A member of AlBaraka Banking Group

Transcription

1 التقرير ال سنوي ع ضو جمموعة الربكة امل صرفية

2 Annual Report A member of AlBaraka Banking Group

3 بنك الربكة الإ سالمي - التقرير ال سنوي

4 Contents 2 Branches 3 Our Mission and Vision 4 Bank s Profile 5 Board of Directors 6 Board of Directors Report 11 Executive Management 12 Chief Executive Officer Report 19 Report of the Shari a Board Financial Table of Contents 20 Auditors Report 21 Balance Sheet 22 Statement of Income 23 Statement of Cash Flows 24 Statement of Changes in Equity 25 Statement of Changes in Restricted Investment Accounts 26 Statement of Sources and Uses of Charity Funds 27 Notes to the Financial Statements Design and Production: design:hub

5 HH Shaikh Khalifa bin Salman Al Khalifa Prime Minister HM King Hamad bin Isa Al Khalifa King of Bahrain HH Shaikh Salman bin Hamad Al Khalifa Crown Prince and Deputy Supreme Commander of the Bahrain Defence Force

6 Branches Head Office Kingdom of Bahrain P O Box 1882, Manama, Kingdom of Bahrain Tel: Fax: Tlx: 8220 BARAKA BN SWIFT: ABIBBHBM baraka@batelco.com.bh Mr. Mohamed Isa Al-Mutaweh CEO & Board Member 1) Commercial Branch Main Office Tel: Fax: ) Riffa Branch Branches Islamic Republic of Pakistan Regional Office PICIC House, 14 - shahrah-e-aiwan-e-tajarat P O Box 1686, Lahore 54000, Pakistan Tel: Fax: albaraka@albaraka.com.pk Mr. Shfaqaat Ahmed Country Head - Pakistan Branches Tel: Fax: ) Isa Town Branch Tel: Fax: ) Muharraq Branch Tel: Fax: AlBaraka Islamic Bank Annual Report

7 Vision and Mission OUR VISION To be a leading diversified International Islamic Bank, offering a wide range of quality products and services, and forming strategic alliances for competitive edge. OUR MISSION We strive to be a premier regional Islamic Bank, dedicated to the economic and social development of the markets, maximising our clients and shareholders value and focusing on the human resource development in an environment of creativity and innovation. 3 AlBaraka Islamic Bank Annual Report

8 Bank s Profile AlBaraka Islamic Bank Bahrain (AIB - Bahrain) established 1984 in Bahrain and up the years has pioneered the development of Islamic banking and finance. The Bank is registered with the Bahrain Ministry of Industry & Commerce CR no and is authorized by Central Bank of Bahrain (CBB) as Retail Bank, with an authorized capital of US$ 600 Million, of which US$ 122 Million has been issued and fully paid. AIB - Bahrain is one of the Banking Units of Albaraka Banking Group (ABG). ABG is a Bahraini Joint Stock Company listed on Bahrain and Dubai stock exchanges and one of the well-known leading international Islamic banks. It has been rated by Standard & Poor s as BBB- with a short-term rating of A-3. ABG offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Sharia a. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$ 1.5 billion. The Group has a wide geographical presence in the form of subsidiary banking Units in 12 countries, which in turn provide their services through more than 240 branches. These banking Units are Jordan Islamic Bank/ Jordan, Al Baraka Islamic Bank Bahrain, Al Baraka Islamic Bank/ Pakistan, Banque Al Baraka D Algerie/ Algeria, Al Baraka Bank Sudan/ Sudan, Al Baraka Bank Ltd/ South Africa, Al Baraka Bank Lebanon/Lebanon, Bank Et-Tamweel Al- Tunisi Al Saudi/ Tunisia, The Egyptian Saudi Finance Bank/Egypt, Al Baraka Turk Participation Bank/Turkey, Al Baraka Bank Syria (under establishment), and Representative office, Indonesia. AIB - Bahrain with a longstanding track record of delivering excellence, innovation and superior results, the Bank ranks among the leading providers of Islamic investment banking products and services to a growing global clientele, focused exclusively on the development and delivery of unique investment solutions of Sharia a compliant. Thanks to its ability to consistently deliver innovative, yet simple investment strategies grounded in the breadth and depth of its experience and resources, including a senior management team with a collective background in numerous areas of Islamic banking. The Bank recently has fully merged with Al Amin Bank, Bahrain (Al Amin), a sister company and member of ABG. Al Amin will continue serving its unique short term assets back securities Isdaraat Al Amin within the merged entity. Al Amin has to date managed over US$ 4 billion in funds on behalf of leading financial institutions and high net-worth customers seeking unmatched short term investment solutions that rend long-term financial benefits. AIB - Bahrain supported by the long tradition of strength and robust financial position of its parent company ABG, count on quality of investments, strength of performance and a sound financial position, the Bank have enjoyed a commendable market reputation as the leading short-term liquidity manager for institutional investors. The resources and capabilities available to the Bank guarantees its success in executing its firm strategies. 4 AlBaraka Islamic Bank Annual Report

9 Board of Directors Board of Directors Mahmoud Jameel Hassoubah Chairman (1) Adnan Ahmed Yousif Vice Chairrman (2) Abdul Latif Abdul Rahim Janahi Director (3) Moosa Abdulaziz Shehadah Director (4) Othman Ahmed Suliman Director (5) Abdul Hameed Mohideen Nazer Director (6) Ashraf Al Ghamrawi Director (7) Adel Saud Dehlawi Director Executive Committee Othman Ahmed Suliman Chairman Adnan Ahmed Yousif Member Abdul Latif Abdul Rahim Janahi Member Mohamed Isa Al Mutaweh Member (8) Audit Committee Moosa Abdulaziz Shehadah Chairman Abdul Hameed Mohideen Nazer Member Ashraf Al Ghamrawi Member The Shari a Board Shaikh Dr. Abdul Sattar Abu-Ghuda Chairman Shaikh Esam Mohammed Ishaq Member Shaikh Waleed Abdul Monem Al Mahmood Member AlSayed Mohammed Muhyeeldin Shari a Supervisor External Auditor s Ernst & Young (4) (6) (7) (8) (5) (3) (1) (2) 5 AlBaraka Islamic Bank Annual Report

