Al Salam Bank-Bahrain B.S.C.

Shares Registrar
Building 22, Avenue 58, Seef District 436, KPMG Fakhro
P. O. Box 18282 Hidayah Building (2), 5th Floor
Manama, Kingdom of Bahrain. Government Ave.
Tel : (+973) 17 560 000 P. O. Box 710,
Fax: (+973) 17 560 003 Manama, Kingdom of Bahrain
E-mail: info@alsalambahrain.com Tel : (+973) 17 215 080
www.alsalambahrain.com Fax: (+973) 17 212 055
E-mail: bh-dlshareusers@kpmg.com.bh
 HIS HIGHNESS HIS MAJESTY HIS HIGHNESS
SHAIKH KHALIFA BIN SALMAN KING HAMAD BIN ISA SHAIKH SALMAN BIN HAMAD
AL KHALIFA AL KHALIFA AL KHALIFA

The Prime Minister The King of The Crown Prince and

The Kingdom of Bahrain The Kingdom of Bahrain Deputy Supreme Commander
CONTENTS PAGE

Corporate Overview 03

Annual Highlights 05

Board of Directors 07

Shari’a Supervisory Board 11

Executive Management Team 12

Board of Directors’ Report to the shareholders 16

CEO Message 21

Management Review of Operations & Activities 22

Corporate Governance 26

Risk Management and Compliance 30

Corporate Social Responsibility 33

Shari’a Supervisory Board Report to the shareholders 37

Independent Auditors’ Report 38

Financial Statements 40

Notes to the Financial Statements 45

OUR VISION

To become a global force in the Islamic financial services industry by providing

innovative, tailor-made Shari’a compliant products. Building a reputation as a
“Trusted Bank” whilst enhancing shareholder value.

OUR MISSION

• Become the one-stop-shop for providing differentiated Islamic financial products

to specific target segments.

• Build a strong global presence and premier brand image as an Islamic financial
shaper.

• Achieve high returns for investors and shareholders based upon specific risk
appetites.

03
 CORPORATE OVERVIEW

Incorporated on 19 January 2006 in the Kingdom of Bahrain, with a

paid-up capital of BD120 million (US$317 million), Al Salam Bank-
Bahrain commenced commercial operations on 17 April 2006. The
Bank operates under Islamic Shari’a principles and in accordance with
regulatory requirements for Islamic banks set by the Central Bank of
Bahrain. The Bank is listed on the Bahrain Stock Exchange.

The founding shareholders of the Bank subscribed to 65 per cent of the

paid-up capital. They include leading regional institutions such as Emaar
Properties, Amlak Finance, Dubai Holding, Dubai Investment Group
and Global Investment House, together with other strategic shareholders
from across the Middle East.

The Bank is committed to adopting internationally-recognised standards

and best practices in critical areas such as corporate governance,
compliance, risk management and banking operations with the highest
levels of integrity, transparency and trust.

Additionally the Bank is equally committed to its role as a concerned

corporate citizen, actively seeking ways to contribute and add value
04 to the social and economic well-being of the local communities in
which it invests and operates.
 ANNUAL HIGHLIGHTS

KEY FINANCIAL INDICATORS 2007

Total Operating Income Net Profit

BD33.9 million BD23.1 million
(US$90.2 million) (US$61.4 million)
2007 2007
2006 2006
BD20.4 million BD16.4 million
(US$54.3 million) (US$43.6 million)

Return on Average Equity Earnings Per Share

17.0% 19.3 Fils
2007 2007
2006 2006
15.1% 15.1 Fils

Total Assets Total Equity

BD397.8 million (US$1,057.9 million) BD159.5 million (US$424.2 million)
2007 2007
2006 2006
BD188.1 million BD136.5 million
(US$500 million) (US$363 million)

05
 The Bank has successfully overcome
the challenges of a start-up entity in
just under two years of establishment
while posting net profits from
operations in both years.

06
 BOARD OF DIRECTORS

H. E. MOHAMED ALI RASHID ALABBAR

Chairman

Mohamed Ali Alabbar is the founding member and Chairman of Emaar Properties
PJSC, the Dubai-based global property developer. He chairs John Laing Homes
in the USA, Hamptons International in the UK and a joint venture with Italy’s
Giorgio Armani to set up a global Armani-branded luxury hotel and resort chain.
He is member of the Dubai Executive Council, and serves on the board of
directors of the Investment Corporation of Dubai (ICD), the investment arm of
the Government of Dubai. He is also a Board Member of Noor Investment Group,
an affiliate of Dubai Group, focused on Shari’a compliant financial services. A
graduate in Finance and Business Administration from Seattle University in the
United States, Mr. Alabbar works closely with regional NGOs, and is especially
committed to the cause of educational reform and social housing. A keen
sportsman, he is Chairman of the UAE Golf Association.

HUSSEIN MOHAMMED AL MEEZA

Vice Chairman, Chairman of the Executive Committee

Hussein Al Meeza is one of the brightest names in the UAE's financial and banking
sectors, particularly in the area of Islamic finance and insurance. Having graduated
from the Beirut Arab University in 1975, Al Meeza started his professional career
at the Dubai Islamic Bank (DIB). His outstanding career success was crowned
in December 2006 when the International Conference of Islamic Bankers chose
him as the 2006 Best Islamic Banking Personality. Al Meeza is currently CEO,
Managing Director of Aman Insurance and Re-Insurance Company, Vice Chairman
of Al Salam Bank-Sudan, Vice Chairman & the Chairman of the Executive
Committee of Al Salam Bank-Algeria, Vice Chairman of Leader Capital, Chairman
of Gulf Jet, Board Member of Emaar Industries & Investments, Member of the
Islamic Finance Advisory Council-Dubai International Financial Centre (DIFC),
Board Member of the Banking Committee and Islamic Financial Association and
Chairman of the founding committee of Islamic Insurance and Re-Insurance
Companies.

ESSAM AL MUHAIDEB
Member

Mr. Essam Al Muhaideb is Group Managing Director of A.K. Al Muhaideb

& Sons; Managing Director and the Chairman of Al Muhaidib Foods company,
and Chairman of Giant Stores and United Group Central Markets, which
are all based in Saudi Arabia. He is also the Vice Chairman of DNATA, Kuwait.
07
He is also the Vice Chairman of Gulf Union Insurance Company, and board
member of Mashaer Company (Kuwait), Nama Group (Qatar), Teeba Holding
Company (Lebanon), Gef Holding Company (Switzerland), VeeTee Investment
Corporation (UK), Al Massa International (Canada) and Reem Rice Mills
Limited (Pakistan).
 BOARD OF DIRECTORS

HABIB AHMED KASSEM

Member

Mr. Habib Kassem is the Chairman of Almahd Investment Company, Bahrain

Ferro Alloys, Bahrain Electricity Supply & Transmission Company, Capital Growth
Management and Quality Wire Products Company. He is also the Chairman of
Almahd Day Boarding School. Mr. Kassem was a Member of the GCC Consultative
Council for the Supreme Council from 1997-2007.

MOHAMMED BIN OMEIR YUSSEF AL MEHAIRI

Member

Mr. Mohammed Bin Omeir is currently the Chief Executive Officer of Bin Omeir
Holding Group. He is also a Board member of Dubai Islamic Insurance and Re-
Insurance Company (Aman), Al Salam Bank-Sudan and Al Salam Bank-Algeria.

OMAR MAHMOOD AL-QUQA

Member

Mr. Omar Al-Quqa is a Chartered Financial Analyst (CFA), and a co-founder

and Executive Vice President, Corporate Finance & Treasury, of Kuwait-based
Global Investment House. He is the Chairman of Jordan Trade Facilities Company.
His Vice Chairmanships include: Housing Finance Company (ISKAN) and Iraq
Holding Company (both based in Kuwait); Arabian Seas Insurance Company
08 (Jordan) and Bahrain-based Real Estate Finance Company (Reef). He is also a
Board Member of the following companies: Al-Manar Finance & Ijara (Kuwait),
Bahrain-based Khaleej Development Company (Tameer), United Finance Company
(Oman), Baghdad Bank (Iraq), Al Salam Bank - Sudan, Investment Funds
Company (Jordan) and the regional office of Palestine Public Real Estate Company
in Jordan.
 BOARD OF DIRECTORS

SALEH SAEED AHMED LOOTAH

Member

Mr. Saleh Lootah is currently the Group Executive Director of the S.S. Lootah
Group, Dubai. Mr. Lootah is Executive Committee Member of Dubai Council
for Economic Affairs, a Board member and Chairman of Credit Committee
at Dubai Islamic Bank. He is Member Board of Directors of Amlak Finance
PJSC (Dubai), Amlak International, Riyadh (KSA), Dubai Islamic Insurance &
Reinsurance Company (Aman). He is also the Managing Director of Dubai
Co-operative Society (Al Islamic Foods) and a member of the Board of Trustees
of Dubai Medical College for Girls. Mr. Lootah is a graduate in Islamic Banking
form the Islamic School for Training & Education, Dubai.

SALEM RASHED SAEED AL MOHANNADI

Member

Mr. Salem Al Mohannadi is currently the Executive Director of Finance and

Administration Department of Abu Dhabi Investment Authority, Chairman
of Tunis and Emirates Bank, Deputy Chairman of Abu Dhabi Holding Company.
He is also a Board member of Al Salam Bank-Sudan, Al Salam Bank-Algeria
and Emaar Properties, Dubai Islamic Bank, Abu Dhabi Islamic Bank, Abu
Dhabi Investment Company, Arab Investment Company-Riyadh, Arab Jordan
Investment Bank-Amman and Arab International Investment Bank-Cairo.

KHALID AHMED ABDULLA AL ASHAR

Secretary to the Board

Mr. Khalid Al Ashar enjoys a vast experience that extends to 27 years. In addition
to his previous work within the public sector, Mr. Al Ashar held a number of
positions at the banking sector. He previously worked in the Operations Department
at the Bank of Bahrain and Kuwait and Arab Banking Corporation. He also held
the position of Director of Human Resources and Administration at the Liquidity
Management Centre. He enjoys a long experience in the field of establishing
09
Islamic banks and contributed in the establishment of the Liquidity Management
Center. Mr. Al Ashar holds a BSc in Commerce and Business Administration from
Beirut Arab University.
 The Shari’a Board has conducted
various meetings with the Bank’s
Management and acknowledged
that they have been complying
with the principles of Islamic
Shari’a and the Board’s Fatwas

10
 SHARI’A SUPERVISORY BOARD

DR. HUSSAIN HAMID HASSAN SHAIKH ADNAN ABDULLA AL QATTAN

Chairman Member

Dr Hassan holds a Ph.D. from the Faculty of Shari’a, Shaikh Adnan Al Qattan holds Masters degree in the
Al Azhar University, Cairo, Egypt and a Masters in Quran and Hadith from the University of Um Al-Qura,
Comparative Jurisprudence and Diploma in Comparative Makka, Kingdom of Saudi Arabia and Bachelor’s degree
Law (both of which are the equivalent of a Ph.D.) from in Islamic Shari’a from the Islamic University, Madeena,
the International Institute of Comparative Law, University Saudi Arabia. Shaikh Al Qattan is also a Judge in the
of New York, USA. He also holds a Masters in Shari’a Supreme Court, Ministry of Justice – Kingdom
Comparative Juries, Diplomas in Shari’a and Private of Bahrain. He is a Member of Shari’a Supervisory
Law, from the University of Cairo and an LLB in Shari’a Boards for several Islamic banks and is also Chairman
from Al Azhar University. He is the Chairman and of Al Sanabil Orphans Protection Society, Chairman of
member of the Shari’a Supervisory Board in many of the Board of Trustees of the Royal Charity Establishment
the Islamic Financial Institutions. In addition, Dr. Hassan under the Royal Court, Kingdom of Bahrain and
is Chairman of the Assembly of Muslim Jurists, President of the Kingdom of Bahrain Hajj Mission. In
Washington, USA, a member of the European Islamic addition, he is a Friday sermon orator at Al-Fatih Grand
Board for Research & Consultation, Dublin, Ireland and Mosque. Shaikh Al Qattan contributed to drafting the
an Expert at the Union of Islamic Banks, Jeddah, Personal Status Law for the Ministry of Justice and is
Kingdom of Saudi Arabia. a regular participant in Islamic committees, courses,
seminars and conferences.

