English - BMI Bank

bmibank.com.bh

English - BMI Bank

Transformation

Inspired by you

2010

//Annual Report

bmibank.com.bh


His Royal Highness Prince

Khalifa bin Salman Al Khalifa

The Prime Minister of the

Kingdom of Bahrain

His Majesty King Hamad bin

Isa Al Khalifa

The King of the Kingdom of

Bahrain

His Royal Highness Prince

Salman bin Hamad Al Khalifa

The Crown Prince and

Deputy Supreme Commander

of the Kingdom of Bahrain

//Contents

2 //Our philosophy

4 //Financial highlights

6 //Gratitude to the former Chairman

8 //Board of Directors’ report

14 //Chief Executive Officer’s report

20 //Board of Directors’ profile

24 //Corporate governance

36 //Management discussion and analysis

51 //2010 Financial statements

2 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 1


Our Philosophy

//Our vision

To become a dynamic regional bank, providing

innovative and unique financial solutions.

//Our key pillars

Innovation, inspiration, teamwork and a strong

corporate culture.

//Our core values

Integrity and ethical behavior, customer

satisfaction, quality and excellence, empowerment

and trust.

//Our creed

BMI Bank – Better, together.

//Our purpose

To provide high quality products and services in the form of Retail and

Commercial Banking including SME Banking, Wholesale Banking including

Global Trade Services, Private Banking, Financial Institutions and

Correspondent Banking, Islamic Financial Services & Treasury services

to an increasing number of people in selected markets throughout the

MENA and other emerging markets in Asia and Africa.

· To deliver a profitable performance; provide high-quality products

and services in competitive ways – maximizing revenues and

minimizing cost.

· To deliver a sustainable performance; provide products & services

in a sustainable way attracting the best customers, accessing

potential markets in which we enjoy their trust while bringing

benefits to everyone concerned including customers, government,

competitors, citizens and communities, thereby generating repeat

business.

· To deliver a consistent and growing performance; invest enough

to deliver long-term growth while balancing it with returns to our

shareholders. We understand that quick growth is unattainable while

slow growth would sacrifice competitive advantage.

//Our mission

We are committed as a team to meet and exceed our customers’

expectations by providing them with innovative and high quality financial

solutions – both conventional and Islamic.

We are empowered with a strong corporate culture, knowledge, skills

and the latest technology to meet our stakeholders’ expectations. We

maintain our integrity, creating and sharing trust and practicing ethical

behavior.

We aim to make a difference in each market we enter and in everything

we do.

2 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 3


2010 Financial Highlights 2010 Financial Highlights

//2010

Financial Highlights

BD ’000

2010 2009 2008 2007 2006

Total Assets 590,502 673,445 814,861 510,166 362,027

//Financial highlights 31 December 2010

1. Profitability

2010 2009 2008 2007 2006

Total Deposits 445,728 459,229 578,395 405,849 314,292

Net Loans & Advances* 310,058 388,049 486,895 327,242 283,121

Shareholders Equity 86,384 112,637 128,582 38,544 28,956

Net Profit (Loss) (26,487) (16,943) (2,981) 4,879 5,105

//Our credit ratings

Moody’s Long term : Baa3 Short term : P-3 BFSR : D Outlook: Stable

Standard & Poor’s Long term : BBB- Short term : A-3 Outlook: Negative

//Moody’s

“The rating reflects BMI’s healthy capitalization, and also reflects the strain on profitability and efficiency, as a result of

significant investment in extra capacity in Bahrain and overseas.”

//S&P

“The rating reflects its small customer franchise, limited track record, deteriorated asset quality and financial performance.

These negative factors are somewhat balanced by its ownership structure and strong capitalization.”

Net Interest Margin 3.4% 2.9% 2.0% 2.1% 2.3%

2. Capital

Capital Adequacy (BIS Standard) 19.7% 21.8% 20.3% 13.1% 13.9%

Shareholders Funds/Total Assets 14.6% 16.7% 15.8% 7.6% 8.0%

3. Asset Quality

Non-Performing Loans to Total Loans 18.6% 8.9% 2.0% 1.1% 0.8%

Loan Loss Provision to Total NPL’s 76.2% 82.3% 88.1% 78.9% 88.4%

4. Liquidity

Net Loans to Total Deposits 69.6% 84.5% 84.2% 80.6% 90.1%

Net Loans to Total Assets 52.5% 57.6% 59.8% 64.1% 78.2%

Liquid Assets to Total Deposits 53.7% 49.3% 46.5% 40.8% 18.9%

* Including Islamic financing assets

4 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 5


Gratitude to the Former Chairman

Gratitude to the Former Chairman

//Gratitude to the

Former Chairman

H.E. Sheikh AbdulMalik bin Abdullah bin Ali Al

Khalili has served as Chairman of the Board

of Directors of BMI Bank B.S.C. (c), since its

inception in 2005. Under his wise leadership,

vision and guidance, BMI Bank has grown from

strength to strength to become a strong Bahraini

retail and commercial banking institution.

On March 7th 2011, under Royal Decree No. 31/ 2011, H.E. Sheikh

AbdulMalik bin Abdullah bin Ali Al Khalili was appointed Minister of

Tourism for the Sultanate of Oman and subsequently resigned from his

position as Chairman of the Board of Directors of BMI Bank.

We would like to express our sincere gratitude to H.E. Sheikh AbdulMalik

bin Abdullah bin Ali Al Khalili for his unwavering dedication & guidance in

building the Bank and wish him every success in his new role.

On behalf of the Board of Directors of BMI Bank,

//Sheikh Khalid bin Mustahail Al Mashani

Chairman

1st June 2011

H.E. Sheikh AbdulMalik bin Abdullah bin Ali Al Khalili

6 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 7


Board of Directors’ Report

Board of Directors’ Report

//Board of Directors’

Report

The year 2010 was another year of customer

base growth and consolidation for BMI Bank

with a steady roll out of new customer centric

products and services. We continued with the

transformation of our business into a stronger

retail and commercial banking one. With the

introduction of our new state-of-the-art core

banking system, we have taken strong steps

towards delivering on our commitment to

provide customers with unique, simple and

convenient financial solutions.

//Local market

Bahrain’s economy posted good

results in 2010, with expansion

in most sectors and inflation

well in hand. In December 2010,

a report by the International

Monetary Fund (IMF) estimated

GDP growth at 4% in 2010, up on

the 2009 figure of 3%. The IMF

assessment predicted that this

growth would accelerate to 5%

in 2011 on the basis of higher oil

prices and careful management of

the economy by the government

and the Central Bank of Bahrain

(CBB). CBB data has also shown

that Bahrain’s debt to GDP ratio

was 27.3% at the end of the

first half of the year. Much of

the debt is the result of higher

state spending to stimulate the

economy and strengthen the

country’s infrastructure. Bahrain

is backing up its plans with some

considerable budget outlays

during 2011-2012. Total state

expenditure is expected to be

US$ 13.9 billion, with generous

allocations to sectors that

support the country’s long-term

development goals.

The financial services sector

remains central to the Bahrain

economy. However, given the

impact of the global slowdown

on finance and construction, the

government has been looking

to build other sectors and shift

employment patterns from

expatriates to nationals. This

includes creating jobs for Bahrainis

in new areas such as manufacturing,

information technology, tourism

and transportation to help support

Composition of BMI Bank’s Board of Directors as listed on page #18 to #21 is as of 31 December

2010. Subsequent to this date, there has been a change in the composition of the Board of

Directors. For the latest list of Directors, kindly visit the Bank’s web site on bmibank.com.bh and

browse through the about BMI Bank section.

Sheikh Khalid bin Mustahail Al Mashani

Deputy Chairman

8 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 9


Board of Directors’ Report

Board of Directors’ Report

them as they work to create

opportunities for themselves

through entrepreneurship. As part

of the national campaign to build

a better life for every Bahraini –

Vision 2030, Bahrain has been

striving to reduce its reliance on

oil and transform itself from an

oil-based economy to a broaderbased,

suitably diversified

economy that is more productive

and competitive by implementing

various reform initiatives. The

Vision 2030 plan – the document

guiding Bahrain’s economic

trajectory over the coming 19

years – is wide-reaching with

much of the diversification

focused on the financial sector.

With the Kingdom being the

traditional financial centre in the

Gulf, the sector now accounts for

25% of GDP.

Whilst some sectors of the

economy, particularly the

construction and real estate

industries, are still recovering from

the sharp downturn in 2008, there

are clear signs of improvement.

The government’s commitment

to boost spending on local

infrastructure including low cost

housing as well as investments to

the tune of US$ 1.3 billion in water

and electricity developments in

2011 will definitely benefit the

construction industry. Major

upgrades to the Kingdom’s ports

and roads, as part of a long-term

drive to strengthen logistics,

will raise the prospects of both

job creation and the interest of

foreign investors. The planned

causeway linking Bahrain and

Qatar represents further progress

for the road system and once

completed, will upgrade Bahrain’s

intra-regional trade position.

These improved road links will

further support the potential

appeal of the upgraded port

to international and domestic

shipping and logistics companies

boosting the Kingdom’s vision

of becoming a leading logistics

centre within the GCC.

Better provision of services and

more prudent fiscal standards are

top of the agenda for Bahrain’s

government, which is also

aiming to boost performance by

increasing expenditure across the

economy in 2011.

//Financial performance

At BMI Bank, we continue to

maintain an excellent Capital

Adequacy ratio of 20% with

strong liquidity and a portfolio of

unique and innovative products

and services. Our financial results

for 2010 reflect the impact of

provisions taken on exposures

which have not performed

as expected. Whilst we are

disappointed by the need to raise

provisions on these exposures,

it is a prudent and sensible

approach which helps us move

into 2011 with a renewed focus

on strengthening our business in

line with our vision.

During the year, we successfully

implemented our new state-ofthe-art

core banking system

enabling us to provide our

customers with simpler and

convenient banking solutions.

The impact of the depreciation

as well as other related costs

associated with implementing

the new system is reflected in

our financial results for the year.

Net interest income for 2010

decreased slightly by 5.3% to

BD 14.5 million from BD 15.3

million in 2009. Non interest

income for the year reduced from

BD 5.2 million to BD 3.3 million,

a decrease of 37% over 2009.

Total assets shrank by 12.3%

to BD 591 million as compared

to BD 674 million in 2009 while

customer deposits increased by

46% from BD 181 million in 2009

to BD 264 million in 2010. As

a result of the Bank’s cautious

lending policy, total loans and

advances decreased by 20% to

BD 310 million during 2010. The

results for the year reflect a profit

pre provision of BD 0.6 million

and a net loss post provision of

BD 26.5 million for the year ended

31 December 2010.

//Strengthening

our talent

At BMI Bank, our people are an

important asset and the growth

of our team needs constant

investment. During 2010, we

continued to strengthen our

team in line with our strategy

of building a stronger retail and

commercial banking business.

Having started the year with

328 staff in total, we ended

the year with a staff strength

of 356 across three countries,

including new appointments of

key members to the Executive

Management Team. Keeping up

with our commitment of recruiting

and training local talent, we

improved our Bahrainization ratio

to 77% at the end of the year as

compared to 70% in 2009. The

experience and talent of our new

hires has positioned us well for the

future as we continue with the

transformation of our business.

//Strategic direction and

achievements

BMI Bank has experienced

consistent growth over the last

five years and by enhancing our

product offering and growing

the branch and ATM network in

Bahrain, we have improved the

customer offering and made

the Bank a stronger choice for

our customers. The underlying

business continued to do well

across all segments in 2010

with good growth shown in our

operations in Bahrain. Through

our partnership with Tamkeen,

we launched a Sharia-compliant

financing scheme for enterprises

within the local private sector

enabling us to strengthen our

product offering and to deliver

on our commitment towards

providing a truly innovative

financial solution. The Bank

also embarked on an exercise

to rebrand its flagship savings

product under a revised name

10 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 11


Board of Directors’ Report

Board of Directors’ Report

‘Ayadi’ with an increased prize

pool. We have also refreshed the

look of the main brand to reflect

the transformation of the Bank’s

philosophy of togetherness both

internally and externally.

At BMI Bank, we still maintain

an excellent Capital Adequacy

ratio at over 20% with strong

liquidity as demonstrated from

our repayment of the threeyear

US$ 120 million syndicated

term loan on the scheduled due

date in July 2010 without the

need for refinancing or roll over

reinforcing our position as a

strong Bahraini Bank. In February

2011, the Bank announced that

it had successfully managed to

raise US$ 80 million through

a syndicated term loan facility

reflecting the trust placed in the

Bank by the financial community.

Our operations in Bahrain, Qatar

and Seychelles as well as at our

associate in Kenya have all seen

good growth during the year

with a significant rise in customer

numbers. We have also revised

key products within our portfolio

as part of our commitment to

consistently review and modify

our offering to better align it to

our customers evolving needs.

We will continue to seek growth

organically whilst investing in

and growing our franchises to

maintain strong momentum built

during 2010.

It is our belief that the operating

environment for banks will remain

difficult in 2011. Our excellent

capital position and strong

liquidity puts us in a strong

position in these difficult market

conditions.

//Managing risks

and internal controls

Building on the foundations laid

during the previous years, we

are pleased to reaffirm that

our internal controls remain

robust. A very strong Issue

Assurance Program which tests

the quality of implementation

of audit findings as well as the

snap check framework which

ensures critical controls within

processes are effective at all

times are important components

of our internal control framework.

Constant improvement in our

risk management culture as well

as in our processes and systems

remains a critical objective for

senior management.

//Looking forward

We look forward to the future

with optimism whilst continuing

to invest in our people, brand,

product and services with a

renewed commitment to provide

our customers with simpler

and quicker banking solutions

with streamlined processes.

We have a stable and growing

business to leverage on with

strong shareholder and customer

support and will continue to work

with BankMuscat to explore and

deliver synergies from operating

as part of a wider group. We

will invest in building a stronger

team supported by world-class

infrastructure to provide the

right financial solutions to our

customers.

//Word of thanks

In conclusion, we would like to

record our gratitude on behalf

of the Board of Directors and

shareholders to their Majesties

King Hamad bin Isa Al Khalifa, the

King of Bahrain; Sultan Qaboos

bin Said, the Sultan of Oman; and

to their respective governments

for their continued support for

BMI Bank. We would also wish

to place on record the Board of

Directors’ sincere appreciation

for the support and guidance

provided by the Central Bank of

Bahrain.

We take this opportunity to

express our admiration and

appreciation to our staff for their

dedication and commitment

for pressing ahead amid the

challenging situation to reach

higher levels of excellence as

well as for growing BMI Bank

across products, services and

countries in 2010. Together we

will continue to build our business

in the years to come.

//Khalid bin Mustahail Al Mashani

Deputy Chairman

12 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 13


Chief Executive Officer’s Report

Chief Executive Officer’s Report

//Chief Executive

Officer’s Report

2010 was another year of customer base

growth and consolidation for the Bank with

a steady roll out of new customer centric

products and services. The underlying business

continued to do well across all segments in

2010 with good growth shown in our operations

in Bahrain. At BMI Bank, we still maintain an

excellent Capital Adequacy Ratio of 20% with

strong liquidity and a portfolio of unique and

innovative products and services. Whilst we

are disappointed by the net negative results

for 2010 due to higher provisions, a prudent

and sensible approach will help us move into

2011 with a renewed focus on strengthening

our business in line with our vision. We remain

committed to maximizing our shareholders’

returns and providing our customers with

world-class standards in customer satisfaction

and competitive value.

//Building

solid foundations

In line with our commitment

towards providing customers

with a bouquet of innovative

and unique financial products

and services, we have focused

on modernizing our product set,

improving our service levels and

investing in training our people.

During 2010, we rolled out our

new state-of-the-art core banking

system that provides us with

a comprehensive view of our

customer relationships enabling

us to service them better. We

also revised the interest rate

to 2% p.a. on our super current

account with interest calculated

on an Average Monthly Balance

(AMB) and credited into the

customers’ account on a monthly

basis. The account, which offers

customers the flexibility of a

regular current account, with the

benefit of higher returns usually

associated with fixed deposits

also includes a wider array of

Jamal Ali Al-Hazeem

Chief Executive Officer

14 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 15


Chief Executive Officer’s Report

Chief Executive Officer’s Report

channels to ease transactions

including a free cheque book, Visa

enabled debit card and access

to our net banking platform. We

also introduced a range of value

added services including free

SMS alerts, Purchase Protection

Insurance and Secured Wallet

Insurance within our bouquet of

credit cards.

At the 2010 annual staff event,

we launched our maiden longevity

service rewards scheme to

express admiration and gratitude

to our employees. A total of 48

staff members were awarded

commemorative trophies during

the event which was attended

by over 250 staff members. We

have highly-experienced people

within the Bank with tremendous

talent and potential and we will

continue to invest in them as we

grow our franchise within Bahrain.

We also held an appreciation

event for our key customers,

partners and members of the

media to celebrate the milestones

our Bank had achieved over the

last half-decade.

Enterprises within the private

sector are a crucial and increasingly

important component in the

development of the country.

Through our partnership with

Tamkeen, we launched a Shariacompliant

financing scheme in

2010, enabling us to strengthen

our product offering and deliver

on our commitment towards

providing a truly innovative

financial solution created

specifically for enterprises. It offers

enterprises quick and convenient

access to finance to meet their

expansion plans resulting in

enhanced productivity. We are

proud to partner with Tamkeen

in this scheme and look forward

to building our relationship

through the introduction of similar

programs and schemes that will

develop increased productivity

and improved efficiency in

businesses within Bahrain.

During 2010 we consolidated

our BCP framework to ensure

that our response to events

that disrupt our operations at

any of our locations puts us

back into business with as little

disruption as possible. The plan

seeks to ensure that we quickly

recover and resume our business

operations after unforeseen

significant business disruptions

and respond by safeguarding

our employees, property, making

a financial and operational

assessment, protecting the

Bank’s books and records and

allowing our customers to

transact business. Our new IT

infrastructure has enhanced our

capabilities to respond to various

types of disasters.

Our flagship retail savings scheme

was recently refreshed under a

new name, “Ayadi”, and with an

increased prize pool of US$ 1.66

million offering our customers

an opportunity to win one of

the biggest grand prizes on the

island during the two Eids and

National Day. In line with our

commitment to being a customer

centric and market driven bank,

we also recently refreshed the

look of our brand to reflect the

transformation of our philosophy

of togetherness both internally

and externally with our customers

which is at the very heart of our

operations. ‘Better, together’

is the natural evolution of our

current tag line and will form the

source of inspiration for all our

future communications. The new

visual identity reinforces the name

of the Bank while establishing a

strong yet distinct brand using

a new color palette. The dark

blue used in our logo makes for a

strong, assertive and reassuring

color whilst the red, which is a

new color to our Bank, brings in

passion and charisma, reiterating

our strong heritage as a Bahraini

Bank.

Serving our customers well is

critical to our success and we

recognize that we need to make

it easier for our customers to

do business with us since both

our growth and success are

interlinked with them. The focus

will be on growing the business

during 2011 with an emphasis

on expanding the retail network

through additional branches and

ATMs as well as enhancing the

bouquet of retail products and

services. We recently rolled out

our ninth retail branch in Hamala,

to cater to the fast growing

corporate clientele within the

encatchment area. The branch

includes a dedicated cheque

and cash deposit ATM, two cash

withdrawal ATMs, and a 24/7

self-service customer workstation

that will be available to access net

banking and the customer service

centre in a secure environment.

We will look into enhancing our

credit card proposition by bringing

in value added features that offer

customers a rewarding experience

every time they use their BMI

Bank credit card. We will also

introduce a new and secure online

credit card payment channel that

will help our customers avoid long

queues and branch visits to pay

monthly bills. In addition, we plan

to implement a full acceptance

scheme for our Diners Club card

within Bahrain in 2011.

Equipped with a rejuvenated

brand and a state-of-the-art

banking system, we will continue

to focus on our strategy of

developing a stronger retail and

commercial banking business that

will deliver on our commitments.

