Charting the Course - First Energy Bank · 2017-05-23 · International Capital Trading, National...

Charting the Course to Create and Capture Value in the Global Energy Sector

ANNUAL REPORT 2011

About First Energy BankFirst Energy Bank B.S.C. (c) (“FEB” or the “Bank”) is an Islamic investment bank licensed by the Central Bank of Bahrain and headquartered in Manama, Kingdom of Bahrain.

FEB’s founders believe that the global energy sector and the Middle East and North Africa (MENA) region offer excellent opportunities for private equity and Islamic financial investment First Energy Bank offers investors unique and specialized opportunities that capitalize on the MENA region’s status as the center for world energy.

The Bank focuses on investments in the production, transportation, storage and refining of hydrocarbons, as well as oilfield services and energy sector technologies. FEB also explores new opportunities to invest in the development of power generation capacity and renewable energy technologies.

FEB operates in accordance with Islamic Sharia’a principles as a financial partner in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios.

FEB was established in June 2008, with an authorized share capital of US$2 billion, and a paid up capital of US$1 billion, consisting of 2 billion ordinary shares each with a par value of US$1. The bank’s shareholders include a range of organizations and individuals with interests in the energy sector from the Kingdom of Bahrain, the United Arab Emirates, Libya, the Kingdom of Saudi Arabia, and other countries in the region.

FIRST ENERGY BANK ANNUAL REPORT 2011 1

Contents

About First Energy Bank

Board of Directors 2 Sharia’a Supervisory Board 6 Senior Management 8

Chairman’s letter to shareholders 12 Financial Highlights 14

Business Activities 16 Projects and Investments 18 Corporate Governance 21 Financial Statements 35 Risk and Capital Management 71

2 FIRST ENERGY BANK ANNUAL REPORT 2011

Board of Directors

H. E. Khadem Abdulla Al Qubaisi - Chairman

H.E. Khadem Abdulla Al Qubaisi, with a broad work experience of over 18 years, served as a key figure on many management teams

throughout the financial industry. Currently, Mr. Al Qubaisi is the Managing Director of International Petroleum Investment Company (IPIC)

in Abu Dhabi. He is also serving as Chairman of Aabar Investments (PJSC), Abu Dhabi National Takaful Co. (Takaful), Borealis AG in Austria,

Nova Chemicals Corporation in Canada and Compañía Española de Petróleos, S.A. (CEPSA) in Spain. Additionally, he is the Vice Chairman

of the Supervisory Board of OMV Aktiengesellschaft in Austria. Mr. Al Qubaisi is a Board Member in numerous companies such as First Gulf

Bank, Abu Dhabi National Chemicals Company (ChemaWEyaat) and Emirates Investment Authority. Mr. Al Qubaisi won the ICIS No. 1 Power

Player award for 2009 (for the global chemical sector) and the Arabian Businessman award for 2009.

H. E. Hamad Rashed Al Neaimi - Vice Chairman (Resigned 15 February 2012)

H.E. Hamad Rashed Al Neaimi, with a broad work experience of over 23 years, is the Director of the Ruler’s Representative Office in Abu Dhabi

(His Highness Sheikh Saeed Bin Zayed Al Nahyan Office). His Excellency is also The Chairman of Associated Construction and Trading Group,

which possesses around 50 companies under its umbrella. In addition to being the Chairman of Force 10 UAE LTD since 1994 and Chairman

of Real Estate Investment and Services Co since 2005, H.E. is shareholder and Chairman of Electronic Stock and Brokerage Company. He

has been holding many key positions such as Shareholder and Board Member of Reem Investments and Al Mal Capital. His Excellency is

also Managing Director of Reem Developers. Finally, H.E. Hamad Al Neaimi is currently a Board Member of various companies that include:

International Capital Trading, National Investment Company, Transgulf Readymix, Union Pipes, Daman Investment, Daman Securities, Buildan

Company, Injaz Mena Investment Company and Arady PSJC.

Abdulla A. Kareem Showaiter - Board MemberH. E. Abdulla Saif Al Nuaimi - Board MemberAbdulfatah A. Enaami - Board Member

H. E. Hamad Rashed Al Neaimi - Vice ChairmanH. E. Khadem Abdulla Al Qubaisi - Chairman


Khalid Mohamed Najibi - Board Member

Mohamed Ali Al Fahim - Board MemberEbrahim Hussain Ebrahim - Board MemberKhalid Jassim Bin Kalban - Board Member

Abdulfatah Abdulsalam Enaami - Board Member

Mr. Enaami is the Head of Direct Investment Department in the Libyan Investment Authority. Mr. Enaami has a degree in Business &

Finance from the University of Sheffield City Polytechnic, UK in 1987, and he has over 18 years of finance and investment experience. In

1994, Mr. Enaami joined the Libyan Foreign Bank in the International Finance Department, he participated in tasks involving: international

loan agreements, oil project finance in Libya, rescheduling of Latin American debts and managing Latin American bond portfolio. In 2004,

he was entrusted to create an Investment Portfolio Department and managed US$ 2.5 billion worth of investments. In 2008, he joined

the Libyan Investment Authority to head the Equities Investment Department, managing US$ 8.5 billion worth of investments.

H. E. Abdulla Saif Al Nuaimi - Board Member

H.E. Abdulla Saif Al Nuaimi, a national of the United Arab Emirates was born in UAE in 1969. He graduated in 1992 with a B.A. in

Business Administration in Management from Emirates University, UAE. After completing several graduate courses in the United States of

America, H.E. Abdulla has around 20 years working experience. He joined the Abu Dhabi Investment Authority (ADIA) as a Senior Analyst

specializing in the US market from 1992 through 1997 he was responsible for analyzing US companies for investment opportunities

and preparing recommendations for selling and buying shares. In 1997, Abdulla Saif Al Nuaimi was seconded to the Privatization

Committee for the Water & Electricity Sector in the Emirate of Abu Dhabi (PCWES) as a Director for the Independent Water and Power

Producers Projects (IWPP). On the first of January 1999 after the issuance of the Transfer Scheme, H.E. Al Nuaimi became the Director of

Privatization of ADWEA. During his tenure in this position in which he continues to hold, Eight IWPP, Two Sewerage treatment and Sohar

Aluminum Smelter projects were established with all legal, financial & technical issues. Along with his position in ADWEA as a General

Director and Director of Privatization H.E. Abdulla Saif Al Nuaimi is the Vice Chairman of TAQA where he has served as a director of the

Sadoun Barghash Al Sadoun - Board Member Adel Abdulaziz Al Jabr - Board Member


Board of Directors (continued)

Board since 2005. He is also the Chairman of Abu Dhabi Distribution Company, Abu Dhabi Transmission and Dispatch Company, Taweelah

Asia Power Company and Gulf Power Company, Vice Chairman of Gulf Total Tractable Power Company. Besides that he is a Board member

of Emirates Power Company, Abu Dhabi Water and Electricity Company, Union Water & Electricity Company, Federal Electricity & Water

Authority, and National Takaful Company. Previously His Excellency has held the positions of Managing Director and Chief Executive Officer

of TAQA, Deputy Chairman of Al-Ain Distribution Company, Chairman of Al Wathbah Central Services Company, and Board member of Abu

Dhabi Sewerage Services Company and the Oman Insurance Company.

Abdulla Abdulkarim Showaiter - Board Member

Mr. Showaiter is the Deputy Chief Executive Officer of Emirates Islamic Bank with a total of 34 years of work experience. He is a Board

member in numerous financial institutions and companies such as Khaleeji Commercial Bank, Al Salam Bank - Sudan and Mada’en Real

Estate, Awqaf and Minor Affairs Foundation – Dubai Government.

Sadoun Barghash Al Sadoun - Board Member

Mr. Sadoun Worked in Several oil and gas companies such as: KNPC, Petromin and Saudi ARAMCO with a total experience of 22 years. He

graduated in 1980 as a Mechanical Engineer. Mr. Sadoun Joined MIDROC International Group (Owned by Sheikh Mohammed Al Amoudi) in

1989 and now President of ABV Rock Group KB. He is also the Chairman of two oil and gas companies in Saudi Arabia and member of the

Board of directors in five different companies within the MIDROC Group.

Adel Abdulaziz Al Jabr - Board Member

Mr. Al Jabr is a Board Member of Al Jabr Trading Company “premier regional leading group of companies in fields of Auto Motors (KIA), Real

Estate, Beverages, Home Appliances and Laundries”. He is also the General Manager of Al Jabr General Contracting Company “A leading

company in the field of Electro-Mechanical works in Saudi Arabia”, General Manager of Golden Chip Company “A newly established company

that works in the field of smart and plastic cards industry at K.S.A”. Mr. Al Jabr represents Al Jabr Group of Companies with a total experience

of 21 years.

Khalid Mohamed Najibi - Board Member

Mr. Najibi is Managing Director & CEO of Capital Management House. He is also the Founding Member and Executive Director of Bahrain-

based Najibi Investment Company. Khalid is a Board Member and Chairman of the Executive Committee of Bahrain Islamic Bank, Board

Member of numerous Financial Institution and companies such as Gulf Finance House, Lona Real State, QInvest and Arbah Capital (Saudi

Arabia). He is also Founding Member of Young Arab Leaders (YAL) Bahrain Chapter. Mr. Najibi has over 21 years experience in the fields of

finance and investment. He holds a B.A. in Business Administration with a major in Finance from Schiller International, UK, which he gained

in 1990. He passed his US Certified Public Accountants Exams in California, USA in 1993.

Khalid Jassim Bin Kalban - Board Member

Mr. Kalban Managing Director and Chief Executive Officer of Dubai Investments, and member of the Board of directors of Emirates National

Bank of Dubai, Emirates International Brokerage LLC, Arab Insurance Group and Thuraya Satellite Communications-Telecommunications

Company. He is also the Chairman of National General Insurance and Union Properties. Mr. Kalban also has a wide experience and

thorough knowledge in managing big establishments, particularly those specializing in insurance services, financial services, chemicals and

communications. His experience was gained during his career of 29 years.


Ebrahim Hussain Ebrahim - Board Member

Mr. Ebrahim, a Bahraini national, is currently the Chief Executive Officer and a Board Member of Khaleeji Commercial Bank BSC, and

was instrumental in establishing the bank in 2004. He has around 31 years’ experience in both Islamic and conventional banking and

has worked with a number of prominent financial institutions in Bahrain. Prior to joining Khaleeji Commercial Bank, Mr. Ebrahim was

the Chief Executive Officer of the Liquidity Management Centre, Bahrain. In his long stint at Arab Banking Corporation, he held various

positions including Vice President in the Global Marketing Unit, Vice President in the Treasury and Marketable Securities Department, and

General Manager of ABC Securities. He also worked as General Manager of Bank of Bahrain and Kuwait’s Financial Services Company

in addition to holding senior positions in the treasury and financial institutions division of Shamil Bank. Mr. Ebrahim currently is the

Chairman of Capital Real Estate Company–Bahrain, Janayen Holding and Danat India investment Company and a Board member on

various companies including First Energy Bank – Bahrain-, Eqarat Al Khaleej, First Gulf Real Estate Company SPC, Gulf German Residences,

Amlak II Bahrain, Surooh Bahrain SPC, Danat India Holding Company and Jawhara Greens Company. Mr. Ebrahim holds B.S. degree in

Finance and also MBA.

Mohamed Ali Al Fahim - Board Member

Mr. Al Fahim has a degree in Finance from the University of Suffolk, Boston (1999) and has over 13 years of finance experience working

within Abu Dhabi entities. He is also a Board member in various companies in the Gulf region and Europe such as Aabar Investments -

Abu Dhabi and Energias de Portugal (EDP) - Portugal.


First Energy Bank is guided by a Sharia’a Supervisory Board consisting of three distinguished scholars, they review the Bank’s activities

to ensure that all products and investment transactions comply fully with the rules and principles of Islamic Sharia’a.

Sheikh Nizam Mohammed Saleh Yaqubi

Sheikh Nizam Mohammed Saleh Yaqubi is a well-known Sharia’a Scholar and is recognized internationally. He is on the Sharia’a

Supervisory Board of many Islamic financial institutions such as The Accounting and Auditing Organization for Islamic Financial

Institutions, Khaleeji Commercial Bank, Shamil Bank, Bahrain Islamic Bank, and Executive member of Gulf Finance House, Abu Dhabi

Islamic Bank, and a member of the Sharia’a Supervisory Boards of many other leading Islamic banks. He has contributed to the

creation of many AAOIFI Sharia’a standards, participated in many Islamic finance and banking conferences around the world.

Sheikh Nizam is one of the pioneers in Islamic banking. He is a well-known Sharia’a scholar in all fields of Islamic Banking and Fiqh

Al Mu’amalat.

Sheikh Dr. Mohamed Ali bin Ibrahim Elgari

Dr. Mohamed Ali bin Ibrahim Elgari is an Islamic Economics Professor at the King Abdulaziz University in the department of

Economics and Administration.

In addition to his position at the King Abdulaziz University, he is affiliated with a number of organizations and financial institutions.

Among them being a member of the Sharia’a committees at the National Commercial Bank, Islamic Citibank, Arab National Bank

and the Dow Jones Islamic Index. Dr. Elgari is also on the editorial Boards of several Islamic journals, and an advisory member on the

Harvard Series on Islamic Law. He also held the title of director of the Centre for Islamic Economics Research.

Sharia’a Supervisory Board


Dr. Elgari has participated in various conferences and seminars, both locally and overseas. Extensive research in the field of Islamic economics

and finance has lead to a number of his works published in recognized journals and presented at relevant conferences. Among them being

topics on fiscal deficit in Islamic economics, setting up Sharia’a compliant credit cards and banking systems, role of Islamic mutual fund and

risk management, and issues facing Islamic banks and investments.

A handful of Dr. Elgari’s research is expected to be published in the future. Dr. Elgari holds PhD in Economics from the University of

Berkley, California.

Sheikh Dr. Osama Mohammed Saad Bahar

Sheikh Bahar is a prominent, highly-respected Sharia’a scholar from Kingdom of Bahrain.

He is currently Head of the Sharia’a Compliance and Advisory at First Energy Bank, following earlier senior positions at Islamic banks in

Bahrain including Head of Sharia’a Compliance at Al Salam Bank and before that, Sharia’a Compliance Officer at ABC Islamic Bank.

Sheikh Bahar is also a Member of the Sharia’a Supervisory Board of the Global Banking Corporation, International Investment Bank, Allianz

Global Investors, Allianz Takaful (Bahrain), International Tharawat and Family Bank; and Sharia’a Advisor for Sakana Holistic Housing

Solutions and Reef (Real Estate Finance).

Sheikh Bahar was awarded his Doctorate degree from Lahaye University in Holland, his Master Degree from Al Emam Al Awzae University

in Lebanon and his Bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies in Algeria.


Mohamed Shukri Ghanem - Acting Chief Executive Officer

Ghanem brings to First Energy Bank (“FEB” or the “Bank”) over 12 years of extensive experience in the regional financing market and in global energy issues. He is responsible for the overall management of the organisation in line with the organisations strategic plan and also responsible for monitoring organisational performance against the strategic plan, working with staff to stay on target and looking ahead to the long term development of the organisation operationally and strategically.

In addition to the Acting CEO role, he has the overall responsibility for the investment and investment placement functions at FEB, including the design and implementation of investment processes for all clients as well as marketing and product placement. He provides high level strategic investment advice including the investment processes and the additional asset classes and investment vehicles across the entire client base. He is also responsible for expanding the client base by ensuring the investment strategy is solid and sustainable.

Prior to joining FEB, Ghanem worked at Arab Banking Corporation (BSC) (“ABC”) as part of the North African business development team at the Global Project and Structured Finance division. He was responsible for the development and origination of advisory assignments throughout North Africa for the corporation, covering the oil, oil field, natural gas and power generation segments of the energy market.

Ghanem also worked with GED Handles G.m.b.H., Vienna in the risk and asset management in the energy and metals sectors. He worked in the trading department as a Senior Trader specializing in oil futures and options.

Ghanem holds a Bachelor of Arts (Major in Business) from Webster University (School of Business and Technology) in Vienna and holds an MBA from Glamorgan University.

Ramzi Al Sewaidi - Head of Investment Banking

Ramzi brings to First Energy Bank (FEB) over 18 years of international and regional experience in the investment and commercial banking sectors.

Ramzi is mainly responsible of identifying and leading the implementation of income generating investment opportunities for FEB through direct investments and in the venture capital space.

Prior to joining FEB, Ramzi worked at Arab Banking Corporation (BSC) (”ABC”) as First Vice President leading project finance and advisory services in the GCC countries and particularly in Saudi Arabia. He also worked with Gulf International Bank and with HSBC Bank of Canada.

Al Sewaidi holds a Bachelor of Science Degree (Business Administration) from Suffolk University, Boston, MA and holds an MBA from the same university.

Kalyan Sunderam - Chief Risk Officer

Over 35 years of comprehensive financial services experience in domestic and international banking and government finance.

Prior work experience primarily with HSBC, Bank of Bahrain & Kuwait, Province of Nova Scotia, Canada, and Bahraini Saudi Bank in successively senior management positions.

Most recent position prior to joining FEB in March 2010 was Chief Risk Officer & Deputy CEO of Bahraini Saudi Bank for 6 years.

Kalyan brings to FEB wide ranging experience in all major segments including: commercial retail banking, wholesale investment banking, Islamic finance, treasury capital markets, public private partnerships, government infrastructure financings, strategy formulation and execution, gained in developed and emerging regional markets. His functional specialization is all aspects of Risk Management. His commitment to ensuring best practices in risk management regionally and globally is derived from his involvement with the Professional Risk Managers’ International Association (PRMIA) as the Regional Director of the Bahrain Chapter and an active member of the Education Committee.

As Chief Risk Officer at FEB, he is responsible for the ongoing development, installation, and maintenance of an integrated enterprise risk management framework (ERM) within FEB. In addition to his risk related responsibilities, Kalyan is also a member of the Executive Management team vested with responsibility for executing the strategy approved by the Board.

Kalyan holds an MBA, Syracuse University, NY; ACIB (London); CFA; PRM.

Senior Management


David Hudson - Head of Legal & Compliance

David, an English solicitor, brings to First Energy Bank (FEB) over 26 years of international legal and advisory experience in different areas of the banking industry.

