CORPORATE HIGHLIGHTS 20 CORPORATE FRAMEWORK INITIATIVES. Chairman s Statement PROFIT BEFORE ZAKAT AND TAX RM685.1 MILLION FINANCING GROWTH +16.

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1 CORPORATE HIGHLIGHTS 20 CORPORATE FRAMEWORK INITIATIVES Chairman s Statement PROFIT BEFORE ZAKAT AND TAX RM685.1 MILLION FINANCING GROWTH +16.2%

2 ACCOUNTABILITY FINANCIAL STATEMENTS DIRECTORY 21 BANK ISLAM MALAYSIA BERHAD Annual Report 2015 IN THE NAME OF ALLAH, THE MOST GRACIOUS, THE MOST MERCIFUL ASSALAMUALAIKUM WARAHMATULLAHI WABARAKATUH DEAR VALUED SHAREHOLDERS, BANK ISLAM ( THE BANK ) FACED WINDS OF CHANGE IN 2015, CHALLENGED BY SLOWER THAN EXPECTED ECONOMIC RECOVERY, A NEW BANKING REGULATORY FRAMEWORK AND AGGRESSIVE MARKET COMPETITION AMIDST FLAT EARNING CONDITIONS. HOWEVER, GUIDED BY THE FINAL PHASE OF OUR HIJRAH TO EXCELLENCE ( H2E ) ROADMAP, THE BANK WAS ABLE TO NAVIGATE ITS WAY FORWARD AND PIONEER NEW INROADS. THIS ENSURED SUSTAINED PERFORMANCE, WITH THE BANK ACHIEVING AN ABOVE INDUSTRY PERFORMANCE IN FINANCING GROWTH COUPLED WITH SOUND ASSET QUALITY, AND A COMMENDABLE RM685.1 MILLION IN PROFIT BEFORE ZAKAT AND TAX ( PBZT ). THE BANK S RETURN ON EQUITY ( ROE ) IMPROVED TO 17.6%, SURPASSING THE INDUSTRY AVERAGE OF 12.4%; WHILE RETURN ON ASSETS ( ROA ) WAS 1.4% COMPARED WITH THE INDUSTRY S 1.3%. ON BEHALF OF THE BOARD OF DIRECTORS, I TAKE GREAT PLEASURE IN PRESENTING BANK ISLAM S ANNUAL REPORT FOR THE YEAR The year saw the Bank once again leveraging on change to become the first Islamic bank to offer products that comply with the guidelines set by the Islamic Financial Services Act ( IFSA ) IFSA 2013 brought about the need to re-classify existing deposit products based on the underlying Shariah contracts to differentiate between deposit and investment accounts ( IA ). Under the IFSA 2013, all existing Islamic deposit products that apply the Shariah contracts of Mudharabah, Musharakah and Wakalah are now classified as IA products. As part of a major enhancement exercise of its existing product line-up, the Bank rolled-out three new IA products on 1 June These were Special Investment Account (Mudarabah), Waheed Investment Account (Wakalah) and Al-Awfar Investment Account. The different Shariah contracts provide different profit payment methods thus expanding the Bank s range of Shariah-compliant investment options with differing risk-return profiles to our depositors and investors. Within six months since its roll-out, the IA balances stood at RM676.1 million. Further details on these products are available on page 28 to 29 of this annual report.