//Our Corporate Social

Responsibility (CSR)

program

Our commitment to CSR has

been inbuilt into the heart of our

operations and we constantly

look at opportunities within

our community to actively

support and sponsor initiatives

in education, arts, sports and

culture. Our aim is to encourage

people to succeed and realize

16 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 17


Chief Executive Officer’s Report

Chief Executive Officer’s Report

their ambitions. During 2010, we

continued our partnership with

the local charities that we support;

Al Sanabel Orphans Care Center,

American Mission Hospital’s

(AMH) Community Outreach

Program, the Island Classic Charity

Golf Tournament and Think Pink

Bahrain with the Bank committing

in excess of BD 25,000 towards

these charities in addition to

smaller donations made to

various needy foundations within

the community.

We also ran our internal charity

program: “Dinar for Dinar” (D4D)

with the aim of giving our staff

the opportunity to be directly

involved with the community.

Through a “Bake Sale”, BD 2,968

was raised and distributed to the

Al Kawther Society for Social

Care, Down Syndrome Society,

Children with Behavioral &

Communication Difficulties (Alia

for early intervention) and UCO

Parent Care Center.

As part of our CSR program, BMI

Bank also sponsored Bahraini

Olympian Sami Al Kooheji

who embarked on a quest for

excellence representing Bahrain

at the 16th Asian Games and like

everyone else in Bahrain, we were

proud to support him in achieving

his goals. Sami, an exceptionally

talented athlete, inspires

young Bahrainis to constantly

achieve their dreams and seek

new challenges. Youthful and

competitive, yet principled and

focused, this local star embodies

all the values that we, as a proud

local Bank stand for.

We are extremely proud of the

support we receive from these

partners who enable us to reach

out to the community we operate

within and I would like to take the

opportunity to thank the teams

at AMH, the local social centers

and Think Pink Bahrain for their

continued support to the Bank.

//The way forward

We have experienced consistent

growth over the last five years and

by enhancing our product offering

and growing the branch and ATM

network in Bahrain we have

improved the customer offering,

and made BMI Bank a stronger

choice for our customers.

I believe that 2011 will be

a difficult year for banks in

general, with the winners being

those with a distinctive brand

offering, excellent service, strong

capital and liquidity positions,

great people, strong controls

and systems and a robust and

challenging corporate culture.

Our excellent capital position

and strong liquidity are critical

factors for these difficult market

conditions. We have a stable and

growing business to leverage

on with strong shareholder

and customer support. We will

continue to work with BankMuscat

to explore and deliver synergies

from operating as part of a wider

group. We look forward to the

future with optimism, continuing

to invest in better customer

service, innovative products

and inspiring banking solutions

to provide our customers with

simpler and quicker banking

solutions through streamlined

processes.

I take this opportunity to thank

the Central Bank of Bahrain, our

shareholders and customers for

their confidence in our capabilities

and our staff for their continued

commitment and support.

BMI Bank - Better, together

//Jamal Ali Al-Hazeem

Chief Executive Officer

18 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 19


Board of Directors’ Profiles

Board of Directors’ Profiles

// Board of Directors’

Profiles

//Mr. Sulaiman bin Mohamed bin Hamed Al Yahyai

// Director

//Sheikh Khalid bin Mustahail Al Mashani

// Deputy Chairman

Sheikh Khalid holds a B.Sc.

in Economics and a Masters

Degree in International

Boundary Studies from the

School of Oriental and African

Studies (SOAS), University of

London.

Mr. Sulaiman Al Yahyai holds

an MBA in Finance from the

University of Wales, U.K.

Mr. Sulaiman bin Mohamed

bin Hamed Al Yahyai is the

Investment Advisor to the Royal

Court Affairs of the Sultanate

of Oman and the Chairman

and Managing Director of Coral

International Hotel, Muscat,

Oman. Mr. Sulaiman Al Yahyai is

also a Director on the Board of

BankMuscat S.A.O.G. member

of BankMuscat S.A.O.G.'s Board

Credit Committee and the

Chairman of Oman Chlorine

Co. S.A.O.G. Mr. Al Yahyai is

a member of the Board of

Directors, Chairman of the Board

Audit Committee, and member

of Board Risk Committee of BMI

Bank B.S.C.(c). Bahrain.

Sheikh Khalid bin Mustahail Al

Mashani is the Deputy Chairman

of the Board of Directors of

BankMuscat S.A.O.G; Deputy

Chairman of the Board of

Directors of BMI Bank B.S.C.(c),

Bahrain; and Deputy Chairman of

Al Omaniya Financial Services Co.

Sheikh Khalid is the Chairman of

Dhofar Cattle Feed Co. S.A.O.G.;

and the Chairman of the Board

Risk Committee of BMI Bank

B.S.C.(c), Bahrain.

//Brigadier Saif bin Ali Al Amri // Director

Brigadier Saif bin Ali Al Amri is

an Arab Certified Accountant

and an Accounting Technician,

and he holds a Higher

Diploma in Finance and Cost

Accountancy from Abingdon

College UK. Brigadier Saif bin

Ali Al Amri is a Defense Resource

Advisor at the Ministry of Defense

of the Sultanate of Oman. Al

Amri is a member of the Credit

Committee of the Ministry of

Defense Pension Fund of the

Sultanate of Oman, Chairman

of the Investment Committee

of Oryx Fund, Vice-Chairman

of the Board of Directors and

Chairman of the Board Audit

Committee and a member of

the Credit Committee of MAJAN

Development Company, and a

member of the Board of Directors

and Board Audit Committee of

BMI Bank B.S.C.(c), Bahrain.

//Mr. Sunder George // Director

Mr. George holds an MBA from

IMD Switzerland, is a Fellow

of the Chartered Institute of

Bankers F.C.I.B. (London) and

a Certified Associate of the

Indian Institute of Bankers

C.A.I.I.B. (India).

Mr. Sunder George is the Deputy

Chief Executive Officer of

BankMuscat S.A.O.G. as well as a

Director of Renaissance Services

S.A.O.G. Mr. George is a member

of the Board of Directors and the

Board Audit Committee of BMI

Bank B.S.C.(c), Bahrain.

Composition of BMI Bank’s Board of Directors as listed on this page is as of 31 December 2010.

Subsequent to this date, there has been a change in the composition of the Board of Directors. For

the latest list of Directors, kindly visit the Bank’s web site on bmibank.com.bh and browse through the

about BMI Bank section.

20 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 21


Board of Directors’ Profiles

Board of Directors’ Profiles

//Mr. Ahmed Al Abri // Director

//Mr. Mustafa Kamal Beg // Director

Mr. Al Abri holds an MBA.

He has also attended the

Advanced Management

Program at INSEAD in France

and a General Managers

Program at Harvard Business

School.

Mr. Ahmed Al Abri is the Chief

Operating Officer of BankMuscat

S.A.O.G., Oman. He is also a

Director in BMI Bank B.S.C.(c),

Bahrain; Gulf African Bank, Kenya;

BMI Offshore Bank, Seychelles;

and Muscat Fund.

Mr. Beg has Bachelors Degree

in Civil Engineering, Masters in

Business Administration and

is also a CFA charter holder.

Mr. Mustafa Kamal Beg is

working as Executive Director

at Istithmar World Capital.

In this capacity Mr. Beg has

responsibility for investments

made by Istithmar globally across

various sub sectors of financial

services industry including banks,

asset management companies,

insurance companies and specialty

finance. Prior to joining Istithmar

Mr. Beg worked at Cupola Group

and was part of the team that

made private equity and venture

capital investments across a

broad spectrum of industries

in Middle East, South Asia and

North America.

//Mr. Salah Saleh Asheer // Director

Mr. Asheer is a Certified Public

Accountant and holds a B.Sc.

in Accounting Science.

Mr. Salah Saleh Asheer has been

serving as the Chief Executive

Officer of certain Bahrainbased

privately held investment

companies (together, the

Companies) for the past several

years. In addition, Mr. Asheer

is an experienced investment

//Mr. Hisham Al-Saie // Director

banker and has served as a

Director of several local, regional

and international subsidiaries

and associates of the above

Companies. The Companies own

and manage a diversified range

of investments in the financial

services industry among others.

Mr. Asheer is a member of the

Board of Directors of BMI Bank

B.S.C.(c), Bahrain.

//Mr. Bader A. Al-Sumait // Director

Mr. Bader A. Al-Sumait

received his Bachelors Degree

from Chapman University

USA and has over 30 years

of experience in asset

management, banking and

finance, and is a prominent

figure in the Kuwaiti capital

market. Mr. Bader Al-Sumait is

the Chief Executive Officer of

Global since March 2009. Before

co-founding Global in 1998, he

was the Managing Director of

the Arab Financial Consultant

Company. In addition to being a

member of the listing committee

of the Dubai International Financial

Exchange (DIFX), Mr. Al-Sumait is

the Chairman and Board Member

of several local and regional

institutions, such as the Chairman

of Al-Manar Financing & Leasing

Company, and the Vice Chairman

of Gulf Franchising Holding

Company.

Mr. Al-Saie holds a BA

in Accounting from the

University of Texas at

Arlington and has attended a

number of executive education

courses at INSEAD and

other reputable institutions.

Mr. Al-Saie is a representative of

Overseas Investment Company

S.P.C. Prior to his current position,

Mr. Al-Saie was head of Corporate

Finance at SICO Investment

Bank, where he was responsible

for structuring key local and

regional equity and debt capital

market transactions. He also held

previous positions at BDO Jawad

Habib, PriceWaterhouse Coopers

and Arthur Andersen.

Mr. Al-Saie is a Board Member

and a Member of the Audit &

Remuneration Committees of

Nass Corporation B.S.C. He is also

a Board Member of Health Island

B.S.C.(c), Manara Developments

B.S.C.(c), Al-Khaleej Commercial

Bank (Qatar), Amar Holding

Company B.S.C.(c), Diyyar Al-

Muharraq B.S.C.(c) and Capital

Management House B.S.C.(c).

22 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 23


Corporate Governance

Corporate Governance

// Corporate

Governance

Corporate Governance is a matter of high

importance to BMI Bank B.S.C.(c) (the Bank)

and is undertaken with due regard to all of the

Bank’s stakeholders, the regulatory compliance

requirements of the Central Bank of Bahrain

(CBB) and the Laws of the Kingdom of

Bahrain and of other jurisdictions in which the

Bank operates. Good corporate governance

is a fundamental part of the culture and the

Bank is fully committed to be compliant with

the requirements under the newly enacted

Corporate Governance Code (CGC) and the

CBB’s High Level Control Module (HC Module).

As a first step in this direction, the Bank

has prepared a new Corporate Governance

Guidelines & Policy in line with the CGC and HC

Module which has been formally adopted by

the Board.

The Board of Directors (the

Board) is responsible for the

corporate governance of the

Bank and of its controlled entities.

The Board reviews and approves

the Corporate Governance

Guidelines and Policy, which sets

out the specific roles, duties,

responsibilities and rights of

the Directors of the Bank. Each

Director is expected to have

regard to these guidelines in

the performance of his duties

as a Director of the Bank. The

Board has entrusted the Audit

Committee to oversee and

monitor the implementation

of the corporate governance

framework.

//The Board of Directors

The Board is accountable to the

Shareholders of the Bank. The

main roles of the Board are to

create value for its shareholders

and provide leadership towards

achieving the objectives of all

its stakeholders, whilst ensuring

that these duties are discharged

in a transparent and ethical

manner. They encompass, but

are not limited to, approving the

strategic objectives of the Bank

and ensuring that the necessary

resources are made available

towards achieving these.

In addition, the main responsibilities

of the Board include:-

• Setting the Bank’s strategy

and approving the annual

budget;

• Reviewing operational and

financial performance, and

approving financial reporting

and other disclosures;

• Evaluating and approving

appointments to the Board

and those of the Chief

Executive Officer, Executive

Management (General

Managers) and the Head of

Internal Audit;

• Ensuring that Board and

Executive Management

development and succession

plans are in place;

• Ensuring that the Bank’s

business is conducted

ethically and transparently;

• Overseeing the implementation

of the Bank’s corporate

governance guidelines and

compliance with the CGC and

HC Module.

//Term of the board

The Board is comprised of ten

non-executive Directors (which

includes two independent and

non-executive), appointed for a

term of three years subject to

renewal by a resolution adopted

by the General Assembly of the

Shareholders and other regulatory

approvals.

The current term of the Board

expired on 31st December

2010. The Board of Directors at

its meeting on 11th November

2010 recommended, to the

Shareholders, the re-appointment

of the members of the Board

of Directors for a further

3-year term commencing on

1st January 2011. This was

approved at the Annual General

Meeting of the Shareholders held

on 12th April 2011.

//Frequency of meetings

The Board meets at least four (4)

times a financial year. Meetings

are organized annually in advance

or by a request from the Chairman

of the Board (the Chairman) or

any Director. Meetings of the

Board are only valid if attended

by at least half of the members.

Composition of BMI Bank’s Board of Directors as listed on page #18 to #21 is as of 31 December

2010. Subsequent to this date, there has been a change in the composition of the Board of

Directors. For the latest list of Directors, kindly visit the Bank’s web site on bmibank.com.bh and

browse through the about BMI Bank section.

24 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 25


Corporate Governance

Corporate Governance

//BMI Bank Board of Directors

Board of Directors Member of Sub-Committees Designation 1 Designation

Sh. AbdulMalik bin Abdullah Al Khalili Chairman, Remunerations & Non-Executive Chairman

Nominations Committee

Sh. Khalid bin Mustahail Al Mashani Chairman, Risk Committee Non-Executive Deputy

Member, Remunerations &

Chairman

Nominations Committee

Mr. Salah Saleh Asheer Member, Remunerations & Non-Executive Director

Nominations Committee

Mr. Sulaiman bin Mohamed bin Chairman, Audit Committee* Non-Executive Director

Hamed Al Yahyai

Member, Risk Committee,

Remunerations &

Nominations Committee

Mr. Mustafa Kamal Beg Member, Audit Committee*, Non-Executive Director

Remunerations & Nominations

Committee

Mr. Bader Al Sumait Member, Risk Committee, Non-Executive Director

Remunerations &

Nominations Committee

Brigadier Saif bin Ali Al Amri Member, Audit Committee*, Non-Executive Director

Remunerations &

Independent

Nominations Committee

Mr. Sunder George Member, Audit Committee*, Non-Executive Director

Remunerations &

Nominations Committee

Mr. Ahmed Al Abri Member, Risk Committee, Non-Executive Director

Remunerations &

Nominations Committee

Mr. Hisham Saleh Ahmed Al Saie Member, Audit Committee*, Non-Executive Director

Risk Committee,

Independent

Remunerations &

Nominations Committee

* Audit Committee Members also are responsible for overseeing and monitoring of the Bank’s corporate governance policy and

performance.

The Board has delegated the

following responsibilities to the

Executive Management:

• The development and

recommendation of strategic

plans for consideration by the

Board that reflect the longer

term objectives and priorities

established by the Board;

• Implementation of the

strategies and policies of the

Bank as determined by the

Board;

• Monitoring of the operating

and financial results against

plans and budgets;

• Monitoring the quality of the

investment process against

objectives;

• Prioritizing the allocation of

capital, technical and human

resources;

• Monitoring the composition

and terms of reference of

management committees;

and

• Developing and implementing

an effective risk management

framework.

//Chairman of the Board

The Chairman is a non-executive

Director, appointed by the Board.

The Chairman’s role includes:

• Ensuring that all Board

members are fully briefed

on the terms of their

appointment, their duties and

responsibilities at the time of

their appointment;

• Providing effective leadership

in formulating the Board’s

strategy and governance;

• Representing the views of the

Board to the public;

• Ensuring that all Directors

receive an agenda, minutes of

prior meetings, and adequate

background information in

writing before each board

meeting and when necessary

between meetings and all

Directors receive the same

board information;

• Ensuring that the Board meets

at regular intervals throughout

the year, and that minutes of

meetings accurately record

decisions taken and, where

appropriate, the views of

individual directors;

• Maintaining continued personal

contact with the Shareholders

to solicit their views and

understand their concerns;

and

• Communicating the Shareholders’

views to the Board as

a whole.

26 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 27


Corporate Governance

Corporate Governance

//Board meetings and attendance

During 2010 the Board and its various Committees (except for Remuneration and Nominations Committee)

convened four times. Attendance at the meetings were as follows:

// Directors’ attendance - board and committee meetings 2010

Committee Meetings

Remunerations

Directors Board Meetings Audit Risk and Nominations

Name of Directors 7 Feb 2010 29 Apr 2010 9 Aug 2010 11 Nov 2010 7 Feb 2010 29 Apr 2010 9 Aug 2010 10 Nov 2010 7 Feb 2010 29 Apr 2010 9 Aug 2010 10 Nov 2010 7 Feb 2010

Shaikh AbdulMalik Al Khalili ✓ ✓ ✓ ✓ Not a Member Not a Member ✓

Shaikh Khalid Al Mashani ✓ ✕ ✓ ✓ Not a Member ✓ ✕ ✓ ✓ ✓

Mr. Sulaiman Al Yahyai ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Brigadier Saif Al Amri ✕ ✓ ✓ ✓ ✕ ✓ ✓ ✓ Not a Member ✕

Mr. Sunder George ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Not a Member ✓

Mr. Ahmed Al Abri ✓ ✓ ✓ ✓ Not a Member ✓ ✓ ✓ ✓ ✓

Mr. Salah Asheer ✓ ✓ ✕ ✕ Not a Member Not a Member ✓

Mr. Bader Al Sumait ✓ ✓ ✕ ✕ Not a Member ✓ ✓ ✕ ✕ ✓

Mr. Mustafa Beg ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Not a Member ✓

Hisham Al Saie ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

//Board sub-committees

There are currently three Board

level Committees. These are the

Audit; Risk; and Remunerations

& Nominations Committees.

The terms of reference of these

Committees are set out below:

//Audit Committee

The Audit Committee was

constituted to assist the

Board in fulfilling its oversight

responsibilities through the

review of the financial reporting

process, the systems of internal

control, the audit process and

the Bank’s process for monitoring

compliance with the regulatory

framework in which it operates.

The Board had empowered the

Audit Committee also to oversee

and monitor implementation of

the corporate governance policy

framework of the Bank.

//Membership and

attendance

The Audit Committee consists

of five non-executive Directors

nominated by the Board of which

two are independent directors.

The Chairman of the Committee

is appointed by the Board.

//Frequency of meetings

Audit Committee meetings

are held once every quarter.

The Committee members may

request additional meetings if

they are considered necessary.

External Auditor’s are regular

invitees.

//Authority

The Audit Committee has an

unlimited scope of activity

authorized by the Board.

The Committee receives

risk assessments and an

understanding of key control

issues facing the Bank from the

internal and external auditors as

well as management.

//Roles and

responsibilities

The Committee’s specific

responsibilities include:

• Evaluating the systems of

internal control and whether

these are comprehensively

reviewed by the internal

and external auditors and

communicated effectively by

executive management;

• Reviewing the activities,

structure, competencies and

effectiveness of the internal

audit function;

• Overseeing and reviewing

internal controls and

procedures for the financial

reporting process and

significant accounting and

reporting issues, including

professional and regulatory

pronouncements;

• Reviewing the un-audited and

audited financial statements in

conjunction with the external

auditors and management,

to ensure that any necessary

adjustments are dealt with

adequately before formal

adoption of the accounts;

• Reviewing the effectiveness

of systems for monitoring

compliance with laws and

regulations, and to periodically

obtain updates from management;

and

• Reviewing the proposed scope,

approach, independence, and

performance of the external

auditors.

//Risk Committee

The Risk Committee assists the

Board in fulfilling its oversight

responsibilities through the

formulation and implementation

of risk policies in compliance

with laws and regulations within

an integrated risk management

framework.

The Committee formulates and

recommends to the Board the

aggregate risk appetite of the

business, and ensures that a

framework is in place to allow the

risk to be measured.