10 Board of Directors Report Mahmoud Jameel Hassoubah Chairman Praise be to Allah, the God of all worlds and peace be upon our Prophet Mohamed and upon His Family and Companions. Dear Shareholders, I am pleased, for myself and on behalf of my brothers Members of the Board of Directors, to present to you this report about the activities of the Bank for the financial year ended 31 December. Year was the year of change in the history of Albaraka Islamic Bank following its acquisition of the sister company Al Amin Bank (Bahrain), which was wholly owned by the parent company Albaraka Banking Group BSC, to become a major Islamic banking institution that provides a comprehensive range of services with assets exceeding US$1 billion, shareholders equity of US$ million and authorized capital of US$600 million. The Bank now provides commercial and investment banking services and possesses all the factors of success and competitiveness in term of size, efficiency, expertise and range of services offered. We, therefore, see this merger as an important strategic decision that reflects the wise vision of the parent company, Albaraka Banking Group, and the major shareholders and in particular Shaikh Saleh Abdulla Kamel. The merger was followed by the appointment of Mr. Mohamed Isa Al Mutaweh as the Chief Executive of the Bank, which emphasizes the policy of Albaraka Banking Group and the Bank in enabling talented Bahrainis take up senior positions in the Group, supported by confidence in their ability to deliver excellent performance, especially that Mr. Al Mutaweh spent many years leading Al Amin Bank, has over 25 years of Banking experience and is fully knowledgeable of the Strategies of the Group which he helped to implement. Therefore, although we realise that and the foreseeable coming period is a transitional period for the full integration of the operations of the two banks as well as a period for reorganizing, restructuring and the building of the new Bank s departments and marketing, operating, human resources and technical systems, which may temporarily affect the operational results of the bank, we are looking forward with confidence to the promising future of the Bank, considering that we are now in a position that allows us to move forward with full thrust to achieving our mission and vision and to excel as a regional Islamic bank with a comprehensive range of competitive Sharia-compliant services and products, as well as serving our markets and communities in the best possible manner which will eventually achieve greater value for our shareholders, investors and all stakeholders. Dear Brothers, All international institutions including the International Monetary Fund expect a slowdown in the global economy during 2008, as it is expected to grow by 3.1% compared to 3.5 in. Year 2008 will be different from in that the slowdown in growth will hit the developed countries as well as the developing countries due to the tight monetary 6 AlBaraka Islamic Bank Annual Report

11 According to the General Council for the Islamic Banks and Financial Institutions, the assets of the Islamic banking industry in the GCC States grew by 40% in compared to 2005 which is a substantial growth and in, total assets amounted US$130 billion which confirms that growth is continuing and rapidly. The share of the Islamic financial institutions in Bahrain of these assets amounted to 13.3% in. Board of Directors Report continued policies adopted in a bid to arrest the increases in prices and local foreign exchange rates. As for the US economy, economic growth forecasts indicate that the US economy has entered a recessionary period where growth is not expected to exceed 1%, but this period will probably not continue for long. Growth forecasts also foresee that the economies in Japan and the Euro zone will be sluggish in the first half of 2008, mainly due to the harm afflicting the main banks as a result to the US sub-prime crises, compounded by another adverse factor in the case of Japan in the form of a slowdown in the housing market, despite of its totally independence from the US economy. The forecasts for the economies of the developing countries show that their performance will be varied. Latin America will witness a decrease in growth rates, especially in Argentina and Venezuela, while developing European countries such as the ex-soviet republics will witness an increase in growth rates. China will lead the slowdown in the growth rates of the developing countries as growth rate is expected to decrease from 11.5% in to 10.5% in 2008 due to tight monetary policies. On the other hand, the Indian economy is expected to stabilise while growth rates are expected to accelerate in Thailand, Philippines and Turkey. Oil and other raw materials forecasts foresee record high increases in the prices of oil during 2008, due to a very narrow margin between supply and demand. The global demand is expected to be 87.7 million barrels a day during 2008 compared to 85.8 million barrels in, and this will not leave any additional production capacity with OPEC countries, which in turn will create pressure on the global oil stockpile and increase oil prices towards the second half of As for direct investment flows, estimates for show that it increased by US$60 billions to US$681 billion and are expected to be US$670 billion in Investment will in the main remain directed to the private sector in developing countries and the majority is expected to be in the form of equity investments (US$323 billion) and private sector creditors, especially banks (US$347 billion). As for GCC countries, despite many unfavourable regional political developments in, they were able to maintain high economic growth rates because of the steady increase in global oil prices which continued to remain at high levels, as well as because of adopting public expenditure programs aimed at enhancing their economies capabilities, supporting the production base, encouraging the inflow of direct foreign investments and increasing savings by both the public and private sectors. A number of reports from the International Monetary Fund and the International Institute of Finance show an increase in the GDP of GCC countries to US$799.7 billion in and is expected to reach US$912.1 billion in The per capita income will increase to US$21.3 thousand during and to US$23.4 thousand in The real GDP growth rate in the GCC reached 5.2% in and is expected to reach 7.8% in The reports expect revenues to reach US$456.4 billion in 2008 compared to US$381.6 billion in. The reports show that revenues from GCC oil exports will increase to US$436 billion compared to US$381.2 billion in and they also indicate that the declared net foreign assets of the GCC States increased from US$176 billion in 2001 to about one trillion dollars in. However, as a common feature, the GCC States, especially in the second half of, suffered high levels of inflation due to the increase in prices. The report of International Finance Institute expects the rise in the average inflation in the Gulf to reach 7% in 2008 compared to 6.7% in and 5.3% in. The GCC States, in their endeavour to diversify their production base of, launched ambitious plans to upgrade their infrastructure and social services for the /2010 period with a value reaching up to US$700 billion. In the Kingdom of Bahrain, where the Albaraka Islamic Bank is based, the economy continued to enjoy robust growth in, as its GDP expanded by 7.0%. The non-oil sector maintained its rapid expansion with an overall 8% growth rate and is fast becoming an increasingly significant contributor to the economy, a healthy development as the government seeks to lower unemployment by promoting private-sector growth. The inflation rate rose to 3.6%, above its average of 1.6%, as a result of higher import costs and the falling US dollar, but the Kingdom continued to record healthy trade and current account surpluses despite the higher cost of imports. 7 AlBaraka Islamic Bank Annual Report