David advises the CEO and senior management on legal matters. He also oversees FEB’s compliance function, reporting to the Board Audit Committee and (at the functional level) advising senior management and other staff on compliance issues.

Prior to joining FEB, David was a senior counsel and group compliance officer for Arab Banking Corporation (BSC) and manager of Norton Rose’s Bahrain office.

David holds a Bachelor of Laws from the University of Bristol and Diplome d’Etudes Superieures Universitaires from Universite Aix-Marseille (France).

Eihab Abdul Latif Ahmad - Corporate Secretary / MLRO

Eihab brings to First Energy Bank (FEB) over 17 years of regional legal and compliance experience.

Eihab is the Corporate Secretary of FEB and is responsible for providing wide range of services to the bank including, but not limited to, Board Secretary function, legal and compliance advisory services to the Board of directors, the focal point of communication with the Board of Directors, Senior Management and Shareholders, providing advice on Corporate Governance principles and practices. He is also approved by the Central Bank of Bahrain as the Money Laundering Reporting Officer (MLRO) to handle all anti money laundering and anti terrorism issues within the bank.

Prior to joining FEB, Eihab worked at the International Investment Bank as Head of Legal & Compliance.

Eihab holds a LL.B – Faculty of Law from the University of Khartoum, Sudan, Sudanese Board of Law Practicing and a Certificate of Certified Compliance Officer (CCO) from the American Academy of Financial Management – Dubai, UAE.

Khaled Hejres - Head of Operations & Support Services

Khaled brings to First Energy Bank (FEB) over 21 years of experience in retail, wholesale and investment banking sectors.

Khaled is mainly responsible for planning, directing and controlling FEB’s support and back office functionalities involving Human Resources, Administration, Information Technology, IT Security and Operations ensuring efficient processing and implementation of robust banking technologies.

Prior to joining FEB, Khaled worked at First Real Estate Company as Chief Operating Officer. Khaled holds a Bachelor of Arts Degree (Economics) from University of Pune, India and holds an Advanced Diploma in Banking from Bahrain Institute of Banking & Finance.

Osama Bahar - Head of Sharia’a Compliance & Advisory

Osama brings to First Energy Bank (FEB) 18 years of experience in the field of Sharia’a compliance and advisory.

He is primarily responsible for providing Sharia’a guidelines and assisting the business lines in structuring the Sharia’a compliant offerings. The Head of Sharia’a Compliance and Advisory is also a primary liaison between the Bank and the Sharia’a Supervisory Board (SSB).

Prior to FEB, he worked at Al Salam Bank as Head of Sharia’a Compliance.

Osama holds a bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies in Algeria, as well as Masters Degree in Islamic Studies from Al Emam Al Awzae University in Beirut.


Executive Management (continued)

Shamal Parab - Head of Financial Control (Resigned February 2012)

Shamal brings to First Energy Bank (FEB) over 21 years of experience in the fields of financial control, project & structured finance, business advisory as well as internal audit.

He is primarily responsible for ensuring that applicable accounting standards, financial policies and procedures are applied efficiently and effectively across the Bank.

He is also responsible for formulating, approving, and controlling the structure of the Bank’s accounts, accounting methods and procedures employed by the Bank to ensure all financial transactions comply with applicable laws, rules and regulations.

Prior to FEB, Shamal worked as Assistant Vice President - Project & Structured Finance in Arab Banking Corporation, Bahrain.

Shamal holds a Bachelor of Commerce Degree from Mumbai University, India. He is also a qualified Chartered Accountant

from the Institute of Chartered Accountants of India, Mumbai.

Yousif Ahmed Ebrahim - Head of Internal Audit

Yousif has over 18 years of auditing experience in the banking industry. He is principally responsible for auditing the Bank’s policies, procedures and systems and providing independent and objective assurance to the Board and management on the overall internal control framework.

Prior to joining First Energy Bank, he worked for Gulf International Bank as Vice President, Internal Audit as well as PricewaterhouseCoopers, Audit & Business Assurance Services.

Yousif is a Certified Public Accountant (USA) and a member of the American Institute of Certified Public Accountant.

Youssef El Habety - Head of North Africa - Business Development

Youssef brings to First Energy Bank (FEB) over 14 years of experience in the field of international trading, portfolio investments as well as marketing.

He is primarily responsible for managing large investment projects for FEB with an objective to maximize revenue and asset growth opportunities, by sourcing, transacting and developing deals across North Africa ensuring adequate sectoral / technical understanding in the process.

Prior to FEB, Youssef worked for the Libyan Investment Authority as Deputy Head of portfolio Investment & Head of energy & renewable team assisting the CEO & DCEO in managing and organizing the institution during establishment.

Youssef holds B. Sc Degree in Political Science from Elfatah University, B.A Degree in Business Administration from the African Management College, Higher Diploma in Business Management form London School of Business and Finance.


Dear Shareholders

On behalf of the Board of Directors, I am pleased to present First Energy Bank’s Board’s report to the shareholders.

Global Overview:

At the beginning of the year we had hoped that the ravages of the 2008 crisis were behind us and we could look forward to a period of relative calm in the financial markets. Sadly this has not been the case. Conditions in the international financial system have deteriorated significantly owing to weakness in global economic growth and escalation of the sovereign debt crisis in the euro area.

Despite the Arab Spring, fortunately we were not directly affected by its consequences.

Financial Highlights for year-end 2011:

The financial results for 2011 show considerable improvement over 2010. Net profit for the year was $3.5 million compared to a loss of $10.1million. Staff costs have seen significant reductions over the last two years. Balance sheet footings remain at more or less the same level; this is by deliberate design given the current distortion in the risk reward balance.

Investments Update:

Last year I informed you that our first drilling rig, in respect of our MENAdrill Project, became fully operational. I am pleased to advise you that our second rig is also operational in the Gulf of Mexico and the benefits of these major investments will be reflected in our performance in 2012. With regard to our polysilicon project in Saudi Arabia, we are close to finalizing this investment. It is worth mentioning that other investments are also progressing well.

There is however, one point I would like to emphasize: the nature of our business is that the gestation period for exits has always been long; what has changed, however, is the fact that they are getting even longer than they used to be. The other significant change is that it is getting more and more difficult to see beyond a year even in the best of circumstances.

Chairman’s letter to shareholders

FEB is well placed to take advantage of opportunities within the energy industry going forward, which is expected to experience some significant growth in 2012


H.E. Khadem Al Qubaisi - Chairman

Nevertheless, I am still optimistic that, barring unforeseen circumstances, our financial performance for 2012 is likely to be significantly better than 2011; perhaps the best since the Bank’s inception.

Way Forward:

While the outlook for 2012 is encouraging, there is no doubt, whatsoever; the Bank has yet to attain its full potential. With this mind, the Board has appointed an external consulting firm to assist it with developing a comprehensive strategy and long range business plan with the specific objective of delivering reasonable and sustainable returns to the shareholders.

In conclusion I would like to thank the shareholders for their continued support and to the staff for their dedication and loyalty.

Yours truly,

Khadem Al Qubaisi

Chairman


The Bank earned gross income of USD 25.5 million and recorded net income of USD 3.5 million compared to a loss of USD 10.1 million

in 2010. This result was achieved despite challenging market conditions. Weakness in financial markets was driven by concerns about

subdued growth and a fear of double dip recessions in the United States and Euro-zone economies, and was later compounded by

sovereign debt concerns. The Bank’s capital adequacy ratio was 83.08%, much higher than the Central Bank of Bahrain’s minimum

limit of 12.0%. Following are the key highlights of the financial results:

Financial Highlights

Amounts in USD ‘000

2011 2010 2009

• Gross Income 25,493 41,391 47,410

• Operating expenses (20,689) (24,119) (24,476)

• Impairment allowances (1,260) (27,396) (8,734)

• Net (Loss) / Income 3,544 (10,124) 14,200

• Total Assets 1,230,697 1,199,844 1,233,919

• Total Equity 1,042,702 1,039,086 1,054,677

• EPS (basic) in US Cents 0.35 (1.01) 1.42

• Return on average assets 0.30% (0.86%) 1.27%

• Return on average equity 0.34% (0.96%) 1.39%

• Net income margin 13.90% (24.46%) 29.95%

• Operating expenses to income ratio 81.16% 58.27% 51.63%

• Total expenses to income ratio 86.10% 124.46% 70.05%


First Energy Bank’s (FEB) business model is built around 7 core business lines: Project Development, Private Equity, Mergers and Acquisitions, Islamic Financing, Capital Market, Asset Management and Treasury.

Project Development The Middle East and North Africa (MENA) region is the world’s major holder of various energy related resources. Developing and producing these resources and converting them to the products needed by the global economy require substantial investments in the energy sector and at different levels of the value chain.

FEB utilizes its strength to develop industrial projects drawing on all its available resources along with aligning itself with strategic partners that it has access to in the energy industry. FEB’s unique strength in this field comes from its strong and diversified shareholder base combined with the management team’s experience in the industry.

In order to capture and maximize value for FEB’s investors, the project development process starts from the early stage of conceptualizing the business idea and developing it to achieve a successful business.

Building on FEB’s financial strength, experience and solid balance sheet, the project development line enjoys the support of a range of other complementing products and services including financial advisory and Islamic finance which are essential elements to achieve a complete and well structured venture.

Private EquityFEB offers its clients direct investments in private equity opportunities that it identifies in the MENA region specifically as well as in the international arena. The Division’s investment strategy is based on two pillars. The first is to identify and invest in regional entities where FEB has a strong presence. FEB would add value through various activities including increased capitalization, financial restructuring, and effective market expansion utilizing the Bank’s extensive network and expertise in these fields. The second investment route is to identify opportunities in the international market. These opportunities are required to have distinct areas of strengths such as technology, technical expertise, know how, superior assets class, etc. FEB capitalizes on its effective network and marketing capabilities to maximize the value of the investment in the region through business expansion and setting up new joint ventures.

Business Activities


Mergers and AcquisitionsThe expected recovery in the energy industry demand growth creates attractive opportunities for mergers and acquisitions (M&A). FEB’s considerable financial strength, will allows FEB to exploit market opportunities to earn superior returns for its clients.

Islamic FinancingIslamic finance has been one of the fastest growing finance segments in recent years. It has proven to be a resilient and valued sector especially in the Middle East. FEB’s Islamic finance team focuses on providing structuring and financial advisory services, deriving on many years of experience in this field and across the region. The team also focuses on providing “ring fenced” Sharia’a compliant project and structured finance to selected strategic transactions where risks are mitigated by these structures and returns are maximized.

Capital MarketThe Islamic capital market has been growing rapidly in the last decade through the increasing Sharia’a compliant Sukuk, structured products and hedging instruments mainly by sovereigns, quasi-sovereigns, internationals, supra-nationals and corporate institutions. FEB’s competent team is committed to develop and execute long-term strategic and tactical plans to meet portfolio return objectives and continuously innovate and evaluate investing and financing solutions.

Asset ManagementInvestors’ demand for Sharia’a compliant investment products has been increasing in recent years. FEB’s strategy is to provide innovative, diversified and well managed products that suit its clients’ needs and meets their return requirements. The FEB team is committed to continuously developing products and providing a well diversified selection of rewarding investments.

Treasury The Islamic banking treasury sector has become increasingly competitive and sophisticated over the years, with demand being fueled by clients and investors expecting Islamic products to be able to provide the same features and benefits as the conventional investment and hedging products. As such, FEB has laid a solid foundation to cater for the fast growing demand of Islamic products offering a wide range of Sharia’a compliant products managed by a team of dedicated personnel to build a stable platform to cater for FEB’s mandated business requirements.

Al Dur Independent Water and Power Project (IWPP)


MENADRILL

Launched in July 2008, MENAdrill is an offshore drilling and services company and one of FEB’s first initiatives.

MENAdrill focuses on providing contract drilling services for offshore exploration and development in the Middle East and globally.

MENAdrill aims to become one of the key drilling companies based in the region, allowing it to capitalize on the significant levels

of drilling activity required to increase offshore oil and gas production throughout the region in particular and globally in general.

MENAdrill’s initial assets include two Super M2 jackup drills constructed at the Maritime Industrial Services (MIS) in Sharjah. The first

rig “MENAdrill I” successfully commenced drilling in Mexico for PEMEX- Exploración Producción (“PEP”), the national oil company

of Mexico. MENAdrill II was successfully delivered to Mexico early 2012 and is awaiting to commence drilling under a long term

contract.

SAUDI POLYSILICON

Saudi Polysilicon is a world class polysilicon production facility. The first of its kind and scale in the region, it will be located in the

Kingdom of Saudi Arabia, and will cover a total area of 375,000 square meters in Al Jubail Industrial City 2.

The project is spearheaded by the strategic partner, First Energy Bank (FEB). It is being sponsored and developed by Cosmos Industrial

Investment Corporation, a subsidiary of FEB.

The project will use advanced and commercially proven technologies in its production processes deriving benefits from the economies

of scale and will be one of the lowest cost polysilicon producers in the world. It will also aim to promote green and sustainable

energy solutions leading to further economic diversification and expansion of the industrial base. The Polysilicon project is expected

to begin production in 2014

Projects and Investments


AL DUR

During 2009, FEB successfully completed a 9% stake acquisition in the Al Dur Independent Water and Power Project (IWPP), the largest of its

kind in the Kingdom of Bahrain. This is part of FEB’s strategy of building up a book of top quality energy related infrastructure assets.

The Al Dur project successfully commenced operation during first quarter of 2012. The project is located on the southeast coast of the

Kingdom and is valued at a total of USD2.2 billion. It is expected to produce 1,234 megawatts of power and 48 million gallons of water per

day when fully operational. This project represents an important addition to the Kingdom of Bahrain and will help meet the rising demand

for both power and electricity going forward.

ADWOC

FEB has acquired a 40% stake in the Arab Drilling and Workover Company (ADWOC), one of the leading oil and gas onshore contract drilling

and workover companies based out of Libya. Established in 1980, ADWOC has been providing its drilling and workover services across the

Arab World. The ADWOC acquisition fits well into FEB’s investment portfolio as it provides the Bank with the diversity and strong foundation

necessary to support future expansion in this sector. Additionally, it complements some of the other investments that the Bank is involved

in, including the offshore drilling investment of MENAdrill.

MENAdrill I


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Corporate governance is the combination of processes and structures implemented by the Board in order to inform, direct, manage and monitor the activities of the organisation toward the achievement of its objectives. FEB’s governance and management structure is illustrated below:

Basic Organization Chart:

BOARD OF DIRECTORS

FEB’s governance structure comprises the main Board of Directors (the Board) and its sub-committees.

In 2011 there were eleven directors on the Board and their names are listed below:

No. Name Type of Membership

1 H. E. Khadem Abdulla Al Qubaisi Chairman

2 H. E. Hamad Rashed Al Neaimi Vice Chairman

3 Abdulfatah Abdulsalam Enaami Member

4 H. E. Abdulla Saif Al Nuaimi Member

5 Abdulla Abdulkarim Showaiter Member

6 Ebrahim Hussain Ebrahim Member

7 Khalid Mohamed Najibi Member

8 Mohamed Ali Al Fahim Member

9 Adel Abdulaziz Al Jabr Member

10 Sadoun Barghash Al Sadoun Member

11 Khalid Jassim Bin Kalban Member

Board of Directors

Nomination, Remunerationand Governance

Committee

Board AuditCommittee

Board InvestmentCommittee

Board Risk Committee Sharia’a Board

Internal Audit Compliance Corporate

Secretary/MLRO Risk Sharia’a

Coordinator

Acting CEO

Legal Treasury

and Capital Markets Investment Banking Operations

and Support Services Financial Control

Corporate Governance


BOARD COMMITTEES

There are four Board sub-committees, namely: the Board Audit Committee, the Board Risk Committee, the Nomination, Remuneration and

Governance Committee and the Board Investment Committee. Each is required to report its activities to the Board on a regular basis, their

functions and membership are described as follows:

1- Board Audit Committee (BAC)

The primary responsibilities of this Committee are:

• ToreviewtheintegrityoftheBank’sfinancialreporting,includingthechoiceofaccountingpolicies.

• ToensuretheinformationneedsoftheBoardtoperformitsmonitoringresponsibilitiesaremet.

• Tooverseetheselectionandcompensationoftheexternalauditorforappointmentandapprovalattheshareholders’meeting.

• Tooverseerelationswiththeexternalauditors,includingensuringtheexternalauditor’sindependence(inparticular,makingsure

that the external audit firm and its partners have no other financial or business relationship without the Board’s

knowledge); reviewing the terms and conditions of the auditor’s appointment; monitoring rotation arrangements for audit

engagement partners; monitoring the performance of the external auditor and any non-audit services provided by the external

auditor; and meeting with the external auditor at least twice per year (and at least once per year in the absence of any members of

executive management).

• ToreviewandevaluatetheeffectivenessoftheBank’sinternalcontrols,theoverallcontrolenvironment,accountingandfinancial

controls.

• ToensurethattheBank’soperations,individuallyandcollectivelyaremeasured,monitoredandcontrolledbyappropriateeffective

and prudent risk management systems that are commensurate with the scope of the Bank’s activities.

• Toregularlyreviewtheactivitiesandperformanceoftheinternalauditandcompliancefunctions.

• ToreviewwhethertheBankcomplieswithallrelevantlaws,regulations,codesandbusinesspractices.

• ToensurethattheBankcommunicateswithshareholdersandrelevantstakeholders(internalandexternal)openlyandpromptly,

with substance of compliance prevailing over form.

• Todealwithanyconcernsarisingfromthe‘whistleblower’program.

• Toreviewandsupervisetheimplementationof,enforcementofandadherencetotheBank’scodeofconduct.

Generally, the Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial information which will

be provided to the shareholders and others, the systems of internal controls which the management and the Board have established

and the audit process and acts as an informed, vigilant and effective overseer of the Bank’s internal controls and financial reporting

processes. It also provides an open avenue of communication between the Board, management, the internal auditors and the independent

accountants.

2- Board Risk Committee (BRC)

This Committee makes recommendations to the Board in relation to the Bank’s overall risk appetite and tolerances and the management of credit, market, operational, liquidity and other risks the Bank faces in carrying out its activities. It assists the Board to approve and monitor overall risk management by developing across all business activities and operations policies, internal controls, methods of risk management, compliance procedures and methods of reporting to the Board.


