BANK OF SYRIA AND OVERSEAS S.A. FINANCIAL STATEMENTS AND AUDITOR S REPORT YEAR ENDED DECEMBER 31, 2007

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1 BANK OF SYRIA AND OVERSEAS S.A. FINANCIAL STATEMENTS AND AUDITOR S REPORT YEAR ENDED DECEMBER 31, 2007

2 BANK OF SYRIA AND OVERSEAS S.A. FINANCIAL STATEMENTS AND AUDITOR S REPORT YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS Page Independent Auditor s report 1 Financial Statements: Balance Sheet 2 Income Statement 3 Statement of Changes in Equity 4 Cash Flow Statement 5 Notes to the Financial Statements 6-52

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5 BANK OF SYRIA AND OVERSEAS S.A. BALANCE SHEET As of December 31, ASSETS Notes Cash, compulsory reserve and Central Bank of Syria 5 13,799,527,332 13,877,830,602 Deposits with banks 6 33,663,478,096 27,681,660,253 Securities: Available for sale 7 50,000,000 50,000,000 Held to maturity 8 477,756,201 - Loans and advances 9 13,372,461,640 6,425,530,625 Customers' liability under acceptances 10 1,058,243, ,624,323 Other assets 11 29,563,329 10,409,919 Property and equipment ,111, ,950,072 Intangible assets 13 86,366,980 91,819,493 Regulatory blocked fund ,781, ,269,840 Total assets 63,592,289,585 49,743,095,127 LIABILITIES Deposits from banks and other financial institutions 15 1,200,415, ,633,414 Customers' and related parties' deposits and other credit balances 16 56,027,308,326 43,956,701,882 Cash margins 17 1,231,162, ,990,151 Liability under acceptances 10 1,058,243, ,624,323 Other liabilities ,071, ,554,544 Total liabilities 60,188,201,226 46,422,504,314 EQUITY Capital 19 3,000,000,000 3,000,000,000 Legal reserve 20 73,985,118 39,873,270 Special reserve 20 73,985,118 39,873,270 Currency adjustments on structural position 21 ( 165,156,352) ( 57,535,419) Retained earnings 421,274, ,379,692 Total equity 3,404,088,359 3,320,590,813 Total liabilities and equity 63,592,289,585 49,743,095,127 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS: 27 Guarantees and stand by letters of credit 6,575,868,963 6,964,959,850 Documentary and commercial letters of credit 2,076,853,713 1,765,987,985 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS 3

6 BANK OF SYRIA AND OVERSEAS S.A. INCOME STATEMENT For the year ended December 31, Notes Interest income 22 2,774,023,914 1,547,972,467 Interest expense 23 ( 2,160,063,752) ( 1,126,497,017) Net interest income 613,960, ,475,450 Fee and commission income ,627, ,750,921 Fee and commission expense ( 8,863,074) ( 10,141,790) Net fee and commission income 340,764, ,609,131 Net realized exchange losses ( 43,452,977) ( 10,069,411) Provision for fluctuations in exchange rates 18 - ( 2,483,000) Net unrealized exchange losses on structural position ( 107,620,933) ( 133,088,681) Net financial revenues 803,650, ,443,489 Allowance for impairment of loans and advances 9 ( 19,017,758) ( 9,989,188) Net financial revenues after allowance for impairment of loans and advances 784,632, ,454,301 Salaries and related charges 25 ( 216,952,273) ( 151,852,983) General operating expenses 26 ( 100,929,242) ( 85,095,034) Depreciation and amortization 12 & 13 ( 103,441,980) ( 66,361,969) Net miscellaneous expenses ( 311,611) ( 440,270) Total other expenses ( 421,635,106) ( 303,750,256) Profit inclusive of unrealized losses on structural position and before income tax ,997, ,704,045 Income tax 18 ( 129,500,000) ( 88,885,000) Net profit for the year ,497, ,819,045 Earnings per share: Basic Diluted SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS 4

7 BANK OF SYRIA AND OVERSEAS S.A. STATEMENT OF CHANGES IN EQUITY Currency adjustments Profit Legal Special on structural Retained for the Capital reserve reserve position earnings year Total Balance as at December 31, ,000,000,000 16,182,497 16,182,497 75,553, ,853,512-3,216,771,768 Profit for ,819, ,819,045 Allocation of 2006 profit (Note 28) - 23,690,773 23,690,773 (133,088,681) 189,526,180 ( 103,819,045) - Balance as at December 31, ,000,000,000 39,873,270 39,873,270 ( 57,535,419) 298,379,692-3,320,590,813 Dividend distribution (150,000,000) - ( 150,000,000) Profit for ,497, ,497,546 Allocation of 2007 profit (Note 28) - 34,111,848 34,111,848 (107,620,933) 272,894,783 (233,497,546) - Balance as at December 31, ,000,000,000 73,985,118 73,985,118 (165,156,352) 421,274,475-3,404,088,359 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS 5