3 CORPORATE HIGHLIGHTS 22 CORPORATE FRAMEWORK INITIATIVES Chairman s Statement (cont d) Towards end-october 2015, the Bank was also one of the four founding Islamic banks to form a consortium to market IAs via the Investment Account Platform ( IAP ). IAP is a centralised multi-bank platform which will be used to match investors (either individual, corporate or institutional investors) with viable ventures or projects that require financing. The IAP essentially provides a channel to bring together investors and ventures and catalyse growth opportunities through IA solutions. The Bank s adherence to a high performance culture earned greater industry recognition in 2015 as attested by the growing number of awards and accolades received. Some of the noteworthy honours included Islamic Bank of the Year - Asia by The European Global Banking & Finance Awards 2015; Strongest Islamic Retail Bank in Malaysia by Islamic Retail Banking Awards 2015 (Cambridge IF Analytica-UK); Best Islamic Bank Malaysia by The International Banker Asia & Australasia Banking Awards 2015; Best Islamic Bank Malaysia & Award for Excellence in Shariah Compliant Banking by Wealth & Finance INTL s 2015 Finance Awards; and Best Commercial Bank Malaysia in conjunction with the 10 th Islamic Business & Finance Awards by CPI Financial, Dubai. Another notable attainment was the Bank s improvement in ranking, from 16 th to 13 th, as Malaysia s Top Leading Graduate Employers and its continued reign as a Top 3 Most Popular Graduate Employer in Banking and Financial Services Sector, ahead of many leading financial institutions. The full list of awards and accolades are listed on page 44 of this annual report. In its continued commitment to provide greater accessibility and convenience, five more Bank Islam branches were opened in underserved areas during the year. This brings the total number of branches to 144 while our Bureau de Change ( BDC ) stands at eight outlets and Ar-Rahnu at nine outlets with more in the pipeline for the coming year FINANCIAL PERFORMANCE The Bank continued to outperform its set targets as well as surpass industry performance in Consumer financing portfolio was the key driver of growth in 2015, as it contributed to robust double-digit financing growth of 16.2% or RM4.8 billion to RM34.3 billion as at 31 December 2015, doubling the 7.9% recorded by the banking industry. PBZT however, dropped slightly by 2.3% to RM685.1 million from RM701.2 million in 2014; mainly attributed to the finance cost incurred on the Subordinated Sukuk Murabahah and the higher income attributable to depositors and IA Holders.

4 ACCOUNTABILITY FINANCIAL STATEMENTS DIRECTORY 23 BANK ISLAM MALAYSIA BERHAD Annual Report 2015 Deposits grew by 6.3% to RM43.6 billion despite the intense competition for customer deposits that continues to afflict the industry; while current and savings account ( CASA ) ratio stood at 35.1% compared with the banking industry s CASA ratio of 25.6%. Overall the corporate scorecard showed a healthy financing to deposits ratio of 78.7% which surpassed the Bank s H2E target of 75% for The Bank s capital position remains robust with a total Capital ratio of 15.3%, in part due to the establishment of the Bank s 30-year Subordinated Sukuk Murabahah Programme of up to RM1 billion in nominal value ( Sukuk Programme ) where the Bank had issued two tranches of the subordinated Sukuk under the Sukuk Programme amounting to RM300 million and RM400 million on 22 April 2015 and 15 December 2015 respectively. This is well above the new regulatory capital requirement of 8.63% effective from January The subordinated Sukuk issued under the Sukuk Programme qualified as Tier II capital for the computation of the regulatory capital of the Bank in accordance with Bank Negara Malaysia s Capital Adequacy Framework for Islamic Banks (Capital Components) whilst enhancing the capital adequacy of the Bank based on internationally-agreed standards on capital adequacy promulgated by the Basel Committee on Banking Supervision and Islamic Financial Services Board. It is heartening to note that RAM Ratings Services Berhad had in October 2015 reaffirmed the Bank s AA3/ Stable/P1 financial institution ratings. The AA3 rating indicates a strong capacity for the Bank to meet its financial obligations while the P1 rating reflects a strong capacity for the Bank to meet its short-term financial obligations. Concurrently, the A1/Stable rating of the Sukuk Programme has also been reaffirmed. ADVANCING ON ALIGNED STRENGTHS Towards the end of 2015, the banking system recorded slower activity with lending growth moderating from 9.3% in December 2014 to 7.9% in December 2015 mainly due to slower growth in household financing. Augmented by narrowing net income margin due to rising cost of funding as well as higher operating and regulatory costs, another challenging year awaits the industry. Nevertheless, Bank Negara Malaysia ( BNM ) has put in place measures to preserve monetary and financial system stability, and ensure that the liquidity condition in the system continues to remain ample, complemented recently with the reduction in Statutory Reserve Requirement ( SRR ) by 50 basis points in January Monetary policy has been kept steady and has remained accommodative and supportive of economic activity. As such, the economy is expected to register growth of between 4% and 4.5% in the year In response to the continued challenging environment, Bank Islam is intent on adhering to a recently developed strategic plan for 2016 that will focus on sustaining capital through robust liability management. This will see us pursuing growth by aligning the strengths of our unique offerings through focus on liability management, particularly in driving retail deposits, coupled with enhanced service excellence. The Bank will also continue to focus on safeguarding asset quality as part of our strategy to maintain a healthy capital position. In addition, we will continue to assess capital requirements to ensure the Bank is well positioned to support its business growth strategies. We also intend to aggressively market our IA products which not only benefit the Bank as they provide a more effective funding structure that allows for capital optimisation and liquidity management. Our customers would also be able to enjoy better return on their investment.

