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0080528_KFH80528_KFH AnnualAnnual Report_extra.i1Report_extra.i1 1 55/29/08/29/08 3:13:303:13:30 PMPM Kuwait Finance House - Bahrain Annual Report 2007
0080528_KFH80528_KFH AnnualAnnual Report_extra.i2Report_extra.i2 2 55/29/08/29/08 3:13:303:13:30 PMPM Contents
02 Vision & Mission 04 3 Year Highlights 06 Chairman & Managing Director’s Statement 10 General Manager’s Statement 12 Board of Directors 14 Management Team 20 Investment Portfolio 34 Consumer Finance & Corporate Finance 36 Asset & Liabilities Management 38 Risk Management 40 Corporate Social Responsibility 42 Shari’a Board Statement 43 Auditor’s Report 44 Financial Statements HH Shaikh Khalifa bin HM Shaikh Hamad bin HH Shaikh Salman bin Salman Al Khalifa Isa Al Khalifa Hamad Al Khalifa
Prime Minister King of The Kingdom of Bahrain Crown Prince, Deputy Supreme Commander Our Vision & Mission
2 KFH-Bahrain - Annual Report 2007 Bringing Banking to Life
Vision
At KFH-Bahrain we believe that banking is not just about money. For us it’s something that can improve people’s lives.
Whether we’re providing commercial and investment banking services or financial products for consumers, we start by understanding our customers. Then, by focusing on innovation, we provide leading edge Islamic banking solutions that truly enhance their lives whilst staying faithful to Shari’a principles.
Mission
It is our mission to Bring Banking to Life by focusing on innovation and insisting on excellence in everything we do – including the development and provision of a wide range of integrated products and services in perfect harmony with Shari’a principles.
Our mission and our commitment are backed by a robust financial position and a long and proven heritage of ingenuity, innovation and integrity. 49% 135% 52%
Net Income Customer Deposits Operating Income
3 Year Highlights
4 KFH-Bahrain - Annual Report 2007 82%
Profile
Kuwait Finance House-Bahrain (KFH-Bahrain) is a leading provider of Islamic commercial and investment banking services. Established in 2002 as a wholly owned subsidiary of Kuwait Finance House-Kuwait, a global industry leader, KFH-Bahrain specialises in conceptualising the development and introduction of innovative, Shari’a compliant banking and investment products.
KFH-Bahrain enjoys a reputation as a performance-driven, results orientated organisation, combining global investment strategies with the provision of popular retail products and services. The bank has made major advances and experienced considerable growth Total Assets in the last few years, allowing it to further develop its products and services, providing outstanding investment opportunities for its clients. KFH-Bahrain is at the forefront of the investment and finance sectors and has developed a series of successful projects and made further investments in diverse sectors of the economy.
KFH-Bahrain is continuing its strategy of innovation and change and is committed to setting a new standard for Islamic banking and finance. It is a strategy that will confirm the bank’s status as a market leader and help it to continue contributing significantly to economic growth and social development in the Kingdom of Bahrain. Bader A. M. Mukhaizeem Chairman and Managing Director
Chairman & Managing Director’s Statement
On behalf of the Board of Directors, it is my privilege to present the annual report of Kuwait Finance House-Bahrain for the year ended 31st December 2007.
6 KFH-Bahrain - Annual Report 2007
Dear Stakeholders,
In the name of Allah, the Beneficent, the Merciful, Prayers and Peace Be Upon the Last Prophet and Messenger Muhammed.
In 2007 KFH-Bahrain’s performance strengthened markedly with a significant increase in net income of 49%, reaching BD 31.4 million for 2007 against the previous year’s net income of BD 21.1 million. At the end of 2007, total customer deposits increased by 135% to a total amount of BD 447.5 million from BD 190.3 million at year end 2006.
This resulted in a 26% return on average equity for 2007. Operating income increased by 52% from BD 47.4 million in 2006 to BD 72.0 million in 2007. Total assets increased by 82% to BD 735.3 million at the end of 2007 versus BD 403 million in 2006. This strong performance came despite many challenges and difficulties engulfing the financial services sector following the US sub-prime crisis and the fear of recession in the US.
The implementation of the core banking application and the establishment of a risk management framework providved further impetus and the bank is now fully equipped to meet the requirements of Basel II, which is expected to be implemented by the Central Bank of Bahrain during 2008. In 2006 KFH-Bahrain focused its strategy on “Building a better Bahrain” with exceptional and ambitious plans for the future. In 2007 the concept of “Bringing Banking to Life” was introduced, a concept that aims to provide products and services that truly make a positive difference to the lives of our customers.
Last year KFH-Bahrain accomplished many operational achievements in all fields, particularly in retail services. For example, KFH Automall, the largest car showroom in the Kingdom of Bahrain, was officially opened. Besides housing Bahrain’s largest selection of car brands it also offers finance and insurance, making it a complete automotive package under one roof.
In association with Visa, the bank also launched the first Islamic chipped credit card, a Shari’a compliant financing tool developed by KFH-Bahrain offering a wide range of advantages to customers.
The weakening of the US dollar in 2007 against major currencies, along with market views on the future of Bahraini dinar’s peg to the dollar posed further challenges to the management, besides the task of raising interbank lines and managing liquidity. This demonstrated that the management had been prudent in managing its US dollar positions in order to minimise the impact of any potential revaluation of the Bahraini dinar against the US dollar.
The Board and the management are both focused on sourcing attractive private equity deals with an emphasis on real estate development, aerospace, telecommunications, sportswear, pharmaceuticals, and healthcare sectors.
The structured product development is also at the forefront, as seen in the bank’s collaboration with the Fortis Real Estate team. KFH-Bahrain and Fortis have partnered in the development of the Shari’a Compliant Overnight Fund. The US$ 1 billion fund was launched, registered and listed in Luxembourg, and enabled Islamic institutions to place excess liquidity with the flexibility of retrieving their investments on a daily basis.
KFH-Bahrain established a US$ 50 million investment bank in Jordan. The investment bank Kuwait Finance House-Jordan (KFH-Jordan) is a wholly owned subsidiary of KFH-Bahrain. The bank will conduct investment banking activities including investment advisory, acquisitions and the development of opportunistic investments. Mr. Abdul Hakeem Al Khayyat was chosen as the Chairman of the new bank.
Bahrain’s banking sector witnessed unprecedented growth with total assets reaching record levels of BD 89.8 billion as of 30 November 2007. From a human capital perspective this situation has presented numerous challenges in recruitment. The bank has successfully overcome this challenge and recruited several highly qualified professionals with relevant skills during 2007.
8 KFH-Bahrain - Annual Report 2007
With gratitude from our bank, our Board of Directors and all of our stakeholders, I conclude by paying tribute to the vision, support and confidence inspired in the Kingdom of Bahrain and its future by His Majesty King Hamad Bin Isa Al Khalifa, King of Bahrain, His Highness Shaikh Khalifa Bin Salman Al Khalifa, the Prime Minister, and His Highness Shaikh Salman Bin Hamad Al Khalifa, the Crown Prince, Deputy Supreme Commander.
Further thanks are also due to the Government of Bahrain and the Central Bank of Bahrain, which have continued to set the highest standards and provided enormous support for the elevation of the Islamic banking industry in the region and internationally.
I extend my gratitude to our employees and customers for their continued loyalty and confidence in KFH-Bahrain. With the blessings of Almighty God we will continue to sustain our momentum in our programme of transformation and usher in the next stage for growth, to “Bring Banking to Life” in the new financial year.
Bader A. M. Mukhaizeem Chairman and Managing Director Abdulhakeem Y. Alkhayyat General Manager
General Manager’s Statement
Two great achievements defined our bank’s efforts in 2007. First, we accelerated the execution of our organic growth strategy, creating value for stakeholders by building and expanding our customer and client relationships across the country and regionally. This greatly increased our opportunities for value creation and future growth in the local and regional markets.
10 KFH-Bahrain - Annual Report 2007 The second is that we continued the momentum we created in 2002. In our banking operations, we made more improvements to products, services and the banking experience to drive both customer satisfaction and revenue to all-time highs. In investment banking, our team worked hard to bring a range of innovative investment products and services to more of our clients than ever before. And in asset management, we fulfilled our customers’ needs with Shari’a compliant products never before seen in the local market.
While our staff members are working within their lines of business to build customer relationships, they are also reaching out to work with teammates throughout the bank to create new opportunities to deliver the full resources of KFH-Bahrain to our customers.
In 2007, KFH-Bahrain’s net profit reached BD 31.4 million. Our results exceeded our expectations in the most important financial categories, including earnings per share, net income, revenue and credit quality. We are proud that we have achieved steady growth in our financial performance since our inception in 2002.
Our strong profit growth provided us with multiple opportunities for capital deployment, which we pursue in three broad categories: (1) investments in existing lines of business, (2) finance of large scale infrastructure projects in partnership with government and, (3) return on capital to shareholders. We are focusing on investments with long term prospects for growth.
Today the bank is developing the skills and tools that enable us to grow by taking calculated risks and by being paid appropriately for the risks we take. We are continuing to build a risk and reward management structure and a culture of shared responsibility, in which every member of staff – from front-line bankers to risk managers and auditors – is accountable for managing risks to help the bank grow.
We provide the financial capital to create economic opportunity that is consistent and sustainable in financial returns for our shareholders and participate in the development of Bahrain’s economic and social welfare.
KFH-Bahrain continued with its social responsibility programme. This focused mainly on the youth, because of the vital role they have to play in the development of Bahrain. We believe this investment is the most important we make.
In closing, I would like to thank all our valuable staff for their guidance during what has been a year of great progress and success. As we continue our work to deliver ever- higher standards of service and performance for our customers, our shareholders and our communities, I look forward to all we will accomplish together.
Abdulhakeem Y. Alkhayyat General Manager 12 KFH-Bahrain - Annual Report 2007
Board of Directors
Bader A. M. Mukhaizeem Chairman and Managing Director
Mohamed bin Mohammed Yaqoob Yousef Mohamed Adel Ahmed Sh. Eshaq Sulaiman Al Omar Majed Isa Alwazzan Al Banwan Vice Chairman Board Member Board Member Board Member Board Member Management Team
General Manager
Abdulhakeem Y. Alkhayyat General Manager
Executive Management
Paul Mercer Abdul Razak Jawahery Waleed Rashdan Lilian Le Falher Executive Manager Executive Manager Executive Manager Executive Manager
14 KFH-Bahrain - Annual Report 2007
Senior Management
Ahmad Hisham Jalal Haji Khalid Mohammed Sattam Yousif Saeed Al-Moayyed Jassim Al Maarafi Ali Hamad Algosaibi Al-Hammadi Senior Manager Senior Manager Senior Manager Senior Manager Senior Manager Senior Manager Senior Manager Investment Real Estate Operations Banking Group Internal Audit Corporate Finance Financial Control
Department Managers
Amit Jehad Jameel Majed Peter Salah Waleed Yashpal Al-Wardi Al-Khaja Mahmood Rushton Al-Majthoob Ahmadi Manager Manager Manager Manager Manager Manager Manager Risk Management Administration Credit Priority Banking Corporate Information Human Communications Technology Resources
Bringing Banking to Life The Team
16 KFH-Bahrain - Annual Report 2007
Investment Placement
Investment Bringing Banking to Life
Consumer Finance
Corporate Finance
18 KFH-Bahrain - Annual Report 2007
Treasury
Priority Banking A vision of global investment strategies has propelled KFH-Bahrain forward in the last few years, moving it at a rapid pace in 2007 and opening a range of opportunities for our clients.
20 KFH-Bahrain - Annual Report 2007 Investment Portfolio
Global Investment Growth
A strategy of diverse international investment has been a major factor in the success of KFH-Bahrain over recent years. While the new investments of the bank have been in economic and infrastructure projects in the Kingdom of Bahrain, it has also positioned itself to enter into partnerships and alliances with many international companies whose businesses are based on applying innovative business practices to provide globally com-p petitive products and services.
In 2007 KFH-Bahrain continued to develop a diverse investment portfolio deployed over a wide geographical area with great success. Large-scale real estate development projects in Bahrain also showed good progress, moving from concept to construction and, in many cases, approaching completion.
Led by a team of highly qualified professionals, KFH-Bahrain’s investment department has an unwavering focus on increasing shareholder value through careful planning and efficient execution of its investment strategy. The department continually monitors the current portfolio by closely interacting with management of the operating companies and KFH-Bahrain board representatives, as well as obtaining feedback from leading industry consultants. In this way the bank can enhance the value of the underlying investments and increase the likelihood of profitable results in the future.
Investment portfolio
KFH-Bahrain employs and actively pursues an international investment strategy that allows investors access to a wide range of local, regional and international opportunities – all of which are designed to deliver strong returns while enhancing the reach and profile of the Islamic banking industry.
Real estate investment activities and acquisitions
KFH-Bahrain, directly or through its subsidiaries, is continuously seeking opportunities in the real estate market, acting as a developer and entering with strategic partners into joint ventures to acquire and develop projects in the Kingdom of Bahrain and the region. The bank has a very strong portfolio that includes Diyar Al Muharraq, Durrat Al Bahrain, Ishbiliya Village, Meena 7, and other projects soon to be announced. During the year, KFH-Bahrain has made a number of acquisitions in various areas of the Kingdom of Bahrain with more to come in the future. Country Bahrain Sector Real Estate Year of Acquisition 2003 Group Holding 50%
Durrat Al bahrain
The flagship of the KFH-Bahrain investment portfolio is the that offers a fast link from Manama city to the resort was Durrat Al Bahrain project, a world-class residential, leisure, opened to traffic during the last year. commercial and tourist destination. Durrat Al Bahrain is owned by the Durrat Khaleej Al Bahrain Company, in which The development of a world-class championship golf course is the Government of the Kingdom of Bahrain and KFH-Bahrain also under way. The concept master plan has been developed (together with its investors) each hold a 50% stake. Once by world famous golfer Ernie Els and is among his few signature complete, Durrat Al Bahrain, a 20-square-kilometre area of courses. pristine waters and untouched beaches, is expected to be approximately the size of Manama, Bahrain’s capital city. During 2007, Durrat Al Bahrain sold the North Horn of the Crescent and sales progressed rapidly, with the properties In 2007, reclamation was completed and infrastructure works offered for sale in the market having been completely sold and villa construction progressed rapidly. Handover of villas to out. There is significant demand for the remaining parts of the buyers will start in 2008. project.
