ANNUAL REPORT 2015... 2015 ANNUAL REPORT L iqu idit y M a nag eme n t C e n t r e B.S. C . ( c ) A...

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2015

ANNUALREPORT

L i q u i d i t y M a n a g e m e n t C e n t r e B . S . C . ( c ) A n n u a l R e p o r t 2 0 1 5

14

Annual Report2015

Liquidity Management Centre B.S.C. (c) 9th Floor, LMC Building - P.O. Box 11567Seef District, Kigdom of Bahrain

Tel : (973) 17568568 - Fax : (973) 17568569

w w w . l m c b a h r a i n . c o m


Tel : (973) 17568568 - Fax : (973) 17568569


His Royal Highness Prince Khalifa Bin Salman Al KhalifaThe Prime Minister of theKingdom of Bahrain

His Majesty KingHamad Bin Isa Al Khalifa The King of the Kingdom of Bahrain

His Royal Highness Prince Salman Bin Hamad Al Khalifa The Crown Prince & Deputy Supreme Commander & First Deputy Prime Minister of the Kingdom of Bahrain

4 | Annual Report 2015

Contributing to the growth of the Islamic Capital Market

5 | Liquidity Management Centre B.S.C. (c)

Vision and Mission 06

Corporate Profile 08

Chairman’s Message 12

Biographies of BOD 14

CEO’s Message 16

Executive Management 17

Corporate Governance 20

Financial Highlights 22

Shari’a Supervisory Board Report 24

Independent Auditors’ Report 25

Financial Statements 27

Public Disclosure 69CON

TEN

TS


OUR VISION & MISSION

Liquidity Management Centre B.S.C.(c) (LMC) is a Wholesale Islamic Investment Bank incorporated in July 2002 and regulated by the Central Bank of Bahrain. It aims to provide optimal Islamic Financing and Investment solutions which contribute to growth of the Islamic capital market.


VISIONTo enable Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the Shari’a principles.

MISSIONFacilitating the investment of surplus funds with Islamic banks and financial institutions into quality short and medium term financial instruments structured in accordance with Shari’a principles.

LMC is committed to playing a key role in the creation of an active and geographically expansive Islamic inter-bank market which will assist Islamic financial institutions in managing their short-term liquidity. The establishment and depth of such inter-bank market will further accelerate the development process of the Islamic banking sector. In addition, LMC continues to attract assets from governments, financial institutions and corporates in both private and public sectors in key target markets. The sourced assets are also securitized into readily transferable securities or structured into other innovative investment instruments.


Bahrain Islamic Bank:Bahrain Islamic Bank (BIsB) was established in 1979 as the first Islamic commercial

bank in the Kingdom of Bahrain. The Bank has been maintaining its leading

position in the Islamic banking sector through adopting innovative Islamic

investment and financing products, supported by superior retail and corporate

banking services. The Bank is listed on the Bahrain Bourse (previously known

as the Bahrain Stock Exchange). The major shareholders are leading local and

regional financial institutions. The Bank operates under supervision and the

regulatory framework of the Central Bank of Bahrain.

Dubai Islamic Bank:Dubai Islamic Bank, established in 1975, is the world’s first Shariah-compliant

player and the largest Islamic Bank in UAE, with growing international operations

in Asia, Middle East and Africa. The organization is increasingly being recognized

as a formidable force in the area of global Islamic finance and one of the most

progressive Islamic Financial institutions in the world. The bank is also a renowned

player in the Islamic debt capital markets where a number of historic mandates

have been won and successfully delivered.

Islamic Development Bank: The Islamic Development Bank is a multi-national financial institution

established in pursuance of the Declaration of Intent issued by the Conference

of Finance Ministers of Muslim Countries held in Jeddah in Dhul Q’adah 1393H,

corresponding to December 1973. The purpose of the Bank is to foster the

economic development and social progress of member countries and Muslim

communities individually as well as jointly in accordance with the principles of

Shari’a.

Kuwait Finance House Investment Company: Kuwait Finance House Investment Company formerly known as Liquidity

Management House is a wholly owned subsidiary of Kuwait Finance House.

KFHI was established in December 2007 in the State of Kuwait and commenced

its operations in May 2008. The company was launched with a paid up capital

of Kuwaiti Dinars 100 Million (approx US$ 360 million) with the objective to be

market leader in International Debt Capital Market arena.

CORPORATE PROFILESHAREHOLDERS

SHAREHOLDERS COUNTRY SHAREHOLDING (%)

Bahrain Islamic Bank Kingdom of Bahrain 25%

Dubai Islamic Bank United Arab Emirates 25%

Islamic Development Bank Kingdom of Saudi Arabia 25%

Kuwait Finance House Investment Co. State of Kuwait 25%


LMC TODAY

LMC plays an active role in the primary and secondary Islamic financing market delivering innovative, adaptable and tradable

Islamic Shari’a compliant short term and medium term financial instruments to Islamic financial institutions. In addition, it

provides Islamic advisory services, including but not limited to the areas of structured finance, project finance and corporate

finance.

With an authorized capital of US$ 200 million and an equity of US$ 70 million as of 31st December 2015, LMC proudly shares

a very close working relationship with each of its shareholders who are renowned in the Islamic Financial Market for their

contribution to the industry, namely, Bahrain Islamic Bank B.S.C. (Kingdom of Bahrain), Dubai Islamic Bank P.J.S.C. (United Arab

Emirates), Islamic Development Bank (Saudi Arabia) and Kuwait Finance House Investment Company (State of Kuwait) each

of whom today hold equal shares in LMC. The Bank has proven to be a leading arranger of sukuk instruments (Islamic bonds)

having issued a number of innovative sukuk with recognised structures that have been reflected in other sukuk issuances in the

region. LMC has also been recognized for their innovation winning an award from Euromoney for the best debt house in Bahrain

“Best Domestic Market Sukuk House” in 2005.

The Bank’s focus has not only been on bringing long term financing opportunities but also developing short term Shari’a

compliant investment opportunities. The Bank has pioneered the structure of its Short Term Sukuk Program, a tradable low

risk liquidity management product which provides investors with opportunity to invest in short term sukuk. The program is

secured by a diverse, high quality and liquid portfolio of asset backed corporate and sovereign sukuk instruments arranged and

administered by LMC and other recognized arrangers with a purchase undertaking from LMC. The Short Term Sukuk Program is

the first such repackaged Sukuk product to be offered into the Islamic banking market.

BUSINESS SERVICES AND PRODUCTS OFFERED

1. Short Term Investment ServicesLMC conducts extensive Sukuk asset sourcing and repacking as part of the offering, placement and administration of its

Short Term Sukuk (STS) Program.

2. Structured Finance ServicesLMC’s structured finance services provide an end-to-end solution tailored to meet the needs of its clients in the international

market place. Comprising services offered include the following:

• Finance Raising:LMC has extensive experience in the structuring, issuance, marketing and post-issuance administration of tradable Islamic

capital markets instruments such as Sukuk. The approach centres on structuring attractive transactions in partnership with

clients. Its role includes being an arranger, structuring advisor, documentation agent and placement agent.

• Private Equity Raising: Conducts and coordinates with its client the modelling of transactions, identifying and resolving prospective legal and

corporate issues arising from equity offerings, prepares offering documents and presentation materials, articulates all

placement related activities, and conducts the offering process. Throughout, LMC is solely focussed on ensuring the

successful completion of the equity raising transaction.

3. Strategic Advisory ServicesThese services revolve around the provision of analysis and advice to clients in relation to their business development activities.

The principal objective is to develop and evaluate strategic plans which meet the client’s needs. Additionally, LMC actively

focuses in ensuring that its clients optimise their capital structures with a view to facilitating access to new and efficient sources

of debt and/or equity and other forms of Islamic compliant financing.

• Portfolio Management:


Advise and manage fixed income investments which include Sukuk in various sectors through valuation tools and factors that

influence sukuk yields. LMC also manages a proprietary equity investment portfolio to maximize returns through carefully

examining markets and companies while adhering to Shari’a principles.

PRIMARY MARKET ARRANGEMENT TRACK RECORD

1. Bahrain – Eskan Bank - Bahrain Property Musharaka Trust BD 40 Million issued in November 2010.

2. Bahrain – Golden Falcon Syndicated Ijara Facility – US $140 million closed in July 2009.

3. Bahrain – BFH Asset Company, Syndicated Investment Agency (Wakala) Facility - AED 367.3 million

closed in December 2008.

4. UAE – Thani Investments Limited Sukuk – US$100 Million issued in November 2007.

5. GCC – Project Finance Sukuk for Cement Plant – US$130 Million issued in September 2007.

6. Kuwait – Lagoon City Sukuk – US$200 Million issued in December 2006.

7. UAE – Bukhatir Investments Limited Sukuk – US$50 Million issued in May 2006.

8. Bahrain - Bahrain Financial Harbour Al Marfa’a Al Mali Sukuk - US$134 Million issued in July 2005.

9. Kuwait - The Commercial Real Estate Company Ijara Sukuk - US$100 Million issued in May 2005.

10. Bahrain - Durrat Khaleej Al Bahrain Sukuk - US$152.5 Million issued in January 2005.

11. Bahrain - FIRSAN Sukuk - Euro76 Million issued in October 2004.

12. UAE - EMAAR Sukuk - US$65 Million issued in June 2004.

13. Bahrain – Bahrain Monetary Agency Ijara Sukuk US$250 Million issued in June 2003.

SECONDARY MARKET DEVELOPMENT ACTIVITIES

LMC plays an active role in the secondary Islamic financing market delivering innovative, adaptable and tradable Islamic

Shari’a compliant short term, medium term and long term financial instruments to Islamic financial institutions. The Bank has

pioneered the structure of its Short Term Sukuk Program, a tradable low risk liquidity management product which actively

promotes the secondary market development activities.

Backed by its strong operating performance, LMC looks forward to maintaining a reasonable growth phase during the current

market conditions. Having said that, LMC foresees itself equipped to harness further activities and expand its services to

include a range of investment banking solutions including debt capital markets, asset management, equity capital markets

and private equity in compliance with Islamic Shari’a principles.


TRACK RECORD


2015 RESULTS AND PERFORMANCE

1. As widely acknowledged 2015 remained a relatively challenging year for the financial markets in the midst of regional political turmoil and falling oil prices. Conservative asset valuations continued to remain the largest factor weighing on profitability for financial institutions. With flight to quality continuing, 2015 witnessed improved risk appetite as financial institutions searched for higher returns. Nevertheless, most of the year saw the investment grade, government and quasi government issuers gaining a much larger share compared to other corporate entities. Despite continuing market volatility, out of Europe and earlier in the Middle East, LMC managed to achieve a net profit of USD 3.56 million for the fiscal year 2015 in comparison to a net profit of USD 4.22 million for the same period in 2014. It is worth noting that the Bank continued to be prudent by implementing aggressive steps to enhance its balance sheet. LMC further maintained the amount of provisions in line with market conditions and requirements. The Bank’s gross operating income stood at USD 10.08 million in 2015 and this was mainly due to:

a) The successful Sukuk investment activities, mainly through the Short Term Sukuk Program (“STS Program“) has proven to be, given current market conditions, a relatively superior instrument offering superior risk-adjusted returns;

b) Despite cautiously booking selected assets and also the capitalization of the portion repaid for the Ijarah facility for the LMC headquarter, the Bank’s total assets decreased from USD 202 million in 2014 to USD 183.39 million in 2015 mainly due to the sizable repayment of the Bank short term obligations;

Chairman’s Message

Mohammed Ahmed Hassan Janahi Chairman of the Board

In the name of Allah, the Most Compassionate, the Most Merciful, Praise be to Allah who takes all things towards perfection; Prayers and peace be upon Mohammed, His Last Prophet.

On behalf of the Board of Directors of Liquidity Management Centre B.S.C. (c) (“LMC“ or the “Bank“) I am pleased to present the Report of the Board of Directors for the year ended 31st December 2015.


c) As mentioned above, lack of demand for corporate issuance resulted in a negative impact on fees income from primary issuance however this was offset by fee income from advisory services for prominent restructuring transactions. Moreover, the Bank’s revenue stream benefited from its diversified investment policy;

d) Barring for the ultra low levels of LIBOR during the year 2015, the returns from the Bank’s investments would have been higher.

2. The bank adopted a prudent and conservative approach towards controlling operating expenses which successfully assisted in lowering the operating expenses to USD 5.26 million in 2015 in comparison with USD 5.51 million in 2014.

3. The impairment provisioning during 2015 amounted to USD 832 thousand compared with USD 278 thousand in year 2014 in line with the Bank’s conservative provisioning policy.

4. The Bank continued to further book quality assets and take advantage of market conditions. However, the lack of supply in investment grade issuances that meet the banks criteria coupled with opportunistic Sukuk sales, led to a decrease in the bank’s investment portfolio from USD 145 million in 2014 to USD 97.67 in 2015.

5. The shareholders equity showed a healthy increase from USD 67.48 million in 2014 to USD 70.97 million in 2015 mainly due to net profit achieved during the year. This was a result of the efficient performance of the Bank during challenging economic circumstances.

6. The Board of Directors have decided not to distribute any dividends for the year 2015.

Although economic indicators depict a pessimistic view on the regional economy, we look forward to 2016 with greater confidence as we pursue further diversification through cautiously exploring and engaging in new business lines.

In closing, on behalf of the Board of Directors, I would like to thank the Government of the Kingdom of Bahrain represented by the Central Bank of Bahrain and Ministry of Industry and Commerce for their continued commitment and support to the Islamic Banking sector.

My highest appreciation is also due to our shareholders, Islamic Development Bank, Dubai Islamic Bank, Bahrain Islamic Bank and Kuwait Finance House Investment Co. (a wholly owned subsidiary of Kuwait Finance House - Kuwait), whose commitment was and will continue to be crucial to our success.

Finally, I would also like to thank the management and the staff of the Bank, for their outstanding dedication and performance

Allah the Almighty is the Purveyor of all Success.

Mohammed Ahmed Hassan Janahi Chairman of the Board

Chairman’s Message


Mr. Mohammed Ahmed Hassan Janahi (Chairman of the Board)Mr. Mohammed Ahmed Hassan Janahi is Deputy Chief Executive Officer at Bahrain Islamic Bank (BISB). Mr. Janahi assumed number of senior executive positions previously in Citibank, National Bank of Bahrain (NBB), Baraka Islamic Bank and Gulf Air in Bahrain. Mr. Janahi attended numerous courses on administrative sciences, banking and leadership at renowned universities and institutes in Europe and USA. In addition, he also attended a number of intensive and diversified workshops at leading institutions and banks, including Citibank, Financial Times and the Executive Development Institute in London. Mr. Janahi is a Bahraini national and has vast experience in banking & financial operations over a span of 46 years.

Mr. Farid Masood(Deputy Chairman)Mr. Farid Masood is the Director of Advisory Services and Asset Management at Islamic Corporation for the Development of the Private Sector (ICD), Islamic Development Bank’s private sector arm. He is also a member of the management committee and investment committee of ICD and represents ICD on the board / investment committee of several investee companies and investment funds. Mr. Masood held many positions before joining ICD, he was CEO of KASB Securities (Merrill Lynch) in Pakistan and also he was a Strategy Consultant for PricewaterhouseCoopers in the USA. Farid holds a Bachelors and Masters in Systems and Information Engineering from the University of Virginia (USA) and a Masters from the University of Cambridge (UK). He has over 22 years of professional experience.

Mr. Abdul Wahab Essa Al Rushood (Director)Mr. Al Rushood is the Group Chief Treasury Officer in Kuwait Finance House (Kuwait). He is currently holds board memberships in Kuwait Finance House (KFH), Bahrain; Development Enterprises Holding Co., Kuwait & Aviation, Lease and Finance Co. (ALAFCO), Kuwait. Mr. Al Rushood is a Kuwaiti national who holds a B.Sc. degree in Mathematics and Computer Science from Western Oregon State College, USA and has completed specialized Strategic Leading Management Program at Harvard Business School, USA. He has over 29 years of professional experience.

Dr. Adnan Chilwan (Director)Dr. Adnan Chilwan is the Group Chief Executive Officer of Dubai Islamic Bank (DIB). He has an extensive career spanning two decades with reputed conventional and Islamic banks in the region. He also represents DIB in boards of various strategic investments, subsidiaries and associates including Tamweel PJSC; DIB Capital; Deyaar PJSC; Liquidity Management Centre Bahrain and Dar Al Shari’a Consultancy. He is also on the advisory council of Higher Colleges of Technology (HCT), UAE. Dr. Chilwan is an Indian national who holds a PhD and MBA in Marketing. He is a Certified Islamic Banker (CeIB), a Post Graduate in Islamic Banking & Insurance and an Associate Fellow Member in Islamic Finance Professionals Board. He has over 20 years of banking experience in the gulf region.

BIOGRAPHIES OF BOARD OF DIRECTORSCORPORATE PROFILESHAREHOLDERS


Mr. Khalid M. Al Doseri (Director) Mr. Khalid Mohammed Al Doseri is Chief Financial Officer (CFO) at Bahrain Islamic Bank (BISB). He was previously a Board Member and Managing Director of the Islamic Bank of Yemen. Mr. Al Doseri, a Bahraini national, is a Certified Public Accountant (CPA) from Oregon Board of Accountants, an MBA from the University of Glamorgan, and is a graduate of the Executive Management Development Program from the University of Virginia, Darden. He has over 32 years of professional experience.

Mr. Mohamed S. Al Sharif (Director)Mr. Al Sharif is currently the Chief of Investment Banking in Dubai Islamic Bank (DIB). He holds several Chairmanships and Board memberships on publicly traded companies and financial services firms on behalf of DIB Group. Starting his career with the UAE Central Bank, Al Sharif held many positions in the Financial Control and Banking Supervision departments and later transitioned to Dubai Islamic Bank where he held the position of CFO for 11 years. Mr. Al Sharif is a UAE national who is a Certified Public Accountant (CPA) from Virginia, USA; and a Master’s degree in Accounting. He is a registered accounting and banking expert by UAE Courts. Al Sharif is a banking professional with 29 years of experience in Islamic Banking and Central Banking.

Mr. Nawaf Al Menayekh (Director)Mr. Al Menayekh is the Senior Vice President of Investment Banking at Kuwait Finance House Investment in Kuwait. Mr. Al Menayekh is a Kuwaiti national who holds an MBA (International Banking & Finance) from The University of Birmingham, UK and has completed the Program for Leadership Development at Harvard University, USA. He has over 18 years of professional experience.

Mr. Seedy Mohammad Njie (Director)Mr. Seedy Mohammad Njie is a Senior Investment Specialist at the Islamic Development Bank (Jeddah). He was previously Senior Credit Risk Specialist with the same bank and Assistant Audit Manager with Deloitte - Gambia. Mr. Njie, a Gambian national, who holds MBA from School of Oriental and African Studies (University of London) and Certified Islamic Banker (CIBAFI). He is a Fellow with the Association of Chartered Certified Accountants - UK (FCCA), Chartered Management Accountant with the Chartered Institute of Management Accountants – UK. He has over 15 years of professional experience.

BIOGRAPHIES OF BOARD OF DIRECTORS


Ahmed AbbasChief Executive Officer

In the name of Allah, the Most Compassionate, the Most Merciful, Praise be to Allah who takes all things towards perfection; Prayers and peace be upon Mohammed, His Last Prophet.

Falling oil prices, regional political turmoil and subdued economic growth marked the close of the 2015. The year was filled with key events such as a 12 year low in oil prices, China’s devaluation of the Yuan and negative economic outlook for the GCC economies. The prevailing market conditions further subdued global Sukuk issuances which stood at USD 35.4 Billion for the year in comparison to USD 49.5 Billion for 2014. As the GCC continue to diversify their economies amidst falling oil prices and downgrades; addressing the fiscal budgets and deficit funding will become the key challenges during coming year along with asset valuations which have been the backdrop for a risk-averse environment.