12 Board of Directors Report continued The Kingdom continued in to implement many ambitious reform programs such as the Economy Reform Program, Labour Market Reform Program as well as launching the Education and Training Reform and the new constructional plans, in addition to the concerted efforts to improve investment environment, especially by facilitating and reducing the cost of obtaining permits to do business in Bahrain and increasing the level of transparency in government tenders and government financial accounts. The banking sector under the guidance of the Central Bank of Bahrain continued to strengthen its legislative and regulatory structure after the Central Bank started implementing a new system for granting banking licenses, implementing the standards of the Basel II as well as the standards of corporate governance and anti- money laundering. As a result of these efforts and the substantial improvement in the economic and financial conditions the contribution of the financial sector to GDP is estimated to have risen to 25.5%. The consolidated balance sheet of the banking system (Commercial banks, offshore banking units, Islamic banks and investment banks numbering 400 institutions in total) amounted to US$245.8 billion as at the end of. The Kingdom is the base for 29 Islamic financial institutions that provide all Sharia-compliant banking products and services and also the home of the Accounting and Auditing Organization for Islamic Financial Institutions, Liquidity Management Centre the International Islamic Financial Market and the General Council for Islamic Banks and Financial Institutions. In Pakistan, where the Bank has a network of 18 branches located in the main cities and centres of the country, the economy performed well in with a Gross Domestic Product (GDP) growth rate of around 6.4% in fiscal year /, slightly higher than in 2005/ and the annual average 6.0% rate of The Pakistani economy remains one of the fastest growing economies in the Asian region. Despite a persistently large trade deficit - $9.7 billion in 2005/ and $8.2 billion in the second half of / exacerbated by high prices for imported oil, the current account deficit had improved to 1.3% of GDP in the period to September down from 6.1% of GDP for the / fiscal year. Strong food-price inflation drove the inflation rate up to 7.6%, above the State Bank of Pakistan s % target range, causing the SBP to maintain its tight monetary policy and increase interest rates. The relations between GCC States and Pakistan are destined to grow significantly in the coming period, which will reflect positively upon the Bank s business in Pakistan. In this regard year witnessed the first round of negotiations on an agreement to establish a free trade zone between the GCC States and Pakistan which resulted in an agreement on a general framework for the negotiations which included the general principles of the free trade agreement and the sectors that it covers such as trading in commodities and services. It also included a time frame for the negotiations, negotiations mechanism and lists of the goods that will be traded between the two sides. The second round of negotiations is expected to take place in Under the supervision of the State Bank of Pakistan, the banking system in Pakistan is growing fast. In Pakistan there are now 6 Islamic banks with 185 branches and 12 conventional commercial banks that provide Islamic banking services through its 103 branches. The total assets of these banks amount to PKR178 billion. However these assets represent only a fraction of no more than 4% of the total assets of the banking system in Pakistan, which reflects the enormous growth opportunities available to Islamic banks operating in the country. Dear Brothers, The Islamic banking industry continues to witness uninterrupted rapid growth, as it becomes widely accepted with flow of oil revenues and recycling of such revenues into various development projects. According to the General Council for the Islamic Banks and Financial Institutions, the assets of the Islamic banking industry in the GCC States grew by 40% in compared to 2005 which is a substantial growth and in, total assets amounted US$130 billion which confirms that growth is continuing and rapidly. The share of the Islamic financial institutions in Bahrain of these assets amounted to 13.3% in. 8 AlBaraka Islamic Bank Annual Report