3- Nomination, Remuneration and Governance Committee (NRGC)

The Nomination, Remuneration and Governance Committee, mindful of best practice in the field, assists the Board in formulating

and reviewing the Bank’s relevant policies and rules including the administrative policy and governance requirements. It handles

the nomination, remuneration, and governance compensation of the Board and Executive Management and regularly reviews the

Bank’s succession plan.

4- Board Investment Committee (BIC)

The Investment Committee assists the Board in formulating the Bank’s investment policy and making investment transaction

decisions. The BIC reports its activities to the Board of Directors on a quarterly basis.

Board and Sub-Committees Meetings during 2011 and members attendance for each (Table 1):

Board of Directors

No. Name Type of Membership 5 Board Meetings Date of Meetings

1 H. E. Khadem Abdulla Al Qubaisi Chairman * 5

9/2/2011

28/2/2011

30/3/2011

11/5/2011

5/10/2011

2 H. E. Hamad Rashed Al Neaimi V. Chairman 4

3 Abdulfatah Abdulsalam Enaami Board Member * 1

4 H. E. Abdulla Saif Al Nuaimi Board Member * 1

5 Abdulla Abdulkarim Showaiter Board Member * 5

6 Ebrahim Hussain Ebrahim Board Member 5

7 Khalid Mohamed Najibi Board Member 5

8 Mohamed Ali Al Fahim Board Member 5

9 Adel Abdulaziz Al Jabr Board Member 5

10 Sadoun Barghash Al Sadoun Board Member 5

11 Khalid Jassim Bin Kalban Board Member 4

Board Audit Committee (BAC)

No. Name Type of Membership 4 Audit Committee Date of Meetings

1 Ebrahim Hussain Ebrahim Chairman 423/2/201111/5/2011

7/8/20111/11/2011

2 Khalid Jassim Bin Kalban Member 4

3 Mohamed Ali Al Fahim Member 4

* Executive members.

Corporate Governance (continued)


Board Risk Committee (BRC)

No. Name Type of Membership 3 Risk Committee Date of Meetings

1 Khalid Mohamed Najibi Chairman 3 17/4/2011

11/5/2011

4/10/2011

2 Adel Abdulaziz Al Jabr Member 3

3 Sadoun Barghash Al Sadoun Member 3

Nomination, Remuneration & Governance Committee (NRGC)

No. Name Type of Membership 6 NRGC Committee Date of Meetings

1 H. E. Khadem Abdulla Al Qubaisi Chairman 5 28/2/2011

30/3/2011

11/5/2011

7/6/2011

18/6/2011

28/6/2011

2 H. E. Hamad Rashed Al Neaimi V. Chairman 2

3 Abdulla Abdulkarim Showaiter Member 6

4 Khalid Mohamed Najibi Member 6

5 Adel Abdulaziz Al Jabr Member 6

Board Investment Committee (BIC)

No. Name Type of Membership 3 Investment Committee Date of Meetings

1 H. E. Khadem Abdulla Al Qubaisi Chairman 328/2/2011

11/5/2011

5/10/2011

2 H. E. Hamad Rashed Al Neaimi Member 2

3 H. E. Abdulla Saif Al Nuaimi Member 3

4 Abdulfatah Abdulsalam Enaami Member 3

5 Abdulla Abdulkarim Showaiter Member 3

SHARIA’A COMPLIANCE

The Bank has a dedicated Sharia’a department acting as the primary conduit of communication between the Bank and its Sharia’a Supervisory Board (SSB). The responsibilities of the Sharia’a department include the following:

• Ensuringprogrammesareinplaceforallapprovedproducts,withdetailedproceduressignedoffbyrelevantdepartments.

• EnsuringthereareFatwassupportingallapprovedproductsandthattheconcerneddepartmentsadheretothem.

• EnsuringthattheBankcomplieswithapplicableAAOIFIstandards,theSSB’sandotherapplicableSharia’aguidelinesandtheBank’s Sharia’a compliance manual.

• ConductingperiodicSharia’aaudits,discussingtheauditfindingswithmanagementandissuingcompliancereports.

• ReportingtotheCEOandSSBontheresultsoftheSharia’aauditsandthestatusofimplementationoftherecommendationsmadeby the Sharia’a Department.

• AssistingrelationshipmanagersandrelevantdepartmentsininterpretingSharia’aguidelines.

• CollatinginquiriesandquestionsfromBankdepartmentsandsubmittingthemtotheSSB.

• ArrangingandminutingSSBmeetings.


MANAGEMENT COMMITTEES

The Bank has established four Management Committees, both to support the Board committees in carrying out their duties and to

ensure appropriate controls and processes are in place. They are the Executive Management Committee (EMC), the Management Risk

Committee (MRC), the Asset and Liability Committee (ALCO) and the Human Resources Committee (HRC). The terms of reference

of each committee are derived from the terms of reference of the corresponding Board committee. Management committees meet

monthly and report to the Board quarterly or more frequently if required or requested.

Miner changes in management committee structure from the previous year reflect rationalisation to enhance productivity.

1- Executive Management Committee (EMC)

The Executive Management Committee (EMC) focuses on the execution of the strategic business plan approved by the Board. The

EMC has overall responsibility for the day-to-day management of the Bank, within the overall approved guidelines laid down by the

Board. The responsibilities of the EMC include the following:

• RegularlyreviewtheenvironmentinwhichtheBankoperatesandreflectchangesthereinintheBank’sfuturedevelopment.

• Overseetheday-to-daydecisionmakingsothattheBankcanbeeffectivelymanaged.

• Harnessandenhancetheteamspiritbetweendepartmentstoimprovecoordination.

• Troubleshootandaddressissuesofconcern.

• Continuouslymonitorandreviewactivitiesofalldepartmentswiththeobjectiveofefficientresourceutilization.

• ReviewtheBank’sbusinessstrategyandannualoperatingplans(revenueandcost)andmonitorsprogresstowardstheir

achievement, taking appropriate corrective action as necessary.

• EnsurecontinuityofmanagementsothatthedaytodayrunningoftheBankisunaffectedbytheabsenceofanyone/all

Committee members.

• AvoidconcentrationsofdecisionmakingpowerintheBankbyinstallinganappropriatedelegationofauthoritiesforoperational

decisions.

• PromoteconsistenceandcohesivenessintheBank’srelationshipswithallitsstakeholders.

• Trackindustrytrendsanddevelopments.

2- Management Risk Committee (MRC)

The principal role of the MRC is to assist the Board in the development, installation, and ongoing maintenance of an integrated

enterprise risk management framework within FEB. The principal duties & responsibilities of the MRC include the following:

• FormulateandrecommendRiskStrategytotheBoardfortheirapproval

• DevelopandrecommendRiskPoliciestotheBoardfortheirapproval

• Reviewandapprovealltypesofcounterpartyexposures,including,butnotlimitedtocredittransactions,investments,Islamic

financings, sukuks, placements etc.

• Exercisesthepowersspecificallydelegatedtoitwithcareanddiligence.

• Reviewallassumptionsofriskhowsoeveroriginated,(creditcounterparty,investment,operational,treasury)andapprove/reject

or recommend the proposal to the relevant approving authorities depending on the approval authority level.



• DefineandsetriskparametersandbenchmarksthatareconsistentwiththeBank’sstrategicbusinessobjectivesandriskprofile;

• ProactivelyreviewtheBank’sriskprofileandensureitiswithintheriskparametersapprovedbytheBoard;

• ReviewtheBank’sprovisioningrequirementandcapitaladequacyandallocatecapitaltobusinessesasrequired.

3- Asset and Liability Committee (ALCO)

ALCO’s principal responsibilities are to:

• Proposethenecessarypoliciesandprocedurestomanageliquidityandmarketrisk.

• Reviewandmonitorthebalancesheet(andoff-balancesheetpositions)oftheBank(includingtheimpactofitssubsidiaries)such

that the Board’s liquidity and market risk policies are implemented.

• Ensurethatlinesofauthorityandaccountabilitywithintheliquidityandmarketriskmanagementprocessareclearlydelineated.

• OverseecontrolstomanagetheBank’smarketrisk.

• ProposestrategiestotheBoardinrespectofproprietaryinvestmentsandtheuseofderivatives.

• Ensurethatonaday-to-daybasistheBankcomplieswithapplicablelawsandregulations.

4- Human Resources Committee (HRC)

The principal role of the HRC is to assists the Board’s NRGC by performing the following tasks:

• EnsuringtheBankhasaneffectiveorganizationalstructureandappropriatelystaffedatalltimestoachievethebusinessplanapproved

by the Board.

• Monitorcompetitivehumanresourcesandcompensationpoliciesandpracticesandrecommendingchangesasappropriate.

• Ensuringappropriateprocessesareinplacefortheselection,evaluation,compensation,andsuccessionofstaffandseniormanagement.

• Evaluatingandrecommendingcompensationforthestaff.

• Evaluatingotherrelatedinitiativesasmaybenecessaryordesirabletoenhanceperformance.

• PerformsuchothertasksasdelegatedbytheNRGCfromtimetotime.

The duties & responsibilities of the (HRC) has the following specific responsibilities:

• AssisttheBoard’sNRGCinreviewingannuallytheBank’sorganizationalstructure,compensationphilosophy,performancemanagement

system and compensation guidelines, and human resources policies, and recommend to the Board any necessary changes.

• Reviewtheannualadjustmentstocompensationproposedbymanagementand,ifsatisfied,recommendapprovaltotheBoard.

• Developingcriteriatobemetbyprospectivecandidates,andabroadcompetitivesearchprocess

• ReviewingandassessingqualificationsofcandidatesandrecommendingacandidatetotheNRGC

• ReviewManagement’sproposalsfortheappointmentofexecutivesandseniormanagers.

• Reviewthemanagement’ssuccessionanddevelopmentplansfortheexecutivesandseniormanagersandtrainingplanforallBankstaff.


FEB shareholders List ( Table 2)

No. Name Nationality NO. of SharesNominal

Value (USD)Percentage of

Capital

1 Tasameem Real Estate CO. LLC UAE 162,500,000 162,500,000 16.25%

2 Libyan Investment Authority Government of Libya Libya 162,500,000 162,500,000 16.25%

3Abu Dhabi Water and Electricity Authority Government of Abu Dhabi

UAE 150,000,000 150,000,000 15%

4 Emirates Islamic Bank PJSC UAE 100,000,000 100,000,000 10%

5 Mohamed Bin Hussain Bin Ali Al Amoudi Saudi Arabia 50,000,000 50,000,000 5%

6 Ithmaar Development CO. LTD Cayman island 50,000,000 50,000,000 5%

7 Al Jabr Trading CO. Saudi Arabia 50,000,000 50,000,000 5%

8 Capital Management House B.S.C. ( Closed ) Bahrain 43,892,857 43,892,857 4.39%

9 Dubai Investment PJSC UAE 35,000,000 35,000,000 3.50%

10 Taqa Investment Company LTD Cayman island 31,027,070 31,027,070 3.10%

11 Omar Ibn Abdullah Ibn Hassan Bahassan Saudi Arabia 20,000,000 20,000,000 2%

12 Awqaf Minors Affairs Foundation UAE 20,000,000 20,000,000 2%

13 Al Taif Investment LLC UAE 15,000,000 15,000,000 1.50%

14General Pension and Social Security Authority Government of the UAE

UAE 12,500,000 12,500,000 1.25%

15 RAK Properties PJSC UAE 12,500,000 12,500,000 1.25%

16 Khaleeji Commercial Bank Bahrain 10,000,000 10,000,000 1%

17 Bahrain Islamic Bank Bahrain 10,000,000 10,000,000 1%

18 Sultan Group Investment LLC UAE 10,000,000 10,000,000 1%

19 Sharjah Islamic Bank UAE 10,000,000 10,000,000 1%

20 Ismail Aqeel Abdul Rahim Janahi UAE 10,000,000 10,000,000 1%

21 Abdull Rahman Bin Jasem Bin Abdulla Al Banali Saudi Arabia 9,107,143 9,107,143 0.91%

22 Abdulrazaq Mohammed Qambar Al Ansari & Sons Co. Saudi Arabia 6,670,000 6,670,000 0.67%

23 Nahar Investment Company WLL Bahrain 5,302,930 5,302,930 0.53%

24 Tatweer Real Estate Co. SPC Bahrain 5,000,000 5,000,000 0.50%

25 Sheikh Mohammed Bin Faisal Bin Thani Al Thani Qatar 5,000,000 5,000,000 0.50%

26 Abdulaziz Sulaiman Hamad Al Bassam Bahrain 4,000,000 4,000,000 0.40%

Total 1,000,000,000 1,000,000,000 100%



CORPORATE GOVERNANCE AND TRANSPARENCY DISCLOSURES (CBB RULE BOOK - PD-1.3.10):

a) Board Structure & Basic Organizational Chart: I. Board Structure

Refer to (Table 1) Page 24/25II. Basic Organizational Chart

Refer to Chart Page 22III. Independent Board members

The Board of FEB has the following 3 independent directors as follows:1- H.E. Hamad Rashid Al Neaimi 2- Mr. Mohammed Al Fahim 3- Mr. Ebrahim Hussain

b) Bios of Board Members and Senior Management: - Refer to the Board Bio’s page 2 and to the Senior Management Bio’s page 8

c) Information on the managerial structure: I. Committees Refer to Page 26 II. Segregation of duties: Detailed job descriptions that ensure proper segregation of duties are in place for each role. Also, all critical positions (approved persons) are approved by the CBB as required. III. Reporting lines All senior management members reports to either ACEO or appropriate Board Committees. IV. Responsibilities: As defined in each job description

d) Performance-linked incentive structure: FEB had no performance-linked incentive structure during 2011.

e) Nature and extent of transactions with related parties: Covered under Note 18 of the consolidated financial statements.

f) Approval process for related party transactions:Approval process for related party transaction is exactly the same as the approval process for unrelated party transactions as they are treated on arm’s length basis and there is no exceptional treatment/process for approving such transactions.Refer to Note (o) below

g) Changes in the structures from prior periods:

Board’s Committees:

1- Investment Was (in 2010) 2011

Mustafa Zarti H. E. Khadem Abdulla Al Qubaisi

H.E. Hamad Rashed Al Neaimi H.E. Hamad Rashed Al Neaimi

H.E. Ahmed Saif Al Darmaki Abdulfatah Abdulsalam Enaami

Abdulla Abdulkarim Showaiter Abdulla Abdulkarim Showaiter

Jamal Bahelil H. E. Abdulla Saif Al Nuaimi

2- Audit : Same members

3- Risk: Same members


4- NRGC Was (in 2010) 2011H.E. Hamad Rashed Al Neaimi H. E. Khadem Abdulla Al Qubaisi *Abdulla Abdulkarim Showaiter H.E. Hamad Rashed Al NeaimiKhalid Mohamed Najibi Abdulla Abdulkarim Showaiter Jamal Bahelil Khalid Mohamed Najibi Adel Abdulaziz Al Jabr Adel Abdulaziz Al Jabr

* H. E. Khadem Abdulla Al Qubaisi was replaced by Mr. Abdulfatah Abdulsalam Enaami in October 2011.

h) Communications strategy:The Bank has a public disclosure policy approved by the Board of directors. The Bank communicates with its customers and stakeholders in a timely manner through various channels. Information on developments, financial results, new products or any updates of existing products are placed on the Bank’s website www.1stenergybank.com and/or published in the media. The annual report includes all the notes for the current financial year and a minimum of three preceding financial years are provided on the Bank’s website. Product details are also disseminated to customers and other interested parties through prospectuses, brochures and/or periodic investment updates.

i) Distribution of ownership of shares by nationality:Refer to FEB shareholders list (Table 2) Page 28.

j) Directors’ and senior managers’ trading of the Bank’s shares during the year, on an individual basis: There was no such trading.

k) Distribution of ownership of shares by directors and senior managers, on an individual basis:Directors and senior managers do not own any shares in the Bank.

l) Distribution of ownership of shares by size of shareholder: Refer to FEB shareholders list (Table 2) Page 28.

m) Ownership of shares by government: The following government entities hold shares in the Bank:• LibyanInvestmentAuthority-GovernmentofLibya• AbuDhabiWater&ElectricityAuthority–GovernmentofAbuDhabi• AwqafandMinersAffairsFoundation–GovernmentofDubai• GeneralPension&SocialSecurityAuthority-GovernmentofAbuDhabi

n) The Board’s functions: • The Board aims to perpetuate a successful business and optimizing long term financial returns. • The Board is responsible for establishing the Bank’s policies and strategy and for regularly monitoring the effectiveness of executive management in carrying out those policies and strategies.

o) The types of material transactions that require Board approval: The Board has delegated certain approval authorities to the Management Risk Committee (MRC) and Board Investment Committee (BIC). These approval authorities are risk sensitive i.e. the higher the risk, the lower the approval authority amount. For the (MRC) the maximum approval amounts range from US$10MM to US$25MM, and for the (BIC) the maximum approval amounts range from US$30MM to US$70MM depending on the internal rating of the obligor. Any amount exceeding the BIC approval authority limit has to be approved by the Board.

p) Number and names of independent Board members: Refer to Note (a) - (III) Page 29

q) Board terms and start date for each term for each directors: Started June 2011 – ends June 2014

r) What the Board does to induct, educate and orient new directors:The Board arranges induction sessions to new directors to educate them about their responsibilities, the business of the Bank, the regulator’s rules and regulations and introducing them to management as well. Further, appointment letters are issued by the Board to all new directors which clearly state the rights, duties and expectations from new directors. New directors are given copies of the Directors Handbook as well for further information on the responsibilities of the Board and its committees.



s) Election system of directors and any termination arrangements: Directors are elected by the Shareholders General Meeting in accordance with the Bank’s Memorandum & Articles and the Commercial Companies Law.

t) Meeting dates (number of meetings during the year):Refer to the Board and Sub-Committees Meetings ( Table1) Page 24/25

u) Attendance of directors at each meeting:Refer to the Board and Sub-Committees Meetings ( Table1) Page 24/25

v) The Board’s code of ethical business conduct, and how the Board monitors compliance: The directors have adopted and will adhere to the following code of conduct:

1.1 To act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the Bank and its shareholders and other stakeholders 1.2 To act only within the scope of their responsibilities and not participate in the day-to-day management of the Bank 1.3 To have a proper understanding of, and competence to deal with the affairs and products of the Bank and devote sufficient time to their responsibilities 1.4 To safeguard the confidentiality of Board discussions and deliberations1.5 Not to make improper use of information gained through the position as a Director or take improper advantage of the position of Director1.6 To make informed decisions with sufficient detailed knowledge of the Bank’s business and performance1.7 To independently assess and question the policies, processes and procedures of the Bank , with the intent to identify and initiate management action on issues requiring improvement 1.8 Not to agree to the Bank incurring an obligation unless he/she believes at the time, on reasonable grounds, that the Bank will be able to perform the obligations when it is required to do so1.9 Not to agree to the business of the Bank being carried out or cause or allow the business to be carried out, in a manner likely to harm the Bank’s creditors1.10 To deal fairly and show respect to all of the Bank’s employees and customers 1.11 Not enter into competition with the Bank1.12 Not demand or accept substantial gifts from the Bank for himself/herself or his/her associates1.13 Not misuse the Bank’s assets 1.14 Not take advantage of business opportunities to which the Bank is entitled for himself/herself or his/her associates1.15 Disclose to the Board any potential conflicts of interest1.16 Excuse themselves from any discussions or decision-making that involve a subject in which they are incapable of providing objective advice or which involves a real or potential conflict of interest.