//Membership and

attendance

The Risk Committee consists of

five (5) Directors nominated by

the Board. The Chairman of the

Committee is appointed by the

Board.

//Frequency

of meetings

Board Risk Committee meetings

are held once every quarter

or more frequently if deemed

necessary.

28 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 29


Corporate Governance

Corporate Governance

//Authority

The Committee has complete

authority to recommend to the

Board, amendments to any risk

policy which become necessary

in light of changes to the Bank’s

operating environment and

developments in both domestic

and international markets.

In addition the Committee

has the mandate to ensure

compliance with all risk policies,

to communicate with internal and

external auditors to assess the

strength of the risk framework

and suitability of policies and to

consider and approve extensions

to credit facilities above the

remit of the management

credit committee, upon their

recommendation.

//Roles and

responsibilities

The Committee’s specific

responsibilities include:

a) The effective operation of

policies, procedures and

processes pertaining to risk

management;

b) Maintenance of a compliant

Internal Capital Adequacy

Assessment Process as

prescribed by Basel II as it

relates to credit, operational

and market risk;

c) The ongoing review of credit

risk management policy

formulation, in light of the

Bank’s strategic objectives

and dynamic operating

environment;

d) Ensuring the credit approval

process is fair and transparent

and compliant with the policies

set by the Board;

e) Ensuring that the quality of

credit assets conforms to the

credit risk parameters as set

by the Bank’s policies;

f) Implementing and monitoring

a risk management framework

that reflects best practice in

the industry;

g) The review and organization

of the necessary critical

skills and other resources

required to maintain the

highest standards of risk

management; and

h) Reviewing and updating the

terms of reference as per the

directives of the Board.

//Business Strategy

Committee

Following the Board’s decision at

its meeting held on 09 August

2010 the Board Strategy

Committee was disbanded in view

of duplication of responsibilities

between the Board and the Board

Strategy Committee.

//Nominations

& Remunerations

Committee

Review of the remuneration

and incentive packages of the

executive management and the

Board and ensuring that such

packages are consistent with the

corporate values and strategy

of the Bank which has been

delegated to the Remuenerations

and Nominations Committee

(BRNC).

//Composition

All members of the Board are

members of the BRNC. The

Chairman of the Board is the

Chairman of the subcommittee.

//Frequency of meetings

The Committee shall meet at

least twice a year.

//Duties and

responsibilities

The Committee’s specific responsibilities

include:

a) Consider and make specific

recommendations to the

Board on, both remuneration

policy and individual

remuneration packages for

the CEO and his/her direct

reports in line with the policy

guidelines to be used for

determining remuneration

in individual cases, including

relative importance of each

component; and specific

criteria to be used in evaluating

an officer’s performance;

b) To evaluate the aggregate

performance of all other

officers of the Bank in

consultation with the CEO and

the Chairman of the Board;

c) For retaining and overseeing

outside consultants or

firms for the purpose of

determining director or officer

remuneration, administering

remuneration plans, or related

matters;

Additionally, with regards to

Board membership:

a) The Committee shall make

recommendations to the

Board from time to time as

to changes the Committee

believes to be desirable to

the size of the Board or any

Committee of the Board;

b) Whenever a vacancy arises

(including a vacancy resulting

from an increase in Board

size), the Committee shall

recommend to the Board

a person to fill the vacancy

either through appointment

by the Board or through

Shareholder election;

c) In performing the above

responsibilities, the Committee

shall consider any criteria

approved by the Board and

such other factors as it deems

appropriate;

d) The Committee shall also consider

all candidates for Board

membership recommended

by the Shareholders and any

candidates proposed by management,

and

e) The Committee shall identify

Board members qualified to fill

vacancies on any Committee

of the Board and recommend

to the Board that such

person appoint the identified

person(s) to such Committee.

//Communication with

stakeholders

The Bank uses all available

avenues to communicate with

30 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 31


Corporate Governance

Corporate Governance

its stakeholders, in line with the

principle of transparency and

disclosure that is integral to

good corporate governance. This

includes wide use of the media

for the purposes of advertising

and providing information on the

Bank’s progress. Furthermore the

Bank’s website www.bmibank.

com.bh carries updates of any

significant events and regulatory

directives/requirements.

The Bank’s quarterly results are

published in both Arabic and

English newspapers, and are

posted on the Bank’s website.

Copies of these releases are

available on request.

//Code of ethics for

business conduct

The Bank has a Code of Ethics for

Business Conduct in place aiming

to provide its customers courtesy,

fairness, flexibility, efficiency

and professionalism and thereby

upholding the image of the Bank

at all times. The Bank has adopted

this Code of Ethics for Business

Conduct to ensure that it retains

its integrity and merits, public

trust and confidence by following

it along with other policies and

procedures of the Bank and by

adhering to the letter and the

spirit of all applicable laws and

regulations.

//Compliance and Anti-

Money laundering

The Bank is aware of its duties

and responsibilities in observing

all regulatory requirements in

its functioning as a responsible

financial institution and has an

established Compliance function

in place to handle it. Compliance

function handles all the regulatory

requirements laid down by the

Central Bank of Bahrain, which

also encompasses the Anti-

Money Laundering requirements

in line with Central Bank of

Bahrain’s regulations. The Bank

has in place a documented

Compliance Manual covering all

the regulatory requirements of

Central Bank of Bahrain and Anti-

Money Laundering policy and

procedure complying to Financial

Crime regulatory requirements in

line with the recommendations

issued by FATF.

//Rewards policy

Currently the Bank does not have

a stock option plan. The Bank

operates a bonus scheme that

seeks to reward achievements

against agreed objectives and the

contribution individuals make to

meet the Bank’s goals. The bonus

payment is at the sole discretion

of the Bank.

//Management

Committees

Several management committees

have been constituted to assist in

the affairs of the Bank, comprising

of Executive Management and

various senior managers. The main

Committees and their respective

summary terms of reference are

set out below. All Management

Committees are chaired by the

Chief Executive Officer except the

Executive Risk Committee where

the Risk Director is the Chairman.

Committee members are heads of

the relevant divisions appointed

by the Committee Chairman.

Committee Frequency Summary Terms of Reference

of Meetings

Each Committee meets at least

once a month except for the

Management Remunerations and

Promotions Committee which

meets annually.

EXCO (Executive Monthly To review the overall performance of the functions of the Bank in line

Committee)

with the business plan and operating environment in order to achieve

the Bank’s objectives as set out by the Board and to agree actions

required to achieve the business plan.

Executive Risk Monthly • To drive control across the business, assessing & managing

Committee

the risks to the business and managing the business in line with

the Risk Appetite as agreed and monitored by the Board Risk

Committee.

• To devise and recommend to the BRC the aggregate Risk

appetite of the Bank to ensure appropriate policies, controls and

measures are in place and adhered to support this, and to provide

appropriate oversight to management to ensure conformance.

• To review the risk profile of the business, develop policy and

approach in conjunction with the Risk Management function and

to propose major policy change to the Board Risk Committee.

Asset & Liability Monthly • To perform overall management of the balance sheet and the

Committee (ALCO)

strategic management of risk.

Management Credit Monthly • To exercise authority in assessing & managing the credit risks

Committee

of the business and ensuring the maintenance of a good quality

risk asset portfolio in line with the Risk Appetite as agreed and

monitored by the Board Risk Committee.

• To monitor implementation of credit decisions in a manner so

as to conform to credit policy as well as laws and regulations

stipulated by the statutory authorities.

32 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 33


Corporate Governance

Corporate Governance

// Executive management profile

Jamal Ali Al-Hazeem

Chief Executive Officer

• CPA from California.

Banking Experience: More than 30 years working with

banks and in the banking industry.

• Joined BMI Bank on 03 May 2010.

Basim Husain

Head – Private Banking

• Trader & Investment Professional (Series7), BIBF,

Bahrain; Bachelor of Business Administration, the

college of Business, Southwest Texas State University,

San Marcos, Texas, USA; M.Sc. in Financial Economics,

from the University of London, UK.

Banking Experience: 21 years.

• Joined BMI Bank in 1999.

Mazen S. Sater

Head – Retail

• MBA Marketing & Change Management, DePaul

University, Chicago, Illinois, USA.

Banking Experience: 15 years.

• Joined BMI Bank in 2010.

Nurani A Ramanathan

Head – Finance

• Bachelor of Commerce – University of Mumbai, India,

Management Accountant from the Institute of Cost &

Works Accountants of India.

Banking Experience: 10 years.

• Joined BMI Bank in December 2007.

Marco Peter Wolters

Chief Operating Officer

• Master of Business Administration, Joseph M. Katz

Graduate School of Business, University of Pittsburgh,

PA. Bachelor in Hotel Administration, Dutch School

for Hospitality Management, Maastricht, The

Netherlands.

Banking Experience: 14 years.

• Joined BMI Bank in 2008.

Fathi M. Ebrahim

Head – Wholesale Banking

• Advanced Diploma in Banking, BIBF, Bahrain.

Banking Experience: 32 years.

• Joined BMI Bank in 1999.

Mohammed Bushehri

Head of Human Capital

• Bachelor’s degree in Arts from the University of

North Carolina at Charlotte (USA). Full Member of

the Chartered Institute of Personnel & Development.

Banking Experience: 20 years.

• Joined BMI Bank in 2007.

Sadiq Al Shaikh

Head – Financial Institutions & International Banking

• Bachelor in Business Management, University of

Bangalore, India.

Banking Experience: 12 years.

• Joined BMI Bank in August 2005.

Salah Khalifa

Head – Islamic Financial Services

• Master of Business Administration (MBA), University

of Glamorgan, U.K.

Banking Experience: 18 years.

• Joined BMI Bank in July 2010.

Venkatesh Ramaswamy

Acting Head – Treasury

• Master in Industrial Management, IIT Chennai, FRM

(Financial Risk Manager), ACI Diploma.

Banking Experience: 18 years.

• Joined BMI Bank in 2005.

//Professional profile of the statutory auditors

Shobhana Kumar

Head – Legal / Corporate Secretary

• Master of Law (LLM), University of Bombay, India.

Banking Experience: 14 years.

• Joined BMI Bank in February 2006.

Vijayan Govindarajan

Acting Head – Risk / Head - Wholesale Credit Risk

• C.A.I.I.B (Certified Associate, Indian Institute of

Bankers)

Banking Experience: 32 years.

• Joined BMI Bank in December 1994.

The Board recommended to the Shareholders for the reappointment of Ernst & Young, Bahrain as the statutory auditors

of the Bank and the same was approved by the Shareholders by a resolution adopted at the Annual General Meeting of

the Shareholders held on 16 March 2010.

Ernst & Young is a professional services organization providing professional accounting, auditing, taxation and consultancy

services, with more than 141,000 personnel worldwide. They provide integrated services to private enterprises and

public agencies in more than 670 cities located in more than 140 countries.

The Middle East practice of Ernst & Young is an independent professional firm which has operated in the Middle East

region since 1923 and is a member of Ernst & Young Global. The firm has 3,100 staff working from 17 offices in

14 Arab countries.

34 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 35


Management Discussion and Analysis

Management Discussion and Analysis

// Management Discussion

and Analysis

On 01 January 2005, BMI Bank B.S.C (c),

previously BankMuscat International B.S.C

(c), (“the Bank”) was established as a locally

incorporated Full Commercial Bank (FCB),

registered and based in the Kingdom of Bahrain

and regulated by the Central Bank of Bahrain

(CBB). Under the revised license framework

of the CBB introduced in July 2006, the Bank

operates as a Conventional Retail Bank with

a retail banking network of nine (9) branches

and twenty nine (29) ATMs in Bahrain and

a branch in the State of Qatar (operating

under a license to offer wholesale and private

banking products and services, granted by the

Qatar Financial Centre Regulatory Authority).

Following approvals of the Bank’s shareholders

at their Extraordinary General Meeting held on

6th January 2008 and of the Central Bank of

Bahrain, the Bank changed its name to BMI

Bank B.S.C (c) effective 01 April 2008.

The Bank owns a 100% stake in

Diners Club Services W.L.L, which

is incorporated in Bahrain and

operates the Diners Club cards

franchise in Bahrain, Syria and

Yemen. The Bank also operates

and owns 50% of BMI Offshore

Bank in Seychelles and 50%

of Money on Demand Holdings

WLL (“Mode”), mobile banking

company incorporated in Bahrain.

Finally, BMI Bank has a 21.33%

stake in Gulf African Bank, an

Islamic bank in Kenya.

Composition of BMI Bank’s Board of Directors as listed on page #18 to #21 is as of 31 December

2010. Subsequent to this date, there has been a change in the composition of the Board of

Directors. For the latest list of Directors, kindly visit the Bank’s web site on bmibank.com.bh and

browse through the about BMI Bank section.

//The Bank’s

shareholders are:

BankMuscat (Oman) 49%,

Overseas Investments (Bahrain) 20%,

Royal Court Affairs (Oman) * 11%,

Istithmar World Capital (Dubai) ** 10%

Global Investment House (Kuwait) 0.1%

Financial Assets Bahrain W.L.L. 9.9%

*The Royal Court Affairs is part of

the Government of the Sultanate

of Oman

** Istithmar World Capital is

the investment arm of the

Government of Dubai

The Bank’s staff strength

increased to 356 people across

three countries at the end of 2010

from 328 people across three

countries at the end of 2009.

//Regional outlook

2009 was a difficult year for

the region as the full impact of

the global financial crisis was

felt by the GCC economies. The

banking sector was hit by the

default of two major groups in

Saudi Arabia, followed by the

restructuring announced by Dubai

World at the end of 2009. The

first half of 2010 continued to

feel the fallout of these events,

however recovery emerged as

oil demand rebounded thanks

to Asian emerging markets and

the financial sector stabilized.

The price of oil continued to

rise, by the end of 2010 it was

US$ 90 per barrel up from US$

70 per barrel. Growth in 2010

was constrained by weak credit

expansion, and by the fact that

some GCC countries had to

restrain output to support oil

prices. In 2010, economic growth

for the GCC group is projected to

be at 4.5% - a strong comeback

from the near zero in 2009. The

expectation for 2011 is 5%,

however Qatar is the primary

driver of this growth projecting to

record growth of around 15% in

both 2010 and 2011.

All GCC governments continued to

stimulate their economies as the

global economy started slowing in

the second quarter of 2010. The

recent political events in the North

African region (Tunisia, Egypt,

etc.) have impacted some of the

GCC countries, resulting in political

uncertainty in the region. These

uncertainties have resulted in the

price of oil going over the US$100

mark, however the long term

stability of the region is dependant

on the satisfactory resolution of

the underlying issues.

//Bahrain’s political and

economic outlook

Bahrain is widely regarded as

one of the most forward looking

countries in the region. Political

and economic reforms have

yielded significant progress in

recent years.

Bahrain’s well supervised financial

system provides the government

with a relatively deep and liquid

market for its securities and

enables the Kingdom to serve

as a regional financial centre.

Regional and international

institutions have been attracted

to the country mainly due

to Bahrain’s liberal economic

policies, geographic proximity to

36 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 37


Management Discussion and Analysis

Management Discussion and Analysis

major oil exporters, developed

infrastructure, cosmopolitan

society and the reputation of

the Central Bank of Bahrain as a

prudent financial regulator. The

emergence of Dubai and Qatar

as contenders for the position of

regional financial centre means

that Bahrain’s financial services

industry is exposed to increased

competition. Nevertheless, it

retains strong comparative

advantages in particular

segments, including Islamic

finance, asset management and

private placement. Bahrain’ s GDP

reached US$ 20 billion as of end

December 2010, reflecting a real

growth of 4% during the year.

GDP per capita for 2010 was

estimated at BD 7,560 compared

to BD 7,260 for 2009.

Inflation has remained moderate

and is expected to be around the

3% levels for 2010. Inflation level

is likely to be underestimated

due to measurement issues,

but even assuming that it is in

reality somewhat higher than the

published numbers, it compares

well with the level of consumer

inflation in most of other GCC

countries.

The recent political turmoil,

however, has dampened

expectations for 2011. A quick

and acceptable resolution to the

crisis would be imperative for

the stability and growth of the

Kingdom.

//The financial sector

Bahrain continues to be one of

the major financial services hubs

of the region. This is borne out by

the number of financial institutions

operating in the country, and the

contribution of the banking sector

to the GDP which stood at 25% in

2010. The financial sector is the

largest employer in the Kingdom.

The total number of licensed

Financial institutions in Bahrain

as of end December 2010 was

403 out of which 134 belong to

the banking sector. Among them

were 30 retail banks, 15 locally

incorporated, 15 branches of

foreign banks, 77 wholesale banks

and 27 representative offices.

The Central Bank of Bahrain

reported total banking sector

assets at BD 85 billion (US$ 224

billion), which was 11.2 times

the GDP. The Central Bank has

promptly pledged to provide dinar

and dollar liquidity as necessary

when the financial crisis hit.

The Central Bank of Bahrain

mandates banks operating in

the Kingdom to comply with

Basel II standards and has set

regulatory capital adequacy ratio

at 12%. BMI Bank comfortably

exceeds this requirement with

Capital Adequacy Ratio standing

at 19.7%. In response to an

IMF financial sector assessment

program report, the Central

Bank has closely monitored

banks’ exposure to real estate

and introduced related measures

including a maximum bank

exposure to real estate of 25%

of portfolio and a maximum loan

to value ratio of 70%. Although

real estate inflation has not been

as high in Bahrain as elsewhere in

the GCC over the past few years,

moderate correction of prices

happened in 2009 and 2010.

The US Dollar – Bahraini Dinar

peg remains actively maintained

by the CBB. Hence interest rate

movements directed by CBB were

largely reflective of the actions

taken by the US Federal Reserve

during the year to maintain low

interest rates.

//Performance & outlook

Though business confidence may

be weak and the Kingdom may

be facing increasing competition

as one of the Gulf’s financial

services hubs, Bahrain’s economy

is predicted to grow modestly in

the coming year.

Income statement 2010 2009

BD ’000 BD ’000

Net interest income 14,514 15,259

Other operating income 3,298 5,245

Share of results of associate and

joint venture 110 (804)

Operating income 17,922 19,700

Cash operating expenses (15,337) (14,047)

Amortisation of intangible assets (144) (285)

Depreciation (1,806) (941)

Operating expenses (17,287) (15,273)

Net income before

provision for impairment 635 4,427

Net provision for impairment of

financial assets (25,469) (21,370)

Impairment of intangible assets (1,653) -

Loss for the year (26,487) (16,943)

//Net interest income

Net interest income decreased

by BD 745 thousand (5%) to

BD 14,514 thousand in year

2010 mainly due to higher level

of suspended interest on the

impaired loans and lower level

of wholesale banking lending.

Due to the market slowdown in

Bahrain and BMI Bank conscious

decision to run down its cross

border exposures and big ticket

lending, loans and advances have

decreased by 20% during the

year.

Average interest earning assets

decreased in 2010 by BD 55

million (10%) from BD 566

million in 2009 to BD 511 million.

Average interest earning liabilities

decreased in year 2010 by BD 63

million (13%) from BD 470 million

in 2009 to BD 407 million.

38 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 39


Management Discussion and Analysis

Management Discussion and Analysis

During the year, the net interest

margin continued to improve

from 2.9% in year 2009 to 3.4%

in 2010. The increase in margin

partly compensated for the drop

in volume of interest earning

assets and the higher level of

suspended interest and hence

the net interest income dropped

by only 5%.

//Other operating

income

Other operating income was lower

by BD 1.9 million, primarily due to

the following:

• Lower fees and commission

(BD 1.2 million) primarily in

the retail banking segment.

• Foreign exchange earnings

and other income were

lower during the year by

BD 712 thousand due to

lower customer volumes.

//Share of profits of

associates and joint

ventures

During the year, the Bank’s

associate Gulf African Bank,

Kenya and its joint venture in

Seychelles turned profitable and

accordingly the share of profit of

BMI Bank for the year was BD 110

thousand as compared to a loss

of BD 804 thousand in 2009.