The landscape has been transformed and is most apparent Durrat Al Bahrain rebranded in December 2007 and continued from a thousand miles above the site, where the 12 islands of to increase its marketing activities to raise awareness of and Durrat Al Bahrain have created a breathtaking landmark for the promote the landmark project locally and internationally. Durrat Kingdom’s south east coast. All of the five Petal Islands and the Al Bahrain participated in an international real estate exhibition six Atoll Islands along with the Hotel Island now prominently in Cannes, France, and at the CityScape exhibition in Dubai dot the south territorial seas. and Abu Dhabi, where it was well received by visitors and exhibitors alike. Once completed, Durrat’s 60,000 residents and an estimated 4,500 visitors daily will be able to hop from point to point within www.durratbahrain.com the island via ultra-modern roads and bridges. The highway
22 KFH-Bahrain - Annual Report 2007 Country Bahrain Country Bahrain Sector Real Estate Sector Real Estate Year of Acquisition 2005 Year of Acquisition 2003 Group Holding* 100% Group Holding 60%
Ishbiliya Village Meena Towers Company
Situated on a large plot of land in a prime location in the Al With a holding of 60%, KFH-Bahrain entered into a business Qadam area of Bahrain, Ishbiliya Village is a premier residential venture with other notable investors in Bahrain to form the Meena development targeted for the middle to high income market. Towers Company for the purpose of developing the Meena The project development team is led by Al Enma’a House for Towers real estate project. The design was conceptualised Real Estate. by world famous architects, creating a structure blending modern and intricate designs reflecting the Arabic architectural Ishbiliya Village will offer high quality housing at affordable heritage. prices to the fast growing local population, providing this market segment with a new lifestyle of choice in a fully master- The development consists of 240 apartment units in a cluster planned community. The project, which is close to Manama of seven residential towers in the south side of the Town Centre City Centre, will feature 300 villas and 500 apartments of of the Al Marsa Floating City, at the Amwaj Islands in Bahrain. varying sizes alongside high class commercial and leisure facilities, modern infrastructure and community essentials such The project is now complete and KFH-Bahrain exited the as schools, parks and mosque. investment in December 2007 realising a significant return on its investment. The project is now in the development and construction phase with all the building permits having been obtained. The properties will be offered for sale during the second quarter of 2008.
*Includes investors. Country Bahrain Country Bahrain Sector Real Estate Sector Real Estate Year of Acquisition 2006 Year of Acquisition 2007 Group Holding* 50% Group Holding 13%
Diyar Al Muharraq Seef Properties B.S.C
During 2006, KFH-Bahrain acquired a 50% equity stake in Diyar Seef Properties is a leading property development and Al Muharraq Company, a company incorporated to undertake the management company in the Kingdom of Bahrain. Its development of the Diyar project. signature asset is Seef Mall, which is the most successful and popular shopping mall in Bahrain. KFH-Bahrain invested in Diyar Al Muharraq will consist of a mix of residential, commercial Seef Properties B.S.C. through the Initial Public Offering in May and retail components for the medium to high net worth market. 2007. The project lies just off the coast of Muharraq, the northern island and historical city centre of the Kingdom of Bahrain, which is also Shares in Seef Properties B.S.C. were listed on the Bahrain in close proximity to the international airport. Diyar Al Muharraq Stock Exchange in July 2007 and as of 31 December 2007 will comprise a total area of 12.2 million square metres and the share price had risen by 58% from the subscription price. once completed will be a self-contained city combining modern The net profits of the company have increased significantly amenities with traditional design. year-on-year. The company is planning further expansion and undertaking new projects within Bahrain, based on its strong There has been significant progress in various areas of the brand recognition and experience in the real estate sector. project development. Marine survey, oceanography and ground investigation contracts are complete. A sizeable portion of land has already been reclaimed, with dredging and further reclamation proceeding well.
The company arranged for the issue of a US$ 200 million Sukuk for the purpose of partially financing the reclamation and development of the project. The lead underwriter was KFH-Kuwait.
*Includes investors.
24 KFH-Bahrain - Annual Report 2007 Country Bahrain Country Bahrain Sector Industrial Real Estate Sector Real Estate Year of Acquisition 2007 Year of Acquisition 2003 Group Holding 100% Group Holding 59.28%
KFH Industrial Oasis Al Enma’a House for Real Estate B.S.C. (c)
KFH–Bahrain is intending to diversify its investment base by Established in 2003, Al Enma’a House for Real Estate B.S.C. is capitalising on the Kingdom of Bahrain’s ever-growing demand one of the largest privately held real estate developers in Bahrain for industrial based real estate projects. The Industrial Oasis will in terms of capital and projects in hand. Engaged in property be located in the Bahrain International Investment Park (BIIP), a development, project management, real estate management newly established area focused on technology, manufacturing & logistics, and strategic investments, the company has not and service sectors. only cemented its name in the Kingdom of Bahrain but has progressed regionally with two wholly owned subsidiaries in The land allocated for the Industrial Oasis is 170,000 square both Syria and Saudi Arabia (presently under formation) and meters and construction has already commenced and will be interests in Turkey. in two phases which will comprise of multi storey buildings and advanced factory blocks. www.enmahouse.com
At full capacity, it is expected that the KFH Industrial Oasis will source investments of about USD200 million into the Bahrain economy and will help create more than 2,000 industrial related jobs. Country USA Sector General Aviation Year of Acquisition 2005 Group Holding* 75%
Liberty Aerospace
Based in Melbourne, Florida, USA, Liberty specialises in the design, production and marketing of the XL2, a two-seat, Corporate single-engine, piston-powered aircraft. The plane, designed to provide a modern, cost-effective alternative for recreational flying, pilot training and surveillance, was the first of its kind Investments to receive a US FAA Part 23 Type Certification in over thirty years and incorporates advanced technologies that provide exceptional performance, safety, fuel efficiency, comfort and affordability.
In 2007 XL2 received VFR and IFR ratings certification from the European Aviation Safety Agency (EASA) and IFR ratings certification from the General Administration of Civil Aviation of China. In 2007 Liberty achieved a significant milestone by signing an aircraft Purchase and Licensing Agreement with Anyang Angel Aero Science and Technology Development Co., Ltd, (‘Anyang’) China. The contract allows Anyang to manufacture XL2 component parts and ultimately produce the XL2 in China.
www.libertyaircraft.com
*Includes investors.
26 KFH-Bahrain - Annual Report 2007 Country New Zealand / UK Country New Zealand Sector Apparel Sector Telecommunications Year of Acquisition 2004 Year of Acquisition 2004 Group Holding* 60% Group Holding* 53%
Canterbury Woosh Wireless
Canterbury, the world’s leading rugby apparel brand, was Woosh is a wireless broadband telecommunications company established in Christchurch, New Zealand, in 1904. Canterbury targeting the home and small office market. Its technology, which now produces a wide range of clothing for both on and off the is manufactured by IP Wireless of the United States, enables it to field. The company has succeeded in showcasing its products be the lowest-cost provider of broadband in New Zealand. in many high street outlets internationally, including Galeries Lafayette in France, Harrods, House of Fraser, John Lewis in In 2007 the company’s customer base increased to approximately UK and Saks Fifth Avenue in US. 32,000, with Woosh continuing to process approximately 1,500 new customers per month. The 2006 acquisition of Quicksilver In the 2007 Rugby World Cup, Canterbury sponsored more has now been fully integrated. teams than all other major competitors combined, including the world champions South Africa. The company also sponsors The company continues its growth strategy of merger/acquisition Portsmouth Football Club in the English Premier League. with smaller players, providing immediate revenue, operating synergies and a dial-up subscriber base to migrate to its wireless product suite. Woosh is in preliminary discussions with several large The company has steadily achieved growth through expansion local operators who wish to explore joint build out and operating in Europe over the last few years. Canterbury has also opportunities. The company emerged as one of the successful introduced new products into the market while rationalising its bidders in the spectrum auction which was held in New Zealand overall range of offering. towards the end of 2007. Woosh has taken a strategic business decision to deploy a WiMAX network and is in the process of www.canterburynz.com exploring opportunities for the execution of this strategy.
*Includes New Zealand Australia Private Equity Fund investment. www.woosh.com
*Includes New Zealand Australia Private Equity Fund investment. Country Bahrain Country Jordan Sector Telecommunications Sector Pharmaceutical Year of Acquisition 2003 Year of Acquisition 2003 Group Holding 100% Group Holding 82.2%
Mena Telecom AL-KINDI Pharmaceutical
Mena Telecom is a licensed telecommunications company Al-Kindi Pharma is a healthcare company specialising in formed in 2003 and based in the Kingdom of Bahrain. The Biotech products that improve the quality of patients lives. company aims to provide Bahrain with high quality yet affordable The company is a specialised manufacturer and distributor telecommunications services, enabling every segment of of human-based insulin, a range of intravenous solutions and Bahraini society to participate in the rapidly evolving information haemodialysis solutions under licence from major international and communications market and the e-Business revolution. pharmaceutical companies.
Mena Telecom holds one of the two National Fixed Wireless The company has a manufacturing site in the King Abdullah Services licences allowing the provision of Fixed Wireless Industrial estate in Sahab, Jordan, a few kilometres from the Access in the Kingdom of Bahrain and bringing numerous centre of Amman and this is supported by insulin production benefits to the company from a strategic and value enhancement by Bioton in Poland and intravenous fluids technology by perspective. Aguettant in France.
Mena Telecom has chosen Motorola as its technology partner Al-Kindi Pharma is now in full operational mode, serving the to deploy state-of-the-art WiMAX technology for its wireless growing insulin market in Jordan and targeting the markets of access network. The execution of the WiMAX roll-out has the Middle East and North African regions. already started during 2007 and is successfully heading towards completion in the ensuing year. www.alkindipharma.com
www.menatelecom.com
28 KFH-Bahrain - Annual Report 2007 Country New Zealand Country Bahrain Sector Health Care Sector Design & Printing Year of Acquisition 2004 Year of Acquisition 2003 Group Holding* 63% Group Holding 70%
Radius Health Group Miracle Graphics
Radius Health Group is a diversified health sector investment Established in 1993 as Bahrain’s first independent reprographic company that provides healthcare services for all. The Radius and pre-press production house, Miracle Graphics is an art Circle of Care covers every possible facet of health and life care company engaged in the areas of Graphic Design, Publishing, for New Zealanders, including medical centres, pharmacies Print Production and Digital Technology. In Bahrain it pioneered and residential rest homes. in reprographic and pre-press production services. In addition to its core service offerings, Miracle has a strategic partnership The company, of which KFH-Bahrain and its associate New with Corporate Edge, a leading UK brand consultancy, for the Zealand Private Equity Fund (NZAPEF) together own a 63% provision of brand consultancy services. equity holding, is poised to become one of the most recognised names in the New Zealand healthcare sector. Since its acquisition by KFH-Bahrain in 2003 with a holding of 70%, the company has seen stable growth in its revenues and The company has experienced a steady progress in expanding operating performance. The company successfully managed its portfolio of healthcare facilities which, combined with the re-branding of the Durrat Al Bahrain project during 2007. various business restructuring initiatives, resulted in enhancing its profitability. www.miraclegraphics.com www.radiushealth.co.nz
*Includes New Zealand Australia Private Equity Fund investment. Country UK Country New Zealand Sector Skin Imaging Sector Technology Year of Acquisition 2005 Year of Acquisition 2005 Group Holding 47% Group Holding* 63%
Astron Clinica NextWindow
Astron Clinica is based in Cambridge, UK, with a wholly NextWindow is a leading designer and developer of optical owned subsidiary in Australia and several distributors across touch screens, manufacturing touch sensitive overlays for Canada, Europe, the Middle East, Australia and New Zealand. existing LCD or plasma displays and OEM touch assemblies The company is helping to revolutionise skin imaging with its for integration into manufacturers’ display models. Touch SIAscopy technology, which helps dermatologists, general screen technology is widely used by leading companies practitioners and cosmetic surgeons to diagnose and treat around the world across a wide range of industries, including skin cancer and other skin conditions. It has also developed telecommunications, tourism, retail, real estate and public DERMETRICS. information. Its many applications include digital signage, directory information and way-finding, wildlife exhibits, retail SIAscopy, which has received US FDA approval, examines displays, digital whiteboards, interactive education, trade key components of the skin – melanin, haemoglobin, dermal shows and real estate advertising. melanin and collagen – to a depth of up to 2mm below the surface. MoleView, a DERMETRICS application, has already NextWindow has signed major contracts in the volume been clinically proven to give more accurate diagnosis of markets and is now in mass production through a contract malignant melanoma, the most dangerous form of skin manufacturer in Thailand. One of the company’s notable clients cancer. is global PC manufacturer, Hewlett Packard (HP). During 2007 NextWindow has entered into significant business relationships www.astronclinica.com with various new customers, including HP.
*Includes New Zealand Australia Private Equity Fund investment.
30 KFH-Bahrain - Annual Report 2007 Country Bahrain Country Bahrain Sector Utility Services Sector Investment Year of Acquisition 2005 Year of Acquisition 2007 Group Holding 16.5% Group Holding* 100%
Energy Central Company B.S.C. (ECCO) Baytik Capital Holdings (B.S.C)
Incorporated in 2005, Energy Central Company (ECCO) has Baytik Capital Holdings B.S.C. (c) was incorporated during the been developing its business model of providing utility services third quarter of 2007 in the Kingdom of Bahrain, with a capital such as district cooling, wastewater treatment, seawater of US$ 150 million, for the purpose of investing in government desalination and power generation, both on a single and multi- and non-government related projects, with a focus on Turkey utility basis. The integrated model is gaining considerable and other emerging countries in the region. interest and success within the region and ECCO management is currently working on a number of projects, with several more The company’s projects will cover real estate, building materials, due to commence in 2008. healthcare, financial services, transport/infrastructure, energy/ oil, technology and agriculture. It currently has representative The target markets for ECCO are within the GCC, focusing offices in both Istanbul and Kuwait. specifically on Bahrain, Saudi Arabia, UAE, Kuwait, Qatar and Oman. ECCO has recently incorporated Energy Central Utilities *Includes investors’ and parent company holding. (ECU) for the purpose of providing irrigation water through sea water desalination via a 25 year concession for Durrat Al Bahrain. Country Bahrain Country Jordan Sector Industrial Projects Year of Acquisition 2007 Year of Acquisition 2007 Group Holding 100% Group Holding 100%
Baytik Industrial Investment Company KFH-JORDAN
Baytik Industrial Investment Company is a wholly owned KFH-Bahrain has established an investment bank in Jordan, subsidiary of KFH-Bahrain and is considered to be its Kuwait Finance House (Jordan), (KFH-Jordan) with an industrial investment arm. The Company aims to set up new authorised share capital of US $50 million, is a wholly owned industry enterprises including the manufacturing and service subsidiary of KFH-Bahrain. industries. KFH-Jordan will be under the supervision of the Hashemite The Company will also aim to invest in existing international Kingdom of Jordan and will conduct investment banking industrial enterprises and develop a local presence for these including investment advisory, acquisitions and the development enterprises in the Kingdom of Bahrain through the use of the of opportunistic investments. It will also invest in private equity KFH Industrial Oasis. in key market industries and generally be a key player in the Jordanian market.