13 Board of Directors Report continued At the global level, the assets of the Islamic banking industry reached US$405 billion taking into account Islamic financial institutions and banks only, and this figure increases to US$800 billion after adding Islamic windows in conventional banks, investment Funds and Islamic insurance. Growth in is estimated at 25%, which proves that Islamic financial institutions have become an important component of the international financial system as well as at the level of Arab and Islamic countries which witnessed substantial movement from conventional financial institutions to Islamic financial institutes. Islamic financial institutions are leaders in the banking industry and at the forefront as regard to contribution to the economic development. Islamic banks are required to enhance their capabilities to enable them respond to the competition and other challenges that they are facing and to maintain the momentum they achieved during the last thirty years. The primary elements of success for Islamic banks are enhanced financial resources, development of the specialized and qualified human resources and the proper utilization of technology. Furthermore, the economies of Islamic world countries are required to achieve certain tasks such as the diversification of income/revenue sources, attracting direct investment and providing job opportunities for their citizens. Here, the role of Islamic banks becomes more obvious in encouraging the establishment private equity based investment projects and funds that are directed to serve such goals. In other words, Islamic financial institutions are required to involved directly, in co-operation with major investors and high net worth individuals, in promoting economic and development projects in the region instead of concentrating on establishing funds that invest abroad even if these funds conform to Islamic principles. Islamic banks, like conventional Arab banks, stand today to face the challenges of the Basel II requirements in terms of enhancing their capital resources, improving their transparency and complying with international banking standards and regulations. The challenges also include diversifying the risks in the business environment, introducing modern technologies, increased competition as a result of the liberalization of the markets and dealing with all such matters in accordance with the framework of Islamic banking principles. Dear Shareholders, Although subject to competitive pressures in Bahrain and Pakistan, Albaraka Islamic Bank was able to expand its levels of services and finance portfolios during. Slight growth in the Bank s Murabaha portfolio was made up for by a big 30% expansion in its Ijarah Muntahia Bittamleek portfolio and a rise of 29.6% in its investments, which in turn contributed to an overall 5.7% growth in total assets, to $1.05 billion as at the end of, up from s combined total assets for the two banks of $991 million. This growth was funded by current and other deposit accounts which grew by 11.8% to $94 million, together with unrestricted investment accounts which rose by 4.8% to $738 million. On the other hand, shareholders equity increased to $ as at the end of (compared to $ million as at the end of ), which provides the Bank with a strong capital base as reflected by the capital adequacy ratio (Basel 1) which reached 30.74% as at the end of (33.79% as at the end of ). Although modest, this expansion in assets produced a much-improved total income from jointly accounts and investments of $58.65 million, an increase of 29.9% over the previous year. After deducting the investors share of income and adding the revenues from banking services and other operating revenues the total operating income of the Bank amounted to $28.26 million, compared to $18.62 the previous year, an increase of 51.8%. Administrative expenses rose by 20.94% to $21.64 million, reflecting mainly the costs of branch network expansion, producing a net operating income of $6.86 million compared to $1.04 million for and, after setting aside provisions and accrued taxation, the Bank achieved a net profit of $4.15 million as against a loss of $3.20 million in. In surmising the activity of, we can say that the Bank s increasing profitability and growing opportunities in its markets has prompted Albaraka Islamic Bank to implement an ambitious plan for network expansion. Accordingly, year 2008 will see a number of new branches opened which are intended to provide a platform for consumer services 9 AlBaraka Islamic Bank Annual Report

14 Board of Directors Report continued expansion. The bank is also in the process of acquiring new Equation core banking software from Misys as well as building its electronic delivery capabilities. It is also on track to meet Central Bank of Bahrain guidelines and instructions on Basel II implementation by the end of 2008 in addition to implementing a number of other risk management and corporate governance initiatives. Back to what we said at the beginning of this message, we consider 2008 as a year for consolidating and integrating the efforts and resources of the two merged banks, Albaraka Islamic Bank and Al Amin Bank, into one strong institution in accordance with a strategic plan based on capitalizing upon the immense resources and expertise in offering a comprehensive range of banking services to individuals, corporations and governments, as well as investment banking and treasury products designed to benefit from the continuing and growing strength of the regional economies and the opportunities available to the Islamic banking sector, which are expected to continue to grow supported by high oil prices and important developments in the regulatory environment that regulates the financial products and services. of Bahrain a successful and inspiring Islamic banking centre. My thanks also go to the Ministry of Industry and commerce and the Central Bank of Bahrain for the support they extend to all our programmes and activities and their guidance to promote such programmes and activities in accordance with Islamic banking standards. We also extend our thanks and gratitude to the Bank s Sharia Supervisory Board for its support and valuable guidance and to our loyal customers and investors to whose support and confidence we owe our success, and also to all of our management and staff whose hard work and dedication was the main reason behind the successes that we achieved. We also must thank our ex-general manager Mr. Salah Ahmed Zainalabedin for his major contributions during his service with the Bank, and wish the Bank s Chief Executive Mr. Mohamed Isa Al Mutaweh every success in his new role. Peace be upon you. Mahmoud Jameel Hassoubah Chairman It is my honour to conclude my message by expressing my sincere thanks and gratitude to His Majesty King Hamad Bin Isa Al Khalifa, King of the Kingdom of Bahrain, His Highness Shaikh Khalifa Bin Salman Al Khalifa, Prime Minister, H.H. Shaikh Salman Bin Hamad Al Khalifa, Crown Prince and Commander in chief of the Bahrain Defence Force for their wise guidance which made the Kingdom 10 AlBaraka Islamic Bank Annual Report

15 Executive Management 1) Mr. Mohamed Isa Al Mutaweh Chief Executive Officer & Board Member (April 2008) ) Mr. Yousuf Ahmed Ali Al Hammadi Deputy General Manager for Commercial Branches 3) Mr. Tariq Mahmood Kazim Deputy General Manager Support Services and Foreign Branches (Pakistan) ) Mr. Shafqaat Ahmed Regional General Manager, Pakistan 5) Mr. Moosa Adulatif Mohammed Assistant General Manager Operations 6) Mr. Abdul Aziz Abdul Wahab Al Gosaibi Assistant General Manager International Banking Relations ) Mr. Abdul Aziz Al Abbasi Assistant General Manager Commercial Branches 8) Mr. Nadeem Khan Chief Financial Officer 9) Mr. Fouad El Ouzani Senior Manager, Head of Credit ) Dr. Mohammed Hassan Abdul Majeed Manager, Jeddah follow-up office 11) Mr. Abdul Mahdi Nayem Manager Internal Auditing 11 AlBaraka Islamic Bank Annual Report

