2010 Annual Report - Khaleeji Commercial Bank BSC

2010annual report

His Royal HighnessPrime Minister PrinceKhalifa Bin Salman Al KhalifaHis Majesty King HamadBin Isa Al KhalifaThe King of BahrainHis Royal Highness PrinceSalman Bin Hamad Al KhalifaCrown Prince & DeputySupreme Commanderof Bahrain Defence Force

ContentsFinancial HighlightsBoard of DirectorsShari’a Supervisory BoardChairman’s ReportBusiness ReportCorporate ReportRisk ManagementShari’a ReportAuditor’s ReportFinancialsNotes to the Consolidated Financial StatmentsRisk and Capital Management Disclosures91011121623263334354397Khaleeji Commercial Bank BSCHarbour Tower EastBahrain Financial HarbourP.O. Box 60002Manama, Kingdom of BahrainTelephone: +973 17 505 050Facsimile: +973 17 100 017Email: info@khcbonline.comwww.khcbonline.com

in times of change,khcb recognises a seaof opportunities.we are committedto navigate through,directing witha moral compass.we will lead the bank,our shareholders,clients and businesspartners toa successful future

FINANCIALHIGHLIGHTSTOTAL INCOME19,585NET INCOME(6,533)TOTAL ASSETS419,216TOTAL EQUITY118,158EARNINGS PER SHARE(5.78)

BOARD OFDIRECTORSDr. Fuad Abdulla Al OmarChairmanMr. Abdulla ShowaiterVice ChairmanMr. Ebrahim H. EbrahimDirector & CEOMr. A. Latif Al MeerDirectorMr. Khalid Al ThaniDirectorMr. Rashad Y. JanahiDirectorMr. Hesham AljabrDirectorMr. Yousef KhalafDirectorMr. Mohammed Al MutairDirector10

SHARI’ASUPERVISORY BOARDKhaleeji Commercial Bank is guided by a Shari’a Supervisory Board consisting of three distinguishedscholars. This Board reviews the bank’s activities to ensure that all products and investmenttransactions comply fully with the rules and principles of Islamic Shari’a.Dr. Fareed Yaqoob Al MuftahChairmenMember of Supreme Council of Islamic Affairs,Undersecretary of the Ministry of IslamicAffairs, Kingdom of Bahrain; former judge ofHigh Shari’a Court; lecturer at University ofBahrain; PhD from University of Edinburgh,United Kingdom.Shaikh Nizam Mohammed Saleh YaqubyMemberExecutive member of Shari’a SupervisoryBoard, Abu Dhabi Islamic Bank and ShamilBank; Board Member of Dow Jones IslamicIndex; Member of Shari’a Supervisory Board ofnumerous Islamic banks.Dr. Fareed Mohammed HadiExecutive MemberAssistant Professor at the College of Arts,Department of Arabic and Islamic Studies,University of Bahrain; PhD in Ibn Hazm’sMethodology of Jahala, University of Edinburgh,UK; PhD in Al-Bukhari’s Methodology, Universityof Mohammed V, Morocco; Member of Shari’aSupervisory Board of numerous Islamic banks.11

Chairman’sReportDr. Fuad Abdulla Al OmarIn the name of Allah, the beneficent, the merciful,prayers and peace upon the last apostle andmessenger, our Prophet Muhammad (pbuh). Onbehalf of the Board of Directors, it is my pleasureto present the annual financial statements ofKhaleeji Commercial Bank for the year ended 31December 2010.This, the sixth year of operations for the Bank,has been an extremely challenging one. Theregional economic and business environmentcontinues to remain difficult against thebackdrop of the global financial crisis andunsettled capital markets.The Bank’s business model has in the pastbeen designed with a focus on investmentand private banking, which was in part aresult of the restrictions on the Bank’s originallicence and to a greater extent a reflectionof the attractive opportunities in those areasand the abundant liquidity in the regionalmarkets during the period from 2005 to 2008.I am pleased to report that the Central Bankof Bahrain has now removed the restrictionson the Bank’s licence which prevented it fromengaging in retail consumer finance activitiesother than those related to real estate.In view of the changed circumstances in theglobal financial markets and in the terms ofthe Bank’s licence, the Board decided to reviewthe Bank’s business model and the strategicdirection of the Bank. The Board concludedthat in order to remain a successful financialinstitution that provides sustainable returnsto its shareholders, the Bank had to reshapeits business model and implement a newstrategic plan. The Bank’s new strategic plan isfocused on expanding its commercial bankingbusiness. Key elements of the plan includelaunching and growing the retail bankingbusiness in Bahrain, increasing the Bank’sshare of business in the local corporate andbusiness markets and expanding the Bank’scommercial banking business in the regionalmarkets, while continuing to leverage on itsinvestment banking capabilities. In connectionwith these aims, the Bank is also looking toextend its local branch network and electronicdistribution channels.Overall PerformanceLike other financial institutions, the currentmarket environment has had an adverseimpact on the Bank, both directly and indirectly.However, I am pleased to report that througha combination of prudent and conservativemanagement, the Bank was able to navigatethis difficult period successfully. The Bankhas focused on diversifying and expandingits business while maintaining conservativeliquidity and capital positions.With the blessings of Allah The Almighty, theBank continues to maintain strong liquidity(with 20.9% of the Bank’s assets beingliquid) and adequate capital (the Bank has aregulatory capital adequacy ratio of 31.8%),both comfortably in excess of regulatoryrequirements. As a result of conservativeliquidity and balance sheet management, the12

Chairman’s Reporttotal assets of the Bank declined by 11.5% to BD419.2 million during 2010. However, the Bankmanaged to increase its financing portfolioby 2.8% to BD 211.1 million and revenue fromcommercial and retail banking activities by7.1%, confirming the success of the Bank’sstrategy of expanding its commercial bankingbusiness. Unrestricted Investment Accounts(URIA) and Murabaha from customers alsoincreased marginally, reaching BD 217.2million, which reflects the market’s confidencein the Bank’s products and services.During the year, revenue declined significantlyby 41.1%, mainly due to lower income frominvestment banking activities when comparedwith previous years. Given the challengingcredit and economic conditions, the Boardalso took the prudent step of increasing theBank’s impairment provision by BD 8.6 million.Consequently, and for the first time in itshistory, the Bank has to report a net loss for2010 of BD 6.5 million compared to a profit ofBD 3.1 million in 2009.In line with the Bank’s revised business modeland strategic direction, the Bank launchedseveral new products to meet clients’ needs. InOctober 2010 a full suite of consumer financeproducts including auto financing, personalfinancing and mortgage financing werelaunched in addition to a Visa-branded creditcard. I am happy to report that these productswere well received by the Bank’s customers.The Al-Waffer savings account continued toexpand and attract new customers and helpedthe Bank in diversifying its customer baseand sources of funds. The Bank’s investmentbanking team has been actively managing theportfolio of investment products and RestrictedInvestment Accounts (RIA), to enhance thevalue of the assets held in those products andto work towards potential exits.Organisational DevelopmentThe Board believes that to remain competitivein the long run, building organisationalcapacity, including human capital, isimperative. A committed and well trainedwork force is a key enabler in achieving theBank’s long term objectives. During 2010,the Bank hired 22 employees, mainly for theBank’s retail banking business in a marketwhere new jobs were not being created. TheBank also continued to invest in the trainingand development of its human resourcesthrough external and in-house trainingprogrammes and the enhanced graduatetrainee programme. The Board takes pride inthe fact that 91% of the Bank’s employees areBahrainis. In addition, the Bank has supportedthe Human Resource Development fund (HRD)of the Kingdom of Bahrain, the Waqf Fund andTamkeen in addition to providing trainingopportunities to students from different localand international universities.Full compliance with the rules and guidelinesof the Central Bank of Bahrain and otherregulatory agencies is another fundamentalelement of the Bank’s strategy. During theyear the Board undertook significant initiativesto improve the knowledge and practice ofCorporate Governance within the Bank. Thesesteps included holding a workshop for Directorsand Executive Management to familiarise themwith the new Corporate Governance Code andundertaking a strategic review of the Bank’scurrent corporate governance practices.I am happy to report that the Bank has already13

From left to right: Fuad Taqi - DGM, Commercial Banking; Silvan Varghese - DGM & COO; Dimitry Blasi - DGM,Investment Banking; Ebrahim H. Ebrahim - CEO & Board Member; Mahdi A. Nabi - AGM, Adminstration &Operations.

Chairman’s Reportcomplied with most of the requirementsunder the new Code and the Board remainscommitted to taking all necessary action toensure the Bank’s continued compliance.Corporate Social ResponsibilityThe Board believes that, as a growing institution,the Bank has a responsibility to contributetowards the communities in which it operates,and in the past, the Bank has supportedseveral initiatives that provide benefits tothe local community. In 2010, a wide rangeof organisations involved in humanitarian,education, health and other activities receivedsupport from the Bank both in cash and inkind. The Board is committed to continuingto expand these through the Bank’s ongoingprogramme of corporate social responsibility.Looking AheadThe Board believes that the recent challengesfacing the banking sector will continue in 2011and the Bank will not be immune to thesechallenges. However, the Board also seesmany opportunities for growing the Bank’sbusiness, not only in the primary markets ofthe GCC, but also in the wider MENA region. Inthe last two years, the Bank has taken severalsteps to diversify its assets, revenue streamsand widening its customer base. The launch ofthe Bank’s suite of consumer finance productswill further this endeavour.The key challenge for the Board in the mediumterm is to build the scale necessary for theBank to become a leading player in the localand regional market. The Bank will continueto aggressively grow its commercial andretail banking business while exploring otheroptions including viable acquisitions of otherentities and asset portfolios. The Board will alsolook to continue to expand the Bank’s networkof branches and distribution channels to reacha larger number of customers.The Board believes that the Bank hasestablished a solid foundation from which toexecute the new strategic plan and capitaliseon opportunities currently available in themarket.AppreciationOn behalf of the Board, I would like to expressmy gratitude to his Majesty King Hamad Bin IsaAl Khalifa, His Royal Highness Shaikh Khalifa BinSalman Al Khalifa, the Prime Minister, and HisRoyal Highness Shaikh Salman Bin Hamad AlKhalifa, the Crown Prince and Deputy SupremeCommander of Bahrain Defense Force, for theirencouragement of the growth of the privatesector and the development of the bankingand finance industry in Bahrain. I also extendmy thanks to all government ministries andthe Central Bank of Bahrain for their continuedguidance and support.Special appreciation is due to the Bank’sshareholders, clients and business partners fortheir ongoing confidence and loyalty; and tothe Bank’s management and staff for their hardwork and dedication. Allah The Almighty is thepurveyor of all success.Dr. Fuad Abdulla Al OmarChairman15

BUSINESSReportEbrahim H. EbrahimThe year 2010 was an extremely challenging onefor the Bank. The impact of the global financialcrisis continued to be felt across the region,although some markets recoverd faster thanothers.Credit and Investment environment remainedunsettled and increasingly commercial andretail customers were feeling the negativeeffects of the real estate bubble. With investmentin infrastructure and real estate not recoveringto the pre-crisis levels, market activity continuedto remain low. This was reflected in increasingcases of non-performing assets and lack ofgrowth in credit. The sukuk market showedsome signs of activity but investors continuedto stay away from private equity markets, a keytarget market for the Bank in the past.Operating under difficult market conditions,the management remained focused onprudent management of the balance sheetand expansion and diversification of thebusiness in line with the Bank’s revised businessmodel and strategy. I am pleased to report thatduring 2010, KHCB continued to launch newproducts and grow and expand its businessoperations in line with its long term strategy.The first step in our revised strategy anddiversification of our business was the launchof our new logo. Designed to reflect the waveof change the Bank is riding into, the logoretains key elements of the earlier design.It is simple yet elegant, with a vibrant iconthat is in keeping with the Bank’s new vitalityand dynamism. Its corporate red and bluecolours have been fashioned into two sleeksails that pioneer paths through new waters,signifying the new momentum. For us the newbrand marks a watershed, a transformation inkeeping with the changing times. The sails ofthe new logo signify the spirit of change thatwill take us into the exciting future. The imageit creates is of strength and flexibility, of havingan open mind and the vision to venture ontonew paths. We truly believe we will live up tothe promise of the new logo by fashioning adistinct identity for the Bank and diversifyinginto other business segments.Commercial BankingCommercial Banking is the key focus area forexpansion for the Bank and I am pleased tonote that despite operating in this difficultenvironment, we have progressed considerablyin this regard. During the year, consumerfinance products were launched targeting anew segment of customers for the Bank. Ourcustomer deposits including UnrestrictedInvestment Accounts (URIA) grew marginallybut the customer base diversified substantially.Corporate and wholesale banking businessalso continued to grow and diversify.Corporate and Wholesale Banking2010 was a particularly challenging year forcorporates and businesses. At the local level,several key sectors like real estate, constructionand tourism have been adversely affectedand activity levels continued to remain low.16

BUSINESS ReportReal estate sector, a major contributor to thelocal economy, has been particularly affected,reflected in the decline in property values andlimited number of transactions and low levelsof activity. This to some extent contributed todeterioration in the credit quality of existingassets in the banking sector. Nevertheless,KHCB continued to grow and diversify itscorporate and wholesale banking business.Financing assets, which included Ijarah,Murabaha, and Musharakah, grew by 2.8% toBD 211 million from BD 206 million in 2009. TheBank also started targeting customers for tradefinance business which was newly launchedin 2009. The Bank continued to support localand regional business houses in their growthplans. In July 2010, the Bank concluded a USD25 Million facility for Bukhathir InvestmentCompany, a diversified conglomerate based inSharjah and provided a USD 26 million facilityfor Al Jazeera Finance Company in Qatar.The Bank also financed several projects in theKingdom of Bahrain. We have however beenselective in our approach to building assets aswe aim to create a high quality portfolio with alocal and regional client base.Retail BankingThe Bank’s retail banking business wasconstrained by restrictions on the Bank’slicense which prevented it from engaging inretail consumer finance activities other thanthose related to real estate. Consequently, theBank’s target customers were mainly HighNet Worth Individuals and Institutions, whichis reflected in its limited branch network. In2010 the CBB removed the restrictions on theBank’s license, allowing it to offer the full suiteof commercial banking products includingconsumer finance.One of the key elements of the Bank’s revisedbusiness model is to launch and grow theBank’s retail banking business in Bahrain.Several new products and campaignstargeting a new customer segment waslaunched while enhancing existing productsand services. In the third quarter of the year,the Bank launched personal finance, autofinance and mortgage finance products withattractive features targeted at Bahraini andexpat residents of Bahrain. The launch wasaccompanied by a highly visible advertismentcampaign. I am pleased to report that theresponse to the campaign was very positive.The Bank also launched four types of creditcards (i.e. Corporate Platinum, Gold, andclassic). With the launch of these productsKHCB will offer its customers a comprehensiverange of products to meet all their personalfinancing needs.Al Waffer savings account, an UnrestrictedInvestment Account that offers clientsmonthly, quarterly and annual prizes on theirinvestment, completed a full year with thegrand draw held in September 2010. A totalcash prize of USD 1,000,000 was distributed to240 winners over the 12 months of the program.The product was re-launched in October 2010with a larger number of prizes and total prizemoney exceeding USD 1,000,000. I am pleasedto report that the Al Waffer was well receivedin the market and we expect the product toattract more customers and deposits in thefuture.Investment BankingInvestment Banking has been key to the Bank’sgrowth and success in the last few years. Theassets under management of the Bank are17

2010 marked the successfultransformation of the bankinto a brand that symbolisespositive change.