8 BANK OF SYRIA AND OVERSEAS S.A. CASH FLOW STATEMENT For the year ended December 31, Notes Cash flows from operating activities: Profit for the year before income tax 362,997, ,704,045 Adjustments for: Depreciation and amortization 103,441,979 66,361,969 Allowance for impairment of loans and advances 9 19,017,758 9,989,188 Currency adjustments on regulatory blocked funds 14 10,488,540 13,285,490 Amortization of discounts on securities 7&8 ( 44,590) - Provision for fluctuations in exchange rates - 2,483,000 Loss on disposal of fixed assets 47,139 - Net increase in loans and advances 9 ( 6,965,948,773) ( 1,796,680,184) Net (increase)/ decrease in other assets ( 19,153,410) 2,499,807 Increase in term deposits with banks ( 2,269,601,447) ( 1,671,624,055) Net (decrease)/ increase in deposits from banks ( 125,000,000) 125,000,000 Net increase in customers and, related parties deposits and other credit balances 16 11,989,256,306 22,668,356,677 Net increase in accrued interest receivable ( 190,065,511) ( 147,923,355) Net increase in accrued interest payable 78,617, ,289,879 Tax paid 18 ( 88,885,000) ( 50,227,000) Net increase in cash margins ,797, ,850,996 Net increase in other liabilities 56,481, ,236,772 Net cash generated by operating activities 3,460,447,076 20,044,603,229 Cash flows from investing activities: Purchase of property and equipment 12 ( 168,497,160) ( 279,508,160) Purchase of intangible assets 13 ( 1,700,470) ( 34,783,750) Purchase of available for sale securities 7 - ( 50,000,000) Purchase of held to maturity securities 8 ( 474,013,250) - Net cash used in investing activities ( 644,210,880) ( 364,291,910) Cash flows from financing activities: Dividend distribution 34 ( 129,579,725) - Net cash used in financing activities ( 129,579,725) - Net increase in cash and cash equivalents 2,686,656,471 19,680,311,319 Cash and cash equivalents - Beginning of year 38,538,871,452 18,858,560,133 Cash and cash equivalents - End of year 31 41,225,527,923 38,538,871,452 SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS 6

9 BANK OF SYRIA AND OVERSEAS S.A. NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, BANK S OBJECTIVES AND ACTIVITIES Bank of Syria and Overseas S.A. (The Bank) is a Syrian joint stock company, incorporated on November 19, 2003 and registered under No on December 29, 2003 at the commercial register of Damascus district. The Bank is registered at the Governmental Commission under No.9 as a private bank, and conducts all banking services. The headquarter of the Bank is located in Harika, Bab Barid, Lawyers Syndicate Building, Damascus, Syria. As of December 31, 2007, the Bank had ten branches: two in Aleppo and one in each of Lattakia, Hama, Homs, Tartous and four in Damascus city. 2. ADOPTION OF NEW AND REVISED STANDARDS In the current year, the Bank has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after 1 January 2007, and the consequential amendments to IAS 1 Presentation of Financial Statements. The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Bank s financial instruments and management of capital. Four Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment of Embedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Bank s accounting policies. At the date of authorisation of these financial statements the following Standards and Interpretations were in issue but not yet effective: IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after 1 January 2009); IFRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009); IFRIC 11 IFRS 2: Group and Treasury Share Transactions (effective for accounting periods beginning on or after1 March 2007); IFRIC 12 Service Concession Arrangements (effective for accounting periods beginning on or after 1 January 2008); IFRIC 13 Customer Loyalty Programmes (effective for accounting periods beginning on or after 1 July 2008); and 7

10 IFRIC 14 IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after 1 January 2008). The Management anticipates that the adoption of all of the above Standards and Interpretations will have no material impact on the financial statements of the Bank in the period of initial application. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Statement of Compliance The financial statements are prepared in accordance with International Financial Reporting Standards and the existing banking laws in Syria; assets and liabilities are grouped according to their nature and are presented in an approximate order that reflects their relative liquidity. B. Basis of Preparation The financial statements have been prepared on the historical cost basis except for certain financial instruments that are stated at fair value. The financial statements are presented in Syrian Pounds (), the functional and reporting currency. C. Foreign Currencies Transactions effected during the year in foreign currencies, including revenues and expenses, are translated to Syrian Pounds, the reporting currency, using rates of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the year end into Syrian Pounds at the exchange rates as published by the Central Bank of Syria (on December 31, 2007: for 1US Dollar and for 1 Euro). Translation gains and losses are included in the income statement. Cash flows in foreign currencies generated by and used in the various activities, as shown in the accompanying cash flow statement, are translated into Syrian Pounds at the exchange rates prevailing at the year end, except for cash and cash equivalents at the beginning of year which are translated at prior year closing exchange rates, and the effect of currency rate fluctuation, if any, is disclosed separately in the notes to the financial statements. The Council of Money and Credit issued decision number 249, that allowed banks operating in Syria to hold a structural position equivalent to 60% of their net equity. This decision stipulated that the currency adjustments on structural position be considered as unrealized profit / (loss), consequently theses gains / (losses) are not taxable and not available for distribution. Accordingly, these differences were transferred from the income statement to the statement of changes in equity as currency adjustments on structural position. 8