16 Chief Executive Officers Report Mr. Mohamed Isa Al-Mutaweh CEO & Board Member In the Name of Allah, the Most Compassionate, the Most Merciful. All praises be to Almight Allah and blessings to the Messenger of Allah, Muhammad (peace be upon him). Year was the year of an important change in the history of Albaraka Islamic Bank as it acquired 100% assets of the sister company Al Amin Bank B.S.C.(e) (Bahrain), which was wholly owned by the parent company Albaraka Banking Group BSC. The acquisition process was completed in September following obtaining the approval of the regulatory authorities in the Kingdom of Bahrain. Since Al Amin Bank was wholly owned by the same parent company, Albaraka Islamic Bank adopted the pooling of interests accounting method in recording the acquisition transaction in its books. Al Amin Bank started its operations in 1987 as Al Amin Company for Securities and Investment Funds BSC(e) and was converted in May 2001 to an Islamic Investment Bank pursuant to a license granted to it by the Central Bank of Bahrain. It is expected that the merger between the two banks will create a major Islamic banking institution that provides a comprehensive range of commercial and investment banking services and possesses all the factors of success and competitiveness in term of size, efficiency, expertise and range of services offered services with an authorized capital of US$600 million. The strategy of merging the two banks was based on the wise long-term vision of the parent company, Albaraka Banking Group, and the key owners of transforming the Bank to a leading Islamic commercial investment institution with a strong capital base that can provide comprehensive services, maximize the benefits from the strong points that the two banks possess and consolidate their financial, technical and human resources and capabilities within unified business strategies. Since the first day after completing the merger between the two banks in September, we continued our concerted efforts to reorganize and integrate the structure and systems of the new Bank and enhance its financial, technical and human resources and capabilities and to improve the work and operating environment in order to enable it implement the new business strategies. No doubt, the affiliation of the Bank to Albaraka Banking Group (which itself is going through a phase of an intensive process of unifying and integrating the business activities of its subsidiary banks within unified business strategies with a view to maximizing the benefits from its geographical presence which is the widest amongst Islamic banks) contributes significantly towards realising such strategies and provides us with sound and solid ambitions and goals, diversity and high quality services and products. Therefore and though such tasks and measures took and will continue to take a major part of our time and efforts in the coming period, our attention will remain focused on achieving excellent results in 2008, benefiting to the fullest extent from the favourable economic conditions prevailing in the region as a result of expected continuing high levels of oil prices, major developments in the regulatory environment which regulate the financial products 12 AlBaraka Islamic Bank Annual Report

17 Year was the year of change in the history of Albaraka Islamic Bank following its acquisition of the sister company Al Amin Bank (Bahrain), which was wholly owned by the parent company Albaraka Banking Group BSC, to become a major Islamic banking institution that provides a comprehensive range of services with assets exceeding US$1 billion, shareholders equity of US$ million and authorized capital of US$600 million. Chief Executive Officers Report continued and services, growth in private sector activities and financial markets of the region, increasing demand on financing transactions in addition to the everincreasing issue of Islamic sukuks designed to finance development projects and investments. Income Statement Albaraka Islamic Bank achieved a net income of $4.15 million in compared to a loss of $3.20 million in. This noticeable improvement reflects the intensive efforts of the Bank s management in improving and diversifying the sources of income and in curtailing expenses despite of the hard work involved in the process of merging the two banks. As for the key sources of income, income from joint investments increased by 29.9% from $45.15 million in to $58.65 million in. This income includes sales income from joint finance which increased by 40.5% from $31.13 million in to $43.74 million in, income from other finance and investment which increased by 6.4% from $14.01 million in to $14.91 million in including in particular the income from Ijara Muntahia Bittamleek of $6.92 million ($4.97 million in ), income from investments of $4.92 million ($1.78 million in ), income from Mudaraba of $2.46 million ($6.55 million in ), income from Musharaka of $1.49 million ($167 thousand in ) and income from transaction structuring fees of $1.0 million (none in ). These figures clearly show improvements in almost all key sources of income. In line with the growth in total income from joint finance transactions, the return on unrestricted account increased by 20.8% from $34.14 million in to $41.25 million in, which represents the gross return on unrestricted investment accounts of $47.76 million in ($38.38 million in ) less the Bank s share as a Mudarib of $6.52 million in ($4.24 million in ). After deducting the investors share in the returns, the Bank s total income (both as a Mudarib and capital provider) amounted to $17.41 million in compared to $11.01 million in, reflecting an increase of 58.1%. Other incomes also showed noticeable improvements as the Bank s income from Bank murabaha sales increased by 17.3% from $612 thousand in to $718 thousand in, income from other Bank finance and investments by 273% from $769 thousand in to $2.87 million in, income from banking services by 11.3% from $4.09 million in to $4.55 million in, including principally fees and commissions of $2.27 million, letters of credit commissions of $871 thousand, acceptances commissions of $527 thousand and letters of guarantee commission of $475 thousand. Other earnings also increased, including mainly gains on foreign exchange, by 45.9% from $1.61 million in to $2.35 million in. Because of expenses arising from the merger of the two banks and the opening of new branches for Albaraka Islamic Bank in Bahrain and Pakistan, total expenses increased by 21.7% from $17.58 million in to $21.40 million in, including mainly operating and staff expenses which increased by 19.4% from $15.00 million in to $17.92 million in. After deducting all these expenses, the net income before tax and provisions amounted to $6.86 million in, an enormous increase of 560% over the net income in amounting to $1.04 million. Provisions for doubtful debts dropped from $3.81 million in to $1.57 million in, while taxes, which comprise Pakistan s Bank operations taxes, increased from $434 thousand in to $1.14 million in. Consequently, the net result of operations changed from a loss of $3.20 million in to a profit of $4.15 million in. Therefore it can be seen that the noticeable improvement in the Bank s results in was the result of a number of factors the most important of which were the increase in income from the key finance products, improvement in fee and commission income and the restructuring of operations as well as concentrating on the quality of assets which reduced the need for making provisions for bad and doubtful debts in in comparison with whose results were adversely affected by the large provisions made by the Bank during that year. 13 AlBaraka Islamic Bank Annual Report