//Operating expenses

Total Cash Operating expenses

at BD 15.3 million were higher by

BD 1.3 million (9%). This was due

to the following reasons :

1. During the year, the Bank

successfully rolled out its new

state-of-the-art integrated

core banking platform.

2. Consequently, the salary and

other related expenses of the

people involved in this activity,

which were capitalized in the

previous years, have now

been reflected in the income

statement. Total headcount

as of end of 2010 were 356

compared to 328 as of the

end of 2009.

3. This has also resulted in higher

level of running expenses for

the maintenance of hardware/

software and other related

expenses.

Amortization of intangible assets

represents franchise rights of

business and related cardholder

and merchant relationships

arising on acquisition of Diners

Club Services WLL (which issues

cards in Bahrain, Syria and

Yemen). During the year the

Bank conducted an impairment

testing of the business model and

concluded that these intangible

assets were fully impaired.

Accordingly, the amortized

charge for the year was lower

at BD 144 thousand compared

to BD 285 thousand for 2009

and the entire balance amount of

BD 1.65 million was charged to

the income statement.

Depreciation for the year at

BD 1.8 million was higher than

BD 941 thousand in 2009,

primarily due to the additional

depreciation charge on the new

banking system.

//Net impairment loss

on financial assets

During the year, the Bank

continued to experience stress

on its wholesale portfolio and

Islamic financing assets. The

Bank has prudently raised specific

provisions on these stressed

assets. The Bank has also raised a

//Balance sheet

higher level of collective provisions

on its standard book amounting

to BD 6 million, taking the total

amount of collective provisions to

BD 8.3 million as of end December

2010. Consequently the provision

cover on its Non-performing loans

was 76.2% as of end December

2010 compared to 82.3% as of

end December 2009.

Selected balance sheet data (BD million) 31-Dec-10 31-Dec-09

Cash and balances with the

Central Bank of Bahrain 83.0 35.9

(incl. Treasury Bills)

Due from banks and financial institutions 128.0 194.3

Loans and advances 310.0 388.0

(incl. Islamic Financing Assets)

Non-trading investments 44.4 31.7

Investment in associates 1.2 1.2

Investment in joint ventures 0.4 0.3

Total assets 590.5 673.4

Due to banks and financial institutions 163.6 170.7

Customers’ deposits 263.8 180.6

Wholesale Islamic deposits 18.3 108.0

Medium term loan 35.3 80.6

Subordinated liability 13.2 13.2

Total equity 86.4 112.6

Total Assets reduced from

BD 673.4 million as of end

December 2009 to BD 590.5

million as of end December 2010.

Cash and Placements with the

Central Bank (higher by BD 47

million), reflects the higher level

of placements with CBB made

during the year as a consequence

of the improved liquidity position

of the Bank.

Due from banks and financial

institutions were lower by

BD 66 million (34%) due to lower

interbank activity.

Loans and advances (including

Islamic financing assets), were

lower by BD 78 million (20%)

due to rundown of the loan book

and higher level of provisions.

The gross loan book (including

Islamic financing assets) reduced

40 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 41


Management Discussion and Analysis

Management Discussion and Analysis

by BD 52 million during the year.

Higher level of loan loss provisions

accounted for the remaining

reduction in net loans and

advances.

Non-Trading investments were

higher by BD 13 million at BD

44 million as of end December

2010 compared to BD 31.7

million as of end December 2009.

This increase was primarily due

to fresh investments during

the year in long dated debt

securities issued by the Central

Bank of Bahrain amounting to

BD 15.2 million.

As of 31 December 2010, the

Bank’s share of the net assets

of Gulf African Bank was BD 1.2

million.

As of 31 December 2010, the

Bank’s share of the net assets

of its joint venture in Seychelles,

BMI Offshore Bank Limited, was

BD 403 thousand. During the

year, the bank invested a further

amount of BD 94 thousand

(US$ 250 thousand) in

accordance with the requirement

of the Central Bank of Seychelles

for maintaining minimum levels of

capital. The bank’s investment in

Money on Demand Holdings WL.L.

(Mode) continues to be valued

at nil, as was done during end

December 2009.

Due to banks and financial

institutions were lower by BD 7

million at BD 164 million, reflecting

the lower level of inter-bank

activity.

Customer deposits have recorded

a strong growth at BD 83 million

(46%). The Bank continues to

improve its market share in the

deposit market.

Wholesale interbank deposits

have dropped from BD 108 million

as of end December 2009 to

BD 18 million as of end December

2010. These deposits have

traditionally been volatile in nature

and the reduction is in line with the

conscious strategy of reducing

dependence on such deposits.

During the year the bank

successfully repaid its syndicated

term borrowing of BD 45.2

million (US$ 120 million) on due

date. Since the global meltdown

in 2008, the Bank has taken

a number of steps to boost

its liquidity. The repayment of

the syndicated borrowing on

due date, without resorting to

additional borrowings, was the

result of these measures.

Subordinated liability remained

unchanged at BD 13 million.

Total shareholders’ funds were

lower at BD 86 million as of end

December 2010 compared to

BD 113 million as of end December

2009. This was primarily due to

the loss of BD 26 million incurred

during the year.

//Business unit

performance

The main business units of the

bank include retail, private,

SME, wholesale and financial

institutions and correspondent

banking as well as the Islamic

financial services unit.

//Retail banking

Despite a challenging external

environment and an increasingly

high level of competition, the

retail business reported growth in

2010 and achieved the strategy

for the year which focused on

reducing unsecured exposure and

bridging the funding gap. In 2010,

retail liabilities increased by 68%

to BD 117.1 million. In addition, a

number of key developments were

implemented during the year to

improve our customer experience

such as the implementation of the

new core banking system which

enables a comprehensive view

of our customer relationships,

implementation of risk based

pricing and the enhancement

of our credit cards functionality

through the introduction of

SMS alerts, purchase protection

insurance and secured wallet

insurance.

During the year, retail updated

the prize structure of its flagship

product - the Al Mazyona saving

certificate prize scheme offering

customers a chance to win a total

of 812 cash prizes in a calendar

year, giving them a higher chance

to win. Additionally the new prize

scheme offered twenty weekly

cash prizes of US$1,000 each, one

monthly cash prize of US$10,000

and a new grand prize of

US$100,000. The same scheme

was revised towards the end of

the year and launched with a new

name and prize scheme offering

customers the opportunity to win

the highest grand prize in terms

of value during the two Eids and

National Day.

Diners Club Services Bahrain, a

subsidiary of the bank, launched

a unique ‘Business World

Gold Membership’ program in

conjunction with Regus Group,

the world’s largest provider of

workplace solutions. It offered

its cardholders unlimited access

to Regus offices around the

world as part of its value added

proposition. In line with our

strategy of constantly refreshing

our product offering, the Bank

revised the interest rate to 2%

p.a. on its super current account

with interest calculated on an

Average Monthly Balance (AMB)

and credited into the customer’s

account on a monthly basis. The

account which offers customers

the flexibility of a regular current

account with the benefit of higher

returns usually associated with

fixed deposits also includes a

wider array of channels to ease

transactions including a free

cheque book, Visa enabled debit

card and access to net banking.

The focus will be on growing

the business during 2011 with

an emphasis on expanding the

retail network through additional

branches and ATMs as well as

enhancing the bouquet of retail

products and services in line with

the Bank’s vision of providing its

customers with innovative and

rewarding financial solutions. The

Bank recently rolled out its ninth

retail branch in Hamala in February

2011, to cater to the fast growing

corporate clientele within the

encatchment area. The branch

includes a dedicated cheque

and cash deposit ATM, two cash

withdrawal ATMs, and a 24/7

42 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 43


Management Discussion and Analysis

Management Discussion and Analysis

self-service customer workstation

that will be available to access net

banking and the customer service

centre in a secure environment.

Retail banking will also look

into enhancing its credit cards

proposition through new features

that offer customer a rewarding

experience every time they use

their BMI Bank credit cards and

include a new and secure online

payment channel that will help

customers avoid long queues

and visits to the branches to pay

their credit card bills. The unit

also plans to implement a full

acceptance scheme for its Diners

Club card within Bahrain in 2011.

//Private banking

2010 was indeed a challenging

year but ended at a positive note

on different fronts for BMI Bank’s

private banking unit. It topped its

targets, contributed to liabilities

and assets growth as well as

doubled the client based during

the year. The unit continued to

focus on growing, diversified and

very liquid business within the

bank. The growth achieved in

2010 will help it in sustaining the

Bank going forward into 2011.

//Wholesale banking:

2010 was a challenging year

for wholesale banking mainly

due to the continued effect of

the economic downturn, more

prudent lending policies and

additional specific and collective

provisions. Its portfolio comprised

of total assets of BD 91 million

and total liabilities of BD 74

million. The department was

able to generate a good fee and

commission income besides an

interest income. During 2010, the

corporate and commercial banking

departments were merged

together to create synergy. As

the unit moves forward, its focus

remains on growing the business

in the local markets by building

a strong and healthy portfolio of

new and existing relationships.

Also, the unit plans on introducing

new products and will continue to

promote the Bank’s Global Trade

Services “GTS” business which

offers a first class service.

//Financial Institutions

and correspondent

banking

During the year the Bank was

successful in its efforts to

build a stronger banking and

correspondent relationships with

other banks both within Bahrain

and the regional markets. Those

relationships enabled the Bank

to raise a medium term funding

of US$ 80 million syndicated

term loan facility for three years

tenor in early 2011. The strong

credit lines available from financial

institutions around the globe

has helped the Bank increase its

ability to support the increasing

business in local markets and take

cross border risk on a case by

case basis. The Bank continues

to be cautious on its risk appetite

towards the regional markets

and has been able to identify

good business that has a sensible

credit approach in terms of risk

and tenor. The Bank will continue

to look to identify the treasury

relationships and trade finance

self liquidation transactions within

the GCC and regional markets

to build a sustainable long-term

relationship that would benefit

both the Bank and its customers.

//Small and Medium

Enterprises (SME)

banking

The Bank’s SME department

continued where it left off in 2009,

with another strong year in 2010.

The growth strategy remained

the same - continued focus on

liability growth and new customer

acquisition, with selected lending

to good quality companies. In

these key areas, the department

significantly exceeded its targets,

confirming the competitiveness

of the proposition. During this

time, the department also grew

steadily in terms of head count,

with the department now having

one of the strongest sales teams

in the country. With a range of

new products in the pipeline,

the department is well placed

to continue with its objective

of making BMI Bank the bank of

choice for SME customers in the

Kingdom of Bahrain.

//Islamic Financial

Services (IFS)

Islamic Financial Services was not

immune from the fragilities of the

market environment. IFS’s clients

and the bank shareholders alike

have been affected by the market

conditions which presented IFS

with a real challenge to structure

and market products that present

sustainable rewards. In light of the

global proceedings and investor

sentiment, IFS continued to

focus its attention on meeting

fundamental objectives in 2010

and managed to expand its client

base which presently consists of

corporate, Islamic commercial

and investment banks, financing

companies, government and quasi

- government entities in Bahrain,

other GCC countries, Turkey and

Pakistan, and increased its assets

largely by replacing runoffs of

legacy/low priced assets with

higher yield generating assets.

The focus was also on short

to medium term financing. Fee

income from our off balance

sheet items such as LCs and LGs

played an increasingly important

part.

In its business conduct for 2011

onwards, IFS will primarily focus on

bilateral and syndicated facilities

in the emerging markets with an

eye on active energy, aviation,

hospitality, healthcare, education

and shipping sectors. IFS will

largely target governments,

oil and gas exploration and

production companies, airlines

and shipping companies for its

corporate and structured finance

business. In addition to its core

business activities, IFS will offer

its advisory services and the

arrangement and provision of

Islamic retail banking services,

structured and trade finance,

SME finance, assets management

and investments products. IFS

will engage in traditional trade

finance instruments to finance

asset acquisition programs and

thereafter refinance these assets

through medium-term assetbacked

transactions.

44 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 45


Management Discussion and Analysis

Management Discussion and Analysis

IFS will work closely with other

local, regional and international

financial institutions and

investment funds in order to be

able to:

• Maximize the distribution of

clients securities;

• Secure asset-backed and/or

project and/or trade finance;

• Raise equity and/or debt;

• Restructure existing investment

and/or debt portfolios.

The launch of the Islamic retail

branch and our new Islamic Brand

name and logo will take place by

the second quarter of 2011. This

will include a bouquet of Islamic

retail products (assets & liabilities)

with the distribution handled

through IFS retail counters. IFS’s

strategy includes a focus on the

operational efficiency together

with sustainable and prudent

growth and above average

returns within a well-controlled,

conservative risk profile. IFS

believes the combination of the

highest global banking standards,

relatively stronger economic

growth in the targeted emerging

market economies and new

strategic alliances will make IFS an

ideal business platform to further

grow over the medium-term.

//Risk management

Risk is defined as the combination

of severity and frequency of

potential loss over a given time

horizon and is inherent to the

Bank’s activities. Risk can be

expressed in the dimensions

of potential severity of loss

(magnitude of impact) and

potential loss frequency

(likelihood of occurrence). Risk

Management is the process by

which the Bank identifies key risks,

sets consistent understandable

risk measures, chooses which

risks to reduce, which to

increase and by what means,

and establishes procedures to

monitor the resulting risk position.

Risk Management is the discipline

at the core of every financial

institution and encompasses all

the activities that affect its risk

profile. It involves identification,

measurement, monitoring and

controlling risks to ensure that

optimum value is created for the

shareholders through an optimum

return on equity by an appropriate

trade-off between risk and return.

Effective Risk Management is

the cornerstone of operating

performance and capital

structure. The vision of Risk

Management is to address all

aspects of risk which the Bank

may be exposed to. The Bank’s

risk function is independent of

lines of business and the Head

of Risk Management reports to

the Chief Executive Officer with

independent oversight provided

by the Board Risk Committee,

appointed by the Board of

Directors.

The Bank has exposure to risks,

which include, but are not limited

to, credit, market, liquidity,

reputational and operational risk.

The Bank’s aim is to achieve an

appropriate balance between risk

and return and minimize potential

adverse impact on the Bank’s

financial performance.

The Bank’s risk policy, as

approved by the Board of

Directors, analyses and sets

risk limits for credit risk, liquidity

risk and market risk (to include

interest rate and currency risk).

This is further segmented into line

of business segment, product,

geography, counterparty, and

risk type as agreed by executive

management and the Board

according to a clear authorities

matrix.

//Credit risk management

Credit risk is defined as the

potential that the Bank’s borrower

or counterparty will fail to meet its

obligations in accordance with the

agreed terms. The goal of credit

risk management is to maximize

the Bank’s risk-adjusted rate

of return by maintaining credit

exposures within acceptable

parameters of both quantity

and quality. The Bank has welldefined

policies and procedures

for identifying, measuring,

monitoring and controlling credit

risk in all the Bank’s activities.

Credit limits are approved after

a thorough assessment of the

creditworthiness of the borrower

or counterparty, including the

purpose and structure of the

credit facility, and the source of

repayment. Credit proposals are

prepared by lines of business and

are independently reviewed and

analyzed by risk management

professionals before the

approval of the appropriate

approving authority, such as the

Management Credit Committee,

Board Risk Committee (a

sub-committee of Board of

Directors) or Board of Directors,

is sought. Monthly presentations

of the credit portfolio to the

Management Credit Committee

are undertaken by individual lines

of business, in order to provide

an overview of the Bank’s entire

credit portfolio.

Cross border exposures,

exposures to sovereigns, banks

and other financial institutions are

guided by risk limits set for these

entities and approved by the

Board Risk Committee, and based

on various risk factors.

The credit growth, quality

and portfolio composition are

continuously monitored to

maximize risk adjusted returns and

manage the level of impairment

in line with strategy, policy and

expectation. The concentration

of risk is mitigated by the setting

of various limits such as the

Single Borrower Limit (SBL),

country limits, industry-wise

concentrations, sensitive sectorial

limits and individual counterparty

limits. These parameters are

subject to regular review, and

updated accordingly. Sector limits

and Maximum Exposure Guidelines

are set on a country basis and

a portfolio basis to avoid undue

concentrations.

The Credit Administration

Department ensures that credit

facilities are only released

upon obtaining the requisite

approvals and documentation.

It also monitors daily excesses

over limits, overdue reviews and

exceptions to policy and escalates

the same to the relevant

46 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 47


Management Discussion and Analysis

Management Discussion and Analysis

committee. All relationships

are reviewed annually and nonperforming

accounts are reviewed

more regularly.

Through its Early Warning System,

the Bank adopts a rigorous

standard for the identification

and monitoring of non-performing

loans’ (NPL) with a view to eventual

recovery. Problematic accounts

are reviewed regularly by the

Management Credit Committee

to evaluate compliance with the

terms of the ‘work out’ strategy

with laid down lending norms and

to ensure incorporation of the

lessons learned, if any, into the

Bank’s lending guidelines.

//Liquidity risk

management

Liquidity risk is the potential

inability of the Bank to meet cash

flows of its maturing obligations

to a counterparty. Liquidity risk

management seeks to ensure

that the Bank has the ability,

under varying scenarios, to fund

increases in assets and meet

maturing obligations as they arise.

The Treasury Department of the

Bank is responsible for liquidity

management in the Bank, under

the guidance and supervision of

the Asset and Liability Committee

(ALCO). The liquidity risk policy

sets liquidity limits, targets, and

ratios, to aid robust liquidity

management.

The Bank’s funding sources are

well-diversified across funding

types and include customer

deposits, inter bank deposits,

and subordinated loans. The

sources and maturities of

assets and liabilities are closely

monitored to avoid any undue

concentrations and to ensure the

robust management of liquidity

risk. Contingency plans to meet

liquidity in order to withstand

a bank specific or market crisis

scenario are in place, these plans

are reviewed regularly by ALCO.

Positions are monitored daily

against gap limits approved by

the Board Risk Committee.

//Market risk

management

Market risk arises from fluctuations

in interest rates, foreign exchange

rates and commodity and equity

prices. As per the board directive,

the Bank does not have authority

to enter into any proprietary

position on currencies or interest

rates.

Currency and interest rate risk

is carried only on the banking

book. Currency risk, arising out

of customer positions is hedged

on a back-to-back basis. The

Bank maintains minimal open

positions on G7 and other volatile

currencies.

The treasury also operates within

the prescribed open currency

position limits approved by the

Board Risk Committee. The

management of currency risk

rests with ALCO which meets

on a monthly basis, but where

positions are monitored daily.

//Interest rate risk

management

Interest rate risk is the risk that

the Bank’s profitability or fair

value of its financial instruments

will be adversely affected by the

changes in interest rates. Interest

rate risk arises from the possibility

of changes in interest rates

and mismatches or gaps in the

amount of assets and liabilities

and off balance sheet items that

mature or are re-priced in a given

period. The responsibility for

interest rate risk management

rests with the Bank’s ALCO which

takes an integrated view of the

interest rate risk across the Bank’s

products and lines of business.

Positions are monitored daily to

ensure they are maintained within

established limits.

//Operational risk

management

Operational risk is the risk of loss

arising from causes associated

with the Bank’s processes,

personnel, information systems

and external factors such as those

arising from legal and regulatory

requirements. It is inherent in

every business organization and

covers a wide spectrum of issues.

The objective of the Bank is to

manage this risk by striking a

commercial balance between the

risk of financial loss and avoiding

excessively bureaucratic internal

procedures which limit the ability

to provide an effective service

to customers. The Bank achieves

this through a control-based

environment where processes

are documented, authorization is

independent and transactions are

monitored and reconciled. This

is supported by an independent

program of periodic internal audit

reviews.

Operational risk management

process is guided by high level

policies supported by procedures

embedded within the policies.

The policies and the procedures

captures how the Bank manages

its operational risk by identifying,

controlling and mitigating the

operational risk and implementing

any additional procedures which

may be required as dictated by

the risk identified or operational

risk loss incurred. The operational

risk processes and procedures

are dictated by the scale of

operations.

The Operational risk management

regime is guided by the following

principles:

• Management of operational

risk is the responsibility of the

senior management of each

segment of business.

• Appropriate and regular

management reports.

• Risk assessment of critical

businesses to identify risks

facing each department

and the risks inherent in its

processes and products.

Risks identified are subjected

to periodic reviews to ensure

that the circumstances under

which they were identified

have not significantly changed.

• Collection of operational

risk loss data and reporting

individual cases and trends to

senior management.

48 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 49


Management Discussion and Analysis

• All risks identified and loss

data reported are analyzed

for underlying root causes

and mitigants put in place to

ensure that the root causes

do not pose a risk to the Bank.

• Risk mitigation techniques,

like insurance, are used where

appropriate.

The Bank has developed and

implemented a comprehensive

Business Continuity Plan (BCP)

to respond to events that disrupt

its operations at any location

within its network. The plan seeks

to quickly recover and resume

its most critical operations

with minimal disruption to its

operations. The plan addresses

several areas including data backup

and recovery, communication

with stakeholders and the use

of alternate physical locations

amongst others. The plan is

dependent on a number of

external vendors as well as their

responses in the event of a

disruption.

//Internal control

systems

Management is fully aware of

its responsibilities to the Bank’s

depositors and shareholders. A key

factor in the fulfillment of these

responsibilities is the strength of

the Bank’s operating procedures

and associated internal control

systems. These are designed to

address several critical issues

including the completeness,

accuracy and reliability of the

financial information that is used

to monitor and manage the

business and the need to provide

fast and efficient services to

customers.

The Bank addresses these issues

by maintaining clearly defined

operating procedures, which are

updated as and when necessary

to cope with the growth in the

bank’s size and complexity.

The operation of the internal

control systems is also reviewed

by the Bank’s Internal Audit

department, which reports

directly to the Audit Committee

of the Board of Directors.

The organization structure and

human resources policy of the

Bank are designed to ensure that

areas of the Bank’s operations

are managed and supervised

effectively by competent and

well-qualified staff.

//Outlook

The Bank remains committed to

its vision of long-term regional

growth and providing superior

returns to its stakeholders,

employees and the community in

which it operates.

The Bank will continue to work

towards further strengthening its

position, developing new products

and services, and achieving overall

excellence.

//Financial Statements

In accordance with the Central Bank of Bahrain Rules concerning Public Disclosure module, the

Pillar III disclosures are published separately on the Bank’s web site under the financials section and

this document has been reviewed by the Bank’s external auditors, Ernst and Young.

50 // BMI Bank Annual Report 2010

BMI Bank BMI Bank Annual Annual Report Report 2010 2010 // 51// 51


Auditors’ Report to the Shareholders

Independent Auditors’ Report to the Shareholders of

BMI Bank B.S.C. (c)

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of BMI Bank B.S.C. (c) [‘the Bank’] and its subsidiary

[together ‘the Group’] which comprise the consolidated statement of financial position as at 31 December 2010 and the

consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a

summary of significant accounting policies and other explanatory information.

Board of Directors’ Responsibility for the Financial Statements

The Board is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with

International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the

preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our

audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements

and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free

from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated

financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of

material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments,

the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial

statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing

an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by the Board, as well as evaluating the overall

presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of

the Group as at 31 December 2010, and its financial performance and its cash flows for the year then ended in accordance with

International Financial Reporting Standards.

Report on Other Regulatory Matters

We confirm that, in our opinion, proper accounting records have been kept by the Bank. The consolidated financial statements

and the contents of the Report of the Board of Directors relating to these consolidated financial statements, are in agreement

therewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies

Law, nor of the Central Bank of Bahrain and Financial Institutions Law, nor of the memorandum and articles of association of the

Bank have occurred during the year ended 31 December 2010 that might have had a material adverse effect on the business

of the Bank or on its financial position, and that the Bank has complied with the terms of its banking licence.

10 February 2011

Manama, Kingdom of Bahrain

52 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 53


Consolidated Statement of Financial Position

Consolidated Statement of Income

//Consolidated Statement of Financial Position

31 December 2010

//Consolidated Statement of Income

Year ended 31 December 2010

2010 2009

Note BD ’000 BD ’000

ASSETS

Cash and balances with the Central Bank of Bahrain 7 63,391 35,899

Treasury bills 8 19,642 -

Due from banks and financial institutions 9 128,016 194,328

Loans and advances 10 253,529 313,747

Islamic financing assets 11 56,529 74,302

Non-trading investments 12 44,406 31,697

Investment in an associate 13 1,189 1,176

Investment in joint ventures 14 403 288

Premises and equipment 15 17,872 15,834

Intangible assets 16 - 1,797

Other assets 17 5,525 4,377

TOTAL ASSETS 590,502 673,445

LIABILITIES AND EQUITY

LIABILITIES

Due to banks and financial institutions 163,573 170,683

Customers’ deposits 18 263,845 180,572

Wholesale Islamic deposits 18,310 107,974

Medium term borrowings 19 35,336 80,568

Other liabilities 20 9,859 7,816

Subordinated liability 21 13,195 13,195

2010 2009

Note BD ’000 BD ’000

Interest and similar income 24 25,200 27,515

Interest expense and similar charges 25 10,686 12,256

NET INTEREST INCOME 14,514 15,259

Net fees and commission income 26 2,028 3,263

Share of results of associate and joint venture 13,14 110 (804)

Other operating income 27 1,270 1,982

OPERATING INCOME 17,922 19,700

Staff expenses 9,498 8,719

Other operating expenses 5,839 5,328

Depreciation 15 1,806 941

Amortisation of intangible assets 16 144 285

OPERATING EXPENSES 17,287 15,273

PROFIT BEFORE PROVISION FOR IMPAIRMENT 635 4,427

Net provision for impairment of financial assets 28 25,469 21,370

Impairment of intangible assets 16 1,653 -

LOSS FOR THE YEAR (26,487) (16,943)

TOTAL LIABILITIES 504,118 560,808

EQUITY

Share capital 22 58,530 58,530

Reserves 23 27,854 54,107

TOTAL EQUITY 86,384 112,637

TOTAL LIABILITIES AND EQUITY 590,502 673,445

Chairman Chief Executive Officer Director

The attached notes 1 to 42 form part of these consolidated financial statements

The attached notes 1 to 42 form part of these consolidated financial statements

54 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 55


Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

//Consolidated Statement of Comprehensive Income

Year ended 31 December 2010

//Consolidated Statement of Cash Flows

Year ended 31 December 2010

2010 2009

Note BD ’000 BD ’000

LOSS FOR THE YEAR (26,487) (16,943)

Other comprehensive income (loss):

Unrealised gains on available-for-sale investments 268 986

Exchange differences on translation of investment in an associate (76) 49

Cash flow hedges - (37)

Directors’ sitting fees paid - (68)

Other comprehensive income for the year 192 930

TOTAL COMPREHENSIVE LOSS FOR THE YEAR (26,295) (16,013)

2010 2009

Note BD ’000 BD ’000

OPERATING ACTIVITIES

Loss for the year (26,487) (16,943)

Adjustments for non-cash items:

Share of results of an associate and joint venture 13,14 (110) 804

Depreciation 15 1,806 941

Amortisation of intangible assets 16 144 285

Impairment of intangible assets 16 1,653 -

Net provision for impairment of financial assets 28 25,469 21,370

Share based payments 29 42 68

Directors’ sitting fees paid - (68)

Other non-cash movements 100 (35)

Operating profit before changes in operating assets and liabilities 2,617 6,422

//Consolidated Statement of Changes in Equity

Year ended 31 December 2010

Reserves

Foreign

Subordinated currency Cumulative Cash flow

Share Share Statutory debt translation changes in hedge Accumulated Proposed Total Total

capital premium reserve reserve reserve fair value reserve losses appropriations reserves equity

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

Balance at 1 January 2010 58,530 61,470 1,407 7,917 (397) (477) - (15,813) - 54,107 112,637

Loss for the year - - - - - - - (26,487) - (26,487) (26,487)

Other comprehensive (loss) income - - - - (76) 268 - - - 192 192

Total comprehensive (loss) income - - - - (76) 268 - (26,487) - (26,295) (26,295)

Share based payments (note 29) - - - - - - - 42 - 42 42

Balance at 31 December 2010 58,530 61,470 1,407 7,917 (473) (209) - (42,258) - 27,854 86,384

Balance at 1 January 2009 58,530 61,470 1,407 7,917 (446) (1,463) 37 797 333 70,052 128,582

Loss for the year - - - - - - - (16,943) - (16,943) (16,943)

Other comprehensive income (loss) - - - - 49 986 (37) - (68) 930 930

Total comprehensive income (loss) - - - - 49 986 (37) (16,943) (68) (16,013) (16,013)

Reversal of proposed directors’

remuneration - - - - - - - 265 (265) - -

Share based payments (note 29) - - - - - - - 68 - 68 68

Balance at 31 December 2009 58,530 61,470 1,407 7,917 (397) (477) - (15,813) - 54,107 112,637

Changes in operating assets and liabilities:

Mandatory reserve deposit with the Central Bank of Bahrain 7 (3,630) 608

Purchase of treasury bills (6,964) -

Loans and advances 10 48,338 56,303

Islamic financing assets 11 6,455 20,392

Other assets 17 (1,685) 1,890

Due to banks and financial institutions (7,110) (118,790)

Customers’ deposits 83,273 12,119

Wholesale Islamic deposits (89,664) (12,495)

Other liabilities 20 2,024 (6,307)

Net cash from (used in) operating activities 33,654 (39,858)

INVESTING ACTIVITIES

Purchase of non-trading investments (17,409) (220)

Proceeds from redemption of non-trading investments 4,999 7,358

Proceeds from sale of investment in an associate - 9,372

Investment in a joint venture 14 (94) -

Purchase of premises and equipment 15 (3,849) (7,173)

Proceeds from sale of premises and equipment 15 5 2

Net cash (used in) from investing activities (16,348) 9,339

FINANCING ACTIVITY

Medium term borrowings repaid 19 (45,240) -

Net cash used in financing activity (45,240) -

DECREASE IN CASH AND CASH EQUIVALENTS (27,934) (30,519)

Cash and cash equivalents at beginning of the year 223,859 254,378

CASH AND CASH EQUIVALENTS AT END OF THE YEAR 195,925 223,859

Cash and cash equivalents comprise:

Cash and balances with the Central Bank of Bahrain

excluding mandatory reserve deposit 7 55,231 31,369

Treasury bills with original maturity of 90 days or less 12,678 -

Placements with banks with original maturity of 90 days or less 128,016 192,490

The attached notes 1 to 42 form part of these consolidated financial statements

The attached notes 1 to 42 form part of these consolidated financial statements

195,925 223,859

56 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 57


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

1. CORPORATE INFORMATION

Incorporation

BMI Bank B.S.C. (c) (“the Bank”) is a closed shareholding company incorporated on 1 January 2005 when the Bank acquired

the Bahrain commercial branch of BankMuscat S.A.O.G. The registered address of the Bank is PO Box 350, Manama, Kingdom

of Bahrain.

Activities

The Bank operates under a retail banking license issued under the new integrated licensing framework of the Central Bank of

Bahrain and is engaged in commercial banking activities through its eight branches in the Kingdom of Bahrain and a branch in the

Qatar Financial Centre in the State of Qatar.

The Bank owns 100% stake in Diners Club Services W.L.L. (“the Subsidiary”). The Subsidiary is incorporated in the Kingdom of

Bahrain and operates the Diners Club cards franchise in Bahrain, Syria and Yemen.

These consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors

dated 10 February 2011.

2. BASIS OF PREPARATION

Statement of compliance

The consolidated financial statements of the Bank and its Subsidiary (“the Group”) have been prepared in accordance with

International Financial Reporting Standards (IFRS) and in confirmity with the regulations of the Bahrain Commercial Companies

Law and the Central Bank of Bahrain and Financial Institutions Law.

Accounting convention

The consolidated financial statements have been prepared under the historical cost convention as modified for the remeasurement

at fair value of available-for-sale investments and derivatives.

The consolidated financial statements have been presented in Bahraini Dinars (BD) which is the functional currency of the Group.

All values are rounded off to the nearest thousand (BD thousand) unless otherwise indicated.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and its Subsidiary. A subsidiary is an entity

that the Group has the power to control so as to obtain economic benefits and therefore excludes those held in a fiduciary

capacity. The financial statements of the Subsidiary are prepared for the same reporting period as the Bank, using consistent

accounting policies.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, which is other

than fiduciary in nature, and continue to be consolidated until the date that such control ceases.

All intra-group balances, transactions, income and expenses and profit and losses resulting from intra-group transactions are

eliminated in full.

3. FUTURE CHANGES IN ACCOUNTING POLICIES

New standards and interpretations issued but not yet effective

IAS 32 Financial Instruments (Revised): Presentation - Classification of Rights Issues

The amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and amended the definition of

a financial liability, in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such

rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to

acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment will have no

impact on the Group after initial application.

IAS 24 Related Party Disclosures

The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related

party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard

introduces a partial exemption of disclosure requirements for government-related entities. The Group does not expect any

impact on its financial position or performance. Early adoption is permitted for either the partial exemption for governmentrelated

entities for the entire standard.

IFRS 9: Financial Instruments - Classification and Measurement

IFRS 9 was issued in November 2009 and replaces the parts of IAS 39 relating to the classification and measurement of

financial assets. The standard is effective for annual periods beginning on or after 1 January 2013. The Group is considering the

implication of the standard, the impact on the Group and the timing of its adoption by the Group.

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments

issued to a creditor to extinguish a financial liability as consideration paid. The equity instruments issued are measured at their

fair value. In case this cannot be reliably measured, they are measured at fair value of the liability extinguished. Any gain or loss

is recognised immediately in consolidated statement of income. The adoption of this interpretation will have no effect on the

consolidated financial statements of the Group.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted in the preparation of these consolidated financial statements are consistent with

those in the previous financial year, except for the following new and amended IFRS and IFRIC interpretations applicable as of 1

January 2010.

IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)

IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items

IFRIC 17 Distribution of Non-cash Assets to Owners

These amendments did not have any impact on the Group’s financial position, or performance during the year.

Improvements to IFRSs

Amendments resulting from improvements to the following standards did not have any significant impact on the accounting

policies, financial position or performance of the Group:

IFRS 2 Share based payment: Group cash settled share-based payment transactions effective 1 January 2010

IFRS 5 Non-current assets held for sale and discontinued operations effective 1 January 2010

IAS 1 Presentation of Financial Statements

IAS 7 Statement of Cash Flows

IAS 34 Interim Financial Reporting

IAS 36 Impairment of Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IFRIC 9 Reassessment of Embedded Derivatives

IFRIC 16 Hedge of a Net Investment in a Foreign Operation

Business combinations and goodwill

Business combinations are accounted for using the purchase method. The cost of the business combination is measured as the

aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments

issued by the Group in exchange for control of the acquiree. Any costs directly attributable to the business combination are

accounted for as expenses in the period in which the costs are incurred and the services are received, except for costs to issue

debt or equity securities, which are recognised in accordance with IAS 32: Financial Instruments: Presentation and IAS 39:

Financial Instruments: Recognition and Measurement. The acquiree’s identifiable assets, liabilities and contingent liabilities that

meet the conditions for recognition under IFRS 3: Business Combinations are recognised at their fair values at the acquisition

date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5: Noncurrent

Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

58 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 59


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

4 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Business combinations and goodwill (continued)

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 acquiree’s identifiable assets, liabilities and contingent liabilities acquired.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment

testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s 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 Group are assigned to those units or groups of units.

Each unit or group of units to which goodwill is allocated:

• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes;

and

• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined

in accordance with IFRS 8: Operating Segments.

Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cashgenerating

units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cashgenerating

units) is less than the carrying amount of the cash-generating unit (group of cash-generating units) to which goodwill

has been allocated, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.

Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying

value may be impaired. The Group performs its annual impairment test of goodwill as at the consolidated statement of financial

position date.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill

associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss

on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation

disposed of and the portion of the cash-generating unit retained.

When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences

and unamortised goodwill is recognised in the consolidated statement of income.

Treasury bills

Treasury bills are carried at amortised cost, less allowance for any impairment.

Due from banks and financial institutions

These are stated at amortised cost, less allowance for any impairment.

Loans and advances and Islamic financing assets

These are stated at amortised cost using effective interest rate method less interest or profit suspended, provision for

impairment and any amounts written off.

Non-trading investments

These are classified as follows:

• Held-to-maturity

• Loans and receivables

• Available-for-sale

All investments are initially recognised at fair value including directly attributable transaction costs.

For unquoted equity investments, fair value is determined by reference to the market value of a similar investment, or is based

on the expected discounted cash flows.

Premiums and discounts on non-trading investments are amortised using the effective interest rate method and taken to

interest and similar income and interest and similar charges respectively, within the consolidated statement of income.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Non-trading investments (continued)

Held-to-maturity

Non-trading investments with fixed or determinable payments and fixed maturities and which the Group has the intention and

ability to hold to maturity are classified as held-to-maturity.

Loans and receivables

Debt instruments which do not meet the definition of held-to-maturity, and which have fixed or determinable payments but are

not quoted in an active market are treated effectively as loans and receivables carried at amortised cost, less any provision for

impairment.

Available-for-sale

Available-for-sale investments are those which are designated as such or do not qualify to be classified as fair value through

profit or loss, held to maturity or loans and receivables. These investments may be sold in response to needs of liquidity and

changes in market conditions. These include equity and debt instruments.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value except where fair

value cannot be reliably determined, in which case they are measured at cost less impairment. Unrealised gains and losses are

recognised directly in the consolidated statement of comprehensive income under ‘other comprehensive income’. When the

investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the statement of income in

‘Other income’. Interest earned whilst holding available-for-sale debt securities is reported as interest income using the effective

yield method. The losses arising from impairment of such investments are recognised in the consolidated statement of income

in ‘net provision for impairment of financial assets’ and removed from the ‘cumulative changes in fair value’ in the consolidated

statement of changes in equity.

Investments in associates

An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. The

Group’s investments in its associates are accounted for using the equity method.

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 the net assets of an associate. The consolidated statement of income

reflects the Group’s share of the results of operations of an associate. Where there has been a change recognised directly in the

equity of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated

statement of changes in equity. Unrealised profits and losses resulting from transactions between the Group and an associate

are eliminated to the extent of the interest in the associate.

The reporting dates of an associate and the Group are identical and the associate’s accounting policies confirm to those used

by the Group for like transactions and events in similar circumstances.

After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment

loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective

evidence that the investment in associate is impaired. If this is the case, the Group calculates the amount of impairment as

being the difference between the recoverable amount of an associate and its carrying value and recognises the amount in the

consolidated statement of income.

Joint ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to

joint control. A joint venture involves the establishment of a separate entity in which each venturer has an interest. The Group

recognises its interest in the joint venture using equity method.

Under the equity method, the investment in joint venture 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 joint venture. The statement of income reflects the

Group’s share of the results of operations of the joint venture. Where there has been a change recognised directly in the equity

of the joint venture, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated

statement of changes in equity. Unrealised profits and losses resulting from transactions between the Group and the joint

venture are eliminated to the extent of the interest in the joint venture.

60 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 61


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

4 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Joint ventures (continued)

The reporting dates of the joint ventures and the Group are identical and the joint ventures’ accounting policies confirm to those

used by the Group for like transactions and events in similar circumstances.

After application of equity method, the Group determines whether it is necessary to recognise an additional impairment loss

on the Group’s investment in its joint ventures. The Group determines at each reporting date whether there is any objective

evidence that the investment in joint ventures is impaired. If this is the case, the Group calculates the amount of impairment as

being the difference between the recoverable amount of the joint venture and its carrying value and recognises the amount in

the consolidated statement of income.