The directors’ observance of the code of conduct will be regularly reviewed by the Audit Committee.

w) Minimum number of Board committee meetings per year, the actual number of Board meetings, attendance of committees’ members and the work of committees and any significant issues arising during the period:• RefertotheBoardandSub-CommitteesMeetings(Table1)Page24/25• Nosignificantissuesarose.

x) Reference to Module HC and any amendments subsequently made by the CBB: Bahrain’s Ministry of Industry and Commerce issued a Corporate Governance Code (CGC), effective from 1 January 2011, with a view to establishing best-practice corporate governance principles in Bahrain and providing protection for investors and other company stakeholders through compliance with those principles. All public joint stock companies incorporated under the Bahrain Commercial Companies Law had to be in full compliance by the end of 2011. In October 2010 the CBB updated the corporate governance provisions of Module HC of the CBB Rulebook to align them with the new Code, and banks were required to be fully compliant with Module HC by 31 December 2011. The CBB issued further updates to the Module in January, April and October 2011. In common with other CBB Rulebook Modules, Module HC contains a mixture of Rules (with which compliance is mandatory) and Guidance (with which the Bank is expected to comply or to explain its noncompliance). FEB has substantially implemented both Rules and Guidance in their entirety.

y) Review of internal control processes and procedures: The Board of Directors’ responsibilities are to: - Review and evaluate the effectiveness of and/or weaknesses in the Bank’s internal controls, the overall control environment, accounting and financial controls.


- Ensure that the Bank’s operations, individually and collectively are measured, monitored and controlled by appropriate effective and prudent risk management systems that are commensurate with the scope of the Bank’s activities.- Receive and discuss reports from management on an annual /periodic basis relating to compliance at the Bank (including anti-money laundering and regulatory compliance).In fulfilling its responsibilities, the Board has established appropriate number of sub-committees with members having sufficient experience to enable them performing their functions effectively. The Board receive, review and discuss periodic reports from the management, internal / external auditors which assess effectiveness of the Bank ’s internal control framework.

z) Directors responsibility with regard to the preparation of financial statements: The Board of Directors, through its Audit Committee periodic meetings, has the following responsibilities in respect of the financial statements: - Review and discuss with the Bank’s management and external auditors the overall financial statements and assess any possible improprieties in financial reporting or other matters.- Assess whether the Bank has followed appropriate accounting policies and made appropriate estimates and judgments, taking into account the views of the external auditors.- Receive a written statement from the Bank’s Acting CEO and the Head of Financial Control that the Bank’s interim and annual financial statements present a true and fair view, in all material respects, of the Bank’s financial condition and results of operations in accordance with applicable accounting standards.

aa) Assessment of Board of Directors & Committees:The Board, its Committees and individual directors are annually assessed by the Board with respect to their effectiveness and contribution.

bb) Website and Communication with Shareholders:Refer to the communications Strategy Note (h) Page 30

cc) Investor / consumer awareness programs for information on new products and services:No new products were introduced in 2011.

dd) Mediation and advice bureaus for investors and customers set up by the Bank , including clearly written procedures for logging of complaints:In its Rulebook update of October 2011, the CBB announced that all Islamic bank licensees would be required by 31 March 2012 to have appropriate customer complaints handling procedures and systems for effective handling of complaints made by customers and to appoint a customer complaints officer. The Bank will be fully compliant with these requirements by the stipulated time.

ee) Social functions and charitable contributions of the Bank :N/A

ff) Governance arrangements, systems and controls employed by the Bank to ensure Sharia’a compliance:Refer to Sharia’a Section page 25

gg) Non-Sharia’a-compliant earnings and expenditure and the manner in which they are disposed of:In 2011 there were no non-Sharia’a’s-complaint

hh) The annual zakah contributions of the Bank , where relevant:Zakah is paid by the Bank on behalf of the shareholders based on retained earnings and other reserve balances at the end of the year, with the payment of Zakah on share capital being the responsibility of the Bank’s shareholders. For details of contributions, please refer to the statement of sources and uses of Zakah and Charity fund as well as note no. 19 within the consolidated financial statements.

ii) Aggregate remuneration paid to board members:Refer to note 18 of the consolidated financial statements.

jj) Remuneration policy of the Bank for Board members and senior management:There is no policy as such but Board Nomination Committee reviews and recommends management and Board remuneration to the Board as per market practice.

kk) Aggregate remuneration paid to senior management.Details are as per note 18 of the consolidated financial statements.



OTHER DISCLOSURES (CBB RULE BOOK - PD-6.1.1):

a) Names of shareholders owning 5% or more:Refer to FEB shareholders List ( Table 2) Page 28

The Bank is not aware that any shareholders owning 5% or more act in concert or of any voting, shareholders’ or other agreements among them.

b) Directorships held by the directors on other Boards:Refer to The Board Bio’s Page 2

c) Director’s trading of the Bank’s shares during the year:There was no such trading

d) Audit fees charged by the external auditor:Audit fees: BD 17,500

e) Non-audit services provided by external auditors:Review of Reporting: BD 23,500Other Consultations: BD 1,500

f) Reasons for any switching of auditor and reappointing of auditor; andIn adopting good governance and market best practices, related to changes of external auditors and their respective performance assessments, the Bank has appointed Ernst & Young as its external auditors for 2011.

g) Conflict of interest :The Directors Handbook issued to all directors on joining the Board contains a detailed section on conflicts of interest describing the steps the Board takes to ensure directors exercise independent judgment in considering transactions and agreements in respect of which a director or executive officer has a material interest. The Handbook stresses that:• TheBoardanditsmembersmustactwithhonesty,integrityandingoodfaith,withduediligenceandcare,withaviewtothebest interest of the Bank and its shareholders and other stakeholders.• EachDirectormustconsiderhimselfasrepresentingallshareholdersandmustactaccordingly.• DirectorsmustactethicallyatalltimesandinaccordancewiththeCodeofConductandtheConflictofInterestpolicy.• IfanactualorpotentialconflictofinterestarisesinrespectofaDirector,theDirectormustpromptlydisclosesuchconflicttotheBoard.• EachDirectormustmakeeverypracticableefforttoarrangehispersonalandbusinessaffairstoavoidaconflictofinterestwiththeBank.• ADirectormustabsenthimselffromanydiscussionordecision-makingthatinvolvesasubjectwhereheisincapableofproviding objective advice, or which involves a subject, transaction or proposed transaction where there is a potential conflict of interest.• TheSecretaryshallascertain,atthebeginningofeachBoardcommitteemeeting,theexistenceofanyconflictsofinterestand minute them accordingly.

• NoconflictofinterestwasreportedbyanyDirectorduring2011.


FIN

AN

CIA

L ST

ATEM

ENTS


In compliance with the terms of our letter of appointment, we are required to report as follows:

The Sharia’a Supervisory Board (“SSB”) has reviewed the principles and contracts relating to the transactions conducted by First Energy Bank (the “Bank”) during the course of the year ending December 31, 2011 their review was conducted in order to judge whether the Bank followed the principles of the Islamic Sharia’a, specific fatwas, and guidelines issued by the SSB. The SSB has also reviewed and approved the internal periodic Sharia’a reports issued by the Bank’s Head of Sharia’a compliance. The Bank’s management is responsible for ensuring that its operations are carried out in compliance with SSB rulings.

The SSB responsibility is to present an independent view of the Bank’s operations and to communicate it to the shareholders.

The review was planned and performed so as to obtain all necessary information and explanations to provide sufficient evidence proving that the Bank has not violated any rules and principles of the Islamic Sharia’a.

In our opinion:

•TheBank’scontracts,transactionsanddealsfortheyearendingDecember31,2011areincompliancewiththerulesandprinciples of the Islamic Sharia’a.

•TheBank’sallocationofprofitandchargingoflossesrelatingtoinvestmentaccountsareincompliancewiththerulesandprinciples of the Islamic Sharia’a.

•Earningsthathavebeenrealizedfromsourcesthatarenon-Sharia’acompliantweredonatedtocharity.

•TheBank’scalculationofZakatisincompliancewiththerulesandprinciplesoftheIslamicSharia’a.

We beseech the Almighty to grant us excellence and success.

Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh.

Sheikh Nizam Mohammed Saleh Yaqubi

Chairman - Sharia’a Supervisory Board

Sheikh Dr. Mohamed Ali bin Ibrahim Elgari Sheikh Dr. Osama Mohamed Bahar

Member - Sharia’a Supervisory Board Member - Sharia’a Supervisory Board

Sharia’a Supervisory Board Report


We have audited the accompanying consolidated statement of financial position of First Energy Bank B.S.C. (c) (“the Bank”)

and its subsidiaries (“the Group”) as of 31 December 2011, and related consolidated statements of income, cash flows,

changes in owners’ equity and sources and uses of zakah and charity fund for the year then ended. These consolidated

financial statements and the Group’s undertaking to operate in accordance with Islamic Sharia’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 2011, the results of its operations, its 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.

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 2011 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 Sharia’a

Rules and Principles as determined by the Sharia’a Supervisory Board of the Group.

Independent Auditors’ Report to the Shareholders

FIRST ENERGY BANK B.S.C. (c) Manama, Kingdom of Bahrain 28 February 2012


Notes 2011 2010Restated

ASSETS

Cash and bank balances 3 3,019 3,910 Due from financial institutions 4 425,848 555,658 Financing receivables 5 317,008 267,182 Investment securities 6 328,826 210,477 Investment in associates 7 92,116 97,342 Other assets 8 52,791 50,396 Property and equipment 9 11,089 14,911

TOTAL ASSETS 1,230,697 1,199,876

LIABILITIES AND OWNERS’ EQUITYLiabilitiesDue to financial institutions 89,527 148,812 Other liabilities 10 98,468 11,946

Total liabilities 187,995 160,758

Owners’ equity

Equity attributable to shareholders of the parent 11Share capital 1,000,000 1,000,000 Statutory reserve 1,800 1,437 Foreign exchange translation reserve (2,170) (2,170)Retained earnings 5,481 2,252

Total equity attributable to shareholders of the parent 1,005,111 1,001,519

Non-controlling interest 37,591 37,599

Total owners’ equity 1,042,702 1,039,118 TOTAL LIABILITIES AND OWNERS’ EQUITY 1,230,697 1,199,876

COMMITMENTS 21 85,296 146,078

The consolidated financial statements, which consist of pages 38 to 69, were approved by the Board of Directors on 28 February 2012 and signed on its behalf by:

H.E. Khadem Al Qubaisi Ebrahim Hussain Ebrahim Mohammad Ghanem

Chairman Board Member Acting Chief Executive Officer

CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2011 US$ 000’s

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


CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2011 US$ 000’s


Notes 2011 2010

INCOME

Profit from Islamic finances 12 16,707 18,745

Profit on Islamic finances (772) (766)

Net income on Islamic finances 15,935 17,979

Income from investments 13 7,249 7,512

Share of results of associates 7 831 15,134

Other income 1,478 -

Total income 25,493 40,625

EXPENSES

Staff costs 14 10,637 12,459

Investment banking expenses 941 1,605

Depreciation and amortisation 15 2,845 2,744

Other expenses 16 6,266 6,545

Total expenses 20,689 23,353

NET INCOME FOR THE YEAR BEFORE PROVISION

FOR IMPAIRMENT 4,804 17,272

Provision for impairment 17 (1,260) (27,396)

NET INCOME FOR THE YEAR 3,544 (10,124)

Attributable to:

Shareholders of the parent 3,630 (10,049)

Non-controlling interest (86) (75)

3,544 (10,124)


CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2011 US$ 000’s

2011 2010

OPERATING ACTIVITIESNet income (loss) for the year 3,544 (10,124)Adjustments for :

Depreciation and amortisation 2,845 2,744 Amortisation of discount (1,783) (2,545)Fair valuation loss on equity option 1,959 998 Provision for impairment 1,260 27,396 Share of results of associates (831) (15,134)Gain on sale of investments (1,320) (2,086)

Operating profit before changes in operating assets and liabilities 5,674 1,249

Net changes in operating assets and liabilities:Financing receivables (49,826) (128,638)Due from financial institutions 33,168 56,296 Other assets (4,513) (7,294)Due to financial institutions (59,285) (22,652)Other liabilities 86,661 4,028

Net cash from (used in) operating activities 11,879 (97,011)

INVESTING ACTIVITIESPurchase of investments (195,646) (41,060)Sale of investments 80,400 46,772 Net changes in investment in associates 6,057 14,579 Purchase of premises and equipment (32) (276)Purchase of software (92) (231)

Net cash (used in) from investing activities (109,313) 19,784

FINANCING ACTIVITIESNet changes in non-controlling interest 78 - Payment to charities (177) (499)

Net cash used in financing activities (99) (499)

Foreign currency translation adjustments - (4,648)

NET DECREASE IN CASH AND CASH EQUIVALENTS (97,533) (82,374)

Cash and cash equivalents at 1 January 495,975 578,349

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 398,442 495,975

For the purpose of the cash flows statement, cash and cash equivalents comprised of the following:

Cash and bank balances 3,019 3,910 Due from financial institutions with original maturity of 90 days or less (Note 4) 395,423 492,065

398,442 495,975



Equity attributable to shareholders of the parent

Sharecapital

Statutoryreserve

Investmentsfair value

reserve

Foreignexchange

translationreserve

Retainedearnings

TotalNon-

controllinginterest

Total owners’

equity

Balance at 1 January 2011 1,000,000 1,437 - (2,170) 2,252 1,001,519 37,599 1,039,118

Movement in non-controlling interest - - - - - - 78 78

Foreign currency translation - - - - - - - -

Net income for the year - - - - 3,630 3,630 (86) 3,544

Transfer to statutory reserve - 363 - - (363) - - -

Transfer to zakah and charity fund - - - - (38) (38) - (38)

Balance at 31 December 2011 1,000,000 1,800 - (2,170) 5,481 1,005,111 37,591 1,042,702

Balance as at 1 January 2010 1,000,000 1,437 148 2,478 12,940 1,017,003 37,674 1,054,677

Changes due to adoption of FAS 25 - - (148) - (148) - (148)

Balance at 1 January 2010 (restated) 1,000,000 1,437 - 2,478 12,940 1,016,855 37,674 1,054,529

Foreign currency translation - - - (4,648) - (4,648) - (4,648)

Net loss for the year - - - - (10,049) (10,049) (75) (10,124)

Transfer to zakah and charity fund - - - - (639) (639) - (639)

Balance at 31 December 2010 (restated) 1,000,000 1,437 - (2,170) 2,252 1,001,519 37,599 1,039,118

CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITYFor the year ended 31 December 2011 US$ 000’s



CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY FUNDFor the year ended 31 December 2011 US$ 000’s

Notes 2011 2010

Sources of zakah and charity funds

Undistributed zakah and charity funds at the beginning of the year 140 -

Contributions by the Bank 38 639

Total sources of zakah and charity funds during the year 178 639

Uses of zakah and charity fund

Contributions for charitable purposes 177 499

Total uses of funds during the year 177 499

Undistributed zakah and charity fund at 31 December 10 1 140



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2011 US$ 000’s

1 INCORPORATION AND ACTIVITIES

First Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23 June 2008, under Commercial Registration No. 69089. The Bank operates under an Islamic Wholesale Banking license issued by the Central Bank of Bahrain (the “CBB”). The Bank’s registered office is at Building 1398, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank and its subsidiaries (the “Group”) include Sharia’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios primarily related to the energy sector. The Bank is regulated by the CBB and supervised by a Sharia’a Supervisory Board for compliance with Sharia’a rules and principles.

Recent developments in the MENA region The Group operates and undertakes business in several countries in the MENA region in which serious social and political unrest has occurred over the course of the first half of the year. The Group’S exposure is mainly in the GCC where the circumstances have greatly stabilized.

However, the Group has an investment in an Associate with significant business activity in Libya which has been subjected to civil unrest and military activity during the first quarter. During the unrest, the operations of the Associate within Libya were suspended and steps were taken to safeguard the assets. The Board of Directors is optimistic that, as the country stabilizes, the Associate will be able to recover and re-establish profitable business operations within Libya in the near future. The last management accounts received from the Associate are up to November 2010 and as a result the financial results of the Associate from that date have not been incorporated into these financial statements.

During the period ended 30 September 2011, the United Nations Security Council called upon member states to impose economic sanctions on a number of Libyan or Libyan related individuals and entities, including the Libyan Investment Authority and the Central Bank of Libya. The Libyan Investment Authority owns 16.25% of the issued share capital of the Bank. Neither the United Nations Security Council nor any member state has called for any economic sanctions to be imposed on any member of the Group or its associates.

However, post 30 September, 2011, there have been significant positive developments in Libya and a new interim Government has been formed to conduct economic and social activities. The UN has been gradually lifting sanctions on certain key Libyan entities like the Central Bank and the Libyan Investment Authority. The management of the Associate started calling the foreign workforce to return to Libya and has begun an initial assessment of its state of operations. The Associate has partially started its commercial operations using work over rigs and expects to achieve around 50 percent operation by the end of 2013.

The consolidated financial statements were authorised for issue by the Board of Directors on 28 February 2012.