18 Financial Position of the Bank The Bank s total assets after the merger- amounted to $1.05 billion as at the end of, representing an increase of 5.7% over the comparative figures of the total assets of the two merged banks as at the end of which amounted to $ million. In spite of this small increase in total assets, the income generating assets such as Ijara Muntahia Bittamleek, Musharaka and investments witnessed noticeable growths which helped improve the Bank s earnings. Income Generating Assets The Murabaha sale receivables, which continued to represent the main part of the income generating assets, increased slightly by 0.7% from $ million in to $ million in. These financing transactions represent murabaha finance agreements with financial institutions and corporate clients, mainly in syndicate transactions. Bank s Operations Investments increased in by 29.6% to reach $162.3 million compared to $ million in. The investment portfolio comprises investments held till maturity in an amount of $60.36 million in ($27.57 million in ), comprising Salam Sukuks, Ijarah and investments held for resale in an amount of $97.12 million comprising investment funds, private equity funds, real estate and others, as well as trading investments in an amount of $1.40 million in ($1.59 million in ). In November, the Bank launched the Shariacompliant Kotak Fund Ltd for public subscription. The Fund is registered in Mauritius Island and managed by Kotak Mahandra Ltd (U.K.) which is a branch of Kotak Mahandra Bank Ltd with total assets under its management of more than US$5.2 billion. The Islamic Indian Equity Kotak Fund comprises class A rated shares under the umbrella of the Sharia-compliant Kotak Fund Ltd, which is an open fund that allows investors to redeem their units on any working day. The Fund will invest in companies listed on the Indian stock exchange in accordance with the Sharia principles and the conditions set by the Fund s Sharia Supervisory Board. The object behind launching this Fund is to give investors from the Gulf the opportunity to invest in one of the strongest financial markets in Asia and gain real benefits from the Indian economy. In spite of the decline in the Indian markets, the Fund performed better than the Indian Sensex index and it is expected to improve further to achieve rewarding returns especially that the international capital markets are improving gradually in view of the drop in interest rates globally which reduces the operating costs of companies and improves the performance of indices. Furthermore, the Global Equity Fund, which was launched by the Bank in 2002, continued its excellent performance in. In spite of the deterioration witnessed by international financial markets as a result of the sub-prime mortgage crises, the Fund achieved attractive returns in of 18.62%, outperforming the Islamic Dow Jones Index which registered 17.10%. The Global Equity Fund achieved an accumulative return of 78.7% over the last five year, i.e. with an annual average of 15.74% in every year. The income generating assets also include Mudaraba finance transactions which dropped by 47.3% from $67.89 million in to $35.76 million in and which are usually conducted with banks and financial institutions. They also include Ijara Muntahia Bittamleek which increased by 30.0% from $56.07 million in to $72.91 million in. Also, Musharaka finance has increased by 42.4% from $13.67 million in to $19.47 million in. Real estate investments, in turn, witnessed a significant increase from $1.08 million in to $5.40 million in. This last increase is an indication of the Bank s efforts in benefiting from the rapid growth in this sector. During, the Bank acquired real estate investments worth of $6.21 million and sold properties worth of $1.83 million. Geographic and Sector Distribution In reflection of the Bank s growing role in the Gulf and the Middle East and North Africa, the majority of the Bank s assets (60%) are concentrated in these regions while 35.1% of its assets are located in Asia and the remaining percentage in Europe and other regions. On the other hand, 48.4% of the 14 AlBaraka Islamic Bank Annual Report

19 Chief Executive Officers Report continued assets are in the form of transactions with banks and financial institutions, 29.5% in trading and production activities and 12.6% in construction and contracting. Liquidity Management The Bank keeps a portion of its assets in liquid form, which reflects its strong liquid position as a commercial bank on one part and to enables it capitalise upon good opportunities arising in the markets of the regions as an investment bank on the other. Liquid assets amounted to $ million in in comparison with $ million in, representing 19.6% of deposits and unrestricted investment accounts in (19.8% in ). The distribution of assets maturity wise shows that 66.3% of total assets have tenors of less than one year, compared to 70.2% on the liabilities and equity side, which reflects the strong liquidity position of the Bank and the matching of the income generating assets with the sources of funding in terms of maturity. Liabilities and Customer Investments On the liability side, the unrestricted investment accounts, deposits from financial institutions and customer current accounts are the main funding source for the Bank s operations. Unrestricted investment accounts increased during by 4.8% to $ million compared to $ million in, and they fund 70.6% of the total assets and reflect the strong customer base of the Bank. Such growth in the customer base was the result of increased deposits from retail and corporate customers. The Bank relies primarily on customer deposits to finance the growth in assets while it resorts to borrowing from other financial institutions for the other needs of the Bank. During, deposits from other financial institutions dropped by 35.1% to $33.31 million compared to $51.29 million in. Current accounts increased by 85.3% to $60.68 million in up from $32.75 million in. The Bank opened a new branch in Isa Town in late and another in Muharraq in September making a total of four commercial branches in the Kingdom of Bahrain. We are looking into embarking upon an ambitious plan in this regard to cover all main cities and centres in the Kingdom. Capital Adequacy Shareholders equity amounted to $ in compared to $ million in, reflecting an increase of 2.1%. This provides the Bank with a strong capital base that enables it expand its businesses in future, as reflected by the capital adequacy ratio (Basel 1) which reached 30.74% as at the end of (33.79% as at the end of ). Restricted Investment Accounts During, the restricted investment accounts amounted to $ compared to $ million in, reflecting a drop of 22.8%. These accounts are invested primarily in international commodities and investment funds. Bank s Operations in Pakistan The Bank s operations in Pakistan witnessed a noticeable growth in, accompanied by concerted efforts to consolidate such operations which resulted in achieving significant expansion in terms of revenues, operations and branch network. As a result, total assets increased by 16% to $354 million and net profit before tax by 73% to $5.3 million. The Bank succeeded in achieving all the targets set for. The financing operations of the Bank witnessed an increase in the number and diversity of its consumer finance products leading to an increase in financing to reach $207 million as at the end of, reflecting an increase of 29%. The Bank concentrated primarily on financing foreign trade which increased in volume to US$462 million in, in accordance with a plan designed to encourage exports which is being implemented in co-operation with the State Bank of Pakistan. There were also some rewarding investments in sukuks which helped diversify the side of the incomegenerating assets. In line with this growth, the Bank was able to attract increased customer deposits which increased by 22% to US$280 million as at the end of. The Bank opened six new branches during to make 18 the total number of branches located in 15 AlBaraka Islamic Bank Annual Report

