www.kfh.bh
080528_KFH Annual Report_extra.i1 1
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Kuwait Finance House - Bahrain
Annual Report 2007
080528_KFH Annual Report_extra.i2 2
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Contents
02
04
06
10
12
14
20
34
36
38
40
42
43
44
Vision & Mission
3 Year Highlights
Chairman & Managing Director’s Statement
General Manager’s Statement
Board of Directors
Management Team
Investment Portfolio
Consumer Finance & Corporate Finance
Asset & Liabilities Management
Risk Management
Corporate Social Responsibility
Shari’a Board Statement
Auditor’s Report
Financial Statements
HH Shaikh Khalifa bin
Salman Al Khalifa
HM Shaikh Hamad bin
Isa Al Khalifa
HH Shaikh Salman bin
Hamad Al Khalifa
Prime Minister
King of The Kingdom of Bahrain
Crown Prince, Deputy
Supreme Commander
Our Vision & Mission
2
KFH-Bahrain - Annual Report 2007
Bringing Banking to Life
Vision
At KFH-Bahrain we believe that banking is not just about money. For us it’s something
that can improve people’s lives.
Whether we’re providing commercial and investment banking services or financial
products for consumers, we start by understanding our customers. Then, by focusing
on innovation, we provide leading edge Islamic banking solutions that truly enhance
their lives whilst staying faithful to Shari’a principles.
Mission
It is our mission to Bring Banking to Life by focusing on innovation and insisting on
excellence in everything we do – including the development and provision of a wide
range of integrated products and services in perfect harmony with Shari’a principles.
Our mission and our commitment are backed by a robust financial position and a long
and proven heritage of ingenuity, innovation and integrity.
135%
49%
Net Income
Customer Deposits
3 Year Highlights
4
KFH-Bahrain - Annual Report 2007
52%
Operating Income
82%
Profile
Kuwait Finance House-Bahrain (KFH-Bahrain) is a leading provider of Islamic commercial
and investment banking services. Established in 2002 as a wholly owned subsidiary
of Kuwait Finance House-Kuwait, a global industry leader, KFH-Bahrain specialises
in conceptualising the development and introduction of innovative, Shari’a compliant
banking and investment products.
Total Assets
KFH-Bahrain enjoys a reputation as a performance-driven, results orientated organisation,
combining global investment strategies with the provision of popular retail products and
services. The bank has made major advances and experienced considerable growth
in the last few years, allowing it to further develop its products and services, providing
outstanding investment opportunities for its clients. KFH-Bahrain is at the forefront of the
investment and finance sectors and has developed a series of successful projects and
made further investments in diverse sectors of the economy. KFH-Bahrain is continuing its strategy of innovation and change and is committed to
setting a new standard for Islamic banking and finance. It is a strategy that will confirm
the bank’s status as a market leader and help it to continue contributing significantly to
economic growth and social development in the Kingdom of Bahrain.
Bader A. M. Mukhaizeem
Chairman and Managing Director
Chairman & Managing
Director’s Statement
On behalf of the Board of Directors, it is
my privilege to present the annual report of
Kuwait Finance House-Bahrain for the year
ended 31st December 2007. 6
KFH-Bahrain - Annual Report 2007
Dear Stakeholders,
In the name of Allah, the Beneficent, the Merciful, Prayers and Peace Be Upon the
Last Prophet and Messenger Muhammed.
In 2007 KFH-Bahrain’s performance strengthened markedly with a significant
increase in net income of 49%, reaching BD 31.4 million for 2007 against the
previous year’s net income of BD 21.1 million. At the end of 2007, total customer
deposits increased by 135% to a total amount of BD 447.5 million from BD 190.3
million at year end 2006.
This resulted in a 26% return on average equity for 2007. Operating income increased
by 52% from BD 47.4 million in 2006 to BD 72.0 million in 2007. Total assets
increased by 82% to BD 735.3 million at the end of 2007 versus BD 403 million
in 2006. This strong performance came despite many challenges and difficulties
engulfing the financial services sector following the US sub-prime crisis and the fear
of recession in the US.
The implementation of the core banking application and the establishment of a
risk management framework providved further impetus and the bank is now fully
equipped to meet the requirements of Basel II, which is expected to be implemented
by the Central Bank of Bahrain during 2008.
In 2006 KFH-Bahrain focused its strategy on “Building a better Bahrain” with exceptional and ambitious
plans for the future. In 2007 the concept of “Bringing Banking to Life” was introduced, a concept that aims
to provide products and services that truly make a positive difference to the lives of our customers.
Last year KFH-Bahrain accomplished many operational achievements in all fields, particularly in retail
services. For example, KFH Automall, the largest car showroom in the Kingdom of Bahrain, was officially
opened. Besides housing Bahrain’s largest selection of car brands it also offers finance and insurance,
making it a complete automotive package under one roof.
In association with Visa, the bank also launched the first Islamic chipped credit card, a Shari’a compliant
financing tool developed by KFH-Bahrain offering a wide range of advantages to customers.
The weakening of the US dollar in 2007 against major currencies, along with market views on the future
of Bahraini dinar’s peg to the dollar posed further challenges to the management, besides the task of
raising interbank lines and managing liquidity. This demonstrated that the management had been prudent
in managing its US dollar positions in order to minimise the impact of any potential revaluation of the
Bahraini dinar against the US dollar.
The Board and the management are both focused on sourcing attractive private equity deals with an
emphasis on real estate development, aerospace, telecommunications, sportswear, pharmaceuticals,
and healthcare sectors.
The structured product development is also at the forefront, as seen in the bank’s collaboration with
the Fortis Real Estate team. KFH-Bahrain and Fortis have partnered in the development of the Shari’a
Compliant Overnight Fund. The US$ 1 billion fund was launched, registered and listed in Luxembourg,
and enabled Islamic institutions to place excess liquidity with the flexibility of retrieving their investments
on a daily basis.
KFH-Bahrain established a US$ 50 million investment bank in Jordan. The investment bank Kuwait
Finance House-Jordan (KFH-Jordan) is a wholly owned subsidiary of KFH-Bahrain. The bank will
conduct investment banking activities including investment advisory, acquisitions and the development of
opportunistic investments. Mr. Abdul Hakeem Al Khayyat was chosen as the Chairman of the new bank. Bahrain’s banking sector witnessed unprecedented growth with total assets reaching record levels of
BD 89.8 billion as of 30 November 2007. From a human capital perspective this situation has presented
numerous challenges in recruitment. The bank has successfully overcome this challenge and recruited
several highly qualified professionals with relevant skills during 2007. 8
KFH-Bahrain - Annual Report 2007
With gratitude from our bank, our Board of Directors and all of our stakeholders,
I conclude by paying tribute to the vision, support and confidence inspired in the
Kingdom of Bahrain and its future by His Majesty King Hamad Bin Isa Al Khalifa, King
of Bahrain, His Highness Shaikh Khalifa Bin Salman Al Khalifa, the Prime Minister,
and His Highness Shaikh Salman Bin Hamad Al Khalifa, the Crown Prince, Deputy
Supreme Commander.
Further thanks are also due to the Government of Bahrain and the Central Bank
of Bahrain, which have continued to set the highest standards and provided
enormous support for the elevation of the Islamic banking industry in the region and
internationally.
I extend my gratitude to our employees and customers for their continued loyalty
and confidence in KFH-Bahrain. With the blessings of Almighty God we will continue
to sustain our momentum in our programme of transformation and usher in the next
stage for growth, to “Bring Banking to Life” in the new financial year.
Bader A. M. Mukhaizeem
Chairman and Managing Director
Abdulhakeem Y. Alkhayyat
General Manager
General Manager’s
Statement
Two great achievements defined our bank’s
efforts in 2007. First, we accelerated the
execution of our organic growth strategy,
creating value for stakeholders by building
and expanding our customer and client
relationships across the country and regionally.
This greatly increased our opportunities for
value creation and future growth in the local
and regional markets.
10
KFH-Bahrain - Annual Report 2007
The second is that we continued the momentum we created in 2002. In our banking
operations, we made more improvements to products, services and the banking
experience to drive both customer satisfaction and revenue to all-time highs. In
investment banking, our team worked hard to bring a range of innovative investment
products and services to more of our clients than ever before. And in asset
management, we fulfilled our customers’ needs with Shari’a compliant products
never before seen in the local market.
While our staff members are working within their lines of business to build customer
relationships, they are also reaching out to work with teammates throughout the
bank to create new opportunities to deliver the full resources of KFH-Bahrain to our
customers.
In 2007, KFH-Bahrain’s net profit reached BD 31.4 million. Our results exceeded
our expectations in the most important financial categories, including earnings per
share, net income, revenue and credit quality. We are proud that we have achieved
steady growth in our financial performance since our inception in 2002.
Our strong profit growth provided us with multiple opportunities for capital
deployment, which we pursue in three broad categories: (1) investments in existing
lines of business, (2) finance of large scale infrastructure projects in partnership
with government and, (3) return on capital to shareholders. We are focusing on
investments with long term prospects for growth.
Today the bank is developing the skills and tools that enable us to grow by
taking calculated risks and by being paid appropriately for the risks we take. We
are continuing to build a risk and reward management structure and a culture of
shared responsibility, in which every member of staff – from front-line bankers to risk
managers and auditors – is accountable for managing risks to help the bank grow.
We provide the financial capital to create economic opportunity that is consistent
and sustainable in financial returns for our shareholders and participate in the
development of Bahrain’s economic and social welfare.
KFH-Bahrain continued with its social responsibility programme. This focused
mainly on the youth, because of the vital role they have to play in the development of
Bahrain. We believe this investment is the most important we make.
In closing, I would like to thank all our valuable staff for their guidance during what has
been a year of great progress and success. As we continue our work to deliver everhigher standards of service and performance for our customers, our shareholders
and our communities, I look forward to all we will accomplish together.
Abdulhakeem Y. Alkhayyat
General Manager
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KFH-Bahrain - Annual Report 2007
Board of Directors
Bader A. M. Mukhaizeem
Chairman and Managing Director
Mohamed bin
Sh. Eshaq
Mohammed
Sulaiman Al Omar
Yaqoob Yousef
Majed
Mohamed
Isa Alwazzan
Adel Ahmed
Al Banwan
Vice Chairman
Board Member
Board Member
Board Member
Board Member
Management Team
General Manager
Abdulhakeem Y. Alkhayyat
General Manager
Executive Management
14
Paul Mercer
Abdul Razak Jawahery
Waleed Rashdan
Lilian Le Falher
Executive Manager
Executive Manager
Executive Manager
Executive Manager
KFH-Bahrain - Annual Report 2007
Senior Management
Ahmad
Saeed
Hisham
Al-Moayyed
Jalal Haji
Jassim
Khalid
Al Maarafi
Senior Manager
Investment
Senior Manager
Real Estate
Senior Manager
Operations
Senior Manager
Banking Group
Mohammed
Ali Hamad
Sattam
Algosaibi
Yousif
Al-Hammadi
Senior Manager
Senior Manager
Internal Audit Corporate Finance
Senior Manager
Financial Control
Department Managers
Amit
Yashpal
Jehad
Al-Wardi
Jameel
Al-Khaja
Majed
Mahmood
Peter
Rushton
Salah
Al-Majthoob
Waleed
Ahmadi
Manager
Risk Management
Manager
Administration
Manager
Credit
Manager
Priority Banking
Manager
Corporate
Communications
Manager
Information
Technology
Manager
Human
Resources
Bringing Banking to Life
The Team
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KFH-Bahrain - Annual Report 2007
Investment Placement
Investment
Bringing Banking to Life
Consumer Finance
Corporate Finance
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KFH-Bahrain - Annual Report 2007
Treasury
Priority Banking
A vision of global investment strategies has propelled
KFH-Bahrain forward in the last few years, moving
it at a rapid pace in 2007 and opening a range of
opportunities for our clients.
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KFH-Bahrain - Annual Report 2007
Investment Portfolio
Global Investment Growth
A strategy of diverse international investment has been a major factor in the success
of KFH-Bahrain over recent years. While the new investments of the bank have been in
economic and infrastructure projects in the Kingdom of Bahrain, it has also positioned
itself to enter into partnerships and alliances with many international companies whose
businesses are based on applying innovative business practices to provide globally comppetitive products and services.
In 2007 KFH-Bahrain continued to develop a diverse investment portfolio deployed
over a wide geographical area with great success. Large-scale real estate development
projects in Bahrain also showed good progress, moving from concept to construction
and, in many cases, approaching completion.
Led by a team of highly qualified professionals, KFH-Bahrain’s investment department
has an unwavering focus on increasing shareholder value through careful planning and
efficient execution of its investment strategy. The department continually monitors the
current portfolio by closely interacting with management of the operating companies and
KFH-Bahrain board representatives, as well as obtaining feedback from leading industry
consultants. In this way the bank can enhance the value of the underlying investments
and increase the likelihood of profitable results in the future.
Investment portfolio
KFH-Bahrain employs and actively pursues an international investment strategy that
allows investors access to a wide range of local, regional and international opportunities
– all of which are designed to deliver strong returns while enhancing the reach and profile
of the Islamic banking industry.
Real estate investment activities and acquisitions
KFH-Bahrain, directly or through its subsidiaries, is continuously seeking opportunities
in the real estate market, acting as a developer and entering with strategic partners into
joint ventures to acquire and develop projects in the Kingdom of Bahrain and the region.
The bank has a very strong portfolio that includes Diyar Al Muharraq, Durrat Al Bahrain,
Ishbiliya Village, Meena 7, and other projects soon to be announced. During the year,
KFH-Bahrain has made a number of acquisitions in various areas of the Kingdom of
Bahrain with more to come in the future.
Country
Bahrain
Sector
Real Estate
Year of Acquisition
2003
Group Holding
50%
Durrat Al bahrain
The flagship of the KFH-Bahrain investment portfolio is the
Durrat Al Bahrain project, a world-class residential, leisure,
commercial and tourist destination. Durrat Al Bahrain is
owned by the Durrat Khaleej Al Bahrain Company, in which
the Government of the Kingdom of Bahrain and KFH-Bahrain
(together with its investors) each hold a 50% stake. Once
complete, Durrat Al Bahrain, a 20-square-kilometre area of
pristine waters and untouched beaches, is expected to be
approximately the size of Manama, Bahrain’s capital city.
In 2007, reclamation was completed and infrastructure works
and villa construction progressed rapidly. Handover of villas to
buyers will start in 2008.
The landscape has been transformed and is most apparent
from a thousand miles above the site, where the 12 islands of
Durrat Al Bahrain have created a breathtaking landmark for the
Kingdom’s south east coast. All of the five Petal Islands and the
six Atoll Islands along with the Hotel Island now prominently
dot the south territorial seas.