BUSINESS Reportcurrently BD 700 Million, a reflection of theBank’s strong relationship with investors aswell as the unique and attractive investmentopportunities brought to the market. At aportfolio level, the assets under managementretained a positive valuation trend in 2010,hence preserving the underlying value toinvestors.In light of the changed market environmentcaused by the global financial crisis, investorswithdrew from the markets bringing theprivate equity and sukuk markets to astandstill. Although there were signs of revivalin the sukuk and credit markets, investors inthe private equity and project based productscontinued to be risk averse and preferred towait on the sidelines. The situation gave riseto distressed asset prices for real estate assetsespecially in the GCC countries.In view of the limited appetite for newinvestment products in the market, themanagement focused on protecting andadding value to our investments and workingtowards potential exits in 2011 and 2012. Whilethe exit dates were extended for many of theinvestment products, I am pleased to reportthat in 2010 we redeemed 34% of the investedcapital in Amlak 2. The investment team led therestructuring of Euro 525 Million syndicatedthird party financing for the Gulf Germanresidence portfolio resulting in considerablesavings and making the portfolio cash flowpositive. Completion of the restructuringgenerated much needed funds for capitalexpenditure which in turn will continue todrive further valuation growth and higheroccupancy rates into 2011 and beyond.Certain other property investment productsmanaged by the Bank, principally Eqarat AlKhaleej and Janayen, while suffering somevaluation losses on account of depressedproperty prices across the Gulf region,continued to generate returns albeit at alevel lower than previous years. The Suroohresidential villa project in Bahrain has beencompleted with power also being suppliedand delivery of sold villas to purchasers is nowtaking place. Further projects, in which theBank has partnered with another prominentBahraini financial institution, such as Safanaand North Gate, have incurred some delaysdue to their scale and complexity but remainon track from a valuation perspective.The prospects for the large investmentproducts in India, Global Logistix Navi Mumbaiand Danat India, New Delhi, continued to begood with positive valuation fundamentalscontinuing into 2010. Considerable progresshas been achieved on both these projectsand our investment team is actively workingwith local partners and advisers to developthe projects further for potential exit. JawharaGreens, the multi-use development project inQatar, while delayed has now received a boostwith plans for FIFA World Cup 2022. The projecthas gone against the trend of reduced GCCvaluations in 2010 and reported a valuationincrease of 50% for the calendar year.At an overall level, the Investment Bankingdivision will maintain a focus on achievinginvestor exits in 2011.Organizational DevelopmentsDuring 2010 , we continued to strengthen ourinstitutional capacity in line with the growth insize and scope of our business.19

BUSINESS ReportThe Bank’s success, is to a large extent,dependent on knowledge, skills, creativity,and motivation of its employees. Our humanresources strategy is therefore focused onbuilding a high performance team thatis sustainable with a diversified level ofcompetence. Attracting, developing andretaining talented professionals have been keypriorities for the Bank.In 2010 the Bank recruited 22 employees tomeet the requirements of our expansion anddiversification. Total number of employeesincreased from 138 to 150 and we are proudof the fact that 91% of our employees areBahrainis.The Bank continued to invest in employeedevelopment through training programsboth, internal and external. Our employeeshave made use of the many courses madeavailable by BIBF and we also organized aspecialized training program in Islamic Bankingconducted by experienced faculty from theindustry. Beyond development of employees,the Bank also continued to support the youthof the country by providing short term trainingopportunities for university students. KHCBhas also been a major supporter of the WaqfFund’s Training Program.The Bank continued to enhance its operationalsystems and applications including thecore banking system. Significant projectsin the Information Technology (IT) were toaccommodate the new consumer and retailfinancing products and ensure compliancewith regulatory requirements. The cardmanagement system was enhanced toinclude a VISA branded credit card and thirdparty service providers for the same andintegrate with an outsourced call centre. TheBank completed its Disaster Recovery (DR) andBusiness Continuity Plan (BCP) projects in thethird quarter of the year. I’m pleased to reportthat the Bank now has fully-functional DR andBCP sites.Conclusion2010 was a challenging year, one that presentedcomplex challenges to the financial sector ingeneral and KHCB in particular. We can takesatisfaction from the fact we have been flexibleenough to adapt to the changing environmentand navigate the difficult period successfully.The Bank is now well positioned to capitalise onopportunities available locally and regionally.Based on our new corporate strategic plan, wewill focus on diversifying our revenues, assets,and customer base and will grow our retailbanking business by offering a comprehensiverange of products. In the medium term, we willexpand our branch network, enhance ourdelivery channels and explore opportunitiesto grow in key markets in the region.Finally, it is my pleasure to extend sincereappreciation to our Board of Directors for theiron-going support and valuable guidance, tothe Central Bank of Bahrain, Bahrain StockExchange, to our loyal customers and finally toall our dedicated staff members who worked sohard, individually and collectively during 2010.Ebrahim H. EbrahimCEO & Board Member21

creating a new reality,through adding value.as we expand and diversify,we ensure safe sailing toa bright new future.

CORPORATEGOVERNANCECorporate Governance StructureThe Bank’s corporate governance frameworkfocuses on Board responsibility, oversightand management accountability vis-à-visgoverning regulations and better practices.The framework is in line with global bestpractices and regulatory requirements whichseek to balance entrepreneurship, control,and transparency, while creating value for allstakeholders.Corporate governance, the way the Boardand Management is organised and how theyoperate in practice, ultimately aims at leadingthe Bank towards successfully meeting itsstrategic objectives. The Board of Directors isaccountable to the Bank’s shareholders forthe creation and delivery of strong sustainablefinancial performance and long-termshareholder value. To achieve this, the Boardapproves and monitors the Bank’s strategyand financial performance, within a frameworkof sound corporate governance and effectiverisk management.The Bank is in compliance with the CorporateGovernance Code (CGC), the Public DisclosureModule and the Stock Exchange DisclosureStandards set by the CBB. The corporategovernance philosophy of the Bank is to befully ethical and transparent in all dealings.In pursuit of this goal the Board of Directorshave approved a Corporate GovernanceFramework, Director’s Conflict of InterestPolicy, Insiders’ Trading Policy, and the BankKey Persons’ Dealing Policy. The Bank, throughits Board and Committees, endeavors todeliver the highest governing standards forthe benefit of its stakeholders.The Bank is committed to continuouslyreviewing and developing its corporategovernance standards to ensure compliancewith the requirements of the revised corporategovernance framework being implementedby the Central Bank of Bahrain and otherregulatory bodies, and also to keep abreastwith international best practice.Board of DirectorsThe Board of Directors comprises of 9members. The Chairman of the Board ofDirectors is charged with regular supervisionand assessment of Executive Managementand is responsible for leading the Board,ensuring its effectiveness, monitoring theperformance of the CEO and maintaining adialogue with the Bank’s stakeholders. TheBoard has constituted certain committees withspecific delegated authorities to oversee andguide the management in specific areas of theBank’s operations and decision-making. TheBoard, either directly or through its variouscommittees, will oversee the management ofthe Bank.Board Committees StructureThe Board of Directors has constitutedfour committees with specific delegatedauthorities.• Board Audit Committee, which is responsiblefor internal and external audit, compliance,and anti-money laundering.• Board Investment & Credit Committee,which is responsible for investment and creditapproval, setting limits and investment policies,asset liability management, monitoring asset23

corporate governanceimpairment and creation of loss provisons, maintaining banking relationships, as well as for theoversight of the off-balance sheet vehicles.• Board Nominations, Remunerations and Governance Committee, which is responsible for settingpolicies for compensation and incentives, human resources and administration. It is also responsiblefor the corporate governance framework of the Bank.• Board Risk Management Committee, which is responsible for ensuring that the Bank’s overall riskmanagement framework is effective and that key risks are managed within parameters establishedby the Board.The Chairman, the Board of Directors and the Board Committees have direct access to the headsof Internal Audit, Risk Management, Regulatory Compliance and Shari’a Compliance. During 2010,the Board of Directors held 7 meetings, the Board Investment & Credit Committee held 4 meetings,the Board Nomination, Remuneration & Governance Committee held 2 meetings, the Board RiskManagement Committee held 4 meetings and the Board Audit Committee held 4 meetings.BOARD COMMITTEESBoard of directorBOARD NOMINATIONS,REMUNERATIONS &GOVERNANCECOMMITTEES(BNRGC)Board Investment &credit Committee (BICC)Board AuditCommittee (BAC)Board riskmanagementcommittee(BRMC)- HR & Related Policies- Compensation &Incentives- Human Resources- Administration- Corporate Governance-Investment & CreditApproval- Asset LiabilityManagement- Provisions- Internal Audit- External Audit- Accounting Policies- Compliance- Anti Money Laundering- Risk Management- Policies related to RiskManagementEXECUTIVE/MANAGEMENT COMMITTEESchief executive officermanagementcommitteeasset liabilitymanagementcommitteeexecutive credit& investmentcommitteeexecutive riskmanagementcommittee- Strategy- Performance Review- Budget- Human Resources- Administration- Balance SheetManagement- Funding- Liquidity-Banking Relationships- Review of Investments,Exit and Credit Proposals- Monitoring of Investments- Risk Management Policies- Risk Review- Provision and Impairment25

RISKMANAGEMENTRisk Management FrameworkRisk is inherent in the Bank’s business andeffective management of risk is seen as a corerequirement to create shareholder value.The Board of Directors of the Bank has overallresponsibility for establishing the Bank’s riskculture and ensuring that an effective riskmanagement framework is in place. The Boardapproves and periodically reviews the riskmanagement policies and risk strategies of theBank.The assumption of risks by the Bank is guidedby certain fundamental principles such asprotection of investor and shareholder fundsby adoption of sound credit and investmentanalysis, adoption of effective “risk reward”strategy to optimize stakeholders’ returns,adherence to prudent levels of exposureconcentration, while focusing on the targetmarket segments such as high net worthindividuals, corporate and public sector clients,and products which generate high profitabilityand growth.The Board has established an Executive RiskManagement Committee (ERMC), which isresponsible for developing and implementingthe Bank’s risk management policies in allareas of the Bank’s operations. The committeeconsists of heads of business and otherfunctional units in the Bank and reportsregularly to the Board Risk ManagementCommittee.The Risk Management Department of the Bank,independent of the business units, is responsiblefor the day-to-day oversight and managementof the various risks faced by the Bank. The RiskManagement Department, together with theInternal Audit and Compliance Departments,provides independent assurance that all typesof risks are being measured and managed inaccordance with the policies and guidelinesset by the Board of Directors.Risk PoliciesThe Bank’s risk management policies areestablished to identify and analyze the risksfaced by the Bank, to set appropriate risk limitsand controls, and to monitor adherence to suchlimits. Risk management policies and systemsare reviewed regularly to reflect changesin market conditions, as well as productsand services offered. The Bank, through itstraining and management interventions ,aims to develop a disciplined and constructivecontrol environment, in which all employeesunderstand their roles and responsibilities.The Bank’s risk policies identify approvalauthorities, reporting requirements, and theprocedures for referring risk related issues toexecutive management, ERMC and the Board,as appropriate. Policies are in place to addressall major categories of risks including liquidity,investment and credit, currency, operational,legal and regulatory risks.Credit and Investment RiskThe Bank has well defined policies formanaging credit and investment risks. Theseinclude delegated approval authority limits,concentration limits, maximum exposure limits,etc. Credit and investment limits to clientsare approved after thorough assessment ofcounterparty, legal and market risks associatedwith the project. In most cases, exposures are fullyor partially secured by collateral securities. TheBoard of Directors has delegated responsibilityfor the management of credit and investmentrisk to its Executive Risk Management26

RISK MANAGEMENTCommittee (ERMC). A separate Risk and CreditManagement Department independent ofthe business units is responsible for oversightof the Bank’s credit and investment risk. TheRisk Management Department reviews everycredit and investment proposal and recordsits views before the same is submitted forapproval. Fair valuation of the investmentsand impairment tests for credit exposures takeplace periodically as per the Bank’s approvedpolicies. This exercise is performed by the RiskManagement Department and is followed by areview by the external auditors. It is the Bank’spolicy to ensure that adequate provisionsare made for expected credit or investmentlosses. The Bank’s policy on Impairment &Provisioning lays down guidelines for thecreation of adequate allowance for impairmentlosses that represents the estimated future losson its portfolio.Market RisksMarket risk is the risk that changes in marketparameters, such as profit rates, equity prices,foreign exchange rates and credit spreads,(not relating to changes in the obligor’s/ issuer’s credit standing), will affect theBank’s income or the value of its holdings offinancial instruments. The objective of marketrisk management is to manage and controlmarket risk exposures within acceptable limits,while optimizing the return on risk. As on date,the Bank does not have an active trading bookand therefore the impact of market volatilityon the Bank’s revenues is minimal.Operational RiskOperational risk is the risk of loss arisingfrom inadequacies or failures in systems andprocesses, human errors, or external events.Failure to manage operational risk can resultin financial and reputational loss as well aslegal and regulatory consequences. The Bankmanages operational risk through ongoingmonitoring of predefined risk triggersand through a system of internal checksand balances. These include well definedprocedures for transaction processing,hierachial authority structure for transactionapprovals, and continuous oversight byinternal audit and compliance departments.The Risk Management Department isresponsible for identifying, monitoring andmanaging operations risk in the Bank. TheBoard has approved a detailed policy for thispurpose and all the operational and physicalinfrastructure is in place. The Risk ManagementDepartment conducts Operational Riskassessment of each department of the Bank onan ongoing basis and also provides guidanceto the operating staff. The departmentalso submits periodical reports to the TopManagement and the Board on operationalrisk events that have occurred including nearmisses and on corrective actions taken.Liquidity RiskLiquidity risk is defined as the risk that fundswill not be available to meet liabilities as andwhen they fall due. While the policy guidelinesfor management of liquidity risk are laiddown by the Board of Directors, all operationsregarding day-to-day management of balancesheet and liquidity is handled by the FinancialControl and Treasury Departments. The AssetLiability Management Committee (ALCO),which is chaired by the CEO and has seniorexecutives of the Bank as members, exerciseseffective supervision of this process. ALCOperiodically monitors the level of liquid assetsmaintained by the Bank and uses a maturityladder approach27

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for managing and monitoring the liquidity risk.The Bank’s approach to managing liquidity isto ensure, as far as possible, that it will alwayshave sufficient liquidity and the right maturityprofile to meet its liabilities under both normaland stressed conditions, without incurringunacceptable losses or risking damage to theBank’s reputation.Profit Rate RiskThe principle risk to which non-tradingportfolios are exposed is the risk of loss fromfluctuations in the future cash flows or fairvalues of financial instrument because ofchanges in market profit rates. The Bank’spolicy on profit rate risk management aimsto enable identification, measurement,monitoring, control and reporting of profitrate risks in a timely manner. Profit rate riskis managed principly through monitoringprofit rate gaps and by having pre-approvedlimits for repricing bands. The managementof profit rate risk against profit rate gap limitsis supplemented by monitoring the sensitivityof the Bank’s financial assets and liabilities tovarious standard and nonstandard profit ratescenarios.Foreign Exchange RiskForeign exchange risk is the risk that the valueof a financial instrument will fluctuate dueto changes in foreign exchange rates. TheBank’s foreign exchange risk is managed onthe basis of limits on net open positions setby the Board of Directors and a continuousassessment of current and expected exchangerate movements. The management of foreignexchange risk against net exposure limits issupplemented by monitoring the sensitivityof the Bank’s financial assets and liabilitiesto various foreign exchange scenarios. TheBank does not engage in foreign exchangetrading and, where posible, matches currencyexposures inherent in certain assets withliabilities in the same or correlated currency. TheRisk Management Department in associationwith the Treasury Department is responsiblefor all operations related to foreign exchangerisk management in the Bank.Legal and Regulatory RiskLegal risk includes the risk of unexpectedloss from transactions and/or contracts notbeing enforceable under applicable lawsor from unsound documentation. The Bankhas a full-fledged legal department whichprovides necessary inputs and guidance toall other departments on any legal issuesthat may arise. The Bank also hires externallegal advisors for advice when necessary,and to handle litigations. Regulatory riskincludes the risk of non-compliance withregulatory and legal requirements. The Bankhas an Independent Compliance Departmentwhich monitors the level of compliancewith regulatory requirements by otherdepartments of the Bank. It also acts as thefocal point in all interaction with the CentralBank of Bahrain. The Compliance Departmentis also responsible for the Bank’s anti-moneylaundering initiatives.Capital Adequacy & the InternalCapital Adequacy AssessmentProcess (ICAAP)The Bank’s regulatory capital adequacy ratiois calculated in accordance with the guidelinesissued by the CBB. Under this, the Bank isexpected to maintain a minimum prescribedratio of total capital to total risk weightedassets.29

RISK MANAGEMENTThe CBB also requires the Bank to establish aprocess to monitor the overall capital adequacyof the Bank, taking into account all relevant riskfactors. The Board of Directors has approvedan Internal Capital Adequacy AssessmentProcess (ICAAP) to satisfy this requirement. TheICAAP is a requirement under Pillar 2 of theBasel II Accord and seeks to ensure appropriateidentification,measurement, aggregationand monitoring of all risks by the Bank and torelate the level of internal capital of the Bankto its overall risk profile and business plan. TheBank has adopted a structured approach foridentifying and assessing capital required foreach of the major risk categories by employingappropriate methodologies.The total of such individual risk capitals is takenas the overall capital requirement. The ICAAPalso incorporates guidelines to assess thefuture capital needs of the Bank in line with itsbusiness plans over its strategic time horizon.Stress TestingRegulatory and internal capital adequacycomputations are based on past data. Whilefuture projections are done, these are on theassumption that the business environmentcontinues to be normal. It is essential forthe Bank to measure sensitivity of its capitalto serious adverse changes in external andinternal risk environment and changes inbusiness cycles. The Bank has developed astress testing model for the purpose whichprovides an estimate of capital adequacyunder a variety of stress scenarios.The first step in the process is identifyingrelevant stress factors that can affect the bank’srevenues, liquidity, asset quality, and businessgrowth etc. Each item in the Bank’s balancesheet is then revalued on the basis of differentcombinations of these risk factors and atvarious levels of severity. The capital adequacylevels at these stress scenarios are computedon current as well as forecasted balance sheetsto identify the likely worst case scenarioswhich will help the Bank identify preventativemanagement actions where necessary.Reputational RiskReputational risk arises from negative publicperception of the Bank arising out of losses,faulty business practices, and failure of internalcontrols etc. Such a perception whethertrue or not, can have serious impact on theBank’s business by undermining investorconfidence. It may also lead to costly litigationthat would in turn have an adverse impact onliquidity and capital adequacy of the Bank. Thesenior management, through the relevantcommittees, examines issues that can haveadverse impact on the Bank’s reputation andissues guidelines to address these. The Bankalso under its ICAAP provides separate capitalagainst this risk.DisclosuresThe Bank recognizes its continuous disclosureobligations set forth by the Central Bank ofBahrain (CBB), Bahrain Stock Exchange andother relevant regulatory bodies. The Bankhas approved policies related to externalcommunications & disclosures in line with BaselII & CBB requirements which ensure disclosureof all relevant information to stakeholders ina timely manner. The Pillar 3 disclosure andCorporate Governance Code requirementsprescribed by the Central Bank of Bahrain(CBB) are part of this annual report.31

SHARI’A REPORTIn the name of Allah, the Beneficent, the Merciful. Prayers and Peace Upon the Last Apostle andMessenger, Our Prophet Mohammed, His Family and Companions.The Shari’a Supervisory Board (“SSB”) of Khaleeji Commercial Bank has reviewed the Bank’s activitiesthrough its annual review and through the Shari’a compliance department and compared themwith the previously issued fatwas and rulings during the financial year ending 31st December 2010and found them compatible with the already issued fatwas and rulings.The Shari’a Compliance Department in collaboration with the SSB has audited the Shari’a aspectsarising from the Bank’s businesses, and submitted it’s report to the SBB, which in turn, reviewed theobservations contained therein, and emphasized that the management must be in compliance withthe rules and principles of Islamic Shari’a. The SSB has decided based on this report and the jobsdone by Shari’a Compliance Department to supervise the Banks adherence to the decisions andfatwa’s of the SBB under rules and principles of Islamic Shari’a.The SSB believes that it has expressed its opinion in respect of the activities carried on by the Bank andit is the responsibility of the management to ensure the implementation of such decisions. It is theduty of the SSB to express an independent opinion on the basis of its control and review of the Bank’soperations and to prepare a report about them.A representative of the Bank’s management explained and clarified the contents of the BalanceSheet, attached notes and Income Statement for the financial year ended on 31st December 2009to our satisfaction. The report of the SSB has been prepared based on the contents provided by theBank.The SSB is further satisfied that any income which is not in compliance with the Glorious Islamic Shari’ahas been dispersed to a charity account and that the responsibility of the payment of the Zakat lieswith the shareholders in their shares.The SSB is satisfied that the Bank’s activities and services are in compliance with the Glorious IslamicShari’a.Praise be to Allah, Lord of the Worlds. Prayers on Prophet Mohammed (Peace Be Upon Him), all his Familyand companions.Dr. Fareed Yacoub Al-MuftahChairmanDr. Fareed Mohammed HadiExecutive MemberSh. Nizam bin MohammedSaleh YaqubyMember33

independent auditors’report to shareholdersReport on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of Khaleeji Commercial BankB.S.C. (“The Bank”) and its subsidiaries (together the “Group”), which comprise the consolidatedstatement of financial position as at 31 December 2010, and the consolidated income statement,the consolidated statement of changes in equity, the consolidated statement of cash flows, theconsolidated statement of changes in restricted investment accounts and the consolidated statementof sources and uses of charity and zakah fund for the year then ended, and a summary of significantaccounting policies and other explanatory notes.Respective responsibilities of board of directors and auditorsThese consolidated financial statements and the Group’s undertaking to operate in accordancewith Islamic Shari’a rules and principles are the responsibility of the Board of Directors of the Bank.Our responsibility is to express an opinion on these consolidated financial statements based on ouraudit.Basis of opinionWe conducted our audit in accordance with Auditing Standards for Islamic Financial Institutionsissued by Accounting and Auditing Organisation for Islamic Financial Institutions. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.OpinionIn our opinion, the consolidated financial statements give a true and fair view of the financial positionof the Group as at 31 December 2010 and of the results of its operations, its cash flows, changes inequity, changes in restricted investment accounts and sources and uses of charity and Zakah Fund forthe year then ended, in accordance with Financial Accounting Standards issued by the Accountingand Auditing Organisation for Islamic Financial Institutions and the Shari’a rules and principles asdetermined by the Shari’a Supervisory Board of the Bank.Report on other legal and regulatory requirementsIn addition, in our opinion, the Bank has maintained proper accounting records and the consolidatedfinancial statements are in agreement therewith. We have reviewed the accompanying report of thechairman and confirm that the information contained therein is consistent with the consolidatedfinancial statements. We are not aware of any violations of the Bahrain Commercial Companies Law2001, the Central Bank of Bahrain and Financial Institutions Law 2006, terms of the Bank’s license orit’s memorandum and articles of association having occurred during the year that might have hada material effect on the business of the Bank or on its financial position. Satisfactory explanations andinformation have been provided to us by the management in response to all our requests.26 January 2011Manama, Kingdom of Bahrain34

FINANCIALS

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF FINANCIAL POSITIONas at 31 December 2010BD 000’sASSETSCash and bank balancesPlacements with financial institutionsFinancing assetsInvestment securitiesAssets acquired for leasingLease rentals receivableAsset held-for-saleInvestment in associatesInvestment propertyOther assetsProperty and equipmentNotes 31 December 2010 31 December 20093456778910111212,29074,959203,210100,2795,9792,001-4,1133,9432,4769,96619,975122,193192,08592,3548,5444,8894,8526,521-17,8434,348Total assets419,216473,604LIABILITIESPlacements from financial institutions and othersCustomers’ current accountsOther liabilities131484,93510,9286,975101,73035,0976,615Total liabilities102,838143,442Unrestricted investment accounts15198,220203,588EQUITYShare capitalShare premiumStatutory reserveTreasury sharesUnvested employee incentive scheme sharesShare grant reserveAvailable-for-sale investments fair value reserveRetained earnings16115,4161,2136,298(6,018)(937)3241171,745104,9249586,298(5,216)(1,648)3673020,861Total equity (page 7)118,158126,574Total liabilities, unrestricted investment accountsand equity419,216473,604Restricted investment accounts (page 10)42,61546,742The consolidated financial statements, which consist of pages 5 to 65, were approved by the Board of Directorson 26 January, 2011 and signed on its behalf by:Dr. Fuad Abdulla Al-OmarChairmanAbdulla Abdulkarim ShowaiterVice - ChairmanThe accompanying notes 1 to 37 form an integral part of these consolidated financial statements.Ebrahim Hussain EbrahimChief Executive Officer & BoardMember36

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2010BD 000’sNotes 2010 2009Income from investment banking services4713,798Placement, management and arrangement fees1,2601,013Income from placements with financial institutions9151,477Income from financing assets and assets acquired for leasing16,09215,024Income from investment securities172,1981,280Share of (losses)/profits from associate companies9(1,005)136Other income78504Total income before return on unrestricted investmentaccounts19,58533,232Less: Return on unrestricted investment accounts before Bank’sshare as Mudarib15(8,254)(11,103)Bank’s share as a Mudarib152,4691,772Return on unrestricted investment accounts(5,785)(9,331)Expense on placement from financial institutions and others(1,295)(1,270)Total net income12,50522,631Staff cost185,0705,073Depreciation121,3421,311Other expenses204,0663,890Total expenses10,47810,274Profit for the year before impairment allowances2,02712,357Impairment allowances19(8,560)(9,257)(LOSS) / PROFIT FOR THE YEAR(6,533)3,100Basic earnings per share (fils)25(5.87)3.04Diluted earnings per share (fils)25(5.87)3.04The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.37

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2010BD 000’s31 December 2010 SharecapitalSharepremiumStatutoryreserveTreasurysharesUnvestedemployeeincentiveschemesharesSharegrantreserveAvailablefor-saleinvestmentsfair valuereserveRetainedearningsTotalBalance at 01 January 2010104,9249586,298(5,216)(1,648)3673020,861126,574Fair value changes------87-87Loss for the year-------(6,533)(6,533)Total recognised incomeand expense for the year------87(6,533)(6,446)Treasury shares acquired---(992)----(992)Treasury shares sold---190----190Vesting charge for the year(note 21)-----212--212Adjustment for vesting andissue of shares-255--711(255)--711Transfer to charity fund(2009)-------(150)(150)Transfer zakah fund (2009)-------(1,941)(1,941)Bonus shares (2009)10,492------(10,492)-Balance at 31 December2010115,4161,2136,298)6,018()937(3241171,745118,158The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.38

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2010 (continued)BD 000’s31 December 2009 SharecapitalSharepremiumStatutoryreserveTreasurysharesUnvestedemployeeincentiveschemesharesSharegrantreserveAvailablefor-saleinvestmentsfair valuereserveRetainedearningsTotalBalance at 01 January 2009100,0005815,988(4,915)(2,380)442-38,266137,982Fair value changes------30-30Profit for the year-------3,1003,100Total recognised incomeand expense for the year------303,1003,130Transfer to statutory reserve--310----(310)-Treasury shares acquired---(1,581)----(1,581)Treasury shares sold---1,280----1,280Vesting charge for the year(note 21)-----434--434Adjustment for vesting andissue of shares-377--732(509)--600Transfer to charity fund(2008)-------(250)(250)Bonus shares (2008)4,924------(4,924)-Directors fees (2008)-------(250)(250)Dividend declared (2008)-------(14,771)(14,771)Balance at 31 December2009104,9249586,298)5,216()1,648(3673020,861126,574The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.39

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 31 December 2010BD 000’sOPERATING ACTIVITIESProceeds from investment banking servicesNet disbursements on financing assetsPlacement, management and arrangement fees receivedIncome from placements with financial institutions receivedReturns paid to unrestricted investment accounts(Repayment to ) / receipts from unrestricted investment accountholders, netPayment for expensesReceipts from lease of assets, netDirectors fees paidNet withdrawals in customers’ current accountsOther income receivedNet (payment)/ receipt in CBB reserve accountNotes 2010 20093,2278711,523915(7,772)(5,368)(9,233)5,453-(24,169)78(1,420)27,422(43,392)1,0131,477(8,938)40,772(12,798)10,049(250)(87,286)5045,679Net cash used in operating activities(35,895)(65,748)INVESTING ACTIVITIESPurchase of investment securitiesProceeds from sale of investment securitiesPayment for advance towards investment securitiesDividend/ income from investment securities receivedDistributions from investment in associates receivedProceeds from sale of asset held-for-salePurchase of equipment and capital advances made(12,684)8,967-7811,403223(243)(7,663)17,897(9,583)1,481-1,070(135)Net cash (used in)/ generated from investing activities(1,553)3,067FINANCING ACTIVITIESPlacements from financial institutions and others, netPurchase of treasury shares, netExpense paid on placement from financial institutions and othersDividends paid(16,795)(802)(1,295)-71,501(301)(1,270)(14,732)Net cash (used in)/ generated from financing activities(18,892)55,198Net decrease in cash and cash equivalentsCash and cash equivalents at 1 January(56,340)135,233(7,483)142,716Cash and cash equivalents at 31 December78,893135,233Cash and cash equivalent comprise:Cash and bank balances (excluding CBB reserve account)Placements with financial institutions343,93474,95978,89313,040122,193135,233The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.40

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF CHANGES IN RESTRICTED INVESTMENT ACCOUNTSfor the year ended 31 December 2010BD 000’s31 December2010Balance at 1January 2010Movements during the yearBalance at 31December 2010No. ofunits(000)Averagevalue pershare BDTotalBD 000’sInvestment(withdrawals)BD 000’sRevaluationBD 000’sGrossincome/(loss)BD 000’sDividendspaidBD 000’sBank’sfees as anagentBD 000’sAdministrationexpensesBD 000’sNo. ofunits(000)Averagevalue pershare BDTotalBD 000’sAl Hareth FrenchProperty Fund17.05539.769,203-(603)----17.05504.408,600Safana InvestmentWLL (RIA 1)9,5631.009,563------9,5631.009,563Janayen HoldingLimited (RIA 4)52,6850.3618,805(558)(2,742)(229)(216)--52,6850.2915,060Shaden Real EstateInvestment WLL(RIA 5)8,1001.008,100------8,1001.008,100Locata CorporationPty Ltd (RIA 6)2,8410.381,071221-----3,4270.381,29246,742(337)(3,345)(229)(216)--42,61531 December2009Balance at 1January 2009Movements during the yearBalance at 31December 2009No. ofunits(000)Averagevalue pershare BDTotalBD 000’sInvestment(withdrawals)BD 000’sRevaluationBD 000’sGrossincomeBD 000’sDividendspaidBD 000’sBank’sfees as anagentBD 000’sAdmi -nistrationexpensesBD 000’sNo. ofunits(000)Averagevalue pershare BDTotalBD 000’sAl Hareth FrenchProperty Fund17.05537.979,172-31159(159)--17.05539.769,203Safana InvestmentWLL (RIA 1)9,5631.009,563------9,5631.009,563Janayen HoldingLimited (RIA 4)52,6850.3920,610--2,248(1,911)-(2,142)52,6850.3618,805Shaden Real EstateInvestment WLL(RIA 5)8,1001.008,100------8,1001.008,100Locata CorporationPty Ltd (RIA 6)---1,071-----2,8410.381,07147,4451,071312,407(2,070)-(2,142)46,742The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.41

KHALEEJI COMMERCIAL BANK BSCCONSOLIDATED STATEMENT OF SOURCES AND USES OF CHARITY ANDZAKAH FUNDfor the year ended 31 December 2010BD 000’s2010 2009Sources of charity and zakah fundContributions by the BankNon-Islamic income2,091362501Total sources2,127251Uses of charity and zakah fundContributions to charitable organisations654100Total uses654100Excess of sources over usesBalance at the beginning of the year1,473593151442Undistributed charity fund at 31 December (note 14)2,066593The accompanying notes 1 to 37 form an integral part of these consolidated financial statements.42

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20101. Incorporation and Principal ActivityKhaleeji Commercial Bank BSC (“the Bank”), a public shareholding company, was incorporated on 24 November2004 in the Kingdom of Bahrain under Commercial Registration No. 55133. The Bank operates under an Islamic retailbanking license granted by the Central Bank of Bahrain (“CBB”) on 20 October 2003. The Bank’s shares are listed onthe Bahrain Stock Exchange (BSE).The Bank’s activities are regulated by the Central Bank of Bahrain (CBB) and supervised by a Religious SupervisoryBoard to ensure adherence to shari’a rules and principles in its transactions and activities.The principal activities of the Bank include providing banking and investment products and services to retailcustomers, high net worth individuals, corporate entities, and financial institutions. These include commercial andcorporate banking, consumer finance, wealth management, structured investment products and project financingfacilities which comply with Islamic Shari’a rules and principles as determined by the Bank’s Shari’a SupervisoryBoard.2. Significant Accounting PoliciesThe significant accounting policies applied in the preparation of these consolidated financial statements are set outbelow. These accounting policies have been consistently applied by the Group and are consistent with those usedin the previous year. except for those changes arising from revised/new AAOIFI standards, FAS 23 Consolidationand FAS 24 Investment in Associates, that are effective for annual reporting periods beginning 1 January 2010. Therequirements of these standards are largely in line with the current policies followed by the Group for accountingof subsidiaries and associates and the adoption of these standards did not result in any material impact on theconsolidated financial statements.a. Statement of complianceThe financial statements have been prepared in accordance with Financial Accounting Standards (‘FAS’)issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). In line withthe requirement of AAOIFI and the CBB Rule Book, for matters that are not covered by AAOIFI standards, theGroup uses guidance from the relevant International Financial Reporting Standards.b. Basis of preparationThe consolidated financial statements are presented in Bahraini Dinars, being the principal currency of theBank’s operations. They are prepared on the historical cost basis except for the measurement at fair valueof certain available-for-sale investments.The Group classifies its expenses in the income statement by the nature of expense method.The preparation of consolidated financial statements requires the use of certain critical accountingestimates. It also requires management to exercise its judgement in the process of applying the Group’saccounting policies. Estimates and underlying assumptions are reviewed on an on-going basis. Revisionsto accounting estimates are recognised in the period in which the estimate is revised and in any futureperiods affected. Management believes that the underlying assumptions are appropriate and the Group’sconsolidated financial statements therefore present the financial position and results fairly. The areasinvolving a higher degree of judgement or complexity, or areas where assumptions and estimates aresignificant to the consolidated financial statements, are disclosed in note 22.43

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)c. Basis of consolidationi. SubsidiariesThe consolidated financial statements of the Group comprise the financial statements of the Bank and itssubsidiaries. Subsidiaries are those enterprises (including special purpose entities) controlled by the Bank.Control exists when the Group has the power, directly or indirectly, to govern the financial and operatingpolicies of an enterprise so as to obtain benefits from its activities. Subsidiaries are consolidated from thedate on which control is transferred to the Group and de-consolidated from the date that control ceases.Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-definedobjective such as the securitisation of particular assets, or the execution of a specific borrowing or investmenttransaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Groupand the SPE’s risks and rewards, the Group concludes that it controls the SPE. The assessment of whether theGroup has control over an SPE is carried out at inception and normally no further reassessment of control iscarried out in the absence of changes in the structure or terms of the SPE, or additional transactions betweenthe Group and the SPE. Where the Group’s voluntary actions, such as lending amounts in excess of existingliquidity facilities or extending terms beyond those established originally, change the relationship betweenthe Group and an SPE, the Group performs a reassessment of control over the SPE. The Group in its fiduciarycapacity manages and administers assets held in trust and other investment vehicles on behalf of investors.The financial statements of these entities are not included in these consolidated financial statements exceptwhen the Group controls the entity. Information about the Group’s fiduciary assets under management isset out in note 23.ii. AssociatesAssociates are those enterprises in which the Group holds, directly or indirectly, more than 20% of thevoting power and exercises significant influence, but not control, over the financial and operating policies.Investments in associates are initially recognised at cost and the carrying amount is increased or decreasedto recognise the investor’s share of the profit or loss of the investee after the date of acquisition. Distributionsreceived from an investee reduce the carrying amount of the investment. Adjustments to the carryingamount may also be necessary for changes in the investor’s proportionate interest in the investee arisingfrom changes in the investee’s equity. When the Group’s share of losses exceeds its interest in an associate,the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except tothe extent that the Group has incurred legal or constructive obligations or made payments on behalf of theassociate.iii. Transactions eliminated on consolidationIntra-group balances and transactions, and any unrealised gains arising from intra-group transactions, areeliminated in preparing the consolidated financial statements. Intra-group gains on transactions betweenthe Group and its equity accounted associates are eliminated to the extent of the Group’s interest in theinvestees. Unrealised losses are also eliminated in the same way as unrealised gains, but only to the extentthat there is no evidence of impairment. Accounting policies of the subsidiaries and associates have beenchanged where necessary to ensure consistency with the policies adopted by the Group.44

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)d. Foreign currency transactionsItems included in the consolidated financial statements of the Group are measured using the currency of theprimary economic environment in which the entity operates (‘the functional currency’). The consolidatedfinancial statements are presented in Bahraini Dinars, which is the Bank’s functional and presentationcurrency.Foreign currency transactions are translated using the exchange rates prevailing at the dates of thetransactions. Foreign exchange gains and losses resulting from the settlement of such transactions andfrom the translation at year-end exchange rates of monetary assets and liabilities denominated in foreigncurrencies are recognised in the income statement. Translation differences on non-monetary items carriedat their fair value, such as certain available-for-sale equity securities, are included in investments fair valuereserve.The other Group companies functional currencies are either denominated in Bahraini dinars or US dollarswhich is effectively pegged to the Bahraini dinar. Hence, the translation of financial statements of the groupentities that have a functional currency different from the presentation currency do not result in exchangedifferences.e. Investment securitiesInvestment securities comprise equity investments in entities where the Bank holds less than 20% ofthe equity interest in an entity and investments in sukuk (Islamic bonds). Investment securities excludeinvestments in subsidiaries and associate companies.i. ClassificationThe Group classifies its investment securities in the following categories: trading; held-to-maturityinvestments and available-for-sale investments.Trading investments are those investments which the Group acquires or incurs principally for the purpose ofselling or repurchasing in the near term, or holds as part of a portfolio that is managed together for shorttermprofit or position taking. The Group currently does not have a trading portfolio.Held-to-maturity investments are securities with fixed or determinable payments and fixed maturity that theGroup has the positive intention and ability to hold to maturity, and which are not designated as trading oras available-for-sale. These include investments in medium to long-term sukuk.Available-for-sale investments are those investments that are not classified as trading investments or areheld-to-maturity. These include investments in certain quoted and unquoted equity securities and shorttermsukuk which the Bank may not hold till maturity.ii. Recognition and de-recognitionInvestment securities are recognised at the trade date i.e. the date that the Group contracts to purchaseor sell the asset, at which date the Group becomes party to the contractual provisions of the instrument.Investment securities are derecognised when the rights to receive cash flows from the financial assets haveexpired or where the Group has transferred substantially all risk and rewards of ownership.iii. MeasurementInvestment securities are measured initially at fair value, which is the value of the consideration given.Trading investments are initially recognised at fair value and transaction cost are expensed in the income45

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)e. Investment securities (continued)iii. Measurement (continued)statement. Other investment securities are recognised initially at fair value, plus attributable transactioncosts.Subsequent to initial recognition, trading and available-for-sale investments are re-measured to fairvalue. Gains and losses arising from a change in the fair value of trading investments are recognised inthe income statement in the period in which they arise. Gains and losses arising from a change in the fairvalue of available-for-sale investments are recognised in the consolidated statement of changes in equityand presented in a separate fair value reserve within equity. When the available-for-sale investments aresold, impaired, collected or otherwise disposed of, the cumulative gain or loss previously recognised in thestatement of changes in equity is transferred to the income statement.Available-for-sale investments which do not have a quoted market price or other appropriate methodsfrom which to derive reliable fair values, are stated at cost less impairment allowances.Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using theeffective profit method less any impairment allowances.iv. Measurement principlesAmortised cost measurementThe amortised cost of a financial asset or liability is the amount at which the financial asset or liability ismeasured at initial recognition, minus capital repayments, plus or minus the cumulative amortisation usingthe effective profit method of any difference between the initial amount recognised and the maturityamount, minus any reduction for impairment. The calculation of the effective profit rate includes all feesand points paid or received that are an integral part of the effective profit rate.Fair value measurementFair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable,willing parties in an arm’s length transaction on the measurement date.The Group measures the fair value of quoted investments using the market bid-prices in an active marketfor that instrument.f. Financing assetsFinancing assets comprise shari’a compliant financing contracts with fixed or determinable payments.These include financing provided through Murabaha, Musharaka, Istisna and Wakala contracts. Financingassets are recognised on the date at which they are originated and are carried at their amortised cost lessimpairment allowances, if any.g. Placements with and from financial institutions and othersThese mainly comprise inter-bank placements made and received using shari’a compliant contracts.Placements are usually for short-term and are stated at their amortised cost.46

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)h. Cash and cash equivalentsFor the purpose of the statement of cash flows, cash and cash equivalents comprise cash and balancesand placement with financial institutions with maturities of three months or less when acquired which aresubject to insignificant risk of changes in fair value and are used by the Group in the management of itsshort-term commitments.i. Risk management instrumentsThe Group from time to time enters into shari’a compliant foreign exchange risk management transactionsto hedge economic risks to cover significant open positions under its risk management guidelines. TheGroup also enters into shari’a compliant foreign exchange risk management instruments on behalf of itscustomers/ projects on a back-to-back basis and does not retain significant open positions. These derivativetyperisk management instruments are initially recognised at fair value on the date on which the contractis entered into and are subsequently re-measured at their fair value. The fair value of such instrumentsis the equivalent of the unrealised gain or loss from marking to market the instrument using prevailingmarket rates. Instruments with positive market values (unrealised gains) are disclosed under other assetsand instruments with negative market values (unrealised losses) are disclosed under other liabilities in theStatement of financial position. For risk management instruments that are not designated in a qualifyinghedge relationship, all changes in its fair value are recognised immediately in the income statement.j. Assets acquired for leasingAssets acquired for leasing (Ijarah Muntahia Bittamleek) are stated at cost less accumulated depreciationand any impairment in value. Under the terms of lease, the legal title of the asset passes to the lessee atthe end of the lease term, provided that all lease instalments are settled. Depreciation is calculated on astraight line basis at rates that systematically reduce the cost of the leased assets over the period of the lease.The Group assesses at each statement of financial position date whether there is objective evidence thatthe assets acquired for leasing are impaired. Impairment losses are measured as the difference betweenthe carrying amount of the asset and the estimated recoverable amount. Impairment losses, if any, arerecognised in the income statement.k. Assets held-for-saleThe Group classifies non-current assets or disposal groups as held for sale if its carrying amount is expectedto be recovered principally through a sale transaction rather than through continuing use within twelvemonths. Non-current assets or disposal groups classified as held for sale are measured at the lower of itscarrying amount and fair value less costs to sell.If the criteria for classification as held for sale are no longer met, the entity shall cease to classify the asset(or disposal group) as held for sale and shall measure the asset at the lower of its carrying amount beforethe asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation orrevaluations that would have been recognised had the asset (or disposal group) not been classified as heldfor sale and its recoverable amount at the date of the subsequent decision not to sell. The Bank continuesto classify non-current assets or disposal groups as held for sale where events or circumstances beyond thecontrol of the Bank extend the period to complete the sale beyond twelve months and the Bank remainscommitted to its plan to sell.47

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)l. Investment propertyProperties held for rental, or for capital appreciation purposes, or both, are classified as Investment property.Investment property are carried at cost less impairment allowances, if any. Cost includes expenditure thatis directly attributable to the acquisition of the investment property. Investment property of the Groupincludes a plot of land held for capital appreciation purposes.m. Property and equipmentProperty and equipment is stated at cost, net of accumulated depreciation and impairment allowances, ifany. Property includes land which is not depreciated. Other equipment is depreciated using the straightlinemethod to write-off the cost of the assets over their estimated useful lives ranging from 3 to 5 years.The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheetdate.n. Impairment of assetsThe Group assesses at each statement of financial position date whether there is objective evidence thata asset is impaired. Objective evidence that financial assets (including equity securities) are impairedcan include default or delinquency by a borrower, restructuring of financing facility or advance by theGroup on terms that the Group would not otherwise consider, indications that a borrower or issuer willenter bankruptcy, the disappearance of an active market for a security, or other observable data relatingto a group of assets such as adverse changes in the payment status of borrowers or issuers in the group,or economic conditions that correlate with defaults in the group. In addition, for an investment in anequity security, a significant or prolonged decline in its fair value below its cost is objective evidence ofimpairment.Financial assets carried at amortised costFor financial assets carried at amortised cost impairment is measured as the difference between the carryingamount of the financial assets and the present value of estimated cash flows discounted at the assets’original effective profit rate. Losses are recognised in income statement and reflected in an allowanceaccount. When a subsequent event causes the amount of impairment loss to decrease, the impairmentloss is reversed through the income statement. The Group considers evidence of impairment for financialassets carried at amortised cost at both a specific asset and collective level. All individually significantfinancial assets are assessed for specific impairment. All individually significant financial assets found not tobe specifically impaired are then collectively assessed for any impairment that has been incurred but notyet identified. Financial assets that are not individually significant are collectively assessed for impairmentby grouping together assets with similar risk characteristics.Available-for-sale equity investmentsIn the case of investments in equity securities classified as available-for-sale and measured at fair value, asignificant or prolonged decline in the fair value of the security below its cost is considered in determiningwhether the assets are impaired. If any such evidence exists for available-for-sale investments, thecumulative loss – measured as the difference between the acquisition cost and the current fair value, lessany impairment loss on that investment previously recognised in income statement – is removed fromequity and recognised in the income statement. Impairment losses recognised in the income statement on48

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)n. Impairment of assets (continued)equity instruments are subsequently reversed through equity.For available-for-sale investments carried at cost, the Group makes an assessment of whether there is anobjective evidence of impairment for each investment by assessment of financial and other operating andeconomic indicators. Impairment is recognised if the estimated recoverable amount is assessed to be belowthe cost of the investment.Other non-financial assetsThe carrying amount of the Group’s assets (other than for financial assets covered above), are reviewed ateach statement of financial position date to determine whether there is any indication of impairment. If anysuch indication exists, the asset’s recoverable amount is estimated. The recoverable amount of an asset isthe greater of its value in use or fair value less costs to sell. An impairment loss is recognised whenever thecarrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognisedin the income statement. Impairment losses are reversed only if there is an indication that the impairmentloss may no longer exist and there has been a change in the estimates used to determine the recoverableamount.o. Customers’ current accountsBalances in current (non-investment) accounts are recognised when received by the Bank. The transactionis measured at the cash equivalent amount received by the Bank at the time of contracting. At the end ofthe accounting period, the accounts are measured at their book value.p. Unrestricted investment accountsUnrestricted investment accounts are funds held by the Bank, which it can invest at its own discretion.The unrestricted investment account holder authorises the Bank to invest the account holders’ funds in amanner which the Bank deems appropriate without laying down any restrictions as to where, how and forwhat purpose the funds should be invested.The Bank charges management fee (Mudarib fees) to unrestricted investment account holders. Of thetotal income from unrestricted investment accounts, the income attributable to customers is allocated toinvestment accounts after setting aside provisions, reserves (Profit equalisation reserve and Investment riskreserve) and deducting the Bank’s share of income as a Mudarib. The allocation of income is determined bythe management of the Bank within the allowed profit sharing limits as per the terms and conditions of theunrestricted investment accounts. Administrative expenses incurred in connection with the managementof the funds are borne directly by the Bank and are not charged separately to unrestricted investmentaccounts.Unrestricted investment accounts are carried at their book values and include amounts retained towardsprofit equalisation and investment risk reserves. Profit equalisation reserve is the amount appropriatedby the Bank out of the Mudaraba income, before allocating the mudarib share, in order to maintain acertain level of return to the deposit holders on the investments. Investment risk reserve is the amountappropriated by the Bank out of the income of unrestricted investment account holders, after allocatingthe mudarib share, in order to cater against future losses for investment account holders. Creation of thesereserves results in an increase in the liability towards the pool of unrestricted investment accounts.49

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)q. Restricted investment accountsRestricted investment accounts represents assets acquired by funds provided by holders of restrictedinvestment accounts and their equivalent and managed by the Bank as an investment manager basedon either a Mudaraba contract or agency contract. The restricted investment accounts are exclusivelyrestricted for investment in specified projects as directed by the investments account holders. Assets thatare held in such capacity are not included as assets of the Bank in the consolidated financial statements.r. Financial guaranteesFinancial guarantees are contracts that require the Group to make specified payments to reimburse theholder for a loss it incurs because a specified debtor fails to make payment when due in accordance withthe terms of a debt instrument. A financial guarantee contract is recognised from the date of its issue. Theliability arising from a financial guarantee contract is recognised at the present value of any expectedpayment, when a payment under the guarantee has become probable.s. Treasury sharesThe amount of consideration paid including all directly attributable costs incurred in connection with theacquisition of the treasury shares are recognised in equity. Consideration received on sale of treasury sharesis presented in the financial statements as a change in equity. No gain or loss is recognised on the Group’sincome statement on the sale of treasury shares.t. Statutory reserveThe Bahrain Commercial Companies Law 2001 requires that 10 percent of the annual net profit beappropriated to a statutory reserve which is normally distributable only on dissolution. Appropriations maycease when the reserve reaches 50 percent of the paid up share capital.u. Revenue recognitionIncome from investment banking services is recognised as per contractual terms when the service isprovided and income is earned. This is usually when the Bank has performed all significant acts in relationto a transaction and it is highly probable that the economic benefits from the transaction will flow to theBank. Significant acts in relation to a transaction is determined based on the terms agreed in the privateplacement memorandum/contracts for each transaction. Income from investment banking servicesreceived in-kind in the form of shares is measured at the fair value of the consideration received.Fees and commission income that are integral to the effective profit rate on a financial asset carried atamortised cost are included in the measurement of the effective profit rate of the financial asset. Other feesand commission income, including account servicing fees, sales commission, management fees, placementand arrangement fees and syndication fees, are recognised as the related services are performed.Income from Murabaha contracts are recognised on a time-apportioned basis over the period of thecontract.50

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)u. Revenue recognition (continued)Profit or losses in respect of the Bank’s share in Musharaka financing transaction that commence and endduring a single financial period is recognised in the income statement at the time of liquidation (closureof the contract). Where the Musharaka financing continues for more than one financial period, profit isrecognised to the extent that such profits are being distributed during that period in accordance withprofit sharing ratio as stipulated in the Musharaka agreementIstisna’a revenue and the associated profit margin is recognised in the Bank’s books according to thepercentage of completion method.Income from assets acquired for leasing (Ijarah Muntahia Bittamleek) are recognised proportionatelyover the lease term.Income from sukuk is recognised at its effective profit rate over the term of the sukuk.Dividend income is recognised when the right to receive is established.v. Earnings prohibited by Shari’aThe Bank is committed to avoid recognising any income generated from non-Islamic sources. Accordingly,all non-Islamic income is credited to a charity account where the Bank uses these funds for charitablepurposes.w. ZakahZakah is calculated on the Zakah base of the Group in accordance with FAS 9 Zakah using the net assetsmethod. Zakah is paid by the Group based on the statutory reserve and retained earnings balances at theend of the year and the remaining Zakah is payable by individual shareholders. The Bank calculates andnotifies the shareholders of their pro-rata share of the Zakah payable annually. The calculations of Zakah isapproved by the Shari’a Supervisory Board.Payment of Zakah on the unrestricted investment and other accounts is the responsibility of the investmentaccount holders.x. Employee benefitsi. Short-term benefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as therelated service is provided. A provision is recognised for the amount expected to be paid under short-termcash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay thisamount as a result of past service provided by the employee and the obligation can be estimated reliably.ii. Post-employment benefitsPensions and other social benefits for Bahraini employees are covered by the General Organisation forSocial Insurance scheme, which is a “defined contribution scheme” in nature, and to which employeesand employers contribute monthly on a fixed-percentage-of-salaries basis. Contributions by the Bank arerecognised as an expense in income statement when they are due.51

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20102. Significant accounting policies (continued)x. Employee benefits (continued)ii. Post-employment benefits (continued)Expatriate employees on fixed contracts are entitled to leaving indemnities payable under the BahrainiLabour Law for the Private Sector of 1976, based on length of service and final remuneration. Provision forthis unfunded commitment has been made by calculating the notional liability had all employees left at thestatement of financial position date. These benefits are in the nature of “defined benefit scheme” and anyincrease or decrease in the benefit obligation is recognised in the income statement.The Bank also operates a voluntary employees saving scheme under which the Bank and the employeecontribute monthly on a fixed percentage of salaries basis. The scheme is managed and administered bya board of trustees who are employees of the Bank. The scheme is in the nature of a defined contributionscheme and contributions by the Bank are recognised as an expense in the income statement when theyare due.iii. Share-based employee incentive schemeThe Bank operates a share-based incentive scheme for its employees (the ”Scheme”) whereby eligibleemployees are granted the Bank’s shares as compensation on achievement of certain non-market basedperformance conditions and additional service conditions (the ‘vesting conditions’).The grant date fair value of equity instruments granted to employees is recognised as an employee expense,with a corresponding increase in equity, over the period in which the employees become unconditionallyentitled to the share awards. The amount recognised as an expense is adjusted to reflect the number ofshare awards for which the related service and non-market performance vesting conditions are expectedto be met, such that the amount ultimately recognised as an expense is based on the number of shareawards that do meet the related service and non-market performance conditions at the vesting date.y. Dividends and board remunerationDividends to shareholders and board remuneration are recognised as liabilities in the period in which theyare declared.z. OffsettingFinancial assets and liabilities are offset only when there is a legal or religious enforceable right to set off therecognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settlethe liability simultaneously.aa. ProvisionsA provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligationthat can be estimated reliably, and it is probable that an outflow of economic benefits will be required tosettle the obligation.52

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s3. Cash and Bank balancesCashBalances with banksBalances with the Central Bank:- Current account- Reserve account31 December 20101,3102,1015238,35631 December 20097939,6422,6056,93512,29019,975The reserve account with the Central Bank of Bahrain is not available for day-to-day operational purposes.4. Placements with financial institutionsGross Murabaha and Wakala receivableLess: Deferred profits31 December 201075,003(44)31 December 2009122,275(82)74,959122,193The average profit rate on placement with financial institutions for 2010 was 1.51% per annum (2009: 1.50% perannum).5. Financing assetsMurabahaMusharakaWakalaIstisnaLess: Impairment allowances – specificLess: Impairment allowances – collective31 December 2010163,86634,30620,392998219,562(14,189)(2,163)31 December 2009152,32324,68823,7931,533202,337(7,897)(2,355)203,210192,085Murabaha financing receivables are net of deferred profits of BD 16,719 thousand (2009: BD 16,690 thousand).Of the total financing asset portfolio, consumer financing receivables amounted to BD 1,039 thousand (31December 2009: Nil)53

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20105. Financing assets (continued)BD 000’sThe movement in impairment allowances are as follows:2010SpecificCollectiveTotalAt 1 January7,8972,35510,252Additions/(write back) during the year6,292(192)6,100At 31 December14,1892,16316,3522009SpecificCollectiveTotalAt 1 January2,8281,4164,244Additions during the year5,0699396,008At 31 December7,8972,35510,2526. Investment securities31 December 2010 31 December 2009Available-for-sale investments- Quoted equity securities (at fair value)- Unquoted equity securities (at cost)- Sukuk (at fair value)Total available-for-sale investments (net of impairment)Held-to-maturity investments- Sukuk (at amortised cost)27482,44431083,02817,25118762,924-63,11129,243At 31 December100,27992,354Unquoted available-for-sale equity securities comprise investments in closed companies managed by externalinvestment managers or represent investments in projects promoted by the Group. These investments arecarried at cost less impairment in the absence of a reliable measure of fair value. The Group intends to exit theseinvestments principally by means of private placements, strategic buy outs, sale of underlying assets or throughinitial public offerings.54

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20106. Investment securities (continued)BD 000’sThe movement in impairment allowances for available-for-sale equity investments were as follows:At 1 JanuaryImpairment allowances on quoted equity securitiesImpairment allowances on unquoted equity securitiesAt 31 December20104,125-1,7935,91820091,170122,9434,125Held-to-maturity investments are net of collective impairment allowances of BD 52 thousand (2009:BD 158 thousand).7. Assets acquired for leasingProperty Equipment 20102009CostAt 1 January10,4448,05518,49925,029Addition during the year1,340-1,340-Settlements/adjustments during the year(4,145)(4,869)(9,014)(6,530)At 31 December7,6393,18610,82518,499Accumulated depreciationAt 1 January5,0854,8709,9556,518Charge for year1,4442,4613,9054,096Settlements during the year(4,145)(4,869)(9,014)(659)At 31 December2,3842,4624,8469,955Net book value at 31 December5,2557245,9798,544At 31 December 2010, accrued lease rental receivable amounted to BD 2,001 thousand (2009: BD 4,889 thousand).Lease rental receivable is net of collective provision of BD 136 thousand (2009: BD 136 thousand).55

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s8. Asset held for saleAssets-held-for sale included investment in an associate company which the Bank intended to down sell to itsinvestors. During the year, the Bank sold a portion of its investments amounting BD 167 thousand (31 December2009: BD 803 thousand) to its investors and recognised income of BD 55 thousand (31 December 2009: BD 267thousand) from the transaction and has retained the balance investment. The retained investment does not qualifyas an ‘associate’ and has been classified as an available-for-sale investment during the year.9. Investment in associates2010 2009At 1 JanuaryDistribution during the yearShare of (losses)/profits for the year6,521(1,403)(1,005)6,385-136At 31 December4,1136,521Investment in associates comprise:NameCountry of incoporation%holdingNature of businessCapital Real Estate Projects Company BSC (c)Bahrain30%Real estate holdingand developmentAmlak II SPVCayman islands23.1%Purchase and sale ofreal estate in BahrainSummarised financial information of associates that have been equity accounted not adjusted for the percentage ownership heldby the Group (based on their most recent unaudited management accounts)Total assetsTotal liabilitiesTotal revenuesTotal net (losses)/profits201023,1528,185717(3,084)200931,0337,73891555156

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s10. Investment PropertyDuring the year, in consideration for sale of an available-for-sale investment, the Bank received two plots of land inthe Bahrain Financial Harbour project. Of the two plots of land received, one plot is intended for the Group’s ownuse and has been classified under “Property and equipment” (refer note 12). The second plot of land is held forcapital appreciation purposes and hence has been classified as “Investment property”.11. OTHER ASSETS31 December 2010 31 December 2009Income from investment banking services receivableIncome from sukuk receivableAdvance towards purchase of investmentsPrepayments and other receivables-800-1,6763,23660111,3102,6962,47617,843Other receivables is net of impairment provision of BD 773 thousand (2009: Nil )12. EQUIPMENTLand(note 10)FurnitureandfixturesComputersMotorvehicleOtherequipmentWork-inprogress2010total2009totalCostAt 1 January-3,8102,021731713826,4576,323Additions/ capitalisation6,71434223-272097,207136Disposal-(420)(49)-(17)(106)(592)-At 31 December6,7143,4242,1957318148513,0726,459Accumulated DepreciationAt 1 January-9471,0902348-2,108800Charge for year-7105801537-1,3421,311Disposal-(344)----(344)At 31 December-1,3131,6703885-3,1062,111Net book value at 31 December 20106,7142,11152535964859,9664,348Net book value at 31 December 2009-2,864930501233814,34857

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s13. placements from financialinstitutions and others31 December 201031 December 2009Banks and other Financial institutionsOther InstitutionsIndividuals65,91614,4784,54189,17911,3611,19084,935101,730These represent placements in the form Murabaha and Wakala contracts.14. Other liabilitiesEmployee related accrualsAccounts payableCharity and zakah payable (page 11)Payable for Istisn’a contractsOther payable and accrued exprenses31 December 20101,0711,4842,0661602,19431 December 20092,8891,3115931431,6796,9756,61515. Unrestricted investment accountsThe funds received from unrestricted investment account holders have been commingled and jointly investedwith the Bank in the following asset class as at 31 December:CBB reserve accountPlacement with financial institutionsInvestment in sukukFinancing assets31 December 20108,35674,95917,56197,34431 December 2009--29,243174,34558

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201015. Unrestricted invetsment accounts (continued)BD 000’sThe return on joint invested assets and distribution to unrestricted investment account holders were as follows:Returns from comingled assetsBanks share of Mudarib feesReturn on unrestricted investment accountsInvestment risk reserve utilised/(created), netProfit equalisation reserve utilised/(created), net20108,254(2,469)5,7859481,039200911,103(1,772)9,331(452)(560)Distributions to unrestricted investment account holders’7,7728,319The average gross rate of return in respect of unrestricted investment accounts during the year was 4.03% (31December 2009: 6.1%). Approximately 5.27% (31 December 2009: 5.6%) was distributed to investors and the balancewas either set aside for provisions and/or retained by the Bank as a Mudarib fee. Unrestricted investment accountsinclude profit equalisation reserve of BD 169 thousand (2009: BD 1,209 thousand) and investment risk reserve Nil(2009:BD 925 thousand).16. Share capital31 December 2010 31 December 2009Authorised:3,000,000,000 ordinary shares of BD 0.100 each300,000300,000Issued and fully paid up:1,154,161,084 ordinary shares (2009: 1,049,237,349) of BD 0.100 each115,416104,924During the year, the paid up capital of the Bank increased from BD 104,924 thousand to BD 115,416 thousand as aresult of issue of bonus shares (one shares for every ten shares held) for 2009 amounting to BD 4,924 thousand.The Bank has only one class of equity shares and the holders of these shares have equal voting rights. At 31 December2010, the Bank holds 27,805,198 as treasury shares (2009: 17,490,527)59

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 20106. Share capital (continued)BD 000’sDistribution schedule of equity shares, setting out the number of holders and percentage in the followingcategories:Categories*Number of sharesNumber ofshareholders% of totaloutstandingsharesLess than 1%168,896,97254114.631% up to less than 5% **177,168,386915.355% up to less than 10%103,950,00019.0110% up to less than 20%161,700,000114.0120% and less than 50%542,445,726146.991,154,161,084553100.00* Expressed as a percentage of total outstanding shares of the Bank.** Includes treasury shares and unvested employee incentive scheme sharesNames and nationalities of the major shareholders and the number of equity shares held in which they have an interestof 5% or more of outstanding sharesCategories*NationalityNumber of shares% of totaloutstandingsharesGulf finance house BSC *Bahrain542,445,72646.99Al Imtiaz Investment Company KSCCKuwait161,700,00014.01Emirates Islamic Bank PJSCUAE103,950,0009.00* As at 31 December 2010, 426,945,726 shares representing 36.99% were held by KHCB Asset Company and 115,500,000shares representing 10% were held by Esam Janahi, resident of Bahrain, on behalf of Gulf Finance House BSC before31 December 2010.60

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s17. Income from investment securitiesIncome from available-for-sale investments:- Dividend income- Fair value gain on investment acquisition- Income from SukukIncome from held-to-maturity investments - Sukuk20101321,24471,3838152009123-1212441,0362,1981,28018. Staff costSalaries and benefitsSocial insurance expensesOther staff expenses20103,95250761120094,4814511415,0705,07319. Impairment allowancesFinancing assets (note 5)Available-for-sale equity securities (note 6)Held-to-maturity investments (note 6)Lease rentals receivable (note 7)Other receivable (note 11)20106,1001,793(106)-77320096,0082,955158136-8,5609,25761

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s20. Other expenses2010 2009Invetsment related expensesPremisesAdvertisement and marketingPrinting and stationeryProfessional feesShari’a commitee expensesBoard expensesCommunication expensesTraveling and transportation expensesInformation technology expensesInsurance expensesDistribution channel expensesOther administrative expenses2869051,113734364322515716469627420766486264675438312092203841968471734,0663,89021. Share-based employee incentive schemeThe Bank operates an equity-settled share-based incentive scheme for its employees (the “Scheme”) wherebyeligible employees are granted the Bank’s shares as compensation on achievement of certain non-marketperformance conditions.The Group has incorporated a special purpose vehicle, Hawafiz Khaleeji Management Company BSC (c) (‘Hawafiz’),to hold the shares for the beneficial interest of the Scheme until they vest.The shares granted vest to eligible employees in a staggered manner over a 5 year vesting period (service condition).The shares granted shall be eligible to receive dividends. The vested shares will be settled by physical delivery oncompletion of vesting conditions.In case the employee leaves before satisfying the vesting conditions, he/ she would be entitled for a cash paymentfor the unvested shares in accordance with the terms of the Scheme. Such unvested shares will be retained byHawafiz and may be offered to other employees as per the terms of the Scheme.The maximum number of shares to be issued to employees under the scheme is 30.4 million ordinary shares at an62

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201021. Share-based employee incentive scheme (continued)exercise price of BD 0.12 per share, to be issued over the vesting period in accordance with the terms of the Scheme.Up to 31 December 2010, on a cumulative basis, 30.4 million share grants have been awarded of which 22.591 millionshares (2009: 16.599 million shares) have vested up to 31 December 2010 and 0.198 million shares (2009: 0.069 millionshares) were forfeited due to failure to satisfy the service condition. No new grants have been made since 2009. Thevesting expense for the year, net of reversals due to forfeitures, amounted to BD 212 thousand (31 December 2009:BD 434 thousand).22. Critical accounting estimates and judgements in applying accountingpoliciesThe Bank makes estimates and assumptions that effect the reported amounts of assets and liabilities within the nextfinancial year. Estimates and judgements are continually evaluated and are based on historical experience andother factors, including expectation of future events that are believed to be reasonable under the circumstances.JudgementsClassification of investmentsIn the process of applying the Group’s accounting policies, management decides on acquisition of aninvestment whether it should be classified as held-to-maturity or available-for-sale investments. Theclassification of each investment reflects the management’s intention in relation to each investment and issubject to different accounting treatments based on such classification [refer note 2 (e)].Special purpose entitiesThe Bank sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowingclients to hold investments. The Bank provides corporate administration, investment management andadvisory services to these SPE’s, which involve the Group making decisions on behalf of such entities. TheBank administers and manages these entities on behalf of its clients, who are by and large third parties andare the economic beneficiaries of the underlying investments. The Bank does not consolidate SPE’s thatit does not have the power to control. In determining whether the Bank has the power to control an SPE,judgements are made about the objectives of the SPE’s activities, its exposure to the risks and rewards, aswell as about the Group’s intention and ability to make operational decisions for the SPE and whether theGroup derives benefits from such decisions.EstimationsImpairment of available-for-sale investmentsThe Group determines that available-for-sale equity securities are impaired when there is an objectiveevidence of impairment and there has been a significant or prolonged decline in the fair value below itscost. This determination of what is significant or prolonged requires judgment.In case of quoted equity securities, the Group considers a decline of more than 30% in the fair value belowcost to be significant and considers a decline below cost which persists for more than 6 months as prolonged.Where fair values are not readily available and the investments are carried at cost, the recoverable amountof such investment is estimated to test for impairment.63

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201022. Critical accounting estimates and judgements in applying accounting policies (continued)In making this judgment, the Bank evaluates among other factors, evidence of a deterioration in thefinancial health of the investee, industry and sector performance, changes in technology, and operationaland financing cash flows. It is reasonably possible, based on existing knowledge, that the current assessmentof impairment could require a material adjustment to the carrying amount of the investments within thenext financial year due to significant changes in the assumptions underlying such assessments.Impairment of financing assetsFinancing assets are evaluated for impairment on a basis described in accounting policy 2 (n). Eachcounterparty exposure is evaluated individually for impairment and is based upon management’s bestestimate of the present value of the cash flows that are expected to be received. In estimating these cash flows,management makes judgements about a counterparty’s financial situation and the net realisable value ofany underlying assets/ collaterals. Each impaired asset is assessed on its merits, and the workout strategyand estimate of cash flows considered recoverable are independently evaluated by the Risk ManagementDepartment. For evaluation of the portfolio for impairment on a collective basis, management, whereavailable, uses estimates based on historical loss experience for assets and loss experience in the industry forassets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio.For the purposes of a collective evaluation of impairment, Financing assets are grouped on the basis ofsimilar credit risk characteristics (that is, on the basis of the Group’s grading process that considers assettype, industry, geographical location, collateral type, past-due status and other relevant factors). Themethodology and assumptions used for the grading process and estimating both the amount and timingof future cash flows are reviewed regularly to reduce any differences between loss estimates and actual lossexperience. In view of the management, the current level of provisioning is adequate and no additionalimpairment allowances are required on a collective basis.23. Assets under managementThe Bank provides corporate administration, investment management and advisory services to its investmententities, which involve the Group making decisions on behalf of such entities. Assets that are held in such capacityare not included in these consolidated financial statements. At the statement of financial position date, the Grouphad assets under management of BD 427.93 million (2009: BD 323.65 million). During the year, the Bank has chargedmanagement fees amounting to BD 1,260 thousands (31 December 2009: BD 450 thousands) for the managementof these assets.24. Related party transactionsParties are considered to be related if one party has the ability to control the other party or exercise significantinfluence over the other party in making financial and operating decisions. Related parties include the significantshareholders and entities over which the Bank and the shareholders exercises significant influence, directors andexecutive management of the Bank.64

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s24. Related party transactions (continued)A significant portion of the Bank’s income from investment banking services and management fees arises fromentities (assets under management) over which the Bank or its significant shareholders exercises influence.Although these entities are considered related parties, the Bank administers and manages these entities on behalfof its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments.Details of Directors’ interests in the Bank’s ordinary shares as at the end of the year were:Categories*Less than 1%1% up to 10%Number of shares9,467,16714,005,641Number of directors51* Expressed as a percentage of total outstanding shares of the Bank.The related party balances and transactions (except for compensation of key managerial personnel) included inthese financial statements are as follows:31 December 2010AssociatesKeymanagementpersonnelSignificantshareholders/entities inwhich directorsare interestedAssets undermanagement(includingspecialpurposeentitiesTotalAssetsInvestment securities---44,69044,690Financing assets1,102--11,83212,934Investment in associates4,113---4,113Other assets385--9461,331LiabilitiesPlacement from financial institutionsand others-----Customers’ current accounts2621251,1381,426Unrestricted investment accounts1301,73433029,82232,016Other liabilities-1,64978-1,727TransactionsAcquisition of investment securities--22,991-22,991Disposal of investment securities--18,850-18,850Purchase of properties--10,657-10,65765

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s24. Related party transactions (continued)31 December 2009AssociatesKeymanagementpersonnelSignificantshareholders/entities in whichdirectors areinterestedAssets undermanagement(includingspecialpurposeentities)TotalAssetsPlacements with financial institution-----Investment securities--5,65536,26141,916Islamic financing assets1,479--4,3485,827Asset-held-for-sale4,852---4,852Investment in associates6,521---6,521Other assets139--2,9783,117LiabilitiesPlacement from financial institutionsand othersCustomers’ current accountsUnrestricted investment accountsOther liabilities-5,608230--11,5471,64810,475461,531--3,11044,179-10,4758,76547,4871,64866

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s24. Related party transactions (continued)2010AssociatesKeymanagementpersonnelSignificantshareholders/entities inwhich directorsare interestedAssets undermanagement(includingspecialpurposeentities)TotalIncomeIncome from investment bankingservices---4747Placement, management andarrangement fees---1,2601,260Income from financing assets andassets acquired forleasing95--643738Income from investment securities--1,244501,294Share of losses from associates(1,005)---(1,005)Other incomeExpensesReturn on unrestricted investmentaccounts112-749921,178Other expenses-16-138154Impairment allowances---1,4331,43367

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s24. Related party transactions (continued)2009AssociatesKeymanagementpersonnelSignificantshareholders/entities in whichdirectors areinterestedAssets undermanagement(includingspecialpurposeentities)TotalIncomeIncome from investment bankingservices---13,79813,798Placement, management andarrangement fees---1,0071,007Income from placements withfinancial institutions--85-85Income from financing assets andassets acquired forleasing128-681-809Income from investment securities--130120250Share of profits from associates136---136Other income---7373ExpensesFinancing expenses--578-578Return in unrestricted investmentaccounts1266621,8311,971Investments related expenses4519-448512Impairment allowances---4,1264,126Compensation of key management personnelKey management personnel of the Bank comprise of the Board of Directors and key members of managementhaving authority and responsibility for planning, directing and controlling the activities of the Bank. The keymanagement personnel compensation during the year is as follows:2010 2009Board members feeBoard member allowancesSalaries and other short-term benefits351641,14226716880368

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201024. Related party transactions (continued)BD 000’sTransactions with restricted investment accountsTransactions involving transfer/ sale of assets to restricted investment accounts are generally executed based onthe pre-agreed values as per the terms of the contracts for each restricted investment product. During the year, inits normal course of business, the Bank sold certain investments at agreed contractual values amounting to BD 167thousand (31 December 2009: BD 803 thousand) to its restricted investment accounts at a profit of BD 55 thousand(31 December 2009: BD 267 thousand).25. Earnings per shareBasic earnings per share is calculated by dividing the profit for the year by the weighted average number of equityshares outstanding during the year ended 31 December 2009. The Bank has dilutive equity instruments in the formof share grants in issue.Basic EPS20102009(Loss)/profit for the year (BD 000’s)Weighted average number of equity shares (Nos. in 000’s)Basic earnings per share (fils)(6,533)1,113,440(5.87)3,1001,019,1273.04Diluted EPS20102009(Loss)/profit for the year (BD 000’s)Weighted average number of equity shares (Nos. in 000’s)Diluted earnings per share (fils)(6,533)1,113,440(5.87)3,1001,019,1273.04As the average market value of shares during the current period were lower than the assumed issue price ofshares under the Scheme (refer note 21), the share awards are not considered to be dilutive for the purposes ofcomputation of earnings per share69

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201026. Shari’a supervisory boardThe Bank’s Shari’a Supervisory Board consists of three Islamic scholars who review the Bank’s compliance withgeneral Shari’a principles and specific fatwas, rulings and guidelines issued. Their review includes examinationof evidence relating to the documentation and procedures adopted by the Bank to ensure that its activities areconducted in accordance with Islamic Shari’a principles.27. ZakahZakah is directly borne by the shareholders on distributed profits and investment account holders. The Bankcurrently does not collect or pay Zakah on behalf of its shareholders and investors in restricted investment accounts.Zakah payable by the shareholders is computed by the Bank on the basis of the method prescribed by the Bank’sShari’a Supervisory Board and notified to shareholders annually. During the year, the Shari’a Supervisory Boardhas computed Zakah payable of BD 2,506 thousand (2009 BD 4,218 thousand) of which BD 250 thousand (2009: 1,941thousand) represents the Zakah computed on the cumulative statutory reserve and retained earnings as at 31December 2010, payable by the Bank (refer note 33). The remaining Zakah balance amounting to BD 2,256 thousandor 1.95 fils per share (2009: BD 2,277 thousand or 2.17 fils per share) is due and payable by the shareholders.28. Segment reportingAn operating segment is a component of the Group that engages in business activities from which it may earnrevenues and incur expenses, whose operating results are regularly reviewed by the Group’s chief operatingdecision maker (Board of Directors) to make decisions about resource allocation to each segment and assess itsperformance and for which discrete financial information is available.An operating segment is divided into business segment and geographic segments. For management purposes theGroup is organised into two major business segments:Commercial bankingProviding customer services such as accepting mudaraba deposits, savings account and current accountfacilities, fund transfer facilities, bill payment facilities. It also provides financing facilities (in form ofCommodity Murabaha, Musharaka, Istisna and Ijarah facilities) to corporate clients and High-Networth-Individuals and consumer finance products. Provides money market and treasury services (in form ofshort term Commodity Murabaha) to banks, financial institutions and corporate and also used to managefunding of the Group.Investment bankingPrimarily relates to conceptualising of investment deals and performing roles of an arranger, lead manager,and administrator of the funds (involves structuring of deals, raising of funds through private placement andfund administration). Bank also offers products like Restricted Investment Accounts (RIA) and managementof funds raised through the RIA structures. Also involves carrying out strategic investments in the form ofequity contribution (either in the funds created and managed by the Bank or other institutions) and Sukuk70

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s28. Segment reporting (continued)investments.Segment performance is measured based on results for each department as mentioned in the internalmanagement reports that are reviewed by the Board of directors on a quarterly basis. Segment resultsis used to measure performance as management believes that such information is the most relevant inevaluating the results of certain segments relative to other entities that operate in these industries.The Bank reports directly attributable revenue and cost relating to transactions originating from respectivesegments as segment revenue and segment cost respectively. Indirect costs and corporate overheads aretreated as unallocated. The internal management reports are designed to reflect revenue and cost forrespective segments which are measured against the budgeted figures.The Group primarily operates from Bahrain and does not have any overseas branches/divisions. Thegeographic concentration of assets and liabilities is disclosed in Note 30 (b) to the consolidated financialstatements.These segments are the basis on which the Group reports its primary segment information. Transactions betweensegments if any are conducted on an arm’s length basis.31 December 2010InvestmentBankingCommercialBanking Unallocated TotalCash and bank balances-12,290-12,290Placements with financial institutions98173,978-74,959Financing assets651202,559-203,210Investment securities82,71817,561-100,279Assets acquired for leasing (including lease rentalreceivable)-7,980-7,980Investment in associates4,113--4,113Investment property3,943--3,943Other assets9098007672,476Property and equipment--9,9669,966Total segment assets93,315315,16810,733419,216Placements from financial institutions and others65,91619,019-84,935Customers’ current accounts9829,946-10,928Other liabilities-1,5255,4506,975Total segment liabilities66,89830,4905,450102,838Unrestricted investment accounts-198,220-198,220Restricted investment accounts42,615--42,61571

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s28. Segment reporting (continued)2010InvestmentBankingCommercialBanking Unallocated TotalIncome from investment banking services47--47Placements, management and arrangement fees1,260--1,260Income from placements with financial institutions12903-915Income from financing assets and assets acquired forleasing-16,092-16,092Income from investment securities1,376822-2,198Share of losses from associate companies(1,005)--(1,005)Other income(30)108-78Total income before return on unrestrictedinvestment accounts1,66017,925-19,585Less: Return on unrestricted investment accountsbefore Bank’s share as mudarib-(8,254)-(8,254)Less: Bank’s share as a Mudarib-2,469-2,469Return on unrestricted investment accounts-(5,785)-(5,785)Less: Expense on placement from financial institutionsand others(320)(975)-(1,295)Total segment revenue1,34011,165-12,505Staff cost1,1891,0122,8695,070Depreciation--1,3421,342Other expenses284-3,7814,066Total segment cost1,4741,0127,99210,478Segment results before impairment allowances(134)10,153(7,992)2,027Impairment allowances(2,565)(5,994)-(8,560)Segment results(2,407)4,185(7,991)(6,533)72

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s28. Segment reporting (continued)31 December 2009InvestmentBankingRetail/CommercialBanking Unallocated TotalCash and bank balances-19,975-19,975Placements with financial institutions8,122114,071-122,193Islamic financing assets2,262189,823-192,085Investment securities63,11229,242-92,354Assets acquired for leasing (including lease rentalreceivable)-13,433-13,433Assset held-for-sale4,852--4,852Investment in associates6,521--6,521Other assets15,5406011,70217,843Equipment--4,3484,348Total segment assets100,409367,1456,050473,604Placements from financial institutions and others89,17912,551-101,730Customers’ current accounts8,12226,975-35,097Other liabilities-1,5985,0176,615Total segment liabilities97,30141,1245,017143,442Unrestricted investment accounts-203,588-203,588Restricted investment accounts46,742--46,75273

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s28. Segment reporting (continued)31 December 2009InvestmentBankingCommercialBanking Unallocated TotalIncome from investment banking services13,798--13,798Placements, management and arrangement fees1,013--1,013Income from placements with financial institutions171,460-1,477Income from financing assets and assets acquired forleasing-15,024-15,024Income from investment securities1191,161-1,280Share of profits from associate companies136--136Other income43173-504Total income before return on unrestricted investmentaccounts15,51417,718-33,232Less: Return on unrestricted investment accountsbefore Bank’s share as mudarib-(11,103)-(11,103)Less: Bank’s share as a Mudarib-1,772-1,772Return on unrestricted investment accounts-(9,331)-(9,331)Less: Expense on placement from financial institutionsand others(1,032)(238)-(1,270)Total segment revenue14,4828,149-22,631Staff cost1,1891,0132,8715,073Depreciation--1,3111,311Other expenses6643,226-3,890Total segment cost1,8534,2394,18210,274Segment results before impairment allowances12,6293,910(4,182)12,357Impairment allowances(6,223)(3,034)-(9,257)Segment results6,406876(4,182)3,10074

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s29. Maturity profileThe maturity profile of placements with and from financial institutions, financing assets, assets acquired for leasingassets unrestricted investment accounts (including lease rental receivable) and investment in sukuk has beenpresented using their contractual maturity period. For other balances, maturity profile is based on expected cashflows/ settlement profile of the respective assets and liabilities.31 December 2010Up to 3months3 to 6months6 months-1 year1 to 3yearsOver 3yearsTotalAssetsCash and bank balances12,290----12,290Placements with financial institutions74,959----74,959Financing assets23,80517,9974,78893,54963,071203,210Investment securities3,7651,60918,52045,99630,389100,279Assets acquired for leasing (includinglease rental receivable)822-725796,3547,980Investment in associates--1,168-2,9454,113Investment property---3,943-3,943Other assets271-4768538762,476Property and equipment----9,9669,966Total assets115,91219,60625,677144,420113,601419,216LiabilitiesPlacements from financial institutionsand others78,3531,4095,110243984,935Customers current account10,928----10,928Other liabilities487268455,8972786,975Total liabilities89,7681,6775,1555,921317102,838Unrestricted investment accounts35,94929,75648,65777,9435,915198,220Restricted investment accounts23,16018,163--1,29242,615Commitments6,0124,7374,81520615,59075

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s29. Maturity profile (continued)31 December 2009Up to 3months3 to 6months6 months- 1year1 to 3yearsOver 3yearsTotalAssetsCash and bank balances19,975----19,975Placements with financial institutions122,193----122,193Financing assets18,71436,49431,13650,28755,454192,085Investment securities17,14221,4054,39847,0452,36492,354Assets acquired for leasing (includinglease rental receivable)443-5,6511,8235,51613,433Asset held-for-sale-4,852---4,852Investment in associates-2,5713,950--6,521Other assets5,001--12,842-17,843Equipment----4,3484,348Total assets183,46865,32245,135111,99767,682473,604LiabilitiesPlacements from financial institutionsand others90,03011,700---101,730Customers current account35,097----35,097Other liabilities6,615----6,615Total liabilities131,74211,700---143,442Unrestricted investment accounts161,59223,83915,7862442,127203,588Restricted investment accounts-18,766-26,9051,07146,742Commitments5,2307505,1065,258-16,34476

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s30. CONCENTRATION OF ASSETS, LIABILITIES, UNRESTRICTED AND RESTRICTEDINVESTMENT ACCOUNTSa. Industry sector31 December 2010Banks andfinancialinstitutionsReal estateOthersTotalAssetsCash and bank balances12,290--12,290Placements with financial institutions74,959--74,959Financing assets14,169105,30383,738203,210Investment securities20,98659,11320,180100,279Assets acquired for leasing (includinglease rental receivable)2,5044,0651,4117,980Investment in associates-4,113-4,113Investment property-3,943-3,943Other assets6739368672,476Property and equipment--9,9669,966Total assets125,581177,473116,162419,216LiabilitiesPlacements from financial institutionsand othersCustomers current accountOther liabilities68,378-----16,55710,9286,97584,93510,9286,975Total liabilities68,378-34,460102,838Unrestricted investment accounts24,63552,095121,490198,220Restricted investment accounts-41,3231,29242,615Commitments-4,31811,27215,59077

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s30. Concentration of assets, liabilities, unrestricted and restricted investment accounts (continued)a. Industry sector (continued)31 December 2009Banks andfinancialinstitutionsReal estateOthersTotalAssetsCash and bank balances19,975--19,975Placements with financial institutions122,193--122,193Financing assets17,30896,04178,736192,085Investment securities15,88465,73410,73692,354Assets acquired for leasing (includinglease rental receivable)3,0056,8353,59313,433Asset held-for-sale-4,852-4,852Investment in associates-6,521-6,521Other assets32,50815,33217,843Equipment--4,3484,348Total assets178,368182,491112,745473,604LiabilitiesPlacements from financial institutionsand othersCustomers’ current accountOther liabilities89,179-----12,55135,0976,615101,73035,0976,615Total liabilities89,179-54,263143,442Unrestricted investment accounts16,91561,158125,515203,588Restricted investment accounts-45,6711,07146,742Commitments-3,61212,73216,34478

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s30. Concentration of assets, liabilities, unrestricted and restricted investment accounts (continued)b. Geographic sector2010GCCcountries Europe USA Asia Australia Africa TotalAssetsCash and bank balances10,6301,642--18-12,290Placements with financial institutions64,0267,540---3,39374,959Financing assets188,20211,1946513,163--203,210Investment securities64,6562,927-26,3334,6851,678100,279Assets acquired for leasing (includinglease rental receivable)7,980-----7,980Investment in associates4,113-----4,113Investment property3,943-----3,943Other assets2,341--135--2,476Property and equipment9,966-----9,966Total assets355,85723,30365129,6314,7035,071419,216LiabilitiesPlacements from financial institutionsand others75,8821,886---7,16784,935Customers’ current account9,848463-617--10,928Other liabilities6,975-----6,975Total liabilities92,7052,349-617-7,167102,838Unrestricted investment accounts182,508321-15,391--198,220Restricted investment accounts32,7228,600--1,293-42,615Commitments15,5882----15,590Concentration by location for financing assets is measured based on the location of the counterparty, which has ahigh correlation with the location of the collateral for the exposure79

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s30. Concentration of assets, liabilities, unrestricted and restricted investment accounts (continued)b. Geographic sector (continued)2009GCCcountries Europe USA Asia Australia Africa TotalAssetsCash and bank balances12,6154686,84646--19,975Placements with financial institutions109,30812,885----122,193Financing assets190,5241,561----192,085Investment securities63,3042,216-24,944-1,89092,354Assets acquired for leasing (includinglease rental receivable)13,433-----13,433Asset held-for-sale----4,852-4,852Investment in associates6,521-----6,521Other assets7,157--2,015-8,67117,843Equipment4,348-----4,348Total assets407,21017,1306,84627,0054,85210,561473,604LiabilitiesPlacements from financial institutionsand others99,9961,734----101,730Customers’ current account32,789419-1,889--35,097Other liabilities6,615-----6,615Total liabilities139,4002,153-1,889--143,442Unrestricted investment accounts180,576984-22,028--203,588Restricted investment accounts45,671---1,071-46,742Commitments14,459--1,885--16,34480

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201031. Fair valueFair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willingparties in an arm’s length transaction.The fair values of quoted held-to-maturity Sukuk carried at amortised cost of BD 10,240 thousand (31 December 2009:18,292 thousand) amounts to BD 9,076 thousand as at 31 December 2010 (31 December 2009: 16,598 thousand).Other than available-for-sale investments of BD 82,444 thousand (2009: BD 62,924 thousand), asset held-forsaleof Nil (2009: BD 4,852 thousand) and unquoted held-to-maturity investment in sukuk of BD 7,011 thousand(2009: 5,951 thousand) that are carried at cost, the estimated fair values of the Bank’s other financial instruments arenot significantly different from their carrying values.32. Risk managementIntroduction and overviewThe Group has exposure to the following risks from its use of financial instruments:• credit risk• liquidity risk• market risks• operational risksThis note presents information about the Group’s exposure to each of the above risks, it’s objectives, policiesand processes for measuring and managing risk, and the Bank’s management of capital.Risk management frameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Bank’s riskmanagement framework. The Board has established an Executive Risk Management Committee, which isresponsible for developing and monitoring the Bank’s risk management policies in the specified areas.The committee also continuously monitors consistent implementation of the Board approved policies inthe Bank and reports deviations if any to the Board. The committee consists of heads of business and otherfunctional units in the Bank and reports regularly to the Risk Management Committee of the Board.The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank,to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk managementpolicies and systems are reviewed regularly to reflect changes in market conditions, products and servicesoffered. The Bank, through its training and management standards and procedures, aims to develop adisciplined and constructive control environment, in which all employees understand their roles andobligations.The Bank’s Audit Committee is responsible for monitoring compliance with the risk management policiesand procedures, and for reviewing the adequacy of the risk management framework in relation to therisks faced by the Bank. The Audit Committee is assisted in these functions by Internal Audit. Internal Auditundertakes both regular and ad-hoc reviews of risk management controls and procedures, the results ofwhich are reported to the Audit Committee.81

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)Credit riskCredit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrumentfails to meet its contractual obligations, and arises principally from the Bank’s exposures to placementswith financial institutions, Financing assets, outstanding assets acquired for leasing, investment in Sukukand receivables classified under other assets. For risk management reporting purposes, the Bank considersand consolidates all elements of credit risk exposure (such as individual and group exposure risk, countryand sector concentration risk, related party exposure etc.). The Bank monitors the total exposure to assetsacquired for leasing (including lease rental receivables) on a cumulative basis for monitoring of market riskand credit risk.The Board of Directors has delegated responsibility for the management of credit risk to its Executive RiskManagement Committee (ERMC). A separate Risk and Credit Management Department (RMD), reporting tothe ERMC is responsible for oversight of the Bank’s credit risk, including:• Formulating credit policies in consultation with business units, covering collateral requirements, creditassessment, risk grading and reporting, documentary and legal procedures, and compliance withregulatory and statutory requirements and submitting the same for approval to the Board of Directors.• Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisationlimits are not at present allocated to business units. Smaller exposures are approved by the Executive Credit& Investment Committee consisting of heads of business units and the Chief Operating Officer. Largerfacilities require approval by the Chief Executive Officer, Chairman, Board Investment and Credit Committeeor the full Board, as the case may be.• Reviewing and assessing credit risk. RMD assesses all credit exposures and signs off on the relevantproposals prior to approval of the facilities by the appropriate authorities. Renewal and review of facilitiesare subject to the same process.• Limiting concentrations of exposure to counterparties, countries and industries in respect of Financingassets, assets acquired for leasing as well as investments.• Developing and maintaining the Bank’s risk gradings in order to categorise exposures according to thedegree of probable risk of financial loss to focus management on the attendant risks. The risk gradingsystem is also used to identify specific exposures for which impairment provisions may be required.The risk grading framework for the Bank’s financing portfolio consists of ten grades reflecting varyingdegrees of risk of default and the availability of collateral or other credit risk mitigation. Investments inequity securities are not currently being graded and are evaluated individually on a case-by-case basis. Theresponsibility for setting risk grades lies with the final approving executive / committee as appropriate, onthe recommendations of the RMD. Risk grades are subject to regular reviews by RMD.• Reviewing compliance of business units with agreed exposure limits, including those for selected industries,country risk and product types. Regular reports are submitted to the Board on the compliance levels. RMDalso provides advice, guidance and specialist skills to business units to promote best practice throughoutthe Bank in the management of credit risk.• Each business unit is required to implement the Bank credit policies and procedures in respect ofexposures assumed by them and are responsible for the quality and performance of its credit portfolio andfor monitoring and controlling all credit risks in its portfolios, irrespective of the approving authority for theexposure. Regular audits of business units and Bank credit processes are undertaken by Internal Audit.82

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)Exposure to credit risk2010Placementswith financialinstitutionFinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)Invetsmentsecurities-SukukOtherfinancialassetsTotalImpairedGrade 9: Impaired-28,548---28,548Unrated----773773Allowance for Impairment-(14,189)--(773)(14,962)Carrying amount-14,359---14,359Past due but not impairedGrade 1-6: Low-Fair Risk-3,356---3,356Grade 7-8: Watch list-15,377---15,377Past due comprises:0-30 days-1,854---1,85430-60 days-2,832---2,83260-90 days-3,788---3,78890-180 days-1,945---1,945180 days +-8,314---8,314Carrying amount-18,733---18,733Neither past due nor impairedGrade 1-6: Low-Fair risk74,959151,4006,20817,613-250,181Grade 7-8: Watch list-20,8811,908--22,789Unrated----1,9481,948Carrying amount74,959172,2818,11617,6131,948 274,917Less: Collective impairment provisions-(2,163)(136)(52)-(2,351)Total74,959203,2107,98017,5611,948 305,65883