11 D. Financial Assets and Liabilities: Recognition and Derecognition: The Bank initially recognizes loans and advances, deposits, debt securities issued and subordinated liabilities on the date that they are originated. All other financial assets and liabilities are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. The Bank derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which all the risks and rewards of ownership of the financial asset are transferred. The Bank derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. Offsetting: Financial assets and liabilities are set off and the net amount is presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts or intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Fair Value Measurement: The determination of fair values of financial instruments traded in active markets is based on quoted market prices. For financial instruments where there is no quoted price, fair value is determined by using valuation techniques. Valuation techniques include net present value technique, the discounted cash flow method, and comparison to similar instruments for which market observable prices exist. Impairment of Financial Assets: Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the asset, the estimated future cash flows of the investment have been impacted. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated future cash flows discounted at the original effective interest rate. Losses are recognized in profit or loss and reduce the carrying amount of the asset to its estimated recoverable amount. If, in a subsequent period, the amount of the impairment loss decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of available-for-sale investment securities, the previously accumulated losses recorded under equity are recognized in profit or loss in case of impairment losses substantiated by a prolonged decline in fair value of the investment securities. Any increase in fair value subsequent to an impairment loss is not recognized in profit or loss for available-for-sale equity securities. Any increase in fair value subsequent to an impairment loss is recognized in profit or loss for available-for-sale debt securities. 9

12 E. Investment Securities: Investment securities are initially measured at fair value plus incremental direct transaction costs, and subsequently accounted for depending on their classification as either held-to-maturity or available-forsale. Held-to-Maturity Investment Securities: Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated at fair value through profit or loss or available-for-sale. Held-to-maturity investments are carried at amortized cost using the straight line method where results approximate those resulting from the effective interest method. Available-for-Sale Investment Securities: Available-for-sale investments are non derivative investments that are not designated as another category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value and unrealized gains or losses are included in equity, except for impairment losses which are included in the income statement, as applicable. The change in fair value on available-for-sale debt securities reclassified to held-to-maturity is segregated from the change in fair value of available-for-sale debt securities under equity and is amortized over the remaining term to maturity of the debt security as a yield adjustment. F. Loans and Advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances are disclosed at amortized cost net of unearned interest and after provision for credit losses where applicable. Bad and doubtful debts are carried on a cash basis because of doubts and the probability of non-collection of principal and/or interest. G. Financial Guarantees Financial guarantees contracts are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. These contracts can have various judicial forms (guarantees, letters of credit, credit-insurance contracts). Financial guarantee liabilities are initially measured at their fair value, and subsequently carried at the higher of this amortized amount and the present value of any expected payment (when a payment under the guarantee has become probable). Financial guarantee liabilities are included within other liabilities accounts. 10

13 H. Property and Equipment Property and equipment are stated at historical cost in Syrian Pounds, less accumulated depreciation and impairment losses, if any. Depreciation of property and equipment is charged on the straight-line method over the estimated useful life of the assets on the basis of the following annual rates: % Buildings 5 Furniture and office equipment Computer equipment 20 Vehicles 20 Leasehold improvements 20 I. Intangible Assets - Key Money: Key money is recorded at acquisition cost and is amortized on straight-line basis over a period of 20 years, or over the duration of rent contract, whichever is less. - Software: Software is recorded at acquisition cost and is amortized on straight-line basis over a period of 5 years. J. Impairment of Tangible and Intangible Assets: At each balance sheet date, the Bank reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 11

14 K. Social Security Contributions The Bank is registered in the Syrian Social Security Establishment and pays regular contributions for its employees to the Establishment. These contributions represent the Bank s commitment towards its employees concerning end-of-service indemnities that will be allotted to them by the Social Security Establishment. The Bank has no other liability towards its employees end-of-service indemnity. L. Provisions: A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. M. Revenue and Expense Recognition: Interest income and expense are recognized on an accrual basis, taking into account the principal outstanding and the rate applicable, except for non-performing loans and advances for which interest income is only recognized upon realization. Interest income and expense include the amortization discount or premium. Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability (e.g. commissions and fees earned on loans) are included under interest income and expense. Other fee and commission income are recognized as the related services are performed. Dividend income is recognized when the right to receive payment is established. N. Income Tax The Bank computes its income tax in accordance with the provisions of law number 28 dated April 16, 2001 which sets the tax rate at 25% of the net taxable profit. Taxable profit differs from net profit as reported in the income statement because it excludes nontaxable income amounts and includes added-back non-deductible expense amounts. 12

15 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Bank s accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. A. Critical Accounting Judgments In Applying The Accounting Policies: Classification of Financial Assets: The Bank s accounting policies provide scope for investment securities to be designated on inception into different categories in certain circumstances based on specific conditions. In classifying investment securities as held-to-maturity, the Bank has determined that it has both the positive intent and ability to hold these assets until their maturity. If the Bank fails to keep these investments until maturity, other than for specific circumstances, they will require reclassifying the entire category as available for sale that will be measured at fair value with the corresponding cumulative positive change in fair value booked in equity. B. Key Sources of Estimation Uncertainty: The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Allowances for Credit Losses: Specific impairment for credit losses is determined by assessing each case individually. This method applies to classified loans and advances, and the factors taken into consideration when estimating the allowance for credit losses include the counterparty s credit limit, the counterparty s ability to generate cash flows sufficient to settle the advances provided and the value of collateral and potential possession of assets satisfaction of debt. Impairment of Available-for-sale Equity Investment Securities: The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination requires judgment. In making this judgment the Bank, among other factors, evaluates the normal volatility in share price. 13