32 KFH-Bahrain - Annual Report 2007 Restricted Mudharaba Investment Accounts
KFH-Bahrain has developed a Shari’a compliant Asset Management product in the form of Restricted Mudharaba Investment Accounts. These allow private investors to co-invest with KFH-Bahrain in corporate (private equity and real estate) financing transactions for KFH investment portfolio companies and projects.
The market response was very positive from a diverse range of investors, including institutions, as the product offers several benefits, including a choice of investments and a diverse range of returns and cash flows according to the investor’s needs.
New Zealand Australia Private Equity Fund (NZAPEF)
NZAPEF was established to conduct Shari’a compliant investments in private companies with strong growth potential in New Zealand and Australia. The total size of the fund is US$ 100 million, and since its inception it has invested in four companies.
During the past few years, KFH-Bahrain has assisted the portfolio companies in their expansion and growth plans through a recapitalisation process. The new round of investments has been crucial for the expansion strategy of the individual companies, helping them penetrate new markets and taking them to the next level. Consumer Finance
KFH-Bahrain’s consumer banking and finance services combine a broad range of innovative products and services with exceptional customer care. Our products and financing facilities are developed with the aim of providing for the long-term needs of customers and those of the local market, which continue to increase. Thinking innovatively and ultimately seeking to deliver superior products are at the core of all we do.
KFH-Bahrain can now act as a one-stop shop for our customers’ banking and financing requirements through our growing network of bank branches and ATMs. The number of branches is set to increase from four to nine, with Riffa, Bahrain Financial Harbour and the World Trade Centre amongst the new locations, while the ATM network will almost double, with new machines being installed in major residential, financial and shopping districts bringing the total to 25.
New services and innovations are constantly being introduced for the benefit of customers. These range from technology and service enhancements that provide greater access to information and funds – both locally and worldwide – to the launch of never before seen products. The Ijarah card, the world’s first Islamic financing card that allows cardholders to acquire durable goods on a lease-to-own basis, is one such product. A unique 20- year home financing scheme is another example of how product innovation and technological enhancement are helping KFH-Bahrain consumer finance set the standard.
In 2007 KFH-Bahrain continued to offer new products and services that were firsts in the local market. For example, in association with Visa the bank launched the first Islamic chipped credit card – a Shari’a compliant offering with many benefits. Customers enjoy a revolving credit facility without incurring interest costs, paying a low annual service charge instead.
In June 2007, KFH Automall, the Kingdom’s largest car showroom, was officially opened. As well as housing Bahrain’s widest range of car brands KFH Automall offers in-house financing from the fully operational KFH branch and comprehensive insurance coverage through Solidarity.
KFH Automall brings a whole new dimension to buying a car in the Kingdom of Bahrain. The full service KFH branch within the showroom offers flexible car financing solutions at one of the lowest profit rates in the Kingdom on either a Murabaha or Musawama basis. Cars can be purchased with a 0% to 10% down payment with easy instalments over a period of up to six years.
34 KFH-Bahrain - Annual Report 2007 Corporate Finance
Combining a superior product and service offering with the value of expert advice, KFH- Bahrain’s corporate finance division helps companies ranging from small and medium- sized organisations to large corporates to expand their operations through Shari’a compliant resources and strategies.
The bank serves businesses across many industry sectors by providing financing for projects, real estate, working capital, machinery and equipment as well as trade financing facilities.
Our broad range of financing instruments are structured according to Islamic Murabaha, Musharaka, Ijarah and Istisna’a as well as Commodity and Convertible Murabaha facilities. All transactions are undertaken by our experienced corporate finance team and backed by effective execution and results.
Projects on which KFH-Bahrain advises and provides financing range in scope and value and encompass both private and public sector ventures. In line with KFH-Bahrain’s mission to support growth in the local and regional markets, the corporate finance team closely evaluates compelling opportunities and noteworthy projects and ultimately rewards initiative and ingenuity with backing. Asset & Liabilities Management
Treasury
This has been another productive year for KFH-Bahrain treasury department where by we have further strengthened our interbank dealing process by streamlining the front and back office functions. This has resulted in less turnaround time for the execution of our deals.
We have also allocated productive resources for the research and development of quality Shari’a compliant liquidity products and tools for a more effective short term fund management. 2007 has been a break through for us at KFH-Bahrain, whereby we have successfully developed a liquidity product in collaboration with one of the top European Banks. KFH-Bahrain treasury will continue to research and collaborate with other financial institutions to further develop and introduce innovative liquidity management tools.
Shari’a Compliant Overnight Fund (SCOF)
Albeit buoyant, the Islamic banking industry offers investors limited options in terms of short term investments for management of their excess liquidity. Most of this liquidity is invested in Murabaha products – sale agreements with pre-determined profits using commodities as underlying assets – due to the lack of a better alternative. It is within this context that the Shari’a Compliant Overnight Fund (SCOF) has been established.
SCOF is an innovative solution enabling Islamic investors to invest in short-term maturity services while enjoying significant flexibility. It entitles investors to receive rents from prime European properties while having the option of redemption on a daily basis. Regulated in Luxembourg, SCOF is co-managed by KFH-Bahrain and Fortis. The structure is backed by an underlying real estate fund (sponsored by Fortis) that protects both the rental payments and the principle to the investors.
Investment in the fund is available on each USD business day. By investing in the fund, investors are entitled to daily rentals indexed at Libor flat (USD) and yielded by the leasing of some properties interests in which SCOF buys on a daily basis.
36 KFH-Bahrain - Annual Report 2007 Debt Capital Market & Structured Products
Syndication
KFH-Bahrain has recently taken the initiative to set up a syndication desk at the bank. The objective is to diversify our asset base by sourcing and booking superior asset class transactions at the regional and international level.
A number of transactions have already been underwritten and closed including financing of A-320 aircraft and international leasing and Ijarah. The bank also participates in a number of syndicated transactions, primarily at the senior level.
Rising Africa Infrastructure Fund (RAIF)
Within a context of high potential for PPP infrastructure projects (Public Private Partnership) in an African continent experiencing a significant economical boom, KFH-Bahrain and Natixis are collaborating in order to implement RAIF.
As a Shari’a compliant Private Equity Fund (to be established in a company form), RAIF’s purpose is to develop infrastructures in Africa through the PPP model, which gives investors the opportunity to participate and contribute to the current forward motion in the region.
KFH-Bahrain & Groupe Caisse d’Epargne will act as sponsors of RAIF targeting size amounts up to US$ 500 million.
KFH-Bahrain will play an active management role in the RAIF, especially in terms of Shari’a compliant debt structuring.
The project is due for launch by summer 2008. Risk Management
At KFH-Bahrain we believe in the proactive management of risk in the full life cycle of a financial transaction including its operating circumstances from the origination stage to its final disposal from the books of the bank.
The bank’s risk strategy, backed by appropriate limit sturctures, is articulated through Risk Charter and Capital Management policies. These policies provide an enterprise-wide integrated risk management framework in the bank. The risk charter identifies risk objectives, policies, strategies and risk governance structure both at the Board and the management level. The capital management policy is aimed at ensuring financial stability by allocating enough capital to cover unexpected losses. Limit structures serve as a key component in articulating risk strategy in quantifiable risk appetite. They are further supported by a comprehensive framework for various risk silos with its own policies and methodology documents. In addition, the bank is in the process of implementing various risk systems to help quantify not just the regulatory capital but also the economic capital allocated to various portfolios.
The bank is exposed to various types of risk, such as market, credit, rate of return, liquidity and operational, all of which require the comprehensive controls and ongoing oversight. The risk management framework encapsulates the spirit behind Basel II, which includes management oversight & control, risk culture & ownership, risk recognition & assessment, control activities & segregation of duties, adequate information & communication channels, monitoring risk management activities and correcting deficiencies.
In line with our risk strategy, the bank has taken several steps to reinforce the culture of risk management across our various business activities. In 2007 the bank formed a Risk and Governance Committee – a Board level committee with the mandate to set the policy on all risk and governance issues and maintain oversight of all bank risks and governance aspects through different senior management committees. In addition the bank took initiatives to introduce risk-based pricing of products using RAROC measures. KFH-Bahrain proactively identifies, measures, monitors and manages risks through established processes. These include: a risk governance structure with clearly established responsibilities at each level; well defined risk management policies and procedures; the implementation of sophisticated risk systems for Basel II; the setting of limits for various types of risks according to tolerance levels defined by the Board; and continuous assessment by Internal Audit of the overall effectiveness of risk policies.
Our major accomplishments in 2007 have been as follows:
1. Finalization of Risk Management Policies: Risk Charter, Capital Management, Market, Credit and Operational Risks, Trading Procedure and their respective methodologies 2. Integrating Risk Management framework in the policies and procedures of all the business units in the bank 3. Implementation of ALM and Credit Risk Systems. Start of Internal Rating Based processes 4. Implementation of VAR Framework and corresponding Limit Structure 5. Reinforcement of ALCO, Credit, Investment Committee framework and constitution of ‘Risk and Governance Committee’ and ‘Nomination and Remuneration Committee’ 6. While keeping integrated Risk Management setup, creation of various specialized units for various risk silos, hence, optimizing integration with the required specialization 7. Hired qualified staff
38 KFH-Bahrain - Annual Report 2007 Though, we made a lot of progress last year towards putting the basic building block for Risk Management framework, we recognise that more is less when it comes to implementing cost effective risk management solution. Nevertheless, we will strive to become a benchmark for Risk Management best practices among our peers in coming years.
Corporate governance
KFH-Bahrain is committed to adopting the highest international standards and global best practices in corporate governance. The bank has established a strong corporate governance framework that is designed to protect the interests of all stakeholders, ensure compliance with regulatory requirements, and enhance organisational efficiency.
KFH-Bahrain has established a robust organisational structure that segregates functions and responsibilities, and reflects a division of roles and responsibilities of the Board of Directors and management. Clear mandates exist for the Board, Chairman of the Board, Board committees, the management, General Manager and management committees.
Responsibilities The Board of Directors is accountable to the shareholders for the creation and delivery of strong sustainable financial performance and long-term shareholder value. The Chairman is responsible for leading the Board, ensuring its effectiveness, monitoring the performance of the Executive Management, and maintaining a dialogue with the bank’s shareholders.
Code of Conduct The bank has developed a Code of Business Conduct that governs the professional and personal behaviour of the directors, management and staff.
Compliance The bank recognised that compliance with regulatory and statutory provisions is of paramount importance. The bank has a compliance unit which acts as a focal point for implimenting local regulatory and statutory requirements.The Board of Directors has the overall responsibility for ensuring that all activities of KFH-Bahrain are conducted in accordance and in full compliance with applicable laws and regulations.
Disclosures A disclosure policy has been developed as part of the Bank’s commitment to adopting the highest standards of transparency and fairness in disclosing information for the benefit of all stakeholders. The bank is committed to disclosing information to the public in a manner consistent with guidelines provided by the Central Bank of Bahrain and in line with Basel II Pillar III requirements.
Anti-money laundering KFH-Bahrain has adopted detailed policies and procedures in line with the Central Bank of Bahrain’s directives to combat money laundering and other financial crimes. It is a firm policy of the bank not to allow itself to be directly or indirectly used by any elements for unlawful activities.
Corporate communications policy The bank maintains an effective communications policy that enables both the Board and management to communicate effectively with its shareholders, stakeholders and the public generally. Main communications channels include the annual general meeting, annual report and accounts, corporate website and corporate brochure, and regular announcements in the appropriate local press. Corporate Social Responsibility
our most important investment
As a bank with extensive commercial operations and investments across the Kingdom of Bahrain, KFH-Bahrain makes a major contribution to the community as a natural extension of the Islamic values at the heart of our business.
Excellence in education, health and sport were the key themes running through most of our CSR activities, designed as they are to foster growth, nurture talent and develop the next generation of leaders who best exemplify the qualities inherent in Bahrain.
During 2007 KFH-Bahrain supported several projects and initiatives that clearly reflect our principles and ethics.
Sophia Antipolis Science Park Mentorship Programme
Underscoring its commitment to enhancing opportunities for Bahraini students, KFH-Bahrain sponsored the 2nd Annual Sophia Antipolis Science Park Mentorship Programme. A joint initiative between Kuwait Finance House-Bahrain, the Young Arab Leaders Organization (YAL) and InJaz Bahrain, a non-profit youth development and training organisation.
The programme sent 16 Bahraini students on an intensive leadership training course to Sophia Antipolis in France, Europe’s top science and technology park. There the students were not only immersed in the surroundings of global institutions, universities and research centres but also faced challenges and daily interactive seminars on topics such as entrepreneurship and team work.
The Crown Prince’s International Scholarship Fund 2007
The bank provided its support to the educational programme run by the Crown Prince’s International Scholarship Fund (CPISF). It awards undergraduate to post-graduate scholarships to talented and deserving Bahraini students for admission at distinguished schools, colleges and universities in the US and UK.
The programme provides the youth with a unique opportunity to pursue their educational goals towards a fulfilling and successful career. More importantly, it gives them the chance to take part in cross-cultural learning, broaden their knowledge and experience and gain new perspectives in a foreign country.
