Al Rajhi Bank - FINANCIAL STATEMENTS FOR THE ......AL RAJHI BANKING & INVESTMENT CORPORATION...

AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD (Incorporated in Malaysia) Company No. 719057-X

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FINANCIAL STATEMENTS FOR THE FINANCIAL

YEAR ENDED 31 DECEMBER 2007

Registered Office

Ground Floor, East Block Wisma Selangor Dredging 142-B Jalan Ampang 50450 Kuala Lumpur


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Contents Directors’ Report 3 Statement by Directors 16 Statutory Declaration 17 Report of the Auditors 18 Report of Shariah Committee 19 Balance Sheets 20 Income Statements 21 Statements of Changes in Equity 22 Cash Flow Statements 23 Summary of Significant Accounting Policies 24 Notes to the Financial Statements 32


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DIRECTORS’ REPORT The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended 31 December 2007. PRINCIPAL ACTIVITIES The Bank is principally engaged in Islamic Banking business and the provision of related financial business. There have been no significant changes to these principal activities during the financial year. FINANCIAL RESULTS RM’000 Net loss for the financial year

96,805

DIVIDENDS No dividends has been paid or declared by the Bank since the end of the previous financial period. The Directors do not recommend the payment of any dividend for the current financial year. RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year except as disclosed in the financial statements. DIRECTORS OF THE COMPANY The Directors who have held office during the year since the date of the last report are as follows: Abdullah Sulaiman Al Rajhi Saeed Mohammed Al Ghamdi Mohd Daruis Bin Zainuddin Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Ahmed Baqar Rehman (appointed on 27 July 2007) Fahad Abdullah Al Rajhi (resigned on 30 July 2007)

According to the register of Directors’ shareholding, none of the Directors holding office at 31 December 2007 held any shares in the Bank during the financial year.

DIRECTORS’ BENEFITS Since the end of the financial period, no Director of the Bank has received nor become entitled to receive any benefit (other than directors’ remuneration as disclosed in Note 19 to the financial statements) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest. Neither at the end of the financial year, nor at any time during that year, did there subsist any arrangements to which the Bank is a party whereby Directors might acquire benefits by means of the acquisition of shares in, or debentures of, the Bank or any other body corporate.


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DIRECTORS’ REPORT (cont’d) ISSUE OF SHARES During the financial year, the Bank increased its authorised as well as its issued and paid-up ordinary share capital from RM300,000,000 to RM600,000,000 as at 31 December 2007 by way of the issuance of 300,000,000 ordinary shares of RM1.00 at an issue price of RM1.00 per ordinary share for cash. The new ordinary shares issued during the financial year were for working capital purposes and rank pari passu in all respects with the existing ordinary shares of the Bank. BAD AND DOUBTFUL FINANCING Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that proper actions had been taken in relation to the writing off of bad financing and the making of allowance for doubtful financing and have satisfied themselves that there were no known bad financing and that adequate allowance had been made for doubtful financing. At the date of this report, the Directors are not aware of any circumstances which would render any amount to be written off for bad financing or the amount of the allowance for bad and doubtful financing in the financial statements of the Bank, inadequate to any substantial extent. CURRENT ASSETS Before the financial statements of the Bank were made out, the Directors took reasonable steps to ensure that any current assets, other than debts and financing, which were unlikely to realise their value as shown in the accounting records in the ordinary course of business, had been written down to an amount which they might be expected so to realise. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Bank misleading. VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities of the Bank misleading or inappropriate. CONTINGENT AND OTHER LIABILITIES At the date of this report, there does not exist: i) any charge on the assets of the Bank which has arisen since the end of the financial year and which

secures the liabilities of any other person; or ii) any contingent liability in respect of the Bank that has arisen since the end of the financial year other than

in the ordinary course of the banking business. No contingent liability or other liability of the Bank has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the Bank to meet its obligations as and when they fall due


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DIRECTORS’ REPORT (cont’d) CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements of the Bank, which would render any amount stated in the financial statements misleading. ITEMS OF UNUSUAL NATURE The results of the operations of the Bank for the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for the current financial year in which this report is made. PERFORMANCE OVERVIEW 2007 During the financial year, Al Rajhi Bank furthered its expansion with a series of branch launches within the Klang Valley as well as major cities. To-date, the Bank’s physical retail presence has grown in strength to a total of nineteen (19) Branches as compared to nine (9) branches in 2006. In addition to the ten (10) new branches, a kiosk has been set up in the city to cater to the needs of middle-eastern tourists and another two (2) off-premise Auto Teller Machines. For the year ended 31 December 2007, the Bank registered a pre-tax loss of RM106.2million with a total recorded income of RM36.3million. BUSINESS PLAN AND OUTLOOK FOR 2008 The Bank is strategically planning to achieve further growth in 2008 by increasing its footprint in Malaysia. The continuous expansion in the Malaysian retail network is to ensure greater accessibility and convenience to our customers. In addition, the Bank shall continue to build its success and recognition on its retail business and corporate investment banking. Several retail and corporate products are in the pipeline for launch and shall make a debut in 2008. The corporate investment banking will play an even greater role in the coming years by being the catalyst or intermediary, for an ever increasing cross border transaction between Malaysia and Saudi and the South East Asian region. The Bank has positioned itself well in the market thus far and will continue its growth momentum via marketing activities that meet and exceed the needs of their growing customer base. The Bank is confident that it has set the groundwork for such growth and will continue to propel it further in the coming years to come.


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DIRECTORS’ REPORT (cont’d) STATEMENT OF CORPORATE GOVERNANCE The Board of Directors of the Bank (“the Board”) recognises the importance of corporate governance as set out in the Malaysian Code on Corporate Governance (“the Code”) in discharging its responsibilities to enhance shareholders’ value and safeguard the interests of other stakeholders towards enhancing business prosperity and corporate accountability. This also means inculcating a culture that seeks to balance conformance requirements with the need to deliver long term strategic success through performance, predicated on entrepreneurship, control and ownership, without comprising personal or corporate ethics and integrity. Although the Bank is not a listed company, the Board has endeavoured to apply the principles and comply with the relevant best practices of corporate governance as set out in the Code. The Bank is also required to comply with BNM’s Guidelines on Directorship in the Banking Institutions (“BNM/GP1”). BOARD OF DIRECTORS (i) Board Composition and Its Roles and Responsibilities At the date of this Annual Report, the Board comprises five (5) Directors, which includes two (2)

independent non-executive Directors. The appointment of non-executive Directors facilitates the exercise of independent evaluation in Board deliberations and decision-making, and thus providing the check and balance in the Board.

The Board is responsible for the overall corporate governance, including its strategic direction,

establishing goals for management and monitoring the achievement of these goals. The roles of the Chairman and the Chief Executive Officer have always been separated, which is consistent with the principles of the Revised BNM/GP1 to institute an appropriate balance of power and authority. The Chairman is responsible for ensuring the effectiveness of the Board as well as representing the Board to the Shareholder.

The Directors, with their different backgrounds and specialisations, collectively bring with them a wide range of experience and expertise. The Chief Executive Officer is responsible for implementing the policies and decisions of the Board, overseeing the operations as well as coordinating the development and implementation of business and corporate strategies. The independent non-executive Directors bring an independent judgment to the decision making of the Board and provide a review and challenge on the performance of the management.

As a principle of good governance, all Directors are subject to re-election at regular intervals. The Bank’s

Articles of Association also provide for the retirement of Directors by rotation and, under Bank Negara Malaysia’s guidelines, all appointment and re-appointment of Directors have to be approved by Bank Negara Malaysia.