Fair values

The fair value of financial instruments that are quoted in an active market is determined by reference to market bid prices for

assets and offer prices for liabilities, at the close of business on the statement of financial position date.

The fair value of liabilities with a demand feature is the amount payable on demand.

Financial instruments with no active market or where fair value cannot be reliably determined are stated at cost less provision

for any impairment.

The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not

available, then fair value is estimated by discounting the difference between the contractual forward price and the current

forward price for the residual maturity of the contract using a risk free interest rate.

The fair value of interest rate swaps is arrived at by discounting estimated future cash flows based on the terms and maturity

of each contract and using market interest rates for a similar instrument at the measurement date.

Derecognition of financial assets and financial liabilities

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised

where:

• the rights to receive cash flows from the asset have expired;

• the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full

without material delay to a third party under a ‘pass-through’ arrangement; and

• either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither

transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the

asset.

(ii) Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Premises and equipment

Premises and equipment are initially recognised at cost. Depreciation on premises and equipment is provided on a straight-line

basis over the following estimated useful life.

Equipment and hardware: 4 to 5 years

Software (includes software and other developmental costs on the core banking platform): 10 years

Motor vehicles: 4 years

Capital work-in-progress is not depreciated.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Due to banks and financial institutions and customer deposits

Due to banks and financial institutions and customer deposits are carried at the fair value of consideration received, less

amounts repaid.

Interest bearing loans and borrowings

Interest bearing loans and borrowings are initially recognised at fair value, less directly attributable transaction costs. After

initial measurement, debts issued are subsequently measured at amortised cost using the effective interest rate method.

Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of

the effective interest rate.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and the

costs to settle the obligation are both probable and reliably measurable. Provisions are determined by discounting the expected

future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific

to the liability.

Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial

recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any

difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position

if, and only if, there is a legally enforceable right to set off the recognised amounts and the Group intends to either settle on a

net basis, or to realise the asset and settle the liability simultaneously.

Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can

be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

(i) Interest and similar income

Interest income and related fees are recognised using the effective yield method, which is the rate that exactly discounts

estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where

appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual

terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument

and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or

financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated

based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

Recognition of interest income is suspended when loans become impaired. Notional interest is recognised on impaired loans and

other financial assets based on the rate used to discount future cash flows to their net present value.

(ii) Fees and commission income

Credit origination fees are treated as an integral part of the effective interest rate of financial instruments and are recognised

over their lives, except when the underlying risk is sold to a third party at which time it is recognised immediately. Other fees

and commission income is recognised when earned.

(iii) Dividend income

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

Income tax

Tax liability for the current year relates to tax payable by the Group’s branch in the State of Qatar to the Qatar Financial Centre

Regulatory Authority (QFCRA). The tax rates and tax laws used to compute the amount are those that are enacted by the

statement of financial position date, which is a flat rate of 10% on the Branch’s net income for the year.

62 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 63


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

4 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currencies

Transactions in foreign currencies are initially recorded at the functional currency rate prevailing on the date of the transaction.

Monetary assets and liabilities in foreign currencies are translated into Bahraini Dinars at rates of exchange prevailing at the

statement of financial position date. Any gains or losses are taken to the consolidated statement of income.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates

as at the dates of the initial transaction and are not subsequently restated. Non-monetary items measured at fair value in a

foreign currency are translated using the exchange rates at the date when the fair value was determined. Fair value differences

arising from investment in associates denominated in a foreign currency are taken to “foreign currency translation reserve”

forming part of equity.

Employees’ end of service benefits

Bahraini employees are covered by the Social Insurance Organisation scheme which comprises a defined contribution scheme

to which the Group contributes a monthly sum based on a fixed percentage of the salary. The contribution is recognised as an

expense in the consolidated statement of income.

The Group provides end of service benefits to its non-Bahraini employees. Entitlement to these benefits is usually based upon

the employees’ length of service and the completion of a minimum service period. The expected costs of these benefits which

comprise a defined benefit scheme are accrued over the period of employment based on the notional amount payable if all

employees had left at the statement of financial position date.

Cash and cash equivalents

Cash and cash equivalents referred to in the consolidated statement of cash flows comprise cash and non restricted balances

with the Central Bank of Bahrain, deposits with banks and financial institutions and treasury bills with original maturities of 90

days or less. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

Intangible assets

Intangible assets acquired separately are initially recognised at cost. The cost of intangible assets acquired in a business

combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less

any accumulated amortisation and any accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with infinite lives are amortised

over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life

are reviewed annually. Changes in the expected useful life or the expected pattern of consumption of future economic benefits

embodied in the assets are accounted for by changing the amortisation period or method, as appropriate, and treated as

changes in accounting estimates. The amortisation expense on intangible assets with finite life is recognised in the consolidated

statement of income.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over

their estimated useful lives as follows:

• Franchise cost

• Cardholder and merchant relationships

Seven years and five months (being the residual life of the franchise

agreement)

Five to ten years

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal

proceeds and the carrying amount of the asset and are recognised in the consolidated statement of income when the asset is

derecognised.

Derivatives and hedge accounting

The Group makes use of derivative instruments including forwards and swaps to manage exposures to interest rate and foreign

currency risks.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derivatives and hedge accounting (continued)

Derivatives are initially recognised, and subsequently measured at fair value with transaction costs taken directly to the

consolidated statement of income. The fair value of a derivative is the equivalent of the unrealised gain or loss from marking to

market the derivative. Derivatives with positive fair values (unrealised gains) are included in other assets and derivatives with

negative fair values (unrealised losses) are included in other liabilities in the statement of financial position.

Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value, when their

economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried as

held for trading. The embedded derivatives are, where material, separated from the host contract and carried at fair value with

the changes in fair value recognised in the consolidated statement of income.

The Group applies hedge accounting for transactions which meet the specified criteria.

At the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instruments is expected to

be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessed each quarter. A hedge is

regarded as highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which

the hedge is designated are expected to offset in a range of 80% to 125%.

Any gains or losses arising from changes in fair values of derivatives that do not meet the criteria for hedge accounting are taken

directly to the consolidated statement of income.

(i) Cash flow hedges

Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity

in the cash flow hedge reserve to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in

fair value are recognised in the consolidated statement of income.

When the hedged cash flow affects the consolidated statement of income, the gain or loss on the hedging instrument is recycled

in the corresponding income or expense line of the consolidated statement of income. When the hedging instrument expires or

is sold, terminated or exercised or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss

existing in equity at the time remains in equity and is recognised when the hedged forecast transaction is ultimately recognised

in the consolidated statement of income. When a forecast transaction is no longer expected to occur, the cumulative gain or

loss that was reported in equity is immediately transferred to the consolidated statement of income.

(ii) Fair value hedges

Changes in the fair value of a derivative hedging instrument designated as fair value hedge are recognised in the consolidated

statement of income. Meanwhile, the change in the fair value of the hedged item attributable to the risk hedged is recorded as

part of the carrying value of the hedged item and is also recognised in the consolidated statement of income.

If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge

accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, using the effective interest rate

method, the difference between the carrying value of the hedged item on termination and the face value is amortised over the

remaining term of the original hedge. If the hedged item is derecognised, the unamortised fair value adjustment is recognised

immediately in the consolidated statement of income.

Share based payment transactions

Share based payment arrangements which provides counterparty the right to choose whether share based payment transaction

is settled in cash or by issuing equity instruments, are accounted for as a compound financial instrument containing both liability

and equity components. In accordance with IFRS 2, the fair value of the cash settled component of the share based transaction

is first measured followed by measurement of the equity settled component.

The cost of cash settled transactions is measured initially at fair value at the grant date using option pricing models. The fair value

is expensed over the period until vesting with recognition of a corresponding liability. The liability is re-measured at each reporting

date up to and including the settlement date with changes in fair value recognised in the consolidated statement of income.

The cost of equity settled transactions is recognised, together with the corresponding increase in equity, over the vesting

period.

64 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 65


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of financial assets

An assessment is made at each quarter to determine whether there is objective evidence that a specific financial asset may be

impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of

impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)

and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial

assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial

difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other

financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash

flows, such as changes in arrears or economic conditions that correlate with defaults.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference

between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit

losses that have not yet been incurred) discounted at original effective rate. The carrying amount of the asset is reduced

through the use of an allowance account and the amount of the loss is recognised in the consolidated statement of income.

Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the

asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and

all collaterals have been realised or have been transferred to the Group. If, in a subsequent year, the amount of the estimated

impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously

recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered,

the recovery is credited to the ‘Other income’.

Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists,

or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s

recoverable amount is higher of an asset’s fair value less costs to sell and its value in use and is determined for an individual

asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of

assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written

down to its recoverable amount and impairment losses are recognised in the consolidated statement of income.

Financial guarantees

In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and

acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the

commission received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of

the amortised commission and the best estimate of expenditure required to settle any financial obligation arising as a result of

the guarantee.

Any increase in the liability relating to financial guarantees is taken to the consolidated statement of income in ‘Net provision for

impairment of financial assets’. The premium received is recognised in the consolidated statement of income in ‘Net fees and

commission income’ on a straight line basis over the life of the guarantee.

Renegotiated loans

Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending

the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no

longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that

future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment,

calculated using the loan’s original effective interest rate.

Fiduciary assets

The Group provides trusts and other fiduciary services that result in the holding or investing of assets on behalf of its clients.

Assets held in a fiduciary capacity are not reported in the consolidated financial statements, as they are not the assets of the

Group.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Trade and settlement date accounting

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. The Group initially recognises loans and advances, Islamic financing assets, deposits, debt securities issued and

subordinated liabilities on the date that they are originated. All other financial assets and liabilities are initially recognised on the

trade date at which the Group becomes a party to the contractual provisions of the instrument.

Events after the statement of financial position date

The consolidated financial statements are adjusted to reflect events that occurred between the statement of financial position

date and the date the consolidated financial statements are authorised for issue, provided they give evidence of conditions that

existed as of the statement of financial position date. Events that are indicative of conditions that arose after the statement of

financial position date are disclosed, but do not result in an adjustment to the consolidated financial statements.

5. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions

that affect the reported amount of assets, liabilities, revenue, expenses and the disclosure of contingent liabilities as of the

reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a

material adjustment to the carrying amount of the asset or liability affected in the future.

Judgments

In the process of applying the Group’s accounting policies, management has made the following judgments apart from those

involving estimates and assumptions, which have the most significant effect on the amounts recognised in the consolidated

financial statements.

Going concern

The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that

the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of

any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore,

the financial statements continue to be prepared on the going concern basis.

Classification of investments

Management decides on acquisition of an investment whether it should be classified as held-to-maturity, carried at amortised

cost or available-for-sale.

Estimates

The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial

position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within

the next financial year are discussed below:

Impairment losses on loans and advances

The Group reviews its problem loans and advances on a quarterly basis to assess whether a provision for impairment should

be recorded in the consolidated statement of income. In particular, considerable judgment by management is required in the

estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates

are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual

results may differ resulting in future changes to such provisions.

Collective impairment provisions on corporate loans and advances

In addition to specific provisions against individually significant loans and advances, the Group also considers the need for a

collective impairment provision against loans and advances which although not specifically identified as requiring a specific

provision have a greater risk of default than when originally granted. This collective provision is based on any deterioration in the

internal grade of the loan since it was granted. These internal ratings take into consideration factors such as any deterioration in

country risk, industry, and technological obsolescence as well as identified structural weaknesses or deterioration in cash flows.

The amount of the provision is based on the likelihood of recoverability of the loans and is adjusted to reflect current economic

changes.

66 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 67


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

5. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES (continued)

Impairment of intangible assets

The Group reviews its intangible assets at each statement of financial position date to assess whether they are impaired.

Considerable judgment by management is required in the estimation of the amount and timing of future cash flows and the

discount rate when determining the recoverable amount of the intangible asset. The actual impairment loss could differ from

estimates due to a number of factors.

Impairment of available-for-sale investments

The Group reviews its debt securities classified as available-for-sale investments at each statement of financial position date to

assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances.

The Group also records impairment charges on available-for-sale equity investments when there has been a significant or

prolonged decline in the fair value below their cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment.

In making this judgment, the Group evaluates, among other factors, historical share price movements and duration and extent

to which the fair value of an investment is less than its cost.

6. CLASSIFICATION OF FINANCIAL INSTRUMENTS

As at 31 December, the Group’s financial instruments have been classified for the purpose of measurement under IAS 39 -

Financial Instruments: Recognition and Measurement into available-for-sale and assets carried at amortised cost or loans and

receivables. All of the Group’s financial instruments, except BD 26,255 thousand (31 December 2009: BD 10,529 thousand)

of available-for-sale, are classified as assets carried at amortised cost or loans and receivables.

7. CASH AND BALANCES WITH THE CENTRAL BANK OF BAHRAIN

2010 2009

BD ’000 BD ’000

Cash 2,727 3,243

Balances with the Central Bank of Bahrain in:

Current account 2,304 926

Mandatory reserve* 8,160 4,530

Deposit accounts 50,200 27,200

60,664 32,656

* This balance is unavailable for use in day-to-day operations of the Group.

8. TREASURY BILLS

63,391 35,899

These represent treasury bills issued by the Government of the Kingdom of Bahrain and mature within 31 December 2011.

9. DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2010 2009

BD ’000 BD ’000

Nostro accounts 10,659 15,989

Balances with brokers 2,437 1,642

Placements with banks and financial institutions 114,920 177,310

Less: Impairment provision on placement with a financial institution - (613)

128,016 194,328

10. LOANS AND ADVANCES

2010 2009

Corporate Syndicated Retail Total Corporate Syndicated Retail Total

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

Commercial loans 99,046 51,677 - 150,723 102,973 83,703 - 186,676

Overdrafts 50,358 - 2,934 53,292 54,842 - 3,135 57,977

Personal loans - - 32,552 32,552 - - 37,987 37,987

Mortgage loans - - 53,185 53,185 - - 52,688 52,688

Credit cards - - 6,192 6,192 - - 6,572 6,572

Other 254 - - 254 433 - - 433

149,658 51,677 94,863 296,198 158,248 83,703 100,382 342,333

Less: Suspended interest (2,077) (824) (940) (3,841) (721) (335) (582) (1,638)

Less: Provision for

credit losses (25,542) (7,695) (5,591) (38,828) (17,168) (6,661) (3,119) (26,948)

122,039 43,158 88,332 253,529 140,359 76,707 96,681 313,747

The movements in provision for credit losses and suspended interest are as follows:

Corporate Syndicated Retail Total

2010 BD ’000 BD ’000 BD ’000 BD ’000

At 1 January 2010 17,889 6,996 3,701 28,586

Charge for the year 8,987 2,037 3,252 14,276

Provision written back during the year (613) - - (613)

Net charge for the year 8,374 2,037 3,252 13,663

Written off during the year - (1,003) (780) (1,783)

Interest suspended during the year 1,356 489 358 2,203

At 31 December 2010 27,619 8,519 6,531 42,669

Specific provision 24,020 7,138 4,207 35,365

Collective provision 1,522 557 1,384 3,463

Suspended interest 2,077 824 940 3,841

27,619 8,519 6,531 42,669

Gross amount of individually impaired loans 40,877 9,670 7,374 57,921

Corporate Syndicated Retail Total

2009 BD ’000 BD ’000 BD ’000 BD ’000

At 1 January 2009 450 3,880 3,000 7,330

Charge for the year 16,811 2,888 2,063 21,762

Recoveries during the year - - (330) (330)

Net charge for the year 16,811 2,888 1,733 21,432

Written off during the year - - (1,305) (1,305)

Interest suspended during the year 628 228 273 1,129

At 31 December 2009 17,889 6,996 3,701 28,586

Specific provision 15,516 6,346 3,119 24,981

Collective provision 1,652 315 - 1,967

Suspended interest 721 335 582 1,638

17,889 6,996 3,701 28,586

Gross amount of individually impaired loans 15,409 5,297 9,803 30,509

68 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 69


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

11. ISLAMIC FINANCING ASSETS

2010 2009

Corporate Syndicated Total Corporate Syndicated Total

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

Islamic financing assets 21,718 48,934 70,652 23,109 53,397 76,506

21,718 48,934 70,652 23,109 53,397 76,506

Less: Suspended profit (759) (90) (849) (216) (32) (248)

Less: Provision for credit losses (7,167) (6,107) (13,274) (1,037) (919) (1,956)

13,792 42,737 56,529 21,856 52,446 74,302

The movements in provision for credit losses and suspended profit in respect of Islamic financing assets are as follows:

Corporate Syndicated Total

2010 BD ’000 BD ’000 BD ’000

At 1 January 2010 1,253 951 2,204

Charge for the year 6,129 5,188 11,317

Profit suspended during the year 544 58 602

At 31 December 2010 7,926 6,197 14,123

Specific provision 7,098 1,357 8,455

Collective provision 69 4,750 4,819

Suspended profit 759 90 849

7,926 6,197 14,123

Gross amount of individually impaired Islamic financing assets 7,779 2,567 10,346

Corporate Syndicated Total

2009 BD ’000 BD ’000 BD ’000

At 1 January 2009 1,086 151 1,237

Charge for the year (49) 768 719

Profit suspended during the year 216 32 248

At 31 December 2009 1,253 951 2,204

Specific provision 1,037 603 1,640

Collective provision - 316 316

Suspended profit 216 32 248

1,253 951 2,204

Gross amount of individually impaired Islamic financing assets 4,367 2,532 6,899

12. NON-TRADING INVESTMENTS

2010 2009

Loans and Available- Loans and Availablereceivables

for-sale Total receivables for-sale Total

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

Quoted investments

Government debt securities - 15,751 15,751 - 498 498

Other debt securities - 2,795 2,795 - 2,322 2,322

- 18,546 18,546 - 2,820 2,820

Unquoted investments

Government debt securities 8,685 - 8,685 8,685 - 8,685

Other debt securities* 10,220 7,351 17,571 12,672 7,351 20,023

Equity securities* - 358 358 - 358 358

Provision for impairment of debt securities (754) - (754) (189) - (189)

18,151 7,709 25,860 21,168 7,709 28,877

Total 18,151 26,255 44,406 21,168 10,529 31,697

* Fair value of unquoted available-for-sale investments approximates cost

The movement in provision for non-trading investments are as follows:

2010 2009

BD ’000 BD ’000

At 1 January 189 970

Charge for the year 565 189

Reversals during the year - (970)

Net charge (reversal) during the year 565 (781)

At 31 December 754 189

Gross amount of individually impaired investments 754 754

13. INVESTMENT IN AN ASSOCIATE

The Group has investment in the following associate:

Country of incorporation

Ownership

2010 2009

Gulf African Bank Kenya 21.33% 21.33%

Gulf African Bank is an Islamic bank incorporated in Kenya. This investment is denominated in Kenyan Shillings.

70 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 71


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

13. INVESTMENT IN AN ASSOCIATE (continued)

The following table summarises the financial information of the Group’s investment in Gulf African Bank:

2010 2009

BD ’000 BD ’000

Share of associate’s statement of financial position:

Assets 9,543 8,163

Liabilities (8,354) (6,987)

Net assets and carrying amount of the investment 1,189 1,176

Share of associate’s statement of income:

Revenue 842 607

Profit/(loss) 89 (113)

Share of associate’s contingent liabilities: 1,208 2,103

14. INVESTMENTS IN JOINT VENTURES

The Group has investments in the following joint ventures:

Country of incorporation

Ownership

2010 2009

BMI Offshore Bank Limited Seychelles 50.00% 50.00%

Money on Demand Holdings W.L.L. (“MODE”) Kingdom of Bahrain 50.00% 50.00%

BMI Offshore Bank Limited

The Group entered into a joint venture agreement with Seychelles International Mercantile Banking Corporation Limited, (trading

under the name “NOUVOBANQ”) as an off-shore limited liability entity (BMI Offshore Bank Limited) in Seychelles. During the

year, the Group invested a further amount of BD 94 thousand (US$ 250 thousand) in accordance with the requirement of the

Central Bank of Seychelles for maintaining minimum levels of capital.