Young Arab Leaders Annual Meeting 2007
KFH-Bahrain provided full support for the Young Arab Leaders 2007 Annual Meeting, which was held between 9th to 11th November 2007 under the patronage of His Highness the Crown Prince.
40 KFH-Bahrain - Annual Report 2007 Healthcare sponsorship
As part of an initiative aimed at providing leading edge medical services for patients suffering with heart disease, KFH-Bahrain provided advanced medical equipment to Mohammed Bin Khalifa Bin Salman Al Khalifa Cardiac Centre. The equipment, which will be used in catheterisation operations and for calcium reduction in the bloodstream, will contribute highly to the advancement of healthcare in Bahrain.
The bank also honoured members of the Bahrain Medical Society who attained high specialised degrees in 2006 and 2007 and dentists who received high and post graduate degrees during the past year.
Sports sponsorship
KFH-Bahrain sponsored the 11th Annual Bankers Cup and the summer programme of the Bahrain Shooting & Fencing Association. The bank also sponsored a high profile initiative by the Bahrain Royal Endurance Association during their participation in several races held in Europe last September.
Seef Mall Summer Festival
KFH-Bahrain participated as a key sponsor of the Seef Mall Shopping Festival. This alliance reflected the bank’s commitment to supporting social activities that help drive the national economy. The Seef Festival has firmly established itself as a truy defined annual event in Bahrain. e-Learning Centre at the University of Bahrain
KFH-Bahrain supported the University of Bahrain which contributed to the opening of the e-Learning Centre, the first of its kind in Bahrain. Shari’a Board Statement
In the name of Allah, the Beneficent, the Merciful. Praise be to Allah, the Lord of the Worlds, and peace and blessing be upon our Prophet, Muhammed, and on his Companions.
To the Stakeholders of KFH-Bahrain
Assalam Alaikum Wa Rahmatullah
In compliance with the letter of appointment, we are required to submit the following report:
We have reviewed the principles and the contracts relating to the transactions and applications undertaken by KFH-Bahrain during the period ended 31 December 2007. We have also conducted our review to form an opinion as to whether KFH-Bahrain has complied with Shari’a Rules and Principles and also with the specific fatwas, rulings and guidelines issued by us.
We conducted our review, to the Shari’a Advisor and his assistants, which included examining, on a test basis, each type of transaction, the relevant documents and procedures adopted by KFH-Bahrain.
We planned and performed our view so as to obtain all the information and explanations which we consider necessary in order to provide us with sufficient evidence to give reasonable assurance that KFH-Bahrain has not violated the Shari’a Rules and Principles.
In our opinion:
a) The contracts, transactions, and dealings entered into by KFH-Bahrain during the year ended 31 December 2007 that we have reviewed are in compliance with the Shari’a Rules and Principles;
b) The allocation of profits and losses relating to investment accounts conform to the basis that had been approved by us in accordance with Shari’a Rules and Principles;
c) All earnings that have been realised from sources or by means prohibited by Shari’a Rules and Principles, have been disposed of to charitable causes; and
d) The calculation of Zakat is in compliance with Shari’a Rules and Principles.
This opinion is rendered based on what has been presented to us by KFH-Bahrain’s General Manager and its in-house Shari’a Advisor. We would like to thank the management for its acceptance and compliance to the Shari’a principles and guidelines. We pray to Allah the Almighty to grant us success and the path of straightforwardness.
Wassalam Alaikum Wa Rahmatullah Wa Barakatuh.
Ahmad Bazie Al-Yaseen Ajeel Jasem Al-Nashmi Chairman Member
Mohammed Fawzi Faidullah Anwar Shuaib Abdulsalam Member Member
Khalid Mathkour Al-Mathkour Mohammed Abdul Razaq Al-Tabtabaee Member Member
42 KFH-Bahrain - Annual Report 2007 Independent Auditors’ Report to the Shareholders of Kuwait Finance House - Bahrain
We have audited the accompanying consolidated the appropriateness of accounting policies used and the fi nancial statements of Kuwait Finance House (Bahrain) reasonableness of accounting estimates made by the Board B.S.C. (c) [the “Bank”] and its subsidiaries [together the of Directors, as well as evaluating the overall presentation of the fi nancial statements. “Group”] which comprise the consolidated balance sheet as at 31 December 2007 and the consolidated statement We believe that the audit evidence we have obtained is suffi cient of income, the consolidated statement of cash fl ows, and appropriate to provide a basis for our audit opinion. the consolidated statement of changes in equity and the consolidated statement of restricted investment accounts Opinion for the year then ended and a summary of signifi cant In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of the Group accounting policies and other explanatory notes. as of 31 December 2007 and of its fi nancial performance and its cash fl ows for the year then ended in accordance with Board of Directors’ Responsibility Financial Accounting Standards issued by the Accounting for the Financial Statements and Auditing Organization for Islamic Financial Institutions and The Board of Directors is responsible for the preparation and the Islamic Shari’a Rules and Principles as determined by the fair presentation of these consolidated fi nancial statements Shari’a Supervisory Board of the Bank. in accordance with both the Financial Accounting Standards
issued by the Accounting and Auditing Organisation for Islamic In addition, in our opinion, the consolidated fi nancial statements Financial Institutions, to operate in accordance with Islamic present fairly, in all material respects, the fi nancial position Shari’a, and International Financial Reporting Standards. of the Group as of 31 December 2007 and of its fi nancial This responsibility includes: designing, implementing and performance and its cash fl ows for the year then ended in maintaining internal controls relevant to the preparation and accordance with International Financial Reporting Standards. fair presentation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or Other Regulatory Matters error; selecting and applying appropriate accounting policies; We confi rm that, in our opinion, proper accounting records and making accounting estimates that are reasonable in the have been kept by the Group and the consolidated fi nancial circumstances. statements, and the contents of the Report of the Board of Directors relating to these consolidated fi nancial statements, Auditors’ Responsibility are in agreement therewith. We further report, to the best of Our responsibility is to express an opinion on these consolidated our knowledge and belief, that no violations of the Bahrain fi nancial statements based on our audit. We conducted our Commercial Companies Law, nor of the Central Bank of audit in accordance with both the International Standards Bahrain and Financial Institutions Law, nor of the memorandum on Auditing and Auditing Standards for Islamic Financial and articles of association of the Bank have occurred during Institutions. Those standards require that we comply with the year ended 31 December 2007 that might have had a ethical requirements and plan and perform the audit to obtain material adverse effect on the business of the Group or on reasonable assurance whether the consolidated fi nancial its consolidated fi nancial position, and that the Bank has statements are free from material misstatement. complied with the terms of its banking license.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair 13 February 2008 presentation of the fi nancial statements in order to design audit Manama, Kingdom of Bahrain procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4343 55/22/08/22/08 4:11:214:11:21 PMPM Consolidated Balance Sheet at 31 December 2007
2007 2006 Notes BD 000s BD 000s
ASSETS Cash and balances with banks and Central Bank of Bahrain 5 23,640 21,383 Murabaha and Mudaraba contracts with banks 6 80,685 66,654 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 7 276,061 161,956 Investments 8 141,872 83,063 Investment in associates 9 41,356 15,385 Investment properties 10 105,097 27,623 Receivables and prepayments 11 40,658 11,268 Goodwill and intangibles 12 6,927 2,508 Premises and equipment 18,995 13,204 TOTAL ASSETS 735,291 403,044
LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY
LIABILITIES Murabaha contracts with banks 13 77,329 110,366 Murabaha contracts with non-banks 14 287,269 99,345 Customers’ current accounts 15 107,150 46,549 Other liabilities 17 46,191 12,875 517,939 269,135
UNRESTRICTED INVESTMENT ACCOUNTS 53,091 44,375
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Share capital 19 70,016 44,560 Share premium 19 15,040 760 Statutory reserve 20 8,238 5,098 General reserve 20,173 13,800 Investment revaluation reserve 22,390 12,058 Retained earnings 17,925 10,827 153,782 87,103 MINORITY INTEREST 10,479 2,431 164,261 89,534 TOTAL LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY 735,291 403,044
RESTRICTED INVESTMENT ACCOUNTS 66,066 19,109
CREDIT COMMITMENTS AND CONTINGENT ITEMS 28 59,372 31,003
Bader A. M. Mukhaizeem Mohamed bin Sh. Eshaq Abdulhakeem Y. Alkhayyat Chairman and Managing Director Vice Chaiman General Manager
The attached notes 1 to 33 form part of these consolidated fi nancial statements.
44 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4444 55/22/08/22/08 4:11:224:11:22 PMPM Consolidated Statement of Income Year ended 31 December 2007
2007 2006 Notes BD 000s BD 000s
Income from investment activities 21 29,908 28,180 Income from retail and corporate banking activities 22 25,863 17,819 Share of income of associates 9 14,173 512 Other income 2,049 864 71,993 47,375 Less: Profi t on Murabaha contracts 14,639 9,039 57,354 38,336
Staff costs 8,106 6,438 Depreciation 1,871 1,493 Provisions 3,233 2,284 Other operating expenses 23 9,812 6,158 23,022 16,373
NET INCOME BEFORE PROFIT ON UNRESTRICTED INVESTMENT ACCOUNTS 34,332 21,963
Less: Profi t on unrestricted investment accounts 18 1,662 1,200
NET INCOME FOR THE YEAR 32,670 20,763
Attributable to: Shareholders of the Parent 31,399 21,130 Minority interest 1,271 (367) 32,670 20,763
The attached notes 1 to 33 form part of these consolidated fi nancial statements.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4545 55/22/08/22/08 4:11:224:11:22 PMPM Consolidated Statement of Cash Flows Year ended 31 December 2007
2007 2006 Notes BD 000s BD 000s
OPERATING ACTIVITIES Net income for the year 32,670 20,763 Adjustments for: Provisions 3,233 2,284 Depreciation 1,871 1,493 Share of income of associates 9 (14,173) (512) Unrealised gain on investments 21 (7,147) (6,705) Unrealised gain on investment properties 21 (9,625) (1,363) Profi t on sale of investment properties 21 (2,736) (1,875) Operating income before changes in operating assets and liabilities 4,093 14,085
Changes in operating assets and liabilities: Mandatory reserve with Central Bank of Bahrain (6,100) (1,680) Murabaha and Mudaraba contracts with banks 4,408 15,497 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers (124,089) (53,712) Receivables and prepayments (24,022) (2,694) Murabaha contracts with banks (26,135) 54,022 Murabaha contracts with non-banks 169,686 31,166 Customers’ current accounts 61,455 15,367 Other liabilities 7,661 5,182 Net cash from operating activities 66,957 77,233
INVESTING ACTIVITIES Acquisition of a subsidiary - net of cash and bank balances acquired 12 (2,236) - Additional investment in acquired subsidiary (8,892) - Purchase of investments (37,178) (31,696) Investments in associates (16,315) - Purchase of investment properties (21,730) (12,233) Proceeds from sale of investment properties 4,037 2,585 Purchase of intangibles (1,552) - Purchase of premises and equipment (7,534) (3,657) Net cash used in investing activities (91,400) (45,001)
FINANCING ACTIVITIES Increase in unrestricted investment accounts 8,716 13,568 Issue of new shares of the Bank 35,280 2,320 Net movement in minority interest (4,653) - Net Cash from fi nancing activities 39,343 15,888
NET CHANGE IN CASH AND CASH EQUIVALENTS 14,900 48,120 Cash and cash equivalents at 1 January 77,610 29,490
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 92,510 77,610
The attached notes 1 to 33 form part of these consolidated fi nancial statements.
46 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4646 55/22/08/22/08 4:11:224:11:22 PMPM Consolidated Statement of Changes in Equity Year ended 31 December 2007
Attributable to the shareholders of the parent Investment Share Share Statutory General revaluation Retained Minority Capital premium reserve reserve reserve earnings Total interest Total equity Notes BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
Balance at 1 January 2006 38,500 - 2,985 - 3,992 18,325 63,802 2,777 66,579
Income for the year - - - - - 21,130 21,130 (367) 20,763 Transfer to investment revaluation reserve - - - - 11,738 (11,738) - - - Transfer to retained earnings on sale of investments - - - - (3,672) 3,672 - - - Directors’ remuneration - - - - - (149) (149) - (149) Net movement in minority interest ------21 21 Transfer to general reserve - - - 18,300 - (18,300) - - - Bonus shares issued 4,500 - - (4,500) - - - - - Issue of new shares 1,560 760 - - - - 2,320 - 2,320 Transfer to statutory reserve - - (2,113) - - 2,113 - - -
Balance at 31 December 2006 44,560 760 5,098 13,800 12,058 10,827 87,103 2,431 89,534
Income for the year - - - - - 31,399 31,399 1,271 32,670 Transfer to investment revaluation reserve - - - - 11,717 (11,717) - - - Transfer to retained earnings on sale of investments 10 - - - - (1,385) 1,385 - - - Net movement in minority interests ------6,777 6,777 Transfer to general reserve - - - 10,829 - (10,829) - - - Bonus shares issued 19 4,456 - - (4,456) - - - - - Issue of new shares 19 21,000 14,280 - - - - 35,280 - 35,280 Transfer to statutory reserve - - 3,140 - - (3,140) - - -
Balance at 31 December 2007 70,016 15,040 8,238 20,173 22,390 17,925 153,782 10,479 164,261
Note: Included in retained earnings is a non-distributable reserve amounting to BD 349 thousands (2006: BD 47 thousands) relating to subsidiaries of the Bank.
The attached notes 1 to 33 form part of these consolidated fi nancial statements.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4747 55/22/08/22/08 4:11:234:11:23 PMPM Consolidated Statement of Restricted Investment Accounts Year ended 31 December 2007
Balance at Balance at 1 January Gross Mudarib Withdrawals / 31 December 2006 Deposits Income Fee distributions 2006 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
Murabaha contracts - 5,363 208 (54) (154) 5,363 Istisna’a contracts 11,007 4,534 1,050 (260) (2,585) 13,746 11,007 9,897 1,258 (314) (2,739) 19,109
Balance at Balance at 1 January Gross Mudarib Withdrawals / 31 December 2007 Deposits Income Fee distributions 2007 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
Murabaha contracts 5,363 59,800 1,766 (380) (8,680) 57,869 Istisna’a contracts 13,746 - 973 (237) (6,285) 8,197 19,109 59,800 2,739 (617) (14,965) 66,066
The attached notes 1 to 33 form part of these consolidated fi nancial statements.