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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d) (ii) Board of Directors’ Profile

The Directors’ profiles are as follows: Abdullah Sulaiman Al Rajhi Chairman Abdullah Sulaiman Al Rajhi, in his capacity as the Chief Executive Officer of Al Rajhi Bank, Saudi Arabia also spearheads the development of the Malaysian Bank’s operation as the Chairman. A member of the well-known Al Rajhi family, upon completion of his Business studies, he had bolstered his academic achievements with training courses at the Wharton School in the United States of America and the Cranfield School of Management in United Kingdom. Abdullah Sulaiman had familiarised himself with various activities and levels of banking operations by assuming various senior responsibilities in the Bank. He is also an avid speaker and advocate Islamic banking principles by participating in many of regional and international financial forums in recent years. Saeed Mohammed Al Ghamdi Non- independent Non-executive Director Saeed Mohammed Al Ghamdi, is the deputy Chief Executive Officer of Al Rajhi Bank, Saudi Arabia. He joined the Al Rajhi Banking and Investment Corporate in 1998 as the Chief Information Officer, in charged of operational functions. After overseeing the IT, Operations and Retail divisions, he was appointed to his current position as Deputy CEO for AL Rajhi Bank, Saudi Arabia. Saeed Mohammed obtained his Bachelor of Science from the King Fahad University of Petroleum & Minerals, Saudi Arabia. Mohd Daruis Bin Zainuddin Independent Non-executive Director Mohd Daruis Bin Zainuddin was appointed as a Board member of the Bank with effect from 3 March 2006. He is a retired Partner and Executive Director of PricewaterhouseCoopers, Malaysia after being with the firm and its legacy firm of Coopers & Lybrand for the past 32 years. Presently, he is the sole practitioner in the audit firm of MDZ & Co in Johor Bahru and with effect from 1 January 2008, he joined as a partner of Ash’ari Cheong, a Chartered Accountant firm based in Kuantan. Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Independent Non-executive Director Dato’ Dr Nik Norzul Thani was appointed as a Board member of the Bank with effect from 20 December 2006. Dato’ Dr. Nik advises clients on a wide range of legal matters covering a range of banking advisory aspects, including Islamic Finance and is currently attached to Zaid Ibrahim and Co. Besides being a board member for several other local companies, Dato’ Dr Nik also has several books and articles to his credit.


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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d)

(ii) Board of Directors’ Profile

Ahmed Baqar Rehman Non- independent Executive Director Ahmed Rehman was appointed as a Board member of the Bank on 27

th July 2007 and is the Chief

Executive Officer of Al Rajhi Bank’s Malaysian operations with effect from March 2006. Leading the Saudi financial giant’s first foray into the international market, Ahmed was responsible for the set-up and launch of the Retail and Wholesale Islamic bank. With over two decades of experience in the financial sector, Ahmed has developed an in-depth knowledge and expertise in the banking industry. He held several multinational positions in a foreign international bank which includes overseeing markets such as Dubai, Pakistan, Middle East and Africa prior to his appointment at Al Rajhi Bank.

(iii) Board Meetings During the financial year ended 31 December 2007, five (5) Board meetings were held and attendances

by Directors at the board meetings were as follows:

Board meeting dates

Attendance by Directors Percentage attendance Chairman Non-Independent Independent

(1 member) (2 members) (2 members) 4

th February 2007 a 1 of 2 a 80%

17th

April 2007 a 1 of 2 a 80%

11th

July 2007 a 1 of 2 a 80%

10th

September 2007 a a a 100%

14th

November 2007 a a a 100%

At the Board meetings, the Board reviews various management reports on the business performance of

the Bank and the minutes of meetings of the Board Committees were tabled for review by members of the Board.

Members of the Board deliberate and in the process evaluate the potential risks and viability of business

propositions and corporate proposals that have significant impact on the bank’s business or on its financial position.

Board meetings are governed by a structured format agenda and the agenda for each Board meeting

and papers relating to the agenda items are forwarded to all Directors in advance prior to the scheduled Board meetings for their perusal.

Minutes of every Board meeting were also circulated to all the Directors for their perusal prior to

confirmation of the minutes at the following Board meeting


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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d) (iv) Board Committee Board Committees were established to assist the Board in the running of the Bank. The following Board

Committees with their specific terms of reference and functions are as follows: Audit Committee The Audit Committee consists of two independent non-executive Directors and one non-independent

non-executive Director. There were four (4) meetings held during the financial year. The members of the committee are as follows:

Mohd Daruis Bin Zainuddin - Chairman Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Member Saeed Mohammad Al Ghamdi - Member The primary function of the Audit Committee is to assist the Board in discharging its responsibilities by

providing independent oversight of the Bank’s financial reporting, the internal control system, the effectiveness of internal audit function and risk management system. The Audit Committee also provides, by way of regular meetings, a line of communication between the Board, the internal and external auditors.

Risk Management Committee The Risk Management Committee consists of two independent non-executive Directors and one non-

independent non-executive Director and had four (4) meetings during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Mohd Daruis Bin Zainuddin - Member Saeed Mohammad Al Ghamdi - Member The objectives of the Risk Management Committee are to establish a forum for deliberation and

consideration of risks which the Bank is exposed to in relation to its strategic direction and objectives while overseeing to ensure that the risk management systems, policies and procedures are in place and functioning.

Nominating Committee The Nominating Committee consists of two independent non-executive Directors and two non-

independent non-executive directors with one (1) meeting held during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Abdullah Sulaiman Al Rajhi - Member Mohd Daruis Bin Zainuddin - Member Saeed Mohammad Al Ghamdi - Member Fahad Abdullah Al Rajhi - Member (resigned on 30 July 2007) The responsibilities of the nominating committee is to provide a formal and transparent procedure for the

appointment of Directors and the Chief Executive Officer as well as the assessment of the effectiveness of individual Directors, Board as a whole and performance of Chief Executive Officer and senior management officers.


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DIRECTORS’ REPORT (cont’d) (iv) Board Committee (cont’d) Remuneration Committee The Remuneration Committee consists of one independent non-executive Directors and three non-

independent non-executives Director. One (1) meeting was held during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Abdullah Sulaiman Al Rajhi - Member Saeed Mohammad Al Ghamdi - Member Fahad Abdullah Al Rajhi - Member (resigned on 30 July 2007) The responsibilities of the Remuneration Committee is to provide for a formal and transparent procedure

for developing remuneration policy for Directors, Chief Executive Officer and senior management officers and ensuring that the compensation is competitive and consistent with the Islamic Bank’s culture, objective and strategy.

INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES The Malaysian Code on Corporate Governance and Bank Negara Malaysia’s Guidelines on Corporate Governance requires banks to maintain a sound system of internal controls to safeguard shareholders' investments and the Bank's assets. Responsibility of the Board The Board recognises the importance of maintaining a sound system of internal control to safeguard shareholders' investments and the Bank's assets. The Board is responsible for the Bank’s system of internal controls and its effectiveness. It includes reviewing adequacy and integrity of controls relating to financial, operational, risk management and compliance with applicable laws and regulations. The system is designed to manage the Bank’s risks within an acceptable risk profile and the Board acknowledges that the system, by its nature, can only provide reasonable assurance and not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud.


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DIRECTORS’ REPORT (cont’d) INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES (Cont’d) Key Internal Control Elements The Bank has in place on-going internal control processes for identifying, evaluating, managing and reporting on the significant risks that may affect the achievement of its business objectives throughout the financial year under review. The key internal controls elements in the process are described below: (i) Clear Line of Responsibilities The management of the Bank is primarily delegated to the Chief Executive Officer and its Management

Committee, whose responsibilities are set by the Board. The management assists the Board in the implementation of the policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.

(ii) Risk Management Framework Risk Management Division is established to assist the Board in the development of general risk policies

and procedures, monitor and evaluate material risks that may arise from the Bank’s business activities. The Board with the assistance of the Risk Management Division, has established an enterprise-wide risk management framework that details a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk.

(iii) Internal Audit Activities Ongoing reviews of the internal control system are carried out by the internal auditor to test control

effectiveness in the Bank. Results of such reviews are reported to the Audit Committee. The internal audit activities revolve primarily on areas of priority as identified by risk analysis and in accordance with the annual internal audit plans as approved by the Audit Committee.

(iv) Annual Business Plan A detailed budgeting process is established requiring all key business units in the Bank to prepare

budgets annually which are discussed and approved by the Board. Regular reporting on actual performance against approved budgets is in place and significant variances shall be followed up by the management and to be reported to the Board.

(v) Management Reporting The Board also receives and reviews reports from the management on a regular basis in ensuring the

effectiveness of the Bank’s daily operations and that the Bank’s operations are in accordance with the established goals.

(vi) Policies and Procedures There are policies, procedures and authority limits imposed on the management in respect of the day-to-

day operations. Compliance with internal controls and the relevant laws and regulations are also set out in operations manuals, guidelines and directives which are updated from time to time.