16 5. CASH, COMPULSORY RESERVE, AND CENTRAL BANK OF SYRIA This caption includes the following: December 31, 2007 F/Cy in Total in Cash 700,287, ,385,639 1,117,673,352 Compulsory reserve 1,200,600,000 1,573,231,682 2,773,831,682 Central Bank of Syria 9,795,981,590 5,276,143 9,801,257,733 Clearing cheques 16,686,082-16,686,082 11,713,555,385 1,995,893,464 13,709,448,849 Accrued interest receivable 90,078,483-90,078,483 11,803,633,868 1,995,893,464 13,799,527,332 December 31, 2006 F/Cy in Total in Cash 442,033, ,498, ,531,350 Compulsory reserve 755,600,000 1,171,863,707 1,927,463,707 Central Bank of Syria 11,074,896,379 10,799,656 11,085,696,035 12,272,529,400 1,592,161,692 13,864,691,092 Accrued interest receivable 13,139,510-13,139,510 12,285,668,910 1,592,161,692 13,877,830,602 Banking laws and regulations require banks to maintain cash compulsory reserve with the Central Bank of Syria in the form of deposit, calculated on the basis of 5% of total customers deposits (demand, savings and term) excluding housing savings deposit accounts as per decision (72/MN/84) dated December 8, 2004 issued by the Council of Money and Credit. 14

17 6. DEPOSITS WITH BANKS This caption comprises the following: December 31, 2007 F/Cy in Total in Current accounts 68,877, ,875, ,752,166 Interest earning term deposits - 31,176,840,672 31,176,840,672 Certificates of deposit 1,100,000, ,916,063 1,577,916,063 1,168,877,078 32,230,631,823 33,399,508,901 Accrued interest receivable 96,118, ,850, ,969,195 1,264,995,833 32,398,482,263 33,663,478,096 December 31, 2006 F/Cy in Total in Current accounts 181,612,251 1,589,076,171 1,770,688,422 Interest earning term deposits 400,000,000 24,356,430,813 24,756,430,813 Certificates of deposit 1,000,000,000-1,000,000,000 1,581,612,251 25,945,506,984 27,527,119,235 Accrued interest receivable 54,648,137 99,892, ,541,018 1,636,260,388 26,045,399,865 27,681,660,253 Current accounts comprise the following: December 31, 2007 F/Cy in Total in Correspondent banks - Resident 68,877,078 24,157,935 93,035,013 Correspondent banks - Non resident - 292,172, ,172,443 Related banks - Non resident - 259,544, ,544,710 68,877, ,875, ,752,166 December 31, 2006 F/Cy in Total in Correspondent banks - Resident 181,612, ,890, ,502,414 Correspondent banks - Non resident - 177,803, ,803,631 Related banks - Non resident - 908,382, ,382, ,612,251 1,589,076,171 1,770,688,422 15

18 Interest earning term deposits comprise the following: December 31, 2007 F/Cy in Total in Correspondent banks - Non resident - 30,208,888,172 30,208,888,172 Related banks - Non resident - 967,952, ,952,500-31,176,840,672 31,176,840,672 December 31, 2006 F/Cy in Total in Correspondent banks - Resident 400,000, ,000,000 Correspondent banks - Non resident - 23,751,523,813 23,751,523,813 Related banks - Non resident - 604,907, ,907, ,000,000 24,356,430,813 24,756,430,813 Term deposits with nonresident correspondent banks as of December 31, 2007 include the counter value of USD 1,600,000 pledged by a correspondent bank to cover two documentary letters of credit for USD 800,000 each maturing in September Term deposits with related banks as of December 31, 2007 include the counter value of USD 1,000,000 pledged to cover the issuance of credit cards by the Bank. The average interest rate on interest earning term deposits by currency was as follows: December 31, 2007 USD EURO GBP AED Average Average Average Average interest interest interest interest Amount rate Amount rate Amount rate Amount rate '000 % '000 % '000 % '000 % Less than 3 months 24,386, ,568, , , Between 3 and 12 months 2,710, , ,096,745 3,964,409 96,120 19,567 December 31, 2006 USD EURO GBP Average Average Average Average interest interest interest interest Amount rate Amount rate Amount rate Amount rate '000 % '000 % '000 % '000 % Less than 3 months 20,967, ,313, , Between 3 and 12 months 1,014, , ,982,483 2,313,948 60, ,000 16