MODE

In April 2008, the Group entered into an agreement with Nonoo Holdings W.L.L. to form MODE as a joint venture. The joint

venture has been incorporated in the Kingdom of Bahrain and is engaged in providing mobile phone banking operations following

necessary approvals from the Central Bank of Bahrain. During the year, the Group made a provision of BD 537 thousand (2009:

nil) against short term funding provided to MODE (note 28). The following table summarises the financial information of the

Group’s investments in joint ventures:

2010 2009

BD ’000 BD ’000

Share of joint ventures’ statement of financial positions:

Assets 13,353 8,968

Liabilities (12,950) (8,356)

Impairment recognised during the year - (324)

Net assets and carrying amount of the investment 403 288

Share of joint ventures’ statement of income:

Revenue 159 104

Profit (loss) 21 (314)

15. PREMISES AND EQUIPMENT

Premises Motor Capital workand

equipment Software vehicles in-progress Total

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

Cost:

At 1 January 2010 6,568 - 158 11,861 18,587

Additions 589 - 45 3,215 3,849

Transfer from capital work-in-progress - 14,335 - (14,335) -

Disposals - - (30) - (30)

At 31 December 2010 7,157 14,335 173 741 22,406

Depreciation:

At 1 January 2010 2,678 - 75 - 2,753

Charge during the year 1,018 754 34 - 1,806

Disposals - - (25) - (25)

At 31 December 2010 3,696 754 84 - 4,534

Net book value:

At 31 December 2010 3,461 13,581 89 741 17,872

At 31 December 2009 3,890 - 83 11,861 15,834

Capital work-in-progress included costs incurred for implementation of a new core banking software and the related accounting

and reporting applications which were capitalised in August 2010.

At 31 December 2010, the gross amount of fully depreciated premises and equipment that is still in use is BD 1,578 thousand

(31 December 2009: BD 1,551 thousand).

16. INTANGIBLE ASSETS

As of 30 September 2010, the Group performed an impairment review of its intangibles comprising ‘Franchise rights and

Cardholder and merchant relationships’ relating to its subsidiary. Based on this review, the management concluded that the

intangibles are fully impaired. The impairment of BD 1.65 million (2009: nil) has been recognised in the consolidated statement

of income.

Cardholder

Franchise and merchant

rights relationships Total

BD ’000 BD ’000 BD ’000

Cost:

At 1 January 2010 1,859 343 2,202

Amortisation:

At 1 January 2010 (354) (51) (405)

Amortised during the year (125) (19) (144)

Impairment recognised (1,380) (273) (1,653)

At 31 December 2010 (1,859) (343) (2,202)

Net book value:

At 31 December 2010 - - -

At 31 December 2009 1,505 292 1,797

72 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 73


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

17. OTHER ASSETS

2010 2009

BD ’000 BD ’000

Interest receivable 3,900 2,260

Sundry debtors and prepayments 623 703

Positive fair value of derivatives (note 34) 388 349

Other 614 1,065

5,525 4,377

18. CUSTOMERS’ DEPOSITS

2010 2009

BD ’000 BD ’000

Term deposits 164,651 93,746

Current accounts 82,637 69,564

Saving accounts 15,718 16,092

Call accounts 839 1,170

263,845 180,572

19. MEDIUM TERM BORROWINGS

(i) During the year, one of the Group’s syndicated borrowing facilities amounting to US$ 120 million (BD 45.24 million)

matured and was repaid in full.

(ii) On 23 July 2008, the Group borrowed US$ 93.6 million (BD 35.34 million) in various currencies from a syndicate of banks,

arranged by Gulf International Bank B.S.C. This facility was structured as an Islamic Murabaha repayable after 3 years, carries

profit of 75 basis points over the six months reference rate (LIBOR, QIBOR and UAE inter bank borrowing rates) and matures

in July 2011 (2010: same terms and conditions).

20. OTHER LIABILITIES

2010 2009

BD ’000 BD ’000

Interest payable 2,247 1,505

Staff related accruals 1,647 1,380

Unearned revenue 1,378 1,370

Insurance deferral 569 837

Pay orders 655 566

Negative fair value of derivatives (note 34) 111 -

Sundry creditors and other 3,252 2,158

9,859 7,816

21. SUBORDINATED LIABILITY

The subordinated liability represents a debt of US$ 35 million (BD 13.20 million) carrying interest at 160 basis points over the

six month LIBOR. The facility, arranged by The Bank of New York, is repayable on 14 April 2011 and is subordinated to the claims

of all other creditors of the Group (2009: same terms and conditions).

22. SHARE CAPITAL

2010 2009

BD ’000 BD ’000

Authorised:

225 million (31 December 2009: 225 million) ordinary shares of BD 1 each 225,000 225,000

Issued and fully paid up:

58.53 million (31 December 2009: 58.53 million) ordinary shares of BD 1 each 58,530 58,530

The Bank’s shareholding is as follows:

2010 2009

Country of Share- Shareincorporation

holding % BD ’000 holding % BD ’000

BankMuscat S.A.O.G. Oman 49.0 28,680 49.0 28,680

Overseas Investment S.P.C. Bahrain 20.0 11,706 20.0 11,706

Royal Court Affairs of Oman Oman 11.0 6,438 11.0 6,438

Istithmar World UAE 10.0 5,853 10.0 5,853

Financial Assets Bahrain W.L.L. Bahrain 9.9 5,847 9.9 5,847

Global Investment House Kuwait 0.1 6 0.1 6

100 58,530 100 58,530

23. RESERVES

i) Statutory reserve

As required by the Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net profit for the

year is required to be transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when

the reserve equals 50% of paid up share capital. The reserve is not available for distribution, except in circumstances as

stipulated in the Bahrain Commercial Companies Law and following the approval of the Central Bank of Bahrain. No transfer

was made during the year as the Bank has incurred a loss.

ii)

Subordinated debt reserve

The Group transfers an amount of BD 2.64 million each year from retained earnings to a distributable subordinated debt

reserve, representing 20% amortisation of the subordinated debt maturing during 2011. No transfer was made during the

year as the Group has accumulated losses as of 31 December 2010.

24. INTEREST AND SIMILAR INCOME

2010 2009

BD ’000 BD ’000

Interest income on:

Loans and advances 20,490 21,961

Due from banks and financial institutions 609 759

Non-trading investments 576 979

21,675 23,699

Profit on Islamic financing assets 3,525 3,816

25,200 27,515

74 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 75


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

25. INTEREST EXPENSE AND SIMILAR CHARGES

76 // BMI Bank Annual Report 2010

2010 2009

BD ’000 BD ’000

Interest expense on:

Due to banks and financial institutions 3,609 4,906

Customers’ deposits 4,704 3,315

Medium term borrowings 1,475 2,352

Subordinated liability 344 557

10,132 11,130

Profit on wholesale Islamic deposits 554 1,126

10,686 12,256

26. NET FEES AND COMMISSION INCOME

2010 2009

BD ’000 BD ’000

Fees and commission income:

Wholesale banking 799 846

Islamic financing 380 492

Retail banking 854 1,732

Private banking 191 417

2,224 3,487

Fees and commission expense:

Retail banking 177 204

Private banking 19 20

196 224

2,028 3,263

Fees and commissions income includes BD 55 thousand (2009: BD 44 thousand) relating to trust and other fiduciary activities.

27. OTHER OPERATING INCOME

2010 2009

BD ’000 BD ’000

Net foreign exchange gain 613 1,433

Other 657 549

1,270 1,982

28. NET PROVISION FOR IMPAIRMENT OF FINANCIAL ASSETS

2010 2009

BD ’000 BD ’000

Provision for (reversal of provision) impairment of:

Loans and advances (note 10) 13,663 21,432

Islamic financing assets (note 11) 11,317 719

Non-trading investments (note 12) 565 (781)

Other assets (note 14) 537 -

Placement with banks and financial institutions (613) -

25,469 21,370

29. SHARE BASED PAYMENTS

Equity settled share based payment

The Bank has an Employee Share Option Plan (the Plan). Under the Plan certain eligible employees of the Bank are granted share

options. These options vest on 31 December 2010 and are exercisable between 31 December 2010 and 31 December 2015.

The exercise price is determined by applying a compounded annual growth rate of 12% on the Bank’s share price of BD 2.830

as of the grant date. There are no cash settlement alternatives.

The fair value of the options is estimated at the grant date using a binomial pricing model, taking into account the terms and

conditions upon which the instruments were granted.

Staff expenses include BD 42 thousand (2009: BD 52 thousand) relating to equity settled share based payments.

The Bank also had an equity settled share based payment scheme for consultants providing management services which was

terminated as at 31 December 2009. As at 31 December 2009, BD 16 thousand is included in other operating expenses in

respect of this scheme.

30. RISK MANAGEMENT

Introduction

Risk is defined as the combination of severity and frequency of potential loss over a given time horizon and is inherent in the

Group’s activities. Risk can be expressed in the dimensions of potential severity of loss (magnitude of impact) and potential loss

frequency (likelihood of occurrence). Risk Management is the process by which the Group identifies key risks, sets consistent

understandable risk measures, chooses which risks to reduce, which to increase and by what means, and establishes procedures

to monitor the resulting risk position. Risk Management is the discipline at the core of every financial institution and encompasses

all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that

optimum value is created for the shareholders through an optimum return on equity by an appropriate trade-off between risk

and return.

Effective Risk Management is the cornerstone of capital structure. The vision of Risk Management is to address all aspects of

risk which the Group may be exposed to. The Group’s risk function is independent of lines of business and the Head of Risk

Management reports to the Risk Committee appointed by the Board of Directors. The key role of the Risk Management function

is defining, identifying and reducing risks, and being independent and objective.

The Group has exposure to risks, which include credit, market, liquidity, reputation, compliance risk and operational risk. Taking

risk is core to the financial business. The Group’s aim is to achieve an appropriate balance between risk and return and minimise

potential adverse effect on the Group’s financial performance.

The Group’s risk policy, as approved by the Board of Directors, analyses and sets risk limits for credit risk, liquidity risk, market

risk and operational risk.

Risk measurement and reporting systems

The Group’s risk management policies aim to identify, analyse and manage the risks faced by the Group, to set appropriate risk

limits and controls, and to continuously monitor risk levels and adherence to limits.

The operational risk management function is aimed at developing and ensuring proper functioning of internal processes,

procedures and controls that minimise the Group’s exposure to internal and external risk factors.

Risk governance

The Board of Directors of the Group has overall responsibility for the oversight of the risk management framework and reviewing

its risk management policies and procedures as well as approving significantly large exposures.

Credit, market, interest rate and liquidity risks both at portfolio and transactional levels are managed and controlled through

a Management Credit Committee and an Asset and Liability Management Committee. In order to facilitate efficient decisionmaking,

the Group has established a hierarchy of approval authorities depending on the type and amount of the exposure.

BMI Bank Annual Report 2010 // 77


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

30. RISK MANAGEMENT (continued)

Risk assessment, management and control

Compliance with the Group’s standards is supported by periodic reviews undertaken by the Internal Audit department. The

results of Internal Audit reviews are discussed with the management of the business unit to which they relate and presented to

the Risk Department, with summaries submitted to the Audit Committee and senior management of the Group.

31. CREDIT RISK

Credit risk is defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with the

agreed terms. The goal of credit risk management is to maximize the Group’s risk-adjusted rate of return by maintaining

credit exposures within acceptable parameters. The Group has well-defined policies and procedures for identifying, measuring,

monitoring and controlling credit risk in all the Group’s activities. Credit limits are approved after a thorough assessment of the

creditworthiness of the borrower or counterparty, including the purpose and structure of the credit facility, and the source of

repayment. Credit proposals are prepared by lines of business and are independently reviewed and analysed by risk management

professionals before the approval of the appropriate approving authority, such as the Management Credit Committee or Board,

is sought. Monthly presentations of the credit portfolio to the Management Credit Committee are undertaken by individual lines

of business, in order to provide an overview of the Group’s entire credit portfolio.

Exposures to sovereigns, banks and other financial institutions are guided by risk limits set for these entities and approved by

the Board of Directors based on various risk factors.

The credit growth, quality and portfolio composition are continuously monitored to maximise risk adjusted returns and reduce

the level of impairment. The concentration of risk is spread by the setting of various limits such as the Single Borrower Limit

(SBL), country limits, industry-wise concentrations, sensitive sectoral limits and individual counterparty limits. These parameters

are subject to review, and updated accordingly. A comprehensive stress testing regime is in place and the results of these tests

are similarly reviewed on a regular basis by executive management.

The Credit Administration Department, ensures that credit facilities are only released upon obtaining the requisite approvals and

documentation. It also monitors daily excesses above agreed limits, overdues, exceptions, overdue reviews, and escalates the

same to the relevant credit committee. All relationships are reviewed annually and non-performing and problematic accounts

are reviewed more regularly.

The Group adopts a rigorous standard for the identification and monitoring of non-performing loans’ (NPL) with a view to eventual

recovery. Every problematic account is reviewed to evaluate compliance with laid down lending norms and incorporating the

lessons, if any, into the Group’s lending guidelines.

a) Credit risk governance

Credit risk in respect of derivative financial instruments is limited to those with the positive fair values, which are included under

other assets.

The Group has established a number of authority levels, which are responsible for oversight of the credit risk.

The Group has a comprehensive and precise authorities matrix defining which individual or committee is responsible for approving

corporate, Islamic, financial institutions and SME credit risk exposures. This matrix is based upon a combination of both the

absolute amount of the lending and the internal rating assigned to it.

b) Credit risk management

Exposure to credit risk is managed through regular analysis of the ability of borrowers to meet interest and principal repayment

obligations, and by changing lending limits where appropriate.

31. CREDIT RISK (continued)

c) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The Group’s maximum exposure to on balance sheet credit risk is reflected in the carrying amounts of financial assets on the

balance sheet. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.

Credit risk for off balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another

party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same

procedures and methodologies, as defined by the Group’s credit policy, for approving credit related commitments (undrawn loan

commitments, letters of credit and guarantees) as it does for on balance sheet credit obligations (loans).

The table below shows the maximum exposure to credit risk for the components of the statement of financial position. The

maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements,

but after impairment provisions, where applicable.

Gross Gross

maximum maximum

exposure exposure

2010 2009

BD ’000 BD ’000

Balances with the Central Bank of Bahrain 60,664 32,656

Treasury bills 19,642 -

Due from banks and financial institutions 128,016 194,328

Loans and advances

Corporate 122,039 140,359

Syndicated 43,158 76,707

Retail 88,332 96,681

Islamic financing assets

Corporate 13,792 21,856

Syndicated 42,737 52,446

Non-trading investments 44,048 31,339

Other assets 5,341 4,029

567,769 650,401

Commitments and contingent liabilities 129,457 75,968

Total 697,226 726,369

d) Collateral and other credit enhancements

Exposure to credit risk is also managed, in part, by obtaining and monitoring collateral in the form of mortgage interests over

property, pledge of assets and securities, charge over vehicles, bank guarantees and other collaterals.

While collateral is an important mitigant to credit risk, it is the Group’s policy to establish that loans are within the customer’s

capacity to repay rather than to over rely on security. In certain cases, depending on the customer’s standing and the type of

product, facilities may be unsecured.

The principal collateral types are as follows:

• For commercial loans; charges over business assets such as properties, equipment, inventory and assignment of trade

receivables, bank guarantees;

• For mortgage loans; mortgages over the properties being financed;

• For retail loans; charge over vehicles and properties; and

• For private banking loans; securities.

All collateral are subject to periodic valuations to monitor the adequacy of margins.

78 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 79


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

31. CREDIT RISK (continued)

In case of facilities covered with fixed assets (land, building, plant and machinery), collateral values are reviewed concurrently

when obligor/facility financing reviews are performed. However, the frequency may be revised in the event of an obligor’s credit

risk rating being downgraded.

An industry sector analysis of the Group’s gross loans and advances and Islamic financing assets, before and after taking into

account collateral held or other credit enhancements, is as follows:

Gross Net Gross Net

maximum maximum maximum maximum

exposure exposure exposure exposure

2010 2010 2009 2009

BD ’000 BD ’000 BD ’000 BD ’000

Banking and financial services 48,595 48,218 38,616 38,616

Manufacturing 33,919 33,816 40,203 33,467

Personal 120,899 97,968 120,514 106,592

Trade 66,853 61,444 71,620 58,226

Construction 62,918 35,283 59,698 11,539

Other 33,666 28,543 88,188 63,016

Total 366,850 305,272 418,839 311,456

The above table reflects only the impact of collaterals qualifying under Basel II and exclude, for example the value of all mortgage

interest over properties. As stated, such collateral is an important mitigant of credit risk and consequently the true net maximum

exposure will, in reality be substantially lower than that reported above.

The fair value of collateral that the Group holds relating to loans and advances individually determined to be impaired at

31 December 2010 amounts to BD 10.83 million (31 December 2009: BD 6.25 million).

The Group holds no collateral against Islamic financing assets individually determined to be impaired at 31 December 2010.

The collateral consists of cash, securities, properties and letters of guarantee from banks. Refer the table above for a detailed

discussion on collaterals and other credit enhancements.

31. CREDIT RISK (continued)

The Group’s exposure analysed on geographic regions and industry sectors is as follows:

31 December 2010 31 December 2009

Contingent

Contingent

Assets Liabilities liabilities Assets Liabilities liabilities

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

Geographic region:

Kingdom of Bahrain 376,861 319,285 33,793 375,424 308,108 37,949

Other GCC countries 160,715 137,786 17,578 205,518 169,877 15,113

Europe 24,976 1,525 646 52,663 58,840 2,432

Asia 14,856 21,242 280 18,630 7,143 106

Americas 11,135 601 135 17,090 217 -

Rest of the world 1,959 23,679 1,964 4,120 16,623 1,184

590,502 504,118 54,396 673,445 560,808 56,784

31 December 2010 31 December 2009

Contingent

Contingent

Assets Liabilities liabilities Assets Liabilities liabilities

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

Industry sector:

Banking and financial services 286,247 236,948 9,372 333,193 380,381 -

Manufacturing 25,696 3,966 4,908 39,965 238 4,354

Personal 116,847 129,935 - 116,339 126,917 -

Trade 43,930 6,528 20,192 59,786 33,304 17,155

Construction 58,989 22,931 11,131 72,651 431 22,551

Other 58,793 103,810 8,793 51,511 19,537 12,724

590,502 504,118 54,396 673,445 560,808 56,784

e) Concentration risk

Concentration risk arises when a number of counterparties are engaged in similar economic activities or activities in the same

geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly

affected by changes in economic, political or other conditions. The Group seeks to manage its concentration risk by establishing

and constantly monitoring geographic and industry wise concentration limits.

