His Royal Highness His Majesty His Royal Highness

Prince Khalifa bin Salman King Hamad bin Isa Prince Salman bin Hamad
Al Khalifa Al Khalifa Al Khalifa
The Prime Minister of the The King of the The Crown Prince &
Kingdom of Bahrain Kingdom of Bahrain Deputy Supreme Commander
Contents 8 Corporate Overview

9 Annual Highlights

10 Board of Directors

18 Fatwa and Shari’a Supervisory Board

20 Group Executive Management Team

24 Board of Directors’ Report to the Shareholders

27 Message from the Chief Executive Officer

29 Management Review of Operations & Activities

33 Corporate Governance Report

44 Risk Management and Compliance

47 Corporate Social Responsibility

50 Fatwa and Shari’a Supervisory Board Report to the Shareholders

52 Independent Auditors’ Report to the Shareholders

54 Consolidated Financial Statements

59 Notes to the Consolidated Financial Statements

A new ring forms in between the most
recent ring and the bark of the tree. This
causes the tree to grow wider with one ring
marking each year. These tree rings inform
you of the age and strength of the tree.
The process is comparable to the infusion
of new ideas and implementation of the
operational strategy which is beneficial to
all Al Salam clients.
Our Vision

To become a regional force in the Islamic financial services industry by

providing differentiated Shari’a compliant products to focused segments.

Our Mission

• Become a “one-stop-shop” for Islamic financial services.

• Create a strong onshore presence in select countries.

• Develop a premier brand image as an Islamic financial shaper.

• Achieve high returns for stakeholders commensurate with the risks undertaken

Dynamic - Diversified - Differentiated

Dynamic - Diversified - Differentiated

AL SALAM BANK - BAHRAIN 7

 Corporate Overview

Headquartered in the Kingdom of Bahrain, Al Salam Bank-Bahrain

(B.S.C.) is a dynamic, diversified and differentiated Islamic bank.

Key factors that contribute to the Bank’s distinct market

differentiation include:

• Strong paid-up capital base;

• Pre-eminent founding shareholders;
• High-caliber management team;
• State-of-the-Art IT infrastructure;
• Universal business model covering deposits, financing and
investment services;
• Innovative, tailor-made Shari’a-compliant solutions;
• Firm commitment to corporate and social responsibility;

Incorporated on 19 January 2006 in the Kingdom of Bahrain and

commenced commercial operations on 17 April 2006, the Bank
operates under Shari’a principles in accordance with regulatory
requirements for Islamic banks set by the Central Bank of Bahrain.
Al Salam Bank-Bahrain was listed on the Bahrain Bourse on 27
April 2006, and subsequently on the Dubai Financial Market
on 26 March 2008. The Bank’s high-caliber management team
comprises highly qualified and internationally-experienced
professionals with proven investment expertise in key areas of
banking, finance and related fields; all supported by a world-class
Information Technology (IT) infrastructure and the latest ‘smart’
working environment. In 2009, the Bank acquired a 90.31%

Strong stake in Bahraini Saudi Bank BSC. Established with a paid-up

capital of BD120 million, the Group’s total equity has crossed

paid-up BD 200 million (US$530 million) with total assets crossing the
US$2 billion mark.

capital base Al Salam Bank-Bahrain is committed to adopting internationally

recognized standards and best practices in Corporate Governance
and operates with highest levels of integrity, transparency and
trust.

The Bank is committed to its role as a concerned corporate

citizen, actively seeking ways to contribute and add value to
the social and economic well-being of the local communities in
which it invests and operates.

8 AL SALAM BANK - BAHRAIN

 Annual Highlights

Key Financial Indicators

BD23.7
USD 629

USD 59.4
BD22.4

USD 2.451
BD924
USD 2.272
USD 2.085

BD857
BD786
USD 37.0
BD14.0
USD 33.8
BD12.7

USD 19.4
BD7.3

USD 1.3
BD0.5

2009 2010 2011 2009 2010 2011 2009 2010 2011

Total Operating Income Net Profit (million) Total Assets (million)

(million)
91.0%
BD201.9
USD 535.4
BD201.8
USD 535.2

BD200.6
USD 532.2

60.6%
40.9%

2009 2010 2011 2009 2010 2011

Total Equity (million) Cost to Income Ratio

AL SALAM BANK - BAHRAIN 9

 Guiding the Vision to Success - Board of Directors

H. E. Mohamed Ali
Rashid Alabbar

H.H. Shaikha
Hessa bint Khalifa
Salman Saleh Al Khalifa
Al Mahmeed

Hamad Tarek Habib Ahmed

Terence
Alhomaizi Kassem
D. Allen

10 AL SALAM BANK - BAHRAIN

Sheikh Abedlelah
Kaki Fahad Sami
Al Ebrahim
Yousif Abdulla
Essam bin
Taqi
Abdulkadir
Al Muhaidib Ahmed Jamal
Jawa

Khalid Ahmed
Abdulla Al Ashar

AL SALAM BANK - BAHRAIN 11

 Leading The Way Ahead - Board of Directors

Directors’ Profiles

H. E. Mohamed Ali Rashid Alabbar

Chairman

Independent and non-executive

Director Since: 17 April 2006
Term started: 18 April 2009
Term ended: 20 March 2012

H.E. Mohamed Alabbar is the founding member and Chairman of Emaar Properties PJSC, the Dubai-based global
property developer. He serves on the board of directors of the Investment Corporation of Dubai (ICD), the investment
arm of the Government of Dubai. He is also a Board Member of Noor Investment Group, an affiliate of Dubai Group,
focused on Shari’a compliant financial services. A graduate in Finance and Business Administration from Seattle
University in the United States, Mr. Alabbar works closely with regional NGOs, and is especially committed to the
cause of educational reform and social housing. A keen sportsman, he is Chairman of the UAE Golf Association.

Mr. Habib Ahmed Kassem

Vice Chairman

Independent and non-executive

Director Since: 17 April 2006
Term started: 18 April 2009

Habib Kassem is the Chairman of Almahd Investment Company, Bahrain Ferro Alloys, Bahrain Electricity Supply &
Transmission Company, Capital Growth Management and Quality Wire Products Company. He is also the Chairman
of Almahd Day Boarding School. Mr. Kassem was Minister of Commerce and Agriculture, Kingdom of Bahrain from
1976 to 1995, and Member of the GCC Consultative Council for the Supreme Council from 1997-2007.

Sheikh Abedlelah Mohammed Saleh Kaki

Director

Independent and non-executive

Term started: 15 February 2010
Term ended: 20 March 2012

Sheikh Abedlelah Kaki has more than 35 years experience in banking, trading & industry. He is the Chairman of Saudi
International Trading & Marketing Ltd. AMK Gulf for Investments & International Agencies Co. Ltd. and United Gulf
Industries Ltd in Saudi Arabia, Marsh Saudi Arabia Insurance & Reinsurance Broking, Marsh Insurance Consulting
Saudi Arabia. He is also the Chairman of Noubaria Seed Production Co, Nile Company For Development & Tourism
& Real Estate Investment, Tanta Flax & Oil Co, SAE and Mediterranean Agricultural Products Co (MAPCO) in Egypt.
He is an active board member in several Egyptian Companies; Saudi Corporation for Arab Investment SAE, Egyptian
Saudi Investment Tourism & Real Estate Co, Lacto Misr Co and Dynarabia Co Ltd, Al Jouf Cement Company in Saudi
Arabia. Sheikh Kaki is a graduate in Economics from United States International University in California, United
States of America.

12 AL SALAM BANK - BAHRAIN

 Leading The Way Ahead - Board of Directors (continued)

H.H. Shaikha Hessa bint Khalifa bin Hamad Al Khalifa

Director

Independent and non-executive

Term started: 18 April 2009

An active member of the royal family of the Kingdom of Bahrain, H.H. Shaikha Hessa gained her Bachelor’s degree
in Management (1998), and her Master degree in Social Policy and Planning (2002) both from the London School
of Economics and Political Science. Gained a MSc Development Finance 2010 from University of London. She
joined the Supreme Council for Women in 2001 as a member of the Social Committee. Since 2004 she has been
a Permanent Member of the Council’s Board. In 2005, she founded “INJAZ Bahrain” which is an international
organization to inspire and prepare young Bahrainis to succeed in a global economy and is presently its Executive
Director. With her experience and active role in enterprise education and developing skills of young women, she has
been invited as speaker and panelist at various occasions including the UN, and the World Economic Forum.

Mr. Essam bin Abdulkadir Al Muhaidib

Director

Independent and non-executive

Director Since: 17 April 2006
Term started: 18 April 2009

Mr. Essam Al Muhaidib is CEO of A.K. Al Muhaidib & Sons Group, and Board member in several organizations
having interests in banking & insurance, FMCG & retail, building & construction, industrial, real estate apart from
educational, charitable and benevolent organizations. Emmar Middle East, United Sugar Company, Amwal Al
Khaleej, Saudi Tabreed Company, Synthomer Middle East, Nestle Co, Al Oula Real Estate Development Co, Dubai
Contracting Company (DCC, Gulf Union Insurance Company, Al Massa International Inc-Canada, Dnata Kuwait,
Saudi Fisheries Company, Aziziah Panda United Co, Savola Foods Co, Al Latifia Trading & Contracting Co. Moreover,
he is also a member in some of charitable and non profitable & educational organizations such as King Fahad
University of Petroleum & Minerals Endowment Fund, board of directors of the educational services company at
Prince Mohammad bin Fahad in Dammam as well as founder for Prince Sultan College for Prince Sultan Ladies’
Fund.

Mr. Salman Saleh Al Mahmeed

Director

Independent and non-executive

Term started: 15 February 2010

Salman Al Mahmeed is the Deputy Chief Executive Officer of Bahrain Airport Services, the Deputy Chairman of Dar
Albilad, the Managing Director and Owners’ Representative of Global Hotels, Global Express and Movenpick Hotel
in Bahrain. He was a Board Member of Bahraini Saudi Bank as well as being a member of its Investment, Executive
and Strategic Options Committees. He was also the Investment Director of Managa Holdings. Mr. Al Mahmeed holds
an MBA in Business Administration, Master in Hotel Management and BSc. degree in Administration from Cairo
University.

AL SALAM BANK - BAHRAIN 13

 Leading The Way Ahead - Board of Directors (continued)

Mr. Fahad Sami Al Ebrahim

Director

Independent and non-executive

Term started: 18 April 2009

Received his Bachelors of Arts in Journalism and Communication Studies from the University of Oregon-Eugene,
Oregon, USA. He also has an MBA degree from the Maastricht School of Management and he has successfully
completed the 10th session of the “General Management Program” at Harvard Business School.

He has over 12 years of professional experience. Mr. Al Ebrahim heads the International Wealth Management Group
of Global Investment House, Kuwait as Senior Vice President, where he had played a major role in increasing assets
under management and had been an active participant to establish one of the leading wealth management groups
in the region.

He was mandated in early 2010 as Acting CEO of Global Investment House – Saudi for the first half of the year were
he was able to downstream the operation in the Kingdom and position the company in the Saudi market and played
a major role in increasing AUM and revenue of the Saudi operations.

Mr. Al-Ebrahim began his career with Global in the Marketing Department. Later on, he pursued Business Development
positions in the Investment Funds Department focused on Alternative Investments including Hedge Funds, Real
Estate Funds and Private Equity. Prior to joining Global, Mr. Al-Ebrahim worked in a semi-government institution for
approximately two years. In addition, he is a member of numerous boards of directors in the financial and real estate
arenas. His board memberships include Al-Mazaya Holding Company, Kuwait as Vice Chairman; First Securities
Brokerage Company S.A.K., Kuwait; Investment House, Qatar and Global Investment House – Saudi, and Investment
Committee member in Macro Fund.

Mr. Hamad Tarek Alhomaizi

Director

Independent and non-executive

Term started: 18 April 2009

Hamad Alhomaizi has a BSc in Computer Science and Business Administration from George Washington University
and has a strong IT background and technical understanding of web technologies. He has varied experience in a
number of areas including direct investments, hedge funds, real estate and startup businesses. He has worked in
various capacities in a number of companies and was a founding Board Member in companies including Shuwaikh
Real Estate Projects Company (Kuwait), Ishraq Real Estate Company (Bahrain / UAE) and Al Shaab Holding Company
(Kuwait).

Mr. Ahmed Jamal Jawa

Director

Independent and non-executive

Term started: 18 April 2009
Term ended: 20 March 2012

A graduate in Business Administration with an MBA from the University of San Francisco, Mr. Jawa has served on the
boards of the Novapark Swiss Hotel Group; Mirapolice, and Tricon Group, US. Mr. Jawa is President, CEO and Board
Member of Starling Holding Ltd, and President of Contracting and Trading Company (CTC), Saudi Arabia. Mr. Jawa is
Board Member of Emaar Properties PJSC. He is also Chairman of the Nomination and Remuneration Committee, as
well as a member of the Audit Committee.

He is a Board Member of Emaar the Economic City and Chairman of the Nomination and Remuneration Committee.
He is a Board Member of Emaar Turkey and serves on the board of Emaar MGF India, Emaar Egypt and Emaar Cham,
Syria. He is also a Board Member of RAK Petroleum. The World Economic Forum had honored Mr. Jawa as one of the
Global Leaders of tomorrow in February 2006.

14 AL SALAM BANK - BAHRAIN

 Leading The Way Ahead - Board of Directors (continued)

Mr. Terence D. Allen

Director

Independent and non-executive

Term started: 18 April 2009
Term ended: 20 March 2012

Mr. Allen has more than 40 years of experience in the treasury and investment banking business. He is the founder
and Managing Director of Allied Investment Partners PJSC a UAE based merchant banking company with diversified
group holdings. He has spent several years in the private fund management business, where he was a Director of
several asset and fund management companies. In the past he has been appointed as advisor and consultant to
several regional governments and institutions. He is a Qualified Arbitrator for the GCC. He is the author of several
books and frequently produces articles for newspapers and journals ranging from military history to financial and
banking topics.

Mr. Yousif Abdulla Taqi

Director and Chief Executive Officer

Director Since: 05 May 2008

Term started: 18 April 2009

A Certified Public Accountant (CPA), Mr. Taqi has been active in the banking and financial services industry since
1983. During his career, Mr. Taqi worked in leading positions for a number of institutions in the Kingdom of Bahrain.
Prior to joining Al Salam Bank-Bahrain, he was Deputy General Manager of Kuwait Finance House (Bahrain), where
he was responsible for establishing Kuwait Finance House Malaysia. Prior to this, Mr. Taqi spent 20 years with Ernst &
Young, during which time he provided professional services for many regional and international financial institutions.
During his career with Ernst & Young, Mr. Taqi was promoted to Partner, responsible for providing auditing and
consultancy services to the Islamic financial firms. He is currently the Chairman of Manara Developments Company
B.S.C. (c), Amar Holding Company B.S.C. (c), affiliates of Al Salam Bank-Bahrain, and also a board member of Eskan
Bank, Al Salam Bank-Algeria, Aluminium Bahrain (ALBA) and Tadhamon Capital.

New Directors
At the Annual General Meeting held on 20 March 2012, the Bank’s shareholders elected a new Board comprising
of 11 members for the next term of three years. The new Board of Directors of Al Salam Bank-Bahrain held its first
meeting at Bank’s premises on 5 April 2012 and elected H.H. Shaikha Hessa bint Khalifa bin Hamad Al Khalifa as the
Chairperson of the Board and Mr. Hamad Tariq Al Humaizi as the Vice Chairman for a new term of 3 years.

Accordingly, the following new directors were appointed with effect from 20 March 2012:

Mr. Hussein Mohammed Al Meeza

Director

Independent and non-executive

Term started: 20 March 2012

Hussein Mohammed Al Meeza is considered one of the renowned personalities in the Islamic banking sectors and
Islamic finance and insurance. Al Meeza’s outstanding career success was crowned in December 2006 when the
International Conference of Islamic Bankers chose him as the 2006 Best Islamic Banking Personality. Having graduated
from the Beirut Arab University in 1975, Al Meeza started his professional career at the Dubai Islamic Bank (DIB)
where he spent 27 years during which he played a pioneering role in enhancing and developing the banks services.
Al Meeza is currently the CEO and Managing Director of Aman Insurance and Re-Insurance Company (AMAN), Vice
Chairman and Chairman of the Executive Committee of Al Salam Bank-Sudan, Vice Chairman and Chairman of the
Executive Committee of Al Salam Bank- Algeria, Board member of the General Council of Islamic Banks and Financial
Institutions, Chairman of the founding committee of Islamic Insurance and Re-Insurance Companies, Chairman of
Amity Health Services Company, Vice Chairman of Emirate Cooperative Society – Dubai, Vice Chairman of Leader
Capital. He is also Board Member of Emirates Society for Insurance and Chairman of Nawat Company.

AL SALAM BANK - BAHRAIN 15

 Leading The Way Ahead - Board of Directors (continued)

Mr. Mohammed Omeir Bin Yussef

Director

Independent and non-executive

Term started: 20 March 2012

Mr. Mohammed Omeir Bin Yussef holds M.Sc. from University of Cairo and B.Sc. in Political Science & Business
Administration from U.A.E. University, Al Ain. He is currently the Vice Chairman & Managing Director, Omeir Bin
Youssef Group, Chairman of Al Salam Bank-Sudan, Chairman of Al Salam Bank-Algeria, Chairman of Dubai Islamic
Insurance and Re-Insurance Company (AMAN), the Chief Executive Officer of Bin Omeir Holding Group. He is also
the CEO of United Investment Group and the CEO of Emirates National Group.

Mr. Salem Rashed Saeed Al Mohannadi

Director

Independent and non-executive

Term started: 20 March 2012

Mr. Salem Al Mohannadi is currently the Advisor in the Managing Director’s Office at Abu Dhabi Investment Authority,
Chairman of Tunis and Emirates Bank, Vice Chairman of Abu Dhabi Holding Company. He is also Board member
of Al Salam Bank – Sudan, Al Salam Bank-Algeria and Emaar Properties, Vice Chairman of Aman Insurance and Re-
Insurance Company (AMAN).

Mr. Adnan Abdulla Al Bassam

Director

Independent and non-executive

Term started: 20 March 2012

Mr. Adnan Al Bassam is a Certified Public Accountant (CPA) and holds B.S. in Business Administration with
specialization in Accounting from Oregon State Board of Accountancy. His years of experience in the financial and
investment sector go back to 1994. Currently he holds the positions of Vice Chairman and Managing Director of Al
Bassam Investment Company W.L.L., Board member in each of Jordan Islamic Bank, Al Baraka Bank, Sudan, Esterad
Investment Company B.S.C., Capivest B.S.C.(c), Chairman of Muharraq Mall Company W.L.L. Prior to joining the
Board Adnan worked for Messrs Ernst & Young and Bahrain Islamic Bank in various capacities.

Mr. Khalid Ahmed Abdulla Al Ashar

Secretary to the Board

Mr. Al Ashar holds a BSc in Commerce and Business Administration from Beirut Arab University. He previously
worked in the Operations Department at the Bank of Bahrain and Kuwait and Arab Banking Corporation. He also
held the position of Director of Human Resources and Administration at the Liquidity Management Center. He enjoys
a long experience in the field of establishing Islamic banks and contributed to the establishment of the Liquidity
Management Center.

16 AL SALAM BANK - BAHRAIN

The trunk is covered by the bark which is an important diagnostic feature in
tree identification and which often differs markedly from the bottom of the
trunk to the top depending on the species. The trunk is the most important part
of the tree for timber production. At Al Salam, we understand the intricacies
of the science behind this phenomenon - a parallel we draw in our workings,
developing solutions that make a positive difference to our clients.