Once completed, Durrat’s 60,000 residents and an estimated
4,500 visitors daily will be able to hop from point to point within
the island via ultra-modern roads and bridges. The highway
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KFH-Bahrain - Annual Report 2007
that offers a fast link from Manama city to the resort was
opened to traffic during the last year.
The development of a world-class championship golf course is
also under way. The concept master plan has been developed
by world famous golfer Ernie Els and is among his few signature
courses.
During 2007, Durrat Al Bahrain sold the North Horn of the
Crescent and sales progressed rapidly, with the properties
offered for sale in the market having been completely sold
out. There is significant demand for the remaining parts of the
project.
Durrat Al Bahrain rebranded in December 2007 and continued
to increase its marketing activities to raise awareness of and
promote the landmark project locally and internationally. Durrat
Al Bahrain participated in an international real estate exhibition
in Cannes, France, and at the CityScape exhibition in Dubai
and Abu Dhabi, where it was well received by visitors and
exhibitors alike. www.durratbahrain.com
Country
Sector
Year of Acquisition
Group Holding*
Bahrain
Real Estate
2005
100%
Country
Sector
Bahrain
Real Estate
Year of Acquisition
2003
Group Holding
60%
Ishbiliya Village
Meena Towers Company
Situated on a large plot of land in a prime location in the Al
Qadam area of Bahrain, Ishbiliya Village is a premier residential
development targeted for the middle to high income market.
The project development team is led by Al Enma’a House for
Real Estate.
With a holding of 60%, KFH-Bahrain entered into a business
venture with other notable investors in Bahrain to form the Meena
Towers Company for the purpose of developing the Meena
Towers real estate project. The design was conceptualised
by world famous architects, creating a structure blending
modern and intricate designs reflecting the Arabic architectural
heritage.
Ishbiliya Village will offer high quality housing at affordable
prices to the fast growing local population, providing this
market segment with a new lifestyle of choice in a fully masterplanned community. The project, which is close to Manama
City Centre, will feature 300 villas and 500 apartments of
varying sizes alongside high class commercial and leisure
facilities, modern infrastructure and community essentials such
as schools, parks and mosque.
The project is now in the development and construction
phase with all the building permits having been obtained. The
properties will be offered for sale during the second quarter of
2008.
*Includes investors.
The development consists of 240 apartment units in a cluster
of seven residential towers in the south side of the Town Centre
of the Al Marsa Floating City, at the Amwaj Islands in Bahrain.
The project is now complete and KFH-Bahrain exited the
investment in December 2007 realising a significant return on
its investment.
Country
Sector
Bahrain
Real Estate
Country
Sector
Bahrain
Real Estate
Year of Acquisition
2006
Year of Acquisition
2007
Group Holding*
50%
Group Holding
13%
Diyar Al Muharraq Seef Properties B.S.C
During 2006, KFH-Bahrain acquired a 50% equity stake in Diyar
Al Muharraq Company, a company incorporated to undertake the
development of the Diyar project.
Seef Properties is a leading property development and
management company in the Kingdom of Bahrain. Its
signature asset is Seef Mall, which is the most successful and
popular shopping mall in Bahrain. KFH-Bahrain invested in
Seef Properties B.S.C. through the Initial Public Offering in May
2007.
Diyar Al Muharraq will consist of a mix of residential, commercial
and retail components for the medium to high net worth market.
The project lies just off the coast of Muharraq, the northern island
and historical city centre of the Kingdom of Bahrain, which is also
in close proximity to the international airport. Diyar Al Muharraq
will comprise a total area of 12.2 million square metres and
once completed will be a self-contained city combining modern
amenities with traditional design.
There has been significant progress in various areas of the
project development. Marine survey, oceanography and ground
investigation contracts are complete. A sizeable portion of land
has already been reclaimed, with dredging and further reclamation
proceeding well.
The company arranged for the issue of a US$ 200 million Sukuk for
the purpose of partially financing the reclamation and development
of the project. The lead underwriter was KFH-Kuwait.
*Includes investors.
24
KFH-Bahrain - Annual Report 2007
Shares in Seef Properties B.S.C. were listed on the Bahrain
Stock Exchange in July 2007 and as of 31 December 2007
the share price had risen by 58% from the subscription price.
The net profits of the company have increased significantly
year-on-year. The company is planning further expansion and
undertaking new projects within Bahrain, based on its strong
brand recognition and experience in the real estate sector.
Country
Sector
Year of Acquisition
Group Holding
Bahrain
Industrial Real Estate
2007
100%
Country
Sector
Year of Acquisition
Group Holding
Bahrain
Real Estate
2003
59.28%
KFH Industrial Oasis
Al Enma’a House for Real Estate B.S.C. (c) KFH–Bahrain is intending to diversify its investment base by
capitalising on the Kingdom of Bahrain’s ever-growing demand
for industrial based real estate projects. The Industrial Oasis will
be located in the Bahrain International Investment Park (BIIP), a
newly established area focused on technology, manufacturing
and service sectors.
Established in 2003, Al Enma’a House for Real Estate B.S.C. is
one of the largest privately held real estate developers in Bahrain
in terms of capital and projects in hand. Engaged in property
development, project management, real estate management
& logistics, and strategic investments, the company has not
only cemented its name in the Kingdom of Bahrain but has
progressed regionally with two wholly owned subsidiaries in
both Syria and Saudi Arabia (presently under formation) and
interests in Turkey.
The land allocated for the Industrial Oasis is 170,000 square
meters and construction has already commenced and will be
in two phases which will comprise of multi storey buildings and
advanced factory blocks.
At full capacity, it is expected that the KFH Industrial Oasis will
source investments of about USD200 million into the Bahrain
economy and will help create more than 2,000 industrial
related jobs.
www.enmahouse.com
Country
Sector
USA
General Aviation
Year of Acquisition
2005
Group Holding*
75%
Liberty Aerospace
Corporate
Investments
Based in Melbourne, Florida, USA, Liberty specialises in the
design, production and marketing of the XL2, a two-seat,
single-engine, piston-powered aircraft. The plane, designed
to provide a modern, cost-effective alternative for recreational
flying, pilot training and surveillance, was the first of its kind
to receive a US FAA Part 23 Type Certification in over thirty
years and incorporates advanced technologies that provide
exceptional performance, safety, fuel efficiency, comfort and
affordability.
In 2007 XL2 received VFR and IFR ratings certification from
the European Aviation Safety Agency (EASA) and IFR ratings
certification from the General Administration of Civil Aviation
of China. In 2007 Liberty achieved a significant milestone by
signing an aircraft Purchase and Licensing Agreement with
Anyang Angel Aero Science and Technology Development
Co., Ltd, (‘Anyang’) China. The contract allows Anyang to
manufacture XL2 component parts and ultimately produce the
XL2 in China.
www.libertyaircraft.com
*Includes investors.
26
KFH-Bahrain - Annual Report 2007
Country
New Zealand / UK
Sector
Apparel
Country
Sector
Year of Acquisition
2004
Year of Acquisition
Group Holding*
60%
Group Holding*
New Zealand
Telecommunications
2004
53%
Canterbury Woosh Wireless
Canterbury, the world’s leading rugby apparel brand, was
established in Christchurch, New Zealand, in 1904. Canterbury
now produces a wide range of clothing for both on and off the
field. The company has succeeded in showcasing its products
in many high street outlets internationally, including Galeries
Lafayette in France, Harrods, House of Fraser, John Lewis in
UK and Saks Fifth Avenue in US.
Woosh is a wireless broadband telecommunications company
targeting the home and small office market. Its technology, which
is manufactured by IP Wireless of the United States, enables it to
be the lowest-cost provider of broadband in New Zealand.
In the 2007 Rugby World Cup, Canterbury sponsored more
teams than all other major competitors combined, including the
world champions South Africa. The company also sponsors
Portsmouth Football Club in the English Premier League.
The company has steadily achieved growth through expansion
in Europe over the last few years. Canterbury has also
introduced new products into the market while rationalising its
overall range of offering.
www.canterburynz.com
*Includes New Zealand Australia Private Equity Fund investment.
In 2007 the company’s customer base increased to approximately
32,000, with Woosh continuing to process approximately 1,500
new customers per month. The 2006 acquisition of Quicksilver
has now been fully integrated.
The company continues its growth strategy of merger/acquisition
with smaller players, providing immediate revenue, operating
synergies and a dial-up subscriber base to migrate to its wireless
product suite. Woosh is in preliminary discussions with several large
local operators who wish to explore joint build out and operating
opportunities. The company emerged as one of the successful
bidders in the spectrum auction which was held in New Zealand
towards the end of 2007. Woosh has taken a strategic business
decision to deploy a WiMAX network and is in the process of
exploring opportunities for the execution of this strategy.
www.woosh.com
*Includes New Zealand Australia Private Equity Fund investment.
Country
Sector
Year of Acquisition
Group Holding
Bahrain
Telecommunications
2003
100%
Country
Sector
Year of Acquisition
Group Holding
Jordan
Pharmaceutical
2003
82.2%
Mena Telecom AL-KINDI Pharmaceutical
Mena Telecom is a licensed telecommunications company
formed in 2003 and based in the Kingdom of Bahrain. The
company aims to provide Bahrain with high quality yet affordable
telecommunications services, enabling every segment of
Bahraini society to participate in the rapidly evolving information
and communications market and the e-Business revolution.
Al-Kindi Pharma is a healthcare company specialising in
Biotech products that improve the quality of patients lives.
The company is a specialised manufacturer and distributor
of human-based insulin, a range of intravenous solutions and
haemodialysis solutions under licence from major international
pharmaceutical companies.
Mena Telecom holds one of the two National Fixed Wireless
Services licences allowing the provision of Fixed Wireless
Access in the Kingdom of Bahrain and bringing numerous
benefits to the company from a strategic and value enhancement
perspective.
The company has a manufacturing site in the King Abdullah
Industrial estate in Sahab, Jordan, a few kilometres from the
centre of Amman and this is supported by insulin production
by Bioton in Poland and intravenous fluids technology by
Aguettant in France.
Mena Telecom has chosen Motorola as its technology partner
to deploy state-of-the-art WiMAX technology for its wireless
access network. The execution of the WiMAX roll-out has
already started during 2007 and is successfully heading
towards completion in the ensuing year.
Al-Kindi Pharma is now in full operational mode, serving the
growing insulin market in Jordan and targeting the markets of
the Middle East and North African regions.
www.menatelecom.com
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KFH-Bahrain - Annual Report 2007
www.alkindipharma.com
Country
New Zealand
Country
Sector
Health Care
Sector
Year of Acquisition
2004
Year of Acquisition
Group Holding*
63%
Group Holding
Bahrain
Design & Printing
2003
70%
Radius Health Group Miracle Graphics
Radius Health Group is a diversified health sector investment
company that provides healthcare services for all. The Radius
Circle of Care covers every possible facet of health and life care
for New Zealanders, including medical centres, pharmacies
and residential rest homes.
Established in 1993 as Bahrain’s first independent reprographic
and pre-press production house, Miracle Graphics is an art
company engaged in the areas of Graphic Design, Publishing,
Print Production and Digital Technology. In Bahrain it pioneered
in reprographic and pre-press production services. In addition
to its core service offerings, Miracle has a strategic partnership
with Corporate Edge, a leading UK brand consultancy, for the
provision of brand consultancy services.
The company, of which KFH-Bahrain and its associate New
Zealand Private Equity Fund (NZAPEF) together own a 63%
equity holding, is poised to become one of the most recognised
names in the New Zealand healthcare sector.
The company has experienced a steady progress in expanding
its portfolio of healthcare facilities which, combined with
various business restructuring initiatives, resulted in enhancing
its profitability.
www.radiushealth.co.nz
*Includes New Zealand Australia Private Equity Fund investment.
Since its acquisition by KFH-Bahrain in 2003 with a holding of
70%, the company has seen stable growth in its revenues and
operating performance. The company successfully managed
the re-branding of the Durrat Al Bahrain project during 2007. www.miraclegraphics.com
Country
Sector
UK
Skin Imaging
Country
Sector
Year of Acquisition
2005
Year of Acquisition
Group Holding
47%
Group Holding*
New Zealand
Technology
2005
63%
Astron Clinica
NextWindow Astron Clinica is based in Cambridge, UK, with a wholly
owned subsidiary in Australia and several distributors across
Canada, Europe, the Middle East, Australia and New Zealand.
The company is helping to revolutionise skin imaging with its
SIAscopy technology, which helps dermatologists, general
practitioners and cosmetic surgeons to diagnose and treat
skin cancer and other skin conditions. It has also developed
DERMETRICS.
NextWindow is a leading designer and developer of optical
touch screens, manufacturing touch sensitive overlays for
existing LCD or plasma displays and OEM touch assemblies
for integration into manufacturers’ display models. Touch
screen technology is widely used by leading companies
around the world across a wide range of industries, including
telecommunications, tourism, retail, real estate and public
information. Its many applications include digital signage,
directory information and way-finding, wildlife exhibits, retail
displays, digital whiteboards, interactive education, trade
shows and real estate advertising.
SIAscopy, which has received US FDA approval, examines
key components of the skin – melanin, haemoglobin, dermal
melanin and collagen – to a depth of up to 2mm below the
surface. MoleView, a DERMETRICS application, has already
been clinically proven to give more accurate diagnosis of
malignant melanoma, the most dangerous form of skin
cancer.
www.astronclinica.com
NextWindow has signed major contracts in the volume
markets and is now in mass production through a contract
manufacturer in Thailand. One of the company’s notable clients
is global PC manufacturer, Hewlett Packard (HP). During 2007
NextWindow has entered into significant business relationships
with various new customers, including HP.
*Includes New Zealand Australia Private Equity Fund investment.
30
KFH-Bahrain - Annual Report 2007
Country
Sector
Bahrain
Utility Services
Year of Acquisition
Group Holding
2005
16.5%
Country
Sector
Year of Acquisition
Group Holding*
Bahrain
Investment
2007
100%
Energy Central Company B.S.C. (ECCO)
Baytik Capital Holdings (B.S.C)
Incorporated in 2005, Energy Central Company (ECCO) has
been developing its business model of providing utility services
such as district cooling, wastewater treatment, seawater
desalination and power generation, both on a single and multiutility basis. The integrated model is gaining considerable
interest and success within the region and ECCO management
is currently working on a number of projects, with several more
due to commence in 2008.
Baytik Capital Holdings B.S.C. (c) was incorporated during the
third quarter of 2007 in the Kingdom of Bahrain, with a capital
of US$ 150 million, for the purpose of investing in government
and non-government related projects, with a focus on Turkey
and other emerging countries in the region.