DR. ALI MOHIUDDIN AL QURRA DAGHI

Member DR. MOHAMED ABDUL HAKIM ZOEIR
Member & Board Secretary
Dr. Al Qurra Daghi holds a Ph.D. in Shari’a and Law,
and a Masters in Shari’a and Comparative Fiqh from Dr. Zoeir holds Ph.D. in Islamic Economy, Masters
Al Azhar University, Cairo, Egypt. He also holds a degree in Islamic Shari’a (Economy), Bachelor’s degree
BSc. in Islamic Shari’a from Baghdad University, Iraq, in Management Sciences and a Higher Diploma in
a certificate of traditional Islamic Studies under the Islamic Studies. He is Member of the Fatwa Board in
guidance of eminent scholars in Iraq and is a graduate a number of Islamic financial institutions and has 18
of the Islamic Institute in Iraq. He is currently Professor years experience with Egypt Central Bank. Dr. Zoeir
of Jurisprudence in the Faculty of Shari’a Law and was also the Head of Shari’a compliance at Dubai
Islamic Studies at the University of Qatar. He sits on Islamic Bank.
the Boards of Shari’a Supervisory Boards for several
banks and financial institutions. Dr. Al Qurra Daghi is
also a member of the Islamic Fiqh Academy, the
Organisation of Islamic Conference, the European
Muslim Council for Efta and Researches, the International
Union of Muslim Scholars and the Academic Advisory 11
Committee of the Islamic Studies Centre, Oxford
University, UK. He published several research papers
tackling various types of Islamic Finance, Islamic Fiqh,
Zakah and Islamic Economy.
 EXECUTIVE MANAGEMENT

DR. OMAR MARWAN KAMAL MOHAMMED PARACHA

DR. HASAN MAHMOOD AL BASTAKI MARCO DONDI

14
DR. OMAR MARWAN KAMAL
Executive Vice President, Investments Group Head

Dr. Kamal has extensive experience in the field of Islamic Financial Services, and his career to date has embraced financial
consultancy, investment banking and academia. Through his diversified exposure, Dr. Kamal established a strong network
in the Islamic Finance industry at an international level. He joined Al Salam Bank - Bahrain after working for Ernst & Young,
where he became the Partner in Charge of the Islamic Financial Services Group (IFSG). He is recognized as a leading
strategist within the industry and is considered a prominent figure in contemporary Islamic financial markets. A highly
sought after speaker at industry conferences, Dr. Kamal is also a frequent contributor to international media.

MOHAMMED PARACHA
Executive Vice President, General Counsel

A qualified Solicitor (English Law), Mr. Paracha holds a Bachelor degree in Law (LL B Hons.) from Brunel University,
UK and a Postgraduate Diploma in Law from the College of Law, UK. He was Partner Designate at the international
law firm Norton Rose. Notable career achievements by Mr. Paracha include being named as ‘Lawyer of the Year’ in
2004 and in their Hot 100 list in 2007 by the prestigious legal publication, The Lawyer. He served as a member of the
Bank of England Working Party on Islamic Finance, assisted in the formation of the Islamic Bank of Britain, and advised
Lloyds TSB on the establishment of an Islamic banking window.

DR. HASAN MAHMOOD AL BASTAKI

Executive Vice President, Operations, IT and Support Services Group Head

Dr. Al Bastaki holds a Ph.D. in Accounting from the University of North Texas, USA. He has over 21 years’ experience of
working in the Kingdom of Bahrain and North America. He was Secretary General of the Bahrain Centre for Studies and
Researches. His private sector experience includes senior management and specialist positions with one of the international
auditing firms. In the academic world, Dr. Al Bastaki was Vice President for Finance & Administration at the University of
Bahrain. Dr. Al Bastaki is an Arbitrator and Expert at the Bahrain-based GCC Commercial Arbitration Centre and was
appointed by a Royal Decree as a member in the Bahrain Tender Board for the period from 2003 to 2007.

MARCO DONDI
Senior Vice President, Head of Treasury and Capital Markets

Mr. Dondi has over 21 years’ regional and international banking experience, specialising in treasury, money markets,
derivatives trading, and bonds. He was Chief Dealer and Deputy Treasurer at BNP Paribas Bahrain, where he held a
global mandate for trading, marketing and sales on GCC and North African currencies. Before this, Mr. Dondi spent
four years with Kuwait-based Gulf Bank and eight years with the Brussels branch of Sumitomo Bank.

15
 BOARD OF DIRECTORS’
REPORT TO THE SHAREHOLDERS

In the name of Allah, the Beneficent, the Merciful, Prayers and Peace Be Upon the
Last Apostle and Messenger, our Prophet Mohammed.

On behalf of the Members of the Board of Directors, I have the pleasure in

submitting the Annual report for the year ended 31 December 2007.

The first full year of commercial operations had been very successful with the
Bank’s total assets reaching BD397.8 million, crossing the US dollar one billion
mark, as of 31 December 2007 and net profit of BD23.1 million (US$61.4 million)
for 2007 showing an increase of 41% over 2006. This is your Bank’s second
profitable year since its inception in January 2006 despite many challenges and
difficulties a new Bank undergoes during the establishment phase. Although the
last quarter of 2007 saw credit squeeze and liquidity tightening due to the sub-
prime crisis and fears of US economy stagnation, the Bank managed to post
impressive growth in both total assets and net income.

In 2007, the Board and the senior management continued their efforts in completing
the establishment of key pillars of the Bank’s infrastructure with people, policies
and systems being the focus on all aspects of the business. The implementation
of the core banking application and the establishment of risk management framework
received further impetus and the Bank is now fully positioned to meet the challenges
of Basel II which is expected to be implemented by the Central Bank of Bahrain
16
during 2008.

The Directors are pleased to highlight that your Bank has successfully overcome
the challenges of a start-up entity in just under two years of establishment while
posting net profits from operations in both years.
Corporate Banking The Bank launched its retail operations in May 2007 immediately after His Highness
Shaikh Khalifa Bin Salman Al-Khalifa, Prime Minister of the Kingdom of Bahrain,
and Syndications patronized the opening of the Bank’s operations on 17 May 2007. The launch of
business saw a retail operations was followed by the rollout of retail distribution channels and
products. The Board and the management have recognized the need to offer un-
successful year paralleled client service and to this end has implemented an internet banking
with the Bank solution, currently available to clients on a selective basis. The next few months
winning three we will see that this service is available to all clients with compatibility to all
Operating Systems.
competitive bids
to finance in The Bank installed in its Al-Seef main branch Automated Teller Machines (ATM’s)
which are linked to the Bahrain’s Benefit Switch and the GCC Net. The Bank
aggregate BD62.4
launched EMV embedded Islamic debit cards, the first by any bank in Bahrain,
million (US$166 during the year. The last quarter of 2007 saw the launch of Al Salam Wakala
million) to the Deposit, a private banking and retail investment product for the investors. The
product gives investors competitive yields in the marketplace reflecting the yields
Government of on the related underlying assets whilst offering flexibility to the Bank in terms of
Bahrain and its deployment of the funds derived from those unrestricted investment deposits.
entities.
Corporate Banking and Syndications business saw a successful year with the Bank
winning three competitive bids to finance in aggregate BD62.4 million (US$166
million) to the Government of Bahrain and its entities. Your Bank was cautious in
building assets bearing in mind the need for asset quality and to be on top of
liquidity in the current banking environment after the US sub-prime crisis.

The weakening of the US dollar in 2007 against major currencies and market views
on the future of the peg of GCC currencies to the US dollar posed further challenge
to the management in addition to the task of raising interbank lines and managing
liquidity. Hence, the management had been prudent in running US dollar long
position keeping in mind the possibility of a potential revaluation of the GCC
currencies against the US dollar in order to minimise the impact of any potential
revaluation of the GCC currencies. This coupled with the lack of competitive Shari’a
compliant hedging instruments to hedge the potential foreign exchange risk posed
a major challenge to the management in acquiring corporate assets as the market
requirements have predominantly been in US dollars.

The Board and the management are both focussed on sourcing attractive private
equity deals with emphasis on alternative energy, aviation, healthcare and real
estate sectors. In 2006 the Board resolved to expand the scope of the Bank’s
activities to include investment banking activities to cover private equity investments
in certain sectors of focus. Following this decision, management concluded a
US$34 million transaction representing 100% equity in a Boeing 777 200-ER 17
aircraft on lease to Malaysian Airline Systems. This transaction was successfully
placed with investors with the Bank retaining a strategic stake.
 BOARD OF DIRECTORS’
REPORT TO THE SHAREHOLDERS (Continued)

In addition, the Bank successfully concluded an 80% participation in a private

2007 had seen
equity fund for US$50 million with underlying being significant minority stakes
impressive growth in Chinese manufacturing, food and consumer goods industries. In addition, your
in net profit from Bank has secured a number of attractive real estate transactions in the GCC and
in South East Asia which offer competitive risk-return proposition over the medium
BD16.4 million term. A number of private equity transactions are in the pipeline from the Asia/Pacific
posted in 2006 to region which will satisfy growing investor appetite for exposure to China, India
BD23.1 million and other Far Eastern countries.

As an unrated entity, the Bank is facing the challenge of raising unrestricted

investment deposits, from both banks and customers, since counterparties prefer
dealing with rated institutions whose exposures receive favourable capital treatment
under the Basel II regime. Your Bank managed to overcome this challenge as
evidenced by over BD96 million (US$257 million) of outstanding interbank liabilities
as of 31 December 2007. In a matured market like Bahrain, raising customer
deposits is not easy either. However, the Bank has successfully overcome the
funding challenges normally faced by any start-up entity by raising over BD132
million (US$352 million) in customer deposits as of 31 December 2007.

Bahrain’s banking sector has witnessed an unprecedented growth with total assets
surpassing record levels reaching BD89.8 billion as of 30 November 2007. From
a human capital perspective this situation has presented numerous challenges in
recruitment. Your Bank has successfully overcome this challenge and recruited 33
qualified professionals with relevant skills during 2007 bringing the total workforce
to 100 as of 31 December 2007. The challenge facing us is one of attracting
additional resources and retaining the acquired talent and skills bank-wide. To
overcome this challenge, the Bank commissioned the services of a leading
international human resources consulting firm which devised the performance
measurement and monitoring systems to reward employees based on their
performance. The recommendations of the consulting firm are in the process of
being implemented.

The Board is also pleased to note that your Bank is a member of the Central Bank
of Bahrain’s Real Time Gross Settlement (RTGS) system which enables the Bank
to seek and offer interbank Bahrain dinar settlement within the same day of
lodgement. The Bank has established a remote Disaster Recovery Site in Bahrain
to ensure business continuity in the event of interruption to the main systems
located in the headquarters site.

During 2007, to ensure operational efficiency going forward, the Bank focussed
on streamlining various business and support processes to adhere to industry best
18 practices and differentiate itself from competition. To name a few processes,
Credit, Investment, Financial Planning, Budgeting & Forecasting, Management
Information Systems, Recruitment and Training were streamlined in 2007.
The Directors are The Directors are confident that your Bank is poised to outperform peers and in
the medium term the Bank should move into a higher league, i.e. from being part
confident that your of a group of start-up banks to benchmarking itself with banks following a business
Bank is poised to model similar to that of your Bank and have been in existence for several years.
outperform peers
In the Extraordinary General Assembly Meeting held on 10 September 2007, the
and in the medium shareholders resolved to split the ordinary shares denominated at a par value of
term the Bank would BD1 each into ten shares of 100 fils each and authorized the Board of Directors
to seek cross listing of the Bank’s stock on other stock exchanges. Following this,
move into a higher
management completed the legal process of implementing the share split which
league became effective from 18 November 2007. Management is now looking at an
opportune time to seek cross listing on other stock exchanges as resolved by the
shareholders.

Financially, the year 2007 has seen impressive growth in net profit from BD16.4
million posted in 2006 to BD23.1 million in 2007, representing a return on equity
of 17.0% (2006: 15.1%). The gross operating income amounted to BD33.9 million
(2006: BD20.4 million) and the operating expenses were BD10.7 million (2006:
BD4.0 million). The cost-to-income ratio for the year was 27.2% (2006: 19.6%)
with the increase in costs attributable to the Bank becoming fully operational in
2007. The Earnings Per Share (EPS) for the year amounted to 19.3 fils (2006: 15.1
fils), adjusted for the share split that took place in 2007.

Retained Earnings and Appropriation of Net Income:

BD’000

Balance at beginning of the year 3,333

Net profit for the year - 2007 23,149

Transfer to statutory reserve (2,315)

Transfer to investment reserve (11,079)

Zakah (529)

Charitable contributions (100)

Proposed dividends (12,000)

Balance at end of the year 459

19
 BOARD OF DIRECTORS’
REPORT TO THE SHAREHOLDERS (Continued)

Directors’ and Senior Management Interests:

As required by the Central Bank of Bahrain rulebook set out below are the interests
of Directors and Senior Managers in the shares of Al Salam Bank-Bahrain B.S.C.
and the distribution of the shareholding as of 31 December 2007.

31 December
2007
Directors’ Shares 170,146,200
Senior Managers’ shares 5,851,580
175,997,780

Directors’ renumeration, fees and expenses for attendance at Board meetings for
2007 amounted to BD 300,000.

2007 % of Total
No. of Outstanding
No. of Shares Shareholders shares
Percentage of shares held

Less than 0.5% 627,236,606 22,657 52%

0.5% to less than 1% 225,376,341 27 19%
1% up to less than 5% 347,387,053 15 29%

TOTAL 1,200,000,000 22,699 100%

The Directors would like to express their appreciation to the leadership and
ministries of the Kingdom of Bahrain, the Central Bank of Bahrain, correspondents,
customers, shareholders and employees of the Bank for their support and collective
contribution since the establishment of the Bank and look forward to their continued
support in the fiscal year 2008.

