Annual Report and Financial Statements. 31 December 2006 Registered number

Transcription

1 Annual Report and Financial Statements 31 December 2006 Registered number

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3 Contents Chairman s statement 1 Report of the Sharia a Supervisory Committee 3 Directors report 4 Statement of directors responsibilities in respect of the Annual Report and the financial statements 7 Independent Auditors Report to the Members of Islamic Bank of Britain PLC 8 Income statement 9 Balance sheet 10 Statement of changes in equity 11 Statement of cash flows 12 Notes to the financial statements 13

4 Chairman s Statement I am pleased to present the Annual Report of the Islamic Bank of Britain PLC (the Bank ) for the financial year ended 31 December In 2006 the emphasis has been on developing the Bank s business to build on our achievements in These efforts resulted in: The number of customers increased by 120% to 30,814 (2005: 14,023) Number of accounts more than doubled to 51,032 (2005: 25,403) Deposits grew by 76% to 83.9m (2005: 47.7m) Total customer financing (personal and commercial) advanced by 131% to 10.4m (2005: 4.5m) A number of key initiatives contributed to this performance: We opened two branches, Manchester in January 2006 and East Ham in November The Bank now has a total of eight branches. We strengthened our distribution capabilities in line with our strategic objectives by launching Internet Banking in September We launched our Commercial Property Finance product in the third quarter of 2006, having worked pro-actively with Her Majesty s Revenue and Customs to incorporate the Diminishing Musharaka contract in the Finance Bill We enhanced our relationship management team to develop business from Private Clients, SME s, and Charities. We launched Home financing in conjunction with other partners in Islamic Banking. We upgraded our debit cards to MasterCard s Maestro platform which now allows our customers access to a global network of ATMs and points of sale. In June 2006, the Chairman of the FSA, in the presence of the Chancellor of the Exchequer, cited Islamic Bank of Britain PLC as a positive initiative and expressed the view that the UK was proud to have supported the introduction and development of the first Sharia acompliant bank in the Western world. The loss for the year ended 31 December 2006 was 8.8m (2005: 6.4m). This represents an increase in operating income of 36% to 3m, offset by operating costs which increased by 32% to 11.4m and impairment charges of 0.45m. The growth in income was lower than plan mainly due to the delay in the launch of Commercial Property Finance which was dependent on the Finance Bill This became effective in July The growth in costs represents planned costs associated with the extension of our distribution capability, both branches and internet, and the introduction of new products aimed at the business sector. Staff costs were up by 1m, due to an increase in average staff numbers from 102 to 144. Depreciation and amortisation charges were up by 0.2m. Increases in occupancy, IT costs and volume related costs, were partly offset by lower professional and legal costs. Credit criteria were further tightened in December 2005 taking into account our arrears experience and the increased level of arrears on unsecured finance in the UK. 1

5 We continue to be optimistic about the prospects for Islamic Banking in the UK. The Bank now has a comprehensive range of products and offers a real alternative to conventional banking. In 2007 we aim to build on our customer base and focus on further strengthening our service delivery channels. We are working with external providers to develop new Murabaha finance products in the consumer market. Although our main focus remains in the UK we are also engaging in dialogue with interested parties aiming to launch Islamic Banking services into other European countries. In February 2007 we were the principal sponsor of the inaugural UK Muslim Power 100 awards which recognised the significant positive impact the Muslim population contributes in the social and economic spheres. The event highlighted the 31bn annual contribution to GDP made by the UK Muslim community and recognised achievers in business, education, professional services, health, and the arts. The event, which was well received, was attended by a wide range of individuals and businesses and attracted glowing national press coverage. In December 2006, Michael Hanlon retired from his position as Managing Director. I would like to thank him for his contribution and work in establishing Islamic Bank of Britain and setting up a sound infrastructure to take the Bank into the future. I would like to welcome Gerry Deegan to our Board as Managing Director. Gerry comes with 35 years of experience in retail banking and a strong track record of delivery in his previous roles. I would also like to extend my thanks to Ashraf Piranie, who resigned as Finance Director in March 2007 to pursue another career opportunity. Ashraf worked diligently to enhance both the profile and development of the Bank s product range and distribution capability. Additionally, I would like to welcome Robert Owen as Senior Independent Non-Executive Director to the Board replacing Chris Davis who resigned in February Robert brings 35 years of UK financial services experience to our Board. I would like to thank Chris for his positive contribution to the Bank. I would like to thank Islamic Bank of Britain s shareholders for their continued support and commitment to the Bank. I would also like to thank Abdul Rahman Abdul Malik, who resigned as Chairman in March 2007, for his guidance and leadership that were essential in establishing Islamic Bank of Britain as the first full service Sharia a-compliant bank in Europe. Finally, I would like to thank the Bank s management and staff for their hard work and dedication. I am pleased the Bank was awarded, for a second successive year, the Best Islamic Bank in Europe award. We are now looking forward to the next phase of our development with optimism and vigour. May Allah grant us success in our endeavours. Mohsen Moustafa Chairman 2

6 Report of of the Sharia a Supervisory Committee In the name of Allah, the Most Gracious, the Most Merciful (In the name Report of of Allah, the Sharia a the Most Supervisory Gracious, Committee the Most Merciful) To the Shareholders of the Islamic Bank of Britain PLC For the period from 1 January 2005 to 31 December 2005 To the Shareholders of the Islamic Bank of Britain PLC For the period from 1 January 2006 to 31 December 2006 In compliance with the Terms of Reference of our Committee, we submit the following report: We have reviewed the documentation relating to the products entered into by the Islamic Bank of Britain PLC for the period from 1 January 2005 to 31 December According to management, the funds were raised and invested in this period on the basis of agreements approved by us. In compliance with Therefore, the Terms based of on Reference the report of of the our Bank s representative Sharia a and Supervisory representations Committee, received we from submit management, the following report: in our opinion the transactions and the products entered into by the Company during the period We have reviewed from the 1 documentation Januar y 2005 to relating 31 December to the 2005 products are in compliance and transactions with the entered Islamic Sharia a into by the rules and Islamic Bank of Britain principles PLC and for also the the period specific from directives, 1 January rulings 2006 and to guidelines 31 December issued by us. We beg Allah the Almighty to grant us all the success and straightforwardness. According to Management, the Sharia a Compliance Officer of the Bank and documents evidencing the fact, the funds were raised and invested in this period on the basis of agreements approved by us. Therefore, based on the report of our representative and representations received from management, in our opinion the transactions and the products entered into by the Bank during the period from 1 January 2006 to 31 December 2006 are in compliance with the Islamic Sharia a rules and principles and fulfil the specific directives, rulings and guidelines issued by us. We beg Allah the Almighty to grant us all the success and straightforwardness. Dr Abdul Sattar Abu Ghuddah Chairman of the Sharia a Supervisory Committee 22 March 2006 Dr Abdul Sattar Abu Ghuddah Chairman of the Sharia a Supervisory Committee 01 March