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DIRECTORS’ REPORT (cont’d)

RISK MANAGEMENT Risk management plays a substantial role in the governance of the Bank as the bank recognises the diversity and complexity of banking operations and the exposure to various kinds of risks mainly on credit risk, market risk and operational risk. The Bank recognises the importance of an effective risk management and control measures to ensure the Bank’s corporate value, sustained profitability and continued enhancement of shareholder value. A risk conscious corporate culture and pre-emptive actions of employees are also crucial for an effective risk management. The risk conscious corporate culture is met through communication, training, policies, procedures and organisational structures, roles and responsibilities. Overall Risk management Framework Risk Management Governance Structure and Processes The Bank has established within its risk management framework a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk. The risk management governance structure provides clear accountabilities and responsibilities for risk management processes throughout the organisation at the Board level, at the Executive Management level and at the business unit and support unit level. The risk management processes encompass four broad processes, namely risk identification, risk assessment and measurement, risk control and mitigation and risk monitoring. Credit Risk Management Credit risk is defined as the risk of potential losses arising from a customer default or deterioration of the credit standing of a customer with whom the Bank has entered transactions into. The Bank establishes policies and procedures for credit origination, scoring, rating, approval, monitoring, collection and recovery. Credit approval authorities are delegated to committees and individuals in accordance to the risk appetite of the Board. Regular analysis and reporting of risk profile covering credit exposure, movements of non-performing financings (“NPFs”), concentration of credit exposure, adequacy of specific provision for NPFs and capital adequacy is updated to the Management, the Risk Management Committee and the Board. Market Risk Management Market risk is defined as the risk that could incur losses due to changes in the value of assets and liabilities (including off-balance sheet items) caused by fluctuations in the market risk factors such as profit rates and foreign exchange rates. Meanwhile, liquidity risk is defined as the risk of losses arising from funding difficulties to raise the necessary funds, or when it is forced to obtain funds at much higher rates than usual. The Bank establishes policies and procedures for monitoring, reporting and control of market and liquidity risks including setting appropriate management trigger and exposure limits and performing regular stress testing. The Asset and Liability Committee (“ALCO”) is established to monitor, deliberate and make decision on matters related to funding, liquidity as well as asset and liability mismatch risks management. The Bank manages its liquidity in compliance to BNM’s New Liquidity Framework. Regular analysis and reporting of market and liquidity risks profile is updated to the Management, the Risk Management Committee and the Board.


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DIRECTORS’ REPORT (cont’d)

RISK MANAGEMENT (Cont’d) Operational Risk Management Operational risk is defined as the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequacy or failure of processes, procedures, systems or controls and external events. Operational risk, in some form, exists in each of the Bank’s business and support activities and can result in direct and indirect financial loss, regulatory sanctions, customer dissatisfaction and damage to the Bank’s reputation. The management of operational risk is an important priority for the Bank. To mitigate such operational risks, the Bank has developed an operational risk program and essential methodologies that enables identification, measurement, monitoring and reporting of inherent and emerging operational risks. The day to day management of operational risk exposures is through the development and maintenance of comprehensive internal controls and procedures based on segregation of duties, independent checks, segmented system access control and multi-tier authorisation processes. An incident reporting process is also established to capture and analyse frauds and control lapses. A periodic self-risk and control assessment is established for business and support units to pre-emptively identify risks and evaluate control effectiveness. Action plans are developed for the control issues identified. In addition, the Bank is in the progress of establishing the Business Continuity Plan (“BCP”) to ensure that critical operations are not interrupted so that critical business processes continue with minimal adverse impact on customers, staff and products and services. BCP constitutes an essential component of the Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’s critical processes and revenue streams. The Bank’s business continuity plan is to maintain continuous operational viability in the event of natural disasters, systems failures and other types of emergencies. Regular analysis and reporting of operational risk profile is updated to the Management, the Risk Management Committee and the Board. DISCLOSURE OF SHARIAH COMMITTEE The Bank’s business activities are subject to Shariah compliance and confirmation by the Shariah Committee consisting of four members appointed by the Board of Directors as follows: Dr. Salleh Abdullah S. Allheidan - Chairman (appointed on 1 April 2007) Burhanuddin Lukman - Deputy Chairman Dr. Azman Mohd Noor - Member Dr. Ashraf Md. Hashim - Member (appointed on 6 July 2007) Dr Abdullah Abdulaziz Al-Muajel - Chairman (resigned on 31 March 2007) The duties and responsibilities of the Shariah Committee amongst others are as follows: (i) To advise the Board of Directors on Shariah matters in order to ensure that the business operations of

the Bank comply with the Shariah principles at all times; (ii) To endorse the Shariah Compliance Manual. The manual specifies the manner in which a submission

or request for advice be made to Shariah Committee, the conduct of the Shariah Committee’s meeting and the manner of compliance with any Shariah decision;


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DIRECTORS’ REPORT (cont’d) DISCLOSURE OF SHARIAH COMMITTEE (cont’d) (iii) To ensure that the Bank complies with Shariah principle in all aspect and to decide consequential

action upon any violation; (iv) To ensure that the products of the Bank comply with Shariah principles in all aspects, the Shariah

Committee must endorse the following;

(a) the terms and conditions contained in the proposal form, contract, agreement or other legal documentation used in executing the transactions; and

(b) the product manual, marketing advertisements, sales illustrations and brochures used to

describe the product.

(v) To provide assistance to related parties such as legal counsel, auditor or consultant on Shariah matters so that compliance with Shariah principles can be assured completely;

(vi) To provide written Shariah opinion and to record any opinion given under the following circumstances:

(a) where the Bank makes reference to the Shariah Advisory Council (“SAC”) of Bank Negara Malaysia for advice; and

(b) where the Bank submits applications to Bank Negara Malaysia for new products approval in

accordance with guidelines on product approval issued by Bank Negara Malaysia. (vii) To advise on matters to be referred to the SAC for matters which have not been resolved or endorsed.

The Shariah is also expected to assist the SAC on any matters referred by the Bank. The Shariah Committee is also planning to set up a Shariah Compliance Unit. Currently, the compliance work is carried out by the Secretariat to the Shariah Committee.

ISLAMIC FINANCIAL SERVICES BOARD’S CAPITAL ADEQUACY STANDARD The implementation of the Islamic Financial Services Board’s Capital Adequacy Standard by Bank Negara Malaysia shall take into effect on 1 January 2008. The Bank shall be adopting the Standardised Approach for credit, market and operational risk and has submitted 31 March 2007, 30 June 2007 and 30 September 2007 quarterly positions to Bank Negara Malaysia for trial run basis. SIGNIFICANT EVENTS There were no significant events during the financial year ended 31 December 2007. SUBSEQUENT EVENTS There were no material events subsequent to the balance sheet date that require disclosure or adjustments to the financial statements.


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AUDITORS The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office. In accordance with a resolution of the Board of Directors dated 5 June 2008 ABDULLAH SULAIMAN AL RAJHI SAEED MOHAMMED AL GHAMDI CHAIRMAN DIRECTOR Riyadh, Kingdom of Saudi Arabia


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STATEMENT BY DIRECTORS PURSUANT TO SECTION 169(15) OF THE COMPANIES ACT, 1965

We, Abdullah Sulaiman Al Rajhi and Saeed Mohammed Al Ghamdi, being two of the Directors of Al Rajhi

Banking & Investment Corporation (Malaysia) Bhd, state that, in the opinion of the Directors, the financial

statements set out on pages 20 to 52 are drawn up so as to give a true and fair view of the state of affairs of the

Bank as at 31 December 2007 and of the results and cash flows of the Bank for the financial year then ended, in

accordance with the provisions of the Companies Act, 1965, MASB Approved Accounting Standards in Malaysia

for entities other than private entities and Bank Negara Malaysia Guidelines.

