His Highness Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah Amir of the State of Kuwait

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1 Annual Report

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3 Annual Report 43 rd 2006

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5 His Highness Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah Amir of the State of Kuwait

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7 His Highness Sheikh Nawaf Al-Ahmed Al-Jaber Al-Sabah Crown Prince

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9 His Highness Sheikh Naser Al-Mohammed Al-Ahmed Al-Sabah Prime Minister

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11 Contents Board of Directors 11 General Management 13 Chairman s Statement 14 Economy Outlook 16 Company Activities 19 Auditors Report 27 Consolidated Balance Sheet, December 31, Consolidated Statement of Income For the year ended December 31, Consolidated Statement of Changes in Equity For the year ended December 31, Consolidated Statement of Cash Flows For the year ended December 31, Notes to Consolidated Financial Statements December 31,

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13 Board of Directors Bader Naser AlSubaiee Chairman and Managing Director Mishari Zaid Al-Khaled Deputy Chairman Barrak Abdulmohsen Al-Sabeeh Director Jamal Abdullah Al-Saleem Director Abdulwahab S. Al-Muzaini Director Mohammed Abdulrida Saleem Director Mohammed Iqab Al-Khatib Director Waleed A. M. A. Al-Roudan Director 11

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15 General Management Yousef E. Al-Hassawi General Manager Adel J. Al Mudaf Assistant General Manager, Finance & Administration Fahad Bader Al Kuhailan Assistant General Manager, Trading & Treasury Raed A. Al Saleh Assistant General Manager, Asset Management Fawaz Sulaiman Al-Ahmad Assistant General Manager, Direct Investment Corpotate Finance Division Naser A. Al Salem Legal Affairs & Secretary of the Board Wagdi Sayed Eid Financial Controller 13

16 CHAIRMAN AND MANAGING DIRECTOR S STATEMENT To: The Shareholders, On behalf of the Board of Directors, I am pleased to present the 43rd annual report of Kuwait Investment Company (KIC) for the financial year ended 31 December First of all, and on behalf of the Board of Directors and all employees of the Company, I take this opportunity to congratulate the people of Kuwait on the occasion of the 1st anniversary of HH Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah taking over the rule as the Amir of the State of Kuwait. We pray to the Almighty God to bestow him with guidance to the common interest of Kuwait and its people. Reflecting on the upset economic situation in Kuwait, it is noted that both the government and national assembly (parliament) have overlooked certain issues. Public domain, including health, education, development, as well as security and stability, is affected by several factors. Accordingly, both branches should give priority to this issue. Driving the economy to the aspired quality requires joint efforts on both legislative and executive levels, so as to convert Kuwait into a regional financial center, and restore the pioneering position it had years ago. Owing to this fact, the government should initiate a set of economic reforms and integrated action plans in order to restore economic confidence. Major actions include initiating a ministry of economy to be taken over by a minister who possesses a clear economic vision and an integrated economic plan. In addition, a set of aggressive resolutions need to be adopted, such as privatizing the public utilities, investing the budget surpluses in developmental projects, instead of wasting these funds on consumer projects, such as loan cancellation, salary or allowance increments. Although lacking public support in the short term, these plans reflect overall prosperity from the future perspective. On the national assembly side, achieving this goal will require a set of legislations to be enacted by its specialist committees. An economic committee should be formed, and intensive efforts should be exerted towards attracting investors. Relationship between the government and the national assembly should be positive, giving the impression of stability, which is conducive to capital attraction. In 2006, the local economy continued to perform positively, although at a slower pace than the record performance level registered in It is expected to continue the positive trend in the medium term. Reports predict that the Kuwaiti economy s performance will continue to be positive. In light of the substantial gains realized by Kuwait Stock Exchange over the period , at an annual increase averaging 69%, the market performance raised concerns in Although receding, stock exchange performed well, compared to other GCC stock exchanges, most of which have suffered sharp declines this year. Several factors caused the performance to fluctuate during the year. These include the internal political changes, the implications of the Iranian nuclear issue, the decline of most of money market indices in the GCC countries, the disclosure issue, and the government s rescinding of a number of BOT contracts with private sector entities. Other factors include the record levels of indices, which required corrective actions, as well as the adverse impact of the tense relation between the government and the national assembly, leading to dissolution of the latter. Despite the election of a new national assembly, there were no signs of possible cooperation between it and the government, causing some investors to switch to other areas of investment. However, the corrective actions witnessed by the market in 2006, which are relatively limited, compared to certain stock exchanges in the region, have successfully eased some of these concerns. In the mean time, they highlighted the degree of relative stability and economic recovery, which prevailed in Kuwait and the region, thus boosting the overall confidence. Corrective actions have motivated the concerned authorities, including the Ministry of Commerce and Industry, to seriously consider regulatory and structural amendments, so as to enhance market transparency and stability. The Ministry introduced a draft law for the money market authority, and referred it to the Council of Ministers. In addition, Kuwait Stock Exchange s administration tended to revise the terms of listing in both regular and parallel markets, while seeking mechanisms for market activation and development. 14

17 Most of the market expectations for 2007 were cautiously optimistic due to the pending issues, mainly the withdrawal of BOT contracts, the ambiguity in the mechanism of dealing with the Iranian nuclear issue, and the regional situation. Meanwhile, other positive factors continued to prevail, mainly the continued financial surpluses resulting from oil, the improving performance of major corporate entities, as well the tendency to improve the investment environment of the economy, in general, and Kuwait Stock Exchange, in particular. During 2006, Kuwait Investment Company (KIC) successfully maintained the pace of its performance growth to cope with the constant growth of the national economy. The Company maintained growth in spite of the recession of Kuwait Stock Exchange and most of the GCC stock exchanges. Over the past year, the Company attracted more customers and strategic investors to a financial brokerage company with a capital of 20 million. It also initiated a section for financial analysis under the local and Arab Shares Department. Notwithstanding the recession in most of the stock exchanges in the region in 2006, including the Kuwaiti market, the Company, via its local and Arab mutual funds, managed to realize performance rates higher than those attained by the market in which those funds operate. Out of these, three funds (Al-Raed Investment, Kuwait Investment, and Al-Atheer) manage about million in the local market. During the year, the Company attracted portfolios of up to 96 million under its management, and others under customer management. Combined market value of portfolios amounted to nearly 1 billion as at the end of The Company also boosted its activity in some GCC countries, such as Qatar and Oman, for the purpose of trading for the account of certain customers in these markets. Negotiations are in progress with other customers in this respect. In line with its conservative policy, covering returns and risk taking, the Company managed to adopt selective dealing positions in the global markets. The global funds of the Company, operating in the US, European and Asian markets, registered higher rates, compared to the performance of global indices applied in these markets. The Company performed distinctively in the area of corporate finance by diversifying the credit facilities and its sectorial and geographic participation. Such involvement took place in line with the risk spreading principle, the credit standards applicable in the Company, and the credit policy applied by the Central Bank of Kuwait (CBK). On the direct investment side, the Company further enhanced its activities, and accomplished several operations. These activities included participation in the capital of Maritime Sea Tankers and Cargo Company, Mena Capital Holding Company, Al-Midraj Investment Company, and Unicorn Global Fund. In the mean time, the Company sold its 23.9 million stake in the Bank of Bahrain and Kuwait, realizing a profit of 10 million. In respect of real estate projects and financial instruments, the Company invested in a number of regional projects, mainly the Beirut Downtown Gate, Barwat Al-Khour Real Estate Company of Qatar, BCC Investment, Instrata Capital in Bahrain, and Gulf Finance and Investment, with expected return on investment (ROI) ranging between 22% and 25% per annum. The Company distributed dividend to the customers of Al-Areen Desert Project over an investment period of 18 months. It also marketed a number of major regional real estate projects, including the Bahrain Financial Harbor, and Qatar Energy Center. With a profit of 26.8 million, the Company s financial results were positive as compared to the local, Arab and global economic circumstances. The board of directors recommended approving the distribution of cash dividend of 30% per share, and the distribution of bonus shares at 5% of the share capital. We hereby assure the shareholders that the Company will diligently endeavor to set up a new strategy for the next 5 years, which will ensure performance stability and progress. Bader Naser AlSubaiee Chairman and Managing Director 15