7 Directors report The directors present their report and financial statements for the year ended 31 December Principal Activities Islamic Bank of Britain PLC (the Company ) was incorporated with the intention of becoming the first independent Islamic bank in the United Kingdom established and managed on a wholly Sharia a compliant basis providing banking services to Muslims in the United Kingdom and other parts of Europe, and received authorisation in August 2004 by the Financial Services Authority (FSA). The first branch was opened on Edgware Road London on 22 September A further seven branches have subsequently been opened: Small Heath Birmingham, Leicester, Whitechapel London, Southall London, Alum Rock Birmingham, Manchester and East Ham London. A direct telephone and postal banking capability is also in place and during the current year Internet Banking has been launched to further compliment the Branch network. In addition, the product offering was further developed in 2006 and at the end of the year the Bank offers a range of Sharia a compliant banking solutions for both individual and business customers including current accounts, savings accounts, high net worth treasury placement accounts and consumer and business financing. During the year the major new product launches were the Commercial Property Finance and Home Finance products. Financial Results For all periods up to and including the 5 month period ended 31 December 2004, Islamic Bank of Britain PLC prepared its financial statements in accordance with UK Generally Accepted Accounting Principles ( UK GAAP ). From 1 January 2005, Islamic Bank of Britain PLC elected to prepare its financial statements in accordance with International Financial Reporting Standards as adopted by the EU ( adopted IFRSs ). Consequently, within these financial statements both current year and prior year comparatives have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ( adopted IFRSs ). The financial statements for the year ended 31 December 2006 are shown on pages 9 to 35. The loss for the year amounts to 8,833,253 (2005: 6,449,507). The directors do not recommend the payment of a dividend (2005: nil). Enhanced Business Review Details of the Company s performance and prospects are given within the Chairman s statement on page 1. Details of the financial and operational risk management objectives and policies and the Company s indicative exposure to financial risk are given in note 4 on page 21. 4

8 Directors report (continued) Directors and directors interests The directors who held office during the year were as follows: Mr Abdul Rahman Abdul Malik (Chairman)^ Mr Abdulaziz Al-Khulaifi + Mr Christopher Davis *+^ Mr David Gates (Resigned as director 26 April 2006) Mr Michael Hanlon (Resigned as director 31 December 2006) Mr Mohsen Moustafa *^ Mr Ashraf Piranie (also Company Secretary) Mr Shabir Randeree *+ Mr Ahmad Salam (Resigned as director 26 April 2006) * Denotes member of Audit Committee + Denotes member of Remuneration Committee ^Denotes member of Nomination Committee Subsequent to the reporting date the following changes have occurred; Mr Gerry Deegan appointed as director on 26 January 2007, Mr Robert Owen appointed as director (and will also be a member of the Audit Committee) on 12 February 2007, Mr Christopher Davis resigned as director on 12 February Mr Abdul Rahman Abdul Malik resigned as Chairman on 8 March 2007 and Mr Mohsen Moustafa appointed as Chairman on the same date. Mr Abdul Rahman Abdul Malik will resign as director with effect from 31 March Mr Ashraf Piranie will resign as director and company secretary with effect from 31 March The directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company according to the register of directors interests: Class of share Interest at end Interest at start of year of year Mr Abdul Rahman Abdul Malik Ordinary 1,000,000 1,000,000 (Chairman) Mr Shabir Randeree Ordinary 30,058,013 30,058,013 (held in the name of DCD London & Mutual PLC) None of the other directors who held office at the end of the financial year had any disclosable interest in the shares of the company. According to the register of directors interests, no rights to subscribe for shares in or debentures of the company were granted to any of the directors or their immediate families, or exercised by them, during the financial year. 5

9 Directors report (continued) Significant shareholders The following shareholders had interests in the ordinary shares of the Company in excess of 3% as at 31 December 2006 (comparatives only shown if holding as at 31 December 2005 was greater than 3%): 2006 % 2005 % HRH Sheikh Hamad Bin Khalifa Bin Hamad Al Thani Qatar International Islamic Bank HE Sheikh Thani Bin Abdulla Bin Thani Jasim Al Thani Hanover Nominees Ltd DCD London & Mutual PLC Qatar Islamic Insurance HSBC Global Custody Nominee (UK) Ltd HSBC Global Custody Nominee (UK) Ltd Securities Services Nominees Ltd N.Y. Nominees Ltd Sharia a Supervisory Committee members The Sharia a Supervisory Committee members during the year were as follows: Dr. Abdul Sattar Abu Ghuddah (Chairman) Sheikh Nizam Yacouby Mufti Abdul Kadir Barkatullah The report of the Sharia a Supervisory Committee for the year is set out on page 3. Creditor payment policy The Company seeks to settle trade invoices in line with their payment terms. The amount due to the Company s trade creditors as at 31 December 2006 represented 19 days (2005: 20 days) average daily purchases of goods and services calculated in accordance with the Companies Act 1985, as amended by Statutory Instrument 1997/571. Political and charitable contributions The Company made no political contributions during the year (2005: nil). Donations to UK charities amounted to 1,720 (2005: 8,250). Payments in 2006 include 1,090 of fees and charges relating to late payment on personal finance accounts that were paid to charity in accordance with product terms as agreed with the Sharia a Supervisory Committee. A further payment of 4,000 is to be made in 2007 in respect of similar charges incurred in Disclosure of information to auditors The directors who held office at the date of approval of this directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Auditors In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the board Islamic Bank of Britain PLC Ashraf Piranie Edgbaston House Finance Director and Company Secretary 3 Duchess Place Hagley Road 08 March 2007 Birmingham B16 8NH 6