Signed on behalf of the Board of Directors in accordance with their resolution dated 5 June 2008

ABDULLAH SULAIMAN AL RAJHI SAEED MOHAMMED AL GHAMDI CHAIRMAN DIRECTOR Riyadh, Kingdom of Saudi Arabia


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STATUTORY DECLARATION PURSUANT TO SECTION 169(16) OF THE COMPANIES ACT, 1965

I, Ahmed Baqar Rehman, being the officer primarily responsible for the financial management of Al Rajhi Banking

& Investment Corporation (Malaysia) Bhd, do solemnly and sincerely declare that the accompanying financial

statements of the Bank as set out on pages 20 to 52 are, in my opinion, correct and I make this solemn

declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory

Declarations Act, 1960. AHMED BAQAR REHMAN

Subscribed and solemnly declared by the abovenamed, Ahmed Baqar Rehman, at Kuala Lumpur on 5 June

2008

Before me:


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REPORT OF THE AUDITORS TO THE MEMBERS OF AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD

We have audited the financial statements set out on pages 20 to 52. These financial statements are the responsibility of the Bank’s directors. It is our responsibility to form an independent opinion, based on our audit, on these financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility to any other person for the contents of this report. We conducted our audit in accordance with approved auditing standards in Malaysia. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Directors, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion: (a) the financial statements have been prepared in accordance with the provisions of the Companies Act,

1965, MASB approved accounting standards in Malaysia for entities other than private entities and Bank Negara Malaysia Guidelines so as to give a true and fair view of:

(i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial

statements; and (ii) the state of affairs of the Bank as at 31 December 2007 and of the results and cash flow of the Bank

for the financial year ended on that date; and (b) the accounting and other records and the registers required by the Companies Act, 1965 to be kept by the

Bank have been properly kept in accordance with the provisions of the said Act. PRICEWATERHOUSECOOPERS (No AF: 1146) Chartered Accountants

MOHAMMAD FAIZ BIN MOHAMMAD AZMI (No. 2025/03/08(J)) Partner of the firm

Kuala Lumpur, 5 June 2008


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REPORT OF SHARIAH COMMITTEE

We the undersigned, Dr Salleh Abdullah S. Al Lheidan and Burhanuddin Lukman, in our capacity as members of

the Shariah Committee of Al Rajhi Banking & Investment Corporation (Malaysia) Bhd, do hereby confirm on behalf

of the members of the Shariah Committee that the operations of the Bank for the financial year ended 31

December 2007 have, in general, been conducted in compliance with Shariah. However, it has become clear to

the Shariah Committee the presence of irregularities which must be rectified. The Shariah Committee will inform

the bank of the said irregularities and discuss with them how to deal with these irregularities.

On behalf of the Shariah Committee, DR SALLEH ABDULLAH S. AL LHEIDAN BURHANUDDIN LUKMAN Chairman Deputy Chairman


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BALANCE SHEET AS AT 31 DECEMBER 2007

Note 2007 2006 RM’000 RM’000

ASSETS Cash and short-term funds 2 540,054 35,259 Deposits and placements with other financial institution

3

-

173,000

Financing and advances 4 1,866,779 2,408 Other assets 5 16,039 3,297 Statutory deposits with Bank Negara Malaysia 6 3,180 - Property and equipment 7 73,673 51,304 Intangible assets 8 22,180 16,435 Deferred tax assets 9 19,090 9,673

Total Assets 2,540,995 291,376

LIABILITIES AND SHAREHOLDER’S EQUITY Liabilities Deposits from customers 10 2,073,832 41,862 Bills and acceptances payable 5,247 647 Other liabilities 11 33,834 23,980

Total Liabilities 2,112,913 66,489

Shareholder’s equity Share capital 12 600,000 300,000 Reserves (171,918) (75,113)

Total Shareholder’s Equity 428,082 224,887

Total Liabilities and Shareholder’s Equity 2,540,995 291,376

COMMITMENTS AND CONTINGENCIES 24 248,929 2,513

CAPITAL ADEQUACY 26 Core capital ratio (%) 24.02% 191.76% Risk-weighted capital ratio (%) 25.69% 191.79%

The accompanying notes are an integral part of these financial statements.


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INCOME STATEMENT

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 Note 1.1.2007

to 31.12.2007 From 22.12.2005

to 31.12.2006

RM’000 RM’000 Income derived from investment of depositors’ funds and others

13 23,775

49

Income derived from investment of shareholders’ funds

14

12,507

1,601

Allowance for losses on financing 15 (30,101) (36) Other expenses directly attributable to the investment of the depositors’ funds

(4,085)

-

Total distributable income 2,096 1,614 Income attributable to depositors 16 (16,680) (39)

Total net income (14,584) 1,575 Personnel expenses 17 (44,970) (10,577) Other overheads and expenditures 18 (46,668) (75,784)

Loss before zakat and taxation (106,222) (84,786) Zakat - - Taxation 20 9,417 9,673

Net loss for the financial year/period (96,805)

(75,113)

Basic loss per share (sen) 21 (26.27) (50.08)



22

STATEMENT OF CHANGES IN EQUITY

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

Distributable

Share

Statutory

Accumulated

Capital Reserve losses Total RM’000 RM’000 RM’000 RM’000 At 1 January 2007 300,000 - (75,113) 224,887 Issue of share capital 300,000 - - 300,000 Transfer to statutory reserves - - - - Net loss for the financial year - - (96,805) (96,805)

At 31 December 2007 600,000 - (171,918) 428,082

Distributable

Share

Statutory

Accumulated

Capital Reserve losses Total RM’000 RM’000 RM’000 RM’000 At 22 December 2005 -* - -

- Issue of share capital 300,000 - - 300,000 Transfer to statutory reserves - - - - Net loss for the financial period - - (75,113) (75,113)

At 31 December 2006 300,000 - (75,113) 224,887

* Issued and paid-up share capital at the date of incorporation of RM3.



23

CASH FLOW STATEMENT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

Note 1.1.2007

to 31.12.2007 From 22.12.2005

to 31.12.2006

RM’000 RM’000

CASH FLOWS FROM OPERATING ACTIVITIES

Loss before zakat and taxation (106,222) (84,786) Adjustments for: Depreciation of property and equipment 12,552 2,502 Amortisation of intangible assets 4,563 758 Allowance for losses on financing 30,101 36 (59,006) (81,490)

Increase in Operating Assets Deposits and placements with other financial institutions

173,000

(173,000)

Financing and advances (1,894,472) (2,444) Other assets (12,742) (3,297) Statutory deposits with Bank Negara Malaysia (3,180) -

Increase in Operating Liabilities Deposits from customers 2,031,970 41,862 Bills and acceptances payable 4,600 647 Other liabilities 9,853 23,980 Net cash generated from operating activities 250,023 (193,742)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property and equipment (34,920) (53,807) Purchase of intangible asset (10,308) (17,192) Net cash used in investing activities (45,228) (70,999) CASH FLOWS FROM FINANCING ACTIVITES

Issuance of ordinary shares 300,000 300,000 Net cash from financing activities 300,000 300,000 NET INCREASE IN CASH AND CASH EQUIVALENTS

504,795 35,259

CASH AND CASH EQUIVALENTS AS AT 1 JANUARY 2007 / DATE OF INCORPORATION

35,259 - *

CASH AND CASH EQUIVALENTS AS AT 31 DECEMBER 2007

2 540,054

35,259

* Issued and paid-up capital at the date of incorporation of RM3.



24

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been used consistently in dealing with items which are considered

material in relation to the financial statements except as disclosed below. 1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Bank have been prepared under the historical cost convention (unless otherwise indicated), and are in accordance with the directives and guidelines issued by Bank Negara Malaysia (“BNM”), Financial Reporting Standards (“FRS”), the Malaysian Accounting Standards Board (“MASB”) approved accounting standards in Malaysia for entities other than private entities, the provisions of the Companies’ Act, 1965 and Shariah requirements.

The preparation of financial statements in conformity with the provisions of the Companies Act 1965,

FRS, the MASB Approved Accounting Standards in Malaysia for entities other than private entities and BNM’s guidelines requires the use of estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the year. It also requires directors to exercise their judgment in the process of applying the Bank’s accounting policies. Although these estimates are based on the directors’ best knowledge of current events and actions, actual results may differ from those estimates.

Critical accounting estimates and assumptions used that are significant to the financial statements, and

areas involving a higher degree of judgment and complexity are disclosed in Section B.

(i) Standards, amendments to published standards and interpretations that are effective: The new accounting standards and amendments to published standards that are mandatory for the

Bank’s financial year beginning on 1 January 2007 are as follows: Applicable to the Bank’s financial statements:

• FRS 117 Leases

• FRS 124 Related Party Disclosures

All changes in accounting policies have been made in accordance with the transition provisions in the respective standards and amendments to published standards. All standards and amendments adopted by the Bank require retrospective application. The adoption of the above new FRS did not have any significant financial impact on the results of the Bank.


25

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 (Cont’d)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont’d) (i) Standards, amendments to published standards and interpretations that are effective (continued):

Not applicable to the Bank’s financial statements:

• FRS 6 Exploration for and Evaluation of Mineral Resources

• Amendment to FRS 1192004 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures

(ii) Standards, amendments to published standards and interpretations to existing standards that are

not yet effective and have not been early adopted:

The new standards, amendments to published standards and interpretations that are mandatory for the Bank’s financial periods beginning on or after 1 July 2007 or later periods, but which the Bank has not early adopted are as follows:

• FRS 107 Cash Flow Statements. This revised standard has no significant changes as compared to the original standard.

• FRS 112 Income Taxes. This revised standard has removed the requirements that prohibit recognition of deferred tax on reinvestment allowances or other allowances in excess of capital allowances.