48 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4848 55/22/08/22/08 4:11:234:11:23 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
1 CORPORATE INFORMATION
Kuwait Finance House (Bahrain) B.S.C. (c) [‘the Bank’] is a closed joint stock company incorporated in the Kingdom of Bahrain on 22 January 2002 under the Bahrain Commercial Companies Law No. 21/2001 and is registered with the Ministry of Industry and Commerce under commercial registration (CR) number 48128. The Bank is regulated and supervised by the Central Bank of Bahrain (the ‘CBB’) and has a retail Islamic banking license, is operating under Islamic principles and in accordance with all the relevant regulatory guidelines for Islamic banks issued by the CBB. The address of the Bank’s registered offi ce is Building 121, Government Avenue, Block 304, Manama, Kingdom of Bahrain.
The Bank offers a full range of Islamic banking services and products. The activities of the Bank include accepting Shari’a money placements/deposits, managing Shari’a profi t sharing investment accounts, offering Shari’a fi nancing contracts, dealing in Shari’a compliant fi nancial instruments as principal/agent, managing Shari’a compliant fi nancial instruments and other activities permitted under the CBB’s Regulated Banking Services as defi ned in the licensing framework. The activities of the Bank’s subsidiaries are mentioned in note 4.
The Bank is a subsidiary of Kuwait Finance House K.S.C. (the ‘Parent Company’), a public company incorporated in the State of Kuwait. The Bank’s Shari’a Supervisory Board is entrusted to ensure the Bank’s adherence to Shari’a rules and principles in its transactions and activities.
The Bank and its subsidiaries (together the ‘Group’) operate in the Kingdom of Bahrain and Hashemite Kingdom of Jordan.
The consolidated fi nancial statements were authorized for issue in accordance with a resolution of the Board of Directors on 13 February 2008.
2 BASIS OF PREPARATION
The consolidated fi nancial statements have been prepared under the historical cost basis, except for investments and investment properties that have been measured at fair value. The consolidated fi nancial statements are presented in Bahraini Dinars which is the functional currency of the Group. All the values are rounded to the nearest BD thousand.
Statement of Compliance The consolidated fi nancial statements have been prepared in accordance with Financial Accounting Standards [FAS] issued by the Accounting and Auditing Organization for Islamic Financial Institutions [AAOIFI], International Financial Reporting Standards [IFRS] and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law.
Basis of Consolidation The consolidated fi nancial statements comprise the fi nancial statements of the Group as at 31 December each year. The fi nancial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies.
All intra-group balances, transactions, income and expenses and profi ts and losses resulting from intra-group transactions are eliminated in full.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, which is other than fi duciary in nature, and continue to be consolidated until the date that such control ceases.
Minority interests represent the portion of profi t or loss and net assets not held by the Group and are presented separately in the consolidated statement of income and within equity in the consolidated balance sheet, separately from the Bank’s shareholders’ equity.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 4949 55/22/08/22/08 4:11:234:11:23 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES
Signifi cant accounting judgments and estimates In the process of applying the Group’s accounting policies, management has used its judgments and made estimates in determining the amounts recognised in the consolidated fi nancial statements. The most signifi cant use of judgments and estimates are as follows:
Valuation of unquoted equity investments Valuation of unquoted equity investments is normally based on one of the following:
- recent arm’s length market transactions; - current fair value of another instrument that is substantially the same ; - the expected cash fl ows discounted at current rates applicable for items with similar terms and risk characteristics; or - other valuation models.
The Group calibrates the valuation techniques periodically and tests these for validity using either prices from observable current market transactions in the same instrument or other available observable market data. Nonetheless, the actual amount that is realised in a future realisation transaction may differ from the current valuation and may still be different from the management’s estimates, given the inherent uncertainty surrounding valuations of unquoted equity investments.
Impairment losses on Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts (the “Financial Contracts”) relating to customers
The Group reviews its problem fi nancial contracts at each reporting date to assess whether an allowance for impairment should be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash fl ows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
In addition to specifi c allowances against individually signifi cant fi nancial contracts, the Group also makes a collective impairment allowance against exposures which, although not specifi cally identifi ed as requiring a specifi c allowance, have a greater risk of default than when originally granted. This take into consideration factors such as any deterioration in country risk, industry, and technological obsolescence, as well as identifi ed structural weaknesses or deterioration in cash fl ows.
Impairment of equity investments The Group treats available-for-sale equity investments as impaired when there has been a signifi cant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘signifi cant’ or ‘prolonged’ requires judgment. In addition, the Group evaluates other factors, such as the share price volatility.
Change in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous fi nancial year except as follows:
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the fi nancial performance of the Group. They did however give rise to additional disclosures in the fi nancial statements.
- IFRS 7 Financial Instruments: Disclosures - IAS 1 Amendment—Presentation of Financial Statements - IFRIC 8 Scope of IFRS 2 - IFRIC 10 Interim Financial Reporting and Impairment
The principal effects of these changes are as follows:
IFRS 7 Financial Instruments: Disclosures This standard requires disclosures that enable users of the fi nancial statements to evaluate the signifi cance of the Groups fi nancial instruments and the nature and extent of risks arising from those fi nancial instruments. The new disclosures are included throughout the consolidated fi nancial statements. While there has been no effect on the fi nancial position or results, comparative information has been added where needed.
50 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5050 55/22/08/22/08 4:11:234:11:23 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
IAS 1 Presentation of Financial Statements This amendment requires the Group to make new disclosures to enable users of the fi nancial statements to evaluate the Group’s objectives, policies, and processes for managing capital. These new disclosures are shown in Note 27.
IFRIC 8 Scope of IFRS 2 This interpretation requires IFRS 2 to be applied to any arrangements in which the entity cannot identify specifi cally some or all of the goods received, in particular where equity instruments are issued for consideration which appears to be less than fair value. As equity instruments are only issued to employees in accordance with the employee share scheme at price approximating fair values, the interpretation had no impact on the fi nancial position or performance of the Group.
IFRIC 10 Interim Financial Reporting and Impairment The Group adopted IFRIC interpretation 10 as of 1 January 2007, which requires that an entity must not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a fi nancial asset carried at cost. As the Group had no impairment losses previously reversed, the interpretation had no impact on the fi nancial position or performance of the Group.
Summary of Signifi cant Accounting Policies The signifi cant accounting policies adopted in the preparation of the consolidated fi nancial statements are set out below:
(i) Murabaha contracts Murabaha contracts consist of deferred sales transaction agreements and are stated net of deferred profi ts, any amounts written-off and provision for impairment.
(ii) Mudaraba contracts Mudaraba contracts are partnerships in which the Bank provides capital to the Mudarib and Mudarib manages the capital for a mudarib fee. These are stated at the fair value of consideration given less any amounts written-off and provision for impairment.
(iii) Musharaka contracts Musharaka contracts are partnerships in which the Bank contributes capital. These are stated at the fair value of consideration given less any amounts written-off and provision for impairment.
(iv) Ijarah Muntahia Bittamleek Ijarah Muntahia Bittamleek comprises assets, mainly land and buildings, leased to third parties, under terms that would transfer the ownership of the assets to third parties at the end of the lease period.
Ijarah assets are recorded at cost. Depreciation is provided on all Ijarah assets at rates calculated to write off the cost of each asset over the period of the lease to its residual value.
(v) Istisna’a Istisna’a comprises direct costs of producing ‘al-masnoo’ and indirect costs relating to the contract allocated on an objective basis. Istisna’a costs incurred during the year are recognised as an asset.
(vi) Investments These are classifi ed as follows:
- Carried at fair value through income statement - Available for sale
All investments are initially recognised at cost being the fair value of consideration given including acquisition charges associated with the investment. After initial recognition, investments are remeasured using the policies given below:
Carried at fair value through income statement Investments carried at fair value through income statement includes investments held for trading and investments designated upon initial recognition as carried at fair value through income statement.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5151 55/22/08/22/08 4:11:234:11:23 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
Investments are classifi ed as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognised in consolidated statement of income.
Investments are designated at initial recognition as carried at fair value through income statement if the fair value of the investment can be reliably measured and the classifi cation as fair value through income statement is as per the documented strategy of the Bank. Investments classifi ed as “Investments carried at fair value through income statement” upon initial recognition are remeasured at fair value with all changes in fair value being recorded in the consolidated statement of income.
Available for sale Available for sale investments are those which are designated as such or do not qualify to be classifi ed as carried at fair value through income statement. They include equity investments and sukuks.
After initial measurement, available for sale investments are subsequently measured at fair value. Unrealised gains and losses are recognised directly in equity in the “Available for sale reserve”. When the investment is disposed off, the cumulative gain or loss previously recognised in equity is recognised in the consolidated statement of income in income from investment activities. Where the Group holds more than one investment in the same security they are deemed to be disposed off on a weighted average basis. Profi t earned whilst holding available for sale investments is reported as income from debt instruments using the effective profi t rate. Dividends earned whilst holding available for sale investments are recognised in the consolidated statement of income as ‘Other income’ when the right of the payment has been established.
(vii) Determination of fair values
The fair value for fi nancial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotations, without any deduction for transaction costs. The fair value of investments in managed funds is based on net asset values provided by fund manager.
For all other fi nancial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models.
(viii) Premises and equipment Premises and equipment are stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value.
Depreciation is calculated using the straight-line method to write down the cost of premises and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:
Premises: 20 Years Equipment: 3 Years
An item of property and equipment is derecognised upon disposal or when no future economic benefi ts are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in the consolidated statement of income in the year the asset is derecognised.
(ix) Investment in associates
The Group’s investment in its associate is accounted for under the equity method of accounting. An associate is an entity in which the Group has signifi cant infl uence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post- acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group’s net investment in the associate. The consolidated statement of income refl ects the share of the results of operations of the associate. Where there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes and discloses this, when applicable, in the consolidated statement of changes in equity. Profi ts and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
52 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5252 55/22/08/22/08 4:11:244:11:24 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
The reporting dates of the associate and the Group are identical and the associates’ accounting policies conform to those used by the Group for like transactions and events in similar circumstances.
(x) Investment properties The Group holds certain properties as investments to earn rental income, for capital appreciation or both. Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which refl ects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment properties are included in the consolidated statement of income in ‘Income from investment activities’ in the year in which they arise.
(xi) Investment revaluation reserve Unrealized gains resulting from revaluation of investments and investment properties, are appropriated to investment revaluation reserve and are not available for distribution to shareholders. Upon disposal of these investments, the related cumulative gain is transferred to retained earnings and is available for distribution.
(xii) Business combinations and goodwill Business combinations are accounted for using the purchase method of accounting. This involves recognising identifi able assets (including previously unrecognised intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value. Any excess of the cost of acquisition over the fair values of the identifi able net assets acquired is recognised as goodwill. If the cost of acquisition is less than the fair values of the identifi able net assets acquired, the discount on acquisition is recognised directly in the consolidated statement of income in the year of acquisition.
Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifi able assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and related goodwill is recognised in the consolidated statement of income.
(xiii) Intangible assets Intangible assets include the value of patents and license rights. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.
The useful lives of intangible assets are assessed to be either fi nite or indefi nite. Intangible assets with fi nite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a fi nite useful life are reviewed at least at each fi nancial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefi ts embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with fi nite lives is recognised in the consolidated statement of income in the expense category consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives.
(xiv) Inventories held for consumer fi nance Inventories are stated at the lower of cost and net realisable value. Costs are those expenses incurred in bringing the inventories to its present location and condition, such as purchase cost. Net realisable value is based on estimated selling price less any further costs expected to be incurred on disposal.
(xv) Unrestricted Investment accounts All unrestricted investment accounts are carried at cost less amounts repaid.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5353 55/22/08/22/08 4:11:244:11:24 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
(xvi) Provisions Provisions are recognized when the Group 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.
(xvii) Offsetting Financial Instruments Financial assets and fi nancial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.
(xviii) Cash and Cash Equivalents Cash and cash equivalents comprise of cash and balances with banks and the Central Bank of Bahrain (excluding mandatory reserve deposits) and murabahas and mudarabas with banks with original maturities of 90 days or less.
(xix) Revenue recognition Murabaha Where the income is quantifi able and contractually determined at the commencement of the contract, income is recognized on a time-apportioned basis over the period of the contract based on the principal amounts outstanding. Where the income from a contract is not quantifi able, it is recognized when realized. Accrual of income is suspended when the Group believes that the recovery of these amounts may be doubtful or when the repayments are overdue by 90 days, whichever is earlier.
Mudaraba Income and losses on Mudaraba transactions are recognized when the right to receive is established or these are declared by the Mudarib, whichever is earlier.
Musharaka Income on musharaka contracts is recognised when the right to receive payment is established or on distribution. Income related to accounts that are 90 days overdue is excluded from the consolidated statement of income.
Ijarah Ijarah income is recognized on a time-apportioned basis over the lease term.
Istisna Istisna income is recognised over the construction period using the percentage completion method.
Dividends Dividends from investments in equities are recognized when the right to receive the payment is established.
Fees and commission income Fees and commission income is recognized when earned.
(xx) Allocation of income Income is allocated proportionately between unrestricted investment accounts and shareholders on the basis of the average balances outstanding during the year and share of the funds invested.
(xxi) Foreign currency translation The consolidated fi nancial statements are presented in Dinars, which is Group functional and presentational currency. Each entity in the group determines its own functional currency and items included in the fi nancial statements of each entity are measured using that functional currency.
Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated statement of income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate.
54 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5454 55/22/08/22/08 4:11:254:11:25 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
(xxi) Foreign currency translation (continued)
Group companies As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (the Bahraini Dinars) at the rate of exchange ruling at the balance sheet date, and their statements of income are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement in ‘Other operating expenses’ or ‘Other operating income’, respectively.
(xxii) Trade and settlement date accounting Purchases and sales of fi nancial assets are recognized on the trade date, i.e. the date that the Group commits to purchase or sell the asset.
(xxiii) Fiduciary assets Assets held in a fi duciary capacity are not reported in the consolidated fi nancial statements, as they are not the assets of the Group.