18 Economy Outlook Economic Review The domestic economy has performed positively in 2006 for the fourth successive quarter, although lower than the record performance rate achieved in The economic performance capitalized on the record levels of oil prices, increasing volume of oil exports, higher government and private investment expenditure, as well as abundant liquidity. Medium term expectations for economic performance remain positive, even if the oil prices recede from their recently registered high levels. In light of the substantial financial surpluses, in state budget, or in the balance of dealings with the outer world, the government successfully increased its foreign investments. The step paved the road for higher income from investments, particularly benefiting from the increasing interest rates on a global level. Such economic abundance has been achieved despite a notable increase in the volume of government expenditure. Reports estimate that in 2007 the Kuwaiti economy will continue to perform positively due to major economic reforms, namely those relating to ratifying major laws, combating corruption, and allowing the private sector a broader role in most of the economic sectors. Continuing the oil production at its present rates for most of the year will also motivate the improvement of public fiscal position, thus positively affecting the non-oil sectors. Real GDP is expected to grow to about 8% in 2006 to register nearly 26.8 billion. It is also expected that the real growth will continue to soar, with slight slow downs in It is expected to slip to 5.6% due to the expected decline of the average price of oil barrel, as well as the rate of production of Kuwaiti oil, as it was reduced in November 2006 by about 4.4%, and another intended reduction will take place in February Over 2006 Kuwait s actual production rate was mb/d. For the same year the price of Kuwaiti oil barrel was about $ 59.3 a barrel, against $ 48.4 a barrel in 2005, an increase of almost 22.5%. Kuwait Dinar per US Dollar Jan 1992 to Dec 2006 (KWD/USD) Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 16

19 State Budget Budget projections indicate an actual surplus in view of the fact that the actual price of Kuwaiti oil barrel will be higher than the projected price. However, the projected surplus in 2007/2008 budget will be lower than that of 2006/2007 budget, or about 5 billion. The growing investment spending in the next budget, which reflects an increasing confidence in the economy s future outlook, will ensure progressive economic growth. Cost of investment projects in the oil and gas, energy, infrastructure, and real estate sectors over the coming 5 years is estimated to account for about 60 billion. Soaring oil prices motivated the generation of substantial financial revenues, enabling the government to increase its expenditure by about 9% and 13% over the years 2004/2005 and 2005/2006, respectively. The current fiscal year, 2006/ 2007, is expected to witness further increase in expenditure. Capital expenditure budget is the major beneficiary from these developments. Capital expenses (CAPEX) registered an annual increase of 18% over the past 3 years. Government budget for the current year indicates that the capital expenses will grow by about 29%, most of which will be directed towards road, electricity, water and public works projects. Interest rates Government projected expenditure on capital projects excludes the increasing investment expenses on oil sector projects implemented by Kuwait Petroleum Corporation (KPC). Such expenses witnessed notable increases over the past years. During the year, monetary policies and indicators witnessed numerous developments. On 3 July 2006 the Central Bank of Kuwait (CBK) increased the discount rate on, for the first time in 2006, by 0.25% point, to 6.25%. CBK s discount rate has been increased 10 times since 2005 and up to December 2005, totaling 2.75 points. Against this, CBK has during the first half of 2006 increased the interest rate on repurchase agreements in 3 occasions, by 25 base points each time. An upward trend characterized interest rates on deposits from the outset of On the other hand, interest rates on loans witnessed a slight movement, as the interest rates prescribed for most of the loans are bound to CBK s discount rate. By the end of 2006, M2 amounted to 16 billion, an increase of nearly 21% over the end of 2005 level. Higher interest rates in 2006, coupled with a recession in Kuwait Stock Exchange, led to a sharp increase in time deposits, which registered an increase by 1,751 million. FC deposits also increased by the equivalent of 896 million. Meanwhile, demand deposits receded and savings deposits realized a limited growth. These developments reveal a reversal in the pattern of growth in deposits, which was apparent over the two previous years, where a progressive growth occurred in the demand deposits, in line with the hectic trading activity in the regional stock exchanges. Exchange Rates Pursuant to Kuwait s exchange rate policy, rate is tied to the dollar, with a space for maneuvering. On 11 May, CBK increased exchange rate against the dollar by 1% to become against 1 dollar. The action followed a period where the exchange rate was fixed at the level of , which has been operative since early Affected by this policy, exchange rate against other major currencies dropped due to the dollar s downward trend since 2003, which contributed to higher inflation over the past two years. Agreement on the Gulf monetary unification remains fragile enough to make the Central Bank of Kuwait hesitate in demanding a larger margin of flexibility in the movement against the dollar. 17

20 Economy Outlook Kuwait Stock Exchange (KSE) In light of the substantial gains realized by Kuwait Stock Exchange (KSE) over the period from 2003 to 2005, at an annual increase of 69%, there were concerns about the market performance in In spite of the actual market recession during the year, its performance remained better, compared to GCC stock exchanges, which suffered from a sharp decline of 43%-54% during the year (except for Omani Stock Exchange), following an unprecedented state of recovery over the past years. The obvious fluctuation in performance during the year, the decline of the weighted index of Kuwait Investment Company by 9%, as well as the receding price index of Kuwait Stock Exchange by 12.04%, are attributable to several factors, mainly: Internal political changes. Implications of the Iranian nuclear issue. Fall of all stock exchange indices in the GCC countries at sharp rates, except for Oman Stock Exchange, as well as the receding performance of the indices of most Arab stock exchanges. The eruption of the disclosure issue in accordance with Paragraph "D" of the law, and the resulting neutralization of the shares of major stakeholders in 23 listed companies so far. The government's rescinding of a number of contracts signed with the private sector companies under BOT system, and the referral of the dispute to courts. However, the corrective actions that took place in the market in 2006, which are relatively limited, compared to the events that took place in the region's markets, have eased such concerns. In the mean time, they revealed the relative stability in the economic recovery prevailing in Kuwait and the region, thus fostering the general atmosphere of confidence The corrective actions have motivated the concerned authorities, including the Ministry of Commerce and Industry, to seriously consider regulatory and structural amendments to increase market transparency and stability. The Ministry introduced a draft law for the money market authority, and referred it to the Council of Ministers. In addition, the Kuwait Stock Exchange's administration tended to revise the terms of listing in both regular and parallel markets, while seeking mechanisms for market activation and development. On the other hand, numerous positive developments were observed on the performance of major listed companies, which capitalized on the substantial growth in profitability, liquidity, and the increasing investors' confidence. Over the past few years, they embarked on regional and global expansion, either through acquisition or by holding new enterprises. Like other Gulf investors, Kuwaiti investors also focused on the locally and globally available investment opportunities. Most of the reported market expectations were cautiously optimistic due to the pending issues, mainly the withdrawal of BOT contracts, the ambiguity in the mechanism of dealing with the Iranian nuclear issue, and the regional situation. Other positive factors include the continued financial surpluses resulting from oil, the improving operating performance of major companies, as well the tendency to improve the investment environment of the economy, in general, and Kuwait Stock Exchange, in particular, all within the framework of the government's plan to convert Kuwait into a regional financial center. Performance of Kuwaiti Dinar against GBP, EUR and JPY Dec- 02 Dec- 03 Dec- 04 Dec- 05 Dec- 06 GBP JPY EUR 18

21 Company Activity During 2006, Kuwait Investment Company (KIC) successfully maintained the pace of its performance growth to cope with the constant growth in the performance of the national economy. The Company maintained growth despite the recession of Kuwait Stock Exchange and most of the GCC stock exchanges as a result of several economic and political factors, mainly the hectic, rapid, and sometimes surprising developments in the Iraqi, Iranian, Lebanese and Palestinian causes. Asset Management Sector During last year, Asset Management Sector of the Company enhanced its role in the total and operating revenues through fees and commissions that represent the major source of profit. Local and Gulf Investments Department During the year, Local and Gulf Investments Department continued its efforts towards enhancing the Company s role in this area, in Kuwait and the region, by moving in several directions: The department successfully attracted more customers to initiate new portfolios to be managed by the Company, while negotiating with local and Gulf companies in this respect. Seeking the initiation of time portfolios to serve the Company's customers. Following the Company's evaluation of its brokerage office at Kuwait Stock Exchange, the office was converted into a company with a capital of up to 20 million, and strategic investors were attracted to invest in it. Cooperating with Kuwait Stock Exchange towards providing the share lending service. Negotiating with a number of shareholding companies willing to have their shares quoted in the market by acting as listing consultants for those companies. In harmony with the Company's policy to participate in the new companies in Kuwait and abroad through alliances with local and regional corporate entities, the Company continued to seek new investment opportunities to ensure their feasibility and make decisions in this respect over the coming period. Performance of Kuwait Stock Market Volume vs. Market Index for the year 2006 Mil. Shares 500 Index ROR (%) Jan-05 Feb- 05 Apr- 05 Jun- 05 Jul-05 Sep- 05 Nov- 05 Dec- 05 Feb- 06 Apr- 06 Jun- 06 Jul-06 Sep- 06 Nov Dec- 06 Volume Index 19