80 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 81


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

31. CREDIT RISK (continued)

f) Credit quality per class of financial assets

The Group employs an internal credit rating based approach to the qualitative assessment of wholesale lending assets, using

Moody’s Risk Analyst to generate a default grade (DG) from DG 1 to DG 10. The table below shows the credit quality by class

of financial assets based on the Group’s internal rating system:

31 December 2010

Neither past due nor impaired

Past due

High Acceptable Special but not Individually

grade grade mention impaired impaired Total

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

Balances with the Central Bank of Bahrain 60,664 - - - - 60,664

Treasury bills 19,642 - - - - 19,642

Due from banks and financial institutions 118,801 9,215 - - - 128,016

Loans and advances 37,381 155,493 1,821 40,119 18,715 253,529

Islamic financing assets 25,854 11,286 5,380 12,889 1,120 56,529

Non-trading investments 8,685 35,721 - - - 44,406

Other assets - 5,525 - - - 5,525

271,027 217,240 7,201 53,008 19,835 568,311

31 December 2009

Neither past due nor impaired

Past due

High Acceptable Special but not Individually

grade grade mention impaired impaired Total

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

Balances with the Central Bank of Bahrain 32,656 - - - - 32,656

Due from banks and financial institutions 84,596 107,894 - - 1,838 194,328

Loans and advances - 260,966 15,776 35,082 1,923 313,747

Islamic financing assets - 60,917 8,445 245 4,695 74,302

Non-trading investments 8,685 22,447 - - 565 31,697

Other assets - 4,377 - - - 4,377

125,937 456,601 24,221 35,327 9,021 651,107

31. CREDIT RISK (continued)

g) Aging analysis of past due but not impaired financial assets

2010 Less than 31 to 60 61 to 90 Over 90

30 days days days days Total

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

Loans and advances

Corporate 7,968 10,146 385 - 18,499

Syndicated - 1,895 5,246 - 7,141

Retail 11,438 2,633 1,458 - 15,529

Islamic financing assets

Syndicated - 17,130 - - 17,130

19,406 31,804 7,089 - 58,299

2009 Less than 31 to 60 61 to 90 Over 90

30 days days days days Total

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

Loans and advances

Corporate 2,811 419 1,074 13,313 17,617

Syndicated - 1,326 - - 1,326

Retail 8,645 4,895 2,717 - 16,257

Islamic financing assets

Corporate 127 - - - 127

h) Renegotiated facilities

11,583 6,640 3,791 13,313 35,327

2010 2009

BD ’000 BD ’000

Loans and advances

Corporate 24,321 15,851

Syndicated 4,332 1,700

Retail 1,040 690

Islamic financing assets

Corporate 2,009 2,009

Syndicated 880 1,320

Total renegotiated facilities 32,582 21,570

32. MARKET RISK

Market risk arises from fluctuations in interest rates, foreign exchange rates and equity prices. As per the Board directive, the

Group does not have authority to enter into any proprietary position on currencies or interest rate.

Currency and interest rate risk is carried only on the Banking book. Currency risk arising out of customer positions are hedged

on a back to back basis. The Bank maintains minimal open position on G7 and other volatile currencies.

The treasury also operates within the prescribed currency position limit approved by Asset and Liability Committee (ALCO).

82 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 83


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

32. MARKET RISK (continued)

a) Interest rate risk

Interest rate risk is the risk that the Group’s profitability or fair value of its financial instruments will be adversely affected by the

changes in interest rates. Interest rate risk arises from the possibility of changes in interest rates and mismatches or gaps in the

amount of assets and liabilities and off balance sheet items that mature or are re-priced in a given period. The responsibility for

interest rate risk management rests with the Group’s ALCO. ALCO takes an integrated view of the interest rate risk across the

Group’s products and lines of business.

Positions are monitored on a daily basis to ensure positions are maintained within established limits.

The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on the net

interest income for one year, based on financial assets and financial liabilities held at 31 December 2010. The sensitivity of

equity is calculated by revaluing fixed rate available-for-sale financial assets at 31 December 2010 for the effects of the

assumed changes in interest rates.

The following table demonstrates the currency wise sensitivity to a reasonable possible change in interest rates, with all other

variables held constant, of the Group’s consolidated statement of income:

2010 2009

Sensitivity

Sensitivity

of net

of net

interest Sensitivity interest Sensitivity

income of equity income of equity

BD ’000 BD ’000 BD ’000 BD ’000

At 10 bps increase (+) / decrease (-):

Bahraini Dinars 33 (22) 80 (7)

US Dollars (16) (11) 23 (13)

b) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group

views the Bahraini Dinar as its functional currency. The Board has set limits on positions by currency. Positions are monitored on

a daily basis and hedging strategies used to ensure positions are maintained within limits established by ALCO.

The tables below indicate the currencies to which the Group had significant exposure at 31 December 2010 and 2009 on its

monetary assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the currency rate against

the Bahraini Dinar with all other variables held constant on the income statement (due to the fair value of currency sensitive

non-trading monetary assets and liabilities) and equity. A negative amount in the table reflects a potential net reduction in

consolidated statement of income or equity, while a positive amount reflects a net potential increase.

2010 2009

Change in Effect on Effect on

currency rate profit profit

by % BD ’000 BD ’000

Currency:

Euro +10 (18) 4

Pound Sterling +10 5 (2)

Kuwaiti Dinar +10 8 7

33. LIQUIDITY RISK

Liquidity risk is the potential inability of the Group to meet cash flows of its maturing obligations to a counterparty. Liquidity

risk management seeks to ensure that the Group has the ability, under varying scenarios, to fund increases in assets and meet

maturing obligations as they arise. The Treasury Department of the Group is responsible for its liquidity management in the

Group, under the guidance and supervision of the Asset and Liability Committee (ALCO). The risk policy sets liquidity limits,

targets, and ratios, to aid robust liquidity management.

The Group’s funding sources are well-diversified across funding types and include customer deposits, inter Group deposits,

syndicated term loan and subordinated loans among others. The sources and maturities of assets and liabilities are closely

monitored to avoid any undue concentrations and to ensure the vigorous management of liquidity risk.

a) Maturity analysis of assets and liabilities

The table below summarises the maturity profile of the Group’s assets and liabilities as at 31 December 2010 based on

expected maturities.

ASSETS

Up to 1 to 3 3 to 6 6 months Total upto 1 to 5 Over No fixed

1 Month months months to 1 year 1 year years 5 years maturities Total

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

Cash and balances with the

Central Bank of Bahrain 55,231 - - - 55,231 - - 8,160 63,391

Treasury bills - 12,679 5,976 987 19,642 - - - 19,642

Due from banks and

financial institutions 118,715 9,301 - - 128,016 - - - 128,016

Loans and advances 61,665 36,512 9,784 7,282 115,243 55,364 82,922 - 253,529

Islamic financing assets 4,801 10,572 16,130 22,800 54,303 880 1,346 - 56,529

Non-trading investments 1,885 5,132 6,580 220 13,817 17,281 5,599 7,709 44,406

Investments in associates - - - - - - - 1,189 1,189

Investments in joint ventures - - - - - - - 403 403

Premises and equipment - - - - - - - 17,872 17,872

Other assets 5,341 - - - 5,341 - - - 5,341

Total assets 247,638 74,196 38,470 31,289 391,593 73,525 89,867 35,333 590,318

LIABILITIES

Due to banks and

financial institutions 120,514 25,340 8,294 9,425 163,573 - - - 163,573

Customers’ deposits 143,291 51,309 34,726 20,752 250,078 13,221 546 - 263,845

Wholesale Islamic deposits 18,310 - - - 18,310 - - - 18,310

Medium term borrowings - - - 35,336 35,336 - - - 35,336

Other liabilities 9,859 - - - 9,859 - - - 9,859

Subordinated liability - - 13,195 - 13,195 - - - 13,195

Total liabilities 291,974 76,649 56,215 65,513 490,351 13,221 546 - 504,118

Net liquidity gap (44,336) (2,453) (17,745) (34,224) (98,758) 60,304 89,321 35,333 86,200

Cumulative liquidity gap (44,336) (46,789) (64,534) (98,758) (38,454) 50,867 86,200

As at 31 December 2010, the Group had significant net foreign currency exposure in respect of US Dollars and other GCC

currencies. As the Bahraini Dinar and other GCC currencies are pegged to the US Dollar, positions in these currencies are not

considered to represent significant currency risk.

c) Equity price risk

As the Group has very minimal equity investments, equity price risk is not considered material.

84 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 85


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

33. LIQUIDITY RISK (continued)

The maturity profile of the assets and liabilities at 31 December 2009 was as follows:

Up to 1 to 3 3 to 6 6 months Total upto 1 to 5 Over No fixed

1 Month months months to 1 year 1 year years 5 years maturities Total

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

ASSETS

Cash and balances with

Central Bank of Bahrain 31,369 - - - 31,369 - - 4,530 35,899

Due from banks and

financial institutions 194,328 - - - 194,328 - - - 194,328

Loans and advances 77,750 16,829 10,082 48,875 153,536 116,404 43,807 - 313,747

Islamic financing assets 1,088 6,420 8,483 12,629 28,620 36,710 8,972 - 74,302

Non-trading investments - 2,252 566 1,885 4,703 18,000 1,285 7,709 31,697

Investment in associates - - - - - - - 1,176 1,176

Investments in joint ventures - - - - - - - 288 288

Premises and equipment - - - - - - - 15,834 15,834

Intangible assets - - - - - 30 1,767 - 1,797

Other assets 4,029 - - - 4,029 - - - 4,029

Total assets 308,564 25,501 19,131 63,389 416,585 171,144 55,831 29,537 673,097

LIABILITIES

Due to banks and

financial institutions 156,013 12,785 1,885 - 170,683 - - - 170,683

Customers’ deposits 123,461 38,506 8,491 3,407 173,865 6,707 - - 180,572

Wholesale Islamic deposits 80,469 18,080 - 9,425 107,974 - - - 107,974

Medium term borrowings - - 45,240 - 45,240 35,328 - - 80,568

Other liabilities 7,816 - - - 7,816 - - - 7,816

Subordinated liability - - - - - 13,195 - - 13,195

Total liabilities 367,759 69,371 55,616 12,832 505,578 55,230 - - 560,808

Net liquidity gap (59,195) (43,870) (36,485) 50,557 (88,993) 115,914 55,831 29,537 112,289

Cumulative liquidity gap (59,195) (103,065) (139,550) (88,993) 26,921 82,752 112,289

33. LIQUIDITY RISK (continued)

b) Maturity profile of contractual, undiscounted repayment obligations

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2010 based on contractual

undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given

immediately.

31 December 2010

Up to 1 1 to 3 3 to 6 6 to 12 1 to 5

month months months months years Total

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

Due to banks and financial institutions 120,539 25,472 8,343 9,574 - 163,928

Customers’ deposits 143,327 51,571 35,284 21,274 15,470 266,926

Wholesale Islamic deposits 18,311 - - - - 18,311

Medium term borrowings - - - 35,909 - 35,909

Subordinated liability - - 13,292 - - 13,292

Other liabilities 9,859 - - - - 9,859

Total undiscounted liabilities 292,036 77,043 56,919 66,757 15,470 508,225

Derivatives:

Forward foreign exchange contracts 15,550 3,610 4,569 3,830 418 27,977

Interest rate swaps - 198 152 295 613 1,258

Contingent liabilities:

Acceptances 2,767 1,116 91 - - 3,974

Letters of credit 2,353 13,484 5,717 1,782 - 23,336

Guarantees 1,732 1,540 9,158 7,741 6,915 27,086

6,852 16,140 14,966 9,523 6,915 54,396

31 December 2009

Up to 1 1 to 3 3 to 6 6 to 12 1 to 5

month months months months years Total

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

Due to banks and financial institutions 156,033 12,836 1,897 - - 170,766

Customers’ deposits 123,491 38,615 8,605 3,486 7,244 181,441

Wholesale Islamic deposits 80,490 18,183 - 9,651 - 108,324

Medium term borrowings 265 - 45,718 601 35,857 82,441

Subordinated liabilities - 147 - 147 13,342 13,636

Other liabilities 7,816 - - - - 7,816

Total undiscounted liabilities 368,095 69,781 56,220 13,885 56,443 564,424

Derivatives:

Forward foreign exchange contracts 12,559 3,580 2,974 1,174 3,102 23,389

Interest rate swaps - 204 73 146 72 495

Contingent liabilities:

Acceptances 1,444 537 1,413 - - 3,394

Letters of credit 2,682 2,224 2,694 5 - 7,605

Guarantees 4,434 4,142 5,835 6,666 24,708 45,785

8,560 6,903 9,942 6,671 24,708 56,784

86 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 87


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

34. DERIVATIVE FINANCIAL INSTRUMENTS

In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments.

A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements

in price in one or more underlying financial instruments, reference rates or indices.

These include forwards and interest rate swaps, which create rights and obligation that have the effect of transferring between

the parties of the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On

inception, a derivative financial instrument gives one party a contractual right to exchange financial assets or financial liabilities

with another party under conditions that are potential favourable, or a contractual obligation to exchange financial assets or

financial liabilities with another party under conditions that are potentially unfavourable. However, they generally do not result in

a transfer of the underlying primary financial instrument on inception of the contract, nor does such a transfer necessarily take

place on maturity of the contract. Some instruments embody both a right and an obligation to make an exchange. Because the

term of the exchange are determined on inception of the derivative instruments, as prices in financial markets change those

terms may become either favourable or unfavourable.

The table below shows the net fair values of derivative financial instruments together with the notional amounts. The notional

amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the

value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at period-end and are

neither indicative of the market risk nor credit risk.

2010 2009

Notional Derivative Derivative Notional Derivative Derivative

amount assets liabilities amount assets liabilities

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

Derivatives held as hedges:

Interest rate swaps 26,390 388 - 26,390 282 -

Forward foreign exchange contracts 27,977 - 111 23,389 67 -

54,367 388 111 49,779 349 -

The Group uses fair value hedges to protect against changes in the fair value of its financial assets and financial liabilities due to

movements in interest and exchange rates.

Interest rate swaps are used to hedge against interest rate risk on the Group’s retail and mortgage loan portfolios. The Group

uses forward foreign exchange contracts in the normal course of business to protect it against changes in exchange rates.

For the year ended 31 December 2010, the Group recognised a net loss of BD 270 thousand (2009: net gain of BD 101

thousand), representing the loss on the hedging instruments which was offset by a net gain on hedged items attributable to

the hedged risk amounting to BD 268 thousand (2009: net loss of BD 97 thousand).

35. RELATED PARTY TRANSACTIONS

Related parties represent shareholders, directors and key management personnel of the Group, and entities controlled, jointly

controlled or significantly influenced by such parties. All the loans and advances to related parties are performing advances and

are free of any provision for possible credit losses except as stated below.

Balances/transactions with related parties are as follows:

2010 2009

Directors

Directors

and key

and key

management

management

Shareholders personnel Total Shareholders personnel Total

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

Due from banks and financial

institutions* 11,872 - 11,872 48,735 - 48,735

Due to banks and financial

institutions 37,888 - 37,888 76,218 - 76,218

Customers’ deposits - 972 972 - 1,084 1,084

Loans and advances 2,225 1,009 3,234 - 677 677

Interest and similar income 5 21 26 96 28 124

Interest expense and similar charges 1,166 36 1,202 1,982 11 1,993

* At 31 December 2009, this includes BD 2.45 million of past due amounts receivable from a shareholder, with a related

provision of BD 0.61 million, which has been regularised during the year.

Terms and conditions of transactions with related parties

The Group enters into transactions, arrangements and agreements with its related parties in the ordinary course of business at

commercial interest rates and fees. The above mentioned transactions and balances arose from the ordinary course of business

of the Group. The interest or profit charged and paid to these related parties is at normal commercial rates. Outstanding

balances at the year end are unsecured. The Group did not provide or receive any guarantee for any related party payables or

receivables.

Compensation of the key management personnel is as follows:

2010 2009

BD ’000 BD ’000

Salaries and other benefits 1,557 1,340

End of service benefits 46 36

Share based payments 16 23

Total compensation paid to key management personnel 1,619 1,399

88 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 89


Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

//Notes to the Consolidated Financial Statements

31 December 2010

36. CAPITAL ADEQUACY

Capital management

The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed

capital requirements and that the Group maintains strong credit ratings and healthy capital ratios.

The Group’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business.

Current and future capital requirements are determined on the basis of asset growth expectations for each business group,

expected growth in off-balance sheet facilities, future sources and uses of funds.

The Group seeks to maintain a prudent balance between the different components of its capital, particularly the relative mix of

Tier I and Tier II capital. It also recognises the impact of shareholder returns of the level of capital employed and therefore seeks

to maintain a prudent balance between the advantages and flexibility afforded by a strong capital position and the higher returns

on equity made possible by greater leverage.

During the year 2010, in line with the guidelines issued by the Central Bank of Bahrain, the Group has calculated capital adequacy

based on Basel II regulations. Accordingly risk weighted assets comprise credit risk weighted assets, market risk weighted assets

and operational risk weighted assets. The Group uses Basel II standardised approach for credit and market risk. Basic indicator

approach is used for operational risk. The risk asset ratio for the Group is as follows:

2010 2009

BD ’000 BD ’000

Capital base:

Tier I capital 84,460 112,526

Tier II capital 6,149 2,051

Total capital base (a) 90,609 114,577

Risk weighted assets (b) 459,331 526,387

Capital adequacy (a/b * 100) 19.73% 21.77%

Minimum requirement 12.00% 12.00%

Regulatory capital consists of Tier I capital, which comprises share capital, retained earnings brought forward, statutory reserve,

subordinated debt reserve and fair value reserve on available for sale investments. Certain adjustments are made to IFRS based

results and reserves as prescribed by the Central Bank of Bahrain. The other component of regulatory capital is Tier II capital,

which includes current year loss, subordinated debt, foreign currency translation reserve and collective provisions.

37. COMMITMENTS AND CONTINGENT LIABILITIES

Credit-related commitments

Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances

which are designed to meet the requirements of the Group’s customers.

Letters of credit, guarantees (including standby letter of credit) and acceptances commit the Group to make payments to third

parties on behalf of customers in certain circumstances.

Commitments to extend credit represents contractual commitments to make loans and revolving credits. The majority of

commitments expire within one year. Since commitments may expire without being drawn upon, the total contract amounts do

not necessarily represent future cash requirements.

The Group has the following credit related commitments:

2010 2009

BD ’000 BD ’000

Contingent liabilities on behalf of customers:

Acceptances 3,974 3,394

Letters of credit 23,336 7,605

Guarantees 27,086 45,785

54,396 56,784

Irrevocable commitments to extend credit 71,223 15,610

Capital expenditure commitments

Estimated capital expenditure contracted for at the statement of financial position date

but not provided for 291 509

Operating lease commitments

Future minimum lease payments:

Within one year 1,001 796

After one year but not more than five years 2,546 2,269

Total operating lease expenditure contracted for at the statement of financial position date 3,547 3,065

90 // BMI Bank Annual Report 2010

BMI Bank Annual Report 2010 // 91


Notes to the Consolidated Financial Statements

//Notes to the Consolidated Financial Statements

31 December 2010

38. FIDUCIARY ASSETS

The assets managed on behalf of customers, to which the Group does not have any legal title are not included in the statement

of financial position. At 31 December 2010, the total market value of such assets was BD 8.9 million (31 December 2009:

BD 10.07 million).

39. 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.

With the exception of the unquoted investments carried at cost, the fair value of financial instruments are not materially

different from their carrying values at the statement of financial position date.

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

technique:

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

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

directly or indirectly; and

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

market data.

All quoted available-for-sale investments and derivative assets and liabilities qualify under level 2 of the fair value hierarchy.

The Group had no financial assets or liabilities qualifying under level 3 of the fair value hierarchy.

During the year ended 31 December 2010 there were no transfers between levels 1 and 2.

40. DEPOSIT PROTECTION SCHEME

Deposits held with the Group’s Bahrain operations are covered by the Deposit Protection Scheme (the Scheme) which was

established by the Central Group of Bahrain concerning the establishment of Deposit Protection Scheme and Deposit Protection

Board. No liability is due until one of the member commercial Groups of the Scheme is unable to meet its deposit obligations.

41. COMPARATIVE FIGURES

The comparative figures have been reclassified where necessary to conform with the current year’s presentation. This mainly

related to BD 74,302 thousand reclassified from “Loans and advances” to “Islamic financing assets” and BD 107,974 thousand

from “Customers’ Deposits” to “Wholesale Islamic Deposits”.

Such reclassification has not affected net income, total assets, and total liabilities and equity of the Group as previously reported.

42. SUBSEQUENT EVENTS

Subsequent to the year end, the Group entered into a syndicated term loan agreement to raise US$ 80 million (BD 30.16

million). The term loan carries interest of 275 basis points over the six months reference rate and matures in January 2014.

92 // BMI Bank Annual Report 2010

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