AL SALAM BANK - BAHRAIN 17

 Fatwa and Shari’a Supervisory Board

Dr. Hussain Hamid Hassan

Chairman

Dr Hassan holds a PhD from the Faculty of Shari’a, Al Azhar University, Cairo, Egypt;
and a Masters in Comparative Jurisprudence and Diploma in Comparative Law (both
of which are the equivalent of a PhD) from the International Institute of Comparative
Law, University of New York, USA. He also holds a Masters in Comparative Juries,
and Diplomas in Shari’a and Private Law, from the University of Cairo; and an LL B
in Shari’a from Al Azhar University. He is the Chairman and member of the Shari’a
Supervisory Board in many of the Islamic Financial Institutions. In addition, Dr.
Hassan is Chairman of the Assembly of Muslim Jurists, Washington, USA; a member
of the European Islamic Board for Research & Consultation, Dublin, Ireland; and an
Expert at the Union of Islamic Banks, Jeddah, Kingdom of Saudi Arabia.

Dr. Ali Mohuddin Al’Qurra Daghi

Member

Dr. Al’Qurra Daghi holds a PhD in Shari’a and Law, and a Masters in Shari’a and
Comparative Fiqh, from Al Azhar University, Cairo, Egypt. He also holds a BSc. in
Islamic Shari’a from Baghdad University, Iraq; a certificate of traditional Islamic
Studies under the guidance of eminent scholars in Iraq; and is a graduate of the
Islamic Institute in Iraq. He is currently Professor of Jurisprudence in the faculty of
Shari’a law and Islamic Studies at the University of Qatar. He sits on the Boards of
Shari’a Supervisory Boards for several banks and financial institutions. Dr. Al’Qurra
Daghi is also a member of the Islamic Fiqh Academy, the Organisation of Islamic
Conference, the European Muslim Council for Efta and Researches, the International
Union of Muslim Scholars, and the Academic Advisory Committee of the Islamic
Studies Centre, Oxford University, UK. He also has published several research papers
tackling various types of Islamic Finance, Islamic Fiqh, Zakah and Islamic Economy.

18 AL SALAM BANK - BAHRAIN

Fatwa and Shari’a Supervisory Board (continued)

Shaikh Adnan Abdulla Al Qattan

Member

Shaikh Adnan Al-Qattan holds Masters degree in the Quran and Hadith from the
University of Um Al-Qura, Makka, Kingdom of Saudi Arabia; and Bachelor’s degree
in Islamic Shari’a from the Islamic University, Madeena, Saudi Arabia. Shaikh Al
Qattan is also a Judge in the Shari’a Supreme Court, Ministry of Justice – Kingdom
of Bahrain. Shaikh Al Qattan is a Member of Shari’a Supervisory Boards for several
Islamic banks and he is also Chairman of Al Sanabil Orphans Protection Society,
Chairman of the Board of Trustees of the Royal Charity Establishment under the Royal
Court - Kingdom of Bahrain, and President of the Kingdom of Bahrain Hajj Mission.
In addition, he is a Friday sermon orator at Al-Fatih Grand Mosque. Shaikh Al Qattan
contributed to drafting the Personal Status Law for the Ministry of Justice and is a
regular participant in Islamic committees, courses, seminars and conferences.

Dr. Mohamed Abdulhakim Zoeir

Member & Secretary to the Board

Dr. Zoeir holds PhD in Islamic Economy; Masters degree in Islamic Shari’a (Economy);
Bachelor’s degree in Management Sciences; and a Higher Diploma in Islamic Studies.
He is Member of the Fatwa Board in a number of Islamic financial institutions and has
18 years experience with Egypt Central Bank. Dr. Zoeir was also the Head of Shari’a
compliance in Dubai Islamic Bank.

AL SALAM BANK - BAHRAIN 19

 Board of Directors’ Report to the Shareholders

The Directors of Al-Salam Bank-Bahrain BSC (“the Bank”) have the pleasure in submitting their report to the
shareholders accompanied by the consolidated financial statements for the year ended 31 December 2011. The
consolidated financial statements comprise the financial statements of the Bank and its subsidiary, Bahraini Saudi
Bank BSC (together known as “the Group”).

Needless to say, 2011 was an extremely turbulent year for businesses in the market place due to the prolonged
period of unrest in Bahrain. The unrest in the Arab World that began in Tunisia in late 2010 and more specifically the
situation in Syria and Iran are not helping Bahrain and the region. Europe went through turmoil in a different way
with many EU member countries trying to tackle their debt crisis. There are still no sure signs of recovery in the US
and UK. While we see marginal improvements in the US employment data, the economic growth has been flat and
their external debt bulging with their trade deficit continuing to be very significant. We have not been hearing positive
news from Asia either. Major economies like China and India are reporting reduction in growth rates and exports,
as well as decline in their manufacturing data. It appears that the recession that started in the later part of 2008 in
the US has been moving eastwards and has hardly left any economy unaffected, perhaps Australia is an exception.

In spite of difficult market conditions, the Group managed to post an impressive growth in total assets from BD
856.6 million (US$2.3 billion) at 31 December 2010 to BD 923.9 million (US$ 2.5 billion), an increase of BD 67.3
million (US$178.6 million) or 8% over 31 December 2010. The increase is largely attributable to growth in the credit
portfolio and investments complemented by increase in customer deposits from BD 532 million at end of 2010 to
BD 598 million at end of 2011. Continuing global economic downturn prevented planned exits. The prevailing
economic and capital market conditions also resulted in a significant decrease in asset valuations during the year.

While the gross operating income decreased by 43% over 2010, income from core banking activities representing
Islamic retail and commercial banking increased by 10%. Although the operating results of 2011 are not as good as
we expected with a net profit of BD 0.3 million, we have been extremely prudent in recognizing fair value changes
on our investment portfolio. Prudent cost management continued through in 2011 with a reduction in operating
expenses by 14.5% for 2011.

During the year, the Group successfully extended the lease of its Boeing 777-200 ER aircraft with Malaysian Airlines
for a further period of 7 years. This transaction was one of the first and significant private equity transactions entered
by the Bank in the aviation sector. This investment continues to provide attractive returns to the Bank’s investors.

The Group managed to record a growth of 18% in its financing portfolio compared to 2010 in a year that was
very difficult for Bahrain owing to the unrest prevalent for most part of the year. The growth in financing portfolio
demonstrates the Bank’s continuous efforts in increasing its focus on retail and corporate banking initiatives.

As part of its initiative to provide support to growth of private sector businesses in the Kingdom of Bahrain, the Group
entered into an agreement with Tamkeen to provide Shari’a compliant facilities to private sector business.

In line with regulatory focus on reducing real estate exposure, the Bank has tightened its investment and financing to
the sector. The Board and management are conscious of the need to check the Bank’s concentration to the real estate
sector and hence new businesses in this sector are being undertaken on a selective basis to take advantage of market
opportunities bearing in mind investor’s cash yield expectations.

On the treasury front, the Group continued to expand its financial institutions network. In 2011, the Group continued
to be a net lender to the system with a net lending position of BD 96 million at 31 December 2011 in addition to
holding a large portfolio of the Central Bank of Bahrain issued Sukuk which are eligible for rediscounting. The Group
also enjoys a comfortable liquidity position as reflected by its strong liquidity ratio of 16% as of 31 December 2011.

24 AL SALAM BANK - BAHRAIN

 Board of Directors’ Report to the Shareholders (continued)

This is net of due to banks and interbank deposits and excludes Sukuk issued by Central Bank of Bahrain (CBB).

The Directors believe that the challenges facing the banking sector are far from being over and expect 2012 to be
even more challenging. The Directors and management will use key initiatives along with an existing strong risk
management framework and growing customer base to achieve better results in 2012. Your Bank continues to look
for acquisition opportunities locally to support inorganic growth and achieve its vision of becoming one of the largest
Islamic financial institutions in Bahrain as a precursor to launching the regional expansion strategy. The Board and
management are ambitious in positioning the Group as the largest Islamic bank in Bahrain in the coming years. Our
Group is ideally positioned to consummate deals of bigger size due to abundant liquidity and a strong capital base.

Financially, fiscal year 2011 had seen a decline in net profit from BD 7.2 million in 2010 to a net profit of BD 0.3
million in 2011 attributable to shareholders of the Bank. The gross operating income amounted to BD 12.7 million
(2010: BD 22.4 million) and the operating expenses were BD 11.6 million (2010: BD 13.6 million).

Retained earnings and appropriation of net income

BD ’000
Balance at beginning of the year 4,603
Net profit for the year – 2011 312
Transfer to statutory reserve (31)
Charitable contributions (100)
Transfer from investment reserve 33,039
Balance at end of the year 37,823

Directors’ and senior management interest

As required by the Central Bank of Bahrain rule book set out below are the interests of directors and senior managers
in the shares of Al Salam Bank-Bahrain B.S.C. and the distribution of the shareholdings as of 31 December 2011.

31/12/2011
Directors' shares 125,688,928
Senior managers' shares 511,268
126,200,196

AL SALAM BANK - BAHRAIN 25

 Board of Directors’ Report to the Shareholders (continued)

Directors’ attendance fee and expenses for 2011 amounted to BD 65,000.

2010 % of total
No. of Outstanding
No. of shares Shareholders shares

Percentage of shares held

Less than 1% 941,294,918 23,141 62.88
1% up to less than 5% 384,735,107 14 25.70
Over 5% 171,033,800 1 11.42
Total 1,497,063,825 23,156 100.00

Nationality Holding
Shareholders holding over 5%
Global Mena Macro Fund Company B.S.C. (c) Bahrain 11.42%

The directors would like to express their appreciation to the leadership and ministries of the Kingdom of Bahrain, the
Central Bank of Bahrain, Dubai Financial Services Authority, correspondents, customers, shareholders and employees
of the Group for their support and collective contribution since establishment and we look forward to their continued
support in the fiscal year 2012.

4 March 2012 Mohammed Ali Rashid Alabbar

Manama, Kingdom of Bahrain Chairman

26 AL SALAM BANK - BAHRAIN

Message from the Chief Executive Officer

Fiscal year 2011 was yet another challenging year for the Bahrain banking
sector. Set against the backdrop of regional and global volatility we remained
focused on building the balance sheet. I am pleased to report that, despite
these tumultuous times, we have forged ahead and remained profitable, albeit
marginally, achieving an 8% growth in total assets from BD 856.6 million
(US$2.3billion) to BD 923.9 million (US$2.5 billion), through expansion of
the financing portfolio and diversified investment activities, including a sukuk
portfolio.

The Group focused on expanding the deposit base and commercial banking
business by successfully growing customer deposits by BD 66 million during the
fiscal year. Aligned with this focus, 2011 was dedicated to the implementation
of key initiatives, such as preparation of the infrastructure of both Al Salam
Bank-Bahrain and the Bahraini Saudi Bank, together with the expansion of
the Group’s reach through the opening of new branches. The Group has now
created a solid platform from which we plan to launch new Shari’a compliant
products and services such as the Tayseer personal financing tool, which has
been well received in the market. There are a number of exciting new initiatives
that are being targeted for the coming year.

The Group maintained a conservative approach to banking practices and

relied on its core competencies in lending activities. Prudent risk management
practices have been followed in granting new financing facilities and acquiring
investments. The Group has followed a tight policy in providing financing and
investment in the real estate sector in line with the regulatory focus to control
such exposures.

The Group reported a net profit of BD 0.3 million for 2011 compared to BD 7.2
million in 2010. Although the operating results did not meet our expectations,
the Group has demonstrated its ability to control operating costs in a challenging
environment, reducing the operating expenses by 14.5%. In an effort to diversify
the sources of income, measures were taken to build a high quality liquid sukuk
portfolio.

Highlighting our commitment to development of the Kingdom’s economy and

infrastructure, renewed focus was placed to uplift the SME sector. The Group
has entered into partnership with Tamkeen on several fronts to support private
sector projects.

The Group continued to maintain a healthy Capital Adequacy Ratio which stood
at 24.9% (2010: 24.7%) as of the end of the fiscal year against a mandatory
Central Bank of Bahrain requirement of 12%. Our strong liquidity position at
16% (2010:24%) coupled with our capital base, is expected to provide us with
the competitive advantage to rollout our expansion plans and seek acquisition
opportunities both locally and regionally.

AL SALAM BANK - BAHRAIN 27

 Message from the Chief Executive Officer (continued)

The year ahead will no doubt present new challenges as the global economic recovery from the financial
crisis is taking place at a much slower pace than initially expected. However, I am confident that the Group
is well positioned to face these challenges and meet the expectations of our customers and shareholders.

The Management and Board of Directors are also confident that the Group is well positioned to become
one of the largest Islamic financial Institutions in the Kingdom of Bahrain within the coming years.

I would like to take this opportunity to express my heartfelt appreciation to the continuing support of the
Government of the Kingdom of Bahrain led by His Majesty King Hamad bin Isa Al Khalifa, with the directives
of HRH the Prime Minister Prince Khalifa bin Salman Al Khalifa and the support of HRH the Crown Prince
and Deputy Supreme Commander Prince Salman bin Hamad Al Khalifa. I also express my appreciation of
Al Salam Bank-Bahrain and Bahraini Saudi Bank staff members whose hard work and dedication have been
fundamental to our ongoing success. I am grateful to the Board of Directors and the Central Bank of Bahrain
for their strong support and guidance, and to our shareholders and clients for their continued confidence.
I also express my heartfelt appreciation to the continuing support of the Government of the Kingdom of
Bahrain and its leadership.

Yousif Abdulla Taqi

Director & Chief Executive Officer

28 AL SALAM BANK - BAHRAIN

 Management Review of Operations & Activities

Operating Environment
2011 began on a relatively positive footing on the backdrop that advanced economies were expected to show some
signs of recovery from the fallout of the global financial crisis. However, as the year unfolded, financial markets
continued to reflect a lackluster sentiment triggered by the extent of the Euro crisis.

GCC economies also displayed signs of a partial recovery in 2011, encouraged by high oil prices and increased
government spending, particularly on infrastructure projects. Nevertheless the operating environment remained
challenging with real estate and stock market segments still bearing scars of the 2008 crash.

Fiscal stimulus plans have been put in place by most GCC Governments to encourage an increase in the contribution
of the private sector in economic activity, especially major infrastructure projects, as well as to fuel resumption in
bank lending after a stagnant growth in the last two years.

The majority of regional financial institutions focused on restructuring their balance sheets and streamlining business
units in an effort to reduce operating costs in an extremely difficult operating environment.

In the face of decreased profitability levels and a decline in asset quality of some key players, the GCC Banking Sector
managed to uphold its high reputation and continues to remain the backbone of the GCC states economies.

Business Environment
2011 stands as one of the most politically turbulent years the Kingdom of Bahrain has faced in over four decades.
Businesses in the marketplace were severely affected by the unrest that continued throughout the year. However
many customers maintained confidence in the Kingdom’s banking system, reflected by the steady growth in customer
deposits and healthy liquidity.

Regardless of the turmoil in the business environment, the Group remained focused on expanding the retail banking
business. The Group opened a fully operational branch in to the Country Mall, further improving the Group’s presence
and expanding customer reach.

The Group continued to consolidate the benefits of its acquisition of the Bahrain Saudi Bank, which became a fully-
fledged Islamic Bank. The Group now has a solid platform to successfully exploit innovative Islamic banking products
and services.

Financial Performance
In a year that was particularly challenging for the domestic banking sector, the Group continued on its growth
trajectory. The total assets of the Group grew by 8% (2010: 9%) to BD 923.9 million (2010: BD 856.6 million) over
the last fiscal year. The financing portfolio grew by BD 44.3 million (2010: BD 43.9 million) to BD 290.9 million
while the investment portfolio saw a moderate growth of BD 3.3 million (2010: BD 27.7 million) to BD 223.3
million during the fiscal year. Customer deposits increased from BD 532 million to BD 598 million highlighting
continued customer confidence. Operating income of the Group decreased by 43% (2010: a decrease of 7%) to
BD 12.7 million (2010: BD 22.4 million) mainly due to the decrease in asset values and fee income highlighting
the challenges in sourcing new investment opportunities. However, income from financing contracts grew by
18.9% (2010: 59.1%). As a result of the stringent cost management measures employed during the year, the
operating expenses of the Group decreased by 14.5% over the previous year. Additional provisions were taken
against nonperforming financing contracts amounting to BD 0.65 million (2010: BD 1.5 million). The Group
recorded a net profit of BD 0.3 million for the fiscal year 2011 (2010: BD 7.2 million) in an extremely challenging
environment both locally and regionally.

Capital Adequacy
In accordance with the Basel ll capital adequacy guidelines, the Group’s capital adequacy continued to reflect a
healthy ratio of 24.90% (2010: 24.7%) as of the end of the fiscal year against a mandatory Central Bank of Bahrain
requirement of 12%.

AL SALAM BANK - BAHRAIN 29

 Management Review of Operations & Activities (continued)

Asset Quality
The Group continues to maintain a conservative approach in selecting new assets for financing and investments. As
a result more than 84.3% (2010: 91.0%) of the financing asset portfolio has been grouped under the “satisfactory”
category while an amount of BD 2.15 million (2010: BD 1.51 million) has been set aside as provisions for past due,
but not impaired facilities, although such assets are covered by adequate collateral. This provision has been made in
line with the Group’s conservative risk management policy.

Funds Under Management

The level of liquidity in the region available for investment continued to rise on the back of higher oil prices, however,
it is understandable that High Net Worth Individuals in the region continued to take a conservative approach towards
new investment commitments in 2011. The Group’s funds under management at the end of the fiscal year increased
by BD 6.6 million (2010: reduced by BD 12.6 million) to BD 54.8 million (2010: BD 48.13 million).

During the short history of the Group, we have built strong relationships with our investors; based on trust,
professionalism, transparency and our ability to offer unique Shari’a compliant investment opportunities, and will
continue to nurture these relationships going forward.

BANKING GROUP

Corporate Banking
Corporate Banking faced a challenging year as Bahrain›s economy deflated by 1.4 percent quarter-on-quarter in the
first three months of 2011 as the effects of the unrest hit businesses in the Kingdom. However, some momentum
was maintained through government intervention, improvement in liquidity and significant spending, with the
Government continuing the vital work of developing the Kingdom’s infrastructure.

During the year Corporate Banking business was strengthened with the conversion of Bahraini Saudi Bank into a
fully-fledged Islamic financial institution. The Group continued to provide support and stability to its existing client
base, however credit quality remained on high priority when new facilities were granted.

Underscoring our commitment to support Small and Medium Enterprises (SME) in the Kingdom, and the growth of
the local economy, the Group signed a Shari’a compliant financing arrangement with Tamkeen during the year.

Our strong team of Relationship Managers continue to build relationships with local and international companies
whilst nurturing existing relationships with major Bahrain-based institutions.

Retail Banking
During the year, the Group’s subsidiary, Bahraini Saudi Bank, was formally recognized as an Islamic Bank. In line
with our focus on growing the commercial and retail banking business, the Group made a significant investment in
providing the necessary skills to employees in customer facing roles.

The Group continued to grow its retail presence with Bahraini Saudi Bank opening a new branch in Country Mall
as a result of our strategic partnership with the Electricity & Water Authority (EWA). The branch and ATM network
serving Al Salam Group has now reached 11 fully operational branches and 23 ATM’s across the Kingdom, offering
more accessibility, and even greater convenience, to our customers.

With the emphasis on improving customer service, a significant revamp was undertaken to increase the effectiveness
of the 24-hour call ensuring our customers have instant access to information and support in relation to any of the
Group’s products and services. Significant measures are also being taken to reduce the turnaround time for approval
of personal financing facilities.