• FRS 118 Revenue. This revised standard has no significant changes as compared to the original standard.

• FRS 134 Interim Financial Reporting. This revised standard has no significant changes as compared to the original standard.

• FRS 137 Provisions, Contingent Liabilities and Contingent Assets. This revised standard has no significant changes as compared to the original standard.

• FRS 139 Financial Instruments: Recognition and Measurement (effective date yet to be determined by MASB). This new standard establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted only under strict circumstances. The Bank will apply this standard when effective. Nevertheless, the accounting policies of the Bank incorporate revised BNM/GP8 which included selected principles of FRS 139.


26



1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont’d)

(iii) Standards those are effective and not relevant for the Bank’s operations:

• FRS 111 Construction Contracts (Revised)

• FRS 120 Accounting for Government Grants and Disclosure of Government Assistance (Revised)

• Amendment to FRS 121 The Effects of Changes in Foreign Exchange Rates – Net Investment in Foreign Operation.

• IC Interpretation 1Changes in Existing Decommissioning, Restoration and Similar Liabilities

• IC Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments

• IC Interpretation 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

• IC Interpretation 6 Liabilities arising from Participating in Specific Market – Waste Electrical and Electronic Equipment

• IC Interpretation 7 Applying the Restatement Approach under FRS 1292004 Financial Reporting in Hyperinflationary Economies

• IC Interpretation 8 Scope of FRS 2. This Interpretation clarifies that FRS 2 Share-based Payment applies even in the absence of specifically identifiable goods and services.

2. INCOME RECOGNITION

(i) Finance income is recognised on an accrual basis by using the effective profit method. Financing income on financing assets is recognised either on a monthly rest basis or rule 78 method.

Where an account is classified as non-performing, income is suspended until it is realised on a cash basis. Financing income recognised prior to the non-performing classification is not clawed back to the first day of default in conformity with Bank Negara Malaysia guidelines. Customers’ accounts are classified as non-performing where repayments are in arrears for more than 90 days from the day of default.

(ii) Income from banking services is recognised as and when the related services are rendered.


27

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 (Cont’d) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3. FINANCING AND ADVANCES

Financing is recognised when cash is disbursed to customers. They are initially stated at cost including

any transaction cost and are subsequently measured at amortised cost using the effective profit rate method.

Specific allowances are made for non-performing financing and advances which have been individually reviewed and specifically identified as bad, doubtful or substandard. Any allowances made during the period are charged to the income statement. A general allowance based on a percentage of the financing portfolio (net of specific allowances for bad and doubtful financing) is also made to cover possible losses which are not specifically identified. These percentages are reviewed annually in light of past experiences and prevailing circumstances and an adjustment is made to the overall general allowance, if necessary.

Any uncollectible financing or a portion of financing classified as bad is written off after taking into

consideration the realisable value of collateral, if any, when in the judgment of the management, there is no prospect of recovery.

The Bank’s allowance for non-performing financing is in conformity with the minimum requirements of

BNM’s “Guidelines on the Classification of Non- Performing Financing and Provision for Substandard, Bad and Doubtful Debts (BNM/GP3)”, which is deemed in conformity with the requirement on the allowance for financing impairment under the BNM/GP8-i.

4. OTHER PROVISIONS

Provisions are recognised when all of the following conditions have been met: (i) The Bank has a present legal and constructive obligation as a result of past events; (ii) It is probable that an outflow of reserves will be required to settle the obligation; and

(iii) A reliable estimate of the amount can be made.

5. PROPERTY AND EQUIPMENT AND DEPRECIATION

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditure that is directly attributable to the acquisition of the items and any other costs directly attributable to bringing the asset to working conditions for its intended use.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is de-recognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred.


28


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 5. PROPERTY AND EQUIPMENT AND DEPRECIATION (Cont’d)

Assets in progress are not depreciated as these assets are not available for use. Depreciation of the property and equipment is calculated to write off the cost of the property and equipment on a straight line basis over the expected useful lives of the assets concerned. The principal annual rates of depreciation are as follows:

Furniture fittings and office equipment 10%

Renovations 20% Computer equipment and software 20% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at each balance sheet date. At each balance sheet date, the Bank assess whether there is any indication of impairment. Where an indication of impairment exists, the carrying amount of the asset is written-down immediately to its recoverable amount. See accounting policy Note 7 on impairment of non-financial assets. Any item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement.

6. INTANGIBLE ASSETS Acquired computer software are capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (five years). Computer software classified as intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses, if any. Cost associated with developing or maintaining computer software programmes are recognised as an expense when incurred. Costs that are directly associated with identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

7. IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the assets exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there is separately identifiable cash flow (cash generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement. Any subsequent increase in recoverable amount is recognised in the income statement.


29


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 8. OTHER ASSETS

Other assets are initially recognised at their cost when the contractual right to receive cash or another financial asset from another entity is established. Subsequent to initial recognition, receivables are stated at cost less allowance for doubtful debts. Other assets are not held for the purpose of trading.

9. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and bank balances and short term deposits with banks and other financial institutions that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

10. BILLS AND ACCEPTANCES PAYABLE Bills and acceptance payable represent the Bank’s own bills and acceptances rediscounted and

outstanding in the market.

11. EMPLOYEE BENEFITS

(i) Short-term employee benefits

Short-term employee benefit obligations in respect of salaries, annual bonuses, paid annual leave and sick leave are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(ii) Defined contribution plans A defined contribution plan is a pension plan under which the Bank pays fixed contributions to the national pension scheme, Employees’ Provident Fund (“EPF”). The Bank’s contributions to defined contribution plans are charged to the income statement in the period to which they relate. Once the contributions have been paid, the Bank has no further payment obligations.


30



12. INCOME TAX

Current tax expense is determined according to the tax laws of Malaysia and includes all taxes based upon the taxable profits for the financial year. Deferred income tax is provided in full, using the liability method, on temporary differences. Temporary differences are differences between the tax bases of assets or liabilities and the carrying amount of the asset or liability as reported in the financial statements. It reflects the manner in which the Bank expects to recover the carrying value of the asset or settle the carrying value of the liability. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised.

Deferred tax is determined using tax rate (and tax laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled.

13. ZAKAT

Zakat represents business zakat payable by the Bank to comply with the principles of Shariah and as approved by the Shariah Advisory Council. The Bank only pays zakat on its business and does not pay zakat on behalf of depositors or shareholders. Zakat provision is calculated based on 2.5% of profit subject to zakat.

14. CURRENCY CONVERSION AND TRANSLATION

(a) Functional and presentation currency

The financial statements are presented in Ringgit Malaysia, which is the Bank’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transaction at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.


31



15. CONTINGENT LIABILITIES AND ASSETS

The Bank does not recognise a contingent liability but discloses its existence in the financial statements. A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because it cannot be measured reliably. A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-occurrences of one or more uncertain future events beyond the control of the Bank. The Bank does not recognise contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

16. FINANCIAL INSTRUMENTS Financial instruments are recognised in the balance sheet when the Bank has become a party to the

contractual provisions of the instrument. The accounting policies on recognition and measurement of these items are disclosed in their respective accounting policies.

Financial instruments are classified as liabilities or equity in accordance with the substance of the

contractual arrangement. Profit, dividends and gains or losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Bank has a legally enforceable right to offset and intends to settle the liability simultaneously

B. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(i) Allowance for losses on financing and advances

The Bank makes allowance for losses based on assessment of recoverability. Whilst management’s judgment is guided by the relevant BNM guidelines, judgment is made about the future and other key factors in respect of the recovery of the financing and advances. Amongst factors considered are the Bank’s aggregate exposure to the borrower, the net realisable value of the underlying collateral value, the viability of the customer’s business model and the capacity to generate sufficient cash flow to service debt obligations and the aggregate amount and ranking of all other creditor claims.


32

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007

1. GENERAL INFORMATION

The Bank is principally engaged in Islamic banking business which refers generally to the acceptance of deposits and granting of financing under the principles of Shariah as well as the provision of related financial services. The Bank is a licensed Islamic Bank under the Islamic Banking Act 1983, incorporated and domiciled in Malaysia. The registered office of the Bank is located at the Ground Floor, East Block, Wisma Selangor Dredging, 142-B Jalan Ampang, 50450 Kuala Lumpur. The holding company of the Bank is Al Rajhi Banking and Investment Corporation, Saudi Joint Stock Company, a public limited liability company, incorporated in Riyadh on 29 June 1987. The registered office is located at PO Box 28, Riyadh 11411, Kingdom of Saudi Arabia. As at 31 December 2007, the Bank has 19 branches and the numbers of full time employees in the Bank at the end of the financial year were 329 (2006: 216).