Mohamed Ali Rashid Alabbar

20 Chairman
MESSAGE FROM THE
CHIEF EXECUTIVE OFFICER

This year was the second financial year for the Bank since establishment. The Bank’s
strategic objectives for the year were defined in a three year strategic plan at
inception of the Bank in 2006. The Board approved strategy focused mainly on
the establishment of a strong organizational foundation to support consistent and
sustainable growth. We have successfully achieved all our performance objectives
for this year in addition to delivering excellent financial results for two years in a
row as we continue to tap more opportunities for our customers and our shareholders.

Our excellent performance in the past two years since establishment is driven by
our two core businesses, banking and investment, each of which made solid
contributions. The overall performance achieved to date is an excellent proof of
our ability to deliver in a competitive market within a short period of time.

On the other hand, as a newly established institution, the Bank faced a number
of challenges since it’s establishment. Nevertheless the Board of Directors and
the Executive Management were successful in identifying, analyzing and managing
these challenges to the benefit of all of the Bank’s stakeholders.

In addition to the business establishment challenges, the Bank had to face the
systemic effects of the sub-prime crisis, especially the challenges on liquidity
management due to credit squeeze prompted by flight of capital to risk-free assets.
However, looking back, we are proud to report that despite these challenges, the
Bank managed to achieve excellent results as net operating income grew by
40.9%, total assets grew by 111.6% and inter-bank assets grew by 113.8%.

At year-end, our capital adequacy ratio was 48.7% compared to 79.8% at the end
of the previous year with the significant reduction demonstrating the deployment
of capital. Our capital adequacy ratio continued to remain significantly higher than
the minimum ratio of 12% and 8% stipulated by the Central Bank of Bahrain and
Basel Committee on Banking Supervision, respectively. This strong ratio provides
more growth opportunities for the Bank while the 12% regulatory threshold offers
a risk management buffer of 4% to cover unforeseen circumstances.

Social Contribution

The Bank allocated more than BD600,000 for Zakah and charity purposes and
participated in a number of community sponsorship programs across Bahrain.
The Bank is aware of its responsibilities in the communities where it operates and
invests. To this end, the Bank established a Zakah and Charity Committee, a
focused working group, to ensure that the Bank provides adequate support to
social and community projects. 21

Yousif Abdulla Taqi

Chief Executive Officer
 MANAGEMENT REVIEW OF
OPERATIONS & ACTIVITIES

Financial

Despite many challenges as a newly established institution, the Bank managed

to achieve remarkable results by growing total operating income by 66.2% from
BD20.4 million to BD33.9 million and net profit for the year by 40.9% from BD16.4
million to BD23.1 million. These results amount to a Return on Average Equity
of 17.0% (15.1% in 2006) and Earnings Per Share of 19.3 fils (15.1 Fils in 2006).

The balance sheet strengthened further as total assets increased to BD397.8 million
(US$1,057.9 million) compared to BD188 million (US$500 million) in 2006. While
The Bank’s strategy on the other hand, total equity increased to BD159.5 million (US$424.2 million)
is built on providing compared to BD136.5 million (US$363 million) in 2006.

investments,
products and Organisational

services that drive The Bank continued to build and strengthen key business and support functions
with the main objective of achieving higher levels of customer satisfaction across
customer satisfaction
business lines. The focus during the year was to build efficient and effective turn-
and trust with the around processes for customer requests including commercial and retail banking
aim to increase our financing requests, investment proposals and trust services opportunities. The
processes established within the Bank are robust and no compromise is made
growing customer against risk management or compliance as these are given utmost care and
base. attention at all costs.

The Bank successfully completed the implementation of the state-of-the-art core

banking system including the finalization of the internet banking platform. The
targeted launch of the internet banking services in early 2008 will take the Bank
to a higher league among its local and regional peers. Also, we are proud to
become one of the first banks in the Kingdom of Bahrain to achieve full EMV “chip-
card” compliance. This new technology offers better security for our customers
when using their cards.

In addition, the Bank completed the implementation of the HR Management System

including the interface of the system with the core banking application. Furthermore,
the Bank has started the implementation of a Document Management System towards
the end of the year to ensure efficient management of customers’ and Bank data.

During the year, the Bank recruited more than 30 skilled and experienced staff
across different areas of specialization. These additional resources enhanced the
Bank’s capabilities to efficiently and effectively deliver new products and services
22
to our customers in line with our business strategy. The number of staff at end
of the financial year was 100 compared to 70 on 31 December 2006.
We take training of our staff seriously and from the moment they join our Bank
all staff are subject to different forms of training from on-the-job training to in-
house classroom training to regional and overseas training courses and workshops.
During the past financial year, the staff received about 2,000 hours of internal and
external training. Each and every staff member undergoes training needs analysis
which is followed by a training program under the supervision of the Human
Resources Department.

In addition, all staff attended a number of internal training programs covering Anti-money
Laundering Policies and Procedures, Corporate Governance, Risk Management and Basel II.

Banking

As a core business division of the Bank, the Banking Group is responsible for Retail
Banking, Corporate Banking, Private Banking and Wealth Management. The Group is
also responsible for placement of investment products to private banking and wealth
management clients.

The Group aspires to provide innovative banking solutions to its clients whether
corporate or individuals, rather than merely providing financing to them. The
main objective of the Group is to understand the needs and requirements of its
customers and ensure that these are met. The Group’s approach is consistent
with the Bank’s overall strategy as a partner to its clients rather than a financier
in line with the principles of Shari’a compliant banking.

Overall, corporate and retail banking performed well. Significant growth was
achieved in volumes and number of customers without sacrificing on asset quality.
The Bank ended the financial year with zero non-performing relationships.

During the past year the Bank scored a number of wins on competitive bidding
transactions, by securing three competitive bids to finance in aggregate of BD62.4
million (US$166 million) to the Government of Bahrain and its entities.

On the retail and private banking front, the Bank commenced retail operations
after the successful launch of the retail operations in May 2007. With the launch,
the Bank opened it’s first branch at Al Seef District followed by the soft launch of
the internet banking services. Since then, the Bank has been consistently growing
its customer base as it launches new products and services. One of the key
banking products launched in the past year was Al Salam Wakala Deposit, which
continues to offer competitive returns for its customers.
23

The launch of the private and retail banking investment products including the
new Wakala Deposit and the winning of the three government financing bids
within a short period of time since establishment has strengthened the Bank’s
competitive position in the market.
 MANAGEMENT REVIEW OF
OPERATIONS & ACTIVITIES (Continued)

Investments

As the second core business division of the Bank, the Investment Group is
responsible for managing the Bank’s corporate and real estate investment activities.
The Group focuses on key sectors through which the Bank can meet the expectations
and demands of its clients.

The Group is structured into two specialist units: Corporate Investments and Real
Estate Investments. The Corporate Investments Unit focuses primarily on sourcing,
acquiring, managing and exiting private equity deals. The Unit focuses on identifying
opportunities in the MENA region, Asia Pacific and Europe covering alternative
energy, aviation and health care sectors.

During the year the Group closed a US$34 million aviation transaction through
the acquisition of a 1999 built Boeing 777-200ER aircraft on lease to a government
owned entity, Malaysian Airline Systems Berhad.

To take advantage of the opportunities in Asia, the Bank successfully concluded an

80% participation in a private equity fund for US$50 million with underlying being
significant minority stake in Chinese manufacturing, food and consumer goods industries.

24 The Group also identified an opportunity in alternative energy where the Bank
acquired rights to construct, commission and operate a 100,000 MT biodiesel
plant in Hong Kong. The technology in use is unique in that the plant uses non-
food raw materials such as waste cooking oil, grease trap waste, non-pork animal
fat and palm oil fatty acid distillate which are converted into Biodiesel. The Biodiesel
plant will be strategically located in a science and technology park in Hong Kong.
On the real estate front, the Bank in partnership with strategic investors established
Manara Developments Company B.S.C.(c), a Bahrain-based real estate development
company, to take advantage of the real estate opportunities in the country. To
date Manara has announced development projects in the pipeline in excess of
US$1 billion.

In addition, the Bank invested in a grand scale investment project in Penang, Malaysia.

Treasury & Financial Markets

The Treasury and Financial Markets Group focuses on providing treasury related
services such as foreign exchange, liquidity management, Sukuk trading and structuring
and distribution of structured products. The team achieved excellent growth in inter-
bank assets, efficiently supported liquidity management, developed new key alliances
with local, regional and international financial institutions, generated positive
contribution to the bottom line, recruited qualified treasury personnel and established
a modern treasury dealing room with all the necessary tools and equipment.

Risk Management & Compliance

The Risk Management & Compliance Group operates as an independent function
from business lines with a direct reporting line to the Chief Executive Officer. The
Risk Management Group Head is the Chairman of the Risk/Credit Committee and
a member of the Asset Liability Management Committee and Investment Committee.
All proposals for financing or investment are routed to the relevant committee
for approval after detailed review and analysis by the Risk Management &
Compliance Group.

The Bank invested a considerable amount of human and financial resources towards
meeting the Basel II implementation deadline of 2008 as set out by the Central
Bank of Bahrain. The Bank views the implementation of and compliance with the
Basel II Accord as a strategic element of our business model as it will facilitate the
strengthening of our risk management framework and better alignment of risk and
rewards leading to efficient utilization of capital.

The Risk Management and Compliance Group finalized the development of the
Basel II implementation plan, developed all its major risk policies in line with Basel
II framework, provided Basel II and risk management training to all relevant staff
across business and support functions, assessed and short-listed potential vendors
for Basel II and risk systems and finalized the development of the Internal Capital
Adequacy Assessment Framework (ICAAF).
25
The Compliance function under this group ensured that the Bank has adequate
compliance policies and procedures, all relevant staff received appropriate
compliance and anti-money laundering training, timely periodic reporting to the
Board and Executive Management and successful resolution of any significant
matters related to compliance.
 CORPORATE GOVERNANCE

The Board is committed to establishing the highest standards in Corporate

Governance. To this end, it has established various committees in line with industry
best practice and has also directed the Senior Management to establish various
management committees with relevant members. The Board Charter imposes the
highest level of ethical conduct; doing what it proclaims to be its responsibility;
reporting results with accuracy and transparency in a timely manner; and ensuring
full compliance with the by-laws, and the rules and regulations that govern the
Bank’s business. The Board has adopted a Board Charter, which together with the
Bank’s Memorandum and Articles of Association and the Charters of various Board
Committees, provides the authority and practices for governance of the Bank.

The Board provides central leadership to the Bank. It has established and defined
the objectives and strategies that direct the ongoing activities of the Bank to enable
it to achieve its objectives. The roles and responsibilities of the Board of Directors,
their independence, code of conduct and ethics are described in the Board Charter.

The Bank is organized as follows:

SHAREHOLDERS

External Auditors Shari’a Supervisory Board

Board of Directors

Executive Committee

Renumeration Committee

Audit Committee

Chief Executive Officer

Management Committee
• Risk / Credit Internal Audit Department
• Investment
• Asset Liability Shari’a Department
• Information Technology

BUSINESS GROUPS SUPPORT GROUPS

Banking Risk & Compliance

26 Operations, IT &
Investment Support Services

Treasury & Financial Markets Finance & Strategic Development

Trusts Serrvices Legal

The Board is BOARD COMMITTEES

committed to Consistent with the industry’s best practice, the Board has established three
establishing the Committees with defined roles and responsibilities. The Standing Committees of
highest standards in the Board are the Executive Committee, the Audit Committee, and the Remuneration
Committee.
Corporate
Governance. To this Executive Committee
end, it has Has delegated authority within the overall Board authority. Provides direction to
the executive management on all business matters and assumes the role of the
established various Board to address matters arising between Board meetings. The Committee is
committees in line responsible for business matters concerning credit and market risks, strategy
with industry best review and recommendation to the Board.

practice and has also

Audit Committee
directed the Senior Has responsibility to assist the Board in discharging its oversight duties relating
Management to to matters such as risk and compliance, including the integrity of the Bank’s financial
statements, financial reporting process and systems, internal controls and financial
establish various
controls. The Committee also, acts as a liaison between the External auditors and
management the Board and between the Regulators and the Board.
committees with
Remuneration Committee
relevant members.
The role is to provide a formal and transparent procedure for developing a
compensation policy for the Chief Executive Officer and senior management;
ensures that compensation offered is competitive, in line with the market/peer
group and consistent with the responsibilities assigned to employees. The
Committee approves policies covering hiring, compensation and training. In
addition, the Committee recommends to the Board special compensation plans,
including annual performance bonus and short/long term incentives, to attract,
motivate and retain key employees.

27
 CORPORATE GOVERNANCE (Continued)

MANAGEMENT COMMITTEES

The Chief Executive Officer is supported by a number of management committees

each having a specific mandate to give focus to areas of business, risk and strategy.
The various committees and their roles and responsibilities are:

Committee Roles and responsibilities

Credit/Risk Committee Recommending the risk policy and framework

to the Board. Its Primary role is the selection
and implementation of risk management
systems, portfolio monitoring, stress testing,
risk reporting to Board, Board Committees,
Regulators and Executive Management. In
addition to these responsibilities, individual
credit transaction approval and monitoring
is an integral part of the responsibilities.

Asset Liability Committee This Committee’s primary responsibility is to

review the trading and liquidity policy for the
overall management of the balance sheet and
its associated risks.