30 AL SALAM BANK - BAHRAIN

 Management Review of Operations & Activities (continued)

Underlining our commitment to meeting our customers every banking need the retail banking group launched several
innovative products during the year. The Murabaha-based “Tayseer”, a flexible personal financing product, which
aims to meet customer liquidity requirements, continues to be well received by the market. The convenient financing
tool allows customers to acquire durable assets, as well as supporting liquidity needs for marriage, education, medical
treatment, travel and more. The Shari’a compliant Wakala deposit products, including Wakala Plus and Easy Wakala
are packed full of benefits and continue to be popular, offering our customers outstanding profit returns at tenures
to suit all needs. Our customers continue to take advantage of the generous return on monthly savings with the Taib
savings account, allowing depositors to specify a time period for their deposit; allowing profit to be paid on maturity.

Inline with the regulations of the Central Bank of Bahrain (CBB), the Group announced the successful completion of
implementing International Bank Account Number (IBAN) standard, used to minimize risk and transcription errors
across all local and international electronic payments.

Wealth Management
With markets lacking sustained direction, and continued market unpredictability, investor appetite remained
subdued. Clients continued to seek stability in their financial portfolios, however despite these challenges, Wealth
Management continued to perform well.

Through our professional and dedicated placement team we continue to focus on offering attractive products and
providing personalized services. Our placement team based in the Kingdom meets with investors on a regular basis
to assess their investment appetite and risk profile in order to provide personalized Islamic financing solutions.

Investments
In these volatile market conditions, investment protection is a key factor in the Group’s investment strategy. In
order to minimize downside risk and preserve investment valuation, the Group maintains a cautious approach
to new investment selection, with all potential opportunities subjected to rigorous internal review, diligence and
analysis prior to presenting them to the Group’s Investment Committee. Our investment teams, based in Bahrain and
Singapore, continue to seek attractive, diversified investment opportunities, and typically analyze in excess of one
hundred regional and cross border opportunities in a year.

During the year, our investment team successfully concluded the extension of the lease of the Group’s 777-200ER
aircraft with Malaysian Airline Systems, for a further period of 7 years. This transaction was one of the first and
significant private equity transactions entered by the Group in the aviation sector, which continues to provide
attractive returns to the Group’s investors.

The Group’s investment in a Shari’a compliant mezzanine facility provided to refinance a landmark commercial
property located in the heart of Canary Wharf in the financial district of London in 2010 continues to provide
attractive cash yield to investors.

The Group’s investment in Burj Al Safwa and Burj Al Jewar, residential and commercial towers located just meters
away from the King Abdul-Aziz Gate overlooking the holy mosque are in full operation by a hotel operator of
international repute providing a cash yield to our investors.

The Group’s investment across a diversified portfolio of operating companies in China has been adversely affected
by the state of the Country’s economy. A reduction in growth rates and exports, as well as a decline in manufacturing
data, is evidence to the fact that the waves of the 2008 recession have well and truly arrived in the East.

Information Technology
The Information Technology division, inline with the Group’s business strategies, creates infrastructure architecture
that seeks to deliver excellence in customer services and business support whilst maintaining world-class standards
of security.

During the year the Group unified the core-banking platform of its subsidiary Bahraini Saudi Bank with Al Salam
Bank, setting out the road map for successfully integrating a single Islamic banking Platform in the near future.

AL SALAM BANK - BAHRAIN 31

 Management Review of Operations & Activities (continued)

The Information Technology division focused on enhancing our customers’ banking experience, upgrading IT
Infrastructure and ensuring compliance with regulatory as well as internal control requirements.

Corporate Governance and Risk Management

During the year, significant initiatives were undertaken to improve the knowledge and practice of Corporate
Governance within the Group. Compliance to Central Bank of Bahrain guidelines and other regulatory guidelines is
a fundamental element of the Group’s strategy.

Know Your Customer

The Group complies with Financial Crimes Module of Central Bank of Bahrain’s rulebook. The module contains
Bahrain’s current anti-money laundering legislation, developed under the directives of the Financial Action Task
Force, which is the international organization responsible for developing global anti-money laundering policies.

The Group places significant emphasis in understanding its customers and their financial activities. The Group has
implemented world-class systems to support the monitoring activities. Proper due diligence is conducted to ensure
that financial activities of customers are performed in accordance with the guidelines issued by the regulatory
authorities.

Human Capital
The Group maintains a strong commitment to the development of human capital throughout the organization;
considering our people a vital asset of the Group, and a key determinant in organizational effectiveness.

Attracting and retaining the highest quality of talent remains our focus. This has been achieved through motivating
effective performance using holistic appraisal and compensation systems, as well as the development of our
employees through training initiatives.

The Group encourages dialogue between employees and management, facilitating employee feedback both formally
through appraisal systems, and informally through social gatherings and events. Transparency and communication
remain key factors in achieving such a dialogue. These initiatives strengthen the fabric of the Group’s corporate
culture and the development of a strong organizational capacity for Corporate Social Responsibility.

Inline with the Group’s Corporate Social Responsibility strategy to support the youth and develop a capable future
workforce, 15 fresh graduates took part in the annual Summer Traineeship. The program included a number of
workshops to introduce the graduates to Islamic banking, helping them link their theoretical knowledge with practical
on-the-job experience.

Bahraini employees comprise of 84% (82% in 2009) of the total of 222 employees (233 in 2009) across Singapore
and Bahrain.

32 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011

Policy
The Group aspires to the highest standards of ethical conduct: doing what it says; reporting results with
accuracy and transparency and maintaining full compliance with the laws, rules and regulations that govern
the Group’s business.

The Board has adopted a Board of Directors Charter which, together with the Bank’s Memorandum and
Articles of Association and the charters of certain Board committees, provides the authority and practices for
governance of the Group.

Board of directors

The Board of Directors shall provide central leadership to the Bank, establish its objectives and develop
the strategies that direct the ongoing activities of the Group to achieve these objectives. Directors shall
determine the future of the Bank through the protection of its assets and reputation. They will consider how
their decisions relate to “stakeholders” and the regulatory framework. Directors shall apply skill and care in
exercising their duties to the Bank and are subject to fiduciary duties. Directors shall be accountable to the
shareholders of the Bank for the Group’s performance and can be removed from office by them.

The primary responsibility of the Board is to provide effective governance over the Bank’s affairs for the
benefit of its shareholders, and to balance the interests of its diverse constituencies including its customers,
correspondents, employees, suppliers and local community. In all actions taken by the Board, the directors
are expected to exercise their business judgment in what they reasonably believe to be in the best interests of
the Group. In discharging that obligation, directors may rely on the honesty and professional integrity of the
Group’s senior executives and external advisors and auditors.

AL SALAM BANK - BAHRAIN 33

 Corporate Governance Report 2011 (continued)

Major Shareholders as on 31 December 2011

Name Country of origin No. of shares % Holding

1 Global Mena Macro Fund Company BAH 171,033,800 11.42%

2 Leader Capital (L.L.C) UAE 57,976,149 3.87%
3 Mohamed Omeir Yousif Ahmed Al Mehairi UAE 53,544,981 3.58%
4 Independent Enterprises & Co. Representation UAE 44,101,670 2.95%
5 Social Insurance Org.(Pension)-Civil BAH 26,557,556 1.77%
6 Bayan Group for Proper Investment W.L.L BAH 26,310,253 1.76%
7 Alsouban Company BAH 26,250,000 1.75%
8 Capital Management House B.S.C.(Closed) BAH 24,766,207 1.65%
9 HRH Prince Mohammed Bin Fahad Bin Abdulaziz Al-Saud KSA 21,708,750 1.45%
10 Al Salam Bank-Sudan SUD 21,000,000 1.40%
11 Al Rushid Investments (L.L.C) UAE 21,000,000 1.40%
12 Ebrahim Nader Al Qubaisi UAE 21,000,000 1.40%
13 Noim Properties Ltd UK 18,375,000 1.23%
14 Global Express Company W.L.L BAH 18,072,561 1.21%
15 Bahrain Islamic Bank B.S.C. BAH 17,570,462 1.17%
16 Ali Hassan Ali Dayekh CAN 16,066,943 1.07%
17 Emaar Properties PJSC UAE 15,750,000 1.05%

Shareholding – 31 December 2011

% of outstanding
Category No. of shares No. of shareholders shares

Less than 1% 895,979,493 23,139 59.87

1% to less than 5% 430,050,532 16 28.72
5% to less than 10% - - -
10% to less than 20% 171,033,800 1 11.42
20% up to less than 50% - - -
50% and above - - -
Total 1,497,063,825 23,156 100.00

34 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011 (continued)

The ordinary share ownership of the Bank is distributed as follows

Nationality No. of shares Ownership percentage

Bahraini
Government 26,557,556 1.77
Institutions 379,920,356 25.38
ASBB treasury Stock 7,205,906 0.48
Individuals 185,934,872 12.42
GCC
Government 5,179,864 0.35
Institutions 300,225,266 20.05
Individuals 483,200,267 32.28
Other
Institutions 65,140,708 4.35
Individuals 43,699,030 2.92
Total 1,497,063,825 100.00

Board Composition
The Board consists of members of high-level professional skills and expertise. Furthermore, in compliance with
the corporate governance requirements, the Board Committees consist of Members with adequate professional
background and experience. The Board periodically reviews its composition and the contribution of Directors and
Committees.

The appointment of Directors is subject to prior screening by Remuneration and Nomination Committee and approval
by the Shareholders and the Central Bank of Bahrain. The classification of ‘executive’ Directors, ‘non-executive’
Directors and “independent non-executive” Directors is as per definitions Stipulated by the Central Bank of Bahrain.

Mandate of the Board of Directors and Directors’ Roles and Responsibilities

The principal role of the Board of Directors, (the Board), is to oversee the implementation of the Group’s strategic
initiatives and its functioning within the agreed framework, in accordance with relevant statutory and regulatory
structures. The Board is also responsible for the consolidated financial statements of the Group. The Board ensures
the adequacy of financial and operational systems and internal control, as well as the implementation of corporate
ethics and the code of conduct. The Board has delegated responsibility for overall management of the Bank to the
Chief Executive Officer.

The Board receives a formal schedule of matters for its decision to ensure that the direction and control of the Bank
rests with the Board. This includes strategic planning, performance reviews, material acquisition and disposal of
assets, capital expenditure, authority levels, appointment of auditors and review of the financial statements, financing
and borrowing activities including annual operating plan and budget, ensuring regulatory compliance and reviewing
the adequacy and integrity of internal controls. All policies pertaining to the Bank’s operations and functioning are
to be approved by the Board.

Each Director holds the position for three years, after which he must present himself to the Annual General Meeting of
shareholders for re-appointment. The majority of Al Salam Bank-Bahrain (“ASBB”) Directors (including the Chairman
and/or Deputy Chairman) are required to attend the Board meetings in order to ensure a quorum.

AL SALAM BANK - BAHRAIN 35

 Corporate Governance Report 2011 (continued)

Board elections system

Article 26 of the Bank’s Articles of Association provides the following:

1. The Bank shall be administered by a Board of Directors consisting of not more than fourteen members and not less
than five members. The Board’s term shall be three years which may be renewed.

2. Each shareholder owning 10% or more of the capital may appoint whoever represents him on the Board to the
same percentage of the number of the Board members. His right to vote shall be forfeited for the percentage he
has appointed representatives. If a percentage is left that does not qualify him to appoint another member, he may
use such percentage to vote.

3. Other members of the Board shall be elected by the General Assembly by secret ballot.

4. The Board of Directors shall elect, by secret ballot, a Chairman and one Vice Chairman or more, three years
renewable. The Vice Chairman shall act for the Chairman during his absence or if there is any barrier preventing
him.

Article 29 of the Article of Association covered the “Termination of Membership in the Board of Directors”. It provided
the following:

A Director shall lose his office on the Board in the event that he:

a. Fails to attend four consecutive meetings of the Board in one year without an acceptable excuse, and the Board of
Directors decides to terminate his membership;

b. Resigns his office by virtue of a written request;

c. Forfeits any of the provisions set forth in Article 26 of the Articles of Association;

d. Is elected or appointed contrary to the provisions of the Law; and

e. Has abused his membership by performing acts that may constitute a competition with the Company or caused
actual harm to the Company.

Induction and Orientation for new Directors

The Bank shall provide an orientation program for new directors, which shall include presentations by senior
management on the Bank’s strategic plans, significant financial, accounting and risk management issues, compliance
programs, operations, Code of Conduct, management structure and executive officers, and its internal and external
auditors. The orientation program may also include visits to Group’s significant branches/offices to the extent practical.
The Group shall also make available continuing education programs for all members of the Board. All directors are
invited to participate in the orientation and continuing education programs.

Evaluation of Board Performance

The Board shall conduct an annual review of its performance. This review shall include an overview of the talent
base of the Board as a whole as well as an individual assessment of each director’s qualification under corporate
governance rules and all other applicable laws, rules and regulations regarding directors; consideration of any
changes in a director’s responsibilities that may have occurred since the director was first elected to the Board and
such other factors as may be determined by the Committee to be appropriate for review. Each Committee shall
annually prepare an evaluation of its performance as provided in its charter.

Remuneration of Directors
Remuneration of the Directors as provided by Article 36 of the Articles of Association states the following:

The General Assembly shall specify the remuneration of the members of the Board of Directors. However, such
remunerations must not exceed in total 10% of the net profits after deducting statutory reserve and the distribution of
profits not less than 5% of the paid capital among the shareholders. The General Assembly may decide to pay annual
bonuses to the Chairman and members of the Board of Directors in the years when the Company does not make
profits or in the years when it does not distribute profits to the shareholders, subject to the approval of the Minister of

36 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011 (continued)

Industry and Commerce. The report of the Board of Directors to the General Assembly shall include a full statement
of the remuneration the members of the Board of Directors have been paid during the year in accordance with the
provisions set forth in Article 188 of the Commercial Companies Law of 2001.

The Board Charter provides the following:

The Board, based upon the recommendation of the Remuneration and Nomination Committee and subject to the
laws and regulations, determines the form and amount of director compensation. The Remuneration and Nomination
Committee shall conduct an annual review of directors’ compensation. Directors who are employees of the Group
shall not receive any compensation for their services as directors. Directors who are not employees of the Group
may not enter into any consulting arrangements with the Group without the prior approval of the Board. Directors
who serve on the Audit Committee shall not directly or indirectly provide or receive compensation for providing
accounting, consulting, legal, investment banking or financial advisory services to the Group.

Whistle Blowing Policy

The Group has a whistle blowing policy with designated officials to whom the employee can approach. The policy
provides adequate protection to employees for any reports in good faith. The Board’s Audit Committee oversees the
implementation of this policy.

Key Persons (KP) Policy

The Group has established a Key Persons’ Policy to ensure that Key Persons are aware of the legal and administrative
requirements regarding holding and trading of ASBB shares, with the primary objective of preventing abuse of inside
information. Key Persons are defined to include the Directors, Executive Management, designated employees and
any person or firm connected to the identified Key Persons. The ownership of the Key Persons’ Policy is entrusted to
the Board’s Audit Committee.

The Key Persons’ Policy is posted on the Bank’s website.

Code of Conduct
The Board has an approved Code of Conduct for ASBB Directors. The Board has also approved a Code of Ethics for
the Executive Management and staff that include ‘whistle-blowing’ procedures. The responsibility for monitoring
these codes lies with the Board of Directors. The Directors’ “Code of Conduct” is published on the Bank’s website.
The directors’ adherence to this Code of Conduct is periodically reviewed.

The directors have adopted the following code of conduct in respect to their behavior:

• To act with honesty, integrity and in good faith, with due diligence and care, in the best interest of the Group and
its stakeholders;

• To act only within the scope of their responsibilities;

• To have a proper understanding of the affairs of the Bank and to devote sufficient time to their responsibilities;

• To keep confidential Board discussions and deliberations;

• Not to make improper use of information gained through the position as a director;

• Not to take undue advantage of the position of director;

• To ensure his/her personal financial affairs will never cause reputational loss to the Bank;

• To maintain sufficient/detailed knowledge of the Bank’s business and performance to make informed decisions;

• To be independent in judgment and actions and to take all reasonable steps to be satisfied as to the soundness of
all decisions of the Board;

• Not to agree to the Group incurring an obligation unless he/she believes at the time, on reasonable grounds, that
the Group will be able to discharge the obligations when it is required to do so;

AL SALAM BANK - BAHRAIN 37

 Corporate Governance Report 2011 (continued)

• Not to agree to the business of the Group being carried out, or cause or allow the business to be carried out, in a
manner likely to create a substantial risk of serious loss to the Group’s creditors;

• To treat fairly and with respect all of the Group’s employees and customers with whom they interact;

• Not enter into competition with the Bank;

• Not demand or accept substantial gifts from the Bank for himself/herself or his/her associates;

• Not take advantage of business opportunities to which the Group is entitled for himself/herself or his/her associates;

• Report to the Board any potential conflict of interest, and

• Absent themselves from any discussions or decision-making that involves a subject in which they are incapable
of providing objective advice or which involves a subject or proposed conflict of interest.

Conflict of Interest
The Group has a documented procedure for dealing with situations involving ‘conflict of interest’ of Directors. In the
event of Board or its Committees considering any issues involving ‘conflict of interest’ of Directors, the decisions are
taken by the full Board/Committees.

The concerned Director abstains from the discussion/ voting process. These events are recorded in Board/Committees
proceedings. The Directors are required to inform the entire Board of (potential) conflicts of interest in their activities
with, and commitments to, other organisations as they arise and abstain from voting on the matter. This disclosure
includes all material facts in the case of a contract or transaction involving the Director.

Board Meetings and Attendances

The Board of Directors meets at the summons of its Chairman or his Deputy (in event of his absence or disability) or
if requested to do so by at least two Directors. According to the Commercial Law, the Board meets at least four times
a year. A meeting of the Board of Directors shall be valid if attended by not less than eight directors in person. During
2011, four Board meetings were held in Bahrain in the following manner:

38 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011 (continued)

Quarterly Board meetings, 2011 - Minimum four meetings per annum

Members 1 February 2011 18 April 2011 13 July 2011 31 October 2011

1. H. E. Mohamed Ali Rashid Alabbar - √ By Circulation -
2. Mr. Essam Al Muhaideb √ √ By Circulation √
3. Mr. Habib Ahmed Kassem √ √ By Circulation √
4. Mr. Terence D. Allen √ √ By Circulation √
5. Mr. Fahad Sami Al-Ebrahim √ √ By Circulation -
6. Mr. Ahmed Jamal Jawa - √ By Circulation √
7. Mr. Hamad Tarek Al Homaizi √ √ By Circulation √
8. H.H. Shaikha Hessa bint Khalifa
Al- Khalifa √ √ By Circulation √
9. Sheikh Abdulelah Mohahmmed Kaki √ √ By Circulation √
10. Mr. Salman Al Mahmeed √ √ By Circulation -
11. Mr. Yousif Abdulla Taqi √ √ By Circulation √

Directors’ and related parties’ interests

The number of shares held by Directors as of 31 December 2011 was as follows:

Members 31 December 2010 31 December 2011

H.E. Mohamed Ali Rashid Alabbar 10,500,000 10,500,000
Mr. Habib Ahmed Kassem 2,102,489 2,102,489
Mr. Essam Bin Abdulkadir Al Muhaideb - -
Sheikh Abdlelah Mohamed Saleh Kaki 3,618,354 3,618,354
H.H. Shaikha Hessa bint Khalifa Al-Khalifa - -
Mr. Salman Saleh Al Mahmeed - -
Mr. Hamad Tarek Al Homaizi - -
Mr. Fahad Sami Fahad Al-Ebrahim - -
Mr. Ahmed Jamal Hassan Jawa 105,000 105,000
Mr. Terence D. Allen - -
Mr. Yousif Abdulla Taqi - -

There are no movements in the above shareholding during the year 2011.