19 Certificates of deposit comprise the following: December 31, 2007 F/Cy in Total in Certificates of deposit Resident correspondent banks 1,100,000,000-1,100,000,000 Certificates of deposit - Non resident correspondent bank - 477,916, ,916,063 1,100,000, ,916,063 1,577,916,063 December 31, 2006 F/Cy in Total in Certificates of deposit Resident correspondent bank 1,000,000,000-1,000,000,000 1,100,000,000-1,000,000,000 Certificates of deposit issued by resident correspondent banks consist of 22 certificates for a value of 50 million each, issued by the Real Estate Bank in Syria. As of December 31, 2007 these certificates are distributed based on maturity as follows: Interest Maturity Date Number Unit value Total value rate % April ,000, ,000, June ,000, ,000, November ,000, ,000, November ,000, ,000, November ,000,000 50,000, September ,000,000 50,000, ,100,000,000 Certificates of deposit issued by non resident correspondent banks represents the value of certificates having a par value in the amount of USD 10 million maturing in 2010 with an effective interest rate of 7.83%. This caption comprises as of December 31, 2007 the following: Counter value in USD Balance, December 31, Par value of acquired certificates 480,500,000 10,000,000 Discount ( 2,594,700) ( 54,000) Net amount paid 477,905,300 9,946,000 Discount amortization 10, Carrying value, December 31, ,916,063 9,946,224 17

20 7. AVAILABLE FOR SALE SECURITIES This caption comprises the cost of 100,000 shares, out of 2 million shares in a related insurance company (representing 5% of ownership) acquired at the issue price of 500. These shares were not recorded at fair value due to unavailability of quoted market prices. 18

21 8- HELD TO MATURITY SECURITIES This caption represents the value of investments in bonds with floating interest rates purchased from non resident banks with credit ratings varying between (A-) and (BBB+). These bonds comprise the following as of December 31, 2007: Effective Par Amortization Amortized cost at Maturity date interest rate value Discount Net Paid of discount December 31, 2007 % November ,100,000-96,100,000-96,100,000 January ,100,000 ( 2,762,875) 93,337,125 6,679 93,343,804 September ,100,000 ( 1,321,375) 94,778,625 31,569 94,810,194 April ,100,000 ( 1,321,375) 94,778,625 3,123 94,781,748 October ,100,000 ( 1,081,125) 95,018,875 3,219 95,022, ,500,000 ( 6,486,750) 474,013,250 44, ,057,840 Accrued interest receivable 3,698, ,756,201 In accordance with decision No. 2256/100 issued by the Central Bank of Syria on December 27, 2007, stipulating that all certificates of deposit should be classified under the "Deposits with banks" caption, a restatement of 2006 comparative figures was applied; consequently, certificates of deposit purchased from the Real-Estate Bank in Syria were reclassified under "Deposits with banks" caption. 19

22 9. LOANS AND ADVANCES This caption comprises the following: December 31, 2007 F/Cy in Total in Loans and advances to customers 7,622,937, ,267,924 8,196,205,530 Creditors accidentally debtors 46,471,240 16,767,987 63,239,227 Discounted commercial bills 3,506,851,698-3,506,851,698 Promissory notes 1,384,757,219 31,620,906 1,416,378,125 Advances on salaries 3,131,538-3,131,538 12,564,149, ,656,817 13,185,806,118 Classified Non-performing debts 210,024,314 5,508, ,532,442 Provision for impairment of loans and advances ( 28,876,920) - ( 28,876,920) 12,745,296, ,164,945 13,372,461,640 December 31, 2006 F/Cy in Total in Loans and advances to customers 3,729,747, ,660,495 4,130,408,276 Creditors accidentally debtors 102,878,333 18,792, ,670,356 Discounted commercial bills 1,268,882,689 19,373,435 1,288,256,124 Promissory notes 784,005,743 20,842, ,848,675 Advances on salaries 3,139,330-3,139,330 5,888,653, ,668,885 6,348,322,761 Classified Non-performing debts 85,655,663 1,541,389 87,197,052 Provision for impairment of loans and advances ( 9,989,188) - ( 9,989,188) 5,964,320, ,210,274 6,425,530,625 Loans and advances to customers as of December 31, 2007 include an amount of 606 million representing facilities granted to a related insurance company. The interest income on these facilities was 20,020,721 in 2007 ( 9,205,069 in 2006). 20

23 Loans and advances to customers are distributed by economic sectors as follows: December 31, 2007 Corporate Individuals Total Percentage Percentage Percentage Amount to total Amount to total Amount to total Sector 000 % 000 % 000 % Commercial 7,670, ,570, ,240, Industrial 307, , , Agricultural 74, , , Real Estate 182, , , Services and other sectors 628, , , ,863, ,006, ,870, Less : Deferred income ( 684,485) 13,185,806 December 31, 2006 Corporate Individuals Total Percentage Percentage Percentage Amount to total Amount to total Amount to total Sector 000 % 000 % 000 % Commercial 4,945, ,983, ,928, Industrial 396, , , Agricultural 24, , Services and other sectors 52, , , ,419, ,105, ,524, Less : Deferred income ( 175,953) 6,348,323 Classified non-performing debts comprise doubtful and litigated debts that were classified as nonperforming debts due to the existence of doubts or non-collection probability over these debts and/or revenues there from. Classified non-performing debts comprise the following: December 31, 2007 Debt balance (net of unearned Provision for interest) impairment Net balance Substandard debts 83,905,640-83,905,640 Doubtful debts 67,996,579 ( 11,813,165) 56,183,414 Bad debts 63,630,223 ( 17,063,755) 46,566, ,532,442 ( 28,876,920) 186,655,522 21