The target markets for ECCO are within the GCC, focusing
specifically on Bahrain, Saudi Arabia, UAE, Kuwait, Qatar and
Oman. ECCO has recently incorporated Energy Central Utilities
(ECU) for the purpose of providing irrigation water through
sea water desalination via a 25 year concession for Durrat Al
Bahrain.
The company’s projects will cover real estate, building materials,
healthcare, financial services, transport/infrastructure, energy/
oil, technology and agriculture. It currently has representative
offices in both Istanbul and Kuwait.
*Includes investors’ and parent company holding.
Country
Sector
Bahrain
Industrial Projects
Year of Acquisition
Group Holding
2007
Country
Year of Acquisition
Group Holding
Jordan
2007
100%
100%
Baytik Industrial Investment Company
KFH-JORDAN
Baytik Industrial Investment Company is a wholly owned
subsidiary of KFH-Bahrain and is considered to be its
industrial investment arm. The Company aims to set up new
industry enterprises including the manufacturing and service
industries.
KFH-Bahrain has established an investment bank in Jordan,
Kuwait Finance House (Jordan), (KFH-Jordan) with an
authorised share capital of US $50 million, is a wholly owned
subsidiary of KFH-Bahrain.
The Company will also aim to invest in existing international
industrial enterprises and develop a local presence for these
enterprises in the Kingdom of Bahrain through the use of the
KFH Industrial Oasis.
KFH-Jordan will be under the supervision of the Hashemite
Kingdom of Jordan and will conduct investment banking
including investment advisory, acquisitions and the development
of opportunistic investments. It will also invest in private equity
in key market industries and generally be a key player in the
Jordanian market.
32
KFH-Bahrain - Annual Report 2007
Restricted Mudharaba Investment Accounts
KFH-Bahrain has developed a Shari’a compliant Asset Management product in the form
of Restricted Mudharaba Investment Accounts. These allow private investors to co-invest
with KFH-Bahrain in corporate (private equity and real estate) financing transactions for
KFH investment portfolio companies and projects.
The market response was very positive from a diverse range of investors, including
institutions, as the product offers several benefits, including a choice of investments and
a diverse range of returns and cash flows according to the investor’s needs.
New Zealand Australia Private Equity Fund (NZAPEF)
NZAPEF was established to conduct Shari’a compliant investments in private companies
with strong growth potential in New Zealand and Australia. The total size of the fund is
US$ 100 million, and since its inception it has invested in four companies.
During the past few years, KFH-Bahrain has assisted the portfolio companies in their
expansion and growth plans through a recapitalisation process. The new round of
investments has been crucial for the expansion strategy of the individual companies,
helping them penetrate new markets and taking them to the next level.
Consumer Finance
KFH-Bahrain’s consumer banking and finance services combine a broad range of innovative products and
services with exceptional customer care. Our products and financing facilities are developed with the aim of
providing for the long-term needs of customers and those of the local market, which continue to increase.
Thinking innovatively and ultimately seeking to deliver superior products are at the core of all we do.
KFH-Bahrain can now act as a one-stop shop for our customers’ banking and financing requirements through
our growing network of bank branches and ATMs. The number of branches is set to increase from four to
nine, with Riffa, Bahrain Financial Harbour and the World Trade Centre amongst the new locations, while the
ATM network will almost double, with new machines being installed in major residential, financial and shopping
districts bringing the total to 25.
New services and innovations are constantly being introduced for the benefit of customers. These range from
technology and service enhancements that provide greater access to information and funds – both locally and
worldwide – to the launch of never before seen products. The Ijarah card, the world’s first Islamic financing card
that allows cardholders to acquire durable goods on a lease-to-own basis, is one such product. A unique 20year home financing scheme is another example of how product innovation and technological enhancement
are helping KFH-Bahrain consumer finance set the standard.
In 2007 KFH-Bahrain continued to offer new products and services that were firsts in the local market. For
example, in association with Visa the bank launched the first Islamic chipped credit card – a Shari’a compliant
offering with many benefits. Customers enjoy a revolving credit facility without incurring interest costs, paying
a low annual service charge instead.
In June 2007, KFH Automall, the Kingdom’s largest car showroom, was officially opened. As well as housing
Bahrain’s widest range of car brands KFH Automall offers in-house financing from the fully operational KFH
branch and comprehensive insurance coverage through Solidarity.
KFH Automall brings a whole new dimension to buying a car in the Kingdom of Bahrain. The full service
KFH branch within the showroom offers flexible car financing solutions at one of the lowest profit rates in the
Kingdom on either a Murabaha or Musawama basis. Cars can be purchased with a 0% to 10% down payment
with easy instalments over a period of up to six years.
34
KFH-Bahrain - Annual Report 2007
Corporate Finance
Combining a superior product and service offering with the value of expert advice, KFHBahrain’s corporate finance division helps companies ranging from small and mediumsized organisations to large corporates to expand their operations through Shari’a
compliant resources and strategies.
The bank serves businesses across many industry sectors by providing financing for
projects, real estate, working capital, machinery and equipment as well as trade financing
facilities.
Our broad range of financing instruments are structured according to Islamic Murabaha,
Musharaka, Ijarah and Istisna’a as well as Commodity and Convertible Murabaha
facilities. All transactions are undertaken by our experienced corporate finance team and
backed by effective execution and results.
Projects on which KFH-Bahrain advises and provides financing range in scope and value
and encompass both private and public sector ventures. In line with KFH-Bahrain’s
mission to support growth in the local and regional markets, the corporate finance
team closely evaluates compelling opportunities and noteworthy projects and ultimately
rewards initiative and ingenuity with backing.
Asset & Liabilities Management
Treasury
This has been another productive year for KFH-Bahrain treasury department where by we have further
strengthened our interbank dealing process by streamlining the front and back office functions. This has
resulted in less turnaround time for the execution of our deals.
We have also allocated productive resources for the research and development of quality Shari’a compliant
liquidity products and tools for a more effective short term fund management. 2007 has been a break through
for us at KFH-Bahrain, whereby we have successfully developed a liquidity product in collaboration with one
of the top European Banks. KFH-Bahrain treasury will continue to research and collaborate with other financial
institutions to further develop and introduce innovative liquidity management tools. Shari’a Compliant Overnight Fund (SCOF)
Albeit buoyant, the Islamic banking industry offers investors limited options in terms of short term investments for
management of their excess liquidity. Most of this liquidity is invested in Murabaha products – sale agreements
with pre-determined profits using commodities as underlying assets – due to the lack of a better alternative. It
is within this context that the Shari’a Compliant Overnight Fund (SCOF) has been established.
SCOF is an innovative solution enabling Islamic investors to invest in short-term maturity services while enjoying
significant flexibility. It entitles investors to receive rents from prime European properties while having the option
of redemption on a daily basis. Regulated in Luxembourg, SCOF is co-managed by KFH-Bahrain and Fortis.
The structure is backed by an underlying real estate fund (sponsored by Fortis) that protects both the rental
payments and the principle to the investors.
Investment in the fund is available on each USD business day. By investing in the fund, investors are entitled to
daily rentals indexed at Libor flat (USD) and yielded by the leasing of some properties interests in which SCOF
buys on a daily basis.
36
KFH-Bahrain - Annual Report 2007
Debt Capital Market & Structured Products
Syndication
KFH-Bahrain has recently taken the initiative to set up a syndication desk at the bank.
The objective is to diversify our asset base by sourcing and booking superior asset class
transactions at the regional and international level.
A number of transactions have already been underwritten and closed including financing
of A-320 aircraft and international leasing and Ijarah. The bank also participates in a
number of syndicated transactions, primarily at the senior level.
Rising Africa Infrastructure Fund (RAIF)
Within a context of high potential for PPP infrastructure projects (Public Private Partnership)
in an African continent experiencing a significant economical boom, KFH-Bahrain and
Natixis are collaborating in order to implement RAIF.
As a Shari’a compliant Private Equity Fund (to be established in a company form), RAIF’s
purpose is to develop infrastructures in Africa through the PPP model, which gives
investors the opportunity to participate and contribute to the current forward motion in
the region.
KFH-Bahrain & Groupe Caisse d’Epargne will act as sponsors of RAIF targeting size
amounts up to US$ 500 million.
KFH-Bahrain will play an active management role in the RAIF, especially in terms of
Shari’a compliant debt structuring.
The project is due for launch by summer 2008.
Risk Management
At KFH-Bahrain we believe in the proactive management of risk in the full life cycle of a financial transaction
including its operating circumstances from the origination stage to its final disposal from the books of the
bank.
The bank’s risk strategy, backed by appropriate limit sturctures, is articulated through Risk Charter and Capital
Management policies. These policies provide an enterprise-wide integrated risk management framework in the
bank. The risk charter identifies risk objectives, policies, strategies and risk governance structure both at the
Board and the management level. The capital management policy is aimed at ensuring financial stability by
allocating enough capital to cover unexpected losses. Limit structures serve as a key component in articulating
risk strategy in quantifiable risk appetite. They are further supported by a comprehensive framework for
various risk silos with its own policies and methodology documents. In addition, the bank is in the process of
implementing various risk systems to help quantify not just the regulatory capital but also the economic capital
allocated to various portfolios.
The bank is exposed to various types of risk, such as market, credit, rate of return, liquidity and operational,
all of which require the comprehensive controls and ongoing oversight. The risk management framework
encapsulates the spirit behind Basel II, which includes management oversight & control, risk culture &
ownership, risk recognition & assessment, control activities & segregation of duties, adequate information &
communication channels, monitoring risk management activities and correcting deficiencies.
In line with our risk strategy, the bank has taken several steps to reinforce the culture of risk management
across our various business activities. In 2007 the bank formed a Risk and Governance Committee – a Board
level committee with the mandate to set the policy on all risk and governance issues and maintain oversight
of all bank risks and governance aspects through different senior management committees. In addition
the bank took initiatives to introduce risk-based pricing of products using RAROC measures. KFH-Bahrain
proactively identifies, measures, monitors and manages risks through established processes. These include: a
risk governance structure with clearly established responsibilities at each level; well defined risk management
policies and procedures; the implementation of sophisticated risk systems for Basel II; the setting of limits
for various types of risks according to tolerance levels defined by the Board; and continuous assessment by
Internal Audit of the overall effectiveness of risk policies.
Our major accomplishments in 2007 have been as follows:
1. Finalization of Risk Management Policies: Risk Charter, Capital Management, Market, Credit and
Operational Risks, Trading Procedure and their respective methodologies
2. Integrating Risk Management framework in the policies and procedures of all the business units in
the bank
3. Implementation of ALM and Credit Risk Systems. Start of Internal Rating Based processes
4. Implementation of VAR Framework and corresponding Limit Structure
5. Reinforcement of ALCO, Credit, Investment Committee framework and constitution of ‘Risk and
Governance Committee’ and ‘Nomination and Remuneration Committee’
6. While keeping integrated Risk Management setup, creation of various specialized units for various risk
silos, hence, optimizing integration with the required specialization
7. Hired qualified staff
38
KFH-Bahrain - Annual Report 2007
Though, we made a lot of progress last year towards putting the basic building block for Risk
Management framework, we recognise that more is less when it comes to implementing cost
effective risk management solution. Nevertheless, we will strive to become a benchmark for
Risk Management best practices among our peers in coming years.
Corporate governance
KFH-Bahrain is committed to adopting the highest international standards and global
best practices in corporate governance. The bank has established a strong corporate
governance framework that is designed to protect the interests of all stakeholders, ensure
compliance with regulatory requirements, and enhance organisational efficiency.
KFH-Bahrain has established a robust organisational structure that segregates functions
and responsibilities, and reflects a division of roles and responsibilities of the Board of
Directors and management. Clear mandates exist for the Board, Chairman of the Board,
Board committees, the management, General Manager and management committees.
Responsibilities
The Board of Directors is accountable to the shareholders for the creation and delivery
of strong sustainable financial performance and long-term shareholder value. The
Chairman is responsible for leading the Board, ensuring its effectiveness, monitoring the
performance of the Executive Management, and maintaining a dialogue with the bank’s
shareholders. Code of Conduct
The bank has developed a Code of Business Conduct that governs the professional and
personal behaviour of the directors, management and staff.
Compliance
The bank recognised that compliance with regulatory and statutory provisions is of
paramount importance. The bank has a compliance unit which acts as a focal point
for implimenting local regulatory and statutory requirements.The Board of Directors has
the overall responsibility for ensuring that all activities of KFH-Bahrain are conducted in
accordance and in full compliance with applicable laws and regulations.
Disclosures
A disclosure policy has been developed as part of the Bank’s commitment to adopting
the highest standards of transparency and fairness in disclosing information for the
benefit of all stakeholders. The bank is committed to disclosing information to the public
in a manner consistent with guidelines provided by the Central Bank of Bahrain and in
line with Basel II Pillar III requirements.
Anti-money laundering
KFH-Bahrain has adopted detailed policies and procedures in line with the Central Bank
of Bahrain’s directives to combat money laundering and other financial crimes. It is a firm
policy of the bank not to allow itself to be directly or indirectly used by any elements for
unlawful activities.
Corporate communications policy
The bank maintains an effective communications policy that enables both the Board
and management to communicate effectively with its shareholders, stakeholders and
the public generally. Main communications channels include the annual general meeting,
annual report and accounts, corporate website and corporate brochure, and regular
announcements in the appropriate local press.
Corporate Social Responsibility
our most important investment
As a bank with extensive commercial operations and investments across the Kingdom of Bahrain, KFH-Bahrain
makes a major contribution to the community as a natural extension of the Islamic values at the heart of our
business.
Excellence in education, health and sport were the key themes running through most of our CSR activities,
designed as they are to foster growth, nurture talent and develop the next generation of leaders who best
exemplify the qualities inherent in Bahrain. During 2007 KFH-Bahrain supported several projects and initiatives that clearly reflect our principles and ethics.
Sophia Antipolis Science Park Mentorship Programme
Underscoring its commitment to enhancing opportunities for Bahraini students, KFH-Bahrain sponsored the
2nd Annual Sophia Antipolis Science Park Mentorship Programme. A joint initiative between Kuwait Finance
House-Bahrain, the Young Arab Leaders Organization (YAL) and InJaz Bahrain, a non-profit youth development
and training organisation.
The programme sent 16 Bahraini students on an intensive leadership training course to Sophia Antipolis
in France, Europe’s top science and technology park. There the students were not only immersed in the
surroundings of global institutions, universities and research centres but also faced challenges and daily
interactive seminars on topics such as entrepreneurship and team work.
The Crown Prince’s International Scholarship Fund 2007
The bank provided its support to the educational programme run by the Crown Prince’s International Scholarship
Fund (CPISF). It awards undergraduate to post-graduate scholarships to talented and deserving Bahraini
students for admission at distinguished schools, colleges and universities in the US and UK.