2. CASH AND SHORT-TERM FUNDS

2007 2006 RM’000 RM’000 Cash and bank balances with banks and other financial institutions

72,476 20,259

Money at call and deposit placements maturing within one month

467,578 15,000

540,054 35,259

3. DEPOSITS AND PLACEMENTS WITH OTHER FINANCIAL INSTITUTION

2007 2006 RM’000 RM’000 Licensed Islamic bank - 173,000


33

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 4. FINANCING AND ADVANCES

(i) By type

2007 2006 RM’000 RM’000 Term Financing: Personal financing 211,441 3,038 Home financing 17,074 - Vehicle financing 1,760 - Corporate financing 3,252,931 - Charge cards 2,841 236 Staff financing - 57 3,486,047 3,331 Unearned income (1,589,131) (887) Gross financing and advances 1,896,916 2,444 Less: Allowance for bad and doubtful debts and financing - General (28,360) (36) - Specific (1,777) - Total net financing and advances 1,866,779 2,408

(ii) By contract

2007 2006 RM’000 RM’000 Bai’ Bithaman Ajil 1,894,075 2,151 Qard 2,841 236 Others - 57 1,896,916 2,444

(iii) By type of customer

2007 2006 RM’000 RM’000 Domestic non-bank financial institutions - Others 15,409 - Domestic business enterprise - Others 209,624 - Individuals 159,788 2,416 Foreign entities 1,512,095 28 1,896,916 2,444


34

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 4. FINANCING AND ADVANCES (CONT’D)

(iv) By profit rate sensitivity

2007 2006 RM’000 RM’000 Fixed rate: Personal financing 148,040 2,151 Home financing 10,457 - Vehicle financing 1,427 - Corporate financing 1,734,151 - Charge card 2,841 236 Staff financing - 57 1,896,916 2,444

(v) By purpose

2007 2006 RM’000 RM’000 Personal use 148,040 2,208 Charge card 2,841 236 Purchase of landed property – residential property 10,457 - Purchase of transport vehicles 1,427 - Purchase of securities 1,509,118 - Working capital 225,033 - 1,896,916 2,444

(vi) By sector

2007 2006 RM’000 RM’000 Manufacturing 63,173 - Wholesale & Retail trade 70,180 - Transportation 50,239 - Finance services 5,357 - Real estate 36,084 - Telecommunication 1,509,118 - Household 162,765 2,444 1,896,916 2,444

(vii) Movements in non performing financing and advances

2007 2006 RM’000 RM’000 At 1 January/date of incorporation - - Classified as non-performing 3,038 - Reclassified as performing (21) - 3,017 - Less: Specific allowance (1,777) - Net non-performing financing and advances 1,240 -

Ratio of net non-performing financing and advances to total net financing and advances 0.1%

-


35

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 4. FINANCING AND ADVANCES (CONT’D)

(vii) Movements in the allowances for bad and doubtful financing

2007 2006 RM’000 RM’000 General allowance At 1 January/date of incorporation 36 - Allowance made during the period 28,324 36 At 31 December 28,360 36

As % of total gross financing and advances less specific allowance

1.5%

1.5%

Specific allowance At 1 January/date of incorporation - - Allowance made during the period 1,787 - Amount recovered (10) - At 31 December 1,777 -

As % of total gross financing and advances less specific allowance 0.1%

-

(viii) Non-performing financing by purpose

2007 2006 RM’000 RM’000 Personal use 3,017 -

5. OTHER ASSETS

2007 2006 RM’000 RM’000 Sundry deposits 2,274 1,893 Income receivable 213 509 Inventories held for sale 4,792 529 Other debtors and deposits 8,678 366 Amount due from holding company 82 - 16,039 3,297

The amount due from holding company is unsecured and has no fixed terms of repayment. 6. STATUTORY DEPOSITS WITH BANK NEGARA MALAYSIA The non-interest bearing statutory deposits are maintained with Bank Negara Malaysia in compliance with

Section 37(1) (c) of the Central Bank of Malaysia Act 1958 (Revised 1994), the amounts of which are determined as set percentages to total eligible liabilities.


36

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 7. PROPERTY AND EQUIPMENT

Renovations

Furniture & Fittings

Office Equipment

Computer Equipment

Work-in-progress

Total

Cost RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

At 1 January 2007 12,056 1,367 2,373 38,010 - 53,806 Additions 4,612 566 2,087 9,159 18,496 34,920 Disposals - - - - - Reclassification (30) - (447) 477 - - At 31 December 2007 16,638 1,933 4,013 47,646 18,496 88,726 Accumulated depreciation

At 1 January 2007 569 35 57 1,841 - 2,502 Charge for the year 3,125 184 383 8,860 - 12,552 Disposal - - - - - Reclassification (3) - (10) 12 - (1)

At 31 December 2007 3,691 219 430 10,713 - 15,053

Net book value

At 31 December 2007 12,947 1,714 3,583 36,933 18,496 73,673 At 31 December 2006 11,487 1,332 2,316 36,169 - 51,304 Depreciation charge for 2006 569 35 57 1,841 - 2,502

8. INTANGIBLE ASSETS

Computer Software 2007 2006 RM’000 RM’000

Cost At 1 January 17,193 - Additions 10,308 17,193 At 31 December 27,501 17,193 Accumulated amortisation At 1 January 758 - Amortisation for the year 4,563 758 At 31 December 5,321 758 22,180 16,435

9. DEFERRED TAX

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when the deferred taxes relate to the same authority. The following amounts determined after appropriate offsetting, are shown in the balance sheet.

2007 2006 RM’000 RM’000

Deferred tax assets 32,402 17,877 Deferred tax liabilities (13,312) (8,204) 19,090 9,673


37

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d)

9. DEFERRED TAX (cont’d) The movements in deferred tax assets and liabilities during the financial period comprise the following: Deferred tax liabilities

Excess of capital allowances over

depreciation

Total RM’000 RM’000 At 1 January 2007 (8,204) (8,204) Transfer to income statement (5,108) (5,108) At 31 December 2007 (13,312) (13,312)

At date of incorporation - - Transfer to income statement (8,204) (8,204) At 31 December 2006 (8,204) (8,204)

Deferred tax assets

Provisions

Unabsorbed capital

allowances

Unutilised

losses

Total RM’000 RM’000 RM’000 RM’000

At 1 January 2007 8 8,904 8,965 17,877 Transfer from income statement 7,365 566 6,594 14,525

At 31 December 2007 7,373 9,470 15,559 32,402

At date of incorporation - - - - Transfer from income statement 8 8,904 8,965 17,877

At 31 December 2006 8 8,904 8,965 17,877

10. DEPOSITS FROM CUSTOMERS

(i) By type of deposit

2007 2006 RM’000 RM’000 Non-Mudharabah Demand deposits 93,242 6,526 Savings deposits 26,459 1,386 Commodity Murabaha 821,983 - Others 486 2 942,170 7,914 Mudharabah General investment deposits 1,131,662 33,948 2,073,832 41,862


38

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 10. DEPOSITS FROM CUSTOMERS (cont’d)

(ii) By type of customer

2007 2006 RM’000 RM’000 Business enterprises 1,945,941 29,018 Individuals 113,399 12,315 Others 14,492 529 2,073,832 41,862

11. OTHER LIABILITIES

2007 2006 RM’000 RM’000 Profit payable 1,773 29 Dividend payable 2,902 - Other accruals and payables 29,159 23,951 33,834 23,980

Included in other liabilties is an amount of RM52,000 (2006: RM36,000) for charities being “hibah” received from financial institutions which is excluded from the income recognition of the Bank.

12. SHARE CAPITAL

2007 2006 RM’000 RM’000 Authorised: Ordinary shares of RM1.00 each At 1 January / date of incorporation 304,000 304,000 Created during the period 300,000 - At 31 December 604,000 304,000

Issued and fully paid: Ordinary shares of RM1.00 each At 1 January / date of incorporation 300,000 -* Issuance during the year 300,000 300,000 At 31 December 600,000 300,000

* RM3 at incorporation date

During the financial year, the Bank increased its authorised as well as its issued and paid-up capital by way of issuance of an additional 300,000,000 new ordinary shares of RM1 each at an issued price of RM1 per share for cash. The new ordinary shares were for working capital purposes and rank pari passu in all respects with the existing ordinary shares of the Bank.