Investment Committee The role of the Committee is to review and

approve all transactions related to corporate
and real estate investments and monitoring
their performance on an ongoing basis. In
addition, the Committee is responsible to
oversee the performance of the fund managers
and recommend exit strategies to maximize
return to its investors.

Technology Steering Committee TSC oversees the information technology

function of the Bank. It recommends the
annual IT budget and plans, drawn up in
accordance with the approved strategy for
the Bank, to the CEO for submission to the
Board of Directors for their approval. It
supervises the implementation of the
28
approved IT annual plan within set deadlines
and budgetary allocations.
 Code of Conduct
The Bank conducts itself in accordance with the highest standards of ethical
behavior. A Code of Business Conduct has been developed to govern the personal
and professional conduct of all stakeholders.

Compliance
The Bank The Bank has in place comprehensive policies and procedures to ensure full
established the compliance with the relevant rules and regulations of the Central Bank of Bahrain
and the Bahrain Stock Exchange, including anti-money laundering, prudential and
Investor Relations
insider trading reporting.
Unit as a step to
enhancing the Communications
The Bank conducts all communications with its stakeholders in a professional,
communication
honest, transparent, understandable, accurate and timely manner. Main
with its communications channels include annual reports, corporate brochure and website,
shareholders. and regular announcements in the appropriate local media and the internet.

29
 RISK MANAGEMENT AND COMPLIANCE

At Al Salam Bank - Bahrain we appreciate the fact that we are in the business of
taking risks and our success is largely dependent on how efficiently we identify,
measure, control and manage these risks. Hence, we view risk management as
a core competency from a strategic point of view and the Basel II Accord as a
catalyst to the successful implementation of the pillars of risk management.

The fundamental principle underlying our risk management framework is ensuring

that accepted risks are within Board approved risk appetite and the returns are
commensurate with the risks taken. The objective is creating shareholder value
through protecting the Bank against unforeseen losses, ensuring maximization of
earnings potential and opportunities vis-à-vis the Bank’s risk appetite and ensuring
earnings stability.

With this in mind, the Bank’s establishment plan gave priority to the development
of an effective and practical risk management framework and independent risk
management and compliance function in line with best risk management practice
locally and internationally, the requirements of Central Bank of Bahrain and the
Basel II Accord.

RISK MANAGEMENT FRAMEWORK

The risk management framework defines the risk culture of Al Salam Bank - Bahrain
and sets the tone throughout the Bank to practice the right risk behavior consistently
to ensure that there is always a balance between business profits and risk appetite.

The risk management framework achieves this through the definition of the Bank’s
key risk management principles covering credit, market, operational, strategic and
reputation risks, the role and responsibilities of the Board, Risk Management group
and Senior Management towards risk management, the risk assessment
methodology based on likelihood and consequences, the major risk policies,
procedures and risk limits, the risk management information systems and reports,
the internal control framework and the Bank’s approach to capital management.

The effectiveness of the risk management framework is independently assessed

and reviewed through Internal audits, External audits and Central Bank of Bahrain
supervision. In addition, business and support groups carry out periodic control
risk self assessments.

As a result, the risk management framework creates an alignment between business

and risk management objectives.

30
 Board Committees

Risk Management & Compliance Function

Comprehensive
Internal Control
Framework

Risk Management
Systems

CAPITAL MANAGEMENT
The cornerstone of risk management framework is the optimization of risk-reward
relationship against the capital available through a focused and well monitored capital
management process involving Risk Management, Finance and Business groups.

CORPORATE GOVERNANCE
The risk management framework is supported by an efficient Corporate Governance
Framework discussed on pages 26 to 29.

RISKS OWNERSHIP
The implementation of the risk management framework bank-wide is the
responsibility of the Risk Management & Compliance Group. Ownership of the
various risks across the Bank lies with the business and support Heads and it is
their responsibility to ensure that these risks are managed in accordance with the
risk management framework. Risk Management will assist business and support
heads in identifying concerns and risks, identifying risk owners, evaluating risks
as to likelihood and consequences, assessing options for accommodating the risks,
prioritizing risk management efforts, developing risk management plans, authorizing
implementation of risk management plans and tracking risk management efforts.

RISK MANAGEMENT AND COMPLIANCE ORGANIZATION

Al Salam Bank- Bahrain Risk Management and Compliance Group function is
headed by an independent Chief Risk Officer with direct reporting line to the Chief
Executive Officer.

31
 RISK MANAGEMENT AND COMPLIANCE (Continued)

COMPLIANCE & ANTI-MONEY LAUNDERING UNIT

The Bank has established an independent and focused unit to coordinate the
implementation of compliance and Anti-Money Laundering and Anti-Terrorist
Financing program. The program covers policies and procedures for managing
compliance with regulations, anti-money laundering, disclosure standards on
material and sensitive information and insider trading.

In line with its commitment to combat money laundering and terrorist financing,
Al Salam Bank - Bahrain through it’s Anti-Money Laundering policies ensures that
adequate preventive and detective internal controls and systems operate effectively.
The policies govern the guidelines and procedures for client acceptance, maintenance
and monitoring in line with the Central Bank of Bahrain and International standards
such as FATF 40 + 9 recommendations and Basel Committee papers.

All inward and outward electronic transfers are screened against identified sanction
lists issued by certain regulatory bodies including the UN Security Council Sanctions
Committees and US Department of the Treasury - OFAC, in addition to those
designated by the Central Bank of Bahrain.

The compliance program also ensures that all applicable Central Bank of Bahrain
regulations are complied with and/or non-compliance is detected and addressed
in a timely manner. The program includes compliance with regulations set by
Ministry of Industry & Commerce and Bahrain Stock Exchange.

32
CORPORATE SOCIAL RESPONSIBILITY

Since its inception, social responsibility formed a priority for Al Salam Bank–Bahrain.
Bahrainis The Bank adopts a very balanced policy to contribute to the social and economic
accounted well-being of the communities in which it operates. The Bank focused on several
educational initiatives such as the donation towards the Crown Prince International
for 87% of all Scholarship Program.

employees The Bank had several effective sponsorships and participations in local and
at the end international conferences and events such as the “EnviroArabia 2007”, the
sponsorship of the showcase reception held during the IMF & World Bank meeting
of 2007. in Washington, which was an opportunity for the Bank to promote its investments
opportunities and solutions and promote Bahrain as a regional investment hub.
The Bank also sponsored the Second Arab Kids Forum, which looked into inspiring
and empowering of the youth capability that could be a start for the leaders of
the future.

The Bank adopts a policy that supports training and employment. Bahrainis
accounted for 87 per cent of all employees at the end of 2007. Also in 2007 the
Bank received the first batch of university students as part of its Summer Training
Program. The students occupied positions to gain work experience relevant to
their studies. 33

During the year, the Bank has allocated part of its profit to aid society and enhance
the quality of life for everyone, through its support for charitable, educational,
medical, scientific, cultural, social, sporting and environmental organisations.
34
 FINANCIAL STATEMENTS

Net profit of BD23.1 million (US$61.4 million) for

2007 showing an increase of 41% over 2006.
THE SHARI’A SUPERVISORY BOARD
REPORT TO THE SHAREHOLDERS
FOR THE YEAR ENDED 31 DECEMBER 2007

In the name of Allah, The Beneficent, The Merciful, Praise be to Allah, the Lord of the worlds, and blessing and
peace be upon His Prophet Mohammed and the people of His house and His companions.

Firstly:
The Shari’a Supervisory Board (“the Board”) of Al Salam Bank-Bahrain B.S.C. (“the Bank”) supervised the
Bank’s activities and transactions carried out during the year 2007. The Board carried out its role by guiding the
various departments to comply with the principles of Islamic Shari’a and with specific Fatwas. The Board has
conducted various meetings with the Bank’s Management and acknowledged that they have been complying
with the principles of Islamic Shari’a and the Board’s Fatwas.

The Board has studied the transactions submitted by the Bank during the year, approved its contracts, and
responded to related questions and queries. The Board issued suitable decisions and Fatwas to the Bank for
execution.

Secondly:
The Board has reviewed the contracts and agreement templates and requested management adherence to
those templates. Furthermore, the Board has resolved to schedule a training plan for the employees on the
new Shari’a agreements for immediate implementation.

Thirdly:
The Board has reviewed the financial statements and the related notes and disclosures. The Board believes
that:
1. These financial statements fairly represent the Bank’s assets and revenues.
2. The Bank maintains three separate pools i.e. one each for Wakala deposits, Mudaraba
deposits, and shareholders equity. It is the Board’s opinion that the balance sheet and
income statement as well as the distribution of profits to the depositors and shareholders
are presented accordingly.

Fourthly:
The Board noted that the Bank’s Articles of Association have been amended to enable the Bank to pay
Zakah out of the shareholders’ equity, and the Board approves the Zakah payable calculation prepared by
management.

Based on the internal Shari’a audit reports, reviewed transactions and recommendations implemented by
management, the Board confirms that the Bank’s transactions executed during the year do not violate Islamic
Shari’a principles.

Dr. Hussain Hamid Hassan Dr. Ali Mohiuddin Al Qurra Daghi 37

Chairman Member

Shaikh Adnan Abdulla Al Qattan Dr. Mohamed Abdul Hakim Zoeir

Member Member & Board Secretary
 P.O. Box 140 Phone: 17 535455
14th Floor, The Tower Fax: 17 535405
Bahrain Commercial manama.bh@eyi.com
Complex www.ey.com/me
Manama C.R. No. 6700
Kingdom of Bahrain

We have audited the accompanying financial statements of Al-Salam Bank Bahrain B.S.C. (“the Bank”), which
comprise the balance sheet as at 31 December 2007 and the statement of income, statement of changes in
equity and cash flow statement for the year ended 31 December 2007, and a summary of significant accounting
policies and other explanatory notes.

Board of Director’s Responsibility for the Financial Statements

The Board of Directors are responsible for the preparation and fair presentation of these financial statements in
accordance with Financial Accounting Standards issued by Accounting and Auditing Organization for Islamic
Financial Institutions, to operate in accordance with Islamic Shari’a. This responsibility includes: designing,
implementing and maintaining internal controls relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
In addition the Board of Directors are responsible for the Bank’s undertaking to operate in accordance with
Islamic Shari’a Rules and Principles.

Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with International Standards on Auditing and Auditing Standards issued by Accounting
and Auditing Organization for Islamic Financial Institutions. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial
statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate for the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the financial statements.

38 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Bank as of 31 December 2007 and of its financial performance and its cash flows for the year ended
31 December 2007 in accordance with Financial Accounting Standards issued by the Accounting and Auditing
Organization for Islamic Financial Institutions and the Islamic Shari’a Rules and Principles as determined by the
Shari’a Supervisory Board of the Bank.

Other Regulatory Matters

We confirm that, in our opinion, proper accounting records have been kept by the Bank and the financial
statements, and the contents of the Report of the Board of Directors relating to these financial statements, are
in agreement therewith. We further report, to the best of our knowledge and belief, that no violations of the
Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial Institutions Law, nor of
the memorandum and articles of association of the Bank have occurred during the year ended 31 December
2007 that might have had a material adverse effect on the business of the Bank or on its financial position, and
that the Bank has complied with the terms of its banking licence.

4 February 2008
Manama, Kingdom of Bahrain

39
 BALANCE SHEET
31 December 2007

31 December 31 December
2007 2006
Notes BD BD
ASSETS
Cash and balances with Central Bank of Bahrain 4 15,173,663 2,942,042
Central Bank of Bahrain Sukuk 20,380,000 -
Murabaha and Mudaraba with banks 5 224,450,893 105,089,786
Murabaha financing 6 32,641,599 22,963,267
Ijarah Muntahia Bittamleek 6&7 10,435,863 10,382,429
Non-trading investments 8 62,735,696 32,618,646
Investment in an associate 9 8,272,000 2,073,500
Investment properties 1,177,528 1,177,528
Receivables and prepayments 10 10,505,046 8,784,454
Premises and equipment 2,979,252 2,026,884
Investments held-for-sale 9,024,000 –
TOTAL ASSETS 397,775,540 188,058,536

LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS

AND EQUITY

LIABILITIES
Murabaha from banks 96,983,041 23,647,305
Murabaha from non-banks 106,908,709 20,111,967
Customers’ current accounts 5,688,686 5,673,812
Other liabilities 11 8,954,642 2,223,863
218,535,078 51,656,947
UNRESTRICTED INVESTMENT ACCOUNTS 12 19,769,585 –

EQUITY
Share capital 13 120,000,000 120,000,000
Treasury stock 13 – (17,203)
Reserves and retained earnings 14 & 15 38,941,790 16,418,792
Proposed appropriations 32 529,087 –
159,470,877 136,401,589
TOTAL LIABILITIES, UNRESTRICTED INVESTMENTS
ACCOUNTS AND EQUITY 397,775,540 188,058,536

The financial statements have been authorised for issue in accordance with a resolution of the Board of Directors on
4 February, 2008.

40

Mohamed Ali Rashid Alabbar Hussein Mohammed Al Meeza Yousif Taqi

Chairman Vice Chairman Chief Executive Officer

The attached notes 1 to 34 form part of these financial statements.