(xxiv) Restricted investment accounts Restricted investment accounts represents assets held in trust or in a fi duciary capacity by the Group for the benefi t of the investment accounts holders. The restricted investment accounts are exclusively restricted for investment in specifi ed projects as directed by the investments account holders.
(xxv) Impairment of fi nancial assets The Group assesses at each balance sheet date whether there is any objective evidence that a fi nancial asset or a group of fi nancial assets is impaired. A fi nancial asset or a group of fi nancial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash fl ows of the fi nancial asset or the group of fi nancial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing signifi cant fi nancial diffi culty, default or delinquency in profi t or principal payments, the probability that they will enter bankruptcy or other fi nancial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash fl ows, such as changes in arrears or economic conditions that correlate with defaults.
Balances with banks and Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers For balances with banks and Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers carried at amortised cost, the Group fi rst assesses individually whether objective evidence of impairment exists individually for fi nancial assets that are individually signifi cant, or collectively for fi nancial assets that are not individually signifi cant. If the Group determines that no objective evidence of impairment exists for an individually assessed fi nancial asset, whether signifi cant or not, it includes the asset in a group of fi nancial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash fl ows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated statement of income. Income from Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts continue to be accrued on the reduced carrying amount based on the original effective profi t rate.
Financial contracts together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the ‘Income from retail and corporate banking activities’.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5555 55/22/08/22/08 4:11:254:11:25 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
3 ACCOUNTING POLICIES (continued)
(xxv) Impairment of fi nancial assets (continued)
The present value of the estimated future cash fl ows is discounted at the fi nancial asset’s original effective profi t rate. If a fi nancial asset has a variable profi t rate, the discount rate for measuring any impairment loss is the current effective profi t rate. The calculation of the present value of the estimated future cash fl ows of a collateralised fi nancial asset refl ects the cash fl ows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, fi nancial assets are grouped on the basis of the Group’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.
Future cash fl ows on a group of fi nancial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to refl ect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash fl ows refl ect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash fl ows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
Available for sale investments For available for sale investments, the Group assesses at each balance sheet date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classifi ed as available for sale, objective evidence would include a signifi cant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated statement of income is removed from equity and recognised in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income; increases in their fair value after impairment are recognised directly in equity.
In the case of debt instruments classifi ed as available for sale, impairment is assessed based on the same criteria as fi nancial assets carried at amortised cost. Profi t continues to be accrued at the original effective profi t rate on the reduced carrying amount of the asset and is recorded as part of ‘Income from investment activities’. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.
Cars inventory Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. For individually signifi cant amounts this estimation is performed on an individual basis. Amounts which are not individually signifi cant, but which are old or obsolete, are assessed collectively and an allowance applied according to the inventory type and the degree of ageing or obsolescence, based on historical selling prices.
Future changes in accounting policies
The International Financial Reporting Standards and Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions, effective 1 January 2008, will not have any signifi cant impact on the consolidated fi nancial statements of the Group.
56 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5656 55/22/08/22/08 4:11:254:11:25 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
4 INVESTMENT IN SUBSIDIARIES
Key subsidiaries, all of which have 31 December as their year end, are as follows:
Subsidiary Activities Year of Country of Ownership % incorporation incorporation
Mena Telecom W.L.L. The company is a licensed 2003 Kingdom of Bahrain 100.00 telecommunications company and a Satellite Access Service Provider.
Miracle Graphics The company is engaged in the business of 2003 Kingdom of Bahrain 70.00 Company W.L.L. designing, big format printing, reprographics and publishing.
Baytik Investment The principal activity of the company is 2003 Kingdom of Bahrain 100.00 Advisory W.L.L. providing advisory services to the Bank and its affi liates.
Al-Enma House for The company is engaged in property 2003 Kingdom of Bahrain 59.28 Real Estate W.L.L. management of commercial, industrial and residential buildings in the Kingdom of Bahrain. (Note 12)
Bayan Group for The principal activity of the company 2004 Kingdom of Bahrain 100.00 Investment Properties is to buy, sell and lease properties and W.L.L. to undertake joint ventures with other companies engaged in similar activities.
Al Kindi Pharmaceutical The company is engaged in the manufacture 1997 Hashemite Kingdom of Jordan 82.20 Industries (Public of drugs in all their pharmaceutical dosage Shareholding Company) forms and the manufacturing of semi- pharmaceutical products specialised for skin care, cosmetics and others.
Kuwait Finance House The company will be engaged in investment 2007 Hashemite Kingdom of Jordan 100.00 - Jordan advisory, acquisition and development of private equity investments in the Hashemite Kingdom of Jordan.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5757 55/22/08/22/08 4:11:264:11:26 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
5 CASH AND BALANCES WITH BANKS AND CENTRAL BANK OF BAHRAIN
2007 2006 BD 000s BD 000s
Cash 2,027 1,276 Balances with banks - nostros 4,525 9,519 Balances with Central Bank of Bahrain 17,088 10,588 23,640 21,383
6 MURABAHA AND MUDARABA CONTRACTS WITH BANKS
Europe Middle East Total 2007 2006 2007 2006 2007 2006 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
Murabaha contracts with banks - international commodities - - 80,796 62,226 80,796 62,226 Deferred profi ts - - (111) (472) (111) (472) - - 61,754 36,451 61,754 36,451
Mudaraba contract with banks - 4,900 - - - 4,900 - 4,900 80,685 61,754 80,685 66,654
7 MURABAHA, MUSHARAKA, ISTISNA’A AND IJARAH MUNTAHIA BITTAMLEEK CONTRACTS RELATING TO CUSTOMERS
2007 2006 BD 000s BD 000s
Murabaha contracts 125,072 72,620 Deferred profi ts (10,283) (7,295) 114,789 65,325
Ijarah Muntahia Bittamleek (Note 7.1) 107,122 69,892 Musharaka contracts 7,535 2,709 Istisna’a contracts 56,369 30,695 285,815 168,621
Provisions (9,754) (6,665) 276,061 161,956
58 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5858 55/22/08/22/08 4:11:264:11:26 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
7 MURABAHA, MUSHARAKA, ISTISNA’A AND IJARAH MUNTAHIA BITTAMLEEK CONTRACTS RELATING TO CUSTOMERS (continued)
7.1 Movement is Ijarah Muntahia Bittamleek assets is as follows:
2007 2006 BD 000s BD 000s
At 1 January 72,601 47,921 Additions during the year 42,182 28,508 Ijarah assets’ depreciation - net (7,661) (3,828) At 31 December 107,122 72,601
The rentals received against Ijarah Muntahia Bittamleek are included in income from retail and corporate banking activities. During the year, BD 4,607 thousand (2006: BD 2,358 thousand) has been provided as depreciation which is included in the rentals received. Certain Ijarah have completed the contracted period whose accumulated depreciation amounted to BD 774 thousand (2006: BD 493 thousand).
The composition of the Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts, net of deferred profi ts and provision, based on the status of the customer to the contract, is as follows:
2007 2006 BD 000s BD 000s
Commercial and business 76,524 23,632 Real estate 118,260 63,078 Private individuals 81,277 75,246 276,061 161,956
The movements in provisions were as follows:
2007 2006 BD 000s BD 000s
At 1 January 6,665 4,756 Charge for the year 3,089 1,909 At 31 December 9,754 6,665
At 31 December 2007 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts on which profi t is not being accrued, amounted to BD 447 thousand (2006: BD 336 thousand). Unrecognised profi t relating to such contracts amounted to BD 72 thousand (2006: BD 47 thousand).
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 5959 55/22/08/22/08 4:11:264:11:26 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
8 INVESTMENTS
At 31 December 2007 the Group has the following investments:
2007 2006 BD 000s BD 000s
Classifi ed as Carried at fair value through income statement: Held for trading equities - quoted 11,830 - Equities 67,809 51,139 Managed funds 8,155 8,648 Available for sale: Equities 28,336 11,733 Government sukuks 12,275 7,773 Other sukuks 13,467 3,770 141,872 83,063
The composition of the investment portfolio is as follows:
New Zealand/ Total Australia Middle East Others 2007 2006 BD 000s BD 000s BD 000s BD 000s BD 000s
Commercial and technology 5,077 - 7,742 12,819 5,058 Real estate development - 72,171 - 72,171 35,670 Others 18,288 32,573 6,021 56,882 42,335 23,365 104,744 13,763 141,872 83,063
9 INVESTMENT IN ASSOCIATES
The Group has investment in Durrat Khaleej Al Bahrain B.S.C. (c), an associate with 48% (2006: 37.7%) interest. The associate, incorporated in the Kingdom of Bahrain, is currently engaged in developing Durrat Al-Bahrain Island, a real estate project in the Kingdom of Bahrain. During the year, Al-Enma House for Real Estate W.L.L. (previously an associate) has become a subsidiary (Note 12).
The following table illustrates the summarised fi nancial information of the Group’s investment in associates.
2007 2006 BD 000s BD 000s
Share of associate’s balance sheet Current assets 30,283 17,800 Non current assets 51,733 26,396 Current liabilities (16,221) (5,149) Non current liabilities (39,627) (30,489)
Net assets 26,168 8,558
Share of associates’ revenue and net income Revenue 40,936 6,805 Net income for the year 14,173 512
60 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 6060 55/22/08/22/08 4:11:274:11:27 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
10 INVESTMENT PROPERTIES
2007 2006 BD 000s BD 000s
Cost At 1 January 22,591 11,068 Additions 60,387 12,233 Relating to a subsidiary acquired during the year 9,718 - Disposals (1,301) (710) At 31 December 91,395 22,591
Fair value adjustment At 1 January 5,032 3,669 Unrealised gain on investment properties 9,625 3,017 Relating to a subsidiary acquired during the year 430 - Relating to disposals (1,385) (1,654) At 31 December 13,702 5,032
Total 105,097 27,623
Investment properties, held in the Kingdom of Bahrain, at 31 December consist of the following:
2007 2006 BD 000s BD 000s
Buildings 31,199 6,211 Land 73,898 21,412 105,097 27,623
Investment properties were revalued as of dates close to the balance sheet date, by independent consultants who have reasonable and suffi cient experience in the location and category of the properties being valued.
These include certain properties in which the Bank’s share is valued at BD 614 thousand (2006: BD 3,300 thousand) which are jointly owned with third parties and are subject to normal conditions applicable to joint ownership.
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11 RECEIVABLES AND PREPAYMENTS
2007 2006 BD 000s BD 000s
Advance for purchase of investment property 11,000 - Performance and management fees receivable (Note 25) 8,101 1,083 Investment liquidation proceeds receivable 4,305 - Project expenses receivable (Note 25) 3,915 3,343 Inventories held for consumer fi nance 2,669 - Profi t receivable 1,726 1,473 Receivable relating to investment property 1,675 - Trade receivables of a subsidiary 1,586 1,375 Inventories and work in progress of a subsidiary 650 568 Prepaid expenses 486 445 Other assets 4,545 2,981 40,658 11,268
12 GOODWILL AND INTANGIBLES
2007 2006 BD 000s BD 000s
Goodwill 4,221 1,354 Intangibles 2,706 1,154 At 31 December 6,927 2,508
Acquisition of additional shares in Al Enma’ House for Real Estate B.S.C.(c) Until 9 July 2007, the Group had a 39.52% stake in Al Enma’ House for Real Estate B.S.C.(c) which was treated as an associate and accounted for under the equity method of accounting. On 10 July 2007, the Bank increased its holding to 59.28% through a purchase of 990,000 shares. As a result, from 10 July 2007, Al Enma’ House for Real Estate B.S.C.(c) became a subsidiary of the Group and has been consolidated from that date.
The fair value and the carrying value of identifi able assets and liabilities of Al Enma’ House for Real Estate B.S.C.(c) as at the date of acquisition were as follows:
BD 000s Assets Cash and balances with banks 1,464 Investments 1,003 Investment properties 10,148 Receivables and prepayments 4,649 Equipment 94 17,358 Liabilities Murabaha contracts with banks 7,759 Other liabilities 320 Net assets 9,279
62 KFH-Bahrain - Annual Report 2007
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12 GOODWILL AND INTANGIBLES (continued)
BD 000s Acquisition of additional shares representing 19.76% interest 1,834 Goodwill arising on acquisition 1,866 Total Consideration 3,700
BD 000s Cash and balances with banks acquired with the subsidiary 1,464 Cash paid on acquisition (3,700) Net cash and balances with banks paid on acquisition (2,236)
From the date of consolidation, Al Enma’ House for Real Estate B.S.C.(c) has contributed BD 3,918 thousand to the net income of the Group. If the combination had taken place at the beginning of the year, the net income of the Group would have been higher by BD 754 thousand and income from investment activities would have been higher by BD 891 thousand.
Acquisition of additional shares in an existing subsidiary During the year, the Group has increased its interest in Al Kindi Pharmaceutical Industries (Public Shareholding Company) from 55.0% to 82.20%, which has resulted in an increase in goodwill of BD 1,001 thousand.
The goodwill of BD 4,221 thousand represents the fair value of expected synergies arising form the acquisition.
13 MURABAHA CONTRACTS WITH BANKS
Murabaha contracts with banks represent funds received from banks on the principles of Murabaha contracts.
14 MURABAHA CONTRACTS WITH NON-BANKS
These represent funds received from non-banks on the principles of Murabaha contracts.
15 CUSTOMERS’ CURRENT ACCOUNTS
These represent customers’ accounts which are not entitled to any profi t distributions in accordance with the terms of the related agreements.
16 FUNDS UNDER MANAGEMENT
At 31 December 2007, clients’ funds managed in a fi duciary capacity amounted to BD 127,200 thousand (2006: BD 97,078 thousand).