22 Company Activity Performance of Local and Regional Funds Kuwait Investment Fund While most of the stock exchanges in the region have experienced declines during 2006, including Kuwait Stock Exchange, the Company s mutual funds successfully outperformed the indices of the markets in which they operate. The outstanding performance came as a result of the experience of fund managers, coupled with the balanced policy they follow. Since its initiation in July 2003, Kuwait Investment Fund, which invests only in Islamic shares quoted on Kuwait Stock Exchange and local real estate market, has achieved a positive performance of 63%. However, it receded by only 2.36% in 2006, which is considered to be a tremendous performance, compared to other funds, and in relation to market situation. KIC Bond Fund Al-Raed Fund Since the demise of the late Sheikh Jaber Al-Ahmad A-Sabah, Kuwait Stock Exchange has declined successively. War on Lebanon, and other political circumstances, added to the downward trend, which characterized the regional markets. Nevertheless, the performance of Al-Raed Fund, targeting favorable returns for investors by investing in the Kuwaiti companies listed on Kuwait Stock Exchange and mutual funds, has retreated by 7.55%, i.e. less sharply compared to the rate of decline of Kuwait Stock Exchange index, which lost over 12%. Since its inception in October 2001 and up to 2006, the fund has registered %. The Bond Fund targets attractive return by investing in Kuwaiti treasury bills and bonds, and medium/long term securities issued by authorities, institutions and corporate entities. The Fund s performance was positive in 2006, realizing a return of 5.7%. Al-Hilal Fund Al-Hilal Fund aims at achieving return by employing funds in all available, Islamic Sharia -compatible financial instruments. During 2006, it performed positively, attaining a return of 7.17%. 20

23 Al-Atheer Fund International Capital Markets Department In 2006 Gulf and Arab markets sustained fluctuation and sharp declines due to the region s political turmoil, with the war on Lebanon representing the main event. These factors adversely affected the performance of telecommunication companies shares quoted on the regional markets, in which Al-Atheer Fund invests. Despite the sharp recession in the Arab markets, in general, and the GCC markets, in particular, which suffered from a sharp decline of 43-54%, except for Oman Market, the Fund managed to reduce the rate of recession to 9.44% in early Following a geographic diversification policy in its investment, while selecting the right time for entry and exit, the Fund achieved a better performance, compared to other funds operating in the same markets. Since its initiation, the Fund realized a return of about 96.52%. Furthermore, cash dividend of 5%, and bonus shares of 20% were distributed for 2005, totaling 22.5% cash and 27.5% bonus distributions since inception. In 2006 global markets were affected positively by the growth in world economy. Standard and Poores 500 US Companies Performance Index (S&P500) rose by 13.62%. NASDAC 100 also rose by 6.79%. A number of factors motivated the upward trend, mainly the stabilized or receding oil prices, together with optimism over reducing the interest rates in mid 2007, pushing the market indices higher in early October, and stabilizing them towards the end of In the first half of the year, with the rising inflation rates in the US as a result of the soaring oil prices, interest rates moved higher to adjust the rhythm of inflation. By the second half of the year, inflation rate stabilized, and oil prices slipped, thus enhancing the market expectation of interest rate fall. In the last quarter, markets witnessed improvement on grounds of economic growth. However, the credit market growth was mixed. Bond market lost some momentum although realizing some positive returns. On the investment sectors level, technology and industrial sectors witnessed notable growth. Geographically, China and India appeared as growth stars in the emerging markets. International Department successfully adopted selective trading positions in conformity with its return/risk balanced policy. Performance of Local and Arab Portfolios Most of the local, Gulf and Arab stock exchanges performed modestly. However, the Portfolios Department continued to attract new customers in all markets in which they operate. New portfolios exceeding 90 million were initiated, varying between company-managed and customer-managed portfolios. Towards the end of 2006, market value of portfolios totaled nearly 1 billon. The Company furthered its activity in some Gulf countries, such as Qatar and Oman, for the purpose of trading for the account of certain customers in these markets. Negotiations with other customers in this context are in progress. 21

24 Company Activity Performance of Global Mutual Funds Corporate Finance Department KIC Global Strategic Fund registered a good performance in 2006, compared to the performance of the Global Stock Exchanges Fund. It rose by 17.62% during the year. The Fund invests in all developed global markets. This performance is similar to that of MSCI. The Fund has realized a growth of 70.2% since its inception on 13 September European Stocks Fund, which invests in European shares, achieved a performance of 19.27% during the year, i.e. higher than that of MSPE index, which grew by 15.28%. The Fund has realized a growth of 52.9% since its initiation on 28 June Meanwhile, Asian Stocks Fund, which invests in Asia and the Pacific, attained a growth of 33.38% during the year. This is higher than the performance of Morgan Stanley Index (MXPC) for Asia and the Pacific markets, which grew by 10.43%. The Fund has achieved a growth of 203.3% since its establishment on 15 December Global Bond Fund, which invests in the global bond markets, achieved a growth of 9.16% during the year. This is higher than the performance of JPMGB, which grew by 5.94%. The Fund has grown by 99% since its inception on 26 May North American Stock Fund, which invests in the American stock markets, grew by 6.48% during the year, compared to NASDAC, which achieved 6.79% for the same period. The Fund has achieved a growth by 16.6% since its inception on 28 June During the year, Corporate Finance Department has endeavored to implement the themes of its declared strategy, and achieve the goals set in the annual action plan. In 2006 the Department diversified the traditional credit facilities of all types and their tools by participation or arrangement, and management with direct or indirect finance. In line with risk spreading, Corporate Finance Department also diversified its participations in the oil, industrial, real estate and investment sectors. The step also came in line with the company s credit principles and standards, as well as the credit policies applicable at the Central Bank of Kuwait. In line with the geographic risk spreading, Corporate Finance Department contributed to local, regional and international short and medium term facilities in major currencies, and US dollar, in cooperation with local, regional and international institutions, companies and banks. The Department continued to cope with the corporate finance developments in the region and on a global level, by participating in the financial forums and conferences in this context. Real Estate Projects and Financial Instruments Department In search of feasible investment opportunities, the Department invested in a set of regional projects, which were carefully studied by the Company s specialists: 22

25 The Company, in cooperation with Abu Dhabi Investment House, entered into the Beirut Downtown Gate project, which aims at reviving the Beirut downtown, covering an area of 21,447 m2, and including residential towers, commercial offices and entertainment facilities. Entering into this investment, the Company aims at selling the land parcels it previously purchased to developers. It expects to achieve a return on investment (ROI) of 37.5% over the investment period of 18 months, i.e. 25% per annum. Participation in, and marketing of, Barwat Al-Khour project in the State of Qatar, which is valued at 250 million. The project owns the Khour (creek) land of 86 million f2. It expects a minimum ROI of 25% p.a. over the coming 3 years. Participation in, and marketing of, 15% of the share capital of Gulf Finance and Investment Company in the State of Bahrain. Participation in the establishment of Instrata Capital Company in the Kingdom of Bahrain, which targets management of mutual funds and infrastructure projects in the Gulf region, in particular, and the Middle East, in general. The company holds a stake of 20% of the newly established company. The Company distributed a profit of 40% to the customer of Al-Areen Desert Project over an investment period of 18 months, upon the sale of the developed areas to developers. The expected return for phase 1 (infrastructure and project planning) amounted to about 37.5%. Direct Investment Department In 2006 Direct Investment Department continued its distinctive performance and successfully accomplished various investment and exiting transactions for a number of geographic and sectorwise diversified projects, mainly: Participation in the share capital of Mena Capital Holding Company, with 5 million shares, and by 1.67% of the share capital. Participation in the Unicorn Global Fund with 10 units, at the rate of 0.67% of the share capital. Selling the Company's stake of about 23.9 million shares in the Bank of Bahrain and Kuwait, achieving a profit of 10 million. Treasury Department Interest rates on deposits continued to soar in The Central Bank of Kuwait increased the discount rate on one occasion this year. Meanwhile, the year witnessed several interventions by the US Fed, which increase the interest rate from 4.25% to register 5.25%. On the FC level, the dollar commenced dealings at the level of 1.19 against the Euro, and 1.73 against the Sterling Pound. In the first quarter it had a balanced level. However, at the outset of the 2nd quarter, the dollar dropped to a record level of 1.26 against the Euro. It continued the downward trend in the 2nd quarter, touching the level of 1.29 against the Euro, and 1.9 against the Pound. It continued the trend in the 3rd quarter. In the last quarter of 2006 it declined to the lowest level of against the Euro, and against the Pound. The Company s investments continued to expand on all levels, concurrently with a notable activity of the money market for banks and financial and investment companies. Kuwait Investment Company s name and local and international image reflected the volume of finance obtained by its investments, in addition to the re-lending transactions, which reflected the Company s potential in terms of high flexibility to provide liquidity, if required.the Department successfully achieved its pre-set objectives in terms of cash surpluses, which realized best returns, in addition to providing cost-effective funds, compared to the prevailing rates in the money market. Furthermore, FC activity achieved the targeted profit for the year. The expansive relations with banks and new financial and investment institutions had a prominent foothold in relation to the Department s activity, and expansion of the scope of customer service, for the purpose of diversifying the sources of income for the Department and increasing the commission rates. 23