 STATEMENT OF INCOME
Year ended 31 December 2007

31 December 19 January 2006 to

2007 31 December 2006
BD BD
OPERATING INCOME
Income from Murabaha and Mudaraba 8,239,228 8,501,816
Income from other Islamic financing contracts 4,330,891 643,221
12,570,119 9,145,037
Profit paid on Murabaha from banks (2,815,106) (42,368)
Profit paid on Murabaha from non-banks (2,704,532) (387,697)
Share of profit to unrestricted investment account holders (245,414) –
6,805,067 8,714,972

Fees and commission income (note 16) 4,480,641 254,381

Gain on sale of investments designated as held-for-sale 11,017,492
Unrealised gains on investments designated
as fair value through profit or loss 11,079,352 11,443,688
Foreign exchange gains 254,264 15,792
Other operating income 215,703 –

TOTAL OPERATING INCOME 33,852,519 20,428,833

OPERATING EXPENSES
Staff costs 5,312,083 2,393,760
Premises and equipment cost 423,905 219,525
Depreciation 745,138 54,633
Depreciation on Ijarah Muntahia Bittamleek 1,140,346 –
Other operating expenses 2,981,195 1,342,123

TOTAL OPERATING EXPENSES 10,602,667 4,010,041

OPERATING PROFIT 23,249,852 16,418,792

Share of loss of associate 100,858 –

PROFIT FOR THE YEAR 23,148,994 16,418,792

WEIGHTED AVERAGE NUMBER OF SHARES

OUTSTANDING (NOTE 13) 1,199,935,900 1,089,777,780

BASIC EARNINGS PER SHARE (FILS) 19.3 15.1

41

The attached notes 1 to 34 form part of these financial statements.

 STATEMENT OF CASH FLOWS
Year ended 31 December 2007

31 December 19 January 2006 to

2007 31 December 2006
BD BD
OPERATING ACTIVITIES
Profit for the year 23,148,994 16,418,792
Adjustments:
Depreciation 745,138 54,633
Changes in fair value of investments carried at fair value
through profit or loss (11,079,352) (11,443,688)

Operating income before changes in operating assets and liabilities 12,814,780 5,029,737

Changes in operating assets and liabilties:

Mandatory reserve with Central Bank of Bahrain (4,710,000) (930,000)
Central Bank of Bahrain Sukuk (20,380,000) –
Murabaha and Mudaraba with Banks with original
maturities of 90 days or more 14,439,734 (14,816,100)
Murabaha financing (9,678,332) (22,963,267)
Ijarah Muntahia Bittamleek (53,434) (10,382,429)
Receivables and prepayments (1,720,592) (8,784,454)
Customers’ current accounts 14,874 5,673,812
Murabaha from banks 73,335,736 23,647,305
Murabaha from non-banks 86,796,742 20,111,967
Other liabilities 6,630,779 1,935,676

Net cash from (used in) operating activities 157,490,287 (1,477,753)

INVESTING ACTIVITIES
Purchase of investments held-for-sale (17,845,885) –
Proceeds from sale of investments held-for-sale 8,821,885 –
Investment in an associate (6,198,500) (2,073,500)
Premises and equipment (1,697,506) (2,081,517)
Investment properties – (1,177,528)
Non-trading investments (19,037,698) (20,886,771)

Net cash used in investing activities (35,957,704) (26,219,316)

42

The attached notes 1 to 34 form part of these financial statements.

STATEMENT OF CASH FLOWS
Year ended 31 December 2007

31 December 19 January 2006 to

2007 31 December 2006
BD BD

FINANCING ACTIVITIES
Issue of equity shares, net of treasury stock – 119,982,797
Proceeds from sale of treasury stock 20,294 –
Unrestricted investment accounts 19,769,585 –

Net cash from financing activities 19,789,879 119,982,797

NET INCREASE IN CASH AND CASH EQUIVALENTS 141,322,462 92,285,728

Cash and cash equivalents at 1 January 92,285,728 –

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 233,608,190 92,285,728

Cash and cash equivalents comprise of:

Cash and other balances with Central Bank of Bahrain 1,814,814 505,920
Balances with other banks 7,718,849 1,506,122
Murabaha and Mudaraba with banks with original maturities
of less than 90 days 224,074,527 90,273,686

233,608,190 92,285,728

43

The attached notes 1 to 34 form part of these financial statements.

 STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2007

Proposed
Share Treasury Statutory Retained Investment appropria Total
capital stock reserve earnings reserve -tions equity
BD BD BD BD BD BD BD

Balance as of
1 January 2007 120,000,000 (17,203) 1,641,879 3,333,225 11,443,688 - 136,401,589

Zakah - - - (529,087) - 529,087 -

Charitable
donations - - - (100,000) - - (100,000)

Net profit for the

year - - - 23,148,994 - - 23,148,994

Transfer to statutory
reserve - - 2,314,899 (2,314,899) - - -

Sale of
treasury stock - 17,203 3,091 - - - 20,294

Transfers - - - (11,079,352) 11,079,352 - -

Balance at
31 December 2007 120,000,000 - 3,959,869 12,458,881 22,523,040 529,087 159,470,877

Proceeds from issue

of share capital 120,000,000 (17,203) - - - - 119,982,797

Net profit for the

period - - - 16,418,792 - - 16,418,792

Transfer to statutory
reserve - - 1,641,879 (1,641,879) - - -

Transfers - - - (11,443,688) 11,443,688 - -

Balance at
31 December 2006 120,000,000 (17,203) 1,641,879 3,333,225 11,443,688 - 136,401,589

44

The attached notes 1 to 34 form part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

1 INCORPORATION AND PRINCIPAL ACTIVITIES

a) Incorporation
Al Salam Bank-Bahrain B.S.C. (“the Bank”) was incorporated in the Kingdom of Bahrain under the Bahrain
Commercial Companies Law No. 21/2001 and was registered with Ministry of Industry and Commerce
under Commercial Registration Number 59308 on 19 January 2006. The Bank is regulated and supervised
by the Central Bank of Bahrain (CBB) and has a retail Islamic banking licence and is operating under Islamic
principles, and in accordance with all the relevant regulatory guidelines for Islamic banks issued by the CBB.
The Bank’s registered office is P.O. Box 18282, Building 22, Avenue 58, Block 436, Al Seef District, Kingdom
of Bahrain.

b) Principal activities
The Bank offers a full range of Shari’a-compliant banking services and products. The activities of the Bank
include accepting money placements/deposits, managing profit sharing investment accounts, offering
Islamic financing contracts, dealing in Shari’a-compliant financial instruments as principal/agent, managing
Shari’a-compliant financial instruments and other activities permitted for under the CBB’s Regulated Banking
Services as defined in the licensing framework.

2 ACCOUNTING POLICIES

2.1 BASIS OF PREPARATION

The financial statements are prepared on a historical cost basis, except for investments held at fair value
through profit or loss and investment properties that have been measured at fair value.

These financial statements are presented in Bahraini dinars, being the functional currency of the Bank.

Statement of compliance
The financial statements of the Bank are prepared in accordance with the Financial Accounting Standards
(FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and
in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial
Institutions Law. In accordance with AAOIFI, for matters for which no AAOIFI standards exist, the Bank uses
the relevant International Financial Reporting Standard.

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the financial statements requires management to make judgements and estimates that
affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These
judgements and estimates also affect the revenues and expenses and the resultant provisions as well as fair
value changes reported in equity.
45
Judgements are made in the classification of available-for-sale, fair value through profit or loss or held-
to-maturity investments based on management’s intention at acquisition of the financial asset. As fully
described below, judgements are also made in determination of the objective evidence that a financial asset
is impaired.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

2 ACCOUNTING POLICIES (Continued)

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (Continued)
Classification of investments
Management decides upon acquisition of an investment whether it should be classified as fair value through
profit or loss, available for sale or held-to-maturity.

Impairment of available-for-sale equity investments

The Bank treats available-for-sale equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. In
addition, the Bank evaluates other factors, including normal volatility in share price for quoted equities and
the future cash flows and the discount factors for unquoted equities.

Estimation uncertainty
The key assumptions concerning the future and other key sources of estimating uncertainty at the balance
sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below:

Impairment losses on financial contracts

The Bank reviews its problem financial contracts on a regular basis to assess whether a provision for
impairment should be recorded in the statement of income. In particular, considerable judgement by
management is required in the estimation of the amount and timing of future cash flows when determining
the level of provisions required. Such estimates are necessarily based on assumptions about several factors
involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future
changes to such provisions.

Collective impairment provisions on financial contracts

In addition to specific provisions against individually significant financial contracts the Bank also considers
the need for a collective impairment provision against financial contracts which although not specifically
identified as requiring a specific provision have a greater risk of default than when originally granted. This
collective provision is based on any deterioration in the status, as determined by the Bank, of the financial
contract since it was granted (acquired). The amount of the provision is based on the historical loss pattern
for other contracts within each grade and is adjusted to reflect current economic changes.

Valuation of unquoted equity investments

Valuation of unquoted equity investments is normally based on one of the following:

• recent arm’s length market transactions;

• current fair value of another instrument that is substantially the same;
46
• the expected cash flows discounted at current rates applicable for items with similar terms and risk
characteristics; or
• other valuation models.
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

The Bank calibrates the valuation techniques periodically and tests these for validity using either prices from
observable current market transactions in the same instrument or other available observable market data.

The principal accounting policies applied in the preparation of these financial statements are set out
below:

Financial contracts
Financial contracts consist of cash and balances with banks and the Central Bank of Bahrain, Murabaha
receivables (net of deferred profit), Mudaraba and Ijarah Muntahia Bittamleek. Balances relating to these
contracts are stated net of provisions for impairment.

Murabaha receivables
Murabaha receivables are stated net of provision for impairment and deferred profits.

Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek assets comprises assets under lease, comprising aircraft, land and buildings,
under terms that would transfer ownership of the assets to third parties at the end of the respective lease
period.

Depreciation is provided on a straight-line basis on all Ijarah Muntahia Bittamleek assets other than land
(which is deemed to have an indefinite life), at rates calculated to write off the cost of each asset over the
period of the lease.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Non-trading investments
These are classified as held-to-maturity, available-for-sale or fair value through profit or loss.

All investments are initially recognised at cost, being the fair value of the consideration given including
acquisition costs associated with the investment.

Following the initial recognition of investments, the subsequent period-end reporting values are determined
as follows:

Investments held-to-maturity
Investments which have fixed or determinable payments and fixed maturity which are intended to be held-
to-maturity, are carried at amortised cost, less provision for impairment in value.

47
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

2 ACCOUNTING POLICIES (Continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments available-for-sale
After initial recognition, investments which are classified “available-for-sale” are normally remeasured at
fair value, unless the fair value cannot be reliably determined, in which case they are measured at cost
less impairment. Fair value changes are reported as a separate component of equity until the investment
is derecognised or the investment is determined to be impaired. On derecognition or impairment the
cumulative gain or loss previously reported as “cumulative changes in fair value” within equity, is included
in the statement of income for the period.

Investments carried at fair value through profit or loss

Investments in this category are designated as such on initial recognition if these investments are evaluated
on a fair value basis in accordance with the Bank’s risk management policy and its investment strategy.
These include all private equity investments including those in joint ventures and associates. In accordance
with AAOIFI, such investments would classify as “available for sale investments”.

Investments at fair value through profit or loss are recorded in the balance sheet at fair value. Changes in
fair value are recorded as “Unrealised gains on investments designated at fair value through profit or loss”
in statement of income.

Investment in associates
The Bank’s investments in its associates are accounted for under the equity method of accounting. An
associate is an entity over which the Bank has significant influence and which is neither a subsidiary nor a
joint venture.

Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-
acquisition changes in the Bank’s share of net assets of the associate. Losses in excess of the cost of the
investment in an associate are recognised when the Bank has incurred obligations on its behalf. Goodwill
relating to an associate is included in the carrying amount of the investment and is not amortised. The
income statement reflects the Bank’s share of results of operations of the associate. Where there has been a
change recognised directly in the equity of the associate, the Bank recognises its share of any changes and
discloses this, when applicable, in the statement of changes in equity.

The reporting dates of the associate and the Bank are identical and the associates accounting policy conform
to those used by the Bank for like transactions and events in similar transactions.

48
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

Investment properties
Investment properties are those held to earn rentals and/or for capital appreciation. These are initially
recorded at cost, including acquisition charges associated with the property.

Subsequent to initial recognition, all investment properties are remeasured at fair value and changes in fair
value are recognised in the statement of income as gain or loss in investment properties. The fair value of
the investment properties is determined either based on valuations made by independent valuers or using
internal models with consistent assumptions.

Investment reserve
Unrealised gains resulting from revaluation of “investments carried at fair value through profit or loss” and
“investment properties” recorded in the statement of income are appropriated to an investment revaluation
reserve in equity and are not available for distribution to the shareholders. Upon disposal of the “investment
carried at fair value through profit or loss” or “investment properties”, the cumulative gains related to the
investment are transferred to retained earnings and are available for distribution.