The programme provides the youth with a unique opportunity to pursue their educational goals towards a
fulfilling and successful career. More importantly, it gives them the chance to take part in cross-cultural learning,
broaden their knowledge and experience and gain new perspectives in a foreign country.
Young Arab Leaders Annual Meeting 2007
KFH-Bahrain provided full support for the Young Arab Leaders 2007 Annual Meeting, which was held between
9th to 11th November 2007 under the patronage of His Highness the Crown Prince.
40
KFH-Bahrain - Annual Report 2007
Healthcare sponsorship As part of an initiative aimed at providing leading edge medical services for patients
suffering with heart disease, KFH-Bahrain provided advanced medical equipment
to Mohammed Bin Khalifa Bin Salman Al Khalifa Cardiac Centre. The equipment,
which will be used in catheterisation operations and for calcium reduction in the
bloodstream, will contribute highly to the advancement of healthcare in Bahrain.
The bank also honoured members of the Bahrain Medical Society who attained high
specialised degrees in 2006 and 2007 and dentists who received high and post
graduate degrees during the past year.
Sports sponsorship
KFH-Bahrain sponsored the 11th Annual Bankers Cup and the summer programme
of the Bahrain Shooting & Fencing Association. The bank also sponsored a high
profile initiative by the Bahrain Royal Endurance Association during their participation
in several races held in Europe last September.
Seef Mall Summer Festival
KFH-Bahrain participated as a key sponsor of the Seef Mall Shopping Festival. This
alliance reflected the bank’s commitment to supporting social activities that help drive
the national economy. The Seef Festival has firmly established itself as a truy defined
annual event in Bahrain.
e-Learning Centre at the University of Bahrain
KFH-Bahrain supported the University of Bahrain which contributed to the opening of
the e-Learning Centre, the first of its kind in Bahrain.
Shari’a Board Statement
In the name of Allah, the Beneficent, the Merciful. Praise be to Allah, the Lord of the Worlds, and peace and
blessing be upon our Prophet, Muhammed, and on his Companions.
To the Stakeholders of KFH-Bahrain
Assalam Alaikum Wa Rahmatullah
In compliance with the letter of appointment, we are required to submit the following report:
We have reviewed the principles and the contracts relating to the transactions and applications undertaken
by KFH-Bahrain during the period ended 31 December 2007. We have also conducted our review to form an
opinion as to whether KFH-Bahrain has complied with Shari’a Rules and Principles and also with the specific
fatwas, rulings and guidelines issued by us.
We conducted our review, to the Shari’a Advisor and his assistants, which included examining, on a test basis,
each type of transaction, the relevant documents and procedures adopted by KFH-Bahrain.
We planned and performed our view so as to obtain all the information and explanations which we consider
necessary in order to provide us with sufficient evidence to give reasonable assurance that KFH-Bahrain has
not violated the Shari’a Rules and Principles.
In our opinion:
a)
The contracts, transactions, and dealings entered into by KFH-Bahrain during the year ended 31 December
2007 that we have reviewed are in compliance with the Shari’a Rules and Principles;
b)
he allocation of profits and losses relating to investment accounts conform to the basis that had been
T
approved by us in accordance with Shari’a Rules and Principles;
c)
All earnings that have been realised from sources or by means prohibited by Shari’a Rules and Principles,
have been disposed of to charitable causes; and
d)
The calculation of Zakat is in compliance with Shari’a Rules and Principles.
This opinion is rendered based on what has been presented to us by KFH-Bahrain’s General Manager and
its in-house Shari’a Advisor. We would like to thank the management for its acceptance and compliance
to the Shari’a principles and guidelines. We pray to Allah the Almighty to grant us success and the path of
straightforwardness.
Wassalam Alaikum Wa Rahmatullah Wa Barakatuh.
42
Ahmad Bazie Al-Yaseen Chairman
Ajeel Jasem Al-Nashmi Member
Mohammed Fawzi Faidullah Member
Anwar Shuaib Abdulsalam Member
Khalid Mathkour Al-Mathkour Member
Mohammed Abdul Razaq Al-Tabtabaee Member
KFH-Bahrain - Annual Report 2007
Independent Auditors’ Report
to the Shareholders of Kuwait Finance House - Bahrain
We have audited the accompanying consolidated
financial statements of Kuwait Finance House (Bahrain)
B.S.C. (c) [the “Bank”] and its subsidiaries [together the
“Group”] which comprise the consolidated balance sheet
as at 31 December 2007 and the consolidated statement
of income, the consolidated statement of cash flows,
the consolidated statement of changes in equity and the
consolidated statement of restricted investment accounts
for the year then ended and a summary of significant
accounting policies and other explanatory notes.
Board of Directors’ Responsibility
for the Financial Statements
The Board of Directors is responsible for the preparation and
fair presentation of these consolidated financial statements
in accordance with both the Financial Accounting Standards
issued by the Accounting and Auditing Organisation for Islamic
Financial Institutions, to operate in accordance with Islamic
Shari’a, and International Financial Reporting Standards.
This responsibility includes: designing, implementing and
maintaining internal controls relevant to the preparation and
fair presentation of consolidated financial statements that
are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies;
and making accounting estimates that are reasonable in the
circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our
audit in accordance with both the International Standards
on Auditing and Auditing Standards for Islamic Financial
Institutions. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditors’
judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers
internal controls relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit
procedures that are appropriate for the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the entity’s internal controls. An audit also includes evaluating
KFH ar 08 financials v9 19 may.indd 43
the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the Board
of Directors, as well as evaluating the overall presentation of
the financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Group
as of 31 December 2007 and of its financial performance and
its cash flows for the year then ended in accordance with
Financial Accounting Standards issued by the Accounting
and Auditing Organization for Islamic Financial Institutions and
the Islamic Shari’a Rules and Principles as determined by the
Shari’a Supervisory Board of the Bank.
In addition, in our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position
of the Group as of 31 December 2007 and of its financial
performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards.
Other Regulatory Matters
We confirm that, in our opinion, proper accounting records
have been kept by the Group and the consolidated financial
statements, and the contents of the Report of the Board of
Directors relating to these consolidated financial statements,
are in agreement therewith. We further report, to the best of
our knowledge and belief, that no violations of the Bahrain
Commercial Companies Law, nor of the Central Bank of
Bahrain and Financial Institutions Law, nor of the memorandum
and articles of association of the Bank have occurred during
the year ended 31 December 2007 that might have had a
material adverse effect on the business of the Group or on
its consolidated financial position, and that the Bank has
complied with the terms of its banking license.
13 February 2008
Manama, Kingdom of Bahrain
5/22/08 4:11:21 PM
Consolidated Balance Sheet
at 31 December 2007
Notes
2007
BD 000s
2006
BD 000s
ASSETS
Cash and balances with banks and Central Bank of Bahrain
5
23,640
21,383
Murabaha and Mudaraba contracts with banks
6
80,685
66,654
Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek
contracts relating to customers
7
276,061
161,956
Investments
8
141,872
83,063
Investment in associates
9
41,356
15,385
Investment properties
10
105,097
27,623
Receivables and prepayments
11
40,658
11,268
Goodwill and intangibles
12
6,927
2,508
18,995
13,204
735,291
403,044
Premises and equipment
TOTAL ASSETS
LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY
LIABILITIES
Murabaha contracts with banks
13
77,329
110,366
Murabaha contracts with non-banks
14
287,269
99,345
Customers’ current accounts
15
107,150
46,549
Other liabilities
17
46,191
12,875
517,939
269,135
53,091
44,375
UNRESTRICTED INVESTMENT ACCOUNTS
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Share capital
19
70,016
44,560
Share premium
19
15,040
760
Statutory reserve
20
8,238
5,098
General reserve
20,173
13,800
Investment revaluation reserve
22,390
12,058
Retained earnings
17,925
10,827
153,782
87,103
MINORITY INTEREST
TOTAL LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY
RESTRICTED INVESTMENT ACCOUNTS
CREDIT COMMITMENTS AND CONTINGENT ITEMS
Bader A. M. Mukhaizeem
Chairman and Managing Director
Mohamed bin Sh. Eshaq
Vice Chaiman
28
10,479
2,431
164,261
89,534
735,291
403,044
66,066
19,109
59,372
31,003
Abdulhakeem Y. Alkhayyat
General Manager
The attached notes 1 to 33 form part of these consolidated financial statements.
44
KFH-Bahrain - Annual Report 2007
KFH ar 08 financials v9 19 may.indd 44
5/22/08 4:11:22 PM
Consolidated Statement of Income
Year ended 31 December 2007
Notes
2007
BD 000s
2006
BD 000s
Income from investment activities
21
29,908
28,180
Income from retail and corporate banking activities
22
25,863
17,819
9
14,173
512
Share of income of associates
Other income
Less: Profit on Murabaha contracts
2,049
864
71,993
47,375
14,639
9,039
57,354
38,336
Staff costs
8,106
6,438
Depreciation
1,871
1,493
Provisions
3,233
2,284
Other operating expenses
23
NET INCOME BEFORE PROFIT ON UNRESTRICTED
INVESTMENT ACCOUNTS
Less: Profit on unrestricted investment accounts
NET INCOME FOR THE YEAR
18
9,812
6,158
23,022
16,373
34,332
21,963
1,662
1,200
32,670
20,763
31,399
21,130
Attributable to:
Shareholders of the Parent
Minority interest
1,271
(367)
32,670
20,763
The attached notes 1 to 33 form part of these consolidated financial statements.
KFH ar 08 financials v9 19 may.indd 45
5/22/08 4:11:22 PM
Consolidated Statement of Cash Flows
Year ended 31 December 2007
Notes
OPERATING ACTIVITIES
Net income for the year
2007
BD 000s
2006
BD 000s
32,670
20,763
3,233
2,284
1,871
1,493
Adjustments for:
Provisions
Depreciation
Share of income of associates
9
(14,173)
(512)
Unrealised gain on investments
21
(7,147)
(6,705)
Unrealised gain on investment properties
21
(9,625)
(1,363)
Profit on sale of investment properties
21
(2,736)
(1,875)
4,093
14,085
Mandatory reserve with Central Bank of Bahrain
(6,100)
(1,680)
Murabaha and Mudaraba contracts with banks
4,408
15,497
(124,089)
(53,712)
Operating income before changes in operating assets and liabilities
Changes in operating assets and liabilities:
Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek
contracts relating to customers
Receivables and prepayments
(24,022)
(2,694)
Murabaha contracts with banks
(26,135)
54,022
Murabaha contracts with non-banks
169,686
31,166
61,455
15,367
Customers’ current accounts
Other liabilities
Net cash from operating activities
INVESTING ACTIVITIES
Acquisition of a subsidiary - net of cash and bank balances acquired
12
Additional investment in acquired subsidiary
7,661
5,182
66,957
77,233
(2,236)
-
(8,892)
-
Purchase of investments
(37,178)
(31,696)
Investments in associates
(16,315)
-
Purchase of investment properties
(21,730)
(12,233)
Proceeds from sale of investment properties
4,037
2,585
Purchase of intangibles
(1,552)
-
Purchase of premises and equipment
(7,534)
(3,657)
(91,400)
(45,001)
8,716
13,568
2,320
Net cash used in investing activities
FINANCING ACTIVITIES
Increase in unrestricted investment accounts
Issue of new shares of the Bank
35,280
Net movement in minority interest
(4,653)
-
Net Cash from financing activities
39,343
15,888
NET CHANGE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at 1 January
14,900
77,610
48,120
29,490
92,510
77,610
CASH AND CASH EQUIVALENTS AT 31 DECEMBER
24
The attached notes 1 to 33 form part of these consolidated financial statements.
46
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Consolidated Statement of Changes in Equity
Year ended 31 December 2007
Attributable to the shareholders of the parent
Investment
Share
Statutory
General
revaluation
premium
reserve
reserve
reserve
Retained
earnings
Total
Minority
interest
Total equity
BD 000s
BD 000s
BD 000s
BD 000s
BD 000s
BD 000s
38,500
-
2,985
-
3,992
18,325
63,802
2,777
66,579
-
-
-
-
-
21,130
21,130
(367)
20,763
-
-
-
-
11,738
(11,738)
-
-
-
-
-
-
-
(3,672)
3,672
-
-
-
-
-
-
-
-
(149)
(149)
-
(149)
-
-
-
-
-
-
-
21
21
-
-
-
18,300
-
(18,300)
-
-
-
Bonus shares issued
4,500
-
-
(4,500)
-
-
-
-
-
Issue of new shares
1,560
760
-
-
-
-
2,320
-
2,320
-
-
(2,113)
-
-
2,113
-
-
-
44,560
760
5,098
13,800
12,058
10,827
87,103
2,431
89,534
-
-
-
-
-
31,399
31,399
1,271
32,670
-
-
-
-
11,717
(11,717)
-
-
-
-
-
-
-
(1,385)
1,385
-
-
-
-
-
-
-
-
-
-
6,777
6,777
-
Share
Capital
Notes
BD 000s
BD 000s
BD 000s
Balance at
1 January 2006
Income for the year
Transfer to investment
revaluation reserve
Transfer to retained
earnings on sale of
investments
Directors’ remuneration
Net movement in
minority interest
Transfer to general reserve
Transfer to statutory
reserve
Balance at
31 December 2006
Income for the year
Transfer to investment
revaluation reserve
Transfer to retained
earnings on sale
of investments
10
Net movement in
minority interests
Transfer to general
-
-
- 10,829
-
(10,829)
-
-
Bonus shares issued
reserve
19
4,456
-
-
(4,456)
-
-
-
-
-
Issue of new shares
19
21,000
14,280
-
-
-
-
35,280
-
35,280
-
-
3,140
-
-
(3,140)
-
-
-
70,016
15,040
8,238 20,173
22,390
17,925 153,782
10,479
164,261
Transfer to statutory
reserve
Balance at 31
December 2007
Note: Included in retained earnings is a non-distributable reserve amounting to BD 349 thousands (2006: BD 47 thousands)
relating to subsidiaries of the Bank.
The attached notes 1 to 33 form part of these consolidated financial statements.