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28 CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT FOR THE YEAR ENDED 31 DECEMBER

29 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF KUWAIT INVESTMENT COMPANY (S.A.K.) AND SUBSIDIARY Report on the financial statements We have audited the accompanying consolidated financial statements of Kuwait Investment Company S.A.K. ( the Parent Company ) and subsidiary (together referred to as the Group ) which comprise the consolidated balance sheet at 31 December 2006, and the related consolidated statements of income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the consolidated financial statements The Group s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted in the State of Kuwait. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated 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. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. 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 consolidated financial statements. 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 consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted in the State of Kuwait. Report on other legal and regulatory requirements We further report that we have obtained the information and explanations that we required for the purpose of our audit and the consolidated financial statements include the information required by the Kuwait Commercial Companies Law of 1960, as amended, and the Parent Company s articles and memorandum of association. In our opinion, proper books of account have been kept by the Parent Company, an inventory count was carried out in accordance with recognized procedures and the accounting information given in the board of directors report agrees with the books of account. We have not become aware of any contravention, during the year ended 31 December 2006, of the Kuwait Commercial Companies Law of 1960, as amended, or of the Parent Company s articles and memorandum of association, or of Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organization of banking business and its related regulations, that would materially affect the Group s activities or its consolidated financial position. Qais M. Al-Nisf License No. 38-A Moore Stephens Al Nisf & Partners Member of Moore Stephens International 20 February 2007 Jassim Ahmad Al-Fahad License No. 53-A Al-Fahad & Co. Deloitte & Touche 27

30 CONSOLIDATED BALANCE SHEET At 31 December Notes Assets Cash - current and call accounts 3,301,379 5,028,307 Placements 3 47,443,788 43,247,858 Investments at fair value through profit or loss 4 109,188, ,825,204 Loans and advances 5 22,551,455 22,242,621 Government debt bonds 6 784, ,544 Available for sale investments 7 129,982, ,363,345 Investment in an associate 8 1,908,800 7,257,350 Unconsolidated subsidiaries 9 4,813,282 4,168,282 Investment property 10 3,644,844 4,340,413 Other assets 11 9,801,989 11,432,095 Total assets 333,420, ,833,019 LIABILITIES AND EQUITY Liabilities Call and notice accounts 926,485 2,946,927 Customers deposits 154,270, ,923,609 Accrued interest payable 1,273, ,716 Dividend payable 561, ,661 Accruals and other liabilities 12 14,740,491 20,449,725 Total liabilities 171,772, ,946,638 Equity Share capital 13 50,000,000 50,000,000 Treasury shares 14 (1,675) (1,675) Statutory reserve 15 20,274,213 17,492,080 General reserve 16 20,274,213 17,492,080 Retained earnings 45,162,865 53,910,367 Fair value reserve 22,821,744 33,425,187 Equity attributable to equity holders of the Parent 158,531, ,318,039 Minority interest 3,116,607 2,568,342 Total equity 161,647, ,886,381 Total liabilities and equity 333,420, ,833,019 Bader Naser AlSubaiee Chairman and Managing Director Mishari Zaid Al-Khaled Deputy Chairman Yousef Esa Al-Hassawi General Manager The notes set out on pages 8 to 30 form an integral part of these consolidated financial statements. 28

31 CONSOLIDATED STATEMENT OF INCOME for the year ended 31 December Notes Income Interest income 5,000,940 3,992,857 Dividend and other investment income 3,886,695 3,562,418 Commissions 14,851,346 13,504,518 Income from property rental and management services (net) 17 2,752,450 2,704,279 (Loss)/gain from investments at fair value through profit or loss 18 (1,603,457) 40,855,779 Gain on sale of investments available for sale 9,887,406 81,136 Gain on sale of investment property , ,945 Gain on sale of intangible assets 9,604,350 - Gain on sale of investment in associate - 1,364,056 Foreign exchange (loss)/gain (182,521) 121,348 Allowance released for credit losses , ,090 Group share of results of unconsolidated subsidiaries and an associate (132,925) 2,430,964 Total income 44,365,597 69,338,390 Expenses and charges Interest expense 7,206,573 3,154,245 General and administrative expenses 21 8,413,448 10,159,336 Loss on disposal of equipment - 48,105 Depreciation and amortisation 1,049,881 1,021,916 Total expenses and charges 16,669,902 14,383,602 Profit from operations 27,695,695 54,954,788 Other income 723,448 78,410 Profit for the year before provision for contribution to Kuwait Foundation for the Advancement of Sciences (KFAS), National Labour Support Tax (NLST) and 28,419,143 55,033,198 Directors remuneration Contribution to KFAS (250,392) (493,929) NLST 22 (674,523) (1,220,474) Directors remuneration (80,000) (80,000) Profit for the year 27,414,228 53,238,795 Attributable to: Equity of the Parent 26,816,417 53,086,588 Minority interest 597, ,207 27,414,228 53,238,795 Earnings per share attributable to equity holders of the Parent (fils) The notes set out on pages 8 to 30 form an integral part of these consolidated financial statements. 29

32 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2006 Equity attributable to equity holders of the Parent Minority interest Total equity Share capital Treasury shares Statutory reserve General reserve Retained earnings Fair Value reserve Total Balance at 31 December ,000,000 (1,675) 12,003,981 12,003,981 26,799,804 18,933, ,740,044 2,228, ,968,956 Reversal due to sale of investments available for sale (37,490) (37,490) (36,020) (73,510) Effect of changes in fair value of available for sale investments ,528,724 14,528, ,053 14,736,777 Net profit recognized directly in equity ,491,234 14,491, ,033 14,663,267 Profit for the year ,086,588-53,086, ,207 53,238,795 Total recognized profit for the year ,086,588 14,491,234 67,577, ,240 67,902,062 Cash dividend (14,999,827) - (14,999,827) - (14,999,827) Transferred to reserves - - 5,488,099 5,488,099 (10,976,198) Change in Minority interest ,190 15,190 Balance at 31 December ,000,000 (1,675) 17,492,080 17,492,080 53,910,367 33,425, ,318,039 2,568, ,886,381 Reversal due to sale of available for sale investments (9,421,127) (9,421,127) - (9,421,127) Effect of changes in fair value of available for sale investments (1,182,316) (1,182,316) (53,404) (1,235,720) Net profit recognized directly in equity (10,603,443) (10,603,443) (53,404) (10,656,847) Profit for the year ,816,417-26,816, ,811 27,414,228 Total recognized profit for the year ,816,417 (10,603,443) 16,212, ,407 16,757,371 Cash dividend (29,999,653) - (29,999,653) - (29,999,653) Transferred to reserves - - 2,782,133 2,782,133 (5,564,266) Change in Minority interest ,858 3,858 Balance at 31 December ,000,000 (1,675) 20,274,213 20,274,213 45,162,865 22,821, ,531,360 3,116, ,647,967 The notes set out on pages 8 to 30 form an integral part of these consolidated financial statements. 30

33 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2006 Notes OPERATING ACTIVITIES Profit for the year before KFAS, NLST and Directors remuneration 28,419,143 55,033,198 Adjustments for: Depreciation and amortisation 1,049,881 1,021,916 Change in minority interest 3,858 15,190 Allowance released for credit losses (140,363) (129,090) (Gain) / loss from investments at fair value through profit or loss 1,603,457 (40,855,779) Gain on sale of investments available for sale (9,887,406) (81,136) Gain on sale of investment in associate - (1,364,056) Group share of results from associate and unconsolidated subsidiaries 132,925 (2,430,964) Gain on sale of investment property (160,950) (591,945) Dividend income (3,877,526) (3,545,057) Interest income (5,000,940) (3,992,857) Interest expense 7,206,573 3,154,245 19,348,652 6,233,665 Movements in working capital Decrease in placements 5,008,179 6,171,716 Increase in investments at fair value through profit or loss (7,070,994) (2,639,308) Increase / (decrease) in loans and advances (316,249) 2,219,312 Decrease in other assets 1,270,372 (3,568,296) Decrease in government debt bonds 143, ,456 Increase / (decrease) in customers deposits 26,794,820 (1,794,820) (Decrease) / increase in accruals and other liabilities (1,210,721) 7,993,485 Dividend received 3,877,526 3,545,057 Interest received 4,880,387 3,892,191 Interest paid (6,142,684) (3,092,282) Net cash from operating activities 46,582,789 19,110,176 INVESTING ACTIVITIES Proceeds from sale of investment property 300, ,000 Addition to investment property (13,075) (11,197) Proceeds from sale of investments available for sale 15,766,644 4,109,590 Purchase of investments available for sale (36,543,195) (15,484,737) Amount paid for investment in associate (7,304,450) - Net amount paid for investment in unconsolidated subsidiaries (1,260,540) (672,821) Proceeds from liquidation of investment in unconsolidated subsidiaries 1,232,615 - Proceeds from sale of investment in associate - 1,969,056 Net cash used in investing activities (27,822,001) (9,290,109) FINANCING ACTIVITIES Dividends paid (29,855,158) (15,029,177) Net cash used in financing activities (29,855,158) (15,029,177) Net decrease in cash and cash equivalents (11,094,370) (5,209,110) Cash and cash equivalents at beginning of the year (60,857,370) (55,648,260) Cash and cash equivalents at end of the year 24 (71,951,740) (60,857,370) The notes set out on pages 8 to 30 form an integral part of these consolidated financial statements. 31