10 Statement of directors responsibilities Statement of directors responsibilities in respect of the Annual Report and the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable laws. The financial statements are required by law to present fairly the financial position and the performance of the Company; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 7

11 Independent Auditors Report Independent Auditors Report to the Members of Islamic Bank of Britain PLC We have audited the financial statements of Islamic Bank of Britain PLC ( the Company ) for the year ended 31 December 2006 which comprise the Income Statement, the Balance Sheet, the Cash Flow Statement, the Statement of Changes in Equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Company s members, as a body, in accordance with section 235 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors' Responsibilities on page 7. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act We also report to you whether in our opinion the information given in the Director s Report is consistent with the financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Company's affairs as at 31 December 2006 and of its loss for the year then ended; the financial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors' Report is consistent with the financial statements. KPMG Audit Plc 8 Salisbury Square London, EC4Y 8BB 08 March 2007 Chartered Accountants Registered Auditor 8

12 Income Statement For the year ended 31 December 2006 Note Income receivable from: Islamic financing transactions 6 4,554,578 2,985,143 Returns payable to customers and banks 6 (1,705,389) (814,978) Net income from Islamic financing transactions 2,849,189 2,170,165 Fee and commission income 7 174,554 40,963 Fee and commission expense 7 (12,764) (3,167) Net fee and commission income 161,790 37,796 Operating income 3,010,979 2,207,961 Net impairment loss on financial assets 14 (445,089) (52,068) Personnel expenses 8 (4,241,778) (3,250,576) General and administrative expenses (5,430,902) (3,859,216) Depreciation 15 (621,462) (754,689) Amortisation 16 (1,105,001) (740,919) Total operating expenses (11,844,232) (8,657,468) Loss before income tax (8,833,253) (6,449,507) Income tax expense Loss for the year (8,833,253) (6,449,507) Loss per ordinary share 26 (2.1) (1.5) (basic and diluted) - pence The notes on pages 13 to 35 are an integral part of these financial statements. 9

13 Balance sheet As at 31 December 2006 Note Assets Cash , ,251 Commodity Murabaha and Wakala receivables and other advances to banks ,286,964 78,037,676 Consumer finance accounts and other advances to customers 14 8,092,326 4,454,369 Net investment in commercial property finance 14 2,338,401 - Property and equipment 15 3,965,370 3,798,951 Intangible assets 16 1,894,272 1,509,005 Other assets , ,248 Total assets 118,012,095 89,289,500 Liabilities and equity Liabilities Deposits from banks ,164 - Deposits from customers 19 83,853,383 47,714,593 Other liabilities 20 2,187,261 1,010,367 Total liabilities 86,280,808 48,724,960 Equity Called up share capital 22 4,190,000 4,190,000 Share premium 48,747,255 48,747,255 Retained deficit (21,205,968) (12,372,715) Total equity 31,731,287 40,564,540 Total equity and liabilities 118,012,095 89,289,500 The notes on pages 13 to 35 are an integral part of these financial statements. These financial statements were approved by the Board of Directors on 8 March 2007 and were signed on its behalf by: Ashraf Piranie Finance Director 10

14 Statement of changes in equity For the year ended 31 December 2006 Share Share Profit Total capital premium and loss account account Balance at 1 January ,190,000 48,747,255 (5,923,208) 47,014,047 Loss for the year - - (6,449,507) (6,449,507) Balance at 31 December ,190,000 48,747,255 (12,372,715) 40,564,540 Balance at 1 January ,190,000 48,747,255 (12,372,715) 40,564,540 Loss for the year - - (8,833,253) (8,833,253) Balance at 31 December ,190,000 48,747,255 (21,205,968) 31,731,287 The notes on pages 13 to 35 are an integral part of these financial statements. 11

15 Statement of cash flows For the year ended 31 December 2006 Note Cash flows from operating activities Loss for the year (8,833,253) (6,449,507) Adjustments for: Depreciation , ,689 Amortisation 16 1,105, ,919 Impairment on financial assets ,089 52,068 Change in Commodity Murabaha and Wakala receivables and other advances to banks (24,870,824) (28,299,186) Change in consumer finance accounts and other advances to customers (4,083,046) (4,506,437) Change in net investment in commercial property finance (2,338,401) - Change in other assets (73,022) (523,171) Change in deposits from banks 240,164 - Change in deposits from customers 36,138,790 45,589,803 Change in other liabilities 1,176,894 (854,822) Net cash (used in) / generated from operating activities (471,146) 6,504,356 Cash flows from investing activities Purchase of property and equipment 15 (787,881) (2,394,999) Purchase of intangible assets 16 (1,490,268) (861,492) Net cash used in investing activities (2,278,149) (3,256,491) Net change in cash and cash equivalents (2,749,295) 3,247,865 Cash and cash equivalents at 1 January 4,939,877 1,692,012 Cash and cash equivalents at 31 December 12 2,190,582 4,939,877 The notes on pages 13 to 35 are an integral part of these financial statements. 12

16 1 Reporting Entity Islamic Bank of Britain PLC ( the Company ) is a company domiciled in the UK. The address of the Company s registered office is Edgbaston House, 3 Duchess Place, Hagley Road, Birmingham B16 8NH. The financial statements of the company are presented as at and for the year ended 31 December The Company is a retail bank offering Sharia a compliant banking products and services. 2 Basis of preparation (a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and approved by the directors. In preparing these financial statements, the Company has adopted IFRS 7 Financial Instruments: Disclosures prior to the required application date of 1 January The adoption of IFRS 7 impacted the type and amount of disclosures made in these financial statements, but had no impact on the reported profits or financial position of the Company. In accordance with the transitional requirements of the standards, the Company has provided full comparative information. The financial statements were approved by the Board of Directors on 8 March The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Computer software, both purchased and developed, and computer licences have been presented separately as intangible assets (note 16) within these financial statements. Previously computer software and licences had been shown as part of computer equipment. This change in presentation has had no impact upon the current year and comparative totals. The comparative information for 2005 has been reclassified to be presented on a consistent and comparable basis with Details of the amount of the reclassification are given in note 16. There was no impact on the income statement or equity. (b) Basis of measurement The financial statements have been prepared on the historical cost basis. (c) Functional and presentation currency The financial statements are presented in Sterling, which is the Company s functional currency. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in notes 4 and 5. 13