Subsidiaries or associates acquired with a view to sell

A subsidiary or an associate acquired with a view to subsequent disposal within 12 months are classified as
“held-for-sale” when the sale is highly probable. Related assets and liabilities of the subsidiary are shown
separately on the balance sheet as “Investments held-for-sale” and “Liabilities relating to investments held-
for-sale”. Assets that are classified as held-for-sale are measured at the lower of carrying amount and fair
value less costs to sell. Any resulting impairment loss reduces the carrying amount of the assets. Assets that
are classified as held-for-sale are not depreciated.

Any impairment loss is recognised in the profit or loss for any initial and subsequent write down of these
assets to fair value, less costs to sell. A gain for any subsequent increase in the fair value, less costs to sell,
is recognised to the extent that it is not in excess of the cumulative impairment loss that was recognised.

Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful lives of all premises and equipment, other than freehold land
and capital work-in-progress.

- Computer hardware and software 3 to 5 years

- Furniture and office equipments 3 to 5 years
- Motor vehicle 5 years
- Leasehold Improvements Over the lease period

49
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

2 ACCOUNTING POLICIES (Continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Treasury stock
Treasury stock is stated at cost with any gains and losses on sale recognised in equity.

Impairment and uncollectability of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence that a
specific financial asset may be impaired. If such evidence exists, any impairment loss, is recognised in the
statement of income.

Impairment is determined as follows:

(a) for assets carried at amortised cost, impairment is based on estimated cash flows discounted at the
original effective profit rate;
(b) for assets carried at fair value, impairment is the difference between cost and fair value; and
(c) for assets carried at cost, impairment is based on present value of future cash flows discounted at the
current market rate of return for a similar financial asset.

For available for sale equity investments reversal of impairment losses are recorded as increases in cumulative
changes in fair value through equity.

In addition, a collective provision is made to cover impairment for specific groups of assets where there is
a measurable decrease in estimated future cash flows.

Offsetting
Financial assets and financial liabilities can only be offset with the net amount being reported in the balance
sheet when there is a legally enforceable right to set off the recognised amounts and the Bank intends to
either settle on a net basis, or intends to realise the asset and settle the liability simultaneously.

Employees’ end of service benefits

The Bank provides end of service benefits to its expatriate employees. Entitlement to these benefits is based
upon the employees’ final salary and length of service, subject to completion of a minimum service period.
The expected costs of these benefits are accrued over the period of employment.

For national employees, the Bank makes contributions to General Organisation for Social Insurance calculated
as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions, which
are expensed when due.

50
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

Revenue recognition

Murabaha
Where the income is quantifiable and contractually determined at the commencement of the contract,
income is recognised on a time-apportioned basis over the period of the contract based on the principal
amounts outstanding. Where the income from a contract is not quantifiable, it is recognised when realised.
Accrual of income is suspended when the Bank believes that the recovery of these amounts may be doubtful
or normally when the repayments are overdue by 90 days, whichever is earlier.

Mudaraba
Income on Mudaraba transactions are recognised when the right to receive is established or these are
declared by the Mudarib, whichever is earlier.

Dividends
Revenue is recognised when the Bank’s right to receive the payment is established.

Ijarah
Ijarah Muntahia Bittamleek income is recognised on a time-proportionate basis over the lease term.

Fees and commission income

The Bank earns fee and commission income from a diverse range of services it provides its customers. Fee
income can be divided into the following main categories:

Fee income on financing transactions: Fees earned on financing transactions include up-front fees and early
maturity fees. These fees are recognised when earned. To the extent the fees are deemed yield enhancement
they are recongised over the period of the financing contracts.

Fee income from transaction services: Fees arising from corporate finance, corporate advisory, arranging the
sale of assets and wealth management are recognised upon completion of the underlying transaction or on
a time proportionate basis when the fee is linked to time.

Fair value of financial assets

For investments that are traded in organised financial markets, fair value is determined by reference to the
prevailing market bid price on the balance sheet date.

For investments where there is no quoted market price, a reasonable estimate of fair value is determined by
reference to current market value of another instrument, which is substantially the same, or is based on the
assessment of future cash flows. The cash equivalent values are determined by the Bank at current profit
rates for contracts with similar terms and risk characteristics.

For investments having fixed or determinable payments fair value is based on the net present value of
estimated future cash flows determined by the Bank using current profit rates for investments with similar
51
terms and risk characteristics.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

2 ACCOUNTING POLICIES (Continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currencies
Foreign currency transactions are recorded at rates of exchange prevailing at the dates of the transactions.
Monetary assets and liabilities in foreign currencies at the balance sheet date are retranslated at market rates
of exchange prevailing at that date. Gains and losses arising on translation are recognised in the statement
of income. Non-monetary assets that are measured in terms of historical cost in foreign currencies are
recorded at rates of exchange prevailing at the value dates of the transactions. Translation gains or losses
on non-monetary items classified as “available-for-sale” are included in equity until the related assets are
sold or derecognised at which time they are recognised in the statement of income. Translation gains on
assets and liabilities classified as “fair value through profit or loss” are directly recognised in the statement
of income.

Trade and settlement date accounting

Purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Bank commits
to purchase or sell the asset.

Derecognition of financial assets

A financial asset (in whole or part) is derecognised either when the Bank has transferred substantially all the
risk and rewards of ownership or when it has neither transferred nor retained substantially all the risks and
rewards and when it no longer has control over the asset or a proportion of the asset.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expires. Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new liability, and
the difference in the respective carrying amounts is recognised in profit or loss.

Fiduciary assets
Assets held in a fiduciary capacity are not treated as assets of the Bank.

Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved
by the Bank’s shareholders. Dividends for the year that are approved after the balance sheet date are
disclosed as an event after the balance sheet date.

Unrestricted investment account holders (URIA)

52
All unrestricted investment accounts are carried at cost plus accrued profits less amounts repaid. Income to
unrestricted investment account holders is allocated on the basis of their average daily balances in proportion
to shareholders’ balances.
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

Zakah
In accordance with the Articles of Association, the Bank is required to pay Zakah on all realised retained
earnings and reserves on behalf of the shareholders, excluding paid-up capital and share premium
which are the responsibility of the shareholders. The Bank is obligated to calculate and notify individual
shareholders of their share of Zakah payable. The Bank’s Shari’a Supervisory Board approves these
calculations. Zakah is treated as an appropriation from the retained earnings.

Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with banks with maturities of less than 90 days from
the date of acquisition.

53
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

3 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

As at 31 December 2007, financial instruments have been classified for the purpose of measurement
under International Accounting Standard 39 Financial Instruments: Recognition and Measurement as
follows:

Financial
assets at Financial Financial
fair value Financing assets at liabilities at
through profit and amortised amortised
or loss receivables cost cost Total
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain - - 15,173,663 - 15,173,663
Central Bank of Bahrain Sukuk - - 20,380,000 - 20,380,000
Murabaha and Mudaraba with
banks - - 224,450,893 - 224,450,893
Murabaha financing - 32,641,599 - - 32,641,599
Ijarah Muntahia Bittamleek - 10,435,863 - - 10,435,863
Non-trading investments 62,735,696 - - - 62,735,696
Receivables - 10,156,438 - - 10,156,438
62,735,696 53,233,900 260,004,556 - 375, 974,152

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha from banks - - - 96,983,041 96,983,041
Murabaha from non-banks - - - 106,908,709 106,908,709
Customers’ current accounts - - - 5,688,686 5,688,686

UNRESTRICTED INVESTMENT
ACCOUNTS - - - 19,769,585 19,769,585
- - - 229,350,021 229,350,021

54
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

As at 31 December 2006, Financial instruments, were classified as follows:

Financial
assets at Financial Financial
fair value Financing assets at liabilities at
through profit and amortised amortised
or loss receivables cost cost Total
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain - - 2,942,042 - 2,942,042
Murabaha and Mudaraba with
banks - - 105,089,786 - 105,089,786
Murabaha financing - 22,963,267 - - 22,963,267
Ijarah Muntahia Bittamleek - 10,382,429 - - 10,382,429
Non-trading investments 32,618,646 - - - 32,618,646
Receivables - 8,510,867 - - 8,510,867
32,618,646 41,856,563 108,031,828 - 182,507,037

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha from banks - - - 23,647,305 23,647,305
Murabaha from non-banks 20,111,967 20,111,967
Customers’ current accounts - - - 5,673,812 5,673,812

UNRESTRICTED INVESTMENT
ACCOUNTS - - - - -
- - - 49,433,084 49,433,084

4 CASH AND BALANCES WITH CENTRAL BANK OF BAHRAIN

2007 2006
BD BD
Mandatory reserve with Central Bank of Bahrain 5,640,000 930,000
Cash and other balances with Central Bank of Bahrain 1,814,814 505,920
Balances with other banks 7,718,849 1,506,122
55
15,173,663 2,942,042
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

5 MURABAHA AND MUDARABA WITH BANKS

31 December 2007
Up to 3 months to
3 months 6 months Total
BD BD BD

GCC 199,822,903 376,366 200,199,269

Europe 24,251,624 - 24,251,624
224,074,527 376,366 224,450,893

31 December 2006
Up to 3 months to
3 months 6 months Total
BD BD BD

GCC 74,684,215 7,276,100 81,960,315

Arab World - 7,540,000 7,540,000
Europe 15,589,471 - 15,589,471
90,273,686 14,816,100 105,089,786

Deferred profit on Murabaha and Mudaraba with banks as of 31 December 2007 amounted to
BD 188,345 (2006: BD 220,724).

6 MURABAHA AND IJARAH MUNTAHIA BITTAMLEEK

At 31 December 2007, no provisions existed for Murabaha and Ijarah Muntahia Bittamleek
contracts (2006: Nil).

56
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

7 IJARAH MUNTAHIA BITTAMLEEK

This represents net investments in assets leased for periods which either approximate or cover major parts
of the estimated useful lives of such assets.The lease agreements stipulate that the lessor undertakes to
transfer the leased assets to the lessee upon receiving the final rental payment.

2007 2006
BD BD
The future minimum lease receivable payments in aggregate are as follows:

Due within one year 738,954 885,462

Due in one to five years 8,561,766 9,496,967
Due after five years 1,135,143 -
10,435,863 10,382,429

Less: Deferred income 376,923 321,628

Present value of minimum lease payments 10,058,940 10,060,801
Allowance for doubtful Ijarah receivables - -
Net value of minimum lease payments receivable 10,058,940 10,060,801

2007 2006
BD BD
Ijarah Muntahia Bittamleek are divided into the following asset classes:

Aviation 4,142,211 4,610,408

Land and buildings 5,916,729 5,450,393
10,058,940 10,060,801

Income recognized on Ijarah financing in the year ended 31 December 2007 amountd to BD 905,497
(2006: BD 321,627).

8 NON-TRADING INVESTMENTS
2007 2006
BD BD
Quoted 12,051,192 7,914,375
Unquoted 50,684,504 24,704,271
57
62,735,696 32,618,646

These represent investments classified as fair value through profit or loss and are carried at fair value.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

9 INVESTMENT IN AN ASSOCIATE

During 2007 the Bank had taken a 20% stake in Al Salam Bank Algeria (ASBA), a bank incorporated in
Algeria. Al Salam Bank Algeria is not listed on any public exchange.The following table illustrates the
summarised financial information of the Bank’s investment in ASBA:
2007 2006
BD BD
Share of the associate’s balance sheet:
Assets 8,279,141 -
Liabilities 318,766 -
Net assets 7,960,375 -
Carrying amount of the investment 8,272,000 2,073,500

Share of associate’s loss:

Loss for the year 100,858 -

Al Salam Bank Algeria was in the process of being incorporated as of 31 December 2006, therefore no
comparitive figures are included.

10 RECEIVABLES AND PREPAYMENTS

2007 2006
BD BD
Profit receivable on financing contracts 1,227,578 898,461
Prepayments 348,608 273,588
Other receivables 8,928,860 7,612,405
10,505,046 8,784,454

Other receivables include advance payments amounting to BD 4,154,051 (2006: BD 7,540,000) for the
acquisition of investments.The related acquisitions and transfers of title to the underlying investments
were in the process of being concluded at the year-end.

11 OTHER LIABILITIES
2007 2006
BD BD
Profit payable 1,176,903 161,845
58 Accounts payable and accruals 7,640,165 2,003,748
End of services benefits 137,574 58,270
8,954,642 2,223,863
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

12 UNRESTRICTED INVESTMENT ACCOUNTS

Unrestricted investment account holders’ funds are commingled with the Bank’s funds and invested
in short-term highly liquid Commodity Murabaha and/or Wakala deposits. According to the terms of
acceptance of the unrestricted investment accounts, 100% of the funds are invested after deducting
a mandatory reserve. All unrestricted investment accounts have no restriction on cash withdrawal,
therefore the Mudarib fee ranges between 40% and 50%.

13 SHARE CAPITAL
2007 2006
BD BD
Authorised:
1,200,000,000 ordinary shares of BD 0.100 each 120,000,000 120,000,000

Issued and fully paid:

1,200,000,000 ordinary shares of BD 0.100 each,
issued against cash
120,000,000 120,000,000

It was resolved by the Extraordinary General Assembly meeting held on 10 September 2007 to split
the nominal value of the issued and fully paid-up shares of the Bank from BD 1 each to 10 shares of
100 fils (BD 0.100) each. The resolution was implemented effective 18 November 2007. Accordingly,
the number of authorised, issued and paid-up shares increased from 120 million ordinary shares to 1.2
billion ordinary shares.The calculation of earnings per share has been adjusted retroactively as required
by IAS 33.