KFH ar 08 financials v9 19 may.indd 47
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Consolidated Statement of Restricted Investment Accounts
Year ended 31 December 2007
Murabaha contracts
Istisna’a contracts
Murabaha contracts
Istisna’a contracts
Balance at
1 January
2006
BD 000s
-
Deposits
BD 000s
Gross
Income
BD 000s
Mudarib
Fee
BD 000s
Withdrawals /
distributions
BD 000s
Balance at
31 December
2006
BD 000s
5,363
208
(54)
(154)
5,363
11,007
4,534
1,050
(260)
(2,585)
13,746
11,007
9,897
1,258
(314)
(2,739)
19,109
Balance at
1 January
2007
BD 000s
Deposits
BD 000s
Gross
Income
BD 000s
Balance at
Mudarib Withdrawals / 31 December
Fee distributions
2007
BD 000s
BD 000s
BD 000s
5,363
59,800
1,766
(380)
(8,680)
13,746
-
973
(237)
(6,285)
57,869
8,197
19,109
59,800
2,739
(617)
(14,965)
66,066
The attached notes 1 to 33 form part of these consolidated financial statements.
48
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Notes to the Consolidated Financial Statements
At 31 December 2007
1
CORPORATE INFORMATION
Kuwait Finance House (Bahrain) B.S.C. (c) [‘the Bank’] is a closed joint stock company incorporated in the Kingdom of Bahrain
on 22 January 2002 under the Bahrain Commercial Companies Law No. 21/2001 and is registered with the Ministry of Industry
and Commerce under commercial registration (CR) number 48128. The Bank is regulated and supervised by the Central Bank
of Bahrain (the ‘CBB’) and has a retail Islamic banking license, is operating under Islamic principles and in accordance with all
the relevant regulatory guidelines for Islamic banks issued by the CBB. The address of the Bank’s registered office is Building
121, Government Avenue, Block 304, Manama, Kingdom of Bahrain.
The Bank offers a full range of Islamic banking services and products. The activities of the Bank include accepting Shari’a
money placements/deposits, managing Shari’a profit sharing investment accounts, offering Shari’a financing contracts, dealing
in Shari’a compliant financial instruments as principal/agent, managing Shari’a compliant financial instruments and other
activities permitted under the CBB’s Regulated Banking Services as defined in the licensing framework. The activities of the
Bank’s subsidiaries are mentioned in note 4.
The Bank is a subsidiary of Kuwait Finance House K.S.C. (the ‘Parent Company’), a public company incorporated in the State
of Kuwait. The Bank’s Shari’a Supervisory Board is entrusted to ensure the Bank’s adherence to Shari’a rules and principles in
its transactions and activities.
The Bank and its subsidiaries (together the ‘Group’) operate in the Kingdom of Bahrain and Hashemite Kingdom of Jordan.
The consolidated financial statements were authorized for issue in accordance with a resolution of the Board of Directors on
13 February 2008.
2
BASIS OF PREPARATION
The consolidated financial statements have been prepared under the historical cost basis, except for investments and investment
properties that have been measured at fair value. The consolidated financial statements are presented in Bahraini Dinars which
is the functional currency of the Group. All the values are rounded to the nearest BD thousand.
Statement of Compliance
The consolidated financial statements have been prepared in accordance with Financial Accounting Standards [FAS] issued by
the Accounting and Auditing Organization for Islamic Financial Institutions [AAOIFI], International Financial Reporting Standards
[IFRS] and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions
Law.
Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Group as at 31 December each year. The
financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting
policies.
All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are
eliminated in full.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, which is
other than fiduciary in nature, and continue to be consolidated until the date that such control ceases.
Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented separately
in the consolidated statement of income and within equity in the consolidated balance sheet, separately from the Bank’s
shareholders’ equity.
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES
Significant accounting judgments and estimates
In the process of applying the Group’s accounting policies, management has used its judgments and made estimates in
determining the amounts recognised in the consolidated financial statements. The most significant use of judgments and
estimates are as follows:
Valuation of unquoted equity investments
Valuation of unquoted equity investments is normally based on one of the following:
-
recent arm’s length market transactions;
current fair value of another instrument that is substantially the same ;
the expected cash flows discounted at current rates applicable for items with similar terms and risk
characteristics; or
other valuation models.
The Group calibrates the valuation techniques periodically and tests these for validity using either prices from observable current
market transactions in the same instrument or other available observable market data. Nonetheless, the actual amount that is
realised in a future realisation transaction may differ from the current valuation and may still be different from the management’s
estimates, given the inherent uncertainty surrounding valuations of unquoted equity investments.
Impairment losses on Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts (the “Financial Contracts”)
relating to customers
The Group reviews its problem financial contracts at each reporting date to assess whether an allowance for impairment should
be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of
the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on
assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
In addition to specific allowances against individually significant financial contracts, the Group also makes a collective impairment
allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of
default than when originally granted. This take into consideration factors such as any deterioration in country risk, industry, and
technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.
Impairment of equity investments
The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged decline in
the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or
‘prolonged’ requires judgment. In addition, the Group evaluates other factors, such as the share price volatility.
Change in accounting policy and disclosures
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these
revised standards and interpretations did not have any effect on the financial performance of the Group. They did however give
rise to additional disclosures in the financial statements.
-
IFRS 7
IAS 1
IFRIC 8
IFRIC 10
Financial Instruments: Disclosures
Amendment—Presentation of Financial Statements
Scope of IFRS 2
Interim Financial Reporting and Impairment
The principal effects of these changes are as follows:
IFRS 7 Financial Instruments: Disclosures
This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Groups
financial instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are
included throughout the consolidated financial statements. While there has been no effect on the financial position or results,
comparative information has been added where needed.
50
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
IAS 1 Presentation of Financial Statements
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the
Group’s objectives, policies, and processes for managing capital. These new disclosures are shown in Note 27.
IFRIC 8 Scope of IFRS 2
This interpretation requires IFRS 2 to be applied to any arrangements in which the entity cannot identify specifically some or all of
the goods received, in particular where equity instruments are issued for consideration which appears to be less than fair value.
As equity instruments are only issued to employees in accordance with the employee share scheme at price approximating fair
values, the interpretation had no impact on the financial position or performance of the Group.
IFRIC 10 Interim Financial Reporting and Impairment
The Group adopted IFRIC interpretation 10 as of 1 January 2007, which requires that an entity must not reverse an impairment
loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial
asset carried at cost. As the Group had no impairment losses previously reversed, the interpretation had no impact on the
financial position or performance of the Group.
Summary of Significant Accounting Policies
The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below:
(i) Murabaha contracts
Murabaha contracts consist of deferred sales transaction agreements and are stated net of deferred profits, any amounts
written-off and provision for impairment.
(ii) Mudaraba contracts
Mudaraba contracts are partnerships in which the Bank provides capital to the Mudarib and Mudarib manages the capital
for a mudarib fee. These are stated at the fair value of consideration given less any amounts written-off and provision for
impairment.
(iii) Musharaka contracts
Musharaka contracts are partnerships in which the Bank contributes capital. These are stated at the fair value of consideration
given less any amounts written-off and provision for impairment.
(iv) Ijarah Muntahia Bittamleek
Ijarah Muntahia Bittamleek comprises assets, mainly land and buildings, leased to third parties, under terms that would transfer
the ownership of the assets to third parties at the end of the lease period.
Ijarah assets are recorded at cost. Depreciation is provided on all Ijarah assets at rates calculated to write off the cost of each
asset over the period of the lease to its residual value.
(v) Istisna’a
Istisna’a comprises direct costs of producing ‘al-masnoo’ and indirect costs relating to the contract allocated on an objective
basis. Istisna’a costs incurred during the year are recognised as an asset.
(vi) Investments
These are classified as follows:
-
Carried at fair value through income statement
Available for sale
All investments are initially recognised at cost being the fair value of consideration given including acquisition charges associated
with the investment. After initial recognition, investments are remeasured using the policies given below:
Carried at fair value through income statement
Investments carried at fair value through income statement includes investments held for trading and investments designated
upon initial recognition as carried at fair value through income statement.
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
Investments are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on
investments held for trading are recognised in consolidated statement of income.
Investments are designated at initial recognition as carried at fair value through income statement if the fair value of the investment
can be reliably measured and the classification as fair value through income statement is as per the documented strategy of
the Bank. Investments classified as “Investments carried at fair value through income statement” upon initial recognition are
remeasured at fair value with all changes in fair value being recorded in the consolidated statement of income.
Available for sale
Available for sale investments are those which are designated as such or do not qualify to be classified as carried at fair value
through income statement. They include equity investments and sukuks.
After initial measurement, available for sale investments are subsequently measured at fair value. Unrealised gains and losses
are recognised directly in equity in the “Available for sale reserve”. When the investment is disposed off, the cumulative gain or
loss previously recognised in equity is recognised in the consolidated statement of income in income from investment activities.
Where the Group holds more than one investment in the same security they are deemed to be disposed off on a weighted
average basis. Profit earned whilst holding available for sale investments is reported as income from debt instruments using the
effective profit rate. Dividends earned whilst holding available for sale investments are recognised in the consolidated statement
of income as ‘Other income’ when the right of the payment has been established.
(vii) Determination of fair values
The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price
or dealer price quotations, without any deduction for transaction costs. The fair value of investments in managed funds is based
on net asset values provided by fund manager.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation
techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market
observable prices exist and other relevant valuation models.
(viii) Premises and equipment
Premises and equipment are stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and
accumulated impairment in value.
Depreciation is calculated using the straight-line method to write down the cost of premises and equipment to their residual
values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:
Premises:
Equipment:
20 Years
3 Years
An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is recognised in the consolidated statement of income in the year the asset is
derecognised.
(ix) Investment in associates
The Group’s investment in its associate is accounted for under the equity method of accounting. An associate is an entity in
which the Group has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post- acquisition changes
in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of
the investment and is not amortized. After application of the equity method, the Group determines whether it is necessary
to recognize any additional impairment loss with respect to the Group’s net investment in the associate. The consolidated
statement of income reflects the share of the results of operations of the associate. Where there has been a change
recognized directly in the equity of the associate, the Group recognizes its share of any changes and discloses this, when
applicable, in the consolidated statement of changes in equity. Profits and losses resulting from transactions between the Group
and the associate are eliminated to the extent of the interest in the associate.
52
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
The reporting dates of the associate and the Group are identical and the associates’ accounting policies conform to those used
by the Group for like transactions and events in similar circumstances.
(x) Investment properties
The Group holds certain properties as investments to earn rental income, for capital appreciation or both. Investment properties
are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at
fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of
investment properties are included in the consolidated statement of income in ‘Income from investment activities’ in the year in
which they arise.
(xi) Investment revaluation reserve
Unrealized gains resulting from revaluation of investments and investment properties, are appropriated to investment revaluation
reserve and are not available for distribution to shareholders. Upon disposal of these investments, the related cumulative gain
is transferred to retained earnings and is available for distribution.
(xii) Business combinations and goodwill
Business combinations are accounted for using the purchase method of accounting. This involves recognising 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 is recognised directly in the consolidated statement of income in the year of acquisition.
Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business
combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following
initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment,
annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences
and related goodwill is recognised in the consolidated statement of income.
(xiii) Intangible assets
Intangible assets include the value of patents and license rights. Intangible assets acquired separately are measured on
initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date
of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any
accumulated impairment losses.
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised
over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful
life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption
of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as
appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is
recognised in the consolidated statement of income in the expense category consistent with the function of the intangible asset.
Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over
their estimated useful lives.
(xiv) Inventories held for consumer finance
Inventories are stated at the lower of cost and net realisable value. Costs are those expenses incurred in bringing the inventories
to its present location and condition, such as purchase cost. Net realisable value is based on estimated selling price less any
further costs expected to be incurred on disposal.
(xv) Unrestricted Investment accounts
All unrestricted investment accounts are carried at cost less amounts repaid.
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
(xvi) Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) arising from a past event and the
costs to settle the obligation are both probable and able to be reliably measured.
(xvii) Offsetting Financial Instruments
Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally
enforceable right to set off the recognized amounts and the Group intends to either settle on a net basis, or to realise the asset
and settle the liability simultaneously.
(xviii) Cash and Cash Equivalents
Cash and cash equivalents comprise of cash and balances with banks and the Central Bank of Bahrain (excluding mandatory
reserve deposits) and murabahas and mudarabas with banks with original maturities of 90 days or less.
(xix) Revenue recognition
Murabaha
Where the income is quantifiable and contractually determined at the commencement of the contract, income is recognized on
a time-apportioned basis over the period of the contract based on the principal amounts outstanding. Where the income from
a contract is not quantifiable, it is recognized when realized. Accrual of income is suspended when the Group believes that the
recovery of these amounts may be doubtful or when the repayments are overdue by 90 days, whichever is earlier.
Mudaraba
Income and losses on Mudaraba transactions are recognized when the right to receive is established or these are declared by
the Mudarib, whichever is earlier.
Musharaka
Income on musharaka contracts is recognised when the right to receive payment is established or on distribution. Income
related to accounts that are 90 days overdue is excluded from the consolidated statement of income.
Ijarah
Ijarah income is recognized on a time-apportioned basis over the lease term.
Istisna
Istisna income is recognised over the construction period using the percentage completion method.
Dividends
Dividends from investments in equities are recognized when the right to receive the payment is established.
Fees and commission income
Fees and commission income is recognized when earned.
(xx) Allocation of income
Income is allocated proportionately between unrestricted investment accounts and shareholders on the basis of the average
balances outstanding during the year and share of the funds invested.
(xxi) Foreign currency translation
The consolidated financial statements are presented in Dinars, which is Group functional and presentational currency. Each
entity in the group determines its own functional currency and items included in the financial statements of each entity are
measured using that functional currency.
Transactions and balances
Transactions in foreign currencies are initially recorded in the functional currency rate of exchange ruling at the date of the
transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date. All differences are taken to the consolidated statement of income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates
as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using
the exchange rates at the date when the fair value was determined. Any goodwill arising on the acquisition of a foreign operation
and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets
and liabilities of the foreign operations and translated at closing rate.
54
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
(xxi) Foreign currency translation (continued)
Group companies
As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (the
Bahraini Dinars) at the rate of exchange ruling at the balance sheet date, and their statements of income are translated at the
average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component
of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign
operation is recognised in the income statement in ‘Other operating expenses’ or ‘Other operating income’, respectively.
(xxii) Trade and settlement date accounting
Purchases and sales of financial assets are recognized on the trade date, i.e. the date that the Group commits to purchase or
sell the asset.
(xxiii) Fiduciary assets
Assets held in a fiduciary capacity are not reported in the consolidated financial statements, as they are not the assets of the Group.
(xxiv) Restricted investment accounts
Restricted investment accounts represents assets held in trust or in a fiduciary capacity by the Group for the benefit of the
investment accounts holders. The restricted investment accounts are exclusively restricted for investment in specified projects
as directed by the investments account holders.
(xxv) Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of
financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is
objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an
incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or
the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower
or a group of borrowers is experiencing significant financial difficulty, default or delinquency in profit or principal payments, the
probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a
measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate
with defaults.