17 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in the income statement as incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Computer equipment 3 years Fixtures, fittings and office equipment 5 years Leasehold improvements 10 years or over the life of the lease whichever is shorter Depreciation methods, useful lives and residual values are reassessed at the reporting date. (iv) Change in Presentation Computer software, both purchased and developed, and computer licences have been presented separately as intangible assets (note 16) within these financial statements. Previously computer software and licences have been shown as part of computer equipment. This change in presentation has had no impact upon the current year or comparative totals. (b) Intangible assets Software and computer licences acquired by the group are stated at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Company is able to complete the development and use the software in a manner that will generate future economic benefits, and can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and impairment. Subsequent expenditure on software assets and computer licences is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in profit or loss on a straight line basis over the estimated useful life of the software or the licence term, from the date that it is available for use. The estimated useful life of software is three years. 14

18 3 Significant accounting policies (continued) (c) Commodity Murabaha and Wakala receivables and other advances to banks Commodity Murabaha is an Islamic financing transaction, which represents an agreement whereby the Company buys a commodity and sells it to a counterparty based on a promise received from that counterparty to buy the commodity according to specific terms and conditions. The selling price comprises of the cost of the commodity and a pre-agreed upon profit margin. Wakala is an Islamic financing transaction, which represents an agreement whereby the Company provides a certain sum of money to an agent, who invests it according to specific conditions in order to achieve a certain specified return. The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. Commodity Murabaha receivables are recognised upon the sale of the commodity to the counterparty. Wakala receivables are recognised upon placement of funds with other institutions. Income, on both Commodity Murabaha and Wakala receivables, is recognised on an effective yield basis. The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of the receivable. The effective yield is established on initial recognition of the asset and is not revised subsequently. The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Commodity Murabaha and Wakala receivables are initially recorded at fair value and are subsequently measured at amortised cost using the effective yield method, less impairment losses. The accrued income receivable is classified under other assets. Other advances to banks are stated at cost and are non-return bearing. (d) Consumer finance accounts Islamic consumer financing transactions represent an agreement whereby the Company buys a commodity or goods and then sells it to the customer with an agreed profit mark-up with settlement of the sale price being deferred for an agreed period. The customer may subsequently sell the commodity purchased to generate cash. Consumer finance assets will be recognised on the date that the commodity or good is sold by the Company. Consumer finance account balances are initially recorded at fair value and are subsequently measured at amortised cost. The amortised cost is the amount at which the asset is measured at initial recognition, minus repayments received relating to the initial recognised amount, plus the cumulative amortisation using an effective yield method of any difference between the initial amount recognised and the agreed sales price to the customer, minus any reduction for impairment. Income is recognised on an effective yield basis over the period of the contract. The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of receivable. The effective yield is established on initial recognition of the asset and is not revised subsequently. The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. 15 The accrued income receivable from the customer is classified under other assets.

19 3 Significant accounting policies (continued) (e) Commercial property finance Commercial property finance is provided using the Diminishing Musharaka (reducing partnership) principle of Islamic financing. The Company will enter into an agreement to jointly purchase a property with another party and rental income will be received by the Company relating to that proportion of the property owned by the Company at any point in time. The other party to the agreement will make separate payments to purchase additional proportions of the property from the Company, thereby reducing the Company s effective share. The transaction is recognised as a financial asset upon legal completion of the property purchase and the amount receivable is recognised at an amount equal to the net investment in the transaction. Where initial direct costs are incurred by the Company such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging the transaction, these costs are included in the initial measurement of the receivable and the amount of income over the term will be reduced. Rental income is recognised at a constant periodic rate of return on the Company s net investment. (f) Deposits from customers Profit sharing accounts are based on the principle of Mudaraba whereby the Company and the customer share an agreed percentage of any profit earned on the customer deposits. The customer s share of profit is paid in accordance with the terms and conditions of the account. The profit calculation is undertaken at the end of each calendar month. Customer Murabaha deposits consist of an Islamic financing transaction involving the Company arranging the purchase of an asset on behalf of the customer and the purchase thereof from the same customer by the Company at cost plus an agreed profit mark-up with settlement on a deferred payment basis. Customer Murabaha deposit balances are included in the balance sheet under deposits from customers and the accrued returns payable to the customer are classified under other liabilities. Returns payable on Customer Murabaha deposits are recognised on an effective yield basis over the period of the contract. (g) Derecognition of financial assets and liabilities The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards or ownership of the financial asset are transferred. Any remaining interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability. The Company derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 16

20 3 Significant accounting policies (continued) (h) Impairment of financial assets At each balance sheet date the Company assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated readily. The Company considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. Objective evidence that financial assets are impaired include default or delinquency by the counterparty, extending or changing repayment terms, indications that a counterparty may go into bankruptcy, or other observable data relating to a group of assets such as adverse changes in the payment status of counterparties, or economic conditions that correlate with defaults in the group. In assessing collective impairment the Company uses analysis of historical trends to identify the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic conditions are such that the actual losses are likely to be greater or less than suggested by historical analysis. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated cash flows discounted at the assets original effective yield rate. Losses are recognised in the income statement and reflected against the asset carrying value. When a subsequent event causes the amount of impairment losses to decrease, the impairment loss is reversed through profit or loss. (i) Impairment of non-financial assets The carrying amounts of the Company s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the profit or loss. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to resell. In assessing value in use, the estimated future cash flows are discounted to their present value. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 17

