the region through business expansion and setting up new joint ventures.

MERGERS AND ACQUISITIONSWithin the overall energy and related sectors, FEB believes there are attractive opportunities for mergers and acquisitions (M&A). FEB has already

made a few successful part acquisitions in the past within the Oil and Gas sectors. FEB’s considerable financial strength, will allows FEB to exploit

market opportunities to earn superior returns.

STRUCTURED / ISLAMIC FINANCINGIslamic finance has been one of the fastest growing finance segments in recent years. It has proven to be a resilient and valued sector especially in the Middle East. FEB’s Islamic finance team focuses on providing structuring and financial advisory services, deriving on many years of experience in this field and across the region. The team also focuses on providing “ring fenced” Sharia’a compliant project and structured finance to selected strategic transactions where risks are mitigated by these structures and returns are maximized.

CAPITAL MARKETThe Islamic capital market has been growing rapidly in the last decade through the increasing Sharia’a compliant Sukuk, structured products and hedging instruments mainly by sovereigns, quasi-sovereigns, internationals, supra-nationals and corporate institutions. FEB’s competent team is committed to develop and execute long-term strategic and tactical plans to meet portfolio return objectives and continuously innovate and evaluate investing and financing solutions.

First Energy Bank’s (FEB) business model is built around 7 core business lines: Project Development, Private Equity, Mergers and Acquisitions, Structured / Islamic Financing, Capital Market, Asset Management and Treasury.

BUSINESS ACTIVITIES




Total Equity


64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009



Total Equity


64 61

25

41 47

2013 2012 2011 2010 2009

4.0 3.7

0.4

-1.0

1.4

2013 2012 2011 2010 2009

40 37

4

(10)

14

2013 2012 2011 2010 2009

1,417 1,400

1,231 1,200

1,234

2013 2012 2011 2010 2009

1,196

1,160

1,043 1,039 1,055

2013 2012 2011 2010 2009

62% 61%

14%

-24%

30%

2013 2012 2011 2010 2009

ASSET MANAGEMENTInvestors’ demand for Sharia’a compliant investment products has been increasing in recent years. FEB’s strategy is to provide innovative, diversified and well-managed products that suit its clients’ needs and meets their return requirements. The FEB team is committed to continuously developing products and providing a well-diversified selection of rewarding investments.

TREASURY The Islamic banking treasury sector has become increasingly competitive and sophisticated over the years, with demand being fueled by clients and investors expecting Islamic products to be able to provide the same features and benefits as the conventional investment and hedging products. As such, FEB has laid a solid foundation to cater for the fast growing demand of Islamic products offering a wide range of Sharia’a compliant products managed by a team of dedicated personnel to build a stable platform to cater for FEB’s mandated business requirements.

AL-DUR POWER AND WATER COMPANY B.S.C. (C)


ARABTECIn July 2013, the Bank made an investment in Arabtec by purchasing shares in the Dubai Financial Markets (“DFM”). Arabtec, formerly known as Arab Technical Construction Company (“ATCC”), was founded in 1975 and is listed on DFM since 2005.

Arabtec, together with its subsidiaries, provides construction services for residential and commercial sectors primarily in Abu Dhabi, Dubai, Jordan, Qatar, Russia, Saudi Arabia, and Syria. The Company provides architectural modeling, civil engineering, construction and project management, business development, quantity surveying, high rise development, offshore and onshore oil and gas installation, airport development, drainage, and electrical high voltage and low voltage services. The Company also engages in the manufacture and transportation of ready mix concrete products, trade and lease of construction equipment, fabrication of steel structures, and manufacture of switch gears, power distribution panels and precast panels. In addition, it is involved in building maintenance and cleaning services as well as undertaking electrical, mechanical and plumbing contracts.

FEBORAN AD – NEOCHIM ADIn the fourth quarter of 2013, the Bank together with Borealis AG formed a joint venture in Bulgaria, FEBORAN AD. The joint-venture company purchased 20.3% of the shares of Neochim AD which is Bulgaria’s leading producer and distributor of fertilizers; it operates one ammonia plant, two nitric acid plants and an ammonium nitrate plant in Dimitrovgrad in southern Bulgaria. Borealis AG is a leading provider of innovative solutions in the fields of polyolefins, base chemicals and fertilizers.

This investment in Neochim extends the FEB investment portfolio into Europe and also into petrochemicals.

KORE COAL FINANCE B.V.In December 2013, the Bank signed a Euro 25 million Murabaha facility with Kore Coal Finance B.V., established in the Netherlands and a subsidiary of Sapinda Holding B.V. The Murabaha facility has been structured on the basis of an attractive return and will be repaid by October 2016. FEB is acting as the Investment Agent and the Security Agent under this Murabaha financing. The financing will assist Sapinda in enhancing its investments in an internationally operating resource company which owns coal mining assets in South Africa. This Islamic facility supplements a conventional Profit Participation Note of Euro 55 million raised by Kore Coal Finance with a similar objective.

This transaction is in line with the Bank’s long term commitment to seize attractive and income generating opportunities and diversify in asset classes which can generate sustained income streams.

MENADRILL INVESTMENT COMPANY MENAdrill is the first and principal investment of FEB which was incorporated in August 2008 soon after the formation of FEB. Towards the end of the first quarter of 2012, MENAdrill became a subsidiary of FEB. MENAdrill focuses on providing contract-drilling services for offshore exploration and development globally.

MENAdrill’s aim is to be one of the key drilling companies based in the region, allowing it to capitalize on the significant levels of drilling activity required to increase offshore oil and gas production throughout the region and globally. MENAdrill’s initial assets include two Super M2 jackup drills constructed at the Maritime Industrial Services (MIS) in Sharjah. In May 2011, the first rig “MENAdrill I” successfully commenced drilling in Mexico for PEMEX- Exploración Producción (“PEP”), the national oil company of Mexico, and MENAdrill II started operation in September 2012 on a similar contract with Pemex. Both rigs continue to operate successfully under their respective Pemex contracts which resulted in MENAdrill recording good profitability in its first full year of operation.

PROJECTS AND INVESTMENTS


FEBORAN AD – NEOCHIM AD

Asset mix by category

2013 2012 2011 2010 2009

Investment securities

Investment in ijarah assets

Financing receivables

Due from financial institutions

Investment in associates

Other assets

Cash and bank balances

Property and equipment

Profit earning assets Vs. Non profit earning assets

11% 8% 5% 6% 6%

89% 92% 95% 94% 94%

2013 2012 2011 2010 2009 Non profit earning assets Profit earning assets

Assets by industry sector

Banks and financial institutions 33%

Energy, power and infrastructure

44%

Others 23%


2013 2012 2011 2010 2009






Other assets




11% 8% 5% 6% 6%

89% 92% 95% 94% 94%





44%

Others 23%


ARAB DRILLING AND WORKOVER COMPANY (“ADWOC”) In 2009 FEB acquired a 40% stake in the Arab Drilling and Workover Company (ADWOC), one of the leading oil and gas onshore contract drilling and workover companies based out of Libya. Established in 1980, ADWOC has been providing its drilling and workover services across the Arab World. The ADWOC acquisition fits well into FEB’s investment portfolio as it provides the Bank with the diversity and strong foundation necessary to support future expansion in this sector. Additionally, it complements some of the other investments that the Bank is involved in, including the offshore drilling investment of MENAdrill. ADWOC enjoys long-standing relationships with the major oil companies in Libya and operates and owns a highly mobile fleet of land rigs.

AL-DUR POWER AND WATER COMPANY B.S.C. (C)During 2009, FEB successfully completed approximately 9% stake acquisition in the Al Dur Independent Water and Power Project (IWPP). This co-investment with GDF SUEZ META and Gulf Investment Corporation is part of FEB’s strategy of building up a book of top quality energy related infrastructure assets.

The Al Dur project, which is the largest of its kind in the Kingdom of Bahrain, successfully commenced operation during the first quarter of 2012. The project is located on the southeast coast of the Kingdom and is valued at a total of USD2.2 billion. Its production capacity is 1,234 megawatts of power and 48 million gallons of water per day. The plant utilizes mainly GE turbines for the two power blocks and Reverse Osmosis (RO) as its water desalination technology. This project represents an important addition to the Kingdom of Bahrain and will help meet the rising demand for both power and electricity going forward. The Bahraini Electricity and Water Authority (‘EWA’) is the sole off-taker of the plant output as stipulated in the 25-year Power and Water Purchase Agreement.

FEB-NOVUS AIRCRAFT HOLDING LTD – MALAYSIA AIRLINESIn 2012, FEB successfully closed a Purchase and Lease Transaction of A330-300 Aircraft to Malaysia Airlines, the flag carrier of Malaysia and one of the world’s leading airlines. FEB partnered with Novus Aviation Limited, a market leader in the aviation leasing industry, specialists in aircraft sourcing, trading, leasing, financing and remarketing. The Airbus A330-300 is a twin-engine, high capacity wide-body commercial aircraft fitted with two Pratt & Whitney PW 4170 engines. This transaction introduces diversification to the bank’s asset classes and is generating stable and sustained income.

AL IZZ ISLAMIC BANK, OMANFEB through its wholly owned subsidiary First Energy Oman is one of the founding Promoters of Al Izz which received its license from the Central Bank of Oman (“CBO”) on September 5, 2013. Al Izz commenced operations on September 30, 2013. Out of the banks total paid up capital, 40% of it was successfully raised through an Initial Public Offering (“IPO”) in October 2012. The Bank offers comprehensive business and retail Islamic banking solutions in accordance with Omani law and the CBO regulations governing Islamic banking in Oman.

SAUDI POLYSILICONIn September 2009, the Bank invested through its subsidiary Cosmos Industrial Investment Corporation B.S.C. (c) (“Cosmos”) to develop a plant in the Kingdom of Saudi Arabia for the production of Polysilicon (“Saudi Polysilicon”). The project will use advanced and commercially proven technologies in its production processes deriving benefits from the economies of scale and will be one of the lowest cost polysilicon producers in the world. It is expected to have a total production capacity of 7,500 tons per annum of high quality polysilicon product capable to cater users in the solar photo voltaic power as well as electronics industry markets.

Projects And Investments(continued)



2013 2012 2011 2010 2009






Other assets




11% 8% 5% 6% 6%

89% 92% 95% 94% 94%





44%

Others 23%

KORE COAL FINANCE B.V.


CORPORATE GOVERNANCE


Board of Directors

Nomination, Remunerationand Governance Committee

Board Audit and RiskCommittee

Board InvestmentCommittee

Sharia’a Board

Internal Audit Compliance Corporate

Secretary/MLRO Risk Sharia’a

Coordinator

CEO

Legal Treasury

and Capital Markets Investment Banking

Operationsand Support Services Financial Control

Corporate governance is the combination of processes and structures implemented by the Board in order to inform, direct, manage and monitor the activities of the organisation toward the achievement of its objectives. FEB’s governance and management structure is illustrated below:

CORPORATE GOVERNANCE


BOARD OF DIRECTORSFEB’s governance structure comprises the main Board of Directors (the Board) and its sub-committees.As of 31 December 2013, the Board of Directors of FEB comprises 9 Directors, their term started June 2011 and will expire June 2014 and their names are listed below:

No. Name Type of Membership Exec/Non-Exec

1 H. E. Khadem Abdulla Al Qubaisi Chairman Exec

2 H. E. Abdulla Saif Al Nuaimi Vice Chairman Exec

3 Abdulmagid Breish* Vice Chairman Exec

4 Abdulla Abdulkarim Showaiter Member Exec

5 Mohamed Ali Al Fahim Member Non-Exec

6 Mohamed Badawy Al-Husseiny Member Non-Exec

7 Sadoun Barghash Al Sadoun Member Exec

8 Ebrahim Hussain Ebrahim Member Non-Exec

9 Adel A. Aziz Al Jabr Member Exec

* Mr. Abdulfatah Abdulsalam Enaami replaced by Mr. Abdulmagid Breish on 16 September 2013 ** Mr. Khalid Jassim Bin Kalban resigned on 20 May 2013

BOARD COMMITTEES

There are three Board sub-committees, namely: The Board Audit & Risk Committee, The Nomination, Remuneration and Governance Committee and The Board Investment Committee. Each is required to report its activities to the Board on a regular basis, their functions and membership are described as follows:

1- Board Audit & Risk Committee (BARC)

Members: Type of Membership Summary terms of reference, role and responsibilities:

Mohamed Ali Al Fahim Chairman The Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial information, the effectiveness of internal control structure, the compliance with legal, regulatory, anti-money laundering and Sharia’a Supervisory Board requirements and setting the overall risk appetite parameters and limits. It oversees the performance of the Bank’s internal and external audit function. The Committee provides recommendations to the Board in relation to the risk strategies, appetite and policies necessary for a robust, integrated risk management framework. This process extends to reviewing the adequacy of all the Bank’s policies and procedures prior to approval by the Board. It also ensures that appropriate business continuity plans are developed and maintained.

Ebrahim Hussain Ebrahim Member

Adel A. Aziz Al Jabr Member

Sadoun Barghash Al Sadoun Member

** Mr. Khalid Jassim Bin Kalban resigned on 20 May 2013


2- Nomination, Remuneration and Governance Committee (NRGC)


H.E. Abdulla Saif Al Nuaimi Chairman The Nomination, Remuneration and Governance Committee, mindful of best practice in the field, assists the Board in formulating and reviewing the Bank’s relevant policies and rules including the administrative policy and governance requirements. It handles the nomination, remuneration, and governance compensation of the Board and Executive Management and regularly reviews the Bank’s succession plan.

Abdulla Abdulkarim Showaiter Member

Mohamed Badawy Al-Husseiny Member

* Mr. Abdulfatah Abdulsalam Enaami replaced by Mr. Abdulmagid Breish on 16 September 2013

3- Board Investment Committee (BIC)


H.E. Khadem Abdulla Al Qubaisi Chairman

The Investment Committee assists the Board in formulating the Bank’s investment policy and making investment transaction decisions. The BIC reports its activities to the Board of Directors on a quarterly basis.

H.E. Abdulla Saif Al Nuaimi Member

Abdulla Abdulkarim Showaiter Member

Mohamed Badawy Al-Husseiny Member


Board and Sub-Committees Meetings as of 31 December 2013 and members attendance for each (Table 1):

Board of Directors

No. Name Type of Membership Numbers of attendance Date of Meetings

1 H.E. Khadem Abdulla Al Qubaisi Chairman 2

26/2/2013

19/5/2013

8/10/2013

28/11/2013

2 H.E. Abdulla Saif Al Nuaimi Vice Chairman 4

3 Abdulmagid Breish* Vice Chairman 1

4 Abdulla Abdulkarim Showaiter Member 4

5 Mohamed Badawy Al-Husseiny Member 3

6 Mohamed Ali Al Fahim Member 3

7 Sadoun Barghash Al Sadoun Member 4

8 Ebrahim Hussain Ebrahim Member 4

9 Adel A. Aziz Al Jabr Member 4

* Mr. Abdulmagid Breish joined the BOD on 16 September 2013 instead of Mr. Abdulfatah Abdulsalam Enaami ** Mr. Khalid Jassim Bin Kalban resigned on 20 May 2013

Corporate Governance (continued)


Board Audit and Risk Committee (BARC)*


1 Mohammed Al Fahim Chairman 4 25/2/201318/5/201328/7/2013

18/11/2013

2 Ebrahim Hussain Ebrahim Member 4

3 Adel A. Aziz Al Jabr Member 4

4 Sadoun Barghash Al Sadoun Member 4

* Mr. Khalid Jassim Bin Kalban resigned on 20 May 2013

Nomination, Remuneration & Governance Committee (NRGC)*


1 H.E. Abdulla Saif Al Nuaimi Chairman 5 10/2/201326/2/201319/5/201325/6/20137/10/2013




Board Investment Committee (BIC)*


1 H.E. Khadem Abdulla Al Qubaisi Chairman 1 10/2/201326/2/2013

6/5/201310/9/2013

2 H.E. Abdulla Saif Al Nuaimi Member 4




The meetings of the Board of Directors and the Board committees are held whenever the need arises, but under the regulations, the BOD should meet at least four times during a single fiscal year.

SHARIA’A COMPLIANCEThe Bank has a dedicated Sharia’a department acting as the primary conduit of communication between the Bank and its Sharia’a Supervisory Board (SSB). The responsibilities of the Sharia’a department include the following:

• Ensuring programmes are in place for all approved products, with detailed procedures signed off by relevant departments.

• Ensuring there are Fatwas supporting all approved products and that the concerned departments adhere to them.

• Ensuring that the Bank complies with applicable AAOIFI standards, the SSB’s and other applicable Sharia’a guidelines and the Bank’s Sharia’a compliance manual.

• Conducting periodic Sharia’a audits, discussing the audit findings with management and issuing compliance reports.

• Reporting to the CEO and SSB on the results of the Sharia’a audits and the status of implementation of the recommendations made by the Sharia’a Department.

• Assisting relationship managers and relevant departments in interpreting Sharia’a guidelines.

• Collating inquiries and questions from Bank departments and submitting them to the SSB.

• Arranging and minuting SSB meetings.


MANAGEMENT COMMITTEES

The Bank has established four Management Committees, both to support the Board committees in carrying out their duties and to ensure appropriate controls and processes are in place. They are the Executive Management Committee (EMC), the Management Risk Committee (MRC), the Asset and Liability Committee (ALCO) and the Human Resources Committee (HRC). The terms of reference of each committee are derived from the terms of reference of the corresponding Board committee. Management committees meet monthly and report to the Board quarterly or more frequently if required or requested.