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17 OTHER LIABILITIES
2007 2006 BD 000s BD 000s
Payable against purchase of investment properties 26,945 3,372 Pay orders issued not presented 7,727 831 Payable on account of fi nancing contracts 3,378 1,143 Staff related accruals 2,989 2,320 Profi t payable on account of Murabaha contracts 1,115 576 Others 4,037 4,633 46,191 12,875
18 UNRESTRICTED INVESTMENT ACCOUNTS
Profi t allocation between unrestricted investment accounts and shareholders is as follows:
2007 2006 BD 000s BD 000s
Shareholders of the parent and minority interest 32,670 20,763 Unrestricted investment accounts 1,662 1,200 34,332 21,963
Unrestricted investment account holders’ funds are commingled with the Bank’s funds for investing in short term highly liquid investments and medium term murabahas, no priority is granted to any party for the purpose of distribution of profi ts. According to the terms of acceptance of the unrestricted investment accounts, 100% of the funds are invested after deductions of mandatory reserve and suffi cient operational cash requirements. The mudarib fee on investment accounts ranges from 20% to 35% depending on the investment period and in case of saving accounts, where there is no restriction of cash withdrawal, the mudarib fee ranges from 50% to 60%. However, during the year, in addition to depositors share of profi t, the Bank has distributed profi t to investors from its own share of mudarib fee.
The provision against Murabaha receivables is charged to both the shareholders and the holders of the unrestricted investment accounts, considering the allocation of various assets. Any reversal in provision is reversed to the extent it was charged to shareholders or the holders of the unrestricted investment accounts. Expenses are allocated in proportion to average unrestricted investment account to total average assets of the Bank.
64 KFH-Bahrain - Annual Report 2007
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19 SHARE CAPITAL 2007 2006 BD 000s BD 000s
Authorised share capital as of 31 December 2007 represents 3,500,000 thousand (2006 : 350,000 thousand) shares of BD 0.1 (2006 : BD 1) each. 350,000 350,000
Issued and fully paid-up share capital as of 31 December 2007 comprised as follows: Held by the Parent of the Bank - 675,654 thousand (2006 : 43,000 thousand) shares of BD 0.1 (2006 : BD 1) each. 67,565 43,000 Held under Employee Share Ownership Plan (“ESOP”) - 24,506 thousand (2006 : 1,560 thousand) shares of BD 0.1 (2006 : BD 1) each. 2,451 1,560 70,016 44,560
Following a resolutions passed by the shareholders of the Bank at an Extraordinary General Meeting (EGM) held on 25 March 2007, the Bank has:
(a) issued 4,456 thousand bonus shares amounting to BD 4,456 thousand by transfer from general reserves; (b) changed the nominal value of the ordinary shares from BD 1 per share to BD 0.1 per share; and (c) increased the issued and paid up capital to BD 70,016 thousand by issuing 210 million ordinary shares at a value of BD 0.168 per share including a premium of BD 0.068 per share.
Shares issued for the ESOP, approved by the shareholders, are offered to eligible employees of the Bank through a special purpose vehicle.
20 STATUTORY RESERVE
As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year has been transferred to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of paid up share capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Central Bank of Bahrain.
21 INCOME FROM INVESTMENT ACTIVITIES
2007 2006 BD 000s BD 000s
Unrealised gain on investments * 7,147 6,705 Gain on sale of investments 1,305 16,893 Unrealised gain on investment properties ** 9,625 1,363 Gain on sale of investment properties 2,736 1,875 Performance and management fees (Note 25) 4,869 376 Other income 4,226 968 29,908 28,180
* This includes gain of BD 4,323 thousand relating to held for trading investments. ** This includes gain of BD 732 thousand relating to minority shareholders of a subsidiary.
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22 INCOME FROM RETAIL AND CORPORATE BANKING ACTIVITIES
2007 2006 BD 000s BD 000s
Income from Murabaha contracts 7,958 5,944 Income from Ijarah Muntahia Bittamleek 7,310 4,847 Income from Musharaka contracts 602 220 Income from Istisna’a contracts 4,366 2,456 Income from Murabaha and Mudaraba contracts with banks 4,577 4,002 Fees and commission 1,050 350 25,863 17,819
23 OTHER OPERATING EXPENSES
2007 2006 BD 000s BD 000s
Business development 3,201 1,793 Technology and communication 973 871 Premises - rentals and maintenance 611 412 Administration, professional and others 5,027 3,082 9,812 6,158
24 CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the consolidated statement of cash fl ows comprise of the following balance sheet amounts:
2007 2006 BD 000s BD 000s
Cash 2,027 1,276 Balances with banks - nostros 4,525 9,519 Balances with Central Bank of Bahrain excluding mandatory reserve deposit 5,273 4,873 Murabaha contracts with banks 80,685 57,984 Mudaraba contracts with banks - 3,958 92,510 77,610
25 RELATED PARTY TRANSACTIONS
Related parties represent associated companies, parent company and its major shareholders, directors and key management personnel of the Bank, and entities controlled, jointly controlled or signifi cantly infl uenced by such parties. Pricing policies and terms of these transactions are approved by the Group’s management. All the facilities to the related parties are performing facilities and are free of any provision for possible credit losses.
66 KFH-Bahrain - Annual Report 2007
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25 RELATED PARTY TRANSACTIONS (continued) The following balances arise from the transactions, in addition to those relating to investment transactions, entered into with the related parties:
Parent Directors and Other Associated and its major key management related companies shareholders personnel parties 2007 2006 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
Murabaha and Mudaraba contracts with banks - - - 4,336 4,336 10,178 Murabaha contracts relating to customers - - 563 23,716 24,279 622 Performance and management fees receivable (Note 11) 8,101 - - - 8,101 1,083 Project expenses receivable (Note 8) 365 - - 3,550 3,915 3,343 Murabaha contracts with non-banks 30,921 - 107 30,748 61,776 14,869 Customers’ current accounts 8,626 3,712 30 59,392 71,760 3,914 Payable against purchase of investment properties 23,591 - - - 23,591 - Other liabilities 151 - - - 151 3,372 Unrestricted investment accounts 102 - 2,594 4,750 7,446 7,906 Letter of credit 5,655 - - 8,671 14,326 5,678 Guarantees - - - 2,451 2,451 2,451
The income and expenses in respect of related parties included in the consolidated fi nancial statements are as follows:
Parent Directors and Other Associated and its major key management related companies shareholders personnel parties 2007 2006 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s Income from Murabaha and Mudaraba contracts with banks - 56 - 58 114 480 Income from Murabaha contracts relating to customers - - - 1,411 1,411 634 Performance and management fees (Note 21) 4,365 - - 504 4,869 376 Income from managed funds - - - 726 726 971 Fee and commission income - - - - - 90 Profi t on Murabaha contracts with non-banks 1,097 - - 1,652 2,749 1,090 Profi t on unrestricted investment accounts 2 - 26 81 109 147 Operating expenses - - - 581 581 594
Compensation of key management personnel, included in consolidated statement of income, is as follows:
2007 2006 BD 000s BD 000s
Short term employee benefi ts 2,822 2,301 Long term employee benefi ts 5 1
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26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled. Group’s contractual undiscounted repayment obligations are disclosed in Note 27 ‘Risk Management’.
Upto one year Over one year Subtotal Subtotal Up to 3 months to Less than 1 to 5 5 to 10 Over 10 Over 3 months 12 months 12 months years years years 1 year Total 2007 2007 2007 2007 2007 2007 2007 2007 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
ASSETS Cash and balances with banks and Central Bank of Bahrain 11,825 - 11,825 - - 11,815 11,815 23,640 Murabaha and Mudaraba contracts with banks 80,685 - 80,685 - - - - 80,685 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 19,805 64,539 84,344 119,468 43,795 28,454 191,717 276,061 Investments 11,830 6,620 18,450 29,915 80,314 13,193 123,422 141,872 Investment in associates - - - - - 41,356 41,356 41,356 Investment properties - - - 105,097 - - 105,097 105,097 Receivables and prepayments 15,026 14,236 29,262 11,396 - - 11,396 40,658 Goodwill and intangibles - - - - - 6,927 6,927 6,927 Premises and equipment - - - - - 18,995 18,995 18,995 TOTAL 139,171 85,395 224,566 265,876 124,109 120,740 510,725 735,291
LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS Murabaha contracts with banks 73,559 3,770 77,329 - - - - 77,329 Murabaha contracts with non-banks 254,182 33,087 287,269 - - - - 287,269 Customers’ current accounts 53,575 21,430 75,005 32,145 - - 32,145 107,150 Other liabilities 15,486 29,142 44,628 47 - 1,516 1,563 46,191 Unrestricted investment accounts 26,921 15,294 42,215 10,876 - - 10,876 53,091 TOTAL 423,723 102,723 526,446 43,068 - 1,516 44,584 571,030
NET (284,552) (17,328) (301,880) 222,808 124,109 119,224 466,141 164,261
68 KFH-Bahrain - Annual Report 2007
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26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
Upto one year Over one year Subtotal Subtotal Up to 3 months to Less than 1 to 5 5 to 10 Over 10 Over 3 months 12 months 12 months years years years 1 year Total 2006 2006 2006 2006 2006 2006 2006 2006 BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s
ASSETS Cash and balances with banks and Central Bank of Bahrain 15,668 - 15,668 - - 5,715 5,715 21,383 Murabaha and Mudaraba contracts with banks 61,942 4,712 66,654 - - - - 66,654 Murabaha, Musharaka Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 11,321 25,699 37,020 88,109 31,108 5,719 124,936 161,956 Investments 1,208 910 2,118 18,073 62,872 - 80,945 83,063 Investment in associates - - - - - 15,385 15,385 15,385 Investment properties - - - 27,623 - - 27,623 27,623 Receivables and prepayments 11,268 - 11,268 - - - - 11,268 Goodwill and intangibles - - - - - 2,508 2,508 2,508 Premises and equipment - - - - - 13,204 13,204 13,204 TOTAL 101,407 31,321 132,728 133,805 93,980 42,531 270,316 403,044
LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS Murabaha contracts with banks 100,941 9,425 110,366 - - - - 110,366 Murabaha contracts with non-banks 96,437 1,100 97,537 1,808 - - 1,808 99,345 Customers’ current accounts 23,275 9,310 32,585 13,964 - - 13,964 46,549 Other liabilities 12,875 - 12,875 - - - - 12,875 Unrestricted investment accounts 23,600 12,754 36,354 8,021 - - 8,021 44,375 TOTAL 257,128 32,589 289,717 23,793 - - 23,793 313,510
NET (155,721) (1,268) (156,989) 110,012 93,980 42,531 246,523 89,534
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27 RISK MANAGEMENT
27.1 Introduction
Risk is inherent in the Group’s activities but it is managed through a process of ongoing identifi cation, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profi tability and each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to prepayment risk and operating risks.
The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Group’s strategic planning process.
Risk management structure The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent bodies responsible for managing and monitoring risks.
Board of Directors The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles.
Executive Committee The Executive Committee has the responsibility to monitor the overall risk process within the Group.
Shari’a Supervisory Board The Bank’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the Bank’s adherence to Shari’a rules and principles in its transactions and activities.
Risk Committee The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant risk decisions.
Risk Management Unit The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process and also monitoring compliance with risk principles, policies and limits, across the Bank. The unit is also responsible for the independent control of risks, including monitoring the risk of exposures against limits and the assessment of risks of new products and structured transactions. This unit also ensures the complete capture of the risks in risk measurement and reporting systems.
Asset and Liability Committee The Asset and Liability Committee establishes policy and objectives for the asset and liability management of the Bank’s balance sheet in terms of structure, distribution, risk and return and its impact on profi tability. It also monitors the cash fl ow, tenor and cost/yield profi les of assets and liabilities and evaluates the Bank’s balance sheet both from profi t rate sensitivity and liquidity points of view, making corrective adjustments based upon perceived trends and market conditions, monitoring liquidity, monitoring foreign exchange exposures and positions.
Bank Treasury Bank Treasury is responsible for managing the Bank’s assets and liabilities and the overall fi nancial structure. It is also primarily responsible for the funding and liquidity risks of the Bank.
Audit Committee The Audit Committee is appointed by the Board of Directors and consists of three members who are Directors, including one non-Executive Director. The Board Audit Committee assists the Board in carrying out its responsibilities with respect to assessing the quality and integrity of fi nancial reporting, the audit thereof, the soundness of the internal controls of the Bank, the measurement system of risk assessment and relating these to the Bank’s capital, and the methods for monitoring compliance with laws, regulations and supervisory and internal policies.
70 KFH-Bahrain - Annual Report 2007
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27 RISK MANAGEMENT (continued)
27.1 Introduction (continued)
Internal Audit Risk management processes throughout the Bank are audited by the internal audit function, that examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its fi ndings and recommendations to the Audit Committee.
Risk measurement and reporting systems The Groups risks are measured using a method which refl ects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to refl ect the economic environment. The Bank also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.
Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits refl ect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented and explained to the Board of Directors, the Risk Committee, and the head of each business division. The report includes aggregate credit exposure, credit metric forecasts, hold limit exceptions, liquidity ratios and risk profi le changes. On a monthly basis detailed reporting of industry, customer and geographic risks takes place. Senior management assesses the appropriateness of the allowance for credit losses on a quarterly basis. The Board of Directors receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Group.
For all levels throughout the Group, specifi cally tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, necessary and up-to-date information. A daily briefi ng is given to the General Manager and all other relevant members of the Bank on the utilisation of market limits, proprietary investments and liquidity, plus any other risk developments.
Excessive risk concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specifi c guidelines to focus on maintaining a diversifi ed portfolio. Identifi ed concentrations of credit risks are controlled and managed accordingly.
27.2 Credit Risk
Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties failed to discharge their contractual obligations. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.
The Group has established a credit quality review process to provide early identifi cation of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classifi cation system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action.
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27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Credit-related commitments risks The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to fi nancing contracts and these are mitigated by the same control processes and policies.
Maximum exposure to credit risk without taking account of any collateral and other credit enhancements The table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.
Gross Gross Maximum Maximum Exposure Exposure 2007 2006 BD 000s BD 000s
Balances with banks and Central Bank of Bahrain 21,613 20,107 Murabaha and Mudaraba contracts with banks 80,685 66,654 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 276,061 161,956 Investments - sukuks 25,742 11,543 Receivables 40,172 10,823 Total 444,273 271,083 Credit commitments and contingent items 59,372 31,003 Total credit risk exposure 503,645 302,086
Where fi nancial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
Risk concentrations of the maximum exposure to credit risk
Concentration of risk is managed by client/counterparty, by geographical region and by industry sector. The maximum credit exposure to any client or counterparty as of 31 December 2007 was BD 54,718 thousands (2006: BD 30,414 thousands) before taking account of collateral. This facility is fully secured by authenticated mortgage over title deeds of land and building in the favour of the Bank.