20 main cities and centres. The new branches were opened in Peshawar, the capital of the border region; Multan, a key commercial centre close to Punjab, Sind and Gugranwala which is an export centre. Existing branch network in main cities like Lahore and Karachi was strengthen by opening more branches. The Bank intends to launch many new products and services in 2008 to expand its consumer finance services as well as current Ijarah and Muraraba in commodities to meet the needs of wide segments of businesses. Furthermore, the Bank intends to open 12 more new branches as part of its strategic plan to enhance its competitiveness. The operations of Albaraka Islamic Bank in Pakistan command high respect and recognition at the international level as reflected by the rating that JCR VIS, an affiliate of the leading international rating agency JCR Japan, gave to Albaraka Islamic Bank, Pakistan, namely A-1 for short term commitments, A for long term commitments with a Stable outlook. Furthermore, the Bank is well known in Pakistan for its leading social role and for its generous support to different charity projects and organizations in the field of healthcare and education in addition to its intention to establish an academy in Lahore to provide training on Islamic banking. The results achieved by the Bank s operations in Pakistan were the result of close co-operation and coordination between the Bank s management in Pakistan and the Head Office in Bahrain on one part and between Albaraka Bank, Bahrain and the parent company Albaraka Banking Group on the other. These results were a testimony to the hard work of the Bank s management in Pakistan and its success in implementing the strategies of the Group. Credit Rating In August, Capital Intelligence which is a leading international rating agency kept the Bank s rating consistent at BB+. The rating is based on the good quality of the Bank s assets, its sound capital base and the strong support from the parent company, Albaraka Banking Group. Human Resources and Training The total number of the Bank s employees is 414. The Bank continued in to create an effective work environment and promote the values of teamwork, with the setting of satisfying customers needs as a key goal for all employees. The Bank also continued its efforts in filling vacant senior positions and improving the performance of the staff. Some 96 Bank employees had participated in specialized training courses inside and outside Bahrain, especially in the areas of anti-money laundering and investment banking. Last year also witnessed wide ranging promotions amongst Bank staff with a view to enabling them take up senior positions in the Bank and give them an incentive to be more productive and loyal to the Bank. Training courses are key factors in having efficient human resources and qualified teams. For this reason, the Bank allocates a training budget that covers all the projected expenses of the training programs during the financial year. The senior management of the Bank places high importance to training as one of the most effective means of developing the skills and abilities of human resources, who are the main assets in the operating and production process. Training employees and developing their skills will enable them keep abreast with the development in the science and technologies used in the banking industry, which keeps evolving in line with modern advances globally. Accordingly, the Bank drew up a training plan for the years and 2008, with a view to achieving the goals of the senior management aimed at creating a work environment based on modern scientific advances in banking, utilizing in this regard training programs offered by the Bahrain Institute for Banking and Finance (BIBF) and programs prepared by IIR Holding Co (International Institute of Research). A number of Bank employees participated in a number of training courses locally and abroad in addition to nine employees who applied for the Advanced Islamic Banking Diploma Program (AIBDP). Information Technology Because of continuing advancement in Information Technology (IT), Albaraka Islamic Bank is always keen to attend IT shows and conferences in order to be one of the first banks that adopt the new systems 16 AlBaraka Islamic Bank Annual Report