1- Executive Management Committee (EMC)

The Executive Management Committee (EMC) focuses on the execution of the strategic business plan approved by the Board. The EMC has overall responsibility for the day-to-day management of the Bank, within the overall approved guidelines laid down by the Board. The responsibilities of the EMC include the following:

• Regularly review the environment in which the Bank operates and reflect changes therein in the Bank’s future development.

• Oversee the day-to-day decision making so that the Bank can be effectively managed.

• Harness and enhance the team spirit between departments to improve coordination.

• Troubleshoot and address issues of concern.

• Continuously monitor and review activities of all departments with the objective of efficient resource utilization.

• Review the Bank’s business strategy and annual operating plans (revenue and cost) and monitors progress towards their achievement, taking appropriate corrective action as necessary.

• Ensure continuity of management so that the day to day running of the Bank is unaffected by the absence of any one / all Committee members.

• Avoid concentrations of decision making power in the Bank by installing an appropriate delegation of authorities for operational decisions.

• Promote consistence and cohesiveness in the Bank’s relationships with all its stakeholders.

• Track industry trends and developments.

2- Management Risk Committee (MRC)

The principal role of the MRC is to assist the Board in the development, installation, and ongoing maintenance of an integrated enterprise risk management framework within FEB. The principal duties & responsibilities of the MRC include the following:

• Formulate and recommend Risk Strategy to the Board for their approval

• Develop and recommend Risk Policies to the Board for their approval

• Review and approve all types of counterparty exposures, including, but not limited to credit transactions, investments, Islamic financings, sukuks, placements etc.

• Exercises the powers specifically delegated to it with care and diligence.

• Review all assumptions of risk howsoever originated, (credit counterparty, investment, operational, treasury) and approve/reject or recommend the proposal to the relevant approving authorities depending on the approval authority level.

• Define and set risk parameters and benchmarks that are consistent with the Bank’s strategic business objectives and risk profile;

• Proactively review the Bank’s risk profile and ensure it is within the risk parameters approved by the Board;

• Review the Bank’s provisioning requirement and capital adequacy and allocate capital to businesses as required.



3- Asset and Liability Committee (ALCO)

ALCO’s principal responsibilities are to:

• Propose the necessary policies and procedures to manage liquidity and market risk.

• Review and monitor the balance sheet (and off-balance sheet positions) of the Bank (including the impact of its subsidiaries) such that the Board’s liquidity and market risk policies are implemented.

• Ensure that lines of authority and accountability within the liquidity and market risk management process are clearly delineated.

• Oversee controls to manage the Bank’s market risk.

• Propose strategies to the Board in respect of proprietary investments and the use of derivatives.

• Ensure that on a day-to-day basis the Bank complies with applicable laws and regulations.

4- Human Resources Committee (HRC)

The principal role of the HRC is to assists the Board’s NRGC by performing the following tasks:

• Ensuring the Bank has an effective organizational structure and appropriately staffed at all times to achieve the business plan approved by the Board.

• Monitor competitive human resources and compensation policies and practices and recommending changes as appropriate.

• Ensuring appropriate processes are in place for the selection, evaluation, compensation, and succession of staff and senior management.

• Evaluating and recommending compensation for the staff.

• Evaluating other related initiatives as may be necessary or desirable to enhance performance.

• Perform such other tasks as delegated by the NRGC from time to time.

The duties & responsibilities of the (HRC) has the following specific responsibilities:

• Assist the Board’s NRGC in reviewing annually the Bank’s organizational structure, compensation philosophy, performance management system and compensation guidelines, and human resources policies, and recommend to the Board any necessary changes.

• Review the annual adjustments to compensation proposed by management and, if satisfied, recommend approval to the Board.

• Developing criteria to be met by prospective candidates, and a broad competitive search process

• Reviewing and assessing qualifications of candidates and recommending a candidate to the NRGC

• Review Management’s proposals for the appointment of executives and senior managers.

• Review the management’s succession and development plans for the executives and senior managers and training plan for all Bank staff.


FEB shareholders List ( Table 2) As of 31 December 2013

No. Name Nationality No. of SharesNominal Value

(USD)Percentage

of Capital

1 Tasameem Real Estate Co. LLC UAE 218,503,834 218,503,834 21.85 %

2 Libyan Investment Authority (Government of Libya) Libya 162,500,000 162,500,000 16.25 %

3Abu Dhabi Water and Electricity Authority(Government of Abu Dhabi)

UAE 150,000,000 150,000,000 15 %

4 Emirates Islamic Bank PSJC UAE 100,000,000 100,000,000 10 %

5 Mohamed Bin Hussain Ali Al Amoudi Saudi Arabia 50,000,000 50,000,000 5 %

6 Al Jabr Trading Co. Saudi Arabia 50,000,000 50,000,000 5 %

7 Ithmaar Development Co. Ltd Cayman Island 45,000,000 45,000,000 4.50 %

8 Capital Management House B.S.C. (c) Bahrain 39,401,857 39,401,857 3.94 %

9 Dubai Investment PJSC UAE 35,000,000 35,000,000 3.50 %

10 Omar Ibn Abdullah Ibn Hassan Bahassan Saudi Arabia 20,000,000 20,000,000 2.00 %

11Awqaf and Minors Affairs Foundations(Dubai Government)

UAE 20,000,000 20,000,000 2.00 %

12 Al Taif Investment L.L.C. UAE 15,000,000 15,000,000 1.50 %

13 Taqa Investment Company Ltd Cayman Island 12,621,379 12,621,379 1.26 %

14General Pension and Social Security Authority (Government of the United Arab Emirates)

UAE 12,500,000 12,500,000 1.25 %

15 RAK Properties PJSC UAE 12,500,000 12,500,000 1.25 %

16 Khaleeji Commercial Bank B.S.C. Bahrain 10,000,000 10,000,000 1.00 %

17 Bahrain Islamic Bank B.S.C. Bahrain 10,000,000 10,000,000 1.00 %

18 Sultan Group Investment L.L.C. UAE 10,000,000 10,000,000 1.00 %

19 Sharhaj Islamic Bank UAE 10,000,000 10,000,000 1.00 %

20 Abdul Razak Mohammed Qanbar Al Ansari Holding Company L.L.C. Saudi Arabia 6,670,000 6,670,000 0.67 %

21 Nahar Investment Co. W.L.L. Bahrain 5,302,930 5,302,930 0.53 %

22 Sheikh Mohammed Bin Faisal Bin Thani Al Thani Qatar 5,000,000 5,000,000 0.50 %

Total 1,000,000,000 1,000,000,000 100 %


Share ownership by size of shareholding

Less than 5% 27%

5% up to less than 10% 10%


Composition of regulatory capital requirement

Credit Risk

Weight Exposures

81%

Market Risk

Weighted Exposures

8%

Operational Risk

Weighted Exposures

11%

82% 91% 83% 86% 73%

2013 2012 2011 2010 2009

UAE; 59.61%

Share ownership by nationality

Bahrain; 6.47%

KSA; 12.67%

Libya; 16.25%

Qatar; 0.50%

Cayman Island; 4.50%

Capital adequacy ratio



Less than 5% 27%




Credit Risk

Weight Exposures

81%

Market Risk

Weighted Exposures

8%

Operational Risk

Weighted Exposures

11%

82% 91% 83% 86% 73%

2013 2012 2011 2010 2009

UAE; 59.61%


Bahrain; 6.47%

KSA; 12.67%

Libya; 16.25%

Qatar; 0.50%





CORPORATE GOVERNANCE AND TRANSPARENCY DISCLOSURES:

a) Board Structure & Basic Organizational Chart:

I. Board StructureRefer to (Table 1) Page 28/29.

II. Basic Organizational Chart Refer to Chart Page 26.

III. Independent Board members The Board of FEB has the following 3 independent Directors as follows:

1- Mr. Mohamed Ali Al Fahim.

2- Mr. Mohamed Badawy Al-Husseiny.

3- Mr. Ebrahim Hussain Ebrahim.

b) Bios of Board Members and Senior Management: Refer to the Board Bio’s Page 4 and to the Senior Management Bio’s Page 12.

c) Information on the managerial structure:

I. Committees Refer to Page 28.

II. Segregation of duties: Detailed job descriptions that ensure proper segregation of duties are in place for each role. Also, all critical positions (approved persons) are approved by the CBB as required.

III. Reporting lines All senior management members reports to either CEO or appropriate Board Committees.

IV. Responsibilities: As defined in each job description.

d) Performance-linked incentive structure: FEB had no performance-linked incentive structure during 2013.

e) Nature and extent of transactions with related parties: Covered under Note 23 of the consolidated financial statements.

f) Approval process for related party transactions:Approval process for related party transaction is exactly the same as the approval process for unrelated party transactions as they are treated on arm’s length basis and there is no exceptional treatment/process for approving such transactions.Refer to Note (o) below.


g) Changes in the structures from prior periods:

- Board of Directors:

Was in 2012 As of 31 December 2013

H. E. Khadem Abdulla Al Qubaisi H. E. Khadem Abdulla Al Qubaisi

H. E. Abdulla Saif Al Nuaimi H. E. Abdulla Saif Al Nuaimi

Abdulfatah Abdulsalam Enaami Abdulmagid Breish

Abdulla Abdulkarim Showaiter Abdulla Abdulkarim Showaiter

Mohamed Ali Al Fahim Mohamed Ali Al Fahim

Mohamed Badawy Al-Husseiny Mohamed Badawy Al-Husseiny

Sadoun Barghash Al Sadoun Sadoun Barghash Al Sadoun

Ebrahim Hussain Ebrahim Ebrahim Hussain Ebrahim

Adel A. Aziz Al Jabr Adel A. Aziz Al Jabr

Khalid Jassim Bin Kalban

- Mr. Khalid Jassim Bin Kalban resigned in May 2013 - Mr. Abdulfatah Abdulsalam Enaami replaced by Mr. Abdulmagid Breish on 16 September 2013

Board’s Committees:

- Board Audit and Risk Committee (BARC):

Was in 2012 2013

Mohamed Ali Al Fahim Mohamed Ali Al Fahim

Ebrahim Hussain Ebrahim Ebrahim Hussain Ebrahim

Adel A. Aziz Al Jabr Adel A. Aziz Al Jabr

Sadoun Barghash Al Sadoun Sadoun Barghash Al Sadoun

Khalid Jassim Bin Kalban Khalid Jassim Bin Kalban*

* Mr. Khalid Jassim Bin Kalban resigned in May 2013

- Nomination, Remuneration & Governance Committee (NRGC):

Was in 2012 2013


Abdulfatah Abdulsalam Enaami Abdulfatah Abdulsalam Enaami*




- Board Investment Committee (BIC):

Was in 2012 2013

H. E. Khadem Abdulla Al Qubaisi H. E. Khadem Abdulla Al Qubaisi


Abdulfatah Abdulsalam Enaami Abdulfatah Abdulsalam Enaami*






h) Communications strategy:The Bank has a public disclosure policy approved by the Board of Directors. The Bank communicates with its customers and stakeholders in a timely manner through various channels. Information on developments, financial results, new products or any updates of existing products are placed on the Bank’s website www.1stenergybank.com and/or published in the media. The annual report includes all the notes for the current financial year and a minimum of three preceding financial years are provided on the Bank’s website. Product details are also disseminated to customers and other interested parties through prospectuses, brochures and/or periodic investment updates.

i) Distribution of ownership of shares by nationality:Refer to FEB shareholders list (Table 2) Page 32.

j) Directors’ and senior managers’ trading of the Bank’s shares during the year, on an individual basis: There was no such trading.

k) Distribution of ownership of shares by Directors and senior managers, on an individual basis:Directors and senior managers do not own any shares in the Bank.

l) Distribution of ownership of shares by size of shareholder: Refer to FEB Shareholders List (Table 2) Page 32.

m) Ownership of shares by government: The following government entities hold shares in the Bank:

- Libyan Investment Authority Government of Libya.- Abu Dhabi Water & Electricity Authority Government of Abu Dhabi.- Awqaf and Miners Affairs Foundation Government of Dubai.- General Pension & Social Security Authority Government of UAE.

n) The Board’s functions: - The Board aims to perpetuate a successful business and optimizing long term financial returns. - The Board is responsible for establishing the Bank’s policies and strategy and for regularly monitoring the effectiveness of executive management in carrying out those policies and strategies.

o) The types of material transactions that require Board approval: The Board has delegated certain approval authorities to the Management Risk Committee (MRC) and Board Investment Committee (BIC). These approval authorities are risk sensitive i.e. the higher the risk, the lower the approval authority amount. For the (MRC) the maximum approval amounts range from US$10MM to US$25MM, and for the (BIC) the maximum approval amounts range from US$30MM to US$70MM depending on the internal rating of the obligor. Any amount exceeding the BIC approval authority limit has to be approved by the Board.

p) Number and names of independent Board members: Refer to Note (a) - (III) Page 33.

q) Board terms and start date for each term for each Directors: Started June 2011 – ends June 2014.

r) What the Board does to induct, educate and orient new Directors:The Board arranges induction sessions to new Directors to educate them about their responsibilities, the business of the Bank, the regulator’s rules and regulations and introducing them to management as well. Further, appointment letters are issued by the Board to all new Directors which clearly state the rights, duties and expectations from new Directors. New Directors are given copies of the Directors Handbook as well for further information on the responsibilities of the Board and its committees.


s) Election system of Directors and any termination arrangements: Directors are elected by the Shareholders General Meeting in accordance with the Bank’s Memorandum & Articles and the Commercial Companies Law.

t) Meeting dates (number of meetings during the year):Refer to the Board and Sub-Committees Meetings (Table1) Page 28/29.

u) Attendance of Directors at each meeting:Refer to the Board and Sub-Committees Meetings (Table1) Page 28/29.

v) The Board’s code of ethical business conduct, and how the Board monitors compliance:

The Directors have adopted and will adhere to the following code of conduct:

1.1 To act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the Bank and its

shareholders and other stakeholders.

1.2 To act only within the scope of their responsibilities and not participate in the day-to-day management of the Bank.

1.3 To have a proper understanding of, and competence to deal with the affairs and products of the Bank and devote sufficient

time to their responsibilities.

1.4 To safeguard the confidentiality of Board discussions and deliberations.

1.5 Not to make improper use of information gained through the position as a Director or take improper advantage of the position

of Director.

1.6 To make informed decisions with sufficient detailed knowledge of the Bank’s business and performance.

1.7 To independently assess and question the policies, processes and procedures of the Bank , with the intent to identify and

initiate management action on issues requiring improvement.

1.8 Not to agree to the Bank incurring an obligation unless he/she believes at the time, on reasonable grounds, that the Bank

will be able to perform the obligations when it is required to do so.

1.9 Not to agree to the business of the Bank being carried out or cause or allow the business to be carried out, in a manner likely to

harm the Bank’s creditors.

1.10 To deal fairly and show respect to all of the Bank’s employees and customers.

1.11 Not enter into competition with the Bank.

1.12 Not demand or accept substantial gifts from the Bank for himself/herself or his/her associates.

1.13 Not misuse the Bank’s assets.

1.14 Not take advantage of business opportunities to which the Bank is entitled for himself/herself or his/her associates.

1.15 Disclose to the Board any potential conflicts of interest.

1.16 Excuse themselves from any discussions or decision-making that involve a subject in which they are incapable of providing

objective advice or which involves a real or potential conflict of interest.

The Directors’ observance of the code of conduct will be regularly reviewed by the Board Audit & Risk Committee.

w) Minimum number of Board committee meetings per year, the actual number of Board meetings, attendance of committees’

members and the work of committees and any significant issues arising during the period:

- Refer to the Board and Sub-Committees Meetings (Table1) Page 28/29.

- No significant issues arose.



x) Reference to Module HC and any amendments subsequently made by the CBB:

Bahrain’s Ministry of Industry and Commerce issued a Corporate Governance Code (CGC), effective from 1 January 2011, with a view

to establishing best-practice corporate governance principles in Bahrain and providing protection for investors and other company

stakeholders through compliance with those principles. All public joint stock companies incorporated under the Bahrain Commercial

Companies Law had to be in full compliance by the end of 2011. In October 2010 the CBB updated the corporate governance provisions

of Module HC of the CBB Rulebook to align them with the new Code, and banks were required to be fully compliant with Module HC

by 31 December 2011. The CBB issued further updates to the Module in January, April and October 2011. In common with other CBB

Rulebook Modules, Module HC contains a mixture of Rules (with which compliance is mandatory) and Guidance (with which the Bank

is expected to comply or to explain its noncompliance). FEB has substantially implemented both Rules and Guidance in their entirety. As

per HC-1.3.7A of CBB Rulebook, at least half the Board meetings in any twelve-month period are held in the Kingdom of Bahrain.

y) Review of internal control processes and procedures:

The Board of Directors’ responsibilities are to:

- Review and evaluate the effectiveness of and/or weaknesses in the Bank’s internal controls, the overall control environment,

accounting and financial controls.

- Ensure that the Bank’s operations, individually and collectively are measured, monitored and controlled by appropriate effective and

prudent risk management systems that are commensurate with the scope of the Bank’s activities.

- Receive and discuss reports from management on an annual /periodic basis relating to compliance at the Bank (including anti-money

laundering and regulatory compliance).