2 ACCOUNTING POLICIES

2.1 Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and equity-type instruments through equity that have been measured at their fair value. The consolidated financial statements are presented in United States Dollars (US$) being the reporting and functional currency of the Bank. All values are rounded to the nearestUSDollarthousands(US$‘000)unlessotherwiseindicated.

Statement of Compliance The consolidated financial statements are prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”), the Shari’a Rules and Principles as determined by the Sharia’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 contained in Volume 2 of the CBB rulebook) and directives. In accordance with the requirements of AAOIFI, for matters which are not covered by the AAOIFI standards including “Interim Financial Reporting,” the Group uses the relevant International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“the IASB”).




Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at and for the year ended 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies.

All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue 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.

Non-controlling interest in a subsidiary’s net assets is reported as a separate item in the Group’s owners’ equity. In the consolidated statement of income, non-controlling interest is included in net profit, and shown separately from that of the shareholders.

Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interests’ share of changes in owners’ equity since the date of combination. Losses applicable to the non-controlling interest in excess of the non-controlling interest in a subsidiary’s owners’ equity are allocated against the interests of the Group except to the extent that the non-controlling interest has a binding obligation and is able to make an additional investment to cover the losses.

Transactions with non-controlling interests are handled in the same way as transactions with external parties. Sale of participations to non-controlling interests result in a gain or loss that is recognised in the consolidated statement of income. Changes in the ownership interest in a subsidiary that do not result in a loss of control are accounted for as an owners’ equity transaction.

The following are the principal subsidiaries of the Bank, which are consolidated in these consolidated financial statements:

Name of subsidiaryEquity interest Nature of business

Cosmos Industrial Investment Corporation B.S.C. (c), Bahrain

93% Holding company for investment in a project for development and operation of a polycrystalline silicon plant in the Kingdom of Saudi Arabia.

Al Dur Energy Investment Company, Cayman Islands

59% To hold 15% indirect interest in a power and water plant project in the Kingdom of Bahrain.

North Africa Investment Company, Cayman Islands

100% To hold the Group’s 40% associate stake in Arab Drilling and Workover Company, Libya.

2.2 New and amended accounting standard The accounting policies adopted are consistent with those of the previous financial year, except for the following new FAS effective as of 1 January 2011:

Financial accounting standard (FAS 25) “Investment in sukuk, shares and similar instruments”The Group has adopted FAS 25 issued by AAOIFI which covers the recognition, measurement, presentation and disclosure of investment in sukuk, shares and similar investments that exhibit characteristics of debt and equity instruments made by the Islamic financial institutions.

The adoption of FAS 25 had no effect on the classification and measurement of the Groups financial assets except for the restatement as disclosed in note 6.


2 ACCOUNTING POLICIES (continued)



2.3 Summary of significant accounting policies The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below:

a. Cash and cash equivalentsCash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with banks and amounts due from financial institutions with original maturities of 90 days or less.

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

c. Due to financial institutions These comprise funds received from financial institutions under the principles of murabaha and wakala contracts and are stated at the fair value of the consideration received less amounts settled.

d. Financing receivables These comprise deferred sales transactions (murabaha), which are stated net of deferred profits and provision for impairment.

e. Investment securities These are classified as either equity type instruments carried at fair value through equity or debt type instruments carried at amortized cost.

Initial recognition All investment shall be recognised on the acquisition date and shall be recognised initially at their fair value plus, except for investments at fair through statement of income, transaction costs. Transaction costs relating to investments at fair value through statement of income are charged to the income statement when incurred.

Equity-type instruments at fair value through equity Subsequent to acquisition, these are re-measured at fair value with unrealised gains or losses recognised in owners’ equity until the investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously recorded in owners’ equity is recognised in consolidated statement of income.

Instruments which do not have a quoted market price or other appropriate methods from which to derive reliable fair values are stated at cost less impairment allowances.

Debt-type instruments at amortised cost These instruments are managed on a contractual yield basis and are not held for trading and have not been designated at fair value through 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. Investment in associates The Group’s investment in its associates is accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. The consolidated statement of income reflects the Group’s share of the results of operations of the associate. If the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.




g. Risk management instruments and hedge accounting The Group currently only enters into sharia’a compliant risk management instruments to cover its exposure to profit rate risks. These derivative-type risk management instruments are initially recognised at fair value on the date on which a contract is entered into and are subsequently re-measured at their fair value. The fair value of an instrument is the equivalent of the unrealised gain or loss from marking to market the instrument using prevailing market rates. Instruments with positive market values (unrealised gains) are disclosed under other assets and instruments with negative market values (unrealised losses) are disclosed under other liabilities in the consolidated statement of financial position.

Changes in the fair value of these financial instruments that are designated, and qualify as fair value hedges, are included in the income statement together with the corresponding change in the fair value of the hedged asset or liability that is attributable to the risk being hedged. Unrealised gains or losses on hedged assets which are attributable to the hedged risk are adjusted against the carrying values of the hedged assets or liabilities. For risk management instruments that are not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in the consolidated statement of income.

If the hedging risk management instrument expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective profit method is used, is amortised to profit or loss as part of the recalculated effective profit rate of the item over its remaining life.

Embedded derivatives Certain derivatives embedded in other financial instruments, such as the conversion option in a debt instrument, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through statement of income. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognised in the consolidated statement of income unless the Group chooses to designate the hybrid contracts at fair value through statement of income. The Group uses internal models to measure the fair value of embedded derivatives. These models use techniques generally recognised as standard within the industry. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions.

h. Property and equipment Property and equipment are stated at cost less net of accumulated depreciation and accumulated impairment. The cost of additions and major improvements are capitalised; maintenance and repairs are charged to the consolidated statement of income as incurred. Gains or losses on disposal are reflected in other income. Depreciation is calculated using the straight-line method over the estimated useful lives of 3 years other than freehold land, which is deemed to have an indefinite life.

i. Fair values Fair value is determined for each financial asset 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 or applying relevant valuation techniques such as net present value of estimated future cash flows.

(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 impairment.





j. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised.

k. Intangible assets Intangible assets comprise principally the value of computer software. Intangible assets acquired are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

l. Dividends Dividends to shareholders are recognised as liabilities in the period in which they are declared.

m. Revenue recognition

Profit from Islamic finances Profit from Islamic finances (murabaha and wakala) is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised on a time-apportioned basis over the period of the transaction. Where the income from a contract is not contractually determinable or quantifiable, it is recognised when the realisation is reasonably certain or when actually realised. Income related to accounts that are 90 days overdue is excluded from the consolidated statement of income.

Income from investment in Sukuk Income from investment in Sukuk is recognised on a time-apportioned basis using the effective profit method.

Dividend income Dividend income is recognised when the right to receive is established. This is usually the ex-dividend date for equity securities.

Investment advisory services income Investment advisory services income is 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.

n. Earnings prohibited by Sharia’a The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly all non-Islamic income is credited to a charity fund which the Group uses for social welfare activities.

o. Zakah Zakah is calculated using the net invested funds method as prescribed by the Bank’s Sharia’a Supervisory Board . Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on statutory reserve, foreign exchange translation reserves and retained earning balances at the end of the year with the payment of Zakah on share capital being the responsibility of the Bank’s shareholders.




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 consolidated statement of financial position date.

Bahraini employees of the Group are covered by contributions made to the Social Insurance Organisation as a percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed when due.

The Bank also operates a voluntary employees saving scheme under which the Bank and the employee contribute monthly on a fixed percentage of salaries basis. The scheme is in the nature of a defined contribution scheme and contributions by the Bank are recognised as an expense in the income statement when they are due.

q. ProvisionsProvisions are recognised when there is a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured.

r. Impairment of financial assetsAn assessment is made at each consolidated statement of financial position date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the consolidated 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.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment value was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the consolidated statement of income. In the case of equity-type instruments at fair value through equity, impairment is reflected directly as a write down of the financial asset. Impairment losses on equity-type instruments at fair value through equity are not reversed through the consolidated statement of income. Any subsequent increases in their fair value are recognised directly in owners’ equity.

s. Foreign currencies

Foreign currency transactions at the subsidiary levelTransactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. The monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the financial position date. All differences are taken to the statement of income at the entity level.

Foreign currency translations As at the reporting date, assets and liabilities in foreign currencies are translated into the presentational currency of the Group (United States Dollars) at the rate of exchange ruling at the financial position date and their income statements are translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of owners’ equity. On disposal of a foreign entity, the deferred cumulative amount recognised in owners’ equity relating to that particular foreign entity is recognised in the consolidated statement of income.

t. Judgements and estimatesThe preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported in the consolidated financial statements. The most significant uses of judgements and estimates are as follows:

Going concernThe 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, the Board of Directors 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 a going concern basis.





Classification of investments Management decides on acquisition of an investment whether it should be classified as an equity-type instrument at fair value through statement of income, an equity-type instrument at fair value through a equity or debt-type instrument at amortised cost.

Special purpose entities The Group sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold investments. The Group provides corporate administration, investment management and advisory services to these SPE’s, which involve the Group making decisions on behalf of such entities. The Group administers and manages these entities on behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The Group does not consolidate SPE’s that it does not have the power to control. In determining whether the Group has the power to control an SPE, judgments are made about the objectives of the SPE’s activities, its exposure to the risks and rewards, as well as about the Group intention and ability to make operational decisions for the SPE and whether the Group derives benefits from such decisions.

Qualifying hedge relationships In designating financial instruments in qualifying hedging relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging relationship.

Impairment losses on financing contracts with customers The Group reviews its financing contracts at each reporting date to assess whether an impairment allowance should be recorded in the consolidated financial statements. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about factors involving varying degrees of judgment and uncertainty and actual results may differ resulting in future changes to the provisions.

Impairment of equity-type instruments at fair value through equity The Group treats equity-type instruments at fair value through equity as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’or‘prolonged’requiresjudgment.TheGroupevaluatesfactors,suchasthehistoricalsharepricevolatilityforcomparablequoted equities and future cash flows and the discount factors for comparable unquoted equities.

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 23 (a). This requires judgment when determining the maturity of assets and liabilities with no specific maturities.

u. Derecognition A 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 withoutmaterialdelaytoathirdpartyundera‘passthrough’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.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired.

v. Offsetting financial instruments Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable or religious 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.




w. Sharia’a supervisory Board The Group’s business activities are subject to the supervision of a Sharia’a supervisory Board consisting of three members appointed by the general assembly of shareholders.

x. Trade date accounting All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.

3 CASH AND BANK BALANCES

2011 2010

Cash in hand 10 8

Balances with banks 3,009 3,902

3,019 3,910

4 DUE FROM FINANCIAL INSTITUTIONS

2011 2010

Commodity murabahas 342,259 396,819

Wakala contracts 83,670 159,335

425,929 556,154

Less: Deferred profits (81) (496)

425,848 555,658

The original maturity of commodity murabahas and wakala contracts are as follows:

Original maturity of 90 days or less 395,423 492,065

Original maturity of more than 90 days 30,425 63,593

425,848 555,658

5 FINANCING RECEIVABLES

2011 2010

Musharaka - 12,304

Murabaha financing 317,008 254,878

317,008 267,182

Murabaha financing includes US$ 56,158 thousand (2010: US$ 53,871 thousand) representing the debt component of a convertible murabaha financing facility provided by the Bank to one of its associate companies. The embedded derivative within the convertible murabaha, representing the equity conversion option, has been separated and disclosed under other assets (refer note 8).





6 INVESTMENT SECURITIES

At 31 December 2011

Amortised Cost Fair value through equity Total

Debt typeQuoted investmentsSukuk 224,406 - 224,406

Equity typeUnquoted investmentsEquity shares - 124,420 124,420

224,406 124,420 348,826 Provision for impairment - (20,000) (20,000)

224,406 104,420 328,826

At 31 December 2010

Amortised Cost Fair value through equity Restated Total

Debt typeQuoted investments

Sukuk 106,057 - 106,057

Equity typeUnquoted investments

Equity shares - 124,420 124,420

106,057 124,420 230,477 Provision for impairment - (20,000) (20,000)

106,057 104,420 210,477

RECLASSIFICATION OF INVESTMENTSThe adoption of FAS 25 resulted in the following adjustment to the carrying values as of 31 December 2010:

Before adopting FAS 25 On adopting FAS 25

Held to maturity

Available for sale

FAS 25adjustment

Amortised Cost

Fair value through equity

Debt typeQuoted investments

Sukuk 66,860 39,165 32 106,057 -

Equity typeUnquoted investments

Equity shares - 124,420 - - 124,420

66,860 163,585 32 106,057 124,420 Provision for

impairment - (20,000) - - (20,000)

66,860 143,585 32 106,057 104,420




7 INVESTMENT IN ASSOCIATES

2011 2010At 1 January 97,342 96,787 Elimination of intra-group transactions (6,057) (4,974)Share of results of associates 831 15,134 Dividend received - (4,957)Foreign exchange translation differences - (4,648)

At 31 December 92,116 97,342

Intra-group gains on transactions between the Group and its equity accounted associates are eliminated to the extent of the Group’s interest in the investees.

Summarised financial information of associates that have been equity accounted, not adjusted for the percentage ownership held by the Group.

2011 2010

Total assets 683,299 613,821 Total liabilities 399,193 333,438 Total revenues 17,052 140,043 Total net income 2,044 21,696

Investment in associates comprise the following:

Name Country of incorporation % holding Nature of business

Arab Drilling and Workover Company Libya 40% Lease of oil drilling rigs

MENAdrill Investment Company Cayman Islands 41% Development and lease of jack up oil rigs

8 OTHER ASSETS

2011 2010

Project work-in-progress* 42,884 42,148

Fair value of equity option embedded in a

convertible murabaha (note 5) 1,386 1,959

Intangible assets – software 295 454

Goodwill 2,309 2,309

Due from associate 2,257 -

Others 3,660 3,526

52,791 50,396

*Project work-in-progress comprises costs incurred for acquisition and development of a project in the Kingdom of Saudi Arabia by a subsidiary company.




9 PROPERTY AND EQUIPMENT

Land Equipment ComputersFurniture

and fixture Total

Cost:

At 1 January 2010 22,994 124 680 6,757 30,555

Additions - 61 103 67 231

At 31 December 2010 22,994 185 783 6,824 30,786

Additions - 11 5 16 32

At 31 December 2011 22,994 196 788 6,840 30,818

Depreciation:

At 1 January 2010 - 26 188 563 777

Charge for the year - 56 248 2,260 2,564

At 31 December 2010 - 82 436 2,823 3,341

Charge for the year - 62 252 2,280 2,594

At 31 December 2011 - 144 688 5,103 5,935

Provision for impairment:

At 1 January 2010 8,734 - - - 8,734

Charge for the year (refer note 17) 3,800 - - - 3,800

At 31 December 2010 12,534 - - - 12,534

Charge for the year (refer note 17) 1,260 - - - 1,260

At 31 December 2011 13,794 - - - 13,794

Net book values:

At 31 December 2011 9,200 52 100 1,737 11,089

At 31 December 2010 10,460 103 347 4,001 14,911




10 OTHER LIABILITIES

2011 2010

Employee-related accruals 6,219 5,571

Accounts payable 2,370 623

Accrued expenses 2,086 1,107

Advance from investors 4,505 4,505

Zakat and charity payable 1 140

Payables to financial institutions * 83,287 -

98,468 11,946

* These relates to funds from Libyan entities frozen by the Bank as per CBB circular EDFIS/C/011/2011 dated 31 March 2011.

11 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT

(a) Share Capital

2011 2010

Authorised:

2,000,000,000 ordinary shares of US$ 1 each 2,000,000 2,000,000

Issued, subscribed and paid-up:

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

(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 in which they have an interest of 5% or more of outstanding shares are as follows:

2011 2010

Country of incorporation

% of holding

Share capital

% of holding

Share capital

Libyan Investment Authority Libya 16.25% 162,500 16.25% 162,500

Tasameem Real Estate UAE 16.25% 162,500 16.25% 162,500

Abu Dhabi Water and Electricity Authority UAE 15.00% 150,000 15.00% 150,000

Emirates Islamic Bank UAE 10.00% 100,000 10.00% 100,000

Mohammed Bin Hussain Bin Ali AlAmoudi KSA 5.00% 50,000 5.00% 50,000

Ithmaar Development Co Ltd Bahrain 5.00% 50,000 5.00% 50,000

AlJabr Trading Co KSA 5.00% 50,000 5.00% 50,000




(iii) Distribution schedule of equity shares, setting out the number of holders and percentage of holding is as follows:

At 31 December 2011Number of

sharesNumber of

shareholders

% of totaloutstanding

shares

Categories

Less than 5% 275,000 19 27.50%

5% up to less than 10% 150,000 3 15.00%

10% up to less than 20% 575,000 4 57.50%

1,000,000 26 100.00%

At 31 December 2010Number of

sharesNumber of

shareholders

% of totaloutstanding

shares

Categories

Less than 5% 275,000 19 27.50%

5% up to less than 10% 150,000 3 15.00%

10% up to less than 20% 575,000 4 57.50%

1,000,000 26 100.00%

(b) Reserves

Statutory reserveIn accordance with the Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year is transferred to the statutory reserve until such time as the reserve reaches 50% of the paid-up share capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the CBB. US$ 489 thousand (2010: US$ Nil) was transfer during the year.

Foreign currency translation reserveThe foreign currency translation reserve is used to record exchange differences arising from the translation of the net investment in foreign operations.

12 PROFIT FROM ISLAMIC FINANCES

2011 2010

Profit on murabaha financing 12,964 7,262

Profit on commodity murabaha and wakala contracts 3,071 10,455

Profit on musharaka financing 672 1,028

16,707 18,745




13 INCOME FROM INVESTMENTS

2011 2010

Income from Sukuk 5,929 5,426

Gain on sale of Sukuk 1,320 2,086

7,249 7,512

14 STAFF COSTS

2011 2010

Salaries and benefits 9,139 11,787 Other staff expenses 1,498 672

10,637 12,459

15 DEPRECIATION AND AMORTISATION

2011 2010

Depreciation - property and equipment (note 9) 2,594 2,564

Amortisation - intangible assets 251 180

2,845 2,744

16 OTHER EXPENSES

2011 2010

Loss on fair value of equity option 1,959 998

Rent and utilities 1,598 1,572

Travelling and related expenses 127 338

Board and sharia’a committee expenses 708 732

Professional and consultancy fee 215 55

Advertising and marketing expenses 58 466

Other expenses 1,601 2,384

6,266 6,545

17 PROVISION FOR IMPAIRMENT

2011 2010

Equity-type instruments at fair value through equity (note 6) - 20,000 Advance paid for acquisition of an investment - 3,596 Land (note 9) 1,260 3,800

1,260 27,396




18 RELATED PARTY 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, sharia’a supervisory Board, external auditors and executive management of the Group and/or entities over which they excercise control and/or significant influence.