AL SALAM BANK - BAHRAIN 39

 Corporate Governance Report 2011 (continued)

Related Parties
The following shareholders are related to H.E. Mohamed Alabbar:

• Al Rushd Investments owns 21,000,000 shares

• Leader Capital owns 57,976,149 shares

• Emaar Properties owns 15,750,000 shares

The following shareholder is related to Mr. Habib Kassem:

• Almahd Investment Company owns 3,059,792 shares

• Mary Sabkar owns 2,489 shares

The following shareholder is related to Mr. Essam AL Muhaideb:

• Al Muhaideb Holding Company owns 4,414,522 shares

The following shareholder is related to Mr. Yousif Taqi:

• Capital Service House owns 7,160,133 shares

Global Mena Macro Fund Company is related to Mr. Fahad Al-Ebrahim and Mr. Hamad Al Homaizi.

Nature and Extent of Transactions with Related Parties during 2011

None.

Approval process for Related Parties’ Transactions

The Group has a due process for dealing with transactions involving related parties. Any such transaction will require
the approval of the Board of Directors.

Material Transactions
While any transaction above BD 5 million and up to BD 10 million requires the approval of the Executive Commit-
tee of the Board of Directors, any transaction above BD 10 million requires the approval of the Board of Directors
of the Bank.

Material Contracts and Financing Involving Directors

The Chairman has provided a personal guarantee for the amount outstanding. The details of the facility as follows:
- Principal amount of financing : USD 2,000,000
- Nature of facility : Murabaha Contract
- Purpose of financing : Personal and business financing needs
- Profit rate : 8%
- Security : Personal guarantee from the Chairman
Repayment of principal : Bullet at maturity of the facility

40 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011 (continued)

Organization Structure

SHAREHOLDERS

Fatwa and Shari’s

External Auditors Supervisory Boad

Board of Directors

Executive Committee

Renumeration and
Nomination Committee

Audit Committee

Chief Executive Officer

Management Committees
• Risk / Credit International Audit Department
• Investment
• Asset Liability Shari’a Compliance
• Information Technology Department

BUSINESS GROUPS SUPPORT GROUPS

Banking Risk & Compliance

Investment HR, Operations, IT &

Support Services

Treasury & Financial Markets Finance & Strategic

Development

AL SALAM BANK - BAHRAIN 41

 Corporate Governance Report 2011 (continued)

Board Committees

The Board level committees are formed, and the Board of Directors appoints their members, at the beginning of each
Board term. They are considered the high level link between the Board and the Executive Management. The objective
of these committees is to assist the Board in supervising the operations of the Group. The Committee reviews issues
that are submitted by the management to the Board and makes recommendations to the Board for their final review.

There are no major issues of concern to report relating to the work of the Board Committees during the year 2011.

The full texts for the Terms of Reference for Board Committees (Executive Committee, Audit Committee, and
Nomination, Remuneration) are published on the Bank’s website.

Executive Committee
Quarterly Committee meetings, 2011 - Minimum four meetings per annum

Members 30 January 2011 17April 2011 08 June 2011 24 October2011

Mr. Habib Ahmed Kassem √ √ √ √
Mr. Essam Al Muhaideb √ √ √ √
Mr. Ahmed Jamal Jawa √ √ √ √
Mr. Fahad Sami Al-Ebrahim √ - √ √

Summary of Responsibilities: reviews, approves and directs the Executive Management on matters raised to the
Board of Directors such as various policies, business plans and the periodical review of the Group’s achievements.

Audit Committee

Quarterly Committee meetings, 2011 - Minimum four meetings per annum

27 January 17 April 20 October 12 December

Members 2011 2011 2011 2011
Mr. Terence D. Allen √ √ √ √
Mr. Hamad Al Homaizi √ √ √ √
Mr. John Hawkins - √ - √

Summary of Responsibilities: reviews the internal audit program and internal control system, considers major
findings of internal audit review, investigations and management’s response, ensures coordination among internal
and External Auditors, monitors trading activities of key persons and ensures prohibition of the abuse of inside
information and disclosure requirements.

42 AL SALAM BANK - BAHRAIN

 Corporate Governance Report 2011 (continued)

Remuneration and Nomination Committee

Quarterly Committee meetings, 2011 - Minimum Two meetings per annum

Members 1 February 2011 15 June 2011 23 October 2011

H.H. Shaikha. Hessa bint Khalifa Al- Khalifa √ √ √
Mr. Habib Ahmed Kasim √ √ √
Mr. Fahad Sami Al-Ebrahim √ √ √

Summary of Responsibilities: to assess, evaluate and advise to the Board of Directors on all matters. To ensure
that the Group adopts and enhances sound Corporate Governance practices which are consistent with the Corporate
Code of the Kingdom of Bahrain, regulatory requirements and also reflects the best market practices in Corporate
Governance, making recommendations to the Board as deemed appropriate.

Compliance
The Group has in place comprehensive policies and procedures to ensure full compliance with the relevant rules
and regulations of the Central Bank of Bahrain and the Bahrain Bourse, the Dubai Financial Market, the Emirates
Securities & Commodities Authority, including anti-money laundering, prudential and insider trading reporting. The
Group is in compliance with High Level Control Module issued by the Central Bank of Bahrain.

Communication Policy
ASBB recognizes that active communication with different stakeholders and the general public is an integral part of
good business and administration. In order to reach its overall goals for communication, the Group follows a set of
guiding principles such as efficiency, transparency, clarity and cultural awareness.

ASBB uses modern communication technologies in a timely manner to convey messages to its target Banks. The
Group shall reply without unnecessary delay, to information requests by the media and the public. ASBB strives in
its communication to be as transparent and open as possible while taking into account Group confidentiality. This
contributes to maintaining a high level of accountability. ASBB also proactively develops contacts with its target
groups and identifies topics of possible mutual interest. The Group reinforces clarity by adhering to a well-defined
visual identity in its external communications.

The Group’s formal communication material is provided in both English and Arabic languages. The Bank maintains
a Legal Policy published on its website: www.alsalambahrain.com that includes terms and conditions on the use of
information published on the site.

The annual reports and quarterly financial statements, Board Charter and Corporate Governance report is published
on the Bank’s website. Shareholders have easy access to various types of forms including proxies used for the Annual
General Meeting. In addition, forms are also available online to file complaints or make inquiries which are duly
dealt with. The Group regularly communicates with its staff through internal communications to provide updates of
the Group’s various activities.

AL SALAM BANK - BAHRAIN 43

 Risk Management and Compliance

At Al Salam Bank-Bahrain we appreciate the fact that we are in the business of taking risks and our success is
largely dependent on how efficiently we identify, measure, control and manage these risks. Hence, we view risk
management as a core competency from a strategic point of view and the Basel II Accord as a catalyst to the
successful implementation of the pillars of risk management.

The fundamental principle underlying our risk management framework is ensuring that accepted risks are within Board
approved risk appetite and the returns are commensurate with the risks taken. The objective is creating shareholder
value through protecting the Group against unforeseen losses, ensuring maximization of earnings potential and
opportunities vis-à-vis the Group’s risk appetite and ensuring earnings stability.

With this in mind, the Bank’s establishment plan gave priority to the development of an effective and practical
risk management framework and independent risk management and compliance function in line with best risk
management practice locally and internationally, the requirements of the Central Bank of Bahrain and the Basel II
Accord.

Risk Management Framework

The risk management framework defines the risk culture of Al Salam Bank–Bahrain and sets the tone throughout the
Group to practice the right risk behavior consistently to ensure that there is always a balance between business profits
and risk appetite.

The risk management framework achieves this through the definition of the Group’s key risk management principles
covering credit, market, operational, strategic and reputation risks, the role and responsibilities of the Board, Risk
Management group and Senior Management towards risk management, the risk assessment methodology based on
likelihood and consequences, the major risk policies, procedures and risk limits, the risk management information
systems and reports, the internal control framework and the Group’s approach to capital management.

The effectiveness of the risk management framework is independently assessed and reviewed through internal audits,
external audits and Central Bank of Bahrain supervision. In addition, business and support groups carry out periodic
control risk self assessments.

As a result, the risk management framework creates an alignment between business and risk management objectives

RISK MANAGEMENT & CORPORATE GOVERNANCE FRAMEWORK

Board Committees
Fatwa and Shari’a Supervisory Board

Senior Management Committees

Risk Management & Compliance Function

Board & Senior Comprehensive Compliance &

Management Internal Control Anti-Money
Oversight Framework Laundering

Risk Assessment Methodology

Risk Policies, Capital Management
Risk Management
Procedures & Risk Adjusted
Systems
& Limits Pricing

Internal Audit, External Audit, Central Bank of Bahrain

44 AL SALAM BANK - BAHRAIN

 Risk Management and Compliance (continued)

Capital Management
The cornerstone of risk management framework is the optimization of risk-reward relationship against the capital
available through a focused and well monitored capital management process involving Risk Management, Finance
and Business groups.

Corporate Governance
The risk management framework is supported by an efficient Corporate Governance Framework discussed on pages
33 to 43.

Risks Ownership

The implementation of the risk management framework Group-wide is the responsibility of the Risk Management &
Compliance Departments. Ownership of the various risks across the Group lies with the business and support Heads
and it is their responsibility to ensure that these risks are managed in accordance with the risk management framework.

Risk Management assists business and support heads in identifying concerns and risks, identifying risk owners,
evaluating risks as to likelihood and consequences, assessing options for mitigating the risks, prioritizing risk
management efforts, developing risk management plans, authorizing implementation of risk management plans and
tracking risk management efforts.

Board Approved Policies, Procedures and Limits

Credit Risk Market Risk Operational Risk Capital Compliance & Anti-
Management Management Management Management Money Laundering

• Exposures and • Positioning and • Control Self • Basel II • Compliance

limits Monitoring Limits Monitoring Assessments Compliance Monitoring

• Risk
• Portfolio Measurement • Key Risk • Risk Adjusted • Anti-money
Management Methodology Indicators Pricing Laundering
Monitoring control
• Timely reporting
• Timely Reporting to ALCO • Risk & Loss • Reporting to • Training and
to Risk Events Database Board Executive Awareness
Committee Committee

• Internal rating • IT Security • Scenario Analysis • AML System

Methodology Managements Controls

• Periodic Stress • Business

Testing and Continuity
Scenario Analysis Planning

• Outsourcing Risk
Management

AL SALAM BANK - BAHRAIN 45

 Risk Management and Compliance (continued)

Compliance & Anti-Money Laundering Unit

The Bank has established an independent and dedicated unit to coordinate the implementation of compliance
and Anti-Money Laundering and Anti-Terrorist Financing program. The program covers policies and procedures
for managing compliance with regulations, anti-money laundering, disclosure standards on material and sensitive
information and insider trading.

In line with its commitment to combat money laundering and terrorist financing, Al Salam Bank - Bahrain through
it’s Anti-Money Laundering policies ensures that adequate preventive and detective internal controls and systems
operate effectively.

The policies govern the guidelines and procedures for client acceptance, maintenance and monitoring in line with
the Central Bank of Bahrain and International standards such as FATF 40 + 9 recommendations and Basel Committee
papers.

All inward and outward electronic transfers are screened against identified sanction lists issued by certain regulatory
bodies including the UN Security Council Sanctions Committees and US Department of the Treasury - OFAC, in
addition to those designated by the Central Bank of Bahrain.

The compliance program also ensures that all applicable Central Bank of Bahrain regulations are complied with and/
or non-compliance is detected and addressed in a timely manner. The program includes compliance with regulations
set by Ministry of Industry & Commerce and Bahrain Bourse.

46 AL SALAM BANK - BAHRAIN

 Corporate Social Responsibility

The Group endeavors to be a good corporate citizen through continuing to support the Government in its initiatives
to enhance the quality of life in the Kingdom.

Initiatives such as developing the Country’s housing, education and healthcare, as well as entrepreneurship, and the
development of our youth, are synonymous with our vision and core values.

The Group continues to support charitable causes that uplift those who are less fortunate in the Kingdom.

The Group supported a number of societal initiatives during the year including the national campaign “I am Bahrain”,
initiated by the Youth Committee at the Supreme council for Women. The campaign promoted the concept of national
unity. Manara Developments, the Group’s real estate development arm sponsored the “Youth Arab Leadership”,
(YAL) forum entitled “Building the Leaders of Future Generations”. YAL’s mission is to elevate economic and social
standards of the Arab countries through the development of its youth.

AL SALAM BANK - BAHRAIN 47

Dendrochronology is what scientists call using trees to measure
time. When you begin counting the tree rings, you are actually
measuring time using a tree. At Al Salam, we assess our systems
and processes on a constant basis and our measures aim to not
only fulfil time bound promises made to our clients, but seek
to exceed the immeasurable service and performance quality
levels.
 Fatwa & Sharia Supervisory Board’s Report Presented to
The General Assembly for the Financial Year Ended 31 December 2011

The Shari’a Supervisory Board (“the Board”) has reviewed the transactions entered into by the Bank during the
year. The Board reviewed the balance sheet, the income statement, the statement of cash flows and the statement
of changes in equity. The Board met and discussed the financial statements with the management of the Bank and
presented its annual report as follows:

First:
1. The Board has supervised the Bank’s activities and transactions during the year. The Board had played its role in
guiding various departments to adherence to the Principles of Shari’a and the pronouncements of the Board in
respect of these activities and transactions. The Board held, for this purpose, several meetings with the Bank’s
management. The Board is hereby emphasizing the Bank’s management utmost keenness to observe the Rules and
Principles of Shari’a and Pronouncements of the Board.

2. The Board has examined the transactions that were presented to it during the year, and approved contracts and
documents relating to these transactions. The Board has responded to questions and queries raised in respect of
these transactions, and issued appropriate Fatwas and Pronouncements. These decisions have been circulated to
the departments concerned for execution.

Second:
The Board has reviewed samples of contracts and agreements that were presented to it and requested management
to abide by these sample contracts and agreements.

Third: Financial Statements

The Board has reviewed the consolidated financial statements of the Group (the Bank and its subsidiary) and the
notes thereto and clarifications complementary to them, on which the Board made the following observations and
recommendations:

1. Based on information made available by the Banks’ management, the consolidated financial statements reviewed
by the Board presents fairly the Banks’ assets, its liabilities, URIA, equity, revenues and operating expenses. The
accuracy of the information and data provided are the responsibility of the Bank’s management.

2. The Banks’ management represents that majority of the deposits are based on Wakala contracts; the clients
are informed of the profit to expect and the Bank holds one general pool for these deposits. The management
represents that the Bank receives limited amounts of saving accounts deposits for investment on the basis of
Mudaraba which are comingled with the funds of shareholders in a common pool. The Board has advised that the
Bank expands its activities of receiving deposits to include accepting fixed-term deposits on Mudaraba basis in
line with the practice in other Islamic Banks.

The Board believes that the consolidated balance sheet, income statement and the distribution of profits between
depositors and shareholders had been prepared on this basis.

Fourth: Zakah
Since the Articles of Association of the Bank does not require the Bank to pay Zakah on behalf of the shareholders, the
Board has calculated the Zakah payable by shareholders. This has been disclosed in the notes to financial statements
for shareholders information.

Fifth: Conversion of Bahraini Saudi Bank

The Bank has acquired a 90.31% stake in Bahraini Saudi Bank with the objective of converting it to an Islamic Bank.
The conversion is underway and the Board has advised that 31 December 2011 is the last day of conversion, so that
the bank may start all its activities on 01 January 2012 in accordance with Shari’a principles and rules only.

50 AL SALAM BANK - BAHRAIN

 Fatwa & Sharia Supervisory Board’s Report Presented to
The General Assembly for the Financial Year Ended 31 December 2011 (continued)

Sixth: Shari’a Prohibited Income

Pursuant to the Board’s directive, the prohibited income earned by the Subsidiary should be purified by the Group
from the date of conversion. Since the Subsidiary’s operations are not fully compliant with Shari’a rules and Principles,
the prohibited income and expenses have been calculated and disclosed in the notes to the financial statements.
The shareholders should purify the amount of prohibited income attributable to each share by donating the relevant
amounts of such prohibited income to charity.

The prohibited income to be donated by each shareholder for 2011 has been determined by the Shari’a Supervisory
Board as 1.053 fils per share.

The Board hereby emphasizes that management has the primary responsibility to comply with the Rules and
Principles of Shari’a in all activities and transactions of the Bank. The Board confirms that the executed transactions
that are submitted by management of the Bank for the Board’s review during the year were generally in compliance
with Rules and Principles of Shari’a. The management has shown utmost interest and willingness to fully comply
with the recommendations of the Board.

Shari’a Board Members

Dr. Hussein Hamed Hassan Dr. Ali Al Qura Daghi

Chairman Board Member

Dr. Mohammed Zoeir Shaikh Adnan Al Qattan

Member & Secretary to the Board Board Member

AL SALAM BANK - BAHRAIN 51

 P.O.Box 140
14th Floor - The Tower
Bahrain Commercial Complex
Manama, Kingdom of Bahrain
Tel: +973 1753 5455 Fax: +973 1753 5405
[email protected]
www.ey.com/me
C.R. No. 6700

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF

AL SALAM BANK-BAHRAIN B.S.C.

Report on the consolidated financial statements

We have audited the accompanying consolidated statement of financial position of Al Salam
Bank-Bahrain B.S.C. [“the Bank”] and its subsidiary [together “the Group”] as of 31 December
2011, and the related consolidated statements of income, cash flows and changes in equity
for the year then ended. These consolidated financial statements and the Group’s undertaking
to operate in accordance with Islamic Shari’a Rules and Principles are the responsibility of the
Bank’s Board of Directors. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

Auditors’ Responsibility
We conducted our audit in accordance with Auditing Standards for Islamic Financial
Institutions issued by the Accounting and Auditing Organisation for Islamic Financial
Institutions [“AAOIFI”]. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Board of
Directors, as well as evaluating the overall consolidated financial statements presentation. We
believe that our audit provides a reasonable basis for our opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Group as of 31 December 2011, the results of its
operations, its cash flows and changes in equity for the year then ended in accordance with
the Financial Accounting Standards issued by AAOIFI.

52 AL SALAM BANK - BAHRAIN

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
AL SALAM BANK-BAHRAIN B.S.C. (continued)

Report on other regulatory requirements

As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB)
Rule Book (Volume 2), we report that:
a) the Bank has maintained proper accounting records and the consolidated financial
statements are in agreement therewith; and
b) the financial information contained in the report of the Board of Directors is consistent with
the consolidated financial statements.

We are not aware of any violations of the Bahrain Commercial Companies Law, the Central
Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 2 and 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 during the year ended 31 December 2011 that might have had a material
adverse effect on the business of the Bank or on its consolidated financial position. Satisfactory
explanations and information have been provided to us by the management in response to
all our requests. The Bank has also complied with the Islamic Shari’a Rules and Principles as
determined by the Shari’a Supervisory Board of the Bank.