24 December 31, 2006 Debt balance (net of unearned Provision for interest) impairment Net balance Substandard debts 25,641,065-25,641,065 Doubtful debts 61,555,987 ( 9,989,188) 51,566,799 87,197,052 ( 9,989,188) 77,207,864 The movement of unearned interest was as follows: Balance January 1 2,806,000 - Additions 32,436,158 2,806,000 Settlements ( 1,077,700) - Balance December 31 34,164,458 2,806,000 The movement of provision for impairment of loans and advances was as follows: Balance January 1 9,989,188 - Additions, period charges 19,017,758 9,989,188 Write offs ( 130,026) - Balance December 31 28,876,920 9,989, CUSTOMERS / BANKS LIABILITY UNDER ACCEPTANCES Customers liability under acceptances represents the liability to the Bank of its customers for shipping documents and drafts or bills of exchange, which have been accepted, by the Bank and/or other banks for its account. These balances relate to deferred payment documentary letters of credit on shipping document. The commitments resulting from these acceptances are stated as a liability in the balance sheet for the same amount. 22

25 11. OTHER ASSETS This caption comprises the following: December 31, Prepaid rent 316, ,836 Other prepaid expenses 18,572,656 3,727,395 Stationery 3,042,065 3,505,500 Deferred charges 674, ,465 Stamps 506, ,842 Other debit balances 6,451,107 1,248,881 29,563,329 10,409,919 23

26 12. PROPERTY AND EQUIPMENT This caption comprises the following: Land Furniture Advances on and and office Computer Leasehold capital buildings equipment equipment Vehicles improvements expenditure Total Historical Cost: Balance December 31, ,857,428 30,717,626 20,252,465 6,347, ,395,952 26,735, ,306,732 Additions 83,825,905 25,990,390 12,007,758-94,490,769 63,082, ,397,723 Transfer from key money (Note 13) 71,000, ,000,000 Transfers 51,554, , , ( 52,948,112) - Balance December 31, ,237,513 57,294,816 33,067,355 6,347, ,886,721 36,870, ,704,455 Additions 36,500,000 26,795,423 5,518,647 1,190,000 59,720,509 38,772, ,497,160 Disposals - ( 80,498) ( 80,498) Transfers - 4,605,944 7,018,192-3,995,790 ( 15,619,926) - Balance December 31, ,737,513 88,615,685 45,604,194 7,537, ,603,020 60,023, ,121,117 Accumulated Depreciation: Balance December 31, 2005 ( 4,873,793) ( 4,062,625) ( 4,210,347) ( 2,221,635) ( 22,451,491) - ( 37,819,891) Additions ( 11,222,063) ( 6,513,104) ( 5,422,867) ( 1,269,520) ( 34,813,212) - ( 59,240,766) Adjustments - 110, ,437 Transfer from key money (Note 13) ( 6,804,163) ( 6,804,163) Balance December 31, 2006 ( 22,900,019) ( 10,465,292) ( 9,633,214) ( 3,491,155) ( 57,264,703) - ( 103,754,383) Additions ( 21,081,182) ( 13,309,723) ( 8,146,138) ( 1,348,853) ( 52,403,101) - ( 96,288,997) Disposal - 33, ,359 Balance December 31, 2007 ( 43,981,201) ( 23,741,656) ( 17,779,352) ( 4,840,008) ( 109,667,804) - ( 200,010,021) Net Book Value: Balance December 31, ,756,312 64,874,029 27,824,842 2,697, ,935,216 60,023, ,111,096 Balance December 31, ,337,494 46,829,524 23,434,141 2,856, ,622,018 36,870, ,950,072 24

27 Advances on capital expenditure include an amount of 20 million representing the price of a real estate property acquired in Homs district for a potential branch opening. Up to the date of these financial statements, this property is still classified as a residential property and consequently can not be operated as a commercial property by the bank. Land and buildings include an amount of 3,916,000 representing the cost of a plot of land acquired during 2006 in the region of Aadra for the purpose of opening a new branch. During 2006, the leased premises in Damascus, Nijmeh Square was acquired and the key money previously paid to the lessor was considered as a payment on account of the total cost of the real estate. The historical cost and accumulated amortization amounting to 71,000,000 and 6,804,163 respectively were reclassified under the Buildings caption (See Note 13). 13. INTANGIBLE ASSETS This caption comprises the following: Key Money Software Total Historical Cost: Balance December 31, ,000,000 6,658, ,658,842 Additions 30,000,000 4,783,750 34,783,750 Transfer to buildings (Note 12) ( 71,000,000) - ( 71,000,000) Balance December 31, ,000,000 11,442, ,442,592 Additions - 1,700,470 1,700,470 Balance December 31, ,000,000 13,143, ,143,062 Accumulated Amortization: Balance December 31, 2005 ( 8,591,662) ( 1,714,397) ( 10,306,059) Additions ( 5,245,833) ( 1,875,370) ( 7,121,203) Transfer to buildings (Note 12) 6,804,163-6,804,163 Balance December 31, 2006 ( 7,033,332) ( 3,589,767) ( 10,623,099) Additions ( 4,550,000) ( 2,602,983) ( 7,152,983) Balance December 31, 2007 ( 11,583,332) ( 6,192,750) ( 17,776,082) Net Book Value: Balance December 31, ,416,668 6,950,312 86,366,980 Balance December 31, ,966,668 7,852,825 91,819,493 25