34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, INCORPORATION AND ACTIVITIES Kuwait Investment Company ( the Parent Company ) is a public shareholding investment company incorporated under the laws of the State of Kuwait by virtue of memorandum of association No.29 on 25 November, 1961, registered in the commercial registry under No.4340 on 22 May Its registered office is at Souk Al Manakh, Mubarak Al Kabeer Street, Kuwait and its mailing address is P.O. Box 1005 Safat, State of Kuwait. The Parent Company s major shareholder is Kuwait Investment Authority. The Parent Company and its subsidiary (together referred to as the Group ) are primarily engaged in the following activities: Security trading and investment Real estate investment Property rental and management Underwriting bonds and certificate of deposit issues Time deposit acceptance and placement with financial institutions Foreign exchange contracts Holding international, regional and local exhibitions The consolidated financial statements of the Group for the year ended 31 December 2006 were authorized for issue in accordance with a resolution of the Board of Directors on 20 February The shareholders general assembly has the power to amend these consolidated financial statements after issuance. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait. These regulations require adoption of International Financial Reporting Standards (IFRS) except for the IAS 39: Financial Instruments: Recognition and Measurement requirement for a impairment provision on loans and advances, which has been replaced by the Central Bank of Kuwait s requirement for a minimum general provision as described under the accounting policy for impairment of financial assets. Significant accounting policies adopted are summarized as follows: 2.1 Adoption of new and revised standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures Effective for annual periods beginning on or after 1 January 2007 IFRS 8 Operating Segments Effective for annual periods beginning on or after 1 January 2009 IFRIC 7 Applying the Restatement Approach Effective for annual periods beginning on or after 1 March 2006 under IAS29, Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 Effective for annual periods beginning on or after 1 May 2006 IFRIC 9 Reassessment of Embedded Derivatives Effective for annual periods beginning on or after 1 June 2006 IFRIC 10 Interim Financial Reporting and Impairment Effective for annual periods beginning on or after 1 November 2006 The impact of the adoption of IFRS 7 Financial Instruments: Disclosures is to expand the disclosures provided in the consolidated financial statements regarding financial instruments. The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the consolidated financial statements of the Group. 32

35 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Basis of preparation The consolidated financial statements are presented in Kuwaiti Dinars and are prepared under the historical cost convention, except for available for sale investments and investments at fair value through P&L that are stated at fair value. The consolidated financial statements comprise the Parent Company and its subsidiary. The preparation of consolidated financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Details of the subsidiaries are set out in Note Basis of consolidation Subsidiaries are those enterprises controlled by the Parent Company. Control exists when the Parent Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. Equity and net income attributable to minority interests are shown separately in the balance sheet and statement of income, respectively. Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. The minority interests are measured by the proportion of the pre-acquisition carrying amounts of the identifiable assets and liabilities of the subsidiaries. 2.4 Recognition, classification and measurement of financial instruments In accordance with IAS 39, the Group has classified financial instruments as investments at fair value through profit or loss, held to maturity or available for sale. Those classified as investments at fair value through profit or loss and available for sale are carried at fair value. A financial asset or a financial liability is recognized when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognized when the Group loses control of the contractual rights that comprise the financial asset and a financial liability is derecognized when the obligation specified in the contract is discharged, cancelled or expired. All financial instruments are initially recognized at cost being the fair value at the date of purchase (which includes transaction costs). 2.5 Impairment and uncollectability of financial assets The carrying amounts of the Group s financial assets are reviewed at each balance sheet date to determine whether there is any indication or objective evidence of impairment. If any such indication or evidence exists, the asset s recoverable amount is estimated and an impairment loss is recognized in the consolidated statement of income. The recoverable amount of the Group s receivables is calculated as the present value of expected future cash flows, discounted at the original effective yield rates inherent in the asset. Receivables and loans with a short duration are not discounted. In addition, in accordance with Central Bank of Kuwait instructions, a minimum general provision of 2% is made on all credit facilities net of certain restricted categories of collateral, not subject to specific provision. The recoverable amount of the Group s investments held for trading and investments available for sale are their fair value. The recoverable amount of other assets is the higher of an asset s fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs 33

36 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Reversal of impairment of assets Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of impairment loss is recognized immediately in the consolidated statement of income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Impairment losses are recognized in the consolidated statement of income. 2.7 Cash and cash equivalents Cash and cash equivalents consists of cash current and call accounts, placements maturing within ninety days from the date of acquisition, less call and notice accounts, Customers deposits maturing within ninety days from the date of acquisition. 2.8 Placements Placements are stated at amortized cost less any provision for impairment. 2.9 Loans and advances Loans originated by the Group by providing money directly to the borrower or to a sub-participation agent at draw down are classified as loans originated by the Group and are carried at amortized cost less any provision for impairment. Third party expenses such as legal fees, incurred in granting a loan are treated as part of the cost of the transaction. All loans and advances are recognized when cash is advanced to borrowers. Loans and advances are written off when there is no realistic prospect of recovery. Specific provisions are calculated on the losses of loans and advances originated by the Group against credit risks. The specific provision is made for loans originated by the Group against the credit risks due to impairment of loans and advances, in case there is an objective evidence of non-collection of the due amount. The provision amount is the difference between the carrying value of loans and advances and the recoverable amount, which is the present value of the expected future cash flows including the amounts recoverable from collaterals and assets pledged in favour of the Group, discounted by the effective interest rate prevailing in the market for variable rate loans. Provision for impairment loss in loans and advances is charged to the consolidated statement of income. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial Government debt bonds Government debt bonds are carried at cost. 34

37 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.11 Investments at fair value through profit or loss Investments are classified as at fair value through profit and loss where the financial asset is either held for trading or it is designated as at fair value through profit and loss. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking. A financial asset other than a financial asset held for trading may be classified as at fair value through profit or loss upon initial recognition if: such classification eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or Investments at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in the consolidated statement of income. The net gain or loss recognised in the consolidated statement of income incorporates any dividend or interest earned on the financial asset. Fair value is determined based on quoted current bid prices Available for sale investments Available for sale investments are initially recognised at cost being the fair value plus transactions costs that are directly attributable to the acquisition. Subsequent to acquisition, available for sale financial assets are re-measured at fair value and unrealized gains and losses arising from changes in their fair values are taken to equity in the fair value reserve account. When the available for sale asset is sold, or impaired, the related accumulated fair value adjustments are transferred to the consolidated statement of income as gains or losses. Fair values are based on quoted current bid prices or using the current market rate of interest for that instrument. Fair values for unquoted equity instruments are estimated using applicable price/ earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Investments, whose fair value cannot be reliably measured, are carried at cost less impairment losses, if any Investments held to maturity Investments with a fixed and determinable maturity and where management has both the positive intent and ability to hold them till maturity are classified as investments held to maturity and are carried at amortized cost less any provision for impairment. The revenue is recognised on an effective yield basis Trade and settlement date accounting All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date the Group commits to purchase or sell the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place concerned. 35

38 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.15 Unconsolidated subsidiaries and associates An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Significant influence is generally accompanied by a shareholding of 20 to 50 percent. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost for post-acquisition changes in the Group s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group s interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate) are not recognised, unless the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group s interest in the relevant associate. Subsidiaries considered immaterial to the consolidated financial statements are not consolidated and are accounted for under equity method Investment property Investment property comprises undeveloped land and buildings erected on leased land. Undeveloped land and buildings erected on leased land are initially stated at cost and buildings erected on leased land are depreciated using the straightline method over the lease period. Undeveloped land is not depreciated. The carrying amounts are reviewed at each balance sheet date to assess whether they are stated in excess of their recoverable amounts, and where carrying values exceed their recoverable amount assets are written down to their recoverable amount Call and notice accounts and Customers deposits Call and notice accounts and Customers deposits are stated at amortized cost Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. 36

