FOCUSING ON

FUNDAMENTALS
& TRANSFORMING
THE BUSINESS

ANNUAL
REPORT
2015
 --------

Focusing on Fundamentals
Getting ‘Back to Basics’ will remain Bahrain Islamic Bank’s mantra for the next three years and, with
a solid foundation of fundamental banking principles across the entire Bank, sets the stage for a
sustainable turnaround and further success. The Bank is underscoring its commitment to delivering
banking simply as it should be with a focus on core business activities, the launch of innovative
initiatives, services and products, the further development of a state of the art Information and
Communication Technology infrastructure and, central to our’ Back to Basics’ ethos, a continued
focus on providing superior customer service and a simply better banking experience.

Contents
Bank Overview 02 Corporate Profile
03 Vision and Mission
04 Financial Highlights
05 Operational Highlights

Business Review 06 Board of Directors Report

08 Board of Directors
10 Sharia’a Supervisory Board
12 Chief Executive Officer Report
16 Executive Management
18 Review of Operation
26 Risk Management
27 Remuneration Disclosures
32 Corporate Social Responsibility Review
33 Corporate Governance Review
41 Sharia’a Supervisory Board Report

Financial Statements 43 Independent Auditors’ Report

44 Consolidated Statement of Financial Position
45 Consolidated Statement of Income
46 Consolidated Statement of Cash Flows
47 Consolidated Statement of Changes in
Owners’ Equity
48 Consolidated Statement of Sources and Uses
of Good Faith Qard Fund
49 Consolidated Statement of Sources and Uses
of Zakah and Charity Fund
50 Notes to the Consolidated Financial Statements
80 Basel III, Pillar III Disclosures

Bahrain Islamic Bank

Al Salam Tower
Diplomatic Area
PO Box 5240, Manama
Kingdom of Bahrain
Tel: (+973) 17 546 111
Fax: (+973) 17 535 808
Email: [email protected]
www.bisb.com

bahrainislamicbank @_bisb @bahrainislamicbank

His Royal Highness His Majesty King His Royal Highness
Prince Khalifa bin Salman Hamad bin Isa Prince Salman bin Hamad
Al Khalifa Al Khalifa Al Khalifa

The Prime Minister of The King of the Kingdom The Crown Prince,
the Kingdom of Bahrain of Bahrain Deputy Supreme Commander
and First Deputy Prime
Minister
2
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE PROFILE

The leading Islamic commercial bank in Bahrain.

Incorporated in 1979 as the first Islamic bank in the

kingdom of Bahrain, and the forth in the GCC. Bahrain
Islamic Bank (BisB) has played a pivotal role in the
development of the Islamic banking industry and the
Kingdom’s economy. The Bank operates under an Islamic
Retail banking licence from the Central Bank of Bahrain
and is listed on the Bahrain Bourse.
At the end of 2015, the Bank’s paid up capital was BD 97 million, while total assets
stood at BD 976 million. The Bank’s modern branch network comprises 6 branches,
4 innovative financial malls, and 53 ATM’s located throughout the Kingdom. A steadfast
focus on continuous innovation, strong corporate governance and risk management,
employee development, and the use of state of the art technology to deliver superior
customer service, has cemented Bahrain Islamic Bank’s position as the leading Sharia’a
– compliant bank in the Kingdom.

6
Branches

4
Financial
Mallsbranches
53ATMs branches
3
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
VISION AND MISSION

OUR VISION
To be the preferred Islamic Financial Partner
going beyond boundaries to grow together.

OUR MISSION
Our mission is to deliver value to:

Exceed their Nurturing and

Customers expectations
Employees retaining talent.
and
build loyalty.

Maximising Honouring
Shareholders consistent returns.
Community our social
commitment to
society.
4
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
FINANCIAL HIGHLIGHTS

2015 976 2015 594

Total Assets Total Financing
BD Million BD Million
2014 875 2014 510

2013 910 2013 437

976m 594m
2012 833 2012 415

2011 839 2011 392

Total Operating 2015 47

Investors’ Share 2015 5.7

Income in Income
BD Million BD Million
2014 50 2014 7.5

2013 47 2013 11

47m 5.7m
2012 38 2012 14

2011 41 2011 15

Investments 2015 202

Unrestricted 2015 709
BD Million Investment
2014 208
Accounts 2014 642
BD Million

2013 201 2013 713

202m 709m
2012 210 2012 661

2011 233 2011 638

Book Value 2015 112

Share Price 2015 143

per share BD Fils

BD Fils
2014 85 2014 148

2013 84 2013 136

112fils 143fils
2012 75 2012 82

2011 108 2011 90

5
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
OPERATIONAL HIGHLIGHTS

Corporate Banking
Retail Banking supports SME’s & grows
Innovation commercial customer base
Aligned with the Bank’s customer centric business strategy, BisB’s BisB grew its commercial customer base by an impressive 40%
retail banking division launched a number of new initiatives and in 2015, substantially reduced non-performing loans and cost of
services, and made further enhancements to its innovative product funding, and attracted high quality assets. In addition, the Bank
line in order to offer customers further value added benefits. As a continues its support for (SMEs) through our ongoing robust
result, the Bank’s retail customer base expanded by 8% and the financing scheme through Tamkeen.
Islamic financing portfolio grew by 12.5%.

Leveraging
Improving the Technology
Customer Experience IT infrastructure
BisB undertook a number of initiatives during 2015 in order BisB continued to strengthen its IT infrastructure during 2015. Key
to improve the customers’ banking experience. These include achievements include the upgrade of the core banking system. The
the opening of a new, larger branch in Zayid Town, Further state-of –the-art system has standardized the entire technological
enhancements were also made to the Bank’s diverse array of infrastructure of the bank to the latest software versions; enhancing
product offerings such as additional prizes and categories for the overall security and performance of the Bank. Back office
Tejoori, in addition to more exclusive benefits for MasterCard operational processes and procedures were also further streamlined
Titanium cardholders. with advanced systems implemented across a number of functions.

Financial results
testament
to disciplined focus on International
fundamentals recognition
The solid financial performance by Bahrain Islamic Bank in 2015, which saw net As our financial and operational achievements
profit increase by 52% over the previous year, is testament to a disciplined and during 2015 demonstrate, the Bank has made
relentless approach to strategy implementation; ensuring strategic objectives are good progress. This success was recognized at
translated and implemented across all levels and activities of the Bank. The year the 2015 World Islamic Banking Conference
witnessed a continued focus on growing core activities and disposing of non- (WIBC) when BisB was awarded one of the
performing investment assets. The Bank relied fully on revenues and fees from Conferences’ flagship Performance Awards
financing and major activities, which were responsible for generating 82% of based on aggregate performance scores
operating revenues. These were free from revaluations or unearned profits, with the against multiple measures on a global, regional
exception of the successful exits from some investment portfolios and listed equities, and country level, with Bahrain Islamic Bank
which realised a net gain of BD 6.9 million. Significant developments include a presented with the ‘Best Performing Islamic
capital increase of BD 20 million which will effectively strengthen the capital base Bank’ in Bahrain.
and bolster the liquidity ratio, and a USD$100 million 1 year bilateral syndication
between the Bank and its joint majority shareholder National Bank of Bahrain (NBB).
6
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
BOARD OF DIRECTORS REPORT

GROWING CORE
BUSINESS ACTIVITIES

Abdul Razak Al Qassim

Chairman of the Board

On behalf of the Board of Directors, it is my

“Focus on strengthening In the name of Allah, the Most
privilege to present the annual report and
Beneficent, the Most Merciful.
the Bank’s corporate Prayers and Peace be upon the consolidated financial statements of Bahrain
Islamic Bank (BisB) for the year ended 31
governance and risk Last Apostle and Messenger, December 2015. This was a positive year
management frameworks, Our Prophet Mohammed, His for the Bank, during which we made good
Comrades and Relatives. progress towards our strategic objectives
enhancing institutional through a steadfast focus on growing core
capability through training business activities.

and development and Testament to the success of this disciplined

approach, I am delighted to report that BisB
leveraging state of the achieved an improved financial performance
art technology to deliver in 2015. Net profit for the year increased by
21 percent to BD 11.2 million from BD 9.3
superior products and million in 2014; while total income from
core activities grew by 29 percent to BD 40.4
services" million from BD 31.4 million the previous
year. Earnings per share were 14.02 Bahraini
fils compared with 11.76 fils in 2014.
Net Profit
for the year BisB continued to maintain a strong balance
sheet, with total assets standing at BD 976
million and owners’ equity of BD 110 million

11,2m
at the end of 2015, while liquidity remained
healthy at BD 134 million. Maintaining our
prudent and moderate approach, we made
impairment provisions totaling BD 9 million
7
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

in 2015, in comparison with impairment and operational achievements during 2015 Prince, Deputy Supreme Commander and
provisions of BD 11.9 million in 2014. demonstrate, the Bank has made good First Deputy Prime Minister, and to all
Measures taken by BisB during the year progress and was awarded the “Best Retail Government ministries and authorities
to address non performing investment Islamic Bank” from World Finance, UK. This - especially the Central Bank of Bahrain
and financing assets resulted in the success was also recognized by the Islamic and the Ministry of Industry, Commerce
reduction of the non performing portfolio Banking experts at the 2015 World Islamic & Tourism, for their guidance, kind
to approximately 9% of the Bank’s total Banking Conference (WIBC) when BisB was consideration and support.
financing book compared to 13% in 2014. awarded one of the Conferences’ flagship
The Directors also extend their thanks and
Performance Awards based on aggregate
Despite operating against a backdrop of appreciation to the Sharia’a Supervisory
performance scores against multiple
continued, intense competition and less Board for its advice and supervision; the
measures on a global, regional and country
than ideal market conditions, I am pleased staff of the Bank whose dedicated service
level, with Bahrain Islamic Bank presented
to report that the Bank’s retail and corporate and commitment has played a vital role in
with the ‘Best Performing Islamic Bank’ in
banking businesses performed well and the achievements of the Bank and to all
Bahrain.
increased their respective market share of our valued customers and friends for their
Bahrain’s commercial banking sector during Key to this continued strategic success is the continuous support and the confidence
2015. This reflects on our unrelenting focus creation of a world class management team. reposed by them in Bahrain Islamic Bank.
to deliver the highest levels of customer Aligned with this endeavor, the Board of
care and further improve our wide array of Directors appointed Mr. Hassan Amin Jarrar,
innovative products and services. a prominent leader in the banking sector, as
Chief Executive Officer of the Bank effective
The year witnessed an increased focus
July 1st 2015. On behalf of the Board of
on strengthening the Bank’s corporate
Directors, I welcome Mr. Jarrar and wish him
governance and risk management
every success in his new position. He has the
frameworks, enhancing institutional
Board’s full support in carrying out his new
capability through training and development
responsibilities. I would also like to take this
and leveraging state of the art technology
opportunity to commend the efforts of Mr.
to deliver superior products and services. Abdul Razak Al Qassim
Mohammed Ahmed Janahi during his role as
Through its comprehensive corporate social
Acting CEO in the previous period and wish Chairman of the Board
responsibility programme, BisB sustained
him success in his new position as Deputy
its contribution to the economic and social
CEO.
well-being of the Kingdom of Bahrain and
the development of the Islamic banking Despite the substantial difficulties faced by
industry. the economies of its regional peers, Bahrain
has remained resilient thanks to a strong
In a significant development, the Bank
performance in the non-oil sector, and fairly
strengthened its capital base by BD 20
robust construction growth as a result of the
million in Q4 of 2015 with 100% of the
GCC-marshal funded projects. The Kingdom
170,940,171 ordinary shares subscribed at
remains one of the most cost effective
a share offering price of 117 fils against a
countries in the region to do business and
nominal value of 100 fils during the period
with a number of viable real estate projects
15 to 29 November 2015. The capital
ongoing in the Financial Harbor, as well as
increase has positioned the Bank well in
a reinvigorated Foreign Direct Investment
terms of its relationship with regulators
strategy, the outlook for the Kingdom
and rating agencies and further supported
remains positive. We therefore remain
BisB’s journey towards profitability. I would
cautiously optimistic for the prospects of
like to express my gratitude to the Bank’s
BisB in 2016 as we focus on fundamentals
shareholders for their effective participation,
and transform the business.
as well as the Ministry of Industry, Commerce
& Tourism, the CBB and the Bahrain Bourse The Directors, on behalf of the shareholders,
for their valuable cooperation. take this opportunity to express their
gratitude and sincere appreciation to His
The share offering further contributes to the
Majesty King Hamad bin Isa Al Khalifa -
successful implementation of BisB’s five-year
the King of Bahrain, to His Royal Highness
strategy - a comprehensive business plan
Shaikh Khalifa bin Salman Al Khalifa - the
developed in collaboration with Boston
Prime Minister, to His Royal Highness Shaikh
Consulting Group that is now in its 2nd
Salman bin Hamad Al Khalifa - the Crown
year of implementation. As our financial
8
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
BOARD OF DIRECTORS

01 02 03

04 05 06

07 08 09
9
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

1. Mr. Abdul Razak Abdulla Al Qassim He holds an MBA in Business Administration Business Administration and Economics from the
Chairman (majoring in Finance) from Mercer University, Washington Center University, USA; and has over
Atlanta, USA; a BA in Business Administration 28 years’ professional experience.
Executive & Non-Independent Director (majoring in Accounting) from Oglethorpe
Appointed on 5 June 2013 University, Atlanta, USA.
7. Mrs. Fatima Abdulla Budhaish
Mr. Abdul Razak Al Qassim is the Chief Executive
Officer and Director of National Bank of Board Member
4. Mr. Khalil Ebrahim Nooruddin
Bahrain (NBB). He is the Chairman of the Board Executive & Non-Independent Director
of Directors of Bahrain Islamic Bank (BisB); Board Member
Appointed on 5 June 2013
Chairman of Benefit Company; Chairman of Non-Executive & Independent Director Mrs. Fatima Abdulla Budhaish is Assistant General
Bahrain Association of Banks; Deputy Chairman, Elected on 7 July 2013 Manager and heads the Credit Risk Department
Chairman of Executive Committee and Member
Mr. Khalil Ibrahim Nooruddin is an experienced - Risk Group, National Bank of Bahrain (NBB).
of Nomination and Remuneration Committee at
banker, at both an executive and board level. Member of Asset/Liability Committee, Business
Bahrain Telecommunication Company (Batelco);
Currently, he is the Managing Partner of Capital Continuity Planning Committee and Credit
Deputy Chairman of Umniah Mobile Company
Knowledge, a consulting and training company. Committee. Mrs. Budhaish is a Certified Public
(Jordan); Deputy Chairman of Dhivehi Raajeyge
Over the past five years, he has concluded Accountant (CPA) from USA. She also holds
Gulhn plc. (Dhiraagu), Maldives; Deputy Chairman
several consulting assignments for financial an Executive MBA and Bachelor in Accounting
of Qualitynet, Kuwait, Deputy Chairman of Sure
institutions, working on strategy formulation and from University of Bahrain. Mrs. Budhaish also
Guernsey Limited, Sure Jersey Limited and of Sure
implementation. Prior to this, Khalil Nooruddin completed an Executive Management Leadership
Isle of Man Limited; Board Member of the Crown
worked for Investcorp Bank, Bahrain; UBS Asset Diploma from Darden Graduate School of
Prince International Scholarship Programme;
Management in London and Zurich; and Chase Business, University of Virginia (USA). She joined
Board Member of Deposit and URIA Protection
Manhattan Bank in Bahrain. He is an active NBB in 2004, and worked in various capacities
Board at Central Bank of Bahrain. He holds a
member of several civil and professional societies before taking up her current position as Assistant
Master’s degree in Management Sciences and
in Bahrain. A Chartered Financial Analyst, Mr. General Manager. Prior to this, she spent five years
a Sloan Fellowship from MIT (Massachusetts
Nooruddin holds an MSc in Quantitative Analysis with BBK. Mrs. Budhaish Chaired currently Risk
Institute of Technology), USA.
from the Stern Business School at New York Management Committee in Bahrain Islamic Bank
University, USA; and a BSc in Systems Engineering board of directors, she is an experienced banker
2. Brig. Khalid Mohammed Al Mannai from the King Fahd University of Petroleum & with over 17 years’ professional experience.
Minerals, Saudi Arabia. He has over 30 years’
Vice Chairman
professional experience.
8. Mr. Mohammed Ahmed Abdulla
Non-Executive &Non-Independent Director
Appointed on 11 June 2013 Board Member
5. Mr. Ebrahim Hussain Ebrahim Aljassmi
Brigadier Khalid Mohammed Al Mannai is Board Member Non-Executive &Non-Independent Director
the General Manager of the Bahrain Military Appointed on 11 June 2013
Pension Fund, and one of the co-founders of Non-Executive & Independent Director Mr. Mohammed Ahmed is the Head of Asset
the GCC Expanded Military Pension Coverage Elected on 7 July 2013 Management at Osool Asset Management
Committee. He joined the Military Pension Fund Mr. Ebrahim Hussain Ebrahim Aljassmi was the Company. Prior to Osool, he held senior
after spending 31 years with the Bahrain Defense Chief Executive Officer & Board Member of management positions at Credit Suisse AG-
Force. Brigadier Al Mannai is a Board Member of Khaleeji Commercial Bank until June 2012, and Bahrain Branch and Credit Suisse AG-Dubai. He
Bahrain Telecommunications Company (Batelco), continued as Board Member until July 2013, started his career at HSBC Middle East, before
the Social Insurance Organisation (SIO) and Osool and currently is a board member of Takaful moving to Merrill Lynch-Bahrain where he spent
Asset Management Company. He holds a MBA International. Prior to this, he was Chief Executive 7 years. Mohammed Ahmed is a Board Member,
from Sheffield Hallam University, UK; and has over Officer of the Liquidity Management Centre. Chairman of the Nomination & Remuneration
35 years’ professional experience. Previously, at the Arab Banking Corporation, Committee and Audit Committee Member at
he held the positions of Vice President-Global both the Medgulf Group and Medgulf Allianz
3. Mr. Talal Ali Al Zain Marketing Unit, Vice President-Treasury & Takaful. Furthermore, he is a Board Member
Marketable Securities Department, and General and Vice Chairman of the Audit Committee
Board Member
Manager-ABC Securities. He has also worked of Bahrain Commercial Facilities Company. He
Non-Executive & Independent Director for BBK Financial Services Company, and Shamil holds a Bachelor’s degree in Accounting from
Elected on 7 July 2013 Bank. He holds an MBA from the University of the University of Bahrain, and is accredited to the
Mr. Talal Ali Al Zain was the Chief Executive Bahrain and a Bachelor’s degree in Economics National Association of Securities Dealers and the
Officer of PineBridge Investments Middle East BSC from the University of Kuwait; and has over 34 National Futures Association. Mr. Mohammed has
(c), and Co-Head of Alternative Investments at years’ experience in both conventional and Islamic more than 17 years’ professional experience.
PineBridge Investments. Prior to this, he was Board banking.
Member and CEO of Bahrain Mumtalakat Holding 9. Muhammad Zarrug Rajab
Company; having previously spent 18 years with 6. Mr. Othman Ebrahim Naser Al Askar Board Member
Investcorp Bank as Managing Director and Co- Board Member
Head of Placement & Relationship Management. Holds a Bachelors degree in Accountancy and
Talal was Vice President of Private Banking Non-Executive & Independent Director is a fellow member of the Institute of Chartered
international and Head of Investment Banking Elected on 7 July 2013 Accountants in England & Wales. Has held senior
Middle East with Chase Manhattan Bank; as well Mr. Othman Ebrahim Al Askar is the Director posts in Libya including the Auditor General,
as a Corporate Banker with Citibank Bahrain. of the Investment department of Waqf public the Minster of Treasury, Head of Libyan Peoples’
Talal Al Zain is a Board Member of the Bahrain foundation of the State of Kuwait. He joined Congress, the Prime Minister from 1983 to 1985,
Islamic Bank, Alubaf Arab International Bank and the awqaf foundation 1995, and held various Convener of Libyan Central Bank, and Libyan
the Bahrain Association of Banks. He previously positions before taking up his current post in Foreign Investment. Muhammad Rajab has over
chaired and served as a board member on many 2010. Prior to this, he was Head of the Investment 45 years’ professional experience.
corporations including McLaren, the Bahrain and Banks Department at Kuwait Public Transport
Economic Development Board, Gulf Air, and the Company. Othman Al Askar is a Board Member
Bahrain International Circuit. of the Educational Holding Group, Kuwait; and
a former Board Member of Rasameel Structured
Finance Company, Kuwait. He holds a BSc in
10
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
SHARIA’A SUPERVISORY BOARD

01 02 03

04 05
11
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

1. Rev. Shaikh 2. Rev. Shaikh 4. Rev. Shaikh

Dr. Abdul Latif Mahmood Al Mahmood Mohammed Jaffar Al Juffairi Dr. Nedham Mohammed Saleh Yacoubi
Chairman Vice Chairman Member

Shaikh Al Mahmood is a Member of the Sharia’a Shaikh Aljuffairi is a former Judge of the High Shaikh Yacoubi is a Member of several Sharia’a
Supervisory Board of Takaful International and Sharia’a Court of Appeal, Kingdom of Bahrain; Supervisory Boards around the world, including
ABC Islamic Bank, Kingdom of Bahrain; ABC and seconded as President of the High Sharia’a Bahrain Islamic Bank, Ithmaar Bank, Gulf Finance
Islamic Bank, London; and the Joint Sharia’a Court, Ministry of Justice. He is a Friday Imam and House and ABC Islamic Bank, Kingdom of
Supervisory Board of AlBaraka Group. He has speaker. Bahrain; Abu Dhabi Islamic Bank and Sharjah
been a Preacher at a number of Bahrain’s Islamic Bank, UAE; ABC Islamic Bank, London; and
mosques since 1973; and a lecturer in Quran the Islamic Accounting Standards Organization,
interpretation, jurisprudence and preaching. 3. Rev. Shaikh Bahrain. He is the recipient of numerous awards
Shaikh Al Mahmood is a regular participant Adnan Abdullah Al Qattan
in the field of Islamic Finance. He has a doctorate
in jurisprudence, educational, economic, Member in Islamic studies.
intellectual, social and cultural conferences and
seminars. He holds a PhD from the Shariah Shaikh Al Qattan is a Preacher at the Ahmed
Al-Zaytuna College, Tunisia. Al Fateh Islamic Mosque. He is a Judge of the 5. Rev. Shaikh
High Sharia’a, Ministry of Justice, Kingdom of Dr. Essam Khalaf Al Enizi
Bahrain; a Puisne Justice of the High Sharia’a Member
Court; and a lecturer at the Islamic Studies
Department, University of Bahrain. Shaikh Al Shaikh Al Enizi is a Member of Sharia’a and
Qattan is Chairman of the Orphans and Widows Islamic Studies Faculty at the University
Care Committee of the Royal Court; and the of Kuwait. He is a Member of the Sharia’a
Pilgrimage Mission; and a Member of the Board Supervisory Committee at Boubayan Bank,
of Directors of Sanabil for Orphan Care. He is Al Sham Bank, and Investment Dar, Kuwait;
a regular participant in Islamic committees, He holds a PhD from the University of Jordan
courses, seminars and conferences. - Specialization Fiqh and the Bahrain-based
Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI).
12
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CHIEF EXECUTIVE OFFICER REPORT

BACK
TO BASICS

Hassan Amin Jarrar

Chief Executive Officer

Getting ‘Back to Basics’ will remain the

"‘Back to Basics’ will In the name of Allah, the Most
Bank’s direction for the next three years. This
Beneficent, the Most Merciful.
remain the Bank’s focus on fundamentals sets the stage for a
2015 marked a year of positive sustainable turnaround and further success,
mantra for the next change for BisB, with the and with a solid foundation of fundamental
three years" continued implementation of its banking principles across the entire Bank, we
are underscoring our commitment to deliver
5-year strategy reinforcing the banking simply as it should be.
planned objectives across all of
the Bank’s operations. Aligned with our strategy, the addition
of key senior management personnel
augmented the on-going building of a top
class management team while the new
share rights’ offering, which was completed
in November 2015, strengthened the capital
base by BD 20 million.

At a Glance
Assets up 12%
Customer Deposits up 8%‬
Income from core Activities up 29%‬
Provisions and impairment down 25%‬
Net profit up by 21%‬
EPS up by 19%‬
Capital Adequacy Ratio, as of 31 December
2015, was a healthy 17.73%
‬‬
These results were achieved while total
expenses remained constant.
13
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Financial highlights begun to identify and realign the processes reward performance. Bearing in mind
Demonstrating the excellent financial and products that will best deliver value to ‘Back to Basics’, practical training programs
performance by BisB in 2015, net profit our customer base. A dedicated Customer and refresher schedules will be devised
increased by a significant 21 percent to Service Quality team is being created, second for new entrants and existing staff in
BD 11.2 million from BD 9.3 million in to none, with its primary mission to ensure order to cultivate and anchor the Bank’s
2014; and total income from core activities superlative service for the Bank’s customers. new philosophy .Succession planning for
increased by 29 percent to BD 40.4 million qualified Bahraini talent is of paramount
In consonance with the perceived needs of
from BD 31.4 million the previous year. importance, with the aim of developing the
current and future generations, the Bank
Islamic financing witnessed an increase of next generation of Bahraini leaders.
will incorporate enhanced delivery channels.
16 percent, investments in Sukuk grew by 17 This includes improved online banking, and
percent, customer investments accounts rose the launch of mobile banking through our Corporate Governance
by 8 percent. The Bank maintained a liquid first ever-digital branch in Hidd which is Management will maintain a proper
assets ratio of 13.7 percent, while the cost of scheduled to open in the second quarter of relationship with the Board of Directors,
funding reduced by 24 percent. 2016, as well as a fully transactional banking appreciating their counsel as advisors when
Importantly, the Bank relied fully on app. we implement our strategies.
revenues and fees from financing and major Further investment in state of the BisB will continue to actively engage with
core activities, which were responsible for art Information and Communication our stakeholders and regulators, such as the
generating 97 percent of operating income. Technology infrastructure has heightened Central Bank of Bahrain, Bahrain Bourse and
the Bank’s ability to serve its operational Ministry of labour, as well as other relevant
Business growth requirements and delivery of service to its regulatory bodies..
The Bank’s core business activities posted customer base.
With BisB’s continuous efforts to enhance
another strong performance in 2015. The its regulatory compliance environment,
launch of innovative initiatives, services Institutional Capabilities along with internal control we’re proud
and products, together with a continued BisB will seek to build long-lasting to highlight that in 2015 BisB managed to
focus on delivering superior customer relationships rather than transactional adopt effective methods to achieve and
service, resulted in the Retail customer base business. The challenge to keep pace maintain regulatory compliance objectives
increasing by 7 percent and market share with our broader customer portfolio without a single infraction.
growing by 4 percent. Islamic financing requirements makes it even more
increased by 16 percent, customers We are committed to having open lines
imperative to endorse our ‘Back to Basics’
investment accounts rose by 8 percent, and of communication with all BisB staff in
philosophy. This entails a complete overhaul
the cost of funding reduced by 24 percent. order to ensure clear understanding and
of BisB’s Risk Management framework,
This was achieved against a backdrop of implementation of our ‘Back to Basics”
understanding portfolio parameters, and
intensified competition in Bahrain’s banking messaging.
being disciplined in the way we do this.
sector. Defined responsibilities at every level of
the risk process is paramount. A new Chief Corporate responsibility
Corporate banking performed well in 2015.
Achievements include improving market Risk Officer has been recruited, and anew As a socially responsible corporate citizen,
share by booking substantial new assets, Treasurer will be appointed in the very near BisB is committed to contributing to the
and growing the number of borrowing future. economic development and social well-
relationships by 13 percent. BisB contnues to being of the Kingdom of Bahrain. This
Focus will be given to capture local business
its support for SMEs through our on going includes supporting the development of the
by applying global banking standards. We
robust financing scheme through Tamkeen. Islamic banking industry by sponsoring and
will seek to expand the corporate client base
participating in a number of key industry
and further develop BisB’s excellent links
events. In 2015, the Bank sponsored the
Customer Service with local Government accounts.
World Islamic Banking Conference and
Improved customer service, and the start BisB will be viewed as a bona fide the annual Islamic Banking and Finance
of revamping almost all of our operational commercial bank without losing the Conference organized by the Accounting &
processes remained key features during fundamental Islamic principles which have Auditing Organization for Islamic Financial
the year. This included the relocation of been ingrained in the Bank’s heritage as the Institutions (AAOIFI). We also maintained
certain branches to enhance accessibility country’s first Islamic bank. our active support for numerous charitable,
and convenience, and the continued educational, medical, cultural and social
development of specialised service offerings. The newly recruited Head of Human organizations; while encouraging staff to
Resources has been tasked with establishing participate in community activities.
Central to our’ Back to Basics’ ethos is a focus modern programs and policies with
on customer service. An intensive review has relevant appraisal systems designed to
14
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CHIEF EXECUTIVE OFFICER REPORT (CONTINUED)

Industry recognition Future Outlook Acknowledgements

Testament to the success of the Bank’s In 2016, Bahrain will remain our main BisB’s recent successful Rights Issue drew
customer centric business strategy and for market. Expanding beyond that will only be unstinting support from the Central
the second year in a row, the World Finance considered once we have settled in place a Bank of Bahrain, the Ministry of Industry,
magazine, a leading UK-based financial high calibre management team, and with Commerce & Tourism, the Bahrain Bourse
publication, awarded BisB the ‘Best Islamic the guidance of the Board of Directors. and our shareholders, each of whom we
Retail Bank in Bahrain’ for 2015. The prevailing difficulties internationally, acknowledge with gratitude.
A prestigious judging panel, supported by a and uncertain situations in parts of the
The advice, encouragement and support of
research team, reviewed nominations from region, dictate caution in our approach. The
the Board of Directors is highly appreciated,
the magazine’s readers as part of the process pressure on oil prices is projected to remain
as is the valued guidance and supervision
of selecting winning institutions in the field for the foreseeable future adding strain
of the Sharia’a Supervisory Board. The
of Islamic finance and banking. to the finances of regional governments
continued loyalty and confidence of our
through its impact on government spending.
BisB also received an esteemed accolade customers deserve our thanks, as does the
from the World Islamic Banking Conference Concerns over liquidity, and the likelihood continued support and cooperation of
(WIBC), winning the ‘Best Performing Islamic of further upward interest rate moves by the our business partners. The Bank’s success
Bank’ in Bahrain. The WIBC Performance Fed, will likely cause upward pressure on the owes much to the contributions from our
Awards are the flagship awards for the cost of funds, with the strong possibility of management and staff, whose constant hard
WIBC and are based on weighted scores credit tightening work and dedication are the bedrock of our
of 3 metrics - financial stability, financial institution.
Our overriding priorities will be to offer
performance, and Governance and social
essential banking services to our local Allah the Almighty is the Purveyor of all
responsibility.
customers while adhering to world class Success.
risk under-writing standards, preserve the
Bank’s Capital, and to return value to our
shareholders.