21 3 Significant accounting policies (continued) (j) Provisions A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of cost of funds and, where appropriate, the risks specific to the liability. (k) Fees and commissions Fees and commission income that relate mainly to transaction and service fees are recognised as the related services are performed. Fees and commission expenses that relate mainly to transaction and service fees are expensed as incurred. Arrangement fees for commercial property finance deals are amortised over the expected life of the transaction. (l) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (m) Lease payments made Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expensed, over the term of the lease. 18

22 3 Significant accounting policies (continued) (n) Employee benefits Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. Short-term employee benefits, such as salaries, paid absences, and other benefits, are accounted for on an accruals basis over the period for which employees have provided services. Bonuses are recognised to the extent that the Company has a present obligation to its employees that can be measured reliably. (o) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestrictive balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. Commodity Murabaha and Wakala transactions, used by the Company for investment purposes, are not included within cash and cash equivalents. Cash and cash equivalents are carried at amortised cost in the balance sheet. (p) Other receivables Trade and other receivables are stated at their nominal amount (discounted if material) less impairment losses. (q) Earnings per share The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. (r) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency at exchange rates at the date of transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Foreign currency differences arising on retranslation are recognised in the income statement. 19

23 3 Significant accounting policies (continued) (s) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations relevant to the Company are not yet effective for the year ended 31 December 2006 and have not been applied in preparing these financial statements. IFRIC 9 Reassessment of Embedded Derivatives requires that an assessment of whether embedded derivatives should be separated from the underlying host contract should be made only when there are changes to the contract. IFRIC 9, which becomes mandatory for the Company s 2007 financial statements, is not expected to have any impact on the financial statements. IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. IFRIC 10 will become mandatory for the Company s 2007 financial statements, and will apply to goodwill, investments in equity instruments, and financial assets carried at cost prospectively from the date that the Company first applied the measurement criteria of IAS 36 and IAS 39 respectively. The adoption of IFRIC 10 is not currently expected to have any impact on the financial statements. 20

24 4 Financial risk management The Company has exposure to the following risks arising from its use of financial instruments: credit risk liquidity risk market risks operational risks The Company is not exposed to any material foreign currency risk. This note presents information about the Company s exposure to each of the above risks, the Company s objectives, policies and processes for measuring and managing these risks, and the Company s management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework. The Company has established the Asset and Liability (ALCO), Credit and Operations Committees, which are responsible for developing and monitoring risk management policies in their specific areas. The Company s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. Risk management controls and procedures are reviewed by Internal Audit, both as part of the regular audit review programme and through ad-hoc reviews. The results of these reviews are reported to the Audit Committee. (a) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company s credit risk arises principally from its financing products but also from other advances to customers and banks. (i) Management of credit risk The Company seeks to manage credit risk by monitoring credit exposures, limiting transactions with specific counterparties, countries or sectors and continually assessing the creditworthiness of counterparties. The Board of Directors has delegated responsibility for the management of credit risk to the Credit Committee. A separate Credit Risk department, reporting to the Credit Committee is responsible for oversight of the Company s credit risk, including: Formulating credit policies in consultation with other business units, covering credit assessments, collateral requirements, risk reporting, legal requirements and compliance with regulatory and statutory requirements. Establishing authorisation limits and structures for the approval and renewal of credit exposure limits. Reviewing and assessing credit risk prior to agreements being entered into with customers. Limiting concentrations of exposure to counterparties and reviewing these limits. Ongoing assessment of exposure and implementation of procedures to reduce this exposure. Providing advice, guidance and specialist skills to all business areas to promote best practice throughout the Company in the management of credit risk. 21 Adherence to country and counterparty limits, for amounts due to other banks, is monitored on an ongoing basis by the Company s Treasury department, with a detailed review of all limits at least annually. Senior management receives regular reports on the utilisation of these limits. Regular reviews of the Credit Risk department s processes are undertaken by Internal Audit.

25 4 Financial risk management (continued) (a) (ii) Credit risk (continued) Exposure to credit risk Consumer finance accounts Net investment Total and other advances in commercial to customers property finance Note Total Gross 8,589,483 4,506,437 2,338,401-10,927,884 4,506,437 Individually impaired - 14 (357,081) (357,081) - allowance for impairment Collectively impaired - 14 (140,076) (52,068) - - (140,076) (52,068) allowance for impairment Carrying amount 14 8,092,326 4,454,369 2,338,401-10,430,727 4,454,369 As at 31 December 2006, the amount of unimpaired balances stood at 10,570,803 (2005: 4,506,437). The maximum exposure to credit risk is the carrying amount of the financial asset receivable balances as at 31 December 2006 and 31 December (iii) Write-off policy The Company writes off a balance (and any related allowances for impairment) when the Credit Risk department determines that the balance is uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the counterparty s financial position such that the counterparty can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. (iv) Collateral The Company holds collateral against secured advances made to businesses, as shown within the corporate section below, in the form of charges over properties, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of financing and are updated on a periodic basis. The estimated fair value of collateral held against financial assets as at 31 December 2006 is 5.3m (2005: nil). None of this amount was held against impaired assets. (v) Concentration of credit risk The Company monitors concentrations of credit risk by sector and geographical location. An analysis of concentrations of credit risk at the reporting date is shown below: Consumer finance accounts Net investment Commodity Murabaha & and other advances in commercial Wakala receivables and to customers property finance other advances to banks Concentration by sector: Individuals 7,989,887 4,454, Corporate 102,439-2,338, Bank ,286,964 78,037,676 8,092,326 4,454,369 2,338, ,286,964 78,037,676 Concentration by location: United Kingdom 8,092,326 4,454,369 2,338,401-26,087,038 21,034,065 Europe ,922,142 47,697,552 Middle East ,277,784 9,306,059 8,092,326 4,454,369 2,338, ,286,964 78,037,676 22