The current economic environment resulted in LMC taking preventative measures and aggressive steps towards enhancing its financial position with a balanced approach and proactive risk management. However, despite the state of the global economy, LMC was still able to achieve a net profit of USD 3.56 million amid the Bank’s conservative approach toward impairment provisioning reflecting in a return on capital of 6.3% for the fiscal year 2015.

The Bank’s operating income stood at USD 10.08 million in comparison to USD 10.11 million in 2014. Net income before fair value changes and impairment provision stood at USD 4.82 million for the year 2015 in comparison to USD 4.60 million for the year 2014. During these trying times, the Bank booked assets selectively while utilizing excess liquidity to manage the repayment of short term obligations resulting in

the total assets declining from USD 202.00 million in 2014 to USD 183.39 million in 2015.

Fewer global issuances came to market during 2015 compared to 2014. The Bank’s involvement in the primary and secondary markets remained a core business area and given its cautious investment approach the Bank was able to maintain its net profit margins. Corporate clients remained risk averse and reluctant to come to capital markets finding the conditions not conducive however the Bank continued to focus on securing advisory mandates.

The current economic conditions and financial markets are expected to further slowdown due to the reduction in oil prices putting pressure on the GCC fiscal budgets for 2016. Given our track record and strong team here at LMC, we remain cautious and watchful to capitalize on opportunities should they arise in the coming future.

In summation, 2015 continued to be another challenging year for investors and despite all efforts, the market conditions limited us from achieving higher returns. However, we remain cautious and prepared for an evolving economic environment. We would like to take the opportunity to thank our team members, clients and more so our Shareholders and strategic partners for their continued support.


CEO’s Message



Amer SadiqExecutive Vice President

Structured Finance

Hussain MerzaSenior Vice President

Financial Controls

EXECUTIVE MANAGEMENT


Transforming our vision into a reality


CORPORATE GOVERNANCE

LMC acknowledges the importance of Corporate Governance

as an application of the best management practices that are

directed towards achievement of corporate values, goals and

objective and enhancing shareholders value coupled with

high transparency and corporate responsibility. During 2015,

the Board conducted a thorough review of the Bank’s high

level policies for corporate governance, internal control, risk

management and compliance with the latest regulations and

guidelines of the Central Bank of Bahrain (CBB).

THE BOARD OF DIRECTORSThe Board is nominated by the shareholders of the Bank in

accordance with the provisions of the Article of Association

of the Bank and CBB approvals. The Board has eight

directors representing the interest of the Bank and is highly

responsible for the Management and its performance, and

provides directions and applies policies in order to ensure

strategic guidance of the Bank.

Board’s ResponsibilitiesThe Board of Directors is delegated with the responsibility to

oversee that the Bank is carrying out its duties, and enhance

the effectiveness of the Board. It serves in monitoring the

Management to ensure that the policies and processes are

in the right place to show that it is operating effectively and

taking the responsibility with regard to the financial report,

internal control and the process of monitoring compliance

with applicable laws and regulations. Each Director is

appointed for a three years term renewable at an Annual

General Meeting of the shareholders of the Bank, subject to

CBB approval.

Board MeetingsIn accordance with the applicable CBB regulations and the

Article of Association of the Bank, the Board of Directors is

required to meet at least four times per year. On a regular

basis, the Board have close contact with The Management

and are required to act within their given authority for the

benefit of the Bank.

BOARD COMMITTEESBoard of DirectorsThe Board of Directors is responsible for the conduct of the

general operations of the Bank and exercises all the powers

delegated by the Articles of Association of the Bank. The

Board has created four sub-committees to assist in carrying

out its duties.

Executive CommitteeThe Executive Committee is responsible for reviewing

investment proposals and implementing the Bank's strategy

and policies agreed by the Board of Directors. It also proposes

new strategies and policies to the Board of Directors and

acts as the principal forum in which members liaise through

their representatives with Management.

Audit CommitteeThe Audit Committee is responsible for the integrity of the

Bank’s financial statements, financial reporting process and

the Bank’s systems of internal accounting and financial

controls; reviewing internal control, internal audit and

external audit. In addition, the committee is responsible

for the compliance of the Bank with legal and regulatory

requirements, including the Bank’s disclosure of controls and

procedures.

Nomination, Remuneration & Corporate Governance CommitteeThe Nomination, Remuneration & Corporate Governance

Committee enables the Board to fulfill its responsibilities

in setting the appropriate composition and evaluating the

performance of the Board, individual directors and senior

management. Moreover, the Committee is responsible

for recommending remuneration policies and special

compensation plans for review and approval by the Board

of Directors. The committee also takes a leadership role in

shaping corporate governance policies and practices, leads

the Board in its annual review of the Board’s performance,

and recommends to the Board of Directors candidates for

appointment in each committee.

Risk Management CommitteeThe Risk Management Committee is responsible for identifying,

monitoring and approving the risk management policies

of the Bank to establish the appropriate approval level of

decisions. The committee also provides a forum for "big-picture"

analysis of future risks and critically assesses the Bank’s

business strategies and plans from a risk perspective.

SHARI’A SUPERVISORY BOARDThe Shari’a Supervisory Board is entrusted to ensure the

compliance aspects of the Bank’s products and instruments.

They are also responsible for monitoring and approving

the operations, investments and activities carried out by

the Bank without violating the principles and provisions

of Islamic Shari’a. The views of the Shari’a advisor shall be

binding in the specific area of supervision.


Shari’a Board Members1. Dr. Hussain Hamed Hassan

2. Dr. Abdul Sattar Abu Ghuddah

3. Shaikh Adnan Al Qattan

MANAGEMENTLMC boasts significant achievements in a span of thirteen

years with a sound track record, acknowledged by industry

leaders around the world. LMC is led by Mr. Ahmed

Abbas, the Chief Executive Officer, and supported by a

professional technical and structured finance team and

a highly experienced and qualified management team.

The Management in LMC is responsible for working in an

effective manner combining legal and ethical manners in

its aim to increase teamwork, commitment, and to achieve

a successful decision making process through its staff and

business units in the Bank.

ORGANIZATIONAL STRUCTUREAs LMC cares about updating and maintaining its track

record, The Board has defined the organization structure

responsibilities and authorities for the Management team

and staff where they mainly respond to the changes and

needs of the Bank during the year and ensure the proper

segregation of responsibilities, accountabilities. and duties

of the staff, at all levels.

COMPLIANCELMC conducts its business with separate compliance

functions in handling its works under the regulatory

requirements stipulated by the CBB. The Bank complies

under many key regulations such as, Shari’a Compliance,

Legal Compliance, Financial Accounting Standards and the

CBB's Regulations and Guidelines.

Status of Compliance with the CBB Rules - Corporate Governance Guidelines (High Level Controls Module)Liquidity Management Centre “LMC” regularly reviews its

compliance with the governance requirements stipulated in

the High Level Control Module (HC) issued by the Central

Bank of Bahrain.

During 2015, LMC fully complied with the requirements

of the CBB’s High Level Control Module except for the

following:

Rule HC-1.3.4:Each individual Board member must attend at least 75% of

all Board meetings in a given financial year.

LMC’s Explanation: During 2015, the Bank’s Board of Directors met the

attendance requirement with an exception of two

Members. The Bank would like to highlight that meetings

were scheduled in advance and the Bank provided an

appropriate amount of notice for each meeting. The Bank

also offered Members the option of attending meetings

via conference calls. Currently one of the above mentioned

Members has resigned and lengthy discussions have been

made with the remaining Member who has assured us that

the attendance requirement will be met in the current year.

Rule HC-1.4.4, HC-1.4.8, HC-3.2.1, HC-4.2.2 & Guidance HC-1.4.5, HC-1.4.6, HC-1.8.2, HC-5.3.2, HC-9.2.4:The Bank must appoint at least one Independent Director,

majority of Independent Directors in the Audit Committee

and Nomination should be Independent, and the Chairman

must not be an Executive Director.

LMC’s Explanation: As of 31st December 2015, the Bank has 8 Dependent

- Executive Directors, representing the four institutional

Shareholders equally. These Directors are appointed by

the Shareholders and hold managerial positions in their

respective institutions but are not currently involved in the

daily management of LMC.

In order to comply with HC-1.4.4, the Nomination,

Remuneration and Corporate Governance Committee is in

the process of setting a selection criteria and methodology

to evaluate and appoint a suitable independent Director.

Furthermore, although the Chairman is an Executive Director

as per the definition of the CBB since he is in a management

position at one of the Bank’s Shareholder, he is not involved

in the daily management of LMC.

The Bank continues to be committed to adopting banking

practices to ensure the best corporate governance and

will continue to endeavor to be in compliance with the HC

Module of the Central Bank of Bahrain.


2015 2014 2013 2012 2011 2010

Balance Sheet Position

Total Assets 183,394 202,003 221,045 213,645 184,657 237,196

Total Liabilities 112,427 134,524 158,088 154,871 129,193 181,773

Total Equity 70,967 67,479 62,957 58,774 55,464 55,423

Profit & Loss Statement

Operating Income 10,079 10,113 10,567 8,060 7,349 7,740

Net profit before unrealized fair value change and impairment provision 4,817 4,604 4,849 3,155 1,498 634

Net Profit/(Loss) 3,558 4,224 3,577 3,069 325 (9,570)

Cash Flow Statement

Operating cash flow 28,169 (6,836) (12,419) 24,324 3,147 (6,874)

Investing cash flow (4,454) (4,328) (5,739) (2,549) (4,305) (7,561)

Financing cash flow - - - - - -

Performance Ratios (%)

Return on average assets (%) 1.85 2.00 1.65 1.54 0.15 (3.56)

Return on average equity (%) 5.14 6.48 5.88 5.37 0.59 (16.12)

Liquidity Ratio (%)

Liquid asset Ratio (%)* 18.25 3.4 20.4 35 7.3 10

Capital Adequacy Ratio (%)

Capital adequacy (%)** 31.44 36.38 29.94 33.13 34.73 25.02

*Total of Cash, Short term balances with banks, Short term Murabaha and Mudharaba as a percentage of total assets.

** Capital Adequacy Ratio for the year ended 31st December 2015 was calculated as per Basel III requirements whereas Basel II

was applied for previous years.

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

70,9

67

237,

196

184,

657

213,

645

221,

045

202,

003

183,

394

67,4

79

62,9

57

58,7

74

55,4

64

55,4

23

31.4

4

36.3

8

29.9

4

33.1

3

34.7

3

25.0

2

(9,5

70)

325

3,06

9

3,57

7

4,22

4

3,55

8

2010 2011 2012 2013 2014 2015

1.85

2.00

1.65

1.54

0.15

6.48

5.14

5.88

5.37

0.59

(3.5

6)

(16.

12)

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

70,9

67

237,

196

184,

657

213,

645

221,

045

202,

003

183,

394

67,4

79

62,9

57

58,7

74

55,4

64

55,4

23

31.4

4

36.3

8

29.9

4

33.1

3

34.7

3

25.0

2

(9,5

70)

325

3,06

9

3,57

7

4,22

4

3,55

8

2010 2011 2012 2013 2014 2015

1.85

2.00

1.65

1.54

0.15

6.48

5.14

5.88

5.37

0.59

(3.5

6)

(16.

12)

FINANCIAL HIGLIHTSFinancial performance of Liquidity Management Centre for the year ended on 31st December, 2015

TOTAL ASSETS USD millions

TOTAL EQUITYUSD millions


EXTERNAL FACTORS AFFECTING THE BANK’S PERFORMANCE

There are many factors that affect the Bank’s business and the results of its operations, some of which are beyond the control of the bank. The following is a description of some of the important factors that may cause the actual results of the Bank’s operations in the future periods to differ materially from those currently expected or desired.

1. The Bank’s future growth rates and success are in-part dependent on continued growth and success of international markets. Although the Bank’s dealings are concentrated in areas that are deemed very safe, as is the case with most international operations, the success and profitability of the bank’s international business can be subject to numerous risks and uncertainties such as local economic and labour conditions, stage of the business cycle, political instability, a change in tax laws, new monetary policies affecting exchange rates along with other economic structures, overall business sentiment, and newly introduced or amended local and national government regulations.

2. Due to Bank’s diversified portfolio, the profit margins realized by the bank can vary somewhat among these products and services, its clientele and its geographic markets. Consequently, the overall profitability of the Bank’s operations for any given period is partially dependent on the product, clientele and geographic mix reflected in that period’s revenues.

3. A sharp downfall in oil prices can put a strain on local economies where the Bank concludes most of its business. Although oil prices seem to have stabilized, there is no guarantee that a further deterioration in the global economy will manage to keep oil prices stable to comfortably service these economies.

4. A sudden deterioration in liquidity of the global economy and local banking institutions can cause further depreciation in asset prices, deleveraging and de-equitization which can affect the Bank’s balance sheet.

5. The Bank’s profitability will be highly dependent on the upcoming economic performance and its recovery. Three key prerequisites for sustained economic rebound internally are further enhancement of regulatory environment, a stabilization of real-estate activities and a stable political environment. Fiscal stimulus if conducted by local economies may temporarily boost GDP, but without these prerequisites, sustained economic expansion can be affected.

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

70,9

67

237,

196

184,

657

213,

645

221,

045

202,

003

183,

394

67,4

79

62,9

57

58,7

74

55,4

64

55,4

23

31.4

4

36.3

8

29.9

4

33.1

3

34.7

3

25.0

2

(9,5

70)

325

3,06

9

3,57

7

4,22

4

3,55

8

2010 2011 2012 2013 2014 2015

1.85

2.00

1.65

1.54

0.15

6.48

5.14

5.88

5.37

0.59

(3.5

6)

(16.

12)

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

2010 2011 2012 2013 2014 2015

70,9

67

237,

196

184,

657

213,

645

221,

045

202,

003

183,

394

67,4

79

62,9

57

58,7

74

55,4

64

55,4

23

31.4

4

36.3

8

29.9

4

33.1

3

34.7

3

25.0

2

(9,5

70)

325

3,06

9

3,57

7

4,22

4

3,55

8

2010 2011 2012 2013 2014 2015

1.85

2.00

1.65

1.54

0.15

6.48

5.14

5.88

5.37

0.59

(3.5

6)

(16.

12)

NET PROFIT / (LOSS)USD millions

RETURN ON AVERAGE ASSETS (%)

CAPITAL ADEQUACY (%)

RETURN ON AVERAGE EQUITY (%)


SHARI’A SUPERVISORY BOARD REPORTOn the Liquidity Management Centre activities for the year ended on 31st December, 2015

In the name of Allah, the most compassionate and the most

merciful

To M/s: The stakeholders of Liquidity Management Centre

B.S.C. (Closed)

Thanks to all mighty Allah and prayers and peace be upon

our last prophet Mohammed and his relatives and comrades.

Based on the standard principles and the assigning of Fatwa

and Shari’a Supervisory Board to supervise the group’s

activities and investments, the Fatwa and Shari’a Supervisory

Board presents the following report:

1. Fatwas and Resolutions:

The Board has answered the queries and questions received

from the group’s management, and accordingly, the Board

issued the suitable fatwas and resolutions required, which

the group abided to eventually.

2. Structured Finance and Documents Preparation:

The Board has approved all the group’s structured financing

related transactions, and has reviewed and approved the

contracts and documents related to it.

3. Approval of Amendments to Sukuk & Syndicated Facilities:

The Board has reviewed the group’s preparations /co-

preparations for the amendments to investment sukuk and

syndicated facilities and has accordingly approved those

transaction documents.

4. Product Development:

The Board, in co-operation with the group’s management is

developing a number of products.

5. Compliance and Legislative Auditing:

The Board has legislatively audited some of the group’s

accomplished transactions within the said year, and has

commented on them accordingly.

6. Reviewing of Books and Records:

The Board reviewed a set of the group’s books, records and

documents based on its own demand, and has received

the data and information in terms of enabling the board to

perform the duty of supervisory and legislative auditing.

7. Reviewing the Balance Sheet:

The Board has reviewed the group’s balance sheet, the

related statements and detailed notes. Accordingly, the

board concluded that this balance sheet, based on the data

and information provided by the group’s management truly

represents the group’s assets and income.

8. Zakat:

The management is not authorized to pay the Zakat on

behalf of the shareholders, and as such the responsibility

for payment of the Zakat lies with the shareholders in

accordance with the Zakat calculation approved by the

Sharia Supervisory Board, which is USD 0.02649 per share.

The Board Overall Conclusion:

The Board confirm that the group has abided towards the

compliance of Shari’a and committing on executing the

Boards’ fatwas within all the group’s activities, and based

on the received transactions, collected data, auditing,

commenting and truthful response by the group in terms of

abiding to the Board comments, the Board according to its

authorization has concluded that the group’s accomplished

activities and transactions within the said year are in total

compliance with Islamic sharia’a terms as well as the Board’s

fatwas.

We all call to Allah the almighty to realize for us the right

guidance and the good achievements as he likes and

accepts.

Peace be upon all of you, as well as God’s mercy and

blessings.

Dr. Shaikh Hussain Hamed HassanHead of Shari’a Supervisory Board

Dr. Shaikh Abdul Sattar Abu GhuddahMember

Shaikh Adnan AlqattanMember


INDEPENDENT AUDITOR'S REPORTTo the Shareholders of Liquidity Management Centre B.S.C. (c)

We have audited the accompanying consolidated financial

statements of Liquidity Management Center B.S.C. (c) (the

“Bank“) and its subsidiary (the “Group“) which comprise

the consolidated statement of financial position as at 31

December 2015, and the related consolidated statements of

income, cash flows and changes in owners’ equity for the

year then ended. These consolidated financial statements

and the Group’s undertaking to operate in accordance with

Islamic Shari’a Rules and Principles are the responsibility of

the Group’s Board of Directors. Our responsibility is to express

an opinion on these consolidated financial statements

based on our audit.

We conducted our audit in accordance with Auditing

Standards for Islamic Financial Institutions issued by the

Accounting and Auditing Organisation for Islamic Financial

Institutions (“AAOIFI“). Those standards require that we plan

and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free of

material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in

the consolidated financial statements. An audit also includes

assessing the accounting principles used and significant

estimates made by management, as well as evaluating the

overall consolidated financial statements presentation. We

believe that our audit provides a reasonable basis for our

opinion.

Opinion

In our opinion, the consolidated financial statements

present fairly, in all material respects, the financial position

of the Group as of 31 December 2015 and the results of its

operations, cash flows and changes in owners’ equity for the

year then ended in accordance with Financial Accounting

Standards issued by AAOIFI.

Other Matters

As required by the Bahrain Commercial Companies Law and

the Central Bank of Bahrain (CBB) Rule Book (Volume 2), we

report that:

a) The Bank has maintained proper accounting records

and the consolidated financial statements are in agreement

therewith; and

b) The financial information contained in the Report of

the Board of Directors is consistent with the consolidated

financial statements.

We are not aware of any violations of the Bahrain Commercial

Companies Law, the Central Bank of Bahrain and Financial

Institutions Law, the CBB Rule Book (Volume 2 and

applicable provisions of Volume 6) and CBB directives or the

terms of the Bank’s memorandum and articles of association

having occurred during the year ended 31 December

2015 that might have had a material adverse effect on the

business of the Bank or on its financial position. Satisfactory

explanations and information have been provided to us by

management in response to all our requests. The Bank has

also complied with the Islamic Shari’a Rules and Principles as

determined by the Shari’a Supervisory Board of the Group.