In fulfilling its responsibilities, the Board has established appropriate number of sub-committees with members having sufficient

experience to enable them performing their functions effectively. The Board receive, review and discuss periodic reports from the

management, internal / external auditors which assess effectiveness of the Bank ’s internal control framework.

z) Directors responsibility with regard to the preparation of financial statements:

The Board of Directors, through its Board Audit & Risk Committee periodic meetings, has the following responsibilities in respect of the financial

statements:

- Review and discuss with the Bank’s management and external auditors the overall financial statements and assess any possible

improprieties in financial reporting or other matters.

- Assess whether the Bank has followed appropriate accounting policies and made appropriate estimates and judgments, taking into

account the views of the external auditors.

- Receive a written statement from the Bank’s CEO and the Head of Financial Control that the Bank’s interim and annual financial

statements present a true and fair view, in all material respects, of the Bank’s financial condition and results of operations in

accordance with applicable accounting standards.

aa) Assessment of Board of Directors & Committees:

The Board, its Committees and individual Directors are annually assessed by the Board with respect to their effectiveness and contribution.

bb) Website and Communication with Shareholders:

Refer to the Communications Strategy Note (h) Page 35.

cc) Investor / consumer awareness programs for information on new products and services:

Progress reports sent by the Investment Department to the respective Investors.


dd) Mediation and advice bureaus for investors and customers set up by the Bank , including clearly written procedures for logging

of complaints:

FEB has appointed a Customer Complaints Officer who is acting as per the approved Customer Complaints Mannual. His contact details

are available on the website of the Bank.

ee) Social functions and charitable contributions of the Bank :

Refer to note 30 of the consolidated financial statements.

ff) Governance arrangements, systems and controls employed by the Bank to ensure Sharia’a compliance:

Refer to Sharia’a Section Page 29.

gg) Non-Sharia’a-compliant earnings and expenditure and the manner in which they are disposed of:

The non-Sharia’a-complaint earnings and expenditure converted, by a decision of the Sharia’a Board of the Bank to a charity account.

hh) The annual zakah contributions of the Bank , where relevant:

Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on retained

earnings and other reserve balances at the end of the year with the payment of Zakah on share capital being the responsibility of the

Bank’s shareholders. For details of contributions, please refer to the statement of sources and uses of Zakah and Charity fund as well as

note 24 within the consolidated financial statements.

ii) Aggregate remuneration paid to board members:

Refer to note 23 of the consolidated financial statements.

jj) Remuneration policy of the Bank for Board members and senior management:

Remuneration of senior management as well as for all staff is reviewed by the Nomination, Remuneration, & Governance Committee

and approved by the Board. With regards to Board members, there is no policy as such, but the Nomination Committee does review

their remuneration, if any, and submits their recommendation to the Board as per market practice.

kk) Aggregate remuneration paid to senior management.

Details are as per note 23 of the consolidated financial statements.



OTHER DISCLOSURES:

a) Names of shareholders owning 5% or more:

Refer to FEB Shareholders List (Table 2) Page 32.

The Bank is not aware that any shareholders owning 5% or more act in concert or of any voting, shareholders’ or other agreements

among them.

b) Directorships held by the Directors on other Boards:

Refer to The Board Bio’s Page 4.

c) Director’s trading of the Bank’s shares during the year:

There was no such trading

d) Audit fees charged by the external auditor:

Audit fees: BD 28,223

e) Non-audit services provided by external auditors:

Review of Reporting: BD 27,068

Other Consultations: BD 8,000

f) Reasons for any switching of auditor and reappointing of auditor:

Auditors were reappointed by the AGM for the new financial year.

g) Conflict of interest :

The Directors Handbook issued to all Directors on joining the Board contains a detailed section on conflicts of interest describing the

steps the Board takes to ensure Directors exercise independent judgment in considering transactions and agreements in respect of which

a Director or executive officer has a material interest. The Handbook stresses that:

• The Board and its members must act with honesty, integrity and in good faith, with due diligence and care, with a view to the best

interest of the Bank and its shareholders and other stakeholders.

• Each Director must consider himself as representing all shareholders and must act accordingly.

• Directors must act ethically at all times and in accordance with the Code of Conduct and the Conflict of Interest policy.

• If an actual or potential conflict of interest arises in respect of a Director, the Director must promptly disclose such conflict to the Board.

• Each Director must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with the Bank.

• A Director must absent himself from any discussion or decision-making that involves a subject where he is incapable of providing

objective advice, or which involves a subject, transaction or proposed transaction where there is a potential conflict of interest.

• The Secretary shall ascertain, at the beginning of each Board committee meeting, the existence of any conflicts of interest and

minute them accordingly.

• No conflict of interest was reported during 2013.

h) Details of penalties paid:

No penalties has been paid during 2013.


FINANCIAL STATEMENTS


IN COMPLIANCE WITH THE TERMS OF OUR LETTER OF APPOINTMENT, WE ARE REQUIRED TO REPORT AS FOLLOWS:

The Sharia’a Supervisory Board (“SSB”) has reviewed the principles and contracts relating to the transactions conducted by First Energy Bank (the “Bank”) during the course of the year ending December 31, 2013. Their review was conducted in order to judge whether the Bank followed the principles of the Islamic Sharia’a, specific fatwas, and guidelines issued by the SSB. The SSB has also reviewed and approved the internal periodic Sharia’a reports issued by the Bank’s Head of Sharia’a Compliance. The Bank’s management is responsible for ensuring that its operations are carried out in compliance with SSB rulings.

The SSB responsibility is to present an independent view of the Bank’s operations and to communicate it to the shareholders.

The review was planned and performed so as to obtain all necessary information and explanations to provide sufficient evidence proving that the Bank has not violated any rules and principles of the Islamic Sharia’a.

IN OUR OPINION:

• The Bank’s contracts, transactions and deals for the year ending December 31, 2013 are in compliance with the rules and principles of the Islamic Sharia’a.

• The Bank’s allocation of profit and charging of losses relating to investment accounts are in compliance with the rules and principles of the Islamic Sharia’a.

• The Bank’s calculation of Zakat is in compliance with the rules and principles of the Islamic Sharia’a.

We beseech the Almighty to grant us excellence and success.

Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh

Sheikh Dr. Nizam Mohammed Saleh Yaqubi Sheikh Dr. Mohammed Ali bin Ibrahim Elgari Sheikh Dr. Osama Mohamed Bahar

Chairman - Sharia’a Supervisory Board Member - Sharia’a Supervisory Board Member - Sharia’a Supervisory Board

SHARIA’A SUPERVISORY BOARD REPORT


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the accompanying consolidated financial statements of First Energy Bank B.S.C. (c) (the “Bank”) and its subsidiaries (the “Group”) which comprise the consolidated statement of financial position as at 31 December 2013, and the related consolidated statements of income, cash flows, changes in equity and sources and uses of zakah and charity fund 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 Auditing Standards for Islamic Financial Institutions issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”). 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 financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2013, the results of its operations, its cash flows and changes in equity for the year then ended in accordance with Financial Accounting Standards issued by AAOIFI.

OTHER MATTERS

As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB) Rule Book (Volume 2), we report that:

a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; and

b) the financial information contained in the Report of the Board of Directors is consistent with the consolidated financial statements.

We are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 2 and applicable provisions of Volume 6) and CBB directives or the terms of the Bank’s memorandum and articles of association having occurred during the year ended 31 December 2013 that might have had a material adverse effect on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by management in response to all our requests. The Bank has also complied with the Islamic Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Group.management in response to all our requests. The Bank has also complied with the Islamic Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Group.

FIRST ENERGY BANK B.S.C. (c) Manama, Kingdom of Bahrain 17 February 2014


CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2013 US$ 000’s

The attached notes 1 to 31 form part of these consolidated financial statements. The attached notes 1 to 31 form part of these consolidated financial statements.

Notes 2013 2012

ASSETS

Cash and bank balances 3 55,986 15,654 Due from financial institutions 4 129,394 158,403 Investment in ijarah assets 5 516,484 529,363 Investment securities 6 489,825 497,387 Investment in associates 7 130,340 101,049 Other assets 8 84,981 89,263 Property and equipment 9 10,283 9,345

TOTAL ASSETS 1,417,293 1,400,464

LIABILITIES AND EQUITY

LiabilitiesDue to financial institutions 10 48,189 59,612 Murabaha payable 11 48,756 54,081 Term financing 12 63,882 68,200 Other liabilities 13 60,141 58,992

Total liabilities 220,968 240,885

Equity

Equity attributable to shareholders of the parent 14Share capital 1,000,000 1,000,000 Statutory reserve 7,991 4,784 Investments fair value reserveInvestment fair value reserve 11,464 - Foreign exchange translation reserve (1,834) (2,170)Retained earnings 36,074 32,104

Total equity attributable to shareholders of the parent 1,053,695 1,034,718

Non-controlling interest 15 142,630 124,861

Total equity 1,196,325 1,159,579

TOTAL LIABILITIES AND EQUITY 1,417,293 1,400,464

COMMITMENTS 26 69,890 77,968

The consolidated financial statements, which consist of pages 44 to 79, were approved by the Board of Directors on 17 February 2014 and signed on its behalf by:

H.E. Khadem Al Qubaisi Mohamed Al Fahim Mohamed Ghanem

Chairman Board Member Chief Executive Officer


CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2013 US$ 000’s


Notes 2013 2012

INCOME

Profit from Islamic financing 16 472 5,090 Profit on Islamic financing (530) (644)

Net (loss) income from Islamic financing (58) 4,446

Rental income from investment in ijarah assets 68,605 33,084 Financing cost relating to term financing

obtained to purchase ijarah assets 12 (2,439) (2,506)Profit on Islamic financing against investment

in ijarah assets (1,697) (1,053)Depreciation on investment in ijarah assets 5 (13,742) (7,459)Other operating expenses relating to

ijarah assets 17 (19,237) (8,553)

Net income on investment in ijarah assets 31,490 13,513

Income from securities 18 24,269 17,259 Share of results of associates 7 4,947 (7,067)Profit on subordinated finance 19 2,906 10,657 Gain arising on conversion of

associate to subsidiary - 21,759 Other income - net 725 596

Total income 64,279 61,163

EXPENSES

Staff costs 20 9,677 10,656 General and administrative expenses 21 4,362 7,327 Depreciation and amortisation 324 2,079

Total expenses 14,363 20,062

NET INCOME FOR THE YEAR BEFORE PROVISION FOR IMPAIRMENT / WRITE OFF 49,916 41,101

Provision for impairment / write off 22 (9,828) (4,077)

NET INCOME FOR THE YEAR 40,088 37,024

Attributable to:Shareholders of the parent 32,071 29,838 Non-controlling interest 8,017 7,186

40,088 37,024


CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2013 US$ 000’s


Notes 2013 2012

OPERATING ACTIVITIESNet income for the year 40,088 37,024 Adjustments for :

Depreciation on investment in ijarah assets 5 13,742 7,459 Depreciation and amortisation 324 2,079 Amortisation of premium 2,973 2,756 Fair valuation loss on equity option - 1,386 Provision for impairment / write off 22 9,828 4,077 Share of results of associates 7 (4,947) 7,067 Gain arising on conversion of associate to subsidiary - (21,759)Gain on disposal of securities (12,939) (5,794)Loss on disposal of property and equipment 22 -

Operating profit before changes in operating assets and liabilities 49,091 34,295

Net changes in operating assets and liabilities:Financing receivables - 317,008 Due from financial institutions original maturity of more than 90 days 4,206 26,219 Other assets 5,559 (40,800)Due to financial institutions (11,423) (29,915)Other liabilities (9,085) (43,577)Payment to charities (908) (207)

Net cash from operating activities 37,440 263,023

INVESTING ACTIVITIESPurchase of securities (233,619) (345,113)Proceeds from disposal / maturity of securities 261,300 182,485 Net changes in investment in associates (24,008) (16,000)Investment in ijarah assets (863) (515,063)Purchase of property and equipment (1,156) (104)Purchase of software (94) (184)

Net cash from (used in) investing activities 1,560 (693,979)

FINANCING ACTIVITIESMovement in non-controlling interest 15 9,796 80,115 Dividend paid (23,580) - Dividend paid to non-controlling interest 15 (44) (31)Murabaha payable (5,325) 54,081 Term financing, net (4,318) 68,200

Net cash (used in) from financing activities (23,471) 202,365

NET MOVEMENT IN CASH AND CASH EQUIVALENTS 15,529 (228,591)

Cash and cash equivalents at 1 January 169,851 398,442

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 185,380 169,851

For the purpose of consolidated statement of cash flows, cash and cash equivalents comprise of the following:

Cash and bank balances 3 55,986 15,654 Due from financial institutions with original maturity of 90 days or less 4 129,394 154,197

185,380 169,851


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2013 US$ 000’s


Equity attributable to shareholders of the parent

NotesShare

capitalStatutory

reserve

Investmentfair value

reserve

Foreignexchange

translationreserve

Retainedearnings Total

Non-controlling

interestTotal

equity

Balance at 1 January 2013 1,000,000 4,784 - (2,170) 32,104 1,034,718 124,861 1,159,579

Movement in non-controllinginterest 15 - - - - - - 9,796 9,796

Dividends of subsidiary 15 - - - - - - (44) (44)

Unrealised gain on remeasurementto fair value of investment at fair value through equity - - 15,293 - - 15,293 - 15,293

Net amount transferred to consolidated statement of income on disposal of investment at fair vaule through equity - - (3,829) - - (3,829) - (3,829)

Effects of exchange difference ontranslation of investment in subsidiary 336 336 - 336

Net income for the year - - - - 32,071 32,071 8,017 40,088

Dividend paid 14 - - - - (24,000) (24,000) - (24,000)

Transfer to statutory reserve - 3,207 - - (3,207) - - -

Transfer to zakah and charity fund - - - - (894) (894) - (894)

Balance at 31 December 2013 1,000,000 7,991 11,464 (1,834) 36,074 1,053,695 142,630 1,196,325

Balance at 1 January 2012 1,000,000 1,800 - (2,170) 5,481 1,005,111 37,591 1,042,702

Movement in non-controlling interest 15 - - - - - - 80,115 80,115

Dividends of subsidiary 15 - - - - - - (31) (31)

Net income for the year - - - - 29,838 29,838 7,186 37,024

Transfer to statutory reserve - 2,984 - - (2,984) - - -

Transfer to zakah and charity fund - - - - (231) (231) - (231)

Balance at 31 December 2012 1,000,000 4,784 - (2,170) 32,104 1,034,718 124,861 1,159,579


CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY FUNDFor the year ended 31 December 2013 US$ 000’s

Notes 2013 2012

Sources of zakah and charity funds

Undistributed zakah and charity funds at the beginning of the year 25 1

Contributions by the Bank 894 231

Total sources of zakah and charity funds during the year 919 232

Uses of zakah and charity fund

Contributions for charitable purposes 908 207

Total uses of funds during the year 908 207

Undistributed zakah and charity fund at 31 December 13 11 25



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2013 US$ 000’s

1 INCORPORATION AND ACTIVITIES

First Energy Bank B.S.C. (c) (the «Bank») is a closed shareholding company incorporated in the Kingdom of Bahrain on 23 June 2008, under Commercial Registration No. 69089. The Bank operates under an Islamic Wholesale Banking license issued by the Central Bank of Bahrain (the «CBB»). The Bank’s registered office is at Building 1459, Road 4626, Block 346, Manama, Kingdom of Bahrain. The principal activities of the Bank and its subsidiaries (the «Group») include Sharia’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios primarily related to the energy sector. The Bank is regulated by the CBB and supervised by a Sharia’a Supervisory Board for compliance with Sharia’a rules and principles. The consolidated financial statements were authorised for issue by the Board of Directors on 17 February 2014.

2 ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements have been prepared on a historical cost basis, except for equity-type instruments through equity that have been measured at fair value. The consolidated financial statements are presented in United States Dollar («US$») being the reporting and functional currency of the Bank. All values are rounded to the nearest thousand (US$ <000) unless otherwise indicated. Statement of ComplianceThe consolidated financial statements have been prepared in accordance with Financial Accounting Standards (FAS) as 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 Group, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, and the CBB regulations (as contained in Volume 2 and applicable provisions of Volume 6 of the CBB rulebook) and directives. In accordance with the requirements of AAOIFI, for matters which are not covered by the AAOIFI standards, the Group uses relevant International Financial Reporting Standards («IFRS») as issued by the International Accounting Standards Board («the IASB»).

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at and for the year ended 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full. Subsidiaries are fully consolidated from the date of 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. Non-controlling interest in a subsidiary’s net assets is reported as a separate item in the Group’s owners’ equity. In the consolidated statement of income, non-controlling interest is included in net profit, and shown separately from that of the shareholders. Non-controlling interest in a subsidiary’s net assets is reported as a separate item in the Group’s owners’ equity. In the consolidated statement of income, non-controlling interest is included in net profit, and shown separately from that of the shareholders.

Transactions with non-controlling interests are handled in the same way as transactions with external parties. Sale of participations to non-controlling interests result in a gain or loss that is recognised in the consolidated statement of income. Changes in the ownership interest in a subsidiary that do not result in a loss of control are accounted for as an owners’ equity transaction. The following are the principal subsidiaries of the Bank, which are consolidated in these consolidated financial statements:




2 ACCOUNTING POLICIES (continued)

Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interests’ share of changes in owners’ equity since the date of combination. Losses applicable to the non-controlling interest in excess of the non-controlling interest in a subsidiary’s owners’ equity are allocated against the interests of the Group except to the extent that the non-controlling interest has a binding obligation and is able to make an additional investment to cover the losses.