Hassan Amin Jarrar

Chief Executive Officer
BisB’s recent successful
Rights Issue drew unstinting
support from the Central Bank
of Bahrain, the Ministry of
Industry, Commerce & Tourism,
the Bahrain Bourse and our
shareholders, each of whom we
acknowledge with gratitude.
16
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
EXECUTIVE MANAGEMENT

01 02 03

04 05 06

07 08
17
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

1. Hassan Amin Jarrar 3. Abdulrahman Mohammed Turki 6. Khalid Mahmood Abdulla

Chief Executive Officer General Manager - Retail Banking Head of Internal Audit
Mr. Hassan Amin Jarrar is one of the most Abdulrahman Turki has over 36 years’ experience Khalid Mahmood has over 21 years of experience
prominent banking leaders in the region with in banking. He took up his current position as in Accounting, Auditing, Banking and Sharia. He
more than 27 years of international, regional General Manger Retail Banking at BisB in 2008. took up his current position with BisB in 2006.
and local banking experience. Mr. Jarrar’s diverse Prior to this, he was Head of Islamic Retail Prior to this, he was Head of Internal Audit at Al
career in Banking includes extensive experience Banking Unit at Commercial Bank of Qatar ; Baraka Islamic Bank, having started his career
in retail, SME, and corporate banking in the Abdul Rahman held various positions with a with Arthur Anderson. Khalid is a Certified Public
Middle East and the US. Regionally, Mr. Jarrar number of other prominent regional banks, Accountant (CPA) California, USA, and attended
served as Chief Executive Officer of Standard after starting his career with Aluminium Bahrain. the Leadership Development Program at Darden
Chartered Bank, Head of Corporate and SME Abdulrahman holds an MBA degree from the School of Business, University of Virginia, USA.
Banking at Abu Dhabi Commercial Bank, and University of Strathclyde, Scotland, UK.
Head of Corporate Banking, Abu Dhabi at
Mashreq bank. Internationally, he has two 7. Wesam Abdul Aziz Baqer
decades of experience in key management 4. Fahim Ahmed Shafiqi Head of Corporate Banking
positions in leading banking institutions in the Chief Risk Officer
Mr. Wesam Baqer is an experienced Banking
United States; namely with Security Pacific Bank,
Mr. Fahim Ahmed is an experienced Banker with professional with a diverse career covering all
and Bank of America. Mr Jarrar holds a BSc in
over 17 years of international experience gained facets of Corporate Banking, Private Banking,
Finance from California State University, San
through various roles in corporate banking and Business Development. Mr. Baqer joined
Jose, and serves on the Boards of the Bahrain
and risk management spanning the markets of BisB in 2008 as Senior Manager of the Corporate
Association of Banks, Bahrain Institute of Banking
Pakistan, Qatar, Oman, UAE and the UK. Prior Banking. Previously, he held the same post
and Finance (BIBF) and Tamkeen.
to joining BisB, Mr. Ahmed held the position at National Bank of Kuwait. Prior to that, he
of Chief Risk Officer at Standard Chartered managed corporate relationships with HSBC
2. Mohammed Ahmed Janahi Bank Bahrain. He has a Diploma in Islamic for 8 years. Mr. Baqer holds an MSc (Economics)
Deputy Chief Executive Officer Finance (CDIF), and holds an MBA from the UK’s in Finance and Investment Management from
University of Warwick. the University of Aberdeen, Scotland, and a BS
Mr. Mohammed Ahmed Janahi is a veteran in Business Administration from the University
banker with a vast experience in banking & of Bahrain. He is a Certified Financial Adviser
financial operations over a span of 46 years. 5. Khalid Mohammed Al Doseri (CeFA), and a member of the Chartered Institute
He commenced his career with the Bahrain Chief Financial Officer of Bankers.
Islamic Bank (BisB) in 2007 in the position of
Khalid Al Doseri has over 32 years of professional
General Manager Support Services. In September
experience in banking and accountancy. He took 8. Dawood Khalil Al Ashhab
2014, he assumed his current position. Prior to
up his current position with BisB in 2003. Prior to Head of Human Resources & General Services
joining BisB, Mr. Janahi assumed number senior
this, he worked for Ithmar Bank (Formerly Faysal
executive positions in Citibank, National Bank
Islamic Bank) for 13 years, and has started his Mr. Dawood Al Ashhab brings to the Bank a
of Bahrain NBB, Baraka Islamic Bank and Gulf
career with Kuwait Asia Bank. Al Doseri is a Board wealth of international banking experience and
Air in Bahrain. Mr. Janahi attended numerous
Member of the Liquidity Management Centre, an in depth knowledge of HR Management
courses on administrative sciences, banking
Chairman of Audit Committee and Member of best practice. Prior to joining BisB, Mr Al Ashhab
and leadership at renowned universities and
Risk Committee, and was previously a Board managed the human resources team regionally
institutes in Europe and USA. In addition, he also
Member and Managing Director of Islamic Bank at Standard Chartered Bank, covering the
attended a number of intensive and diversified
of Yemen for the period from 2007 till 2009. Mr. Bank’s Bahrain, Oman, Qatar, Jordan and Saudi
workshops at leading institutions and banks,
Al Doseri is a Certified Public Accountant from Arabia offices. Mr. Al Ashhab holds a BS in
including Citibank, Financial Times and the
Oregon Board of Accountancy, USA, he holds Public Administration, is a certified coach from
Executive Development Institute in London.
an MBA degree from University of Glamorgan, the prestigious Gallup University, UK, and is
Wales - UK; and a graduate of the Gulf Executive a member of the Society of HR Management
Development Programme at Darden School of (SHRM).
Business, University of Virginia, USA.
18
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REVIEW OF OPERATION

BUSINESS DIVISIONS superior customer service and innovative East Region and the ability for card users
banking products. Aligned with this to upgrade their existing Frequent Flyer
Retail Banking concentration, BisB undertook a number Program membership from Gulf Air to Gold.
Despite continued competition in the of initiatives during the year to improve The Al Thuraya Visa Signature card, part of
Kingdom’s retail banking sector, the Bank’s the customers’ banking experience. These the package of Privileged Banking Services
retail banking business posted yet another included the opening of a new, larger for high net worth clients, continued to be
strong performance in 2015. The Bank branch in Zayid Town offering customers extremely well received by customers with
outperformed the CBB Consumer Finance enhanced accessibility and convenience. The usage significantly increasing during the
Index for the seventh consecutive year with consolidated branch network now stands year.
the Bank’s Islamic finance portfolio growing at 6 branches, 4 financial malls, and 55
In 2015, 20% of customers migrated to
by an impressive12.5% compared with a CBB ATM’s conveniently located throughout the
e-banking, (18% in 2014), with 50% of the
Index of 9%. Key performance indicators Kingdom.
Bank’s e-pin holders using online banking
included an increased customer base and Further highlighting this customer- centric for all their banking needs. This number is
market share, a substantial reduction in the approach, a new ‘Meet and Greet’ function expected to grow and, supported by the
cost of funding, and growth across a number was introduced at the financial malls that new core banking system and in line with
ofthe main product lines and services. offers personalized guidance to mall visitors the Bank’s mission to leverage technology
The Bank successfully grew its retail on arrival; effectively reducing waiting time to meet the needs of our growing and
customer base by 8%, increased its overall and elevating the overall level of customer sophisticated customer base, BisB will
market share to 11%, and reduced its cost service. implement a fully transactional Mobile
of funding by 32%. The growth recorded Banking service within the first half of 2016.
The Bank also enhanced its diverse array of
by main products during the year include innovative product offerings. This included The Bank is also set to launch its first ultra
Tas’heel Personal Finance growing by more prizes and categories for Tejoori, modern digital branch in Hidd, a new
14.45%; mortgage financing by 29.44%; including a premium Platinum category and concept of Banking in Bahrain that will serve
credit card accounts and receivables by exclusive draws for women, the youth, and to elevate the industry and support the bank
12.64%; the Vevo Youth Account by 12%, expats. Enhancements were also made to in its mission to become a state of the art
and the Iqra Investment Scheme by 17.44%; the MasterCard Titanium which witnessed retail bank.
in addition to the Tejoori savings account by a 73% growth in usage and 29% growth
31.83%. Aligned with the Kingdom’s 2030 vision
in card issuance. Improvement to the
to address social housing needs and BisB’s
Supporting this robust performance card included value added benefits such
position as a socially responsible corporate
was an unwavering focus on delivering as access to 5 lounges within the Middle

For the seventh consecutive year…

The Bank’s retail banking business posted yet another

strong performance in 2015

The Bank’s Islamic finance portfolio growing by an

impressive12.5% compared with a CBB Index of 9%.
Key performance indicators included an increased
customer base and market share, a substantial
reduction in the cost of funding, and growth across a
number ofthe main product lines and services.
19
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

The Bank successfully grew its retail

customer base by 7%, increased its overall
market share to 11%, and reduced its cost
of funding by 32%. The growth recorded
by main products during the year.

Opening Zayid Town branch

The opening of a new, larger branch in Zayid
Town offering customers enhanced accessibility
and convenience. The consolidated branch
network now stands at 6 branches, 4 financial
malls, and 55 ATM’s conveniently located
throughout the Kingdom.

Launching the first digital branch

The Bank is also set to launch its first ultra modern digital
branch in Hidd, a new concept of Banking in Bahrain that
will serve to elevate the industry and support the bank in
its mission to become a state of the art retail bank.
20
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REVIEW OF OPERATION (CONTINUED)

entity, BisB in association with Eskan Bank relationship strategy that thinks hard the introduction of value added products
and the Ministry of Housing, facilitated about all aspects of customer interactions, such as; Islamic overdrafts and cheque
access to subsidized financing for 75 empowers its employees with the skills discounting designed to meet the liquidity
Bahrain Nationals during 2015 as part of to deliver superior banking products and needs of our corporate and commercial
the Ministry’s Social Housing Financing services, and leverages advanced technology clients.
Scheme. BisB maximized on the business in a way that transforms the way we think
In addition; the team managed a 34%
opportunities this scheme has presented about Islamic Banking.
improvement in delinquent account
to the private sector, whilst supporting
recoveries and a substantial reduction
the government as it works to address the Corporate & Institutional Banking in non-performing loans. This reflected
Kingdom’s social housing shortage.
BisB’s Corporate & Institutional Banking positively on the bank’s bottom line.
In an increasingly competitive market, division performed considerably well
Aligned with the Bank’s strategy, the
BisB remains differentiated by its superior during 2015; successfully increasing the
provision of trade finance facilities for
customer service, therefore to enable the corporate and institutional customer base,
SMEs increased with an additional BD 20
Bank’s staff to deliver the highest standards substantially reducing non-performing loans
million being made available to Tamkeen’s
of customer service, priority continued to and cost of funding, while attracting high
Enterprise Financing Scheme. This raises the
be placed on training and development quality assets.The Bank focused on three
value of the Tamkeen-BisB agreement to
in 2015. Technical training courses and key segments – Local blue chip corporate
BD 60 million, from which over 350 Small to
customer service-oriented sessions as well financing, sovereign and quasi-sovereign
Medium Enterprises benefitted to date.
as regulatory-related training courses for institutions, as well as small-and-medium
anti- money laundering (AML), Know Your enterprises (SMEs). As we move towards 2016, BisB’s Corporate
Customer (KYC), and the Foreign Account & Institutional Banking division will focus
The Bank managed to attract quality
Tax Compliance Act (FATCA) were held primarily on expanding trade finance
assets and reduce the cost of funding thus
during the year. activities and growing the corporate
enabling the Bank to improve its lending
customer base in Bahrain. The Bank will
Testament to the success of the Bank’s rate and compete more effectively with
maintain a continued concentration on
customer centric business strategy and for both Sharia’a- compliant and conventional
reducing non-performing loans, targeting
the second year in a row, the World Finance competitors. The commercial customer base
blue chip local corporate names, and
magazine, a leading UK-based financial grew considerably with a number of new
participate in selective regional syndications.
publication, awarded BisB the ‘Best Islamic blue chip companies added on the books.
The Bank also plans to upgrade the
Retail Bank in Bahrain’ for 2015.
Attributable to this positive performance corporate internet banking channel to a full
Going forward, BisB’s retail banking was a marketing initiative that enhanced transactional base banking in 2016.
business will continue to grow and nurture awareness of the Bank in the market, a
its customer base through a customer committed focus on client servicing, and

%20 of customers migrated to

e-banking
In 2015, 20% of customers
migrated to e-banking, (18% in
2014), with 50% of the Bank’s
e-pin holders using online banking
for all their banking needs.
21
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

97% Bahraini workforce

Underlining the Bank’s commitment
to supporting local talent, the number
of Bahraini nationals employed by the
Bank remained at 97% of the total
workforce of 354 employees one of
the highest Bahrainisation level of any
bank in Bahrain.

Treasury and Investments Underscoring shareholder confidence, a a disciplined approach to the quality of
Despite a challenging business backdrop of bilateral syndication between the Bank and assets booked, the divestment from non
local and regional liquidity issues, the Bank’s its joint majority shareholder National Bank performing assets, and the reduction of non
Treasury activities had another successful of Bahrain (NBB) valued at $100 million performing loans.
year in 2015; continuing to manage the under Murabaha for a term of 1 year also
Bank’s liquidity and attract increased took place during the year. New product Human Recourses
deposits while effectively reducing the cost offerings during the year included Islamic
2015 was a year of positive change for
of funding and divesting from non-core and foreign exchange swaps and hedging,
BisB. Following on from a rationalization
non-performing investments. in addition to investments in sukuk, and
of the head count in 2014, the year
balance sheet hedging; allowing the Bank to
witnessed the Bank enhance institutional
Throughout the year, the Treasury team cater to the needs of both institutional and
capability through a recruitment campaign
successfully enhanced profitability. Income retail clients.
that saw the appointment of a number
from the sukuk portfolio increase by approx
In 2015, the Bank maintained a moderate of key positions throughout the Bank.
44% to BD 3.6 million while was also a
approach towards investment, with net This is a key milestone as the Bank
major foreign exchange (FX) income a major
income from investments totaling BD 2 works towards building a best in class
contributor to fee-based income. Interbank
million, compared with BD 5 million in 2014. executive management team to support
affiliations, which remain essential to
Aligned with executing a key objective of the implementation of its new 5-year
managing the Bank’s liquidity and short-
the Bank’s new five-year strategy, a number strategy. Recruitments included, but were
term funding requirements, were also
of non-core and non-performing investment not limited to, the appointment of a new
substantially increased with new lines using
assets were exited through a Special Assets Chief Executive Officer, Head of e-Banking,
both Wakala and International Commodity
division, generating a net gain of BD 1.9 Assistant General Manager of Human
Murabaha instruments. As per the Bank’s
million. This excess liquidity was invested Resources & Services and a Chief Risk Officer.
strategic mandate, non-performing loans
were significantly reduced and, with in short- and medium-term fixed income
Underlining the Bank’s commitment to
shareholder support, successfully nullified. instruments, resulting in the Sukuk portfolio
supporting local talent, the number of
growing by over 17%, and thus enhancing
Bahraini nationals employed by the Bank
Significant developments include a recurring income.
remained at 97% of the total workforce
capital increase of BD 20 million which
In terms of treasury infrastructure, the of 354 employees one of the highest
will effectively strengthen the capital base
Reuters EIKON system upgrade will move Bahrainisation level of any bank in Bahrain.
and bolster the liquidity ratio. This is a
positive step as the Bank seeks to enhance onto phase 2. This will see the dealing and
The department also undertook a
compliance with regulators, improve its data systems consolidated for a faster and
number of initiatives aimed atattracting,
interbank dealings, and launch a trade more efficient deal workflow.
retaining and engaging employees. These
finance and cash management platform in Moving forward, the Bank will continue included conducting a market salary
order to fund corporate clients and high net on the path of profitability by focusing survey, the development of a ‘career path’
worth individuals in Bahrain. on achieving capital incretion through programme, and the introduction of ‘on
22
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REVIEW OF OPERATION (CONTINUED)

the spot’ rewards aimed at recognising qualifications that they need to succeed The Bank remained committed to supporting
and rewarding exemplary performance. whilst encouraging an organisational culture staff in gaining professional qualifications.
Aligned with an effort to shape a corporate that supports continuous learning. More During the year, one employee achieved
culture that supports open and transparent than 6000 hours were devoted to various certifications in financial services (CFA)
communication, a monthly ‘CEO majlis’ was training initiatives throughout the year with while two employees achieved the
introduced which has provided invaluable in over 65% of BisB staff participating. Advanced Diploma in Islamic Finance (ADIF)
opening up lines of communication between certifications with two more employees
In line with the Bank’s mission to develop
employees and the Bank’s leadership. enrolled. An employee completed the
and nurture future leaders, a number of
Professional SHRM (Society for human
As part of the transformation of the HR leadership programmes were conducted
Resource Management) qualification with
function, Phase 1 of the SAP (Systems, during the year. These included the
two Compliance employees nominated to
Applications, Products) software platform ‘Leadership Development Skills’ programme,
undertake certifications from the Association
was implemented. The system, which is set conducted by DC Gardener and Euromoney-
of Certified Money Laundering (ACAMS) and
to increase automation of the department UK and attended by a number of BisB’s
the International Compliance Association
by 30%, will facilitate the effective middle managers, and the ‘Waqf Fund
(ICA).
management of all HR products, including Leadership Grooming Program’, an intensive
performance and talent management, and leadership programme conducted by Ivey
streamline work processes and procedures Business School and held in Hong Kong and Information Technology
for maximum departmental effectiveness Canada. In celebrating the Bahraini Women BisB remains an industry leader in leveraging
and efficiency. The second phase, which will Day in the Banking and Financial sector, technology to deliver innovative banking
see SAP integrated with other systems in the a special ‘Leadership Skills for Women’ products and services and, aligned with the
Bank, is earmarked for implementation in workshop was also organised for 17 selected Bank’s five-year strategy, major milestones
early 2016 female employees. were reached in upgrading the Information
and Communications Technology (ICT)
As we move into 2016, the Bankwill continue In addition, in-house workshops on Work infrastructure in 2015.
to follow its modern Human Resource Ethics, aimed at enhancing awareness of
strategy shaped on values of equality and Bahrain’s labour law, were attended by more A key achievement was the upgrade of the
diversity. The Bank aims to attract world-class than 150 employees. Further emphasis was core banking system and subsystems. The
international bankers who can truly bring also given to improving Islamic Banking new ‘Ethix’ system has greatly improved
new leadership and product capabilities to & Shari’a knowledge and customer management of the Bank’s transactions,
the new BisB, while developing the current service skills. Regulatory training was also while the more centralised infrastructure has
human resources by nurturing Bahrain’s conducted, covering Anti-Money Laundering effectively reduced operational costs. The
future leaders. (AML), Know Your Customer (KYC), Islamic state-of –the-art system has standardized
Banking ethics and Financial Advice the entire technological infrastructure of
Training and Development Programme (FAP). In addition, a number the bank to the latest software versions;
of employees were trained for licensing as enhancing the overall security and
BisB invested heavily in the training and performance of the Bank.
Heath and Safety officers to ensure their
development of its people during 2015;
availability in all branches and departments.
empowering employees with the skills and In addition, back office operational

MORE THAN 6000 TRAINING HOURS

BisB invested heavily in the training and

development of its people during 2015;
empowering employees with the skills and
qualifications that they need to succeed whilst
encouraging an organisational culture that supports
continuous learning.
23
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

processes and procedures were further Central Operations of Bahrain’s banking industry, BisB was a
streamlined. The advanced SAP Products Central Operations supports the Bank’s key player in the initiation of the Electronic
in "ERP" Enterprise resource planning is business lines through four dedicated units Fund Transfer System (EFTS) in collaboration
being under implementation with further covering all transactions for payments, with the CBB and the Benefit Company - A
system integration earmarked for early 2016. treasury back office, trade finance, and national project that will provide individuals,
Payment, processes were also automated. Islamic financing. The year witnessed a solid businesses and government agencies in
The overall automation of the Bank now emphasis on stakeholder management and Bahrain with innovative fund transfer and
stands at 80%. the enhancement of operational efficiency bill payment services.
During the year, the Bank complied with through the increased automation of Bank A core focus throughout the year was on
CBB regulations and implemented a new processes and procedures. stakeholder management and engagement,
Electronic Fund Transfer System (EFTS); in During the year, the Bank’s achievements and as a result a number of operational
addition to the Anti-Money Laundering towards increasing operational efficiency works that were historically conducted in
(AML) system to support the effective were acknowledged. The Bank won the the branches moved to Central Operations.
monitoring of all transactions for illicit Best Bank Award in the Middle East and This initiative substantially enhanced
activity. North Africa (MENA) in Straight Through transaction turn around time while
Processing (STP) in recognition of its simultaneously allowing front line staff to
Going forward, the ICT division is committed
excellence and high efficiency, with a fully focus on delivering superior customer
to facilitating the Bank’s access to cutting
94.20% satisfaction, on nomination by service. In addition, and aligned with the
edge technology as an enabler of strategic
Standard Chartered Bank. Bank’s mandate to achieve higher levels of
success. Plans include improving all
compliance, the division worked closely with
customer e-channels, comprising the In addition to receiving accolades on the the Bank’s consultants and Compliance team
implementation of a fully transactional international stage, the division successfully to review the Bank’s operational policies and
mobile banking platform, and the adoption carried out testing and market rehearsal procedures.
of a sophisticated Customer Relationship for the Bank’s state of the art core banking
Management (CRM) programme -set to system, and implemented a new Duplicate Going forward, emphasis with be given to
increase the Bank’s overall automation to Detection Application (DDA). The DDA the further centralization of non customer
95%. The Bank will also adopt a standard is designed to detect duplicate financial facing activities, and the introduction of
methodology ITSM (IT Service Management) messages and prevent the emission of process automation and lean improvements.
system based on ITIL (Information outgoing payments as well as the processing
Technology Infrastructure Library) service of incoming duplicate payments. General Services
standards, with the aim to achieve an ISO
Further underscoring its commitment to The role of General Services is to ensure the
20000 certification in the near future.
leading the technological advancement smooth day-to-day functioning of the Bank.

Aligned with the Bank’s five-year strategy

BisB remains an industry leader in leveraging

technology to deliver innovative banking products
and services and, aligned with the Bank’s five-
year strategy, major milestones were reached in
upgrading the Information and Communications
Technology (ICT) infrastructure in 2015.
24
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REVIEW OF OPERATION (CONTINUED)

CEO MAJLIS

An unprecedented series of communication initiatives took place

between the leadership and staff -highlighting the importance
the Bank places on employee feedback and participation as it
works towards the successful implementation of its strategy. The
new monthly ‘CEO Majlis’ is one such initiative which provides
employees with a platform from which they can openly share
their ideas and have their voices heard - testament to the new,
innovation driven and transparent face of BisB.

The department’s responsibilities cover Further enhancements were made to Bank ignite organisational innovation, and
property management, branch renovations security which comprises a 24-hour security encourage the development of a corporate
and maintenance, procurement, quality room providing live viewing of CCTV footage culture of transparency.
control, utilities, security, transport, mail and from all financial malls, branches and ATMs
Externally, the Bank nurtured its relationship
archiving, payment process. across Bahrain. In addition to connecting
with the media and other banks and actively
all branches and ATM live feeds in the BisB
Key activities for the division in 2015 participated in a number of symposiums and
network directly to the Ministry of Interior.
included playing a key role the opening events, including sponsorship of the AAOIFI
the new Zayid Town branch. In addition, Inline with the Bank’s strategy to reduce and World Islamic Banking Conferences
good progress was made with respect to operational costs, a number of cost cutting (WIBC).
electronic archiving of documentation for measures were introduced including the
Internally, an unprecedented series of
all transactions, including the archiving of installation of Power Reactor Capacitor
communication initiatives took place
Murabaha files which has greatly enhanced Panels that have effectively reduced the
between the leadership and staff
operational efficiency. Aligned with the Bank’s electricity usage by more than 20%.
-highlighting the importance the Bank
Bank’s aim to continuously streamline
places on employee feedback and
processes and procedures, plans are in place Corporate Communications participation as it works towards the
to electronically archive other departments
BisB substantially enhanced its external and successful implementation of its strategy.
in the Bank.
internal communications activities in 2015; The new monthly ‘CEO Majlis’ is one such
promoting the Bank in the public domain, initiative which provides employees with a
while spearheading intensive internal platform from which they can openly share
communication campaigns that work to their ideas and have their voices heard -
break down barriers to communication, testament to the new, innovation driven and
transparent face of BisB.
A number of staff social events, including
Labour Day, Annual Ramadan Meeting
“Gabga”, Bahrain Women Day celebration,
National Day, desert camping & other
activities were also organized with the
aim of building relationships, improving
inter-departmental communications, and
encouraging a sense of ‘community’ in the
workplace.
In line with the Bank’s mission to raise
awareness and share knowledge pertaining
to Islamic Banking, the Bank published the
second version of AlMufeed ‘Transactions of
Islamic Banks’, and is currently working on
an updated version of ‘Sharia’a Fatawa’. This
is in addition to championing the creation,
publication and dissemination of marketing
collateral such as the ‘BisB Annual Report’
and ‘Annual Calendar’.
25
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

‘BEST ISLAMIC BANK

IN BAHRAIN 2015’
AWARD

As our financial and operational achievements during

2015 demonstrate, the Bank has won for the second
year the best Islamic Retail Bank in Bahrain for 2015
from the World Finance Magazine.
This success was recognized at the 2015 World Islamic
Banking Conference (WIBC) when BisB was awarded
one of the Conferences’ flagship Performance
Awards based on aggregate performance scores
against multiple measures on a global, regional and
country level, with Bahrain Islamic Bank presented
with the ‘Best Performing Islamic Bank’ in Bahrain.
26
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
RISK MANAGEMENT

As an inherent part of the Bank’s activities, risk is managed through Key developments and initiatives achieved include:
a process of ongoing identification, measurement, monitoring and
• Amending the Credit Risk Management Policy and Risk
reporting in line with the risk appetite of the Bank, which is set and
Management Framework
guided by the Board of Directors. This process of risk management is
critical to the continued profitability of BisB, and all individuals within
the institution are personally accountable for the risk exposures • Providing an external training programme to business units and
relating to their responsibilities. C&RM on Credit review, rating and restructuring
The Bank is exposed primarily to credit risk, liquidity risk, market risk • Ensuring the ongoing compliance with the policies of the Bank,
(including profit rate, equity price and currency risks), operational and monitoring the enterprise-wide risk through various systems
risk, reputational risk and Sharia’a-compliance risk. and processes
• Monitoring Sharia’a-compliant risk as well as the other risks to
Risk management philosophy
which BisB is exposed.
The risk management philosophy of BisB is to identify, capture,
monitor and manage the various dimensions of risk. The objective Note: Additional information on the Bank’s risk management
is to protect asset values and income streams so that the interests framework, policies, processes and procedures is included in the
of the Bank’s stakeholders are safeguarded; while optimising Notes to the Consolidated Financial Statements and the Basel III Pillar
shareholders’ returns, and maintaining risk exposure within the 3 Public Disclosure sections of this annual report.
parameters set by the Board.
The Bank has defined its risk appetite within the broad framework
of its Risk Management Framework. BisB reviews and aligns its
risk appetite in line with its evolving business plan, and changing
economic and market scenarios. The Bank also assesses its tolerance
for specific risk categories and its strategy to manage these risks. Credit & Risk
Management
Risk management framework
BisB has in place a comprehensive enterprise-wide integrated Risk
Management Framework. This embraces all levels of authorities, Credit Review Credit Risk
organisational structure, people and systems required for the Legal
Analysis & Administration Management
smooth functioning of risk management policies within the Bank.
The Board of Directors retains ultimate responsibility and authority
for all risk matters, including establishing overall policies and Credit Credit
procedures. The Board is assisted in fulfilling its responsibilities MIS
Review Risk
by the Chief Executive, and various Board-level and Management
committees.
The Credit & Risk Management (C&RM) division – headed by the Deal Market
Chief Risk Officer reporting to the Chief Executive on a day-to-day Execution Risk
administrative basis, and to the Board Risk Committee – has day-to-
day responsibility for managing the risks involved across all areas of
the Bank. C&RM provides independent identification, measurement, Security & Operations
monitoring and control of all risk parameters, while liaising with the Notarisation Risk
business divisions that ultimately own the risks. C&RM comprises
a number of specialist units, including Risk Management, Credit
Review & Analysis, Credit Administration, Benefit Credit Reference Limit
Bureau Reporting, and Legal Affairs. Control
• Taking into consideration the current global and regional market
conditions, the Bank continued to place the highest priority on
further strengthening its risk management infrastructure during
2015 and as a result the Bank has an improved risk management
mechanism in place.
27
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REMUNERATION DISCLOSURES

The Bank’s total compensation approach, which includes the NRC role and focus
variable remuneration policy and the Share Incentive Scheme, sets The NRC has oversight of all reward policies for the Bank’s
out the Banks’s policy on remuneration for Directors and senior employees. The NRC is the supervisory and governing body for
management and the key factors that are taken into account in compensation policy, practices and plans. It is responsible for
setting the policy. determining, reviewing and proposing variable remuneration policy
The Bank adopted regulations concerning Sound Remuneration for approval by the Board. It is responsible for setting the principles
Practices issued by the Central Bank of Bahrain. The revised policy and governance framework for all compensation decisions. The NRC
framework and incentive components were approved by the Board ensures that all persons must be remunerated fairly and responsibly.
of Directors and the policy came into effect as of January 2014. The remuneration policy is reviewed on a periodic basis to reflect
changes in market practices, the business plan and risk profile of the
The key features of the remuneration framework are summarized Bank.
below.
The responsibilities of the NRC with regards to the Bank’s variable
Remuneration strategy remuneration policy, as stated in its mandate, include but are not
limited to, the following:
It is the Bank’s basic compensation philosophy to provide a
competitive level of total compensation to attract and retain • Approve, monitor and review the remuneration system to ensure
qualified and competent employees. The Bank’s variable the system operates as intended.
remuneration policy will be driven primarily by a performance based • Approve the remuneration policy and amounts for each
culture that aligns employee interests with those of the shareholders Approved Person and Material Risk-Taker, as well as total
of the Bank. variable remuneration to be distributed, taking account of total
These elements support the achievement of the Bank’s objectives remuneration including salaries, fees, expenses, bonuses and other
through balancing rewards for both short-term results and long- employee benefits.
term sustainable performance. This strategy is designed to share
• Ensure remuneration is adjusted for all types of risks and that the
success, and to align employees’ incentives with the risk framework
remuneration system takes into consideration employees that earn
and risk outcomes.
the same short-run profit but take different amounts, of risk on
The quality and long-term commitment of all BisB’s employees behalf of the Bank.
is fundamental to success. The Bank therefore aims to attract, • Ensure that for Material Risk-Takers, variable remuneration forms a
retain and motivate the very best people who are committed to substantial part of their total remuneration.
maintaining a career with the Bank, and who will perform their
• Review the stress testing and back testing results before approving
role in the long- term interests of shareholders. The Bank’s reward
the total variable remuneration to be distributed including salaries,
package comprises the following key elements:
fees, expenses, bonuses and other employee benefits.
1. Fixed pay • Carefully evaluate practices by which remuneration is paid for
2. Benefits potential future revenues whose timing and likelihood remain
3. Annual performance bonus uncertain. The NRC will question payouts for income that cannot
be realised or whose likelihood of realisation remains uncertain at
A robust and effective governance framework ensures that the the time of payment.
Bank operates within clear parameters of its compensation strategy • Ensure that for Approved Persons in risk management, internal
and policy. All compensation matters, and overall compliance with audit, operations, financial control and compliance functions, the
regulatory requirements, are overseen by the Board Nomination & mix of fixed and variable remuneration is weighted in favour of
Remuneration Committee (NRC). fixed remuneration.
The Bank’s remuneration policy in particular, considers the role of • Recommend Board member remuneration based on their
each employee and has set guidance on whether an employee is a attendance and performance and in compliance with Article 188
Material Risk Taker and / or an Approved Person in a business line, of the Bahrain Commercial Companies Law.
control or support function. An Approved Person is an employee • Ensure appropriate compliance mechanisms are in place to
whose appointment requires prior regulatory approval because ensure that employees commit themselves not to use personal
of the significance of the role within the Bank; and an employee is hedging strategies or remuneration-and liability-related insurance
considered a Material Risk Taker if they are the Head of a significant to undermine the risk alignment effects embedded in their
business line or any individuals within their control who have a remuneration arrangements.
material impact on the Bank’s risk profile.
• As outlined in the Corporate Governance section of the Annual
In order to ensure alignment between what BisB pays its people Report, the Board is satisfied that all non-executive Directors are
and the business strategy, individual performance is assessed independent including the NRC members. The NRC comprises the
against annual and long-term financial and non-financial objectives following members:
summarized in the performance management system. This
assessment also takes into account adherence to the Bank’s values,
risks and compliance measures and above all integrity. Altogether,
performance is therefore judged not only on what is achieved
over the short and long-term, but also importantly on how it is
achieved, as the NRC believes the latter contributes to the long-term
sustainability of the business.
28
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REMUNERATION DISCLOSURES (CONTINUED)

Member Appointment Number of The NRC carefully evaluates practices by which remuneration is paid
Name date meetings attended for potential future revenues whose timing and likelihood remain
uncertain. NRC demonstrates that its decisions are consistent with an
Abdul Razak Abdulla 5 June 2013 4 assessment of the Bank’s financial condition and future prospects.
Hassan Al Qassim
The Bank uses a formalised and transparent process to adjust the
Khalid Mohammed 11 June 2013 4 bonus pool for quality of earnings. It is the Bank’s objective to pay
Al Mannai out bonuses out of realised and sustainable profits. If the quality of
earnings is not strong, the profit base could be adjusted based on
Mohamed Ahmed Abdulla 11 June 2013 4 the discretion of the NRC.