Partner’s registration no: 145

17 February 2016

Manama, Kingdom of Bahrain


FIN

AN

CIA

L ST

ATEM

ENTS

Consolidated Statement of Financial Position 24

Consolidated Statement of Income 25

Consolidated Statement of Cash Flows 26

Consolidated Statement of Changes in Owners’ Equity 27

Notes to the Consolidated Financial Statements 28


CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAt 31 December 2015

Notes2015

US$ '0002014

US$ ‘000

ASSETS

Cash and bank balances 5,451 3,736

Due from banks and financial institutions 3 22,000 -

Mudaraba receivables 4 6,026 3,186

Financing receivables 5 8,434 9,038

Investment in sukuks 6 97,665 145,009

Investment in equities and funds 6 12,513 15,194

Investment in real estate 7 29,181 23,780

Equipment 135 119

Other assets 8 1,989 1,941

TOTAL ASSETS 183,394 202,003

LIABILITIES AND OWNERS' EQUITY

Liabilities

Due to short term sukuk investors and banks 9 108,292 130,793

Staff payables 3,670 2,840

Other liabilities 10 465 891

Total liabilities 112,427 134,524

Owners' Equity

Share capital 11 56,228 53,550

Reserves 11 9,694 9,408

Retained earnings 5,045 4,521

Total owners' equity 70,967 67,479

TOTAL LIABILITIES AND OWNERS' EQUITY 183,394 202,003

Mohammed HassanChairman

Khalid Al DossariDirector


•

The attached notes 1 to 26 from part of these consolidated financial statements


CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2015

Notes2015

US$ '0002014

US$ '000

INCOME

Income from:

Investments in sukuk 12 6,803 8,586

Investments in equities and funds 841 249

Due from banks and financial institutions 5 99

Financing receivables 412 496

Mudaraba receivables 187 342

Gain on investments at fair value through statement of income 187 9

Less: Return to Short Term Sukuk - investors and banks (1,720) (2,377)

6,715 7,404

Investment banking fees 13 1,647 896

Ijarah income 1,553 1,547

Foreign exchange gain 16 93

Other income 148 173

OPERATING INCOME 10,079 10,113

EXPENSES

Staff costs 14 3,056 3,016

Ijarah expense 125 308

Depreciation 651 602

General and administrative expenses 15 1,430 1,583

OPERATING EXPENSES 5,262 5,509

NET PROFIT FOR THE YEAR BEFORE UNREALISED FAIR VALUE CHANGE AND IMPAIRMENT PROVISION 4,817 4,604

Unrealised fair value loss on investment in funds (427) (102)

Impairment provision 16 (832) (278)

NET PROFIT FOR THE YEAR 3,558 4,224

Mohammed HassanChairman

Khalid Al DossariDirector




Notes2015

US$ '0002014

US$ '000

OPERATING ACTIVITIES

Net profit for the year 3,558 4,224

Adjustments for:

Depreciation 651 602

Amortisation of discount on investments (93) (97)

Restructuring investments in funds (554) -

Unrealised fair value loss on investments through statement of income - funds - 102

Unrealised fair value gain on investments through statement of income - funds 187 (133)

Net gain from sale of investments at amortised cost 12 (2,457) (2,399)

Unrealised fair value losses (gains) on investment through statement of income 427 -

Impairment provision / (writeback) - net 343 278

Collective impairment provision 489 31

Operating profit before changes in operating assets and liabilities 2,551 2,608

Changes in:

Mudaraba receivables (2,840) 26,984

Financing receivables 604 2,633

Other assets (48) 685

Due to short term sukuk investors and banks (22,501) (23,992)

Staff payables 830 -

Other liabilities (546) 428

Purchase of investments at amortised cost (40,565) (61,821)

Sale/ redemption proceeds of investments at amortised cost 89,804 46,337

Purchase of investment at fair value through equity (592) (964)

Sale/ redemption proceeds of investment at fair value through equity 1,255 213

Sale/ redemption of investment at fair value through statement of income - net 217 53

Net cash from (used) in operating activities 28,169 (6,836)

INVESTING ACTIVITIES

Investment in real estate (4,431) (4,431)

Sale / (Purchase) of equipment (23) 103

Net cash used in investing activities (4,454) (4,328)

NET MOVEMENT IN CASH AND CASH EQUIVALENTS 23,715 (11,164)

Cash and cash equivalents at 1 January 3,736 14,900

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 27,451 3,736

Cash and cash equivalents at year end comprise of:

Cash and balances with banks 5,451 3,736

Due from banks and financial institutions with original maturity of ninety days or less 22,000 -

27,451 3,736

CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2015



CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITYFor the year ended 31 December 2015

Reserves

Paid-upShare

capitalUS$ '000

Statutoryreserve

US$ '000

Generalreserve

US$ '000

Investmentfair value

reserveUS$ '000

Totalreserves

US$ '000

RetainedearningsUS$ '000

Totalowners'

equityUS$ '000

Balance at 1 January 2015 53,550 3,313 2,226 3,869 9,408 4,521 67,479

Cumulative changes in fair value - - - (70) (70) - (70)

Net profit for the year - - - - - 3,558 3,558

Total income recognised directly in equity - - - (70) (70) 3,558 3,488

Transfer to paid-up capital (note 11) 2,678 - - - - (2,678) -

Transfer to statutory reserve - 356 - - 356 (356) -

Balance at 31 December 2015 56,228 3,669 2,226 3,799 9,694 5,045 70,967

Balance at 1 January 2014 51,000 2,891 2,226 3,571 8,688 3,269 62,957

Cumulative changes in fair value - - - 298 298 - 298

Net profit for the year - - - - - 4,224 4,224

Total income recognised directly in equity - - - 298 298 4,224 4,522

Transfer to paid-up capital (note 11) 2,550 - - - - (2,550) -

Transfer to statutory reserve - 422 - - 422 (422) -

Balance at 31 December 2014 53,550 3,313 2,226 3,869 9,408 4,521 67,479



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2015

1. INCORPORATION AND ACTIVITIES

Liquidity Management Centre B.S.C. (c) (the “Bank“) is a closed joint stock entity incorporated in the Kingdom of Bahrain on 31 July 2002 under Commercial Registration number 49092. The Bank operates under a wholesale banking license issued by the Central Bank of Bahrain (the “CBB“). The Bank's registered office is Building 852, Road 3618, Block 436, Seef District, Kingdom of Bahrain.

The principal activities of the Bank and its wholly owned subsidiary (the “Group“) include the following:

• Facilitating the creation of an Islamic inter-bank money market that will allow Islamic Financial Services Institutions (“IFSI“) to effectively manage their assets and liabilities.

• Providing short-term liquid, tradable asset backed treasury instruments (Sukuk) based on Islamic Shari’a principles where IFSI can invest their surplus liquidity.

• Providing short-term investment opportunities based on Islamic Shari’a principles.

The Bank is regulated by the CBB and supervised by the Shari’a Supervisory Board for compliance with Shari’a rules and principles. As of 31 December 2015, the total number of employees employed by the Bank was 23 (2014: 23).

The consolidated financial statements were approved for issue by the Board of Directors on 17 February 2016.

2. ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements have been prepared in accordance with Financial Accounting Standards (“FAS“) as issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI“), the Islamic Shari’a rules and principles as determined by the Shari’a Supervisory Board of the Group, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law and the CBB regulations (as combined in Volume 2 and applicable provisions of Volume 6 of the CBB rulebook). In accordance with the requirements of AAOIFI, for matters which are not covered by AAOIFI standards, the Group uses relevant International Financial Reporting Standards (“IFRS“) as issued by the International Accounting Standards Board (the “IASB“).

Statement of ComplianceThe consolidated financial statements have been prepared on a historical cost basis, except for equity type instruments carried at fair value through equity and at fair value through statement of income that have been measured at fair value. The consolidated financial statements have been presented in United States Dollar (“US$“), being the reporting and functional currency of the Group’s operations. All values are rounded to the nearest thousand (US$’000) unless otherwise indicated. Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank and its subsidiary as at and for the year ended 31 December of each year. The financial statements of the subsidiary 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.

The Bank's subsidiary is fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continues to be consolidated until the date that control ceases. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.



2. ACCOUNTING POLICIES (continued)

2.1 Basis of preparation (continued)

Basis of consolidation (continued)

The consolidated financial statements comprise the financial statements of the Bank and its following subsidiary:

Ownership and Voting Power Year of Country of Nature of

2015 2014 incorporation business

Held directly by the Bank

The Short Term

Sukuk Centre B.S.C. (c) 100% 100% 2003 Kingdom of Bahrain

Dynamic management of sukuks portfolio

2.2 Summary of significant accounting policies The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous year and are as follows: a. Cash and cash equivalents Cash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with banks and amounts due from banks and financial institutions with original maturities of 90 days or less.

b. Due from banks and financial institutions These comprise international commodity murabaha and wakala contracts, which are trade transaction agreements stated at cost net of deferred profit and provision for impairment.

c. Mudaraba receivables A mudaraba receivable is a partnership in which the Group contributes capital. These contracts are stated at the fair value of the consideration given less provision for impairment. d. Financing receivables These represent wakala and murabaha financing to projects and are stated at the fair value of the consideration given less provision for impairment. e. Investments These are classified as either equity type instruments carried at fair value through the statement of income or fair value through equity or debt type instruments carried at amortised cost. Initial recognitionAll investments are recognised on the acquisition date and are recognised initially at their fair value plus transaction costs, except for investments carried at fair value through the statement of income. Transaction costs relating to investments carried at fair value through the statement of income are charged to the consolidated statement of income when incurred. Equity type instruments carried at fair value through the statement of income Investments held for trading and designated at fair value through the statement of income are subsequently remeasured at fair value. All related realised and unrealised gains or losses are reported in the consolidated statement of income. Equity type instruments carried at fair value through equityInvestments designated at fair through equity are subsequently remeasured at fair value and the resultant fair value gain or loss is directly reported in equity under ‘investment fair value reserve’ until the investment is sold, realised or deemed to be impaired, at which time the realised gain or loss is reported in the consolidated statement of income. Losses arising from impairment of such investments are recognised in the consolidated statement of income in “impairment losses“ and removed from the investment fair value reserve. Impairment losses recognised in the consolidated statement of income for an equity instrument classified as fair value through equity are not reversed through the consolidated statement of income.



2.2 Summary of significant accounting policies (continued)

e. Investments (continued)Debt type instruments carried at amortised costThese instruments are managed on a contractual yield basis and are not held for trading and have not been designated at fair value through the statement of income. Such investments are carried at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such investments is recognised in the consolidated statement of income when the investment is de-recognised or impaired. f. Fair valueFair value is determined for each investment individually in accordance with the valuation policies set out below: (i) For investments that are traded in organised financial markets, fair value is determined by reference to the quoted

market bid prices prevailing on the consolidated statement of financial position date.

(ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with third parties that are either completed or are in progress. Where no recent significant transactions have been completed or are in progress, fair value is determined by reference to the current market value of similar investments. For others, the fair value is based on the net present value of estimated future cash flows, or other relevant valuation methods.

(iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of estimated future cash flows determined by the Group using current profit rates for investments with similar terms and risk characteristics.

(iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less provision for any impairment.

g. OffsettingFinancial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legal or religious enforceable right to set off the recognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

h. Derecognition of financial instrumentsFinancial assetsA financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:

(i) The right to receive cash flows from the asset have expired;

(ii) The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass through' arrangement; or

(iii) The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Financial liabilitiesA financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

i. ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation.



2. ACCOUNTING POLICIES (continued)2.2 Summary of significant accounting policies (continued)

j. Revenue recognitionIncome from investments, due from banks and financial institutions and financing receivables.Income is recognised on a time-apportioned basis over the period of the investment. sIncome that is 90 days or more overdue is suspended until it is received in cash.

Dividend income Dividends are recognised when the right to receive payment is established.

Ijarah income Ijarah income is accounted for on a straight line basis over the ijarah terms.

Income from Mudaraba receivablesIncome on mudaraba receivables is recognised when the right to receive payment is established or on distribution by the mudarib.

Investment banking feesThese comprise fees for structuring, arranging and underwriting deals. Investment banking fees are recognised when the services are provided and income is earned. This is usually when the Bank has performed all significant acts in relation to a transaction and it is highly probable that the economic benefits from the transaction will flow to the Bank. Significant acts in relation to a transaction are determined based on the terms agreed in the private placement memorandum/contracts for each transaction.

k. Return to short term sukuk investorsReturn to short term sukuk investors is recognised in accordance with the underlying contracts.

l. Foreign currenciesTransactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into US Dollars at the rate of exchange ruling at the reporting date. All differences are taken to the consolidated statement of income at the entity level.

Translation gains or losses on non-monetary items are included in equity as part of the fair value adjustment.

m. Impairment of financial assetsAn assessment is made at each statement of financial position date to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the assessment by the Group of the estimated cash equivalent value, is recognised in the consolidated statement of income. Specific provisions are created to reduce all impaired financial contracts to their realisable cash equivalent value. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted. Impairment is determined as follows:

(i) For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously recognised in the consolidated statement of income.

(ii) For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset.

(iii) For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective profit rate.

Impairment losses on investments at fair value through equity are not reversed through statement of income. Any gains post impairment will be recognised in the statement of equity.

n. ZakahIn accordance with its Articles of Association, the Group is not required to pay Zakah on behalf of its shareholders.




2.2 Summary of significant accounting policies (continued)

o. Fiduciary assets Assets held in a fiduciary capacity are not treated as assets of the Group. p. Employees’ end of service benefits Provision is made for end of service indemnity payable under the Bahraini Labour Law applicable to non-Bahraini employees’ accumulated periods of service at the statement of financial position date. In addition, provision for indemnity is also made for Bahraini employees in accordance with the Bank’s policy. Bahraini employees of the Bank are covered by contributions made to the Social Insurance Organization of the Kingdom of Bahrain as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions, which are expensed when due. q. Earnings prohibited by Shari’a The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is credited to a charity account where the Group uses these funds for various social welfare activities. r. Dividends Dividends to shareholders are recognised as a liability when they are approved by the shareholders. s. Trade and settlement date accounting All “regular way“ purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset. t. Investment in real estate Properties held for rental, or for capital appreciation purposes, or both, are classified as investment in real estate. Investments in real estate are initially recorded at cost, being the fair value of the consideration given and acquisition charges associated with the property. Subsequent to initial recognition, an entity has the option to adopt either the fair value model or the cost model and shall apply that policy consistently to all of its investment in real estate. The Group has opted to use the cost model.

Investment in real estate remeasured using the cost model is stated at cost less depreciation and any impairment provisions. Depreciation is the systematic allocation of the cost of an asset over its estimated useful life. Major expenditure incurred by the entity related to additions to and improvements in real estate subsequent to its acquisition shall be added to the carrying amount of investment in real estate in the consolidated statement of financial position, provided that the entity expects that such expenditure will increase the future economic benefits to the entity from the real estate. However, if such economic benefits are not expected to occur, the entity shall recognise this expenditure in the consolidated statement of income in the financial period in which it is incurred.



2 ACCOUNTING POLICIES (continued)

2.3 Estimates and judgements

In the process of applying the Group’s accounting policies, management has made estimates and judgements in determining the amounts recognised in the consolidated financial statements. The most significant use of estimates and judgements are as follows:

Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis.

Impairment The Group assesses at each statement of financial position date whether there is objective evidence that a specific asset or a group of assets may be impaired. An asset or a group of assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred “loss event“) and that loss event(s) has an impact on the estimated future cash flows of the asset or the group of the assets that can be reliably estimated. Collective impairment provision Impairment is assessed collectively for losses on Islamic financing facilities that are not individually significant and for individually significant facilities and investments in sukuk where there is not yet objective evidence of individual impairment. Collective impairment is evaluated at each reporting date with each portfolio subject to a separate review. Fair valuation of investments The determination of fair values of unquoted investments requires management to make estimates and assumptions that may affect the reported amount of assets at the date of the consolidated financial statements. The valuation of such investments is based on the fair value criteria explained above. The actual amount that is realised in a future transaction may differ from the current estimate of fair value and may still be outside management estimates, given the inherent uncertainty surrounding valuation of unquoted investments. Liquidity The Group manages its liquidity through consideration of the maturity profile of its assets and liabilities which is set out in the liquidity risk disclosures in note 18 (b). This requires judgment when determining the maturity of assets and liabilities with no specific maturities.

In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which affect the amounts recognised in the consolidated financial statements. Classification of investments Management decides on acquisition of a equity type financial asset whether it should be classified as “equity-type instruments at fair value through the statement of income“ or “equity-type instruments at fair value through equity“. A similar decision is taken by management on acquisition of a debt type financial asset as to whether it should be classified as a “debt-type instrument through the statement of income“ or a “debt-type instrument at amortised cost“.

2.4 Shari’a Supervisory BoardThe Group’s Shari’a Supervisory Board consists of four members appointed by the general assembly. They review the Group’s compliance with general Shari’a principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari’a principles.



3. DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2015US$ '000

2014US$ '000

Wakala contracts 22,000 -

All balances have original maturities of 90 days or less.

4. MUDARABA RECEIVABLES

2015US$ '000

2014US$ '000

Banks and financial institutions 6,026 3,186

5. FINANCING RECEIVABLES

2015US$ '000

2014US$ '000

Wakala receivable* 5,138 5,738

Murabaha receivable 3,296 3,300

8,434 9,038

* This represents a syndicated financing transaction based on an investment agency (wakala) agreement entered into by the Bank in order to finance a project in the Kingdom of Bahrain. The facility is collaterised against four plots of land. The facility was restructured during 2015 with the maturity being extended to 3 September 2019 bearing a profit rate of 6% p.a. As at 31 December 2015, the fair value of the collateral against the wakala receivable was US$ 88 million for a total transaction value of US$ 34 million ( 2014: US$123 million for a total transaction value of US$ 38 million).

6. INVESTMENTS

2015

Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough the

statementof income

US$ '000Total

US$ '000

Debt typeQuoted investments - Sukuk

104,463 - - 104,463

Equity typeQuoted investments - Equity shares

- 4,727 - 4,727

Unquoted investments - Funds - 8,355 4,935 13,290

104,463 13,082 4,935 122,480

Less: Impairment provision (note 16) (6,798) (5,504) - (12,302)

At 31 December 2015 97,665 7,578 4,935 110,178



6. INVESTMENTS (continued)

2014

Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough the

statementof income

US$ '000Total

US$ '000

Debt typeQuoted investments - Sukuk

151,305 - - 151,305

Equity typeQuoted investments - Equity sharesUnquoted investments - Funds

--

4,590 10,736

3 6,529

4,593 17,265

151,305 15,326 6,532 173,163

Less: Impairment provision (note 16) (6,296)(6,664)

- (12,960)

At 31 December 2014 145,009 8,662 6,532 160,203

The Group’s investments in sukuk held at amortised cost have a fair value of US$ 103 million (31 December 2014: US$ 149 million).

Under unquoted investments which are held at fair value through equity are investments amounting to US$ 3.5 million (2014: US$ 4.7 million) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments.

Investments which are impaired as of 31 December 2015 amounted to US$ 15.7 million (2014: US$ 16.6 million). Investments include an amount of US$ 79.2 million (2014: US$ 125 million) representing the underlying assets of the secured Short Term Sukuk Program (STS Program) of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The maturities of these investments range from 1 to 37 years and the effective profit rate on these investments ranged between 1.6 % to 7.8 % per annum (2014: 1.4 % to 10 % per annum).

The Group has been party to a long term financing arrangement with a third party international financial institution for which certain of the Group’s investments in sukuk amounting to US$ 62 million (2014: US$ 81 million) have been pledged as collateral as of 31 December 2015. In accordance with the financing arrangement, the Group is required to increase the amount of Sukuk pledged as collateral to equal the amount of financing, when the existing Sukuk pledged as collateral decline in value.