4 March 2012
Manama, Kingdom of Bahrain

AL SALAM BANK - BAHRAIN 53

 Consolidated Statement of Financial Position
31 December 2011

(Restated)
31 December 2011 31 December 2010
Note BD ‘000 BD ‘000
ASSETS
Cash and balances with banks and Central Bank of Bahrain 4 72,318 95,791
Central Bank of Bahrain Sukuk 125,027 68,632
Murabaha and Wakala receivables from banks 5 135,698 137,299
Corporate Sukuk 49,650 60,959
Murabaha financing 6 135,383 114,572
Mudaraba financing 57,706 19,309
Ijarah Muntahia Bittamleek 8 66,477 56,756
Musharaka financing 11,711 8,127
Assets under conversion 9 27,750 57,432
Non-trading investments 10 223,320 212,432
Investment in an associate 11 - 7,578
Investment properties 2,500 3,373
Receivables and prepayments 12 15,278 12,479
Premises and equipment 1,089 1,859
TOTAL ASSETS 923,907 856,598
LIABILITIES, EQUITY OF INVESTMENT ACCOUNT
HOLDERS AND OWNERS’ EQUITY
LIABILITIES
Murabaha and Wakala payables to banks 104,573 101,300
Wakala payables to non-banks 515,147 456,447
Customers' current accounts 66,585 57,362
Liabilities under conversion 9 7,633 5,171
Other liabilities 13 13,088 15,993
TOTAL LIABILITIES 707,026 636,273
EQUITY OF INVESTMENT ACCOUNT HOLDERS 14 16,256 18,465
OWNERS’ EQUITY
Share capital 15 149,706 149,706
Treasury stock (465) -
Reserves and retained earnings 47,228 48,165
Total equity attributable to shareholders of the Bank 196,469 197,871
Non-controlling interest 4,156 3,989
TOTAL OWNERS’ EQUITY 200,625 201,860
TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNT
HOLDERS AND OWNERS’ EQUITY 923,907 856,598

These consolidated financial statements have been authorised for issue in accordance with a resolution of the
Board of Directors on 4th March, 2012.

Mohamed Ali Rashid Alabbar Yousif Abdulla Taqi

Chairman Director & Chief Executive Officer
The attached notes 1 to 31 form part of these consolidated financial statements.

54 AL SALAM BANK - BAHRAIN

Consolidated Income Statement
Year ended 31 December 2011

Year ended 31 Year ended 31

December 2011 December 2010

Note BD ’000 BD ’000

OPERATING INCOME

Income from financing contracts 16 30,262 25,447

Gains on sale of investments and sukuk 2,849 1,531

Income from FVTPL investments 601 1,089

Fair value changes on FVTPL investments 5,189 7,608

Writedown of available for sale investments (5,325) -

Fair value changes on investment properties (873) -

Dividend income 1,156 402

Fees, commissions and foreign exchange gains 17 2,300 5,536

36,159 41,613

Profit on Murabaha and Wakala payables to banks (714) (617)

Profit on Wakala payables to non-banks (16,403) (14,674)

Profit relating to equity of investment accountholders 14 (153) (216)

Depreciation on Ijarah Muntahia Bittamleek 8 (6,149) (3,742)

Total operating income 12,740 22,364

OPERATING EXPENSES

Staff costs 6,016 7,023

Premises and equipment cost 1,168 1,144

Depreciation 999 1,133

Other operating expenses 3,415 4,255

Total operating expenses 11,598 13,555

Share of profit from an associate - 15

NET PROFIT BEFORE PROVISIONS 1,142 8,824

Provision for impairment 7 (645) (1,508)

NET PROFIT for the year 497 7,316

Attributable to:

Shareholders of the Bank 312 7,209

Non-controlling interest 185 107

497 7,316

WEIGHTED AVERAGE NUMBER OF SHARES (in ‘000) 1,491,779 1,497,064

BASIC AND DILUTED EARNINGS PER SHARE (FILS) 0.2 4.8

The attached notes 1 to 31 form part of these consolidated financial statements.

AL SALAM BANK - BAHRAIN 55

 Consolidated Statement of Cash Flows
Year ended 31 December 2011

Year ended 31 Year ended 31

December 2011 December 2010
BD ’000 BD ’000
OPERATING ACTIVITIES
Net profit for the year 497 7,316
Adjustments:
Depreciation 999 1,133

Gains on investments 1,009 (7,608)

Provision for impairment 645 1,508
Exchange differences on investment in an associate transferred
to income statement 96 -
Share of profit from an associate - (15)
Operating income before changes in operating assets and liabilities 3,246 2,334
Changes in operating assets and liabilities:
Mandatory reserve with Central Bank of Bahrain (303) (1,600)
Central Bank of Bahrain Sukuk (56,395) (35,724)
Murabaha and Wakala receivables from banks with original maturities of
90 days or more 9,990 (10,888)
Corporate Sukuk 11,309 (43,579)
Murabaha financing (20,811) (28,806)
Mudaraba financing (38,397) (6,746)
Ijarah Muntahia Bittamleek (10,221) (23,004)
Musharaka financing (3,584) (2,743)
Assets under conversion 29,348 41,304
Non-trading investments, net (4,520) (20,914)
Receivables and prepayments (2,799) 14,423
Murabaha and Wakala payables to banks 3,273 11,902
Wakala from non-banks 58,407 119,130
Customers' current accounts 9,223 24,662
Liabilities under conversion 2,755 (95,284)
Other liabilities (3,005) 1,016
Net cash used in operating activities (12,484) (54,517)
INVESTING ACTIVITIES
Purchase of premises and equipment (229) (655)
Purchase of investment property - (2,196)
Net cash used in investing activities (229) (2,851)
FINANCING ACTIVITIES
Equity of investment accountholders (2,209) 9,056
Purchase of treasury stock (465) -
Dividends - (7,129)
Net cash (used in) from financing activities (2,674) 1,927
NET CHANGE IN CASH AND CASH EQUIVALENTS (15,387) (55,441)
Cash and cash equivalents at 1 January 203,116 258,557
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 187,729 203,116
Cash and cash equivalents comprise of:
Cash and other balances with Central Bank of Bahrain (Note 5) 45,410 73,945
Balances with other banks (Note 5) 7,638 2,879
Murabaha and Wakala receivables from banks with original maturities of
less than 90 days 134,681 126,292

187,729 203,116
The attached notes 1 to 31 form part of these consolidated financial statements.

56 AL SALAM BANK - BAHRAIN

 Consolidated Statement of Changes in owners’ Equity
Year ended 31 December 2011

Attributable to Shareholders of the Bank Amounts in BD ’000

Foreign
exchange Share Non- Total
Share Treasury Statutory Retained Investment Changes in translation premium Total Proposed controlling owners'
capital stock reserve earnings reserve fair value reserve reserve reserves appropriations Total interest equity

Balance as of 1 January 2011 149,706 - 8,631 4,603 33,039 172 (96) 2,573 48,922 - 198,628 3,997 202,625
Changes due to adoption of
FAS 25 (note 2.3.1) - - - 33,039 (33,039) (757) - - (757) - (757) (8) (765)
As at 1 January 2011 (restated) 149,706 - 8,631 37,642 - (585) (96) 2,573 48,165 - 197,871 3,989 201,860

Net profit for the year - - - 312 - - - - 312 - 312 185 497

Net change in fair value - - - - - (1,245) - - (1,245) - (1,245) (18) (1,263)

Transfer to income statement - - - - - - 96 - 96 - 96 - 96

Treasury shares purchased - (465) - - - - - - - - (465) - (465)

Transfer to statutory reserve - - 31 (31) - - - - - - - - -

Charitable donations - - - (100) - - - - (100) - (100) - (100)

Balance at 31 December 2011 149,706 (465) 8,662 37,823 - (1,830) - 2,573 47,228 - 196,469 4,156 200,625

Balance as of 1 January 2010 142,577 - 7,910 5,009 26,245 (381) - 2,573 41,356 14,258 198,191 3,586 201,777
Changes due to adoption of
FAS 25 (note 2.3.1) - - - 26,245 (26,245) 507 - - 507 - 507 - 507

As at 1 January 2010 (restated) 142,577 - 7,910 31,254 - 126 - 2,573 41,863 14,258 198,698 3,586 202,284

Net profit for the year - - - 7,209 - - - - 7,209 - 7,209 107 7,316
Changes on investment in
an associate - - - - - - (96) - (96) - (96) - (96)

Net change in fair value - - - - - (711) - - (711) - (711) 296 (415)

Bonus shares issued 7,129 - - - - - - - - (7,129) - - -

Transfer to statutory reserve - - 721 (721) - - - - - - - - -

Charitable donations - - - (100) - - - - (100) - (100) - (100)

Dividends paid for 2009 - - - - - - - - - (7,129) (7,129) - (7,129)

AL SALAM BANK - BAHRAIN

Balance at 31 December 2010 149,706 - 8,631 37,642 - (585) (96) 2,573 48,165 - 197,871 3,989 201,860

57
The attached notes 1 to 31 form part of these consolidated financial statements.
A sliced tree makes one observe the dark and lighter parts of the circle. These
represent the seasons of growth. The lighter parts of the rings are when the tree
was growing in the spring. The dark spots of the circles tell you where the tree was
growing in the late summer and the fall seasons. By looking at the color of the rings,
you can read what season it was created. This complex process is similar to the
bespoke mechanism of the Al Salam business model helping our clients secure and
safeguard their financial future.

58 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements
31 December 2011

1. Incorporation and Principal Activities

The parent company, Al Salam Bank-Bahrain B.S.C. (“the Bank”) was incorporated in the Kingdom of Bahrain under
the Bahrain Commercial Companies Law No. 21/2001 and was registered with Ministry of Industry and Commerce
under Commercial Registration Number 59308 on 19 January 2006. The Bank is regulated and supervised by the
Central Bank of Bahrain (“the CBB”) and has an Islamic retail banking license. The Bank is operating under Islamic
principles, and in accordance with all the relevant regulatory guidelines for Islamic banks issued by the CBB. The
Bank’s registered office is P.O. Box 18282, Building 22, Avenue 58, Block 436, Al Seef District, Kingdom of Bahrain.
The Bank and its subsidiary, BSB, (together known as “the Group”) operate through eleven retail branches in the
Kingdom of Bahrain. The Bank offers a full range of Shari’a-compliant banking services and products. The activities
of the Bank include managing profit sharing investment accounts, offering Islamic financing contracts, dealing in
Shari’a-compliant financial instruments as principal/agent, managing Shari’a-compliant financial instruments and
other activities permitted for under the CBB’s Regulated Banking Services as defined in the licensing framework.
The Bank’s Sharia Supervisory Board is entrusted to ensure the Bank’s adherence to Shari’a rules and principles in its
transactions and activities. The Bank’s ordinary shares are listed in the Bahrain Bourse B.S.C. (c) (“Bahrain Bourse”)
and Dubai Financial Market.
In 2009, the Bank acquired a 90.31% stake in Bahraini Saudi Bank B.S.C. (BSB), a publicly listed commercial bank
in the Kingdom of Bahrain. BSB operates under a retail banking license issued by the Central Bank of Bahrain. BSB
has applied for an Islamic retail banking license with the CBB and is awaiting approval. Subsequent to acquisition
by the Bank, BSB has discontinued new conventional activities and the conversion into a fully compliant Islamic
operations is in progress. On 28 December 2011 the Sharia Supervisory Board of BSB has declared BSB an Islamic
bank. Consequently, any income derived, net of related expenses, from conventional contracts will not form part of
the Group’s income statement but will be contributed to charity.
On 20 November 2011, the shareholders’ of BSB have resolved to delist BSB from Bahrain Bourse. On 22 December
2011 the shareholders resolved to merge its operations with the parent subject to regulatory approval.
These consolidated financial statements have been authorised for issue in accordance with a resolution of the Board
of Directors dated 4 March 2012.

2. Significant Accounting Policies

2.1 Basis of Preparation
The consolidated financial statements are prepared on a historical cost basis, except for investments held at fair value
through profit or loss, available-for-sale equity investments and investment properties which are held at fair value. These
consolidated financial statements incorporate all assets, liabilities and off balance sheet financial instruments held by the
Group.

These consolidated financial statements are presented in Bahraini Dinars, being the functional and presentation currency
of the Group, rounded to the nearest thousand [BD ‘000], except where otherwise indicated.

2.1.a Statement of compliance

The consolidated financial statements of the Group are prepared in accordance with the Financial Accounting Standards
(FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and in conformity with
the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law. For matters for
which no AAOIFI standards exist, the Group uses the relevant International Financial Reporting Standard.

The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding
recovery or settlement within 12 months after the consolidated statement of financial position date (current) and
more than 12 months after the consolidated statement of financial position date (non-current) is presented in Note
22.

2.1.b Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and its subsidiary. The financial
statements of the Bank’s subsidiary is prepared for the same reporting year as the Bank, using consistent accounting
policies. Non-Shari’a compliant assets and liabilities of the subsidiary are consolidated as set out in Note 9.

AL SALAM BANK - BAHRAIN 59

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.1 Basis of Preparation (Continued)
2.1.b Basis of Consolidation (Continued)
Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. Control is achieved
where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from
its activities. The results of subsidiaries acquired during the year are included in the consolidated income statement
from the date of gaining control over the subsidiary. All intra-group transactions income and expenses and unrealised
gains and losses resulting from intra-group transactions are eliminated in full.
Non-controlling interests represent the portion of profit or loss and net assets not owned, directly or indirectly, by
the Group and are presented separately in the consolidated income statement and within equity in the consolidated
statement of financial position, separately from parent shareholders’ equity.
2.2 Significant Accounting Judgements and Estimates
The preparation of the consolidated financial statements requires management to make judgements and estimates that
affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These judgements
and estimates also affect the revenues and expenses and the resultant provisions as well as fair value changes reported
in equity.
Judgements are made in the classification of fair value through profit or loss, assets held for sale or held-to-maturity
investments based on the management’s intention at acquisition of the financial asset. As fully described below,
judgements are also made in determination of the objective evidence that a financial asset is impaired.
Classification of investments
Management decides upon acquisition of an investment whether it should be classified as fair value through profit or
loss, available for sale or held-to-maturity.
Estimation uncertainty
The key assumptions concerning the future and otherkey sources of estimating uncertainty at the date of the
consolidated statement of financial position, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are discussed below:
Impairment losses on financial contracts
The Group reviews its financial contracts on a regular basis to assess whether a provision for impairment should be
recorded in the consolidated statement of income. In particular, considerable judgement by management is required
in the estimation of the amount and timing of future cash flows when determining the level of provisions required.
Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and
uncertainty, and actual results may differ resulting in future changes to such provisions.
Impairment of available-for-sale equity investments
The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged
(judgemental) decline in the fair value below its cost or where other objective evidence of impairment exists. In addition,
the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows
and the present value calculation factors for unquoted equities.
Collective impairment provisions on financial contracts
In addition to specific provisions against individually significant financial contracts, the Group also considers the
need for a collective impairment provision against financial contracts which although not specifically identified as
requiring a specific provision, have a greater risk of default than when originally granted. This collective provision
is based on any deterioration in the status, as determined by the Group, of the financial contracts since they were
granted (acquired). The amount of the provision is based on the historical loss pattern for other contracts within each
grade and is adjusted to reflect current economic changes.

60 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.2 Significant Accounting Judgements and Estimates (Continued)
Valuation of unquoted private equity and real estate investments
Valuation of above investments is normally based on one of the following:
• valuation by independent external valuers;
• recent arm’s length market transactions;
• current fair value of another instrument that is substantially the same;
• present value of expected cash flows at current rates applicable for items with similar terms and risk characteristics; or
• other valuation models.
The Group calibrates the valuation techniques periodically and tests these for validity using either prices from
observable current market transactions in the same instrument or other available observable market data.
Going concern
The Group has made an assessment of the Group’s ability to continue on 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 consolidated financial statements continue to be prepared on the going concern basis.
2.3 Accounting Policies
The significant accounting policies applied in the preparation of these consolidated financial statements, which are
consistent with those of prior year except for items disclosed in note 2.3.1.
2.3.1 Adoption of new and Amended Standards
During 2010, AAOIFI amended its conceptual framework and issued new Financial Accounting Standard (FAS
25) “Investment in sukuk, shares and similar instruments”, which is effective from 1 January 2011. The amended
conceptual framework provides the basis for the financial accounting standards issued by AAOIFI. The amended
framework introduces the concept of substance and form compared to the concept of form over substance. The
framework states that it is necessary that information, transaction and other events are accounted for and presented
in accordance with their substance and economic reality as well as the legal form.
The Group has adopted FAS 25 issued by AAOIFI which covers the recognition, measurement, presentation and
disclosure of investment in sukuk, shares and similar investments that exhibit characteristics of debt or equity instruments
made by Islamic financial institutions.
The adoption of FAS 25 had an effect on the classification and measurement of the Group’s financial assets. As
a result of the application of this new standard, the classification of the investment portfolio was revisited and
changes were made in classification to be in line with FAS 25. The corporate sukuk held by the Group have been
reclassified retrospectively from available-for-sale investments to investments at amortised cost. Accordingly, the fair
value adjustments previously recognised on these sukuk have been restated and the impact on the corporate sukuk
balance as of 1 January 2011 was a reduction of BD 765 thousand. The adoption of FAS 25, did have not any impact
on the non-trading investments held by the Group. The impact on the opening total owners’ equity as of 1 January
2011 was a reduction of BD 765 thousand (1 January 2010: increase of BD 507 thousand).
Also, the investment reserve amounting BD 33,039 thousand as of 1 January 2011 (as of 1 January 2010: BD 26,245
thousand), which was previously disclosed as a separate component in the owners’ equity, has now been transferred
to the retained earnings as this reserve is no longer required to be disclosed separately under the new FAS 25.
2.3.2 Summary of significant accounting policies
a) Financial contracts
Financial contracts consist of balances with banks and the Central Bank of Bahrain, Central Bank of Bahrain Sukuk,
Corporate Sukuk, Murabaha financing (net of deferred profit), Mudaraba, Musharaka and Ijarah Muntahia Bittamleek.
Balances relating to these contracts are stated net of provisions for impairment.
b) Corporate sukuk
These are quoted securities and classified as investments at amortised cost in accordance with FAS 25 issued by
AAOIFI.

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 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
c) Murabaha receivables
Murabaha is a contract whereby one party sells (Seller) an asset to the other party (the Purchaser) at cost plus profit
and on a deferred payment basis, after the Seller have purchased the asset based on the Purchaser’s promise to
purchase the same on such Murabaha basis. The sale price comprises the cost of the asset and an agreed profit
margin. The sale price (cost plus the profit amount) is paid by the Purchaser to the Seller on installment basis over
the agreed finance tenure. Under the Murabaha contract the Group may act either as a Seller or a Purchaser, as the
case may be.
The Group considers the promise to purchase made by the Purchaser in a Murabaha transaction in favor of the Seller
to be binding.
Murabaha receivables are stated at amortised cost, net of deferred profits, provision for impairment, if any, and
amounts settled.
d) Mudaraba financing
Mudaraba is a contract between two parties whereby one party is a fund provider (Rab Al Mal) who would provide a
certain amount of funds (Mudaraba Capital), to the other party (Mudarib). Mudarib would then invest the Mudaraba
Capital in a specific enterprise or activity deploying its experience and expertise for a specific pre-agreed share in the
resultant profit. The Rab Al Mal is not involved in the management of the Mudaraba activity. The Mudarib would bear
the loss in case of its default, negligence or violation of any of the terms and conditions of the Mudaraba contract;
otherwise the loss would be borne by the Rab Al Mal. Under the Mudaraba contract the Group may act either as
Mudarib or as Rab Al Mal, as the case may be.
Mudaraba investments are recognized at fair value of the Mudaraba assets net of provision for impairment, if any, and
Mudaraba capital amounts settled. If the valuation of the Mudaraba assets results in difference between fair value and
book value, such difference is recognized as profit or loss to the Group.
e) Ijarah Muntahia Bittamleek
Ijara (Muntahia Bittamleek) is an agreement whereby the Group (as lessor) leases an asset to the customer (as lessee)
(after purchasing/acquiring the specified asset, either from a third party seller or from the customer itself, according to the
customer’s request and promise to lease) against certain rental payments for a specific lease term/periods, payable on fixed
or variable rental basis.
The Ijara agreement specifies the leased asset, duration of the lease term, as well as, the basis for rental calculation, the
timing of rental payment and responsibilities of both parties during the lease term. The customer (lessee) provides the
Group (lessor) with an undertaking to renew the lease periods and pay the relevant rental payment amounts as per the
agreed schedule and applicable formula throughout the lease term.
The Group (lessor) retains the ownership of the assets throughout the lease term. At the end of the lease term, upon
fulfillment of all the obligations by the customer (lessee) under the Ijara agreement, the Group (lessor) will sell the
leased asset to the customer (lessee) for a nominal value based on sale undertaking given by the Group (lessor).
Leased assets are usually residential properties, commercial real estate or aircrafts.
Depreciation is provided on a systematic basis on all Ijarah Muntahia Bittamleek assets other than land (which is deemed
to have an indefinite life), at rates calculated to write off the cost of each asset over the shorter of either the lease term or
economic life of the asset.
f) Musharaka
Musharaka is used to provide venture capital or project finance. The Group and customer contribute towards the
capital of the Musharaka. Usually a special purpose company or a partnership is established as a vehicle to undertake
the Musharaka. Profits are shared according to a pre-agreed profit distribution ratio but losses are borne by the
partners according to the capital contributions of each partner. Capital contributions may be in cash or in kind, as
valued at the time of entering into the Musharaka.
Musharaka is stated at amortised cost, less any impairment.