26 4 Financial risk management (continued) (b) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations from its financial liabilities. The Company s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company s reputation. The Treasury department is responsible for monitoring the liquidity profile of financial assets and liabilities and details of projected cash flows arising from projected future business. The Treasury department will maintain a portfolio of short-term liquid assets, made up of cash on demand and short term commodity Murabaha and Wakala transactions to ensure that sufficient liquidity is maintained. All liquidity policies and procedures are subject to review and approval by ALCO. The key measure used by the Company for managing liquidity risk is the comparison of liquid assets and maturity of assets against customer deposits. This analysis is completed on a daily basis and reports are submitted for review to ALCO. A similar calculation of mismatches is submitted to the FSA as part of the Company s quarterly regulatory reporting. (i) Residual contractual maturities of financial liabilities Note Carrying Gross nominal Less than months More than amount inflow/(outflow) 1 month months - 1 year 1 year 31 December 2006 Deposits from banks , , , Deposits from customers 19 83,853,383 84,349,000 70,259,000 6,889,000 7,201,000-84,093,547 84,589,164 70,499,164 6,889,000 7,201, December 2005 Deposits from banks Deposits from customers 19 47,714,593 48,112,000 35,302,000 8,335,000 4,475,000 - The table above shows the undiscounted cash flows on the Company s financial liabilities on the basis of their earliest possible contractual maturity. However, based on behavioural experience demand deposits from customers are expected to maintain an increasing balance. A breakdown of the Company s Commodity Murabaha and Wakala receivables by maturity date is shown in note

27 4 Financial risk management (continued) (c) Market risk Market risk is the risk that changes in market prices will affect the Company s income. The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimising returns. Given the Company s current profile of financial instruments, the principle exposure is the risk of loss arising from fluctuations in the future cash flows or fair values of these financial instruments because of a change in achievable rates. This is managed principally through monitoring gaps between effective profit and rental rates and by having approved rates and bands reviewed at regular re-pricing meetings: Profit rates for commodity Murabaha and Wakala receivables are agreed with the counterparty bank at the time of each transaction and the profit mark-up and effective yield rate is consequently fixed for the duration of the contract. Risk exposure is managed by reviewing maturity profiles of transactions entered into. Effective rates applied to new consumer finance transactions are agreed on a monthly basis by ALCO and the profit mark-up will then be fixed for each individual transaction for the agreed deferred payment term. Rental for longer term commercial property financing is benchmarked against a market measure, in agreement with the Company s Sharia a Supervisory Committee, and therefore amounts receivable are reassessed every six months. Rates of return payable on customer deposit accounts are calculated at each month-end in line with the Mudaraba profit model and the customer terms and conditions. All rates and re-pricings are reviewed and agreed at ALCO, which is principally responsible for monitoring market risk. ALCO will also review sensitivities of the Company s assets and liabilities to standard and non-standard changes in achievable effective rates. Standard scenarios that are considered on a monthly basis include a 1.00% or 0.50% rise or fall in effective average rates. An analysis of the Company s income statement sensitivity to an increase or decrease in effective rates (assuming no asymmetrical movement and a constant balance sheet position) is as follows: 1.00% parallel 1.00% parallel 0.50% parallel 0.50% parallel increase decrease increase decrease 31 December ,219,894 (1,219,894) 609,947 (609,947) 31 December ,788,430 (1,788,430) 894,215 (894,215) (d) Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks. The Company s objective in managing operational risk is to implement an integrated internal control structure that supports process efficiency and customer needs, whilst effectively reducing the risk of error and financial loss in a cost effective manner. The overall operational risk framework is set by the Board of Directors. Primary responsibility for the development and implementation of internal controls is assigned to senior management within each businesss department. Adherence to overall operational risk policies and procedures is regularly reviewed by Internal Audit and findings are reported to the Audit Committee. 24

28 4 Financial risk management (continued) (e) Settlement risk The Company s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash or other assets as contractually agreed. For certain types of transactions the Company mitigates this risk by conducting settlements through a settlement / clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval / limit monitoring process described earlier. (f) Capital management The Company s capital requirements are set and monitored by the Financial Services Authority (FSA). Regulatory capital is analysed into two tiers: Tier 1 capital, which includes ordinary share capital, share premium and retained earnings. Tier 2 capital, which includes collective impairment allowances, restricted to a maximum amount. The level of total capital is matched against risk-weighted assets which are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets. The Company has complied with all capital requirements throughout the year. There have been no material changes in the Company s management of capital during the year. The Company s regulatory capital position as at 31 December was as follows: Note Tier 1 capital Ordinary share capital 22 4,190,000 4,190,000 Share premium 48,747,255 48,747,255 Retained earnings (21,205,968) (12,372,715) 31,731,287 40,564,540 Tier 2 capital Collective allowances for impairment ,076 52,068 Total regulatory capital (b) 31,871,363 40,616,608 Risk-weighted assets (a) 37,690,732 26,387,874 Total regulatory capital expressed as (b)/(a) 84.56% % a percentage of risk-weighted assets 25 The Basel Committee on Banking Supervision has published the Basel II framework for calculating minimum capital requirements. The EU Capital Requirements Directive is the means by which Basel II will be implemented in the EU. The Company will adopt provisions relating to the calculation of minimum capital requirements on 1 January Work is currently ongoing to implement requirements relating to these provisions and therefore it is currently premature to establish the precise effect of Basel II on the Company s capital ratios.

29 5 Use of estimates and judgments Management discussed with the Audit Committee the development, selection and disclosure of the Company s critical accounting policies and estimates, and the application of these policies and estimates. This disclosure supplements the commentary on financial risk management (see note 4) Key sources of estimation uncertainty Allowance for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy (h). The specific counterparty component of the total allowances for impairment applies to claims evaluated individually for impairment and is based upon management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about each counterparty s financial situation and the realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the estimates of cash flows considered recoverable are approved by the Credit Risk function. Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. 6 Net income from Islamic financing transactions Income received Commodity Murabaha and Wakala transactions 3,880,252 2,783,604 Consumer finance accounts 640, ,539 Commercial property finance 34,069 - Total income received from Islamic financing transactions 4,554,578 2,985,143 Returns payable Deposits from banks (4,988) - Deposits from customers (1,700,401) (814,978) Total returns payable to customers and banks (1,705,389) (814,978) Net income from Islamic financing transactions 2,849,189 2,170,165 7 Net fee and commission income Fee and commission income Retail customer banking fees 130,585 33,916 Home finance introduction fees 1,750 - Arrangement fees ATM commission 34,719 7,047 Other 6,867 - Total fee and commission income 174,554 40,963 Fee and commission expense Electronic transaction fees (12,764) (3,167) Total fee and commission expense (12,764) (3,167) Net fee and commission income 161,790 37,796 26