7. INVESTMENT IN REAL ESTATE

This mainly represents the Bank's Headquarter's building, the majority of which is leased under an operating ijara:

2015US$ '000

2014US$ '000

Cost 25,819 21,388

Addition 6,124 4,431

31,943 25,819

Accumulated depreciation and impairment (2,762) (2,039)

29,181 23,780

During 2015, the Bank received property of US$ 1.7 million as a partial settlement for one of its investments. As at 31 December 2015, the fair value of this property was US$ 1.6 million.

As at 31 December 2015, the Bank’s other investment property had a fair value of US$ 2.3 million ( 2014: US$ 2.3 million ) and it’s headquarters had a fair value of US$ 24.9 million (2014: US$ 26.6 million).




8. OTHER ASSETS

2015US$ '000

2014US$ '000

Accrued profit 663 1,089

Prepaid expenses 150 138

Fee income receivable 556 426

Others 922 590

2,291 2,243

Less: Impairment provision (note 16) (302) (302)

1,989 1,941

9. DUE TO SHORT TERM SUKUK - INVESTORS

Due to short term sukuk investors and banks represents amounts due under the secured Short Term Sukuk Program (STS program) owned by the investors in the secured STS Program of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The investors are the legal owners of the underlying investments of US$ 79.2 million (2014: US$ 125 million) of the STS program as disclosed in note 6.

10. OTHER LIABILITIES

2015US$ '000

2014US$ '000

Board and Shari’a fees payables 77 92

Professional fees payables 118 108

Unearned revenue 98 103

Others 172 588

465 891

11. OWNERS' EQUITY

(a) Share capital

2015US$ '000

2014US$ '000

Authorised200, 000, 000 ordinary shares of US$ 1 each

200,000 200,000

Issued, subscribed and paid-up:At the beginning of the year: 53,550,000 (2014: 51,000,000)

ordinary shares of US$ 1 (2014: US$ 1) each 53,550 51,000

Issued during the year: 2,677,500 (2014: 2,550,000)ordinary shares of US$ 1 (2014: US$ 1) each - (Note 11)

2,678 2,550

At the end of the year: 56,227,500 (2014: 53,550,000)ordinary shares of US$ 1 (2014: US$ 1) each

56,228 53,550



11. OWNERS' EQUITY (continued)

Following a resolution passed by the shareholders of the Bank at the Annual General Meeting held on 4 April 2015 and the approvals of the Central Bank of Bahrain and the Ministry of Industry and Commerce, the Bank has issued 2,677,500 bonus shares amounting to US$ 2.68 million at a value of US$ 1 per share by transfer from retained earnings. (b) Reserves

Statutory reserveIn accordance with the requirements of the Bahrain Commercial Companies Law, 10% of the net profit is transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up share capital. The reserve is not distributable but can be utilised for the purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the CBB. US$ 356 thousand (2014: US$ 422 thousand) was transferred during the year.

General reserveIn accordance with the Bank’s articles of association, the Group may transfer any amount, as approved by the directors, out of net profit for the year to the general reserve after transfer to statutory reserve. The general reserve is distributable, subject to the approval of the CBB and Board of Directors.

Investment fair value reserveInvestment fair value reserve represents unrealised gains and losses, excluding impairment, resulting from re-measurement of investments at fair value through equity. This reserve is distributable upon value realisation, which takes place at the time of actual exit or derecognition of investments.

(c) Proposed appropriation

2015US$ '000

2014US$ '000

Bonus shares 2,811 2,678

2,811 2,678

The Bank has proposed the issue of 2,811,375 bonus shares for each 20 shares held from the retained earnings. This will be submitted for formal approval at the Annual General Meeting subject to regulatory approval.

(d) Additional information on shareholding

(i) The Group has only one class of equity shares and the holders of these shares have equal voting rights.

(ii) Names and nationalities of the major shareholders and the percentage of equity shares held as at 31 December 2015 and 2014 are as follows:

Country ofincorporation

% ofholding

2015Share

capitalUS$ '000

2014Share

capitalUS$ '000

KFH Investment Company State of Kuwait 25% 14,057 13,375

Bahrain Islamic Bank Kingdom of Bahrain 25% 14,057 13,375

Dubai Islamic Bank United Arab of Emirates 25% 14,057 13,375

Islamic Development Bank Kingdom of Saudi Arabia 25% 14,057 13,375



12. INCOME FROM INVESTMENTS IN SUKUK

2015US$ '000

2014US$ '000

Income from sukuk 4,346 6,187

Gain on sale of sukuk 2,457 2,399

6,803 8,586

13. INVESTMENT BANKING FEES

2015US$ ‚000

2014US$ '000

Fees and commission income 1,253 830

Others 394 66

1,647 896

14. STAFF COSTS

2015US$ '000

2014US$ '000

Staff salaries and related benefits 2,671 2,620

Staff indemnity and related provision 286 309

Others 99 87

3,056 3,016

15. GENERAL AND ADMINISTRATIVE EXPENSES

2015US$ ‚000

2014US$ '000

Legal and professional fees 357 382

Premises expenses 259 320

Board sitting fees 184 217

Board and Shari’a expenses 72 113

Board remuneration 112 67

Advertising and marketing expenses 31 36

Others 415 448

1,430 1,583



16. IMPAIRMENT PROVISION2015 2014

Investmentsat

amortisedcost

US$ '000

Investmentsat fair value

through equity

US$ '000

Otherreceivables

US$ '000Total

US$'000

Investmentsat

amortisedcost

US$ '000

Investmentsat fairvalue

throughequity

US$ '000

Otherreceivables

US$ '000Total

US$ '000

Specificprovision

At 1 January 4,566 6,664 302 11,532 4,484 6,382 301 11,167

Charge forthe year

91 252 - 343 82 195 1 278

Reclassification 1,150 100 - 1,250 - 87 - 87

Write offs - (1,512) - (1,512) - - - -

5,807 5,504 302 11,613 4,566 6,664 302 11,532

Collectiveprovision

At 1 January 1,730 - - 1,730 1,831 - - 1,831

Charge forthe year

489 - - 489 - - - -

Reclassification (1,228) - - (1,228) (102) - - (102)

991 - - 991 1,730 - - 1,730

TOTAL 6,798 5,504 302 12,604 6,296 6,664 302 13,262

Notes 6 6 8 6 6 8

Charge for the year2015

US$ '0002014

US$ '000

Investments at fair value through equity (252) (195)

Investments at amortised cost (91) (82)

Collective provision (489) (1)

(832) (278)


17. RELATED PARTY BALANCES AND TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial and operating decisions. Related parties comprise major shareholders, directors, shari’a supervisory board, external auditors and executive management of the Group and/or entities over which they exercise control and/or significant influence.

The related party balances included in these consolidated financial statements are as follows:

Boardmembers/ keymanagement

personnel/Shari'a board

members/external auditorsUS$ '000

Significantshareholders /

entities inwhich

directors areinterested

US$ '000

31 December2015

US$ '000





entities inwhich

directors are interested

US$ '000

31 December2014

US$ '000

Assets

Cash and bank balances - 258 258 - 462 462

Investment in sukuks - 11,285 11,285 - 16,313 16,313

Other assets 199 95 294 161 129 290

Liabilities

Due to short term sukuk investors and banks - 33,336 33,336 - 65,246 65,246

Staff payables 2,719 - 2,719 2,840 - 2,840

Other liabilities 173 - 173 891 - 891



17. RELATED PARTY BALANCES AND TRANSACTIONS (continued)

The related party transactions included in these consolidated financial statements are as follows:


personnel/Shari’a board



entities inwhich

directors areinterested

US$ '000

31 December2015

US$ '000





entities inwhich

directors are interested

US$ '000

31 December2014

US$ '000

Income

Income from investments in sukuk - 745 745 - 1,012 1,012

Income from due from banks and

financial institutions - 1 1 - 3 3

Income from Mudaraba receivables - 14 14 - 158 158

Return to short term sukuk

investors and banks - (1,005) (1,005) - (1,371) (1,371)

Expenses

Staff costs 2,168 - 2,168 1,997 - 1,997

General and administrative expenses 490 - 490 531 - 531

Key management personnel of the Group comprise of the key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation is as follows:

2015US$'000

2014US$'000

Salary and other benefits 2,168 1,997



18. RISK MANAGEMENT

IntroductionRisk is inherent in the Group’s activities and is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. These risks and the processes to mitigate these risks have not significantly altered from the previous year. The Group is exposed to credit, liquidity, market and operational risk. 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 structureThe Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles. The Board has delegated the oversight responsibilities of risk management to the Risk Management Committee and senior management (comprising the Chief Executive Officer and Senior Managers). They are responsible to carry out the policies laid down by the Board by ensuring that there are adequate and effective operational procedures, internal controls and systems for measuring, monitoring and controlling risks. Risk Management CommitteeIn line with the Group's expansion and growth plans, the Board established a Risk Management Committee (RMC) to further strengthen the Group’s risk management process. The RMC 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, managing and monitoring relevant risk decisions. All the members of this Committee are from the Board. The RMC meets quarterly with the objective of assisting the Board in carrying out its responsibilities in relation to managing the Group’s range of inter-related risks in an integrated manner. The Committee is supported by the Group’s risk management function which assists with the establishment of policies on credit, liquidity, market and operational risk, reviews compliance with set risk limits approved by the Board and identifies emerging risk issues. The RMC is responsible for providing oversight and management of all risks in the Group and to ensure that there is an ongoing process to continuously manage the Group's risks proactively.

The following are the management committees that support the risk management of the Group: Risk Management UnitThe Risk Management Unit (RMU) is responsible for implementing and maintaining risk related procedures to ensure an independent control process. The RMU is a management committee set up to centralise the management of risks and to assist senior management and the risk committees in the controlling, monitoring and reporting of risks. Asset/liability Management Committee The Asset/Liability Management Committee (ALCO) is responsible for the Group’s asset and liability management, pricing and funding strategies, management of market and liquidity risks, as well as ensuring that investments are made in accordance with the policies approved by the Board of Directors. Credit and Investment Risk CommitteeThe Credit and Investment Risk Committee (“CICOM“) is responsible for the management of credit risk in compliance with Board decisions on acceptable levels of risk and minimum pricing levels. The function of CICOM includes appraisal and approval of credit applications based on limits set by the Board and also monitoring and reviewing non-performing portfolio and ensuring that adequate loss provisions are held against delinquent accounts in accordance with Group's policies. Internal AuditRisk management processes throughout the Group are audited annually by the Internal Audit function that examines both the adequacy of the procedures and the Group’s compliance with the procedures. Furthermore, overseeing the management of operational risk is the responsibility of Internal Audit which regularly reports to the Audit Committee to provide independent assurance that risks have been identified and there are sufficient and effective controls on all aspects of the Group’s operations. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.



18. RISK MANAGEMENT (continued)

Risk management structure (continued)

Risk measurement and reporting systemsMonitoring 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. The principal risks associated with the Group’s business and the related risk management processes are as follows:

(a) Credit riskCredit risk is the risk that any counterparty, to a financial instrument, will fail to fulfill an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and assessing the creditworthiness of counterparties. In addition to monitoring credit limits, the Group manages credit exposures by entering into collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. According to the terms of the STS program, the Sukukholders bear the credit risk arising from investments on account of default. However, the Bank bears the risk of a rating downgrade of its holding in sukuk assets.

The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral reviews. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a perceived 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.

Maximum exposure to credit riskThe table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial position. The figures represent gross exposure net of any provision for impairment, without taking into account any collateral held and other credit mitigants:

Gross maximum exposure

2015US$ '000

2014US$ '000

Bank balances 5,445 3,733

Due from banks and financial institutions 22,000 -

Mudaraba receivables 6,026 3,186

Financing receivables 8,434 9,038

Investment in sukuks 97,665 145,009

Other assets 1,839 1,803

1,41,409 162,769




(a) Credit risk (continued)

Concentration RiskConcentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location.

The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following geographical regions:

2015Bahrain

US$ '000

Other GCCcountriesUS$ '000

Others US$ '000

TotalUS$ '000

Bank balances 1,961 3 3,481 5,445

Due from banks and financial institutions 22,000 - - 22,000

Mudaraba receivables 6,026 - - 6,026

Financing receivables 5,138 3,296 - 8,434

Investment in sukuks 16,870 62,298 18,497 97,665

Other assets 773 924 142 1,839

52,768 66,521 22,120 141,409

2014Bahrain

US$ '000


OthersUS$ '000

TotalUS$ '000

Bank balances 2,966 287 480 3,733




Other assets 308 1,278 217 1,803

27,748 103,809 31,212 162,769





The Group's financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following industry sectors:

2015

Banks andfinancial

institutionsUS$ '000

GovernmentUS$ '000

Real EstateUS$ '000

OthersUS$ '000

TotalUS$ '000

Bank balances 5,445 - - - 5,445

Due from banks and financial institutions

22,000 - - - 22,000

Mudaraba receivables 6,026 - - - 6,026

Financing receivables - - 8,434 - 8,434

Investment in sukuks 40,830 35,038 21,797 - 97,665

Other assets 632 287 538 382 1,839

74,933 35,325 30,769 382 141,409

2014

Banks andfinancial


GovernmentUS$ '000

Real EstateUS$ '000

OthersUS$ '000

TotalUS$ '000

Bank balances 3,733 - - - 3,733


Financing receivables 3,300 - 5,738 - 9,038


Other assets 677 550 319 257 1,803

56,526 66,654 39,332 257 162,769

As of 31 December 2015, the Group’s exposure to banks and non banks which exceed 15% of the Group’s consolidated capital base amounted to US$ Nil million (2014: US$ 11.5 million) and has been deducted from the eligible capital.

Credit quality per class of financial assetsThe Group’s financial assets are either asset backed or asset based. It is the Group’s policy to maintain consistent perceived risk ratings across the investment portfolio. This facilitates management focus on the applicable risks and the comparison of investment exposures across all lines of business, geographic regions and products. For qouted investments, the Group uses external renowned third party ratings when it is available, whereas for unqouted investment or where third party ratings are not available, the Group uses internal rating system. The internal 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. The Group’s holdings are perceived to be rated investment grade or better.





Credit quality per class of financial assets (continued)The risk ratings used by the Group are defined as follows: (i) High investment grade: These counterparties are internally rated between AAA and A-. These are of high credit quality

and considered as low risk.

(ii) Investment grade: These counterparties are rated internally between BBB+ and BBB-. These are of good credit quality and considered higher risk than the high investment grade counterparties. (iii) Unrated: These counterparties are not rated internally. They are higher risk than investment grade but full repayments are

expected. (iv) Past due or individually impaired: These counterparties are expected to be total loss.

The table below analyses the credit quality by class of financial asset, based on the Group’s internal credit rating system:

Neither past due nor impaired

2015

Highinvestment

grade US$ '000

Investment grade

US$ '000Unrated US$ '000

Past due orindividually

impairedUS$ ’000

TotalUS$ '000

Bank balances 1,017 3,645 783 - 5,445

Due from banks and financial institutions - - 22,000 - 22,000

Mudaraba receivables - - 6,026 - 6,026


Investment in sukuks 17,538 43,350 18,645 18,132 97,665

Other assets 203 329 1,005 302 1,839

18,758 47,324 56,893 18,434 141,409


Neither past due nor impaired

2014

Highinvestment

grade US$ '000

Investment grade

US$ '000Unrated US$ '000

Past due orindividually

impairedUS$ ’000

TotalUS$ '000

Bank balances 1,572 1,381 780 - 3,733

Mudaraba receivables - 3,186 - - 3,186

Financing receivables - 3,300 5,738 - 9,038

Investment in sukuks 26,459 64,833 47,085 6,632 145,009

Other assets 278 490 734 301 1,803

28,309 73,190 54,337 6,933 162,769





Collateral and other credit enhancements The amount and type of collateral depends on an assessment of the credit risk of the counterparty. The types of collateral mainly include charges over real estate properties. Management monitors the market value of collateral during its review of the adequacy of the allowance for impairment losses.

(b) Liquidity risk

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is through money market lines from financial institutions.

Details of the Group’s liquid assets to total assets as of the reporting date were as follows:

Liquid assets/ Total assets

2015 2014

At 31 December

Liquidity Ratio 15% 3%

Including sukuk* 58% 66%

* The management is of the view that certain sukuk are tradable or liquid and this ratio is calculated after including the tradable sukuk as liquid assets.



(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2015 based on contractual maturities from the consolidated statement of financial position date:

Up to 1 monthUS$ '000

1 to 3months

US$' 000

3 to 6months

US$ '000

6 months to 1 yearUS$ '000

1 to 3years

US$ '000

Over3 years

US$ '000

No fixedmaturityUS$ '000

TotalUS$ '000

Assets

Cash and bank balances 5,451 - - - - - - 5,451

Due from banks and financial institutions 22,000 - - - - - - 22,000

Mudaraba receivables - 6,026 - - - - - 6,026

Financing receivables - - 4,384 675 3,375 - - 8,434

Investment in sukuks - - - 698 9,943 74,527 12,497 97,665

Investment in equities and funds - 1,409 511 - 6,521 1,791 2,281 12,513

Investment in real estate - - - - 3,901 25,280 - 29,181

Equipment - - - - - - 135 135

Other assets 124 429 611 722 103 - - 1,989

Total assets 27,575 7,864 5,506 2,095 23,843 101,598 14,913 183,394

Liabilities and owners' equity

Due to short term sukuk investors and banks 89,957 5,000 13,335 - - - - 108,292

Staff payables - 16 450 140 193 2,871 - 3,670

Other liabilities - 77 355 33 - - - 465

Owners' equity - - - - - - 70,967 70,967

Total liabilities and owners' equity 89,957 5,093 14,140 173 193 2,871 70,967 183,394

Liquidity gap (62,382) 2,771 (8,634) 1,922 23,650 98,727 (56,054)

Cumulative liquidity gap (62,382) (59,611) (68,245) (66,323) (42,673) 56,054 -

Commitments - - - - - - -

The net funding requirement with respect to the cumulative liquidity gap is managed through money market lines amounting to US$ 108 million as at 31 December 2015, with various banks and financial institutions.




(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2014 based on contractual maturities from the consolidated statement of financial position date:

Up to 1 monthUS$ '000

1 to 3months

US$ '000

3 to 6months

US$ '000

6 months to 1 yearUS$ '000

1 to 3years

US$ '000

Over3 years

US$ '000


TotalUS$ '000

Assets

Cash and bank balances 3,736 - - - - - - 3,736

Mudaraba receivables 1,000 2,186 - - - - - 3,186

Financing receivables - - 506 506 - 8,026 - 9,038

Investment in sukuks - - - - 8,897 124,747 11,365 145,009

Investment in equities and funds - - - - 15,194 - - 15,194

Investment in real estate - - - - - - 23,780 23,780

Equipment - - - - - - 119 119

Other assets 323 586 180 138 202 - 512 1,941

Total assets 5,059 2,772 686 644 24,293 132,773 35,776 202,003

Liabilities and owners' equity

Due to short term sukuk investors and bank 111,509 19,274 - 10 - - - 130,793

Staff payables - - 522 - 641 1,677 - 2,840

Other liabilities - 697 101 93 - - - 891

Owners' equity - - - - - - 67,479 67,479

Total liabilities and owners' equity 111,509 19,971 623 103 641 1,677 67,479 202,003

Liquidity gap (106,450) (17,199) 63 541 23,652 131,096 (31,703)

Cumulative liquidity gap (106,450) (123,649) (123,586) (123,045) (99,393) 31,703 -

Commitments - - 2,211 2,211 - - -

The net funding requirement with respect to the cumulative liquidity gap is managed through money market lines amounting to US$ 50 million as at 31 December 2014, provided by the shareholders.