The aggregate remuneration paid to NRC members during the year For the overall Bank to have any funding for distribution of a
in the form of sitting fees amounted to BHD 12,000 [2014: BHD bonus pool, threshold financial targets have to be achieved. The
12,000]. performance measures ensure that total variable remuneration
is generally, considerably contracted where subdued or negative
Scope of application of the remuneration policy financial performance of the Bank occurs. Furthermore, the target
bonus pool as determined above is subject to risk adjustments in line
The variable remuneration policy has been adopted on a bank-wide with the risk assessment and linkage framework.
basis.
Remuneration of control functions
Board remuneration
The remuneration level of staff in the control and support functions
The Bank’s Board remuneration is determined in line with the allows the Bank to employ qualified and experienced personnel in
provisions of Article 188 of the Bahrain Commercial Companies Law, these functions. The Bank ensures that the mix of fixed and variable
2001. The Board of Directors’ remuneration will be capped so that remuneration for control and support function personnel should be
total remuneration (excluding sitting fees) does not exceed 10% weighted in favour of fixed remuneration. The variable remuneration
of the Bank’s net profit after all required deductions as outlined of control functions is to be based on function-specific objectives and
in Article 188 of the Companies law, in any financial year. Board is not to be determined by the financial performance of the business
remuneration is subject to approval of the shareholders in the area they monitor.
Annual General Meeting and MOIC approval. Remuneration of non-
executive Directors does not include performance-related elements The Bank’s performance management system plays a major role
such as grants of shares, share options or other deferred stock- in deciding the performance of the support and control units on
related incentive schemes, bonuses or pension benefits. the basis of the objectives set for them. Such objectives are
more focused on non-financial targets that include risk, control,
Variable remuneration for staff compliance and ethical considerations, as well as the market and
regulatory environment apart from value adding tasks which are
Variable remuneration is performance related and consists primarily
specific to each unit.
of the annual performance bonus award. As a part of staff’s variable
remuneration, the annual bonus rewards delivery of operational
and financial targets set each year, the individual performance of Variable compensation for business units
the employees in achieving those targets, and their contribution to The variable remuneration of the business units is primarily
delivering the Bank’s strategic objectives. determined by key performance objectives set through the
performance management system of the Bank. Such objectives
The Bank has adopted a Board approved framework to develop a
contain financial and non-financial targets, including risk control,
transparent link between variable remuneration and performance.
compliance and ethical considerations as well as market and
The framework is designed on the basis of meeting both satisfactory
regulatory requirements. The consideration of risk assessments in
financial performance and the achievement of other non-financial
the performance evaluation of individuals ensures that any two
factors, that will, all other things being equal, deliver a target bonus
employees who generate the same short-run profits but take
pool for employees, prior to consideration of any allocation to
different amounts of risk on behalf of the Bank are treated differently
business lines and employees individually. In the framework adopted
by the remuneration system.
for determining the variable remuneration pool, the NRC aims to
balance the distribution of the Bank’s profits between shareholders
Risk assessment framework
and employees.
The purpose of risk linkages is to align variable remuneration to
Key performance metrics at the Bank level include a combination the risk profile of the Bank. In its endeavour to do so, the Bank
of short term and long term measures and include profitability, considers both quantitative measures and qualitative measures in
solvency, liquidity and growth indicators. The performance the risk assessment process. Both quantitative measures and human
management process ensures that all goals are appropriately judgment play a role in determining any risk adjustments. The
cascaded down to respective business units and employees. risk assessment process encompasses the need to ensure that the
In determining the amount of variable remuneration, the Bank starts remuneration policy as designed reduces employees’ incentives to
from setting specific targets and other qualitative performance take excessive and undue risks, is symmetrical with risk outcomes,
measures that result in a target bonus pool. The bonus pool is then and delivers an appropriate mix of remuneration that is risk aligned.
adjusted to take account of risk via the use of risk-adjusted measures The NRC considers whether the variable remuneration policy is in
(including forward-looking considerations). line with the Bank’s risk profile, and ensures that through the Bank’s
29
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

ex-ante and ex-post risk assessment framework and processes, Malus and Clawback framework
remuneration practices where potential future revenues whose The Bank’s malus and clawback provisions allow the Board of
timing and likelihood remain uncertain are carefully evaluated. Directors to determine that, if appropriate, unvested elements
Risk adjustments take into account all types of risk, including underthe deferred bonus plan can be forfeited / adjusted or the
intangible and other risks such as reputation risk, liquidity risk and delivered variable remuneration recovered in certain situations. The
the cost of capital. The Bank undertakes risk assessments to review intention
financial and operational performance against business strategy and is to allow the Bank to respond appropriately if the performance
risk performance prior to distribution of the annual bonus. The Bank factors on which reward decisions were based turn out not to reflect
ensures that total variable remuneration does not limit its ability to the corresponding performance in the longer term. All deferred
strengthen its capital base. The extent to which capital needs to be compensation awards contain provisions that enable the Bank
built up is a function of the bank’s current capital position and its to reduce or cancel the awards of employees whose individual
ICAAP. behaviour has had a materially detrimental impact on the Bank
during the concerned performance year.
The bonus pool takes into account the performance of the
Bank which is considered within the context of the Bank’s risk Any decision to take back an individual’s award can only be made by
management framework. This ensures that the variable pay pool is the Bank’s Board of Directors.
shaped by risk considerations and Bank-wide notable events. The Bank’s malus and clawback provisions allow the Board to
The size of the variable remuneration pool and its allocation within determine that, if appropriate, vested / unvested elements under the
the bank takes into account the full range of current and potential deferred bonus plan can be adjusted / cancelled in certain situations.
risks, including: These events include the following:

(a) The cost and quantity of capital required to support the risks • Reasonable evidence of willful misbehaviour, material error,
taken; negligence or incompetence of the employee causing the Bank/
the employee’s business unit to suffer material loss in its financial
(b) The cost and quantity of the liquidity risk assumed in the performance, material misstatement of the Bank’s financial
conduct of business; and statements, material risk management failure or reputational loss
(c) Consistency with the timing and likelihood of potential future or risk due to such employee’s actions, negligence, misbehavior or
revenues incorporated into current earnings. incompetence during the concerned performance year.
• The employee deliberately misleads the market and/or
The NRC keeps itself abreast of the Bank’s performance against the shareholders in relation to the financial performance of the Bank
risk management framework. The NRC will use this information during the concerned performance year.
when considering remuneration to ensure returns, risks and
remuneration are aligned. Clawback can be used if the malus adjustment on the unvested
portion is insufficient given the nature and magnitude of the issue.
Risk adjustments
Components of Variable remuneration
The Bank has an ex-post risk assessment framework which is a
qualitative assessment to back-test actual performance against prior Variable remuneration has the following main components:
risk assumptions. Upfront cash Deferred Cash Upfront share awards deferred shares
In years where the Bank suffers material losses in its financial The portion of the variable compensation that is awarded and paid
performance, the risk adjustment framework will work as follows: out in cash on conclusion of the performance evaluation process for
• There will be considerable contraction of the Bank’s total variable each year.
remuneration. The portion of variable compensation that is awarded and paid in
• At an individual level, poor performance by the Bank will mean cash on a pro-rata basis over a period of 3 years.
individual KPIs are not met and hence employee performance
The portion of variable compensation that is awarded and issued
ratings will be lower.
in the form of shares on conclusion of the performance evaluation
• Reduction in the value of deferred shares or awards. process for each year.
• Possible changes in vesting periods and additional deferral applied
The portion of variable compensation that is awarded and paid in
to unvested rewards.
the form of shares on a pro-rata basis over a period of 3 years.
• Lastly, if the qualitative and quantitative impact of a loss incident
All deferred awards are subject to malus provisions. All share awards
• is considered significant, a malus or clawback of previous variable
are released to the benefit of the employee after a six-month
awards may be considered.
retention period from the date of vesting. The number of equity
The NRC, with the Board’s approval, can rationalise and make the share awards is linked to the Bank’s share price as per the rules of
following discretionary decisions: the Bank’s Share Incentive Scheme. Any dividend on these shares
is released to the employee along with the shares (i.e. after the
• Increase / reduce the ex-post adjustment retention period).
• Consider additional deferrals or increase in the quantum of non-
cash awards
• Recovery through malus and clawback arrangements
30
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
REMUNERATION DISCLOSURES (CONTINUED)

Deferred compensation
The CEO, his deputies and 5 most highly paid business line employees are subject to the following deferral rules:

Payout Vesting
Element of variable remuneration percentages period Retention Malus Clawback
Up-front cash 40% immediate - - Yes
Deferred cash 10% 3 years - Yes Yes
Deferred share awards 50% 3 years 6 months Yes Yes
All other covered staff, i.e. Assistant General Manager level and above are subject to the following deferral rules:

Payout Vesting
Element of variable remuneration percentages period Retention Malus Clawback
Up-front cash 50% immediate - - Yes
Up-front share awards 10% immediate 6 months Yes Yes
Deferred share awards 40% 3 years 6 months Yes Yes

The NRC, based on its assessment of the role profile and risk taken by an employee could increase the coverage of employees that will be
subject to deferral arrangements.
Details of remuneration paid
(a) Board of Directors & committees

BD 000’s 2015 2014

Sitting Fees 148,000 224,514

Remuneration - 368,688

(b) Employee remuneration

2015
Fixed Sign on Guaranteed Variable remuneration
Number remuneration bonuses bonuses Upfront Deferred
BD 000’s of staff Cash Others (Cash / Shares) (Cash / Shares) Cash Shares Cash Shares Others Total

Approved persons
- Business lines 6 775 - 188 - 92 - 23 115 - 1,193
- Control & Support 6 793 - - - 33 5 - 20 - 851
Other material risk takers - - - - - - - - - - -
Other staff 342 7,284 - - - 735 - - - - 8,091
TOTAL 354 8,852 - 188 - 860 5 23 135 - 10,063

Includes end of service compensations.

2014
Fixed Sign on Guaranteed Variable remuneration
Number remuneration bonuses bonuses Upfront Deferred
BD 000’s of staff Cash Others (Cash / Shares) (Cash / Shares) Cash Shares Cash Shares Others Total

Approved persons
- Business lines 5 861 - - - 50 - 13 63 - 987
- Control & Support 7 569 - - - 41 5 - 22 - 637
Other material risk takers - - - - - - - - - - -
Other staff 358 8,685 - - - 637 - - - - 9,322
TOTAL 370 10,115 - - - 728 5 13 85 - 10,946
31
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Deferred awards disclosures

2015
Shares
BD 000’s Cash Number BD 000’s Total

Opening balance 13 604,751 90 103

Awarded during the period 42 1,510,126 210 252
Paid out / Released during the period - - - -
Service, performance and risk adjustments - - - -
Corporate action adjustments - (229,533) (32) (32)
Closing balance 55 1,885,344 268 323

Number of shares for the 2015 deferred shared awards has been calculated using estimated year end share prices as the award price in
accordance with the Share plan policy of the Bank will be determined after 22 March 2016.

2014
Shares
BD 000’s Cash Number BD 000’s Total

Opening balance - - - -
Awarded during the period 13 604,751 90 103
Paid out / Released during the period - - - -
Service, performance and risk adjustments - - - -
Corporate action adjustments - - - -
Closing balance 13 604,751 90 103
32
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE SOCIAL RESPONSIBILITY REVIEW

As a socially responsible corporate citizen, BisB is committed to contributing

to the economic development and social well-being of the Kingdom of
Bahrain and this is reflected in our broad corporate social responsibility (CSR)
programme. Some of the key activities of the Bank’s CSR programme during
2015 are listed below:

Industry Sponsorships Enhancing the Awareness of Islam

By sponsoring and participating in major financial industry As a leading Sharia’a-compliant financial institution, BisB is
conferences and events, and supporting other initiatives, BisB actively committed to raising awareness of Islam and Islamic Banking and
contributes to the development of the global Islamic banking as such during 2015 the Bank supported the following national
industry and the banking sector in the Kingdom of Bahrain: institutions.
• 2015 AAOIFI-World Bank Annual Conference on Islamic Banking • Rekaaz Bahrain 2015.
& Finance. • Ministry of Justice & Islamic Affairs Zakat Fund.
• 2015 World Islamic Banking Conference (WIBC). • Quran Education Centres.
• Muslim Education Society.
• Discover Islam.
Developing Local Talent
BisB is a passionate supporter of local talent. In addition to providing Adding Value to the Community
employment and career opportunities to Bahraini nationals, who Through donations and other charitable activities, BisB contributes to
comprise 97% of the Bank’s total workforce, BisB encourages improving the well-being and quality of life of the local community
entrepreneurship and the development of the kingdom’s future through:
tomorrow’s business leaders by supporting the following initiatives:
• Support for a wide range of charitable, medical, educational,
• BIBF Waqf Fund for Islamic Banking Training and Development. cultural, sporting and community organisations and events,
• Enterprise Finance Scheme for SMEs in collaboration with including the Royal Charity Organisation.
Tamkeen. • Financial assistance to needy families, individuals and deserving
• Ministry of Education training initiatives. causes.

• Summer Internship programme for Bahraini university students.

• Students’ trips to underdeveloped countries.
• Youth conferences, workshops and camping activities
33
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE GOVERNANCE REVIEW

As a code of conduct and value driven organization, BisB is committed to uphold the highest standards of corporate governance, and the
Central Bank of Bahrain’s High- Levels Control Module (and its amendments). The Bank seeks to balance entrepreneurship, compliance and
industry best practice, while creating value for all stakeholders. This includes, but is not limited to, conducting the policy and affairs of BisB
in compliance with regulatory requirements. It also involves having the right checks and balances in place throughout the organization to
ensure that the right things are always done in the right way. Aligned with the Bank’s aim to achieve higher standards of compliance, 2015
witnessed a substantial strengthening of the Compliance Division. In addition to the appointment of an external consultant to review Bank
policies and procedures, intensive face-to-face Anti Money Laundering (AML) sessions were held for more than 150 employees above and
beyond the AML courses available on the new e-learning platform.
The Bank remains unwavering in its commitment to good corporate governance and will consistently and transparently communicate with its
regulators, shareholders and stakeholders.

Governance and Organisation Structure

General
Assembly
Shari’a
Board

Board of
Directors

Audit & Corporate Nomination &

Executive Chief Executive Risk
Governance Remuneration
Committee Officer Committee
Committee Committee

Head of Head of
Internal Audit Compliance &
& Shari’a Quality Assurance

AGM Credit
AGM Treasury GM Retail GM Corporate GM Support Chief Financial
& Risk
& Investment Banking Banking Services Officer
Management

Developments in 2015
• Mr. Hassan Amin Jarrar was appointed as Chief Executive Officer.
• Mr. Mohammed Ahmed Janahi was promoted from General Manager Support to Deputy Chief Executive Officer, a newly created role.
• Mr. Fahim Ahmed Shafiqi was appointed as the bank’s Chief Risk Officer, heading the Credit & Risk Management Department.
• Mr. Dawood Khalil Al Ashhab was appointed Assistant General Manager of Human Resources & General Services.
• Mrs. Maisaa Jawdat Al Shannar was appointed Senior Manager - Strategic Planning & Transformation.
• Restructuring of the Bank’s management to be a world class management team, in addition to enhancing the current team to achieve this
level.
• Appointment of an external consultant to review all compliance related policies and procedures.
• Appointed world class trainers to deliver intensive face to face Anti Money Laundering and Compliance clinics in addition to AML courses
on the new e-learning platform.
• Continued implementation of the Bank’s new five-year strategy developed in collaboration with the Boston Consulting Group.
• Establishment of a Management Committee (MANCO).
• Establishment of a Credit and Operational Risk Committee (CORC).
• Establishment of a Customer Experience Council.
• Complied with requirements of Security measures relating to ATM’s issued by the Central Bank of Bahrain (CBB).
• Complied with Credit Check Reports Requested by Pensioners issued by the CBB.
34
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE GOVERNANCE REVIEW (CONTINUED)

Developments in 2015 (continued)

• Implemented Amendment of Rule in Module CA issued by the CBB.
• Adopted an Electronic Establishment of Registration Certificate issued by the Ministry of Industry, Commerce & Tourism.
• Complied with ATM precautionary measures During Formula 1 Period issued by the CBB.
• Complied with ‘Women in the Financial and Banking Sector 2015 issued by the CBB.
• Submitted the Quarterly Capital Adequacy Form in compliance with regulator rules.
• Participated in the CBB workshop on Stress Testing & Capital Planning.
• Incorporated requirements of The Foreign Account Tax Compliance Act (FATCA) within BisB’s customer application form in addition to the
Bank’s systems. The Policy was approved by the Board in January 2015, and a copy of the training guide is available for reference on the
staff intranet.
• Responded to the following CBB Consultation Papers:
- Revised Form PIRI
- Basel III Consultation (Leverage Chapter)
- Proposed Amendments on Module HC for Volume 2 (All Islamic Bank Licensees)
- Proposed Amendments on the Operational Risk Management Module (OM) for Banks
- Proposed Amendments on the Credit Risk Management Module (CM) for Banks

Shareholders Ownership (5% and above)

Shareholder Nationality Number of Shares Percentage

National Bank of Bahrain Bahrain 283,155,923 29.06%

Social Insurance Organization (Military, GOSI & Civil) Bahrain 283,158,585 29.06%
Islamic Development Bank Saudi Arabia 140,497,329 14.42%
Kuwait Awqaf Public Foundation Kuwait 69,932,530 7.18%

Distribution of Ownership of Shares by Nationality

Country Percentage Number of Shares

Kingdom of Bahrain 73.03% 711,631,454

Kingdom of Saudi Arabia 15.16% 147,672,696
Kuwait 8.67% 84,463,888
United Arab Emirates 2.94% 28,609,168
Qatar 0.13% 1,292,741
Jordan 0.04% 434,553
Others 0.03% 308,125
Total 100.000% 974,412,625
35
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Distribution of Ownership shares of Directors and Shari’a Members (As of 31st December 2015)

Directors Shares as of 31st Dec 2015

Abdul Razak Abdulla Al Qassim 84,658

Khalid Mohamed Al Mannai No Shares Transferred As of December 2015
Mohammed Ahmed Abdulla No Shares Transferred As of December 2015
Fatima Abdulla Budhaish 84,658
Talal Ali Al Zain No Shares Transferred As of December 2015
Khalil Ebrahim Nooruddin No Shares Transferred As of December 2015
Ebrahim Husain AlJassmi 184,658
Othman Ebrahim Al Askar 84,658
Muhammad Zarrug Rajab 129,070

Shari’a Members
Shaikh Dr. Abdul Latif Mahmood Al Mahmood 157,035
Shaikh Dr. Nedham Mohamed Saleh Yacoubi 12,123
Shaikh Mohammed Jaffar Al Juffairi No Shares Transferred as of December 2015
Shaikh Adnan Abdulla Al Qattan No Shares Transferred as of December 2015
Shaikh Dr. Essam Khalaf Al Enizi No Shares Transferred as of December 2015

Board of Directors
Role and Responsibilities of the Board
The primary responsibility of the Board of Directors is to provide effective governance over the Bank’s affairs for the benefit of the
shareholders; and to balance the interests of BisB’s diverse constituencies, including associated concerns, employees and other stakeholders.
In all actions taken by the Board, the Directors are expected to exercise their business judgment in what they reasonably believe to be in the
best interests of the Bank.
The Board approves and oversees the implementation of the Bank’s strategies; and reviews and approves the Bank’s strategic plan. As part
of its strategic review process, the Board reviews major plans of action and business plans; sets performance objectives; and oversees major
investments, divestitures and acquisitions. Every year, at an annual Board strategy session, the Board formally reassesses the Bank’s objectives,
strategies and plans. The Board’s responsibilities are described in more detail in the Corporate Governance Report published on the Bank’s
website, and in the Charter of the Board of Directors.

Board Composition
The Board of Directors of BisB comprises nine Executive and Non- Executive Directors, of which four are Independent Directors. Each term
of the Board of Directors consists of three years. The last re-election of the Bank’s Board of Directors was held at the Bank’s Annual General
Meeting (AGM) on 7 July 2013. Profiles of Board Members are listed on page 9 of this annual report.
1. Mr. Abdul Razaq Abdulla Al Qassim - Chairman
2. Brig. Khalid Mohammed Al Mannai - Vice Chairman
3. Mr. Talal Ali Al Zain - Member
4. Mr. Khalil Ebrahim Nooruddin - Member
5. Mr. Ebrahim Husain Ebrahim AlJassmi - Member
6. Mr. Othman Ibrahim Al Askar - Member
7. Mr. Mohammed Ahmed Abdulla - Member
8. Mrs. Fatima Abdulla Budhaish - Member
9. Mr. Mohamed Hedi Mejai – Member (Replaced by Muhammad Zarrug Rajab on: 30-12-2015)
36
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE GOVERNANCE REVIEW (CONTINUED)

Induction of new directors

The Board-approved Corporate Governance Policy requires each new Director to receive a formal and tailored induction from the Chairman
and Senior Management, with respect to BisB’s vision and strategic direction; core values including ethics; corporate governance practices;
and financial matters and business operations.

Board Committees
The Board constitutes four Committees - Executive Committee, Audit and Corporate Governance Committee, Remuneration & Nomination
Committee, and Risk Management Committee. Each of these committees has its own Charter that describes the responsibilities of its
members.

Board Committee Membership and Objectives

Board Committee Members Objectives

Executive Committee Brig. Khalid Mohammed Al Mannai (Chairman) Review of strategy and performance. Review of
new investment proposals, credit proposals and
Mr. Khalil Ebrahim Nooruddin
exit strategies. The committee meets at least six
Mr. Talal Ali Al Zain times per year.

Audit and Corporate Governance Mr. Ebrahim Hussain AlJassmi (Chairman) Oversight of integrity and reporting of the Bank’s
Committee quarterly and annual financial statements.
Mr. Othman Ebrahim Al Askar
Review of risk, provision and impairment.
Mr. Mohammed Hedi Mejai
Compliance with legal and regulatory
requirements.
Review the Corporate Governance status of the
bank.
The committee meets at least four times per year.

Nomination and Remuneration Mr. Abdul Razaq Abdulla Al Qassim (Chairman) Oversight of the compensation and
Committee remuneration policy.
Brig. Khalid Mohammed Al Mannai
Oversight of recruitment and promotion of key
Mr. Mohammed Ahmed Abdulla
personnel and Board members
The committee meets at least two times per year.

Risk Management Committee Mrs. Fatima Abdulla Budhaish (Chairman) Monitoring the enterprise-wide risk profile
independently. Risk guidance to the Board and
Mr. Mohammed Ahmed Abdulla
Management periodically.
The committee meets at least four times per year.

Evaluation of the Board and its Committees

The Nomination and Remuneration Committee carried out an evaluation of the Board and its Committees through the distribution of
questionnaires to each Board Member, followed by an assessment of the Committees and Members. The Committee expressed its satisfaction
with the positive results.

Directors’ Remuneration
The aggregate Board sitting fees, including travel expenses, totaled BD 148,000 in 2015.

Directors’ Attendance
The Board of Directors met seven times during 2015, details of which are given in the following table. This exceeds the minimum requirement
of having at least four meetings in any given year, as stipulated by the Central Bank of Bahrain. The regulatory requirement that individual
Board Members must attend at least 75% of all Board meetings in a given financial year to enable the Board to discharge its responsibilities
effectively, was met by all Directors during 2015, except for one Board Member representing IDB and was replace by another on 30th
December 2015. The table also shows attendance of Directors at Board Committee meetings.
37
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Board Meetings & Attendance in 2015:

Members 14 Jan 11 Feb 23 Mar 12 May 29 Jul 2 Aug 28 Oct

Mr. Abdul Razak Abdulla Al Qassim
      
(Joined on: 05 June 2013)
Brig. Khalid Mohammed Al Mannai
×      
(Joined on: 11 June 2013)
Mrs. Fatima Abdulla Budhaish
      
(Joined on: 05 June 2013)
Mr. Mohammed Ahmed Abdulla
      
(Joined on: 11 June 2013)
Mr. Talal Ali Al Zain
    ×  
(Joined on: 07 July 2013)
Mr. Khalil Ebrahim Nooruddin
      
(Joined on: 07 July 2013)
Mr. Ebrahim Hussain AlJassmi
      
(Joined on: 07 July 2013)
Mr. Othman Ebrahim Al Askar
      
(Joined on: 07 July 2013)
Mr. Mohamed Hedi Mejai
(Joined on: 26 Jan 2015) _   × × × 
(Replaced by Muhammad Zarrug Rajab on: 30 Dec 2015)

Executive Committee Meetings & Attendance:

21 3 12 15 3 9 14 5 9 29 14
Members Jan Feb Mar Apr Jun Jun Jul Aug Sep Nov Dec
Brig. Khalid Mohammed Al Mannai           
Mr. Khalil Ebrahim Nooruddin           
Mr. Talal Ali Al Zain     × ×   ×  

Audit & Corporate Governance Committee Meetings & Attendance

Members 13 Jan 2 Feb 10 Feb 16 Apr 26 Apr 11 May 28 Jul 27 Oct

Mr. Ebrahim Hussain AlJassmi        
Mr. Othman Ebrahim Al Askar        
Mr. Mohammed Hedi Mejai _ _ _ ×  ×  

Risk Management Committee Meetings & Attendance:

Members 27 Jan 22 Mar 5 Apr 8 Apr 24 Jun 13 Jun 7 Oct

Mrs. Fatima Abdulla Budhaish       
Mr. Mohammed Ahmed Abdulla       

Nomination and Remuneration Committee Meetings & Attendance:

Members 1 Mar 10 Mar 10 Aug 12 Nov

Mr. Abdul Razak Abdulla Al Qassim    
Brig. Khalid Mohammed Al Mannai    
Mr. Mohammed Ahmed Abdulla    
38
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
CORPORATE GOVERNANCE REVIEW (CONTINUED)

Performance-Linked Management Incentive Structure

BisB implements a Performance Management Scheme, which is linked to incentives and competencies on an annual basis, for management
and staff. The Bank pays monthly salaries, allowances and bonuses for the Chief Executive, General Managers, Senior Managers and
Managers.

Senior Management Remuneration

The aggregate Senior Management remuneration, including basic salaries and fixed allowances was BD 1 million for 2015.

Management Committees
A number of Management Committees have been established to assist the CEO and Management Team in carrying out their duties, and to
ensure that there is adequate supervision on the Bank’s activities. A number of new committees were established while others were ended
during 2015.

Management Committees - Membership & Objectives

Committee Members Objectives

Asset & Liability Committee (ALCO) Mr. Hassan Ameen Jarrar (Chairman*) The main objective of ALCO is to
Mohammed Ahmed Janahi manage and monitor the liquidity
risk of the Bank on a coordinated and
A. Rahman Turki
consistent basis.
FahimShafiqi**
Khalid Al Doseri
Nader AlBastaki

* Previous Chairman was Mohammed Ahmed Janahi

until 1st July 2015.
** Mohammed Belgami was a previous member until
31st October 2015.

Credit & Investment Committee (C&IC) Mr. Mohammed Ahmed Hasan Janahi (Chairman*) The main objectives of C&IC is to
Mohammed Ahmed Janahi exercise due care, diligence and skill
to oversee, direct and review the
FahimShafiqi**
management of credit risk within the
A. Rahman Turki financing portfolio of the Bank and
Nader Al Bastaki reviewing policies and strategies for
achieving investment objectives.
* Previous Chairman was Mohammed Ahmed Janahi
until 1st July 2015.
** Mohammed Belgami was a previous member until
31st October 2015.