21 The Bank intends to launch many new products and services in 2008 to expand its consumer finance services as well as current Ijarah and Muraraba to meet the needs of wide segments of businesses. Furthermore, the Bank intends to open 8 more new branches IN THE coming few years as part of its strategic plan to enhance its competitiveness. Chief Executive Officers Report continued and technologies in their operations to create an advanced technological infrastructure. From this standpoint, Albaraka Islamic Bank upgraded and modernized the infrastructure of its computer network and increased its capacity using high speed data transfer technologies, which reflected positively upon the time and effort expended by Bank employees. The projects implemented during the year in the area of IT included providing blackberry services, modernizing the ATM machines and installing BWAD system for the training of employees and providing a link to the Benefit Network for ATM services as well as introducing and upgrading many office systems, electronic banking services, communications and data storage etc. Basel II Requirements The Bank is currently implementing the instructions of the Central Bank of Bahrain in connection with the preparation of periodic reports concerning capital adequacy ratio in accordance with the requirements of Basel II. During, senior managers were sent to attend conferences and courses dealing with Basel II standards. In addition to enhancing the Risk Management Department and the appointment of a new manager and specialized employees. Corporate Governance The Board of Directors has full responsibility for implementing the internationally recognized principles of good corporate governance. It is accountable before the owners and shareholders of the Bank. The principles of good corporate governance mean commitment, balanced control and transparency in addition to creating added value for the shareholders and investors. The Board of Directors of the Bank also fully understands the Bank s corporate legal requirements and internal practices. It is committed to adopting the industry s best practices and to working towards improving such practices in line with the needs arising from time to time. In line with its desire in adopting the industry s best practice, the Board of Directors continues to conduct, in cooperation with the parent company, a comprehensive review of all the principles and standards of corporate governance and the establishment of integrated industry practices in line with the organisational frameworks of banks and financial institutions corporate governance. The Bank s current Board of Directors comprises ten directors, nine of whom, including the Chairman of the Board, do not hold executive positions within the Bank and a number of them are independent members. The Board of Directors is committed to achieving strong financial performance and longterm added value to the owners and shareholders of the Bank. To achieve this goal, the Board of Directors is authorised to approve and monitor the Bank s strategy and its financial performance within the framework of an effective risk management. The Chairman presides over the Board of Directors to ensure its effectiveness and the proper supervision of the performance of the Chief Executive Officer. The Chairman must also ensure keeping open appropriate channels of communication with the shareholders. The function of the internal audit is linked directly to the Audit Committee of the Board of Directors of the Bank. Risk Management Risks are an inherent part of the banking business. An effective risk management is an essential requirement for the creation of real value to the shareholders. Risk management is an integral part of the decision making process in the Bank s business activities. The main factor in the philosophy of risk management that the Bank adopts is that the risk management function must carry out independent monitoring of the Bank s business and at the same time operate closely in a coordinated manner with the other functions in the Bank that are exposed to risks. The Bank s Board of Directors is responsible for establishing the policies and procedures related to risk management in general. It approves and reviews periodically the policies and strategies related to the Bank s risk management. The functions of risk management and internal audit operate jointly and independently to ensure the evaluation and 17 AlBaraka Islamic Bank Annual Report

22 Chief Executive Officers Report continued management of risks in accordance with the preset policies and guidelines. Furthermore, the Bank is in the process of preparing a new risk manual during 2008 that conforms to the requirements of the risk manual of the parent company Albaraka Banking Group. The Bank will also recruit more managers who are specialized in the management of credit and operating and market risks. The Bank continues to train its employees on implementing anti-money laundering systems, policies and procedures. In this regard, thirteen Bank employees attended training courses in the Kingdom of Bahrain in and the Bank intends to appoint managers who are specialized in this field during. The key risks that the Bank is exposed to are currency risks, credit and investment risks, liquidity risks, operational risks, asset concentration risks, profit risks and regulatory risks. The decision making process in the Bank always seeks to manage such risks in an effective manner. The Notes attached to the Bank s audited financial statements give details of the risks to which the Bank is exposed and how to evaluate such risks and the measures taken to address them. Money Laundering The Central Bank of Bahrain issued a comprehensive set of legislation in connection with anti-money laundering, which stipulates that a Bank should establish appropriate control systems and procedures to comply with the requirements of the legislation. The Bank is progressing very well in the establishment of such control systems and procedures and it did not register during any suspicious transactions. The Bank put in place a comprehensive policy and procedures manual for anti-money laundering, which is in the process of being approved by the Bank s Board of Directors. 18 AlBaraka Islamic Bank Annual Report

23 Report of the Sharia a Board The Shari a Board Shaikh Dr. Abdul Sattar Abu-Guddah Chairman Shaikh Esam Mohammed Ishaq Member Shaikh Waleed Abdul Monem Al Mahmood Member AlSayed Mohammed Muhyeeldin Shari a Supervisor To the Shareholders of Albaraka Islamic Bank Assalamu Alaikum Warahmatullah Wabarakatuh We have reviewed the principles and procedures applied by Albaraka Islamic Bank B.S.C. (E.C.) (the Bank) and the contracts related to transactions entered into during the year ended 31 December. We have performed the necessary review to enable us express an opinion as to whether or not the bank complied with Islamic Shari a rules and principles as well as with the religious opinions and specific resolutions and guidelines which were issued by us. The Bank s management is responsible for ensuring that the Bank operates and conducts its business in accordance with Islamic Shari a rules and principles. Our responsibility is limited to expressing an independent opinion based on our review of the Bank s operations and preparing a report to you. Our review included the examination of documentation and procedures applied by the bank on the basis of testing each type of operation. We have planned and performed our review so as to obtain all information and explanations considered necessary by us for the purpose of providing us with sufficient evidence to provide reasonable assurance that the bank has not violated Islamic Shari a rules and principles. In our opinion 1. The contracts, operations and transactions entered into by the Bank during and up to the end of year, which we have examined, were all made in compliance with Islamic Shari a rules and principles. 2. The Bank s management has complied with setting aside all the unintended earnings realized from sources or by means prohibited by Islamic Shari a rules and principles and disposed of them to charitable causes. 3. The allocation of profits and charging of losses to investment accounts conform to the basis that have been approved by us in accordance with Islamic Shari a rules and principles. 4. The Bank s management is not authorized to pay Zakah on behalf of the shareholders. Shareholders are responsible for paying Zakah in accordance with the calculation of the Zakah which was approved by the Shari a Supervisory Board, according to which Zakah shall be (fils 709) per share. We invoke Allah Almighty to guide us to the righteous path. Wassalamu Alaikum Warahmatullah Wabarakatuh Bahrain, AlBaraka Islamic Bank Annual Report