28 14. REGULATORY BLOCKED FUND According to paragraph B of Article 12 of Law No. 28/2001, private sector banks are required to block 10% of their capital as Regulatory Blocked Funds at the Central Bank of Syria as an interestfree blocked deposit. This caption comprises the following: December 31, Blocked funds in Syrian Pounds 115,789, ,789,800 Blocked funds in US Dollars 167,991, ,480, ,781, ,269,840 The allocation of the blocked funds is as follows: Nominal Subscribed value per Blocked Blocked Currency Shares share Value Capital Capital % Syrian Pounds 2,315, ,157,898, ,789,800 US Dollars 3,684, ,842,102, ,210,200 Negative difference in exchange - - ( 16,218,700) 6,000,000 3,000,000, ,781,300 The negative difference in exchange is derived as follows: Historical Value as at Negative Shares subscribed Number of Blocked capital translation Historical December 31, difference in USD shares in USD rate value 2007 in exchange USD Original issuance 1,779,114 1,727, ,955,700 82,996,525 ( 5,959,175) Capital increase 1,905,090 1,768, ,254,500 84,994,975 ( 10,259,525) 3,684,204 3,496, ,210, ,991,500 ( 16,218,700) 26

29 15. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS This caption comprises the following: December 31, 2007 F/Cy in Total in Demand deposits - correspondent banks and institutions 217,501, ,121, ,623,051 Demand deposits - related banks and institutions 65,345, ,789, ,134,850 Term deposits - correspondent banks and institutions 24,683, ,376, ,059,831 Term deposits - related banks and institutions 27,286,986 63,178,461 90,465, ,816, ,466,399 1,199,283,179 Accrued interest payable 630, ,271 1,132, ,447, ,967,670 1,200,415,277 December 31, 2006 F/Cy in Total in Demand deposits - correspondent banks and institutions 35,541, ,099, ,640,984 Demand deposits - related banks and institutions 9,012,556 12,844,940 21,857,496 Term deposits - related banks and institutions 166,626,484 64,095, ,722, ,180, ,039, ,220,654 Accrued interest payable 6,008, ,457 6,239,740 Clearing checks 55,173,020-55,173, ,362, ,271, ,633, CUSTOMERS, AND RELATED PARTIES' DEPOSITS AND OTHER CREDIT BALANCES This caption consists of the following: December 31, 2007 F/Cy in Total in Demand deposits 8,643,067,907 7,237,634,522 15,880,702,429 Term deposits 13,870,692,472 23,906,224,357 37,776,916,829 Savings accounts 1,260,126, ,845,755 1,618,971,926 Related party deposits 289,733, ,676, ,409,849 Cash margins against loans and advances 20,276,816 7,844,094 28,120,910 24,083,896,688 31,662,225,255 55,746,121,943 Accrued interest payable 182,510,284 98,676, ,186,383 24,266,406,972 31,760,901,354 56,027,308,326 27

30 December 31, 2006 F/Cy in Total in Demand deposits 6,521,671,709 7,256,900,905 13,778,572,614 Term deposits 10,430,516,719 17,875,789,656 28,306,306,375 Savings accounts 1,110,921, ,655,998 1,378,577,375 Related party deposits 154,557, ,851, ,409,274 18,217,667,119 25,539,198,519 43,756,865,638 Accrued interest payable 122,711,759 77,124, ,836,244 18,340,378,878 25,616,323,004 43,956,701,882 Customers and, related parties deposits and other credit balances are distributed by brackets as follows: December 31, 2007 percentage of Percentage No. of of Bracket Number of Customers to Bracket Amount Customers Total Amount to total % 000 % Less than 500,000 33, ,409, Between 500,001 and 1,000,000 3, ,432, Between 1,000,001 and 10,000,000 7, ,305, More than 10,000,000 1, ,598, , ,746, December 31, 2006 percentage of Percentage No. of of Bracket Number of Customers to Bracket Amount Customers Total Amount to total % 000 % Less than 500,000 17, ,370, Between 500,001 and 1,000,000 2, ,602, Between 1,000,001 and 10,000,000 5, ,848, Greater than 10,000, ,935, , ,756,