In 2006, the founders of the Bank subscribed for 65% of the paid-up capital and the remaining 35% of
the shares were offered to the public. The initial public offer for 42 million shares was made at an issue
price of BD 1.050 per share, including issue expenses of BD 0.050 per share, in February 2006. The
share allotment was completed on 19 March 2006 with the approval of the Capital Markets Supervision
Directorate of the CBB and the Bank issued 42,000,000 shares. The allotment process resulted in the
Bank purchasing 17,203 shares, being fractional shares, as treasury stock at the issue price. The issue
expenses collected on the shares issued were reimbursed to Co-Lead Manager as placement fee as per
terms specified in the offering prospectus.

14 STATUTORY RESERVE

As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the 59
net profit for the year has been transferred to the statutory reserve. The Bank may resolve to discontinue
such annual transfers when the reserve totals 50% of the paid up share capital of the Bank. The reserve
is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies
Law and following the approval of the Central Bank of Bahrain.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

15 INVESTMENT RESERVE

During the year BD 11,079,352 (2006: BD 11,443,688) was transferred from retained earnings to
the investment reserve.The reserve represents unrealised gains from revaluation of investments and
investment properties carried at fair value though profit or loss, and is not available for distribution
under the Bank’s Shari’a policies until transferred back to retained earnings upon disposal of the assets
and realisation of the gains.

16 FEES AND COMMISSION INCOME

2007 2006
BD BD
Financing related fees and commissions 530,937 254,381
Transaction related fees 3,853,532 -
Fiduciary and other fees 96,172 -
4,480,641 254,381

17 RELATED PARTY TRANSACTIONS

Related parties comprise major shareholders, directors of the Bank, close members of their families, entities
owned or controlled by them and companies affiliated by virtue of common ownership or directors with
that of the Bank. The transactions with these parties were made on commercial terms.

The significant balances with related parties at 31 December 2007 were as follows:
2007
Directors
Joint and related Senior
ventures entities management Total
BD BD BD BD
Assets
Murabaha financing - 4,603,987 45,896 4,649,883
Ijarah Muntahia Bittamleek - 6,807,337 253,129 7,060,466
Receivables and prepayments 600 196,325 1,275 198,200

Liabilities
Murabaha from non-banks 1,453,500 568,410 576,490 2,598,400
Customer current accounts - 164,027 21,767 185,794
60 Other liabilities 2,985 1,291 62,583 66,859
Unrestricted investment accounts - 50,315 608,454 658,769
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

The income and expenses in respect of related parties included in the financial statements are as follows:
2007
Directors
Joint and related Senior
ventures entities management Total
BD BD BD BD
Income
Income from Murabaha and Mudaraba - 557,661 3,139 560,800
Income from Ijarah Muntahia Bittamleek - 371,853 7,166 379,019
Fees and commission income (note 16) - 19,250 938 20,188

Expenses
Profit paid on Murabaha from non-banks 165,372 42,062 26,002 233,436
Share of profits on unrestricted investment accounts - 39 1,082 1,121

2006
Directors
Joint and related Senior
ventures entities management Total
BD BD BD BD
Assets
Murabaha financing - 1,221,011 39,447 1,260,458
Ijarah Muntahia Bittamleek - 4,800,884 - 4,800,884

Liabilities
Customer current accounts 361,711 - - 361,711
Murabaha from non-banks 4,332,436 9,052,950 - 13,385,386

The income and expenses in respect of related parties included in the financial statements are as follows:
Income
Income from Murabaha and Mudaraba - - 223 223
Income from Ijarah Muntahia Bittamleek - 158,553 - 158,553
Fees and commission income (note 16) - 21,101 - 21,101

Expenses
Profit paid on Murabaha from non-banks 63,099 65,630 - 128,729
Share of profits on unrestricted investment accounts - - - -

In 2006, income from Murabaha and Mudaraba received from related parties included a profit of BD
3.77 million which was earned and received through the co-lead manager, a related party, in connection
with investments made by the related party on behalf of the Bank using the IPO proceeds. 61

Compensation of key management personnel, consisting solely of short-term benefits, paid during the
year was BD 2,329,980 (2006: BD 1,281,398).
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

18 COMMITMENTS

Undrawn commitments
The Bank has a contracted financing commitment to the extent of BD 6,409,746 (2006:
BD 2,790,779) which remained undrawn as at the year end. In addition, the Bank had an undrawn capital
commitment of BD 32,601,265 (2006: BD 2,008,000) as at the year end on account of investments.
Commitments generally have fixed expiration dates, or other termination clauses. Since commitment
may expire without being drawn upon, the total contract amounts do not necessarily represent future
cash requirements.

Operating lease commitment - Bank as lessee

In 2006, the Bank entered into a five-year operating lease for its headquarters premises. Future minimal
rentals payable under the non-cancellable lease as at 31 December 2007 are as follows:
2007 2006
BD BD
Within 1 year 366,373 322,328
After one year but not more than five years 821,980 978,984
TOTAL 1,188,353 1,301,312

19 CREDIT RISK

Risk management
Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and
cause the other party to incur a financial loss.The Bank attempts to controls credit risk by monitoring
credit exposures, setting limits for transactions with counterparties, and continually assessing the
creditworthiness of counterparties.

In addition to monitoring credit limits, the Bank manages the credit exposures by entering into collateral
arrangements with counterparties in appropriate circumstances and by limiting the duration of the
exposure.

Type of credit risk

Various contracts entered into by the Bank comprise Murabaha receivables, Mudaraba investments and
Ijarah Muntahia Bittamleek contracts.Murabaha receivables contracts cover land, buildings, commodities,
motor vehicles and others.Mudaraba investments consist of financing transactions entered through
other Islamic banks and financial institutions.The various financial instruments are:

62 Murabaha receivables
The Bank arranges Murabaha transactions by buying an asset (which represents the object of the
Murabaha) and then selling this asset to customers (beneficiary) after adding a margin of profit over the
cost.The sale price (cost plus profit margin) is repaid in installments over the agreed period.
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

Ijarah Muntahia Bittamleek

The legal title of the leased asset under Ijarah Muntahia Bittamleek passes to the lessee at the end of the
Ijarah term, provided that all Ijarah instalments are settled and the lessee purchases the asset.

a) The credit quality of Murabaha and Mudaraba with banks subject to credit risk is as follows:

31 December 2007
Past due or
Neither past due nor impaired individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD

Murabaha and Mudaraba

with banks 135,572,893 51,822,000 37,056,000 - 224,450,893
135,572,893 51,822,000 37,056,000 - 224,450,893

31 December 2006
Past due or
Neither past due nor impaired individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD

Murabaha and Mudaraba

with banks 59,576,067 9,264,552 36,249,167 - 105,089,786
59,576,067 9,264,552 36,249,167 - 105,089,786

The ratings referred to in the above tables are by one or more of the 4 international rating agencies
(Standards & Poors, Moody’s, Fitch and Capital Intelligence).

63
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

19 CREDIT RISK (Continued)

b) The credit quality of Murabaha financing and Ijarah Muntahia Bittamleek subject to credit risk, based
on internal credit ratings, is as follows:

31 December 2007

Neither past due nor impaired

Substandard
but not
Satisfactory Watch List impaired Past due Total
BD BD BD BD BD

Murabaha financing 27,040,226 - - 5,601,373 32,641,599

Ijarah Muntahia Bittamleek 10,429,788 - - 6,075 10,435,863
Guarantees and irrevocable
commitments to
extend credit 6,409,746 - - - 6,409,746
43,879,760 - - 5,607,448 49,487,208

31 December 2006

Neither past due nor impaired

Substandard
but not
Satisfactory Watch List impaired Past due Total
BD BD BD BD BD

Murabaha financing 22,963,267 - - - 22,963,267

Ijarah Muntahia Bittamleek 10,382,429 - - - 10,382,429
Guarantees and irrevocable
commitments to
extend credit 2,790,779 - - - 2,790,779
36,136,475 - - - 36,136,475

All internal risk ratings are tailored to the various categories and are derived in accordance with the
Bank’s rating policy.The attributable risk ratings are assessed and updated regularly.

64
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

c) Past due but not impaired Murabaha financing, and Ijarah Muntahia Bittamleek are analysed as
follows:

31 December 2007
0-30 days 30-90 days > 90 days Total
BD BD BD BD

Murabaha financing 997,380 3,480,396 1,123,590 5,601,366

Ijarah Muntahia Bittamleek 252 - 5,823 6,075
997,632 3,480,396 1,129,413 5,607,441

31 December 2006
0-30 days 30-90 days > 90 days Total
BD BD BD BD

Murabaha financing - - - -
Ijarah Muntahia Bittamleek - - - -
- - - -

Of the total aggregate amount of past due but not impaired Murabaha and Ijarah financing,
BD 997,380 is covered by a collateral of BD 1,717,930.

The maximum credit risk, without taking into account the fair value of any collateral and
Shari’a-compliant netting agreements, is limited to the amounts on the balance sheet plus commitments
to customers disclosed in note 18.

No financial assets were renegotiated during this or any previous years.

At 31 December 2007, the amount of credit exposure in excess of 10% of equity to individual
counterparties was nil (2006: nil).

20 CONCENTRATIONS

Concentrations arise when a number of counterparties are engaged in similar business activities, or
activities in the same geographic region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected by changes in economic, political or other
conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments
65
affecting a particular industry or geographic location. The Bank manages its credit risk exposure through
diversification of financing activities to avoid undue concentrations of risks with customers in specific
locations or businesses.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

20 CONCENTRATIONS (Continued)
The distribution of assets, liabilities and unrestricted investment accounts by geographic region and
industry sector was as follows:

2007 2006
Liabilities, Liabilities,
unrestricted unrestricted
investment investment
accounts accounts
Assets and equity Commitments Assets and equity Commitments
BD BD BD BD BD BD
Geographic region
GCC 355,982,172 223,612,663 6,409,746 153,948,549 48,318,047 2,790,779
Arab World 10,201,788 4,177,469 - 17,250,408 - -
Europe 27,161,365 9,930,884 - 16,581,353 3,338,900 -
Asia 3,570,847 576,258 26,344,625 255,606 - 2,008,000
America 779,299 7,389 - 22,620 - -
Others 80,069 - 6,256,640 - - -
397,775,540 238,304,663 39,011,011 188,058,536 51,656,947 4,798,779
Equity - 159,470,877 - - 136,401,589 -
397,775,540 397,775,540 39,011,011 188,058,536 188,058,536 4,798,779

Industry sector
Trading and
manufacturing 5,217,109 71,317 1,750,000 6,668,012 3,225,972 -
Banks and financial
institutions 302,534,030 173,002,367 - 122,256,947 38,716,628 -
Real estate 56,991,542 6,152,146 8,537,265 51,992,775 6,787,056 2,008,000
Aviation 7,159,208 - - 4,800,884 - -
Individuals 10,846,341 49,883,876 4,659,746 39,446 115,661 2,790,779
Others 15,027,310 9,194,957 24,064,000 2,300,472 2,811,630 -
397,775,540 238,304,663 39,011,011 188,058,536 51,656,947 4,798,779
Equity - 159,470,877 - - 136,401,589 -
397,775,540 397,775,540 39,011,011 188,058,536 188,058,536 4,798,779

66
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

21 MARKET RISK

Market risk arises from fluctuations in global yields on financial instruments and foreign exchange rates
that could have an indirect effect on the Bank’s assets value and equity prices. The Board has set
limits on the risk that may be accepted. This is monitored on a regular basis by the Asset and Liability
Committee of the Bank.

22 EQUITY PRICE RISK

Equity price risk arises from fluctuations in equity prices.The Board has set limits on the amount and type
of investments that may be accepted. This is monitored on an ongoing basis by the Bank’s Investment
Committee.

The effect on income (as a result of changes in the fair values of non-trading investments held at fair
value through profit or loss) solely due to reasonably possible changes in equity prices, is as follows:

2007
Change in Effect on Change in Effect on
index net profit index net profit
% BD % BD
Quoted:
GCC 10 1,091,361 (10) (1,091,361)
Unquoted 10 5,068,450 (10) (5,068,450)

2006
Change in Effect on Change in Effect on
index net profit index net profit
% BD % BD
Quoted:
GCC 10 737,100 (10) (737,100)
Unquoted 10 2,470,427 (10) (2,470,427)

23 PROFIT RETURN RISK

The Bank has exposure to fluctuations in the profit rates on its assets and liabilities. The Bank recognises
income on certain financial assets on a time-apportioned basis. The Bank has set limits for profit return
risk and these are monitored on an ongoing basis by the Bank’s Asset Liability Committee (ALCO).The 67
following table indicates the gaps in the profit rate profile at the balance sheet date and the effective
yield/cost, set out as a percentage of principal, of assets/liabilities on which income is generated or
profit is payable.
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

23 PROFIT RETURN RISK (Continued)

The Bank manages exposures to the effects of various risks associated with fluctuations in the prevailing
levels of market profit rates on its financial position and cash flows.