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 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
g) Assets and liabilities under conversion
These represent assets and liabilities of BSB which are under conversion to Shari’a compliant products. These are
initially measured at fair value at the date of acquisition and the subsequent measurement is as follows:
Assets under conversion:
Due from Banks and Loans and advances to customers:
At amortised cost less any amounts written off and provision for impairment, if any.
Investments:
These are classified as available-for-sale investments and are fair valued based on criteria set out in Note 2.3 h. Any
changes in fair values subsequent to acquisition date are recognized in equity.
Liabilities under conversion:
These are remeasured at amortised cost.
h) Non-trading investments
These are classified as held-to-maturity, available-for-sale or fair value through profit or loss.
All investments are initially recognised at cost, being the fair value of the consideration given including acquisition
costs associated with the investment. Acquisition cost relating to investments designated as fair value through profit
or loss is charged to consolidated income statement.
Following the initial recognition of investments, the subsequent period-end reporting values are determined as
follows:
Investments held-to-maturity
Investments which have fixed or determinable payments and fixed maturity which are intended to be held-to-maturity,
are carried at amortised cost, less provision for impairment in value.
Investments available-for-sale
After initial recognition, equity investments which are classified as investments at fair value through equity are
disclosed as “available-for-sale investments”. These are normally remeasured at fair value, unless the fair value cannot
be reliably determined, in which case they are measured at cost less impairment. Fair value changes are reported
in equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or
impairment the cumulative gain or loss previously reported as “changes in fair value” within equity, is included in
the consolidated income statement.
Investments carried at fair value through profit or loss
Investments in this category are designated as such on initial recognition if these investments are evaluated on a fair
value basis in accordance with the Group’s risk management policy and its investment strategy. These include all
private equity investments including those in joint ventures and associates which are not strategic in nature.
Investments at fair value through profit or loss are recorded in the consolidated statement of financial position at fair
value. Changes in fair value are recorded as “Gains on investments designated at fair value through profit or loss” in
the consolidated income statement.
i) Investments in associates
The Group’s investments in its associates, that are acquired for strategic purposes, are accounted for under the equity
method of accounting. Other equity investments in associates are accounted for as fair value through profit or loss
by availing the scope exemption under FAS 24, Investments in associates. An associate is an entity over which the
Group has significant influence and which is neither a subsidiary nor a joint venture. An entity is considered as an
associate if the Group has more than 20% ownership of the entity or the Group has significant influence through any
other mode.
Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-acquisition
changes in the Group’s share of net assets of the associate. Losses in excess of the cost of the investment in an

AL SALAM BANK - BAHRAIN 63

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
associate are recognised when the Group has incurred obligations on its behalf. Goodwill relating to an associate is
included in the carrying amount of the investment and is not amortised. The consolidated income statement reflects
the Group’s share of results of operations of the associate. Where there has been a change recognised directly in
the equity of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the
consolidated statement of changes in equity.
The reporting dates of the associate and the Group are identical and the associates accounting policy conform to
those used by the Group for like transactions and events in similar transactions.
After application of the equity method, the Group determines whether it is necessary to recognise an additional
impairment loss on its investment in associates. The Group determines at each reporting date whether there is any
objective evidence that the investment in associates are impaired. If this is the case, the Group calculates the amount
of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises
the amount in the consolidated income statement.
Profit and losses resulting from transactions between the Group and the associates are eliminated to the extent of the
interest in associates.
Foreign exchange translation gains/losses arising out of the above investment in the associate are included in the
equity.
j) Investment properties
Investment properties are those held to earn rentals and/or for capital appreciation. These are initially recorded at
cost, including acquisition charges associated with the property.
Subsequent to initial recognition, all investment properties are remeasured at fair value and changes in fair value
are recognised in the consolidated statement of income as gain or loss in investment properties. The fair value of
the investment properties is determined either based on valuations made by independent valuers or using internal
models with consistent assumptions.
k) Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and any impairment in value. Depreciation
is provided on a straight-line basis over the estimated useful lives of all premises and equipment, other than freehold
land and capital work-in-progress.
- Computer equipment 3 to 5 years
- Furniture and office
equipment 3 to 5 years
- Motor vehicle 5 years
- Leasehold Improvements Over the lease period
l) Subsidiaries acquired with a view to sell
A subsidiary acquired with a view to subsequent disposal within twelve months is classified as “held-for-sale” when
the sale is highly probable. Related assets and liabilities of the subsidiary are shown separately on the consolidated
statement of financial position as “Assets held-for-sale” and “Liabilities relating to assets held-for-sale”. Assets that
are classified as held-for-sale are measured at the lower of carrying amount and fair value less costs to sell. Any
resulting impairment loss reduces the carrying amount of the assets. Assets that are classified as held-for-sale are not
depreciated.
m) Business combinations and goodwill
Business combinations are accounted for using the purchase method of accounting. This involves recognising
identifiable assets (including previously unrecognised intangible assets) and liabilities (including contingent liabilities
and excluding future restructuring) of the acquired business at fair value. Any excess of the cost of acquisition over
the fair values of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than
the fair values of the identifiable net assets acquired, the discount on acquisition (negative goodwill) is recognised
directly in the consolidated income statement in the year of acquisition.
Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business
combination over the Bank’s interest in the net fair value of the identifiable assets, liabilities

64 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
and contingent liabilities acquired. Gain on business combination, being the excess of the Bank’s interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities acquired over the cost of business acquisition
is recognised as gain in the consolidated statement of income.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is
reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying
value may be impaired.
n) Impairment and uncollectability of financial assets
An assessment is made at each reporting date to determine whether there is objective evidence that a specific
financial asset may be impaired. If such evidence exists, any impairment loss, is recognised in the consolidated
income statement.
Impairment is determined as follows:
(i) for assets carried at amortised cost, impairment is based on estimated cash flows based on the original effective profit rate;
(ii) for assets carried at fair value, impairment is the difference between cost and fair value; and
(iii) for assets carried at cost, impairment is based on present value of anticipated cash flows based on the current
market rate of return for a similar financial asset.
For available-for-sale equity investments reversal of impairment losses are recorded as increases in cumulative
changes in fair value through equity.
In addition, a collective provision is made to cover impairment for specific assets where there is a measurable
decrease in estimated future cash flows.
o) Offsetting
Financial assets and financial liabilities can only be offset with the net amount being reported in the consolidated
statement of financial position when there is a religious or legally enforceable right to set off the recognised
amounts and the Group intends to either settle on a net basis, or intends to realise the asset and settle the liability
simultaneously.
p) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) arising from a past
event and the costs to settle the obligation are both probable and able to be reliably measured.
q) Employees’ end of service benefits
The Group provides end of service benefits to its expatriate employees. Entitlement to these benefits is based
upon the employees’ final salary and length of service, subject to completion of a minimum service period. The
expected costs of these benefits are accrued over the period of employment.
For Bahraini employees, the Group makes contributions to Social Insurance Organisation calculated as a
percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are
expensed when due.
r) Revenue recognition
Murabaha receivables
As the income is quantifiable and contractually determined at the commencement of the contract, income is
recognized on a straight-line basis over the deferred period. Recognition of income is suspended when the
Group believes that the recovery of these amounts may be doubtful or normally when the payments of Murabaha
installments are overdue by 90 days, whichever is earlier.
Corporate sukuk
Income on Corporate sukuk is recognized on a time-proportionate basis based on underlying rate of return of
the respective type of sukuk. Recognition of income is suspended when the Group believes that the recovery of
these amounts may be doubtful or normally when the payments are overdue by 90 days, whichever is earlier.
Mudaraba
Income on Mudaraba transactions are recognised when the right to receive payment is established or these
are declared by the Mudarib, whichever is earlier. In case of losses in mudaraba, the Group’s share of loss is
recognized to the extent that such losses are being deducted from its share of the mudaraba capital.

AL SALAM BANK - BAHRAIN 65

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
Dividends
Dividend income is recognised when the Group’s right to receive the payment is established.
Ijarah Muntahia Bittamleek
Muntahia Bittamleek income is recognised on a time-proportionate basis over the lease term. Income related
to non-performing Ijarah Muntahia Bittamleek is suspended. Accrual of income is suspended when the Group
believes that the recovery of these amounts may be doubtful or normally when the rental payments are overdue
by 90 days, whichever is earlier.
Musharaka
Income on Musharaka is recognized when the right to receive payment is established or on distributions. In case
of losses in musharaka, the Group’s share of loss is recognized to the extent that such losses are being deducted
from its share of the musharaka capital.
Fees and commission income
The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee
income can be divided into the following main categories:
Fee income on financing transactions: Fee earned on financing transactions including up-front fees and early
settlement fees are recognised when earned. To the extent the fees are deemed yield enhancement they are
recognised over the period of the financing contracts.
Fee income from transaction services: Fee arising from corporate finance, corporate advisory, arranging the sale of
assets and wealth management are recognised when earned or on a time proportionate basis when the fee is linked
to time.
Fair value of financial assets
For investments that are traded in organised financial markets, fair value is determined by reference to the prevailing
market bid price on the reporting date.
For investments where there is no quoted market price, a reasonable estimate of fair value is determined by reference
to valuation by independent external valuers or based on recent arm’s length market transactions. Alternatively, the
estimate would also be based on 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 by calculating
the present value of future cash flows at current profit rates for contracts with similar terms and risk characteristics.
For investments having fixed or determinable payments, fair value is based on the net present value of estimated
future cash flows determined by the Group using current profit rates for investments with similar terms and risk
characteristics.
s) Foreign currencies
Foreign currency transactions are recorded at rates of exchange prevailing at the dates of the transactions. Monetary
assets and liabilities in foreign currencies at the consolidated statement of financial position date are retranslated
at market rates of exchange prevailing at that date. Gains and losses arising on translation are recognised in the
consolidated income statement. Non-monetary assets that are measured in terms of historical cost in foreign currencies
are recorded at rates of exchange prevailing at the value dates of the transactions. Translation gains or losses on non-
monetary items classified as “available-for-sale” and investment in associates are included in consolidated statement of
changes in equity until the related assets are sold or derecognised at which time they are recognised in the consolidated
income statement. Translation gains on non-monetary assets classified as “fair value through profit or loss” are directly
recognised in the consolidated income statement.
t) Trade and settlement date accounting
Purchases and sales of financial assets and liabilities are recognised on the trade date, i.e. the date that the Group con-
tracts to purchase or sell the asset or liability.
u) Derecognition of financial assets
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or
where the Group has transferred substantially all risk and rewards of ownership.

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 Notes to the Consolidated Financial Statements (continued)
31 December 2011

2 Significant Accounting Policies (Continued)

2.3.2 Summary of significant accounting policies (Continued)
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the
original carrying amount of the asset and the maximum amount of consideration that the Group could be required
to pay.
v) Derecognition of financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where
an existing financial liability is replaced by another from the same source on substantially different terms, or the terms
of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of
the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is
recognised in the consolidated statement of income.
w) Fiduciary assets
Assets held in a fiduciary capacity are not treated as assets of the Group and are accordingly not included in the
consolidated statement of financial position.
x) Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the
Bank’s shareholders. Dividends for the year that are approved after the reporting date are included in the equity and
are disclosed as an event after the balance sheet date.
y) Equity of investment account holders
All equity of investment accountholders are carried at cost plus profit and related reserves less amounts settled.
Share of income for equity of investment accountholder is calculated based on the income generated by the assets
funded by such investment accounts after deducting Mudarib share (as Mudarib and Rabalmal). 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 investment
income less shareholders’ income. Portion of the income generated from equity of investment accountholders is
transferred to profit equalization reserve, mudarib share and investment risk reserve and the remaining is distributed
to the equity of investment accountholders.
z) Zakah
In accordance with the revised Articles of Association of the Bank, the responsibility to pay Zakah is on the
shareholders of the Bank.
aa) Cash and cash equivalents
Cash and cash equivalents comprise of cash and balances with Central Bank of Bahrain and Murabaha receivables
from banks with original maturities of less than 90 days.
ab) Wakala payables
The Group accepts deposits from banks and customers under Wakala arrangement under which a return may be
payable to customers. There is no restriction on the Group for the use of funds received under wakala agreement.
ac) Jointly financed and self financed
Investments, financing and receivables that are jointly funded by the Group and the equity of investment accountholders
are classified under the caption “jointly financed” in the consolidated financial statements. Investments, financing
and receivables that are funded solely by the Group are classified under “self financed”.
The equity of investment accountholders is used to finance the Murabaha and Wakala receivables from banks and
non-banks.
ad) Investment risk reserve
This is the amount appropriated by the Group out of the income of investment account holders, after allocating the
mudarib share, in order to compensate future losses for investment account holders.
ae) Earnings prohibited by Shari’a
The Group is committed to contributing to charity any income generated from non-Islamic sources. Accordingly, any
earning prohibited by Shari’a is credited to charity funds to be used for social welfare purposes.

AL SALAM BANK - BAHRAIN 67

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

3 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

As at 31 December 2011, financial instruments have been classified as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD ’000 BD ’000 BD ’000 BD ’000
ASSETS
Cash and balances with Central Bank of Bahrain - - 72,318 72,318
Central Bank of Bahrain Sukuk - - 125,027 125,027
Murabaha and Wakala receivables from banks - - 135,698 135,698
Corporate Sukuk - - 49,650 49,650
Murabaha and Mudaraba financing - - 193,089 193,089
Ijarah Muntahia Bittamleek - - 66,477 66,477
Musharaka financing - - 11,711 11,711
Assets under conversion - 8,122 19,628 27,750
Non-trading investments 203,937 19,383 - 223,320
Receivables - - 14,856 14,856
203,937 27,505 688,454 919,896

Financial
liabilities at fair Financial
value through Available for liabilities at
profit or loss sale amortised cost Total
BD ’000 BD ’000 BD ’000 BD ’000
LIABILITIES AND EQUITY OF INVESTMENT
ACCOUNTHOLDERS
Murabaha and Wakala payables to banks - - 104,573 104,573
Wakala from non-banks - - 515,147 515,147
Customers' current accounts - - 66,585 66,585
Liabilities under conversion - - 7,633 7,633
Other financial liabilities - - 10,371 10,371
Equity of investment accountholders - - 16,256 16,256
- - 720,565 720,565

68 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

3 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS (continued)

As at 31 December 2010, financial instruments were classified as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD ’000 BD ’000 BD ’000 BD ’000
ASSETS
Cash and balances with Central Bank of Bahrain - - 95,791 95,791
Central Bank of Bahrain Sukuk - - 68,632 68,632
Murabaha receivables from banks - - 137,299 137,299
Corporate Sukuk - - 60,959 60,959
Murabaha and Mudaraba financing - - 133,881 133,881
Ijarah Muntahia Bittamleek - - 56,756 56,756
Musharaka financing - - 8,127 8,127
Assets under conversion - 8,803 48,629 57,432
Non-trading investments 199,335 13,097 - 212,432
Receivables - - 11,763 11,763
199,335 21,900 621,837 843,072

Financial
liabilities at fair Financial
value through Available for liabilities at
profit or loss sale amortised cost Total
BD ’000 BD ’000 BD ’000 BD ’000
LIABILITIES AND EQUITY OF INVESTMENT
ACCOUNTHOLDERS
Murabaha and Wakala payables to banks - - 101,300 101,300
Wakala from non-banks - - 456,447 456,447
Customers' current accounts - - 57,362 57,362
Liabilities under conversion - - 5,171 5,171
Other financial liabilities - - 12,697 12,697
Equity of investment accountholders - - 18,465 18,465
- - 651,442 651,442

4 CASH AND BALANCES WITH BANKS AND CENTRAL BANK OF BAHRAIN

2011 2010
BD ’000 BD ’000
Mandatory reserve with Central Bank of Bahrain 19,270 18,967
Cash and other balances with Central Bank of Bahrain 45,410 73,945
Balances with other banks 7,638 2,879
72,318 95,791

AL SALAM BANK - BAHRAIN 69

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

5 MURABAHA AND WAKALA RECEIVABLES FROM BANKS

2011 2010
BD ’000 BD ’000
GCC 133,813 137,299
Europe 1,885 -
135,698 137,299

This includes certain Wakala receivables for investment in commodity Murabaha. In addition to above amounts,
deferred profits on Murabaha receivables from banks amounted to BD 15,000 (2010: BD 107,000).

This consists of BD 10,759 thousands (2010: BD 18,465 thousands) of jointly financed assets and BD 124,939
thousands (2010: BD 188,834 thousands) of self financed assets.

6 MURABAHA FINANCING

2011 2010
BD ’000 BD ’000
Murabaha financing - gross 137,036 116,080
Less: Provision for impairment (1,653) (1,508)
Murabaha financing - net 135,383 114,572

Murabaha financing are shown net of deferred profits of BD 23,957,000 (2010: BD 23,480,000).

This consists of BD 5,497 thousands (2010: nil) of jointly financed assets and BD 187,592 thousands (2010:
BD 133,881 thousands) of self financed assets.

7 MOVEMENTS IN PROVISIONS

2011 2010
BD ’000 BD ’000
Balance at beginning of the year 1,508 -
Provisions made during the year 645 1,508
Balance at end of the year 2,153 1,508

70 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

8 IJARAH MUNTAHIA BITTAMLEEK

This represents net investments in assets leased for periods which either approximate or cover major parts of the
estimated useful lives of such assets. The lease documentations provide that the lessor undertakes to transfer the
leased assets to the lessee at the end of the lease term upon the lessee fulfilling all its obligations under the lease
agreement.

2011 2010
BD ’000 BD ’000
Movements in Ijarah Muntahia Bittamleek assets are as follows:
At 1 January 56,756 33,246
Additions during the year 16,370 27,252
Ijarah assets depreciation (6,149) (3,742)
Provision (500) -
At 31 December 66,477 56,756

2011 2010
BD ’000 BD ’000
The future minimum lease receivable in aggregate are as follows:
Due within one year 18,162 18,860
Due in one to five years 29,096 23,340
Due after five years 19,219 14,556
66,477 56,756

2011 2010
BD ’000 BD ’000
Ijarah Muntahia Bittamleek is divided into the following asset classes:
Air crafts 2,735 3,114
Machinery 3,137 3,555
Land and buildings 60,605 50,087
66,477 56,756

The accumulated depreciation on Ijarah Muntahia Bittamleek assets amounted to BD 6,008,000 (2010:BD 4,402,000).