Qard Al Hassan, Donation & Mr. Mohammed Ahmed Janahi (Chairman*) The main objective of Qard Al
Zakah Committee Mr. Hamad Farooq Al Shaikh Hassan and Zakah Committee is
to discharge the Group's social
Mr. Khalid Waheeb Al Nasser
responsibilities toward its society
Mr. Ali Hassan Duaij through distributing zakah, charity
funds, donations & good faith Qard
for marriage, medical treatments, etc.

Provisioning Committee Mr. Hassan Amin Jarrar (Chairman*) The main objective of Provisioning
Mohammed Ahmed Janahi Committee is to assist the CEO in
reviewing the bank's provisions. In
FahimShafiqi**
addition, the Committee would be
Khalid Al Doseri responsible in formulating provision
Khalid Mahmood (observer) policies with a view to maintain the
strategic risk level objectives of the
* Previous Chairman was Mohammed Ahmed Janahi bank.
until 1st July 2015.
** Mohammed Belgami was a previous member until
31st October 2015.
39
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Succession Planning
Succession planning in the bank is driven by our Business strategy and future focused. The primary objective of the plan is to develop our
people to meet future demands of the bank. The output is better internally resourcing and highly capable people filling our key positions, our
process ensure that we meet our regulatory commitments.

Compliance
In accordance with CBB guidelines, the Bank has a designated Head of Compliance, who is independent and reports directly to the Chief
Executive Officer and Board of Directors; and has direct access to Senior Management and all confidential information of the Bank. The
Compliance function acts as the central coordinator for all regulatory matters relating to the CBB, Bahrain Bourse, and other regulatory
bodies. BisB has in place comprehensive policies and procedures to ensure full compliance with the relevant rules and regulations of the
Central Bank of Bahrain, including appropriate anti- money laundering policies.

Anti-Money Laundering
BisB has a designated Money Laundering Reporting Officer (MLRO). The Bank has implemented an anti-money laundering and terrorism
financing policy, and annually trains its staff on the identification and reporting of suspicious activities and transactions. BisB follows
prudent practices related to ‘Customer Due Diligence’, ‘Beneficial Ownership’ and ‘Know Your Customer’ principles. In accordance with CBB
requirements, the MLRO regularly reviews the effectiveness of the Bank’s AML/CFT procedures, systems and controls.

Customer Complaints
The Complaints Resolution Unit of the Quality Assurance Department is responsible for managing customer complaints. After receiving
a complaint, the Unit routes it to the concerned department for their response. After analyzing the response, the customer is contacted
accordingly. BisB customers may use the Bank’s website or the call centre for lodging a complaint. All complaints are logged, monitored and
reported to the CBB.

Code of Conduct
BisB conducts itself in accordance with the highest standards of ethical behavior. A Code of Business Conduct has been developed to govern
the personal and professional conduct of all stakeholders The Code applies to directors, management, staff and temporary workers; and
independent contractors and consultants, whether engaged by or otherwise representing the Bank and its interests.

Disclosure and Communications

BisB conducts all communications with its stakeholders in a professional, honest, transparent, understandable, accurate and timely manner.
Main communications channels include an annual report, corporate brochure and website, and regular announcements in the appropriate
local media. As part of its disclosure and communication strategy, the Bank’s website (www.bisb.com) is the repository of financial
information, together with Board of Directors’ reports and financial commentary, financial statements, relevant information on BisB such as
its key products and services, and press releases.
Note: Additional information is included in the BisB Corporate Governance report 2015, which is posted on the Bank’s website: www.bisb.com.
40
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

THE SHARIA BOARD HAS

REVIEWED THE FINANCIAL
STATEMENTS FOR THE YEAR
ENDED ON 31ST DECEMBER
2015, THE INCOME STATEMENT,
THE ATTACHED NOTES AND THE
ZAKAT CALCULATION METHODS
41
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015
SHARIA’A SUPERVISORY BOARD REPORT
For the year ended 31st December 2015

In The Name of Allah, most Gracious, most Merciful, Peace and Blessings
Be Upon His Messenger.

To the shareholders of Bahrain Islamic Bank B.S.C.

Assalam Alaykum Wa Rahmatu Allah Wa Barakatoh.

The Sharia’a Board hereby present the following report on its it deemed necessary to confirm that the Bank did not violate the
activities in supervising the Bank’s finances and investments from a Sharia principles and Fatwas and decisions of the Sharia’a Board.
Sharia perspective for the financial year ending on 31st December
- The Sharia Board and its Committees held (11) meetings during
2015, in fulfillment to the mandate conferred upon it by BisB’s
the year and issued (95) decisions and fatwas, and approved (34)
Articles of Association:
contracts.
- The Sharia’a Supervisory Board monitored the operations, related
- The Sharia Board has reviewed the financial Statements for the
to the Bank throughout the year ended on 31st December 2015
year ended on 31st December 2015, the income statement, the
to express opinion on the Bank’s adherence to the provisions
attached notes and the Zakat calculation methods. The Sharia’a
and principles of Islamic Sharia’a in its activities by following the
Supervisory Board believes that
fatwas, decisions and the specific guidelines issued from our side.
1. All the Financial Statements inspected by the Sharia’a Board
- The Sharia’a Supervisory Board believes that ensuring the
conform to what has been approved by the Board, and to the
conformity of Bank’s activities and investments with the provisions
standards issued by the Accounting & Auditing Organization for
of Islamic Sharia’a is the sole responsibility of the Management
Islamic Financial Institutions AAOIFI.
while the Sharia’a Supervisory Board is only responsible for
expressing an independent opinion and preparing a report to you. 2. Contracts, and transactions conducted by the Bank throughout
were in accordance with the standard contracts pre-approved
- We planned with the Sharia’a Internal Audit department to
by the Sharia’a Supervisory Board.
carry out monitoring functions by obtaining all the information
and clarifications that were deemed necessary to confirm that 3. The distribution of profit and allocation of losses on investment
the Bank did not violate the principles and provisions of Islamic accounts was in line with the basis and principles approved by
Sharia’a and Fatwas and decisions of the Sharia’a Board. the Sharia’a Supervisory Board and in accordance to Islamic
Sharia.
- Our supervision constituted of inspection, documenting of policies
followed by the Bank on the basis of examining each kind of 4. Any gains resulted from sources or means prohibited by the
operation either directly or indirectly by the internal Sharia’a provisions and principles of Islamic Sharia’a, have been directed
Department in conformity with the methodology approved by the to the Charity and Donations Fund.
Sharia’a Board.
5. Zakah was calculated according to the provisions and principles
- The Sharia’a Internal Audit department performed its mission of of Islamic Sharia’a, by the net invested assets method. And the
auditing the transactions executed by the Bank and submitted shareholders should pay their portion of Zakah on their shares
its periodic reports to the Sharia’a Supervisory Board, which as stated in the financial report.
confirmed the Bank’s adherence in its dealings and investments
with the Sharia’a Board’s fatwas and decisions. 6. The Bank was committed to the Sharia’a standards issued by
the Accounting & Auditing Organization for Islamic Financial
- The 27 reports submitted by Internal Sharia Audit Department Institutions (AAOIFI).
to the Sharia’a Supervisory Board included results of auditing the
files, contracts, executed deals in fulfillment to the Sharia’a Board We pray that Allah may grant all of us further success and prosperity.
annual approved audit plan. The Sharia’a Board obtained the Wassalam Alaykum Wa Rahmatu Allah Wa Barakatoh.
requested information and explanations from the departments

Shaikh Dr. Abdul Latif Mahmood Al Mahmood Shaikh Mohammed Jaffer Al Juffairi
Chairman Vice Chairman

Shaikh Adnan Abdulla Al Qattan Shaikh Nedham Mohamed Saleh Yacoubi Rev. Shaikh Dr. Essam Khalaf Al Onazi
Board Member Board Member Board Member
42
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Financial
Notes to the
Statements
Consolidated
2015 Financial Statements
For the year ended 31 December 2015

Contents
43 Independent Auditors’ Report
44 Consolidated Statement of Financial Position
45 Consolidated Statement of Income
46 Consolidated Statement of Cash Flows
47 Consolidated Statement of Changes in Owners’ Equity
48 Consolidated Statement of Sources and Uses of Good
Faith Qard Fund
49 Consolidated Statement of Sources and Uses of Zakah
and Charity Fund
50 Notes to the Consolidated Financial Statements
43
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Independent Auditors’ Report

to the Shareholders of Bahrain Islamic Bank B.S.C.

Report on the consolidated financial statements Report on other regulatory requirements

We have audited the accompanying consolidated financial As required by the Bahrain Commercial Companies Law and
statements of Bahrain Islamic Bank B.S.C. Volume 2 of the Central Bank of Bahrain Rule Book, we report that:
(the “Bank”) and its subsidiaries (together the “Group”) which a) the Bank has maintained proper accounting records and the
comprise the consolidated statement of financial position as at consolidated financial statements are in agreement therewith;
31 December 2015, the consolidated statements of income, cash b) the financial information contained in the chairman’s
flows, changes in owners’ equity, sources and uses of good faith statement is consistent with the consolidated financial
qard fund and sources and uses of zakah and charity fund for the statements;
year then ended, and a summary of significant accounting policies c) we are not aware of any violations during the year of the Bahrain
and other explanatory notes. Commercial Companies Law, the Central Bank of Bahrain
and Financial Institutions Law, the CBB Rule Book (Volume 2,
Respective responsibilities of board of directors and auditors applicable provisions of Volume 6 and CBB directives), the CBB
These consolidated financial statements and the Group’s Capital Markets Regulations and associated resolutions, the
undertaking to operate in accordance with Islamic Shari’a rules Bahrain Bourse rules and procedures or the terms of the Bank’s
and principles are the responsibility of the board of directors of memorandum and articles of association that would have had
the Bank. Our responsibility is to express an opinion on these a material adverse effect on the business of the Bank or on its
consolidated financial statements based on our audit. financial position; and
d) satisfactory explanations and information have been provided
Basis of opinion to us by management in response to all our requests.
We conducted our audit in accordance with Auditing Standards
for Islamic Financial Institutions issued by Accounting and Auditing
Organisation for Islamic Financial Institutions. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a KPMG Fakhro
reasonable basis for our opinion. Partner Registration No. 100
21 February 2016
Opinion
In our opinion, the consolidated financial statements give a true
and fair view of the consolidated financial position of the Group as
at 31 December 2015, and of its consolidated results of operations,
its consolidated cash flows, its consolidated changes in owners’
equity, its consolidated sources and uses of good faith qard fund,
and its consolidated sources and uses of zakah and charity fund
for the year then ended in accordance with Financial Accounting
Standards issued by the Accounting and Auditing Organisation for
Islamic Financial Institutions and the Shari’a rules and principles as
determined by the Shari’a Supervisory Board of the Bank.
44
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Financial Position

As at 31 December 2015

2015 2014
Note BD’000 BD’000

ASSETS
Cash and balances with banks and Central Bank 3 61,114 52,118
Placements with financial institutions 4 73,150 68,567
Financing assets 5 475,648 408,021
Investment securities 6 130,635 123,561
Ijarah Muntahia Bittamleek 8 118,061 102,277
Ijarah rental receivables 8 15,692 14,065
Investment in associates 7 28,116 30,835
Investment in real estate 10 43,601 53,934
Property and equipment 9 16,640 17,101
Other assets 11 13,691 4,728
TOTAL ASSETS 976,348 875,207

LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND OWNERS’ EQUITY

Liabilities
Placements from financial institutions 93,516 75,570
Customers’ current accounts 141,244 137,423
Other liabilities 12 16,616 16,518
Total Liabilities 251,376 229,511
Equity of Investment Accountholders 13 615,460 566,601

Owners’ Equity
Share capital 14 97,441 93,967
Treasury shares 14 (563) (563)
Shares under employee share incentive scheme (879) -
Share premium 2,794 -
Reserves 10,719 (14,320)
Equity attributable to owners of the parent 109,512 79,084
Non-controlling interest - 11
Total Owners’ Equity 109,512 79,095
TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND OWNERS’ EQUITY 976,348 875,207

Abdulrazaq Al Qassim Khalid Al Mannai Hassan Jarrar

Chairman Vice Chairman Chief Executive Officer

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
45
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Income

For the year ended 31 December 2015

2015 2014
Note BD'000 BD'000
INCOME
Income from financing 17 33,530 28,702
Income from investment in Sukuk 3,659 2,535
37,189 31,237
Return on equity of investment accountholders )21,582( )23,379(
Group's share as Mudarib 16,395 16,092
Net return on equity of investment accountholders 13.4 )5,187( )7,287(

Net financing income 32,002 23,950

Expense on placements from financial institutions )546( )252(
Fee and commission income 7,746 6,452
Income from investment securities 18 739 3,990
Income from investment in real estate 19 1,194 8,988
Share of results of associates, net 7 )711( )1,550(
Net gain from foreign currencies 1,223 1,273
Other income 72 -
Total net income 41,719 42,851

EXPENSES
Staff costs 10,212 11,482
Depreciation 9 1,554 1,641
Other expenses 20 9,795 8,502
Total expenses 21,561 21,625
Profit before impairment allowances 20,158 21,226
Impairment provisions on financing assets 21.1 )5,203( )7,593(
Impairment provisions on investments 21.2 )3,750( )4,336(
PROFIT FOR THE YEAR 11,205 9,297
BASIC AND DILUTED EARNINGS PER SHARE (fils) 23 14.02 11.76

Abdulrazaq Al Qassim Khalid Al Mannai Hassan Jarrar

Chairman Vice Chairman Chief Executive Officer

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
46
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Cash Flows

For the year ended 31 December 2015

2015 2014
Note BD’000 BD’000

OPERATING ACTIVITIES
Profit for the year 11,205 9,297
Adjustments for non-cash items:
Depreciation 9 1,554 1,641
Impairment provisions on financing assets 21.1 5,203 7,593
Impairment provisions on investments 21.2 3,750 4,336
Impairment charge / (Reversal of impairment) / on investment in real estate 19 339 (3,617)
Gain on sale of equity type instruments carried at fair value through equity 18 - (1,946)
Gain on sale of investment in real estate 19 (1,166) (4,951)
Share of results of associates 7 711 1,550
Gain on disposal of property and equipment (72) -
Dividends from investment in associates - (70)
Operating profit before changes in operating assets and liabilities 21,524 13,833
Working capital adjustments:
Mandatory reserve with Central Bank of Bahrain (3,010) 1,685
Financing assets (71,256) (64,808)
Ijarah Muntahia Bittamleek (19,165) (15,021)
Other assets (8,885) (498)
Customers’ current accounts 3,821 31,491
Other liabilities 102 2,911
Placements from financial institutions 17,946 (19,574)
Customers’ investment accounts 48,859 (50,893)
Net cash used in operating activities (10,064) (100,874)

INVESTING ACTIVITIES
Purchase of investment in real estate (1,092) -
Disposal of investment in real estate 11,980 7,799
Dividends from investment in associates - 70
Purchase of investment securities (52,546) (50,229)
Purchase of property and equipment (1,481) (1,715)
Disposal of property and equipment 506 40
Proceeds from disposal of investment securities 43,382 31,849
Net cash from / (used in) investing activities 749 (12,186)

FINANCING ACTIVITIES
Rights issue 19,888 -
Dividends paid (4) (1)
Net cash from / (used in) financing activities 19,884 (1)
NET CHANGE IN CASH AND CASH EQUIVALENTS 10,569 (113,061)
Cash and cash equivalents at 1 January 89,630 202,691
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 100,199 89,630
Cash and cash equivalents at year end comprise of:
Cash on hand 3 12,011 9,048
Balances with CBB, excluding mandatory reserve deposits 3 4,936 4,295
Balances with banks and other financial institutions 3 10,102 7,720
Placements with financial institutions with original maturities less than 90 days 4 73,150 68,567
100,199 89,630

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
47
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Changes in Owners’ Equity

For the year ended 31 December 2015

Shares
under Reserves Equity
employ- Retained attribut-
ee Real Invest- earnings / able Non-
share Share estate ments (accumu- to owners con- Total
Share Treasury incentive premi- Statutory General fair value fair value lated Total of the trolling owners’
capital shares scheme um reserve reserve reserve reserve losses) reserves parent interest equity
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Balance at 1 January 2015 93,967 (563) - - 11,809 1,000 7,361 1,101 (35,591) (14,320) 79,084 11 79,095
Profit for the year - - - - - - - - 11,205 11,205 11,205 - 11,205
Shares issued during the year 940 - )940( - - - - - - - - - -
Shares allocated during the year - - 61 30 - - - - - - 91 - 91
Rights issue 17,094 - - 2,794 - - - - - - 19,888 - 19,888
Write off of accumulated losses )14,560( - - )30( )11,809( )1,000( - - 27,399 14,590 - - -
Net movement in investments fair
value reserve - - - - - - - )480( - )480( )480( - )480(
Net movement in real estate fair
value reserve - - - - - - )276( - - )276( )276( - )276(
Transfer of profit to statutory
reserve - - - - 1,121 - - - )1,121( - - - -
Net movement in non-controlling
interest - - - - - - - - - - - )11( )11(
Balance at 31 December 2015 97,441 (563) (879) 2,794 1,121 - 7,085 621 1,892 10,719 109,512 - 109,512

Balance at 1 January 2014 93,967 (563) - - 10,879 1,000 11,301 4,248 (43,958) (16,530) 76,874 1,242 78,116
Profit for the year - - - - - - - - 9,297 9,297 9,297 - 9,297
Net movement in investments fair
value reserve - - - - - - - (3,147) - (3,147) (3,147) - (3,147)
Net movement in real estatefair
value reserve - - - - - - (3,940) - - (3,940) (3,940) - (3,940)
Transfer of profit tostatutory
reserve - - - - 930 - - - (930) - - - -
Net movement in non-controlling
interest - - - - - - - - - - - (1,231) (1,231)
Balance at 31 December 2014 93,967 (563) - - 11,809 1,000 7,361 1,101 (35,591) (14,320) 79,084 11 79,095

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
48
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Sources and Uses of Good Faith Qard Fund

For the year ended 31 December 2015

Funds
Qard Hasan available for
receivables Qard Hasan Total
BD’000 BD’000 BD’000
Balance at 1 January 2015 80 48 128
Uses of Qard fund
Marriage 9 (9) -
Others (Waqf) 9 (9) -
Total uses during the year 18 (18) -
Repayments (38) 38 -
Balance at 31 December 2015 60 68 128
Balance at 1 January 2014 79 49 128
Uses of Qard fund
Marriage 22 (22) -
Others (Waqf) 3 (3) -
Total uses during the year 25 (25) -

Repayments (24) 24 -
Balance at 31 December 2014 80 48 128

2015 2014
BD’000 BD’000
Sources of Qard fund
Contribution by the Bank 125 125
Donation 3 3
128 128

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
49
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Consolidated Statement of Sources and Uses of Zakah and Charity Fund

For the year ended 31 December 2015

2015 2014
BD’000 BD’000
Sources of zakah and charity funds
Undistributed zakah and charity funds at the beginning of the year 282 225
Non-Islamic income / late payment fee 616 659
Donations - 150
Total sources of zakah and charity funds during the year 898 1,034

Uses of zakah and charity funds

Philanthropic societies 103 441
Aid to needy families 323 311
Total uses of funds during the year 426 752
Undistributed zakah and charity funds at the end of the year 472 282

The attached notes 1 to 32 form an integral part of these consolidated financial statements.
50
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

1. INCORPORATION AND ACTIVITIES

Bahrain Islamic Bank B.S.C. (the “Bank”) was incorporated in the Kingdom of Bahrain in 1979 by Amiri Decree No.2 of 1979 and registered
with the Ministry of Industry and Commerce (“MOIC”) under Commercial Registration (CR) number 9900, to carry out banking and other
financial trading activities in accordance with the teachings of Islam (Shari’a). The Bank is licensed and regulated by the Central Bank
of Bahrain (“CBB”) and has a retail banking license. 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 is listed on the Bahrain Bourse.
The Bank’s registered office is at Building 722, Road 1708, Block 317, Manama, Kingdom of Bahrain.
The Bank has ten branches (2014: eleven), all operating in the Kingdom of Bahrain.
The consolidated financial statements include the financial statements of the Bank and its subsidiary (together the “Group”). The Bank
holds 100% of the share capital of Abaad Real Estate Company B.S.C. (c).
During the year, the Bank liquidated its 100% wholly owned subsidiaries BisB MMF Company B.S.C. (c) and BisB Money Market Fund.
Abaad Real Estate Company B.S.C. (c) (“Abaad”)
Abaad was incorporated in the Kingdom of Bahrain on 8 April 2003 with an authorised and fully paid-up share capital of BD 25 million.
Abaad has started operations during the year 2007. The main activity of Abaad is the custody of real estate investments (in accordance
with the Islamic Shari’a rules and principles).
The consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors issued on
21 February 2016.

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these consolidated financial statements are set out below. These
accounting policies have been consistently applied by the Group and are consistent with those used in the previous year.
a. New standards, amendments, and interpretations
New standards, amendments, and interpretations effective from 1 January 2015:
FAS 23 – Consolidation
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) issued amendments to FAS 23. These amendments
provide clarification and expand the scenarios for assessing control when an entity holds less than majority voting rights in an investee.
In particular, the concept of de-facto control has been introduced.
The amendment clarifies that where the IFI has less than majority voting rights in an investee, control may also exist through
(a) agreement with the entity’s other shareholders or the entity itself;
(b) rights arising from other contractual arrangements;
(c) the IFI’s voting rights (de facto power);
(d) potential voting rights; or
(e) a combination thereof.
Further, FAS 23 does not provide specific guidance for assessment of control over special purpose vehicles (SPVs) where the Bank /
Company has delegated power from its investors. The Bank / Company previously referred to the relevant guidance in International
Financial Reporting Standards (IFRSs). As a result of revision to IFRS 10 (consolidation), the Group has now also changed its accounting
policy for determining when it has control over SPVs to be in line with IFRS 10. The new control model focuses on the scope of decision
making authority over the SPV, rights held by other parties and the Bank’s / Company’s aggregate economic interest in the investee. In
particular, expanded guidance has been provided to assess when the Group’s power over an investee would be considered as those of
a principal (primarily for its own benefit) and when it would be considered to be that of an agent (primarily for benefit of its investors).
A principal will be required to consolidate the SPV where as an agent will not be required to consolidate the SPV.
The Group reassessed its control conclusion for its investees as of 1 January 2015, being the date of initial application of these amendments
and this has not resulted in any changes in the Group’s current conclusions on control and consolidation.
New standards, amendments and interpretations issued but not yet effective
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1
January 2016 and are expected to be relevant to the Group.
51
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

FAS 27 – Investments Accounts

FAS 27 Investments accounts was issued in December 2014 replacing FAS 5 – ‘Disclosures of Bases for Profit Allocation between Owner’s
Equity and Investment Account Holders’ and FAS 6 – ‘Equity of Investment Account Holders and their Equivalent’. This standard is
effective for financial periods beginning 1 January 2016. The adoption of this standard is not expected to have a significant impact on
the financial statements of the Group.
Early adoption
The Group did not early adopt any new standards during the year.
b. Statement of Compliance
The consolidated financial statements are prepared in accordance with the Financial Accounting Standards issued by the Accounting
and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”), and the Bahrain Commercial Companies Law. In accordance with
the requirements of AAOIFI, for matters for which no AAOIFI standard exists, the Group uses guidance from the relevant International
Financial Reporting Standards (“IFRS”) issued by International Accounting Standards Board.
c. Basis of preparation
The consolidated financial statements have been prepared on a historical cost basis, except for measurement of fair value of “investment
in real estate”, “equity type instruments carried at fair value through equity” and “equity type instruments carried at fair value through
statement of income” that have been measured at fair value.
The preparation of consolidated financial statements requires the use of certain critical accounting estimates. It also requires management
to exercise its judgement in the process of applying the Group’s accounting policies. Estimates and underlying assumptions are reviewed
on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future
periods affected. Management believes that the underlying assumptions are appropriate and the Group’s consolidated financial
statements therefore present the financial position and results fairly. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 2 dd.
The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at 31 December each year.
The consolidated financial statements have been presented in Bahraini Dinars (“BD”), being the functional currency of the Group’s
operations. All the values are rounded to the nearest BD thousand except when otherwise indicated.
d. Basis of consolidation
Subsidiaries are all entities (including special purpose entities) controlled by the Group. Control exists when the Group has the power,
directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Subsidiaries
are consolidated from the date on which control is transferred to the Group to the date that control seizes.
The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies.
All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated
in full.
e. Cash and cash equivalents
For the purpose of the consolidated cash flows statement, “cash and cash equivalents” consist of cash on hand, balances with the Central
Bank of Bahrain exluding mandatory reserve deposits, and balances with banks and other financial institutions, with original maturities
of 90 days or less.
f. Placements with financial institutions
Placements with financial institutions comprise commodity Murabaha receivables and Wakala receivables. Commodity Murabaha
receivables are stated net of deferred profits and provision for impairment, if any. Wakala receivables are stated at cost less provision for
impairment, if any.
g. Financing assets
Financing assets comprise Shari’a compliant financing contracts with fixed or determinable payments. These include financing provided
through Murabaha and Musharaka. Financing assets are recognised on the date at which they are originated and carried at their
amortised cost less impairment allowance, if any.
52
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

h. Murabaha financing
Murabaha financing consist mainly of deferred sales transactions (Murabaha) which are stated net of deferred profits and provisions for
impairment, if any.
Murabaha financing are sales on deferred terms. The Group arranges a Murabaha transaction by buying a commodity (which represents
the object of the murabaha) and then resells this commodity to a Murabeh (beneficiary) after computing a margin of profit over cost.
The sale price (cost plus profit margin) is repaid in instalments by the Murabeh over the agreed period.
i. Musharaka financing
Musharaka financing are stated at the fair value of consideration given less impairment, if any.
Musharaka financing are a form of capital partnership. These are stated at fair value of consideration given less any impairment.
Musharaka financing capital provided by the Group at inception in kind (if other than cash) is measured at the fair value of the assets.
If the valuation of the assets results in a difference between fair value and book value, such difference is recognised as profit or loss to
the Group.
j. Investment securities
Investment securities comprise debt type instruments carried at amortised cost, equity type instruments carried at fair value through
equity and equity type instruments carried at fair value through statement of income.
All investments securities, are initially recognised at fair value, being the value of the consideration given including transaction costs,
except in the case of investments carried at fair value through statement of income, where transaction costs are expensed in the
consolidated statement of income.
Debt type instruments carried at amortised cost
These are investments which have fixed or determinable payments of profit and capital. Subsequent to initial recognition, these are
measured at amortised cost using the effective profit method less impairment, if any. Any gain or loss on such instruments is recognised
in the consolidated statement of income when the instruments are de-recognised or impaired.
Equity type instruments carried at fair value through equity
Subsequent to acquisition, equity type instruments are remeasured at fair value, with unrealised gains and losses recognised in a
separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or
impairment, the cumulative gain or loss previously recorded in equity is recognised in the consolidated statement of income for the year.
Impairment losses on equity type instruments carried at fair value through equity are not reversed through the consolidated statement
of income and increases in their fair value after impairment are recognised directly in owners’ equity.
Equity type instruments carried at fair value through statement of income
These are measured at fair value with changes in fair value recognised in the consolidated statement of income.
k. Fair value
For investments traded in organised financial markets, fair value is determined by reference to quoted market bid prices at the close of
business on the reporting date.
For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current
market value of another instrument, which is substantially the same or is based on the assessment of future cash flows. The cash
equivalent values are determined by the Group at current profit rates for contracts with similar terms and risk characteristics.
Investments classified at fair value through equity where the Bank is unable to determine a reliable measure of fair value on a continuing
basis, such as investments that do not have a quoted market price or other appropriate methods from which to derive reliable fair values,
are stated at cost less impairment allowances.
l. Investment in associates
Associates are those enterprises in which the Group holds, directly or indirectly, more than 20% of the voting power and exercises
significant influence, but not control or joint control, over the financial and operating policies.
Investments in associates are initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s
share of the profit or loss of the investee after the date of acquisition. Distributions received from an investee reduce the carrying
amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate
interest in the investee arising from the changes in the investee’s equity. When the Group’s share of losses exceeds its interest in an
associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued, except to the extent that the
Group has incurred legal or constructive obligations or made payments on behalf of the associate.
53
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

l. Investment in associates (Continued)

The Group determines at each reporting date whether there is any objective evidence that the investments in associates are impaired. If
this is the case the Group calculates the amount of impairment as being the difference between the fair value of the associates and the
carrying value and recognises this amount in the consolidated statement of income.
The reporting dates of the associates 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. Latest available financial information is used to account for these under
the equity method of accounting.
m. Ijarah Muntahia Bittamleek
These are initially recorded at cost. Ijarah assets and Ijarah Muntahia Bittamleek mainly comprise of land and buildings and certain other
assets. Ijarah Muntahia Bittamleek is a lease whereby the legal title of the leased asset passes to the lessee at the end of the Ijarah (lease
term), provided that all Ijarah instalments are settled.
Depreciation is calculated on all Ijarah Muntahia Bittamleek other than land (which is deemed to have an indefinite life), at rates
calculated to write off the cost of each asset over its useful life.
n. Investment in real estate
Properties held for rental, or for capital appreciation purposes, or both, are classified as investment in real estate. Investments in real
estate are initially recorded at cost, being the fair value of the consideration given and acquisition charges associated with the property.
Subsequent to initial recognition, investments in real estate are re-measured to fair value and changes in fair value (only gains) are
recognised as property fair value reserve in the consolidated statement of changes in owners’ equity.
Losses arising from changes in the fair values of investment in real estate are firstly adjusted against the property fair value reserve to
the extent of the available balance and then the remaining losses are recognised in the consolidated statement of income. If there are
unrealised losses that have been recognised in the consoliated statement of income in previous financial periods, the current period
unrealised gain shall be recognised in the consolidated statement of income to the extent of crediting back such previous losses in the
consolidated statement of income. When the property is disposed of, the cumulative gain previously transferred to the property fair
value reserve, is transferred to the consolidated statement of income.
o. Property and equipment
Property and equipment is recognised at cost. The cost of additions and major improvements are capitalised; maintenance and repairs
are charged to the consolidated statement of income as incurred. Gains or losses on disposal are reflected in other income. Depreciation
is provided on the straight-line basis over the estimated useful lives of the assets.
The calculation of depreciation is on the following basis:

Buildings 25 to 35 years
Fixtures and fittings 5 years
Equipment 5 years
Furniture 5 years
p. Equity of investment accountholders
Equity of investment account holders are funds held by the Bank in unrestricted investment accounts, which it can invest at its own
discretion. The investment account holder authorises the Bank to invest the account holders’ funds in a manner which the Bank deems
appropriate without laying down anyrestrictions as to where, how and for what purpose the funds should be invested. The Bank charges
management fee (Mudarib fees) to investment account holders. Of the total income from investment accounts, the income attributable
to customers is allocated to investment accounts after setting aside provisions, reserves (Profit equalisation reserve and Investment risk
reserve) and deducting the Bank’s share of income as a Mudarib. The allocation of income is determined by the management of the Bank
within the allowed profit sharing limits as per the terms and conditions of the investment accounts. Administrative expenses incurred in
connection with the management of the funds are borne directly by the Bank and are not charged separately to investment accounts.
Investment accounts are carried at their book values and include amounts retained towards profit equalisation and investment risk
reserves, if any.
q. Investment risk reserve
Investment risk reserves are amounts appropriated out of the income of equity of investment accountholders, after allocating the
Mudarib share, in order to cater for future losses for equity of investment accountholders.
54
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

r. Profit equalisation reserve

The Group appropriates a certain amount in excess of the profit to be distributed to equity of investment accountholders after taking
into consideration the Mudarib share of income. This is used to maintain a certain level of return on investment for equity of investment
accountholders.
s. Zakah
Zakah is calculated on the Zakah base of the Group in accordance with FAS 9 issued by AAOIFI using the net invested funds method.
Zakah is paid by the Group based on the consolidated figures of statutory reserve, general reserve and retained earning balances
at the beginning of the year. The remaining Zakah is payable by individual shareholders. Payment of Zakah on equity of investment
accountholders and other accounts is the responsibility of investment accountholders.
t. Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event and it is probable
that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made
of the amount of obligation.
u. Dividends
Dividends to shareholders are recognised as liabilities in the year in which they are declared.
v. Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
- the right to receive cash flows from the asset have expired;
- the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and
rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the assets, but has transferred
control of the asset; or
- the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material
delay to a third party under a ‘pass through’ arrangement.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and
has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is
recognised to the extent of the Group’s continuing involvement in the asset.
Financial liabilities
A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired.
w. Treasury shares
These are own equity instruments of the Group which are reacquired through its own broker. Treasury shares are deducted from equity
and accounted for at weighted average cost. Consideration paid or received on the purchase, sale, issue or cancellation of the Group’s
own equity instruments is recognised directly in equity. No gain or loss is recognised in consolidated statement of income on the
purchase, sale, issue or cancellation of own equity instruments.
x. Earnings prohibited by Shari’a
The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is
credited to a charity fund where the Group uses these funds for social welfare activities.
y. Joint and self financed
Investments, financing and receivables that are jointly funded by the Group and the equity of investment accountsholders are classified
under the caption “jointly financed” in the consolidated financial statements. Investments, financing and receivables that are funded
solely by the Bank are classified under “self financed”.
z. Offsetting
Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position
when there is a legal or religious enforceable right to set off the recognised amounts and the Group intends to either settle on a net
basis, or to realise the asset and settle the liability simultaneously.
55
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

aa. Revenue recognition

Murabaha
Income from Murabaha financing contracts is recognised on a time-apportioned basis over the period of the conract using the effective
profit rate method. Income related to accounts that are 90 days overdue is excluded from the consolidated statement of income.
Musharaka
Profit or losses in respect of the Bank’s share in Musharaka financing transaction that commence and end during a single financial period
is recognised in the income statement at the time of liquidation (closure of the contract). Where the Musharaka financing continues for
more than one financial period, profit is recognised to the extent that such profits are being distributed during that period in accordance
with profit sharing ratio as stipulated in the Musharaka agreement.
Sukuk
Income from Sukuk is recognised using the effective profit rate over the term of the instrument.
Placements with financial institutions
Income on placements from financial institutions is recognised proportionately over the period of the contract based on the principal
amounts outstanding and the profit agreed with clients.
Ijarah Muntahia Bittamleek
Income from Ijarah Muntahia Bittamleek is recognised on a time-apportioned basis over the lease term. The Ijarah Muntahia Bittamleek
income is net of depreciation. Income related to non-performing (90 days overdue) Ijarah Muntahia Bittamleek is excluded from the
consolidated statement of income.
Dividends income
Dividends are recognised when the right to receive payment is established.
Income from Ijarah assets
Rental income is accounted for on a straight-line basis over the Ijarah term.
Fee and commission income
Fees and commission income that are integral to the effective profit rate on a financial asset carried at amortised cost are included in
the measurement of the effective profit rate of the financial asset. Other fees and commission income, including account servicing fees,
sales commission, management fees, placement and arrangement fees and syndication fees, are recognised as the related services are
performed.
Group’s share as a Mudarib
The Group’s share as a Mudarib for managing equity of investment accountholders is accrued based on the terms and conditions of the
related mudaraba agreements.
Income allocation
Income is allocated proportionately between equity of investment accountholders and shareholders on the basis of the average balances
outstanding during the year.
bb. Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated into Bahraini Dinars at the rate of exchange ruling at the consolidated statement of
financial position date. All differences are taken to the consolidated statement of income.
Translation gains or losses on non-monetary items carried at fair value are included in owners’ equity as part of the fair value adjustment.
cc. Impairment of financial assets
An assessment is made at each consolidated financial position date to determine whether there is objective evidence that a specific
financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset
is determined and any impairment loss, based on the assessment by the Group of the estimated cash equivalent value, is recognised
in the consolidated statement of income. Specific provisions are created to reduce all impaired financial contracts to their realisable
cash equivalent value. Financial assets are written off only in circumstances where effectively all possible means of recovery have been
exhausted. Impairment is determined as follows:
(a)For assets carried at fair value through equity, a significant or prolonged decline in fair value below its cost is an objective evidence
of impairment. If such evidence exists impairment is the difference between cost and fair value, less any impairment loss previously
recognised in the consolidated statement of income.
56
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

cc. Impairment of financial assets (Continued)

For equity type instruments carried at fair value through equity, impairment losses recognised in the consolidated statement of income
are subsequently reversed through equity.
For FVTE investments carried at cost less impairment due to the absence of reliable fair value, the Group makes an assessment of
whether there is an objective evidence of impairment for each investment by assessment of financial and other operating and economic
indicators. Impairment is recognised if the estimated recoverable amount is assessed to be below the cost of the investment.
(b) For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows
discounted at the original effective profit rate.
These include debt-type instruments, financing assets and receivables. For financial assets carried at amortised cost impairment is
measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted
as the assets’ original financial assets and the present value of estimated cash flows discounted at the assets’ original effective profit
rate. Losses are recognised in income statement and reflected in an allowance account. When a subsequent event causes the amount of
impairment loss to decrease, the impairment loss is reversed through the income statement. The Group considers evidence of impairment
for financial assets carried at amortised cost at both a specific assets and collective level.
All individually significant financial assets are assessed for specific impairment. All individually significant financial assets found not to
be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Financial assets
that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
dd. Use of estimates and judgements in preparation of the consolidated financial statements
In the process of applying the Group’s accounting policies, management has made estimates and judgements in determining the
amounts recognised in the consolidated financial statements. The most significant use of judgements and estimates are as follows:
Going concern
The Bank’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has
the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties
that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to
be prepared on the going concern basis.
Impairment
The Group assesses at each consolidated statement of financial position date whether there is objective evidence that a specific asset or
a group of assets may be impaired. An asset or a group of 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 have occurred after the initial recognition of the asset (an incurred “loss event”) and
that loss event(s) has an impact on the estimated future cash flows of the asset or the group of the assets that can be reliably estimated.
Collective impairment provision
Impairment is assessed collectively for losses on Islamic financing facilities that are not individually significant and for individually
significant facilities where the loss is incurred but not reported. Collective impairment is evaluated on each reporting date with each
portfolio receiving a separate review.
Fair valuation of investments
The determination of fair values of unquoted investments requires management to make estimates and assumptions that may affect
the reported amount of assets at the date of the consolidated financial statements. The valuation of such investments is based on the
fair value criteria explained in note 2.k above.
Nonetheless, the actual amount that is realised in a future transaction may differ from the current estimate of fair value and may still be
outside management estimates, given the inherent uncertainty surrounding valuation of unquoted investments.
Classification of investments
Management decides on acquisition of a financial asset whether it should be classified as equity type instrument carried at fair value
through equity or through statement of income.
Fair value of investment in real estate
The fair value of investment in real estate is determined by independent real estate valuation experts based on recent real estate
transactions with similar characteristics and locations.
57
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

ee. Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to
purchase or sell the asset.
ff. Customers’ current accounts
Balances in current (non-investment accounts are recognised when received by the Bank. The transactions are measured at the cash
equivalent amount received by the Bank at the time of transaction are measured at the cash equivalent amount received by the Bank at
the time of contracting. At the end of the accounting period, the accounts are measured at their book value.
gg. Employees’ benefits
Provision is made for amounts payable under the Bahrain Labour law applicable to non-Bahraini employees’ accumulated periods of
service at the date of the consolidated statement of financial position, subject to completion of a minimum period of employment.
Provision for this is made by calculating the notional liability had all employees left at the reporting date.
Bahraini employees of the Group are covered by contributions made to the Social Insurance Organization scheme as a percentage of the
employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed when due.
hh. Financial guarantees
Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because
a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee contract
is recognised from the date of its issue. The liability arising from a financial guarantee contract is recognised at the present value of any
expected payment, when a payment under the guarantee has become probable.
ii. Repossessed assets
In certain circumstances, property is repossessed following the foreclosure on financing facilities that are in default. Repossessed
properties are measured at the lower of carrying amount and fair value less costs to sell and reported within ‘other assets’.
jj. Statutory reserve
The Bahrain Commercial Companies Law 2001 requires that 10 per cent of the annual net profit be appropriated to a statutory reserve
which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 per cent of the paid up share
capital.

3. CASH AND BALANCES WITH BANKS AND CENTRAL BANK

2015 2014
BD’000 BD’000
Cash on hand 12,011 9,048
Balances with CBB, excluding mandatory reserve deposits 4,936 4,295
Balances with banks and other financial institutions 10,102 7,720
27,049 21,063
Mandatory reserve with CBB 34,065 31,055
61,114 52,118
The mandatory reserve with CBB is not available for use in the day-to-day operations.

4. PLACEMENTS WITH FINANCIAL INSTITUTIONS

Jointly Jointly
financed financed
2015 2014
BD’000 BD’000
Commodity Murabaha 59,116 30,502
Deferred profits (7) (15)
59,109 30,487
Wakala 14,041 38,080
73,150 68,567
58
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

5. FINANCING ASSETS
Jointly Jointly
financed financed
2015 2014
BD’000 BD’000
Murabaha (note 5.1) 371,881 308,710
Musharaka (note 5.2) 103,767 99,311
475,648 408,021
5.1 Murabaha
Jointly Jointly
financed financed
2015 2014
BD’000 BD’000
Tasheel 226,578 201,487
Tawarooq 128,068 125,701
Altamweel Almaren 41,008 -
Letters of credit refinance 18,343 17,208
Motor vehicles Murabaha 14,769 17,139
Credit cards 13,920 12,357
Others 230 4,008
442,916 377,900
Qard fund 60 80
Gross receivables 442,976 377,980
Deferred profits (46,808) (44,219)
Provision for impairment (24,287) (25,051)
371,881 308,710
Non-performing Murabaha financing outstanding as of 31 December 2015 amounted to BD 19,011 thousand (2014: BD 21,593
thousand).
The Group considers the promise made in the Murabaha to the purchase orderer as obligatory.
The composition of the Murabaha financing portfolio before provision for impairment by sector is as follows:

2015 2014
BD’000 BD’000
Commercial 51,094 85,971
Financial institutions 4,530 18,430
Others including retail 340,544 229,360
396,168 333,761
The Group exposures of Murabaha financing portfolio is concentrated in Middle East.
5.2 Musharaka

Jointly Jointly
financed financed
2015 2014
BD’000 BD’000
Musharaka in real estate 106,761 104,943
Provision for impairment (2,994) (5,632)
103,767 99,311

Non-performing Musharaka financing outstanding as of 31 December 2015 amounted to BD 4,938 thousand (2014: BD 19,003
thousand).
59
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

6. INVESTMENT SECURITIES
2015 2014
Self Jointly Self Jointly
financed financed Total financed financed Total
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000

i) Debt type instruments

Sukuk - carried at amortised cost
At 1 January - 85,808 85,808 - 41,705 41,705
Acquisitions - 52,546 52,546 - 50,229 50,229
Disposals and redemptions - (37,573) (37,573) - (6,126) (6,126)
At 31 December - 100,781 100,781 - 85,808 85,808
Provision for impairment (4,914) (4,914) - (3,974) (3,974)
Total net Sukuk - 95,867 95,867 - 81,834 81,834
ii) Equity type instruments
Quoted shares - at fair value through equity
At 1 January 1,393 - 1,393 25,418 - 25,418
Fair value change (374) - (374) (2,235) - (2,235)
Disposals - - - (16,941) - (16,941)
Write off - - - (4,849) - (4,849)
Total net 1,019 - 1,019 1,393 - 1,393
Unquoted shares - at cost less impairment
At 1 January 29,201 - 29,201 29,249 - 29,249
Disposals - - - (48) - (48)
Write off (4,238) - (4,238) - - -
At 31 December 24,963 - 24,963 29,201 - 29,201
Provision for impairment (5,418) - (5,418) (7,721) - (7,721)
Total net 19,545 - 19,545 21,480 - 21,480
Unquoted managed funds - at cost less impairment
At 1 January 36,541 - 36,541 43,808 - 43,808
Foreign currency
translation changes (301) - (301) (1,242) - (1,242)
Disposals (5,809) - (5,809) (6,025) - (6,025)
Write off (15,987) - (15,987) - - -
At 31 December 14,444 - 14,444 36,541 - 36,541
Provision for impairment (240) - (240) (17,687) - (17,687)
Total net 14,204 - 14,204 18,854 - 18,854
Quoted investments - carried at fair value through
statement of income
At 1 January - - - 866 - 866
Disposals - - - (866) - (866)
At 31 December - - - - - -
Total net investments securities 34,768 95,867 130,635 41,727 81,834 123,561
60
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

7. INVESTMENT IN ASSOCIATES
Self Self
financed financed
2015 2014
BD’000 BD’000
At 1 January 30,835 36,236
Share of results of associates, net (711) (1,550)
Share of changes in investee’s equity (366) (821)
Dividends received - (70)
Provision for impairment (1,642) (2,960)
At 31 December 28,116 30,835

Investments in associates comprise:

Country of
Name of associate Ownership % incorporation Nature of business
Takaful International Company B.S.C. was incorporated in 1989, and
Takaful International carries out Takaful and Retakaful activities in accordance with the
Company B.S.C.* 22.75% Bahrain teachings of Islamic Shari’a.

Liquidity Management Centre B.S.C. (c) was incorporated in 2002

as a bank, licensed and regulated by the Central Bank of Bahrain to
facilitate the creation of an Islamic inter-bank market that will allow
Liquidity Management Islamic financial services institutions to effectively manage their assets
Centre B.S.C. (c) 25.00% Bahrain and liabilities.

Arabian C Real Estate Company is a Kuwaiti Shareholding Company

incorporated in accordance with the Kuwaiti Commercial Companies
law, Decree No.15 of 1960, as amended and regulated by the Ministry
of Commerce & Industry of Kuwait. The company’s activity focuses on
real estate development and the overall management of a variety of
Arabian C Real Estate strategic investments in the real estate and infrastructure sectors in
Company 19.00% Kuwait GCC/MENA region.

Enjaz Property Development Company B.S.C.(c) is a closed joint stock

company incorporated in the Kingdom of Bahrain and is registered
Enjaz Property with the Ministry of Industry and Commerce since 6 February 2008
Development Company under commercial registration number 67713-1. The company is
B.S.C. (c) 32.76% Bahrain engaged in the purchase and sale of land and property development.

Al Dur Energy Investment Company is an exempt company with limited

liability incorporated in the Cayman Islands on 10 June 2009 and
operates under registration number 227032. The company operates
in the Kingdom of Bahrain with the sole purpose of holding a 15%
Al Dur Energy Investment indirect interest in a power and water plant project company, Al Dur
Company 29.41% Bahrain Power and Water Company B.S.C.(c), in the Kingdom of Bahrain.

* Takaful International Company B.S.C. is a listed company on the Bahrain Bourse. The latest available quoted price of BD 0.100 per share
was as of 22 April 2015, no further trades have taken place on the company’s shares since that date. The estimate fair value of the
investment based on this price is BD 1,422 thousand (2014: BD 2,062 thousand).
61
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

8. IJARAH MUNTAHIA BITTAMLEEK

2015 2014
Jointly financed Jointly financed
Avia-
Aviation tion
Build- related related
Land ings assets Others Total Land Buildings assets Others Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Cost:
At 1 January 44,305 65,112 7,876 10,762 128,055 40,588 56,058 7,287 9,101 113,034
Additions 12,094 56,553 8,033 4,960 81,640 6,824 37,766 589 2,548 47,727
Settlements (33,299) (16,287) (8,200) (4,966) (62,752) (3,107) (28,712) - (887) (32,706)
At 31 December 23,100 105,378 7,709 10,756 146,943 44,305 65,112 7,876 10,762 128,055

Depreciation:
At 1 January - 10,044 1,792 2,229 14,065 - 12,406 1,245 1,273 14,924
Charge for the year - 7,901 275 272 8,448 - 3,431 547 959 4,937
Relating to settled assets - (3,127) (1,791) (1,903) (6,821) - (5,793) - (3) (5,796)
At 31 December - 14,818 276 598 15,692 - 10,044 1,792 2,229 14,065
Provision for impairment (7,642) (2,213) - (3,335) (13,190) (9,175) (2,538) - - (11,713)

Net book value:

As at 31 December 15,458 88,347 7,433 6,823 118,061 35,130 52,530 6,084 8,533 102,277

Non-performing Ijarah Muntahia Bittamleek as of 31 December 2015 is BD 29,754 thousand (2014: BD 24,702 thousand).
Ijarah rental receivable comprises of both rental on Ijarah assets and depreciation charge on Ijarah Muntahia Bittamleek assets which is
fully receivable from the customers.

9. PROPERTY AND EQUIPMENT

2015

Fixture and Work in

Lands Buildings fitting Equipment Furniture progress Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Cost:
At 1 January 7,143 7,387 3,393 9,065 823 410 28,221
Additions / Transfer - 264 302 763 46 106 1,481
Disposals / Transfer (388) - - (46) - - (434)
At 31 December 6,755 7,651 3,695 9,782 869 516 29,268

Depreciation:
At 1 January - 1,439 2,517 6,550 614 - 11,120
Provided during the year - 260 336 889 69 - 1,554
Relating to disposed assets - - - (46) - - (46)
At 31 December - 1,699 2,853 7,393 683 - 12,628
Net Book Value 6,755 5,952 842 2,389 186 516 16,640
62
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

9. PROPERTY AND EQUIPMENT (Continued)

2014
Fixture and Work in
Lands Buildings fitting Equipment Furniture progress Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Cost:
At 1 January 7,183 4,535 2,906 8,008 677 3,269 26,578
Additions - 2,884 487 1,057 146 - 4,574
Disposals / Transfer (40) (32) - - - (2,859) (2,931)
At 31 December 7,143 7,387 3,393 9,065 823 410 28,221

Depreciation:
At 1 January - 1,255 2,162 5,566 528 - 9,511
Provided during the year - 216 355 984 86 - 1,641
Relating to disposed assets - (32) - - - (32)
At 31 December - 1,439 2,517 6,550 614 - 11,120
Net Book Value 7,143 5,948 876 2,515 209 410 17,101

10. INVESTMENT IN REAL ESTATE

Self financed
2015 2014
BD’000 BD’000
Land 41,006 51,339
Buildings 2,595 2,595
43,601 53,934

2015 2014
BD’000 BD’000
At 1 January 53,934 58,219
Capitalized expediture 1,092 257
Disposal (10,814) (7,799)
Fair value changes (611) 3,257
At 31 December 43,601 53,934
Investment in real estate comprises properties located in the Kingdom of Bahrain and the United Arab Emirates.
Investment in real estate held for capital appreciation is stated at fair value as at 31 December, which has been determined based
on valuations performed by independent third party property valuers who have the qualification and experience of valuing similar
properties in the same location.
63
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

11. OTHER ASSETS

2015 2014
BD’000 BD’000

Repossessed assets 5,245 -

Receivables 4,761 2,012
Staff advances 1,324 1,177
Prepaid expenses 696 658
Other 1,665 881
13,691 4,728

12. OTHER LIABILITIES

2015 2014
BD’000 BD’000
Managers’ cheques 3,786 4,150
Payable to vendors 1,626 3,039
Accrued expenses 3,312 3,334
Life insurance (Takaful) fees payable 1,844 1,928
Dividends payable 802 806
Zakah and charity fund 472 282
Other 4,774 2,979
16,616 16,518

13. EQUITY OF INVESTMENT ACCOUNTHOLDERS

As equity of investment accountholders’ funds are commingled with the Group’s funds for investment, no priority is granted to any party
for the purpose of investments and distribution of profits.
The Group maintains an investment risk reserve amounting to BD 227 thousand (2014: BD 103 thousand) and maintains a profit
equalisation reserve amounting to BD 995 thousand (2014: BD 395 thousand).
The Group’s share, as Mudarib, in the profits of equity of investment accountholders is up to a maximum of 85% (2014: 85%).
13.1 Profit Distribution by Type of Account
The following table represents the distribution of profit by type of equity of investment accountholders:

2015 2014
Percentage Percentage
of funds Distributed of funds Distributed
Account Type invested profit rate invested profit rate

Defined deposits 85% 0.94% 85% 1.29%

Specific investment deposits 85% 1.73% 85% 1.89%
Investment certificates 85% 3.73% 85% 3.50%
Savings accounts 45% 0.12% 45% 0.23%
Iqra 90% 1.50% 90% 2.16%
Tejoori 45% 0.13% 45% 0.23%
Vevo 45% 0.12% 45% 0.22%
64
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

13. EQUITY OF INVESTMENT ACCOUNTHOLDERS (Continued)

13.2 Equity of investment accountholders balances

2015 2014
BD’000 BD’000
Type of Equity of Investment Accountholders
Customer investment accounts
Balances on demand 306,918 246,880
Contractual basis 308,542 319,721
615,460 566,601

13.3 Equity of Investment Accountholders Reserves

2015 Movement 2014
BD’000 BD’000 BD’000
Profit equalisation reserve 995 600 395
Investment risk reserve 227 124 103

13.4 Return on equity of investment accountholders

2015 2014
BD’000 BD’000

Gross return to equity of investment accountholders 22,306 23,519

Profit equalization reserve (600) (100)
Group’s share as a Mudarib (16,395) (16,092)
Investment risk reserve (124) (40)
Net Return on equity of investment accountholders 5,187 7,287

14. OWNERS’ EQUITY

2015 2014
BD’000 BD’000
(i) Share capital
a) Authorised
2,000,000,000 shares (2014: 2,000,000,000 shares) of BD 0.100 each 200,000 200,000

b ) Issued and fully paid up

974,412,625 shares (2014: 939,673,499 shares) of BD 0.100 each 97,441 93,967

Rights issue
The shareholders in their extra-ordinary general meeting held on 27 October 2015 resolved to increase the Bank’s paid up capital by BD
17.10 million through rights issue to existing shareholders at a price of BD 0.117 per share. The Bank collected subscriptions of BD 20
million.
Capital reduction
The shareholders in their extra-ordinary general meeting held on 27 October 2015 resolved to write-off accumulated losses of BD 27,399
thousand as of 30 June 2015, by adjusting BD 11,809 thousand against statutory reserve, BD 1,000 thousand against general reserve, BD
30 thousand against share premium and BD 14,560 thousand against paid up share capital thereby reducing the Bank’s paid up share
capital 15.34% (reduction of 2 shares for each 13 shares approximately) from BD 94,907 thousand to BD 80,347 thousand.
65
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

14. OWNERS’ EQUITY (Continued)

Shares under employee share incentive scheme

At the ordinary general meeting for the year 2014 which was held on 23 March 2015, and in pursuant to CBB’s Sound Remuneration
Practices, the Employee Share Incentive Scheme (the “Scheme”) was approved. As a result, 9,396,735 ordinary shares amounting to
BD 940 thousand were issued during the year. These unallocated shares under the Scheme are deducted from equity. The Bank has
allocated 603,537 ordinary shares with a nominal value of BD 61 thousand to the employees under this Scheme, which has resulted in
share premium of BD 30 thousand. The allocated shares under the Scheme are entitled to cash and stock dividends.

(ii) Treasury Shares

2015 2014
Number of Shares BD’000 BD'000
At 31 December 3,620,609 563 563

2015
BD’000
Cost of treasury shares 563
Market value of treasury shares 518

The treasury shares as a percentage of total shares in issue is 0.39%.

Owners’ equity instruments which are reacquired are deducted from equity. No gain or loss is recognised in the consolidated statement
of income on the purchase, sale, issue or cancellation of the Group’s own equity instruments.
(iii) Reserves
Statutory reserve
As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year should
be transferred to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of
paid up share capital. A transfer has been made of BD 1,121 thousand (2014: BD 930) representing 10% of the profit for the year BD
11,205 thousand (2014: BD 9,297 thousand). The reserve is not distributable except in such circumstances as stipulated in the Bahrain
Commercial Companies Law and following the approval of CBB.
General reserve
The general reserve is established in accordance with the articles of association of the Bank and is distributable following a resolution of
shareholders at a general meeting and the approval of CBB. The Group may transfer any amount to the general reserve, as approved by
the shareholders at a general meeting, out of the net income for the year after appropriating statutory reserve.
Real estate fair value reserve
This represents cumulative unrealised revaluation gains on investment in real estate. This reserve is transferred to the retained earnings
upon sale of the investment in real estate.
Investment fair value reserve
This represents the net unrealised gains or losses on equity investments relating to self financed investments.
(iv) Additional information on shareholding pattern
1) Names and nationalities of the major shareholders and the number of shares in which they have an interest of 5% or more of
outstanding shares:

2015 2014
Number of Number of
Names Nationality shares % holding shares % holding
National Bank of Bahrain Bahraini 283,155,923 29.06% 242,038,206 25.76%
Social Insurance Organisation Bahraini 141,579,292 14.53% 121,113,560 12.89%
Social Insurance Organisation Military Pension Fund Bahraini 141,579,293 14.53% 121,113,559 12.89%
Islamic Development Bank Saudi 140,497,329 14.42% 165,956,945 17.66%
General Council of Kuwaiti Awaqaf Kuwaiti 69,932,530 7.18% 68,013,739 7.24%
66
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

14. OWNERS’ EQUITY (Continued)

2) The Group has only one class of shares and the holders of these shares have equal voting rights.
3) Distribution schedule of shares, setting out the number and percentage of holders in the following categories:

2015 2014
% of total % of total
Number of Number of outstanding Number of Number of outstanding
shares shareholders shares shares shareholders shares

Less than 1% 140,197,699 3,376 14.39% 153,552,651 3,383 16.40%

1% up to less than 5% 57,470,559 3 5.90% 67,884,839 3 7.22%
5% up to less than 10% 69,932,530 1 7.18% 68,013,739 1 7.23%
10% up to less than 50% 706,811,837 4 72.53% 650,222,270 4 69.15%
974,412,625 3,384 100.00% 939,673,499 3,391 100.00%
Details of Directors’ interests in the Group’s shares as at the end of the year were:
Categories:
2015 2014
No. of No. of No. of No. of
shares directors shares directors
Less than 1% 567,702 5 400,000 4

The following is the number of shares, and percentage of shareholding of Directors, Shari’a supervisory members and senior management
(Assistant General Managers and above):

2015 2014
No. of Percentage of No. of Percentage of
shares Shareholding shares Shareholding
Directors 567,702 0.058% 400,000 0.043%
Shari'a supervisory members 169,158 0.017% 199,812 0.021%
Senior management 603,537 0.062% - -
1,340,397 0.137% 599,812 0.064%
67
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

15. COMMITMENTS AND CONTINGENT LIABILITIES

Credit related commitments
These include commitments to enter into financing contracts which are designed to meet the requirements of the Group’s customers.
Letters of credit and guarantees commit the Group to make payments on behalf of customers.
The Group has the following credit related commitments and contingent liabilities on behalf of customers:

2015 2014
BD’000 BD’000
Letters of credit and acceptances 2,918 2,775
Guarantees 40,971 18,760
Operating lease commitments * 1,238 742
45,127 22,277
* T
 he Group has entered into commercial leases for certain branches. The remaining average period of these leases ranges between
1 month and 3 years with renewal terms included in the contracts. Renewals are at the option of the Bank. There are no restrictions
placed upon the lessee by entering into these leases.
Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows:

2015 2014
BD’000 BD’000
Within one year 70 225
After one year but not more than five years 1,168 517
1,238 742

16. CAPITAL ADEQUACY

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 Sukuk etc. No changes were made in the objectives, policies and processes from
the previous years.
The Group’s capital structure primarily consists of its paid-up capital, including share premium and reserves. From a regulatory perspective,
a significant amount of the Group’s capital is classified as Tier 1 as defined by the CBB, i.e. most of the capital is of a permanent nature.
The Group’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business.
Current and future capital requirements are determined on the basis of financing facilities growth expectations for each business group,
expected growth in off-balance sheet facilities and future sources and uses of funds.
The Central Bank of Bahrain issued the final regulation to give effect to the Basel IIII framework which came into effect on 1 January
2015. The Basel IIII framework significantly revises the definition of regulatory capital. The framework emphasis common equity as the
predominant component of tier 1 capital by adding a minimum common equity tier 1 (CET 1) capital ratio. The Basel IIII rules also require
institutions to hold capital buffers. For the purpose of calculating CET 1 capital, the regulatory adjustments (deductions) including
amounts above the aggregate limit for significant investments in financial institutions, mortgage servicing rights, and deferred tax
assets from temporary differences, will be deducted from CET1 over a phased manner to be fully deducted by 1 January 2019. The Bank’s
current capital position is sufficient to meet the new regulatory capital requirements.
68
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

16. CAPITAL ADEQUACY (Continued)

The classification of the Group’s capital in accordance with the regulatory requirements is as follows:

2015 2014
BD’000 BD’000
Tier 1 Capital 102,571 74,727
Tier 2 Capital 14,426 19,722
Total Capital Base 116,997 94,449
To assess its capital adequacy requirements in accordance with the CBB requirements, the Group adopts the Standardised Approach for
its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardised Measurement Approach for its Market Risk. The capital
requirements for these risks are as follows:

2015 2014
BD’000 BD’000
Risk weighted exposure:
Total Credit Risk Weighted Assets 587,023 532,703
Total Market Risk Weighted Assets 15,589 15,769
Total Operational Risk Weighted Assets 57,153 56,583
Total Regulatory Risk Weighted Assets 659,765 605,055
Capital Adequacy Ratio 17.73% 15.61%
Tier 1 Capital Adequacy Ratio 15.55% 12.35%
Minimum requirement 12.5% 12%

The capital adequacy ratio as at 31 December 2015 has been calculated in accordance to Basel IIII; where as at 31 December 2014 the
ratio was calculated in accordance to Basel III.