Balances with banks and Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers
For balances with banks and Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts relating to customers
carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists individually for
financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group
determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or
not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them
for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be,
recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit
losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account
and the amount of the loss is recognised in the consolidated statement of income. Income from Murabaha, Musharaka, Istisna’a
and Ijarah Muntahia Bittamleek contracts continue to be accrued on the reduced carrying amount based on the original effective
profit rate.
Financial contracts together with the associated allowance are written off when there is no realistic prospect of future recovery
and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated
impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously
recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered,
the recovery is credited to the ‘Income from retail and corporate banking activities’.
KFH ar 08 financials v9 19 may.indd 55
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Notes to the Consolidated Financial Statements
At 31 December 2007
3
ACCOUNTING POLICIES (continued)
(xxv) Impairment of financial assets (continued)
The present value of the estimated future cash flows is discounted at the financial asset’s original effective profit rate. If a financial
asset has a variable profit rate, the discount rate for measuring any impairment loss is the current effective profit rate. The
calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that
may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s internal credit
grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type,
past-due status and other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of
historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is
adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which
the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from
year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors
that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating
future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
Available for sale investments
For available for sale investments, the Group assesses at each balance sheet date whether there is objective evidence that an
investment or a group of investments is impaired.
In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged
decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured
as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously
recognised in the consolidated statement of income is removed from equity and recognised in the consolidated statement of
income. Impairment losses on equity investments are not reversed through the consolidated statement of income; increases in
their fair value after impairment are recognised directly in equity.
In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial
assets carried at amortised cost. Profit continues to be accrued at the original effective profit rate on the reduced carrying
amount of the asset and is recorded as part of ‘Income from investment activities’. If, in a subsequent year, the fair value of
a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was
recognised in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of
income.
Cars inventory
Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is
made of their net realisable value. For individually significant amounts this estimation is performed on an individual basis.
Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and an allowance applied
according to the inventory type and the degree of ageing or obsolescence, based on historical selling prices.
Future changes in accounting policies
The International Financial Reporting Standards and Financial Accounting Standards issued by the Accounting and Auditing
Organization for Islamic Financial Institutions, effective 1 January 2008, will not have any significant impact on the consolidated
financial statements of the Group.
56
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
4
INVESTMENT IN SUBSIDIARIES
Key subsidiaries, all of which have 31 December as their year end, are as follows:
Subsidiary
Activities
Year of
incorporation
Mena Telecom W.L.L.
The
company
is
a
licensed
telecommunications company and a
Satellite Access Service Provider.
2003
Kingdom of Bahrain
100.00
Miracle Graphics
The company is engaged in the business of
designing, big format printing, reprographics
and publishing.
2003
Kingdom of Bahrain
70.00
Baytik Investment
Advisory W.L.L.
The principal activity of the company is
providing advisory services to the Bank and
its affiliates.
2003
Kingdom of Bahrain
100.00
Al-Enma House for
Real Estate W.L.L.
The company is engaged in property
management of commercial, industrial
and residential buildings in the Kingdom of
Bahrain. (Note 12)
2003
Kingdom of Bahrain
59.28
Bayan Group for
Investment Properties
W.L.L.
The principal activity of the company
is to buy, sell and lease properties and
to undertake joint ventures with other
companies engaged in similar activities.
2004
Kingdom of Bahrain
100.00
Al Kindi Pharmaceutical
Industries (Public
Shareholding Company)
The company is engaged in the manufacture
of drugs in all their pharmaceutical dosage
forms and the manufacturing of semipharmaceutical products specialised for
skin care, cosmetics and others.
1997
Hashemite Kingdom of Jordan 82.20
Kuwait Finance House
- Jordan
The company will be engaged in investment
advisory, acquisition and development of
private equity investments in the Hashemite
Kingdom of Jordan.
2007
Hashemite Kingdom of Jordan 100.00
Company W.L.L.
KFH ar 08 financials v9 19 may.indd 57
Country of
Ownership %
incorporation
5/22/08 4:11:26 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
5
CASH AND BALANCES WITH BANKS AND CENTRAL BANK OF BAHRAIN
2007
BD 000s
2006
BD 000s
Cash
2,027
1,276
Balances with banks - nostros
4,525
9,519
Balances with Central Bank of Bahrain
6
17,088
10,588
23,640
21,383
MURABAHA AND MUDARABA CONTRACTS WITH BANKS
Europe
2007
BD 000s
Middle East
Total
2006
BD 000s
2007
BD 000s
2006
BD 000s
2007
BD 000s
2006
BD 000s
-
-
80,796
62,226
80,796
62,226
-
-
(111)
61,754
(472)
36,451
(111)
61,754
(472)
36,451
Murabaha contracts with banks international commodities
Deferred profits
Mudaraba contract
with banks
7
4,900
-
-
-
4,900
4,900
80,685
61,754
80,685
66,654
MURABAHA, MUSHARAKA, ISTISNA’A AND IJARAH MUNTAHIA BITTAMLEEK CONTRACTS RELATING TO
CUSTOMERS
2007
BD 000s
2006
BD 000s
Murabaha contracts
125,072
72,620
Deferred profits
(10,283)
(7,295)
114,789
65,325
107,122
69,892
Ijarah Muntahia Bittamleek (Note 7.1)
Musharaka contracts
Istisna’a contracts
Provisions
58
-
7,535
2,709
56,369
30,695
285,815
168,621
(9,754)
(6,665)
276,061
161,956
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
7
MURABAHA, MUSHARAKA, ISTISNA’A AND IJARAH MUNTAHIA BITTAMLEEK CONTRACTS RELATING TO
CUSTOMERS (continued)
7.1 Movement is Ijarah Muntahia Bittamleek assets is as follows:
2007
BD 000s
2006
BD 000s
At 1 January
72,601
47,921
Additions during the year
42,182
28,508
Ijarah assets’ depreciation - net
At 31 December
(7,661)
(3,828)
107,122
72,601
The rentals received against Ijarah Muntahia Bittamleek are included in income from retail and corporate banking activities.
During the year, BD 4,607 thousand (2006: BD 2,358 thousand) has been provided as depreciation which is included in the
rentals received. Certain Ijarah have completed the contracted period whose accumulated depreciation amounted to BD 774
thousand (2006: BD 493 thousand).
The composition of the Murabaha, Musharika, Istisna’a and Ijarah Muntahia Bittamleek contracts, net of deferred profits and
provision, based on the status of the customer to the contract, is as follows:
2007
BD 000s
Commercial and business
Real estate
Private individuals
2006
BD 000s
76,524
23,632
118,260
63,078
81,277
75,246
276,061
161,956
2007
BD 000s
2006
BD 000s
At 1 January
6,665
4,756
Charge for the year
3,089
1,909
At 31 December
9,754
6,665
The movements in provisions were as follows:
At 31 December 2007 Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts on which profit is not being
accrued, amounted to BD 447 thousand (2006: BD 336 thousand). Unrecognised profit relating to such contracts amounted to
BD 72 thousand (2006: BD 47 thousand).
KFH ar 08 financials v9 19 may.indd 59
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Notes to the Consolidated Financial Statements
At 31 December 2007
8
INVESTMENTS
At 31 December 2007 the Group has the following investments:
2007
BD 000s
2006
BD 000s
Classified as
Carried at fair value through income statement:
Held for trading equities - quoted
Equities
Managed funds
Available for sale:
Equities
Government sukuks
Other sukuks
11,830
-
67,809
51,139
8,155
8,648
28,336
11,733
12,275
7,773
13,467
3,770
141,872
83,063
The composition of the investment portfolio is as follows:
New Zealand/
Australia
BD 000s
Commercial and technology
Real estate development
Others
9
Total
Middle East
BD 000s
Others
BD 000s
2007
BD 000s
2006
BD 000s
5,077
-
7,742
12,819
5,058
-
72,171
-
72,171
35,670
18,288
32,573
6,021
56,882
42,335
23,365
104,744
13,763
141,872
83,063
INVESTMENT IN ASSOCIATES
The Group has investment in Durrat Khaleej Al Bahrain B.S.C. (c), an associate with 48% (2006: 37.7%) interest. The associate,
incorporated in the Kingdom of Bahrain, is currently engaged in developing Durrat Al-Bahrain Island, a real estate project in the
Kingdom of Bahrain. During the year, Al-Enma House for Real Estate W.L.L. (previously an associate) has become a subsidiary
(Note 12).
The following table illustrates the summarised financial information of the Group’s investment in associates.
2007
BD 000s
60
2006
BD 000s
Share of associate’s balance sheet
Current assets
30,283
17,800
Non current assets
51,733
26,396
Current liabilities
(16,221)
(5,149)
Non current liabilities
(39,627)
(30,489)
Net assets
26,168
8,558
Share of associates’ revenue and net income
Revenue
40,936
6,805
Net income for the year
14,173
512
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
10 INVESTMENT PROPERTIES
2007
BD 000s
2006
BD 000s
Cost
At 1 January
22,591
11,068
Additions
60,387
12,233
9,718
-
Relating to a subsidiary acquired during the year
Disposals
(1,301)
(710)
At 31 December
91,395
22,591
Fair value adjustment
At 1 January
5,032
3,669
Unrealised gain on investment properties
9,625
3,017
430
-
Relating to disposals
(1,385)
(1,654)
At 31 December
13,702
5,032
105,097
27,623
2007
BD 000s
2006
BD 000s
Relating to a subsidiary acquired during the year
Total
Investment properties, held in the Kingdom of Bahrain, at 31 December consist of the following:
Buildings
31,199
6,211
Land
73,898
21,412
105,097
27,623
Investment properties were revalued as of dates close to the balance sheet date, by independent consultants who have
reasonable and sufficient experience in the location and category of the properties being valued.
These include certain properties in which the Bank’s share is valued at BD 614 thousand (2006: BD 3,300 thousand) which are
jointly owned with third parties and are subject to normal conditions applicable to joint ownership.
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Notes to the Consolidated Financial Statements
At 31 December 2007
11 RECEIVABLES AND PREPAYMENTS
2007
BD 000s
Advance for purchase of investment property
2006
BD 000s
11,000
-
Performance and management fees receivable (Note 25)
8,101
1,083
Investment liquidation proceeds receivable
4,305
-
Project expenses receivable (Note 25)
3,915
3,343
Inventories held for consumer finance
2,669
-
Profit receivable
1,726
1,473
Receivable relating to investment property
1,675
-
Trade receivables of a subsidiary
1,586
1,375
Inventories and work in progress of a subsidiary
650
568
Prepaid expenses
486
445
4,545
2,981
40,658
11,268
2007
BD 000s
2006
BD 000s
Other assets
12 GOODWILL AND INTANGIBLES
Goodwill
4,221
1,354
Intangibles
2,706
1,154
At 31 December
6,927
2,508
Acquisition of additional shares in Al Enma’ House for Real Estate B.S.C.(c)
Until 9 July 2007, the Group had a 39.52% stake in Al Enma’ House for Real Estate B.S.C.(c) which was treated as an
associate and accounted for under the equity method of accounting. On 10 July 2007, the Bank increased its holding to
59.28% through a purchase of 990,000 shares. As a result, from 10 July 2007, Al Enma’ House for Real Estate B.S.C.(c)
became a subsidiary of the Group and has been consolidated from that date.
The fair value and the carrying value of identifiable assets and liabilities of Al Enma’ House for Real Estate B.S.C.(c) as at the
date of acquisition were as follows:
BD 000s
Assets
Cash and balances with banks
1,464
Investments
1,003
Investment properties
Receivables and prepayments
Equipment
10,148
4,649
94
17,358
Liabilities
Murabaha contracts with banks
Other liabilities
Net assets
62
7,759
320
9,279
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
12 GOODWILL AND INTANGIBLES (continued)
BD 000s
Acquisition of additional shares representing 19.76% interest
1,834
Goodwill arising on acquisition
1,866
Total Consideration
3,700
BD 000s
Cash and balances with banks acquired with the subsidiary
1,464
Cash paid on acquisition
(3,700)
Net cash and balances with banks paid on acquisition
(2,236)
From the date of consolidation, Al Enma’ House for Real Estate B.S.C.(c) has contributed BD 3,918 thousand to the net income
of the Group. If the combination had taken place at the beginning of the year, the net income of the Group would have been
higher by BD 754 thousand and income from investment activities would have been higher by BD 891 thousand.
Acquisition of additional shares in an existing subsidiary
During the year, the Group has increased its interest in Al Kindi Pharmaceutical Industries (Public Shareholding Company) from
55.0% to 82.20%, which has resulted in an increase in goodwill of BD 1,001 thousand.
The goodwill of BD 4,221 thousand represents the fair value of expected synergies arising form the acquisition.
13 MURABAHA CONTRACTS WITH BANKS
Murabaha contracts with banks represent funds received from banks on the principles of Murabaha contracts.
14 MURABAHA CONTRACTS WITH NON-BANKS
These represent funds received from non-banks on the principles of Murabaha contracts.
15 CUSTOMERS’ CURRENT ACCOUNTS
These represent customers’ accounts which are not entitled to any profit distributions in accordance with the terms of the
related agreements.
16 FUNDS UNDER MANAGEMENT
At 31 December 2007, clients’ funds managed in a fiduciary capacity amounted to BD 127,200 thousand (2006: BD 97,078
thousand).
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Notes to the Consolidated Financial Statements
At 31 December 2007
17 OTHER LIABILITIES
Payable against purchase of investment properties
2007
BD 000s
2006
BD 000s
26,945
3,372
Pay orders issued not presented
7,727
831
Payable on account of financing contracts
3,378
1,143
Staff related accruals
2,989
2,320
Profit payable on account of Murabaha contracts
1,115
576
Others
4,037
4,633
46,191
12,875
2007
BD 000s
2006
BD 000s
32,670
20,763
18 UNRESTRICTED INVESTMENT ACCOUNTS
Profit allocation between unrestricted investment accounts and shareholders is as follows:
Shareholders of the parent and minority interest
Unrestricted investment accounts
1,662
1,200
34,332
21,963
Unrestricted investment account holders’ funds are commingled with the Bank’s funds for investing in short term highly liquid
investments and medium term murabahas, no priority is granted to any party for the purpose of distribution of profits. According
to the terms of acceptance of the unrestricted investment accounts, 100% of the funds are invested after deductions of
mandatory reserve and sufficient operational cash requirements. The mudarib fee on investment accounts ranges from 20%
to 35% depending on the investment period and in case of saving accounts, where there is no restriction of cash withdrawal,
the mudarib fee ranges from 50% to 60%. However, during the year, in addition to depositors share of profit, the Bank has
distributed profit to investors from its own share of mudarib fee.