The Bank’s profit sensitivity position based on the earlier of contractual repricing arrangements or
maturity at 31 December 2007 has been shown in the table below:
31 December 2007
Not exposed by Effective
Up to 3 3 months 1 to 5 Over 5 profit profit
months to 1 year years years rate risk Total rates
BD BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain - - - - 15,173,663 15,173,663
Central Bank of Bahrain
Sukuk 1,560,000 18,820,000 - - - 20,380,000 5.42%
Murabaha and Mudaraba
with banks 224,074,527 376,366 - - - 224,450,893 4.09%
Murabaha financing 18,750,210 5,524,705 8,246,684 120,000 - 32,641,599 8.41%
Ijarah Muntahia Bittamleek 107,861 631,093 8,561,766 1,135,143 - 10,435,863 8.04%
Non-trading investments - - 2,275,111 - 60,460,585 62,735,696 9.50%
Investment in an associate - - - - 8,272,000 8,272,000
Investment properties - - - - 1,177,528 1,177,528
Receivables and
prepayments 501,955 312,342 407,104 6,177 9,277,468 10,505,046
Premises and equipment - - - - 2,979,252 2,979,252
Investments held-for-sale - - - - 9,024,000 9,024,000
244,994,553 25,664,506 19,490,665 1,261,320 106,364,496 397,775,540

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha from banks 96,983,041 - - - - 96,983,041 4.95%
Murabaha from
non-banks 101,975,729 4,742,980 190,000 - - 106,908,709 5.27%
Customers’ current
accounts - - - - 5,688,686 5,688,686
Other liabilities 895,718 51,558 6,747 170,222 7,830,397 8,954,642
UNRESTRICTED
INVESTMENT
ACCOUNTS 19,769,585 - - - - 19,769,585 3.82%
68
219,624,073 4,794,538 196,747 170,222 13,519,083 238,304,663
Profit pricing gap 25,370,480 20,869,968 19,293,918 1,091,098 92,845,413 159,470,877
Cumulative profit
pricing gap 25,370,480 46,240,448 65,534,366 66,625,464 159,470,877
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

31 December 2006
Not exposed by Effective
Up to 3 3 months 1 to 5 Over 5 profit profit
months to 1 year years years rate risk Total rates
BD BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain - - - - 2,942,042 2,942,042
Murabaha and Mudaraba
with banks 90,273,686 14,816,100 - - - 105,089,786 5.28%
Murabaha financing 3,073,000 10,088,261 9,802,006 - - 22,963,267 8.20%
Ijarah Muntahia
Bittamleek 2,175,236 3,843,400 4,363,793 - - 10,382,429 8.45%
Non-trading investments - - - - 32,618,646 32,618,646
Investment in an associate - - - - 2,073,500 2,073,500
Investment properties - - - - 1,177,528 1,177,528
Receivables and
prepayments 253,613 1,864 113,555 529,429 7,885,993 8,784,454
Premises and equipment - - - - 2,026,884 2,026,884
95,775,535 28,749,625 14,279,354 529,429 48,724,593 188,058,536
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha from banks 23,647,305 - - - - 23,647,305 5.26%
Murabaha from non-banks 20,111,967 - - - - 20,111,967 5.20%
Customers’ current
accounts - - - - 5,673,812 5,673,812
Other liabilities 161,845 - - - 2,062,018 2,223,863
UNRESTRICTED INVESTMENT
ACCOUNTS - - - - - -
43,921,117 - - - 7,735,830 51,656,947
Profit pricing gap 51,854,418 28,749,625 14,279,354 529,429 40,988,763 136,401,589
Cumulative profit
pricing gap 51,854,418 80,604,043 94,883,397 95,412,826 136,401,589

The effect on income solely due to reasonably possible immediate and sustained changes in profit
return rates, affecting both floating rate assets and liabilities and fixed rate assets and liabilities with
maturities less than one year are as follows:
2007
Change in Effect on Change in Effect on
rate net profit rate net profit
69
% BD % BD
US Dollars 1 233,879 (1) (233,879)
Bahraini Dinars 1 361,379 (1) (361,379)
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

23 PROFIT RETURN RISK (Continued)

2006
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US Dollars 1 434,358 (1) (434,358)
Bahraini Dinars 1 299,712 (1) (299,712)

24 CURRENCY RISK

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange
rates. The Board has set limits on positions by currency. Positions are monitored on a periodic basis by the Bank’s
Asset Liability Committee to ensure positions are maintained within established limits.

Substantial portion of the Bank’s assets and liabilities are denominated in Bahrain Dinars or US Dollars. The Bank had
the following significant net exposures denominated in foreign currencies as of 31 December :

2007 2006
BD BD
US Dollars 12,150,234 57,231,592
Saudi Riyals 10,889,630 8,705,404

The effect on income solely due to reasonably possible immediate and sustained changes in exchange rates is as
follows:
2007
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars to Bahraini Dinar 1 121,502 (1) (121,502)

2006
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars to Bahraini Dinar 1 572,316 (1) (572,316)

25 LIQUIDITY RISK
70
Liquidity risk is the risk that the Bank will be unable to meet its liabilities as they fall due. Liquidity risk
can becaused by market disruptions or credit downgrades which may impact certain sources of funding.
To mitigate this risk, management has diversified funding sources and assets are managed with liquidity
in mind, maintaining an adequate balance of cash, cash equivalents and readily marketable securities.
Liquidity position is monitored on an ongoing basis by the Bank’s Asset Liability Committee.
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

The table below summarizes the maturity profile of the Bank’s assets and liabilities based on remaining contractual
repayment arrangements. Maturity periods for investments are based on expected exit dates.

The maturity profile of assets and liabilities as at 31 December 2007 is as follows:

31 December 2007
Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain 15,173,663 - - - 15,173,663
Central Bank of Bahrain
Sukuk 1,560,000 - 18,820,000 - 20,380,000
Murabaha and Mudaraba
with banks 224,074,527 376,366 - - 224,450,893
Murabaha financing 13,862,210 5,524,705 13,134,684 120,000 32,641,599
Ijarah Muntahia Bittamleek 107,861 631,093 8,561,767 1,135,142 10,435,863
Non-trading investments - - 62,735,696 - 62,735,696
Investment in an associate - - - 8,272,000 8,272,000
Investment properties - 1,177,528 - - 1,177,528
Receivables and prepayments 9,632,557 56,096 810,216 6,177 10,505,046
Premises and equipment - - 2,979,252 - 2,979,252
Investments held-for-sale - 9,024,000 - - 9,024,000
264,410,818 16,789,788 107,041,615 9,533,319 397,775,540

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha from banks 96,983,041 - - - 96,983,041
Murabaha from non-banks 101,975,729 4,932,980 - - 106,908,709
Customers’ current accounts 5,688,686 - - - 5,688,686
Other liabilities 8,726,115 51,683 6,622 170,222 8,954,642

UNRESTRICTED INVESTMENT
ACCOUNTS 19,769,585 - - - 19,769,585

233,143,156 4,984,663 6,622 170,222 238,304,663

Liquidity gap 31,267,662 11,805,125 107,034,993 9,363,097 159,470,877

Cumulative liquidity gap 31,267,662 43,072,787 150,107,780 71

 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

25 LIQUIDITY RISK (Continued)

31 December 2006
Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain 2,942,042 - - - 2,942,042
Murabaha and Mudaraba
with banks 90,273,686 14,816,100 - - 105,089,786
Murabaha financing 3,073,000 11,428,760 8,461,507 - 22,963,267
Ijarah Muntahia Bittamleek 354,774 534,408 9,493,247 - 10,382,429
Non-trading investments - - 32,618,646 - 32,618,646
Investment in an associate - - - 2,073,500 2,073,500
Investment properties - - - 1,177,528 1,177,528
Receivables and prepayments 996,431 7,788,023 - - 8,784,454
Premises and equipment - - 2,026,884 - 2,026,884
97,639,933 34,567,291 52,600,284 3,251,028 188,058,536

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha from banks 23,647,305 - - - 23,647,305
Murabaha from non-banks 20,111,967 - - - 20,111,967
Customers’ current accounts 5,673,812 - - - 5,673,812
Other liabilities 2,223,863 - - - 2,223,863

UNRESTRICTED INVESTMENT
ACCOUNTS - - - - -

51,656,947 - - - 51,656,947

Liquidity gap 45,982,986 34,567,291 52,600,284 3,251,028 136,401,589

Cumulative liquidity gap 45,982,986 80,550,277 133,150,561

72
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

26 SEGMENT INFORMATION

Primary segment information

For management purposes, the Bank is organised into four major business segments:

Banking principally managing Shari’a compliant profit sharing investment accounts, and offering Shari’a
compliant financing contracts and other Shari’a-compliant products. This segment comprises
corporate banking, retail banking and private banking and wealth management.

Treasury principally handling Shari’a-compliant money market, trading and treasury services includingshort-
term commodity Murabaha.

Investments principally the Banks’ proprietary portfolio and serving clients with a range of investment products,
funds and alternative investments.

Capital manages the undeployed capital of the bank by investing it in high quality financial instruments,
incurs all expenses in managing such investments and accounts for the capital governance related
expenses.

These segments are the basis on which the Bank reports its primary segment information. Transactions between
segments are conducted at estimated market rates on an arm’s length basis. Transfer charges are based on a pool
rate which approximates the cost of funds.

Segment information for the year ended 31 December 2007 was as follows:

31 December 2007
Banking Treasury Investments Capital Total
BD BD BD BD BD
Operating income 12,972,517 866,524 11,184,478 8,829,000 33,852,519
Segment result 8,000,973 51,399 8,335,463 6,761,159 23,148,994

Other information
Segment assets 42,574,473 175,158,216 84,587,099 95,455,752 397,775,540
Segment liabilities, URIA
and equity 126,635,534 104,044,820 23,241,303 143,853,883 397,775,540

73
 NOTES TO THE FINANCIAL STATEMENTS (Continued)
31 December 2007

26 SEGMENT INFORMATION (Continued)

31 December 2006
Banking Treasury Investments Capital Total
BD BD BD BD BD
Operating income 846,293 1,022,217 11,008,323 7,552,000 20,428,833
Segment result 26,546 44,901 10,634,405 5,712,940 16,418,792

Other information
Segment assets 30,815,622 19,534,393 46,566,958 91,141,563 188,058,536
Segment liabilities, URIA
and equity 26,043,987 23,712,259 327,435 137,974,855 188,058,536

Secondary segment information

The Bank primarily operates in the GCC and derives substantially all its operating income and incurs all operating
expenses in the GCC.

27 FIDUCIARY ASSETS

Funds under management at the year-end amounted to BD 26,202,212 (2006: BD 22,041,590). These assets are
held in a fiduciary capacity and are not included in the balance sheet.

28 SHARI’A SUPERVISORY BOARD

The Bank’s Shari’a Supervisory Board consists of four Islamic scholars who review the Bank’s compliance with
general Shari’a principles and specific fatwa’s, rulings and guidelines issued.Their review includes examination of
evidence relating to the documentation and procedures adopted by the Bank to ensure that its activities are
conducted in accordance with Islamic Shari’a principles.

29 FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Bank’s financial instruments are not significantly different from their book values as
at 31 December 2007.

74
30 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

As at 31 December 2007, the Bank received income from non-Islamic institution totaling BD 151 (2006: Nil).These
funds were held as payable to charity as they are prohibited by Shari’a law.
NOTES TO THE FINANCIAL STATEMENTS
31 December 2007

31 SOCIAL RESPONSIBILITY

The Bank discharges its social responsibility through Zakah, charity fund expenditures and donations to the good
faith qard fund which is used for charitable purposes. During the period the Bank incurred an amount of BD 35,100
(2006: BD 8,274) on account of charitable donations.

32 ZAKAH

The total Zakah payable as of 31 December 2007 amounted to BD 4,051,134 of which BD 529,087, representing
the Zakah on the statutory reserve, general reserve and retained earnings balances for the period from
19 January 2006 to 31 December 2007, is payable by the Bank.The remaining Zakah balance amounting to
BD 3,522,047 or 2.94 fils per share is due and payable by the shareholders.

33 CAPITAL

The adequacy of the Bank’s capital is monitored using, primarily, the rules and ratios established by the Basel
Committee on Banking Supervision and adopted by the Central Bank of Bahrain.The primary objective of the
Bank’s capital management is to ensure that it complies with externally imposed capital requirements. The Bank
complied in full with all externally imposed capital requirements during the years ended 31 December 2007 and
31 December 2006.

The risk assets ratio calculations, in accordance with the ‘Basel II’ capital adequacy guidelines of the Central Bank of
Bahrain are as follows:
2007 2006
BD BD
Capital Base (Tier 1) 126,809,000 132,412,000

Credit risk weighted exposures 208,682,000 133,656,000

Market risk weighted exposures 775,000 268,000
Operational risk weighted exposures 50,888,000 32,064,000
Total risk weighted exposure 260,345,000 165,988,000
Capital adequacy 48.7% 79.8%
Minimum requirement 12.0% 12.0%

34 COMPARATIVE FIGURES 75

Certain of the prior year’s figures have been reclassified to conform to the presentation adopted in the current pe-
riod.Such reclassification did not affect previously reported net income or shareholders’ equity.