Transactions with non-controlling interests are handled in the same way as transactions with external parties. Sale of participations to non-controlling interests result in a gain or loss that is recognised in the consolidated statement of income. Changes in the ownership interest in a subsidiary that do not result in a loss of control are accounted for as an owners’ equity transaction.

The consolidated financial statements comprise the financial statements of the Bank and its following subsidiaries:

Name of subsidiary Equity interest Country ofincorporation

Nature of business

2013 2012

North Africa Investment Company 100% 100% Kingdom of Bahrain To hold the Group’s 40% associate stake in Arab Drilling and Workover Company, Libya.

First Energy-Oman 100% 100% Cayman Islands To hold 15% direct interest in Al Izz Islamic Bank in Oman.

FEB-Novus Aircraft Holding Company

98.5% 98.5% Commonwealth of the Bahamas

To purchase and lease one A330-300 aircraft to Malaysian Airlines System.

Cosmos Industrial Investment Corporation B.S.C. (c) *

93% 93% Kingdom of Bahrain Holding company for investment in a project for development and operation of a polycrystalline silicon plant in the Kingdom of Saudi Arabia.

MENAdrill Investment Company ** 59.44% 59.44% Cayman Islands Development and lease of jack up oil rigs.

Al Dur Energy Investment Company 59% 59% Cayman Islands To hold 15% indirect interest in a power and water plant project in the Kingdom of Bahrain.

Feboran AD *** 59.95% - Bulgaria To hold the Group’s 20.3% associate stake in Neochim AD, Bulgaria.

* This subsidiary is consolidated based on 31 December 2013 accounts audited by the respective subsidiary’s auditors.** This subsidiary is consolidated based on 30 November 2013 unaudited accounts reviewed by the respective subsidiary’s auditors.*** This subsidiary was incoporated on 21 December 2013, to hold a 20.3% equity stake in Neochim AD, Bulgaria (note 7).

2.2 Summary of significant accounting policies The significant accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous financial year, except for the adoption of new standards and interpretations effective as of 1 January 2013.

FAS 26 Investment in Real EstateFAS 26 covers the recognition, measurement, presentation and disclosure of investment in real estate that is acquired for the purpose of earning periodical income or held for future capital appreciation or both. The adoption of this standard did not have any impact on the accounting policies, financial position or performance of the Group.




The adoption of other standards, changes in IFRS or interpretations as issued by the IASB do not have any impact on the Group. In addition, standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are not expected to have any significant impact on the Group’s financial position or performance.

a. Cash and cash equivalents

Cash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with banks and amounts due from financial institutions with original maturities of 90 days or less. b. Due from financial institutions These comprise international commodity murabaha and wakala contracts, which are trade transaction agreements stated net of deferred profit and provision for impairment. c. Investment in ijarah assets Investment in ijarah assets are stated at cost less accumulated depreciation and accumulated impairment. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.

Depreciation is calculated using the straight-line method to write down the cost of ijarah assets to their residual values over their useful life.

Ijarah assets are derecognised on disposal or when no future economic benefits are expected from their use. Any gain or loss arising on derecognition of the ijarah asset (calculated as the difference between the net disposal proceeds and the carrying amount of the ijarah asset) is recognised in the consolidated statement of income in the year the asset is derecognised. d. Investment securities These are classified as either equity type instruments carried at fair value through equity or debt type instruments carried at amortised cost.

Initial recognitionAll investments are recognised on the acquisition date and are recognised initially at their fair value plus transaction costs.

Equity-type instruments at fair value through equitySubsequent to acquisition, these are re-measured at fair value with unrealised gains or losses recognised in owners’ equity until the investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously recorded in owners’ equity is recognised in the consolidated statement of income.

Instruments which do not have a quoted market price or other appropriate methods from which to derive reliable fair values are stated at cost less impairment allowances.

Debt-type instruments at amortised costThese instruments are managed on a contractual yield basis and are not held for trading and have not been designated at fair value through statement of income. Such investments are carried at amortised 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 investments is recognised in the consolidated statement of income, when the investment is de-recognised or impaired. e. Investment in associates An associate is an entity over which the Bank has significant influence. The Bank’s investment in its associates is accounted for using the equity method.

Under the equity method, the investment in associates is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Bank’s share of net assets of the associates.





The consolidated statement of income reflects the share of the results of operations of the associates. Unrealised gains and losses resulting from transactions between the Bank and the associates are eliminated to the extent of the interest in the associates.

The share of profit or loss from associates is shown on the face of the consolidated statement of income.

The financial statements of the associates are prepared for the same reporting period as the Bank. Where necessary, adjustments are made to bring the accounting policies in line with those of the Bank.

After application of the equity method, the Bank determines whether it is necessary to recognise an additional impairment loss on the Bank’s investment in its associates. The Bank determines at each reporting date whether there is any objective evidence that the investment in associates is impaired. If there is such evidence, the Bank calculates the amount of impairment as the difference between the recoverable amount of the associates and its carrying value, then recognises the loss as the ‘Share of results of associates’ in the consolidated statement of income.

Upon loss of significant influence over associates, the Bank measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associates upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated statement of income.

f. Property and equipment Property and equipment are stated at cost, net of accumulated depreciation and accumulated impairment. The cost of additions and major improvements are capitalised; maintenance and repairs are charged to the consolidated statement of income as incurred. Gains or losses on disposal are reflected in other income. Depreciation is calculated using the straight-line method over the estimated useful lives of 3-5 years other than freehold land, which is deemed to have an indefinite life. g. Due to financial institutions These comprise international commodity murabaha and wakala contracts, which are trade transaction agreements stated net of deferred profit and provision for impairment.

h. Fair values Fair value is determined for each financial asset 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 consolidated statement of financial position 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 or applying relevant valuation techniques such as net present value of estimated future cash flows.

(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 impairment. i. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash-




generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. j. Intangible assets Intangible assets comprise principally the value of computer software. Intangible assets acquired are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. k. Dividends Dividends to shareholders are recognised as liabilities in the period in which they are declared. l. Revenue recognition Profit from Islamic financingProfit from Islamic financing (murabaha and wakala) is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised on a 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 excluded from the consolidated statement of income.

Profit on subordinated financeProfit on subordinated finance is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised using the effective profit rates over the period of the contract. Recognition of income is suspended when the Group believes that the recovery of these amounts may be doubtful.

Rental income from investment in ijarah assetsRental income from investment in ijarah assets is recognized on the basis of contractual amounts receivable on a time apportioned basis.

Income from investment in sukukIncome from investment in sukuk is recognised on a time-apportioned basis using the effective profit method.

Dividend incomeDividend income is recognised when the right to receive is established. This is usually the ex-dividend date for equity securities.

Investment advisory services incomeInvestment advisory services income is recognised when the services are provided and income is earned. This is usually when the Bank has performed all significant acts in relation to a transaction and it is highly probable that the economic benefits from the transaction will flow to the Bank. Significant acts in relation to a transaction are determined based on the terms agreed in the private placement memorandum/contracts for each transaction.

m. Earnings prohibited by Sharia’a The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly all non-Islamic income is credited to a charity fund which the Group uses for social welfare activities.

n. ZakahZakah is calculated using the net invested funds method as prescribed by the Bank’s Shari’a Supervisory Board . Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on statutory reserve, investment fair value reserve, foreign exchange translation reserves and retained earning balances at the end of the year with the payment of Zakah on share capital being the responsibility of the Bank’s shareholders.





o. Employees’ end of service benefits Provision is made for end of service indemnity payable under the Bahraini Labor Law applicable to non-Bahraini employees’ accumulated periods of service at the consolidated statement of financial position date.

Bahraini employees of the Group are covered by contributions made to the Social Insurance Organisation as a percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed when due.

The Bank also operates a voluntary employees saving scheme under which the Bank and the employee contribute monthly on a fixed percentage of salaries basis. The scheme is in the nature of a defined contribution scheme and contributions by the Bank are recognised as an expense in the consolidated statement of income when they are due. p. Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation. q. Impairment of financial assets An assessment is made at each consolidated statement of financial position 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 statement of income. Specific provisions are created to reduce all impaired financial contracts to their realisable cash equivalent value. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment value was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the consolidated statement of income. In the case of equity-type instruments at fair value through equity, impairment is reflected directly as a write down of the financial asset. Impairment losses on equity-type instruments at fair value through equity are not reversed through the consolidated statement of income. Any subsequent increases in their fair value are recognised directly in equity. r. Foreign currenciesForeign currency transactions at the subsidiary level Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. The monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the financial position date. All differences are taken to the statement of income at the entity level.

Foreign currency translationsAs at the reporting date, assets and liabilities in foreign currencies are translated into the presentational currency of the Group (United States Dollar) at the rate of exchange ruling at the financial position date and their statement of income is translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign entity is recognised in the consolidated statement of income. s. Judgements and estimates The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported in the consolidated financial statements. The most significant uses of judgements and estimates are as follows:

Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Board of Directors is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis.

Classification of investmentsManagement decides on acquisition of an investment whether it should be classified as an equity-type instrument at fair value through statement of income, an equity-type instrument at fair value through equity or a debt-type instrument at amortised cost.




Special purpose entitiesThe Group sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold investments. The Group provides corporate administration, investment management and advisory services to these SPE’s, which involve the Group making decisions on behalf of such entities. The Group administers and manages these entities on behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The Group does not consolidate SPE’s that it does not have the power to control. In determining whether the Group has the power to control an SPE, judgments are made about the objectives of the SPE’s activities, its exposure to the risks and rewards, as well as about the Group intention and ability to make operational decisions for the SPE and whether the Group derives benefits from such decisions.

Impairment losses on financing contracts with customersThe Group reviews its financing contracts at each reporting date to assess whether an impairment allowance should be recorded in the consolidated financial statements. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about factors involving varying degrees of judgment and uncertainty and actual results may differ resulting in future changes to the provisions.

Impairment of equity-type instruments at fair value through equityThe Group treats equity-type instruments at fair value through equity 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 judgment. The Group evaluates factors, such as the historical share price volatility for comparable quoted equities and future cash flows and the discount factors for comparable unquoted equities.

LiquidityThe Group manages its liquidity through consideration of the maturity profile of its assets and liabilities which is set out in the liquidity risk disclosures in note 27 (a). This requires judgment when determining the maturity of assets and liabilities with no specific maturities.

t. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a Group of similar financial assets) is derecognised when: (i) the right to receive cash flows from the asset have expired;

(ii) the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. u. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. v. Sharia’a supervisory board The Group’s business activities are subject to the supervision of a Sharia’a supervisory board consisting of three members appointed by the general assembly of shareholders.

w. Trade date accounting All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.




3 CASH AND BANK BALANCES

2013 2012

Balances with banks 55,973 15,644 Cash in hand 13 10

55,986 15,654

4 DUE FROM FINANCIAL INSTITUTIONS

2013 2012

Commodity murabaha contracts 94,959 109,409 Wakala contracts 34,450 49,024

129,409 158,433 Less: Deferred profits (15) (30)

129,394 158,403 The original maturity of commodity murabahas and wakala contracts are as follows:

2013 2012Original maturity of 90 days or less 129,394 154,197 Original maturity of more than 90 days - 4,206

129,394 158,403

5 INVESTMENT IN IJARAH ASSETS

Aircraft Oil rigs Total

Cost:At 1 January 2013 100,000 440,889 540,889 Additions - 863 863

At 31 December 2013 100,000 441,752 541,752

Depreciation:At 1 January 2013 3,300 8,226 11,526 Charge for the year 3,600 10,142 13,742

At 31 December 2013 6,900 18,368 25,268

Net book value:As at 31 December 2013 93,100 423,384 516,484

As at 31 December 2012 96,700 432,663 529,363

An Aircraft with a carrying value of US$ 93,100 thousand (31 December 2012: US$ 96,700 thousand) has been mortgaged against the term financing availed by Norddeutsche Landesbank Girozentrale (note 12).




6 INVESTMENT SECURITIES

Amortised Cost Fair value through equity Total

At 31 December 2013

Debt type

Quoted investments - Sukuk 349,431 - 349,431

Unquoted investment - Debt security* 83,056 - 83,056

Equity type

Quoted investment - Equity shares - 36,343 36,343

Unquoted investments - Equity shares* / ** - 40,995 40,995

432,487 77,338 509,825

Provision for impairment - (20,000) (20,000)

432,487 57,338 489,825

At 31 December 2012

Debt type

Quoted investments - Sukuk 392,967 - 392,967

Unquoted investment - Debt security 79,215 - 79,215

Equity type

Unquoted investments - Equity shares ** - 45,205 45,205

472,182 45,205 517,387

Provision for impairment - (20,000) (20,000)

472,182 25,205 497,387

*The Group has converted US$ 3,841 thousand from contingent and standby equity in Al Dur Energy Investment Company («ADEIC») of US$ 5,205 thousand into an interest free shareholder loan. Additionally, a balance of US$ 369 thousand of standby equity has been returned to ADEIC, of which US$ 292 thousand has been utilised to top-up the liability reserve account (note 8).

The Group’s quoted investment in equity shares held at fair value through equity amounting to US$ 36,343 thousand as of 31 December 2013 (31 December 2012: Nil) includes an unrealised gain on remeasurement to fair value of US$ 11,464 thousand (31 December 2012: Nil).

The Group’s investments in sukuk held at amortised cost amounting to US$ 349,431 thousand as of 31 December 2013 (31 December 2012: US$ 392,967 thousand) have a fair value of US$ 351,987 thousand (31 December 2012: US$ 402,646 thousand).

** Under unquoted investments which are held at fair value through equity are investments amounting to US$ 20,995 thousand (31 December 2012: US$ 25,205 thousand) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments.




7 INVESTMENT IN ASSOCIATES

2013 2012

At 1 January 101,049 92,116

Acquisition during the year * 24,398 48,078

Elimination of intra-group transactions - (1,078)

Share of results of associates 4,947 (7,067)

Conversion of an associate to subsidiary - (31,000)

Foreign exchange translation differences 336 -

Reduction of share capital *** (390) -

At 31 December 130,340 101,049

* The Group has acquired a 20.3% stake in Neochim AD (through Feboran AD) on 21 December 2013. This associate has not been equity accounted in these consolidated financial statements due to the unavailability of financial information.

During 2012, the Bank exercised its equity conversion option on a murabaha financing facility provided to one of its associate companies which resulted in a gain of US$ 21,759 thousand and the conversion of the associate into a 59.44% owned subsidiary which is now consolidated in these consolidated financial statements.

Investment in associates comprise the following:

Name Country of incorporation % holding Nature of business

2013 2012

Arab Drilling and Workover Company ** Libya 40% 40% Lease of oil drilling rigs

Al Izz Islamic Bank *** Oman 15% 15% Islamic Banking

Neochim AD * Bulgaria 20.3% 0% Manufacture of chemicals and chemical products




Summarised financial information of associates that have been equity accounted in these consolidated financial statements, not adjusted for percentage of ownership held by the Group:

2013 2012

Total assets 667,655 458,407

Total liabilities 145,282 54,700

Total revenues 76,234 52,094

Total net income (loss) 9,252 (18,615)

** Based on the management accounts received from Arab Drilling and Workover Company, profit of US$ 14,236 thousand was recognised for the 11 month period ended 31 October 2013. The Group has recognised profit of US$ 5,694 thousand in these consolidated financial statements representing their 40% share.

*** Based on Al Izz Islamic Bank reviewed accounts, losses of US$ 4,984 thousand were recognised for the 11 month period ended 30 September 2013. The Group has recognised losses of US$ 747 thousand in these consolidated financial statements representing their 15% share. Further, Al Izz Islamic Bank has repaid US$ 390 thousand to First Energy Oman pertaining to pre-incorporation expenses incurred upon incorporation.

8 OTHER ASSETS

Notes 2013 2012

Project work-in-progress * 48,985 46,101

Profit receivable on subordinated finance 19 13,563 10,657

Liability reserve receivable ** 11,438 11,136

Ijarah receivable 11,131 4,910

Deferred expenses 3,179 5,134

Advances paid 1,533 1,656

Goodwill * 22 500 2,309

Intangible assets – software 214 248

Due from associate 65 67

Others 3,773 7,045

Provision for impairment* 22 (9,400) -

84,981 89,263

*Project work-in-progress comprises costs incurred for the acquisition and development of a project in the Kingdom of Saudi Arabia by Cosmos Industrial Investment Corporation B.S.C. (c). During the year, goodwill of US$ 1,809 thousand has been written off and a provision of US$ 9,400 thousand has been recognised against the project work in progress.

** Liability reserve receivable represents an amount that has been funded by Al Dur Energy Investment Company to Al Dur Power and Water Company to meet the liability reserve account (LRA) funding requirement under the common term agreement entered into on 29 June 2009, whereby the shareholders are required to fund such account in meeting the repayment of senior debt obligations (note 6).