30 8 Personnel costs Wages and salaries 3,777,164 2,914,193 Social security costs 401, ,162 Contributions to defined contribution plans 52,094 61,615 Other staff costs 11,038 7,606 Total 4,241,778 3,250,576 The average number of persons employed by the Company during the year was: Auditors remuneration Included within operating losses are the following payments made to the auditors: Amounts receivable by the auditors and their associates in respect of: Audit of financial statements pursuant to legislation 90,000 88,362 Other services pursuant to such legislation - - Under-accrual for prior year audit fees 35,403 - Other services relating to taxation 52, ,667 Services relating to information technology - 20,223 Internal audit services - - Valuation and actuarial services - - Services relating to litigation - - Services relating to recruitment and remuneration - - Services relating to corporate finance transactions entered into or proposed - - to be entered into by or on behalf of the Company or the Company s subsidiaries All other services 30,390 9,956 Total 208, , Directors emoluments Directors emoluments 503, ,966 Company contributions to pension plans 21,831 13,680 Total 525, , The aggregate of emoluments of the highest paid director was 177,620 (2005: 173,800), and Company pension contributions of 12,561 (2005: 12,180) were made on his behalf.

31 11 Income tax expense There were no taxable profits or recoverable losses for the year ended 31 December 2006 (2005: nil) and, accordingly, the Company has not provided for a tax charge or a tax debtor Reconciliation of effective tax rate Loss before tax (8,833,253) (6,449,507) Income tax at UK corporation tax rate (30%) (2,649,978) (1,934,852) Non deductible expenses 47,108 47,621 Depreciation in excess of capital allowances on which deferred tax not recognised 417, ,642 Adjustment to prior year tax (33,242) - Unutilised tax losses 2,218,173 1,438, Deferred tax assets have not been recognised in respect of the following items: Capital allowances 1,064, ,645 Tax losses 4,909,069 2,690,896 5,973,653 3,337,541 In respect of the recognition of deferred tax assets, for the purposes of applying the requirements of IAS 12 ( Income Taxes ), it has been considered that the Company is not currently at a sufficiently advanced stage in its development to confidently assert future offsetting tax liabilities. Capital allowances to be claimed are being finalized and therefore the level of the asset shown above may change. 12 Cash and cash equivalents Cash 451, ,251 Other advances to banks 1,739,090 4,360,626 Total cash and cash equivalents 2,190,582 4,939, Commodity Murabaha and Wakala receivables and other advances to banks Repayable on demand 1,739,090 4,360,626 3 months or less but not repayable on demand 98,038,968 72,099,015 1 year or less but over 3 months 508,906 1,578,035 Total Commodity Murabaha and Wakala receivables 100,286,964 78,037,676 and other advances to banks A breakdown of Commodity Murabaha and Wakala receivables and other advances to bank by geographic regions is shown in note 4. Balances maturing in 1 year or less but over 3 months include a balance of 508,906 (2005: 578,035) representing a repayable security deposit held by a bank that has issued a guarantee to cover the Company s future customer card transactions with Mastercard. The deposit earns no return. 28

32 14 Advances to customers Gross Impairment Carrying Gross Impairment Carrying amount allowance amount amount allowance amount Retail customers: Consumer finance accounts 8,487,044 (497,157) 7,989,887 4,506,437 (52,068) 4,454,369 and other advances to customers Corporate customers: Consumer finance accounts 102, , and other advances to customers Total consumer finance accounts 8,589,483 (497,157) 8,092,326 4,506,437 (52,068) 4,454,369 and other advances to customers Net investment in commercial 2,338,401-2,338, property finance Specific allowances for impairment Balance at 1 January - - Charge for the year 357,081 - Balance at 31 December 357,081 - Collective allowances for impairment Balance at 1 January 52,068 - Charge for the year 88,008 52,068 Balance at 31 December 140,076 52,068 Total allowances for impairment Balance at 1 January 52,068 - Charge for the year 445,089 52,068 Balance at 31 December 497,157 52, ,089 of the impairment charge in 2006 related to the retail consumer finance business and other advances to retail customers (2005: 52,068). The gross investment in commercial property finance comprises: Less than one year 242,367 - Between one and five years 954,392 - More than five years 3,055,194 - Total gross investment in commercial property finance 4,251,953 Unearned future rental on commercial property finance (1,913,552) Net investment in commercial property finance 2,338,401 - The net investment in commercial property finance comprises: Less than one year 141,331 - Between one and five years 552,668 - More than five years 1,644,402-2,338, As at 31 December 2006 there is no material difference between the carrying value and the fair value of any financial assets or liabilities (2005: nil)

33 15 Property and equipment Computer Office Leasehold Fixtures and Total equipment equipment improvements fittings Cost Balance at 1 January ,078,144 78,882 3,470, ,539 4,844,318 Additions 173,471 8, ,809 40, ,881 Balance at 31 December ,251,615 87,617 4,035, ,405 5,632,199 Depreciation Balance at 1 January ,440 18, ,079 37,617 1,045,367 Depreciation charge for the year 387,432 16, ,681 55, ,462 Balance at 31 December ,872 34, ,760 92,619 1,666,829 Net book value At 31 December ,743 53,039 3,310, ,786 3,965,370 Cost Balance at 1 January ,488 48,613 1,642,806 55,412 2,449,319 Additions 375,656 30,269 1,827, ,127 2,394,999 Balance at 31 December ,078,144 78,882 3,470, ,539 4,844,318 Depreciation Balance at 1 January ,967 6, ,329 11, ,678 Depreciation charge for the year 296,473 11, ,750 25, ,689 Balance at 31 December ,440 18, ,079 37,617 1,045,367 Net book value At 31 December ,704 60,651 2,908, ,922 3,798,951 Computer software, both purchased and developed, and computer licences have been presented separately as intangible assets (note 16) within these financial statements. Previously computer software and licences have been shown as part of computer equipment. This change in presentation has had no impact upon the current year and comparative totals. The Company leases its branch and office premises under operating leases. The leases typically run for 10 years, with options to renew the lease after that date. Lease payments are reviewed after periods stipulated in the agreements to reflect market rentals. 30