17. INCOME FROM FINANCING

2015 2014
BD’000 BD’000
Income from Murabaha financing 19,889 17,870
Income from placements with financial institutions 139 515
Income from Musharaka financing 6,781 5,474
Income from Ijarah Muntahia Bittamleek 6,721 4,843
33,530 28,702

18. INCOME FROM INVESTMENT SECURITIES

2015 2014
BD’000 BD’000
Dividend income 739 2,044
Gain on sale of equity type instruments - 1,946
739 3,990
69
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

19. INCOME FROM INVESTMENT IN REAL ESTATE

2015 2014
BD’000 BD’000
Gain on sale 1,166 4,951
Rental income 367 420
(Impairment charge) / reversal of impairment (339) 3,617
1,194 8,988

20. OTHER EXPENSES

2015 2014
BD’000 BD’000
Card Centre expenses 1,865 1,445
Marketing and advertisement expenses 1,678 1,124
Premises and equipement expenses 1,259 1,116
Information technology related expenses 1,016 830
Communication expenses 780 772
Professional services 620 1,018
Board Remunerations * 535 -
Board of directors sitting fees 125 248
Donations - 150
Shari’a committee fees & remuneration 45 80
Others 1,872 1,719
9,795 8,502

* No provision for Board Remuneration made in 2014 as the 2013 provision was utilised for 2014 remuneration.
21. IMPAIRMENT PROVISIONS
21.1 Impairment provisions on financing assets
Specific impairment Collective impairment Total

2015 2014 2015 2014 2015 2014

BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
At 1 January 31,578 30,672 10,818 4,173 42,396 34,845
Charge for the year 7,003 8,659 1,119 6,645 8,122 15,304
Recoveries & write backs )2,919( (7,711) - - )2,919( (7,711)
4,084 948 1,119 6,645 5,203 7,593
Amounts written off against provision )6,517( (42) )611( - )7,128( (42)
At 31 December 29,145 31,578 11,326 10,818 40,471 42,396
70
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

21. IMPAIRMENT PROVISIONS (Continued)

The above impairment provision relates to the following:

2015 2014
BD’000 BD’000
Murabaha financing 24,287 25,051
Musharaka financing 2,994 5,632
Ijarah Muntahia Bittamleek 13,190 11,713
40,471 42,396

21.2 Impairment provisions on investments

2015 2014
BD’000 BD’000
At 1 January 33,418 35,096
Charge for the year * 4,925 6,657
Recoveries & write backs )1,175( (2,321)
3,750 4,336

Amounts written off against provision )21,817( (4,849)

Foreign currency translation changes )353( (1,165)
At 31 December * 14,998 33,418
* I mpairment charge includes BD 1,642 thousand for impairment provision on investment in associate (2014: 2,960 thousand).
The fair value of collateral that the Group holds relating to non performing facilities at 31 December 2015 amounts to BD 112,863
thousand (31 December 2014: BD 65,298 thousand). The collateral consists of cash, securities and properties. The utilisation of the
above collaterals will be on a customer by customer basis and will be limited to the customer’s total exposure.
The Group has taken all the provision allocated to the non performing assets to their own capital. Hence the equity of investment
accountholders was not charged for any provision for impairment.
22. ZAKAH
The total Zakah payable as of 31 December 2015 amounted to BD 1,289 thousand (2014: BD 444 thousand) of which the Bank has
nil Zakah payable (2014: BD nil ) based on the statutory reserve, general reserve and retained earning as at 1 January 2015. The Zakah
balance amounting to BD 1,289 thousand or 1.3 fils per share (2014: BD 444 thousand or 0.5 fils per share) is due and payable by the
shareholders.
23. EARNINGS PER SHARE
Basic and diluted earnings per share is calculated by dividing the net profit or loss for the year by the weighted average number of shares
during the year as follows:

2015 2014
Profit for the year in BD’000 11,205 9,297
Weighted average number of shares 799,408 790,510
Basic and diluted earnings per share (fils) 14.02 11.76
Basic and diluted earnings per share are the same since the Group has not issued any instruments that would have a dilutive effect.
71
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

24. RELATED PARTY TRANSACTIONS

Related parties comprise of major shareholders, directors of the Bank, senior management, close members of their families, entities
owned or controlled by them and companies affiliated by virtue of common ownership or directors with that of the Bank. The transactions
with these parties were made on commercial terms.
The significant balances and transactions with related parties at 31 December were as follows:

Directors
Associates and
and joint related Senior
Shareholders ventures entities management Total
2015 BD’000 BD’000 BD’000 BD’000 BD’000
Assets
Financing assets - - 2,074 17 2,091
Investment in associates 28,116 - - 28,116
Other assets - - - 201 201
Liabilities and Equity of investment accountholders
Placements from financial institutions 37,700 - - - 37,700
Customers’ current accounts - 968 520 247 1,735
Other liabilities - 1,844 - - 1,844
Equity of investment accountholders 41,567 275 1,255 917 44,014

Income
Income from financing - 4 151 1 156
Share of results of associates - (711) - - (711)
Return on equity of investment accountholders (472) (1) (1) (27) (501)
Expense on placements from financial institutions (248) - - - (248)
Expenses
Other expenses - - (705) (1,009) (1,714)

Associates Directors
and joint and related Senior
Shareholders ventures entities management Total
2014 BD’000 BD’000 BD’000 BD’000 BD’000
Assets
Placements with financial institutions - 4,734 - - 4,734
Financing assets - - 2,339 - 2,339
Investment in associates - 30,835 - - 30,835
Other assets - - 64 194 258
Liabilities and Equity of investment accountholders
Customers’ current accounts - 1,277 594 49 1,920
Other liabilities - 1,928 - - 1,928
Equity of investment accountholders 45,639 425 457 591 47,112

Income
Income from financing - 112 243 - 355
Share of results of associates - (1,550) - - (1,550)
Return on equity of investment accountholders (990) (7) (6) (21) (1,024)
Expenses
Other expenses - - (328) (825) (1,153)
72
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

24. RELATED PARTY TRANSACTIONS (Continued)

Compensation of the key management personnel is as follows:

Key management personnel includes staff at the grade of assistant general manager or above.

2015 2014
BD’000 BD’000
Short term employee benefits 849 688
Other long term benefits 160 137
1,009 825

25. RISK MANAGEMENT

Introduction
Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring,
subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each
individual within the Group is accountable for the risk exposures relating to his or her responsibilities. These risks and the processes to
mitigate these risks have not significantly changed from the previous year.
The Group is exposed mainly to credit, liquidity, market and operational risks.

Risk management objectives

The risk management philosophy of the Group is to identify, monitor and manage the various dimensions of risk with the objective of
protecting asset values and income streams such that the interest of the Group’s shareholders (and others to whom the Group owes a
liability) are safeguarded, while maximising the returns intended to optimise the Group’s shareholder return while maintaining it’s risk
exposure within self-imposed parameters.
The Group has defined its risk appetite within the parameters of its risk strategy. The Group reviews and realigns its risk appetite as per
the evolving business plan of the Group with changing economic and market scenarios. The Group also assesses its tolerance for specific
risk categories and its strategy to manage these risks.
Risk appetite of the Group is articulated in terms of the following dimensions:
1. Adequate capital level;
2. Stable profitability and growth;
3. Sufficient liquidity; and
4. Sound reputation.

Structure and Organization of the Risk Management Function

Risk Management Structure includes all levels of authorities, organizational structure, people and systems required for the effective
functioning of risk management processes in the Group. The responsibilities associated with each level of the risk management structure
and authorities include the following:
The Board retains ultimate responsibility and authority for all risk matters, including:
a. Establishing overall policies and procedures; and
b. Delegating authority to the Executive Committee, Credit and Investment Committee, Chief Executive Officer and further delegation
to the management to approve and review.
Executive Committee (EC) comprises of three designated members of the Board of Directors. The Executive Committee is delegated
authority by the Board to manage the ongoing activities of the Group. Decisions are taken by the Executive Committee either at periodic
meetings or if the need arises, by circulation.
Credit and Investment Committee (CIC): As delegated by the Board of Directors and as per approved terms of reference, the Committee
has been delegated with authorities and responsibilities including, approving extension or renewal of credit facilities, granting temporary
excesses to customers with credit facilities approved by the Board, approving early repayments of facilities, monitoring the performance
and quality of the Group’s credit portfolio and overseeing the administration and effectiveness of and compliance with, the Group’s
credit policies through the review of such processes, reports and other information as it deems appropriate.
73
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

25. RISK MANAGEMENT (Continued)

Risk Measurement and Reporting Systems

Based on the risk appetite, the Group has put in place various limits. These limits have been approved by the Board. Any limit breach is
reported by the Risk Management Department (RMD) to the Credit Committee. The limits are reviewed and revised at least annually (or
earlier if required).
a) Credit Risk
Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial
loss.

Credit Risk Mitigation

Credit risk mitigation refers to the use of a number of techniques, such as obtaining collateral and guarantees to mitigate the credit risks
that the Group is exposed to. Credit risk mitigants reduce the credit risk by allowing the Group to protect against counterparty non-
performance of credit contracts through collaterals, netting agreements and guarantees.
Generally, the Group extends credit facilities only where supported by adequate tangible collateral security and/or audited financial
statements. Facilities may be considered without adequate tangible collateral security when audited financial statements reveal
satisfactory financial position/repayment ability and the facilities are properly structured and supported by assignments, guarantees,
etc. as appropriate.
In general, personal guarantees of the partners/promoters/directors of the borrowing entity are obtained in support of credit facilities.
In all cases, a statement of net worth of the guarantor is to be compiled by the Account Officer, so that adequate information is available
at a future date in case the guarantees need to be enforced.
Notwithstanding the above, when facilities are extended to family owned limited liability entities, the following is normally obtained;
a. Collateral security, fully covering the exposure; or
b.Joint and several guarantees of shareholders directly involved in managing the entity as well as of shareholders owing at least 80%
of the shares of the entity.
Third party guarantees in support of credit facilities are accepted only after review and approval of appropriate guarantor lines.
(i) Gross maximum exposure to credit risk
The market value of tangible collateral security is properly evaluated by the Group approved surveyors (for properties) or based on
publicly available quotations. Only the amount of such security equivalent to the exposure is taken into account while considering credit
facilities.
The CIC periodically reviews and approves the value of securities. It has also approved a list of acceptable securities.
The table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial
position, including credit related commitments. The figures represent gross exposure, without taking account of any collateral held or
other credit enhancements.

2015 2014
BD’000 BD’000
Balances with banks and Central Bank 49,103 43,070
Placements with financial institutions 73,150 68,567
Financing assets 502,929 438,704
Ijarah Muntahia Bittamleek 131,251 113,990
Ijarah rental receivables 15,692 14,065
Investment securities 100,781 85,808
872,906 764,204
Letters of credit, guarantees and acceptances 43,889 21,535
74
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

25. RISK MANAGEMENT (Continued)

a. Credit Risk (Continued)
(ii) Risk concentrations of the maximum exposure to credit risk
Concentrations of credit risk 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 of credit risk indicate the relative sensitivity of the Group’s
performance to developments affecting a particular industry or geographic location. The Group seeks to manage its credit risk exposure
through diversification of financing activities to avoid undue concentrations of risks with individuals or groups of customers in specific
locations or businesses.
The distribution of the Group’s assets, liabilities, equity of investment accountholders, commitments and contingent liabilities by
geographic region and industry sector is as follows:

Liabilities and equity Commitments and

Assets of investment accountholders contingent liabilities
31 December 31 December 31 December 31 December 31 December 31 December
2015 2014 2015 2014 2015 2014
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Geographical region
Middle East 967,215 867,636 865,149 788,901 45,127 22,277
Rest of Asia - - 917 913 - -
North America 5,241 4,350 68 195 - -
Europe 3,892 3,221 702 6,103 - -
976,348 875,207 866,836 796,112 45,127 22,277

Industry sector
Trading and manufacturing 60,541 43,824 26,318 27,141 13,267 13,267
Aviation 518 8,241 10,768 17,114 701 701
Real Estate 236,509 246,215 20,509 15,916 1,817 1,817
Banks and financial institutions 126,933 119,083 109,900 109,928 646 646
Personal / Consumer 333,181 240,365 426,838 390,264 1,403 1,403
Government Organization 117,266 75,590 101,252 92,540 - -
Others 101,400 141,889 171,251 143,209 27,293 27,293
976,348 875,207 866,836 796,112 45,127 45,127

(iii) Credit quality per class of financial assets

The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows the credit quality by
class of asset, based on the Group’s credit rating system. Amounts reported are gross of any provision for impairment.

31 December 2015
Neither past due
nor impaired Past due
High Standard but not Individually
grade grade impaired impaired Total
BD'000 BD'000 BD'000 BD'000 BD'000

Murabaha 9,197 332,055 24,385 30,531 396,168

Musharaka 372 86,574 12,410 7,405 106,761
Ijarah Muntahia Bittamleek - 80,055 10,350 40,846 131,251
Ijarah rental receivables - 12,148 1,846 1,698 15,692
9,569 510,832 48,991 80,480 649,872
75
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

25. RISK MANAGEMENT (Continued)

a. Credit Risk (Continued)
(iii) Credit quality per class of financial assets (Continued)

31 December 2014
Neither past due
nor impaired Past due
High Standard but not Individually
grade grade impaired impaired Total
BD'000 BD'000 BD'000 BD'000 BD'000

Murabaha 1,257 274,236 21,637 36,631 333,761

Musharaka 1,117 66,856 13,251 23,719 104,943
Ijarah Muntahia Bittamleek - 72,234 6,742 35,014 113,990
Ijarah rental receivables - 9,119 906 4,040 14,065
2,374 422,445 42,536 99,404 566,759

Restructured facilities during the year amounted to BD 3,789 thousand (2014: BD 21,353 thousand), and they included amounts totalling
BD 1,247 (2014: Nil) which as at 31 December 2015 are past due more than 90 days.
(vi) Aging analysis of past due but not impaired financing facilities per class of financial assets

Up to 31 to 61 to
30 days 60 days 90 days Total
2015 BD’000 BD’000 BD’000 BD’000
Murabaha 18,777 2,833 2,775 24,385
Musharaka 7,604 4,045 761 12,410
Ijara Muntahia Bittamleek 9,020 1,190 140 10,350
35,401 8,068 3,676 47,145

Up to 31 to 61 to
30 days 60 days 90 days Total
2014 BD’000 BD’000 BD’000 BD’000
Murabaha 16,618 4,414 605 21,637
Musharaka 6,517 2,532 4,202 13,251
Ijara Muntahia Bittamleek 5,421 1,321 - 6,742
28,556 8,267 4,807 41,630

b) Liquidity Risk
Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. Liquidity risk can be caused by market
disruptions or credit downgrades which may cause certain sources of funding to cease immediately. To guard against this risk, the Group
has a large customer base and assets are managed with liquidity in mind, maintaining a healthy balance of cash, cash equivalents,
commodity Murabaha, Wakala receivables, credit lines and quoted investments.
Maturity profile of Group’s assets and liabilities
The table below summarises the maturity profile of the Group’s assets and liabilities. The contractual maturities of assets and liabilities
have been determined on the basis of the remaining period at the consolidated statement of financial position date to the contractual
maturity date and do not take account of the effective maturities as indicated by the Group’s retention history of its equity of investment
accountholders.
76
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

25. RISK MANAGEMENT (Continued)

b) Liquidity Risk (Continued)

The maturity profile of assets, liabilities and equity of investment accountholders at 31 December 2015 was as follows:

Up to 1 to 3 3 to 6 6 months 1 to 3 Over No fixed

1 month months months to 1 year years 3 years maturity Total
2015 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000
ASSETS
Cash and balances with the banks and
Central Bank 27,049 - - - - - 34,065 61,114
Placements with financial institutions 73,150 - - - - - - 73,150
Financing assets 25,049 3,532 13,614 27,451 78,663 327,339 - 475,648
Ijarah Muntahia Bittamleek 5,653 - - 41 9,646 102,721 - 118,061
Investment securities 5,143 16,472 7,793 500 22,524 78,203 - 130,635
Investment in associates - - - - - - 28,116 28,116
Investment in real estate - - - - - - 43,601 43,601
Ijarah rental receivables 406 96 6 - 1,934 13,250 - 15,692
Property and equipment - - - - - - 16,640 16,640
Other assets 4,342 1,324 - - 2,780 - 5,245 13,691
Total assets 140,792 21,424 21,413 27,992 115,547 521,513 127,667 976,348

LIABILITIES AND EQUITY OF IN-

VESTMENT ACCOUNTHOLDERS AC-
COUNTHOLDERS
Placements from financial institutions 63,288 30,228 - - - - - 93,516
Customers’ current accounts 141,244 - - - - - - 141,244
Other liabilities 16,616 - - - - - - 16,616
Equity of investment accountholders 78,104 119,532 84,330 324,352 5,652 - 3,490 615,460
Total liabilities and equity of investment
accountholders 299,252 149,760 84,330 324,352 5,652 - 3,490 866,836
Liquidity gap (158,460) (128,336) (62,917) (296,360) 109,895 521,513 124,177 109,512
Cumulative liquidity gap (158,460) (286,796) (349,713) (646,073) (536,178) (14,665) 109,512 -

Up to 1 to 3 3 to 6 6 months 1 to 3 Over No fixed

1 month months months to 1 year years 3 years maturity Total
2014 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000
ASSETS
Cash and balances with the banks and Central
Bank 21,063 - - - - - 31,055 52,118
Placements with financial institutions 64,865 3,702 - - - - - 68,567
Financing assets 31,750 26,797 6,968 23,715 60,521 258,270 - 408,021
Ijarah Muntahia Bittamleek 14,573 13 2 7,569 11,451 68,669 - 102,277
Investments securities 24,760 6,933 9,129 - 8,266 53,096 21,377 123,561
Investment in associates - - - - - - 30,835 30,835
Investment in real estate - - - - - - 53,934 53,934
Ijarah rental receivables - - - 14,065 - - - 14,065
Property and equipment - - - - - - 17,101 17,101
Other assets - - 4,728 - - - - 4,728
Total assets 157,011 37,445 20,827 45,349 80,238 380,035 154,302 875,207

LIABILITIES AND EQUITY OF INVESTMENT

ACCOUNTHOLDERS ACCOUNTHOLDERS
Placements from financial institutions 75,185 385 - - - - - 75,570
Customers’ current accounts 137,423 - - - - - - 137,423
Other liabilities 16,518 - - - - - - 16,518
Equity investment accountholders 127,278 78,299 80,252 271,858 5,931 - 2,983 566,601
Total liabilities and equity of investment
accountholders 356,404 78,684 80,252 271,858 5,931 - 2,983 796,112
Liquidity gap (199,393) (41,239) (59,425) (226,509) 74,307 380,035 151,319 79,095
Cumulative liquidity gap (199,393) (240,632) (300,057) (526,566) (452,259) (72,224) 79,095 -
77
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

25. RISK MANAGEMENT (Continued)

c) Market Risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables
such as profit rates, equity prices, and foreign exchange rates.
(i) Profit rate risk
Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments.
The Group’s management believe that the Group is not exposed to material profit rate risk as a result of mismatches of profit rate
repricing of assets, liabilities and equity of investment accountholders as the repricing of assets, liabilities and equity of investment
accountholders occur at similar intervals. The profit distribution to equity of investment accountholders is based on profit sharing
agreements. Therefore, the Group is not subject to any significant profit rate risk.
However, the profit sharing agreements will result in displaced commercial risk when the Group’s results do not allow the Group to
distribute profits inline with the market rates.
(ii) Equity price risk
Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the value of
individual stocks. The equity price risk exposure arises from the investment portfolio. The Group manages this risk through diversification
of investments in terms of geographical distribution and industry concentration.
In order to measure the risk of equity on its financial positions, the Group adopts a sensitivity analysis on its quoted equity portfolio
for a 10% increase of the portfolio value with all other variables remaining constant. The effect of a similar decrease in equity prices is
expected to be equal and opposite to the effect of the increase shown.
Equity price risk variation as of 31 December is as follows:
Increase
in equity Sensitivity of Sensitivity of
price profit or loss equity
2015 % BD’000 BD’000
Kuwait Stock Exchange +10 102
Increase in Sensitivity of Sensitivity of
equity price profit or loss equity
2014 % BD’000 BD’000
Kuwait Stock Exchange +10 - 139

As at the consolidated statement of financial position date, the Group has unquoted (equities and sukuk) of BD 115 million (31 December
2014: BD 104 million). The impact of changes in the value of these unquoted equities and sukuk and the related impact on equity will
only be reflected when the financial instrument is sold or deemed to be impaired.

iii) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group views
the Bahraini Dinar as its functional currency. The Board has set limits on positions by currency. Positions are monitored on a daily basis to
ensure they are maintained within established limits.
The Group had the following significant net exposures denominated in foreign currencies as of 31 December:
Equivalent Equivalent
Long Long
(short) (short)
2015 2014
BD ’000 BD ’000
Currency
Pound Sterling 4 (1,149)
Euro (10,131) 1,653
CAD (4,295) -
JPY (1,122) -
Kuwaiti Dinars - (11,490)
As the Bahraini Dinar is pegged to the US Dollar, positions in US Dollars are not considered to represent significant currency risk.
Moreover, as the Group does not have significant exposure to other currencies, movement of the currency exchange rates against the
Bahraini Dinar with other variables held constant will have an immaterial impact on the consolidated statement of income and owners'
78
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

equity.

25. RISK MANAGEMENT (Continued)

d) Operational Risk
Operational risk is the risk of loss arising from system 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 financial 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.

26. DEPOSIT PROTECTION SCHEME

Deposits held with the Bank’s Bahrain operations are covered by the regulation protecting Deposits issued by the Central Bank of
Bahrain in accordance with Resolution No (34) of 2010. The scheme applies to all eligible accounts held with Bahrain offices of the
Bank subject to specific exclusions, maximum total amount entitled and other regulations concerning the establishment of a Deposit
Protection Scheme and a Deposit Protection Board.
27. SEGMENTAL INFORMATION
For management purposes, the Group is organised into three major business segments;

Principally handling equity of corporate investment accountholders', corporate current accounts, and providing Islam-
Corporate ic financing facilities to corporate customers.
Principally handling equity of individual retail customers' investment accountholders', retail current accounts, and
Retail providing Islamic financing facilities to individual customers.
Principally handling equity of banks' and financial institutions' investment accountholders, providing money market,
trading and treasury services as well as the management of the Group’s investment activities. Investment activities
Investment involve handling investments in local and international markets and investment in properties.
These segments are the basis on which the Group reports its primary segment information. Transactions between segments are
conducted at estimated market rates on an arm’s length basis. Transfer charges are based on a pool rate which approximates the cost
of funds.
Segment information is disclosed as follows:

31 December 2015
Corpo-
rate Retail Investment Total
BD’000 BD’000 BD’000 BD’000
Total net income 10,906 25,909 4,904 41,719
Total expenses (2,744) )14,217( )4,600( )21,561(
Provision for impairment (4,417) )786( )3,750( )8,953(
Profit / (loss) for the year 3,745 10,906 )3,446( 11,205
Other information
Segment assets 239,128 416,251 320,969 976,348
Segment liabilities, and equity 277,850 490,128 208,370 976,348

31 December 2014
Corporate Retail Investment Total
BD’000 BD’000 BD’000 BD’000
Total income 7,955 21,716 13,180 42,851
Total expenses (3,480) (15,364) (2,781) (21,625)
Provision for impairment (6,355) (1,238) (4,336) (11,929)
Profit / (loss) for the year (1,880) 5,114 6,063 9,297
Other information
Segment assets 219,150 348,118 307,939 875,207
Segment liabilities, and equity 260,948 452,778 161,481 875,207
The Group operates solely in the Kingdom of Bahrain and, as such, no geographical segment information is presented.
79
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Notes to the Consolidated Financial Statements

For the year ended 31 December 2015

28. FINANCIAL INSTRUMENTS

Fair value hierarchy
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an
arm’s length transaction.
Fair values of quoted securities / Sukuk are derived from quoted market prices in active markets, if available. For unquoted securities /
Sukuk, fair value is estimated using appropriate valuation techniques. Such techniques may include using recent arm’s length market
transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or
other valuation models.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or
indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market
data.
The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at 31 December:

Level 1 Level 2 Level 3 Total

2015 BD’000 BD’000 BD’000 BD’000
Investments carried at fair value through statement of income
Quoted equity securities 1,019 - - 1,019

Level 1 Level 2 Level 3 Total

2014 BD’000 BD’000 BD’000 BD’000
Investments carried at fair value through statement of income
Quoted equity securities 1,393 - - 1,393

Transfers between Level 1, Level 2 and Level 3

During the year ended 31 December 2015 there were no transfers between Level 1 and Level 2, and no transfers into or out of Level 3.
The carrying values of other financial assets and liabilities are not significantly different from their fair values at 31 December 2015,
except for the Group’s investments in Sukuk held at amortised cost amounting to BD 95,867 thousand (2014: BD 81,834 thousand) with
fair values amounting to BD 95,915 thousand (2014: BD 81,181 thousand).
29. EARNINGS AND EXPENSES PROHIBITED BY SHARI’A
The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is
credited to a Qard fund account where the Group uses these funds for various charatable purposes. The movements in these funds
is shown in statement of sources and uses of good faith Qard fund. The non-Islamic income includes the penalties charged on late
repayments for Islamic facilities.

30. SHARI’A SUPERVISORY BOARD

The Group’s Shari’a Supervisory Board consists of three Islamic scholars who review the Group’s compliance with general Shari’a principles
and specific Fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and
procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari’a principles.

31. SOCIAL RESPONSIBILITY

The Group discharges its social responsibilities through Zakah and charity fund’s expenditures and donations to good faith Qard fund
for marriage, refurbishment, medical treatments, etc.

32. COMPARATIVE FIGURES

Certain of the prior year’s figures have been reclassified to conform to the presentation adopted in the current year. Such reclassification
did not affect previously reported profit or owners’ equity.
80
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

Contents
1. Background 81
2. Capital Adequacy 81
3. Risk Management 83
3.1 Bank-wide Risk Management Objectives 83
3.2 Strategies, Processes, and Internal Controls 84
3.3 Structure and Organisation of Risk Management Function 85
3.4 Risk Measurement and Reporting Systems 85
3.5 Credit Risk 86
3.7 Operational Risk 98
3.7 Operational Risk 99
3.8 Equity Position in the Banking Book 100
3.9 Equity of Investment Accountholders (“IAH”) 100
3.10 Liquidity Risk 104
3.11 Profit Rate Risk 106
81
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

1. Background
The Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”) requirements
outlined in its Public Disclosure Module (“PD”), Section PD-1: Annual Disclosure requirements, CBB Rule Book, Volume II for Islamic Banks.
Rules concerning the disclosures under this section are applicable to Bahrain Islamic Bank B.S.C. (the “Bank”) being a locally incorporated
Bank with a retail banking license, and its subsidiaries together known as (the “Group”).
The Board of Directors seeks to optimise the Group’s performance by enabling the various Group business units to realise the Group’s
business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and the
Group risk policy framework.
2. Capital Adequacy
The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital
requirements and 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 issuing sukuk etc. No changes were made in the objectives, policies and processes from
the previous years.
The Group’s capital structure is primarily made up of its paid-up capital, and including reserves. From a regulatory perspective, the
significant amount of the Group’s capital is in Tier 1 form as defined by the CBB, i.e., most of the capital is of a permanent nature.
The Group’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business.
Current and future capital requirements are determined on the basis of financing facilities growth expectations for each business group,
expected growth in off-balance sheet facilities, and future sources and uses of funds. To assess its capital adequacy requirements in
accordance with CBB requirements, the Group adopts the Standardised Approach for its Credit Risk, Basic Indicator Approach for its
Operational Risk and Standardised Measurement Approach for its Market Risk. All assets funded by profit sharing investment accounts
are subject to Board approval.
All transfer of funds or regulatory capital within the Group is carried out after proper approval process.
For the purposes of guidance every table was cross referenced with the relevant paragraph number of the Central Bank of Bahrain’s
Public Disclosures Module.
82
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

2. Capital Adequacy (Continued)

Table – 1. Capital Structure (PD-1.3.12, 1.3.13, 1.3.14 and 1.3.15)

The following table summarises the eligible capital as of 31 December 2015 after deductions for Capital Adequacy Ratio (CAR) calculation:

CET 1 T2
BD’000 BD’000
Components of capital
Issued and fully paid ordinary shares 97,441 -
General reserves - -
Legal / statutory reserves - -
Share premium 2,794 -
Accumulated losses brought forward (8,195) -
Current year profits 11,205 -
Unrealized gains and losses from fair valuing equities 768 -
Less:
Employee stock incentive program funded by the bank (outstanding) 879 -
Treasury Shares 563 -
Total Common Equity Tier 1 capital after the regulatory adjustments above (CET1 d) 102,571 -
Assets revaluation reserve - property, plant, and equipment 7,088
General financing loss provisions 7,338
Total Available AT1 & T2 Capital 14,426
Total Capital 116,997

Amount of
exposures
BD’000
Total Credit Risk Weighted Assets 587,023
Total Market Risk Weighted Assets 15,589
Total Operational Risk Weighted Assets 57,153
TOTAL REGULATORY RISK WEIGHTED ASSETS 659,765
CAPITAL ADEQUACY RATIO 17.73
Minimum requirement 12.5%

Table – 2. Capital requirements by type of Islamic financing contracts (PD-1.3.17)

The following table summarises the amount of exposures as of 31 December 2015 (gross of deductions) subject to standardised
approach of credit risk and related capital requirements by type of Islamic financing contracts:

Risk
Weighted Capital
Assets requirements
BD’000 BD’000
Type of Islamic Financing Contracts
Placements with financial institutions 11,622 1,395
Financing assets* 199,247 23,910
Investments 288,562 34,627
Ijarah muntahia bittamleek* 49,105 5,893
Ijarah rental receivables 8,398 1,008
556,933 66,831
Other credit exposures 30,090 3,611
587,023 70,442
*The risk weighted assets have been allocated on a pro-rata basis due to system limitation.
83
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

2. Capital Adequacy (Continued)

Table – 3. Capital requirements for market risk (PD-1.3.18)

The following table summarises the amount of exposures as of 31 December 2015 subject to standardised approach of market risk and
related capital requirements:

Market Risk - Standardised Approach

Foreign exchange risk ( BD'000 )
1,247
Total of Market Risk - Standardised Approach 1,247
Multiplier 12.5

RWE for CAR Calculation ( BD'000 ) 15,589

Total Market Risk Exposures ( BD'000 ) 15,589
Total Market Risk Exposures - Capital Requirement ( BD'000 ) 1,871

Table – 4. Capital requirements for operational risk (PD-1.3.30 (a & b) and PD-1.3.19)
The following table summarises the amount of exposures as of 31 December 2015 subject to basic indicator approach of operational
risk and related capital requirements:

Indicators of operational risk

Average Gross income ( BD'000 ) 30,482
Multiplier 12.5
381,021

Eligible Portion for the purpose of the calculation 15%

Total Operational Risk Exposure ( BD'000 ) 57,153
Total Operational Risk Exposures - Capital Requirement ( BD'000 ) 6,858

Table – 5. Capital Adequacy Ratios (PD-1.3.20)

The following are Capital Adequacy Ratios as of 31 December 2015 for total capital and Tier 1 capital:

Total capital Tier 1 capital

ratio ratio
Top consolidated level 17.73% 15.55%

3. Risk Management
3.1 Bank-wide Risk Management Objectives
The risk management philosophy of the Group is to identify, capture, monitor and manage the various dimensions of risk with the
objective of protecting asset values and income streams such that the interest of the Group’s shareholders (and others to whom the
Group owes a liability) are safeguarded, while maximising the returns intended to optimise the Group’s shareholder return while
maintaining it’s risk exposure within self-imposed parameters.
The Group has defined its risk appetite within the parameters of its Risk Strategy. The Group reviews and realigns its risk appetite as per
the evolving business plan of the Group with changing economic and market scenarios. The Group also assesses its tolerance for specific
risk categories and its strategy to manage these risks.
In addition to satisfying the minimum regulatory capital requirements of CBB, the Group seeks to constantly identify and quantify, to the
extent possible, the various risks that are inherent in the normal course of its business and maintain appropriate internal capital levels as
per the ICAAP framework. The main objective of the Group’s ICAAP is to ensure that adequate capital is retained at all times to support
the risks the Group undertakes in the course of its business.
The Group has an established internal capital adequacy assessment process (ICAAP) as per the requirements under Pillar III of Basel III.
ICAAP prescribed measures are designed to ensure appropriate identification, measurement, aggregation and monitoring of the Group’s
risk. It also defines an appropriate level of internal capital in relation to the Group’s overall risk profile and business plan.
84
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.2 Strategies, Processes, and Internal Controls

3.2.1 Group’s risk strategy
Capital Management policies and Risk Charter define the Group’s risk strategy. Comprehensive Risk Management Policy Framework is
approved by the Board. These are also supported by appropriate limit structures. These policies provide an enterprise-wide integrated
risk management framework in the Group.
The risk charter identifies risk objectives, policies, strategies, and risk governance both at the Board and management level. The capital
management policy is aimed at ensuring financial stability by allocating enough capital to cover unexpected losses.
Limit structures serve as key components 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 Group 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 Group is exposed to various types of risk, such as market, credit, profit rate, liquidity and operational, all of which require
comprehensive controls and ongoing oversight. The risk management framework summarises the spirit behind Basel III, which includes
management oversight and control, risk culture and ownership, risk recognition and assessment, control activities and segregation of
duties, adequate information and communication channels, monitoring risk management activities and correcting deficiencies.