9 PROPERTY AND EQUIPMENT

Land

Computersand

EquipmentMotor

vehicles

Furnitureand

fixtures Total

Cost:

At 1 January 2013 22,994 1,016 71 6,841 30,922

Additions - 197 173 786 1,156

Disposals - - - (6,841) (6,841)

At 31 December 2013 22,994 1,213 244 786 25,237

Depreciation:

At 1 January 2013 - 963 1 6,819 7,783

Charge for the year - 30 38 128 196

Disposal - - - (6,819) (6,819)

At 31 December 2013 - 993 39 128 1,160

Provision for impairment:

At 1 January 2013 13,794 - - - 13,794

Charge for the year - - - - -

Provision for impairment - - - -

Provision for impairment (refer note 17) - - - - -

At 31 December 2013 13,794 - - - 13,794

Net book values:

At 31 December 2013 9,200 220 205 658 10,283

At 31 December 2012 9,200 53 70 22 9,345

10 DUE TO FINANCIAL INSTITUTIONS

2013 2012

Wakala contracts 48,189 59,612

48,189 59,612




11 MURABAHA PAYABLE

The following table shows the movement of murabaha payable during the year:

2013 2012

Balance at beginning of the year 53,755 - Additions - 55,000 Repayments (5,270) (1,245)

48,485 53,755

Accrued profit 271 326

48,756 54,081

On 10 May 2012, MENAdrill Investment Company (the «subsidiary») refinanced a facility of US$ 130,000 thousand granted by the Bank of which US$ 55,000 thousand was advanced by another bank.

12 TERM FINANCING

The following table shows the movement of term financing during the year:

2013 2012

Balance at beginning of the year 68,165 - Additions - 72,000 Repayments (4,341) (3,835)

63,824 68,165

Accrued profit 58 35

63,882 68,200

In January 2012, FEB-Novus Fin One Ltd («FEB-Novus») raised term financing of US$ 72,000 thousand to partially fund the acquisition of an Airbus A330-300 aircraft (note 5). The term financing matures in January 2024 and bears a profit rate of 1 month Libor plus 345bps per annum. FEB-Novus is consolidated in FEB-Novus Aircraft Holding Company, Bahamas (98.5% owned subsidiary of the Bank) in compliance with AAOIFI «Statement of financial accounting No.1: Conceptual Framework for the financial reporting by Islamic Financial Institutions». The financing arrangement is between FEB-Novus and the ultimate finance provider.

13 OTHER LIABILITIES

2013 2012

Payables to financial institutions * 37,545 33,272 Employee-related accruals 13,889 10,839 Accounts payable 4,608 8,504 Accrued expenses 1,392 2,275 Zakat and charity payable 11 25 Collective impairment provision (note 22) 2,696 4,077

60,141 58,992

* These relate to funds from a Libyan entity frozen by the Bank as per CBB circular EDFIS/C/011/2011 dated 31 March 2011.




14 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT

(a) Share capital

2013 2012

Authorised:

2,000,000,000 ordinary shares of US$ 1 each 2,000,000 2,000,000

Issued, subscribed and paid-up:

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

(i) The Group has only one class of equity shares and the holders of these shares have equal voting rights.

(ii) Names and nationalities of the major shareholders and the percentage of equity shares held in which they have an interest of 5% or more of outstanding shares are as follows:

2013 2012

Country of incorporation

% of holding

Share capital

% of holding

Share capital

Tasameem Real Estate UAE 21.85% 218,504 21.85% 218,504

Libyan Investment Authority Libya 16.25% 162,500 16.25% 162,500

Abu Dhabi Water and Electricity Authority UAE 15.00% 150,000 15.00% 150,000

Emirates Islamic Bank UAE 10.00% 100,000 10.00% 100,000

Mohammed Bin Hussain Bin Ali AlAmoudi KSA 5.00% 50,000 5.00% 50,000

AlJabr Trading Co KSA 5.00% 50,000 5.00% 50,000

(iii) The distribution schedule of equity shares, setting out the number of holders and percentage of holding is as follows:

At 31 December 2013Number of

sharesNumber of

shareholders

% of totaloutstanding

shares Categories

Less than 5% 268,996 16 26.90%

5% up to less than 10% 100,000 2 10.00%

10% up to less than 25% 631,004 4 63.10%

1,000,000 22 100%




At 31 December 2012 Number ofshares

Number ofshareholders

% of totaloutstanding

shares Categories

Less than 5% 268,996 16 26.90%5% up to less than 10% 100,000 2 10.00%10% up to less than 25% 631,004 4 63.10%

1,000,000 22 100.00%

(b) Reserve

Statutory reserveIn accordance with the Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year is transferred to the statutory reserve until such time as the reserve reaches 50% of the paid-up share capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the CBB. During the year US$ 3,207 thousand (2012: US$ 2,984 thousand) was transferred to statutory reserve.

Investment fair value reserveThis represents cumulative unrealised fair value changes on equity type investments at fair value through equity. This reserve is transferred to the consolidated statement of income upon sale or impairment of the investment.

Foreign currency translation reserveThe foreign currency translation reserve is used to record exchange difference arising from the translation of the net investment in foreign operations.

(c) Dividend

The dividend for the year ended 31 December 2012 amounting to US$ 24,000 thousand (US$ 0.024 per share) was paid during the year, following regulatory approvals and the approval of the shareholders in the Annual General Meeting held on 27 March 2013.

15 NON-CONTROLLING INTEREST

2013 2012

At 1 January 124,861 37,591 Net income for the year 8,017 7,186 Conversion of an associate to subsidiary - 74,882 Acquisition during the year 9,796 462 Dividends of a subsidiary (44) (31)Increase in share capital - 4,771

142,630 124,861

16 PROFIT FROM ISLAMIC FINANCING

2013 2012

Profit on murabaha financing - 4,072 Profit on commodity murabaha and wakala contracts 472 1,018

472 5,090




17 OTHER OPERATING EXPENSES RELATING TO IJARAH ASSESTS

2013 2012

Repairs and maintenance - rigs 9,272 3,824

Insurance - rigs 3,625 1,851

Professional and consultancy fee 2,804 1,365

Rental of cement unit 1,350 323

Miscellaneous expenses 2,186 1,190

19,237 8,553

Comparative figures include expenses of MENAdrill Investment Company (the «subsidiary») from 29 March 2012, date of conversion from an associate to subsidiary (note 7).

18 INCOME FROM SECURITIES

2013 2012

Income from sukuk 11,330 11,465

Gain on disposal of sukuk 8,301 5,794

Gain on disposal of shares 4,638 -

24,269 17,259

19 PROFIT ON SUBORDINATED FINANCE

A profit of 3.85% per annum has been accrued on the outstanding principal amount of the subordinated finance of US$ 79,215 thousand from 23 July 2009 granted by Al Dur Energy Investment Company to Al Dur Power and Water Company. The profit was not recognised until the commencement of commercial operations of the power plant, which occurred in February 2012. The commencement date was delayed, and management viewed it as conservative to start accrual of profit only after commencement of commercial operations.

20 STAFF COSTS

2013 2012

Salaries and benefits 8,282 8,308

Other staff expenses 1,395 2,348

9,677 10,656




21 GENERAL AND ADMINISTRATIVE EXPENSES

2013 2012

Professional and consultancy fee 816 497

Rent and utilities 744 1,577

Travelling and related expenses 719 643

Board and shari’a committee expenses 581 1,612

Loss on fair value of equity option - 1,386

Advertising and marketing expenses 14 50

Maintenancce related expense 467 379

Communcation and stationary expense 210 292

license and subsctiption 442 545

Others 369 346

4,362 7,327

22 PROVISION FOR IMPAIRMENT / WRITE OFF

The following table shows the movement of provisions / write off during the year:

NotesSpecific

impairmentCollective

impairment TotalSpecific

impairmentCollective

impairment Total

2013 2012

Balance at beginning of the year 13 - 4,077 4,077 - - -

Charged during the year 8 9,400 - 9,400 - 4,077 4,077

Write off during the year 8 1,809 - 1,809 - - -

Write back during the year 8 - (1,381) (1,381) - - -

11,209 2,696 13,905 - 4,077 4,077




23 RELATED PARTY BALANCES AND TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial and operating decisions. Related parties comprise major shareholders, directors, sharia’a supervisory board, external auditors and executive management of the Group and/or entities over which they exercise control and/or significant influence.

The related party balances included in these consolidated financial statements are as follows:

Notes Associates

Key management personnel /

Sharia’aboard members /external uditors

Significantshareholders / Boardmembers /entities in

which directors are interested

31 December2013 Associates

Key management personnel / Sharia’a

board members /external auditors

Significantshareholders / Board

members / entities inwhich directors are

interested31 December

2012

Assets Cash and bank balances - - 883 883 - - 417 417 Due from financial institutions - - 10,001 10,001 - - 11,801 11,801 Investment securities - - 35,930 35,930 - - 70,291 70,291 Investment in associates 7 130,340 - - 130,340 101,049 - - 101,049 Other assets 8 65 - - 65 67 - - 67

Liabilities Due to financial institutions - - - - - - 9,601 9,601 Other liabilities - 418 38,025 38,443 - 488 34,372 34,860

IncomeProfit from Islamic financing - - 6 6 4,072 - 124 4,196 Profit on Islamic financing - - (377) (377) - - (365) (365)Income from securities - - 2,728 2,728 - - 2,107 2,107 Share of results of associates 7 4,947 - - 4,947 (7,067) - - (7,067)Gain arising on conversion of associate to subsidiary 7 - - - - 21,759 - - 21,759

Other income - net - - - - 20 - - 20

ExpensesStaff costs - 1,398 - 1,398 - 1,543 - 1,543 General and administrative expenses - 259 493 752 1,386 274 1,516 3,176

Key management personnel of the Group comprise of the Board of Directors and key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation is as follows:

2013 2012

Board member fees 493 1,516 Salary and other benefits 1,324 1,450 Post employment benefits 74 93

1,891 3,059




24 ZAKAH

Zakah payable by the shareholders in respect of each share for the year ended 31 December 2013 is US cents 1.86 (2012: US cents 1.75) for every share held. US cents 0.14 (2012: US cents 0.09) is payable by the Bank in their capacity as the agents of the shareholders and US cents 1.72 (2012: US cents 1.66) is the responsibility of the individual shareholders.

25 SEGMENT INFORMATION

a) Industry sector

The industrial distribution of the Group’s assets and liabilities as of 31 December 2013 is as follows:

Banks and financialinstitutions

Energy, power andinfrastructure Others Total

2013AssetsCash and bank balances 55,986 - - 55,986 Due from financial institutions 129,394 - - 129,394 Investment in ijarah assets - 423,384 93,100 516,484 Investment securities 237,436 109,290 143,099 489,825 Investment in associates 46,875 58,732 24,733 130,340 Other assets - 28,702 56,279 84,981 Property and equipment - - 10,283 10,283

Total assets 469,691 620,108 327,494 1,417,293

LiabilitiesDue to financial institutions 48,189 - - 48,189 Murabaha payable 48,756 - - 48,756 Term financing 63,882 - - 63,882 Other liabilities 37,545 1,662 20,934 60,141

Total liabilities 198,372 1,662 20,934 220,968

The industrial distribution of the Group’s assets and liabilities as of 31 December 2012 is as follows:

2012AssetsCash and bank balances 15,654 - - 15,654 Due from financial institutions 158,403 - - 158,403 Investment in ijarah assets - 432,663 96,700 529,363 Investment securities 277,086 104,420 115,881 497,387 Investment in associates 48,012 53,037 - 101,049 Other assets - 37,713 51,550 89,263 Property and equipment - - 9,345 9,345

Total assets 499,155 627,833 273,476 1,400,464

LiabilitiesDue to financial institutions 59,612 - - 59,612 Murabaha payable 54,081 - - 54,081 Term financing 68,200 - - 68,200 Other liabilities 33,272 4,675 21,045 58,992

Total liabilities 215,165 4,675 21,045 240,885




25 SEGMENT INFORMATION (continued)

b) Geographic sector

The geographical distribution of the Group’s assets and liabilities as of 31 December 2013 is as follows:

MENA Europe America Asia Total

2013

AssetsCash and bank balances 19,912 35,310 764 - 55,986 Due from financial institutions 94,109 - 35,285 - 129,394 Investment in ijarah assets - - 423,384 93,100 516,484 Investment securities 448,463 21,362 - 20,000 489,825 Investment in associates 105,606 24,734 - - 130,340 Other assets 69,915 11,131 1,670 2,265 84,981 Property and equipment 10,283 - - - 10,283

Total assets 748,288 92,537 461,103 115,365 1,417,293

LiabilitiesDue to financial institutions 48,189 - - - 48,189 Murabaha payable 48,756 - - - 48,756 Term financing - 63,882 - - 63,882 Other liabilities 57,143 - 2,356 642 60,141

Total liabilities 154,088 63,882 2,356 642 220,968

The geographical distribution of the Group’s assets and liabilities as of 31 December 2012 is as follows:

2012

AssetsCash and bank balances 11,788 3,006 860 - 15,654 Due from financial institutions 129,226 9,339 19,838 - 158,403 Investment in ijarah assets - - 432,663 96,700 529,363 Investment securities 426,794 40,239 - 30,354 497,387 Investment in associates 101,049 - - - 101,049 Other assets 74,430 4,910 7,000 2,923 89,263 Property and equipment 9,345 - - - 9,345

Total assets 752,632 57,494 460,361 129,977 1,400,464

LiabilitiesDue to financial institutions 59,612 - - - 59,612 Murabaha payable 54,081 - - - 54,081 Term financing - 68,200 - - 68,200 Other liabilities 51,560 - 7,417 15 58,992

Total liabilities 165,253 68,200 7,417 15 240,885

The Group’s revenue and expenses are reviewed at a Group level and therefore no separate operating segment results and other disclosures are provided in these consolidated financial statements.




26 COMMITMENTS

2013 2012

Other capital commitments 67,856 67,856 Forward treasury commitments - 9,602 Operating lease commitments 2,034 510

69,890 77,968

In its normal course of business, the Bank initially undertakes contractual commitments in relation to project assets and then places the project with its investors along with the associated contractual commitments. Further, the Group has arranged for bank guarantees amounting to US$ 11,936 thousand (2012: US$ 11,936 thousand) in relation to performance obligations against its investment in a project through one of its subsidiaries.

27 RISK MANAGEMENT

The Group has exposure to the following risks from its use of financial instruments:

• liquidity risk;

• credit risk;

• market risks; and

• operational risk

The Bank has a risk management framework in place for managing these risks which are constantly evolving as the business activities change in response to credit, market, product and other developments.

This note presents information about the Group’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.

Risk management frameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions, products and services offered.

The Management Risk Committee is responsible for recommending policy and framework to the Board Audit and Risk Committee, which in turn is responsible for reviewing and recommending to the Board for approval. The Risk Management Department is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.

The principal risks associated with the Group’s business and the related risk management processes are as follows:

(a) Liquidity risk

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.




27 RISK MANAGEMENT (continued)

The Board of Directors approves all significant policies and strategies related to the management of liquidity. Management Committees including the Asset Liability Committee and the Management Risk Committee review the liquidity profile of the Group on a regular basis and any material change in the current or prospective liquidity position is notified to the Board through the Board Audit and Risk Committee.

The Risk Management Department monitors the liquidity profile of the Bank on an ongoing basis to ensure that the liquidity gap is within regulatory limits and the liquidity gap and key liquidity ratios are within the internal Board approved limits.

Details of the Group’s liquid assets to total assets at the reporting date and during the reporting period were as follows:

Liquid assets / Total assets2013 2012

At 31 December 0.4 0.39Average for the year 0.4 0.42

The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2013 based on expected periods to cash conversion from the consolidated statement of financial position date:

2013

Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedmaturity Total

AssetsCash and bank balances 55,986 - - - - - - - 55,986 Due from financial institutions 129,394 - - - - - - - 129,394 Investment in ijarah assets - - - - - - - 516,484 516,484 Investment securities - 13,235 641 251,461 178,384 46,104 - - 489,825 Investment in associates - - - - - - - 130,340 130,340 Other assets 806 738 82,724 - - - - 713 84,981 Property and equipment - - - - - - - 10,283 10,283

Total assets 186,186 13,973 83,365 251,461 178,384 46,104 - 657,820 1,417,293

LiabilitiesDue to financial institutions 48,189 - - - - - - - 48,189 Murabaha payable - - - 48,756 - - - - 48,756 Term financing 1,177 1,123 2,266 8,993 9,037 25,813 15,473 - 63,882 Other liabilities 40,025 - 17,420 - - - - 2,696 60,141

Total liabilities 89,391 1,123 19,686 57,749 9,037 25,813 15,473 2,696 220,968

Net gap 96,795 12,850 63,679 193,712 169,347 20,291 (15,473) 655,124 1,196,325

Cumulative net gap 96,795 109,645 173,324 367,036 536,383 556,674 541,201 1,196,325

Commitments 18,053 117 50,155 939 626 - - - 69,890




The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2012 based on expected periods to cash conversion from the consolidated statement of financial position date:

2012

Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedmaturity Total

AssetsCash and bank balances 15,654 - - - - - - - 15,654 Due from financial institutions 154,197 4,206 - - - - - - 158,403 Investment in ijarah assets - - - - - - - 529,363 529,363 Investment securities 200 - - 235,474 244,718 16,995 - - 497,387 Investment in associates - - - - - - - 101,049 101,049 Other assets 230 565 85,911 - - - - 2,557 89,263 Property and equipment - - - - - - - 9,345 9,345

Total assets 170,281 4,771 85,911 235,474 244,718 16,995 - 642,314 1,400,464

LiabilitiesDue to financial institutions 59,612 - - - - - - - 59,612 Murabaha payable - - - 54,081 - - - - 54,081 Term financing 1,114 1,082 2,181 9,189 8,745 24,857 21,032 - 68,200 Other liabilities 40,738 - 14,177 - - - - 4,077 58,992

Total liabilities 101,464 1,082 16,358 63,270 8,745 24,857 21,032 4,077 240,885

Net gap 68,817 3,689 69,553 172,204 235,973 (7,862) (21,032) 638,237 1,159,579

Cumulative net gap 68,817 72,506 142,059 314,263 550,236 542,374 521,342 1,159,579

Commitments 27,793 255 49,920 - - - - - 77,968

The contractual maturities of the financial assets and liabilities are not significantly different from their expected maturities and the Bank does not have assets and liabilities with contractual maturities beyond 20 years.