The provision against Murabaha receivables is charged to both the shareholders and the holders of the unrestricted investment
accounts, considering the allocation of various assets. Any reversal in provision is reversed to the extent it was charged
to shareholders or the holders of the unrestricted investment accounts. Expenses are allocated in proportion to average
unrestricted investment account to total average assets of the Bank.
64
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Notes to the Consolidated Financial Statements
At 31 December 2007
19 SHARE CAPITAL
Authorised share capital as of 31 December 2007
represents 3,500,000 thousand (2006 : 350,000 thousand)
shares of BD 0.1 (2006 : BD 1) each.
2007
BD 000s
2006
BD 000s
350,000
350,000
67,565
43,000
2,451
1,560
70,016
44,560
Issued and fully paid-up share capital as of 31 December 2007
comprised as follows:
Held by the Parent of the Bank - 675,654 thousand
(2006 : 43,000 thousand) shares of BD 0.1 (2006 : BD 1) each.
Held under Employee Share Ownership Plan (“ESOP”)
- 24,506 thousand (2006 : 1,560 thousand) shares of
BD 0.1 (2006 : BD 1) each.
Following a resolutions passed by the shareholders of the Bank at an Extraordinary General Meeting (EGM) held on 25 March
2007, the Bank has:
(a) issued 4,456 thousand bonus shares amounting to BD 4,456 thousand by transfer from general reserves;
(b) changed the nominal value of the ordinary shares from BD 1 per share to BD 0.1 per share; and
(c) increased the issued and paid up capital to BD 70,016 thousand by issuing 210 million ordinary shares at a value of
BD 0.168 per share including a premium of BD 0.068 per share.
Shares issued for the ESOP, approved by the shareholders, are offered to eligible employees of the Bank through a special
purpose vehicle.
20 STATUTORY RESERVE
As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year
has been transferred to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve
totals 50% of paid up share capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain
Commercial Companies Law and following the approval of the Central Bank of Bahrain.
21 INCOME FROM INVESTMENT ACTIVITIES
2007
BD 000s
2006
BD 000s
Unrealised gain on investments *
7,147
6,705
Gain on sale of investments
1,305
16,893
Unrealised gain on investment properties **
9,625
1,363
Gain on sale of investment properties
2,736
1,875
Performance and management fees (Note 25)
4,869
376
Other income
4,226
968
29,908
28,180
* This includes gain of BD 4,323 thousand relating to held for trading investments.
** This includes gain of BD 732 thousand relating to minority shareholders of a subsidiary.
KFH ar 08 financials v9 19 may.indd 65
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Notes to the Consolidated Financial Statements
At 31 December 2007
22 INCOME FROM RETAIL AND CORPORATE BANKING ACTIVITIES
2007
BD 000s
2006
BD 000s
Income from Murabaha contracts
7,958
5,944
Income from Ijarah Muntahia Bittamleek
7,310
4,847
Income from Musharaka contracts
602
220
Income from Istisna’a contracts
4,366
2,456
Income from Murabaha and Mudaraba contracts with banks
4,577
4,002
Fees and commission
1,050
350
25,863
17,819
2007
BD 000s
2006
BD 000s
3,201
1,793
Technology and communication
973
871
Premises - rentals and maintenance
611
412
5,027
3,082
9,812
6,158
23 OTHER OPERATING EXPENSES
Business development
Administration, professional and others
24 CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the consolidated statement of cash flows comprise of the following balance sheet
amounts:
2007
BD 000s
2006
BD 000s
Cash
2,027
1,276
Balances with banks - nostros
4,525
9,519
Balances with Central Bank of Bahrain excluding mandatory reserve deposit
5,273
4,873
Murabaha contracts with banks
80,685
57,984
Mudaraba contracts with banks
-
3,958
92,510
77,610
25 RELATED PARTY TRANSACTIONS
Related parties represent associated companies, parent company and its major shareholders, directors and key management
personnel of the Bank, and entities controlled, jointly controlled or significantly influenced by such parties. Pricing policies and
terms of these transactions are approved by the Group’s management. All the facilities to the related parties are performing
facilities and are free of any provision for possible credit losses.
66
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Notes to the Consolidated Financial Statements
At 31 December 2007
25 RELATED PARTY TRANSACTIONS (continued)
The following balances arise from the transactions, in addition to those relating to investment transactions, entered into with
the related parties:
Associated
companies
BD 000s
Parent
and its major
shareholders
BD 000s
Directors and
key management
personnel
BD 000s
Other
related
parties
BD 000s
2007
BD 000s
2006
BD 000s
-
-
-
4,336
4,336
10,178
-
-
563
23,716
24,279
622
8,101
-
-
-
8,101
1,083
365
-
-
3,550
3,915
3,343
30,921
-
107
30,748
61,776
14,869
8,626
3,712
30
59,392
71,760
3,914
23,591
-
-
-
23,591
-
151
-
-
-
151
3,372
102
-
2,594
4,750
7,446
7,906
Murabaha and Mudaraba
contracts with banks
Murabaha contracts
relating to customers
Performance and management
fees receivable (Note 11)
Project expenses receivable
(Note 8)
Murabaha contracts
with non-banks
Customers’ current accounts
Payable against purchase
of investment properties
Other liabilities
Unrestricted investment
accounts
Letter of credit
Guarantees
5,655
-
-
8,671
14,326
5,678
-
-
-
2,451
2,451
2,451
The income and expenses in respect of related parties included in the consolidated financial statements are as follows:
Associated
companies
BD 000s
Income from Murabaha and
Mudaraba contracts with banks
Income from Murabaha contracts
relating to customers
Performance and management
fees (Note 21)
4,365
Income from managed funds
Fee and commission income
Profit on Murabaha contracts
with non-banks
1,097
Profit on unrestricted
investment accounts
2
Operating expenses
-
Parent
and its major
shareholders
BD 000s
Directors and
key management
personnel
BD 000s
Other
related
parties
BD 000s
2007
BD 000s
2006
BD 000s
56
-
58
114
480
-
-
1,411
1,411
634
-
-
504
726
-
4,869
726
-
376
971
90
-
-
1,652
2,749
1,090
-
26
81
109
147
-
-
581
581
594
Compensation of key management personnel, included in consolidated statement of income, is as follows:
Short term employee benefits
Long term employee benefits
KFH ar 08 financials v9 19 may.indd 67
2007
BD 000s
2006
BD 000s
2,822
5
2,301
1
5/22/08 4:11:29 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or
settled. Group’s contractual undiscounted repayment obligations are disclosed in Note 27 ‘Risk Management’.
Upto one year
Up to 3 months to
3 months 12 months
2007
2007
BD 000s
BD 000s
Over one year
Subtotal
Less than
12 months
2007
BD 000s
1 to 5
years
2007
BD 000s
5 to 10
years
2007
BD 000s
Over 10
years
2007
BD 000s
Subtotal
Over
1 year
2007
BD 000s
Total
2007
BD 000s
ASSETS
Cash and balances
with banks and
Central Bank
of Bahrain
11,825
-
11,825
-
-
11,815
11,815
23,640
Murabaha and
Mudaraba contracts
with banks
80,685
-
80,685
-
-
-
-
80,685
Murabaha, Musharaka,
Istisna’a and Ijarah
Muntahia Bittamleek
contracts relating to
customers
19,805
64,539
84,344
119,468
43,795
28,454
191,717
276,061
Investments
11,830
6,620
18,450
29,915
80,314
13,193
123,422
141,872
Investment in associates
-
-
-
-
-
41,356
41,356
41,356
Investment properties
-
-
-
105,097
-
-
105,097
105,097
15,026
14,236
29,262
11,396
-
-
11,396
40,658
-
-
-
-
-
6,927
6,927
6,927
Receivables and
prepayments
Goodwill and intangibles
Premises and equipment
TOTAL
-
-
-
-
-
18,995
18,995
18,995
139,171
85,395
224,566
265,876
124,109
120,740
510,725
735,291
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha contracts
with banks
73,559
3,770
77,329
-
-
-
-
77,329
Murabaha contracts
with non-banks
254,182
33,087
287,269
-
-
-
-
287,269
Customers’ current
accounts
53,575
21,430
75,005
32,145
-
-
32,145
107,150
Other liabilities
15,486
29,142
44,628
47
-
1,516
1,563
46,191
Unrestricted investment
accounts
68
26,921
15,294
42,215
10,876
-
-
10,876
53,091
TOTAL
423,723
102,723
526,446
43,068
-
1,516
44,584
571,030
NET
(284,552)
(17,328)
(301,880)
222,808
124,109
119,224
466,141
164,261
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
Upto one year
Over one year
Up to
3 months
2006
BD 000s
3 months to
12 months
2006
BD 000s
Subtotal
Less than
12 months
2006
BD 000s
ASSETS
Cash and balances
with banks and
Central Bank
of Bahrain
15,668
-
15,668
-
-
5,715
5,715
21,383
Murabaha and
Mudaraba contracts
with banks
61,942
4,712
66,654
-
-
-
-
66,654
Murabaha, Musharaka
Istisna’a and Ijarah
Muntahia Bittamleek
contracts relating to
customers
11,321
25,699
37,020
88,109
31,108
5,719
124,936
161,956
Investments
1 to 5
years
2006
BD 000s
5 to 10
years
2006
BD 000s
Over 10
years
2006
BD 000s
Subtotal
Over
1 year
2006
BD 000s
Total
2006
BD 000s
1,208
910
2,118
18,073
62,872
-
80,945
83,063
Investment in associates
-
-
-
-
-
15,385
15,385
15,385
Investment properties
-
-
-
27,623
-
-
27,623
27,623
11,268
-
11,268
-
-
-
-
11,268
-
-
-
-
-
2,508
2,508
2,508
Receivables and
prepayments
Goodwill and intangibles
Premises and equipment
TOTAL
-
-
-
-
-
13,204
13,204
13,204
101,407
31,321
132,728
133,805
93,980
42,531
270,316
403,044
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha contracts
with banks
100,941
9,425
110,366
-
-
-
-
110,366
Murabaha contracts
with non-banks
96,437
1,100
97,537
1,808
-
-
1,808
99,345
Customers’ current
accounts
23,275
9,310
32,585
13,964
-
-
13,964
46,549
Other liabilities
12,875
-
12,875
-
-
-
-
12,875
Unrestricted investment
accounts
TOTAL
NET
KFH ar 08 financials v9 19 may.indd 69
23,600
12,754
36,354
8,021
-
-
8,021
44,375
257,128
32,589
289,717
23,793
-
-
23,793
313,510
(155,721)
(1,268)
(156,989)
110,012
93,980
42,531
246,523
89,534
5/22/08 4:11:29 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT
27.1 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 prepayment risk and operating risks.
The independent risk control process does not include business risks such as changes in the environment, technology and
industry. They are monitored through the Group’s strategic planning process.
Risk management structure
The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent
bodies responsible for managing and monitoring risks.
Board of Directors
The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and
principles.
Executive Committee
The Executive Committee has the responsibility to monitor the overall risk process within the Group.
Shari’a Supervisory Board
The Bank’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the Bank’s adherence to Shari’a rules and
principles in its transactions and activities.
Risk Committee
The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles,
frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant risk
decisions.
Risk Management Unit
The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent
control process and also monitoring compliance with risk principles, policies and limits, across the Bank. The unit is also
responsible for the independent control of risks, including monitoring the risk of exposures against limits and the assessment of
risks of new products and structured transactions. This unit also ensures the complete capture of the risks in risk measurement
and reporting systems.
Asset and Liability Committee
The Asset and Liability Committee establishes policy and objectives for the asset and liability management of the Bank’s
balance sheet in terms of structure, distribution, risk and return and its impact on profitability. It also monitors the cash flow,
tenor and cost/yield profiles of assets and liabilities and evaluates the Bank’s balance sheet 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.
Bank Treasury
Bank Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily
responsible for the funding and liquidity risks of the Bank.
Audit Committee
The Audit Committee is appointed by the Board of Directors and consists of three members who are Directors, including
one non-Executive Director. The Board Audit Committee assists the Board in carrying out its responsibilities with respect to
assessing the quality and integrity of financial reporting, the audit thereof, the soundness of the internal controls of the Bank, the
measurement system of risk assessment and relating these to the Bank’s capital, and the methods for monitoring compliance
with laws, regulations and supervisory and internal policies.
70
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.1 Introduction (continued)
Internal Audit
Risk management processes throughout the Bank are audited by the internal audit function, that examines both the adequacy
of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with
management, and reports its findings and recommendations to the Audit Committee.
Risk measurement and reporting systems
The Groups 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 Bank also runs worse case
scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.
Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits 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 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 General
Manager and all other relevant members of the Bank on the utilisation of market limits, proprietary investments and liquidity, plus
any other risk developments.
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same
geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly
affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s
performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on
maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.
27.2 Credit Risk
Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties failed to discharge their
contractual obligations. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept
for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to
such limits.
The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness
of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification
system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review
process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action.
KFH ar 08 financials v9 19 may.indd 71
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Credit-related commitments risks
The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf.
Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks
to financing contracts and these are mitigated by the same control processes and policies.
Maximum exposure to credit risk without taking account of any collateral and other credit enhancements
The table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure
is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.
Gross
Maximum
Exposure
2007
BD 000s
Gross
Maximum
Exposure
2006
BD 000s
Balances with banks and Central Bank of Bahrain
21,613
20,107
Murabaha and Mudaraba contracts with banks
80,685
66,654
276,061
161,956
Murabaha, Musharaka, Istisna’a and Ijarah Muntahia Bittamleek contracts
relating to customers
Investments - sukuks
25,742
11,543
Receivables
40,172
10,823
444,273
271,083
Total
Credit commitments and contingent items
Total credit risk exposure
59,372
31,003
503,645
302,086
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.
Risk concentrations of the maximum exposure to credit risk
Concentration of risk is managed by client/counterparty, by geographical region and by industry sector. The maximum credit
exposure to any client or counterparty as of 31 December 2007 was BD 54,718 thousands (2006: BD 30,414 thousands)
before taking account of collateral. This facility is fully secured by authenticated mortgage over title deeds of land and building
in the favour of the Bank.
The Group financial assets having credit risk, before taking into account any collateral held can be analysed by the following
geographical regions:
Middle East
North America
Europe
New Zealand / Australia
72
2007
BD 000s
2006
BD 000s
471,456
294,066
13,394
1,541
500
-
10,875
69
Other
7,420
6,410
Total
503,645
302,086
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
An industry sector analysis of the Group financial assets having credit risk, before taking into account collateral held, is as follows:
2007
BD 000s
2006
BD 000s
Trading and Manufacturing
106,324
62,819
Banking and financial institutions
121,941
98,108
Construction and real estate
160,967
68,576
Other
114,413
72,583
Total
503,645
302,086
The Group holds collateral against most of its financial assets having credit risk.