34 16 Intangible assets Computer Purchased and Total licences developed software Cost Balance at 1 January ,507 2,297,171 2,660,678 Additions 318,301 1,171,967 1,490,268 Balance at 31 December ,808 3,469,138 4,150,946 Amortisation Balance at 1 January , ,069 1,151,673 Amortisation charge for the year 179, ,907 1,105,001 Balance at 31 December ,698 1,896,976 2,256,674 Net book value At 31 December ,110 1,572,162 1,894,272 Cost Balance at 1 January ,190 1,524,996 1,799,186 Additions 89, , ,492 Balance at 31 December ,507 2,297,171 2,660,678 Amortisation Balance at 1 January , , ,754 Amortisation charge for the year 87, , ,919 Balance at 31 December , ,069 1,151,673 Net book value At 31 December ,903 1,326,102 1,509, Other assets VAT recoverable 505, ,047 Accrued income 105, ,199 Prepayments 372, ,734 Other receivables - 44,268 Total 983, ,248 There are no receivables within other assets that are expected to be recovered in more than 12 months (2005: nil). 31

35 18 Deposits from banks Repayable on demand 240,164-3 months or less but not repayable on demand year or less but over 3 months - - Total deposits from banks 240,164 - Comprising Non profit sharing - - Profit sharing/paying accounts 240,164 - Total deposits from banks 240, Deposits from customers Repayable on demand 52,159,169 23,043,084 3 months or less but not repayable on demand 24,687,830 20,196,750 1 year or less but over 3 months 7,006,384 4,474,759 Total deposits from customers 83,853,383 47,714,593 Comprising Non profit sharing 19,304,662 8,931,963 Profit sharing/paying accounts 64,548,721 38,782,630 Total deposits from customers 83,853,383 47,714, Other liabilities Returns payable to customers 170,553 52,407 Trade payables 358, ,968 Social security and income tax 134,628 83,802 Accruals 558, ,805 Instalment payable in respect of commercial property 725,000 - finance facility Other creditors 239,987 27,385 Total 2,187,261 1,010,367 Included within accruals is a balance of 64,000 payable over the remaining lease term of 8 years relating to refurbishment of a branch property (2005: 72,000). This is paid in equal annual instalments and therefore 56,000 will be payable in more than 12 months. 32

36 21 Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year 457, ,983 Between one and five years 1,780,779 1,752,864 More than five years 2,289,680 1,521,597 Total 4,527,544 3,638,444 During the year 413,899 was recognised as an expense in the income statement in respect of operating leases (2005: 299,058). 22 Called up share capital Authorised Equity: 500,000,000 ordinary shares of 0.01 each 5,000,000 5,000,000 Allotted, called up and fully paid Issued ordinary share capital 4,190,000 4,190, Related parties During the year the Company has undertaken transactions with DCD London & Mutual PLC, a related party by virtue of the fact that Mr Shabir Randeree is a director of this company and also serves on the board of Islamic Bank of Britain PLC. During 2005 transactions were also undertaken with Pelham Incorporated Limited and The Support Store Limited, related parties by the same virtue Pelham Incorporated Limited Property rental - 7,175 Other The Support Store Limited IT expenses - 2,523 Other - 2,002 DCD London & Mutual PLC Meeting costs 2,394 2,294 Other There we no amounts outstanding to these related parties included within trade payables as at 31 December 2006 (2005: 1,435). 33

37 23 Related parties (continued) In addition to the above transactions, these related parties held bank accounts with the Company under normal customer terms and conditions. A bank account was also held by European Islamic Investment Bank PLC (EIIB), a related party by virtue of the fact that Shabir Randeree served on the boards of both companies during the year. At 31 December 2006, these deposits balances amounted to 240,164 (2005: 5,031,793) and the highest balance during the year was 4,719,055 (2005: 9,847,534). Total returns paid on these deposits during the year totalled 4,988 (2005: 1,424). Directors of the Company and their immediate relatives control 7.41 per cent of the voting shares of the Company. Key management of the Company are the Board of Directors and Management Committee members. The compensation of key management personnel including the directors is as follows: Key management emoluments including social security costs 1,081, ,327 Company contributions to pension plans 38,432 31,708 Total 1,119, ,035 Deposit balances, operated under standard customer terms and conditions, held by key management personnel, including directors, totalled 151,894 as at 31 December 2006 (2005: 960,426). The highest balance during the year was 151,894 (31 December 2005: 1,942,604). Total returns paid on these accounts during the year totalled 1,084 (2005: 15,495). Outstanding consumer finance account balances relating to key management personnel totalled 34,670 as at 31 December 2006 (2005: 37,304). Returns recognised during the year for these accounts were 1,602 (2005: 594). All consumer finance accounts facilities taken by key management personnel and staff were offered in line with standard customer terms and conditions. 24 Capital commitments There were no capital commitments outstanding as at 31 December During the year ended 31 December 2005, the Company entered into a contract to purchase banking computer software and development totalling 220,200. These commitments settled in the current financial year. 25 Segmental reporting The Company has one class of business and all other services provided are ancillary to this. All business is conducted from the United Kingdom. 26 Earnings per ordinary share Basic and diluted earnings per ordinary share are calculated by dividing the loss for the financial year attributable to equity shareholders of 8,833,253 (2005: 6,449,507) by the weighted average number of ordinary shares in issue in the year ended 31 December 2006 of 419,000,000 (2005: 419,000,000). 34

38 27 Assets and liabilities denominated in foreign currency As at 31 December 2006, assets equivalent to 1,046,795 were denominated in US Dollars and are included within Commodity Murabaha and Wakala receivables and other advances to banks (2005: 8,092,486). Customer liabilities of 472,481 were denominated in US Dollars (2005: 7,445,662). 35

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