39

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 13. INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006 RM’000 RM’000 Income derived from investment of: (i) General investment deposits 21,456 30 (ii) Other deposits 2,319 19 23,775 49

(i) Income derived from investment of general investment deposits

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006

RM’000 RM’000 Finance income and hibah Financing, advances and other loans 11,276 1 Money at call and deposit with financial institutions 9,148 28 Total finance income and hibah 20,424 29 Other income

- Service charges 1,032 1 21,456 30

(ii) Income derived from investment of other deposits

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Finance income and hibah Financing, advances and other loans 898 - Money at call and deposit with financial institutions 1,421 19 Total finance income and hibah 2,319 19 Other income

- Service charges - - 2,319 19


40


14. INCOME DERIVED FROM INVESTMENT OF SHAREHOLDERS’ FUNDS

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Finance income and hibah Financing, advances and other loans - 35 Money at call and deposit with financial institutions 8,714 1,520 Total finance income and hibah 8,714 1,555 Other operating income

- Gain from foreign exchange translations 1,295 15 - Others 2 1 Other income

- Service charges 1,263 28 - Commission received 1,233 2 12,507 1,601

15. ALLOWANCE FOR LOSSES ON FINANCING

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Allowance for bad and doubtful financing: (a) General allowance - allowance made during the period 28,324 36 (b) Specific allowance - provided during the period 1,787 - - write-back (10) - 30,101 36

16. INCOME ATTRIBUTABLE TO DEPOSITORS

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006 RM’000 RM’000 Deposits from customers - Mudharabah 13,082 39 - Non-Mudharabah 9 - 13,091 39 Deposits and placements of banks and other financial institutions - Non-Mudharabah 3,589 - 16,680 39


41


17. PERSONNEL EXPENSES

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006

RM’000 RM’000 Salaries and wages 25,430 4,258 Statutory contributions 5,086 1,114 Allowance and bonuses 10,287 3,375 Others 4,167 1,830 44,970 10,577

18. OTHER OVERHEADS AND EXPENDITURES

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Marketing Advertisement and publicity 5,428 14,737 Establishment Office rental 4,933 836 Depreciation of property and equipment 17,115 3,260 EDP expenses 11,376 3,959 General expenses Auditors’ remuneration - statutory audit fees 68 45 - others 30 10 Takaful and insurance 826 390 Professional fees (1,747) 1,661 Pre-operating expenses - 46,248 Others 8,639 4,638 46,668 75,784

19. CEO, DIRECTORS AND SHARIAH COMMITTEE MEMBERS’ REMUNERATION

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006 RM’000 RM’000 Chief Executive Officer Salary and other remuneration including

benefits-in-kind 3,107 2,807 Sign-on bonus - 944 3,107 3,751 Non-executive Directors Fees 180 59 3,287 3,810 Shariah Committee Members 788 320 4,075 4,130


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NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 19. CEO, DIRECTORS AND SHARIAH COMMITTEE MEMBERS’ REMUNERATION (cont’d) The number of Directors of the Bank whose total remuneration during the financial year fell within the

following bands is analysed below:

Number of directors Bank 2007 2006 Executive Director: RM2,750,000 to RM2,800,000 1 1 1 1 Non-executive Directors: Less than RM50,000 - 1 RM50,001 to RM100,000 2 1

2 2

3 3

20. TAXATION

1.1.2007 to

31.12.2007 From 22.12.2005

to 31.12.2006

RM’000 RM’000 Tax expense for the period: - Malaysian income tax - - Deferred tax: - Relating to origination of temporary differences

(Note 9) (9,417) (9,673)

(9,417) (9,673)

A reconciliation of income tax expense applicable to profit before tax at the statutory income tax rate to income tax expense at the effective income tax rate of the Bank are as follows:

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Loss before zakat and taxation

(106,222)

(84,786)

Income tax using Malaysian tax rate of 27% (2006: 28%) Tax effects from:

(28,680)

(23,740)

- change in tax rate 734 745 - expense not deductible for tax purposes 18,529 13,322 (9,417) (9,673)


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NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 21. LOSS PER SHARE

The basic loss per ordinary share is calculated by dividing the Bank’s loss after taxation for the financial year by the weighted average number of ordinary shares outstanding during the financial year.

1.1.2007 to 31.12.2007

From 22.12.2005 to 31.12.2006

RM’000 RM’000 Net loss for the financial year/period (RM’000)

(96,805)

(75,113)

Average shares issued during the year/period (‘000)

368,500 150,000

Basic loss per share (sen) (26.27) (50.08)

22. SIGNIFICANT RELATED PARTY BALANCES AND TRANSACTIONS a) Related parties and relationships The related party and their relationship with the Bank are as follows:

Related party Relationship (i) Al Rajhi Banking and Investment

Corporation, Saudi Joint Stock Company, Kingdom of Saudi Arabia

Holding company

(ii) Key Management Personnel

Defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank either directly or indirectly. The key management personnel of the Bank includes all Directors of the Bank and the Management Committee members of the Bank

b) Significant related party transactions and balances are as follows:

Holding Company

Key Management Personnel

RM’000 RM’000 Expenditure - Professional fees - 62 Amount due from Financing and advances Inter-company billings

-

82

131

-

Amount due to - Current accounts – i - Savings Account

- -

187 197

Corporate Guarantee 1,508,445 -

The above transactions have been entered into in the normal course of business and have been established under terms and conditions that are no less favourable than those arranged with independent parties.


44

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 23. PROFIT RATE RISK

The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of yield/profit rate on its financial position. The rate of return risk is the potential impact of market factors affecting rates on returns in comparison with the expected rates of return for investment account holders. Yield/profit rate is monitored and managed by the ALCO to protect the income of its operations. The assets and liabilities at carrying amount are categorised by the earlier of the next contractual repricing dates and maturity dates as follows:

Non-trading book

Up to 1 month

>1-3

months

>3-12

months

1 to 5 years

> 5 years

Non- profit

sensitive

Trading

book

Total

Effective profit rate

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % 2007

Assets Cash and short term funds 467,578 - - - - 72,476 - 540,054 3.47 Financing and advances

- performing 20,008 65,288 93,704 154,840 1,557,390 2,669 - 1,893,899 4.50 - non performing

(1) - - - - - (27,120) - (27,120) -

Other assets(2)

- - - - - 134,162 - 134,162 -

Total assets 487,586 65,288 93,704 154,840 1,557,390 182,187 - 2,540,995

Liabilities

Deposits from customers 86,128 667,922

839,005 360,590 - 120,187 - 2,073,832 3.46

Bills and acceptance payable - - - - - 5,247 - 5,247 - Other liabilities - - - - - 33,834 - 33,834 -

Total liabilities 86,128 667,922 839,005 360,590 - 159,268 - 2,112,913

Shareholders’ fund - - - - - 428,082 - 428,082

Total liabilities and

shareholders’ fund 86,128 667,922 839,005 360,590 - 587,350 - 2,540,995

On-balance sheet profit sensitivity gap 401,458 (602,634) (745,301) (205,750) 1,557,390 (405,163) - - Off-balance sheet profit sensitivity gap - - - - - - - -

Total profit sensitivity

gap 401,458 (602,634) (745,301) (205,750) 1,557,390 (405,163) - -

Note: (1) This is arrived at after deducting the general allowance and specific allowance from the outstanding gross non

performing financing. (2) Other assets include property and equipment, and deferred tax assets.


45


23. PROFIT RATE RISK (cont’d) Non-trading book

Up to 1 month

>1-3

months

>3-12

months

1 to 5 years

> 5

years

Non- profit

sensitive

Trading

book

Total

Effective profit rate

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % 2006

Assets

Cash and short term funds 15,000 - -

-

-

20,259

-

35,259

3.30

Deposit and placement with other financial institution

173,000 - -

-

-

-

-

173,000

3.48

Financing and advances

- performing - - - 2,351 - - - 2,351 8.50 Other assets

(1) - - - - - 80,766 - 80,766 -

Total assets 188,000 - - 2,351 - 101,025 - 291,376

Liabilities

Deposits from customers

11,903 345 21,700 - - 7,914 - 41,862 3.10

Bills and acceptance payable - - -

-

-

647

-

647

-

Other liabilities - - - - - 23,980 - 23,980 -

Total liabilities 11,903 345 21,700 - - 32,541 - 66,489

Shareholders’ fund - - - - - 224,887 - 224,887

Total liabilities and shareholders’ fund 11,903 345 21,700 - -

257,428

-

291,376

On-balance sheet profit sensitivity gap

176,097 (345)

(21,700) 2,351

- (156,403) -

-

Off-balance sheet profit sensitivity gap

- -

-

- - - - -

Total profit sensitivity

gap

176,097

(345)

(21,700)

2,351

-

(156,403)

-

-

Note: (1) Other assets include property and equipment, and deferred tax assets.