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

Associates

Key management

personnel /Sharia’a Board

members / external auditors

Significantshareholders

/entities in which

directors are interested

31 December2011 Associates

Key management

personnel/Sharia’a Board

members / external auditors

Significantshareholders

/entities in which

directors are interested

31 December2010

Assets Cash and bank balances - - 375 375 - - 190 190 Due from financial institutions - - 15,003 15,003 - - 86,475 86,475 Financing receivables 317,007 - - 317,007 254,878 - - 254,878 Investment securities - - 20,000 20,000 - - 42,718 42,718 Investment in associates 92,116 - - 92,116 97,342 - - 97,342 Other assets 3,694 - - 3,694 1,959 - - 1,959

Liabilities Due to financial institutions - - 15,403 15,403 - - 50,280 50,280 Other liabilities 4,505 625 32,939 38,069 4,505 443 - 4,948

IncomeProfit from Islamic finances 12,964 - 341 13,305 7,262 - 4,786 12,048 Profit on Islamic finances - - (352) (352) - - (409) (409)Income from investments - - 790 790 - - 935 935 Share of results of associates 831 - - 831 15,134 - - 15,134 Other income 1,478 - - 1,478 - - - -

ExpensesStaff costs - 1,687 - 1,687 - 3,161 - 3,161 Investment banking expenses - - - - - 7 - 7 Other expenses 1,959 769 - 2,728 998 4,636 - 5,634 Provision for impairment - - - - - - 20,000 20,000

Key management personnel of the Bank comprise of the Board of Directors and 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:

2011 2010

Board member fees 604 534 Salary and other short-term benefits 1,468 2,848 Post employment benefits 219 313

2,291 3,695




19 ZAKAH

Zakah payable by the shareholders in respect of each share for the year ended 31 December 2011 is US cents 1.69 (2010: US cents 1.75) for every share held. US cents 0.01 (2010: US cents 0.01) is payable by the Bank in their capacity as the agents of the shareholders and US cents 1.68 (2010: US cents 1.74) is the responsibility of the individual shareholders.

20 SEGMENT INFORMATION

a) Industry sector

The industrial distribution of the Group’s assets and liabilities as of 31 December 2011 is as follows:

Banks and financialinstitutions

Energy, power andinfrastructure

Others Total

2011

AssetsCash and bank balances 3,019 - - 3,019 Due from financial institutions 425,848 - - 425,848 Financing receivables - 317,008 - 317,008 Investment securities 173,643 104,420 50,763 328,826 Investment in associates - 92,116 - 92,116 Other assets - 4,617 48,174 52,791 Property and equipment - - 11,089 11,089

Total assets 602,510 518,161 110,026 1,230,697

LiabilitiesDue to financial institutions 89,527 - - 89,527 Other liabilities 83,287 6,505 8,676 98,468

Total liabilities 172,814 6,505 8,676 187,995

The industrial distribution of the Group’s assets and liabilities as of 31 December 2010 is as follows:

Banks and financialinstitutions

Energy, power andinfrastructure

OthersRestated

Total2010

AssetsCash and bank balances 3,910 - - 3,910 Due from financial institutions 555,658 - - 555,658 Financing receivables - 254,878 12,304 267,182 Investment securities 66,860 104,420 39,197 210,477 Investment in associates - 97,342 - 97,342 Other assets - - 50,396 50,396 Property and equipment - - 14,911 14,911

Total assets 626,428 456,640 116,808 1,199,876

LiabilitiesDue to financial institutions 148,812 - - 148,812 Other liabilities - - 11,946 11,946

Total liabilities 148,812 - 11,946 160,758




b) Geographic sector

The geographical distribution of the Group’s assets and liabilities as of 31 December 2011 is as follows:

MENA Europe America Asia Total

2011

AssetsCash and bank balances 2,170 - 849 - 3,019 Due from financial institutions 328,524 47,773 49,551 - 425,848 Financing receivables - - 317,008 - 317,008 Investment securities 308,826 - - 20,000 328,826 Investment in associates 60,658 - 31,458 - 92,116 Other assets 49,148 - 3,643 - 52,791 Property and equipment 11,089 - - - 11,089

Total assets 760,415 47,773 402,509 20,000 1,230,697

LiabilitiesDue to financial institutions 83,797 5,730 - - 89,527 Other liabilities 93,963 - 4,505 - 98,468

Total liabilities 177,760 5,730 4,505 - 187,995

The geographical distribution of the Group’s assets and liabilities as of 31 December 2010 is as follows:

MENA Europe America AsiaRestated

Total

2010

AssetsCash and bank balances 342 141 3,427 - 3,910 Due from financial institutions 399,954 104,384 51,320 - 555,658 Financing receivables 267,182 - - - 267,182 Investment securities 190,477 - - 20,000 210,477 Investment in associates 97,342 - - - 97,342 Other assets 50,396 - - - 50,396 Property and equipment 14,911 - - - 14,911

Total assets 1,020,604 104,525 54,747 20,000 1,199,876

LiabilitiesDue to financial institutions 142,809 - - 6,003 148,812 Other liabilities 11,946 - - - 11,946

Total liabilities 154,755 - - 6,003 160,758

The Group’s revenue and expenses are reviewed at a Group level and therefore no separate operating segment results and other disclosures are provided in these consolidated financial statements.




21 COMMITMENTS

2011 2010

Commitment to finance - 75,529

Other capital commitments 61,856 62,066

Forward treasury commitments 21,909 5,931

Operating lease commitments 1,531 2,552

85,296 146,078

In its normal course of business, the Bank initially undertakes contractual commitments in relation to project assets and then places the project with its investors along with the associated contractual commitments. Further, the Group has arranged for bank guarantees amounting to US$ 11.94 million (2010: US$ 11.94 million) in relation to performance obligations against its investment in a project through one of its subsidiaries.

22 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.

Included under investment in securities (note 6) are certain equity-type instruments at fair value through equity which are carried at cost, 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.

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

23 RISK MANAGEMENT

The Group has exposure to the following risks from its use of financial instruments:

• liquidity risk;• credit risk;• market risks;• profit rate in banking book; and• operational risk

The Bank has a risk management framework in place for managing these risks which are constantly evolving as the business activities change in response to credit, market, product and other developments.

This note presents information about the Group’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.




Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and

controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market

conditions, products and services offered.

The Management Risk Committee is responsible for recommending policy and framework to the Board Risk Committee, which in turn is

responsible for reviewing and recommending to the Board for approval. The Risk Management Department is responsible for monitoring

compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework

in relation to the risks faced by the Bank.

The principal risks associated with the Group’s business and the related risk management processes are as follows:

(a) Liquidity risk

Liquidity risk is defined as the risk that an entity 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 to ensure, as far as possible,

that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring

unacceptable losses or risking damage to the Group’s reputation.

The Board of Directors approves all significant policies and strategies related to the management of liquidity. The Management reviews

the liquidity profile of the Group on a regular basis and any material change in the current or prospective liquidity position is notified to

the Board through the Board Risk Committee.

The Risk Management Department monitors the liquidity profile of the Bank on an ongoing basis to ensure that the liquidity gap is within

regulatory limits and the liquidity gap and key liquidity ratios are within the internal Board approved limits.

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

Liquid asset / Total asset

2011 2010

At 31 December 0.53 0.55

Average for the year 0.52 0.58

The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2011 based on expected periods

to cash conversion from the consolidated statement of financial position date:




2011 Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

No fixedmaturity Total

AssetCash and bank balances 3,019 - - - - - 3,019 Due from financial institutions 425,848 - - - - - 425,848 Financing receivables 56,921 6,104 19,109 117,574 117,300 - 317,008 Investment securities 24,742 - - 155,183 148,901 - 328,826 Investment in associates - - - - 92,116 - 92,116 Other assets 1,438 - 48,749 - - 2,604 52,791 Property and equipment - - - - - 11,089 11,089

Total assets 511,968 6,104 67,858 272,757 358,317 13,693 1,230,697

LiabilitiesDue to financial institutions 89,527 - - - - - 89,527 Other liabilities 1,089 92,249 5,130 - - - 98,468

Total liabilities 90,616 92,249 5,130 - - - 187,995

Net gap 421,352 (86,145) 62,728 272,757 358,317 13,693 1,042,702

Cumulative net gap 421,352 335,207 397,935 670,692 1,029,009 1,042,702

Commitments 34,100 255 50,430 511 - - 85,296

The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2010 based on expected periods to cash conversion from the consolidated statement of financial position date:

2010 Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

No fixedmaturity

RestatedTotal

AssetCash and bank balances 3,910 - - - - - 3,910 Due from financial institutions 555,658 - - - - - 555,658 Financing receivables - 12,060 81,296 57,241 116,585 - 267,182 Investment securities - - 38,039 142,414 30,024 - 210,477 Investment in associates - - - 36,684 60,658 - 97,342 Other assets 1,668 42,147 3,818 - - 2,763 50,396 Property and equipment - - - - - 14,911 14,911

Total assets 561,236 54,207 123,153 236,339 207,267 17,674 1,199,876

LiabilitiesDue to financial institutions 128,811 20,001 - - - - 148,812 Other liabilities 26 7,376 - - 4,544 - 11,946

Total liabilities 128,837 27,377 - - 4,544 - 160,758

Net gap 432,399 26,830 123,153 236,339 202,723 17,674 1,039,118

Cumulative net gap 432,399 459,229 582,382 818,721 1,021,444 1,039,118

Commitments 81,715 50,430 1,021 12,912 - - 146,078


23 RISK MANAGEMENT (continued)



The contractual maturities of the financial assets and liabilities are not significantly different from their expected maturities and the Bank does not have assets and liabilities with contractual maturities beyond 5 years.

(b) Credit risk

Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial

losses, and for the Group it arises principally from the commodity murabaha and wakala placed with financial institutions, investments

in Sukuks and financing receivables.

For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual

obligor default risk, country risk and sector risk).

Management of credit risk

Credit risk is assessed and approved on an individual basis for each counterparty at least once a year as a part of the internal risk

review process. As at 31 December 2011, all credit exposures were appropriately approved by relevant authority level. The credit risk

assessment conducted as a part of the internal risk review process included rating each exposure using industry specific rating models

which consider key risk factors to assign the internal credit rating. The Bank assigns rating-based credit limits for all counterparty banks

and financial institutions with whom it places short-term funds. All placements during the year were with financial institutions having

internal and / or external credit ratings mapped to “Standard” credit category of the Bank. The Bank also conducts detailed assessments

of the equity investment opportunities to evaluate the commercial viability of the investments. Sukuk investments and Islamic Financing

Facilities during the year were with obligors who were either banks, sovereigns or sovereign owned companies, Associates, and were rated

externally and/or internally. The Bank monitors the creditworthiness of the counterparties and the performance of the exposures with

regard to timeliness of payments and other credit conditions on an ongoing basis. Annual and interim credit reviews are conducted to

check the credit quality and impairment assessment requirement, if any.

The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing

the creditworthiness of counterparties. The Bank uses external ratings for regulatory purposes.

The Bank does not perform a collective assessment of impairment for its credit exposures as the credit characteristics of each exposure

is considered to be unique. Credit exposures are subject to regular reviews by the Risk Management Department.

During the year, the Bank has not made any specific provision on any of its credit or investment exposures due to impairment or

restructuring. With respect to renegotiated exposure, the Bank has restructured two financing facilities to one of its Associates with

revised repayment terms. The revised terms include repayments based on full cash sweep, extension in tenor by three and six months

respectively and reduction in fees. However, the profit rate of the financing remains unchanged. The restructured financing exposure was

US$ 317,008 thousand as at 31 December 2011 (2010: Nil). The Bank has a registered mortgage on certain assets which had book value

of US$ 450,000 thousand against its exposures as at 31 December 2011 (2010: US$ 378,079 thousand).

Maximum exposure to credit risk

The 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 impairment provision, without taking into account any collateral held and other

credit mitigants.




Maximum exposure

2011 Restated2010

Balances with banks 3,009 3,902 Due from financial institutions 425,848 555,658 Financing receivables 317,008 267,182 Investment securities 224,406 106,057 Other assets 48,154 44,894

1,018,425 977,693

As of 31 December 2011 (2010: nil), none of the above exposures are neither past due nor impaired.

Credit quality per class of financial assetsThe table below analyses the Group’s maximum credit exposure where the credit quality is reflected by external credit ratings (S&P, Moody’s and Fitch) of the counterparties where relevant:

2011Bank

balances

Due fromfinancial

institutionsFinancing

receivablesInvestment

securitiesOtherassets Total

Prime to High

grade: AAA – AA 2,566 132,834 - 15,180 - 150,580

Medium grade: A – BBB 17 176,699 - 173,643 - 350,359

Non-investment/

speculative: BB – B 28 48,703 - - - 48,731

Substantial risk: Below B 23 - - - - 23

Unrated 375 67,612 317,008 35,583 48,154 468,732

3,009 425,848 317,008 224,406 48,154 1,018,425

2010Bank

balances

Due fromfinancial

institutionsFinancing

receivablesInvestment

securitiesOtherassets

RestatedTotal

Prime to High

grade: AAA – AA 141 104,384 - - - 104,525

Medium grade: A – BBB 3,571 239,774 - 97,385 - 340,730

Non-investment/

speculative: BB – B - - - 8,640 - 8,640

Substantial risk: Below B - - - - - -

Unrated 190 211,500 267,182 32 44,894 523,798

Total carrying amount 3,902 555,658 267,182 106,057 44,894 977,693





Concentration RiskConcentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk primarily arises due to name and sector concentration including the geographic concentration.

The Bank strictly adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage name concentration. Any excesses above the said limits are reported to the CBB and treated in accordance to the regulatory guidelines by way of capital deduction. In addition, the Bank has established internal limits on the maximum permissible exposures to sectors for managing sector concentration.

In respect of geographical concentration the Bank has defined limits for each country / geography which is based on lowest among the available ratings by S&P, Moody’s and Fitch. The Bank also closely monitors political risk arising from events in each country of exposure.

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 sector:

2011Banks and financial

institutionsEnergy, power and

infrastructure Others Total

Balances with banks 3,009 - - 3,009

Due from financial institutions 425,848 - - 425,848

Financing receivables - 317,008 - 317,008

Investment securities 173,643 - 50,763 224,406

Other assets - 2,308 45,846 48,154

602,500 319,316 96,609 1,018,425

2010Banks and financial

institutionsEnergy, power and

infrastructure OthersRestated

Total

Balances with banks 3,902 - - 3,902

Due from financial institutions 555,658 - - 555,658

Financing receivables - 254,878 12,304 267,182

Investment securities 66,860 - 39,197 106,057

Other assets - - 44,894 44,894

626,420 254,878 96,395 977,693




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:

2011 MENA Europe America Asia Total

Balances with banks 2,160 - 849 - 3,009

Due from financial institutions 328,524 47,773 49,551 - 425,848

Financing receivables - - 317,008 - 317,008

Investment securities 224,406 - - - 224,406

Other assets 45,897 - 2,257 - 48,154

600,987 47,773 369,665 - 1,018,425

2010 MENA Europe America AsiaRestated

Total

Balances with banks 334 141 3,427 - 3,902

Due from financial institutions 399,954 104,384 51,320 - 555,658

Financing receivables 267,182 - - - 267,182

Investment securities 106,057 - - - 106,057

Other assets 44,894 - - - 44,894

818,421 104,525 54,747 - 977,693

(c) Market Risk

Market 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, commodities risk, currency risk and other price risk.The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Group does not have a trading portfolio and hence is not exposed to market risk in relation to such instruments. The Group is not exposed to commodities or price risk as there is no commodity holding either in the banking or trading book. The Group does not have any position in listed equities which would result in equity risk. Market risk for the Group arises only on account of its foreign exchange exposure in the banking book particularly on account of commodity murabaha and wakala contracts.





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 Bank monitors this exposure on an ongoing basis and the net open position is not significant.

The Group had the following net exposures denominated in foreign currencies (other than GCC currencies) as of 31 December:

2011 2010

Sterling Pounds 94 62

Euros 51 32

(d) Profit rate risk in banking book

Profit rate risk in banking book is the exposure of the Group’s financial condition to adverse movements in profit rates. Changes in profit rates affect the Group’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating expenses. Changes in profit rates also affect the underlying value of the Group’s assets, liabilities, and off-balance-sheet (OBS) instruments because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

The Group’s profit rate sensitive assets are mainly commodity murabaha and wakala placed with financial institutions, financing receivables and investments in Sukuk. The Group has exposures to both fixed and floating rate Sukuk. Fixed rate sukuk represent 89% of the total Sukuk portfolio as at 31 December 2011 (2010: 37%). The rate sensitive liabilities comprise of murabaha and wakala payable to central banks and other financial institutions.

The Group has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to shift in the yield curve resulting in changes in the economic value of cashflows. Exposure to basis risk is not material and though the basis risk exposure is monitored, the Bank does not consider this item of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise commodity murabaha and wakala contracts, financing receivables and Sukuk. Part of these assets are funded by rate sensitive liabilities in the form of murabaha and wakala payble. The short-term nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Group is not exposed to optionality risk arising due to embedded options in rate sensitive assets or liabilities.

The Bank monitors the timing difference in the re-pricing of the Bank’s rate-sensitive assets and liabilities and resulting impact of any parallel shift in the yield curve on the expected net profit income for up to one year, and the value of equity and overall economic value of equity considering the changes in net profit income and the value of equity. The profit rate risk is managed by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. A standard 200 basis point (bp) profit rate shock by way of parallel shift in all yield curves is considered on a monthly basis to ensure that the resulting impact on the economic value of equity is within the limit prescribed by the Basel Committee on Banking Supervision.

Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. A summary of the Group’s profit rate gap position is as follows:




2011Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years Total

Assets

Due from financial institutions 425,848 - - - - 425,848

Financing receivables 56,921 6,104 19,109 117,574 117,300 317,008

Investment securities 24,742 - - - - 24,742

Total assets 507,511 6,104 19,109 117,574 117,300 767,598

Liabilities

Due to financial institutions 89,527 - - - - 89,527

Other liabilities - 83,287 - - - 83,287

Total liabilities 89,527 83,287 - - - 172,814

Profit rate sensitivity gap 417,984 (77,183) 19,109 117,574 117,300 594,784

2010Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

RestatedTotal

Assets

Due from financial institutions 555,658 - - - - 555,658

Financing receivables - 12,060 81,296 57,242 116,584 267,182

Investment securities - - 29,398 37,462 - 66,860

Total assets 555,658 12,060 110,694 94,704 116,584 889,700

Liabilities

Due to financial institutions 128,811 20,001 - - - 148,812

Total liabilities 128,811 20,001 - - - 148,812

Profit rate sensitivity gap 426,847 (7,941) 110,694 94,704 116,584 740,888

The sensitivity of the Group’s consolidated statement of income to a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position), would be an increase (decrease) of profit by US$ 11,896 thousand (2010: US$ 14,818 thousand).

Overall, profit rate risk positions are managed by Treasury, which uses commodity murabaha and wakala contracts with/ from financial institutions to manage the overall position arising from the Group’s activities.






The average effective profit rates on the financial assets and liabilities as at 31 December were as follows:

2011 2010

Due from financial institutions 0.44% 1.86%

Financing receivables 4.90% 3.92%

Investment securities 5.43% 3.20%

Due to financial institutions 0.42% 0.68%

(e) Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Sharia’a non-compliance risk but excludes strategic and reputational risks.

The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff. The Bank has conducted Risk and Control Self Assessment of Operational Risk in all departments to identify the Key Risk Indicators as a part of the overall Operational Risk Management framework. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board. The Bank has also implemented an IT enabled operational risk system to automate the operational risk processes namely risk and controls assessment, loss data collection and key risk indicator calculation.

24 SOCIAL RESPONSIBILITY

The Bank intends to discharge its social responsibilities through donations to charitable causes and organisations.

25 PROPOSED APPROPRIATIONS

No appropriations are currently being proposed by the Board of Directors. Appropriations, if any, shall be considered for approval of the shareholders at the annual general meeting.

26 COMPARATIVES

Certain prior year amounts have been regrouped to conform to the current year’s presentation. Such reclassification did not affect previously reported consolidated statement of income or consolidated owners’ equity.


RISK

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API

TAL

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Basel II - Pillar III Disclosures

Contents Page

1 Executive Summary 732 Introduction 73

2.1 Pillar I 732.2 Pillar II 742.3 Pillar III 74

3 Overall Risk Management 743.1 Risk Management Strategy 743.2 Risk Management Framework 753.3 Risk Types 75

4 Capital structure, management and capital adequacy 754.1 Capital and Group Structure 754.2 Capital Management 76

4.2.1 Regulatory capital adequacy 764.2.1.1 Regulatory capital structure 774.2.1.2 Regulatory capital requirement 77

4.2.2 Internal capital adequacy assessment process 774.3 Exposures exceeding 15% capital base 77

5 Credit Risk 785.1 Credit Risk Management 785.2 Capital Requirements for Credit Risk 80

5.2.1 Credit Exposure and Risk-weighted Assets 805.2.2 Capital requirements by type of Islamic financing contract 815.2.3 Gross funded and unfunded exposure 815.2.4 Impairment Provisioning for Investment and Credit Exposures 825.2.5 Equity Investments Held in Banking Book 82

5.3 Other quantitative information on credit risk 835.4 Concentration Risk 835.5 Counterparty Credit Risk 835.6 Settlement Risk 83

6 Market Risk 846.1 Capital Requirements for Market Risk 846.2 Foreign Currency Translation Risk 84

7 Operational Risk 847.1 Operational Risk Management 857.2 Legal Compliance and Litigation 857.3 Sharia’a Compliance 857.4 Capital Requirements for Operational Risk 85

8 Liquidity Risk 868.1 Maturity Profile 86

9 Profit Rate Risk in the Banking Book 8610 Reputational Risk 8711 Strategic Risk 8712 Other Risks 87


1 Executive summaryFirst Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23rd June, 2008, under Commercial Registration No. 69089. The Bank operates under Islamic Wholesale Banks licence issued by the Central Bank of Bahrain (the “CBB”). The Bank’s registered office is at Building 1398, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank include Shari’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios related to the energy sector. The Bank is regulated by the CBB and supervised by a Shari’a Supervisory Board for compliance with the Shari’a rules and principles.

The CBB’s Basel II guidelines became effective on 1st January, 2008 as the common framework for the implementation of Basel II capital adequacy framework for banks incorporated in the Kingdom of Bahrain. The disclosures in this report have been prepared in accordance with the CBB requirements outlined in the Public Disclosure Module (“PD”), Section PD-1.3: Disclosures in the Annual Report, CBB Rule Book – Volume II for Islamic Banks. The requirements of the section follow the requirements of Basel II – Pillar III and the Islamic Financial Services Board’s (IFSB) recommended disclosures for Islamic banks.

This report contains a description of the Bank’s risk management and capital adequacy risk and practices, including detailed information on the capital adequacy process. The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB throughout 2011.

The disclosures in this report are in addition to, or in some cases serve to clarify, the disclosures set out in the consolidated financial statements for the year ended 31 December 2011, presented in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). To avoid any duplication, information required under PD module but already disclosed in other sections of the Annual report has not been reproduced in these disclosures.

This report contains detailed qualitative and quantitative information on risk components and capital adequacy.

2 IntroductionThe Basel II based framework provides a more risk sensitive approach for the assessment of risk and the calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and processes within financial institutions. The Bank has accordingly taken steps to comply with these requirements.

The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:

•PillarI:calculationoftheriskweightedamountsandregulatorycapitalrequirement.

•PillarII:thesupervisoryreviewprocess,includingtheInternalCapitalAdequacyAssessmentProcess.

•PillarIII:rulesforthedisclosureofriskmanagementandcapitaladequacyinformation.

2.1 Pillar I

Pillar I prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar I defines the regulatory minimum capital requirements for each bank to cover credit risk, market risk and operational risk inherent in its business model. It also defines the methodology for measurement of these risks and the various elements of qualifying capital. The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs).

The resultant ratio is to be maintained above a predetermined and communicated level. As required by the CBB, the minimum capital adequacy ratio for banks incorporated in Bahrain is 12% compared to the Basel Committee’s minimum recommended ratio of 8%. The CBB also requires banks incorporated in Bahrain to maintain a buffer of 0.5% above the minimum capital adequacy ratio. In the event that the capital adequacy ratio falls below 12.5%, additional prudential reporting requirements apply, and a formal action plan setting out the measures to be taken to restore the ratio above the target level is to be formulated and submitted to the CBB. Consequently, the CBB requires The Bank to maintain an effective minimum capital adequacy ratio of 12.5%.


Under the CBB’s Basel II capital adequacy framework, the RWAs are calculated using sophisticated and risk sensitive methods.

The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the RWAs in accordance with the CBB’s Basel II capital adequacy framework.

Risk Type Approach used by the Bank

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar II

Pillar II deals with the Supervisory Review and Evaluation Process (SREP). It also recommends banks to establish the Internal Capital Adequacy Assessment Process (ICAAP) for assessing the adequacy of the available capital to cover all material risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB for prescribing the bank-specific minimum capital adequacy ratio. Pending finalization of the assessment process, all banks incorporated in Bahrain are required to continue to maintain the existing 12% and 8% minimum capital adequacy ratios on consolidated basis and solo basis respectively.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the bank is exposed. During the year under review, the ICAAP framework was approved by the Board. The ICAAP framework includes identification, assessment, measurement, monitoring and reporting of all material risks and maintain appropriate level of capital in line with the Bank’s overall risk profile and business plan. The ICAAP is also supplemented by developing stress scenarios and assess the impact of such scenarios on the portfolios, risk profile, capital adequacy of the Bank and ensure the adequacy of capital in such instances.

2.3 Pillar III

Pillar III of the CBB’s Basel II framework prescribe the coverage, depth, timelines and medium of communicating the information by the institution on its governance structure, risk profile, risk management framework and the capital adequacy position. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to complement the first two Pillars and enabling stakeholders and market participants in getting an insight in the institution’s risk appetite and risk exposures and enable detailed assessment and comparability between different banks.

Under the current requirements of the PD module, partial disclosure consisting mainly of quantitative analysis is required during half year reporting, whereas full disclosure is required to coincide with the financial year-end reporting.

3 Overall risk management

3.1 Risk management strategy

The Bank perceives good risk management capabilities to be the foundation for delivering superior results on a risk-adjusted

basis to customers, investors and shareholders. The Bank will continue to endeavour to adopt international best practices of risk

management, superior corporate governance and the highest level of market discipline.

The primary objectives of the risk management strategy of the Bank are to:

•ManagerisksinherentintheBank’sactivitiesinlinewiththeriskappetiteoftheBank;

•StrengthentheBank’sriskmanagementpracticestoreflectindustrybestpractices;and

•Aligninternalcapitalrequirementswithriskmateriality.

The risk appetite is articulated through the limit structures for individual risks. These limits are based on the Bank’s business

Introduction (continued)


plans and guided by the regulatory requirements and guidelines. By defining the risk appetite, the Bank links its individual risks to

its strategy. The risk appetite defines the level of risk that the Bank is prepared to take in order to achieve its objectives. The Bank

reviews and realigns its risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios.

The Bank also assesses its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines

the Bank’s risk exposures and defines its tolerance levels towards accepting or rejecting these risks. Tolerance levels are reflected

in the limits defined by the Bank for each risk area.

3.2 Risk management framework

The Bank’s Board of Directors through its Risk Committee (a sub committee of the Board of Directors) has the responsibility for

ensuring the establishment and effective implementation of an integrated risk management framework for the Bank. Further,

the Risk Management Department (RMD) is empowered to independently identify and assess risks that may arise from the

Bank’s investing, financing and operating activities; as well as recommend directly to the Management Risk Committee (MRC)

any prevention and mitigation measures as it deems fit. In addition, the Internal Audit function, which is independent of both

operations and the Bank’s investments units, reviews the risk management process.

3.3 Risk types

As an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to various risks in the normal

course of its business and these risks include:

a. Credit risk including concentration risk, counterparty credit risk and settlement risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Other risks

The details on exposure of the Bank to these risks and the management framework for them are discussed in the following

sections 5-12 of this document.

4 Capital structure, management and capital adequacy

4.1 Capital and group structure

The authorized share capital of the Bank is 2 billion shares of US$ 1 each. The paid up capital of the Bank is US$ 1 billion divided

into 1 billion shares of US$ 1 each.

The Bank fully consolidates all its subsidiaries for capital computation purposes. The Bank’s associates qualify as commercial

entities and their exposure is risk weighted in accordance with applicable capital computation guidelines of the CBB with the

exception of Mena Drill Investment Company which is consolidated for regulatory capital adequacy purpose.


Entity name Entity classification

as per PCD Module

Treatment by the Bank

Al Dur Energy Investment Company (ADEIC) - 58.83% Commercial entity Fully consolidated

Cosmos Industrial Investment Corporation BSC (c) (CIIC) – 93.47% Commercial entity Fully consolidated

North Africa Investment Company – 100% Commercial entity Fully consolidated

MENAdrill Investment Company - 40.65% Commercial entity Consolidated for regulatory

capital adequacy purpose *

* Based on the instruction from the CBB

4.2 Capital management

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator

(CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact

of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between

the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s

capital management policy seeks to optimize returns within the internally defined risk tolerances while satisfying all the

regulatory requirements.

The Bank ensures that the capital adequacy requirements are met and complied with regulatory capital requirements at all

times.

In addition, the Bank has developed a comprehensive, best of breed ICAAP.

4.2.1 Regulatory capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the Bank to maintain the ratio

of eligible capital base to the total risk-weighted assets at a minimum of 12%.

The Bank does not have banking and financial institution subsidiaries or interest in insurance entities.

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB during the year ended

31st December, 2011.

The Bank’s Tier 1 and total capital adequacy ratios comply with the minimum capital requirements under the CBB’s Basel II

framework.

The Bank’s total risk weighted exposures as at 31st December, 2011 amounted to USD 958,763 thousand. Credit risk

accounted for 84.12 per cent, operational risk 7.45 per cent, and market risk 8.43 per cent of the total risk weighted assets.

Tier 1 and total regulatory capital were USD 1,004,974 thousand.

As at 31st December, 2011, Bank’s Tier 1 and total capital adequacy ratios were same at 83.08 per cent.

There are no restrictions on the transfer of funds or regulatory capital within the Group.

Capital structure, management and capital adequacy (continued)


4.2.1.1 Regulatory capital structure

The following table summarises the eligible capital after deductions for Capital Adequacy ratio (CAR) calculation as of 31 December 2011:

USD 000’s

Tier 1 Tier 2 Total

Share capital 1,000,000 - 1,000,000

Statutory reserve 1,800 - 1,800

Retained earnings 5,481 - 5,481

Current interim profit - - -

Less: Goodwill 2,309 - 2,309

Less regulatory deduction

Excess amount over maximum permitted large exposure limit 201,362 - 201,362

Total eligible capital base 803,610 - 803,610

The Bank has not included non-controlling interest in Tier 1 capital as it may not be available to observe such losses.

4.2.1.2 Regulatory capital requirement

The following table summarises the regulatory capital requirements for credit, market and operational risks as of 31 December 2011:

USD 000’s

Risk weighted exposure Capital requirement @ 12%

Credit Risk 815,725 97,887

Market risk 80,803 9,696

Operational 70,771 8,493

Total 967,299 116,076

4.2.2 Internal capital adequacy assessment process

In line with the guidelines provided under the Pillar II of the Basel II Accord, the Bank has established the ICAAP to augment

the regulatory capital adequacy. The ICAAP considers the adequacy of capital with respect to the internal capital adequacy

ratio target and includes other material risks apart from those prescribed under the regulatory Pillar I guidelines, stressed

scenarios and growth in business based on the business plan. The Bank segregates all material risks in to measurable and

non-measurable risks and aims to establish measurement methodologies for all material risks and quantify the capital

requirement for them. Currently, the Bank maintains an additional capital buffer of 2% for the non-measurable risks. As of

31st December 2011, the internal capital adequacy ratio was above the internal target.

4.3 Exposures exceeding 15% capital base

As defined in the PCD Module of the CBB, the Bank is obligated to deduct from its capital base any exposures exceeding the single obligor limit imposed by the CBB which is 15% of the Bank’s regulatory capital base.


The following table summarises the exposures deducted from the capital base for calculating the eligible capital base as of 31 December 2011:

USD 000’s

Exposure type Total ExposureExposure as percentage

of available capitalCapital deduction

amount

Equity and financing exposure in an associate

352,108 35.04 % 201,362

5 Credit riskCredit risk is defined as the potential that a bank’s borrower or counterparty will fail to meet its obligations in accordance with agreed terms.

5.1 Credit risk management

The credit risk exposures faced by the Bank are by way of its short term liquidity related placements with other financial institutions, Islamic financing facilities provided to associates, and in respect of investments in projects, unlisted equity and Sukuks. The investment related funding exposures arise in the ordinary course of its investment banking activities and are generally transacted without collateral or other credit risk mitigants.

RMD is responsible for conducting independent risk review and analysis for all credit applications received from Investment Banking, Islamic Finance, and Treasury Departments. It is also responsible for the ongoing review of the credit worthiness of existing clients through the process of periodic credit reviews, annual or more frequently, if required. RMD is also responsible for monitoring all approved limits, and reporting breaches, if any to the MRC and the Board.

RMD reviews every Credit Application received from the respective business initiator (LOB) and prepares an independent comprehensive Credit Risk Analysis with recommendation. The Credit Application and the Credit Analysis are submitted to the MRC for approval, if within their approval authority, or for review and further submission to the appropriate approval authority.

After the credit is approved and draw down effected, the credit exposures are monitored on an ongoing basis. These include keeping track of counterparties’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral, if applicable, and monitoring timely repayments. All the exposures are reviewed at least once annually and interim reviews are conducted in case of any adverse developments.

RMD assesses the creditworthiness of the counterparties using rating models as a part of the review for new facilities as well as existing facilities undergoing the annual review process. The Bank has implemented industry specific rating models based on key factors relevant to the industry. These models are used to rate its exposures to financial institutions as also for counterparties in various other industries except in case of counterparties rated externally by at least two rating agencies recognised by the CBB. The Bank rates the exposures on a scale of 1 to 10 mapped to the following categories – 1 is mapped to Prime, 2 to High grade, 3 to Upper medium grade, 4 to Lower medium grade, 5 to Non-investment grade speculative, 6 to Highly speculative, 7 to Substantial risk, 8 to Extremely speculative, 9 to In default with little prospect of recovery and 10 to In default with no prospect of recovery (Loss). The Bank currently is not engaged in providing retail credit facilities and hence it does not use any retail credit “scoring” models.

The Bank maintains a strong focus on identification of signs of deterioration in the credit worthiness of counterparties and performance of investments in order to take preventive measures before an existing facility becomes substandard / doubtful or deteriorates in value.

RMD also monitors credit and investment risk exposures against established limits on a daily basis. RMD alerts the concerned business line and the MRC whenever a limit is breached. RMD also produces periodic exposure and risk reports for the Board as well as reports required for regulatory reporting and public disclosure as required under the Pillar III guidelines.

The credit categorisation of the Bank including problem credit categories is aligned with the regulatory categorisation. All

Capital structure, management and capital adequacy (continued)


credit exposures which are regular and for which currently there is no doubt as to their orderly liquidation will be categorised as Standard or Current.

There are three categories of problem credit exposure classification indicating increasing degrees of potential risk of loss in addition to watch-listing.

Substandard

An obligation or part of an obligation that is inadequately protracted by the current financial condition of the obligor or the

collateral pledged. The normal repayment of principal and profit or settlement at maturity may be or has been jeopardised or

collateral coverage is clearly deficient. No loss is foreseen but a protracted work-out is a possibility.

Substandard accounts may exhibit one or all of the following characteristics:

• Principalorprofitrepaymentispastdueformorethan90days;or

• Cash-flowisnotsufficienttomeetcurrentlymaturingfinancingfacility;or

• Accountswhichcarrymorethananormaldegreeofriskduetotheabsenceofupdatedorsatisfactoryfinancial

information or inadequate collateral documentation.

Doubtful

An obligation or part of an obligation where there is a high probability of some loss, the extent which cannot be currently

quantified.

Doubtful accounts may exhibit one or all of the following characteristics:

• Principalorprofitrepaymentispastdueformorethan180days;or

• Collectioninfullonthebasisofcurrentlyexistingfacts,conditionsandvaluesishighlyquestionableandimprobable;or

• LikelihoodoflossishighbutdecisiontoclassifyasLosshasbeendeferredtillanexactdecisionisdetermined.

Loss

An obligation regarded as uncollectable and where loss and consequent write-off is imminent. Once written off these amounts

are no longer shown as Loss although eventual recovery may still be a possibility.

Loss accounts may exhibit one or all of the following characteristics:

• Principalorprofitrepaymentispastdueformorethanayear;or

• Immediatecircumstancesindicatethatanassetisuncollectable.

The Bank regularly assesses its credit portfolio for any indicators of impairment on a periodic basis and would consider provision

for impairment on specific credit exposures. Currently, the Bank does not have a sizeable credit portfolio for assessment of

impairment on a collective basis.

The Bank shall write-off the exposures (fully / partially as the case may be) when there is reasonable doubt over recovery of the

amount. Reasonable doubt shall be based on objective evidence that the balance is impaired and would not be recovered.

The Bank defines its past due credits as any amount due to FEB and not received. Principal or profit repayments that are past

due for more than 90 days are classified as substandard.


The Bank considers an Islamic Financing contract as impaired in case it observes certain objective evidence of impairment which

might include;

• thesignificantfinancialdifficultyresultinginlackofabilityoftheborrower;

• abreachofcontractsuchasadefaultordelinquencyinpaymentofprofitorprincipal;

• lackofwillingnessorintentoftheborrower;

• thelender,foreconomicorlegalreasonsrelatingtotheborrower’sfinancialdifficulty,grantingtotheborrowera

concession that the lender would not otherwise consider;

• itbecomingprobablethattheborrowerwillenterbankruptcyorotherfinancialreorganization;

• thedisappearanceofanactivemarketbecauseoffinancialdifficulties;

• observabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromagroupoffinancial

assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual

financial assets in the group including: adverse changes in the payment status of the borrowers, or national or local economic

conditions that correlate with defaults on the assets in the group.

The Bank has an investment in Libya and it has conducted an independent valuation of this investment to ascertain the

impairment, if any. Based on the independent valuation, the value of the investment in Libya was circa US$ 120 million against

the Bank’s exposure of US$ 60.66 million as at 31 December 2011. During the year, the Bank has not made any specific provision

on any of its credit or investment exposures due to impairment or restructuring. With respect to renegotiated exposure, the Bank

has restructured two financing facilities to one of its Associates with revised repayment terms. The Note 23 forming part of the

consolidated financial statements includes details on the restructuring. The Bank has not made any write-off in respect of any

business related investments or receivables during the year.

The total unfunded commitments of the Bank as of 31December 2011 were US$ 85,296 thousand and mainly within the GCC

region and primarily in the Energy sector.

The Bank did not have any exposure to highly leverage and other high risk counterparties as at 31 December, 2011. As on the

reporting date, the Bank does not have any obligation with respect to recourse transaction. The Bank has also not imposed any

penalties on customers for default during the year.

The Bank provided for an asset which does not form part of core business. This was a provision of US$ 1.26 million for decline in

the market value of a parcel of land held for strategic purpose.

5.2 Capital requirements for credit risk

The Bank uses the Standardised Approach under the Basel II framework for measuring the regulatory capital requirement for its

credit risk. The Bank utilizes ratings from External Credit Assessment Institution (ECAI) recognised by the CBB (S&P, Moody’s,

Fitch, and Capital Intelligence) for its regulatory credit risk capital charge calculations. Please refer to Note 23 of the consolidated

financial statements for details of the credit grading of exposures based on rating by ECAIs as at 31 December 2011.

5.2.1 Credit exposure and risk-weighted assets

The following table summarises the components of credit risk as computed for regulatory capital adequacy purposes “net of

the relevant deductions” as of 31 December 2011:

Credit risk (continued)


USD 000’s

Asset categories for credit riskCredit

exposuresAverage risk weights %

Credit risk weighted assets

Capital requirements

@12%

Cash items 10 0% - -

Total claims on sovereignsSukukOthers

86,263-

0%-

--

--

Total claims on banksStandard Risk WeightsPreferential Risk WeightsShort Term Claims

462,914135,996

-

39.9%20.0%

-

184,60927,199

-

22,1533,264

-

Claims on corporate 79,406 100% 79,406 9,529

Investment in securities and sukuksSukukEquity

-145,078

-150%

-217,617

-26,114

Holding of real estateLand (un-occupied)SukukEquity

9,200-

20,000

200%-

200%

18,400-

40,000

2,208-

4,800

Other assets and specialized financing 248,494 100% 248,494 29,819

Total credit risk weighted asset 1,187,361 68.7% 815,725 97,887

5.2.2 Capital requirements by type of Islamic financing contract

The following table summarises the components of credit risk by type of Islamic financing contract as of 31 December 2011:

USD 000’s

Asset categories for credit risk by Islamic financing contract types

Creditexposures

Average riskweights %

Credit riskweighted

assets

Capitalrequirements

@ 12%

Commodity murabaha and wakala contracts 425,848 31.72%

135,05916,207

Sukuk 224,406 30.80% 69,071 8,289

Total Credit Risk Weighted Assets by type of Islamic financing contracts

650,254 31.39% 204,130 24,496

5.2.3 Gross funded and unfunded exposure

The following table summarises the total average gross credit exposure over the year and gross credit exposure at 31

December 2011 broken down by major types of credit exposures into funded and unfunded


USD 000’s

Average exposures * Gross exposure

Balances with banks 3,465 3,009

Due from financial institutions 462,539 425,848

Financing receivable 303,827 317,008

Investment securities 144,946 224,406

Other assets 48,516 48,154

Total funded exposures 963,293 1,018,425

Commitment to finance 16,555 -

Other capital commitments 61,942 61,856

Operating lease commitments 7,009 21,909

Forward treasury commitments 18,583 1,531

Total unfunded exposures 104,088 85,296

* Represents quarterly average balance for the twelve months ended on 31 December 2011.

5.2.4 Impairment Provisioning for Investment and Credit Exposures

During the year, the Bank has not made any specific provision on any of its credit or investment exposures. Movement in provision for impairment during the year was as follows:

USD 000’s

Impairment provision forTotal

Investment exposures Credit exposures

At 1 January 2011 20,000 - 20,000

Charge for the year - - -

Amounts written off against provision - - -

Recoveries & write backs - - -

At 31 December 2011 20,000 - 20,000

5.2.5 Equity investments held in banking book

All the equity investments of the Bank are held in the banking book and are subject to credit risk weighting under the capital adequacy framework. For regulatory capital computation purpose, the Bank’s equity investments in the banking book include investments carried at fair value through equity.

There were no sales or liquidations of equity investment during the reporting year which would result in realized gains (or losses) in this year.

The following table summarises a breakdown of the Bank’s equity investments by objectives and market type as at 31 December 2011.



USD 000’s

Objective Type Gross

exposureAverage

gross exposure Risk

weight %Risk

weighted exposure Capital

requirement

Capital gain Unquoted 20,000 20,000 200% 40,000 4,800

Strategic* Unquoted 145,078 145,078 150% 217,617 26,114

* This does not include equity exposure of Menadrill Investment Co. of USD 31,458 thousand due its consolidation for capital adequacy

computation purpose.

The Bank does not have any exposure to equity based financing structure.

5.3 Other quantitative information on credit risk

For information related to maturity profile of financial assets, refer to note 23(a) of the consolidated financial statements

5.4 Concentration Risk

Concentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage the name concentration. Any excess above the said limit has been reported to the CBB and treated in accordance with the regulatory guidelines in respect of capital deduction for such exposures. In addition, the Bank has established internal limits on the maximum permissible exposure to business lines / activities, sectors and countries for managing concentration risk. The portfolio is segregated by business line / activities, geography and industry segments. The activities are segregated as Treasury, Islamic Financing and Investments and the Bank has internal limits for these activities. In addition to the business line limits, the Bank segregates all its exposures by country, sets rating-based country limits and monitors the exposures with respect to these limits. The portfolio is also segregated by industry sectors namely Financial Services, Oil & Gas, Power & Water, Manufacturing & Others with limits set and monitored for these sectors. RMD monitors adherence to the limits on an ongoing basis.

The industry and geography-wise concentration of credit exposure has been detailed in note 23(b) of the consolidated financial statements for the year ended 31 December 2011.

5.5 Counterparty credit risk

Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. An economic loss would occur if the transaction or portfolio of transactions with the counterparty has a positive economic value at the time of settlement and the counterparty is in default. The Bank does not have positions in OTC derivatives, Securities Financing Transactions (SFTs), Margin Lending Transactions or any other long settlement transactions which would expose it to counterparty credit risk.

5.6 Settlement risk

Settlement risk is the risk that a counterparty does not deliver on its obligation or its value in cash as per agreement when the

trade was entered though the other counterparty or counterparties have already delivered their obligation as agreed. The Bank

is exposed to settlement risk occasionally on account of the foreign exchange spot transaction entered into for business and

operational requirements. The Bank has established limit structure based on the credit quality (assessed based on credit rating)

for settlement exposures and the limits are monitored on an ongoing basis.


As an enhancement to the internal controls, the Bank implemented an IT enabled limit monitoring system since January 2011.

The system enables online monitoring of credit and settlement limits for counterparties. The earlier system was being used

concurrently during the transition period until April 2011 after which a complete switchover was done to the new system.

The new system has enhanced the limit management capabilities in terms of setting and monitoring limits by tenor, facilities,

counterparties, group of related counterparties, products, sectors and countries. The system also enables monitoring limit end

dates and review dates for facilities.

6 Market risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices

will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to

manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Bank uses the Standardized approach under the Basel II Framework for measuring the regulatory capital required for its market

risk exposure.

The Bank does not maintain a trading portfolio in commodities, equities or Sukuk. Therefore, exposure to market risk remained

minimal. As at 31 December 2011, the Bank’s major source of market risk was from Foreign Exchange open position which resulted in

a capital charge of US$ 9,696 thousand. The Bank is also exposed to foreign exchange translation risk from its investment in foreign

operations (associate in Libya).

The different types of market risks with exposures, objectives, policies and processes to manage the risk have been detailed in note 23

(c), of the consolidated financial statement for the year ended 31 December 2011.

6.1 Capital requirements for market risk

Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of the Bank and is risk

weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted exposure

Capital requirement @ 12%

Maximum duringthe year

Minimum duringthe year

Foreign exchange risk 80,803 9,696 80,836 80,788

The above risk weighted exposure includes US$145k foreign currency exposures (refer to note 23.c of the consolidated finacial

statments for details) and US$80,658k exposure in LYD and INR resulting from our investments in Libya and India.

6.2 Foreign Currency Translation Risk

The Bank is also exposed to foreign exchange translation risk from its investment in foreign operations (associate in Libya) which

is currently un-hedged. Due to unrest in Libya, the Bank was unable to obtain any financial data or update from its associate. The

last financial statements and data received by the Bank were as of 30th November, 2010.

7 Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from

external events. Operational risk also includes Shari’a non-compliance risk but excludes strategic and reputational risks.



Currently, the Bank conducts its business from a single location and in accordance to well-defined processes and procedures. These

processes and procedures include a number of internal controls, including segregation of duties to avoid conflict of interest and other

internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction. The

critical data from the SWIFT system used by Operations Department is replicated online. Data for other key departments namely

Human Resources, Treasury and Financial Control is replicated at the end of the working day on the disaster recovery site. The Bank has

successfully tested three scenarios namely accessing the live systems in the head office in Bahrain Financial Harbour remotely from

the business continuity center, accessing data in the disaster recovery site from head office and lastly accessing systems remotely from

laptops using Citrix clients with 2 way authentication.

7.1 Operational risk management

In addition to the above, the Bank developed and implemented all relevant operational risk management policies and procedures by end of 2010. The Bank has conducted Risk and Control Self Assessment (RCSA) of Operational Risk in all departments to identify the Key Risk Indicators (KRIs) as a part of the overall Operational Risk Management framework. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board. The Bank has also implemented an IT enabled operational risk system to automate the operational risk processes namely risk and controls assessment, loss data collection and key risk indicator calculation.

7.2 Legal compliance and litigation

As on the reporting date, the Bank had no material legal contingencies including pending legal actions. The Bank’s legal risks

are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Bank uses

standard formats for transaction documentation.

7.3 Sharia’a compliance

The Sharia’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activities of the Bank in order to ensure that they are in compliance with the rules and principles of Islamic Sharia’a. The Bank also has a dedicated internal sharia’a reviewer, who is responsible to perform an ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes and also reviews compliance with the requirements of the Sharia’a standards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching and offering to the customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is issued by the SSB confirming the Bank’s compliance with Sharia’a rules and principles. During the year, no non-Sharia’a compliant income was generated and no instances of Sharia’a violations were identified.

7.4 Capital requirements for operational risk

The Bank uses the Basic Indicator Approach to calculate the operational risk capital charge in accordance with the CBB capital adequacy module for Islamic Banks. According to this approach, Bank’s average gross income for three past financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge.

The regulatory operational risk capital charge as of 31 December 2011 is as follows:

USD 000’s

Average gross income Risk weighted exposure Capital charge at 12%

Operational risk 37,744 70,771 8,493


8 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its financial liabilities. The Bank’s

approach for managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when

they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s

reputation.

The Board of Directors approve policies and strategies related to the management of liquidity. The Management reviews the liquidity

profile of the Bank on a regular basis to ensure that the same is within the regulatory and internal liquidity gap limits approved by

the Board and any material change in the Bank’s current or prospective liquidity position is notified to the Board through respective

management and Board committees. The Board has also approved limits on the liquidity ratios and adherence to these limits is overseen

by the management and also reported to the Board Risk Committee.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as 31 December 2011

Ratios 31 December 2011

1 Liquid Assets to Total Assets (%) 53.08

2 Short-term Assets / Short-term Liabilities 3.12x

3 Inter Bank Placements to Inter Bank Borrowings 4.76x

4 Gearing Ratio (Long Term Liabilities / Total Assets) -

8.1 Maturity profile

Refer to note 23 (a) of the consolidated financial statements.

9 Profit rate risk in the banking book

Profit rate risk in banking book is the exposure of the Bank’s financial condition to adverse movements in profit rates. Changes in profit

rates affect the Bank’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating

expenses. Changes in profit rates also affect the underlying value of the Bank’s assets, liabilities, and off-balance-sheet instruments

because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily

arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

The MRC is responsible for recommending the profit rate policy, setting limits and guidelines.

The Bank has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of mismatch in profit rate fixation

periods between assets and liabilities. Yield curve risk arises due to shift in yield curve resulting in change in the economic value of

cashflows. Exposure to basis risk is not material and though the basis risk exposure is monitored, the Bank does not consider this item

of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise short-term interbank placements and

Sukuk. A part of these placements are funded by rate sensitive liabilities in the form of short-term interbank deposits. The short-term

nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The balance

rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Bank is not exposed to optionality risk

arising due to embedded options in rate sensitive assets or liabilities.


The Bank’s profit rate sensitive assets comprise placements with financial institutions, Sukuk investments and Islamic Financing

Facilities. On the liabilities side, the Bank’s profit bearing liabilities includes mainly placements from central banks and other financial

institutions. Profit rate risk is managed principally through regular monitoring of the profit rate gaps. The Bank ensures that shift in

profit rates does not result in the overall economic value based on the re-pricing gaps to exceed the limits set on the economic value

of equity. This is assessed based on the impact of a parallel shift in the yield curve on the expected Net Profit Income for up to one

year horizon and the economic value of Bank’s equity on a regular basis. The overall impact on the economic value of equity for a 200

bps shock is within the internal limit as well as the limit prescribed by the Basel Committee on Banking Supervision.

Please refer to note 23 (a) of the consolidated financial statements for a detailed profit rate gap position of the Bank as of 31

December 2011.

10 Reputational risk

Reputational risk is the risk that negative perception regarding the Bank’s business practices or internal controls, whether true or not, will

cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverse impact on liquidity or capital of the Bank.

Reputation is an important asset and among the issues that could affect the Bank’s reputation is the inability to exit from investments,

lower than expected returns on investments and poor communication with investors. As at 31 December 2011, the Bank was not

exposed to any significant reputational risk. The Bank has developed adequate policies and procedures to identify, monitor and address

all potential risks that may arise from all such activities.

The Bank considers complaints from all investors/customers seriously. These can adversely affect the Bank’s reputation and if it is left

unattended these can also lead to litigation and possible censure by the regulatory authorities. Bank has a formal process of handling

complaints from investors/customers.

11 Strategic Risk

Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation

of decisions, or lack of responsiveness to industry changes. Strategic risk management practices are designed to ensure the comparability

of the bank’s strategic goals, the resources deployed against these goals and the quality of implementation. During the year, the Bank has

engaged an independent consultant to assist in developing a comprehensive strategy and a detailed 5-year business plan.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk and regulatory compliance risk etc. which are inherent in all business and not

easily measurable or quantifiable. The Bank currently does not have funding from equity of investment account holders and off balance

sheet equity of investment account holders and hence is not exposed to fiduciary or displaced commercial risk. The Bank as a matter

of policy prepares its business plan in consultation with the Board to incorporate the shareholders expectations and regularly reviews

and monitors financial and marketing strategies, business performance with respect to the business plan, new legal and regulatory

developments and their potential impact on the Bank’s business and corporate governance practices to ensure avoidance of any

regulatory non-compliance.

First Energy Bank B.S.C.(c) is a closed joint stock company incorporated in the Kingdom of Bahrain with CR No.69089 and licensed as an Islamic wholesale bank by the Central Bank of Bahrain

First Energy Bank B.S.C. (c)

Bahrain Financial Harbour, East Tower (5th & 6th Floor)

P.O. Box 209, Manama, Kingdom of Bahrain

Tel +973 17170000 Fax +973 17170170

www.1stenergybank.com

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