(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations:

2015

OndemandUS$ '000

Less than3 monthsUS$ '000

3 to 12months

US$ '000

1 to 5years

US$ '000Total

US$ '000

Due to Short Term Sukuk - investors - 20,010 - - 20,010

Due to banks - 82,442 13,542 - 95,984

Total undiscounted financial liabilities - 102,452 13,542 - 115,994

2014

OndemandUS$ ‘000

Less than3 monthsUS$ '000

3 to 12months

US$ '000

1 to 5years

US$ '000Total

US$ '000

Due to Short Term Sukuk - investors - 40,161 40 - 40,201

Due to banks - 101,803 - - 101,803

Financing related commitments 340 - - - 340

Ijara commitments - - 4,421 - 4,421

Total undiscounted financial liabilities 340 141,964 4,461 - 146,765

(c) Market riskMarket risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices will affect the Group’s income or the value of its holdings of financial instruments. Market risk comprises equity position risk, profit rate risk, currency risk and other price risk. The Group’s policy guidelines for market risk have been vetted by the Board of Directors in compliance with the rules and guidelines provided by the CBB.

The Group's principal investment activity focuses on the GCC countries, a region whose dynamics the Group comprehends well and where the Group has a better understanding of the inherent risks. Investments are made after rigorous qualitative and quantitative analysis, and where the desired risk-return objectives are met. A healthy diversification across industry sectors is maintained within the investments.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Group considers the US Dollar as its functional currency.




(c) Market risk (continued)

Currency risk (continued)The Group had the following net exposures denominated in foreign currencies (other than GCC currencies which are pegged to the US Dollars) as of 31 December:

2015US$ '000

2014US$ '000

Currency

Euro 8 23

Kuwaiti Dinars 2,546 2,816

Pound Sterling 271 387

The table below indicates the impact of reasonably possible changes in exchange rates on the Group’s net foreign currency exposures. The impact has been calculated using the net foreign currency exposure as at the consolidated statement of financial position date and calculating the impact of the changes in exchange rates:

Change in exchange rate

Net profit and equity (+)

2015US$ '000

2014US$ '000

Euro +10% 1 3

Kuwaiti Dinars +10% 283 313

Pound Sterling +10% 30 43

The effect of an increase in profit return rates is expected to have an equal and opposite effect on the net profit.

Profit rate riskProfit rate risk refers to the potential impact on the Group’s net profit and equity caused by unexpected changes in rates of return. Profit rate risk is mitigated by adopting the floating-profit rate approach through close monitoring of the secondary market trading of sukuks and prevailing market expectations on profit rates and yields. The Group’s policy is to measure and manage its profit rate sensitive positions to ensure that the Group’s profit rates are optimised and its long-run earning power sustained. The Group reviews the volatility of its assets and liabilities portfolio using appropriate tools and techniques.

The effects on profit solely due to reasonably possible immediate and sustained changes in profit return rate, affecting both floating rate assets and liabilities and fixed rate assets and liabilities are as follows:

Effect on net profit

Change in rate

2015US$'000

2014US$ '000

-1% 258 264

The effect of an increase in profit return rates is expected to have an equal and opposite effect on the net profit.




(c) Market risk (continued)Equity price riskEquity price risk is the risk that the fair value of equity decreases as a result of changes in the levels of equity indices and the value of individual stocks. Equity positions are marked to market prices and monitored by RMU and reported to RMC. Risks arising from dealing and investment activities are managed by the establishment of limits that include trading limits, counterparty limits, as well as product and sub-product limits, i.e. permissible acquisition of BBB rated sukuk and above.

Equity price risk arises from the change in fair values of equity investments. The Bank has investments of US$ 2.4 million (2014: US$ 2.6 million) whose fair values are determined through equity indices.

The effect on net profit and equity as a result of a change in the fair value of investments at fair value through the statement of income at 31 December 2015 and 31 December 2014 due to a reasonably possible change in equity indices, with all other variables held constant, is as follows:

Market indices

2015 2014

Change in equity price

%

Effect onnet profit US$ '000

Effect onowners'

equityUS$ '000

Change inequity price

%

Effect onnet profitUS$ ‘000

Effect onowners'

equityUS$ '000

Dubai InternationalFinancial Exchange (20) - (394) (20) (408) (344)

Kuwait Stock Exchange (20) (79) - (20) (113) -

The effect of an increase in equity indices is expected to have an equal and opposite effect on the owners' equity.

(d) Operational RiskThis risk is defined as the risk of loss arising from inadequate or failed internal processes, people and systems and external events. Operational risk also includes shari'a non compliance risk but excludes strategic and reputational risks. In managing this risk, a dedicated team has been established within the Bank to undertake the identification, assessment and measurement, establishing a control framework, monitoring and reporting of operational risks.



19. SEGMENTAL INFORMATION

(a) Industry sectorThe industrial distribution of the Group's assets and liabilities as of 31 December 2015 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Assets

Cash and bank balances 5,445 - - 6 5,451

Due from banks and financial institutions

22,000 - - - 22,000




Investment in equities and funds - 1,970 9,471 1,072 12,513

Investment in real estate - - 29,181 - 29,181

Equipment - - 135 135

Other assets 722 287 538 442 1,989

Total assets 75,023 37,295 69,421 1,655 183,394

Liabilities

Due to short term sukuk investors and banks

108,292 - - - 108,292

Staff payables - - - 3,670 3,670

Other liabilities 34 - - 431 465

Total liabilities 108,326 - - 4,101 112,427



19. SEGMENTAL INFORMATION

(a) Industry sector (continued)The industrial distribution of the Group's assets and liabilities as of 31 December 2014 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Assets

Cash and bank balances 3,736 - - - 3,736


Financing receivables 3,300 - 5,738 - 9,038


Investment in equities and funds 1,563 2,038 10,420 1,173 15,194


Equipment - - - 119 119

Other assets 677 550 319 395 1,941

Total assets 58,092 68,692 73,532 1,687 202,003

Liabilities

Due to short term sukuk investors 40,139 - - 39 40,178

Due to banks and financial institutions 90,615 - - - 90,615

Other liabilities - - 1 3,730 3,731

Total liabilities 130,754 - 1 3,769 134,524

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTAt 31 December 2015



19. SEGMENTAL INFORMATION (continued)

(a) Industry sector (continued)The industrial distribution of the Group’s income and expense as of 31 December 2015 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Income

Income from:

Investment in sukuk 2,338 3,447 1,008 10 6,803

Investment in equities and funds 285 - 556 - 841

Due from banks and financial institutions 5 - - - 5

Financing receivables - - 412 - 412

Mudaraba receivables 187 - - - 187

Gain on investments at fair value through statement of income

- - 187 - 187

Less: Return to Short Term Sukuk - investors

(265) - - - (265)

Less: Return to banks (1,455) - - - (1,455)

Investment banking fees 1,120 - 527 - 1,647

Ijarah income - 901 - 652 1,553

Foreign exchange losses 16 - - - 16

Other Income 148 - - - 148

Total Income 2,379 4,348 2,690 662 10,079

Expense

Staff costs - - - 3,056 3,056

Ijarah expense 125 - - - 125

Depreciation - - - 651 651

General and administrative expenses 25 35 - 1,370 1,430

Total expenses 150 35 - 5,077 5,262

Unrealised fair value change and impairment provisions (91) - (172) (996) (1,259)





(a) Industry sector (continued)The industrial distribution of the Group’s income and expense as of 31 December 2014 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Income

Income from:

Investments in sukuk 3,113 3,534 1,728 211 8,586

Investments in equities and funds 223 24 - 2 249

Due from banks and financial institutions 99 - - - 99

Financing receivables 42 56 398 - 496

Mudaraba receivables 114 - 228 - 342

Gain on investments at fair value through statement of income - - 5 4 9

Less: Return to Short Term Sukuk - investors and banks (2,376) - - (1) (2,377)

Investment banking fees 750 - 146 - 896

Ijarah income - 902 - 645 1,547

Foreign exchange losses 93 - - - 93

Other Income 173 - - - 173

Total Income 2,231 4,516 2,505 861 10,113

Expense

Staff costs - - - 3,016 3,016

Ijarah expense 308 - - - 308

Depreciation - - - 602 602

General and administrative expenses 20 - - 1,563 1,583

Total expenses 328 - - 5,181 5,509

Unrealised fair value change and impairment provisions

(82) (195) (102) (1) (380)





(b) Geographic sectorThe geographical distribution of the Group’s assets and liabilities as of 31 December 2015 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Assets

Cash and bank balances 1,967 3 3,481 5,451

Due from banks and financial institutions 22,000 - - 22,000




Investment in equities and funds 6,901 3,511 2,101 12,513

Investment in real estate 29,181 - - 29,181

Equipment 135 - - 135

Other assets 892 830 267 1,989

Total assets 89,110 68,362 25,922 183,394

Liabilities

Due to short term sukuk investors and banks 74,956 33,336 - 108,292

Staff payables 3,670 - - 3,670

Other liabilities 465 - - 465

Total liabilities 169,093 102,528 26,189 112,427





(b) Geographic sector (continued)The geographical distribution of the Group's assets and liabilities as of 31 December 2014 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Assets

Cash and bank balances 2,970 286 480 3,736







Other assets 445 1,279 217 1,941

Total assets 59,311 108,107 34,585 202,003

Liabilities

Due to short term sukuk investors and banks 78,147 52,646 - 130,793

Staff payables 2,840 - - 2,840

Other liabilities 891 - - 891

Total liabilities 81,878 52,646 - 134,524





(b) Geographic sector (continued)The geographical distribution of the Group’s income and expense as at 31 December 2015 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Income

Income from:

Investments in sukuk 1,317 4,167 1,319 6,803

Investments in equities and funds 841 - - 841

Due from ba nks and financial institutions 5 - - 5

Financing receivables 412 - - 412

Mudaraba receivables 187 - - 187

Gain on investments at fair value through statement of income

- 187 - 187

Less: Return to Short Term Sukuk - investors and banks (1,720) - - (1,720)

Investment banking fees 1,520 127 - 1,647

Ijarah income 1,553 - - 1,553

Foreign exchange gain 16 - - 16

Other income 148 - - 148

Total income 4,279 4,481 1,319 10,079

Expense

Staff costs 3,056 - - 3,056

Ijarah expense 40 85 - 125

Depreciation 651 - - 651

General and administrative expenses 1,372 9 49 1,430

Total expense 5,119 94 49 5,262

Unrealised fair value change and impairment provisions (916) (257) (86) (1,259)





(b) Geographic sector (continued)The geographical distribution of the Group's income and expense as at 31 December 2014 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Income

Income from:


Investment in equities and funds 223 26 - 249

Due from banks and financial institutions 99 - - 99

Financing receivables 402 56 38 496

Mudaraba receivables 114 - 228 342

Gain on investments at fair value through statement of income - 9 - 9

Less: Return to Short Term Sukuk - investors and banks (1,271) (1,068) (38) (2,377)

Investment banking fees 776 200 93 1,069

Ijarah income 1,547 - - 1,547

Foreign exchange gain - 93 - 93

Total income 3,303 5,317 1,493 10,113

Expense

Staff costs 3,016 - - 3,016

Ijarah expense 101 207 - 308

Depreciation 602 - - 602

General and administrative expenses 1,583 - - 1,583

Total expense 5,302 207 - 5,509

Unrealised fair value change and impairment provisions (103) (277) - (380)




20. ACCOUNTING CLASSIFICATION OF FINANCIAL INSTRUMENTS

Financial instruments Financial assets and financial liabilities carried on the consolidated statement of financial position include cash and bank balances, financing receivables, mudaraba receivables, due from banks and financial institutions, investments, other assets, due to short term sukuk investors, due to banks and financial institutions and other liabilities. Set out below is an overview of financial instruments, other than cash and cash equivalents, held by the Group as at 31 December 2015:

Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough

statementof income

US$ '000

Financial assets:

Mudaraba receivables 6,026 - -

Financing receivables 8,434 - -

Investment in sukuks 97,665 - -

Investment in equities and funds - 7,578 4,935

Other assets* 1,839 - -

113,964 7,578 4,935

Financial liabilities:

Due to short term sukuk investors and banks 108,292 - -

Other liabilities* 1,987 - -

110,279 - -

*Other assets exclude prepayments.*Other liabilities exclude provision for indemnity.




21. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

2015

Level 1US$ '000

Level 2US$ '000

Level 3US$ '000

TotalUS$ '000

Investments carried at fair value through statement of income

Equities and funds - 4,935 - 4,935

- 4,935 - 4,935

Investments carried at fair value through equity

Equities and funds 2,367 1,680 - 4,047

2,367 1,680 - 4,047

2,367 6,615 - 8,982

Unrealised gains / (losses) through statement of income -

(427)-

(427)

Unrealised losses through equity (70) - - (70)

(70) (427) - (497)




21. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Under unquoted investments which are held at fair value through equity are investments amounting to US$ 3.5 million (31 December 2014: US$ 3 million) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments (note 6). The fair values of the Group’s other financial instruments are not significantly different from their carrying values as at 31 December 2015 and 2014.

22. CAPITAL ADEQUACY

The primary objective of the Group’s capital management is 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 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 previous years.

The classification of the Group’s capital Core Equity Tier 1 [“CET 1“] in accordance with regulatory requirements is as follows:

CET 1US$ ‘000

Components of capital

Issued and fully paid ordinary shares 56,228

General reserves 2,226

Legal / statutory reserves 3,669

Retained earnings 5,045

Unrealized gains arising from fair valuing equities 3,799

Total Capital 70,967

To assess its capital adequacy requirements in accordance with CBB requirements, the Group adopts the standardised approach for Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardised Measurement Approach for Market Risk.

2015US$ '000

2014US$ '000

Total credit risk weighted assets 206,833 157,851

Total market risk weighted assets 2,825 3,225

Total operational risk weighted assets 19,226 17,964

Regulatory Risk Weighted Assets 228,884 179,040

Capital Adequacy Ratio 31.01 % 36.37%




23 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A During the year no earnings were realised by the Group from transactions which were not permitted by Shari’a.

24 COMMITMENTS Financing and Investment related commitments Financing and Investment related commitments represent contractual commitments to fund certain financing arrangements and investment deals. These commitments may expire without being drawn upon and do not necessarily represent future cash flows. As of 31 December 2015, the Group has no financing related commitment (2014: US$ Nil) and no investment related commitment (2014: US$ 340 thousand). Ijarah commitments During the year, the Group has settled US$ 4,431 thousand, fulfilling its total commitment under the ijara agreement it entered into with financial institutions for the Bank’s Headquarters’ building. There are no future payments due by the Group.

25 SOCIAL RESPONSIBILITY The Group discharges its social responsibilities through donations for charitable causes and to organisations.

26 COMPARATIVES Certain prior year amounts have been reclassified to conform to the presentation in the current year. Such reclassifications do not affect previously reported net profit or owners’ equity.




PUBL

IC D

ISCL

OSU

REBA

SEL

III, P

ILLA

R III

DIS

CLO

SURE

S

1 Background 70

2 Capital adequacy 70

3 Risk Management 72

3.1 Bank-wide risk management objectives 72

3.2 Strategies, processes and internal controls 72

3.3 Structure and organisation of risk management function 73

3.4 Risk measurement and reporting system 74

3.5 Credit risk 75

3.6 Market risk 82

3.7 Operational risk 83

3.8 Equity positions in the banking book 84

3.9 Liquidity risk 84

3.10 Profit rate risk 86

3.11 Corporate governance and transparency 88

4 Remuneration related disclosures 9931 D

ecem

ber 2

015


1. BACKGROUNDThe Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”) requirements outlined in its Public Disclosure Module (“PD Module”), CBB Rule Book, Volume 2 for Islamic Banks. Rules concerning the disclosures under this section are applicable to Liquidity Management Centre B.S.C. (c) (the “Bank”) being a locally incorporated bank with a Wholesale Islamic Investment Banking license and its subsidiary (together known as the “Group”).

The Board of Directors seeks to optimize the Bank’s performance by enabling the various group business units to realize the Group’s business strategy and meet set business performance targets by operating within the agreed capital and risk parameters within the Group risk policy framework.

2. CAPITAL ADEQUACYThe primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that it maintains healthy capital ratios in order to support its business and to maximize shareholders’ value. The Group manages its capital structure and makes adjustments to it in 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. The Bank’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business. Current and future capital requirements are determined on the basis of growth expectations of the business and future sources of and uses of funds. To assess its capital adequacy requirements in accordance with CBB regulations, the Group adopts the Standardized Approach for its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardized Measurement Approach for its Market Risk. There are no restrictions on the transfer of funds or regulatory capital within the Group and all investments are made fully complying with the CBB approval and related instructions. There are no differences in the basis of consolidation for accounting and regulatory purposes for the subsidiary within the Group. Table – 1. Capital Structure (PD-1.3.12, 1.3.13, 1.3.15)

The following table summarizes the eligible capital after deductions for Capital Adequacy Ratio (CAR) calculation:

CET 1US$ '000

AT1US$ ‘000

T2US$ '000

COMPONENTS OF CAPITAL

Issued and fully paid ordinary shares 56,228 - -

General reserves 2,226 - -

Legal / statutory reserves 3,669 - -

Retained earnings 5,045 - -

Unrealized gains arising from fair valuing equities 3,799 - -

Total CET 1 Capital prior to regulatory adjustments 70,967 - -

Other Capital

General financing loss provisions - - 991

Net Available Capital after applying haircut 70,967 - 991

Total Tier 1 - 70,967 -

Total Capital 71,958

BASEL III, PILLAR III DISCLOSURESYear ended 31 December 2015


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

The following table summarises the amount of exposures subject to standardized approach of credit risk and related capital requirements by type of Islamic financing contracts:

Risk weighted

assetsUS$ '000

Capital requirements

@ 12.5%US$ '000

Due from banks and Financial Institutions 4,400 550

Mudaraba receivables 1,205 151



125,538 15,693

Table – 3. Capital requirements for Market Risk (PD-1.3.18)

The following table summarises the amount of exposures subject to standardized approach of market risk and related capital requirements:

Self financedUS$ '000

Market Risk - Standardised Approach - Foreign exchange risk 226

Multiplier 12.5

Eligible Portion for the purpose of the calculation 100%

RWE to be used in CAR Calculation 2,825

The minimum capital requirement for the above market risk exposure at 12.5% is US$ 353 thousand.

Table – 4. Capital Requirements for Operational Risk (PD-1.3.19) and (PD-1.3.30 (a & b))

The following table summarises the amount of exposures subject to basic indicator approach of operational risk and related capital requirements:

Capital charge US$ '000

Indicators of operational risk

Average gross income 10,254

Multiplier 12.5

128,175

Eligible Portion for the purpose of the calculation 15%

19,226

The minimum capital requirement for the above operational risk exposure is US$ 2,403 thousand.



2. CAPITAL ADEQUACY (continued)

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

The following table summarises the CAR as of 31 December 2015 for total capital and Tier 1 capital at the top consolidated level in the Group:

Total capital ratio

Tier 1 capital ratio

Top consolidated level 31.44% 31.01%

3. RISK MANAGEMENT

3.1 Risk Management Objectives

Risk management is an integral part of the Group's decision-making process. The management committee and executive committees guide and assist with overall management of the Group's balance sheet risks. The Group manages exposures by setting limits/strategies approved by the Board of Directors.

The risk management philosophy of the Bank is to identify, capture, monitor and manage the various dimensions of risk with the objective of protecting asset values and income streams such that the interest of the Bank’s shareholders are safeguarded, while maximizing the returns intended to optimize the Bank’s shareholder return while maintaining risk exposure within self-imposed parameters.

In addition to satisfying the minimum regulatory capital requirements of CBB, the Bank seeks to constantly identify and quantify, to the extent possible, the various risks that are inherent in the normal course of its business and maintain appropriate internal capital levels and consequently has developed an Internal Capital Adequacy Assessment Process ("ICAAP") framework. The objective of the Bank’s ICAAP is to ensure that adequate capital is retained at all times to support the risks the Bank undertakes in the course of its business.