(b) Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk principally from the balances with banks, commodity murabaha and wakala contracts placed with financial institutions, investments in sukuks and other receivables.

For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country risk and sector risk).

Management of credit riskCredit risk is assessed and approved on an individual basis for each counterparty at least once a year as a part of the internal risk review process. As at 31 December 2013, all credit exposures were appropriately approved by the relevant authority level. The credit risk assessment conducted as a part of the internal risk review process included rating each exposure using industry specific rating





models which consider key risk factors to assign the internal credit rating. The Bank assigns rating-based credit limits for all counterparty banks and financial institutions with whom it places short-term funds. All placements during the year were with financial institutions having internal and / or external credit ratings mapped to the “Standard” credit category of the Bank. The Bank also conducts detailed assessments of the debt investment opportunities to evaluate the commercial viability of the investments. Sukuk investments during the year were with obligors who were either banks, sovereigns or sovereign owned companies, subsidiaries, and were rated externally and/or internally. The Bank monitors the creditworthiness of the counterparties and the performance of the exposures with regard to timeliness of payments and other credit conditions on an ongoing basis. Annual and interim credit reviews are conducted to check the credit quality and impairment assessment requirement, if any.

The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing the creditworthiness of counterparties. The Bank uses external ratings for regulatory purposes.

In addition to external ratings, the Bank assigns an internal rating which is mapped to the lowest external rating, in cases where the entity is rated by more than one credit rating agency. The external ratings used for this purpose are those issued by S&P, Moody’s, Fitch and Capital Intelligence. In case the entity is not rated externally the Bank assigns an internal rating based on an in house credit assessment.

The Bank performs collective assessment of impairment for its credit exposures on a yearly basis as per the the Bank’s internal guidelines. Credit exposures are also subject to regular reviews by the Risk Management Department.

During the year, the Bank has made a specific provision of US$ 9,400 thousand. There were no restructured facilities during the year (2012: nil).

Maximum exposure to credit riskThe table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial position. The figures represent gross exposure net of any provision for impairment, without taking into account any collateral held and other credit mitigates.

Maximum exposure

2013 2012

Balances with banks 55,973 15,644

Due from financial institutions 129,394 158,403

Investment securities 432,487 472,182

Other assets 80,368 81,142

698,222 727,371

As of 31 December 2013, none of the above exposures are either past due or impaired (2012: nil).




Credit quality per class of financial assetsThe table below analyses the Group’s maximum credit exposure where the credit quality is reflected by external credit ratings (S&P, Moody’s, Fitch and Capital Intelligence) of the counterparties where relevant:

Bankbalances

Due fromfinancial

institutionsInvestment

securitiesOtherassets Total

2013

Prime to High grade: AAA – AA 35,553 45,990 37,460 - 119,003

Medium grade: A – BBB 9,289 53,401 224,191 - 286,881

Non-investment / speculative: BB – B 10,248 - 41,410 - 51,658

Unrated 883 30,003 129,426 80,368 240,680

-

55,973 129,394 432,487 80,368 698,222

2012

Prime to High grade: AAA – AA 2,434 53,342 54,004 - 109,780

Medium grade: A – BBB 8,736 75,360 271,503 - 355,599

Non-investment / speculative: BB – B 4,263 - 21,362 - 25,625

Unrated 211 29,701 125,313 81,142 236,367

15,644 158,403 472,182 81,142 727,371

Concentration RiskConcentration risk is the risk of insufficient diversification of the portfolio resulting in an adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk primarily arises due to name and sector concentration, including geographic concentration.

The Bank strictly adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage name concentration. Any excesses above the said limits are reported to the CBB and treated in accordance to the regulatory guidelines by way of capital deduction. In addition, the Bank has established internal limits on the maximum permissible exposures to sectors for managing sector concentration.

In respect of geographical concentration the Bank has defined limits for each country / geography which is based on the lowest among the available ratings by S&P, Moody’s, Fitch and Capital Intelligence. The Bank also closely monitors political risk arising from events in each country of exposure.





The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following industry sector:

Banks and financialinstitutions

Energy, power andinfrastructure

Others Total

2013

Balances with banks 55,973 - - 55,973

Due from financial institutions 129,394 - - 129,394

Investment securities 237,434 83,056 111,997 432,487

Other assets - 29,209 51,159 80,368

422,801 112,265 163,156 698,222

2012

Balances with banks 15,644 - - 15,644

Due from financial institutions 158,403 - - 158,403

Investment securities 277,086 79,215 115,881 472,182

Other assets - 30,270 50,872 81,142

451,133 109,485 166,753 727,371

The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following geographical regions:

MENA Europe America Asia Total

2013

Balances with banks 19,899 35,310 764 - 55,973

Due from financial institutions 94,109 - 35,285 - 129,394

Investment securities 411,124 21,363 - - 432,487

Other assets 67,566 11,131 1,671 - 80,368

592,698 67,804 37,720 - 698,222

2012

Balances with banks 11,778 3,006 860 - 15,644

Due from financial institutions 129,226 9,339 19,838 - 158,403

Investment securities 442,951 18,877 - 10,354 472,182

Other assets 71,445 4,910 4,605 182 81,142

655,400 36,132 25,303 10,536 727,371




(c) Market Risk

Market risk is the risk that changes in market risk factors, such as currency risk, profit rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Bank monitors this exposure on an ongoing basis.

The Group had the following net exposures denominated in foreign currencies (other than GCC currencies) as of 31 December:

2013 2012

Sterling Pounds 66 82

Euros (14,858) 87

Indian Rupees 20,000 20,000

Libyan Dinars 42,550 53,037

Bulgarian Leva 14,663 -

The table below indicates the impact of reasonably possible changes in exchange rates on the Group’s net foreign currency exposure. The impact has been calculated using the net foreign currency exposure as at the consolidated statement of financial position date and calculating the impact of the changes in exchange rates:

Change in exchange rates (+/-) Net income and equity (+/-) Net income and equity (+/-)

% 2013 2012

Sterling Pounds 10 7 8

Euros 10 (1,486) 9

Indian Rupees 10 2,000 2,000

Libyan Dinars 10 4,255 5,304

Bulgarian Leva 10 1,466 -

Equity price riskThe Group’s listed and unlisted equity securities are susceptible to market price risk arising from uncertainties about future values of the investment securities. The Group manages equity price risk through diversification and by placing limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Group’s senior management on a regular basis. The Group’s Board of Directors reviews and approves all equity investment decisions.



As at 31 December 2013, the Group had an investment in a quoted equity on the Dubai Financial Market. The table below reflects the sensitivity of the investment by considering the impact of reasonably expected changes in the capitalisation rate.

Change in exchange rates (+/-) Effect on net equity (+/-)

%

Stock Exchange 10 3,634

The Group also has unquoted investments carried at cost where the impact of changes in equity prices will only be reflected when the investment is sold or deemed to be impaired, when the consolidated statement of income will be impacted, or when a third party transaction in the investment gives a reliable indication of fair value which will be reflected in equity.

Profit rate risk in the banking bookProfit rate risk in the banking book is the exposure of the Group’s financial condition to adverse movements in profit rates. Changes in profit rates affect the Group’s earnings by changing its net profit income and the level of other profit rate sensitive income and expenses. Changes in profit rates also affect the underlying value of the Group’s assets and liabilities because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily arises on account of reprising risk, yield curve risk, basis risk and optionality risk.

The Group’s profit rate sensitive assets are mainly commodity murabaha and wakala placed with financial institutions and investments in Sukuk. The Group has exposures to both fixed and floating rate Sukuk. Fixed rate sukuk represent 94% of the total Sukuk portfolio as at 31 December 2013 (2012: 95%). The rate sensitive liabilities comprise of due to financial institutions, murabaha payable, term financing and other liabilities.

The Group has minimal exposure to reprising and yield curve risks. Reprising risk arises on account of mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to shift in the yield curve resulting in changes in the economic value of cashflows. Exposure to basis risk is not material and although the basis risk exposure is monitored, the Bank does not consider this item of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise commodity murabaha and wakala contracts and Sukuk. Part of these assets are funded by rate sensitive liabilities in the form of murabaha and wakala payable. The short-term nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Group is not exposed to optionality risk arising due to embedded options in rate sensitive assets or liabilities.

The Bank monitors the timing difference in the re-pricing of the Bank’s rate-sensitive assets and liabilities and resulting impact of any parallel shift in the yield curve on the expected net profit income for up to one year, and the value of equity and overall economic value of equity considering the changes in net profit income and the value of equity. The profit rate risk is managed by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. A standard 200 basis point (bp) profit rate shock by way of parallel shift in all yield curves is considered on a monthly basis to ensure that the resulting impact on the economic value of equity is within the limit prescribed by the Basel Committee on Banking Supervision.

Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. A summary of the Group’s profit rate gap position is as follows:





Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

Over 3years Total

2013

AssetsDue from financial institutions 129,394 - - - - 129,394 Investment securities 19,611 13,235 641 174,513 224,487 432,487

Total assets 149,005 13,235 641 174,513 224,487 561,881

LiabilitiesDue to financial institutions 48,189 - - - - 48,189 Murabaha payable - - - 48,756 - 48,756 Term financing 1,177 1,123 2,266 8,993 50,323 63,882 Other liabilities - 37,545 - - - 37,545

Total liabilities 149,366 38,668 2,266 57,749 50,323 198,372

Profit rate sensitivity gap 99,639 (25,433) (1,625) 116,764 174,164 363,509

2012

AssetsDue from financial institutions 158,403 - - - - 158,403 Investment securities 20,178 - - 190,291 261,713 472,182

Total assets 178,581 - - 190,291 261,713 630,585

LiabilitiesDue to financial institutions 59,612 - - - - 59,612 Murabaha payable - - - 54,081 - 54,081 Term financing 1,114 1,082 2,181 9,189 54,634 68,200 Other liabilities - 33,272 - - - 33,272

Total liabilities 60,726 34,354 2,181 63,270 54,634 215,165

Profit rate sensitivity gap 117,855 (34,354) (2,181) 127,021 207,079 415,420

The sensitivity of the Group’s consolidated statement of income to a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position), would be an increase (decrease) of profit by US$ 7,270 thousand (2012:US$ 8,308 thousand).

Overall, profit rate risk positions are managed by Treasury, which uses commodity murabaha and wakala contracts with/ from financial institutions to manage the overall position arising from the Group’s activities.






The average effective profit rates on the financial assets and liabilities as at 31 December were as follows:

2013 2012

Due from financial institutions 0.28% 0.44%Investment securities 7.24% 5.21%Due to financial institutions 0.50% 0.62%Murabaha payable 3.27% 3.35%Term financing 2.30% 3.13%Other liabilities 1.00% 1.00%

(d) Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Shari’a non-compliance risk but excludes strategic and reputational risks.

The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff. The Bank has conducted Risk and Control Self Assessment of Operational Risk in all departments to identify the Key Risk Indicators as a part of the overall Operational Risk Management framework. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board. The Bank has also implemented an IT enabled operational risk system to automate the operational risk processes namely risk and controls assessment, loss data collection and key risk indicator calculation.

28 ACCOUNTING CLASSIFICATION OF FINANCIAL INSTRUMENTS

Set out below is an overview of financial instruments, other than cash and cash equivalents, held by the Group as at 31 December 2013:

Amortised Cost Fair value through equityFinancial assets:Investment securities 432,487 57,338 Other assets* 80,368 -

Total 512,855 57,338

Financial liabilities:Due to financial institutions 48,189 - Murabaha payable 48,756 - Term financing 63,882 - Other liabilities* 63,933 -

Total 224,760 -

* Other assets exclude deferred expenses, goodwill, advances paid and intangible assets-software.* Other liabilities exclude provision for indemnity.

29 FAIR VALUE OF FINANCIAL INSTRUMENTS

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.




Fair value hierarchyFair values of quoted security is derived from quoted market prices in active markets, if available. For unquoted securities, fair value is estimated using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; andLevel 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at 31 December 2013:

2013

Level 1 Level 2 Level 3 TotalFair value through equityQuoted equity shares 36,343 - - 36,343

2012

Level 1 Level 2 Level 3 TotalFair value through equityQuoted equity shares - - - -

Under unquoted investments which are held at fair value through equity are investments amounting to US$ 20,995 thousand (31 December 2012: US$ 25,205 thousand) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments (note 6).

The fair values of the Group’s other financial instruments are not significantly different from their carrying values as at 31 December 2013 and 2012 except as disclosed in note 6.

30 SOCIAL RESPONSIBILITY

The Bank intends to discharge its social responsibilities through donations to charitable causes and organisations.

31 COMPARATIVES

Certain of the prior year’s figures have been reclassified to conform to the presentation adopted in the current year. Such reclassification did not affect previously reported income or shareholders’ equity. The effect of the above reclassifications on the consolidated statement of comprehensive income for the year ended 31 December 2012 is as follows:

Decrease in general and administrative expenses 8,553

Decrease in depreciation and amortisation 7,459

Increase in other operating expenses relating to ijarah assets 8,553

Increase in depreciation on investment in ijarah assets 7,459



RISK AND CAPITAL MANAGEMENT


BASEL II - PILLAR III DISCLOSURES

CONTENTS Page

1 Executive Summary 832 Introduction 83

2.1 Pillar I 832.2 Pillar II 842.3 Pillar III 84

3 Overall Risk Management 843.1 Risk Management Strategy 843.2 Risk Management Framework 853.3 Risk Types 85

4 Capital structure, management and capital adequacy 854.1 Capital and Group Structure 854.2 Capital Management 86

4.2.1 Regulatory Capital Adequacy 864.2.1.1 Regulatory Capital Structure 874.2.1.2 Regulatory Capital Requirement 88

4.2.2 Internal Capital Adequacy Assessment Process 884.3 Exposures Exceeding 15% Capital Base 88

5 Credit and Investment Risk 885.1 Credit and Investment Risk Management 885.2 Capital Requirements for Credit and Investment Risk 91

5.2.1 Credit and Investment Exposures and Risk-weighted Assets 915.2.2 Capital Requirements by Type of Islamic Financing Contract 925.2.3 Gross Funded and Unfunded Exposure 925.2.4 Provisioning for Credit and Investment Exposures 935.2.5 Equity Investments Held in Banking Book 93

5.3 Other Quantitative Information on Credit and Investment Risk 945.4 Concentration Risk 945.5 Counterparty Credit Risk 945.6 Settlement Risk 95

6 Market Risk 956.1 Capital Requirements for Market Risk 956.2 Foreign Currency Translation Risk 95

7 Operational Risk 967.1 Operational Risk Management 967.2 Legal Compliance and Litigation 967.3 Sharia’a Compliance 967.4 Capital Requirements for Operational Risk 96

8 Liquidity Risk 978.1 Maturity Profile 97

9 Profit Rate Risk in the Banking Book 9710 Reputational Risk 9811 Strategic Risk 9912 Other Risks 99


1 Executive summaryFirst Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23rd June, 2008,

under Commercial Registration No. 69089. The Bank operates under Islamic Wholesale Banks licence issued by the Central Bank of

Bahrain (the “CBB”). The Bank’s registered office is at Building 1459, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank include Sharia’a compliant investment advisory services, participation in project development, joint

ventures, mergers and acquisitions and the purchase of assets and asset portfolios related to the energy sector. The Bank is regulated by

the CBB and supervised by a Sharia’a Supervisory Board for compliance with the Sharia’a rules and principles.

The CBB’s Basel II guidelines became effective on 1st January, 2008 as the common framework for the implementation of Basel II capital

adequacy framework for banks incorporated in the Kingdom of Bahrain. The disclosures in this report have been prepared in accordance

with the CBB requirements outlined in the Public Disclosure Module (“PD”), Section PD-1.3: Disclosures in the Annual Report, CBB Rule

Book – Volume II for Islamic Banks. The requirements of the section follow the requirements of Basel II – Pillar III and the Islamic Financial

Services Board’s (IFSB) recommended disclosures for Islamic banks.

This report contains a description of the Bank’s risk management and capital adequacy risk and practices, including detailed information

on the capital adequacy process. The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB

throughout 2013.

The disclosures in this report are in addition to, or in some cases serve to clarify, the disclosures set out in the consolidated financial

statements for the year ended 31 December 2013, presented in accordance with the Financial Accounting Standards (FAS) issued by the

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). To avoid any duplication, information required under PD

module but already disclosed in other sections of the Annual report has not been reproduced in these disclosures.

This report contains detailed qualitative and quantitative information on risk components and capital adequacy.

2 IntroductionBasel II based framework provides a more risk sensitive approach for the assessment of risk and the calculation of regulatory capital

i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and

processes within financial institutions. The Bank has accordingly taken steps to comply with these requirements.

The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:

• Pillar I: calculation of the risk weighted amounts and regulatory capital requirement.

• Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment Process.

• Pillar III: rules for the disclosure of risk management and capital adequacy information.

2.1 Pillar I

Pillar I prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar I defines the regulatory minimum

capital requirements for each bank to cover credit risk, market risk and operational risk inherent in its business model. It also

defines the methodology for measurement of these risks and the various elements of qualifying capital. The capital adequacy

ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs).

The resultant ratio is to be maintained above a predetermined and communicated level. As required by the CBB, the minimum


capital adequacy ratio for banks incorporated in Bahrain is 12% compared to the Basel Committee’s minimum recommended ratio of 8%. The CBB also requires banks incorporated in Bahrain to maintain a buffer of 0.5% above the minimum capital adequacy ratio. In the event that the capital adequacy ratio falls below 12.5%, additional prudential reporting requirements apply, and a formal action plan setting out the measures to be taken to restore the ratio above the target level is to be formulated and submitted to the CBB. Consequently, the CBB requires the Bank to maintain an effective minimum capital adequacy ratio of 12.5%.

Under the CBB’s Basel II capital adequacy framework, the RWAs are calculated by multiplying book values of the assets by standard weights (prescribed by the CBB) for each risk category (as per External Credit Assessment Institutions) within each asset category.

The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the RWAs in accordance with the CBB’s Basel II capital adequacy framework.

Risk Type Approach used by the Bank

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar II

Pillar II deals with the Supervisory Review and Evaluation Process (SREP). It also recommends banks to establish the Internal Capital Adequacy Assessment Process (ICAAP) for assessing the adequacy of the available capital to cover all material risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB for prescribing the bank-specific minimum capital adequacy ratio. Pending finalization of the assessment process, all banks incorporated in Bahrain are required to continue to maintain the existing 12% and 8% minimum capital adequacy ratios on consolidated basis and solo basis respectively.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the Bank is exposed. The ICAAP framework was approved by the Board. The ICAAP framework includes identification, assessment, measurement, monitoring and reporting of all material risks and maintaining appropriate level of capital in line with the Bank’s overall risk profile and business plan. The ICAAP is also supplemented by developing stress scenarios and assessing the impact of such scenarios on the portfolios, risk profile, capital adequacy of the Bank and ensuring the adequacy of capital in such instances.

2.3 Pillar III

Pillar III of the CBB’s Basel II framework prescribes the coverage, depth, timelines and medium of communicating the information by the institution on its governance structure, risk profile, risk management framework and the capital adequacy position. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to complement the first two Pillars and enabling stakeholders and market participants in getting an insight in the institution’s risk appetite and risk exposures and enable detailed assessment and comparability between different banks.

Under the current requirements of the PD module, partial disclosure consisting mainly of quantitative analysis is required during half year reporting, whereas full disclosure is required to coincide with the financial year-end reporting.

3 Overall risk management

3.1 Risk management strategy

The Bank perceives good risk management capabilities to be the foundation for delivering superior results on a risk-adjusted

Introduction (continued)


basis to customers, investors and shareholders. The Bank will continue to endeavour to adopt international best practices of risk management, superior corporate governance and the highest level of market discipline.

The primary objectives of the risk management strategy of the Bank are to:

• Manage risks inherent in the Bank’s activities in line with the risk appetite of the Bank;

• Strengthen the Bank’s risk management practices to reflect industry best practices; and

• Align internal capital requirements with risk materiality.

The risk appetite is articulated through the limit structures for individual risks. These limits are based on the Bank’s business plans and guided by the regulatory requirements and guidelines. By defining the risk appetite, the Bank links its individual risks to its strategy. The risk appetite defines the level of risk that the Bank is prepared to take in order to achieve its objectives. The Bank reviews and realigns its risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios. The Bank also assesses its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards accepting or rejecting these risks. Tolerance levels are reflected in the limits defined by the Bank for each risk area.

3.2 Risk management framework

The Bank’s Board of Directors through its Audit and Risk Committee (a subcommittee of the Board of Directors) has the

responsibility for ensuring the establishment and effective implementation of an integrated risk management framework for the

Bank. Further, the Risk Management Department (RMD) is empowered to independently identify and assess risks that may arise

from the Bank’s investing, financing and operating activities; as well as recommend directly to the Management Risk Committee

(MRC) any prevention and mitigation measures as it deems fit. In addition, the Internal Audit function, which is independent of

both operations and the Bank’s investments units, reviews the risk management process.

3.3 Risk types

As an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to various risks in the normal

course of its business and these risks include:

a. Credit and investment risk including concentration risk, counterparty credit risk and settlement risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Other risks

The details on exposure of the Bank to these risks and the management framework for them are discussed in the following

sections 5-13 of this document.

4 Capital structure, management and capital adequacy

4.1 Capital and group structure

The authorized share capital of the Bank is 2 billion shares of US$ 1 each. The paid up capital of the Bank is US$ 1 billion divided


into 1 billion shares of US$ 1 each.

The Bank’s investments in commercial entities, below the level of qualifying holding, is risk weighted in accordance with applicable

capital computation guidelines of the CBB. MenaDrill Investment Company which is a qualifying holding is consolidated for

regulatory capital adequacy purposes.

Entity name Entity classificationas per PCD Module

Treatment for accounting purposes

Treatment for regulatory purposes

Al Dur Energy Investment Company (ADEIC) - 58.83%

Commercial entity Consolidated Deconsolidated/ Risk weighted

Cosmos Industrial Investment Corporation BSC (c) (CIIC) – 93.47%


North Africa Investment Company – 100%


MENAdrill Investment Company - 59.44% Commercial entity Consolidated Consolidated*

First Energy Oman – 100% Commercial entity Consolidated Deconsolidated/ Risk weighted

FEB-Novus Aircraft Holding Company – 98.5%


FEBORAN – 59.95% Commercial entity Consolidated Deconsolidated/ Risk weighted

* Based on CBB instructionS.

The Bank conducted a new transaction in 2013 which is an equity investment for the purchase of shares in a fertiliser manufacturing

company. The transaction was conducted via the SPV FEBORAN.

4.2 Capital management

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator

(CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact

of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between

the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s

capital management policy seeks to optimize returns within the internally defined risk tolerances while satisfying all the

regulatory requirements.

The Bank ensures that the regulatory capital adequacy requirements are met and complied with at all times.

In addition, the Bank has developed a comprehensive ICAAP.

4.2.1 Regulatory capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the Bank to maintain the ratio

Capital structure, management and capital adequacy (continued)


of eligible capital base to the total risk-weighted assets at a minimum of 12%.

The Bank does not have banking and financial institution subsidiaries or interest in insurance entities.

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB during the year ended

31 December, 2013.

The Bank’s Tier 1 and total capital adequacy ratios comply

with the minimum capital requirements under the CBB’s

Basel II framework.

The Bank’s total risk weighted exposures as at 31 December

2013 amounted to US$ 909,378 thousand. Credit risk

accounted for 80.80%, operational risk 10.70%, and

market risk 8.50% of the total risk weighted assets. Tier 1

and total regulatory capital were US$ 747,550 thousand.

As at 31st December 2013, Bank’s Tier 1 and total capital adequacy ratios were same at 82.20%.

There are no restrictions on the transfer of funds or regulatory capital within the Group.

4.2.1.1 Regulatory capital structure

The following table summarises the eligible capital after deductions for Capital Adequacy Ratio (CAR) calculation as of 31 December 2013:

USD 000’s

Tier 1 Tier 2

Share capital 1,000,000 -

Statutory reserve 7,991 -

Retained earnings 9,273 -

Tier 1 Capital before PCD deductions 1,017,264 -

Unrealized gains arising from fair valuing equities (45%) -

5,159

Collective impairment loss provision - 2,696

Tier 2 Capital before PCD deductions - 7,855

Total Available Capital - 1,025,119

Less regulatory deduction : Excess amount over maximum permitted large exposure limit (138,785) (138,785)

Additional deduction from Tier 1 to absorb deficiency in Tier 2 130,930 -

Total Deductions 269,715 138,785

Net Available Capital (Tier 2 up to 100% of Tier 1) 747,549 -

Total eligible capital base - 747,549


Less than 5% 27%




Credit Risk

Weight Exposures

81%

Market Risk

Weighted Exposures

8%

Operational Risk

Weighted Exposures

11%

82% 91% 83% 86% 73%

2013 2012 2011 2010 2009

UAE; 59.61%


Bahrain; 6.47%

KSA; 12.67%

Libya; 16.25%

Qatar; 0.50%




The Bank has not included non-controlling interest in Tier 1 capital as all subsidiaries are commercial entities except MENAdrill Investment company which in line with the CBB instructions is consolidated and its non-controlling interest is not included in Tier 1 capital.

4.2.1.2 Regulatory capital requirement

The following table summarises the regulatory capital requirements for credit, market and operational risks as of 31 December 2013:

USD 000’s

Risk weighted exposure

Capital requirement @ 12%

Credit Risk 734,824 88,179

Market risk 77,280 9,274

Operational 97,274 11,673

Total 909,378 109,126

4.2.2 Internal capital adequacy assessment process

In line with the guidelines provided under the Pillar II of the Basel II Accord, the Bank has established the ICAAP to augment the regulatory capital adequacy. The ICAAP considers the adequacy of capital with respect to the internal capital adequacy ratio target and includes other material risks apart from those prescribed under the regulatory Pillar I guidelines, stressed scenarios and growth in business based on the business plan. The Bank segregates all material risks into measurable and non-measurable risks and has established measurement methodologies for all material risks and quantifies the capital requirement for them. Currently, the Bank maintains an additional capital buffer of 2% for the non-measurable risks. As of 31 December 2013, the internal capital adequacy ratio was above the internal target.

4.3 Exposures exceeding 15% capital base

As defined in the PCD Module of the CBB, the Bank is obligated to deduct from its capital base any exposures exceeding the single obligor limit imposed by the CBB which is 15% of the Bank’s regulatory capital base.

The following table summarises the exposures deducted from the capital base for calculating the eligible capital base as of 31 December 2013:

USD 000’s

Exposure type Total Exposure Exposure as percentageof available capital

Capital deductionamount

Equity and financing exposure in a subsidiary 310,146 30.25% 156,378

5 Credit and investment risk

5.1 Credit and Investment Risk Management

The credit and investment risk exposures faced by the Bank are by way of its short term liquidity related placements with other financial institutions, Islamic financing facilities provided to associates, and in respect of investments in projects, sukuk, listed and unlisted equities. The investment related funding exposures arise in the ordinary course of its investment banking activities and are generally transacted without collateral or other credit risk mitigants, however the majority of such investments are asset based.

Capital structure, management and capital adequacy (continued)


Less than 5% 27%




Credit Risk

Weight Exposures

81%

Market Risk

Weighted Exposures

8%

Operational Risk

Weighted Exposures

11%

82% 91% 83% 86% 73%

2013 2012 2011 2010 2009

UAE; 59.61%


Bahrain; 6.47%

KSA; 12.67%

Libya; 16.25%

Qatar; 0.50%




RMD is responsible for conducting independent risk review and analysis for all credit and investment applications received from

Investment Banking, Islamic Finance, Capital Markets and Treasury Departments. It is also responsible for the ongoing review of

the credit worthiness of existing clients through the process of periodic credit reviews, annual or more frequently, if required.

RMD is also responsible for monitoring all approved limits, and reporting breaches, if any to the MRC, Board Audit and Risk

Committee and the Board as appropriate.

RMD reviews every Application received from the respective business initiator (LOB) and prepares an independent comprehensive

Risk Analysis with recommendations. The Application and the Risk Analysis are submitted to the MRC for approval, if within their

approval authority, or for review and further submission to the appropriate approval authority.

Following approval and draw down, the credit exposures are monitored on an ongoing basis. These include keeping track of

counterparties’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral, if

applicable, and monitoring timely repayments. All the exposures are reviewed at least annually and interim reviews are conducted

in case of any adverse developments.

RMD assesses the creditworthiness of the counterparties using rating models as a part of the review for new facilities as well as

existing facilities undergoing the annual review process. The Bank has implemented industry specific rating models based on key

factors relevant to the industry. These models are used to rate exposures to financial institutions and also for counterparties in

various other industries except in case of counterparties rated externally by at least two rating agencies recognised by the CBB.

The Bank rates the exposures on a scale of 1 to 10 mapped to the following categories; 1 is mapped to Prime, 2 to High grade, 3 to

Upper medium grade, 4 to Lower medium grade, 5 to Non-investment grade speculative, 6 to Highly speculative, 7 to Substantial

risk, 8 to Extremely speculative, 9 to In default with little prospect of recovery and 10 to In default with no prospect of recovery

(Loss). The Bank is not engaged in providing retail credit facilities and hence it does not use any retail credit “scoring” models.

The Bank maintains a strong focus on identification of signs of deterioration in the credit worthiness of counterparties and

performance of investments in order to take preventive measures before an existing facility becomes substandard / doubtful or

deteriorates in value.

RMD also monitors credit and investment risk exposures against established limits on a daily basis. RMD alerts the concerned

business line and the MRC whenever a limit is breached. RMD also produces periodic exposure and risk reports for the Board as

well as reports required for regulatory reporting and public disclosure as required under the Pillar III guidelines.

The credit categorisation of the Bank including problem credit categories is aligned with the regulatory categorisation. All credit

exposures which are regular and performing (as the contract requires) and for which there is no reason to suspect that the

creditor’s financial condition or collateral adequacy has depreciated in any way will be categorised as Standard or Current.

There are three categories of problem credit exposure classification indicating increasing degrees of potential risk of loss in

addition to watch-listing.

Substandard

An obligation or part of an obligation that is inadequately protracted by the current financial condition of the obligor or the

collateral pledged. The normal repayment of principal and profit or settlement at maturity may be or has been jeopardised or

collateral coverage is clearly deficient. No loss is foreseen but a protracted work-out is a possibility.

Substandard accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 90 days;

• Cash-flow is not sufficient to meet currently maturing financing facility;

• Accounts which carry more than a normal degree of risk due to the absence of updated or satisfactory financial information

or inadequate collateral documentation.


Doubtful

An obligation or part of an obligation where there is a high probability of some loss, the extent which cannot be currently quantified.

Doubtful accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 180 days;

• Collection in full on the basis of currently existing facts, conditions and values is highly questionable and improbable;

• Likelihood of loss is high but decision to classify as Loss has been deferred till an exact decision is determined.

Loss

An obligation regarded as uncollectable and where loss and consequent write-off is imminent. Once written off these amounts are no longer shown as exposure although eventual recovery may still be a possibility.

Loss accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than a year;

• Immediate circumstances indicate that an asset is uncollectable.

The Bank regularly assesses its credit portfolio for any indicators of impairment on a periodic basis and would consider provision for impairment on specific credit exposures. The Bank makes collective impairment on its credit exposures. The total value of the collective provision was US$ 2,696 thousand as of 31 December 2013.

The Bank shall write-off the exposures (fully / partially as the case may be) when there is reasonable doubt over recovery of the amount. Reasonable doubt shall be based on objective evidence that the balance is impaired and would not be recovered.

The Bank defines its past due credits as any amount due to FEB and not received. Principal or profit repayments that are past due for more than 90 days are classified as substandard.

The Bank considers an Islamic Financing contract as impaired in case it observes certain objective evidence of impairment which might include:

• The significant financial difficulty resulting in lack of ability of the borrower;

• A breach of contract such as a default or delinquency in payment of profit or principal;

• Lack of willingness or intent of the borrower;

• The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

• It becoming probable that the borrower will enter bankruptcy or other financial reorganization;

• The disappearance of an active market because of financial difficulties;

• Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group including: adverse changes in the payment status of the borrowers, or national or local economic conditions that correlate with defaults on the assets in the group.

During the year, the Bank did not restructure any of its credit facilities and has not made any specific provision on any of its credit exposures. However, the Bank made certain provisions of US$ 9,400 thousand for decline in economic value of an investment in the manufacturing sector. The Bank also made a write-off amounting to USD 1,809 thousand on the goodwill for the same investment. The Bank has not made any write-off in respect of any business related receivables during the year.

The total unfunded commitments of the Bank as of 31 December 2013 were US$69,890 thousand and mainly within the GCC region.

The Bank did not have any exposure to highly leverage and other high risk counterparties as at 31 December, 2013. (As per the CBB Highly Leveraged Institutions (HLIs) are defined as having the following characteristics; i- subject to little or no regulatory oversight; ii- generally subject to very limited disclosure requirements and are not subject to rating by credit reference agencies; and iii- often take on significant leverage, where leverage is the ratio between risk, expressed in some common denominator, and

Credit and investment risk (continued)


capital). As on the reporting date, the Bank does not have any obligation with respect to recourse transaction (i.e. where the asset

has been sold, but the bank retains responsibility for repayment if the original counterparty defaults or fails to fulfil obligations).

The Bank has also not imposed any penalties on customers for default during the year.

5.2 Capital requirements for credit and investment risk

The Bank uses the Standardised Approach under the Basel II framework for measuring the regulatory capital requirement for its

credit risk. The Bank utilizes ratings from External Credit Assessment Institution (ECAI) recognised by the CBB (S&P, Moody’s,

Fitch, and Capital Intelligence) for its regulatory credit risk capital charge calculations. Please refer to note 27 of the consolidated

financial statements for details of the credit grading of exposures based on rating by ECAIs as at 31 December 2013.