9 ASSETS AND LIABILITIES UNDER CONVERSION

These represent interest bearing assets and liabilities of BSB, a majority owned subsidiary of the Bank. At the
consolidated statement of financial position date, the conversion of the subsidiary into a fully Islamic compliant
operations is in progress, accordingly these assets and liabilities have been reported as separate line items on the face
of the consolidated statement of financial position. The details of these assets and liabilities under conversion are as
follows:

AL SALAM BANK - BAHRAIN 71

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

9 ASSETS AND LIABILITIES UNDER CONVERSION ( Continued)

2011 2010
BD ’000 BD ’000
Assets
Due from banks and financial institutions - 757
Loans and advances to customers 19,628 47,872
Non-trading investments 8,122 8,803
27,750 57,432

Liabilities 7,633 5,171

Due to banks and financial institutions 7,633 5,171

Loans and advances to customers given above, are stated net of write down of BD 3,983,000 made by the Group
against assets held by the Subsidiary at the time of acquisition. This write down comprise of BD 1,508,000 (2010:BD
2,133,000) of specific adjustments against identified facilities and a general write down of BD 2,475,000 (2010:
BD 1,850,000) as fair value adjustments as required by IFRS 3, Business Combinations. The Subsidiary carries these
assets at amortized cost, less impairment, as per its accounting policy for Loans and Receivables Originated by an
enterprise. Included in the non-trading investments are certain investments against which the Group has taken a fair
value write down amounting to BD 330,000 (2010: BD 330,000).

Income from financing contracts includes BD 1,727 thousands (2010: BD 4,963 thousands) arising from assets under
conversion. Profit on Wakala from non-banks includes BD 18 thousands (2010: BD 1,557 thousands) arising from
liabilities under conversion.

In addition to the above assets under conversion, the subsidiary has a conventional deposit of BD 16,088 thousands
(2010: BD 14,655 thousands) with the Central Bank of Bahrain.

10 NON-TRADING INVESTMENTS

Fair value of available-for-sale financial assets is dervied from quoted market prices in active markets, if available.

Fair value of unquoted available-for-sale financials assets is estimated using appropriate valuation techniques.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial insturments by
valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs that have a significant effect on the recorded
fair value are observable, either directly or indirectly;

Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not
based on observable market data.

72 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

10 NON-TRADING INVESTMENTS (continued)

The following table shows an analysis of the financial instruments carried at fair value in the consolidated statement
of financial position:

31 December 2011 Level 1 Level 2 Level 3 Total

BD ’000 BD ’000 BD ’000 BD ’000
Financial assets at fair value through profit or
loss 4,735 460 198,742 203,937
Available-for-sale financial assets 14,105 - 5,278 19,383
18,840 460 204,020 223,320

During the reporting period ended 31 December 2011 and 2010, there were no transfers between Level 1 and
Level 2 fair value measurements.

31 December 2010 Level 1 Level 2 Level 3 Total

BD ’000 BD ’000 BD ’000 BD ’000
Financial assets at fair value through
profit or loss 9,093 482 189,759 199,334
Available-for-sale financial assets 13,098 - - 13,098
22,191 482 189,759 212,432

The fair values of investments in Sukuk, compared to carrying amounts are as follows:

2011 2010
BD ’000 BD ’000
Carrying value 174,677 129,590
Fair value 175,417 130,355

11 INVESTMENT IN AN ASSOCIATE

The Group has investment in Al Salam Bank Algeria (ASBA), an unlisted bank incorporated in Algeria. This was
reported as an Investment in Associate till 2010. Subsequent to dilution of ownership, the Group does not have
significant influence. Accordingly, this investment is now reported as part of the Non-trading investments in the
consolidated statement of financial position.

AL SALAM BANK - BAHRAIN 73

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

12 RECEIVABLES AND PREPAYMENTS

2011 2010
BD ’000 BD ’000
Profit receivable on Murabaha and Mudaraba 1,590 1,807
Rental receivable on Ijarah Muntahia Bittamleek assets 479 683
Profit receivable on Sukuk 1,359 650
Prepayments 422 716
Other receivables 11,428 8,623
15,278 12,479
Other receivables include BD 4,060 thousands (2010: BD 1,623 thousands) relating to sale of investments.

13 OTHER LIABILITIES

2011 2010
BD ’000 BD ’000
Profit payable 4,325 4,626
Accounts payable and accruals 5,379 7,029
Dividends payable 2,438 3,440
End of service benefits 670 669
Charity payable 276 229
13,088 15,993

Charity payable includes BD 7,000 (2010: BD 8,000) of Shari’a prohibited income allocated for charitable purposes.

14 EQUITY OF INVESTMENT ACCOUNTHOLDERS

Equity of investment account holders funds is commingled with the Group’s funds and used to fund / invest in
Islamic modes of finance and no priority is granted to any party for the purpose of investments and distribution of
profits. According to the terms of acceptance of the unrestricted investment accounts, 100% of the funds are invested
taking into consideration the relevant weightage, if any. The Mudarib’s share of profit ranges between 40% and 50%.
Operating expenses are charged to shareholders’ funds and not included in the calculation.

The balances consists savings accounts of BD 7,829,000 (2010: BD 6,537,000) and call accounts of BD 8,427,000
(2010: BD 11,928,000).

The return on joint invested assets and distribution to unrestricted investment account holders were as follows:

2011 2010
BD ’000 BD ’000
Gross return from commingled assets 278 393
Group's share as Mudarib (125) (177)
Distributions to unrestricted investment account holders 153 216
The average profit rate for the holders is 1.00% (2010: 1.00%)

74 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

15 OWNERS’ EQUITY

2011 2010
BD ’000 BD ’000
15.1 Share capital
Authorised:
2,000,000,000 ordinary shares of BD 0.100 each 200,000 200,000
Issued and fully paid at BD 0.100 per share:
Balance at beginning - 1,497,063,825 (2010: 1,425,775,075) shares 149,706 142,577
Issued during the year - nil (2010: 71,288,750 ) shares - 7,129
149,706 149,706

Pursuant to a shareholders’ resolution, during the year 2010, the Bank issued one bonus share for every twenty
shares held. This amounted to 5% of the paid up capital resulting in an utilization of BD 7,129,000 from the retained
earnings to this effect.

15.2 Statutory reserve

As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net profit
for the year has been transferred to the statutory reserve. The Bank may resolve to discontinue such annual transfers
when the reserve totals 50% of the paid up share capital of the Bank. The reserve is not distributable except in such
circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Central
Bank of Bahrain.

15.3 Investment reserve

The reserve represents unrealised gains and losses from revaluation of investments and investment properties carried
at fair value though profit or loss, and is not available for distribution under the Bank’s policies until transferred back
to retained earnings upon disposal of the assets and realisation of the gains. As a result of adoption of FAS 25, this
reserve is no longer required to be disclosed separately.

16 INCOME FROM FINANCING CONTRACTS

2011 2010
BD ’000 BD ’000
Income from Murabaha and Wakala receivables from banks 585 1,331
Income from Murabaha and Mudaraba financing 12,336 13,747
Income from Musharaka 773 673
Income from Sukuk investments 6,106 2,715
Income from Ijarah Muntahia Bittamleek* 10,462 6,981
30,262 25,447

* The depreciation on Ijarah Muntahia Bittamleek has been disclosed in the consolidated income statement.

AL SALAM BANK - BAHRAIN 75

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

17 FEES, COMMISSIONS AND FOREIGN EXCHANGE GAINS

2011 2010
BD ’000 BD ’000
Financing and transaction related fees and commissions 675 1,269
Fiduciary and other fees 517 876
Foreign exchange gains 1,108 839
Other income - 2,552
2,300 5,536

18 RELATED PARTY TRANSACTIONS

Related parties comprise major shareholders, directors of the Group, 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 Group. The transactions with these parties were made on commercial terms.

The significant balances with related parties at 31 December 2011 were as follows:

2011
Associates and Directors
joint and related Senior
ventures entities management Total

BD ’000 BD ’000 BD ’000 BD ’000

Assets:
Murabaha financing 35,621 778 150 36,549
Ijarah Muntahia Bittamleek - 118 140 258
Musharaka financing 2,100 - 79 2,179
Receivables and prepayments 1,333 16 7 1,356
Liabilities and Equity of Investment
accountholders:
Wakala payables to non-banks 3,289 1,090 453 4,832
Customers' current accounts 4,029 355 189 4,573
Equity of investment accountholders - 130 74 204
Commitments 3,380 - - 3,380
Contingent liabilities - - - -

The income and expenses in respect of related parties included in the consolidated financial statements are as follows:

76 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

18 RELATED PARTY TRANSACTIONS ( Continued)

2011
Associates and Directors
joint and related Senior
ventures entities management Total
BD ’000 BD ’000 BD ’000 BD ’000
Income:
Income from financing contracts 1,812 16 12 1,840
Expenses:
Profit on Wakala payables to non-banks 34 35 52 121
Share of profits on equity of investment
account holders 1 1 1 3
The significant balances with related parties at 31 December 2010 were as follows:
2010
Associates and Directors
joint and related Senior
ventures entities management Total

BD ’000 BD ’000 BD ’000 BD ’000

Assets:
Murabaha financing 21,653 54 37 21,744
Ijarah Muntahia Bittamleek 15,068 3,114 175 18,357
Musharaka financing 7,830 - 89 7,919
Assets under conversion - - 21 21
Receivables and prepayments 3,260 8 6 3,274
Liabilities and Equity of Investment
accountholders:
Wakala from non-banks 3,451 1,297 125 4,873
Customers' current accounts 7,428 161 333 7,922
Equity of investment accountholders 35 91 1,292 1,418
Commitments 4,310 - - 4,310
Contingent liabilities 1,549 63 - 1,612
The income and expenses in respect of related parties included in the consolidated financial statements are as
follows:
2010
Associates and Directors
joint and related Senior
ventures entities management Total

BD ’000 BD ’000 BD ’000 BD ’000

Income:
Income from financing contracts 2,945 150 17 3,112
Expenses:
Profit paid on Wakala from non-banks 118 54 43 215
Share of profits on equity of investment
account holders 3 1 1 5
Compensation of key management personnel, consisting solely of short-term benefits, for the year was BD 1,438
thousands (2010: BD 1,695 thousands).

AL SALAM BANK - BAHRAIN 77

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

19 CONTINGENT LIABILITIES AND COMMITMENTS

The Group has the following commitments:

2011 2010
BD ’000 BD ’000
Contingent liabilities on behalf of customers
Guarantees 5,270 6,773
Letters of credit 1,301 1,645
Acceptances 406 432
6,977 8,850
Irrevocable Unutilised commitments
Unutilised financing commitments 25,591 27,970
Unutilised non-funded commitments 8,283 7,583
Unutilised capital commitments 1,398 1,502
35,272 37,055
42,249 45,905

Letters of credit, guarantees (including standby letters of credit) commit the Group to make payments on behalf of
customers contingent upon their failure to perform under the terms of the contract.

Commitments generally have fixed expiration dates, or other termination clauses. Since commitment may expire
without being utilized, the total contract amounts do not necessarily represent future cash requirements.

Operating lease commitment - Group as lessee

The Group has entered into a five-year operating lease for its premises. Future minimal rentals payable under the
non-cancellable lease are as follows:

2010 2009
BD ’000 BD ’000
Within 1 year 646 429
After one year but not more than five years 1,133 85
1,779 514

78 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT

20.1 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. The Group is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into
trading and non-trading risks. It is also subject to early settlement risk and operational risks.

The independent risk control process does not include business risks such as changes in the environment, technology
and industry. They are monitored through the Group’s strategic planning process.

Risk management structure

The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate
independent bodies responsible for managing and monitoring risks.

Board of Directors

The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies
and principles.

Executive Committee

The Executive Committee has the responsibility to monitor the overall risk process within the Group.
Shari’a Supervisory Board

The Group’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the Group’s adherence to Shari’a
rules and principles in its transactions and activities.

Credit/ Risk Committee

Credit/ Risk committee recommends the risk policy and framework to the Board. Its primary role is selection
and implementation of risk management systems, portfolio monitoring, stress testing, risk reporting to the Board,
Board Committees, Regulators and Executive management. In addition, individual credit transaction approval and
monitoring is an integral part of the responsibilities of Credit/Risk Committee.

Asset and Liability Committee

The Asset and Liability Committee establishes policy and objectives for the asset and liability management of the
Group’s financial position in terms of structure, distribution, risk and return and its impact on profitability. It also
monitors the cash flow, tenor and cost/yield profiles of assets and liabilities and evaluates the Group’s financial
position both from profit rate sensitivity and liquidity points of view, making corrective adjustments based upon
perceived trends and market conditions, monitoring liquidity, monitoring foreign exchange exposures and positions.

Board Audit Committee

The Audit Committee is appointed by the Board of Directors who are non-executive directors of the Bank. The Board
Audit Committee assists the Board in carrying out its responsibilities with respect to assessing the quality and integrity
of financial reporting, the audit thereof, the soundness of the internal controls of the Group, the measurement system
of risk assessment and relating these to the Group’s capital, and the methods for monitoring compliance with laws,
regulations and supervisory and internal policies.

AL SALAM BANK - BAHRAIN 79

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT (continued)

20.1 Introduction (continued)
Internal Audit
Risk management processes throughout the Group are audited by the internal audit function, that examines both the
adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses the results
of all assessments with management, and reports its findings and recommendations to the Board Audit Committee.
Risk measurement and reporting systems
The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal
circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The
models make use of probabilities derived from historical experience, adjusted to reflect the economic environment.
The Group also runs worse case scenarios that would arise in the event that extreme events which are unlikely to
occur do, in fact, occur.
Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect
the business strategy and market environment of the Group as well as the level of risk that the Group is willing to
accept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall
risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify
early risks. This information is presented and explained to the Board of Directors, the Credit / Risk Committee, and
the head of each business division. The report includes aggregate credit exposure, credit metric forecasts, hold limit
exceptions, liquidity ratios and risk profile changes. On a monthly basis detailed reporting of industry, customer and
geographic risks takes place. Senior management assesses the appropriateness of the allowance for credit losses on
a quarterly basis. The Board of Directors receives a comprehensive risk report once a quarter which is designed to
provide all the necessary information to assess and conclude on the risks of the Group.
For all levels throughout the Group, specifically tailored risk reports are prepared and distributed in order to ensure
that all business divisions have access to extensive, necessary and up-to-date information. A daily briefing is given to
the Chief Financial Officer and all other relevant members of the Group on the utilisation of market limits, proprietary
investments and liquidity, plus any other risk developments.
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in
the same geographic region, or have similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate
the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical
location.
In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines
to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed
accordingly.
20.2 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. The Group attempts to control credit risk by monitoring credit exposures, setting limits for
transactions with counterparties, and continually assessing the creditworthiness of counterparties.
In addition to monitoring credit limits, the Group manages the credit exposures by entering into collateral arrangements
with counterparties in appropriate circumstances and by limiting the duration of the exposure.
Maximum exposure to credit risk without taking account of any collateral and other credit enhancements
The table below shows the maximum exposure (excluding sovereign exposure) to credit risk for the components of
the consolidated statement of financial position. The maximum exposure is shown net of provision, before the effect
of mitigation through the use of master netting and collateral agreements.

80 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT (continued)

20.2 Credit risk (continued)

Gross Gross
maximum maximum
exposure exposure
2011 2010

BD ’000 BD ’000
ASSETS
Balances with other banks 7,638 2,879
Murabaha receivables from banks 135,698 137,299
Corporate Sukuk 49,650 61,724
Murabaha and Mudaraba financing 148,243 100,642
Ijarah Muntahia Bittamleek 63,277 65,777
Musharaka financing 11,711 8,127
Assets under conversion 8,708 48,629
Receivables 14,017 9,399
Total 438,942 434,476
Contingent liabilities and commitments 34,848 33,652
Total credit risk exposure 473,790 468,128

Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk
exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

Type of credit risk

Various contracts entered into by the Group comprise Murabaha financing, Mudaraba financing, Musharaka
financing, Sukuk, Musharaka and Ijarah Muntahia Bittamleek contracts. Murabaha financing contracts cover land,
buildings, commodities, motor vehicles and others. Mudaraba financing consist of financing transactions entered
through other Islamic banks and financial institutions. The various financial instruments are:

Murabaha financing

The Bank arranges Murabaha transactions by buying an asset (which represents the object of the Murabaha) and then
selling this asset to customers (beneficiary) after adding a margin of profit over the cost. The sale price (cost plus profit
margin) is paid in installments over the agreed period.

Ijarah Muntahia Bittamleek

The legal title of the leased asset under Ijarah Muntahia Bittamleek passes to the lessee at the end of the Ijarah term,
provided that all Ijarah installments are settled.

AL SALAM BANK - BAHRAIN 81

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT (continued)

20.2 Credit risk (continued)

a) The credit quality of balances with banks and Murabaha receivables from banks subject to credit risk is as follows:

31 December 2011
Neither past due nor impaired Past due or
individually
'A' Rated 'B' Rated Unrated impaired Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

Balances with banks 7,460 54 123 - 7,637
Murabaha and Wakala receivables from
banks 65,804 29,706 40,188 - 135,698

73,264 29,760 40,311 - 143,335

31 December 2010
Neither past due nor impaired Past due or
individually
'A' Rated 'B' Rated Unrated impaired Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

Balances with Banks 2,604 36 239 - 2,879
Murabaha and Wakala receivables from
banks 84,853 15,084 37,362 - 137,299

87,457 15,120 37,601 - 140,178

The ratings referred to in the above tables are by one or more of the 4 international rating agencies (Standards &
Poors, Moody’s, Fitch and Capital Intelligence). The unrated exposures are with various high quality Middle East
financial institutions, which are not rated by a credit rating agency. In the opinion of the management, these are
equivalent to “A” rated banks.

82 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT (continued)

20.2 Credit risk (continued)

b) The credit quality of Corporate sukuk, Murabaha and Mudaraba financing, Ijarah Muntahia Bittamleek, Musharaka
financing, Assets under conversion and financing that are subject to credit risk, based on internal credit ratings, is as
follows:

31 December 2011
Neither past due nor impaired

Substandard Past due

but not but not
Satisfactory Watch List impaired impaired Impaired Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

Corporate sukuk 49,650 - - - - 49,650
Murabaha and Mudaraba
financing 120,382 - 9,019 15,250 3,592 148,243
Ijarah Muntahia Bittamleek 45,081 6,499 3,336 7,979 382 63,277
Musharaka financing 11,492 159 - 60 - 11,711
Assets under conversion 8,708 - - - - 8,708
Receivables 13,925 48 44 - - 14,017
249,238 6,706 12,399 23,289 3,974 295,606

31 December 2011
Neither past due nor impaired
Substandard Past due
but not but not
Satisfactory Watch List impaired impaired Impaired Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

Corporate sukuk 61,724 - - - - 61,724
Murabaha and Mudaraba
financing 86,476 1,958 - 9,260 2,948 100,642
Ijarah Muntahia Bittamleek 53,408 - 195 12,174 - 65,777
Musharaka financing 8,127 - - - - 8,127
Assets under conversion 48,629 - - - - 48,629
Receivables 11,276 41 - - - 11,317
269,640 1,999 195 21,434 2,948 296,216

All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating
policy. The attributable risk ratings are assessed and updated regularly.