39 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.19 Provision for employees end of service indemnity Provision is made for amounts payable to employees under the Kuwait Labour Law and employee contracts. This liability, which is unfunded, represents the amount payable to all employees as a result of involuntary termination on the balance sheet date, and approximates the present value of the final obligation Treasury shares Treasury shares consist of the Parent Company s own shares that have been issued, subsequently reacquired by the Parent Company and not yet reissued or cancelled. The treasury shares are accounted for using the cost method. Under the cost method, the weighted average cost of the shares reacquired is charged to a contra equity account. When the treasury shares are reissued, gains are credited to a separate account in equity (gain on sale of treasury shares) which is not distributable. Any realized losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then reserves. Gains realized subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the gain on sale of treasury shares account. No cash dividends are paid on these shares. The issue of bonus shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares Revenue recognition Interest income is recognized on accrual basis. Dividends are recognized in the consolidated statement of income when the shareholders right to receive payment has been established. Management fees relating to portfolios and fund management are recognized on accrual basis. Commission from guarantees and commitments are recorded on accrual basis. Revenue from property rental and management services are recognized on accrual basis. Gain on sale of investments is measured by the difference between the sale proceeds and the carrying amount of the investment at the date of disposal, and is recognized at the time of sale Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in these consolidated financial statements Foreign currencies The functional currency of the company is Kuwaiti Dinars ( ). Transactions denominated in foreign currencies are translated into at rates of exchange prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into at rates of exchange prevailing at the balance sheet date. The resultant exchange differences are included in the consolidated statement of income Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products and services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments Borrowing costs Interest on borrowings is calculated under the accrual basis and recognised in the consolidated statement of income in the period in which it is incurred. 37

40 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.26 Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant impact causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: 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; the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or other valuation models. Impairment losses on loans and advances and investments in debt instruments The Group reviews loans and advances and investments in debt instruments on a quarterly basis to assess any indications of impairment and if a provision for impairment should be recorded in the consolidated statement of income. Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty, and actual results may differ resulting in future changes to such provisions Critical judgements in applying accounting policies In the process of applying the Group s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements: Classification of investments Management decides on acquisition of an investment whether it should be classified as held to maturity, available for sale or investments at fair value through profit or loss. For those deemed to be held to maturity, the Group ensures that the requirements of IAS 39 are met and in particular when the Group has the intention and ability to hold these to maturity. The Group classifies investments as carried at fair value through profit or loss if the investment has been acquired principally for the purpose of selling it in the near term and its fair value can be reliably determined. All other investments are classified as available for sale. Impairment of investments The Group treats the investments as impaired when there has been a significant or prolonged decline in the fair value below its cost. The determination of what is significant or prolonged requires judgement. In addition, the Group also evaluates among other factors, normal volatility in the share price for quoted investments and the future cash flows and the discount factors for unquoted investments. 38

41 3. PLACEMENTS Placements included a blocked deposit with a local bank of Nil as at 31 December 2006 ( US$ 5,250,000) equivalent to Nil as at 31 December 2006 (2005-1,535,179). This deposit is placed as collateral against loans granted by the bank concerned to Kuwait Foreign Investment Co., a subsidiary. This deposit was released on 9 February 2006, as the subsidiary repaid the loan. 4. INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Kuwaiti shares 40,186,866 22,591,276 Gulf shares 7,244,252 9,198,969 Local funds 52,271,762 57,316,100 Foreign shares 41,855 8,177,833 Foreign funds 9,443,640 7,541, ,188, ,825, LOANS AND ADVANCES Loans and advances are stated net of provision for impairment. The composition of the loans and advances portfolio is as follows: International 29,077,319 27,272,858 Domestic 13,428,009 15,164,034 42,505,328 42,436,892 Less : Provision for impairment (19,953,873) (20,194,271) 22,551,455 22,242,621 Movement in provision for impairment during the year: Balance at beginning of the year Charge (recovery) for the year (Note 20) 20,194,271 20,777,733 Exchange differences 7,415 (219,038) Amounts ceded to Central Bank of Kuwait (Note 6) (132,565) (217,945) Balance at end of the year (115,248) (146,479) 19,953,873 20,194,271 The Group s policy for calculation of the provision for impairment for loans and advances complies in all material respects with the specific and general provision requirements of the Central Bank of Kuwait. In this regard, the Central Bank of Kuwait requires a general provision of 2% on all credit facilities not subject to specific provision. All loans are term loans granted to companies and financial institutions General provision 452, ,339 Specific provision Pre invasion 19,501,157 19,747,932 19,953,873 20,194,271 39

42 6. GOVERNMENT DEBT BONDS The Central Bank of Kuwait purchased resident Kuwaiti customers debts and resident debts of other Gulf Cooperation Council nationals existing as of 1 August 1990, in addition to related interest up to 31 December 1991, on behalf of the Government of Kuwait in accordance with Decree No. 32/92 and Law No.41/93, as amended, in respect of the financial and banking sector. These balances are related to a company acquired after 1 August 1990 and subsequently merged with the Parent Company. The purchase value of these debts was settled by the issue of bonds, with a value date of 31 December The bonds mature over a maximum period of twenty years from the value date. Interest is charged at a rate fixed semi-annually by the Central Bank of Kuwait, and is payable semi-annually in arrears; the average interest rate for 2006 was 4.08 % ( %) per annum. The Group has a contingent liability in respect of any adjustment that the Central Bank of Kuwait may make to the amount of the bonds, in respect of debts that do not fulfil the conditions of the law under which they were purchased. 7. AVAILABLE FOR SALE INVESTMENTS Quoted securities 29,777,889 28,010,764 Unquoted securities 100,204,282 74,352, ,982, ,363,345 It was not possible to reliably measure the fair value of certain unquoted securities amounting to 47,629,731 ( ,668,960), hence these investments are stated at cost. 8. INVESTMENT IN ASSOCIATE Kuwait National Real Estate Holding - 7,257,350 KIC Financial Brokerage K.S.C 1,908,800-1,908,800 7,257,350 The investment in Kuwait National Real Estate Holding previously, Kuwait National Real Estate Services (KSCC) was previously classified as investment in associate. Effective 1 January 2006, the Parent Company has ceased to exert significant influence over the operating and financial policies of the investee. Accordingly, effective from 1 January 2006, the investment has been reclassified as part investment at fair value through profit or loss and part as an available for sale investment. During the year, the Group invested in a % holding in KIC Brokerage Company K.S.C. for 7,304,450. This associate will be primarily engaged in operating a brokerage house in Kuwait Stock Exchange and is presented net of a deferred gain on sale of an intangible asset (note 28). The assets, liabilities, revenues, net profit and commitment and contingent liabilities of the associate as of and for the year ended 31 December were as follows: Assets 21,193,671 49,008,623 Liabilities 9,165 8,580,943 Revenues 541,136 8,420,711 Net profit 434,506 7,856,696 40

43 9. UNCONSOLIDATED SUBSIDIARIES Credit Des Bergues - 1,303,044 Kuwait Foreign Investment Co., Inc. 1,909,718 1,928,581 Kuwait Maritime Transport Co. 640,163 - Arab Financial Services Co. 2,100,000 - Kuwait Asia Holding Co ,000 Others 163,401 36,657 4,813,282 4,168,282 During the year, the Group received proceeds of 1,232,615 from the subsidiary Credit Des Bergues subsequent to its dissolution. A dissolution loss of 123,088 was recorded in the consolidated statement of income and is included in group share of results of unconsolidated subsidiaries and associate. During the year ended 31 December 2006, the Group ceased to exert control over Kuwait Asia Holding Co. due to nonparticipation in the issue of additional share capital by the subsidiary and this investment has been re-classified as an available for sale investment. Unconsolidated subsidiaries were not consolidated on the grounds that their assets, liabilities, and results are not material to the consolidated financial statements of the Group. 10. INVESTMENT PROPERTY Buildings on leased land Undeveloped land Total Cost At 1 January ,745, ,263 13,602,095 Additions 1,367 9,830 11,197 At 31 December ,747, ,093 13,613,292 Additions 13,075-13,075 Disposals - (297,435) (297,435) At 31 December ,760, ,658 13,328,932 Accumulated depreciation and provision At 1 January ,545, ,385 8,703,483 Charge for the year 569, ,396 At 31 December ,114, ,385 9,272,879 Charge for the year 569, ,594 Relating to disposals - (158,385) (158,385) At 31 December ,684,088-9,684,088 Carrying amount At 31 December ,076, ,658 3,644,844 At 31 December ,632, ,708 4,340,413 One of the Group s buildings is erected on land leased from the Government of Kuwait for 25 years, the lease of which expired on 1 April In accordance with Ministerial order No. 66 of 2001, relating to licences and contracts of buildings and premises constructed on land leased from the Government, the Group has accrued for rental expense due to the Ministry of Finance for land leased from the Government for which the Group has an agreement to renew the lease for 10 years ending on 31 March Under this agreement, the Group is liable to pay an annual rent of 304,504. The future minimum lease payments for the rent regarding the leased land are as follows: 41