3.2 Strategies, processes and internal controls

3.2.1 Credit riskCredit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial loss. The Group controls credit risk by monitoring credit exposures and continually assessing the creditworthiness of counterparties.

3.2.2 Market riskThe Bank proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques. The Bank carries out stress testing to assess the impact of adverse market conditions on its market risk sensitive portfolio.

3.2.3 Operational riskThe Bank has established a self assessment process necessary for identifying and measuring its operational risks. In addition to that, the Bank has conducted a Risk and Control Self Assessment ("RCSA") exercise, which has undertaken the Bank’s business lines and their critical activities.

The Bank has established clear segregation of duties, through documentation and implementation of policies and procedures. This ensures objectivity, security and avoids conflicts of interest. Maker checker concept and dual eye principles are applied across the Bank, where applicable.

3.2.4 Equity risk in the banking bookEquity price risk is the risk of decline in the value of a security or portfolio and is the biggest risk faced by all investors. The equity price risk exposure arises from the Group’s investment portfolio and can be minimised through diversification. The Group manages and monitors its equity risk using investment limits.




3.2 Strategies, processes and internal controls (continued)

3.2.5 Profit rate riskProfit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments. The Group measures the profit rate risk by carrying out re-pricing gap analysis. This is further supported by limits put in place by the Bank.

3.2.6 Displaced commercial risk (“DCR”)DCR refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets financed by the liabilities, when the return on assets is under performing as compared with the competitor’s rates.

The Group does not accept deposits from investors or open profit sharing investment accounts and therefore displaced commercial risk is not currently applicable for the Group.

3.2.7 Review of internal control process and proceduresThe Group aims to manage and control the risks it is exposed to by strengthening its internal controls, continuing its efforts to identify, assess, measure and monitor its risks, evolving in its risk management sophistication and promoting a strong control culture within the Group.

Each business unit head is responsible for ensuring that the internal controls relevant to its operations are complied with on a day-to-day basis. The Bank's policies and procedures were applicable throughout the year.

The Audit Committee reviews and evaluates the effectiveness of the Group’s procedures and internal control systems for assessing risks or exposures through reviewing policy and procedures of each department. It assists the Board in fulfilling its oversight duties by reviewing the financial information provided to shareholders and others.

The Group has engaged an external professional firm for internal audit of its internal control, procedures and process. Reports issued by the professional firm are reviewed by the Board Audit Committee.

All the above strategies used have been effective throughout the reporting period.

3.3 Structure and organization of the risk management function

Risk management includes all levels of authorities, organizational structure, people and systems required for the smooth functioning of risk management processes in the Bank. The responsibilities associated with each level of risk management structure and authorities include the following:

a. The Board retains ultimate responsibility and authority for all risk matters.

b. Delegating authority to the Executive Committee, Credit and Investment Committee, the Chief Executive Officer and further delegation to the management to review various transactions prior to approval and execution of those transactions.


Shari’a Supervisory Board Board of Directors

Chief Executive Officer

Risk Management & Compliance Committee

Executive Committee

Audit CommitteeNomination, Remuneration &

Corporate Governance Committee

Internal Audit Function Investment & Credit Committee

2-Investment Division

3-Structured Finance Division

4-Risk Division

1-Support Services Division

Legal Affairs Department

Shari’a Compliance

Market RiskOperational Risk

Board of Directors

Chief Executive OfficerRisk Management and Compliance Committee

Risk Department

Credit Risk Market Risk Operational Risk



3.4 Risk measurement and reporting system

Based on its risk appetite, the Bank has put in place various limits. These limits have been approved by the Board of Directors. Any limit breaches are reported to the respective committees and the Board by the Credit and Risk Management Department (“CRMD”). These limits are reviewed and revised at least, on annual basis or, when is deemed required.

The Bank has developed a risk reporting process that generates various reports to enhance the monitoring process of the Bank.

3.5 Credit Risk

3.5.1 IntroductionCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending and investment activities. The Group controls credit risk by monitoring credit exposures, and continually assessing the creditworthiness of counterparties. Financing contracts are mostly secured by collateral in form of mortgage financing or other tangible securities. Although the Bank has an Ijara Muntaha Bittamleek for the purpose of financing its headquarters, the Bank is not rated by external agencies.

3.5.2 Past due and impaired Islamic financing contractsThe Group defines non-performing facilities as those facilities that are overdue for a period of 90 days or more. These exposures are placed on a non-accrual status with income only being recognized to the extent that it is actually received. It is the Group’s policy that when an exposure is overdue for a period of 90 days or more, the whole financing facility extended is considered as past due, not only the overdue installments / payments.

3.5.3 External Credit Assessment InstitutionsThe Bank relies on external ratings for rated counterparties and issuances. The Bank uses Standard & Poor’s, Fitch, Moody’s and Capital Intelligence ratings for such counterparties. These ratings are used for risk assessment and calculation of risk weighted equivalents.

3.5.4 Concentration riskConcentration risk is the credit risk stemming from not having a well diversified credit portfolio, i.e. being overexposed to a single customer, industry sector or geographic region. As per CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain prior approval from the CBB for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15% of the regulatory capital base.

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risk are controlled and managed accordingly.

3.5.5 Credit risk mitigationCredit risk mitigation refers to the use of a number of techniques, like collaterals to mitigate the credit risks that the Bank is exposed to. Credit risk mitigants reduce/transfer the credit risk by allowing the Bank to protect itself and reduce its loss in case of non-performance by counterparty.

Generally, the Bank participates in syndicated credit facilities / extends credit facilities only where supported by adequate tangible collateral security or audited financial statements. Facilities may be considered without adequate tangible collateral security, when audited financial statements reveal satisfactory financial position / repayment ability and the facilities are properly structured and supported by assignments as appropriate.

The majority of the Bank’s portfolio is collateralized by real estate properties, where the collateral is for all sukukholders and not specific to the Bank.




3.5 Credit Risk (continued)

3.5.5 Credit risk mitigation (continued)

3.5.5.1 General policy guidelines of collateral managementAcceptable Collateral: The Bank has developed guidelines for acceptable collateral. Assets offered by obligor must meet the following criteria to quantify as acceptable collateral:

a. Assets must maintain their value, at the level prevalent at inception, until maturity date of the facility granted.b. Such assets should be convertible into cash, if necessary.c. There should be a reasonable market for the assets.d. The Bank should be able to enforce its rights over the asset, if necessary.

Ownership: Prior to valuation or further follow up on the offered collateral, the credit administration department ensures satisfactory evidence of the borrower’s ownership of the assets though due diligence.

Valuation: All assets offered as collateral are valued by reputable external appraisers.

a. Valuation of shares: shares are valued based on latest quotes available from respective stock exchanges.b. Valuation of funds: funds are valued based on NAV received from the fund manager.c. Valuation of real estate: real estate collateral is valued, on an annual basis, by external real estate valuation experts.

3.5.5.2 Custody / collateral managementThe asset, or title to the asset, is maintained in the Bank’s custody or with custodian approved by the Bank. The CRMD obtains confirmation of the assets held with each custodian

3.5.6 Counterparty credit riskThe Bank has adopted the Standardized Approach to allocate capital for counterparty credit risk. The Bank has put in place an internal counterparty limit structure which is based on internal / external ratings for different types of counterparties and in line with CBB guidelines.

3.5.7 Restructured facilitiesDuring the year, financing contract amounting to US$ 5.1 million was restructured.





Table – 6. Credit Risk Exposures (PD-1.3.23 (a))

The following table summarises the amount of gross funded and unfunded credit exposures and average gross funded and unfunded exposures allocated in own capital. The average gross funded and unfunded exposures are calculated based on month end balances.

Own capital

Total grosscredit

exposureUS$ '000

Averagegross

exposureUS$ '000

Funded

Cash and balances with banks 5,451 4,177

Due from banks and financial institutions 22,000 4,333

Mudaraba receivables 6,026 11,797



Investment in equities and funds 12,513 14,147

Investment in real estate 29,181 25,475

Equipment 135 119

Other assets 1,989 1,781

183,394 167,869

Unfunded / commitments

Ijarah commitments - 2,950

Investment commitments - 266

- 3,216

The majority of the Bank’s portfolio is collateralized by real estate properties, where the collateral is for all sukukholders and not specific to the Bank.





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

The following table summarises the geographic distribution of exposures, broken down into significant areas by types of credit exposure.

Own capital

*Geographic area

BahrainUS$ '000

GCC US$ '000

OthersUS$ '000

TotalUS$ '000

Cash and balances with banks 1,967 3 3,481 5,451

Due from banks and financial institution 22,000 - - 22,000







Other assets 892 830 267 1,989

89,110 68,362 25,922 183,394

* Geographical distribution of exposure is based on counterparty / obligor country of incorporation.





Table – 8. Credit Risk – Industry Sector Breakdown (PD-1.3.23(c))

The following table summarises the distribution of credit exposures by industry, broken down into types of credit exposure:

Own capital

Industry sector

Banks andfinancial

institutions US$ '000

GovernmentUS$ '000

Real estateUS$ '000

OthersUS$ '000

Total US$ '000

Funded

Cash and balances with banks 5,445 - - 6 5,451

Due from banks and financial institution

22,000 - - - 22,000




Investment in equities and funds - 1,970 9,471 1,072 12,513


Equipment - - - 135 135

Other assets 722 287 538 442 1,989

Total 75,023 37,295 69,421 1,655 183,394

Unfunded / commitments

Ijarah commitment - - - - -

Investment commitment - - - - -

Total - - - - -





Table – 9. Credit Risk – Related party and intra-group transactions (PD-1.3.23(d))

The balances and transactions with the related parties are disclosed in the consolidated financial statements and all related party transactions have been made on an arm’s length basis.

The balances of the Bank’s major transactions with its subsidiary are as follows:

Own capital

US$ '000

Statement of financial position

Investment in the Short Term Sukuk Centre 27,500

Agency fee receivable from the Short Term Sukuk Centre 1,609

Payable to the Short Term Sukuk Centre (3,000)

Statement of income

Income from investment in the Short Term Sukuk Centre 346

Agency fee income 5,192

The Bank has policies and procedures for handling related party transactions including loans and advances to directors, senior management and their related parties, as well as transactions and agreements in which a director or an employee has a material interest. Bank’s policy of related party transaction is aligned with CBB guidelines on such transactions. A process is in place by which all related party transactions will be reported to the Board on a quarterly basis. Details of related party transactions are disclosed in note 17 of the audited consolidated financial statements for the year ended 31 December 2015.

As per the Bank’s policy, the Directors concerned do not participate in decisions in which they have or may have a potential conflict of interest. Management, have reviewed all such transactions during 2015, it was concluded that there were no transactions involving potential conflict of interest which need to be brought to the attention of the shareholders. Refer to note 17 to the audited consolidated financial statement for the year ended 31 December 2015 for complete details. All related party transactions are reported to the Bank’s Board of Directors and relevant committees.

Table – 10. Credit Risk – Concentration of Risk (PD-1.3.23(f))

Below are exposures to counterparties in excess of the 15% individual obligor limit:

Own capitalUS$ '000

Counterparty 1* 19,949

Total 19,949

* This exposure is exempt as per CBB guidelines, as it is a money market exposure with a not connected counterparty denominated in USD with a maturity of less than 3 months.





Table – 11. Credit Risk – Residual Contractual Maturity Breakdown (Own Capital) (PD-1.3.23(g))

The following table summarises the residual contractual maturity of own capital breakdown of the whole credit portfolio, broken down by types of credit exposures.

Own capital

Maturity breakdown

Up to1 monthUS$ '000

1 to 3months

US$ '000

3 to 6months

US$ '000

6 months to

1 yearUS$ '000

1 to 3years

US$ '000

3 to 5years

US$ '000

Over5 years

US$ '000


TotalUS$ '000

Cash and balances with banks 5,451 - - - - - - - 5,451

Due from banks and financial institution 22,000 - - - - - - - 22,000

Mudaraba receivables - 6,026 - - - - - - 6,026

Financing receivables - - 4,384 675 3,375 - - - 8,434

Investment in sukuks - - - 698 16,859 33,368 34,243 12,497 97,665

Investment in equities and funds - 1,409 511 - 6,521 1,791 - 2,281 12,513

Investment in real estate - - - - 3,901 25,280 - - 29,181

Equipment - - - - - - - 135 135

Other assets 124 429 611 722 103 - - - 1,989

Total assets 27,575 7,864 5,506 2,095 30,759 60,439 34,243 14,913 183,394





Table – 12. Credit Risk – Impaired financing contracts, past due financing contracts and allowances (Own capital by industry and geographic sector) (PD-1.3.23(h&i))

The following table summarises the own capital impaired financing contracts and allowances disclosed by major industry and geographic sector:

Aging of past due but not impaired Specific and General Allowances

Impaired financingcontractsUS$ '000

Past duenot

impairedfinancingcontractsUS$ '000

3 months

to 1 yearUS$ '000

1 year to3 years

US$ '000

Over3 years

US$'000

Balance at

1 January2015

US$ '000

Chargefor the

yearUS$ '000

Re-classification

US$ '000Write-offUS$ '000

Balance at31 December

2015US$ '000

Impaired Islamic financing contracts

Banks and financial institutions (GCC countries) 6,632 - - - - 4,395 91 - - 4,486

Real Estate (GCC countries) 11,501 - - - - - - 1,150 - 1,150

General allowances (not specific to a geographic area) - - - - - 1,730 489 (1,228) - 991

Total 18,133 - - - - 6,125 580 (78) - 6,627

Table – 13. Credit Risk – Restructured Islamic financing contracts (PD-1.3.23(j))

The following table summarises the restructured islamic financing contracts as of 31 December 2015:

US$ '000

Restructure Islamic contracts 5,138

There is no significant impact of the restructured Islamic contract on the provisions as well as present and future earnings.




3.6 Market risk

Market risk is the risk that arises from fluctuations in market risk factors that include, inter alia, profit rates, currency risk and equity prices and will have a negative impact on the Bank’s income and may influence the value of its portfolios.

Profit rate riskProfit rate risk arises from a) mismatch of maturities of assets and liabilities b) Basis Value Risk and c) Profit rate curve risk. The Bank measures profit rate risk using the following methodologies: a) Gap analysis: where the assets and liabilities are classified into time bands based on the maturity in case of fixed rate instruments or re-pricing dates for floating rate instruments. b) Economic value of equity-duration gap: this measures the loss in value of the portfolio due to change in profit rates

The Bank manages such risk by ensuring that minimum maturity mismatch is achieved between its assets and liabilities and through fixed rates on its assets and liabilities. The Treasury department monitors profit rate risk regularly and submits monthly reports to the Asset and Liability Committee and CIC.

Currency risk Currency risk represents fluctuations in exposures held by the Group in currencies other than the US dollar. The Group may engage, in normal course of business, in transactions denominated in currencies other than its functional currency.

Equity price risk The Bank has guidelines in place to manage equity price risk. Examples of these guidelines include:

a) Equity investment is managed at the preacquisition stage by understanding its performance through different scenarios. b) Specific deal structure to maximise investment rate of return. c) Portfolio approach through geographical and industrial diversification.

3.6.1 Market risk strategyThe Board is responsible for approving and reviewing (at least annually), the risk strategy and significant amendments to the risk policies and procedures. The Bank’s senior management is responsible for implementing the risk strategy approved by the Board, and continually enhancing the policies and procedures for identifying, measuring, monitoring and controlling risks.

In line with the Bank’s risk management objectives and risk tolerance levels, strategies for market risk management include:

1. Managing its market risk exposure by evaluating each new product / activity with respect to the market risk introduced by it;2. Proactively measuring and continually monitoring the market risk in its portfolio;3. Holding sufficient capital in line with the Basel and CBB regulatory capital requirements;4. Establishing a limit structure to monitor and control the market risk in its portfolio, these limits shall include position limits and maturity limits;5. Matching the amount of floating rate assets with floating rate liabilities; and6. Identifying the foreign currencies in which it wishes to deal in and actively manage its market risk in all foreign currencies in which it has significant exposure.

3.6.2 Limits monitoringThe Treasury Department and Risk and Compliance Department monitor the risk limits for each transaction, ensure that the exposures are well within set parameters and report periodically to senior management.

3.6.3 Breach of limitsAdherence to internal and regulatory limits is ensured before incurring any exposure and approvals from the respective approving authority is obtained. In case limits are breached, it will be brought to the appropriate authority, as per Discretionary Authority Limit, for their action. The limits are revised at least annually or when deemed required.




3.6 Market risk (continued)

Table – 14 Market risk capital requirements (PD-1.3.27 (b))The following table summarises the capital requirement by each category of market risk;

Foreign Exchange riskRisk weighted assets

US$ '000Capital requirement

US$ '000

Maximum market risk 3,263 408

Minimum market risk 2,825 353

3.7 Operational risk

3.7.1 IntroductionOperational risk is the risk of loss arising from inadequate information systems, technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems that may result in unexpected losses or damage the Bank’s reputation.

3.7.2 Sources of operational riskThe different sources of operational risks faced by the Bank can be classified broadly into the following categories:

(a) People risk which arises due to staffing inadequacy, unattractive remuneration structure, lack in staff development policies, lack in procedures for appointment, unhealthy professional working relationship and unethical environment.

(b) Processes risk which arises due to inadequate general controls, inadequate application controls, improper business and market practices and procedures, inappropriate/inadequate monitoring and reporting.

(c) Systems (Technology) risk which arise due to integrity of information - lacking in timelines of information, omission and duplication of data, hardware failures due to power surge, obsolescence and low quality programmes.

3.7.3 Operational risk management strategyAs a strategy, the Bank has identified the sources of operational risks in coordination with each business unit. The Bank completed the RCSA to identify the operational risks it is exposed to and has taken steps to monitor and minimize this risk.

On a continuous basis, the Bank:

a. assesses the effectiveness of controls associated with identified risks.b. regularly monitors operational risk profiles and material exposures to losses.c. identifies stress events and scenarios to which it is vulnerable and assess their potential impact, and the probability of aggregated losses from a single event leading to other risks.

3.7.4 Operational risk monitoring and reportingThe internal monitoring and reporting process ensures a consistent approach for providing pertinent information to senior management for the quick detection and correction of deficiencies in the policies, processes and procedures for managing operational risk through ongoing, periodic reviews.

The objective of the reporting process is to ensure relevant information is provided to senior management and the Board to enable the proactive management of operational risk. The process ensures a consistent approach for providing information that enables appropriate decision making and action taking.

During the period, the Bank had no penalties reported to the CBB.

3.7.5 Operational risk mitigation and controlThe business units, in consultation with RCD will determine all material operational risks and decide the appropriate procedures to be used to control and mitigate the risks.

For those risks that cannot be controlled, the business units in conjunction with the RCD will decide whether to accept the risks, reduce the level of business activity involved, transfer the risk outside the Bank or withdraw from the associated activity completely. The RCD facilitates the business units in co-developing the mitigation plans.




3.7 Operational risk (continued)

3.7.6 Business continuity plan ("BCP")The Bank has developed a comprehensive business continuity plan detailing the steps to be taken in the event of extreme conditions to resume the Bank’s operations with minimum delay and disturbance. Elements of contingency plans and disaster recovery processes include operating systems, physical space, telecommunications and resources.

The RCD ensures that the BCP is kept up-to-date and is tested once a year in a simulated environment to ensure that it can be implemented in emergency situations. They also ensure that management and staff understand how it is to be executed. Results of this testing conducted by RCD is evaluated by the Credit Manager and presented to the Executive Committee and Board for evaluation. The plan is reviewed periodically to assess and incorporate changes in the business and market conditions.