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NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 24. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank made various commitments and incurred certain contingent

liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions.

The commitments and contingencies and the related risk-weighted exposures of the Bank as at the end of financial year are as follows:

2007 2006

Principal

amount

Credit equivalent

amount

Risk weighted

amount

Principal

amount

Credit equivalent

amount

Risk weighted

amount RM’00 RM’000 RM’000 RM’00 RM’000 RM’000 Transaction-related contingent items 662 331 331 - - - Irrevocable commitments to extend credit:

- Maturity not exceeding one year 67,000 - - - - - - Maturity exceeding one year 161,031 80,516 80,516 2,513 1,257 1,257 Miscellaneous 20,236 - - - - - 248,929 80,847 80,847 2,513 1,257 1,257

* The credit equivalent amount is arrived at using the credit conversion factors as per Bank Negara

Malaysia guidelines. 25. CAPITAL COMMITMENTS

Capital expenditure pertaining to the Bank as approved by Directors but not provided for in the financial statements is as follows:

2007 2006 RM’000 RM’000 Authorised and contracted for: Property and equipment

21,488

36,405

26. CAPITAL ADEQUACY

(a) The capital adequacy ratios of the Bank as at 31 December 2007 are as follows:

2007 2006 RM’000 RM’000 Tier-1 capital Paid-up share capital 600,000 300,000 Accumulated losses (171,918) (75,113)

428,082 224,887 Less: Deferred tax (19,090) (9,673)

Total Tier-1 capital 408,992 215,214

Tier-2 capital General allowance for bad and doubtful financing 28,360 36

Total Tier-2 capital 28,360 36

Capital base 437,352 215,250


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26. CAPITAL ADEQUACY (cont’d)

(a) The capital adequacy ratios of the Bank as at 31 December 2007 are as follows: Capital ratios: 2007 2006 Core capital ratio 24.02% 191.76% Risk-weighted capital ratio 25.69% 191.79%

(b) The breakdown of risk-weighted assets for credit risk (excluding deferred tax assets) in the

various categories of risk-weights is as follows:

2007 Principal Risk-weighted RM’000 RM’000 0% 538,125 - 20% 5,705 1,141 50% 11,328 5,664 75% 1,509,118 1,131,839 100% 560,825 560,825

Risk-weighted assets for credit risk 2,625,101 1,699,469 Risk-weighted assets for market risk - 3,056

Total risk-weighted assets 2,625,101 1,702,525

2006

Principal Risk-weighted RM’000 RM’000 0% 19,046 - 20% 189,213 37,843 100% 73,444 73,444

Risk-weighted assets for credit risk 281,703 111,287 Risk-weighted assets for market risk - 943

Total risk-weighted assets 281,703 112,230


48

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 27. SEGMENTAL INFORMATION Segment information is presented in respect of the Bank’s business segments. The primary format, business segments, is prepared based on the internal financial reporting system to

reflect the Bank’s management reporting structure. The amounts of each business segment are shown after the allocation of certain centralised costs, funding income and the application of transfer pricing, where appropriate. Inter-segment pricing is determined on a negotiated basis.

The Bank comprises the following main business segments: (i) Retail Operations

Retail operations focus on providing product and services to individual customers and small- and medium- sized enterprises. The products and services offered to customers include credit facilities, charge cards, remittance services, deposit collection and investment products.

(ii) Treasury and Capital Market Operations

The treasury and capital market operations are involved in proprietary trading in treasury related products and services such as foreign exchange, money market operations and securities trading. Income from customer trading is reflected under Retail Operations.

(iii) Corporate Investment Banking

Corporate Investment Banking operations provide a full range of financial services to corporate customers as well as small and medium sized enterprises. The products and services offered include long and short term financing such as working capital financing, asset financing, project financing as well as trade financing.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise corporate assets and expenses.

The Bank operates predominantly in Malaysia and accordingly, information by geographical location on the Bank’s operation is not presented.


49


27. SEGMENTAL INFORMATION (Cont’d)

Bank

Retail Banking

Treasury & Money Market

Corporate Investment Banking

Total RM’000 RM’000 RM’000 RM’000

2007 External revenue 10,908 20,660 4,714 36,282 Inter-segment revenue - - - -

Total revenue 10,908 20,660 4,714 36,282

Result Segment result (6,296) 12,987 (21,275) (14,584) Unallocated corporate expenses (91,638)

Loss before zakat and taxation

(106,222)

Zakat and taxation 9,417

Net loss for the financial year

(96,805)

Other information

Segment assets 231,093 470,758 1,708,162 2,410,013 Unallocated corporate assets

130,982

Total assets 2,540,995

Segment liabilities 1,251,849 821,983 - 2,073,832 Unallocated corporate liabilities

39,081

Total liabilities 2,112,913

Other segment items

Capital expenditure - - - 45,228 Depreciation - - - 17,115

Other non-cash (income)/ expenses 4,112 - 25,989 30,101


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27. SEGMENTAL INFORMATION (Cont’d)

Bank

Retail Banking

Treasury & Money

Market

Total RM’000 RM’000 RM’000

2006 External revenue 84 1,566 1,650 Inter-segment revenue

-

-

-

Total revenue 84 1,566 1,650

Result Segment result 9 1,566 1,575 Unallocated corporate expenses

(86,361)

Loss before zakat and taxation

(84,786)

Zakat and taxation 9,673

Net loss for the financial period

(75,113)

Other information

Segment assets 22,610 188,000 210,610 Unallocated corporate assets

80,766

Total assets 291,376

Segment liabilities 41,862 - 41,862 Unallocated corporate liabilities

24,627

Total liabilities 66,489

Other segment items

Capital expenditure

-

-

70,999

Depreciation - - 3,260

Other non-cash (income)/ expenses

36

-

36


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28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments comprise financial assets, financial liabilities and also off-balance sheet financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction, other than in a forced or liquidation sale. The information presented herein represents estimates of fair values as at the balance sheet date. Quoted and observable market prices, where available, are used as the measure of fair values. However, for a significant portion of the financial instruments, including financing and advances to customers, such market prices do not exist as there is currently no ready market wherein exchanges between willing parties occur. Accordingly, various methodologies have been used to estimate what the approximate fair values of such instruments might be. These methodologies involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates and estimates of futures cash flows, future expected loss experience and other factors. Changes in the uncertainties and assumptions could significantly affect these estimates and the resulting fair value estimates. Where these methodologies are not able to estimate the approximate fair values, such instruments are stated at carrying amount. In addition, fair value information is not provided for non-financial instruments and financial instruments that are excluded from the scope of FRS 132 which requires fair value information to be disclosed. These include property, plant and equipment. Therefore, for a significant portion of the Bank’s financial instruments, including financing and advances to customers, their respective fair value estimates do not purport to represent, nor should they be construed to represent, the amount that the Bank could have realised in a sales transaction at the balance sheet date. The fair value information presented herein should also in no way be construed as representative of and the Bank’s underlying value as a going concern. Furthermore, it is the Bank’s intention to hold most of its financial instruments to maturity and, therefore, it is not probable that the fair value estimates shown will be realised. The face values of the financial assets and liabilities with a maturity period of less than one year are assumed to approximate their fair values. The following table summarises the carrying amounts and the estimated fair values of those financial assets not presented on the Bank balance sheet at their fair value

Carrying value Fair value 2007 RM’000 RM’000

Financial assets Financing and advances 1,866,779 1,323,218


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28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (Cont’d)

Carrying value Fair value 2006 RM’000 RM’000

Financial assets Financing and advances 2,408 1,698

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Financial and advances For fixed rate financing and advances, the fair values are estimated by discounting the estimated future cash flows using prevailing market rates of financing with similar credit risk and maturities. The fair values of impaired fixed rates financing and advances are represented by their carrying value, net of specific allowance being the expected recoverable amount

29. COMPARATIVE FIGURES The presentation and classification of items for the following comparative figures have been restated to conform with current year’s presentation:

As

Restated

As Previously

Stated RM’000 RM’000 Balance Sheet

Assets Property and equipment 51,304 67,739 Intangible assets 16,435 -

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