44 10. INVESTMENT PROPERTY (CONTINUED) Up to one year 304, ,366 More than 1 year and up to 2 years (1 years and 3 months) 380, , , ,940 At 31 December 2006, the fair value of investment properties as per independent valuation is 4,399,079 (31 December ,957,556). The fair value of the Group s investment property at 31 December 2006 was arrived at on the basis of a valuation carried out at that date by independent valuers, that have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. 11. OTHER ASSETS Accounts receivable 2,301,526 5,267,151 Management fees receivable 4,805,112 3,254,068 Accrued interest 628, ,130 Others 2,066,668 2,402,746 9,801,989 11,432, ACCRUALS AND OTHER LIABILITIES Sundry creditors and accrued expenses 6,177,312 4,465,807 Employees benefits payable 1,584,943 3,226,873 Due to Gulf Energy, Qatar - 4,204,272 National Labour Support Tax payable 674,523 1,220,474 Provision for employees end of service indemnity 5,084,360 4,577,568 Provision for employees leave 681, ,336 Kuwait Foundation for the Advancement of Sciences payable 250, ,929 Others 287,025 1,573,466 14,740,491 20,449, SHARE CAPITAL Authorized, issued and fully paid- up share capital of 500,000,000 shares at a nominal value of 100 Kuwaiti Fils, each 50,000,000 50,000,000 The Parent Company has one class of ordinary share which carries no right to fixed income. 14. TREASURY SHARES Number of shares 5,780 5,780 Percentage of issued shares % % Cost () 1,675 1,675 Market value () 2,861 4,219 42

45 15. STATUTORY RESERVE In accordance with the Commercial Companies Law of 1960, as amended, 10% of profit for the year before provision for contribution to Kuwait Foundation for the Advancement of Sciences, National Labour Support Tax and Directors remuneration is transferred to statutory reserve. The Parent Company may resolve to discontinue such annual transfers when the reserve reaches 50% of the paid-up share capital. Distribution of the statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when retained earnings are not sufficient for the payment of dividend of that amount. 16. GENERAL RESERVE In accordance with the Parent Company s Articles of Association, 10% of net profit for the year before provision for contribution to Kuwait Foundation for the Advancement of Sciences, National Labour Support Tax and Directors remuneration is to be transferred to the general reserve. This transfer may be discontinued by a resolution adopted by the ordinary assembly of the shareholders as recommended by the Board of Directors. There are no restrictions on distributions from the general reserve. 17. INCOME FROM PROPERTY RENTAL AND MANAGEMENT SERVICES (NET) Revenue 3,796,625 3,755,461 Less: Costs (1,044,175) (1,051,182) 18. (LOSS)/GAIN FROM INVESTMENTS AT FAIR VALUE THROUGH 2,752,450 2,704,279 PROFIT OR LOSS Net realized gain from investments at fair value through profit or loss 6,221,462 26,854,249 Unrealized (loss)/gain from changes in fair value of investment at fair value through profit or loss (7,824,919) 14,001,530 (1,603,457) 40,855, GAIN ON SALE OF INVESTMENT PROPERTIES During the year ended 31 December 2006, the Group sold certain investment properties for 300,000 ( ,000) resulting in a gain of 160,950 ( ,945). 20. ALLOWANCE RELEASED FOR CREDIT LOSSES Loans and advances (7,415) 219,038 Other receivables 40, Non-cash facilities 107,778 (90,543) 140, , GENERAL, ADMINISTRATIVE AND OTHER EXPENSES General, administrative and other expenses for the year ended 31 December 2006 included employees costs of 5,325,078 (2005 6,848,695). 43

46 22. NATIONAL LABOUR SUPPORT TAX In accordance with the Ministry of Finance resolution No. 24 of 2006, the Group has calculated National Labour Support Tax at 2.5% of profit for the year after deducting the cash dividends from companies listed on the Kuwait Stock Exchange and without deducting the contribution to the Kuwait Foundation for the Advancement of Sciences, 10% transfer to statutory reserve and directors remuneration. 23. EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Earnings per share is computed by dividing net profit for the year by the weighted average number of shares outstanding during the year Net profit for the year attributable to equity holders of the Parent Company 26,816,417 53,086,588 Number of shares outstanding: Number of issued shares 500,000, ,000,000 Less : Weighted average number of treasury shares (5,780) (5,780) Weighted average number of shares outstanding 499,994, ,994,220 Earnings per share fils fils 24. CASH AND CASH EQUIVALENTS Cash- current and call accounts 3,301,379 5,028,307 Placements maturing within ninety days 44,943,788 35,779,679 Call and notice accounts and Customers deposits maturing within ninety days (120,196,907) (101,665,356) (71,951,740) (60,857,370) 25. PROPOSED CASH DIVIDEND Subsequent to the balance sheet date, the Board of Directors have proposed a cash dividend of 30 fils per share amounting to 14,999,827 after excluding treasury shares and 5% bonus shares for the year ended 31 December This proposal is subject to the approval of the shareholders annual general assembly. On 4 April 2006 a cash dividend of 60 fils per share amounting to 29,999,653 after excluding treasury shares was approved at the annual general meeting for the year ended 31 December At year end, any unpaid dividends are included under dividend payable. 26. SUBSIDIARY COMPANIES Details of significant subsidiary are set out below: Name Country of incorporation Percentage of ownership and voting power Shares Activities Shares Kuwait International Fair Company K.S.C.(Closed) Kuwait 51 % Property rental services Kuwait Foreign Investment Co., Inc. USA 100 % Property rental and management services KIC Fund Managers Cayman Islands 100 % Investment Management Services Kuwait Maritime Transport Co. Kuwait 52 % Maritime Transport Arab Financial Services Co. Kuwait 100 % Investment management Services Investments in unconsolidated subsidiaries are disclosed separately in Note 9. The total assets of the unconsolidated subsidiaries amounted to 5,846,994 at 31 December 2006 (2005: 4,854,326) and the total loss amounted to 60,294 for the year ended 31 December 2006.(2005: Profit- 1,411,125) 44

47 27. FIDUCIARY ASSETS The Group manages investment portfolios on behalf of a principal shareholder, government agencies and financial institutions. The total value of these portfolios at 31 December 2006 amounted to 2.36 billion (2005: 2.13 billion) which are not reflected in the consolidated financial statements. As an agent for its custody clients, the Group enters into contractual agreements with counterparties, usually brokers, whereby the brokers can borrow the custody clients securities for a specified period of time to enhance the return on clients securities. There is a risk of loss to the portfolios owners if the counterparties default. The portfolios have no recourse to the general assets of the Group. Further the Group has no recourse to the assets of the portfolios. 28. RELATED PARTY TRANSACTIONS Related parties are the Group s shareholders who have representation in the board of directors, members of the board of directors, senior management, associates and subsidiaries. In the normal course of business subject to the Group s management approval, there have been transactions with related parties during the year ended 31 December All the transactions are entered on an arm s length basis. Related party transactions and outstanding balances are as follows: Consolidated balance sheet: Group s shareholders Other assets - 204,918 Call and notice accounts 102, ,224 Customer s deposits 10,423,980 10,526,940 Transactions carried out with related parties during the year ended 31 December were as follows: Consolidated statement of income Group s shareholders Commission 337, ,306 Interest expense 596, ,975 Associates The Group s share from results of associate - 1,862,350 During the year, the Group sold its brokerage licence to its associate KIC Financial Brokerage Company K.S.C for 20,000,000. This sale resulted in a realized gain of 9,604,350 after eliminating the Group s share (35.97%) of 5,395,650 in the associate, which has been deferred and netted from investment in associate (Note 8). 29. COMPENSATION OF KEY MANAGEMENT PERSONNEL The compensation of key management personnel during the year was as follows: Salaries and other short-term benefits 407, ,829 Post-employment benefits 81,572 5, , ,251 45