The Group fi nancial assets having credit risk, before taking into account any collateral held can be analysed by the following geographical regions:
2007 2006 BD 000s BD 000s
Middle East 471,456 294,066 North America 13,394 1,541 Europe 500 - New Zealand / Australia 10,875 69 Other 7,420 6,410 Total 503,645 302,086
72 KFH-Bahrain - Annual Report 2007
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27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
An industry sector analysis of the Group fi nancial assets having credit risk, before taking into account collateral held, is as follows:
2007 2006 BD 000s BD 000s
Trading and Manufacturing 106,324 62,819 Banking and fi nancial institutions 121,941 98,108 Construction and real estate 160,967 68,576 Other 114,413 72,583 Total 503,645 302,086
The Group holds collateral against most of its fi nancial assets having credit risk.
Collateral and other credit enhancements
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The Bank has guidelines regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows:
- For commercial fi nancing, lien over investment accounts, charges over real estate properties, inventory and trade receivables; and - For retail and consumer fi nancing, lien over investment accounts, mortgages over the related assets.
The Bank also obtains personal guarantees from the owners for loans to their companies, but the benefi ts are not included in the above table. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.
Credit quality per class of fi nancial assets
The credit quality of fi nancial assets is managed by the Bank using internal credit ratings. The table below shows the credit quality by class of fi nancial assets, based on the Bank’s credit rating system.
Neither Past due or past due nor individually impaired impaired Total 2007 2007 2007 BD 000’s BD 000’s BD 000’s
Murabaha and Mudaraba contracts with banks 80,685 - 80,685 Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 270,987 14,828 285,815 Investments - sukuks 25,742 - 25,742 Total 377,414 14,828 392,242
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27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Neither Past due or past due nor individually impaired impaired Total 2006 2006 2006 BD 000’s BD 000’s BD 000’s
Murabaha and Mudaraba contracts with banks 66,554 - 66,554 Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 165,862 2,766 168,628 Investments - sukuks 11,543 - 11,543 Total 243,959 2,766 246,725
An analysis of past due fi nancing contracts, by age, is provided below. The majority of the past due fi nancing contracts are not considered to be impaired.
It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of fi nancial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The attributable risk ratings are assessed and updated regularly.
Aging analysis of past due but not impaired receivables per class of fi nancial assets
Less than 31 to More than 30 days 60 days 60 days Total 2007 2007 2007 2007 BD 000’s BD 000’s BD 000’s BD 000’s
Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 4,430 533 5,289 10,252
Less than 31 to More than 30 days 60 days 60 days Total 2006 2006 2006 2006 BD 000’s BD 000’s BD 000’s BD 000’s
Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 11 285 486 782
Carrying amount per class of fi nancial assets whose terms have been renegotiated
At 31 December 2007 and 2006, the Group had no fi nancial assets whose terms have been renegotiated.
Impairment assessment
The main considerations for the impairment assessment include whether any payments of principal or profi t are overdue by more than 90 days or there are any known diffi culties in the cash fl ows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Group addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.
74 KFH-Bahrain - Annual Report 2007
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27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Individually assessed allowances
The Group determines the allowances appropriate for each individually signifi cant fi nancing contract on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a fi nancial diffi culty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other fi nancial support and the realisable value of collateral, and the timing of the expected cash fl ows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.
Collectively assessed allowances
Allowances are assessed collectively for losses on fi nancing contracts that are not individually signifi cant (including credit cards, residential mortgages and unsecured consumer fi nancing) and for individually signifi cant fi nancing contract where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.
The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration of the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it will be identifi ed as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Group’s overall policy.
Financial guarantees and letters of credit are assessed and provision made in a similar manner as for fi nancing contracts.
27.3 Liquidity risk and funding management
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversifi ed funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash fl ows and liquidity on a daily basis. This incorporates an assessment of expected cash fl ows and the availability of high grade collateral which could be used to secure additional funding if required.
The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash fl ow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Bank maintains a statutory deposit with the Central Bank of Bahrain equal to 5% of customer deposits. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifi cally to the Bank. The most important of these is to maintain limits on the ratio of liquid assets to customer liabilities. Liquid assets consists of cash and balances with banks and Central Bank of Bahrain, Murabaha and Mudaraba contracts with banks, held for trading investments and Central Bank of Bahrain sukuks. The ratios during the year were as follows:
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27 RISK MANAGEMENT (continued)
27.3 Liquidity risk and funding management (continued)
2007 2006 % %
31 December 19.47 37.01 During the year: Average 25.92 34.41 Highest 39.11 38.36 Lowest 19.47 28.59
Analysis of fi nancial liabilities by remaining contractual maturities
The table below summarises the maturity profi le of the Group’s fi nancial liabilities at 31 December 2007 and 2006 based on contractual undiscounted repayment obligations. See note 26 ‘Maturity analysis of assets and liabilities’ for the expected maturities of these liabilities. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not refl ect the expected cash fl ows indicated by the Group’s deposit retention history.
On Less than 3 to 12 1 to 5 Over 5 demand 3 months months years years Total BD 000s BD 000s BD 000s BD 000s BD 000s BD 000s At 31 December 2007 Mudaraba contracts with banks 4,427 69,670 3,980 - - 78,077 Murabaha contracts with non-banks - 255,286 33,231 - - 288,517 Customers’ current accounts 107,150 - - - - 107,150 Other liabilities - 15,486 29,142 47 1,516 46,191 Unrestricted investment 36,255 8,922 8,159 - 53,336 Total undiscounted fi nancial liabilities 2007 147,832 349,364 74,512 47 1,516 573,271
At 31 December 2006 Murabaha contract with banks - 101,379 9,548 - - 110,927 Murabaha contracts with non-banks - 96,853 1,114 1,902 - 99,869 Customers’ current accounts 46,549 - - - - 46,549 Other liabilities 12,875 - - - - 12,875 Unrestricted investment accounts 23,779 12,790 - - - 36,569 Total undiscounted fi nancial liabilities 2006 83,203 211,022 10,662 1,902 - 306,789
76 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 7676 55/22/08/22/08 4:11:324:11:32 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
27 RISK MANAGEMENT (continued)
27.3 Liquidity risk and funding management (continued)
Credit commitments and contingent items
These include commitments to enter into contracts which are designed to meet the requirements of the Group’s customers. Commitments represent contractual commitments under Murabaha, Mudaraba and Ijarah Muntahia Bittamleek contracts. Commitments generally have fi xed expiration dates, or other termination clauses. Since commitments may expire without being exercised, the total contract amounts do not necessarily represent future cash fl ow requirements.
Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract.
The table below shows the contractual expiry by maturity of the Group’s Credit commitments and contingent items.
Upto Over 1 year 1 year Total BD 000’s BD 000’s BD 000’s
At 31 December 2007 Commitments on behalf of customers: Letters of credits 20,043 - 20,043 Guarantees 14,580 8,698 23,278 Irrevocable commitments to extend credit 16,051 - 16,051
Total 50,674 8,698 59,372
At 31 December 2006 Commitments on behalf of customers: Letters of credits 8,062 - 8,062 Guarantees 2,313 14,580 16,893 Irrevocable commitments to extend credit 6,048 - 6,048
Total 16,423 14,580 31,003
The Group does not expect any material loss in respect of the above.
27.4 Market risk
Market risk is the risk that the fair value or future cash fl ows of fi nancial instruments will fl uctuate due to changes in market variables such as profi t rates, foreign exchange rates, and equity prices. The Group managed and monitored the positions using sensitivity analyses.
Profi t rate risk Profi t rate risk arises from the possibility that changes in profi t rates will affect future profi tability or the fair values of fi nancial instruments. The Board has established limits on the profi t rate gaps for stipulated periods and the positions are monitored on a daily basis.
The following table demonstrates the sensitivity to reasonably possible change in profi t rates, with all other variables held constant of the Group’s consolidated statement of income. The sensitivity of the consolidated statement of income is the effect of the assumed changes in profi t rates on the net income for the year, based on the non-trading fi nancial assets and fi nancial liabilities held at 31 December 2007. There is no impact on the Group’s equity.
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 7777 55/22/08/22/08 4:11:324:11:32 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
27 RISK MANAGEMENT (continued)
27.4 Market risk (continued)
The effect of decreases in basis points is expected to be equal and opposite to the effect of the increases shown.
Effect on Change net income 2007 in basis for the year BD 000s points BD 000s
Assets Murabaha and Mudaraba contracts with banks 80,685 +20 161 Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 171,026 +20 342 Investments - sukuks 25,742 +20 51
Liabilities and Unrestricted Investment Accounts Murabaha contracts with banks 77,329 +20 (155) Murabaha contracts with non-banks 287,269 +20 (575) Unrestricted investment accounts 53,091 +20 (106) Total (282)
Effect on Change net income 2006 in basis for the year BD 000s points BD 000s
Assets Murabaha and Mudaraba contracts with banks 66,654 +20 133 Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers 103,296 +20 207 Investments - sukuks 11,543 +20 23
Liabilities and Unrestricted Investment Accounts Murabaha contracts with banks 110,366 +20 (221) Murabaha contracts with non-banks 99,345 +20 (199) Unrestricted investment accounts 44,375 +20 (89) Total (146)
Currency risk Currency risk is the risk that the value of a fi nancial instrument will fl uctuate due to changes in foreign exchange rates. The Board has set limits on positions by currency. Positions are monitored on a daily basis to ensure positions are maintained within established limits.
The tables below indicate the currencies to which the Group had signifi cant exposure at 31 December 2007 on its all monetary assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Bahraini Dinar, with all other variables held constant on the consolidated statement of income.
The effect of decreases in currency rate is expected to be equal and opposite to the effect of the increases shown.
Change Effect on Effect on Effect on Effect on currency profi t equity profi t equity rate 2007 2007 2006 2006 % BD 000s BD 000s BD 000s BD 000s
NZD +5 791 232 784 168 KWD +5 395 - 261 - JOR +5 - 242 - 260 GBP +5 219 - 138 - Total 1,405 474 1,183 428
78 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 7878 55/22/08/22/08 4:11:324:11:32 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
27 RISK MANAGEMENT (continued)
27.4 Market risk (continued)
Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The equity price risk exposure arises from the Group’s investment portfolio.
The effect on income (as a result of a change in the fair value of equity instruments at 31 December 2007) due to a reasonably possible change (i.e. +5%) in the value of individual investments, with all other variables held constant, is BD 5,807 thousands (2006: BD 3,576 thousands). The effect of decrease in the value of individual investment is expected to be equal and opposite to the effect of the increase shown.
27.5 Prepayment risk
Prepayment risk is the risk that the Group will incur a fi nancial loss because its customers and counterparties repay or request repayment earlier or later than expected. The Group is not exposed to any signifi cant prepayment risk.
27.6 Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to fi nancial loss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
28 CREDIT COMMITMENTS AND CONTINGENT ITEMS
Credit related commitments These include commitments to enter into contracts which are designed to meet the requirements of the Bank’s customers. Commitments represent contractual commitments under Murabaha, Musharaka, Mudaraba and Ijarah Muntahia Bittamleek contracts. Commitments generally have fi xed expiration dates, or other termination clauses. Since commitments may expire without being exercised, the total contract amounts do not necessarily represent future cash fl ow requirements.
Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract.
The Bank has the following credit related commitments:
2007 2006 BD 000s BD 000s Commitments on behalf of customers: Letters of credit 20,043 8,062 Guarantees 23,278 16,893 43,321 24,955 Irrevocable commitments to extend credit: Original term to maturity of one year or less 16,051 6,048 59,372 31,003
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 7979 55/22/08/22/08 4:11:334:11:33 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
28 CREDIT COMMITMENTS AND CONTINGENT ITEMS (continued)
Operating lease commitments At 31 December 2007, the Group had commitments in respect of non cancellable operating leases amounting to BD 4,464 thousand (2006: BD 4,532 thousand) relating to leasehold premises. Of the commitments in respect of operating leases BD 231 thousand (2006: BD 150 thousand) are due within one year and the remaining within two to fi ve years.
Capital commitments At 31 December 2007, the Group had commitments of BD 1,694 thousand (2006: Nil) principally relating to the office premises.
29 CAPITAL MANAGEMENT
The Group maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (“BIS rules/ratios“) and adopted by the Central Bank of Bahrain in supervising the Bank. During the past year, the Group had complied in full with all its externally imposed capital requirements.
The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.
Regulatory capital 2007 2006 BD 000s BD 000s
Tier 1 capital 116,584 63,207 Tier 2 capital 40,215 25,778 Total capital 156,799 88,985
Risk weighted assets 705,943 366,355 Total capital ratio 22.2% 24.3% Minimum requirement 12.0% 12.0%
Regulatory capital consists of Tier 1 capital, which comprises share capital, share premium, retained earnings, foreign currency translation and minority interests less goodwill. The other component of regulatory capital is Tier 2 capital, which includes collective provision, current year’s profi t and revaluation reserves. Certain adjustments are made to IFRS-based results and reserves, as prescribed by the Central Bank of Bahrain.
80 KFH-Bahrain - Annual Report 2007
KKFHFH aarr 0088 ffinancialsinancials v9v9 1919 may.inddmay.indd 8080 55/22/08/22/08 4:11:334:11:33 PMPM Notes to the Consolidated Financial Statements At 31 December 2007
30 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A
The Group did not receive any signifi cant income or incurred signifi cant expenses which were prohibited by the Shari’a.
31 FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments comprise fi nancial assets and fi nancial liabilities. Financial assets consist of cash and balances with banks and Central Bank of Bahrain, Murabaha and Mudaraba contracts with banks, Financial contracts relating to customers, investments, investment properties and receivables. Financial liabilities consist of Murabaha contracts with banks, Murabaha contracts with non-banks, customers current accounts and unrestricted investment accounts.
At 31 December 2007 and 2006, the fair values of fi nancial instruments were not materially different from their carrying values.
32 SOCIAL RESPONSIBILITY
The Bank discharges its social responsibilities through donations to charitable causes and organisations approved by Shari’a Supervisory Board.
33 ZAKAH
In accordance with the instructions of the Sharia’a Supervisory Board of the Bank, payment of Zakah is the responsibility of the shareholders of the Bank. Accordingly, no Zakah has been charged to these consolidated fi nancial statements.
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