AL SALAM BANK - BAHRAIN 83

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

20 RISK MANAGEMENT (continued)

20.2 Credit risk (continued)

c) Past due but not impaired Murabaha and Mudaraba financing, and Ijarah Muntahia Bittamleek are analysed as
follows:
31 December 2011
31-90
0-30 days days > 90 days Total
BD ’000 BD ’000 BD ’000 BD ’000
Murabaha and Mudaraba financing 4,815 58 10,378 15,251
Ijarah Muntahia Bittamleek 1,639 149 6,190 7,978
Musharaka Financing - - 60 60
6,454 207 16,628 23,289

31 December 2010
31-90
0-30 days days > 90 days Total
BD ’000 BD ’000 BD ’000 BD ’000
Murabaha and Mudaraba financing - 7,726 1,534 9,260
Ijarah Muntahia Bittamleek - 61 12,113 12,174
- 7,787 13,647 21,434

All the past due but not impaired Murabaha and Mudaraba financing and Ijara financing are covered by collateral of
BD 27,310 thousands (2010: BD 29,933 thousands). As of 31 December 2011, the Group had BD 2,975 thousands
(2010: BD 2,475 thousands) as collective impairment provision and writedown of assets.
The maximum credit risk, without taking into account the fair value of any collateral and Shari’a-compliant netting
agreements, is limited to the amounts on the consolidated statement of financial position plus commitments to
customers disclosed in Note 19 except capital commitments.
During the year BD 30,039,000 (2010: BD 22,148,000) of financing facilities were renegotiated. All renegotiated
facilities are performing and are fully secured.
At 31 December 2011, the amount of credit exposure in excess of 15% of the Group’s regulatory capital to individual
counterparties was nil (2010: nil).
The Group has pledged certain Sukuk with a financial institution having a carrying value of BD 11,502 thousands
as at 31 December 2011 (2010: nil) against which the borrowing as at 31 December 2011 amount to BD 8,465
thousands (2010: nil). These borrowings are included in Murabaha and Wakala payables to banks.
20.3 Legal risk and claims
Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments can disrupt
or otherwise negatively affect the operations of the Group. The Group has developed controls and procedures to
identify legal risks and believes that losses will be minimized.
As at 31 December 2011, legal suits amounting to BD 2,030,000 (2010: BD 1,686,000) were pending against the
Group. Based on the opinion of the Group’s legal counsel, the total estimated liability arising from these cases is not
considered to be material to the Group’s consolidated financial position as the Group also has filed counter cases
against these parties.

84 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

21 CONCENTRATIONS
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in
the same geographic region, or have similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate
the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic
location. The Group manages its credit risk exposure through diversification of financing activities to avoid undue
concentrations of risks with customers in specific locations or businesses.
The distribution of assets, liabilities and equity of investment account holders by geographic region and industry
sector was as follows:

Liabilities, Liabilities,
equity of equity of
investment investment
account Contingent account
holders and liabilities holders and
owners’ and owners’
Assets equity Commitments Assets equity Commitments
2011 2011 2011 2010 2010 2010
BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000
Geographic region
GCC 820,079 703,561 42,607 777,684 644,613 43,494
Arab World 5,282 3,774 - 7,584 3,855 64
Europe 32,563 13,257 - 12,088 3,265 -
Asia 54,459 2,429 1,421 49,907 2,737 2,861
North America 10,159 261 - 6,990 268 -
Others 1,365 - - 2,345 - -
923,907 723,282 44,028 856,598 654,738 46,419
Owners’ equity - 200,625 - - 201,860 -
923,907 923,907 44,028 856,598 856,598 46,419
Liabilities, Liabilities,
equity of equity of
investment investment
account Contingent account
holders and liabilities holders and
owners’ and owners’
Assets equity Commitments Assets equity Commitments
2011 2011 2011 2010 2010 2010

Industry sector
Trading and
manufacturing 11,008 76,298 9,828 12,158 22,726 5,436
Banks and financial
institutions 206,540 128,681 263 207,495 142,136 211
Real estate 256,175 77,670 11,190 221,884 102,717 11,732
Aviation 12,573 29 - 12,872 29 -
Individuals 53,179 336,464 1,853 49,611 232,667 2,499
Government and
public sector 258,711 71,429 9,180 228,176 86,357 24,071
Others 125,721 32,711 11,714 124,402 68,106 2,470
923,907 723,282 44,028 856,598 654,738 46,419
Owners’ Equity - 200,625 - - 201,860 -
923,907 923,907 44,028 856,598 856,598 46,419

AL SALAM BANK - BAHRAIN 85

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

22 MARKET RISK

Market risk arises from fluctuations in global yields on financial instruments and foreign exchange rates that could
have an indirect effect on the Group’s assets value and equity prices. The Board has set limits on the risk that may be
accepted. This is monitored on a regular basis by the Asset and Liability Committee of the Group.

22.1 Equity price risk

Equity price risk arises from fluctuations in equity prices. The Board has set limits on the amount and type of
investments that may be accepted. This is monitored on an ongoing basis by the Group’s Investment Committee.

The effect on income (as a result of changes in the fair values of non-trading investments held at fair value through
profit or loss and available-for-sale investments) solely due to reasonably possible changes in equity prices, is as
follows:

2011
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit net equity net profit net equity

BD ’000 BD ’000 BD ’000 BD ’000

Quoted:
GCC 318 521 (693) (146)
Arab World - 528 (528) -
Asia - 1,036 (718) (318)
Unquoted 4,436 295 (4,436) (295)

2010
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit net equity net profit net equity

BD ’000 BD ’000 BD ’000 BD ’000

Quoted:
GCC 321 667 (321) (667)
Asia - 805 - (805)
Unquoted 19,612 173 (19,612) (173)

Assets under conversion (Note 9) include quoted equities of BD 1,457 thousands (2010: BD 1,632 thousands) and
unquoted equities of BD 2,945 thousands (2010: BD 1,733 thousands). In determining the effect of price volatility on
above, equity positions included in assets under conversion have been considered.

22.2 Profit return risk

The Group has exposure to fluctuations in the profit rates on its assets and liabilities. The Group recognises income
on certain financial assets on a time-apportioned basis. The Group has set limits for profit return risk and these are
monitored on an ongoing basis by the Group’s Asset Liability Committee (ALCO).

86 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

22 MARKET RISK (continued)

22.2 Profit return risk (continued)

The Group manages exposures to the effects of various risks associated with fluctuations in the prevailing levels of
market profit rates on its financial position and cash flows.

The effect on income solely due to reasonably possible immediate and sustained changes in profit return rates,
affecting both floating rate assets and liabilities and fixed rate assets and liabilities with maturities less than one year
are as follows:

2011
Effect on Effect on
Change in rate net profit Change in rate net profit
% BD ’000 % BD ’000
US dollars 0.25 202 (0.25) (202)
Bahraini dinars 0.25 409 (0.25) (409)
Sterling pounds 0.25 27 (0.25) (27)

2011
Effect on Effect on
Change in rate net profit Change in rate net profit
% BD ’000 % BD ’000
US dollars 0.25 246 )0.25( )246(
Bahraini dinars 0.25 483 (0.25) (483)
Sterling pounds 0.25 25 (0.25) (25)

In addition to profit generating Islamic financing and investment products considered in arriving at the effect on
net profits, the assets under conversion includes BD 24,475,000 (2010: BD 52,150,000) financial assets and BD
7,633,000 (2010: BD 5,171,000) of financial liabilities which are interest bearing. The Group is in the process of
converting these into Shari’a compliant contracts. If all the interest bearing assets and liabilities were converted into
Shari’a complaint contracts on 1 January 2012, the change in profit rate by 0.25% would result in a profit or loss of
BD 42,000 (2010: BD 117,000).

22.3 Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange
rates. The Board has set limits on positions by currency. Positions are monitored on a periodic basis by the Group’s
Asset Liability Committee to ensure positions are maintained within established limits.

Substantial portion of the Group’s assets and liabilities are denominated in Bahrain dinars or US dollars. The Group
had the following significant net long positions in foreign currencies as of 31 December:

2011 2010

BD ’000 BD ’000

US dollars 48,825 24,268

Saudi riyals 43,125 48,003

AL SALAM BANK - BAHRAIN 87

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

22 MARKET RISK (continued)

22.3 Currency risk (continued)

The effect on income solely due to reasonably possible immediate and sustained changes in exchange rates is as
follows:

2011
Change in rate Effect on net profit Change inrate Effect on net profit
% BD ’000 % BD ’000
US dollars to Bahraini dinars 1 488 (1) (488)
Saudi riyals to Bahraini dinars 1 431 (1) (431)

2010
Change in rate Effect on net profit Change inrate Effect on net profit
% BD ’000 % BD ’000
US dollars to Bahraini dinars 1 243 (1) (243)
Saudi riyals to Bahraini dinars 1 480 (1) (480)

88 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

23 LIQUIDITY RISK

Liquidity risk is the risk that the Group will be unable to meet its liabilities as they fall due. Liquidity risk can be
caused by market disruptions or credit downgrades which may impact certain sources of funding. To mitigate this
risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an
adequate balance of cash, cash equivalents and readily marketable securities. Liquidity position is monitored on an
ongoing basis by the Group’s Asset Liability Committee.

The table below summarises the expected maturity profile of the Group’s assets and liabilities as at 31 December
2011 and 2010:

31 December 2011
Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

ASSETS
Cash and balances with banks and
Central Bank of Bahrain 68,218 - 4,100 - 72,318
Central Bank of Bahrain Sukuk 12,070 24,600 77,039 11,318 125,027
Murabaha and Wakala receivables from
banks 135,698 - - - 135,698
Corporate Sukuk - - 49,650 - 49,650
Murabaha and Mudaraba financing 33,175 58,707 81,932 19,275 193,089
Ijarah Muntahia Bittamleek 9,309 8,853 29,096 19,219 66,477
Musharaka financing 5,781 407 5,329 194 11,711
Assets under conversion 6,042 6,248 12,000 3,460 27,750
Non-trading investments - 14,105 201,263 7,952 223,320
Investment in an associate - - - - -
Investment properties - - - 2,500 2,500
Receivables and prepayments 14,886 392 - - 15,278
Premises and equipment - - 1,089 - 1,089
285,179 113,312 461,498 63,918 923,907
LIABILITIES AND EQUITY OF
INVESTMENT ACCOUNTHOLDERS
Murabaha and Wakala payables to
banks - 10,457 94,116 - 104,573
Wakala payables to non-banks - 284,748 230,399 - 515,147
Customers' current accounts 66,585 - - - 66,585
Liabilities under conversion 7,633 - - - 7,633
Other liabilities 10,848 2,101 139 - 13,088
Equity of investment accountholders - - 16,256 - 16,256
85,066 297,306 340,910 - 723,282

AL SALAM BANK - BAHRAIN 89

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

23 LIQUIDITY RISK (continued)

31 December 2010
Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

ASSETS
Cash and balances with banks and Central
Bank of Bahrain 76,824 - 18,967 - 95,791
Central Bank of Bahrain Sukuk 20,230 14,510 33,892 - 68,632
Murabaha and Wakala receivables from
banks 137,299 - - - 137,299
Corporate Sukuk - - 60,959 - 60,959
Murabaha and Mudaraba financing 25,016 37,985 59,607 11,273 133,881
Ijarah Muntahia Bittamleek 8,330 8,058 27,702 12,666 56,756
Musharaka financing 5,853 2,044 190 40 8,127
Assets under conversion 14,047 43,385 - - 57,432
Non-trading investments - 13,097 199,335 - 212,432
Investment in an associate - - 7,578 - 7,578
Investment properties - - - 3,373 3,373
Receivables and prepayments 11,394 1,085 - - 12,479
Premises and equipment - - 1,859 - 1,859
298,993 120,164 410,089 27,352 856,598

LIABILITIES AND EQUITY OF

INVESTMENT ACCOUNTHOLDERS

Murabaha and Wakala payables to banks - - 101,300 - 101,300

Wakala payables to non-banks - 296,807 159,640 - 456,447
Customers' current accounts 57,362 - - - 57,362
Liabilities under conversion 5,171 - - - 5,171
Other liabilities 13,411 1,838 744 - 15,993

Equity of investment accountholders - - 18,465 - 18,465

75,944 298,645 280,149 - 654,738

90 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

23 LIQUIDITY RISK (continued)

The table below summarizes the maturity profile of the Group’s financial liabilities at 31 December, 2011 and 2010
based on contractual undiscounted payment obligation:

31 December 2011
On Up to 3 months 1 to 5 Over 5
demand 3 months to 1 year years years Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

LIABILITIES, EQUITY OF INVESTMENT

ACCOUNT HOLDERS’ COMMITMENTS
AND CONTINGENT LIABILITIES
Murabaha and Wakala payables to banks - 101,120 3,453 - - 104,573
Wakala payables to non-banks - 284,748 219,476 10,923 - 515,147
Customers' current accounts 66,585 - - - - 66,585
Liabilities under conversion - 7,633 - - - 7,633
Equity of investment accountholders - 16,256 - - - 16,256
Unutilised commitments 14,576 901 5,361 3,578 9,458 33,874
Unutilised capital commitments - - - 1,398 - 1,398
Contingent liabilities 6,145 342 490 - - 6,977
Other financial liabilities - 8,783 1,449 139 - 10,371
Profit due on financing contracts - 2,071 6,864 811 - 9,746
87,306 421,854 237,093 16,849 9,458 772,560

31 December 2010
On Up to 3 months 1 to 5 Over 5
demand 3 months to 1 year years years Total

BD ’000 BD ’000 BD ’000 BD ’000 BD ’000 BD ’000

LIABILITIES, EQUITY OF INVESTMENT

ACCOUNT HOLDERS’ COMMITMENTS
AND CONTINGENT LIABILITIES
Murabaha and Wakala payables to banks - 100,810 490 - - 101,300
Wakala payables to non-banks - 296,807 140,251 19,389 - 456,447
Customers' current accounts 57,362 - - - - 57,362
Liabilities under conversion - 5,171 - - - 5,171
Equity of investment accountholders - 18,465 - - - 18,465
Unutilised commitments 12,560 2,513 1,641 5,749 13,090 35,553
Unutilised capital commitments - - - 1,502 - 1,502
Contingent liabilities 1,191 2,277 4,888 494 - 8,850
Other financial liabilities - 11,583 1,114 - - 12,697
Profit due on financing contracts - 1,743 3,442 2,288 - 7,473
71,113 439,369 151,826 29,422 13,090 704,820

AL SALAM BANK - BAHRAIN 91

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

24 SEGMENT INFORMATION

Primary segment information

For management purposes, the Group is organised into four major business segments:

principally managing Shari’a compliant profit sharing investment accounts,

and offering Shari’a compliant financing contracts and other Shari’a-compliant
Banking
products. This segment comprises corporate banking, retail banking and private
banking and wealth management.
principally handling Shari’a-compliant money market, trading and treasury
Treasury
services including short-term commodity Murabaha.

principally the Banks’ proprietary portfolio and serving clients with a range of
Investments
investment products, funds and alternative investments.

manages the undeployed capital of the bank by investing it in high quality

Capital financial instruments, incurs all expenses in managing such investments and
accounts for the capital governance related expenses.

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 2011
Banking Treasury Investments Capital Total
BD ’000 BD ’000 BD ’000 BD ’000 BD ’000
Operating income 7,881 4,581 (2,421) 2,699 12,740
Segment result 2,926 3,638 (4,357) (1,710) 497
Other information
Segment assets 228,470 322,645 294,722 78,070 923,907

Segment liabilities, and equity 585,102 118,818 8,494 211,493 923,907

31 December 2010
Banking Treasury Investments Capital Total
BD ’000 BD ’000 BD ’000 BD ’000 BD ’000
Operating income 11,854 2,890 5,108 2,527 22,379
Segment result 3,855 1,866 2,070 (475) 7,316
Other information
Segment assets 195,713 324,322 249,994 86,569 856,598

Segment liabilities, and equity 517,737 120,220 8,318 210,323 856,598

92 AL SALAM BANK - BAHRAIN

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

24 SEGMENT INFORMATION (continued)

Secondary segment information

The Group primarily operates in the GCC and derives substantially all its operating income and incurs all operating
expenses in the GCC.

25 FIDUCIARY ASSETS

Funds under management at the year-end amounted to BD 54,759 thousands (2010: BD 48,137 thousands). These
assets are held in a fiduciary capacity and are not included in the consolidated statement of financial position.

26 SHARI’A SUPERVISORY BOARD

The Group’s Shari’a Supervisory Board consists of four Islamic scholars who review the Group’s compliance with
general Shari’a principles and specific fatwa’s, rulings and guidelines issued by the Group’s Shari’a supervisory
Board. 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.

27 FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Group’s financial instruments are not significantly different from their carrying values
as at 31 December 2011 and 2010.

28 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

During the year, the Bank received income totaling

BD 7,000 (2010: BD 8,000) from conventional financial institutions on current account balances during the year.
These funds were held as payable to charity as they are in the nature of Shari’a prohibited income.

29 SOCIAL RESPONSIBILITY

The Group discharges its social responsibility through charity fund expenditures and donations to the good faith qard
fund which is used for charitable purposes. During the year the Group paid an amount of BD 60,000 (2010: BD
213,000) on account of charitable donations.

30 ZAKAH

Pursuant to a resolution of the shareholders in an EGM held on 12 November 2009, it was resolved to amend the
articles of association of the Bank to inform the shareholders of their obligation to pay Zakah on income and net
worth. Consequently, Zakah is not recognized in the consolidated income statement as an expense. The total Zakah
payable by the shareholders for 2011 has been determined by the Shari’a supervisory board as 3.4 fils (2010: 3.5 fils)
per share.

Pursuant to the Shari’a Supervisory Board’s directive, the prohibited income earned from the subsidiary’s operations
should be purified by the Group from the date of conversion. Since the Subsidiary’s operations are not fully
compliant with Shari’a Rules and Principles, the prohibited income has been calculated and disclosed (Note 9).
The Shareholders should purify the amount of prohibited income attributable to each share by donating the relevant
amounts of such prohibited income to charity. The prohibited income to be donated by each shareholder for 2011
has been determined by the Shari’a Supervisory Board as 1.05 fils per share (2010: 2.06 fils).

AL SALAM BANK - BAHRAIN 93

 Notes to the Consolidated Financial Statements (continued)
31 December 2011

31 CAPITAL ADEQUACY

The adequacy of the Group’s capital is monitored using, primarily, the rules and ratios established by the Basel
Committee on Grouping Supervision and adopted by the Central Bank of Bahrain. The primary objective of the
Group’s capital management is to ensure that it complies with externally imposed capital requirements. The Group
complied in full with all externally imposed capital requirements during the years ended 31 December 2011 and 31
December 2010.

The risk assets ratio calculations, in accordance with the ‘Basel II’ capital adequacy guidelines of the Central Bank
of Bahrain are as follows:

2011 2010
BD ’000 BD ’000
Capital base (Tier 1) 172,872 172,765
Credit risk weighted exposures 653,391 631,566
Market risk weighted exposures 3,416 9,700
Operational risk weighted exposures 36,767 58,372
Total risk weighted exposure 693,574 699,638
Capital adequacy 24.9% 24.7%
Minimum requirement 12.0% 12.0%

94 AL SALAM BANK - BAHRAIN

An example of how tree rings can help us identify the climate of the past is how
scientists have been able to use rings to determine the EI Nino cycles that occurred
before modern records were kept. The oldest complete tree ring records however
are from southern Germany and go back over 10,000 years. At Al Salam we are
inspired by this phenomenon as we study today’s trends to embrace the possibilities
of tomorrow.