48 30. FAIR VALUE OF FINANCIAL INSTRUMENTS In the opinion of management, except for Government debt bonds, the carrying values of all other financial instruments are not significantly different from their fair values. It is not practicable to determine the fair value of Government debt bonds with accuracy, as the future cash flows are not determinable. Information on the principal characteristics of these bonds is presented in Note 6 to the consolidated financial statements. 31. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT In the ordinary course of business, the Group uses financial instruments. The use of financial instruments also brings with it associated inherent risks. The Group recognizes the relationship between returns and risks associated with the use of financial instruments and the management of risks forms an integral part of the Group s strategic objectives. The strategy of the Group is to maintain a strong risk management culture and manage the risk/reward relationship within and across the Group s major risk-based lines of business. The following sections describe the several risks inherent in the business, their nature and how they are managed. Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. Concentrations of credit risk arise when a number of counter parties 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 of credit risk indicate the relative sensitivity of the Group s performance to developments affecting a particular industry or geographic location The Group seeks to manage its credit risk exposure through diversification of lending activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or business. The Group mitigates the credit risk by obtaining securities where appropriate. a) Geographical risk analysis The geographical concentration of assets and liabilities as at 31 December is summarized as follows: Assets Liabilities and equity Off balance sheet items G.C.C. 295, , , ,976 1,188 6,577 Other Middle East and Africa 3,771 1, Europe 26,489 16,363 20,297 3, North America 5,918 15, Asia 1,529 1, , , , ,833 1,188 6,577 Geographical risk analysis Commitments on behalf of customers for which there were corresponding liabilities by the customers concerned: Guarantees 000 1, ,577 46

49 b) Interest rate sensitivity risk Interest rate risk is the sensitivity of the Group s financial condition to future movements in interest rates. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities that mature or reprice in a given period. The Group can reduce this risk by matching the repricing of assets and liabilities through a number of ways. The Group s interest rate sensitivity gap, based on the contractual repricing or maturity dates, whichever dates are earlier is as follows: At 31 December 2006 Up to 1 month 1 3 months 3-12 months Non interest sensitive Effective interest rate Total % Assets Cash- current and call accounts ,301 3,301 - Placements 43,833 3, , Investments at fair value through profit or loss , ,188 - Loans and advances 2,152 19, , Government debt bonds Investments available for sale 2,899 4,989 2, , , Investment in associate ,909 1,909 - Unconsolidated subsidiaries ,813 4,813 - Investment properties ,645 3,645 - Other assets ,802 9,802 - Total assets 48,884 27,965 3, , ,420 - Up to 1 month 1 3 months 3-12 months Non interest sensitive Total Effective interest rate % Liabilities and equity Call and notice accounts Customers deposits 108, ,152 18, , Accrued interest payable ,274 1,274 - Dividend payable Accruals and other liabilities ,741 14,741 - Equity attributable to equity holders of the Parent , ,531 - Minority Interest ,117 3,117 - Total liabilities and equity 109,544 27,152 18, , ,420 - Interest rate sensitivity gap (60,660) 813 (15,009) 74,856 - Cumulative interest rate sensitivity gap (60,660) (59,847) (74,856)

50 At 31 December 2005 Assets Up to 1 month 1 3 months 3-12 months Non interest sensitive Effective interest rate Total % Cash - current and call accounts ,028 5,028 - Placements 25,778 13,495 3,975-43, Investments at fair value through profit or loss , ,825 - Loans and advances 2,961 16,044 2, , Government debt bonds Investments available for sale 4,391 6,004 2,026 89, , Investment in associate ,257 7,257 - Unconsolidated subsidiaries ,168 4,168 - Investment properties ,340 4,340 - Other assets ,432 11,432 - Total assets 33,130 35,543 9, , ,833 Liabilities and equity Up to 1 month 1-3 months 3-12 months Non interest sensitive Effective interest rate Total % Call and notice accounts 2, , Customers deposits 82,434 15,892 8, , Accrued interest payable Dividends payable Accruals and other liabilities ,449 20,449 - Equity attributable to equity , ,318 holders of the Parent - Minority interest ,568 2,568 - Total liabilities and equity 85,381 15,892 8, , ,833 Interest rate sensitivity gap (52,251) 19,651 1,197 31,403 - Cumulative interest rate sensitivity (52,251) (32,600) (31,403)

51 The effective interest rates for major currencies for the year ended 31 December are as follows: Great Britain Pounds Kuwaiti Dinars US Dollars Great Britain Pounds Kuwaiti Dinars US Dollars Assets % % % % % % Placements Loans and advances Investments available for sale Government debt bonds Liabilities Call and notice accounts Customers deposits c ) Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management have diversified funding sources and assets are managed with liquidity in mind, maintaining a healthy balance of cash, cash equivalents and readily marketable securities. The table below summarizes the maturity profile of the Group s assets and liabilities. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date and do not take account of the effective maturities as indicated by the Group s deposit retention history and the availability of liquid funds. The maturity profile is monitored by management to ensure adequate liquidity is maintained, The maturity profile of the assets and liabilities at year end are based on the contractual repayment arrangements. 49

52 Liquidity risk 1-3 months 3-12 months years Over 5 years Total 1-3 months 3-12 months 1-5 years Over 5 years Total Assets Cash - current and call accounts 3, ,301 5, ,028 Placements 47, ,444 39,273 3, ,248 Investments at fair value through profit or loss 109, , , ,825 Loans and advances 46 3,998 18, , ,528 12,855-22,243 Government debt bonds Investments available for sale 12,035-99,774 18, ,982 37, , ,364 Investment in associate ,909 1, ,257 7,257 Unconsolidated subsidiaries ,813 4, ,168 4,168 Investment properties ,076-3, ,632 4,340 Other assets 7, ,343-9,802 8,641 2, , ,838 5, ,333 26, , ,709 15,313 13,544 81, ,833 Liabilities and equity Call and notice accounts , ,947 Customers deposits 108,618 45, ,270 98,326 8, ,924 Accrued interest payable , Dividend payable Accruals and other liabilities 8, ,084 14,741 15, ,578 20,449 Equity attributable to equity holders of the Parent , , , ,318 Minority interest ,117 3, ,568 2, ,611 46, , , ,021 8, , ,833 50

53 d) Currency risk The Group views itself as a Kuwaiti entity with Kuwaiti Dinars as its functional currency. Hedging transactions are used to manage any significant risk in other currencies. The Group had the following significant net exposures denominated in foreign currencies at 31 December: Equivalent Long / (short) 2006 Equivalent Long / (short) Net assets (liabilities): US Dollars 11,046 (2,049) Euros (4,982) 344 Pounds Sterling Japanese Yen Others 1,999 3,139 e) Market risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, or its issuer, or factors affecting all securities traded in the market. The Group is exposed to market risk with respect to its investments. The Group limits market risk by maintaining a diversified portfolio and by continuous monitoring of developments in international equity and bond markets. In addition, the Group actively monitors the key factors that affect stock and bond market movements, including analysis of the operational and financial performance of investees. 51

54 32. SEGMENTAL INFORMATION The Group is organized into functional divisions to manage its various lines of business. The Group operates mainly in the State of Kuwait and, accordingly, does not have a secondary geographical segment. For the purposes of primary segment reporting, management has combined the Group s products and services into the following business segments: Investment Trading: Consists of securities trading and investment activities. Treasury: Consists of foreign exchange and money market activities. Asset Management: Consists of investment portfolio activities. Other Operations: Consists of lending, real estate, investment property, property rental and other management activities. There are no inter-segmental transactions. The following is the detail of the above segments, which constitutes the primary segment information: 2006 Investment Trading Treasury Asset Management Other Operations Total Investment Trading Treasury Asset Management Other Operations Total Income 23,952 2,704 11,876 5,834 44,366 51,762 2,092 9,843 5,641 69,338 Expenses (6,095) (1,156) (670) (4,616) (12,537) (5,954) (69) (607) (1,993) (8,623) Segment results 17,857 1,548 11,206 1,218 31,829 45,808 2,023 9,236 3,648 60,715 Other income Unallocated expenses (5,736) (7,706) Net profit for the year 26,816 53,087 Other information Segment assets 220,998 73,077-36, , ,087 67,780-35, ,067 Unallocated assets 2,432 5,766 Total assets 333, ,833 Segment liabilities - 156,470-5, , ,080-4, ,766 Unallocated liabilities 9,861 16,181 Total liabilities 171, ,947 Capital expenditure Depreciation of Property and equipment and amortization of intangible assets 1,050 1,022 Other non-cash expenses COMPARATIVE FIGURES Certain prior year figures have been reclassified to conform to the current year s presentation. 52

55 : ùcéa : JÉg - âjƒµdg IÉØ üdg 1005 :Ü. U P.O.Box: 1005 Safat, Kuwait - Tel.: Fax: