Member of Al Baraka Banking Group. Annual Report 2006

Transcription

1 Member of Al Baraka Banking Group Annual Report 2006

2 H.H. Shaikh Khalifa Bin Salman Al Khalifa The Prime Minister H.M. King Hamad Bin Isa Al Khalifa King of the Kingdom of Bahrain H.H. Shaikh Salman Bin Hamad Al Khalifa The Crown Prince and Commander-In- Chief of the Bahrain Defence Force 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. Contents 3 Vision & Mission Bank Profile Branches Financial Highlights Board of Directors Board of Directors Report Executive Management Business Review Report of the Sharia s Board Financial Statements Our Mission We strive to be a premier regional Islamic Bank, dedicated to the economic and social development of the markets, maximizing our clients and shareholders value, and focusing on the human resource development in an environment of creativity and innovation.

3 Bank s Profile Branches For over 20 years, AlBaraka Islamic Bank has pioneered the development of Islamic banking and finance. Head Office Kingdom of Bahrain P.O. Box 1882, Manama, Kingdom of Bahrain Established in 1984, the Bank has developed into a leading diversified Islamic financial institution. Today, our operations cover Bahrain, the GCC and Pakistan, Tel: (+973) Fax: (+973) Tlx: 8220 BARAKA BN where we provide a wide range of services for a large base of customers who aspire to conduct their financial affairs in accordance with Islamic Sharia a. SWIFT: ABIBBHBM baraka@batelco.com.bh 4 Headquartered in the Kingdom of Bahrain, the Bank operates under a retail banking licence, and is regulated by the Central Bank of Bahrain. Mr. Salah Ahmed Zainalabedin General Manager 5 The Bank is a proud member of AlBaraka Banking Group (ABG), which holds the interests of a number of Islamic financial institutions incorporated in Algeria, Bahrain, Egypt, Jordan, Lebanon, South Commercial Branch Head Office Tel: (+973) Fax: (+973) Africa, Sudan, Tunisia and Turkey. Riffa Branch Tel: (+973) These institutions are subsidiaries of Dallah AlBaraka Group (DBG), which was founded in 1969 and has Fax: (+973) grown to become one of the largest diversified business groups in Saudi Arabia and the region. DBG has interests in over 300 companies across 44 countries, with total assets exceeding US$7 billion, Isa Town Branch Tel: (+973) Fax: (+973) mainly in the business and financial sectors. Capital The authorized capital amounts to USD200,000,000. The issued and paid up capital amounts to USD Branches Islamic Republic of Pakistan 50,000,000 divided into 500,000 shares. The value of each share is USD100. Regional Office PICIC House, 14-shahrah-e-Aiwan-e-Tajarat P.O. Box 1686, Lahore 54000, Pakistan Tel: (+92 42) A pioneering Islamic Financial Institution Fax: (+92 42) albaraka@albaraka.com.pk Mr. Shfaqaat Ahmed Country Head Pakistan Branches

4 Financial Highlights 6 ($ million) Total Footing Total Assets Liquid Assets Financing Facilities Investments Portfolio Shareholders Equity Total Revenue Operating Expenses Income Before Provisions & Taxes Net Income/Loss Selected Financial Ratios Return on average Assets Return on average Equity Total Assets / Equity Total Financing / Equity Loss Loss % 4.3% % 0.5% % 1.8% % 5.3% % 3.3%

5 Board of Directors Board of Directors Report In the Name of Allah, the Most Compassionate, the Most Merciful All praises be to Almighty Allah and blessings to the Messenger of Allah, Muhammad (peace be upon him) situation in Bahrain, the commercial operations of the Bank are considered highly promising. In 2006, as in last year the emphasis has been to consolidate the Bank operations by shedding under-performing business segments, making recoveries from nonperforming accounts and by creating adequate provisions. 8 Moosa Abdulaziz Shehadah Director Executive Committee Othman Ahmed Suliman - Chairman Adnan Ahmed Yousif - Member Abdul Latif Abdul Rahim Janahi - Member Salah Ahmed Zainalabedin - Member Mahmoud Jameel Hassoubah Chairman Abdul Latif Abdul Rahim Janahi Director The Shari'a Board Shaikh Dr. Abdul Sattar Abu-Guddah - Chairman Shaikh Esam Mohammed Ishaq - Member Shaikh Dr. Abdullatif Ahmed Al Shaikh - Member AlSayed Mohammed Muhyeeldin - Shari'a Supervisor Adnan Ahmed Yousif Deputy Chairman Othman Ahmed Suliman Director Audit Committee Moosa Abdulaziz Shehadah - Chairman Abdullhameed Mohideen Nazer - Member Ashraf Al Gamrawy - Member External Auditor s Ernst & Young Abdullhameed Mohideen Nazer Director Ashraf Al Gamrawy Director Dear Shareholders, On behalf of the board of directors, it is my privilege to present the 23rd annual report of AlBaraka Islamic Bank, together with financial statements, for the year ended 31st December This report consolidates the financial figures for the offshore banking unit in Bahrain, commercial banking operations in Pakistan, and commercial banking operations in Bahrain. I am pleased to state that in 2006 the Bank completed another year of growing operations. The performance indicators for the year end although were not as expected but management's plans for the future are very promising. In 2006 although the bank earned pretax and pre provisions profit of US $0.73 million, due to management's conservative approach towards some past due accounts, provisions of US$ 3.81 million were taken on the income, which resulted in net loss of US $3.51 million on a consolidated basis for year end 31st December By the grace of Almighty Allah, our commercial operations in Bahrain remained profitable and further expanded by opening their 3rd branch in Isa Town. Pakistan operations also opened 2 new branches in port city of Karachi and commercially active city of Rawalpindi, increasing the total number of branches in Pakistan to 11. In the fast-growing economic The Board of Directors would like to express their gratitude to the Kingdom s wise government led by His Majesty King Hamad Bin Isa Al Khalifa, His Highness Shaikh Khalifa Bin Salman Al Khalifa, the Prime Minister, H.H. Shaikh Salman Bin Hamad Al Khalifa, the Crown Prince and H.E. Rasheed Mohammad Al `Maraj, Governor, Central Bank of Bahrain, for their patronage to promote Islamic banking in Bahrain. Thanks to the untiring efforts of its financial team, Bahrain is seen as a highly successful model for implementation of Islamic banking by other countries. The Bank takes pride in its utmost integrity and commitment to offer the best in Islamic banking services. The Board of Directors gratefully acknowledges the contributions of the Bank management and staff whose hard work and dedication was vital for the continued growth of bank operations. We would also like to thank all shareholders, customers and correspondents of the Bank for their valuable confidence. By the grace of Almighty Allah, the Board expects the Bank to grow more stronger in the years to come. Mahmoud Jameel Hassoubah Chairman 9

6 Executive Management Salah Ahmed Zainalabedin General Manager Ali Abdulla AlJowder Senior Manager, Marketing Yousif Ahmed AlHamadi Deputy General Manager Tariq Mahmoud Kazim Deputy General Manager, Support Services & Overseas Branches Adel Saleh Al Ansari Senior Manager, Customer Services (Commercial Branch) Nadeem Amjad Khan Chief Financial Officer Adel Abdulla Al Baluchi Asst. General Manager, Financial Institutions Moosa Abdullatif Mohammed Asst. General Manager, Operations AbdulAziz AlAbbasi Senior Manager, Credit & Marketing (Commercial Branch) Shafaqaat Ahmed Country Head Pakistan Branches Dr. Mohammed Hassan Abdulmajeed Manager, Follow-up Office, Jeddah Hani Abdulmahdi Nayem Manager, Internal Audit

7 Business Review Our Bank has operated successfully in competition with some huge competitors. In 2006, Al Baraka Islamic Bank completed 23 years in business. As an offshore unit, our Bank has operated successfully in competition with some huge competitors. In 2006, the key growth indicators of the Bank remained satisfactory, compared with figures of 2004 and Our Bank continued with its policy of taking provision against non-performing accounts during the year 2006 as well. With all the three units of the Bank performing satisfactorily, we are confident to show a much-improved performance in almost 19% last year had swelled the combined GDP of GCC economies to around US$725 blllion. This follows a cumulative expansion in normal GDP of 74% over the last three years. For the GCC as a whole GDP per capita has risen over the last three years to over US$17k from below US$11k. Given current high oil prices, the IIF estimated that the GCC will record a current account surplus of almost $230 blllion in 2006 and in excess of $220 blllion in Oil prices are seen rising in the coming years as the world demand for oil rises, particular in USA, China, India and other fast developing countries. The oil Operating Environment wind fall has supported increased government spending and lifted domestic confidence, resulting in 12 Economic Overview In recent years, while growth in world's biggest economies of Europe, North America and Japan has slowed down, the Asian region is seen emerging as the new center of world economic growth. In Europe an investment boom. Projects worth more than $1.00 trillion mostly in infrastructure are either under way or planned, which aim to diversify the economic base and generate greater value added from hydrocarbons. 13 and Japan, growth prospects are affected by falling exports, and weak domestic demand. Islamic Banking In another good year for Islamic financial industry, For the oil producing countries, persistently high oil prices have helped erase the problems of fiscal deficits and mounting debts. As the economies of non-oil producing countries slow down and face inflationary pressure under the burden of heavier oil bills, the world economic growth prospects become less bright. the growth rate surpassed that recorded in 2005 and levels of transparency and innovation increased significantly to enhance global investor confidence in Islamic financial products and services. Islamic banking has established itself as a new frontier in financial services as increasing number of mainstream banks plan to develop Islamic banking capabilities. The full-service Islamic banks and financial The GCC Region Thanks to steeply high oil prices since 2002, GCC economies are flushed with unending flow of petro- institutions now focus to strengthen their balance sheets by improving their capitalization and reducing their risk assets. income. Although most GCC countries have dramatically, increased government spending but have still managed to stay well into the black. The development of Islamic sukuk market, Islamic banks leading mega syndication deals and coming along of central banks of various countries to support High Oil prices are driving rapid economic growth in the GCC, yielding substantial external surpluses and stimulating an investment boom as per Institute of International Finance (IIF). Combined GDP growth of Islamic banking point to a bright future for Islamic banking. In Bahrain, the Islamic financial sector continues to perform well under the watchful eye of Central Bank of Bahrain.

8 Business Review With 25 Islamic banks, Bahrain is the largest and terms of cheaper and efficient access of credit. Credit Portfolio has maintained a healthy trend in its rates of profit 14 possibly the best-regulated Islamic Financial Centre in the world. Central Bank of Bahrain had licensed some 350 institutions, of which 187 were banks and related financial institutions, and 163 were insurance and insurance-related firms. Pakistan Since last few years, Pakistan has ranked among the fastest growing economies in the world. In recent years, the country has survived some major economic shocks like steeply high oil prices, war in Iraq and Afghanistan, biggest earthquake in its history in October 2005 and turning of a comfortable current account surplus into a yawning deficit due to unprecedented import of machinery and raw materials. The key strengths of the country include its large and growing base of domestic consumers, large currency flows from its overseas workers, a stable agricultural sector, and a fast-growing industrial sector which is able to generate growth through exports as well as local business. Government s ability to run a benign fiscal deficit by expanding tax revenue while continuously lowering the rates of taxation enhances the ability of private sector to push the economy further upwards. Under the strict surveillance of the State Bank of Pakistan, the central bank, the banking system in Pakistan is developing fast confronting all the present day banking issues such as adoption of information technology, corporate governance, risk management etc. Banks in Pakistan generally enjoy high growth in profits, business volumes and maintain strong capitalization ratios. There are more than 100 banking and financial institutions operating in the country. Commercial banks dominate the financial sector because of their nationwide presence and sound banking history. With a gradually increasing minimum capital requirement, a number of financial institutions are forced to merge. As more and more Islamic banks enter the market, competition is becoming intense. This situation has immensely benefited the corporate and industrial sectors in AlBaraka Pakistan Operations Being fully aware of challenges of a tougher business environment, the Pakistan operation of AlBaraka Islamic Bank continued to expand its customer reach by opening and planning new branches at some prime locations, adding new products, especially for the retail customers, and improving its IT and operational processes for better control and customer service. By the grace of Almighty Allah, the returns from the Pakistan operations have always contributed significantly to the overall profitability of the Bank. Bahrain Commercial Banking In an environment of ever increasing competition among Islamic and conventional banks, the Commercial Banking Unit completed three years of very successful operations in March The commercial operation built on its strategy of dealing with established local business names for offering credit facilities in a secure and conservative manner. At end 2006, all the balance sheet indicators of Commercial Banking Unit had remained ahead of budget. The gradual expansion of branch and ATM network in 2007 would further augment the profitability of the unit. Profits For the year end 31st December 2006 the bank suffered a net loss of US $3.51 million. The profitability of the Bank compared with the budgeted figure for the year-end December 2006 as well as last year was considerably low, although Bahrain commercial & Pakistan operations performed reasonably well in tough and competitive market conditions. The prime reasons for lower than budgeted profitability were net loss from Bahrain Offshore Unit because of loss of income and substantial provisions on some chronic past due accounts (total provision net of recoveries taken of US$3.81 million on year end December 2006 against a budget of US$1.46 mlllion). The financing portfolio grew by 10% after an increase of 11% in The growth in portfolio was contributed by Commercial Banking Unit and Pakistan Operations of the Bank. Investments While improvement in equity prices in 2003 showed the beginning of recovery from the lows markets had suffered during , in , high oil prices once again took the momentum away from the markets. The growing market of real estate investments offered the investors with a suitable alternate, although required fairly long term commitment of funds. After successful launch and execution of a residential project in Dubai last year, this year the Bank launched a US$ 50 mlllion commercial real estate transaction in Business Bay, Dubai (a project of Dubai Properties) which will generate good profit out of structuring fees. In 2006, the Bank also participated in some real estate investment funds managed by other Islamic investment banks. Most of these investments were downsold to retail investors. In Pakistan, the capital market operations were conducted with due conservatism, although it seemed like earning less than competitors. The return from these investments have remained highly impressive which were earned without compromising on market risks. Customer investments By end 2006, customer's investment accounts with the Bank had grown to an all-time high of US$469 million, being more than 14% higher than that at year end During , the compounded annual growth rate in customers investment accounts with the Bank has been an impressive 35%. The growth in deposit base resulted from increases in both retail and institutional deposits. The Bank primarily relies on customer deposits to grow its balance sheet and resorts to financing from other banking institutions only occasionally. Historically, in line with its peers in Islamic banking and other financial institutions in general, Al Baraka distribution. As the following depicted, year 2006 was no exception. Trend in return on joint investment accounts (%) Term Deposits months months months months Liquidity Management The investments in liquid assets reached historically large proportions, benefiting from uninterrupted flow of deposits from institutional and individual customers alike. At the yearend, the balances with other banks (excluding mandatory deposits with Central Bank of Bahrain and State Bank of Pakistan) stood at US$99 mlllion (2005: US$90 million) which were contributed by all the three units. In addition, the Bank held short-term investments of US$23 million in commodities compared with US$42 million in Capital Adequacy At end 2006, shareholders equity as a percentage of total assets was 12%. The capital adequacy ratio at 18% is in line with the minimum capital requirement of 12% set by the Central Bank of Bahrain Provisions A provision charge of US$3.81 million is the result of management policy to provide against nonperforming accounts swiftly even when there exist some recovery prospects. This is in contrast with the policy of earlier years when provision was created only when inevitable. The accumulated provision at year end 2006 covered 82 percent of non-performing facilities while the rest of the Bank exposure is secured against tangible collaterals mostly mortgage of properties in a number of cases. 15 As more and more Islamic banks enter the market, competition is becoming intense.

9 Business Review Strong capital adequacy ratio Credit Ratings growth plans, the Bank concluded the purchase In August 2006, Capital Intelligence which is a and successful partial implementation of a new leading emerging markets rating agency kept the banking system 'MISYS', which will allow us to long term rating of the bank consistent at BB +. reach out to new customers through establishment In Pakistan, JCR-VIS; a leading local rating agency; of new innovative delivery channels in future. 16 recognised by State Bank of Pakistan; has assigned a long term rating of A and short term rating of A1 for bank s operations in Pakistan. The ratings cites healthy future growth potential and strong support from principal shareholder, AlBaraka Banking Group. Compliance Issues Prudential Regulations As an Islamic institution, the Bank has continued to comply with the Prudential Information and Regulatory Framework for Islamic Banks issued by the Central Bank of Bahrain as well as new regulatory directives issued during the year. The Bank continued to review and upgrade its policies and procedures Human Resources The management believes that people lie at the heart of our success, and the Bank is therefore dependent on the human resources management within the organization to recruit, retain and motivate skilled and experienced employees into a rich corporate culture that will enable them to excel and fulfill their personal career aspirations. Training and development of our employees continues to be priority. Human Resource Department organized a number of specialized inhouse training courses. These were in addition to the training programs undertaken in collaboration with the Bahrain Institute of Banking and Finance (BIBF) and a few specialized courses abroad. 17 during the year in order to meet the standards established by the Central Bank of Bahrain. Risk Management In 2006, the Bank continued to enhance its corporate governance policy by establishing a Risk Management Division. The Bank is presently in extensive consultation with leading advisors for development and implementation of a Risk Management manual and implementation of Basel II. Anti Money Laundering Measures The Bank has successfully implemented the Anti Money Laundering regulations introduced by Central Bank of Bahrain in 2001and subsequent directives at all levels of its operations. An annual review of the Bank's compliance with anti money laundering Future Outlook For the commercial banking operations in Bahrain and Pakistan, consumer financing is envisaged to enhance profitability and spread credit risk and to make an alternate to overcome the profitability risk emanating from tight-margin financing to corporate customers. Opening of more branches is planned to expand the customer reach and to further strengthen deposit base. The offshore banking unit will continue to focus on the GCC region to seek diversification in credit portfolio and to look for suitable investment deals to diversify the overall portfolio risk. Provision of the highest levels of service to our valued customers is the cornerstone of future business strategy of the Bank. regulations is carried out by the Bank's external auditors. In view of the market trends and our future plans, we are optimistic and look forward to an exciting Information Technology and successful year, during which we, together To keep up with the current and projected growth in with our shareholders, investors and staff will the number of customer and to augment future prosper..

10 Report of the Sharia a Board In the Name of Allah, the Most Compassionate, the Most Merciful Praise be to Allah, the Lord of the worlds and Peace be upon our Prophet Muhammad his Kin and companions all Our review included checking documentation and procedures followed by the bank on the basis of testing each type of operations. We have planned and carried out our review in order to obtain all information and explanations deemed necessary by us for the purpose of obtaining reasonable evidences that the bank did not violate the rulings and principles of Islamic Sharia a. To the Shareholders of AlBaraka Islamic Bank Asslam Alaikum Wa Rahmat ALLAH Wa Barakatuh In our opinion 1. The contracts, operations and transactions carried out by the bank during and up to the end of the year 2006, which we have 18 We have reviewed the principles applied in contracts related to transactions and practices which were examined, were all complaint with the rules and principles of Islamic Sharia a. 19 launched by AlBaraka Islamic Bank B.S.C. (E.C.) (the Bank) during the year ended 31st December We have conducted the monitoring which is required to express our opinion as to whether the bank is compatible with the rules and principles of Islamic Sharia a and also with fatwas (religious opinions), and the specific decisions and guidelines which were 2. The Management has committed to spend the amount of the unintentional earning which is earned from sources or through means prohibited under the rules and principles of the Islamic Sharia a in charitable ways. issued by our board. 3. The distribution of profits and losses on the The responsibility of ensuring that the Bank works in accordance with the rulings and principles of Islamic Sharia a lies with the management. Our responsibility investment accounts is compatible with the standard adopted by us according to the rules and principles of the Islamic Sharia a. is limited to expressing an independent opinion based on our review of the Bank s operations and preparing our report to you. We invoke the Almighty ALLAH to lead us towards success. Wassalamu alaikum Warhmatullah Wabarakatuh Shaikh Dr. Abdul Sattar Abu-Ghuda Chairman Shaikh Dr. Abdul Latif Ahmed AlShaikh Member Shaikh Esam mohammed Ishaq Member

11 Financial Statements December 2006 Independent Auditors Report to the Shareholders of AlBaraka Islamic Bank B.S.C. (E.C) 20 We have audited the accompanying balance sheet of Albaraka Islamic Bank B.S.C (E.C) ( the Bank ) as of 31 December 2006, and the related statements of income, cash flows, changes in equity, changes in restricted investment accounts and sources and uses of charity fund for the year then ended. These financial statements and the Bank s undertaking to operate in accordance with Islamic Shari a Rules and Principles are the responsibility of the Bank's Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Auditing Standards for Islamic Financial Institutions. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December 2006, the results of its operations, its cash flows, changes in equity, changes in restricted investment accounts and sources and uses of charity fund for the year then ended in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions and the Shari a Rules and Principles as determined by the Shari a Supervisory Board of the Bank. We confirm that, in our opinion, proper accounting records have been kept by the Bank and the financial statements, and the contents of the Report of the Board of Directors relating to these financial statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial Institutions Law, nor of the memorandum and articles of association of the Bank, have occurred during the year ended 31 December 2006 that might have had a material adverse effect on the business of the Bank or on its financial position and that the Bank has complied with the terms of its banking licence. We obtained all the information and explanations which we required for the purpose of our audit th March 2007 Manama, Kingdom of Bahrain

12 Balance Sheet 31 December 2006 Statement of Income Year ended 31 December 2006 Assets Cash and balances with banks Sales receivables Mudaraba Ijara assets Musharaka financing Investments Investment properties Ijara income receivables Premises and equipment Other assets Note US $ 155,962, ,071,426 13,852,743 36,599,965 13,672,501 31,257,027 1,083,790 5,587,314 4,837,516 7,739, US $ 141,484, ,134,335 19,406,665 31,132,808 5,911,585 19,145,054 1,151,482 6,774,410 2,994,566 9,192,532 Income Income from jointly financed sales Income from jointly financed other financings and investments Joint investment income Return on unrestricted investment accounts (investors share of income before Bank's Mudarib share) Bank s Mudarib share Return on unrestricted investment accounts Note US $ 24,751,079 5,411,070 30,162,149 (27,264,912) 2,628,291 (24,636,621) 2005 US $ 17,632,088 2,018,594 19,650,682 (17,208,894) 2,240,800 (14,968,094) 22 Total assets Liabilities Due to banks and financial institutions Current accounts Other liabilities Total liabilities ,664,971 20,973,437 31,844,241 14,648,031 67,465, ,327,955 26,895,278 34,747,293 12,780,019 74,422,590 Bank s share of income from investment accounts (as a mudarib and as fund owner) Bank s income from self financed sales Bank s income from self financed other financings and investments Revenue from banking services Other revenues Bank s Mudarib share in restricted investment profit ,525, ,156 2,250,154 3,143,974 1,668, ,278 4,682, ,335 8,887,802 2,548, , , Unrestricted investment accounts ,993, ,543,483 Total revenue 13,726,626 17,612,303 Equity Share capital Reserves Retained earnings 16 50,000,000 5,682, ,202 50,000,000 5,726,788 6,635,094 Expenses Operating expenses Net income before provisions and taxation 22 (12,997,523) 729,103 (10,586,644) 7,025,659 Total equity 56,205,457 62,361,882 Provision for impairment - net 23 (3,806,185) (3,635,528) Total liabilities, unrestricted investment Net (loss) income for the year before taxation (3,077,082) 3,390,131 accounts and equity 559,664, ,327,955 Taxation 24 (434,810) (703,353) Restricted investment accounts 191,866, ,780,979 NET (LOSS) INCOME FOR THE YEAR (3,511,892) 2,686,778 Commitments ,439,831 89,204,853 The financial statements were approved by the Board of Directors on 10 March 2007 and signed on their behalf by: Mahmoud Jameel Hassoubah Chairman Adnan Ahmed Yousif Deputy Chairman The attached notes 1 to 30 form part of these financial statements The attached notes 1 to 30 form part of these financial statements

13 Statement of Cash Flows Year ended 31 December 2006 OPERATING ACTIVITIES Net (loss)/ income for the year before taxation (3,077,082) 3,390,131 Adjustments for: Provision for impairment - net 3,806,185 3,635,528 Gain on disposal of premises and equipment (43,022) - Gain on disposal of investment properties - (287,387) Depreciation 1,004,033 1,012,168 Directors' remuneration paid (100,000) (84,000) Taxation paid (120,003) (444,535) 1,470,111 7,221, Changes in: Balances with central banks 51,183 (9,791,316) Sales receivables (36,600,073) (6,635,860) Mudaraba 5,562,466 (8,375,371) Ijara assets (5,467,157) (6,018,925) Musharaka financing (7,785,186) (625,096) Ijara income receivables 238,833 (389,932) Other assets 1,241,934 (4,385,609) Other liabilities 1,623,691 2,769,193 Due to banks and financial institutions (5,921,841) (11,582,178) Current accounts (2,903,052) 5,515, Net cash used in operating activities (48,489,091) (32,297,977) INVESTING ACTIVITIES Purchase of investments (26,589,910) (11,728,934) Disposal of investments 14,569,940 10,861,071 Disposal of investment properties - 7,480,193 Purchase of premises and equipment (2,759,532) (1,940,307) Disposal of premises and equipment 23,263 9,063,313 Net cash (used in) from investing activities (14,756,239) 13,735,336 FINANCING ACTIVITIES Increase in unrestricted investment accounts 61,450,322 61,320,693 Dividend paid (2,500,000) - Net cash from financing activities 58,950,322 61,320,693 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,295,008) 42,758,052 Cash and cash equivalents at 1 January 150,293, ,535,864 CASH AND CASH EQUIVALENTS AT 31 DECEMBER (note 25) 145,998, ,293,916 The attached notes 1 to 30 form part of these financial statements

14 Statement of Changes in Equity Year ended 31 December 2006 Reserves Cumulative Share changes in Foreign Retained Total capital Statutory General fair value exchange earnings equity US $ 26 Balance at 1 January ,000,000 5,074,360 1,330, ,092 (792,014) 6,635,094 62,361,882 Net movement in cumulative change in fair value of available for sale investments , ,003 Net loss for the year (3,511,892) (3,511,892) Foreign currency translation reserve (136,536) - (136,536) Dividend paid for 2005 (2,500,000) (2,500,000) Directors' remuneration (100,000) (100,000) Balance at 31 December ,000,000 5,074,360 1,330, ,095 (928,550) 523,202 56,205, Balance at 1 January ,000,000 4,805,682 1,330,350 3,631,351 (752,931) 4,300,994 63,315,446 Net movement in cumulative change in fair value of available for sale investments (3,517,259) - - (3,517,259) Net income for the year ,686,778 2,686,778 Foreign currency translation reserve (39,083) - (39,083) Transfer to statutory reserve - 268, (268,678) - Directors' remuneration (84,000) (84,000) Balance at 31 December ,000,000 5,074,360 1,330, ,092 (792,014) 6,635,094 62,361,882 The attached notes 1 to 30 form part of these financial statements

15 Statement of Changes in Restricted Investment Accounts Year ended 31 December 2006 Balance at Net Balance at 1 January 2006 deposits Gross Mudarib s Admin. 31 December 2006 In US $ (withdrawals) income fee expenses In US $ Murabaha with customers 5,924,446 (4,023,458) ,900,988 Commodity 47,915,208 67,577,447 4,423,706 (292,262) - 119,624,099 Investments 13,418,131 (1,291,212) - (53,547) - 12,073,372 Ijara 788,000 (812,899) 32,359 (7,460) - - Mudaraba in managed funds 34,235,194 22,427,857 1,821,023 (127,342) (88,654) 58,268,078 General mudaraba 1,500,000 (1,454,333) - (45,667) ,780,979 82,423,402 6,277,088 (526,278) (88,654) 191,866, Balance at Net Balance at 1 January 2005 deposits Gross Mudarib s Admin. 31 December 2005 In US $ (withdrawals) income fee expenses In US $ Murabaha with customers 7,008,623 (1,219,026) 153,730 (18,881) - 5,924,446 Commodity 41,153,396 4,791,192 2,071,162 (100,542) - 47,915,208 Investments 13,210, ,074 - (53,520) - 13,418,131 Ijara 1,379,000 (650,730) 78,450 (18,720) - 788,000 Mudaraba in managed funds 8,053,358 26,063, ,061 (19,095) (136,915) 34,235,194 General mudaraba 5,725,033 (4,288,820) 76,544 (12,757) - 1,500,000 Investment in real estate 2,666,667 (2,808,187) 202,171 (60,651) - - Wokala 628,267 (628,267) ,824,921 21,521,021 2,856,118 (284,166) (136,915) 103,780,979 The attached notes 1 to 30 form part of these financial statements

16 Statement of Sources and Uses of Charity Fund Year ended 31 December 2006 Notes to the Financial Statements Year ended 31 December Source of charity fund Non-islamic income transferred to the charity fund 814, ,217 *Receipts of staff loans 27,387 28,716 Total sources 841, ,933 Uses of charity funds Charity for the poor and the needy 355, ,677 Other charitable contributions 397, ,988 Total uses 752, ,665 1 INCORPORATION AND PRINCIPAL ACTIVITY Albaraka Islamic Bank B.S.C (E.C). ("the Bank") is an exempt closed shareholding company incorporated in Bahrain on 21 February The Bank operates under a full commercial bank as well as an offshore islamic investment bank under license number issued by the Central Bank of Bahrain (previously known as The Bahrain Monetary Agency). The Bank has three commercial branches in the Kingdom of Bahrain and eleven branches in Pakistan ("the Branches"). The principal activities of the Bank are taking demand, saving and investment accounts, providing "murabaha finance" (cost plus profit margin), ijara financing and managing other investors' money on the basis of "mudaraba" (share of the profit) or agency for a fee (percentage of invested amount) and providing commercial banking services and other investment activities in Bahrain and in Pakistan. The Bank's registered office is at Building 238, Road 1704, Block 317, Manama, Kingdom of Bahrain. 2 SIGNIFICANT ACCOUNTING POLICIES b. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, balances with banks and international commodity murabaha maturing with an original maturity of ninety days or less. c. Sales receivables Sales receivables consist mainly of sales transaction agreements (murabaha) and are stated net of deferred profits and provision for impairment. d. Mudaraba Balances relating to these contracts are stated net of provisions for impairment. e. Ijara assets and Ijara receivables Assets acquired for leasing (Ijara) are stated at cost, less accumulated depreciation. Ijara assets comprise plant and equipment and motor vehicles. Depreciation is provided on the straight line method over the period of the lease. A provision for doubtful receivable is made if, in the opinion of management, the outstanding rentals net of security, are doubtful of recovery. 31 Net increase of sources over uses 88, ,268 Balance of charity fund at beginning of the year 782, ,500 Balance of charity fund, at end of the year (note 14) 871, ,768 * Upto the year 2000, the Bank used to provide Qard Hassan to staff. The Bank is now recovering these Qard Hassan from staff and recoveries made are shown as receipts of staff loans. Qard Hassan outstanding as of 31 December 2006 amounts to US$ 0.33 million (2005: US$ 0.36 million). The significant accounting policies adopted in the preparation of the financial statements are set out below: a. Basis of preparation The financial statements are prepared in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions, the Shari a rules and principles as determined by the Shari a Supervisory Board of the Bank and the Bahrain Commercial Companies Law. For matters for which no AAOIFI standard exists, the Bank uses the relevant International Financial Reporting Standard. The financial statements are prepared under the historical cost convention, modified by the remeasurement at fair value of investments. f. Musharaka financing Musharaka financing are stated, net of provisions for impairment. g. Investments These are classified as held for trading, held to maturity or available for sale. All investments are initially recognised at cost, being the fair value of the consideration given including acquisition charges associated with the investment. Held for trading These are initially recognised at cost and subsequently stated at fair value. All related realised and unrealised gains or losses are included in statement of income. The accounting policies are consistent with those used in the previous year. The attached notes 1 to 30 form part of these financial statements

17 Notes to the Financial Statements Year ended 31 December SIGNIFICANT ACCOUNTING POLICIES (continued) Held to maturity Investments which have fixed or determinable payments that the Bank has both the intent and ability to hold to maturity are classified as held-tomaturity. Such investments are carried at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such investment is recognised in the income statement, when the investment is de-recognised or impaired. Available for sale Subsequent to acquisition, available for sale investments are re-measured at fair value. The cumulative gain on fair values (net of any losses) is reflected proportionately in owners' equity and unrestricted investment accounts. Cumulative losses are reflected in the income statement. h. Investment properties All properties held for rental or for capital appreciation purposes, or both, are classified as investment properties. Investment properties are initially recorded at cost, being the fair value of the consideration and including acquisition charges associated with the property. Subsequent to initial recognition, investment properties are carried at cost, less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a straight-line basis, at rates calculated to write off the cost of each asset with the exception of land, which is deemed to have an indefinite life, over its expected useful life. i. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight line method at rates intended to write-off the cost of the assets over their estimated useful life. j. Fair values For investments actively traded in organised financial markets, fair value is determined by reference to quoted market bid prices. For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument, which is substantially the same, or is based on the assessment of future cash flows. The cash equivalent values are determined by the Bank at current profit rates for contracts with similar terms and risk characteristics. The fair value of other financial assets and liabilities and unrestricted investment accounts on the balance sheet approximate their carrying values. k. Unrestricted investment accounts These are stated at cost less amounts settled plus accrued profits and related reserves. l. Investment risk reserve The Bank deducts 5% from the profit distributable to unrestricted investment accounts of its Bahrain operations as an investment risk reserve. The Bank uses this reserve to cater against future losses for unrestricted investment account holders. m. Profit equalisation reserve The Bank appropriates a certain amount in excess of the profit to be distributed to unrestricted investment accounts after taking into consideration the mudarib share of income. This is used to maintain a certain level of return on investment for unrestricted investment account holders. n. Revenue recognition Sales receivables Profit from sales transactions (murabaha) is recognised when the ultimate income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is 2 SIGNIFICANT ACCOUNTING POLICIES (continued) recognised by proportionately allocating the attributable profits over the period of the credit whereby each financial period shall carry its portion of profits irrespective of whether or not cash is recovered. Income related to non performing is excluded from the statement of income. Mudaraba Income on mudaraba financing is recognised on distribution by the mudarib or when the right to receive payment is established, whereas any losses are charged to income on their declaration by the mudarib. Ijara assets and receivables Ijara income is recognised proportionately to the financial periods over the lease term. Musharaka Income is recognised on the due dates of the instalments. Income related to accounts that are 90 days overdue is excluded from the statement of income. Bank s share as a Mudarib The Bank s share as a Mudarib for managing unrestricted investment accounts is accrued based on the terms and conditions of the related management agreements. Fees and commission income Fees and commission income is recognised when earned. Dividends Dividends are recognised when the right to receive payment is established. Bank's share of restricted investment income as a Mudarib Profit arising from the management of mudaraba investment funds is recognised on the basis of the Bank's entitlement to receive such revenue, as defined in the Bank's contract with the investor. Rental income Rental income is accounted for on a straight-line basis over the Ijara terms. Income from investments This is recognised on a time-apportioned basis. o. Return on unrestricted investment accounts Investors' share of income is calculated based on the income generated from joint investment accounts after deducting the expenses related to investment pool "mudarib expenses". Mudarib expenses include all expenses incurred by the Bank, including specific provisions, but excluding staff cost and depreciation. The Bank's "mudarib profit" is deducted from investors' share of income before distributing such income at the end of the year. Unrestricted investment accounts withdrawn before maturity and without completing three months are not entitled to any income. Unrestricted investment accounts held for more than three months and withdrawn before their maturity are entitled to income only after deducting a penalty charge equivalent to three months' income. The basis applied by the Bank in arriving at the investment account holders share of income is [total investment income less investment pool expenses] divided by [average funds generating income (shareholders and unrestricted investment accounts) times average funds of unrestricted investment accounts]. Neither the Bank s income from restricted investment accounts "mudarib fee" nor the income paid to restricted investment accounts is included in the calculation of unrestricted investments account holders share of income. Investments that are jointly owned by the Bank and the investment account holders share are classified under the caption "Jointly financed " in these financial statements. Investments that are financed solely by the Bank are classified under the caption "Self financed ". 33

18 Notes to the Financial Statements Year ended 31 December SIGNIFICANT ACCOUNTING POLICIES (continued) p. Investment pool expenses Investment pool expenses include business, administrative, general and other expenses. q. Bank's share of restricted investment accounts The Bank's share of restricted investment accounts is based on its principal participation percentage, in addition to the mudarib fee on profit made on restricted investment accounts. r. Taxation There is no tax on corporate income in the Kingdom of Bahrain. Current Provision for current taxation is based on taxable income in accordance with the tax laws as applicable in Pakistan. Deferred The Bank accounts for deferred taxation on material temporary differences using the liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised for all deductible temporary differences. Deferred tax debits are recognised only if there is a reasonable expectation of realisation in the foreseeable future. Deferred tax is reduced to the extent that it is no longer probable that related tax benefits will be realised. s. Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured. t. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: (i) the right to receive cash flows from the asset have expired; (ii) the Bank retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass through' arrangement; or (iii) the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. u. Earnings prohibited by Shari'a The Bank is committed to avoid recognizing any income generated from non-islamic sources. Accordingly, all non-islamic income is credited to a charity fund where the Bank uses these funds for social purposes. v. Foreign currencies The financial statements of the Bank is presented in US Dollars which is the Bank's functional currency. Foreign currency transactions at the entity level Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. All differences are taken to income statement at the entity level. Foreign currency translations As at the reporting date, the assets and liabilities of foreign operation are translated into the functional currency of the Bank at the rate of exchange ruling at the balance sheet date. The exchange differences 2 SIGNIFICANT ACCOUNTING POLICIES (continued) arising on the translation are taken directly to a separate component of equity. On disposal of a foreign operation, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the statement of income. w. Judgements In the process of applying the Bank's accounting policies, management has made the following judgements, apart from those involving estimations, which effects the amounts recognised in the financial statements: Classification of investments Management decides on acquisition of an investment whether it should be classified as held for trading, held to maturity or available for sale. For those deemed to be held to maturity management ensures that the Bank has the intention and ability to hold these to maturity. The Bank classifies investments as trading if they are acquired primarily for the purpose of making a short term profit. All other investments are classified as available for sale. x. Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, relates to the impairment and uncollectibility of financial assets. Impairment and uncollectibility of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the assessment by the Bank of the value to it of anticipated future cash flows, is recognised in the statement of income. Specific provisions are created to reduce all impaired financial contracts to their realisable cash equivalent value. In addition to specific allowance against individually significant receivables, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. y. Employees' end of service benefits Provision is made for leaving indemnity payable under the Bahraini Labour Law applicable to non- Bahraini employees' accumulated periods of service at the balance sheet date. Bahraini employees of the Bank are covered by contributions made to the General Organisation of Social Insurance Scheme (GOSI) as a percentage of the employees' salaries. The Bank's obligations are limited to these contributions, which are expensed when due. z. Zakah The responsibility of payment of Zakah is on individual shareholders and investment account holders. In Pakistan, zakah is deducted at source by the Branch from the unrestricted account holders as required by local laws. aa. Off setting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. 35

19 Notes to the Financial Statements Year ended 31 December CASH AND BALANCES WITH BANKS Cash in hand 5,467,631 4,050,145 Balances with State Bank of Pakistan Current account 15,854,951 13,390,526 Capital deposit account 33,448,485 33,499,668 Cash reserve account 2,600,000 2,500,000 51,903,436 49,390,194 6 IJARA ASSETS Self Jointly Self Jointly financed financed Total financed financed Total Balances with Central Bank of Bahrain 4,461,630 1,977,077 Balances with other banks and financial institutions 94,130,221 86,067, ,962, ,484,518 Cost: Opening balances 6,722,707 42,111,106 48,833,813 7,411,812 27,391,036 34,802,848 Additions 42,440 25,015,938 25,058,378-17,452,165 17,452,165 Disposals (221,393) (13,490,485) (13,711,878) (689,105) (2,732,095) (3,421,200) 4 SALES RECEIVABLES Closing balance 6,543,754 53,636,559 60,180,313 6,722,707 42,111,106 48,833,813 Self Jointly Self Jointly Accumulated depreciation: 36 financed financed Total financed financed Total International commodities 2,692,605 20,791,870 23,484,475-42,309,066 42,309,066 Opening balance 4,542,106 13,158,899 17,701,005 4,007,184 5,681,781 9,688,965 Additions 676,206 9,715,170 10,391,376 1,224,027 8,193,653 9,417,680 Disposals (221,393) (4,290,640) (4,512,033) (689,105) (716,535) (1,405,640) 37 Others 8,564, ,786, ,351,367 6,828, ,559, ,388,538 Closing balance 4,996,919 18,583,429 23,580,348 4,542,106 13,158,899 17,701,005 Gross sales receivable 11,257, ,578, ,835,842 6,828, ,868, ,697,604 Provision for impairment (note 23) (144,796) (15,518,027) (15,662,823) (144,796) (14,070,912) (14,215,708) Net book value: At 31 December 1,546,835 35,053,130 36,599,965 2,180,601 28,952,207 31,132,808 11,112, ,060, ,173,019 6,684, ,797, ,481,896 Deferred profits (1,135,852) (15,965,741) (17,101,593) (624,610) (10,722,951) (11,347,561) 7 MUSHARAKA FINANCING Net sales receivable 9,976, ,094, ,071,426 6,059, ,074, ,134,335 Sales receivables which are non-performing as of 31 December 2006 amounted to US$ 26.6 million (2005: US$ 18.6 million). The Bank considers the promise made in the murabaha to the purchase order as obligatory. 5 MUDARABA Self Jointly Self Jointly financed financed Total financed financed Total Self Jointly Self Jointly financed financed Total financed financed Total Musharaka 4,480,000 9,336,643 13,816,643 4,480,000 1,551,564 6,031,564 Provision for impairment (note 23) (115,081) (29,061) (144,142) (115,081) (4,898) (119,979) 4,364,919 9,307,582 13,672,501 4,364,919 1,546,666 5,911,585 Banks and financial institutions - 13,852,743 13,852,743-19,406,665 19,406,665

20 Notes to the Financial Statements Year ended 31 December INVESTMENTS 9 INVESTMENT PROPERTIES i) Held for trading Self Jointly Self Jointly financed financed Total financed financed Total Self Jointly Self Jointly financed financed Total financed financed Total Investment in quoted shares 1,594,237-1,594,237 1,129,342-1,129,342 Cost at 1 January Freehold land ,192,806 7,192,806 Building 1,546,667-1,546,667 1,546,667-1,546,667 ii) Held to maturity 1,546,667-1,546,667 1,546,667 7,192,806 8,739,473 Unquoted investments Disposals (7,192,806) (7,192,806) Sukook Leasing (bonds) 240,000 12,813,249 13,053, , ,000 Cost at 31 December 1,546,667-1,546,667 1,546,667-1,546,667 Sukook Salam (bonds) - 1,000,000 1,000,000-1,000,000 1,000,000 Depreciation 240,000 13,813,249 14,053, ,000 1,000,000 1,240,000 At 1 January (395,185) - (395,185) (327,493) - (327,493) Provided during the year (note 22) (67,692) - (67,692) (67,692) - (67,692) 38 iii) Available for sale Self Jointly Self Jointly financed financed Total financed financed Total At 31 December (462,877) - (462,877) (395,185) - (395,185) 1,083,790-1,083,790 1,151,482-1,151, Quoted The market value as at 31 December 2006 was not materially different from carrying value. Managed funds 3,062,629-3,062,629 2,648,850-2,648,850 Unquoted investments at cost Private equity 1,274, ,600 1,873,565 1,251, ,450 1,844,032 Real estate 7,281,478 1,750,000 9,031,478 8,177,226 1,197,920 9,375,146 Others 1,692, ,621 2,339,871 3,532,684 74,464 3,607,148 10,248,693 2,996,221 13,244,914 12,961,492 1,864,834 14,826, IJARA INCOME RECEIVABLES Self Jointly Self Jointly financed financed Total financed financed Total Less: Provision for impairment (note 23) (625,000) (73,002) (698,002) (625,000) (74,464) (699,464) 12,686,322 2,923,219 15,609,541 14,985,342 1,790,370 16,775,712 Ijara income receivables 3,708,032 5,207,392 8,915,424 5,497,476 2,360,820 7,858,296 Provision for impairment (note 23) (2,160,706) (1,167,404) (3,328,110) (1,042,543) (41,343) (1,083,886) 1,547,326 4,039,988 5,587,314 4,454,933 2,319,477 6,774,410 Total investments 14,520,559 16,736,468 31,257,027 16,354,684 2,790,370 19,145,054 Ijara income receivables, which are non-performing as of 31 December 2006, amounted to US$ 2.8 million (2005: US$ nil).

21 Notes to the Financial Statements Year ended 31 December PREMISES AND EQUIPMENT Office furniture and Building equipment Vehicles Total 14 OTHER LIABILITIES Cost: At 1 January ,000,000 5,544, ,267 7,201,091 Additions 2,000, , ,837 2,759,532 Disposals - (1,989) (211,635) (213,624) Margins received 2,714,236 1,969,848 Bills payable 2,555,892 1,407,977 Accounts payable 1,166, ,278 Charity fund 871, ,768 At 31 December ,000,000 6,128, ,469 9,746,999 Provision for staff indemnity 675, ,113 Security deposit against Ijara asset 2,931,114 1,850,518 Depreciation: At 1 January ,486 3,726, ,369 4,206,525 Provided during the year 70, ,997 93, ,341 Disposals - (21,408) (211,975) (233,383) Unearned profit on Ijara assets 1,048,098 2,790,915 Deferred tax liability 1,294, ,118 Others 1,390,590 1,287,484 14,648,031 12,780,019 At 31 December ,845 4,477, ,379 4,909, UNRESTRICTED INVESTMENT ACCOUNTS Net book values: At 31 December ,926,155 1,651, ,090 4,837,516 At 31 December ,514 1,818, ,898 2,994,566 Unrestricted investment accounts 434,878, ,116, Estimated useful lives for calculation of depreciation 30 years 4-10 years 4-5 years Profit equalisation reserve (note 15.1) 207,035 10,472 Investment risk reserve (notes 15.2) 908, , ,993, ,543,483 The building represents the head office premises of the Bank that was sold and leased back over a 5 year period effective from June Movement in profit equalization reserve 12 OTHER ASSETS Balance at 1 January 10,472 91,057 Amount apportioned from income allocable to unrestricted Receivables under letters of credit 393,271 2,348,039 Advance against financing transactions 1,737,040 1,764,804 investment account holders 199, ,371 Transferred to income on jointly financed sales (2,980) (279,956) Income receivable 1,332, ,466 Accounts receivable 2,346,475 2,705,917 Balance at 31 December 207,035 10,472 Advance tax (note 24) 881, ,802 Others 1,128, , Movement in investment risk reserve Total 7,819,553 9,279,397 Less: Provision (note 23) (79,782) (86,865) 13 DUE TO BANKS AND FINANCIAL INSTITUTIONS 7,739,771 9,192,532 Balance at 1 January 416,272 80,427 Amount apportioned from income allocable to unrestricted investment account holders 642, ,845 Transferred to provision for sales receivables (note 23) (150,000) (133,000) Balance at 31 December 908, ,272 State Bank of Pakistan 19,107,996 24,317,278 Due to other banks and financial institutions 1,865,441 2,578,000 20,973,437 26,895,278

22 Notes to the Financial Statements Year ended 31 December EQUITY 18 NET ASSETS BY FOREIGN CURRENCIES (i) Share capital Authorised 2,000,000 ordinary shares of US$ 100 each 200,000, ,000,000 The net assets in foreign currencies at 31 December were as follows: United States Dollars 31,932,365 42,100,541 Saudi Riyals 312,377 3,161,499 Issued and fully paid 500,000 ordinary shares of US$ 100 each 50,000,000 50,000,000 Pakistani Rupees (2,058,709) (5,655,295) Bahraini Dinars 21,767,801 19,651,257 (ii) Statutory reserve In accordance with the Bahrain Commercial Companies Law and the Bank's articles of association, 10% of the net income for the year is transferred to the statutory reserve until such time as the reserve reaches 50% of the Bank's paid-up share capital. The reserve is not Sterling Pound 92,415 (388,974) Euro 3,500,186 3,079,107 Others 659, ,747 distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Central Bank of Bahrain. 56,205,457 62,361,882 (iii) General reserve 19 INCOME FROM OTHER FINANCINGS AND INVESTMENTS 42 In accordance with its articles of association, the Bank may transfer any amount, as approved by the General Assembly, out of net income to the general reserve. The general reserve is distributable, subject to the approval of the Central Bank of Bahrain. 43 (iv) Cumulative changes in fair value This represents the net unrealised gains on available for sale investments. Ijara assets (note 19.1) 3,372,841 2,358,204 Gain on sale of investments 1,055,318 4,879,052 (v) Foreign exchange reserve This represents the net foreign exchange movements on the Bank's net investment relating to its Pakistan branches. Income from investments 1,583, ,593 Structuring fees - 1,000,000 Mudaraba 1,129, ,152 Dividends 182, ,835 Rental income 168, ,296 Musharaka 167,535 61, COMMITMENTS Others - 2,741 Total 7,661,224 10,906,396 Acceptances 30,819,939 28,882,520 Guarantees 29,913,099 20,748,968 Letters of credit 22,823,411 17,868,137 Foreign exchange contracts 19,098,213 7,401,581 Obligations for leased building (note 11) 7,000,000 9,000,000 Confirmations of inward letters of credit 2,739,161 4,619,701 Others 46, , ,439,831 89,204,853 Income from jointly financed other financings and investments 5,411,070 2,018,594 Income from self financed other financings and investments 2,250,154 8,887, Ijara assets 7,661,224 10,906,396 Income from Ijara assets 13,764,217 11,775,884 Less: Depreciation on Ijara assets (note 6) (10,391,376) (9,417,680) 3,372,841 2,358,204

23 Notes to the Financial Statements Year ended 31 December REVENUE FROM BANKING SERVICES Letters of credit 1,040,050 1,038,114 Fees and commissions 1,117, ,905 Acceptance fees 70, ,389 Guarantees 374, ,308 Others 541, ,564 3,143,974 2,548, OTHER REVENUES 44 Foreign exchange gain 1,054, ,863 Others 614, ,269 1,668, , OPERATING EXPENSES Staff costs 7,470,372 5,924,193 Administrative expenses 1,323,483 1,064,830 Premises costs 1,212,473 1,056,654 Depreciation 1,004,033 1,012,168 Business expenses 1,074, ,266 General expenses 913, ,533 12,997,523 10,586,644

24 Notes to the Financial Statements Year ended 31 December MOVEMENT IN PROVISIONS Sales Musharaka Investment Ijara income Other receivables financing Investments properties receivables assets Total 2006 US $ US$ US $ Provision at beginning of the year 14,215, , , ,416 1,083,886 86,865 16,330,318 Charged during the year 3,650,615 24, ,365,940-5,040,825 Written back during the year (812,224) (417,677) (4,739) (1,234,640) 46 2,838,391 24, ,263 (4,739) 3,806,185 17,054, , , ,416 2,032,149 82,126 20,136,503 Written off during the year (244,515) (107) (1,462) - (800) (2,344) (249,228) Transferred from investment risk reserve (note 15.2) 150, ,000 Other adjustments (1,296,761) ,296, Provision at end of the year 15,662, , , ,416 3,328,110 79,782 20,037, Notes Provision at beginning of the year 10,680, , , ,416 1,180, ,959 13,098,029 Charged during the year 4,915,955 4, ,056 47,407 5,577,316 Written back during the year (978,273) (705,203) (258,312) (1,941,788) 3,937,682 4, (96,147) (210,905) 3,635,528 14,618, , , ,416 1,083,968 87,054 16,733,557 Written off during the year (535,612) - (356) - (82) (189) (536,239) Transferred from investment risk reserve (note15.2) 133, ,000 Provision at end of the year 14,215, , , ,416 1,083,886 86,865 16,330,318 Notes