3.8 Equity positions in the banking book

Equity price risk is the risk of decline in the value of a security or portfolio and is the biggest risk faced by all investors. The equity price risk exposure arises from the Group’s investment portfolio and can be minimised through diversification. The Group manages and monitors its equity risk using investment limits. The equity position that the Group is holding is for capital gain purposes. The Group has no holdings for any other reason except for capital gain.

The accounting policies, including valuation methodologies and their related key assumptions, are disclosed in the Group’s consolidated financial statements for the year ended 31 December 2015.

Table – 15. Equity position risk in banking book (PD-1.3.31 (b) (c) and (f))

The following table summarises the amount of total and average gross exposure of equity based financing structures by types of financing contracts and investments.

Total gross

exposure US$ '000

* Average gross

exposureUS$ '000

Publicly traded

US$ '000

Risk weighted

assetsUS$ '000

Capital Requirement

US$ '000

Equity investments 12,513 14,596 2,367 23,091 2,886

*Average balances are computed based on month end balances.

Table – 16. Equity gains or losses in banking book (PD-1.3.31 (d) and (e))

US$ '000

Total unrealized gains recognized in the balance sheet but not through P&L 3,799

Realized gain arising from sales/liquidation 187

3.9 Liquidity risk

3.9.1 IntroductionLiquidity risk is defined as the risk that the Bank will be unable to meet its obligations as they come due because of an inability to obtain adequate funding or to liquidate assets.

3.9.2 Sources of liquidity risk The sources of liquidity risk can broadly be categorized in the following:

a. Funding risk is the risk of not being able to fund net outflows due to unanticipated withdrawal of credit lines;

b. Call risk is the risk of crystallization of a contingent liability; and

c. Event risk is the risk of rating downgrades or other negative public news leading to a loss of market confidence in the Bank.




3.9 Liquidity risk (continued)

3.9.3 Bank’s liquidity strategyThe Board reviews the liquidity strategy on an annual basis and amends the existing strategy, as deemed required. For this purpose, all business units advise the Treasury Department of their projected liquidity requirements and contributions at the start of each year as part of annual budgeting process.

The liquidity strategy highlights any anticipated liquidity shortfalls, the Shari’a compliant funding requirements to finance these shortfalls and their impact on the balance sheet. The Bank also has a liquidity contingency plan that deals with stressed scenarios and outlines an action plan that can be taken in the event of a loss of market liquidity.

3.9.4 Liquidity risk strategyThe Bank monitors the liquidity position by comparing maturing assets and liabilities in different time buckets of up to 1 month, 1-3 months, 3-6 months, 6 months to 1 year, 1-3 years, 3-5 years, 5-10 years and no fixed maturity. The Bank carries out stress testing periodically using the worst case scenarios to assess the effects of changes in market conditions on the liquidity of the Bank.

The Bank has established a contingency liquidity plan to meet urgent liquidity requirements in stressed conditions that addresses how funding liquidity would be managed if either their specific financial conditions were to decline or broader conditions created a liquidity problem. The plan is reviewed on a regular basis and updated as required.

The Treasury Department, in conjunction with RCD periodically reviews, at least on an annual basis, the liquidity risk strategy before presenting to the RMC and subsequently the Board for approval.

The Bank uses a combination of different limits to ensure that liquidity is managed and controlled in an optimal manner. The Bank has set the following limits for monitoring liquidity risks:

a. Liquidity gap limits; andb. Liquidity ratio limits.

3.9.5 Contingency Funding PlanThe Bank has developed a contingency funding plan which details procedures to be followed by the Bank, in the event of a liquidity crisis or a situation where the Bank faces stressed liquidity conditions. The contingency funding plan is an extension of day-to-day liquidity management and involves maintenance of adequate amount of liquid assets and management of access to funding resources. The CIC discuss and monitor the situation over regular time-intervals to ensure sufficient liquidity in the Bank.

The Group’s funding guidelines include: (a) The mobilization and placements of short-term funds, Mudaraba and Murabaha transactions which is the responsibility of the Treasury Department; (b) Ensuring all funding objectives are aligned to the strategic objectives of the Bank; (c) The composition, characteristics and diversification of the Bank’s funding structure are monitored by CIC and executed by the Treasury Department; (d) Treasury Department maintains the counterparty relationships to obtain the necessary lines of funding; (e) The CIC monitors the concentration of funding sources across products and counterparties and effect measures to mitigate undue concentrations; and (f ) Treasury Department implements the deals within the approved guidelines, including the approved products and the counterparties.




3.9 Liquidity risk (continued)

Table – 17. Equity position in banking book liquidity ratios (PD-1.3.37)

The following table summarises the liquidity ratios:

2015 2014 2013 2012 2011

(a) Short term assets (maturity of less than 1 year) / short term liabilities (maturity of less than 1 year)

35% 14% 38% 55% 63%

(b) Commodities Murabaha / Total Assets - - 4% - 3%

(c) Liquid Assets / Total Assets 15% 2% 7% 15% 6%

(d) Liquid Assets / Total Assets * 58% 63% 49% 47% 51%

(e) Due to Short Term Sukuk - investors / Total Assets

11% 20% 29% 35% 41%

* Management evidenced that certain sukuks are tradable or liquid and accordingly, this ratio is calculated after including the tradable sukuks as liquid assets.

3.10 Profit rate risk

3.10.1 IntroductionProfit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the sources of finance.

3.10.2 Sources of profit rate riskThe different profit rate risks faced by the Bank can be classified broadly into the following categories:

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

3.10.3 Profit rate risk strategyThe fair value of financial assets may be affected by current market forces including profit rates. The Bank recognizes income on certain of its financial assets on a time-apportioned basis. As a strategy, the Bank:

a. has identified the profit rate sensitive products and activities it wishes to engage in;b. has established a limit structure to monitor and control the profit rate risk of the Bank; c. measures profit rate risk through establishing maturity/re-pricing schedule that distributes profit rate sensitive assets, liabilities and off-balance sheet items in pre-defined time bands according to their maturity; andd. makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book.




3.10 Profit rate risk (continued)

3.10.4 Profit rate risk measurement toolsThe Bank uses the following tools for profit rate risk measurement in the banking book:

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

3.10.5 Profit rate risk monitoring and reportingThe Treasury department monitors these limits regularly. The Chairman of CIC reviews the results of gap limits and exceptions, if any, and recommends corrective action to be taken according to authority parameters approved by the Executive Committee.

Table – 18. Profit rate risk in banking book (PD-1.3.40 (b))The following table summarises the effect on the value of assets, liabilities and economic capital for a benchmark change of 200bp in profit rates:

Effect onvalue of

assetUS$ '000

Effect onvalue ofliability

US$ '000

Effect onvalue of

economiccapital

US$ '000

Effect of an increase of 200 basis points 2,683 2,166 517

The impact of a similar decrease in profit rate will be approximately opposite to the impact disclosed above.

Table – 19. Quantitative indicators of financial performance and position (PD-1.3.9 (b))

The following table summarises the basic quantitative indicators of financial performance for the past 5 years:

31 December

2015 2014 2013 2012 2011

Return on average equity 5% 6% 6% 5% 1 %

Return on average assets 1.85% 2.00% 1.65% 1.54% 0.15%

Cost to income ratio* 65% 58% 62% 62% 95%

* Cost includes operating costs plus provisions and unrealized losses on FVTPL.




3.11 Corporate governance and transparency

3.11.1 Board Members' ProfileAs of 31 December 2015, the Board of Directors consists of eight members. No Board member has more than one directorship of a retail bank or a wholesale bank.

Table – 20. Corporate governance and transparency – Board members’ profile (PD-1.3.10(b))The following table summarises the information about the profession, business title, experience in years, start date and the qualifications of the current Board members.

Name of Board Member Profession Representative of Business

Title Type Experience in years

Directorship period Qualification Directorship on other

entities

Mohammad Hassan Janahi Banker

Bahrain Islamic Bank B.S.C.

ChairmanNon-

Independent / Executive

46May 2015-

March 2018

Professional Training:Financial Analysis-DubaiInternational Financial

Management and Banking

Manama High School

- Al Dur Holding Company Limited (Bahrain)

Farid Masood BankerIslamic

Development Bank Group

Deputy Chairman

Non-Independent /

Executive22

April 2015-March 2018

Master in Business Administration with a focus on International Business and Finance

Master of Science in System Information Engineering

Bachelor of Science in System Information Engineering

- JS Global Online (Pakistan)- Azerbaijan Leasing Company Ltd. (Azerbaijan)

- Anfaal Capital (Saudi Arabia)

- Caspian International Investment Company (Azerbaijan)

- Capitas Group International (Saudi Arabia)

Abdul Wahab Al Rashood Banker

KFH Investment Company K.S.C.

Board Member

Non-Independent /

Executive29


Bachelor’s Degree in Mathematics from Western Oregon State College and University of Tampa, USA

- Aviation Lease & Financing Company (Kuwait)

- Kuwait Finance House (Bahrain)- Development Enterprises Holding Co. (Kuwait)

Khalid Al Dossari BankerBahrain Islamic

Bank B.S.C.Board

Member

Non-Independent /

Executive33


Certified Public Accountants, CPA, from Oregon Board of Accountancy

Executive Management Development Program from University of Virginia, Darden

None

Adnan Chilwan BankerDubai Islamic Bank

P.J.S.C.Board

Member

Non-Independent /

Executive21


PhD and MBA in Marketing and a Certified Islamic Banker

- Deyaar Development PJSC (UAE)

- Tamweel PJSC (UAE)

Mohammed Al Sharif Banker

Dubai Islamic Bank P.J.S.C.

Board Member

Non-Independent /

Executive29


BSC in Accounting and Economics from UAE and CPA, Virginia USA

- Deyaar Development PJSC (UAE)

- Al Bustan Center (UAE)

Nawaf Al Menayakh Banker

KFH Investment Company K.S.C.

Board Member

Non-Independent /

Executive17


Leadership Development from University of Harvard, USA

MBA in International Banking and Finance from Birmingham, UK

BBA in Finance-Banking from East Tennessee State University

None

Seedy Mohammad Njie Banker

Islamic Development Bank Group

Board Member

Non-Independent /

Executive16


Associate Professional Risk Manager (APRM)

Member Chartered Institute of Management

Accountant-UK (CIMA) Fellow Association of Chartered Certified Accountant-UK (FCCA)

None




3.11 Corporate governance and transparency (continued)

3.11.2 Changes in Board Structure

Except as mentioned below, there were no changes in the structure of the committees of the Board and management committees. On 13th May 2015, the CBB approved Mr. Mohammed Hassan as a new Board Member. The Board of Directors appointed him as a Chairman of the Board of Directors replacing Mr. Abdulwahab Al Rashood, on the 14th May 2015. On the 23rd April 2015 the CBB approved Mr. Farid Masood as a new Board Member. He was appointed as a Deputy Chairman on the 14th May 2015 replacing Mr. Mohammed Al Sharif. On the 13th April 2015 the CBB approved Mr. Seedy Mohammad Njie as a new Board Member.

Table – 21. Corporate Governance and Transparency – Board Member appointed in 2015 (PD-1.3.10(g))Below are details about the new Board member appointed during the year:

Name of Board Member Profession Representative

ofBusiness

Title Type Experiencein Years

Board Terms

Mohammed Hassan BankerBahrain Islamic

Bank B.S.C.Chairman

Non-Independent / Executive

46May 2015-

March 2018

Farid Masood BankerIslamic

Development Bank Group

Deputy Chairman


22April 2015-March 2018

Seedy Mohammad Njie Banker

Islamic Development Bank Group

Board Member


16April 2015-March 2018





3.11.3 Board Members' Profile (continued)At a minimum the Board is required to meet four times during the year. During the year ended 31 December 2015, the Board met five times. The following table summarises the information about Board meeting dates and attendance of directors at each meeting:

Table – 22. Corporate governance and transparency – Board of Directors meetings in 2015 (PD-1.3.10(t and u))

Date Location of Meeting Directors Present Directors Present through conference call Directors absent

22 January 2015 LMC Headquarters, Bahrain 1) Mr. Abdul Wahab Al Rashood 1) Mr. Ammar Odah None

2) Mr. Mohammed Al Sharif

3) Dr. Adnan Chilwan

4) Mr. Khalid Al Dossari

5) Mr. Mohammed Saeedullah

6) Mr. Nawaf Al Menayekh

16 March 2015 LMC Headquarters, Bahrain 1) Mr. Khalid Al Dossari None 1) Mr. Nawaf Al Menayekh

2) Mr. Abdul Wahab Al Rashood


4) Mr. Mohammed Saeedullah

5) Mr. Ammar Odah


14 May 2015 LMC Headquarters, Bahrain 1) Mr. Mohammed Hassan None 1) Mr. Farid Masood

2) Mr. Khalid Al Dossari 2) Mr. Seedy Mohammad Njie




6) Mr. Nawaf Al Menayekh

13 July 2015 LMC Headquarters, Bahrain 1) Mohammed Hassan None 1) Mr. Seedy Mohammad Njie

2) Mr. Farid Masood




6) Mr. Nawaf Al Menayakh


1 November 2015 LMC Headquarters, Bahrain 1) Mr. Mohammed Hassan None None

2) Mr. Farid Masood






8) Mr. Seedy Mohammad Njie





3.11.4 Board CommitteesAt a minimum the Audit Committee is required to meet four times during the year. During the year ended 31 December 2015, the Audit Committee met four times. The following table summarises the information about Audit Committee meeting dates and attendance of directors at each meeting:

Table – 23. Corporate governance and transparency – Audit committee meetings held during 2015 (PD-1.3.10(b))

Date Directors Present Directors Absent

29 April 2015 1) Dr. Adnan Chilwan None


30 July 2015 1) Mr. Khalid Al Dossari 1) Mr. Seedy Mohammad Njie



1 November 2015 1) Mr. Khalid Al Dossari None



4) Mr. Seedy Mohammad Njie

27 December 2015 1) Mr. Khalid Al Dossari 1) Mr. Seedy Mohammad Njie







At a minimum the Risk and compliance committee is required to meet four times during the year. During the year ended 31 December 2015, the Risk and compliance committee met four times. The following table summarises the information about Risk and compliance committee meeting dates and attendance of directors at each meeting:

Table – 24. Corporate governance and transparency – Risk and compliance committee meetings held during 2015 (PD-1.3.10(b))

Date Directors Present Directors Absent

14 May 2015 1) Dr. Adnan Chilwan 1) Mr. Farid Masood



30 July 2015 1) Mr. Abdul Wahab Al Rashood None



4) Mr. Farid Masood

1 November 2015 1) Mr. Abdul Wahab Al Rashood None



4) Mr. Farid Masood

27 December 2015 1) Mr. Abdul Wahab Al Rashood 1) Mr. Farid Masood



Table – 25. Corporate governance and transparency – Nomination, Remuneration & Corporate Governance Committee meetings in 2015 (PD-1.3.10(b))

At a minimum the Nomination, Remuneration & Corporate Governance committee is required to meet two times during the year. During the year ended 31 December 2015, the Nomination, Remuneration & Corporate Governance committee met two times. The following table summarises the information about Nomination, Remuneration & Corporate Governance committee meeting dates and attendance of directors at each meeting:

Date Directors PresentDirectors Present through conference call

Directors Absent

28 January 2015 1) Mr. Abdul Wahab Al Rashood 1) Mr. Ammar Odah None


30 July 2015 1) Mr. Mohamad Hassan None None



4) Mr. Farid Masood





3.11.3 Board Committees (continued)

Table – 26. Corporate governance and transparency – Board committees profile (PD-1.3.10(a))

The following table summarises the information about Board committees, their members and objectives.

Board Committee Members Objective

Board of Directors Chairman:Mohammad Hassan Janahi

Members:

• Farid Masood

• Khalid Al Dossari

• Adnan Chilwan

• Nawaf Al Menayakh

• Mohammed Al Sharif

• Abdul Wahab Al Rashood

• Seedy Mohammad Njie


a) The Board of Directors is responsible for overseeing the management and business affairs of the Bank and making all major policy decisions of the Bank. The ultimate responsibility of the preparation, review and approval of financial statements lies with the Board of Directors.

b) Oversight, Performance Evaluation, and Succession Planning of Executive Management;

c) Review the Bank’s long term strategic plans and the principle issues that the Bank may face in the future. It shall annually approve a business plan, an operating budget and a financing plan;

d) Review, approve and monitor fundamental financial and business strategies and major Bank actions;

e) Review and discuss reports by executive management on the performance of the Bank, its plans and products;

f ) Assess major risks facing the Bank by reviewing and approving strategies for addressing such risks.

g) Establishing a systems and controls framework that will mitigate risks existing in the Bank’s business environment

h) Employ and dismiss independent legal, financial or other advisors, as they deem necessary, without first consulting or obtaining the approval of the Bank’s senior management.




3.11.3 Board Committees (continued)

Table – 26. Corporate governance and transparency – Board committees profile (PD-1.3.10(a)) (continued)

Board Committee Members Objective

Executive Committee

This Committee has been put on hold by the Board of Directors for the year 2015

The Executive Committee of the Board considers specific matters delegated to it by the full Board and makes recommendations thereon to the Board or decisions based on authorities specifically delegated by the Board. Responsibilities and authorities of the committee are reviewed annually by the Board of Directors. The responsibilities of the Executive Committee is being carried out by the BOD.

Audit Committee

Chairman:Khalid Al Dossari

Assists the Board in discharging its oversight responsibilities relating to the integrity of the Group’s financial statements and financial reporting process and the Bank’s systems of internal accounting and financial controls, the annual independent audit of the Bank’s financial statements and all matters related to external and internal auditors, compliance by the Banks with legal and regulatory requirements and compliance with the Bank’s code of conduct.

Members:

• Adnan Chilwan


• Seedy Mohammad Njie

Nomination, Remuneration and Corporate Governance Committee

Chairman:Mohammad Hassan Janahi

Responsible for identifying individuals to become Board members, developing procedure for remuneration policy for the Board senior management, ensure that compensation offered is competitive, in line with the market and consistent with the responsibilities assigned, leads the Board in its annual review of the Board performance, and recommend to the Board the remuneration policy and special compensation plans.

Members:

• Mohammed Al Sharif


• Farid Masood

Risk and Compliance Committee

Chairman:Abdul Wahab Al Rashood

Assist the Board in discharging its oversight responsibilities related to establishment of an effective Risk Management and Compliance Framework.

Members:

• Adnan Chilwan

• Khalid Al Dossari

• Farid Masood

Shari’a Supervisory Board (“SSB”)

Chairman:Dr. Hussain Hassan

The SSB is an independent body of specialised jurists in Shari’a compliant banking. The SSB is entrusted with the duty of directing, reviewing and supervising the activities of the Group in order to ensure that the Bank is in compliance with Shari’a rules and AAOIFI. The Fatwas and rulings of the SSB is binding on the Bank.

Members:

• Dr. A. Sattar Abu Guddah

• Shaikh Adnan Al Qattan



The Bank’s organization chart which is communicated to the CBB defines the reporting lines and segregation of duties among different departments of the Bank. Review of segregation of duties is generally part of the scope of audits conducted by the outsourced internal auditors, as an independent party. There were no changes to either the managerial structure or the organizational chart during 2015.

As the Bank is a closed joint stock company, no shares were traded during the year. Directors and senior managers do not own any shares in the Bank.


BASIC ORGANIZATION STRUCTURE

LMC Organizational Structure

Shari’a Supervisory Board Board of Directors

Chief Executive Officer

Risk Management & Compliance Committee

Executive Committee

Audit CommitteeNomination, Remuneration &

Corporate Governance Committee

Internal Audit Function Investment & Credit Committee

2-Investment Division

3-Structured Finance Division

4-Risk Division

1-Support Services Division

Legal Affairs Department

Shari’a Compliance

Market RiskOperational Risk

Board of Directors

Chief Executive OfficerRisk Management and Compliance Committee

Risk Department

Credit Risk Market Risk Operational Risk




3.11.4 Executive members' Profile

Table – 27. Corporate governance and transparency – Executive members’ profile (PD-1.3.10(b))

The following table summarises the information about the profession, business title, experience in years and the qualifications of each executive member.

Name of Executive Member Designation Profession Business Title Experience in

years Qualification

Ahmed Abbas CEO BankerChief Executive

Officer29 years

Bachelor's Degree in Business and Finance from University of Bahrain.

Amer SadiqEVP -

Structured Finance

BankerExecutive

Vice President19 years

Bachelor's Degree in Accounting from University of Denver, Colorado, USA.

Hussain MerzaSVP -

Financial Controls

BankerSenior

Vice President14 years

FCCA, Bachelor's Degree in Accounting from University of Bahrain and CIPA.





The following table summarises the information about management committees, their members and objectives

Table – 28. Corporate governance and transparency – management committees profile (PD-1.3.10(b))

Committee Members Objective

Management Committee

Chairman:Ahmed Abbas

The Bank has established key management committees to oversee all aspects of the business.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur

Credit and Investment Committee (CIC)


The CIC is established to oversee an efficient and comprehensive due diligence transition of an investment transaction from the point of origination to the point of closing, including all internal and external approval requirements and financial and legal due diligence. The CIC also ensures that management’s handling of credit risk complies with Board decisions about acceptable levels of risk and minimum pricing levels. The functions of this committee with regard to credit activities include appraisal and approval of credit applications based on limits set by the Board. The CIC also monitors and reviews non-performing portfolio and ensures that adequate loss provisions are held against delinquent accounts in accordance with the guidelines issued by the CBB and the Board and provides monthly reporting to the Board.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur

ALCO Committee Chairman:Ahmed Abbas

ALCO which is established to manage the asset and liability structure, the liquidity and the funding strategy of the Bank. This involves monitoring and reviewing the Bank’s financial risks, including liquidity, market and counterparty risk and ensuring that appropriate strategies exist for management of the Bank’s assets, liabilities and capital.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur• AbdulAziz AbdulQader• Bader Al Abbasi

Human Resource Committee


The objective of the Human Resources Committee is to assist the CEO in discharging its duty to oversee the establishment of appropriate Human Resources policies and strategies that provides the Bank with the capability to achieve its short and long term business objectives.

Members:• Amer Sadiq• Hussain Merza• Nadia Jabur• Amina Al Asiri





Authorities signatoriesThe Bank’s authorities signatories, which is approved by the Board, outline matters that require specific Board approvals and also sets out matters that are delegated to the Executive Management. Based on materiality investment approvals above certain limits and criteria and certain investment decisions are brought before the Board.

HC ModuleGood corporate governance is a fundamental part of the culture and the Bank is fully committed to compliance with the requirements under the Corporate Governance Code (CGC) issued by the Ministry of Industry and Commerce and the CBB’s High Level Controls Module (HC Module), as updated from time to time. The Board also adopted a detailed Corporate Governance Manual, which is based on the rules and guidelines of the HC Module and it covers in detail all aspects of the Directors’ roles, duties and responsibilities.

3.11.5 Code of business conduct and ethics for members of the Board of Directors

Induction of directors:The new Board members were given proper induction and background regarding their rules and responsibilities as a member of the Board and its committees. The Board members have approved the code of business conduct and ethics (the “Code”). On joining the Group, all directors are provided with an Induction Package which includes the Bank’s Memorandum and Articles of Association, key policies, terms of reference of the Board and its sub-committees and Corporate Governance guidelines.

Election of directors:The Board is comprised of 8 directors appointed for a term of three years. The appointment and termination of the Board is covered by the Bank’s Articles of Association, which is in accordance with the Commercial Companies Law. The present Board of Directors was elected at the Annual General Meeting in 2015 and their term expires at the Annual General Meeting to be held in 2018.

Purpose of the Code:The primary objectives of the Code are to enable each Director to focus on areas of ethical risks, to help him / her to recognize and deal with ethical issues, to provide mechanisms for reporting unethical conduct, and to foster a culture of honesty and accountability within the Group.

Conflict of interest: Directors shall disclose to the Board any potential conflict of interest in their activities with other organisations. All Board members and members of executive management must declare to the Board in writing, on an annual basis, all of their other interests in other institutions, whether as a shareholder of five percent (5%) or more of the voting capital of the company, a manager or other form of significant participation. Any decision to enter into transactions, under which Board members or any member of executive management may have a conflict of interest that is material, shall be formally and unanimously approved by the Board. Board’s responsibility for disclosureThe Board shall oversee the process of disclosure and communications with internal and external stakeholders. The Board shall ensure that disclosures made by the Group are fair, transparent, comprehensive and timely and reflect the character of the Group and the nature, complexity and risks inherent in the Group’s business activities and that they are in compliance with the disclosure requirements set out by the CBB.

New product information, Bank’s new announcement and information related to stakeholders are made available in timely manner through various channels of communication which may include publications, website (www.lmcbahrain.com), direct mailers, electronic mail and local media.

In addition, the consolidated financial statements of the past 3 years are available on the Bank’s website.

3.11.6 Assessment of Board Performance

Evaluation of Board PerformanceThe Board shall, through the Nomination, Remuneration and Corporate Governance Committee ("NRCGC"), conduct an annual review of the Board’s performance. This review shall include an overview of the talent base of the Board as a whole as well as individual assessment of each director under corporate governance rules and all other applicable laws, rules and regulations regarding directors, consideration of any changes in a director’s responsibilities that may have occurred since the director was first elected to the Board and such other factors as may be determined by the Committee to be appropriate for review.





3.11.6 Assessment of Board Performance (continued)

Remuneration of Board members is approved in the AGM after being discussed at the Board level. For all Bank staff there is a performance bonus. Performance bonus is based on staff performance and recommendation of respective departmental heads. The NRCGC recommends all fixed and performance bonus for all staff and management, which is subsequently approved by the Board of Directors. Remuneration for members of the SSB is approved by the Board of Directors.

Chairman and CEO PerformanceThe Board of Directors shall review the performance of the Chairman and the CEO in order to ensure they are providing the best leadership for the Group

.4. REMUNERATION RELATED DISCLOSURES

4.1 IntroductionThe Bank’s total compensation approach, which includes the variable remuneration ("policy") sets out the Bank’s policy on remuneration for Directors and senior management and the key factors that are taken into account in setting the policy. The remuneration policy is reviewed on a periodic basis to reflect changes in market practices, the business plan and risk profile of the Bank, in line with the applicable CBB rules and guidelines.

The key features of the proposed remuneration framework are summarised below.

4.2 Remuneration strategyIt is the Bank’s basic compensation philosophy to provide a competitive level of total compensation to attract and retain qualified and competent employees. The Bank’s variable remuneration policy will be driven primarily by a performance based culture that aligns employee interests with those of the shareholders of the Bank. These elements support the achievement of our objectives through balancing rewards for both short-term results and long-term sustainable performance. Our strategy is designed to share our success, and to align employees’ incentives with our risk framework and risk outcomes.

The quality and long-term commitment of all of our employees is fundamental to our success. We therefore aim to attract, retain and motivate the very best people who are committed to maintaining a career with the Bank, and who will perform their role in the long-term interests of our shareholders. The Bank’s reward package is comprised of the following key elements:

1. Fixed pay 2. Benefits 3. Annual performance bonus

A robust and effective governance framework ensures that the Bank operates within clear parameters of its compensation strategy and policy. All compensation matters, and overall compliance with regulatory requirements, are overseen by NRCGC.

The Bank’s remuneration policy in particular, considers the role of each employee and has set guidance on whether an employee is a Material Risk Taker and/ or an Approved Person in a business line, control or support function. An Approved Person is an employee whose appointment requires prior regulatory approval because of the significance of the role within the Bank and an employee is considered a Material Risk Taker if they are the Head of a significant business line or any individuals within their control who has a material impact on the Bank's risk profile.

In order to ensure alignment between what we pay our people and our business strategy, we assess individual performance against annual and long-term financial and non-financial objectives summarised in our performance management system. This assessment also takes into account adherence to the Bank’s values, risks and compliance measures and above all integrity. Altogether, performance is therefore judged not only on what is achieved over the short and long-term but also importantly on how it is achieved, as the NRCGC believes the latter contributes to the long-term sustainability of the business.



4. REMUNERATION RELATED DISCLOSURES (continued)

4.3 NRCGC role and focusThe NRCGC has oversight of all reward policies for the Bank’s employees. The NRCGC is the supervisory and governing body for compensation policy, practices and plans. It is responsible for determining, reviewing and proposing variable remuneration policy for approval by the Board. It is responsible for setting the principles and governance framework for all compensation decisions. The NRCGC ensures that all persons must be remunerated fairly and responsibly. The remuneration policy is reviewed on a periodic basis to reflect changes in market practices, the business plan and risk profile of the Bank.

The responsibilities of the NRCGC with regards to the Bank’s variable remuneration policy, as stated in its mandate, include but are not limited to, the following:-

• Approve, monitor and review the remuneration system to ensure the system operates as intended.

• Propose the remuneration policy and amounts for each Approved Person and Material Risk-Taker, as well as total variable remuneration to be distributed, taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits.

• Ensure remuneration is adjusted for all types of risks and that the remuneration system takes into consideration employees that earn same short-run profit but take different amount of risk on behalf of the Bank.

• Ensure that for Material Risk Takers, variable remuneration forms a substantial part of their total remuneration.

• Review the stress testing and back testing results before approving the total variable remuneration to be distributed including salaries, fees, expenses, bonuses and other employee benefits.

• Carefully evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. The NRCGC will question pay outs for income that cannot be realized or whose likelihood of realization remains uncertain at the time of payment.

• Ensure that for approved persons in risk management, internal audit, operations, financial control and compliance functions the mix of fixed and variable remuneration is weighted in favour of fixed remuneration.

• Recommend Board member remuneration based on their attendance and performance and in compliance with Article 188 of the Bahrain Commercial Companies Law.

• Ensure appropriate compliance mechanisms are in place to ensure that employees commit themselves not to use personal hedging strategies or remuneration and liability related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

As outlined in the Corporate Governance section of the Annual Report, the Board is aware that all directors are non-independent including the NRCGC members. Please refer table 28 within section 3.11.3 for details of members of the NRCGC and meetings held during the year. The aggregate remuneration paid to NRCGC members during the year in the form of sitting fees amounted to US$12,000 [2014: US$10,000].

During the year ended 31 December 2015, remuneration paid to external auditors amounts to USD 50,398 for audit and USD 61,008 for non audit services to the Group.




4.4 External consultantsConsultants were appointed during the year 2014 to advise the Bank on amendments on the variable remuneration policy to ensure the Bank is in line with the CBB’s Sound Remuneration Practices and industry norms. This included assistance in designing an appropriate Share-based Incentive Scheme for the Bank.

4.5 Scope of application of the remuneration policyThe variable remuneration policy has been adopted by the entire Group.

4.6 Board remunerationThe Bank’s Board remuneration is determined in line with the provisions of Article 188 of the Bahrain Commercial Companies Law, 2001 (“BCCL”). The Board of Directors’ remuneration will be capped so that total remuneration (excluding sitting fees) does not exceed 10% of the Bank’s net profit after all required deductions as outlined in Article 188 of the BCCL, in any financial year. Board remuneration is subject to approval of the shareholders in the Annual General Meeting. Remuneration of non-executive Directors does not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits.

The Bank provides fixed sitting fees to the Shari’a Board and does not provide any performance linked incentives.

4.7 Variable remuneration for staffVariable remuneration is performance related and consists primarily of the annual performance bonus award and long term incentives for future performance. As a part of our staff’s variable remuneration, the annual bonus rewards delivery of operational and financial targets set each year, the individual performance of the employees in achieving those targets, and their contribution to delivering the Bank’s strategic objectives.

The Bank has adopted a Board approved framework to develop a transparent link between variable remuneration and performance. The framework is designed on the basis of meeting both satisfactory financial performance and the achievement of other non-financial factors, that will, all other things being equal, deliver a target bonus pool for employees, prior to consideration of any allocation to business lines and employees individually. In the framework adopted for determining the variable remuneration pool, the NRCGC aims to balance the distribution of the Bank’s profits between shareholders and employees.

Key performance metrics at the bank level include a combination of short term and long term measures and include profitability, solvency, liquidity and growth indicators. The performance management process ensures that all goals are appropriately cascaded down to respective business units and employees.

In determining the amount of variable remuneration, the Bank starts from setting specific targets and other qualitative performance measures that result in a target bonus pool. The bonus pool is then adjusted to take account of risk via the use of risk-adjusted measures (including forward-looking considerations).

The NRCGC carefully evaluates practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. NRCGC demonstrates that its decisions are consistent with an assessment of the Bank’s financial condition and future prospects.

The Bank uses a formalized and transparent process to adjust the bonus pool for quality of earnings. It is the Bank’s objective to pay out bonuses out of realized and sustainable profits. If the quality of earnings is not strong, the profit base could be adjusted based on the discretion of the NRCGC.

For the overall Bank to have any funding for distribution of a bonus pool; threshold financial targets have to be achieved. The performance measures ensure that total variable remuneration is generally, considerably contracted where subdued or negative financial performance of the Bank occurs. Furthermore, the target bonus pool as determined above is subject to risk adjustments in line with the risk assessment and linkage framework.




4.7 Variable remuneration for staff (continued)

Remuneration of control functions The remuneration level of staff in the control and support functions allows the Bank to employ qualified and experienced personnel in these functions. The Bank ensures that the mix of fixed and variable remuneration for control and support function personnel, such as risk management, operations, financial control, AML and compliance functions, should be weighted in favour of fixed remuneration. The variable remuneration of control functions is to be based on function-specific objectives and is not be determined by the financial performance of the business areas they monitor.

The Bank’s performance management system plays a major role in deciding the performance of the support and control units on the basis of the objectives set for them. Such objectives are more focused on non-financial targets that include risk, control, compliance and ethical considerations as well as the market and regulatory environment apart from value adding tasks which are specific to each unit.

Variable compensation for business unitsThe variable remuneration of the business units is primarily determined by key performance objectives set through the per-formance management system of the Bank. Such objectives contain financial and non-financial targets, including risk control, compliance and ethical considerations as well as market and regulatory requirements. The consideration of risk assessments in the performance evaluation of individuals ensures that any two employees who generate the same short-run profits but take different amounts of risk on behalf of the bank are treated differently by the remuneration system.

4.8 Risk assessment frameworkThe purpose of risk linkages is to align variable remuneration to the risk profile of the Bank. In its endeavour to do so, the Bank considers both quantitative measures and qualitative measures in the risk assessment process. Both quantitative measures and human judgment play a role in determining any risk adjustments. The risk assessment process encompasses the need to ensure that the remuneration policy as designed reduces employees’ incentives to take excessive and undue risks, is symmetrical with risk outcomes and delivers an appropriate mix of remuneration that is risk aligned.

The Bank’s NRCGC considers whether the variable remuneration policy is in line with the Bank’s risk profile and ensures that through the Bank’s ex-ante and ex-post risk assessment framework and processes, remuneration practices where potential future revenues whose timing and likelihood remain uncertain are carefully evaluated.

Risk adjustments take into account for all types of risk, including intangible and other risks such as reputation risk, liquidity risk and the cost of capital. The Bank undertakes risk assessments to review financial and operational performance against business strategy and risk performance prior to distribution of the annual bonus. The Bank ensures that total variable remuneration does not limit its ability to strengthen its capital base. The extent to which capital needs to be built up is a function of the bank’s current capital position and its ICAAP.

The bonus pool takes into account the performance of the Bank which is considered within the context of the Bank’s risk management framework. This ensures that the variable pay pool is shaped by risk considerations and bank-wide notable events.




4.8 Risk assessment framework (continued)

The size of the variable remuneration pool and its allocation within the Bank takes into account the full range of current and potential risks, including:

(a) The cost and quantity of capital required to support the risks taken; (b) The cost and quantity of the liquidity risk assumed in the conduct of business; and (c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.

The NRCGC keeps itself abreast of the Bank’s performance against the risk management framework. The NRCGC will use this information when considering remuneration to ensure returns, risks and remuneration are aligned.

Risk adjustmentsThe Bank has an ex-post risk assessment framework which is a qualitative assessment to back-test actual performance against prior risk assumptions.

In years where the Bank suffers material losses in its financial performance, the risk adjustment framework will work as follows:

• There will be considerable contraction of the Bank's total variable remuneration.

• At an individual level, poor performance by the Bank will mean individual KPIs are not met and hence employee performance ratings will be lower.

• Reduction in the value of deferred shares or awards.

• Possible changes in vesting periods and additional deferral applied to unvested rewards.

• Lastly, if the qualitative and quantitative impact of a loss incident is considered significant, a malus or claw back of previous variable awards may be considered.

The NRCGC, with the Board’s approval, can rationalize and make the following discretionary decisions:

• Increase/ reduce the ex-post adjustment.

• Consider additional deferrals or increase in the quantum of non-cash awards.

• Recovery through malus and claw back arrangements.

Malus and Claw back frameworkThe Bank’s malus and claw back provisions allow the Bank’s Board to determine that, if appropriate, unvested elements under the deferred bonus plan can be forfeited/ adjusted or the delivered variable remuneration recovered in certain situations. The intention is to allow the Bank to respond appropriately if the performance factors on which reward decisions were based turn out not to reflect the corresponding performance in the longer term. All deferred compensation awards contain provisions that enable the Bank to reduce or cancel the awards of employees whose individual behaviour has had a materially detrimental impact on the Bank during the concerned performance year.

Any decision to take back an individual’s award can only be made by the Bank’s Board of Directors.

The Bank’s malus and claw back provisions allow the Board to determine that, if appropriate, vested /unvested elements under the deferred bonus plan can be adjusted/ cancelled in certain situations. These events include the following:

• Reasonable evidence of wilful misbehaviour, material error, negligence or incompetence of the employee causing the Bank/the employee’s business unit to suffer material loss in its financial performance, material misstatement of the Bank’s financial statements, material risk management failure or reputational loss or risk due to such employee’s actions, negligence, misbehaviour or incompetence during the concerned performance year.

• The employee deliberately misleads the market and/or shareholders in relation to the financial performance of the Bank during the concerned performance year.

Claw back can be used if the malus adjustment on the unvested portion is insufficient given the nature and magnitude of the issue.




4.9 Components of variable remunerationVariable remuneration has following main components:

Upfront cashThe portion of the variable compensation that is awarded and paid out in cash on conclusion of the performance evaluation process for each year.

Deferred CashThe portion of variable compensation that is awarded and paid in cash on a pro-rata basis over a period of three years.

Upfront share awardsThe portion of variable compensation that is awarded and issued in the form of shares on conclusion of the performance evaluation process for each year.

Deferred sharesThe portion of variable compensation that is awarded and paid in the form of shares on a pro-rata basis over a period of three years.

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

4.10 Deferred compensation

All staff earning in excess of BD 100,000 are subject to the following rules of deferral:

1. The CEO is subject to the following deferral rules:

Element of variableremuneration

Payoutpercentages

Vestingperiod Retention Malus* Clawback*

Upfront cash 40% immediate - - Yes

Deferred Cash 10% 3 years - Yes Yes

Deferred share awards 50% 3 years 6 months Yes Yes

2. All other covered staff (if any) are subject to the following deferral rules:

Element of variableremuneration

Payoutpercentages

Vestingperiod Retention Malus* Clawback*

Upfront cash 50% immediate - - Yes

Upfront share awards 10% immediate 6 months Yes Yes

Deferred share awards 40% 3 years 6 months Yes Yes

The NRCGC, based on its assessment of role profile and risk taken by an employee could increase the coverage of employees that will be subject to deferral arrangements.


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