31 17. CASH MARGINS This caption comprises the following: December 31, Cash margins against documentary letters of credit 475,814, ,790,819 Cash margins against acceptances 150,828,728 81,976,876 Cash margins against guarantees 360,198, ,219,443 Other margins 241,945,179 47,003,013 1,228,787, ,990,151 Accrued interest payable 2,375,023-1,231,162, ,990, OTHER LIABILITIES This caption consists of the following: December 31, Provision for income tax 129,500,000 88,885,000 Withheld taxes on interest paid to customers 43,365,038 28,916,743 Withheld taxes on salaries 9,876,567 7,594,681 Other withheld taxes 5,222,768 3,460,512 Social security dues 6,586,738 5,884,287 Checks to be paid 382,559, ,946,918 Net inter-branch accounts 115,673 61,908 Fixed assets suppliers 8,006,037 3,839,905 Amounts refundable to shareholders 1,054,440 1,816,485 Dividends payable 20,420,275 - Fair value of financial guarantees 7,653,879 2,064,955 Accrued bonuses and incentives 23,300,000 15,000,000 Accrued electricity and telephone charges 3,840,000 4,499,959 Provision for fluctuations in of exchange rates 2,483,000 2,483,000 Accrued professional fees 2,462,490 1,282,964 Other liabilities 24,625,454 31,817, ,071, ,554,544 The movement of the provision for income tax was as follows: Balance as of January 1 88,885,000 50,227,000 Settlement of prior year income tax ( 88,885,000) ( 50,227,000) Accrued income tax for the year 129,500,000 88,885,000 Balance as of December ,500,000 88,885,000 29

32 The provision for income tax for 2007 was calculated as follows: Profit for 2007 before income tax 362,997,546 Add: Unrealized exchange losses 107,620,933 Provision for doubtful debts 19,017,758 Non-tax-deductible expenses 28,250,102 Taxable profit 517,886,339 Income tax (25%) 129,500,000 Amounts refundable amounts to shareholders represent excess amounts paid by shareholders when subscribing for the capital increase during In accordance with decision No. 249 issued by the Council of Money and Credit during 2006, banks operating in Syria are required to set up a provision for fluctuations in exchange rates. This provision should equal 10% of the "Operational currency position". During 2007, this decision was suspended until issuance of its implementation instructions, and consequently, no provision was set up this year. 19. CAPITAL The Bank s capital as at December 31, 2004 consisted of 3,000,000 nominative shares of 500 par value each, authorized and fully paid. On May 25, 2004, the Extraordinary General Assembly decided to increase the Bank s capital from 1.5 billion to 3 billion, by issuing 3,000,000 additional shares of 500 each. The subscription in the new shares took place during the period from September 18, 2005 to October 10, The allocation of the new shares was approved by the Extraordinary General Assembly held on November 23, As of December 31, 2007, capital consists of 6,000,000 nominative shares of 500 par value each, authorized and fully paid and is broken down by currency as follows: Currency Adjustment on No. of Historical Capital Funded Shares USD Equivalent in U.S. Dollars Original issuance: Capital funded in Syrian Pound 1,220, ,443,000 - Capital funded in U.S. Dollar (reflected in ) 1,779,114 17,272, ,557,000 ( 59,591,753) 3,000,000 1,500,000,000 ( 59,591,753) Capital increase: Capital funded in Syrian Pound 1,094, ,455,000 - Capital funded in U.S. Dollar (reflected in ) 1,905,090 17,688, ,545,000 ( 102,595,277) 3,000,000 1,500,000,000 ( 102,595,277) Total Capital: Capital funded in Syrian Pound 2,315,796-1,157,898,000 - Capital funded in U.S. Dollar (reflected in ) 3,684,204 34,961,810 1,842,102,000 ( 162,187,030) 6,000,000 3,000,000,000 ( 162,187,030) 30

33 Capital paid in US Dollars and reflected in Syrian Pounds comprises the following: Currency Historical Value as at Adjustment on Shares subscribed Number of Capital funded translation Historical December 31, capital funded in USD shares in USD rate value 2007 in USD USD Original issuance 1,779,114 17,272, ,557, ,965,247 ( 59,591,753) Capital increase 1,905,090 17,688, ,545, ,949,723 ( 102,595,277) 3,684,204 34,961,810 1,842,102,000 1,679,914,970 ( 162,187,030) The Bank manages its capital to comply with the instructions of the Central Bank of Syria stipulated in decision Number 253 issued on January 24, 2007, regarding equity sufficiency. This decision requires that the Bank's solvency(or capital adequacy) ratio should not be less than 8% (BASEL 2). The capital adequacy ratio as of December 31, 2007 was 12.30%, calculated as follows:,000 Net equity (excluding current year profit) 3,087,722 Risk-weighted assets 21,331,498 Risk-weighted off balance sheet items 2,238,201 Market and operational risks 1,534,219 25,103,918 Capital adequacy ratio 12.30% 20. RESERVES Article 246 of the Code of Commerce requires the set up of a legal reserve at 10% of annual net profit up to 50% of capital. This reserve is not available for distribution. Article 97 of the Money and Credit law require the set up of a special reserve at 10% of annual net profit up to 100% of capital. This reserve is not available for distribution. 21. CURRENCY ADJUSTMENTS ON STRUCTURAL POSITION On December 26, 2006 the Money and Credit Council issued Decision number 249, with effect from January 1, 2007, which allowed banks operating in Syria to hold a structural currency position equivalent to 60% of that equity. This decision considered the gains/(losses) resulting from valuation of the structural currency position, as unrealized gains/(losses) and, consequently, these gains are not subject to tax nor available for distribution. In prior years, the structural currency position of Bank of Syria and Overseas comprised only of the capital funded in US Dollars, and accordingly the resulting exchange differences used to be classified under "Currency adjustments on capital funded in US Dollars". As a result of the above decision, the 31