ANNUAL REPORT 2014

Bahrain Islamic Bank

Annual Report 2014

Embarking upon
a new strategic direction
Following approval by the Board of Directors in April 2014, Bahrain Islamic Bank
commenced the implementation of its new five-year strategy for growth, which was
developed in collaboration with the Boston Consulting Group. Key objectives of the
new strategy include focusing on core banking activities; disposing of non-performing
investment assets; reducing the cost of capital and operating expenses; upgrading the
information technology infrastructure; and exploiting opportunities for entering new
markets outside Bahrain, with the aim of expanding the Bank’s activities.

CONTENTS
Section 1 Section 3
02 Corporate Overview 43 Independent Auditors’ Report
03 Vision and Mission 44 Consolidated Statement of Financial Position
04 Financial Highlights 45 Consolidated Statement of Income
05 Operational Highlights 46 Consolidated Statement of Cash Flows
47 Consolidated Statement of Changes in Owners’ Equity
Section 2
48 Consolidated Statement of Sources and Uses of Good
06 Chairman’s Statement
Faith Qard Fund
08 Board of Directors
49 Consolidated Statement of Sources and Uses of Zakah
10 Sharia’a Supervisory Board
and Charity Fund
12 Acting Chief Executive Officer’s Report
50 Notes to the Consolidated Financial Information
14 Executive Management
80 Basel II, Pillar III Disclosures
17 Review of Operations
26 Risk Management Review
27 Remuneration Disclosures
33 Corporate Social Responsibility Review
34 Corporate Governance Review
41 Sharia’a Supervisory Board Report

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
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 Crown Prince,

the Kingdom of Bahrain the Kingdom of Bahrain Deputy Supreme Commander
and First Deputy Prime
Minister
Section 1
Profile, Vision and Mission

CORPORATE OVERVIEW

Profile

Bahrain Islamic Bank (BisB) is uniquely distinguished as being the first Islamic bank
in the Kingdom of Bahrain, and the fourth in the GCC. Incorporated in 1979, BisB
operates under an Islamic Retail banking licence from the Central Bank of Bahrain,
and is listed on the Bahrain Bourse. At the end of 2014, the Bank’s paid-up capital
was BD 93 million, while total assets stood at BD 875 million.

By combining its unique heritage and tradition with the adoption of modern banking
techniques, underscored by technology and innovation, BisB has maintained its status
as the leading Sharia’a-compliant commercial bank in the Kingdom.

CUSTOMERS

Arad
Main Office
Around the City Centre Muharraq
Kingdom Hidd
Budaiya
Gudaibiya

Isa Town

Sitra

Riffa

Hamad Town
Financial Malls
Branches

02 Bahrain Islamic Bank

Annual Report 2014
Section 1 Section 2 Section 3
Profile, Vision and Mission

VISION AND MISSION

Vision Mission

Our vision is to be the preferred Our mission is to deliver value to:

Islamic financial partner, going Customers: Exceeding their expectations and
beyond boundaries to grow building loyalty.
together.
Employees: Nurturing and retaining talent.
Shareholders: Maximising consistent returns.
Community: Honouring our social
commitment to society.

EMPLOYEES

SHAREHOLDERS COMMUNITY

7 4 54
Branches Financial Malls ATMs

Bahrain Islamic Bank 03

Annual Report 2014
Section 1
Financial Highlights

FINANCIAL HIGHLIGHTS

875 910 833 839 936 Islamic financing 510 437 415 392 414
Total assets
BD Million BD Million

875m 2014 2013 2012 2011 2010

510m 2014 2013 2012 2011 2010

Total operating 47 48 38 41 35 Investors’ share in 7.5 11 14 15 18

income income
BD Million BD Million

47m 2014 2013 2012 2011 2010

7.5m 2014 2013 2012 2011 2010

208 201 210 233 239 635 713 661 638 741
Investments Unrestricted
BD Million investment
accounts
BD Million

208m 2014 2013 2012 2011 2010 635m 2014 2013 2012 2011 2010

Book value 85 84 75 108 138 148 136 82 90 129

Share price
per share Bahraini fils
Bahraini fils

85fils 2014 2013 2012 2011 2010

148fils 2014 2013 2012 2011 2010

04 Bahrain Islamic Bank

Annual Report 2014
Section 1 Section 2 Section 3
Operational Highlights

OPERATIONAL HIGHLIGHTS

Enhancing
Retail Corporate
Banking customer
Banking extends help service
grows customer base
for SMEs and convenience

The launch of additional new BisB extended its support for the Key customer service-related initiatives
initiatives, services and products during small-and-medium enterprises (SMEs) during 2014 include the opening of
2014, together with a continued focus sector in 2014 with an additional two additional financial malls, bringing
on customer service, resulted in the BD 20 million being made available the total to four; the launch of a
Bank’s retail customer base expanding to Tamkeen’s Enterprise Financing Titanium MasterCard; and, for the first
by 14%, with Islamic financing Scheme. This raises the value of the time in the Kingdom of Bahrain, the
growing by 19%, despite intensified Tamkeen-BisB agreement to BD 50 exclusive introduction of the Signature
competition in Bahrain’s banking million, through which over 200 SMEs Debit Visa card for the Bank’s Al
sector. have benefited to date. Thuraya private and priority banking
customers.

Strengthening Financial
the IT
Continued results
industry reflect
infrastructure recognition success of new strategy

Key information technology The considerable achievements by The excellent financial performance by
achievements in 2014 include Bahrain Islamic Bank during 2014 – Bahrain Islamic Bank in 2014, which
upgrading the core banking system; financial, business and operational – saw net profit increase by 52% over
enhancing the disaster recovery site were recognised by receipt of the ‘Best the previous year, reflects the successful
with the latest new technology; and Islamic Bank in Bahrain’ award from implementation of its new strategic
finalising the information security World Finance, a leading UK-based focus on growing core activities
framework in line with ISO 27001. The financial magazine. A distinguished and disposing of non-performing
Bank also commissioned new systems judging panel reviewed nominations investment assets. The Bank relied fully
in the areas of human resources, retail from the magazine’s readers as part on revenues and fees from financing
collections, purchasing and archiving. of the process of selecting winning and major activities, which were
institutions. responsible for generating 82% of
operating revenues. These were free
from revaluations or unearned profits,
with the exception of the successful
exits from some investment portfolios
and listed equities, which realised a net
gain of BD 6.9 million.

Bahrain Islamic Bank 05

Annual Report 2014
Section 2
Chairman’s Statement

CHAIRMAN’S STATEMENT

“Despite another year of intensified

competition, I am pleased to report that
the Bank’s retail and corporate banking
businesses performed well, and grew
their respective market share of Bahrain’s
commercial banking sector during 2014”

In the name of Allah, the Most Beneficent, the Most Merciful. Prayers and
Peace be upon the Last Apostle and Messenger, Our Prophet Mohammed,
His Comrades and Relatives.

On behalf of the Board of Directors, I am delighted to report that BisB achieved an improved financial
performance in 2014. Net profit for the year increased by 52
it is my privilege to present the percent to BD 9.3 million from BD 6.1 million in 2013; while total
income grew by 19 percent to BD 43 million from BD 36 million the
annual report and consolidated previous year. Earnings per share were 9.93 Bahraini fils compared
with 6.52 fils in 2013.
financial statements of Bahrain BisB continued to maintain a strong balance sheet, with total assets
Islamic Bank (BisB) for the year standing at BD 875 million and owners’ equity of BD 79 million
at the end of 2014, while liquidity remained healthy at BD 121
ended 31 December 2014. This million. Maintaining our prudent and conservative approach, we
made impairment provisions totaling BD 12 million in 2014, in
was a successful year for the comparison with impairment provisions of BD 10 million in 2013,
which reflects the success of measures taken during the year to
Bank, during which we posted an address non performing investment and financing assets.
increase in profitability, continued Despite another year of intensified competition, I am pleased to
report that the Bank’s retail and corporate banking businesses
to improve our competitive edge, performed well, and grew their respective market share of
and commenced implementation of Bahrain’s commercial banking sector during 2014. This reflects
our continued focus on delivering the highest levels of customer
the Bank’s new five year strategy for service, supported by the introduction of additional new innovative
products and services.
growth. At the same time, BisB continued to strengthen its corporate
governance and risk management frameworks, and enhance its
substantial investment in people and information technology.
The Bank also maintained its enduring contribution to the
economic and social well being of the Kingdom of Bahrain, and
the development of the Islamic banking industry, through its
enlightened corporate social responsibility programme.
In a significant development, Bahrain Islamic Bank commenced
the implementation of its new five year strategy during the year.

06 Bahrain Islamic Bank

Annual Report 2014
Abdul Razak Abdulla Hassan Al Qassim
Chairman

Developed in collaboration with the Boston Consulting Group, Looking ahead, the economic outlook for the Kingdom of Bahrain
it was approved by the Board of Directors in April 2014. Key remains positive, driven by an improved performance from the non
objectives of the new strategy include focusing on core banking oil sector and increased state spending. The International Monetary
activities; orderly disposing of non performing investment assets; Fund predicts that the Kingdom’s economy will grow faster than
reducing the cost of capital and operating expenses; upgrading the regional and global averages this year, and that this trend will
information technology infrastructure; and exploiting opportunities continue into 2015, albeit at a more moderate rate due to the
for entering new markets outside Bahrain, with the aim of impact of the recent decline in oil prices. Continued growth in the
expanding the Bank’s activities. As our financial and operational local economy will benefit business and trade, and have a positive
achievements during 2014 illustrate, we have made good progress effect on the banking and financial services industry. We therefore
in the initial implementation of our new strategy for growth. remain cautiously optimistic for the prospects of BisB in 2015, as
we embark upon a new strategic direction and enter a new chapter
During the year, there were some changes to the composition
in our long and pioneering history.
of the Board of Directors. Dr. Sherif Elsayed Aly Ayoub, who
represents the Islamic Development Bank (IDB), resigned from the Finally, on behalf of the Board of Directors, I would like to extend
Board following his appointment as Assistant Secretary General my sincere appreciation to His Majesty the King of Bahrain, His
of the Islamic Financial Services Board. I thank Dr. Ayoub for his Royal Highness the Prime Minister, and His Royal Highness the
contribution and wish him every success in his new role. In turn, Crown Prince, for their wise leadership and visionary reforms;
I would like to welcome Mr. Mohamed Hedi Mejai, who joins and also for their encouragement for the Islamic banking sector.
the Board of Directors as the new IDB representative, and whose Our thanks are also due to the Central Bank of Bahrain and
expertise and experience will be of great benefit to the Board. various Government institutions for their continued guidance and
cooperation.
Also during the year, Mr. Mohammed Ebrahim Mohammed
resigned as Chief Executive Officer of the Bank. On behalf of the I also take this opportunity to express our gratitude to the
Board, I thank him for his sterling contribution since 2007 and Bank’s shareholders for their loyalty and support; to our Sharia’a
wish him well in his new endeavours. I take this opportunity to Supervisory Board for its advice and supervision; and to the
congratulate Mr. Mohammed Ahmed Janahi, who was promoted management and staff of BisB for their highly valued dedication
to Deputy Chief Executive Officer and appointed as Acting CEO. A and professionalism in yet another challenging year.
veteran banker with over 40 years’ experience, Mohammed joined
BisB in 2007 as General Manager - Support Services, following
various executive positions with NBB, Al Baraka Bank and Gulf Air.
I wish him every success in his new position, and assure him of the
Board’s full support in carrying out his new responsibilities.
Abdul Razak Al Qassim
Chairman of the Board

Bahrain Islamic Bank 07

Annual Report 2014
Section 2
Board of Directors

BOARD OF DIRECTORS

1 2

3 4

5 6

7 8 9

08 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Board of Director’s Profiles

1. Mr. Abdul Razak Abdulla Al Qassim 4. Mr. Khalil Ebrahim Nooruddin 7. Mr. Mohammed Ahmed Abdulla
Chairman Board Member Board Member
Executive & Non-Independent Director Non-Executive & Independent Director Non-Executive & Non-Independent Director
Appointed on 5 June 2013 Elected on 7 July 2013 Appointed on 11 June 2013

Mr. Abdul Razak Al Qassim is the Chief Executive Mr. Khalil Ibrahim Nooruddin is an experienced Mr. Mohammed Ahmed AlKhaja is the Head of
Officer and Board member of National Bank of banker, at both an executive and board level. Asset Management at Osool Asset Management
Bahrain (NBB). He joined NBB in 1977 after seven Currently, he is the Managing Partner of Capital Company. Prior to Osool, he held senior
years with Chase Manhattan Bank. Abdul Razak Knowledge, a consulting and training company. management positions at Credit Suisse AG-Bahrain
Al Qassim is Chairman of the Board of Directors of Over the past five years, he has concluded Branch and Credit Suisse AG-Dubai. He started
Bahrain Islamic Bank (BisB); Chairman of Benefit several consulting assignments for financial his career at HSBC Middle East, before moving to
Company; Chairman of Bahrain Association institutions, working on strategy formulation and Merrill Lynch-Bahrain where he spent seven years.
of Banks; Deputy Chairman, Chairman of implementation. Prior to this, Khalil Nooruddin Mohammed Al Khaja is a Board Member, Chairman
Executive Committee and Member of Nomination worked for Investcorp Bank, Bahrain; UBS Asset of the Nomination & Remuneration Committee and
and Remuneration Committee at Bahrain Management in London and Zurich; and Chase Audit Committee Member at both the Medgulf
Telecommunication Company (Batelco); Deputy Manhattan Bank in Bahrain. He is an active member Group and Medgulf Allianz Takaful. Furthermore,
Chairman of Umniah Mobile Company (Jordan); of several civil and professional societies in Bahrain. he is a Board Member and Vice Chairman of
Deputy Chairman of Dhivehi Raajeyge Gulhn plc. A Chartered Financial Analyst, Mr. Nooruddin holds the Audit Committee of Bahrain Commercial
(Dhiraagu), Maldives; Deputy Chairman of Sure an MSc in Quantitative Analysis from the Stern Facilities Company. He holds a Bachelor’s degree in
Guernsey Limited, Sure Jersey Limited and Sure Business School at New York University, USA; and Accounting from the University of Bahrain, and is
Isle of Man Limited; Board Member of the Crown a BSc in Systems Engineering from the King Fahd accredited to the National Association of Securities
Prince International Scholarship Programme; Board University of Petroleum & Minerals, Saudi Arabia. He Dealers and the National Futures Association.
Member of Deposit and URIA Protection Board at has over 36 years’ professional experience. Mr. AlKhaja has more than 16 years’ professional
Central Bank of Bahrain. He holds a Master’s degree experience.
in Management Sciences and a Sloan Fellowship 5. Mr. Ebrahim Hussain Ebrahim Aljassmi
from MIT (Massachusetts Institute of Technology), Board Member 8. Mrs. Fatima Abdulla Budhaish
USA. Non-Executive & Independent Director Board Member
Elected on 7 July 2013 Executive & Non-Independent Director
2. Brig. Khalid Mohammed Al Mannai Appointed on 5 June 2013
Mr. Ebrahim Hussain Ebrahim Aljassmi was the
Vice Chairman
Chief Executive Officer & Board Member of Khaleeji Mrs. Fatima Abdulla Budhaish is Assistant General
Non-Executive & Non-Independent Director
Appointed on 11 June 2013 Commercial Bank until June 2012, and continued Manager - Credit Risk at the National Bank of
as Board Member until July 2013. Prior to this, Bahrain (NBB). She joined NBB in 2004, and worked
Brigadier Khalid Mohammed Al Mannai is the he was Chief Executive Officer of the Liquidity in various capacities before taking up her current
General Manager of the Bahrain Military Pension Management Centre. Previously, at the Arab position as Assistant General Manager in 2013. Prior
Fund, and one of the co-founders of the GCC Banking Corporation, he held the positions of Vice to this, she spent five years with BBK. A Certified
Expanded Military Pension Coverage Committee. President-Global Marketing Unit, Vice President- Public Accountant (USA), Mrs. Budhaish holds an
He joined the Military Pension Fund after spending Treasury & Marketable Securities Department, Executive MBA from the University of Bahrain;
30 years with the Bahrain Defence Force. and General Manager-ABC Securities. He has also and attended the Gulf Executive Development
Brigadier Al Mannai is a Board Member of Bahrain worked for BBK Financial Services Company, and Programme at Darden School of Business, University
Telecommunications Company (Batelco), the Social Shamil Bank. He holds an MBA from the University of Virginia, USA. She has over 16 years’ professional
Insurance Organisation (SIO) and Osool Asset of Bahrain and a Bachelor’s degree in Economics experience.
Management Company. He holds a MBA from from the University of Kuwait; and has over 33
Sheffield Hallam University, UK; and has over 34 years’ experience in both conventional and Islamic 9. Dr. Sherif Ayoub
years’ professional experience. banking. Board Member
Executive & Non-Independent Director
3. Mr. Talal Ali Al Zain 6. Mr. Othman Ebrahim Naser Al Askar Appointed on 6 February 2014
Board Member Board Member
Non-Executive & Independent Director Non-Executive & Independent Director Dr. Sherif Ayoub has over 16 years of experience in
Elected on 7 July 2013 Elected on 7 July 2013 the finance, management consulting, and economic
development domains. During his tenure as a
Mr. Talal Ali Al Zain is Chief Executive Officer of Mr. Othman Ebrahim Al Askar is the Director of the Member of the Board of Directors of Bahrain Islamic
PineBridge Investments Middle East BSC (c), and Investment department of Waqf Public Foundation Bank, he worked at the Islamic Development Bank
Co-Head of Alternative Investments at PineBridge of the State of Kuwait. He joined the Awqaf (IDB) with an advisory responsibility over treasury,
Investments. Prior to this, he was Board Member Foundation 1995, and held various positions before investments, and the development of the Islamic
and CEO of Bahrain Mumtalakat Holding Company; taking up his current post in 2010. Prior to this, he finance industry. Dr. Sherif Ayoub acquired his PhD
having previously spent 18 years with Investcorp was Head of the Investment and Banks Department in Finance from the University of Edinburgh in the
Bank as Managing Director and Co-Head of at Kuwait Public Transport Company. Othman Al United Kingdom having been previously educated
Placement & Relationship Management. Talal was Askar is a Board Member of the Educational Holding at Columbia University (Master-level) and Baldwin
Vice President of Private Banking International Group, Kuwait; and a former Board Member of Wallace University (Bachelor-level) in the United
and Head of Investment Banking Middle East with Rasameel Structured Finance Company, Kuwait. States of America. He has also served as a Visiting
Chase Manhattan Bank; as well as a Corporate He holds a BSc in Business Administration and Fellow at Harvard University and a Visiting Scholar
Banker with Citibank Bahrain. Talal Al Zain is Economics from the Washington Center University, at INCEIF and IFSB in Malaysia. Dr. Sherif Ayoub
a Board Member of Bahrain Islamic Bank and USA; and has over 27 years’ professional experience. is also a CFA Charterholder and a Certified Public
the Bahrain Association of Banks. He previously Accountant (CPA). Dr. Sherif Ayoub submitted his
chaired and served as a board member on many resignation from the Board of Directors of Bahrain
corporations including McLaren, the Bahrain Islamic Bank in October 2014 after he left IDB to
Economic Development Board, Gulf Air, and Bahrain join the Islamic Financial Services Board (IFSB) in the
International Circuit. He holds an MBA in Finance position of Assistant Secretary General.
from Mercer University, Atlanta, USA; and a BA in
Business Administration (majoring in Accounting)
from Oglethorpe University, Atlanta, USA.

Bahrain Islamic Bank 09

Annual Report 2014
Section 2
Sharia’a Supervisory Board

SHARIA’A SUPERVISORY BOARD

1 2

3 4

10 Bahrain Islamic Bank

Annual Report 2014
Section 1 Section 2 Section 3
Sharia’a Supervisory Board Profile

1. Rev. Shaikh 4. Rev. Shaikh

Dr. Abdul Latif Mahmood Al Mahmood Dr. Nedham Mohammed Saleh Yacoubi
Chairman Member
Shaikh Al Mahmood is a Member of the Sharia’a Supervisory Board Shaikh Yacoubi is a Member of several Sharia’a Supervisory Boards
of Takaful International and ABC Islamic Bank, Kingdom of Bahrain; around the world, including Bahrain Islamic Bank, Ithmaar Bank, Gulf
ABC Islamic Bank, London; and the Joint Sharia’a Supervisory Finance House and ABC Islamic Bank, Kingdom of Bahrain; Abu Dhabi
Board of AlBaraka Group. He has been a Preacher at a number of Islamic Bank and Sharjah Islamic Bank, UAE; ABC Islamic Bank, London;
Bahrain’s mosques since 1973; and a lecturer in Quran interpretation, and the Islamic Accounting Standards Organization, Bahrain. He is the
jurisprudence and preaching. Shaikh Al Mahmood is a regular recipient of numerous awards in the field of Islamic Finance.
participant in jurisprudence, educational, economic, intellectual, social
and cultural conferences and seminars. 5. Rev. Shaikh
Dr. Essam Khalaf Al Enizi
2. Rev. Shaikh Member
Mohammed Jaffar Al Juffairi
Shaikh Al Enizi is a Member of Sharia’a and Islamic Studies Faculty at
Vice Chairman the University of Kuwait. He is a Member of the Sharia’a Supervisory
Shaikh Aljuffairi is a former Judge of the High Sharia’a Court of Appeal, Committee at Boubayan Bank, Al Sham Bank, and Investment Dar,
Kingdom of Bahrain; and seconded as President of the High Sharia’a Kuwait; and the Bahrain-based Accounting and Auditing Organization
Court, Ministry of Justice. He is a Friday Imam and speaker. for Islamic Financial Institutions (AAOIFI).

3. Rev. Shaikh
Adnan Abdullah Al Qattan
Member
Shaikh Al Qattan is a Preacher at the Ahmed Al Fateh Islamic Mosque.
He is a Judge of the High Sharia’a, Ministry of Justice, Kingdom of
Bahrain; a Puisne Justice of the High Sharia’a Court; and a lecturer at
the Islamic Studies Department, University of Bahrain. Shaikh Al Qattan
is Chairman of the Orphans and Widows Care Committee of the
Royal Courts and the Pilgrimage Mission; and a Member of the Board
of Directors of Sanabil for Orphan Care. He is a regular participant in
Islamic committees, courses, seminars and conferences.

Bahrain Islamic Bank 11

Annual Report 2014
 Section 2
Acting Chief Executive Officer’s
Report

ACTING CHIEF EXECUTIVE OFFICER’S REPORT

“Throughout 2014, we intensified our focus on

enhancing customer service, which is a key
differentiator for the Bank. Important new initiatives
in 2014 include the opening of a further two financial
malls which offer a convenient ‘one-stop-service’
for customers; and the enhancement of retail and
corporate eBanking services”

In the name of Allah, the Most Beneficent, the Most Merciful.

I am pleased to report that BisB posted another excellent performance Corporate banking enjoyed another successful year in 2014.
in 2014. This was highlighted by a significant growth in profitability, Achievements include improving market share by booking substantial
strong performance by our core banking businesses, and further new assets, and growing the number of borrowing relationships by
enhancements in customer service. At the same time, we continued 20 percent. BisB also extended its support for the small-to-medium
to strengthen the Bank’s institutional capability, and honour our enterprises (SMEs) sector with an additional BD 20 million being
commitment to corporate social responsibility. Such achievements made available to Tamkeen’s Enterprise Financing Scheme. This raises
underline our successful efforts in implementing the Bank’s new five- the value of the Tamkeen-BisB agreement to BD 50 million, through
year strategy. which over 200 SMEs have benefited to date.
Financial highlights Customer service
Illustrating the excellent financial performance by BisB in 2014, net Throughout 2014, we intensified our focus on enhancing customer
profit increased by a significant 52 percent to BD 9.3 million from service, which is a key differentiator for the Bank. A major initiative
BD 6.1 million in 2013; and total income grew by 19 percent to BD in 2014 was the opening of a further two financial malls which
43 million from BD 36 million the previous year. Islamic financing offer a convenient ‘one-stop-service’ for customers. Other notable
witnessed an increase of 17 percent, investments in Sukuk grew by customer service-related initiatives include the enhancement of retail
113 percent, and current accounts rose by 30 percent. The Bank and corporate eBanking services; the launch of a new Titanium
maintained a liquid assets ratio of 14 percent, while the cost of MasterCard; and, for the first time in the Kingdom of Bahrain, the
funding reduced by 32 percent. exclusive introduction of the Signature Debit Visa card for the Bank’s
Al Thuraya private and priority banking clients.
Importantly, the Bank relied fully on revenues and fees from financing
and major core activities, which were responsible for generating Institutional capability
82 percent of operating income. Moreover, the Bank successfully In line with the objectives of the Bank’s new strategy, we continued
disposed of some investments assets including listed equities, to strengthen the Bank’s operating infrastructure and streamline
managed funds and real estate, which realised a net gain of operations during 2014. In terms of human capital, we initiated
BD 7 million. an organisational right-sizing exercise, with some staff accepting
an attractive voluntary early retirement option. At the same time,
Business growth
we maintained our focus on providing training and development
The Bank’s core business activities posted another strong performance
opportunities for staff to realise their full potential and enhance their
in 2014.
careers.
The launch of additional new initiatives, services and products,
During the year, we continued to implement a major strategic
together with a continued focus on customer service, resulted in the
revamp of the Bank’s information and communication technology(ict)
Retail customer base expanding by 14.5 percent and market share
infrastructure. This included upgrading the core banking system;
growing by 13.5 percent. Islamic financing increased by 17 percent,
enhancing financial reporting and management information systems;
current accounts rose by 30 percent, and the cost of funding reduced
and further streamlining back office operational processes and
by 32 percent. This was achieved against a backdrop of intensified
procedures. In addition, new state-of-the-art systems were installed
competition in Bahrain’s banking sector.
in the areas of human resources, retail collections, purchasing and

12 Bahrain Islamic Bank

Annual Report 2014
Mohammed Ahmed Janahi
Acting Chief Executive Officer

archiving. We also maintained our focus on strengthening business Future outlook

continuity planning, with the successful upgrading and testing of the Looking ahead, we remain confident about the future outlook for
Bank’s information security systems and disaster recovery site. Bahrain, which is our core market; and are cautiously optimistic
about the prospects for BisB in 2015. The Government has restated
In 2014, we further enhanced the Bank’s corporate governance
its commitment to ongoing social, political and economic reforms;
and risk management framework in line with the latest regulatory
and increased investment in major infrastructure projects. According
requirements. Key developments in 2014 include taking the necessary
to the Bahrain Economic Development Board, the allocation of up
steps to ensure compliance with the implementation of the Foreign
to US$ 4.4 billion for major capital works will supplement existing
Account Tax Compliance Act (FATCA), the launch of the Corporate
growth levels, and also strengthen the economy’s base for longer-
Credit Reference Bureau, and the Sound Remunerations Policy issued
term development.
by the Central Bank of Bahrain.
Latest forecasts by the IMF show that the Kingdom’s GDP growth for
Corporate responsibility
2014 is expected to be around 4 percent, well above the 2.7 percent
BisB is committed to contributing to the economic development and
predicted for the broader Middle East; and will continue to grow
social well-being of the Kingdom of Bahrain through a comprehensive
faster in 2015 than the global and regional economies, despite the
corporate social responsibility programme. This includes supporting
effect of declining oil prices. With God’s blessing,this should continue
the development of the Islamic banking industry by sponsoring
to have a positive impact on business and consumer confidence,
and participating in a number of key industry events. In 2014, the
which in turn will benefit the local banking sector in general, and BisB
Bank was a Strategic Platinum sponsor of the 21st World Islamic
in particular.
Banking Conference; and Gold sponsor of the annual Islamic Banking
and Finance Conference organised by the Accounting & Auditing Acknowledgements
Organisation for Islamic Financial Institutions (AAOIFI). We also In conclusion, I would like to express my gratitude to the Board
maintained our active support for numerous charitable, educational, of Directors for its confidence and encouragement, and the
medical, cultural, sporting and social organisations; while encouraging Sharia’a Supervisory Board for its guidance and supervision.
staff to participate in community activities. Sincere appreciation is also due to our customers for their trust
and loyalty, and our business partners for their positive and
Industry recognition
constructive cooperation. I would like to pay a special tribute to our
The considerable achievements by Bahrain Islamic Bank during 2014 –
management and staff for their continued dedication, innovation
financial, business and operational – were recognised by receipt of the
and professionalism, which contributed to another successful year for
‘Best Islamic Bank in Bahrain’ award from World Finance, a leading
Bahrain Islamic Bank.
UK-based financial magazine. A prestigious judging panel, supported
by a research team, reviewed nominations from the magazine’s Allah the Almighty is the Purveyor of all Success.
readers as part of the process of selecting winning institutions in the
field of Islamic finance and banking.

Mohammed Ahmed Janahi

Acting Chief Executive Officer

Bahrain Islamic Bank 13

Annual Report 2014
Section 2
Executive Management

EXECUTIVE MANAGEMENT

1 2

3 4

5 6

14 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Executive Management Profile’s

1. Mohammed Ahmed Janahi 5. Dr Mohammed S. Belgami

Acting Chief Executive Officer Head of Credit and Risk Management
Mr. Mohammed Ahmed Janahi is a veteran banker with a vast Dr Mohammed Belgami has over 31 years’ international experience in
experience in banking and financial operations of over 45 years. He the fields of credit analysis, risk management, valuation, due diligence
commenced his career with Bahrain Islamic Bank in 2007 in the position and financial management, and research and academia. He joined
of General Manager Support Services. In September 2014, he assumed BisB in 2008 and took up his current position in 2013. Prior to this, Dr
his current position. Prior to joining BisB, Mr. Janahi held a number Mohammed held senior management positions with the Saad Trading,
senior executive positions in Citibank, National Bank of Bahrain, Al Contracting & Financial Services Company, and Kuwait Finance House-
Baraka Islamic Bank and Gulf Air in Bahrain. Mr. Janahi attended Bahrain; as well as academic positions with institutions in Bahrain and
numerous courses on administrative sciences, banking and leadership India. A Financial Risk Manager from the Global Association of Risk
at renowned universities and institutes in Europe and USA. In addition, Professionals, he holds a Doctoral degree and Master’s and Bachelor’s
he also attended a number of intensive and diversified workshops at degrees in Finance & Accounting and Commerce.
leading institutions and banks, including Citibank, Financial Times and
the Executive Development Institute in London. 6. Khalid Mahmood Abdulla
Head of Internal Audit
2. Abdulrahman Mohammed Turki
General Manager - Retail Banking Khalid Mahmood Abdulla has 20 years of experience in accounting,
auditing, banking and sharia. He took up his current position with
Abdulrahman Turki has 35 years’ experience in banking. He took up his BisB in 2006. Prior to this, he was Head of Internal Audit at Al Baraka
current position at BisB in 2008. Prior to this, he was Head of Islamic Islamic Bank, having started his career with Arthur Anderson. Khalid
Retail Banking at Commercial Bank of Qatar. Abdulrahman held various is a Certified Public Accountant (CPA) California, USA, and attended
positions with a number of other prominent regional banks, after the Leadership Development Program at Darden School of Business,
starting his career with Aluminium Bahrain. He holds an MBA degree University of Virginia, USA.
from the University of Strathclyde, Scotland, UK.
3. Yousif M. A. Karim
Acting General Manager - Corporate & Institutional Banking
Yousif A. Karim has 42 years’ experience in banking operations and
marketing. He took up his current position with BisB in 2011. Prior to
this, he was General Manager - Riyadh branch of the National Bank
of Bahrain. Yousif holds a Master’s degree in Business Administration,
Executive Management Diploma and Advance Banking Studies
Diploma, in addition to attending various programmes both, locally and
internationally.
4. Khalid Mohammed Al Doseri
Chief Financial Officer
Khalid Al Doseri has over 31 years’ professional experience in banking
and accountancy. He took up his current position with BisB in 2003.
Prior to this, he worked for Ithmar Bank (Formerly Faysal Islamic Bank)
for 13 years, and started his career with Kuwait Asia Bank. Khalid is a
Board Member of the Liquidity Management Centre, Chairman of Risk
Committee and Member of Executive Committee, and was previously
a Board Member and Managing Director of Islamic Bank of Yemen
from 2007 till 2009. He is a Certified Public Accountant from Oregon
Board of Accountancy, USA; and holds an MBA degree from University
of Glamorgan, Wales, UK. Khalid is a graduate of the Gulf Executive
Development Programme at Darden School of Business, University of
Virginia, USA.

Bahrain Islamic Bank 15

Annual Report 2014
Section 2
Review of Operations

THE FINANCIAL MALLS OFFER A CONVENIENT

‘ONE-STOP-SERVICE’ FOR CUSTOMERS, PROVIDING
THE HIGHEST LEVELS OF FUNCTIONALITY AND
COMFORT TO ENSURE AN ENHANCED CUSTOMER
EXPERIENCE.
 Section 1 Section 2 Section 3
Review of Operations

REVIEW OF OPERATIONS

BUSINESS DIVISIONS
Retail Banking
BisB’s retail banking business posted another strong performance in
2014, outperforming the CBB Consumer Finance Index for the sixth
consecutive year, with the Bank’s Islamic finance portfolio growing
RETAIL BANKING GROWS
by 19% compared with 7% for the CBB Index. Key performance CUSTOMER BASE
highlights include an increased customer base and market share; a
reduction in the cost of funding; and growth across all main product
lines and services. This performance was achieved despite intensified
competition in the retail banking sector of the Kingdom of Bahrain.
The Bank successfully increased its retail customer base by 14%, THE LAUNCH OF ADDITIONAL NEW
grew its overall market share to 11%, and reduced its cost of
funding by 32%. The excellent growth recorded by all main products
INITIATIVES, SERVICES AND PRODUCTS
during the year include Tas’heel Personal Finance growing by 19%; DURING 2014, TOGETHER WITH A
mortgage financing by 28% and auto financing by 7%; credit card
accounts and receivables by 18% and 13% respectively; the Vevo CONTINUED FOCUS ON CUSTOMER
Youth Account by 13% and the Iqra Investment Scheme by 7%; SERVICE, RESULTED IN THE BANK’S RETAIL
together with the Tejoori savings account by 5% and bancassurance
by 7%. CUSTOMER BASE EXPANDING BY 14
Underpinning this strong performance was a continued focus on PERCENT, WITH ISLAMIC FINANCING
customer service, which acts as a key competitive differentiator for
the Bank. Key customer service developments in 2014 include the GROWING BY 19 PERCENT, DESPITE
opening of two new Financial Malls in Hamad Town and Riffa to INTENSIFIED COMPETITION IN BAHRAIN’S
complement the existing malls at Arad and Budaiya. These purpose-
designed malls offer a convenient ‘one-stop-service’ for customers, BANKING SECTOR.
providing the highest levels of functionality and comfort to ensure
an enhanced customer experience. Feedback to date from customers
and staff has been extremely positive, with customers benefiting from
longer opening hours and convenient parking, and staff enjoying an
enhanced working environment. As a result of four malls now being
in operation, the branch network was reduced to seven outlets,
with extended opening hours. In addition, nine new locations for
BisB Automated Teller Machines were identified, including ATMs at
selected UAE Exchange branches.

Bahrain Islamic Bank 17

Annual Report 2014
 Section 2
Review of Operations

During the year, the Bank continued to enhance its range of products To enable the Bank’s staff to deliver the highest standards of
and services. A key development was the launch of Al Thuraya customer service, priority continued to be placed on training and
Privileged Banking Services for high net worth clients. Al Thuraya development, with a number of customised training programmes
provides a dedicated relationship manager who can advise clients being conducted throughout 2014. These covered technical training
on their specific banking and investment needs. Exclusive privileges courses for newly-appointed tellers; customer service-oriented
include Visa Signature cards offering higher daily withdrawal and sessions for sales staff in malls and branches, including sales and
spending limits; global concierge services, special benefits at luxury negotiation skills; and special leadership seminars for retail managers.
hotels, and access to over 500 airport lounges worldwide; and In addition, regulatory-related training courses were held for anti-
comprehensive insurance cover. To support Al Thuraya clients, BisB money laundering (AML), Know Your Customer (KYC), and the
became the first bank in Bahrain to offer the new Visa Signature debit Foreign Account Tax Compliance Act (FATCA) for US entities and
card with exclusive benefits, as well as introducing the MasterCard individuals.
Titanium card.
The Bank’s achievements during 2014 were recognised by receipt
During the year, there was a further increase in the number of of the ‘Best Islamic Bank in Bahrain’ award from World Finance, a
customers migrating to eBanking services, including a growth in credit leading UK-based financial magazine. A prestigious judging panel
card payments through the Benefit Payment Gateway. supported by a research team, reviewed nominations from the
magazine’s readers as part of the process of selecting winning
These services will be further enhanced in 2015 with the planned
institutions in the field of Islamic finance and banking.
introduction of a full-fledged Mobile Banking service, enabling
customers to conduct transactions through their smart phones Corporate & Institutional Banking
and tablets. The new eKiosks launched last year have proved to be In order to provide a more dedicated client service, BisB’s Corporate &
popular with customers. As well as offering convenient access to Institutional Banking division has been structured into separate teams
online banking and credit card payment services, eKiosks provide responsible for corporate banking, structured finance, commercial
information about ongoing product and services promotions; together banking and SME banking. The Bank focuses on three key segments
with a practical guide on how to use and benefit from eBanking, – corporate financing, sovereign and quasi-sovereign institutions, and
including internet banking, mobile banking, phone banking and small-and-medium enterprises (SMEs).
point-of-sale services.
The division benefited from improved market confidence in BisB
In a significant development during 2014, BisB was appointed as a following the changes to the Bank’s shareholding structure during
participating bank in the Government’s new Social Housing Finance 2013, with NBB and the Social Insurance Organisation now jointly
Scheme. This enables Bahraini citizens who are on the Ministry of holding a majority stake. Together with its sharper segment focus
Housing waiting list to purchase a housing unit from an accredited and a more assertive business development approach, Corporate &
developer by obtaining financing from a participating bank, which Institutional Banking posted a strong performance in 2014.
will be supplemented by additional financial support from the
Government.

18 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Review of Operations

During the year, the Bank continued

to enhance its range of products and
services. A key development was the
launch of Al Thuraya Privileged Banking
Services for high net worth clients.

The Bank managed to attract substantial new high-quality assets

with existing and new clients; and a growth of 20% in the number
of borrowing relationships. The increase in assets was achieved by
reducing the cost of funding, which enabled the Bank to improve
its lending rate and compete more effectively with both Sharia’a- CORPORATE BANKING EXTENDS
compliant and conventional competitors. Another key achievement
was a significant improvement in delinquent account recoveries, with HELP FOR SMEs
a reduction in non-performing loans of over 30%.
Good progress was also made in the area of project financing, with
a number of high-quality current transaction being finalised during
the year; and the development of a strong pipeline of mandates that
are expected to materialise in 2015. The Bank also expanded the BisB EXTENDED ITS SUPPORT FOR THE
provision of trade finance facilities for small-and-medium enterprises.
Support for SME sector was enhanced with an additional BD 20 SMALL-TO-MEDIUM ENTERPRISES (SMEs)
million being made available to Tamkeen’s Enterprise Financing
Scheme. This raises the value of the Tamkeen-BisB agreement to BD
SECTOR IN 2014 WITH AN ADDITIONAL
50 million, from which over 200 SMEs have benefited to date. BD 20 MILLION BEING MADE AVAILABLE
During the year, the division maintained its focus on customer service, TO TAMKEEN’S ENTERPRISE FINANCING
which serves as an important competitive differentiator. There has
been an encouraging response to phase one of the new corporate SCHEME. THIS RAISES THE VALUE OF THE
internet banking service, with 90% of customers now using this TAMKEEN-BisB AGREEMENT TO BD 50
new online facility. This will be further enhanced in 2015 with the
addition of new transactional functionalities. An increased number MILLION, THROUGH WHICH OVER 200
of customers are also using the dedicated Contact Centre, which
provides an enhanced personal service by telephone and e-mail.
SMEs HAVE BENEFITED TO DATE.
Plans for 2015 include expanding trade finance activities and
expanding the customer base in Bahrain; introducing new products
such as Islamic overdrafts and cheque discounting; and continuing to
reduce non-performing loans. In line with the Bank’s new five-year
strategy, the Corporate & Institutional Banking division will actively
explore new business opportunities in markets outside Bahrain,
including regional syndications, bilateral deals and Sukuk issues.

Bahrain Islamic Bank 19

Annual Report 2014
Section 2
Review of Operations

113%
A NUMBER OF NON-CORE AND NON-PERFORMING
INVESTMENT ASSETS WERE EXITED, GENERATING A
NET GAIN OF BD 9 MILLION. THIS EXCESS LIQUIDITY
WAS INVESTED IN SHORT- AND MEDIUM-TERM FIXED
Sukuk portfolio growth in 2014 INCOME INSTRUMENTS.

Treasury and Investments

The Bank’s Treasury business had another successful year in 2014,
continuing to manage the Bank’s liquidity and attracting increased
deposits, with the foreign exchange (FX) business being a major
ENHANCING CUSTOMER SERVICE contributor to fee-based income. Following the change to the
AND CONVENIENCE shareholding structure of BisB, previous relationships were re-
established with regional banks, complementing the numerous
relationships maintained over the years with Gulf-based and
international banks. These interbank affiliations, which are managed
by a dedicated Financial Institutions team, are essential in managing
the Bank’s liquidity and short-term funding requirements. BisB uses
KEY CUSTOMER SERVICE-RELATED both Wakala and International Commodity Murabaha instruments in
its interbank dealings.
INITIATIVES DURING 2014 INCLUDE
Throughout the year, the Treasury team successfully enhanced
THE OPENING OF TWO ADDITIONAL profitability by executing various FX and money market strategies;
FINANCIAL MALLS; THE LAUNCH OF A increasing market making activities for GCC and major international
currencies; and significantly reducing the Bank’s overall cost of
TITANIUM MASTERCARD; AND, FOR THE funding. Planned enhancements to the treasury infrastructure include
FIRST TIME IN THE KINGDOM OF BAHRAIN, an upgrade of the Reuters EIKON system, which will serve as a one-
stop terminal for dealing and data capture.
THE EXCLUSIVE INTRODUCTION OF A more conservative investment approach was adopted in 2014,
THE VISA SIGNATURE DEBIT CARD FOR with net income from investments totalling BD 5 million compared
with BD 8.8 million the previous year. In line with implementing a key
AL THURAYA PRIVATE AND PRIORITY objective of the Bank’s new five-year strategy, a number of non-core
BANKING CUSTOMERS. and non-performing investment assets were exited, generating a
net gain of BD 9 million. This excess liquidity was invested in short-
and medium-term fixed income instruments, resulting in the Sukuk
portfolio growing by over 113%, and enhancing recurring income.
The composition of the Bank’s well-balanced investment portfolio
consists of Sukuks, GCC equities and third-party funds; infrastructure
projects such as Al Dur Power & Water Plant, in which BisB is a
founding shareholder; and private equity transactions on a strictly
case-by-case basis.

20 Bahrain Islamic Bank

Annual Report 2014
Section 1 Section 2 Section 3
Review of Operations

DURING THE YEAR, THE BANK CONTINUED ITS

POLICY AIMED AT DEVELOPING ITS SERVICES
AND PRODUCTS TO MEET CUSTOMERS’
NEEDS AND DESIRES.

Bahrain Islamic Bank 21

Annual Report 2014
Section 2
Review of Operations

BisB CONTINUED TO INVEST IN THE TRAINING AND

DEVELOPMENT OF ITS PEOPLE DURING 2014. FOCUS WAS
PLACED ON LEADERSHIP AND STRATEGY; TECHNICAL SKILLS
INCLUDING CREDIT RISK ANALYSIS AND RESTRUCTURING
PROBLEM CREDITS; AND CUSTOMER SERVICE SKILLS SUCH
AS SALES AND NEGOTIATION.

22 Bahrain Islamic Bank

Annual Report 2013
 Section 1 Section 2 Section 3
Review of Operations

97%
Total Bahraini Workforce

THE NUMBER OF BAHRAINI NATIONALS

EMPLOYED BY THE BANK REMAINED AT 97% OF
THE TOTAL WORKFORCE – THE HIGHEST OF ANY
BANK IN BAHRAIN.

SUPPORT SERVICES
Human Capital
In 2014, the Board approved a revised voluntary early retirement
programme to facilitate the organisational right-sizing objective
of the Bank’s new five-year strategy to streamline operations and
STRENGTHENING THE IT
reduce costs. The number of Bahraini nationals employed by the Bank INFRASTRUCTURE
remained at 97% of the total workforce – the highest of any bank in
Bahrain.
Another key HR project involved the development and Board approval
of a variable remuneration policy in conformance with new rules
from the Central Bank of Bahrain for sound remuneration practices KEY INFORMATION TECHNOLOGY
by licensed banks. In line with new CBB rules, performance-based
incentives were established for cascading down the organisation to
ACHIEVEMENTS IN 2014 INCLUDE
link bonuses with the Bank’s overall and divisional performance. UPGRADING THE CORE BANKING
BisB successfully implemented its succession planning policy during SYSTEM; AND STRENGTHENING BUSINESS
the year. A number of senior management promotions took place,
including a new Deputy Chief Executive Officer and Acting CEO, CONTINUITY PLANNING BY ENHANCING
Assistant General Managers, and Senior Managers. BisB also THE DISASTER RECOVERY SITE AND
commenced the phased implementation of a new SAP human
resources management system. This includes applications for payroll, INFORMATION SECURITY FRAMEWORK.
time and attendance, HR, training and an online staff self-service
facility. THE BANK ALSO COMMISSIONED NEW
Training and Development SYSTEMS IN THE AREAS OF HUMAN
BisB continued to invest in the training and development of its RESOURCES, RETAIL COLLECTIONS,
people during 2014. Focus was placed on leadership and strategy;
technical skills including credit risk analysis and restructuring problem
PURCHASING AND ARCHIVING.
credits and customer service skills such as sales and negotiation; In
collaboration with the Compliance and Risk Management divisions,
regulatory training was also conducted, covering Anti-Money
Laundering (AML), Know Your Customer (KYC), Foreign Account
Tax Compliance Act (FATCA) for US entities and individuals, Islamic
Banking ethics and Financial Advise Programme (FAP)

Bahrain Islamic Bank 23

Annual Report 2014
 Section 2
Review of Operations

BisB also focused on strengthening

business continuity planning, with the
successful upgrading and testing of the
disaster recovery site and information
security systems.

The Bank also continued to support staff in gaining professional Central Operations
qualifications. During the year, five employees achieved certifications Central Operations supports the Bank’s business lines through four
in financial services (CFA, CPA and CIPA) and human resources dedicated units covering all transactions for payments, treasury back
(HRME), while three employees achieved the Advanced Diploma in office, trade finance, and Islamic financing. During the year, the Bank
Islamic Finance (ADIF) certifications. The total number of training continued to enhance its operational efficiency through increased
hours delivered in 2014 was over 4,000, with over 70 percent of staff automation, and identifying and implementing new ways of better
attending training courses internally and externally. utilising its resources. New developments include implementing a new
Information & Communications Technology electronic approval system (EAP) and electronic archiving for Islamic
financing; and testing phase two of the straight-through-processing
In line with the Bank’s new five-year strategy, a major upgrade of
(STP) system to automate correspondent outward payments. In
the information and communications technology (ICT) infrastructure
addition, full implementation of phase one of the new Sunguard
commenced in 2014. New ICT developments during the year include
Quantum treasury system was completed, and planning was finalised
finalising a new ICT policy; commencing the upgrade of the core
for implementation of phase two in early 2015. The overall level of
banking system; enhancing financial reporting and MIS systems;
automation within the Bank increased to 75 percent in 2014.
revamping customer relationship management (CRM); finalising new
frameworks for IT service management and information security; and General Services
further streamlining back office operational processes and procedures. The role of General Services is to ensure the smooth day-to-day
In addition, new state-of-the-art systems were installed in the areas functioning of the Bank. The department’s responsibilities cover
of human resources, retail collections, purchasing and archiving. The archiving, mail, procurement, quality control, utilities, property
Bank also focused on strengthening business continuity planning, management, branch renovations, maintenance, transport and
with the successful upgrading and testing of the disaster recovery site security. Key activities in 2014 include the opening of new financial
and information security systems. malls at Hamad Town and Riffa; ongoing refurbishment of head
office departments and reception area; and finalising the head office
Good progress was made in the critical areas of IT service external works. In addition, good progress was made with electronic
management (ITSM) and information security (IS). An ITSM framework archiving of documentation for all transactions and finalising a new
and procedures, in line with ISO 2000 accreditation, were approved barcode storage system; and completing an inventory of all fixed
by the Board; and development of procedures commenced, assets. The Bank has in place a 24-hour security room providing live
along with certifying selected IT staff to the foundation level of viewing of CCTV footage from all financial malls, branches and ATMs
IT infrastructure library (ITIL) standards. The information security across Bahrain.
framework, based on ISO 27001, was also finalised and reviewed
by Internal Audit for subsequent approval by the Board. In addition, Corporate Communications
a network vulnerability assessment was conducted, and web During 2014, BisB continued to enhance its external and internal
penetration testing conducted; together with the development of a communications activities. External communications developments
risk mitigation action plan. include the launch of a new responsive version of its website, which
enables viewing from any smart devices; enhanced relationships with
ICT also continued to play a critical role in the development of
the media and other banks; and active participation in conferences
new customer services. These include expanding the provision
and events, including sponsorship of Islamic Conferences. In terms
of eChannels such as retail and corporate online banking, and
of internal communications, a new staff suggestions and complaints
eKiosks; the opening of two new financial malls; and upgrading and
system was introduced; and additional staff social events, including
expanding the ATM network. These developments were supported by
desert camping, were organised to improve inter-departmental
uptime service levels of over 99%.
communications.

24 Bahrain Islamic Bank

Annual Report 2014
‘BEST ISLAMIC BANK
IN BAHRAIN 2014’
AWARD

THE CONSIDERABLE ACHIEVEMENTS BY BAHRAIN ISLAMIC BANK DURING 2014 – FINANCIAL, BUSINESS AND OPERATIONAL –
WERE RECOGNISED BY RECEIPT OF THE ‘BEST ISLAMIC BANK IN BAHRAIN’ AWARD FROM WORLD FINANCE, A LEADING UK-BASED
FINANCIAL MAGAZINE. A JUDGING PANEL WITH OVER 230 YEARS’ EXPERIENCE IN FINANCIAL AND BUSINESS JOURNALISM,
SUPPORTED BY A DEDICATED RESEARCH TEAM, REVIEWED NOMINATIONS FROM THE MAGAZINE’S READERS AS PART OF THE
PROCESS OF SELECTING WINNING INSTITUTIONS IN THE FIELD OF ISLAMIC FINANCE AND BANKING.
 Section 2
Risk management Review

RISK MANAGEMENT REVIEW

As an inherent part of the Bank’s activities, risk is managed Developments in 2014

through a process of ongoing identification, measurement, In light of the prevailing global and regional market conditions, the
monitoring and reporting in line with the risk appetite of Bank placed the highest priority on further strengthening its risk
the Bank, which is set and guided by the Board of Directors.
management infrastructure during 2014. Key developments and
This process of risk management is critical to the continued
initiatives achieved include:
profitability of BisB, and all individuals within the institution
are personally accountable for the risk exposures relating to • Implementing approved Business Continuity Planning framework.
their responsibilities. • Introducing Corporate Credit Scoring Model (AVRA) and new
pricing model.
The Bank is exposed primarily to credit risk, liquidity risk, market risk
• Preparing for Basel III implementation.
(including profit rate, equity price and currency risks), operational risk,
• Providing external training programme to business units and
reputational risk and Sharia’a-compliant risk.
C&RM on Credit review, rating and restructuring.
Risk management philosophy • Participating in the Basel III working group set up by the Central
Bank of Bahrain.
The risk management philosophy of BisB is to identify, capture,
• Ensuring ongoing compliance with the policies of the Bank, and
monitor and manage the various dimensions of risk. The objective is
monitoring the enterprise-wide risk through various systems and
to protect asset values and income streams so that the interests of the
processes.
Bank’s stakeholders are safeguarded; while optimising shareholders’
• Ensuring ongoing compliance with the rules and regulations of
returns, and maintaining risk exposure within the parameters set by
the Central Bank of Bahrain and Basel II requirements.
the Board.
• Monitoring Sharia’a-compliant risk as well as the other risks to
which BisB is exposed.
The Bank has defined its risk appetite within the broad framework of
its Risk Strategy. BisB reviews and aligns its risk appetite in line with its Note: Additional information on the Bank’s risk management
evolving business plan, and changing economic and market scenarios. framework, policies, processes and procedures is included in the
The Bank also assesses its tolerance for specific risk categories and its Notes to the Consolidated Financial Statements and the Basel II Pillar 3
strategy to manage these risks. Public Disclosure sections of this annual report.

Risk management framework

Credit & Risk
BisB has in place a comprehensive enterprise-wide integrated risk Management
management framework (Risk Governance). This embraces all levels of
authorities, organisational structure, people and systems required for
the smooth functioning of risk management policies within the Bank.
Credit Review Credit Risk
Legal
& Analysis Administration Management
The Board of Directors retains ultimate responsibility and authority for
all risk matters, including establishing overall policies and procedures.
The Board is assisted in fulfilling its responsibilities by the Acting Chief Credit Credit
Executive, and various Board-level and Management committees. MIS
Review Risk

The Credit & Risk Management (C&RM) division – headed by an

Assistant General Manager reporting to the Chief Executive on a Deal Market
day-to-day administrative basis, and to the Board Risk Committee – Execution Risk
has day-to-day responsibility for managing the risks involved across
all areas of the Bank. C&RM provides independent identification,
measurement, monitoring and control of all risk parameters, Security & Operations
Notarisation Risk
while liaising with the business divisions that ultimately own the
risks. C&RM comprises a number of specialist units, including Risk
Management, Credit Review & Analysis, Credit Administration, Limit
Benefit Credit Reference Bureau Reporting, and Legal Affairs. Control

26 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Remuneration Related Disclosures

REMUNERATION DISCLOSURES

The Bank’s total compensation approach, which includes the variable The Bank’s remuneration policy in particular, considers the role of
remuneration policy, sets out the Banks’s policy on remuneration for each employee and has set guidance on whether an employee is a
Directors and senior management and the key factors that are taken Material Risk Taker and / or an Approved Person in a business line,
into account in setting the policy. control or support function. An Approved Person is an employee
whose appointment requires prior regulatory approval because of
During the year, the Bank adopted regulations concerning Sound the significance of the role within the Bank; and an employee is
Remuneration Practices issued by the Central Bank of Bahrain, and considered a Material Risk Taker if they are the Head of a significant
has proposed revisions to its variable remuneration framework. The business line or any individuals within their control who have a
revised policy framework and incentive components are subject to material impact on the Bank’s risk profile.
the approval of the shareholders in the upcoming Annual General
Meeting. Once approved, the policy will be effective for the 2014 In order to ensure alignment between what BisB pays its people
annual performance incentives and will be fully implemented for and the business strategy, individual performance is assessed
future periods. against annual and long-term financial and non-financial objectives
summarized in the performance management system. This assessment
The key features of the proposed remuneration framework are also takes into account adherence to the Bank’s values, risks and
summarised below. compliance measures and above all integrity. Altogether, performance
is therefore judged not only on what is achieved over the short and
Remuneration strategy
long-term, but also importantly on how it is achieved, as the NRC
It is the Bank’s basic compensation philosophy to provide a believes the latter contributes to the long-term sustainability of the
competitive level of total compensation to attract and retain qualified business.
and competent employees. The Bank’s variable remuneration policy
will be driven primarily by a performance based culture that aligns NRC role and focus
employee interests with those of the shareholders of the Bank. The NRC has oversight of all reward policies for the Bank’s employees.
These elements support the achievement of the Bank’s objectives The NRC is the supervisory and governing body for compensation
through balancing rewards for both short-term results and long-term policy, practices and plans. It is responsible for determining, reviewing
sustainable performance. This strategy is designed to share success, and proposing variable remuneration policy for approval by the Board.
and to align employees’ incentives with the risk framework and risk It is responsible for setting the principles and governance framework
outcomes. for all compensation decisions. The NRC ensures that all persons must
be remunerated fairly and responsibly. The remuneration policy is
The quality and long-term commitment of all BisB’s employees is
reviewed on a periodic basis to reflect changes in market practices,
fundamental to success. The Bank therefore aims to attract, retain
the business plan and risk profile of the Bank.
and motivate the very best people who are committed to maintaining
a career with the Bank, and who will perform their role in the long- The responsibilities of the NRC with regards to the Bank’s variable
term interests of shareholders. The Bank’s reward package comprises remuneration policy, as stated in its mandate, include but are not
the following key elements: limited to, the following:-

1. Fixed pay • Approve, monitor and review the remuneration system to ensure
2. Benefits the system operates as intended.
3. Annual performance bonus • Approve the remuneration policy and amounts for each
Approved Person and Material Risk-Taker, as well as total
A robust and effective governance framework ensures that the
variable remuneration to be distributed, taking account of total
Bank operates within clear parameters of its compensation strategy
remuneration including salaries, fees, expenses, bonuses and
and policy. All compensation matters, and overall compliance with
other employee benefits.
regulatory requirements, are overseen by the Board Nomination &
• Ensure remuneration is adjusted for all types of risks and that the
Remuneration Committee (NRC).
remuneration system takes into consideration employees that earn
the same short-run profit but take different amounts, of risk on
behalf of the Bank.

Bahrain Islamic Bank 27

Annual Report 2014
 Section 2
Remuneration Related Disclosures
Continued

REMUNERATION DISCLOSURES
CONTINUED

• Ensure that for Material Risk-Takers, variable remuneration forms Scope of application of the remuneration policy
a substantial part of their total remuneration. The variable remuneration policy has been adopted on a bank-wide
• Review the stress testing and back testing results before approving basis.
the total variable remuneration to be distributed including salaries,
fees, expenses, bonuses and other employee benefits. Board remuneration
• Carefully evaluate practices by which remuneration is paid for The Bank’s Board remuneration is determined in line with the
potential future revenues whose timing and likelihood remain provisions of Article 188 of the Bahrain Commercial Companies Law,
uncertain. The NRC will question payouts for income that cannot 2001. The Board of Directors’ remuneration will be capped so that
be realised or whose likelihood of realisation remains uncertain at total remuneration (excluding sitting fees) does not exceed 10% of
the time of payment. the Bank’s net profit after all required deductions as outlined in Article
• Ensure that for Approved Persons in risk management, internal 188 of the Companies law, in any financial year. Board remuneration
audit, operations, financial control and compliance functions, the is subject to approval of the shareholders in the Annual General
mix of fixed and variable remuneration is weighted in favour of Meeting. Remuneration of non-executive Directors does not include
fixed remuneration. performance-related elements such as grants of shares, share options
• Recommend Board member remuneration based on their or other deferred stock-related incentive schemes, bonuses or pension
attendance and performance and in compliance with Article 188 benefits.
of the Bahrain Commercial Companies Law.
• Ensure appropriate compliance mechanisms are in place to Variable remuneration for staff
ensure that employees commit themselves not to use personal Variable remuneration is performance related and consists primarily
hedging strategies or remuneration-and liability-related insurance of the annual performance bonus award. As a part of staff’s variable
to undermine the risk alignment effects embedded in their remuneration, the annual bonus rewards delivery of operational
remuneration arrangements. and financial targets set each year, the individual performance of
As outlined in the Corporate Governance section of the Annual the employees in achieving those targets, and their contribution to
Report, the Board is satisfied that all non-executive Directors are delivering the Bank’s strategic objectives.
independent including the NRC members. The NRC comprises the
following members: The Bank has adopted a Board approved framework to develop a
transparent link between variable remuneration and performance.
NRC Member Name Appointment Number of The framework is designed on the basis of meeting both satisfactory
date meetings financial performance and the achievement of other non-financial
attended factors, that will, all other things being equal, deliver a target bonus
Abdul Razak Abdulla Hassan Al Qassim 5 June 2013 4 pool for employees, prior to consideration of any allocation to
business lines and employees individually. In the framework adopted
Khalid Mohammed Al Mannai 11 June 2013 4
for determining the variable remuneration pool, the NRC aims to
Mohamed Ahmed Abdulla 11 June 2013 4 balance the distribution of the Bank’s profits between shareholders
and employees.
The aggregate remuneration paid to NRC members during the year in
the form of sitting fees amounted to BHD 3,000 [2013: BHD 12,000]. Key performance metrics at the Bank level include a combination of
short term and long term measures and include profitability, solvency,
External consultants
liquidity and growth indicators. The performance management
Consultants were appointed during the year to advise the Bank on process ensures that all goals are appropriately cascaded down to
amendments to its the variable remuneration policy to be in line with respective business units and employees.
the CBB’s Sound Remuneration Practices and Industry Norms. This
included assistance in designing an appropriate Share-based Incentive In determining the amount of variable remuneration, the Bank starts
Scheme for the Bank. from setting specific targets and other qualitative performance
measures that result in a target bonus pool. The bonus pool is then
adjusted to take account of risk via the use of risk-adjusted measures
(including forward-looking considerations).

28 Bahrain Islamic Bank

Annual Report 2014
Section 1 Section 2 Section 3
Remuneration Related Disclosures

The NRC carefully evaluates practices by which remuneration is paid Risk assessment framework
for potential future revenues whose timing and likelihood remain The purpose of risk linkages is to align variable remuneration to
uncertain. NRC demonstrates that its decisions are consistent with an the risk profile of the Bank. In its endeavour to do so, the Bank
assessment of the Bank’s financial condition and future prospects. considers both quantitative measures and qualitative measures in
the risk assessment process. Both quantitative measures and human
The Bank uses a formalised and transparent process to adjust the
judgement play a role in determining any risk adjustments. The
bonus pool for quality of earnings. It is the Bank’s objective to pay
risk assessment process encompasses the need to ensure that the
out bonuses out of realised and sustainable profits. If the quality of
remuneration policy as designed reduces employees’ incentives to
earnings is not strong, the profit base could be adjusted based on the
take excessive and undue risks, is symmetrical with risk outcomes, and
discretion of the NRC.
delivers an appropriate mix of remuneration that is risk aligned.
For the overall Bank to have any funding for distribution of a
The NRC considers whether the variable remuneration policy is in
bonus pool, threshold financial targets have to be achieved. The
line with the Bank’s risk profile, and ensures that through the Bank’s
performance measures ensure that total variable remuneration
ex-ante and ex-post risk assessment framework and processes,
is generally, considerably contracted where subdued or negative
remuneration practices where potential future revenues whose timing
financial performance of the Bank occurs. Furthermore, the target
and likelihood remain uncertain are carefully evaluated.
bonus pool as determined above is subject to risk adjustments in line
with the risk assessment and linkage framework. Risk adjustments take into account all types of risk, including
intangible and other risks such as reputation risk, liquidity risk and
Remuneration of control functions
the cost of capital. The Bank undertakes risk assessments to review
The remuneration level of staff in the control and support functions financial and operational performance against business strategy and
allows the Bank to employ qualified and experienced personnel in risk performance prior to distribution of the annual bonus. The Bank
these functions. The Bank ensures that the mix of fixed and variable ensures that total variable remuneration does not limit its ability to
remuneration for control and support function personnel should be strengthen its capital base. The extent to which capital needs to be
weighted in favour of fixed remuneration. The variable remuneration built up is a function of the bank’s current capital position and its
of control functions is to be based on function-specific objectives and ICAAP.
is not be determined by the financial performance of the business are
as they monitor. The bonus pool takes into account the performance of the Bank
which is considered within the context of the Bank’s risk management
The Bank’s performance management system plays a major role framework. This ensures that the variable pay pool is shaped by risk
in deciding the performance of the support and control units on considerations and Bank-wide notable events.
the basis of the objectives set for them. Such objectives are more
focused on non-financial targets that include risk, control, compliance The size of the variable remuneration pool and its allocation within
and ethical considerations, as well as the market and regulatory the bank takes into account the full range of current and potential
environment apart from value adding tasks which are specific to each risks, including:
unit.
(a) The cost and quantity of capital required to support the risks
Variable compensation for business units taken;
The variable remuneration of the business units is primarily (b) The cost and quantity of the liquidity risk assumed in the conduct
determined by key performance objectives set through the of business; and
performance management system of the Bank. Such objectives (c) Consistency with the timing and likelihood of potential future
contain financial and non-financial targets, including risk control, revenues incorporated into current earnings.
compliance and ethical considerations as well as market and
The NRC keeps itself abreast of the Bank’s performance against the
regulatory requirements. The consideration of risk assessments in
risk management framework. The NRC will use this information when
the performance evaluation of individuals ensures that any two
considering remuneration to ensure returns, risks and remuneration
employees who generate the same short-run profits but take different
are aligned.
amounts of risk on behalf of the Bank are treated differently by the
remuneration system.

Bahrain Islamic Bank 29

Annual Report 2014
Section 2
Remuneration Related Disclosures
Continued

REMUNERATION DISCLOSURES
CONTINUED

Risk adjustments the deferred bonus plan can be forfeited / adjusted or the delivered
The Bank has an ex-post risk assessment framework which is a variable remuneration recovered in certain situations. The intention
qualitative assessment to back-test actual performance against prior is to allow the Bank to respond appropriately if the performance
risk assumptions. factors on which reward decisions were based turn out not to reflect
the corresponding performance in the longer term. All deferred
In years where the Bank suffers material losses in its financial compensation awards contain provisions that enable the Bank to
performance, the risk adjustment framework will work as follows: reduce or cancel the awards of employees whose individual behaviour
has had a materially detrimental impact on the Bank during the
• There will be considerable contraction of the Bank’s total variable concerned performance year.
remuneration.
• At an individual level, poor performance by the Bank will mean Any decision to take back an individual’s award can only be made by
individual KPIs are not met and hence employee performance the Bank’s Board of Directors.
ratings will be lower.
• Reduction in the value of deferred shares or awards. The Bank’s malus and clawback provisions allow the Board to
• Possible changes in vesting periods and additional deferral applied determine that, if appropriate, vested / unvested elements under the
to unvested rewards. deferred bonus plan can be adjusted / cancelled in certain situations.
• Lastly, if the qualitative and quantitative impact of a loss incident These events include the following:
is considered significant, a malus or clawback of previous variable
• Reasonable evidence of willful misbehaviour, material error,
awards may be considered.
negligence or incompetence of the employee causing the Bank/
The NRC, with the Board’s approval, can rationalise and make the the employee’s business unit to suffer material loss in its financial
following discretionary decisions: performance, material misstatement of the Bank’s financial
statements, material risk management failure or reputational loss
• Increase / reduce the ex-post adjustment or risk due to such employee’s actions, negligence, misbehavior or
• Consider additional deferrals or increase in the quantum of non- incompetence during the concerned performance year.
cash awards • The employee deliberately misleads the market and/or shareholders
• Recovery through malus and clawback arrangements in relation to the financial performance of the Bank during the
concerned performance year.
Malus and Clawback framework
The Bank’s malus and clawback provisions allow the Board of Clawback can be used if the malus adjustment on the unvested
Directors to determine that, if appropriate, unvested elements under portion is insufficient given the nature and magnitude of the issue.

Components of Variable remuneration

Variable remuneration has the following main components:

Upfront cash The portion of the variable compensation that is awarded and paid out in cash on
conclusion of the performance evaluation process for each year.
Deferred Cash The portion of variable compensation that is awarded and paid in cash on a pro-rata basis
over a period of 3 years.
Upfront share awards The portion of variable compensation that is awarded and issued in the form of shares on
conclusion of the performance evaluation process for each year.
Deferred shares The portion of variable compensation that is awarded and paid in the form of shares on a
pro-rata basis over a period of 3 years.

30 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Remuneration Related Disclosures

All deferred awards are subject to malus provisions. All share the Bank’s Share Incentive Scheme. Any dividend on these shares
awards are released to the benefit of the employee after a six month is released to the employee along with the shares (i.e. after the
retention period from the date of vesting. The number of equity retention period).
share awards is linked to the Bank’s share price as per the rules of

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

Element of variable Payout Vesting

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:

Element of variable Payout Vesting

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

BD 000’s 2014 2013

• Sitting Fees 248,000 186,463

• Remuneration 368,688 -

Bahrain Islamic Bank 31

Annual Report 2014
 Section 2
Remuneration Related Disclosures
Continued

REMUNERATION DISCLOSURES
CONTINUED

(a) Employee remuneration

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

* Includes end of service compensations.

2013
Variable remuneration
Fixed Sign on Guaranteed
remuneration bonuses bonuses Upfront Deferred
Number (Cash / (Cash /
BD 000’s of staff Cash Others shares) shares) Cash Shares Cash Shares Others Total

Approved persons
- Business lines 4 641 - - - 121 - - - - 762
- Control & support 8 661 - - - 105 - - - - 766
Other material risk takers - - - - - - - - - - -
Other staff 380 7,866 - - - 529 - - - - 8,395
TOTAL 392 9,168 - - - 755 - - - - 9,923

32 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Corporate Social Responsibility

CORPORATE SOCIAL RESPONSIBILITY REVIEW

Since inception, BisB has been committed to contributing to the Increasing the awareness of Islam
economic development and social well-being of the Kingdom As a leading Sharia’a-compliant financial institution, BisB is committed
of Bahrain. Our comprehensive corporate social responsibility to raising awareness of Islam through support for national institutions
(CSR) programme underlines the importance that the Bank such as the following:
places on its role as a responsible and caring corporate citizen.
Some of the key activities of the Bank’s CSR programme during • Rekaaz Bahrain 2014.
2014 are listed below. • Hijab campaign 2014.
• Ministry of Justice & Islamic Affairs Zakat Fund.
Industry Sponsorships • Quran Education Centres.
• Muslim Education Society.
By sponsoring and participating in major financial industry
conferences and events, and supporting other initiatives, BisB actively • Discover Islam.
contributes to the development of the global Islamic banking industry • The International Quran Reading Competition.
and the banking sector in the Kingdom of Bahrain:
Improving the well-being of the local community
• 2014 AAOIFI-World Bank Annual Conference on Islamic Banking Through donations and other philanthropic activities, BisB contributes
& Finance. to improving the well-being and quality of life of the local community
• 2014 World Islamic Banking Conference. through:
• 2014 Global Islamic Finance Directory.
• Support for a wide range of charitable, medical, educational,
• Various activities of the Bahrain Association of Banks.
cultural, sporting and community organisations and events,
Developing Bahraini nationals including the Royal Charity Organisation.
BisB not only provides employment and career opportunities for • Financial assistance to needy families, individuals and deserving
Bahraini nationals, who comprise 97% of the Bank’s total staff; but causes.
also encourages entrepreneurship and nurtures tomorrow’s business
leaders, by supporting the following initiatives:

• BIBF Waqf Fund for Islamic Banking Training and Development.

• Enterprise Finance Scheme For SMEs in collaboration with
Tamkeen.
• Ministry of Education training initiatives.
• Summer Internship programme for Bahraini university students.
• Students’ trips to underdeveloped countries.
• Youth conferences, workshops and camping activities.

Bahrain Islamic Bank 33

Annual Report 2014
 Section 2
Corporate Governance Review

CORPORATE GOVERNANCE REVIEW

BisB is committed to upholding the highest standards of but is not limited to, conducting the policy and affairs of BisB
corporate governance, and the Central Bank of Bahrain’s High- in compliance with regulatory requirements. It also involves
Levels Control Module (and its amendments). The Bank seeks having the right checks and balances in place throughout the
to balance entrepreneurship, compliance and industry best organisation to ensure that the right things are always done in
practice, while creating value for all stakeholders. This includes, the right way.

Governance and Organisation Structure

Shari’a General
Board Assembly

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 2014 which was approved by the Board of Directors in April 2014.
• Member of the Board of Directors, Dr. Sherif Elsayed Aly Ayoub, • Appointed consultants to oversee compliance with the Foreign
who represents the Islamic Development Bank (IDB), resigned from Account Tax Compliance Act (FATCA) according to the deadline set
the Board following his appointment as Assistant Secretary General by the Central Bank of Bahrain (CBB).
of the Islamic Financial Services Board. • Complied with requirements of Sound Remuneration Policy issued
• Mr. Mohammed Ebrahim Mohammed resigned as Chief Executive by the CBB.
Officer. • Complied with requirements of the new Corporate Reference
• Mr. Mohammed Ahmed Janahi was appointed as Acting Chief Bureau.
Executive Officer. • Responded to the following CBB Consultation Papers:
• Mr. Mohammed Ahmed Janahi was promoted from General - Proposed Amendments on the Financial Crime (FC) Module for all
Manager - Support to Deputy CEO. Banks
• Commenced implementation of the Bank’s new five-year strategy - New Client Assets Module (CL) for Volumes 1 and 2
developed in collaboration with the Boston Consulting Group, - Revised format for Prudential Information Reporting

Shareholder Ownership (5% and above)

Shareholder Nationality Number of Shares Percentage

National Bank of Bahrain Bahrain 241,838,206 25.74%

Islamic Development Bank Saudi Arabia 165,804,485 17.64%
Social Insurance Organisation (Military Pension Fund) Bahrain 121,113,559 12.89%
Social Insurance Organisation (GOSI) Bahrain 121,019,103 12.88%
General Council of Kuwaiti Awqaf Kuwait 67,946,033 7.23%

34 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Corporate Governance Review

Shareholder Ownership (5% and above)

Country Percentage Number of Shares

Kingdom of Bahrain 68.38% 642,513,024

Kingdom of Saudi Arabia 18.53% 174,099,282
Kuwait 9.08% 85,278,340
United Arab Emirates 3.60% 33,793,459
Qatar 0.16% 1,527,003
Others 0.25% 2,462,391
Total 100.000% 939,673,499

Shareholder Ownership (5% and above)

Directors Shares as of 31st Dec 2014

Abdul Razak Abdulla Al Qassim 100,000

Khalid Mohamed Al Mannai No Shares transferred as of December 2014
Mohammed Ahmed Abdulla No Shares transferred as of December 2014
Fatima Abdulla Budhaish 100,000
Talal Ali Al Zain No Shares transferred as of December 2014
Khalil Ebrahim Nooruddin No Shares transferred as of December 2014
Ebrahim Hussain AlJasmi 100,000
Othman Ebrahim Al Askar 100,000
Shari’a Members
Shaikh Dr. Abdul Latif Mahmood Al Mahmood 185,492
Shaikh Nedham Mohamed Saleh Yacoubi 14,320
Senior Management
Mohammed Ebrahim Mohammed* 100,000

* CEO, Mohammed Ebrahim Mohammed resigned on 31st August 2014.

Board of Directors Board Composition

Role and Responsibilities of the Board The Board of Directors of BisB comprises nine Executive and Non-
Executive Directors, of which four are Independent Directors. Each
The primary responsibility of the Board of Directors is to provide term of the Board of Directors consists of three years. The last
effective governance over the Bank’s affairs for the benefit of re-election of the Bank’s Board of Directors was held at the Bank’s
the shareholders; and to balance the interests of BisB’s diverse Annual General Meeting (AGM) on 7 July 2013. Profiles of Board
constituencies, including associated concerns, employees and other Members are listed on page 9 of this annual report.
stakeholders. In all actions taken by the Board, the Directors are
expected to exercise their business judgement in what they reasonably 1. Mr. Abdul Razaq Abdulla Al-Qassim - Chairman
believe to be in the best interests of the Bank. 2. Brig. Khalid Mohamed Al-Mannai - Vice Chairman
The Board approves and oversees the implementation of the Bank’s 3. Mr. Talal Ali Al Zain - Member
strategies; and reviews and approves the Bank’s strategic plan. As 4. Mr. Khalil Ebrahim Nooruddin - Member
part of its strategic review process, the Board reviews major plans of
action and business plans; sets performance objectives; and oversees 5. Mr. Ebrahim Husain Ebrahim Al Jassmi - Member
major investments, divestitures and acquisitions. Every year, at an 6. Mr. Othman Ibrahim Al-Askar - Member
annual Board strategy session, the Board formally reassesses the
7. Mr. Mohammed Ahmed Abdulla - Member
Bank’s objectives, strategies and plans. The Board’s responsibilities
are described in more detail in the Corporate Governance Report 8. Mrs. Fatima Abdulla Budhaish - Member
published on the Bank’s website, and in the Charter of the Board of 9. Dr. Sherif Ayoub (Resigned: 8 October 2014)
Directors.

Bahrain Islamic Bank 35

Annual Report 2014
 Section 2
Corporate Governance Review
Continued

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

Board Committees - Membership and Objectives

Board Committee Members Objectives

Executive Committee Khalid Mohammed Al-Mannai Review of strategy and performance. Review of
(Chairman) new investment proposals, credit proposals and
exit strategies.
Fatima Abdulla Budhaish
The committee meets six times per year.
Khalil Ebrahim Nooruddin
(Previously, BisB’s CEO - Mohammed
Ebrahim Mohammed, was a non-voting
member until 1 September 2014)

Audit Committee Ebrahim Hussain Al Jassmi Oversight of integrity and reporting of the Bank’s
(including Corporate Governance (Chairman) quarterly and annual financial statements.
Committee responsibilities) Othman Ebrahim Al-Askar Review of risk, provision and impairment.
Compliance with legal and regulatory
Dr. Sherif Ayoub requirements.
The committee meets four times per year.

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

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

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, totalled BD 248,000 in 2014.

Directors’ Attendance
The Board of Directors met eight times during 2014, 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 2014. The table also shows attendance of Directors at Board Committee meetings.

36 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Corporate Governance Review

Directors’ Attendance of Board Meetings - January to December 2014

Members 12 Jan 3 Feb 24 Mar 11 May 17 Jun 9 Jul 11 Aug 28 Oct

Abdul Razaq Al-Qassim

     X  
(Joined 05 June 2013)
Khalid Al-Mannai
 X      
(Joined 11 June 2013)
Fatima Budhaish
       
(Joined 05 June 2013)
Mohammed Abdulla
       
(Joined 11 June 2013)
Talal Al Zain
    X   X
(Joined 07 July 2013)
Khalil Nooruddin
       
(Joined 07 July 2013)
Ebrahim Hussain Al Jassmi
X       
(Joined 07 July 2013)
Othman Al-Askar
    X  X 
(Joined 07 July 2013)
Dr. Sherif Ayoub
X X      X
(Resigned 08 Oct 2014)

Sharia’a Supervisory Board

The Sharia’a Supervisory Board of BisB comprises five eminent and highly-experienced Sharia’a scholars. The Board’s main responsibility is to
advise the Bank’s business units on any Sharia’a-related matters, and to ensure compliance with the tenets and requirements of Islamic Sharia’a
in their operations. The Sharia’a Supervisory Board is also entrusted with the duty of directing, reviewing and supervising the activities of the
Bank in order to ensure full compliance by BisB with Sharia’a rules and AAOIFI standards. Profiles of Sharia’a Supervisory Board Members are
listed on page 11 of this annual report.

Rev. Shaikh Dr. Abdul Latif Mahmood Al Mahmood - Chairman

Rev. Shaikh Mohammed Jaffar Al Juffairi - Vice Chairman

Rev. Shaikh Adnan Abdullah Al Qattan - Member

Rev. Shaikh Dr. Nedham Mohammed Saleh Yacoubi - Member

Rev. Shaikh Dr. Essam Khalaf Al Enizi - Member

Sharia’a Supervisory Board - Membership and Attendance 2014

Members 23 Feb 11 May 7 Sep 30 Nov

Sh. Dr. Abdulatif Al-Mahmood (Chairman)    

Sh. Moh’d Al-Jufairi   X X
Sh. Adnan Al-Qattan X   
Sh. Dr. Nidham Yacoubi    
Sh. Dr. Esam Al-Enizi    

Bahrain Islamic Bank 37

Annual Report 2014
 Section 2
Corporate Governance Review
Continued

CORPORATE GOVERNANCE REVIEW

CONTINUED

Executive Management
The Executive Management of BisB is headed by the Acting Chief Executive Officer, who is responsible for the day-to-day conduct of the
Bank’s business in line with policies and procedures approved by the Board of Directors. The Acting CEO is assisted by a highly-qualified and
experienced Management Team, whose profiles are listed on page 15 of this annual report.
1. Mr. Mohammed Ahmed Janahi: Deputy Chief Executive Officer & Acting CEO
2. Mr. Abdulrahman Mohammed Turki: General Manager - Retail Banking
3. Mr. Yousuf M A Karim: General Manager - Corporate Banking
4. Mr. Khalid Mohammed Al Dossari: Chief Financial Officer
5. Mr. Khalid Mahmoud Abdulla: Head of Internal Audit
6. Dr. Mohammed S. Belgami: Head of Credit and Risk Management

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 825,000 for 2014.

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 of the Bank’s activities.

Management Committees - Membership & Objectives

Committee Members Objectives

Asset & Liability Mohammed Ahmed Hasan Janahi (Chairman*) To manage and monitor the
Committee (ALCO) A. Rahman Turki liquidity risk of the Bank on
Yusuf Abdul Kareem a coordinated and consistent
Dr. Mohammed Belgami basis.
Khalid Al Dossari
Nader Al Bastaki
Sameer Qaedi
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014)

Credit & Investment Mohammed Ahmed Hasan Janahi (Chairman*) To exercise due care, diligence
Committee (C&IC) A. Rahman Turki and skill to oversee, direct and
Yusuf Abdul Kareem review the management of
Nader Al Bastaki credit risk within the financing
Dr. Mohammed Belgami portfolio of the Bank, and
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014) review policies and strategies
for achieving investment
objectives.
Information Mohammed Ahmed Hasan Janahi (Chairman*) To plan, prepare, coordinate,
Technology Steering Khalid Al Dossari implement, support and
Committee A. Rahman Turki follow up on all issues related
Dr. Mohammed Belgami to IT and new projects
Khalid Mahmood implementation issues.
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014)

Human Resource Mohammed Ahmed Hasan Janahi (Chairman*) To monitor and assess the
Committee (HR) Khalid Al Dossari workforce regarding human
A. Rahman Turki resources issues, and monitor,
Yusuf Abdul Kareem review and analyse legislative
Dr. Mohammed Belgami and/or administrative changes
Khalid Mahmood related to human resources.
Nader Al Bastaki
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014)

38 Bahrain Islamic Bank

Annual Report 2014
 Section 1 Section 2 Section 3
Corporate Governance Review

Committee Members Objectives

Qard Al Hassan, Mohammed Ahmed Janahi (Chairman*) To discharge the Bank’s social
Donation & Zakah Hamad Farooq Al Shaikh responsibilities toward society
Committee Khalid Waheeb Al Nasser through distributing Zakah,
Ali Hassan Duaij charity funds, donations and
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014) good faith Qard for marriage,
medical treatments, etc.
Provisioning Mohammed Ahmed Janahi (Chairman*) To assist the CEO in reviewing
Committee Dr. Mohammed Belgami the Bank’s provisions. Also
Khalid Al Dossari responsible for formulating
Srinivas Nallamothu provision policies with a view
Khalid Mahmood (Observer) to maintain the strategic risk
(*Previous Chairman was Mohammed Ebrahim Mohammed until 1 September 2014) levels objectives of the Bank.

Succession Planning
In compliance with CBB requirements, the Nomination & Remuneration Committee reviews and endorses the Bank’s succession plan on an
annual basis. The objective of the plan is to identify, develop and promote personnel to ensure that there are no disruptions to the functioning
of the Bank, in an event that key personnel choose to leave BisB.

Compliance
In accordance with CBB guidelines, the Bank has a designated Head of Compliance, who is independent and reports directly to the 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 periodically trains its staff on the identification and reporting of suspicious 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 analysing 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 and monitored, and
reported to the CBB.

Code of Conduct
BisB conducts itself in accordance with the highest standards of ethical behaviour. 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 2014, which is posted on the Bank’s website: www.bisb.com.

Bahrain Islamic Bank 39

Annual Report 2014
 FINANCIAL RESULTS
REFLECT SUCCESS OF
NEW STRATEGY

THE EXCELLENT FINANCIAL PERFORMANCE BY

BAHRAIN ISLAMIC BANK IN 2014, WHICH SAW NET PROFIT INCREASE
BY 52% OVER THE PREVIOUS YEAR, REFLECTS THE SUCCESSFUL
IMPLEMENTATION OF ITS NEW STRATEGIC FOCUS ON GROWING CORE
ACTIVITIES AND DISPOSING OF NON-PERFORMING INVESTMENT ASSETS.
THE BANK RELIED FULLY ON REVENUES AND FEES FROM FINANCING AND
MAJOR ACTIVITIES, WHICH WERE RESPONSIBLE FOR GENERATING 82%
OF OPERATING REVENUES. THESE WERE FREE FROM REVALUATIONS OR
UNEARNED PROFITS, WITH THE EXCEPTION OF THE SUCCESSFUL EXITS
FROM SOME INVESTMENT PORTFOLIOS AND LISTED EQUITIES, WHICH
REALISED A NET GAIN OF BD 7 MILLION.

40 Bahrain Islamic Bank

Annual Report 2013
 Section 1 Section 2 Section 3
Sharia’a Supervisory Board Report

SHARIA’A SUPERVISORY BOARD REPORT

For the year ended 31st December 2014

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.

In accordance to Articles of Association and the entrustment of discussed with the Bank’s officials all transactions carried out by
the Sharia’a Board with supervising the Bank’s activities from a the Management throughout the year and reviewed the Bank’s
Sharia perspective, we hereby submit the following report: conformity with the provisions and principles of Islamic Sharia’a as
well as the resolutions and guidelines of the Sharia’a Supervisory
The Sharia’a Supervisory Board monitored the operations, related
Board.
to the Bank throughout the year ended on 31st December
2014 to express opinion on the Bank’s adherence to the The Sharia’a Board reviewed the financial Statements for the
provisions and principles of Islamic Sharia’a in its activities by year ended on 31st December 2014 with the notes and income
following the guidelines and decisions issued by the Sharia’a statement and the Zakat calculation methods.
Supervisory Board. The Sharia’a Supervisory Board believes that
The Sharia’a Supervisory Board believes that:
ensuring the conformity of its activities and investments with
the provisions of Islamic Sharia’a is the sole responsibility of the 1. Contracts, and transactions conducted by the Bank throughout
Bank’s Management while the Sharia’a Supervisory Board is only the year ended on 31st December 2014 were in accordance
responsible for expressing an independent opinion and preparing with the standard contracts pre-approved by the Sharia’a
a report thereabout. Supervisory Board.
The Sharia’a Supervisory Board’s monitoring function included the 2. The distribution of profit on investment accounts was in
checking and documentation of the procedures to scrutinize each line with the basis and principles approved by the Sharia’a
operation carried out by the Bank, whether directly or through the Supervisory Board.
Sharia’a Internal Audit department. We planned with the Sharia’a
3. Any gains resulted from sources or means prohibited by the
Internal Audit department to carry out monitoring functions by
provisions and principles of Islamic Sharia’a, have been directed
obtaining all the information and clarifications that were deemed
to the Charity and Donations Account according to SSB’s
necessary to confirm that the Bank did not violate the principles
resolution.
and provisions of Islamic Sharia’a. The Sharia’a Internal Audit
department executed its mission of auditing the transactions and 4. Zakah was calculated according to the provisions and principles
submitted its periodic reports to the Sharia’a Supervisory Board, of Islamic Sharia’a. The shareholders should pay their portion
which confirmed the Bank’s commitment and conformity to the of Zakah on their shares as stated in the financial report.
Sharia’a Supervisory Board’s opinions.
5. The Bank was committed to the Sharia’a standards issued by
The Sharia’a Supervisory Board obtained data and clarifications the Accounting & Auditing Organization for Islamic Financial
it deemed necessary to confirm that the Bank did not violate the Institutions (AAOIFI).
Sharia’a principles and provisions of Islamic Sharia’a. The Sharia’a
Board held a number of meetings during the year and replied We pray that Allah may grant all of us further success and
to inquiries, in addition to approving a number of new products prosperity.
presented by the Management. The Sharia’a Supervisory Board

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

Bahrain Islamic Bank 41

Annual Report 2014
Section 3
Financial Statements

FINANCIAL STATEMENTS 2014

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 Information
80 Basel II, Pillar III Disclosures

42 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

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. (the “Bank”) and Volume 2 of the Central Bank of Bahrain (CBB) Rule Book, we
its subsidiaries (together the “Group”) which comprise the report that:
consolidated statement of financial position as at 31 December a) the Bank has maintained proper accounting records and
2014, the consolidated statements of income, cash flows, the consolidated financial statements are in agreement
changes in owners’ equity, sources and uses of good faith qard therewith;
fund and sources and uses of zakah and charity fund for the year b) the financial information contained in the chairman’s
then ended, and a summary of significant accounting policies and statement is consistent with the consolidated financial
other explanatory notes. statements;
c) we are not aware of any violations during the year of the
Respective responsibilities of board of directors and auditors Bahrain Commercial Companies Law, the Central Bank
These consolidated financial statements and the Group’s of Bahrain and Financial Institutions Law, the CBB Rule
undertaking to operate in accordance with Islamic Shari’a rules Book (Volume 2 and applicable provisions of Volume 6
and principles are the responsibility of the board of directors of and CBB directives), the CBB Capital Markets Regulations
the Bank. Our responsibility is to express an opinion on these and associated resolutions, the Bahrain Bourse rules and
consolidated financial statements based on our audit. procedures or the terms of the Bank’s memorandum and
articles of association that would have had a material adverse
Basis of opinion effect on the business of the Bank or on its financial position;
and
We conducted our audit in accordance with Auditing Standards
d) satisfactory explanations and information have been provided
for Islamic Financial Institutions issued by Accounting and
to us by management in response to all our requests.
Auditing Organisation for Islamic Financial Institutions. Those
standards require that we plan and perform the audit to obtain
Other matter
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes The financial statements of the Group as at and for the year
examining, on a test basis, evidence supporting the amounts and ended 31 December 2013 were audited by another auditor whose
disclosures in the consolidated financial statements. An audit also audit report dated 3 February 2014 expressed an unqualified
includes assessing the accounting principles used and significant opinion on those financial statements and a modified conclusion
estimates made by management, as well as evaluating the overall on regulatory matters.
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

Opinion
In our opinion, the consolidated financial statements give a true
and fair view of the consolidated financial position of the Group KPMG Fakhro
as at 31 December 2014, and of its consolidated results of Partner Registration No. 100
operations, its consolidated cash flows, its consolidated changes 11 February 2015
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.

Bahrain Islamic Bank 43

Annual Report 2014
Section 3
Financial Statements

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

For the year ended 31 December 2014

2014 2013
Note BD’000 BD’000

ASSETS
Cash and balances with banks and Central Bank 3 52,118 50,831
Placements with financial institutions 4 68,567 184,600
Financing assets 5 408,021 346,805
Investments securities 6 123,561 107,026
Ijarah Muntahia Bittamleek 8 102,277 90,356
Ijarah rental receivables 8 14,065 14,924
Investment in associates 7 30,835 36,236
Investment in real estate 10 53,934 58,219
Property and equipment 9 17,101 17,067
Other assets 11 4,728 4,230
TOTAL ASSETS 875,207 910,294

LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS

AND OWNERS’ EQUITY
Liabilities
Placements from financial institutions 75,570 95,144
Customers’ current accounts 137,423 105,932
Other liabilities 12 16,518 13,608
Total Liabilities 229,511 214,684

EQUITY OF INVESTMENT ACCOUNTHOLDERS 13 566,601 617,494

Owners’ Equity
Share capital 14 93,967 93,967
Treasury shares 14 (563) (563)
Reserves (14,320) (16,530)
Attributable to equity holders of the parent 79,084 76,874
Non-controlling interest 11 1,242
Total Owners' Equity 79,095 78,116

TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS 875,207 910,294

AND OWNERS' EQUITY

COMMITMENTS AND CONTINGENT LIABILITIES 15 22,277 15,991

The consolidated financial statements, which consist of pages 44 to 79, were approved by the Board of Directors on 11 February 2015
and signed on its behalf by:

Abdulrazaq Al Qassim Khalid Al Mannai Mohammed Janahi

Chairman Vice Chairman Acting Chief Executive Officer

The attached notes 1 to 32 form an integral part of these consolidated financial statements.

44 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

CONSOLIDATED STATEMENT OF INCOME

For the year ended 31 December 2014

2014 2013
Note BD’000 BD’000

INCOME
Income from financing 17 28,702 32,504
Income from investment in Sukuk 2,535 4,921
31,237 37,425
Less: Return on equity of investment accountholders 13.4 (7,287) (10,860)
23,950 26,565
Expense on placements from financial institutions (252) (264)
Fee and commission income 6,452 5,307
Income from investments 18 4,410 2,918
Income from investment in real estate 19 8,568 (807)
Share of results of associates 7 (1,550) 1,197
Net gain from foreign currencies 1,273 694
Total net income 42,851 35,610

EXPENSES
Staff costs 11,482 10,013
Depreciation 9 1,641 1,644
Other expenses 20 8,502 8,080
Total expenses 21,625 19,737
Profit before impairment allowances 21,226 15,873
Impairment provisions on financing assets 21.1 (7,593) (5,275)
Impairment provisions on investments 21.2 (4,336) (5,411)
Impairment provisions on other assets 21.3 - 920

PROFIT FOR THE YEAR 9,297 6,107

BASIC AND DILUTED EARNINGS PER SHARE (fils) 23 9.93 6.52

Abdulrazaq Al Qassim Khalid Al Mannai Mohammed Janahi

Chairman Vice Chairman Acting Chief Executive Officer

The attached notes 1 to 32 form an integral part of these consolidated financial statements.

Bahrain Islamic Bank 45

Annual Report 2014
 Section 3
Financial Statements

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2014
2014 2013
Note BD’000 BD’000

OPERATING ACTIVITIES
Profit for the year 9,297 6,107
Adjustments for non-cash items:
Depreciation 1,641 1,644
Impairment provisions on financing assets 21.1 7,593 5,275
Impairment provisions on investments 21.2 4,336 5,411
Impairment provisions on other assets 21.3 - (920)
Reversal of impairment / (Charge) on investment in real estates 19 (3,617) 1,321
Gain on sale of equity type instruments carried at fair value through equity 18 (1,946) (995)
Gain on sale of investment in real estates 19 (4,951) (514)
Share of results of associates 7 1,550 (1,197)
Unrealised gain on equity type instruments carried at fair value through
statement of income 18 - (55)
Dividends from investment in associates (70) -
Operating profit before changes in operating assets and liabilities 13,833 16,077
Working capital adjustments:
Mandatory reserve with Central Bank of Bahrain 1,685 (4,485)
Financing assets (64,808) (27,389)
Ijarah Muntahia Bittamleek (15,021) 1,393
Other assets (498) 1,273
Customers’ current accounts 31,491 18,800
Other liabilities 2,911 (1,031)
Placements from financial institutions (19,574) 7,454
Customers' investment accounts (50,893) 43,924
Net cash (used in) / from operating activities (100,874) 56,016

INVESTING ACTIVITIES
Disposal of investment in real estate 10 7,799 5,348
Dividends from investment in associates 70 -
Purchase of investments (50,229) (37,084)
Purchase of property and equipment (1,715) (3,181)
Disposal of property and equipment 40 -
Proceeds from disposal of investments 31,849 37,254
Net cash (used in) / from investing activities (12,186) 2,337

FINANCING ACTIVITIES
Dividends paid (1) (10)
Net cash used in financing activities (1) (10)
NET CHANGE IN CASH AND CASH EQUIVALENTS (113,061) 58,343
Cash and cash equivalents at 1 January 202,691 144,348
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 89,630 202,691
Cash and cash equivalents at year end comprise of:
Cash on hand 3 9,048 7,750
Balances with CBB, excluding mandatory reserve deposits 3 4,295 2,926
Balances with banks and other financial institutions 3 7,720 7,415
Placements with financial institutions with original maturities less than 90 days 4 68,567 184,600
89,630 202,691

The attached notes 1 to 32 form an integral part of these consolidated financial statements.

46 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITY

For the year ended 31 December 2014
Reserves
Real Equity
estate attributable
fair Investments to equity Non- Total
Share Treasury Statutory General value fair value Accumulated Total holders of controlling owners
capital shares reserve reserve reserve reserve losses reserves the 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
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 - - - - - (3,147) - (3,147) (3,147) - (3,147)
fair value reserve
Net movement in real estate - - - - (3,940) - - (3,940) (3,940) - (3,940)
fair value reserve
Transfer of profit to statutory - - 930 - - - (930) - - - -
reserve
Net movement in non- - - - - - - - - - (1,231) (1,231)
controlling interest
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

Balance at 1 January 2013 93,967 (563) 10,268 1,000 - 1,286 (36,195) (23,641) 69,763 - 69,763
Changes due to adoption of
FAS 26 - - - - 13,259 - (13,259) - - - -
As at 1 January 2013
(restated) 93,967 (563) 10,268 1,000 13,259 1,286 (49,454) (23,641) 69,763 - 69,763
Profit for the year - - - - - - 6,107 6,107 6,107 - 6,107
Net movement in investments
fair value reserve - - - - - 2,962 - 2,962 2,962 - 2,962
Net movement in real estate
fair value reserve - - - - (1,958) - - (1,958) (1,958) - (1,958)
Transfer of profit to statutory
reserve - - 611 - - - (611) - - - -
Net movement in non-
controlling interest - - - - - - - - - 1,242 1,242

Balance at 31 December 2013 93,967 (563) 10,879 1,000 11,301 4,248 (43,958) (16,530) 76,874 1,242 78,116

The attached notes 1 to 32 form an integral part of these consolidated financial statements.

Bahrain Islamic Bank 47

Annual Report 2014
Section 3
Financial Statements

CONSOLIDATED STATEMENT OF SOURCES AND USES

OF GOOD FAITH QARD FUND
For the year ended 31 December 2014

Funds
Qard Hasan available for
receivables Qard Hasan Total
BD'000 BD'000 BD'000

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

Balance at 1 January 2013 15 113 128

Uses of Qard fund
Marriage 26 (26) -
Others (Waqf) 63 (63) -
Total uses during the year 89 (89) -
Repayments (25) 25 -
Balance at 31 December 2013 79 49 128

2014 2013
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 part of these consolidated financial statements.

48 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

CONSOLIDATED STATEMENT OF SOURCES AND USES

OF ZAKAH AND CHARITY FUND
For the year ended 31 December 2014

2014 2013
BD’000 BD’000

SOURCES OF ZAKAH AND CHARITY FUNDS

Undistributed zakah and charity funds at the beginning of the year 225 58
Non-Islamic income / late fee 659 687
Donations 150 150
Total sources of zakah and charity funds during the year 1,034 895

USES OF ZAKAH AND CHARITY FUNDS

Philanthropic societies 441 300
Aid to needy families 311 370
Total uses of funds during the year 752 670
Undistributed zakah and charity funds at the end of the year 282 225

The attached notes 1 to 32 form part of these consolidated financial statements.

Bahrain Islamic Bank 49

Annual Report 2014
Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

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 eleven branches (2013: fifteen), all operating in the Kingdom of Bahrain.
The consolidated financial statements include the financial statements of the Bank and its subsidiaries (together the “Group”). The
Bank holds 100% of the share capital of both Abaad Real Estate Company B.S.C. (c) and BisB MMF Company B.S.C. (c), and 99.7%
subscription of 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 activities of Abaad are the management and development of real estate
(in accordance with the Islamic Shari’a rules and principles).
BisB MMF Company B.S.C. (c) (“MMF”)
MMF was incorporated in the Kingdom of Bahrain as a closed joint stock company and registered with the Ministry of Industry and
Commerce under Commercial Registration (CR) number 81322-1. The postal address of the Company is registered at, Building 722,
Road 1708, Block 317, Diplomatic Area, Kingdom of Bahrain. The purpose of the MMF is limited to establishing funds (in accordance
with the Islamic Shari’a rules and principles).
BisB Money Market Fund (“Fund”)
Fund is an open ended investment fund constituted by an instrument dated 12 June 2012 and commenced its activities on 9 July 2012.
The fund is a Bahrain domiciled Shari’a compliant retail collective investment scheme established by Bahrain Islamic Bank B.S.C. pursuant
to the Central Bank of Bahrain regulations and directives as contained in the rulebook volume 7. The fund has been established by BisB
MMF Company B.S.C. (c).
The consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors issued on 11
February 2015.
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, except for
those changes arising from revised/new AAOIFI financial accounting standards.
a. New standards, amendments, and interpretations effective from 1 January 2014:
There are no new AAOIFI accounting standards, amendments to standards and interpretations that are effective for the first time for the
financial year beginning on or after 1 January 2014 that would be expected to have a material impact on the Group.
New standards, amendments and interpretations issued but not effective
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1
January 2015 and are expected to be relevant to the Group.
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 would not have any significant impact on the
financial statements of the Group.
The Bank has not early adopted any new standards during 2014.

50 Bahrain Islamic Bank

Annual Report 2014
Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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”), the Shari’a Rules and Principles as determined by the Shari’a
Supervisory Board of the Group, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law
and the CBB Rule Book (Volume 2, applicable provisions of Volume 6, and CBB directives), regulations and associated resolutions,
rules and procedures of the Bahrain Bourse or the terms of the Bank’s memorandum and articles of association in accordance with the
requirements of AAOIFI, for matters for which no AAOIFI standard exists, the Group uses 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 “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 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
The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at 31 December each year. A
subsidiary is an entity over which the Bank has power to control, which is other than fiduciary in nature. The financial statements of the
subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies.
The subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue
to be consolidated until the date that such control ceases. Control is achieved where the Group has direct ownership of more than 50%
of the voting rights over the subsidiaries or where the Group has the power, directly or indirectly, to govern the financial and operating
policies of the entity so as to obtain benefits from its activities.
Losses within the subsidiaries are attributed to the non-controlling interest even if that results in a deficit balance.
The results of the subsidiaries acquired or disposed off during the year are included in the consolidated statement of income from the
date of acquisition or up to the date of disposal, as appropriate.
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.
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.

Bahrain Islamic Bank 51

Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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. Investments securities
Investments securities comprise of 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 cost, being the fair value of the consideration given including acquisition charges
associated with the investment, except in the case of investments carried at fair value through statement of income, where the
acquisition charges are expensed in the income statement.
Debt type instruments carried at amortised cost
Investments which have fixed or determinable payments and where the Group has both the intent and ability to hold to maturity
are classified as debt type instruments carried at amortised cost. Such investments are carried at amortised cost, less provision for
impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on
such 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 subsequently re-measured at fair value. All related realised and unrealised gains or losses are included in the consolidated
statement of income.
k. Determination of 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 consolidated statement of financial position 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 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.
For Murabaha receivables the fair value is determined by the Bank at the end of the financial period at their cash equivalent value.
l. Investment in associates
The Group’s investments in associates are accounted for under the equity method of accounting. Associates are entities over which the
Group exercises significant influence but not control and which are neither subsidiaries nor joint ventures. Under the equity method,
the investments in associates are carried in the consolidated statement of financial position at cost, plus post-acquisition changes in the

52 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Group’s share of net assets of the associate, less any impairment. The consolidated statement of income reflects the Group’s share of
the results of its associates. Where there has been a change recognised directly in the equity of the associates, the Group recognises its
share of any changes and discloses this, when applicable, in the consolidated statement of changes in owners’ equity. Unrealised profits
and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the
associates.
The Group determines at each consolidated statement of financial position 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 held for capital appreciation are re-measured at 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. Equipment
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
All equity of investment accountholders is carried at cost plus profit and related reserves less amounts settled.
Equity of investment accountholders share of income is calculated based on the income generated from investment accounts after
deducting Mudarib share. Operating expenses are charged to shareholders’ funds and not included in the calculation.
The basis applied by the Group in arriving at the equity of investment accountholders’ share of income is total income from jointly
financed assets less Bank’s portion of this income based on its proportion of the jointly financed assets. The portion of the income
generated from equity of investment accountholders will be deducted as Mudarib share and the remaining will be distributed to the
equity of investment accountholders.

Bahrain Islamic Bank 53

Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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.
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”.

54 Bahrain Islamic Bank

Annual Report 2014
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Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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.
aa. Revenue recognition
Murabaha receivables
Income is recognised by proportionately allocating the attributable profits over the deferred period whereby each financial period carries
its portion of profits irrespective of when cash is received. Income related to accounts that are 90 days overdue is excluded from the
consolidated statement of income.
Musharaka investments
Income on Musharaka is recognised when the right to receive payment is established or on distribution. In the case of losses on
musharaka, the Group’s share of losses is recognised to the extent that such losses are being deducted from its share of the Musharaka
capital.
Placements with financial institutions
Income on placements from financial institutions is recognised on a time apportioned basis 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
Fee and commission income is recognised when earned.
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, 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; and
Bahrain Islamic Bank 55
Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

cc. Impairment of financial assets (continued)
(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.
For equity type instruments carried at fair value through equity, impairment losses recognised in the consolidated statement of income
cannot be reversed through the consolidated statement of income and are recorded as increases in cumulative changes in fair value
through equity.
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.i 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.
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. Employees’ end of service 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.

56 Bahrain Islamic Bank

Annual Report 2014
Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

2 SIGNIFICANT ACCOUNTING POLICIES (continued)

gg. Shari’a supervisory board
The Group’s business activities are subject to the supervision of a Shari’a Supervisory Board consisting of five members appointed by the
general assembly.
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. 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

2014 2013
BD’000 BD’000
Cash on hand 9,048 7,750
Balances with CBB, excluding mandatory reserve deposits 4,295 2,926
Balances with banks and other financial institutions 7,720 7,415
21,063 18,091
Mandatory reserve with CBB 31,055 32,740
52,118 50,831

The mandatory reserve with CBB is not available for use in the day-to-day operations.

4 PLACEMENTS WITH FINANCIAL INSTITUTIONS

Jointly financed Jointly financed

2014 2013
BD’000 BD’000
Commodity Murabaha 30,502 121,566
Deferred profits (15) (33)
30,487 121,533
Wakala 38,080 63,067
68,567 184,600

5 FINANCING ASSETS

Jointly financed Jointly financed

2014 2013
BD’000 BD’000
Murabaha (note 5.1) 308,710 256,038
Musharaka (note 5.2) 99,311 90,767

408,021 346,805

Bahrain Islamic Bank 57

Annual Report 2014
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NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

5 FINANCING ASSETS (continued)

5.1 Murabaha

Jointly financed Jointly financed

2014 2013
BD’000 BD’000
Tasheel 201,487 175,016
Tawarooq 125,701 93,835
Letters of credit refinance 17,208 16,713
Motor vehicles Murabaha 17,139 15,978
Credit cards 12,357 9,887
Others 4,008 414
377,900 311,843
Qard fund 80 79

Gross receivables 377,980 311,922

Deferred profits (44,219) (36,814)
Provision for impairment (note 21) (25,051) (19,070)
308,710 256,038
Non-performing Murabaha financing outstanding as of 31 December 2014 amounted to BD 21,593 thousand (2013: BD 25,568
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 geographically and by sector is as follows:

2014 2013
Europe Middle East Total Europe Middle East Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Commercial - 85,971 85,971 - 81,316 81,316
Financial institutions - 18,430 18,430 7,270 11,302 18,572
Others including retail - 229,360 229,360 - 175,220 175,220
- 333,761 333,761 7,270 267,838 275,108

5.2 Musharaka
Jointly financed Jointly financed
2014 2013
BD’000 BD’000
Musharaka investment in real estate 104,943 98,788
Provision for impairment (note 21) (5,632) (8,021)

99,311 90,767

Non-performing Musharaka financing outstanding as of 31 December 2014 amounted to BD 19,003 thousand (2013: BD 33,369
thousand).

58 Bahrain Islamic Bank

Annual Report 2014
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Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

6 INVESTMENTS

2014 2013
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 carried at amortised cost
Sukuk
At 1 January - 41,705 41,705 - 44,406 44,406
Acquisitions - 50,229 50,229 - 18,947 18,947
Disposals and redemptions - (6,126) (6,126) - (21,648) (21,648)
At 31 December - 85,808 85,808 - 41,705 41,705
Provision for impairment - (3,974) (3,974) - (3,340) (3,340)
Total net Sukuk - 81,834 81,834 - 38,365 38,365

ii) Equity type instruments carried at fair value through equity

Quoted shares - at fair value
At 1 January 26,494 - 26,494 24,920 - 24,920
Acquisitions - - - 4,586 - 4,586
Fair value change (2,235) - (2,235) 2,186 - 2,186
Disposals (16,941) - (16,941) (5,198) - (5,198)
Write off (4,849) - (4,849) - - -
At 31 December 2,469 - 2,469 26,494 - 26,494
Provision for impairment (1,076) - (1,076) (6,499) - (6,499)
Total net 1,393 - 1,393 19,995 - 19,995
Unquoted shares - at cost less impairment
At 1 January 29,249 - 29,249 34,022 - 34,022
Acquisitions - - - 920 - 920
Disposals (48) - (48) - - -
Write off - - - (5,693) - (5,693)
At 31 December 29,201 - 29,201 29,249 - 29,249
Provision for impairment (7,721) - (7,721) (7,119) - (7,119)
Total net 21,480 - 21,480 22,130 - 22,130
Unquoted managed funds - at cost less impairment
At 1 January 43,808 - 43,808 41,970 - 41,970
Acquisitions - - - 9,384 - 9,384
Foreign currency translation changes (1,242) - (1,242) - - -
Disposals (6,025) - (6,025) (7,546) - (7,546)
At 31 December 36,541 - 36,541 43,808 - 43,808
Provision for impairment (17,687) - (17,687) (18,138) - (18,138)
Total net 18,854 - 18,854 25,670 - 25,670

iii) Equity type instruments carried at fair value through statement of income
Quoted investments
At 1 January 866 - 866 426 - 426
Acquisitions - - - 3,247 - 3,247
Fair value change - - - 55 - 55
Disposals (866) - (866) (2,862) - (2,862)
At 31 December - - - 866 - 866
Total net investments securities 41,727 81,834 123,561 68,661 38,365 107,026

Bahrain Islamic Bank 59

Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

7 INVESTMENT IN ASSOCIATES

Self financed Self financed

2014 2013
BD’000 BD’000

At 1 January 36,236 35,215

Share of (loss) / profit (1,550) 1,197
Share of changes in investee’s equity (821) (176)
Dividends received (70) -
Provision for impairment (2,960) -

At 31 December 30,835 36,236

Investments in associates comprise:

Country of
Name of associate Ownership % Nature of business
incorporation

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

Liquidity 25.00% Bahrain Liquidity Management Centre B.S.C. (c) was incorporated in 2002 as a
Management bank, licensed and regulated by the Central Bank of Bahrain to facilitate
Centre B.S.C. (c) the creation of an Islamic inter-bank market that will allow Islamic financial
services institutions to effectively manage their assets and liabilities.

Arabian C Real 19.00% Kuwait Arabian C Real Estate Company is a Kuwaiti Shareholding Company
Estate 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 strategic
investments in the real estate and infrastructure sectors in GCC/MENA
region.

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

Al Dur Energy 29.41% Bahrain Al Dur Energy Investment Company is an exempt company with limited
Investment liability incorporated in the Cayman Islands on 10 June 2009 and operates
Company under registration number 227032. The company operates in the Kingdom
of Bahrain with the sole purpose of holding a 15% indirect interest in
a power and water plant project company, Al Dur 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 0.145 per share was as of 8 May 2014, 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 2,062 thousand (2013: BD 4,124
thousand).

60 Bahrain Islamic Bank

Annual Report 2014
 Section 3
Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

8 IJARAH MUNTAHIA BITTAMLEEK

2014 2013
Jointly financed Jointly financed
Aviation Aviation
related related
Lands Buildings 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 40,588 56,058 7,287 9,101 113,034 38,913 56,772 11,157 7,585
114,427
Additions 6,824 37,766 589 2,548 47,727 4,167 10,222 - 1,516 15,905
Settlements (3,107) (28,712) - (887) (32,706) (2,492) (10,936) (3,870) - (17,298)
At 31 December 44,305 65,112 7,876 10,762 128,055 40,588 56,058 7,287 9,101 113,034

Depreciation:
At 1 January - 12,406 1,245 1,273 14,924 - 10,698 2,145 923 13,766
Provided during the year - 3,431 547 959 4,937 - 3,580 507 350 4,437
Relating to settled assets - (5,793) - (3) (5,796) - (1,872) (1,407) - (3,279)
At 31 December - 10,044 1,792 2,229 14,065 - 12,406 1,245 1,273 14,924
Provision for
impairment (note 21) (9,175) (2,538) - - (11,713) (6,133) (1,621) - - (7,754)
Net book value:
As at 31 December 35,130 52,530 6,084 8,533 102,277 34,455 42,031 6,042 7,828 90,356

Non-performing Ijarah Muntahia Bittamleek as of 31 December 2014 is BD 24,702 thousand (2013: BD 32,516 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

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 / Transfer - 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

Bahrain Islamic Bank 61

Annual Report 2014
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NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

9 PROPERTY AND EQUIPMENT (continued)

2013
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 40 1,108 2,688 6,980 605 2,069 13,490
Additions 7,143 3,427 218 1,028 72 1,200 13,088
At 31 December 7,183 4,535 2,906 8,008 677 3,269 26,578
Depreciation:
At 1 January - 1,107 1,947 4,352 461 - 7,867
Provided during the year - 148 215 1,214 67 - 1,644
At 31 December - 1,255 2,162 5,566 528 - 9,511
Net Book Value 7,183 3,280 744 2,442 149 3,269 17,067

10 INVESTMENT IN REAL ESTATE

Self financed
2014 2013
BD’000 BD’000

Lands 51,339 55,264

Buildings 2,595 2,955

53,934 58,219

2014 2013
BD’000 BD’000

At 1 January 58,219 64,888

Capitalized expediture 257 -
Disposal (7,799) (5,348)
Fair value changes 3,257 (1,321)
53,934 58,219

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 each year, which has been determined
based on valuations performed by independent third part property valuers who have the qualification and experience of valuing similar
properties in the same location.

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Annual Report 2014
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NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

11 OTHER ASSETS

2014 2013
BD’000 BD’000

Receivables 1,907 1,907

Staff advances 1,177 1,323
Prepaid expenses 658 608
Income receivables - 167
Other 986 225
4,728 4,230

12 OTHER LIABILITIES

2014 2013
BD’000 BD’000

Managers’ cheques 4,150 2,924

Payable to vendors 3,039 3,097
Accrued expenses 3,334 2,645
Life insurance (Takaful) fees payable 1,928 1,819
Dividends payable 806 807
Zakah and charity fund 282 225
Other 2,979 2,091
16,518 13,608

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 103 thousand (2013: BD 63 thousand) and maintains a profit
equalisation reserve amounting to BD 395 thousand (2013: BD 295 thousand).
The Group’s share, as Mudarib, in the profits of equity of investment accountholders is up to a maximum of 85% (2013: 65%).
13.1 Profit Distribution by Type of Account
The following table represents the distribution of profit by type of equity of investment accountholders:

2014 2013
Percentage
of funds Distributed Percentage of Distributed
invested profit rate funds invested profit rate
Account Type
Defined deposits 85% 1.29% 85% 1.81%
Specific investment deposits 85% 1.89% 85% 2.86%
Investment certificates 85% 3.50% 85% 3.50%
Savings accounts 45% 0.23% 45% 0.25%
Iqra 90% 2.16% 90% 2.72%
Tejoori 45% 0.23% 45% 0.25%
Vevo 45% 0.22% 45% 0.25%

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31 December 2014

13 EQUITY OF INVESTMENT ACCOUNTHOLDERS (continued)

13.2 Equity of investment accountholders balances
2014 2013
BD’000 BD’000

Type of Equity of Investment Accountholders

Customer investment accounts
Balances on demand 246,880 218,658
Contractual basis 316,879 395,256
Others 2,842 3,580
566,601 617,494

13.3 Equity of Investment Accountholders Reserves

2014 Movement 2013

BD’000 BD’000 BD’000

Profit equalisation reserve 395 100 295

Investment risk reserve 103 40 63

13.4 Return on equity of investment accountholders

2014 2013
BD’000 BD’000

Gross return to equity of investment accountholders 23,519 33,176

Profit equalization reserve (100) (295)
Group’s share as a Mudarib (16,092) (22,021)
Investment risk reserve (40) -
Return on equity of investment accountholders 7,287 10,860

14 OWNERS’ EQUITY
2014 2013
BD’000 BD’000

(i) Share capital

a) Authorised
2,000,000,000 shares (2013: 2,000,000,000 shares) of BD 0.100 each 200,000 200,000

b) Issued and fully paid up

939,673,499 shares (2013: 939,673,499 shares) of BD 0.100 each 93,967 93,967

(ii) Treasury Shares 2014 2013

Number of Shares BD’000 BD’000

At 31 December 3,620,609 563 563

2014
BD’000

Cost of treasury shares 563

Market value of treasury shares 536

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

64 Bahrain Islamic Bank

Annual Report 2014
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31 December 2014

14 OWNERS’ EQUITY (continued)

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 930 thousand (2013: BD 611 thousand) representing 10% of the
profit for the year BD 9,297 thousand (2013: BD 6,107 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.

Fair value reserve on investment in real estate

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.

Cumulative changes in fair value of investments

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:

2014 2013
Number of Number of
Names
Nationality shares % holding shares % holding

National Bank of Bahrain Bahraini 242,038,206 25.76% 242,038,206 25.76%

Social Insurance Organisation Bahraini 121,113,560 12.89% 121,147,267 12.89%
Social Insurance Organisation - Military Pension Fund Bahraini 121,113,559 12.89% 121,113,559 12.89%
Islamic Development Bank Saudi 165,956,945 17.66% 165,956,945 17.66%
General Council of Kuwaiti Awqaf Kuwaiti 68,013,739 7.24% 68,013,739 7.24%

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:

2014 2013
% of total % of total
Number of Number of outstanding Number of Number of outstanding
shares shareholders shares shares shareholders shares
Less than 1% 153,552,651 3,383 16.40% 153,518,944 3,411 16.44%
1% up to less than 5% 67,884,839 3 7.22% 67,884,839 3 7.22%
5% up to less than 10% 68,013,739 1 7.23% 68,013,739 1 7.23%
10% up to less than 50% 650,222,270 4 69.15% 650,255,977 4 69.11%
939,673,499 3,391 100.00% 939,673,499 3,419 100.00%

Bahrain Islamic Bank 65

Annual Report 2014
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NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

14 OWNERS’ EQUITY (continued)

Details of Directors’ interests in the Group’s shares as at the end of the year were:
Categories:

2014 2013
No. of No. of
No. of shares Directors No. of shares Directors
400,000 4 200,000 2

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):

2014 2013
Percentage of Percentage of
No. of shares No. of shares
Shareholding Shareholding
Directors 400,000 0.043% 200,000 0.021%
Shari’a supervisory members 199,812 0.021% 205,725 0.022%
Senior management - 0.000% 22,990 0.002%

599,812 0.064% 428,715 0.045%

The Bank has adopted sound remuneration practices as required under volume 2 of the CBB rulebook. Accordingly the Bank has set up
an employee share incentive scheme which is subject to approval by the shareholders the fourth coming annual general meeting for the
year ended 31 December 2014.

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:

2014 2013
BD’000 BD’000
Letters of credit and acceptances 2,775 3,910
Guarantees 18,760 11,618
Operating lease commitments * 742 463

22,277 15,991

* The 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.

66 Bahrain Islamic Bank

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NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

15 COMMITMENTS AND CONTINGENT LIABILITIES (continued)

Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows:

2014 2013
BD’000 BD’000
Within one year 225 379
After one year but not more than five years 517 84
742 463

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.
In August 2014, the Central Bank of Bahrain issued the final regulation to give effect to the Basel III framework which comes into
effect on 1 January 2015. The Basel III 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 III 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.
The classification of the Group’s capital in accordance with the regulatory requirements is as follows:
2014 2013
BD’000 BD’000
Tier 1 Capital 74,727 51,125
Tier 2 Capital 19,722 13,073

Total Capital Base 94,449 64,198

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:

2014 2013
BD’000 BD’000
Risk weighted exposure:
Total Credit Risk Weighted Assets 532,703 492,627
Total Market Risk Weighted Assets 15,769 18,416
Total Operational Risk Weighted Assets 56,583 42,133
Total Regulatory Risk Weighted Assets 605,055 553,176
Capital Adequacy Ratio 15.61% 11.61%
Tier 1 Capital Adequacy Ratio 12.35% 9.24%
Minimum requirement 12% 12%

Bahrain Islamic Bank 67

Annual Report 2014
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31 December 2014

17 INCOME FROM FINANCING

2014 2013
BD’000 BD’000
Income from jointly financed Islamic financing assets:
Income from Murabaha financing 17,870 18,987
Income from placements with financial institutions 515 895
Income from Musharaka financing 5,474 5,372
Income from Ijarah Muntahia Bittamleek - net * 4,843 7,250
28,702 32,504

* The details of Income from Ijarah Muntahia Bittamleek is as follows:

2014 2013
BD’000 BD’000
Income from Ijarah Muntahia Bittamleek – gross 9,780 11,687
Depreciation during the year (note 8) (4,937) (4,437)
4,843 7,250

18 INCOME FROM INVESTMENTS

2014 2013
BD’000 BD’000
Dividend income 2,044 1,494
Gain on sale of equity type instruments 1,946 995
Income from investment in Ijarah assets 420 374
Unrealised gain on equity type instruments carried at fair value through statement of income - 55
4,410 2,918

19 INCOME FROM INVESTMENT IN REAL ESTATE

2014 2013
BD’000 BD’000
Gain on sale 4,951 514
Reversal of impairment / (Change) 3,617 (1,321)
8,568 (807)

20 OTHER EXPENSES
2014 2013
BD’000 BD’000
Card Centre expenses 1,445 1,435
Marketing and advertisement expenses 1,124 1,692
Premises and equipement expenses 1,116 1,053
Professional services 1,018 559
Information technology related expenses 830 1,019
Communication expenses 772 816
Board of directors sitting fees 248 48
Donations 150 150
Shari’a committee fees & remuneration 80 11
Board Remunerations* - 300
Others 1,719 997
8,502 8,080
* No provision for Board Remuneration made in 2014 as 2013 provision was not utilised.

68 Bahrain Islamic Bank

Annual Report 2014
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31 December 2014

21 PROVISION FOR IMPAIRMENT

21.1 Impairment provisions on financing assets
Specific impairment Collective impairment Total
2014 2013 2014 2013 2014 2013
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
At 1 January 30,672 29,657 4,173 2,688 34,845 32,345
Charge for the year 8,659 8,087 6,645 1,485 15,304 9,572
Recoveries & write backs (7,711) (4,297) - - (7,711) (4,297)
948 3,790 6,645 1,485 7,593 5,275
Amounts written off against provision (42) (2,775) - - (42) (2,775)
At 31 December 31,578 30,672 10,818 4,173 42,396 34,845

The above impairment provision relates to the following:

2014 2013
BD’000 BD’000
Murabaha receivables 25,051 19,070
Musharaka investments 5,632 8,021
Ijarah Muntahia Bittamleek 11,713 7,754
42,396 34,845

21.2 Impairment provisions on investments

2014 2013
BD’000 BD’000
At 1 January 35,096 35,378
Charge for the year * 6,657 5,436
Recoveries & write backs (2,321) (25)
4,336 5,411
Amounts written off against provision (4,849) (5,693)
Foreign currency translation changes (1,165) -
At 31 December 33,418 35,096

* Impairment charge includes BD 2,960 thousand impairment provision on investment in associates (2013: nil).

21.3 Impairment provisions on other assets

2014 2013
BD’000 BD’000
At 1 January - 3,609
Recoveries & write backs - (920)
Amounts written off against provision - (2,689)
- -

The fair value of collateral that the Group holds relating to non performing facilities at 31 December 2014 amounts to BD 65,298
thousand (31 December 2013: BD 105,892 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.

Bahrain Islamic Bank 69

Annual Report 2014
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Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

31 December 2014

22 ZAKAH
The total Zakah payable as of 31 December 2014 amounted to BD 444 thousand (2013: BD 207 thousand) of which the Bank has no
Zakah payable (2013: BD nil) based on the statutory reserve, general reserve and retained earning as at 1 January 2014. The Zakah
balance amounting to BD 444 thousand or 0.5 fils per share (2013: BD 207 thousand or 0.2 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:

2014 2013
Profite for the year in BD’000 9,297 6,107
Weighted average number of shares 936,053 936,053
Basic and diluted earnings per share (fils) 9.93 6.52

Basic and diluted earnings per share are the same since the Group has not issued any instruments that would have a dilutive effect.
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:
2014
Associates Directors
and joint and related Senior
Shareholders ventures entities management Total
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 - - 30,8 35
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)

Less: Return on equity of investment accountholders (990) (7) (6) (21) (1,024)

EXPENSES
Other expenses - - (328) (825) (1,153)

70 Bahrain Islamic Bank

Annual Report 2014
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31 December 2014

24 RELATED PARTY TRANSACTIONS (continued)

2013
Associates Directors
and joint and related Senior
Shareholders ventures entities management Total
BD’000 BD’000 BD’000 BD’000 BD’000

ASSETS
Due from banks and financial institutions - 9,481 - - 9,481
Financing assets - - 2,111 44 2,155
Investment in associates - 36,236 - - 36,236
Other assets - - - 244 244

Liabilities and Equity of investment accountholders

Customers’ current accounts - 581 459 - 1,040
Other liabilities - 1,644 - - 1,644
Customers’ investment accounts - 2,373 443 - 2,816

INCOME
Income from financing - 173 123 - 296
Share of results of associates - 1,197 - - 1,197

Return on equity of investment accountholders (281) (10) (9) (26) (326)

Expenses
Other expenses - - (358) (895) (1,253)

Compensation of the key management personnel is as follows:

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

2014 2013
BD’000 BD’000
Short term employee benefits 688 756
Other long term benefits 137 139
825 895

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.

Bahrain Islamic Bank 71

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31 December 2014

25 RISK MANAGEMENT (continued)

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.
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.

72 Bahrain Islamic Bank

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31 December 2014

25 RISK MANAGEMENT (continued)

a) Credit Risk (continued)
(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.
2014 2013
BD’000 BD’000
Cash and balances with banks and Central Bank 43,070 43,081
Placements with financial institutions 68,567 184,600
Financing assets 438,704 373,896
Ijarah Muntahia Bittamleek 113,990 98,110
Investments 86,118 41,705
Ijarah rental receivables 14,065 14,924
764,514 756,316

Letters of credit, guarantees and acceptances 21,535 15,528

(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 of Commitments and
Assets investment accountholders contingent liabilities
31 December 31 December 31 December 31 December 31 December 31 December
2014 2013 2014 2013 2014 2013
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Geographical region
Middle East 867,636 895,977 788,901 831,964 22,277 15,666
Rest of Asia - 297 913 4 - -
North America 4,350 1,280 195 183 - -
Europe 3,221 12,740 6,103 27 - 325
875,207 910,294 796,112 832,178 22,277 15,991

Industry sector
Trading and manufacturing 43,824 77,461 27,141 17,045 13,824 7,665
Aviation 8,241 11,696 17,114 54,542 466 466
Real Estate 246,215 211,688 15,916 16,792 632 1,888
Banks and financial institutions 119,083 255,103 109,928 120,832 2,543 4,535
Personal / Consumer 240,365 237,957 390,264 477,706 - -
Government Organization 75,590 47,424 92,540 63,232 - -
Others 141,889 68,965 143,209 82,029 4,812 1,437
875,207 910,294 796,112 832,178 22,277 15,991

Bahrain Islamic Bank 73

Annual Report 2014
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31 December 2014

25 RISK MANAGEMENT (continued)

(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 2014
Neither past due nor impaired
Past due but Individually
High grade Standard grade not 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

31 December 2013
Neither past due nor impaired
Past due but Individually
High grade Standard grade not impaired impaired Total
BD’000 BD’000 BD’000 BD’000 BD’000
Murabaha 4,614 209,055 35,871 25,568 275,108
Musharaka 1,862 53,862 9,695 33,369 98,788
Ijarah Muntahia Bittamleek - 53,542 12,275 32,293 98,110
Ijarah rental receivables - 11,866 2,162 896 14,924
6,476 328,325 60,003 92,126 486,930

Restructured facilities during the year amounted to BD 21,353 thousand (2013: BD 9,571 thousand), and they included amounts
totalling BD nil (2013: BD 3,467 thousand) which were past due more than 90 days.
(iv) Aging analysis of past due but not impaired financing facilities per class of financial assets

Up to 30 days 31 to 60 days 61 to 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

2013

Murabaha 35,113 319 439 35,871

Musharaka 9,110 248 337 9,695
Ijara Muntahia Bittamleek 11,020 1,217 38 12,275
55,243 1,784 814 57,841

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25 RISK MANAGEMENT (continued)

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.
The maturity profile of assets, liabilities and equity of investment accountholders at 31 December 2014 was as follows:

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

month months months to 1 year years years maturity Total
ASSETS BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
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 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
Placements from financial institutions 75,185 385 - - - - - 75,570
Customers’ current accounts 137,423 - - - - - - 137,423
Other liabilities 16,518 - - - - - - 16,518
Equity of 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 -

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25 RISK MANAGEMENT (continued)

b) Liquidity Risk (continued)
The maturity profile of assets, liabilities and equity of investment accountholders at 31 December 2013 was as follows:
Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over 3 No fixed
month months months to 1 year years years maturity Total
ASSETS BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
Cash and balances with the banks and
18,091 - - - - - 32,740 50,831
Central Bank
Placements with financial institutions 17,996 8,945 - - - - 184,600
157,659
Financing assets 22,985 20,087 11,049 31,781 67,804 193,099 - 346,805
Ijarah Muntahia Bittamleek 10,556 - 196 9 10,777 68,818 - 90,356
Investments 6,741 20,861 - - 10,259 47,035 22,130 107,026
Investment in associates - - - - - - 36,236 36,236
Investment in real estate - - - - - - 58,219 58,219
Ijarah rental receivables 3,955 57 - 329 654 9,929 - 14,924
Property and equipment - - - - - - 17,067 17,067
Other assets - 1,481 834 - - 1,915 - 4,230

Total assets 219,987 60,482 21,024 32,119 89,494 320,796 166,392 910,294

LIABILITIES AND EQUITY OF INVESTMENT

ACCOUNTHOLDERS
Placements from financial institutions 79,371 7,484 8,289 - - - - 95,144
Customers’ current accounts - - - - - - 105,932
105,932
Other liabilities 13,608 - - - - - - 13,608
Equity investment accountholders 100,094 106,212 128,470 273,981 5,850 - 2,887 617,494

Total liabilities and equity of investment

accountholders 299,005 113,696 136,759 273,981 5,850 - 2,887 832,178

Liquidity gap (79,018) (53,214) (115,735) (241,862) 83,644 320,796 163,505 78,116

Cumulative liquidity gap (79,018) (132,232) (247,967) (489,829) (406,185) (85,389) 78,116 -

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.

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25 RISK MANAGEMENT (continued)

(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 Sensitivity of Sensitivity of

equity price profit or loss equity
% BD’000 BD’000
2014
Kuwait Stock Exchange +10 - 139

2013
Bahrain Bourse +10 10 806
Saudi Stock Exchange (TADAWUL) +10 39 425
Oman Stock Exchange +10 16 -
Kuwait Stock Exchange +10 - 132
Qatar Stock Exchange +10 - 320

As at the consolidated statement of financial position date, the Group has unquoted (equities and sukuk) of BD 104 million (31
December 2013: BD 33 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 Long Equivalent Long
(short) 2014 (short) 2013
BD ‘000 BD ‘000
Currency
Pound Sterling (1,149) (4,359)
Euro 1,653 (1,166)
Kuwaiti Dinars (11,490) (12,376)

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’
equity.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.

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27 SEGMENTAL INFORMATION
For management purposes, the Group is organised into three major business segments;
Corporate Principally handling equity of corporate investment accountholders’, corporate current accounts, and providing Islamic
financing facilities to corporate customers.
Retail Principally handling equity of individual retail customers’ investment accountholders’, retail current accounts, and
providing Islamic financing facilities to individual customers.
Investment 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 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 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

31 December 2013
Total income 11,950 18,440 5,220 35,610
Total expenses (3,021) (13,878) (2,838) (19,737)
Provision for impairment (3,619) (1,656) (4,491) (9,766)
Profit / (loss) for the year 5,310 2,906 (2,109) 6,107

Other information
Segment assets 205,594 287,777 416,923 910,294
Segment liabilities, and equity 298,522 433,083 178,689 910,294

The Group operates solely in the Kingdom of Bahrain and, as such, no geographical segment information is presented.
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.

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28 FINANCIAL INSTRUMENTS (continued)

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
BD’000 BD’000 BD’000 BD’000

2014
Investments carried at fair value through equity
Quoted securities Equities 1,393 - - 1,393

2013
Investments carried at fair value through statement of income
Quoted securities Equities 866 - - 866
Investments carried at fair value through equity
Quoted securities Equities 19,995 - - 19,995
20,861 - - 20,861

Transfers between Level 1, Level 2 and Level 3

During the year ended 31 December 2013 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 2014,
except for the Group’s investments in Sukuk held at amortised cost amounting to BD 81,834 thousand (2013: BD 38,365 thousand)
with fair values amounting to BD 81,181 thousand (2013: BD 40,033 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 social welfare activities. 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.

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CONTENTS

1 Background 81
2 Capital Adequacy 81
2 Capital Adequacy (Continued) 81
2 Capital Adequacy (Continued) 81
3 Risk Management 84
3.1 Bank-Wide Risk Management Objectives 84
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
3.6 Market Risk 74
3.7 Operational Risk 98
3.8 Equity Position In The Banking Book 99
3.9 Equity of Investment Accountholders (“Iah”) 100
3.10 Liquidity Risk 104
3.11 Profit Rate Risk 105
4 Glossary of Terms 107

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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.
As part of the risk management practice, the Group has already implemented Sunguard system to be Basel II compliant as prescribed by
CBB.
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.

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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 2014 after deductions for Capital Adequacy Ratio (CAR)
calculation:
Tier 1 Tier 2
BD’000 BD’000

Components of capital
Issued and fully paid ordinary shares 93,404 -
General reserves 1,000 -
Legal / statutory reserves 10,879 -
Accumulated losses brought forward (43,958) -
Less:
Unrealised gross losses arising from
fair valuing equity securities (316) -
Tier 1 Capital before PCD deductions 61,009 -

Net Profit for the year 9,297

Asset revaluation reserve - Property and equipment (45% only) 3,312
Unrealised gains arising from fair
valuing equities (45% only) 484
Profit Equalization Reserve 395
Investment risk reserve 103
Collective impairment loss provision 6,067
Tier 2 Capital before PCD deductions 19,658
Total available capital 80,667

Deductions
Significant minority investments in banking,
securities and other financial entities unless pro-rata consolidated - -
Investment in insurance entity greater than or equal to 20% (847) (847)
Total Deductions (847) (847)
Tier 1 and Tier 2 eligible capital before additional deduction 60,162 18,811
Additional deduction from Tier 1 to absorb deficiency in Tier 2 (327) (327)
Tier 1 and Tier 2 eligible capital 59,835 18,484
Aggregation 14,892 1,238
TOTAL ELIGIBLE CAPITAL 74,727 19,722

Amount of
exposures
BD’000
Total Credit Risk Weighted Assets 532,703
Total Market Risk Weighted Assets 15,769
Total Operational Risk Weighted Assets 56,583
TOTAL REGULATORY RISK WEIGHTED ASSETS 605,055
CAPITAL ADEQUACY RATIO 15.61
Minimum requirement 12%

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2 Capital Adequacy (continued)

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 2014 (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

Placements with financial institutions 10,192 1,223
Financing assets 181,108 21,733
Investments 92,759 11,131
Ijarah muntahia bittamleek* 45,397 5,448
Ijarah rental receivables 6,698 804
336,153 40,337
Other credit exposures 172,118 20,654
508,271 60,992

*The risk weighted assets have been allocated on a pro-rata basis due to system limitation.
Table – 3. Capital requirements for market risk (PD-1.3.18)
The following table summarises the amount of exposures as of 31 December 2014 subject to standardised approach of market risk and
related capital requirements:

Market Risk - Standardised Approach Foreign exchange risk (BD’000)

1,066
Total of Market Risk - Standardised Approach 1,066
Multiplier 12.5
RWE for CAR Calculation (BD’000) 13,325
Total Market Risk Exposures (BD’000) 13,325
Total Market Risk Exposures - Capital Requirement (BD’000) 1,599

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 2014 subject to basic indicator approach of operational
risk and related capital requirements:

Indicators of operational risk

Average Gross income (BD’000) 28,004
Multiplier 12.5
350,046
Eligible Portion for the purpose of the calculation 15%
Total Operational Risk Exposure (BD’000) 52,507
Total Operational Risk Exposures - Capital Requirement (BD’000) 6,301
Table – 5. Capital Adequacy Ratios (PD-1.3.20)
The following are Capital Adequacy Ratios as of 31 December 2014 for total capital and Tier 1 capital:

Total capital Tier 1 capital

ratio ratio
Top consolidated level 15.61 12.34

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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 II.
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.

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 II, 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.

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3 Risk Management (continued)

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.

3.2.7 Displaced Commercial Risk

Displaced commercial risk (“DCR”) 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 competitor’s 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.

Credit & Risk Management Asst. General Manager

Department (C&RM) 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
Analysis Management Deal Booking

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

Credit Admin Supervisor

Credit Analyst Officer Notarization
Clerk Notarization

Credit Analyst Clerk Credit Admin

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.

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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 (“CR&AD”). 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 CR&AD.

3.5.2 Types of credit risk

Financing contracts mainly comprise 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.

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.

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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.
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.
International 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 jewellers.
The Credit Administration requests the concerned department to arrange for the valuation from approved valuators.

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3.5 Credit Risk (continued)
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.

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).

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3.5 Credit Risk (continued)

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 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 2014. All
related party transactions have been made on arm’s length basis.

3.5 Credit Risk

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 2014 and average
gross funded and unfunded exposures over the year ended 31 December 2014 allocated to own capital and current account and profit
sharing investment account (PSIA):

Own Capital and Current Profit Sharing Investment

Account Account
*Average *Average
Total gross credit Total gross gross credit
gross exposure credit exposure
credit over the year exposure over the year
exposure BD’000 BD’000 BD’000
Funded
Cash and balances with banks and central Bank 21,063 25,590 31,055 32,225
Placements with financial institutions 17,362 24,891 51,205 73,409
Financing assets 103,317 97,965 304,704 288,920
Investments securities 59,474 60,522 64,087 56,568
Ijarah muntahia bittamleek 25,898 24,136 76,379 71,184
Ijarah rental receivables 3,561 3,761 10,504 11,092
Investment in associates 30,835 36,040 - -
Investment in real estate 53,934 54,016 - -
Property and equipment 17,101 17,084 - -
Other assets 4,728 4,016 - -
Unfunded
Commitments and contingent liabilities 22,277 18,653 - -
Total 359,550 366,674 537,934 533,398

*Average balances are computed based on month end balances.

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3 Risk Management (continued)

3.5 Credit Risk (continued)
Table – 7. Credit Risk – Geographic Breakdown (PD-1.3.23(b))
The following table summarises the geographic distribution of exposures as of 31 December 2014, 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 4,350 153 16,560 - 21,063 - - 31,055 - 31,055
central Bank
Placements with financial institutions - - 17,362 - 17,362 - - 51,205 - 51,205
Financing assets - - 103,317 - 103,317 - - 304,704 - 304,704
Investments securities - 967 58,507 - 59,474 - 2,850 61,237 - 64,087
Ijarah muntahia bittamleek - - 25,898 - 25,898 - - 76,379 - 76,379
Ijarah rental receivables - - 3,561 - 3,561 - - 10,504 - 10,504
Investment in associates - - 30,835 - 30,835 - - - - -
Investment real estate - - 53,934 - 53,934 - - - - -
Property and equipment - - 17,101 - 17,101 - - - -
Other assets - - 4,728 - 4,728 - - - - -
Total 4,350 1,120 331,803 - 337,273 - 2,850 535,084 - 537,934
* Geographical distribution of exposure into significant areas by major type of credit exposure is based on counterparty’s country of
incorporation.
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 2014 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 banks and central Bank - 16,768 - - - 4,295 - 21,063
Placements with Financial institutions - 17,362 - - - - - 17,362
Financing assets 9,356 239 20,753 10 51,381 601 20,977 103,317
Investments securities - 13,349 31,869 - - 9,588 4,668 59,474
Ijarah muntahia bittamleek 1,227 74 11,962 1,623 11,012 - - 25,898
Ijarah rental receivables 514 1 1,775 454 647 - 170 3,561
Investment in associates - 7,989 10,331 - - - 12,515 30,835
Investment real estate - - 53,934 - - - - 53,934
Property and equipment - - - - - - 17,101 17,101
Other assets - 1,907 - - 1,167 - 1,654 4,728
Unfunded
Commitments and contingent liabilities 13,824 2,543 632 466 - - 4,812 22,277
Total 24,921 60,232 131,256 2,553 64,207 14,484 61,897 359,550

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3.5 Credit Risk (continued)
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 2014 by industry, broken down
into major types of credit exposure:

Profit Sharing Investment Account Industry Sector

Trading Banks and Personal &
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 - - - - - 31,055 - 31,055
Placement with financial institutions - 51,205 - - - - - 51,205
Financing assets 27,594 705 61,206 31 151,535 1,773 61,860 304,704
Investment securities - 9,261 13,871 - - 28,277 12,678 64,087
Ijarah muntahiah bittanleek 3,618 218 35,277 4,786 32,480 - - 76,379
Ijarah rental receivables 1,515 4 5,235 1,337 1,910 - 503 10,504
Investment in associates - - - - - - - -
Investment in real estates - - - - - - - -
Property and equipment - - - - - - - -
Other assets - - - - - - - -
Total 32,727 61,393 115,589 6,154 185,925 61,105 75,041 537,934

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 2014:

Profit Sharing
Own Capital and Investment
Current Account Account Total
BD’000 BD’000 BD’000
Counterparties 123 364 487
Counterparty # 1 123 364 487

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 2014:

Own capital and Profit Sharing

current account Investment Account Total
BD’000 BD’000 BD’000

Counterparties 12,514 - 12,514

Counterparty #1 12,514 - 12,514

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3.5 Credit Risk (continued)

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 2014, 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
months 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 21,063 - - - - - - - - - 21,063
and central Bank
Placements with financial 16,425 937 - - - - - - - - 17,362
institutions
Financing assets 4,758 3,386 1,629 8,301 17,478 22,452 36,460 5,831 3,022 - 103,317
Investments securities 5,235 2,411 2,312 - 2,093 4,565 41,403 - 1,455 - 59,474
Ijarah muntahia bittamleek 1,756 - - 1,615 892 1,538 4,071 7,581 8,445 - 25,898
Ijarah rental receivables 94 - 2 158 464 414 883 1,000 546 - 3,561
Investment in associates - - - - - - - - 30,835 - 30,835
Investment real estate - - - - - - - - - 53,934 53,934
Property and equipment - - - - - - - - - 17,101 17,101
Other assets 893 1,177 - - 2,658 - - - - - 4,728
Total Assets 50,224 7,911 3,943 10,074 23,585 28,969 82,817 14,412 44,303 71,035 337,273
* All non performing facilities have been classified as over 20 years.
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 2014, 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
months 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 bank- - - - - - - - - - 31,055 31,055
sand central Bank
Placements with financial 48,441 2,764 - - - - - - - - 51,205
institutions
Financing assets 14,032 9,982 4,806 24,482 51,546 66,217 107,529 17,197 8,913 - 304,704
Investments securities 15,439 7,112 6,818 - 6,173 13,463 10,795 - 4,287 - 64,087
Ijarah muntahia bittamleek 5,180 - - 4,764 2,631 4,535 12,005 22,358 24,906 - 76,379
Ijarah rental receivables 277 - 6 466 1,368 1,220 2,605 2,951 1,611 - 10,504
Total Assets 83,369 19,858 11,630 29,712 61,718 85,435 132,934 42,506 39,717 31,055 537,934
* All non performing facilities have been classified as over 20 years.

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3.5 Credit Risk (continued)
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 2014:
Profit Sharing Investment Account
Non- Aging of non-performing or past due Specific * General
performing or impaired Islamic financing contacts allowances 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 Over beginning during during the the end of beginning allowances ending
contracts 3 months** to 1 year 3 years 3 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 4,395 1,463 2,856 48 28 246 711 159 798 - - -
Real Estate 18,352 2,357 971 3,132 11,892 5,762 1,039 54 6,747 - - -
Banks and Financial
Institutions - - - - - - 127 - 127 - - -
Personal /
Consumer Finance 5,794 3,804 942 743 305 1,758 117 1,750 125 - - -
Others 4,269 1,732 769 1,716 52 - 199 - 199 - - -
No specific sector - - - - - - - - - 1,057 1,683 2,739
Total 32,810 9,356 5,537 5,639 12,277 7,766 2,193 1,963 7,996 1,057 1,683 2,739

* 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.

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3.5 Credit Risk (continued)
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 2014:
Profit Sharing Investment Account
Non- Aging of non-performing or past due Specific * General
performing or impaired Islamic financing contacts allowances 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 Over beginning during during the the end of beginning allowances ending
contracts 3 months** to 1 year 3 years 3 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 12,963 4,315 8,423 143 82 727 2,095 467 2,355 - - -
Real Estate 54,123 6,950 2,864 9,238 35,071 16,994 3,064 160 19,898 - - -
Banks and Financial
Institutions - - - - - - 373 - 373 - - -
Personal /
Consumer Finance 17,088 11,217 2,779 2,192 900 5,185 346 5,163 368 - - -
Others 12,587 5,106 2,267 5,062 152 - 588 - 588 - - -
No specific sector - - - - - - - - - 3,116 4,962 8,079

Total 96,761 27,588 16,333 16,635 36,205 22,906 6,466 5,790 23,582 3,116 4,962 8,079

* 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.
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.
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.
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 2014:

Own Capital and Current Account Profit Sharing Investment Account

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

Middle East 32,810 7,996 2,739 96,761 23,582 8,079

Total 32,810 7,996 2,739 96,761 23,582 8,079

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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 2014:

Own capital and current Profit Sharing Investment

account Aggregate amount Account Aggregate amount
BD’000 BD’000

Restructured financing facilities 4,015 11,842

Total 4,015 11,842

Gross of
Deferred
Profit and Deferred Net
provisions Profit Provision Exposure

Total Islamic Financing 670,551 117,856 42,396 510,299

Restructured financing facilities 22,945 3,460 3,628 15,857
Percentage 3.42% 2.94% 8.56% 3.11%
The provision on restructured facilities is BD 3,628 Million 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 2014 by type of Islamic financing contract covered by eligible collateral:

Total exposure covered by

Eligible collateral Guarantees
BD’000 BD’000

Financing assets 9,892 14,799

Ijarah muntahia bittamleek 618 1,125
Total 10,510 15,924

Risk
Guarantees Weighted
BD’000 BD’000

Type of Guarantees
Tamkeen Guarantee 14,924 7,108
Bank Guarantee 1,000 476
Total 15,924 7,584

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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 2014:
BD’000

Gross positive fair value of contracts

Netting Benefits 88,031
Netted current credit exposure 88,031

Collateral held:
-Cash 10,510
-Shares 8
-Real Estate 357,295
Total 367,813
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 arisinf 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.

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;

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3 Risk Management (continued)

3.6 Market Risk (continued)
3.6.3 Market risk strategy (continued)
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.

Market risk measurement techniques includes 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.

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.

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3 Risk Management (continued)

3.6 Market Risk (continued)
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 2014;
Foreign
exchange risk
BD’000

Foreign exchange risk 13,325

Foreign exchange risk capital requirement 1,599

Maximum value capital requirement 1,599

Minimum value capital requirement 1,066

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.

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. identify 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 Unit will 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.

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3 Risk Management (continued)

3.7 Operational Risk (continued)

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
2013 2012 2011
BD’000 BD’000 BD’000

Total Gross Income 35,375 23,780 24,856

Indicators of operational risk

Average Gross income (BD’000) 28,004
Multiplier 12.5
350,046
Eligible Portion for the purpose of the calculation 15%
TOTAL OPERATIONAL RISK WEIGHTED EXPOSURE (BD’000) 52,507

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.

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 2014. 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 2014;

Total gross * Average gross Publicly Privately Risk weighted Capital

exposure exposure traded held assets Requirements
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Sukuk 81,834 71,223 - 81,834 15,728 1,887

Equity investments 22,873 23,988 1,393 21,480 41,532 4,984
Funds 14,870 17,354 - 14,870 29,363 3,524
Total 119,577 112,565 1,393 118,184 86,623 10,395
* Average balances are computed based on month end balances.

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3 Risk Management (continued)

3.8 Equity Position in the Banking Book (continued)
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 2014;

BD’000

Cumulative realised gain arising from sales orliquidations in the reporting period 1,946
Total unrealised losses recognised in the consolidated statement of financial positionbut not through consolidated
statement of income -
Unrealised losses included in Tier 1 Capital 310
Unrealised gains included in Tier 2 Capital 484
* This unrealised gain is discounted by 55% before including it in Tier 2 Capital

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.
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 month, 6
month, 9 month, 12 month and 36 month. The customer signs written contract covering all terms and conditions of the investment,
including tenor, basis of profit allocation, and early withdrawal.
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.

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3.9 Equity of Investment Accountholders (“IAH”) (continued)
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 year 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.
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 2014:

BD’000

Customers 566,601
Total 566,601
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 2014;

Profit Paid on Average IAH Assets * 1.12%

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 2014:

Profit distributed Percentage to total

Account Type to total IAH IAH

Saving accounts (including VEVO) 3.53% 19.57%

Defined accounts - 1 month 0.96% 0.99%
Defined accounts - 3 months 0.35% 0.35%
Defined accounts - 6 months 0.61% 0.56%
Defined accounts - 9 months 0.00% 0.00%
Defined accounts - 1 year 3.26% 2.56%
Investment certificates 0.92% 0.28%
IQRA Deposits 1.41% 0.69%
Tejoori Deposit 3.68% 19.32%
Customer’s deposits 81.88% 44.88%
Bank’s deposits 3.40% 10.80%
100% 100%
The calculation and distribution of profits was based on average balances.

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3.9 Equity of Investment Accountholders (“IAH”) (continued)
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 2014:

Percentage of
Financing to Total
Financing

Placements with financial institutions 10.16%

Financial institutions 60.47%
Investment in Sukuk 12.13%
Ijarah muntahia bittamleek 15.16%
Ijarah rental receivables 2.08%

Percentage of Counterparty Type to Total Financing

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

Placements with financial

institutions 0.00% 10.16% 0.00% 0.00% 0.00% 0.00% 0.00%
Financial institutions 5.48% 0.14% 12.15% 0.01% 30.07% 0.35% 12.28%
Investment in Sukuk 0.00% 1.25% 2.75% 0.00% 0.00% 5.61% 2.52%
Ijarah muntahia bittamleek 0.72% 0.04% 7.00% 0.95% 6.45% 0.00% 0.00%
Ijarah rental receivables 0.30% 0.00% 1.04% 0.27% 0.38% 0.00% 0.10%
6.5% 11.59% 22.94% 1.22% 36.90% 5.96% 14.89%

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 2014:

Share of profit earned by IAH before transfer to/from reserves - BD ‘000 23,419
Percentage share of profit earned by IAH before transfer to/from reserves 31.12%
Share of profit paid to IAH after transfer to/from reserves - BD ‘000 7,287
Percentage share of profit paid to IAH after transfer to/from reserves 31.59%
Share of profit paid to Bank as mudarib - BD ‘000 16,092
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 2014:

3 month 6 month 12 month 36 month

Percentage of average distributed rate of return to profit rate of return 0.73% 0.84% 1.06% 3.50%

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3 Risk Management (continued)

3.9 Equity of Investment Accountholders (“IAH”) (continued)
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 2014:
Opening Movement Closing
Actual During the Actual
Allocation Period Allocation
BD’000 BD’000 BD’000

Cash and balances with banks and central Bank 32,740 (1,685) 31,055
Placements with financial institutions 164,758 (96,191) 68,567
Financing assets 309,527 98,494 408,021
Investment in sukuk 38,841 42,994 81,835
Ijarah muntahia bittamleek 80,643 21,634 102,277
Ijarah rental receivables 13,320 745 14,065
Total 639,829 65,991 705,820

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 (jointly financed) Profit Paid to (IAH)

BD’000 %age BD’000 %age

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%
2010 3,083 4.46% 17,721 2.61%
2009 35,694 5.27% 17,638 2.81%

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 31,055 - - -

Placements with financial institutions 51,205 16,012 4,804 576
Financing assets* 304,704 274,563 82,369 9,884
Investment in sukuk 64,087 24,708 7,412 889
Ijarah muntahia bittamleek* 76,379 68,824 20,647 2,478
Ijarah rental receivables 10,504 10,503 3,151 378
537,934 394,610 118,383 14,206
* The amounts have been allocated on pro-rata basis due to system limitation.

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3 Risk Management (continued)

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.

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 uses a combination of techniques for measurement of its liquidity risk. These include liquidity gap analysis, liquidity ratio
limits and minimum liquidity guidelines.

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.

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3 Risk Management (continued)

3.10 Liquidity Risk (continued)

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:

2014 2013 2012 2011 2010 2009

Due from banks and financial institutions / Total Assets 7.83% 20.28% 15.90% 17.73% 22.27% 12.10%
Islamic Financing / Customer Deposits excluding banks 72.48% 70.80% 72.32% 114.41% 115.46% 123.01%
Customer Deposits / Total Assets 64.74% 67.83% 68.87% 63.08% 64.13% 57.28%
Liquid Assets / Total Assets 13.79% 25.86% 21.17% 22.70% 27.02% 16.06%
Growth in Customer Deposits (8.24%) 7.66% 8.36% (11.71%) 14.86% 21.98%

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. Basis 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.

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3 Risk Management (continued)

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. measures 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.

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 2014:

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: (3,372) 3,372 -

Downward rate shocks: 10,468 (10,468) -

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:

2014 2013 2012 2011 2010 2009

Return on average equity 11.80% 8.26% (42.31%) (17.23%) (33.02%) (12.64%)

Return on average assets 1.00% 0.70% (4.33%) (1.96%) (4.30%) (2.17%)
Cost to Income Ratio 55.10% 53.44% 80.14% 74.89% 107.73% 70.66%

2014 2013 2012 2011 2010

Mudarabah profit / Mudarabah assets 4.73% 5.54% 5.14% 5.44% 4.74%

Mudarabah profit paid / Mudarabah assets 1.14% 1.61% 2.34% 2.43% 2.55%
PER & IRR Movment (155) 233 63 - -
Rate of Return on IAH 1.12% 1.52% 2.11% 2.31% 2.39%
CBB Penalties (PD 1.3.44)
During the period, penalties amounting to BD 24,400 (2013: BD 12,900); (2012: BD 400) were imposed by the CBB for delay in
submission of various regulatory returns. In addition, a penalty of BD 50 was imposed by the CBB for failure to update certain
information in a particular report.

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4 Glossary of Terms

ALCO Assets and Liabilities Committee

BCP Business Continuity Plan
BisB Bahrain Islamic Bank B.S.C.
BPV Basis Point Value
CA Module Capital Adequacy Module
CAR Capital Adequacy Ratio
CBB Central Bank of Bahrain
CRMD Credit and Risk Management Department
CR & AD Credit Review and Analysis Department
C&IC Credit and Investment Committee
DCR Displaced Commercial Risk
Excom Executive Committee
FX Foreign Exchange
GM-C&RM General Manager-Credit and Risk Management
Group Bahraini Islamic Bank B.S.C. and its subsidiaries
HR Committee Human Resource Committee
IAH Investment Account Holder
ICAAP Internal Capital Adequacy Assessment Process
IFRS International Financial Reporting Standards
IT Committee Information Technology Committee
IRR Investment Risk Reserve
MLG Minimum Liquidity Guidelines
PCD Prudential Consolidation and Deduction Requirements Module
PD Public Disclosure
PER Profit Equalisation Reserve
PSIA Profit Sharing Investment Account
RCSA Risk and Control Self-Assessment
RMC Risk Management Committee
RWE Risk Weighted Exposures
VaR Value-at-Risk
L/C Letter of Credit
L/G Letter of Guarantee

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