3.2.2 Credit risk

The Group manages its credit risk exposure by evaluating each new product/activity with respect to the credit risk introduced by it. The
Group has established a limit structure to avoid concentration of risks for counterparty, sector, and geography.

3.2.3 Market risk

The Group proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques such as limits
on its foreign exchange open positions although they are insignificant. The Group regularly carries out stress testing to assess the impact
of adverse market conditions on its market risk sensitive portfolio.
The Group has established a limit structure to monitor and control the market risk in its equity type instruments portfolio. These limits
include maximum Stop-loss limits, position limits, VaR limits and maturity limits.

3.2.4 Operational risk

The Group has implemented SunGuard’s Operational Risk Management system ‘SWORD’ for recording the potential risks, controls, and
events on a continuous basis. As part of implementation, the Group has carried out Risk Control Self Assessment (“RCSA”) exercise on a
regular basis. The system also measures the Operational risk appetite based on the predefined limits/thresholds.
The Group has established a clear segregation of duties, through documentation and implementation of policies and procedures. This
ensures objectivity, security, and avoids conflicts of interest. Maker checker concept and dual eye principles are applied across the Group,
where possible.

3.2.5 Equity price risk

Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the value of
individual stocks. The equity price risk exposure arises from the investment portfolio. The Group manages this risk through diversification
of investments in terms of geographical distribution and industry concentration.

3.2.6 Profit rate risk

Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments.
The Group’s management believes that the Group is not exposed to material profit rate risk as a result of mismatches of profit rate
repricing of assets, liabilities, and equity of investment accountholders. The profit distribution to investment accountholders is based on
profit sharing agreements. Therefore, the Group is not subject to any significant profit rate risk.
However, the profit sharing agreements will result in displaced commercial risk when the Group’s results do not allow the Group to
distribute profits inline with market rates.
85
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.2 Strategies, Processes, and Internal Controls (Continued)

3.2.7 Displaced Commercial Risk

Displaced commercial risk (“DCR”) refers to the market pressure to pay returns that exceed the rate that has been earned on the assets
financed by the liabilities, when the return on assets is under performing as compared with competitors rates.
The Group manages its displaced commercial risk by placing gap limits between the returns paid to investors and market returns.
The Group manages its displaced commercial risk as outlined in the Risk Charter of the Group. The Group may forego its fee in case
displaced commercial risk arises. The Group benchmarks its rates with other leading banks in the market.
All the above strategies used have been effective throughout the reporting year.
3.3 Structure and Organisation of Risk Management Function
Risk Management Structure includes all levels of authorities (including Board level Risk committee), organisational structure, people,
and systems required for the smooth functioning of risk management processes in the Group. The responsibilities associated with each
level of risk management structure and authorities include the following:
The Board retains ultimate responsibility and authority for all risk matters, including:
a. Establishing overall policies and procedures, and
b. Delegating authority to Executive Committee, Credit Committee, the Chief Executive Officer and further delegation to management
to approve and review.

General Manager
Credit & Risk
Management

Senior Manager Credit Senior Manager Senior Manager

Assistant Manager Senior
Review & Analysis Risk Credit
Benefit Manager Legal
Vacant Management Administration

Asst. Manager Legal Clerk

Manager – Credit Manager Risk
Review & Analysis Management Deal Booking

Asst. Manager
Manager – Credit Assistant Manager Officer Deal Officer
& Security Control
Review & Analysis Risk Management Booking Notarization
Archiving

Credit Admin Supervisor

Credit Analyst Officer Notarization
Clerk Notarization

Credit Analyst Credit Admin Clerk

3.4 Risk Measurement and Reporting Systems

Based on risk appetite of the Group, the Group has put in place various limits. These limits have been approved by the Board of Directors.
Any limit breaches are reported to the respective senior management committees and the Board by the Credit and Risk Management
Department (“CRMD”). The limits are reviewed and revised at least on an annual basis or when is deemed required.
The Group has developed a risk measurement and reporting system that generates various types of reports which has enhanced the
monitoring process of the Group.
86
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk

3.5.1 Introduction
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally
from lending and investment activities. The Group controls credit risk by monitoring credit exposures, and continually assessing the
creditworthiness of counterparties. Financing contracts are mostly secured by collateral in the form of mortgage financed or other
tangible securities.
The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept in terms of counterparties, product
types, geographical area, and industry sector. The Group has established a credit quality review process to provide early identification of
possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by
the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision by
the Credit Review and Analysis Department (“CRMAD”). Any changes to the Credit Risk Policy will be approved by the Board.
All credit proposals undergo a comprehensive risk assessment examining the customer’s financial condition, trading performance,
nature of the business, quality of management, and market position, etc. In addition, the Group’s internal risk rating model scores these
quantitative and qualitative factors. The credit approval decision is then made and terms and conditions are set.
Exposure limits are based on the aggregate exposure to counterparty and any connected entities across the Group. Corporate contracts/
facilities are reviewed on an annual basis by CRMAD.
3.5.2 Types of credit risk
Financing contracts mainly comprise of due from banks and financial institutions, Murabaha receivables, Musharaka investments, and
Ijarah muntahia bittamleek.
Due from banks and financial institutions
Due from banks and financial institutions comprise commodity murabaha receivables and wakala receivables.
Murabaha receivables
The Group finances these transactions through buying the commodity which represents the object of the Murabaha contract and then
reselling this commodity to the Murabeh (beneficiary) at a profit. The sale price (cost plus profit margin) is repaid in installments by the
Murabeh over the agreed period. The transactions are secured at times by the object of the Murabaha contract (in case of real estate
finance) and other times by a total collateral package securing the facilities given to the Murabeh.
Musharaka investments
Musharaka is a form of partnership between the Group and its clients whereby each party contributes to the capital of partnership in
equal or varying degrees to establish a new project or share in an existing one, whereby each of the parties becomes an owner of the
capital on a permanent or declining basis. Profits are shared in an agreed ratio, but losses are shared in proportion to the amount of
capital contributed.
Ijarah Muntahia Bittamleek
The legal title of the assets under Ijarah muntahia bittamleek only passes to the lessee at the end of the Ijarah term, through gift,
consideration, or gradual sale, provided that all Ijarah instalments are settled.
3.5.3 Past Due and impaired Islamic financing
The Group defines non-performing facilities as the facilities that are overdue for a period of 90 days or more. These exposures are placed
on a non-accrual status with income being recognised to the extent that it is actually received. It is the Group’s policy that when an
exposure is overdue for a period of 90 days or more, the whole financing facility extended is considered as non performing, not only the
overdue instalments/payments.
As a policy, the Group places on a non-accrual basis any facility where there is reasonable doubt about the collectability of the receivable,
irrespective of whether the customer concerned is currently in arrears or not.
3.5.4 External credit assessment institutions
The Group relies on external ratings for rated corporate customers and counterparties. The Group uses Standard & Poor’s, Fitch, Moody’s
and Capital Intelligence to provide ratings for such counterparties. In case of unrated counterparties, the Group will assess the credit risk
on the basis of defined parameters. These ratings are used for risk assessment and calculation of risk weighted equivalents.
87
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

3.5.5 Definition of Geographical distribution

The geographic distribution of the credit exposures is monitored on an ongoing basis by Group’s Risk Management Department and
reported to the Board on a quarterly basis. The Group’s classification of geographical area is according to its business needs and the
distribution of its portfolios.
3.5.6 Concentration risk
Concentration risk is the credit risk stemming from not having a well diversified credit portfolio, i.e. being overexposed to a single
customer, industry sector, or geographic region. As per CBB’s single obligor regulations, banks incorporated in Bahrain are required to
obtain the CBB’s prior approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding
15% of the regulatory capital base.
In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on maintaining
a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.
3.5.7 Credit risk mitigation
Credit risk mitigation refers to the use of a number of techniques, like collaterals and guarantees to mitigate the credit risks that the
Group is exposed to. Credit risk mitigants reduce the credit risk by allowing the Group to protect against counterparty non-performance
of credit contracts through collaterals, netting agreements, and guarantees.
Generally, the Group extends credit facilities only where supported by adequate tangible collateral security and/or audited financial
statements. Facilities may be considered without adequate tangible collateral security, when audited financial statements reveal
satisfactory financial position/repayment ability and the facilities are properly structured and supported by assignments, guarantees,
etc. as appropriate.
In general, personal guarantees of the partners/promoters/directors of the borrowing entity are obtained in support of credit facilities.
In all cases, a statement of net worth of the guarantor is to be compiled by the Account Officer, so that adequate information is available
at a future date in case the guarantees need to be enforced.
The market value of tangible collateral security are properly evaluated by the Group approved valuers (for properties) or based on
publicly available quotations. Only the Loan-able value of such security is taken into account while considering credit facilities.
From time to time, the Credit and Investment Committee reviews and approves the loan-able value of securities. It has also approved a
list of acceptable securities.
The majority of the Group’s current credit portfolio is secured through mortgage of commercial real estate properties. The Group may
dispose off the assets as a last resort after carrying out due legal process.
3.5.7.1 General policy guidelines of collateral management
Acceptable Collaterals: The Group has developed guidelines for acceptable collaterals. Assets offered by customers must meet the
following criteria to qualify as acceptable collateral:
a. Assets must be maintaining their value, at the level prevalent at inception, until maturity date of the facility granted;
b. Such assets should be easily convertible into cash, if required (liquidity);
c. There should be a reasonable market for the assets (marketability); and
d. The Group should be able to enforce its rights over the asset if necessary (enforceability).
Ownership: Prior to valuation or further follow up on the offered collateral, Credit Administration ensures satisfactory evidence of the
borrower’s ownership of the assets.
88
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Valuation: All assets offered as collateral are valued by an appropriate source either in-house (through another department in the
Group) or by an external appraiser (real estate related collateral). The Group maintains a list of independent appraisers, approved by
management.
a. Valuation of shares and goods: Where competent staff is available within the Group, the valuation is conducted in-house. The
Group performs in-house valuation on the following types of securities:
• Pledge of shares of local companies;
• Pledge of international marketable shares and securities; and
• Pledge and hypothecation of goods.
Quoted shares are valued at the quotes available from stock exchanges, periodicals, etc.
b. Valuation of real estate and others: Besides assets mentioned above the valuation of following securities are also conducted:
• Real Estate;
• Equipment and machinery; and
• Precious metals and jewels.
The Credit Administration requests the concerned department to arrange for the valuation from approved valuators.
The following additional guidelines are also followed by the Group:
a. No facility should be disbursed until credit documentation is properly signed and security/guarantees required have been signed and
registered, where required. Exceptional cases can be considered by sanctioning authorities; and
b. All documents received as security or support for credit facilities will be lodged in the safe custody through the Credit Administration
and should be kept under dual control. Group must ascertain that collateral providers are authorised and acting within their capacity.
3.5.7.2 Guarantees
In cases where a letter of guarantee from parent company or a third party is accepted as credit risk mitigants, the Group ensures that
all guarantees are irrevocable, legal opinion has been obtained from a legal counsellor domiciled in the country of guarantor (overseas)
regarding the enforceability of the guarantee, if the guarantor / prime obligor is domiciled outside Bahrain and all guarantees should
be valid until full settlement of the facilities. Also no maturity (negative) mismatch is permissible between the guarantee and exposure.
3.5.7.3 Custody / collateral management
The assets, or title to the asset, will be maintained in the Group’s custody or with custodian approved by the Group. The Credit
Administration will obtain confirmation of the assets held with each custodian on an annual basis.
The release of collateral without full repayment of all related financial obligations requires authorisation of the same level that originally
approved and sanctioned the facility. Substitution of collateral is permitted if the new collateral would further minimise the Group’s risk
exposure.
When collateral is released to the customer, the Head of Credit Administration obtains and maintains in his records acknowledgement
of receipt from the customer or his/her authorised representative.
3.5.8 Counterparty credit risk
The Group has adopted the Standardised Approach to allocate capital for counterparty credit risk. The Group has put in place an internal
counterparty limit structure which is based on internal / external ratings for different types of counterparties. The Group has also set
concentration limits as a percentage of its capital based on internal and external grades. In case of a counterparty rating downgrade /
deterioration, the Group may require further collateral or advise the counterparty to reduce its exposure on a case by case basis.
89
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

3.5.8.1 Exposure
The measure of exposure reflects the maximum loss that the Group may suffer in case counterparty fails to fulfil its commitments.
Exposure shall always be calculated on the basis of approved limits or actual outstanding exposure (Financing facilities, Investments or
others), whichever is higher.
3.5.8.2 Counterparty
A counterparty is defined as an obligor (individual/company/other legal entity), a guarantor of an obligor, or a person receiving funds
from the Group, the issuer of a security in case of a security held by the Group, or a party with whom a contract is made by the Group
for financial transactions.
3.5.8.3 Group exposure
Group exposure is defined as the total exposure to all counterparties closely related or connected to each other. For this purpose, a
Group is two or more counterparties related in such a way that financial soundness of one may affect the financial soundness of the
other(s) and one of them has a direct or indirect control over the other(s).
3.5.8.4 Connected counterparties
Connected counterparties are companies or individuals connected with the Group or its subsidiaries and associated companies (whether
such association is due to control or shareholding or otherwise), Directors and their associates (whether such association is due to
control, family links or otherwise), members of the Shari’a Supervisory Board, management and other staff, and shareholders holding
more than 10% or more of the equity voting rights in the Group.
3.5.8.5 Large exposure
Large exposure is any exposure whether direct, indirect, or funded by equity of investment accountholders to a counterparty or a group
of closely related counterparties which is greater than or equal to 10% of the Group’s capital base.
Prior written approval from the CBB is required in the following cases:
a. If any counterparty (single/group) exposure exceeds 15% of Group’s Capital Base; and
b. If any facility (new/extended) to an employee is equal or above BD100,000 (or equivalent).
3.5.8.6 Maximum exposure
The Group has set an internal maximum exposure limit in the light of CBB guidelines.
3.5.8.7 Reporting
The Group reports large counterparty exposures (as defined above) to CBB on a periodic basis. The Group reports the exposures on a
gross basis without any set-off. However, debit balances on accounts may be offset against credit balances where both are related to the
same counterparty, provided the Group has a legally enforceable right to do so.
3.5.8.8 Other matters
As a Group’s strategy, exposure to connected counterparties may be undertaken only when negotiated and agreed on an arm’s length
basis.
The Group shall not assume any exposure to its external auditors.
3.5.9 Related party transactions
The disclosure relating to related party transactions has been made in the consolidated financial statements as of 31 December 2015.
All related party transactions have been made on arm’s length basis.
90
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)
Table – 6. Credit Risk Exposure (PD-1.3.23(a))
The following table summarises the amount of gross funded and unfunded credit exposure as of 31 December 2015 and average
gross funded and unfunded exposures over the year ended 31 December 2015 allocated to own capital and current account and profit
sharing investment account (PSIA):
Own capital and current Profit Sharing Investment
account Account
*Average *Average
gross credit gross credit
Total gross exposure Total gross exposure
credit over the credit over the
exposure year exposure year
BD’000 BD’000 BD’000 BD’000
Funded
Cash and balances with banks and central Bank 27,049 27,925 34,065 32,090
Placements with financial institutions 24,789 16,023 48,361 31,259
Financing assets 161,188 150,345 314,460 293,307
Investments securities 67,255 69,473 63,380 63,921
Ijarah muntahia bittamleek 40,008 37,696 78,053 73,541
Ijarah rental receivables 5,317 4,812 10,375 9,388
Investment in associates 28,116 29,912 - -
Investment in real estate 43,601 46,592 - -
Property and equipment 16,640 16,991 - -
Other assets 13,691 6,902 - -
Unfunded - -
Commitments and contingent liabilities 45,127 28,284 - -
Total 472,781 434,955 548,694 503,506
*Average balances are computed based on month end balances.

Table – 7. Credit Risk – Geographic Breakdown (PD-1.3.23(b))

The following table summarises the geographic distribution of exposures as of 31 December 2015, broken down into significant areas
by major types of credit exposure:
Own capital and current account Profit Sharing Investment Account
Geographic area* Geographic area*
North Middle Rest of * North Middle Rest of
America Europe East Asia Total America Europe East Asia Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Cash and balances with banks and central Bank 5,241 78 21,730 - 27,049 - - 34,065 - 34,065
Placements with financial institutions - - 24,789 - 24,789 - - 48,361 - 48,361
Financing assets - - 161,188 - 161,188 - - 314,460 - 314,460
Investments securities - 1,292 65,963 - 67,255 - 2,522 60,858 - 63,380
Ijarah muntahia bittamleek - - 40,008 - 40,008 - - 78,053 - 78,053
Ijarah rental receivables - - 5,317 - 5,317 - - 10,375 - 10,375
Investment in associates - - 28,116 - 28,116 - - - - -
Investment real estate - - 43,601 - 43,601 - - - - -
Property and equipment - - 16,640 - 16,640 - - - - -
Other assets - - 13,691 - 13,691 - - - - -
Total 5,241 1,370 421,043 - 427,654 - 2,522 546,172 - 548,694
*G
 eographical distribution of exposure into significant areas by major type of credit exposure is based on counterparty's country of incorporation.
91
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Table – 8. Credit Risk – Industry Sector Breakdown (own capital and current account) (PD-1.3.23(c))
The following table summarises the distribution of funded and unfunded exposures as of 31 December 2015 by industry, broken down
into major types of credit exposure:

Own Capital and Current Account Industry Sector

Banks and Personal &
Trading and Financial Real Consumer Governmental
Manufacturing Institutions Estate Aviation Finance Organisation Others Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Funded
Cash and balances with banks and central Bank - 22,113 - - - 4,936 - 27,049
Placements with Financial institutions - 24,789 - - - - - 24,789
Financing assets 19,077 1,535 31,420 175 87,566 3,256 18,159 161,188
Investments securities - 11,196 30,599 - - 20,654 4,806 67,255
Ijarah muntahia bittamleek 1,158 84 13,196 - 23,051 2,519 - 40,008
Ijarah rental receivables 281 10 3,068 - 1,835 93 30 5,317
Investment in associates - 8,109 7,479 - - - 12,528 28,116
Investment in real estate - - 43,601 - - - - 43,601
Property and equipment - - - - - - 16,640 16,640
Other assets - 2,001 5,245 - 1,337 - 5,108 13,691

Unfunded
Commitments and contingent liabilities 13,267 646 579 701 1,403 - 28,531 45,127
Total 33,783 70,483 135,187 876 115,192 31,458 85,802 472,781

Table – 9. Credit Risk – Industry Sector Breakdown (profit sharing investment account) (PD-1.3.23(c))
The following table summarises the distribution of funded and unfunded exposures as of 31 December 2015 by industry, broken down
into major types of credit exposure:

Profit Sharing Investment Account Industry Sector

Banks and Personal &
Trading and Financial Real Consumer Governmental
Manufacturing Institutions Estate Aviation Finance Organisation Others Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Funded
Cash and balances with banksand central Bank - - - - - 34,065 - 34,065
Placements with Financial institutions - 48,361 - - - - - 48,361
Financing assets 37,217 2,995 61,296 343 170,840 6,352 35,417 314,460
Investments securities - 5,556 8,876 - - 40,293 8,655 63,380
Ijarah muntahia bittamleek 2,259 164 25,744 - 44,971 4,915 - 78,053
Ijarah rental receivables 549 20 5,985 - 3,581 182 58 10,375
Investment in associates - - - - - - - -
Investment in real estate - - - - - - - -
Property and equipment - - - - - - - -
Other assets - - - - - - - -
Total 40,025 57,096 101,901 343 219,392 85,807 44,130 548,694
92
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Table – 10. Credit Risk – Financing Facilities to Highly Leveraged or Other High Risk Counterparties (PD-1.3.23(e))
The following balances represent the financing facilities to highly leveraged or other high risk counterparties as of 31 December 2015:

Own Profit
Capital and Sharing
Current Investment
Account Account Total
BD’000 BD’000 BD’000
Counterparties
Counterparty # 1 156 309 465
156 309 465

Table – 11. Credit Risk – Concentration of Risk (PD-1.3.23(f))

The following balances represent the concentration of risk to individual counterparties as of 31 December 2015:

Own Profit
capital and Sharing
current Investment
account Account Total
BD’000 BD’000 BD’000
Counterparties
Counterparty # 1 12,529 - 12,529
12,529 - 12,529
Table – 12. Credit Risk – Residual Contractual Maturity Breakdown (Own Capital and Current Account) (PD-1.3.23(g) PD-1.3.38)
The following table summarises the residual contractual maturity of own capital and current account breakdown of the whole credit
portfolio as of 31 December 2015, broken down by major types of credit exposure:

Own capital and current account

Up to
One 1-3 3-6 6-12 1-3 3-5 5-10 10-20 Over 20 No fixed
month months months months years years years years years* maturity Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Assets
Cash and balances with banks and central
Bank 27,049 - - - - - - - - - 27,049
Placements with financial institutions 24,789 - - - - - - - - - 24,789
Financing assets 8,488 1,197 4,613 9,304 26,657 34,809 60,175 9,765 6,180 - 161,188
Investments securities 1,741 5,582 2,641 169 7,633 3,016 44,889 - 1,584 - 67,255
Ijarah muntahia bittamleek 1,916 - - 14 3,269 1,605 6,246 12,219 14,739 - 40,008
Ijarah rental receivables 138 32 2 - 654 732 1,008 1,869 882 - 5,317
Investment in associates - - - - - - - - - 28,116 28,116
Investment real estate - - - - - - - - - 43,601 43,601
Property and equipment - - - - - - - - - 16,640 16,640
Other assets 4,342 1,324 - - 2,780 - - - - 5,245 13,691
Total Assets 68,463 8,135 7,256 9,487 40,993 40,162 112,318 23,853 23,385 93,602 427,654

* All non performing facilities have been classified as over 20 years.

93
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Table – 13. Credit Risk – Residual Contractual Maturity Breakdown (Profit Sharing Investment Account) (PD-1.3.23(g) PD-1.3.38)
The following table summarises the residual contractual maturity of profit sharing investment account breakdown of the whole credit
portfolio as of 31 December 2015, broken down by major types of credit exposure:

Profit Sharing Investment Account

Up to
One 1-3 3-6 6-12 1-3 3-5 5-10 10-20 Over 20 No fixed
month months months months years years years years years* maturity Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Assets
Cash and balances with banks and
central Bank - - - - - - - - - 34,065 34,065
Placements with financial
institutions 48,361 - - - - - - - - - 48,361
Financing assets 16,561 2,335 9,000 18,148 52,006 67,909 117,395 19,051 12,055 - 314,460
Investments securities 3,401 10,890 5,153 330 14,891 5,883 19,745 - 3,087 - 63,380
Ijarah muntahia bittamleek 3,738 - - 27 6,378 3,133 12,184 23,839 28,754 - 78,053
Ijarah rental receivables 268 64 4 - 1,278 1,427 1,966 3,646 1,722 - 10,375
Total Assets 72,329 13,289 14,157 18,505 74,553 78,352 151,290 46,536 45,618 34,065 548,694

* All non performing facilities have been classified as over 20 years.

Table – 14. Credit Risk – Impaired Exposures, Past Due Exposures and Allowances (Own capital and current account by industry
sector) (PD-1.3.23(h) PD-1.3.24(b) PD-1.3.24(d))
The following table summarises the impaired facilities, past due facilities, and allowances financed by own capital and current account
disclosed by major industry sector as of 31 December 2015:

Own capital and current account

Non- Aging of non-performing or past due or
performing impaired Islamic financing contracts Specific allowances * General allowances
or past due
or impaired Balance General General
Islamic at the Charges Charge-offs Balance at allowances General allowances
financing Less than 3 months 1 to 3 Over 3 beginning during during the the end of beginning allowances ending
contracts 3 months** to 1 year years years of the year the year year year balance movement balance
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Trading and Manufacturing 3,273 2,976 107 161 29 1,343 749 1,913 179 - - -
Real Estate 24,517 4,335 4,009 1,918 14,255 9,148 1,258 835 9,571 - - -
Banks and Financial
Institutions - - - - - - - - - - - -
Personal / Consumer
Finance 11,034 8,460 1,106 879 589 191 73 145 119 - - -
Others 3,851 672 3,061 46 72 19 286 297 8 - - -
No specific sector - - - - - - - - - 3,666 172 3,838
Total 42,675 16,443 8,283 3,004 14,945 10,701 2,366 3,190 9,877 3,666 172 3,838

* General allowance represents collective impairment provision against exposures which, although not specifically identified, have a greater risk of default than when originally
granted.
** This includes amounts not due and amounts past due less than 90 days relating to non-performing or past due or impaired Islamic financing contracts.

The Group’s collective retail model uses the net flow rate method, where probability of default is calculated on an account level
segregated by buckets of number of days past due. Loss given default is at annual average recovery rates, which is reviewed annually.
The Group’s collective corporate model uses the expected loss method. Data is grouped in economic sectors and probability of default
and loss given default is calculated for these sectors.
94
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

Table – 15. Credit Risk – Impaired Exposures, Past Due Exposures and Allowances (profit sharing investment account by industry
sector) (PD-1.3.23(h))
The following table summarises the impaired facilities, past due facilities, and allowances financed by profit sharing investment account
disclosed by major industry sector as of 31 December 2015:

Profit Sharing Investment Account

Non- Aging of non-performing or past due or

performing impaired Islamic financing contracts Specific allowances * General allowances
or past due
or impaired Balance General General
Islamic at the Charges Charge-offs Balance at allowances General allowances
financing Less than 3 months 1 to 3 Over 3 beginning during during the the end of beginning allowances ending
contracts 3 months** to 1 year years years of the year the year year year balance movement balance
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Trading and Manufacturing 6,384 5,805 208 314 57 2,621 1,461 3,731 351 - - -
Real Estate 47,830 8,456 7,822 3,743 27,809 17,846 2,454 1,629 18,671 - - -
Banks and Financial Insti-
tutions - - - - - - - - - - - -
Personal / Consumer
Finance 21,525 16,505 2,158 1,714 1,148 373 142 282 233 - - -
Others 7,513 1,310 5,972 90 141 37 580 604 13 - - -
No specific sector - - - - - - - - - 7,152 336 7,488
Total 83,252 32,076 16,160 5,861 29,155 20,877 4,637 6,246 19,268 7,152 336 7,488

* General allowance represents collective impairment provision against exposures which, although not specifically identified, have a greater risk of default than when originally
granted.
** This includes amounts not due and amounts past due less than 90 days relating to non-performing or past due or impaired Islamic financing contracts.

The Group’s collective retail model uses the net flow rate method, where probability of default is calculated on an account level
segregated by buckets of number of days past due. Loss given default is at annual average recovery rates, which is reviewed annually.
The Group’s collective corporate model uses the expected loss method. Data is grouped in economic sectors and probability of default
and loss given default is calculated for these sectors.
Although the above table shows the portion of impairment provision related to PSIA, the Group has taken all the provision to their own
capital. Hence the PSIA were not charged for any of the impairment provision.

Table – 16. Credit Risk – Impaired Exposures, Past Due Exposures and Allowances (own capital and current account and profit
sharing investment account by geographic area) (PD-1.3.23(i) PD-1.3.24(c))
The following table summarises the past due facilities and allowances financed by own capital and current account and profit sharing
investment account disclosed by geographical area as of 31 December 2015:

Own capital and current account Profit Sharing Investment Account

Non-performing Non-performing
or past due or Specific Collective or past due or Specific Collective
impaired Islamic Impairment Impairment impaired Islamic Impairment Impairment
financing contracts provision provision financing contracts provision provision
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Middle East 42,675 9,877 3,838 83,252 19,268 7,488

Total 42,675 9,877 3,838 83,252 19,268 7,488
95
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Table – 17. Credit Risk – Restructured Financing Facilities (PD-1.3.23(j))

The following table summarises the aggregate amount of restructured financing facilities during the year financed by own capital and
current account and profit sharing investment account as of 31 December 2015:

Own capital Profit Sharing

and current Investment
account Account
Aggregate Aggregate
amount amount
BD’000 BD’000

Restructured financing facilities 1,464 2,855

Total 1,464 2,855
Current Deferred
Balance Profit Provision PayOff

Total Islamic Financing 766,485 132,305 40,471 593,709

Restructured financing facilities 5,092 773 530 3,789
Percentage 0.66% 0.58% 1.31% 0.64%

The provision on restructured facilities is BD 529 Thousand and the impact on present and future earnings is not significant.
Table – 18. Credit Risk Mitigation (PD-1.3.25 (b) and (c))
The following table summarises the exposure as of 31 December 2015 by type of Islamic financing contract covered by eligible collateral:

Total exposure covered by

Eligible collateral
Guarantees
BD’000 BD’000
Financing assets 13,068 11,753
Ijarah muntahia bittamleek 49,760 1,113
Total 62,828 12,866

Risk
Guarantees Weighted
Type of Guarantees BD’000 BD’000
Tamkeen Guarantee 11,866 6,508
Bank Guarantee 1,000 535
Total 12,866 7,043
96
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 Credit Risk (Continued)

Table – 19. Counterparty Credit (PD-1.3.26 (b))

The following table summarises the counterparty credit risk exposure covered by collateral after the application of haircuts as of
31 December 2015:

BD’000
Gross positive fair value of contracts
Netting Benefits 128,183
Netted current credit exposure 128,183
Collateral held:
- Cash 15,042
- Shares 758
- Real Estate 454,799
Total 470,599
A haircut of 30% is applied on the Real Estate collateral.

3.6 Market Risk

3.6.1 Introduction
The Group has accepted the definition of market risk as defined by CBB as “the risk of losses in on- and off-balancesheet positions arising
from movements in market prices.

3.6.2 Sources of market risk

For the Group, market risk may arise from movements in profit rates, foreign exchange markets, equity markets, or commodity markets.
A single transaction or financial product may be subject to any number of these risks.
Profit rate risk is the sensitivity of financial products to changes in the profit rates. Profit rate risk arises from the possibility that changes
in profit rates will affect future profitability or the fair values of financial instruments. The Group’s management believe that the Group
is not exposed to material profit rate risk as a result of mismatches of profit rate repricing of assets, liabilities, and equity of investment
accountholders as the repricing of assets, liabilities and equity of investment accountholders occur at similar intervals. The profit
distribution to equity of investment accountholders is based on profit sharing agreements. Therefore, the Group is not subject to any
significant profit rate risk.
Foreign exchange risk is the sensitivity of financial products to changes in spot foreign exchange rates. The value of the Group’s portfolio
which is denominated in a number of currencies may be exposed to these risks when converted back to the Group’s base currency.
Equity price risk is the sensitivity of financial products to the changes in equity prices. Equity risk arises from holding open positions in
equities or equity based instruments, thereby creating exposure to a change in the market price of the equity. In addition to Group
performance expectations, equity prices are also susceptible to general economic data and sector performance expectations.
Commodity risk is defined as inhernt risk in financial product arising from their sensitivity to changes in commodity prices. Since prices in
commodity markets are determined by fundamental factors (i.e. supply and demand of the underlying commodity) these markets may
be strongly correlated within particular sector and less correlated across sectors.
97
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.6 Market Risk (Continued)
3.6.3 Market risk strategy
The Group’s Board is responsible for approving and reviewing (at least annually) the risk strategy and significant amendments to the
risk policies. The Group’s senior management is responsible for implementing the risk strategy approved by the Board, and continually
enhancing the policies and procedures for identifying, measuring, monitoring and controlling risks.
In line with the Group’s risk management objectives and risk tolerance levels, the specific strategies for market risk management include:
1. The Group will manage its market risk exposure by evaluating each new product / activity with respect to the market risk introduced
by it;
2. The Group will proactively measure and continually monitor the market risk in its portfolio;
3. The Group will at all time hold sufficient capital in line with the CBB Pillar 1 regulatory capital requirements;
4. The Group will establish a market risk appetite which will be quantified in terms of a market risk limit structure;
5. The Group will establish a limit structure to monitor and control the market risk in its portfolio. These limits will include position limits,
maximum/stop loss limits, factor sensitivity limits, VaR limits and maturity limits;
6. The Group will carry out stress testing periodically using the worst case scenarios to assess the effects of changes in the market value
due to changing market conditions;
7. The Group will periodically carry out back testing of market risk assessment models in order to evaluate their accuracy and the
inherent model risk;
8. The Group will match the amount of floating rate assets with floating rate liabilities; and
9. The Group will clearly identify the foreign currencies in which it wishes to deal in and actively manage its market risk in all foreign
currencies in which it has significant exposure.

3.6.4 Market risk measurement methodology

Market risk measurement techniques include the use of a number of techniques for market risk measurement. The risk measurement
techniques mentioned in this section are used for measuring market risk in both trading book as well as banking book.
The various techniques which are used by the Group for the measurement, monitoring and control of market risk are as follows:
a. Overnight open positions;
b. Stop loss limits;
c. Factor sensitivity limits;
d. VaR limits; and
e. Profit rate risk gap analysis.

3.6.5 Market risk monitoring and limits structure

The Asset and Liability Committee (ALCO) proposes through the Executive Committee and Board the tolerance for market risk. Based
on these tolerances, Risk and Compliance Unit and Treasury have established appropriate risk limits that maintain the Group’s exposure
within the strategic risk tolerances over a range of possible changes in market prices and rates.

3.6.6 Limits monitoring

The Treasury Department and Risk and Compliance Unit monitor the risk limits for each transaction, ensure that the limits are well within
set parameters, and report periodically to top management.

3.6.7 Breach of limits

In case a limit is breached, an approval from the CEO is required to continue with the transaction. An immediate report is provided to the
ALCO after every significant limit breach. This breach is also reported to and approved by the Executive Committee (EXCOM). The limits
are revised at least bi-annually or when deemed required.
98
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.6 Market Risk (Continued)
3.6.8 Portfolio review process
On a monthly basis, Risk and Compliance Unit reviews the Group’s assets and liabilities portfolio to evaluate the overall corporate
exposure to market risk. As part of the review, Risk and Compliance Unit also monitors the Group’s overall market exposure against the
risk tolerance limits set by the Board. Risk and Compliance Unit also reviews the adherence to approved limits to control the market risk.
Changes, if any, in market risk limits are communicated to business units after review by the GM-C&RM/CEO and approval by the ALCO
or EXCOM, as per the delegated authorities approved by the Board. Balance sheet exposure is being reviewed on a quarterly basis by
the Board level Audit and Risk committees.

3.6.9 Reporting
Risk and Compliance Unit generates at regular periodic intervals market risk management reports. These reports aim to provide the
Group’s senior management with an up-to-date view of its market risk exposure.

3.6.10 Stress testing

Stress tests produce information summarising the Group’s exposure to extreme, but possible, circumstances and offer a way of measuring
and monitoring the portfolio against extreme price movements of this type. The Group’s Risk and Compliance Unit employs four stress
categories: profit rates, foreign exchange rates, equity prices, and commodity prices. For each stress category, the worst possible stress
shocks that might realistically occur in the market are defined.

3.6.11 Foreign subsidiary

The Group does not have any foreign subsidiary.
Table – 20. Market Risk Capital Requirements (PD-1.3.27 (b))
The following table summarises the capital requirement for foreign exchange risk as of 31 December 2015:

Foreign
exchange
risk
BD’000
Foreign exchange risk 15,589
Foreign exchange risk capital requirement 1,871
Maximum value capital requirement 1,871
Minimum value capital requirement 1,247

3.7 Operational Risk

3.7.1 Introduction
Operational risk is the risk of loss arising from system 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 financial 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.

3.7.2 Sources of operational risk

The different sources of operational risks faced by the Group can be classified broadly into the following categories;
1. People risk which arises due to staffing inadequacy, unattractive remuneration structure, lack in staff development policies, lack in
procedures for appointment, unhealthy professional working relationship, and unethical environment;
2. Processes risk which arises due to inadequate general controls, inadequate application controls, improper business and market
practices and procedures, inappropriate/inadequate monitoring and reporting; and
3. Systems (Technology) risk which arise due to integrity of information - lacking in timelines of information, omission and duplication of
data; hardware failures due to power surge, obsolescence or low quality.
99
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.7 Operational Risk (Continued)

3.7.3 Operational risk management strategy

As a strategy, the Group will identify the sources of operational risks in coordination with each business unit. The Group carried out Risk
Control Self-Assessments (“RCSA”), and plans to do a continuous and on-going exercise to identify the operational risks it is exposed to.
The Group on a continuous basis will:
a. assess the effectiveness of controls associated with identified risks;
b. regularly monitor operational risk profiles and material exposures to losses; and
c. i dentify stress events and scenarios to which it is vulnerable and assess their potential impact, and the probability of aggregated losses
from a single event leading to other risks.
3.7.4 Operational risk monitoring and reporting
The internal monitoring and reporting process ensures a consistent approach for providing pertinent information to senior management
for the quick detection and correction of deficiencies in the policies, processes, and procedures for managing operational risk through
ongoing, periodic reviews.
The objective of the reporting process is to ensure relevant information is provided to senior management and the Board to enable
the proactive management of operational risk. The process ensures a consistent approach for providing information that enables
appropriate decision making and action taking.
3.7.5 Operational risk mitigation and control
The business units, in consultation with Risk and Compliance Units determine all material operational risks and decide the appropriate
procedures to be used to control and/or mitigate the risks.
For those risks that cannot be controlled, the business units in conjunction with Risk and Compliance Unit will decide whether to accept
the risks, reduce the level of business activity involved, transfer the risk outside the Group or withdraw from the associated activity
completely. Risk and Compliance Unit facilitates the business units in co-developing the mitigation plans.

3.7.6 Business Continuity Plan (BCP)

The Group has also developed a comprehensive business continuity plan detailing the steps to be taken in the event of extreme conditions
to resume the Group’s operations with minimum delay and disturbance. The plan is in implementation stage. Elements of contingency
plans and disaster recovery processes include operating systems, physical space, telecommunications and resources.
3.7 Operational Risk
Table - 21. Operational Risk Exposure (PD-1.3.30 (a), (b) & (c))
The following table summarises the amount of exposure subject to basic indicator approach of operational risk and related capital
requirements:

Gross income
2014 2013 2012
BD'000 BD'000 BD'000
Total Gross Income 32,290 35,375 23,780
Indicators of operational risk
Average Gross income (BD'000) 30,482
Multiplier 12.5
381,021
Eligible Portion for the purpose of the calculation 15%
TOTAL OPERATIONAL RISK WEIGHTED EXPOSURE (BD'000 ) 57,153

Risk and Compliance Unit ensures that the BCP is kept up to date and tested once a year in a simulated environment to ensure that it can
be implemented in emergency situations and that the management and staff understand how it is to be executed. Results of this testing
conducted by Risk and Compliance Unit is evaluated by the GM-C&RM and presented to the EXCOM/Board for evaluation.
100
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.8 Equity Position in the Banking Book

Equity price risk is the risk that the fair values of equities decrease as a 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 accounting policies, including valuation methodologies and their related key assumptions, are disclosed in the consolidated financial
statements as of 31 December 2015. Equity type instruments carried at fair value through equity and investment properties are kept for
capital gain purposes, all other investments including investments in associates are kept for strategic long term holdings.
Table – 22. Equity Position Risk in Banking Book (PD-1.3.31 (b) (c) & (f))
The following table summarises the amount of total and average gross exposure of equity based financing structures by types of
financing contracts and investments as of 31 December 2015:

Total * Average Risk

gross gross Publicly Privately weighted Capital
exposure exposure traded held assets Requirements
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Sukuk 95,867 93,368 - 95,867 13,759 1,651
Equity investments 20,564 21,344 1,019 19,545 52,256 6,271
Funds 14,204 14,345 - 14,204 55,876 6,705
Total 130,635 129,057 1,019 129,616 121,891 14,627
*Average balances are computed based on month end balances.

Table – 23. Equity Gains or Losses in Banking Book (PD-1.3.31 (d) & (e))
The following table summarises the cumulative realised and unrealised gains or (losses) during the year ended 31 December 2015:
BD’000
Cumulative realised gain arising from sales or liquidations in the reporting period (596)
Total unrealised losses recognised in the consolidated statement of financial position but not through consolidated
statement of income -
Unrealised losses included in Tier 1 Capital 768
Unrealised gains included in Tier 2 Capital 7,088

3.9 Equity of Investment Accountholders (“IAH”)

The Group may require to decrease or increase loses or profit on certain IAH accounts for the purpose of income smoothing. Thus the
Group is exposed to some of the price risk on assets funded by equity of Investment Accountholders (“IAH”). The CBB requires the Group
to maintain capital to cover the price risk arising from 30% of assets funded by IAH on a pro-rata basis.
The Group is authorised by the IAH to invest the account holder’s funds on the basis of Mudaraba contract in a manner which the Group
deems appropriate without laying down any restrictions as to where, how, and for what purpose the funds should be invested. Under
this arrangement the Group can commingle the equity of investment accountholders investment funds with its own funds (owner’s
equity) or with other funds the Group has the right to use (e.g. current accounts or any other funds which the Group does not receive
on the basis of Mudaraba contract). The IAH and the Group generally participate in the returns on the invested funds. In such type of
contract, the Group is not liable for any losses incurred on the joint pool other than the loss resulting from gross negligence or wilful
misconduct on the part of the Group or due to the Group’s violation of the terms and conditions as agreed between the Group and the
IAH.
The amount received from the customer on account of equity of investment accountholders is not invested completely in the portfolio
of selected investments as the Group is required to maintain a cash reserve with CBB. In addition, the Group requires to set aside
certain amount to meet operational requirements. The income allocated to the equity of investment accountholders deposits being
received is in accordance with the utilisation of such deposits. The utilisation rate is determined by the ALCO with the approval of Shari’a
Supervisory Board.
101
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.5 3.9 Equity of Investment Accountholders (“IAH”) (Continued)
If at any point of time in a particular pool the funds of IAH exceed the assets, the excess amount shall be treated to be invested in
commodity Murabaha and earn the average rate of profit on Commodity Murabaha earned during the excess period. There should be
no inter-pool financing at any point of time. The Group should establish a control to avoid excess fund in any pool to be used in other
pool.
Proposal for new products is initiated by the business lines within the Group and ALCO review such proposal to ensure that the new
product is in line with the Group’s business and risk strategy. All new products require the approval of the Shari’a Supervisory Board of
the Bank. The business lines of the Group have expertise in creating high end value added products offering a wide range of products,
expected return, tenors, and risk profile. Information on new products or any change in the existing products will be placed on the
Group’s website or published in the media.
The Group has designed special quality assurance units whom reports complaints directly to the CEO. The complaints are investigated
by personnel not directly related to the subject matter of the complaints.
The Group offers equity of investment accountholders in different currencies for maturity periods ranging from 1 month, 3 months,
6 months, 9 months, 12 months and 36 months. The customer signs a written contract covering all terms and conditions of the
investment, including tenor, basis of profit allocation, and early withdrawaln.
Because equity of investment accountholders is a significant funding source for the Group, the Group regularly monitors rate of return
offered by competitors to evaluate the expectation of its IAH. The Group’s policy provide whole or partial waiver of the Mudarab share
of income from investment in order to provide a reasonable return to its investors.
The Group comingles its own funds and equity of investment accountholders funds which are invested together. The Group has
identified two pools of assets where the equity of investment accountholders funds are invested and income from which is allocated to
such is account.
The Group has already developed a written policies and procedures applicable to its portfolio of equity of investment accountholders.
equity of investment accountholders funds are invested and managed in accordance with Shari’a requirements.
• Pool A: Low risk assets or generating low yield.
• Pool B: High risk assets or generating high yield.
Profits of an investment jointly financed by the Group and the equity of investment accountholders holders shall be allocated between
them according to the contribution of each of the Group and the IAH in the jointly financed investment separately for each Joint pool
A and B. Operating expenses incurred by the Group are not charged to investment account. In case of the loss resulting from the
transactions in a jointly financed investment, such loss shall first be deducted from undistributed profits, if any. Any excess of such loss
shall be deducted from Investment Risk Reserve (IRR). Any remaining of such loss shall be deducted from the total balance of fund
available in the Joint pool, as at that date, in the respective ratio of the Group’s and IAH’s respective contribution to the joint fund.
Impairment provisions shall only be allocated to Pool B in the ratio of capital contribution by Bank and IAH of Pool B. The reversal of this
provision in future years shall be allocated between Bank and IAH of Pool B in the ratio of capital contribution at the time the reversal
is made. The loss can be entirely borne by the shareholders of the Group subject to the approval of the Board. Equity of investment
accountholders deposits are measured at their book value.
In case of early withdrawal of IAH fund before completion of the term, the effective utilisation method will be applied.
102
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.9 Equity of Investment Accountholders (“IAH”) (Continued)
Table – 24. Equity of Investment Accountholders by Type (PD-1.3.33 (a))
The following table summarises the breakdown of equity of investment accountholders accounts as of 31 December 2015:

BD’000

Customers 614,436
Financial institutions' investment accounts 1,024
Total 615,460
Table – 25. Equity of Investment Accountholders Ratios (PD-1.3.33 (d) & (f))
The following table summarises the return on average assets and mudarib share as a percentage of the total investment profit for the
year ended 31 December 2015;

Profit Paid on Average IAH Assets * 0.95

Mudarib Fee to Total IAH Profits 65.00%

* Average assets funded by IAH have been calculated using month end balances.

Table – 26. Equity of Investment Accountholders Ratios (PD-1.3.33 (e) & (g))
The following table summarises the profit distributed to IAH and financing ratios to the total of IAH by type of investment account
holder for the year ended 31 December 2015:

Profit Percentage
distributed to total
Account Type to total IAH IAH
Saving accounts (including VEVO) 2.92% 20.47%
Defined accounts - 1 month 0.85% 0.79%
Defined accounts - 3 months 0.30% 0.29%
Defined accounts - 6 months 0.50% 0.44%
Defined accounts - 9 months 0.00% 0.00%
Defined accounts - 1 year 2.86% 2.16%
Investment certificates 0.67% 0.10%
IQRA Deposits 1.30% 0.73%
Tejoori Deposit 3.00% 22.82%
Customer's deposits 78.07% 39.01%
Bank's deposits 9.53% 13.19%
100% 100%

The calculation and distribution of profits was based on average balances.

Table – 27. Equity of Investment Accountholders to Total Financing (PD-1.3.33 (h) & (i))
The following table summarises the percentage of counterparty type to total financing for each type of Shari’a-compliant contract to
total financing as of 31 December 2015:

Percentage of
Financing
to Total
Financing
Placements with financial institutions 9.40%
Financial institutions 61.10%
Investment in Sukuk 12.32%
Ijarah muntahia bittamleek 15.17%
Ijarah rental receivables 2.02%
103
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.9 Equity of Investment Accountholders (“IAH”) (Continued)

Percentage of Counterparty Type to Total Financing

Banks and Personal &
Trading and Financial Real Consumer Governmental
Manufacturing Institutions Estate Aviation Finance Organisation Others

Placements with financial institutions 0.00% 9.40% 0.00% 0.00% 0.00% 0.00% 0.00%
Financial Assets 7.23% 0.58% 11.91% 0.07% 33.06% 1.23% 7.02%
Investment in Sukuk 0.00% 1.08% 1.72% 0.00% 0.00% 7.83% 1.68%
Ijarah muntahiabittamleek 0.44% 0.03% 5.00% 0.00% 8.74% 0.95% 0.00%
Ijarah rental receivables 0.11% 0.00% 1.16% 0.00% 0.70% 0.04% 0.01%
7.78% 11.09% 19.80% 0.07% 42.49% 10.05% 8.71%

Table – 28. Equity of Investment Accountholders Share of Profit (PD-1.3.33 (l) (m) & (n))
The following table summarises the share of profits earned by and paid out to profit sharing investment accounts and the Group as
Mudarib for the year ended 31 December 2015:

Share of profit earned by IAH before transfer to/from reserves - BD '000 21,582
Percentage share of profit earned by IAH before transfer to/from reserves 24.03%
Share of profit paid to IAH after transfer to/from reserves - BD '000 5,187
Percentage share of profit paid to IAH after transfer to/from reserves 34.28%
Share of profit paid to Bank as mudarib - BD '000 16,395

Table – 29. Equity of Investment Accountholders Percentage Return to Profit Rate of Return (PD-1.3.33 (q))
The following table summarises the average distributed rate of return or profit rate on profit sharing investment accounts for the year
ended 31 December 2015:

3 months 6 months 12 months 36 months

Percentage of average distributed rate of return to profit rate of return 0.64% 0.73% 0.86% 3.50%

Table – 30. Equity of Investment Accountholders Type of Assets (PD-1.3.33 (r ) & (s))
The following table summarises the types of assets in which the funds are invested and the actual allocation among various types of
assets for the year ended 31 December 2015:

Opening Movement Closing

Actual During the Actual
Allocation Period Allocation
BD’000 BD’000 BD’000
Cash and balances with banks and central Bank 52,118 8,996 61,114
Placements with financial institutions 68,567 4,583 73,150
Financing assets 408,021 67,627 475,648
Investment in sukuk 81,834 14,033 95,867
Ijarah muntahia bittamleek 102,277 15,784 118,061
Ijarah rental receivables 14,065 1,627 15,692
Total 726,882 112,650 839,532
104
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.9 Equity of Investment Accountholders (“IAH”) (Continued)
Table – 31. Equity of Investment Accountholders Profit Earned and Paid (PD-1.3.33 (w))
The following table summarises the amount and rate of return of profits earned by the Group and paid out to equity of investment
accountholders over the past five years:

Profit Earned Profit Paid

(jointly
financed) to (IAH)
BD’000 %age BD’000 %age
2015 37,188 4.85% 5,733 0.75%
2014 23,491 3.55% 7,539 1.14%
2013 32,849 4.98% 11,124 1.69%
2012 30,662 5.21% 13,993 2.38%
2011 33,029 5.53% 14,742 2.31%

Table – 32 Treatment of assets financed by IAH (PD-1.3.33 (v))

RWA for
Capital
Adequacy Capital
Assets RWA Purposes Requirements
BD’000 BD’000 BD’000 BD’000
Cash and balances with banks and central Bank 34,065 - - -
Placements with financial institutions 48,572 14,418 4,325 519
Financing assets* 315,830 215,313 64,594 7,751
Investment in sukuk 63,656 17,070 5,121 615
Ijarah muntahia bittamleek* 78,392 82,057 24,617 2,954
Ijarah rental receivables 10,419 10,419 3,126 375
550,934 339,277 101,783 12,214

*The amounts have been allocated on pro-rata basis due to system limitation.

3.10 Liquidity Risk

3.10.1 Introduction
Liquidity risk is defined as “the risk that the Group will be unable to meet its obligations as they come due because of an inability to
obtain adequate funding or to liquidate assets”.
3.10.2 Sources of liquidity risk
The sources of liquidity risk can broadly be categorised in the following:
a. Funding risk is the risk of not being able to fund net outflows due to unanticipated withdrawal of capital or deposits;
b. Call risk is the risk of crystallisation of a contingent liability; and
c. Event risk is the risk of rating downgrades or other negative public news leading to a loss of market confidence in the Group.

3.10.3 Bank’s funding strategy

The Board reviews the funding strategy on an annual basis and amends the existing strategy, as deemed necessary. For this purpose, all
business units advise the Treasurer of their projected liquidity requirements and contributions at the start of each year as part of annual
budgeting process.
The funding strategy highlights any anticipated liquidity shortfalls, the funding requirements to finance these shortfalls and their impact
on the statement of financial position. The Group’s Risk Charter and Liquidity Policy address liquidity contingency plan to deal with
stressed scenarios and outline an action plan that can be taken in the event of liquidity stress situation.
105
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.10 Liquidity Risk (Continued)

3.10.4 Liquidity risk strategy

The Group monitors the liquidity position by comparing maturing assets and liabilities over different time buckets of up to 1 month, 1-3
months, 3-6 months, 6 months to 1 year, 1-3 years, and over 3 years. The Group carries out stress testing periodically using the worst case
scenarios to assess the effects of changes in market conditions on the liquidity of the Group. As a strategy the Group maintains a large
customer base and good customer relationships.
The Treasury Department, in conjunction with Risk and Compliance Unit periodically reviews/updates (at least annually) the liquidity risk
strategy which is evaluated by ALCO before presenting to the EXCOM and the Board for approval.

3.10.5 Liquidity risk measurement tools

The Group is monitoring the liquidity risk through ALCO

3.10.6 Liquidity risk monitoring

The Group has set the tolerance for liquidity risk which are communicated to the Risk and Compliance Unit and Treasury Department.
Based on these tolerances, Risk and Compliance Unit and Treasury have established appropriate risk limits that maintain the Group’s
exposure within the strategic risk tolerances over a range of possible changes in liquidity situations.

3.10.7 Liquidity limits structure

The Group uses a combination of different limits to ensure that liquidity is managed and controlled in an optimal manner. The Group has
set the following limits for monitoring liquidity risks:
a. Liquidity Gap limits;
b. Liquidity Ratio limits; and
c. Minimum Liquidity Guideline (“MLG”).

3.10.8 Liquidity risk stress testing

To evaluate whether the Group is sufficiently liquid, behavior of the Group’s cash flows under different conditions are observed.

3.10.9 Contingency funding plan

The Group does contingency funding exercises which details procedures to be followed by the Group, in the event of a liquidity crisis or
a situation where the Group faces stressed liquidity conditions. The contingency funding plan will be an extension of day to day liquidity
management and involves maintenance of an adequate amount of liquid assets and management of access to funding resources. The
ALCO members discuss and monitor the situation over regular time-intervals to ensure sufficient liquidity in the Group.

Table – 33. Liquidity Ratios (PD-1.3.37)

The following table summarises the liquidity ratios for the past five years:
2015 2014 2013 2012 2011
Due from banks and financial institutions / Total Assets 7.49% 7.83% 20.28% 15.90% 17.73%
Islamic Financing / Customer Deposits excluding banks 78.46% 72.48% 70.80% 72.32% 114.41%
Customer Deposits / Total Assets 77.50% 64.74% 67.83% 68.87% 63.08%
Liquid Assets / Total Assets 13.75% 13.79% 25.86% 21.17% 22.70%
Growth in Customer Deposits 7.48% (8.24%) 7.66% 8.36% (11.71%)
106
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.11 Profit Rate Risk

Profit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the
sources of finance.
Senior management identifies the sources of profit rate risk exposures based upon the current as well as forecasted balance sheet
structure of the Group. The profit rate risk in the Group may arise due to the following transactions:
a. Murabaha transactions;
b. Wakala transactions;
c. Ijarah muntahia bittamleek;
d. Sukuk; and
e. Musharaka investments.
The Group’s management believe that the Group is not exposed to material profit rate risk as a result of mismatches of profit rate
repricing of assets, liabilities and equity of investment accountholders as the repricing of assets, liabilities and equity of investment
accountholders occur at similar intervals. The profit distribution to equity of investment accountholders is based on profit sharing
agreements. Therefore, the Group is not subject to any significant profit rate risk.

3.11.1 Sources of Profit Rate Risk

The different profit rate risks faced by the Group can be classified broadly into the following categories.
a. Re-pricing risk which arises from timing differences in the maturity (for fixed rate) and re-pricing (for floating rate) of assets, liabilities
and off balance sheet positions. As profit rates vary, these re-pricing mismatches expose the Group’s income and underlying economic
value to unanticipated fluctuations;
b. Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on the Group’s income and/or underlying
economic value;
c. B
 asis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on
different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise to
unexpected changes in the cash flows and earnings spread between assets, liabilities, and off balance sheet instruments of similar
maturities or re-pricing frequencies; and
d. Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets
financed by the liabilities, when the return on assets is under performing as compared with competitors rates.

3.11.2 Profit rate risk strategy

The Group is not exposed to interest rate risk on its financial assets as no interest is charged. However, the fair value of financial assets
may be affected by current market forces including interest rates. The Group recognises income on certain of its financial assets on a
time-apportioned basis. As a strategy the Group:
a. has identified the profit rate sensitive products and activities it wishes to engage in;
b. has established a limit structure to monitor and control the profit rate risk of the Group;
c. m
 easures profit rate risk through establishing maturity/re-pricing schedule that distributes profit rate sensitive assets, liabilities and
off-balance sheet items in pre-defined time bands according to their maturity; and
d. makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book.
107
BAHRAIN ISLAMIC BANK
ANNUAL REPORT 2015

Basel III, Pillar III Disclosures

For the year ended 31 December 2015

3. Risk Management (Continued)

3.11 Profit Rate Risk (Continued)

3.11.3 Profit rate risk measurement tools

The Group uses the following tools for profit rate risk measurement in the banking book:
a. Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities of the banking
book in absolute terms; and
b. Basis Point Value (“BPV”) analysis which is the sensitivity measure for all profit rate priced products and positions. The BPV is the
change in net present value of a position arising from a 1 basis point shift in the yield curve. This quantifies the sensitivity of the
position or portfolio to changes in profit rates.

3.11.4 Profit rate risk monitoring and reporting

The Group has implemented information systems for monitoring, controlling and reporting profit rate risk. Reports are provided on
a timely basis to EXCOM and the Board of Directors. The Risk and Compliance Unit monitors these limits regularly. GM-C&RM reviews
the results of gap limits and exceptions, if any, and recommends corrective action to be taken which is approved by ALCO or EXCOM,
according to authority parameters approved by the Board.
Table – 34. Profit Rate Risk in Banking Book (PD-1.3.40 (b))
The following table summarises the effect on the value of assets, liabilities and economic capital for a benchmark change of 200 bp in
profit rates as of 31 December 2015:

Effect on
Effect on Effect on value of
value of value of Economic
Asset Liability Capital
BD’000 BD’000 BD’000

Upward rate shocks: (3,533) 3,533 -

Downward rate shocks: 10,344 (10,344) -

Table – 35. Quantitative Indicators of Financial Performance and Position (PD-1.3.9 (b) PD-1.3.33 (d))
The following table summarises the basic quantitative indicators of financial performance for the past 5 years:

2015 2014 2013 2012 2011

Return on average equity 11.88% 11.80% 8.26% (42.31%) (17.23%)
Return on average assets 1.21% 1.00% 0.70% (4.33%) (1.96%)
Cost to Income Ratio 51.68% 55.10% 53.44% 80.14% 74.89%

Table – 36. The following table summarises the historical data over the past five years for the following (PD-1.3.4)
2015 2014 2013 2012 2011
Mudarabah profit / Mudarabah assets 2.83% 4.73% 5.54% 5.14% 5.44%
Mudarabah profit paid / Mudarabah assets 0.68% 1.14% 1.61% 2.34% 2.43%
PIRI & IRR Movment 584 (155) 233 63 -
Rate of Return on IAH 0.64% 1.12% 1.52% 2.11% 2.31%

CBB Penalties (PD-1.3.44)

There were no penalties imposed by the CBB or paid to the CBB during the year.
www.bisb.com