5 CORPORATE HIGHLIGHTS 24 CORPORATE FRAMEWORK INITIATIVES Chairman s Statement (cont d) FORTIFYING GOVERNANCE IN ALL WE DO The Board is fully committed to the adoption of sound corporate governance standards and practices. Regular reviews were made to assess the adequacy of our controls as well as the risk management framework to ensure they are in line with sound and best practices of corporate governance. The Bank emphasises the importance of integrity, transparency and accountability in all of our transactions. The Bank complies with and continues to strengthen our adherence to BNM s requirements under the Revised Guidelines on Corporate Governance for Licensed Islamic Banks ( BNM/GP1-i ) and BNM Shariah Governance Framework. During the period under review, two of our non-independent nonexecutive directors retired from the Board following the expiry of their tenure. Independent non-executive directors make up 50% of the Board. During the year under review, the Bank has also appointed a new member and a non-shariah scholar Subject Matter Expert to its Shariah Supervisory Council. REFINING OUR CORPORATE RESPONSIBILITY STRATEGY On 6 July 2015, during the holy month of Ramadan, Bank Islam strategically aligned our Corporate Responsibility ( CR ) initiatives as a core pillar of the Bank s activities by launching the AMAL brand. The word AMAL (meaning good deeds or actions in Arabic) was chosen to reflect the essence of CR within Islamic values; thus helping us expand the social impact of our CR activities in line with our growing repute as Malaysia s premier Islamic bank. The CR-related activities undertaken under the AMAL brand name focus on four strategic priorities: Community Development, Education, Projek Bantuan Rumah (Housing Aid Project) and the Environment. Initiatives under these priorities are longstanding efforts that have evolved to grow in scope and impact. In 2015, our commitment to inclusive and sustainable CR was recognised when we were accorded the Best CSR Initiative by the Golden Globe Tigers Awards 2015 for our flagship initiative Projek Bantuan Rumah. A detailed report on our corporate governance best practices and Shariah compliance is available on pages 116 to 140 of this annual report.

6 ACCOUNTABILITY FINANCIAL STATEMENTS DIRECTORY 25 BANK ISLAM MALAYSIA BERHAD Annual Report 2015 The Bank has always encouraged management and staff to get personally involved in our CR programmes as well as any other welfare work and charity projects; in keeping with Prophet Muhammad SAW s reminder that There are two blessings which many people lose: (They are) health and free time for doing good. Instilling the desire for AMAL within our people is thus a responsibility we commit ourselves to in providing opportunities for our employees to experience fulfillment and the joys of caring and sharing. To this end, I am happy to note that in 2015 our people collectively contributed 152,881 hours of their own time to be involved in gotong-royong activities and other voluntary work initiated by the Bank. During the year, the Bank also distributed a total of RM12.7 million in zakat, a 2.6% increase compared with RM12.4 million in This is distributed to 14 state zakat management agencies and is then used for projects to uplift Muslim communities in need by financing diverse projects targeting the poor and underprivileged. As the first Islamic bank in Malaysia, Bank Islam has paid over RM95 million in zakat since A detailed report of the Bank s CR activities can be found on pages 98 to 107 of this annual report. ACKNOWLEDGEMENTS Our greatest strength moving ahead is the support and continued loyalty of Bank Islam s customers, management team and employees. Your trust, engagement and passion fuel the Bank s progress through thick and thin. The regulatory authorities, in particular BNM and the Securities Commission, have played a pivotal role in Bank Islam s growth and the sustainability of Islamic banking as a whole. On behalf of the board, I take this opportunity to acknowledge their role in making Malaysia a leading force in the industry and for continuing to evolve its dynamic future. I also take this opportunity to express gratitude to Tan Sri Ismee Ismail and Dato Johan Abdullah, who have retired from the Board. Their valued contribution is acknowledged and I am privileged to record our deep appreciation. I would also like to thank my fellow directors and members of the Bank s Shariah Council as well as the Bank s committed employees all 4,361 of them, for their dedication and astuteness in expanding the boundaries of Islamic banking. I thank them for their tireless efforts and perseverance to ensure the Bank s success, and indirectly the success of the industry, as well as pay tribute to their valued contribution. On behalf of the board, I also thank our shareholders and all other stakeholders for your unwavering support through the years. Your steadfast trust and endorsement are core strengths the Bank relies on in braving the challenges that lie ahead. Datuk Zamani Abdul Ghani Chairman