Collateral and other credit enhancements
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The Bank has
guidelines regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows:
-
For commercial financing, lien over investment accounts, charges over real estate properties, inventory and trade receivables; and
For retail and consumer financing, lien over investment accounts, mortgages over the related assets.
The Bank also obtains personal guarantees from the owners for loans to their companies, but the benefits are not included
in the above table. Management monitors the market value of collateral, requests additional collateral in accordance with the
underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance
for impairment losses.
Credit quality per class of financial assets
The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows the credit
quality by class of financial assets, based on the Bank’s credit rating system.
Murabaha and Mudaraba contracts with banks
Murabaha, Musharika, Istisna’a and Ijarah Muntahia
Bittamleek contracts relating to customers
Investments - sukuks
Total
KFH ar 08 financials v9 19 may.indd 73
Neither
past due nor
impaired
2007
BD 000’s
Past due or
individually
impaired
2007
BD 000’s
Total
2007
BD 000’s
80,685
-
80,685
270,987
14,828
285,815
25,742
-
25,742
377,414
14,828
392,242
5/22/08 4:11:31 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Murabaha and Mudaraba contracts with banks
Murabaha, Musharika, Istisna’a and Ijarah Muntahia
Bittamleek contracts relating to customers
Investments - sukuks
Total
Neither
past due nor
impaired
2006
BD 000’s
Past due or
individually
impaired
2006
BD 000’s
Total
2006
BD 000’s
66,554
-
66,554
165,862
2,766
168,628
11,543
-
11,543
243,959
2,766
246,725
An analysis of past due financing contracts, by age, is provided below. The majority of the past due financing contracts are not
considered to be impaired.
It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused
management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions
and products. The rating system is supported by a variety of financial analytics, combined with processed market information to
provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories
and are derived in accordance with the Group’s rating policy. The attributable risk ratings are assessed and updated regularly.
Aging analysis of past due but not impaired receivables per class of financial assets
Murabaha, Musharika, Istisna’a and Ijarah
Muntahia Bittamleek contracts relating to customers
Murabaha, Musharika, Istisna’a and Ijarah
Muntahia Bittamleek contracts relating to customers
Less than
30 days
2007
BD 000’s
31 to
60 days
2007
BD 000’s
More than
60 days
2007
BD 000’s
Total
2007
BD 000’s
4,430
533
5,289
10,252
Less than
30 days
2006
BD 000’s
31 to
60 days
2006
BD 000’s
More than
60 days
2006
BD 000’s
Total
2006
BD 000’s
11
285
486
782
Carrying amount per class of financial assets whose terms have been renegotiated
At 31 December 2007 and 2006, the Group had no financial assets whose terms have been renegotiated.
Impairment assessment
The main considerations for the impairment assessment include whether any payments of principal or profit are overdue by more
than 90 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of
the original terms of the contract. The Group addresses impairment assessment in two areas: individually assessed allowances
and collectively assessed allowances.
74
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.2 Credit Risk (continued)
Individually assessed allowances
The Group determines the allowances appropriate for each individually significant financing contract on an individual basis.
Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability
to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should
bankruptcy ensue, the availability of other financial support and the realisable value of collateral, and the timing of the expected
cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful
attention.
Collectively assessed allowances
Allowances are assessed collectively for losses on financing contracts that are not individually significant (including credit cards,
residential mortgages and unsecured consumer financing) and for individually significant financing contract where there is not
yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving
a separate review.
The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet
objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration
of the following information: historical losses on the portfolio, current economic conditions, the approximate delay between
the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment
allowance, and expected receipts and recoveries once impaired. Management is responsible for deciding the length of this
period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure
alignment with the Group’s overall policy.
Financial guarantees and letters of credit are assessed and provision made in a similar manner as for financing contracts.
27.3 Liquidity risk and funding management
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and
stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit
base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an
assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding
if required.
The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen
interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the
Bank maintains a statutory deposit with the Central Bank of Bahrain equal to 5% of customer deposits. The liquidity position
is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market
in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of liquid assets to
customer liabilities. Liquid assets consists of cash and balances with banks and Central Bank of Bahrain, Murabaha and
Mudaraba contracts with banks, held for trading investments and Central Bank of Bahrain sukuks. The ratios during the
year were as follows:
KFH ar 08 financials v9 19 may.indd 75
5/22/08 4:11:31 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.3 Liquidity risk and funding management (continued)
2007
%
2006
%
31 December
19.47
37.01
During the year:
Average
25.92
34.41
Highest
39.11
38.36
Lowest
19.47
28.59
Analysis of financial liabilities by remaining contractual maturities
The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2007 and 2006 based on
contractual undiscounted repayment obligations. See note 26 ‘Maturity analysis of assets and liabilities’ for the expected
maturities of these liabilities. Repayments which are subject to notice are treated as if notice were to be given immediately.
However, the Group expects that many customers will not request repayment on the earliest date the Group could be required
to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.
On
demand
BD 000s
Less than
3 months
BD 000s
3 to 12
months
BD 000s
1 to 5
years
BD 000s
Over 5
years
BD 000s
Total
BD 000s
4,427
69,670
3,980
-
-
78,077
At 31 December 2007
Mudaraba contracts with banks
Murabaha contracts
with non-banks
-
255,286
33,231
-
-
288,517
107,150
-
-
-
-
107,150
-
15,486
29,142
47
1,516
46,191
36,255
8,922
8,159
-
147,832
349,364
74,512
47
1,516
573,271
Murabaha contract with banks
-
101,379
9,548
-
-
110,927
Murabaha contracts
with non-banks
-
96,853
1,114
1,902
-
99,869
Customers’ current accounts
Other liabilities
Unrestricted investment
Total undiscounted financial
liabilities 2007
53,336
At 31 December 2006
Customers’ current
accounts
46,549
-
-
-
-
46,549
Other liabilities
12,875
-
-
-
-
12,875
Unrestricted investment
accounts
23,779
12,790
-
-
-
36,569
83,203
211,022
10,662
1,902
-
306,789
Total undiscounted financial
liabilities 2006
76
KFH-Bahrain - Annual Report 2007
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5/22/08 4:11:32 PM
Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.3 Liquidity risk and funding management (continued)
Credit commitments and contingent items
These include commitments to enter into contracts which are designed to meet the requirements of the Group’s customers.
Commitments represent contractual commitments under Murabaha, Mudaraba and Ijarah Muntahia Bittamleek contracts.
Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being
exercised, the total contract amounts do not necessarily represent future cash flow requirements.
Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers
contingent upon the failure of the customer to perform under the terms of the contract.
The table below shows the contractual expiry by maturity of the Group’s Credit commitments and contingent items.
Upto
1 year
BD 000’s
Over
1 year
BD 000’s
Total
BD 000’s
At 31 December 2007
Commitments on behalf of customers:
Letters of credits
Guarantees
Irrevocable commitments to extend credit
20,043
14,580
16,051
8,698
-
20,043
23,278
16,051
Total
50,674
8,698
59,372
8,062
2,313
6,048
14,580
-
8,062
16,893
6,048
16,423
14,580
31,003
At 31 December 2006
Commitments on behalf of customers:
Letters of credits
Guarantees
Irrevocable commitments to extend credit
Total
The Group does not expect any material loss in respect of the above.
27.4 Market risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market
variables such as profit rates, foreign exchange rates, and equity prices. The Group managed and monitored the positions using
sensitivity analyses.
Profit rate risk
Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial
instruments. The Board has established limits on the profit rate gaps for stipulated periods and the positions are monitored on
a daily basis.
The following table demonstrates the sensitivity to reasonably possible change in profit rates, with all other variables held
constant of the Group’s consolidated statement of income. The sensitivity of the consolidated statement of income is the effect
of the assumed changes in profit rates on the net income for the year, based on the non-trading financial assets and financial
liabilities held at 31 December 2007. There is no impact on the Group’s equity.
KFH ar 08 financials v9 19 may.indd 77
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.4 Market risk (continued)
The effect of decreases in basis points is expected to be equal and opposite to the effect of the increases shown.
2007
BD 000s
Change
in basis
points
Effect on
net income
for the year
BD 000s
Assets
Murabaha and Mudaraba contracts with banks
Musharaka, Istisna’a and Ijarah Muntahia
Bittamleek contracts relating to customers
Investments - sukuks
80,685
+20
161
171,026
25,742
+20
+20
342
51
Liabilities and Unrestricted Investment Accounts
Murabaha contracts with banks
Murabaha contracts with non-banks
Unrestricted investment accounts
77,329
287,269
53,091
+20
+20
+20
(155)
(575)
(106)
Total
(282)
2006
BD 000s
Change
in basis
points
Effect on
net income
for the year
BD 000s
Assets
Murabaha and Mudaraba contracts with banks
Musharaka, Istisna’a and Ijarah Muntahia
Bittamleek contracts relating to customers
Investments - sukuks
66,654
+20
133
103,296
11,543
+20
+20
207
23
Liabilities and Unrestricted Investment Accounts
Murabaha contracts with banks
Murabaha contracts with non-banks
Unrestricted investment accounts
110,366
99,345
44,375
+20
+20
+20
(221)
(199)
(89)
Total
(146)
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 daily basis to ensure positions are maintained within
established limits.
The tables below indicate the currencies to which the Group had significant exposure at 31 December 2007 on its all monetary
assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the currency rate against the
Bahraini Dinar, with all other variables held constant on the consolidated statement of income.
The effect of decreases in currency rate is expected to be equal and opposite to the effect of the increases shown.
NZD
KWD
JOR
GBP
Total
78
Change
currency
rate
%
Effect on
profit
2007
BD 000s
Effect on
equity
2007
BD 000s
Effect on
profit
2006
BD 000s
Effect on
equity
2006
BD 000s
+5
+5
+5
+5
791
395
219
232
242
-
784
261
138
168
260
-
1,405
474
1,183
428
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
27 RISK MANAGEMENT (continued)
27.4 Market risk (continued)
Equity price risk
Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the
value of individual stocks. The equity price risk exposure arises from the Group’s investment portfolio.
The effect on income (as a result of a change in the fair value of equity instruments at 31 December 2007) due to a reasonably
possible change (i.e. +5%) in the value of individual investments, with all other variables held constant, is BD 5,807 thousands
(2006: BD 3,576 thousands). The effect of decrease in the value of individual investment is expected to be equal and opposite
to the effect of the increase shown.
27.5 Prepayment risk
Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request
repayment earlier or later than expected. The Group is not exposed to any significant prepayment risk.
27.6 Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to
perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The
Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to
potential risks, the Group is able to manage the risks. Controls include effective segregation of duties, access, authorisation and
reconciliation procedures, staff education and assessment processes, including the use of internal audit.
28 CREDIT COMMITMENTS AND CONTINGENT ITEMS
Credit related commitments
These include commitments to enter into contracts which are designed to meet the requirements of the Bank’s customers.
Commitments represent contractual commitments under Murabaha, Musharaka, Mudaraba and Ijarah Muntahia Bittamleek
contracts. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire
without being exercised, the total contract amounts do not necessarily represent future cash flow requirements.
Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers
contingent upon the failure of the customer to perform under the terms of the contract.
The Bank has the following credit related commitments:
2007
BD 000s
2006
BD 000s
Commitments on behalf of customers:
Letters of credit
20,043
8,062
Guarantees
23,278
16,893
43,321
24,955
Irrevocable commitments to extend credit:
Original term to maturity of one year or less
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16,051
6,048
59,372
31,003
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Notes to the Consolidated Financial Statements
At 31 December 2007
28 CREDIT COMMITMENTS AND CONTINGENT ITEMS (continued)
Operating lease commitments
At 31 December 2007, the Group had commitments in respect of non cancellable operating leases amounting to BD 4,464
thousand (2006: BD 4,532 thousand) relating to leasehold premises. Of the commitments in respect of operating leases BD 231
thousand (2006: BD 150 thousand) are due within one year and the remaining within two to five years.
Capital commitments
At 31 December 2007, the Group had commitments of BD 1,694 thousand (2006: Nil) principally relating to the office
premises.
29 CAPITAL MANAGEMENT
The Group maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Group’s
capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking
Supervision (“BIS rules/ratios“) and adopted by the Central Bank of Bahrain in supervising the Bank. During the past year, the
Group had complied in full with all its externally imposed capital requirements.
The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed
capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business
and to maximise shareholders’ value.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk
characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend
payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives,
policies and processes from the previous years.
Regulatory capital
2007
BD 000s
2006
BD 000s
116,584
63,207
Tier 2 capital
40,215
25,778
Total capital
156,799
88,985
Risk weighted assets
705,943
366,355
Tier 1 capital
Total capital ratio
22.2%
24.3%
Minimum requirement
12.0%
12.0%
Regulatory capital consists of Tier 1 capital, which comprises share capital, share premium, retained earnings, foreign currency
translation and minority interests less goodwill. The other component of regulatory capital is Tier 2 capital, which includes
collective provision, current year’s profit and revaluation reserves. Certain adjustments are made to IFRS-based results and
reserves, as prescribed by the Central Bank of Bahrain.
80
KFH-Bahrain - Annual Report 2007
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Notes to the Consolidated Financial Statements
At 31 December 2007
30 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A
The Group did not receive any significant income or incurred significant expenses which were prohibited by the Shari’a.
31 FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments comprise financial assets and financial liabilities. Financial assets consist of cash and balances with
banks and Central Bank of Bahrain, Murabaha and Mudaraba contracts with banks, Financial contracts relating to customers,
investments, investment properties and receivables. Financial liabilities consist of Murabaha contracts with banks, Murabaha
contracts with non-banks, customers current accounts and unrestricted investment accounts.
At 31 December 2007 and 2006, the fair values of financial instruments were not materially different from their carrying values.
32 SOCIAL RESPONSIBILITY
The Bank discharges its social responsibilities through donations to charitable causes and organisations approved by Shari’a
Supervisory Board.
33 ZAKAH
In accordance with the instructions of the Sharia’a Supervisory Board of the Bank, payment of Zakah is the responsibility of the
shareholders of the Bank. Accordingly, no Zakah has been charged to these consolidated financial statements.
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Kuwait Finance House - Bahrain
PO Box 2066, Manama,
Kingdom of Bahrain
Tel: (+973) 17 221666
Fax: (+973) 17 221600
Call Centre: (+973) 17 50 60 50
Telebanking (IVR)
Local: 80001110
International: (+973) 17 213366
www.kfh.bh
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