5.2.1 Credit and investment exposures and risk-weighted assets

The following table summarises the components of credit risk as computed for regulatory capital adequacy purposes “net of

the relevant deductions” as of 31 December 2013:

USD 000’s

Asset categories for credit risk ExposuresAverage risk

weights %Credit risk

weighted assets

Capital requirements

@12%

Cash items 12 - - -

Total claims on sovereigns:Sukuk 107,891 3.75% 4,041 485

Total claims on banks:Standard Risk WeightsPreferential Risk Weights

309,92955,236

47.24%20.00%

146,41511,047

17,5701,326

Total claims on public sector enterprises 37,460 20.00% 7,492 899

Claims on corporate 247,536 100.00% 247,536 29,704

Investment in Equity 152,785 140.17% 214,159 25,699

Holding of real estate:Land Equity

9,20040,085

100.00%200.00%

9,20080,170

1,1049,620

Other assets and specialized financing 14,765 100.00% 14,765 1,772

Total credit risk weighted asset 974,899 75.37% 734,824 88,179


5.2.2 Capital requirements by type of Islamic financing contract

The following table summarises the components of credit risk by type of Islamic financing contract as of 31 December 2013:

USD 000’s

Asset categories for credit risk by Islamic financing contract types

CreditExposures

Average riskweights %

Credit riskweighted assets

Capitalrequirements

@ 12%

Financing receivables 28,639 100.00% 28,639 3,437

Due from financial institution 129,394 28.54% 36,934 4,432

Sukuk 349,431 32.68% 114,193 13,703

Total Credit Risk Weighted Assets by type of Islamic financing contracts

507,464 35.42% 179,766 21,572

5.2.3 Gross funded and unfunded exposure

The following table summarises the total average gross credit exposure over the year and gross credit exposure at 31

December 2013 broken down by major types of credit exposures into funded and unfunded

USD 000’s

Average Gross Credit Exposures* Gross Credit Exposures

Balances with banks 30,563 55,973

Due from financial institutions 169,645 129,394

Investment securities 422,953 432,487

Other assets 98,569 80,368

Total funded exposures 721,730 698,222

Forward treasury commitments 3,873 -

Total unfunded exposures 3,873 -

* Represents quarterly average balance for the year ended on 31 December 2013.



5.2.4 Provisioning for credit and investment exposures

During the year, the Bank has made specific provision on one of its investment exposures in the manufacturing sector.

The following table shows the movement in provision for impairment during the year.

USD 000’s

Specific Provision General Provision

At 1 January 2013 33,794 4,077

Charge during the year* 9,400 -

Write back during the year - (1,381)

At 31 December 2013 43,194 2,696

*In addition, the Bank has made a write-off amounting to USD 1,809 thousand on the goodwill.

The following table shows the breakdown of general and specific provision by segmental geographical area:

USD 000’s

Categories Specific provision General provision

MENA 43,194 2,496

Asia - 200

Total 43,194 2,696

The Bank sets aside a general provision for potential losses that may occur as a result of currently unidentifiable risks is

relation to its exposures. Typically, the Bank will make a general provision for performing exposures i.e. internal ratings 1 to

7 corresponding to CBB’s classification of Standard and Watch list exposures, and for the portion of non-performing credit

facilities not covered by specific provisions. The amount of general provision is a percentage of the net book value of all

exposures taking into account certain exemptions.

Given that the nature of general provisions is systemic based on macro-economic factors that apply across all exposures,

it is necessary to adopt a range rather than a single number. In addition within that range, the actual percentage shall be

reviewed annually based on conditions prevailing on that date. Consequently, the Bank will adopt a range that is not less

than 1% and not more than 10% of qualifying exposures. Within this range, every year as of the financial closing date,

the Board, shall, on the recommendation of the Board Audit and Risk Committee (BARC) adopt a specific level of general

provisions as of that date. Upon every anniversary, the level will be reviewed by MRC and appropriate recommendations

made to BARC and Board.

5.2.5 Equity investments held in banking book

All the equity investments of the Bank are held in the banking book and are subject to credit risk weighting under the capital

adequacy framework. For regulatory capital computation purpose, the Bank’s equity investments in the banking book include

investments carried at fair value through equity.

The following table summarises a breakdown of the Bank’s equity investments by objectives and market type as at 31

December 2013.


USD 000’s

Objective Type

Capital gain

recognized during

the year

Fair value

reserve

Gross exposure

Credit exposure

(after deduction)

Risk weight

%

Risk weighted exposure

Capitalrequirement

(12%)

Capital gain

Unquoted(Real

estate) - - 20,000 20,000 200% 40,000 4,800

Capital gain Quoted 4,638 11,464 36,343 30,037 100% 30,037 3,604

StrategicUnquoted(all other equities) - - 180,909 122,748 150% 184,122 22,095

* This does not include equity exposure of Menadrill Investment Co. of US$ 109,759 thousand due its consolidation for capital adequacy

computation purpose.

The Bank does not have any exposure to equity based financing structure.

5.3 Other quantitative information on credit and investment risk

For information related to maturity profile of financial assets, refer to note 27 (a) of the consolidated financial statements.

5.4 Concentration Risk

Concentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage the name concentration. Any excess above the said limit has been reported to the CBB and treated in accordance with the regulatory guidelines in respect of capital deduction for such exposures. In addition, the Bank has established internal limits on the maximum permissible exposure to business lines / activities, sectors and countries for managing concentration risk. The portfolio is segregated by business line / activities, geography and industry segments. The activities are segregated as Treasury, Islamic Financing and Investments and the Bank has internal limits for these activities. In addition to the business line limits, the Bank segregates all its exposures by country, sets rating-based country limits and monitors the exposures with respect to these limits. The portfolio is also segregated by industry sectors mainly Financial Services, Petrochemicals, Oil & Gas, Power & Water Generation, Manufacturing, Commercial Airlines, Sovereigns, Real Estate and Real Estate Development with limits set and monitored for these sectors. RMD monitors adherence to the limits on an ongoing basis.

The industry and geography-wise concentration of credit and investment exposures has been detailed in note 27 (b) of the consolidated financial statements for the year ended 31 December 2013. The Group allocates exposures to a particular geographical area based on the risk domicile concept, which could be either the location of the asset or on the location of the counterparty.

5.5 Counterparty credit risk

Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. An economic loss would occur if the transaction or portfolio of transactions with the counterparty has a positive economic value at the time of settlement and the counterparty is in default. The Bank does not have positions in OTC derivatives, Securities Financing Transactions (SFTs), Margin Lending Transactions or any other long settlement transactions which would expose it to counterparty credit risk.



5.6 Settlement risk

Settlement risk is the risk that a counterparty does not deliver on its obligation or its value in cash as per agreement when the

trade was entered though the other counterparty or counterparties have already delivered their obligation as agreed. The Bank

is exposed to settlement risk occasionally on account of the foreign exchange spot transaction entered into for business and

operational requirements. The Bank has established limit structure based on the credit quality (assessed based on credit rating)

for settlement exposures and the limits are monitored on an ongoing basis.

The Bank uses an IT enabled limit monitoring system for online monitoring of credit and settlement limits of counterparties. The

system assists in setting and monitoring of limits by tenor, facilities, counterparties, group of related counterparties, products,

sectors and countries. The system also enables monitoring limit end dates and review dates for facilities.

6 Market risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices will

affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and

control market risk exposures within acceptable parameters, while optimising the return on risk.

The Bank uses the Standardized approach under the Basel II Framework for measuring the regulatory capital required for its market risk

exposure.

The Bank does not maintain a trading portfolio in commodities, equities or Sukuk. Therefore, exposure to market risk in the trading book

is nil. However, as at 31 December 2013, the Bank’s major source of market risk was from Foreign Exchange open position which resulted

in a capital charge of US$ 9,274 thousand. The Bank has an investment in a listed equity which exposes it to price risk. However, on a

nominal basis the exposure is not significant since it represents around 2% of the Bank’s capital base, nevertheless it is monitored on

daily basis.

The different types of market risks with exposures, objectives, policies and processes to manage the risk have been detailed in note 27

(c), of the consolidated financial statement for the year ended 31 December 2013.

6.1 Capital requirements for market risk

Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of the Bank and is risk

weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted exposure (RWE)

Capital requirement @ 12%

Maximum RWE during the year

Minimum RWE during the year

Foreign exchange risk 77,280 9,274 77,280 62,666

* Refer to note 27(c) for details of impact on the Bank resulting from changes in exchange rates.

6.2 Foreign Currency Translation Risk

The Bank is also exposed to foreign exchange translation risk from its investment in foreign operations (associate in Libya and

subsidiary in Bulgaria) which is currently un-hedged.


7 Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Legal and Sharia’a non-compliance risk but excludes strategic and reputational risks.

Currently, the Bank conducts its business from a single location and in accordance to well-defined processes and procedures. These processes and procedures include a number of internal controls, including segregation of duties to avoid conflict of interest and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction. The critical data from the SWIFT system used by Operations Department is replicated online. Data for other key departments namely Human Resources, Treasury and Financial Control is replicated at the end of the working day on the disaster recovery site. The Bank has successfully tested three scenarios namely accessing the live systems in the head office in Bahrain Financial Harbour remotely from the business continuity center, accessing data in the disaster recovery site from head office and lastly accessing systems remotely from laptops using Citrix clients with 2 way authentication.

7.1 Operational risk management

The Bank has developed and implemented all relevant operational risk management policies and procedures. Risk and Control Self Assessment (RCSA) for Operational Risk is periodically conducted in coordination with all departments to evaluate (and where required, mitigate) operational risk exposures. The last round of RCSAs were conducted during the third quarter of 2013 using the IT enabled operational risk system purchased in 2011. Loss data collection and KRI reporting are also performed through the system. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to senior management and the Board.

7.2 Legal compliance and litigation

As on the reporting date, the Bank had no material legal contingencies including pending legal actions. The Bank’s legal risks are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Bank uses standard formats for transaction documentation.

7.3 Sharia’a compliance

The Sharia’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activities of the Bank in order to ensure that they are in compliance with the rules and principles of Islamic Sharia’a. The Bank has a dedicated internal sharia’a reviewer, who performs ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes and also reviews compliance with the requirements of the Sharia’a standards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching and offering to the customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is issued by the SSB confirming the Bank’s compliance with Sharia’a rules and principles. During the year, no non-Sharia’a compliant income was generated and no instances of Sharia’a violations were identified.

7.4 Capital requirements for operational risk

The Bank uses the Basic Indicator Approach to calculate the operational risk capital charge in accordance with the CBB capital adequacy module for Islamic Banks. According to this approach, Bank’s average gross income for three past financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a multiple of 12.5 times is used to arrive at the risk weighted assets that are subject to capital charge.

The regulatory operational risk capital charge as of 31 December 2013 is as follows:

USD 000’s

Average gross income Risk weighted exposure Capital charge at 12%

Operational risk 51,879 97,274 11,673


8 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its financial liabilities. The Bank’s

approach for managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when

they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s

reputation.

The Board of Directors approve policies and strategies related to the management of liquidity. The Management reviews the liquidity

profile of the Bank on a regular basis to ensure that the same is within the regulatory and internal liquidity gap limits approved by

the Board and any material change in the Bank’s current or prospective liquidity position is notified to the Board through respective

management and Board committees. The Board has also approved limits on the liquidity ratios and adherence to these limits is overseen

by the management and also reported to the Board Audit and Risk Committee. The Bank has been calculating the Basel III liquidity ratios

i.e. the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) since 2012 for internal monitoring, and as per CBB

instructions, the Bank started reporting these ratios to the CBB during 2013.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as 31 December 2013:

Ratios 2013

1 Liquid Assets to Total Assets (%) 40.30%

2 Short-term Assets / Short-term Liabilities 2.6x

3 Inter Bank Placements to Inter Bank Borrowings 2.7x

4 Gearing Ratio (Long Term Liabilities / Total Assets) (%) 7.6%

5 Liquidity Coverage Ratio (solo) 898.8%

6 Net Stable Funding Ratio (solo) 129.7%

8.1 Maturity profile

Refer to note 27 (a) of the consolidated financial statements.

9 Profit rate risk in the banking book

Profit rate risk in banking book is the exposure of the Bank’s financial condition to adverse movements in profit rates. Changes in profit

rates affect the Bank’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating

expenses. Changes in profit rates also affect the underlying value of the Bank’s assets, liabilities, and off-balance-sheet instruments

because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily

arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

The MRC is responsible for recommending the profit rate policy, setting limits and guidelines. The same is reviewed by the Board Audit

and Risk Committee and is approved by the Board.

The Bank has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of mismatch in profit rate fixation

periods between assets and liabilities. Yield curve risk arises due to shift in yield curve resulting in change in the economic value of


cashflows. The rate sensitive assets mainly comprise short-term interbank placements and Sukuk. A part of these placements are

funded by rate sensitive liabilities in the form of short-term interbank deposits. The short-term nature of these items and high degree

of correlation between profits earned and paid on them minimises the basis risk. The balance rate sensitive assets (Sukuks and residual

inter-bank placements) are funded by equity. The Bank is not exposed to optionality risk arising due to embedded options in rate

sensitive assets or liabilities.

The Bank’s profit rate sensitive assets comprise placements with financial institutions, Sukuk investments and Islamic Financing

Facilities. On the liabilities side, the Bank’s profit bearing liabilities include mainly placements from central banks and other financial

institutions. The Board has approved limits on profit rate sensitivity in each time bucket.

Profit rate risk in the banking book is managed principally through monthly monitoring of the re-pricing gaps and the impact of profit

rate changes on the Economic Value of Equity (EVE). The Bank ensures that the re-pricing gap and the impact on EVE as a result of

shifts in profit rates do not exceed the pre-approved limits set on both. This is measured based on the impact of a parallel shift in the

yield curve on EVE which is the sum of the impact on earnings and impact on balance sheet.

The impact on earnings (measured by the sensitivity of Net Profit Income (NPI) is calculated by estimating the change in Profit

Income of the Bank due to a stipulated change in the profit rates of assets and liabilities over a time horizon of one year. We assume

a 2% change (i.e. 200 basis points) in rates of assets and liabilities to calculate the dollar impact on earnings on the residual period

up to one year. We also assume that the cashflow duration for a bucket is the mid-point of bucket.

The impact on balance sheet is calculated using the duration gap approach and assesses the impact of changes in the market profit

rates on the Bank’s balance sheet footing as a percentage of the Bank’s equity. The higher the duration, the higher shall be the profit

rate sensitivity of a financial instrument and vice-versa.

The Bank ensures that shift in profit rates does not result in the overall economic value based on the re-pricing gaps to exceed the

limits set on the economic value of equity. This is assessed based on the impact of a parallel shift in the yield curve on the expected

Net Profit Income for up to one year horizon and the economic value of the Bank’s equity on a regular basis. The overall impact on

the economic value of equity for a 200 bps shock is within the internal limit as well as the limit prescribed by the Basel Committee

on Banking Supervision.

Refer to note 27(c) of consolidated financial statement for a detailed profit rate gap position of the Bank as of 31 December 2013. The

impact on earnings, from a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement

in yield curves and a constant statement of financial position) is also given in the note. Moreover, the Bank also calculates the EVE

(sum of impact on earnings and balance sheet) for assessing the impact of 200 basis point shift in profit rates; the Bank is within the

approved internal EVE limits.

10 Reputational riskReputational risk is the risk that negative perception regarding the Bank’s business practices or internal controls, whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverse impact on liquidity or capital of the Bank. Reputation is an important asset and among the issues that could affect the Bank’s reputation is the inability to exit from investments, lower than expected returns on investments and poor communication with investors. As at 31 December 2013, the Bank was not exposed to any significant reputational risk. The Bank has developed adequate policies and procedures to identify, monitor and address all potential risks that may arise from all such activities. The Bank has also developed an internal dashboard for monitoring and reporting reputational risk exposures which is quarterly presented to the BARC.

The Bank considers complaints from all investors/customers seriously. These can adversely affect the Bank’s reputation and if it is left unattended these can also lead to litigation and possible censure by the regulatory authorities. The Bank has a formal process of handling complaints from investors/customers, in line with the CBB’s requirements. Accordingly, the Bank also appointed a Customer Complaints Officer in 2012.

Profit rate risk in the banking book (continued)


11 Strategic Risk

Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation

of decisions, or lack of responsiveness to industry changes. Strategic risk management practices are designed to ensure the comparability

of the Bank’s strategic goals, the resources deployed against these goals and the quality of implementation. The Bank has developed

adequate policies and procedures to identify, monitor and address strategic risk which were duly approved by the Board.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk and regulatory compliance risk etc. which are inherent in all business and not

easily measurable or quantifiable. The Bank currently does not have funding from equity of investment account holders and off balance

sheet equity of investment account holders and hence is not exposed to fiduciary or displaced commercial risks. The Bank as a matter

of policy prepares its business plan in consultation with the Board to incorporate the shareholders expectations and regularly reviews

and monitors financial and marketing strategies, business performance with respect to the business plan, new legal and regulatory

developments and their potential impact on the Bank’s business and corporate governance practices to ensure avoidance of any

regulatory non-compliance.

First Energy Bank B.S.C. (c)

Head Office:Bahrain Financial Harbour, West Tower, 20th Floor

P.O.Box 209, Manama, Kingdom of Bahrain, Tel: +973 17170000 - Fax: +973 17170170

Abu Dhabi Representative Office:P.O.Box 130089, Abu Dhabi, United Arab Emirates, Tel: +971 2 4458443 - Fax: +971 2 4459443

www.1stenergybank.com

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