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)Credit risk (continued)2009Placementswith financialinstitutionFinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)Invetsmentsecurities-SukukOtherfinancialassetsTotalImpairedGrade 9: Impaired-9,796---9,796Allowance for Impairment-(7,897)---(7,897)Carrying amount-1,899---1,899Past due but not impairedGrade 1-6: Low-Fair Risk-2,792---2,792Grade 7-8: Watch list-4,086---4,086Unrated------Past due comprises:0-30 days-6,788--6,78830-60 days-68---6860-90 days-3---390-180 days-19---19180 days +------Carrying amount-6,878---6,878Neither past due nor impairedGrade 1-6: Low-Fair risk122,193158,31013,56929,401-323,473Grade 7-8: Watch list-27,353---27,353Unrated----17,34317,343Carrying amount122,193185,66313,56929,40117,343368,169Less: Collective impairment provisions-(2,355)(136)(158)-(2,649)Total122,193192,08513,43329,24317,343374,29784

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)Impaired financial assetsImpaired financial assets are those for which the Bank determines that it is probable that it will be unableto collect all or part of the principal and profit due according to the contractual terms of the exposure.Generally these assets fall under risk grades 9 or 10, for other financial assets impairment is assessed on anindividual basis for each exposure under the Bank’s internal credit risk grading system.Past due but not impaired exposuresThe exposure pertains to Financing assets where contractual profit or principal payments are past due butthe Bank believes that impairment is not appropriate on the basis of subsequent collections, the level ofsecurity / collateral available and / or the stage of collection of amounts owed to the Bank.Renegotiated facilitiesExposures classified as neither past due nor impaired financing facilities include facilities renegotiatedduring the year amounting to BD 30,474 thousand (2009: BD 34,917 thousand) that would otherwise be pastdue as per their original repayment terms. The renegotiated terms usually require settlement of profitsaccrued till date on the facility and/or part payment of the principal and / or obtaining of additional collateralcoverage. The renegotiated facilities are subject to revised credit assessments and independent review bythe RMD. Of the total past due facilities of BD 18,733 thousand only installments of BD 7,307 thousand are pastdue as at 31 December 2010Allowances for impairmentThe Bank makes provisions for impairment on individual assets classified under grades 9 and 10. Thisis done on the basis of the present value of projected future cash flows from the assets themselves andconsideration of the value of the collateral securities available. On a collective basis, the Bank has providedfor impairment losses based on management’s judgment of the extent of losses incurred but not identifiedbased on the current economic and credit conditions.Write-off policyThe Bank writes off an asset / security balance (net of any related allowances for impairment losses) whenit determines that the asset / security are uncollectible. This determination is reached after consideringinformation such as the occurrence of significant changes in the counterparty’s financial position suchthat he can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay backthe entire exposure. As on date the Bank has not made any write off.85

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)CollateralsThe Bank holds collateral against Financing assets and receivables from assets acquired for leasing inthe form of mortgage/ pledge over property, listed/ unlisted securities, other assets and guarantees.Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and updatedperiodically, generally at annual intervals. Collateral generally is not held against exposure to other banksand financial institutions. An estimate of the fair value of collateral and other security enhancements heldagainst financial assets is shown below. This includes the value of financial guarantees from banks, but notcorporate and personal guarantees as the values thereof are not readily quantifiable.As at 31 December 2010 As at 31 December 2009FinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)TotalFinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)TotalAgainst impairedProperty9,195-9,195-----Equities1,979-1,979--Other---495---495Against past due but notimpairedPropertyEquities33,1041,579--33,1041,57925,3818,01426,710-10,18825,3818,014Other----36,898-Against neither past duenor impairedProperty174,99510,833185,828173,000199,710Equities6,732-6,7323,8243,824Others34,91112,58447,49570,17280,360Total262,49523,417285,912280,886317,784For analysis of concentration of total assets and liabilities refer note 30 .86

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)Further, for financing assets and assets acquired for leasing the Bank monitors concentrations of credit risk by sectorand by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below:Concentration by sector As at 31 December 2010As at 31 December 2009FinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)TotalFinancingassetsAssetsacquiredfor leasing(includinglease rentalreceivable)TotalBanking and finance8,3322,50410,83617,3083,00520,313Real estate:- Property70,0374,06574,10247,4526,83554,287- Infrastructure developmet35,266-35,26630,261-30,261-Land15,761-15,76118,329-18,329Construction5,0947255,8195,478-5,478Trading31,525-31,52527,359-27,359Manufacturing5,880-5,8807,216-7,216Others31,31568632,00138,6823,59342,275Total carrying amount203,2107,980211,190192,08513,433205,518Settlement riskThe Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement riskis the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or otherassets as contractually agreed.Settlement limits form part of the credit approval / limit monitoring process described earlier. Acceptanceof settlement risk on free settlement trades requires transaction specific or counterparty specific approvalsfrom RMD.Liquidity riskLiquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with itsfinancial liabilities that are settled by delivering cash or another financial assets.87

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)BD 000’sManagement of liquidity riskThe Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficientliquidity to meet its liabilities when due, under both normal and stressed conditions, without incurringunacceptable losses or risking damage to the Bank’s reputation.Financial Control Department (FCD) collates data from treasury and other business units regarding theliquidity profile of their financial assets and liabilities and details of other projected cash flows arising fromprojected future business. FCD communicates the information to the treasury who manages the Bank’sportfolio of short-term liquid assets, largely made up of short-term placements with other banks and otherinter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole.The daily liquidity position is monitored by FCD. The Bank has in place a Liquidity Contingency Plan, theelements of which are periodically tested. Tools for implementation of regular stress testing under variousscenarios are in place. All liquidity policies and procedures are subject to review by ALCO and approvalby appropriate authorities. A summary report, including any exceptions and remedial action taken, issubmitted regularly to ALCO members.Exposure to liquidity riskThe key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits fromcustomers. For computation of this, net liquid assets are considered as including cash and bank balancesand placements with financial Institutions less placements from financial institution, and deposits comprisecurrent accounts, customer reverse murabah account and unrestricted investment accounts.Details of the reported Bank ratio of net liquid assets to deposits and customers at the reporting date andduring the reporting period were as follows:At 31 DecemberAverage for the periodMaximum for the periodMinimum for the period2010%10.5019.4410.5215.792009%22.0026.0744.0018.02For maturity profile of assets and liabilities refer note 29.88

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)Market risksMarket risk is the risk that changes in market prices, such as profit rate, equity prices, foreign exchange ratesand credit spreads will affect the Bank’s income, future cash flows or the value of its holdings of financialinstruments. Market risk comprises three types of risk: currency risk, profit rate risk and other price risk. Theobjective of market risk management is to manage and control market risk exposures within acceptableparameters, while optimising the return on risk.Management of market risksThe Bank separates its exposure to market risk between trading and non-trading portfolios. The Bank hasno trading positions in equity or commodities and the main source of market risk for the Bank is its foreignexchange exposure and profit rate gap.The Bank does not do any trading in foreign exchange. The Bank does not engage in proprietary tradingof foreign exchange derivatives. However, the Bank enters into shari’a compliant foreign exchange riskmanagement transactions to hedge economic risks to cover significant open positions under its riskmanagement guidelines. All foreign exchange income/ losses arising out of customer transactions andrevaluation of statement of financial position assets and liabilities are booked by the treasury operations.The responsibility for monitoring and managing the related risks also rests with the Treasury department.Overall authority for market risk management is vested with ALCO. The RMD is responsible for thedevelopment of detailed risk management policies (subject to review and approval by appropriateapproval authorities) and the Financial Control Department is responsible for the day-to-day review of theirimplementation.Exposure to profit rate risk – non-trading portfoliosThe principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in thefuture cash flows or fair values of financial instrument because of a change in market profit rates. Profitrate risk is managed principally through monitoring profit rate gaps and by having pre-approved limitsfor repricing bands. The ALCO is the monitoring body for compliance with these limits and is assisted by theBank’s Risk Management Department in its day-to-day monitoring activities.89

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)A summary of the Bank’s profit rate gap position at 31 December 2010 is as follows:2010Up to 3months3-6months6 months-1 year1-3yearsMorethan 3yearsTotalAssetsPlacements with financial institutionsFinancing assetsAssets acquired for leasing (includinglease rental receivable)Investments securities (sukuk)74,95939,3604,0427,082-27,3902,5044,141-2,882---88,961794,713-44,6171,3551,62574,959203,2107,98017,561Total profit rate sensitive assets125,44334,0352,88293,75347,597303,710LiabilitiesPlacements from financial institutionsand othersCurrent accountsUnrestricted investment accountsTotal profit rate sensitive liabilities78,353981154,804234,1381,409-27,71429,1235,110-15,11320,22324-22024439-36940884,935981198,220284,136Profit rate gap(108,695)4,912(17,341)93,50947,18919,57490

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s32. Risk management (continued)2009Up to 3months3-6months6 months- 1year1-3 yearsMorethan 3yearsTotalAssetsPlacements with financial institutionsFinancing assetsAssets acquired for leasing (includinglease rental receivable)Investments securities (sukuk)122,19334,13011,47118,192-39,064-5,555-24,651100--48,187-3,770-46,0531,8621,726122,193192,08513,43329,244Total profit rate sensitive assets185,98644,61924,75151,95749,641356,955LiabilitiesPlacements from financial institutionsand othersCurrent accountsUnrestricted investment accountsTotal profit rate sensitive liabilities(90,030)(8,121)(161,592)(259,743)(11,700)-(23,839)(35,539)--(15,786)(15,786)--(244)(244)--(2,127)(2,127)(101,730)(8,121)(203,588)(313,439)Profit rate gap(73,757)9,0808,96551,71347,51543,515The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivityof the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. Standardscenarios that are considered on a monthly basis include a 100 basis point parallel fall or rise across all yield curvesand a 50 bp rise or fall of all yield curves.An analysis of the Bank’s sensitivity to an increase or decrease in market profit rates (assuming no asymmetricalmovement in yield curves and a constant statement of financial position position) is as follows:At 31 December 2010At 31 December 2009100bp parallelincrease/decrease± 196± 43550bp increase/decrease± 98± 218Overall non-trading profit rate risk positions are managed by Treasury, which uses short term investment securities,placement with banks and placement from banks to manage the overall position arising from the Bank’s nontradingactivities.91

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)BD 000’sExposure to foreign exchange riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreignexchange rates. The Group had the following significant net exposures denominated in foreign currencyas of 31 December:Sterling poundsEurosUS Dollars *Kuwaiti DinarsOther GCC currencies *Indian RupeeAustralian Dollars2010BHDEquivalent2,6955,78778,5392,94130,577604,7032009BHDEquivalent2,9619,89959,6403,03133,03045-(*) The exposure in US dollars and other GCC currencies does not create any foreign exchange risk for the Banksince Bahrain Dinars and other GCC currencies are effectively pegged to the US Dollars.The management of foreign exchange risk against net exposure limits is supplemented by monitoring the sensitivityof the Bank’s financial assets and liabilities to various foreign exchange scenarios. Standard scenarios that areconsidered on a monthly basis include a 5% plus / minus increase in exchange rates, for currencies other than USDollars, other GCC currencies.An analysis of the Bank’s sensitivity to an increase or decrease in foreign exchange rates (assuming all other variables,primarily profit rates, remain constant) is as follows:Sterling poundsKuwaiti DinarsEurosIndian RupeeAustralian Dollars2010BHDEquivalent±135±147±289±3±2352009BHDEquivalent±148±152±495±2-92

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)Exposure to other price risks – non-trading portfoliosCredit spread risk on debt securities is subject to regular monitoring by RMD, but is not currently significantin relation to the overall results and financial position of the Bank.The Group’s available-for-sale equity securities carried at cost are exposed to risk of changes in equityvalues. Refer note 22 for significant estimates and judgments in relation to impairment assessment ofavailable-for-sale equity investments carried at cost. The Group manages exposure to other price risks byactively monitoring the performance of the equity securities. The performance assessment is performed ona quarterly basis and is reported to the Board Investment Committee.Operational riskOperational risk is the risk of loss arising from systems and control failures, fraud and human errors, whichcan result in financial and reputation loss, and legal and regulatory consequences. The Bank managesoperational risk through appropriate controls, instituting segregation of duties and internal checks andbalances, including internal audit and compliance. The Risk Management Department is in charge ofidentifying, monitoring and managing operational risk in the bank. The Bank already has an approvedpolicy for doing this and all required organisational and physical infrastructure are in place.The Bank has completed conducting one cycle of Risk Control Self Assessment (RCSA) of Operational risk formajority of the departments of the Bank to identify the important Key Risk Areas, Key Risk Indicators and KeyRisk Triggers: the RCSA process is a continuous process and will be conducted at regular frequencies acrossthe Bank. A software for monitoring these triggers and recording actual and near miss losses is already inplace. The medium term objective of the Bank is to generate statistically reliable data to upgrade to moresophisticated modes of Operational Risk Control both to manage the risk better and to reduce capitalcommitment.Capital managementThe Central Bank of Bahrain (CBB), sets and monitors capital requirements for the Bank as a whole. Inimplementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of totalcapital to total risk-weighted assets. Capital adequacy regulations of CBB is based on the principles of BaselII of the IFSB guidelinesThe Bank’s regulatory capital is analysed into two tiers:• Tier 1 capital, includes ordinary share capital, disclosed reserves including share premium, generalreserves, legal / statutory reserve as well as retained earnings after deductions for goodwill and otherregulatory adjustments relating to items that are included in equity but are treated differently for capitaladequacy purposes. As on 31 December 2009, the deductions to Tier 1 was Nil.• Tier 2 capital, includes interim retained profits reviewed by the auditors and an allowed portion profitequalisation reserve (PER) and investment risk reserves (IRR). As per CBB, the PER & IRR can be up to amaximum amount equal to the capital charge pertaining to 30% of the risk weighted assets financed byunrestricted investment accounts.Certain limits are applied to elements of the capital base in line with regulatory requirements. Tier 1 capitalshould represent at least half of the total eligible capital, i.e., Tier 2 capital is limited to 100% of Tier 1 capital.The limit on Tier 2 capital is based on the amount of Tier 1 capital after all deductions of investmentspursuant to Prudential Consolidation and Deduction Requirements (PCD) Module of the CBB. The PCDModule sets out the regulatory rules for prudential consolidation, pro-rata consolidation or deductionwhere the own controlling or significant minority stakes in regulated financial entities, insurance entitiesand have significant exposures to investment in commercial entities. It also sets out the framework for the93

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201032. Risk management (continued)BD 000’sCapital management (continued)prudential deductions from capital for various instances including exposures to counterparties exceedingthe large exposure limits as set out by CBB. As on 31 December 2010, the Bank was not required to make anydeductions under the requirements of the PCD Module.Banking operations are categorised as either trading book or banking book, and risk-weighted assets aredetermined according to specified requirements that seek to reflect the varying levels of risk attached toassets and off-balance sheet exposures. For computation of credit risk on assets financed by unrestrictedinvestment accounts 30% of risk weight assets are considered as against 100% for assets self financed.The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and marketconfidence and to sustain future development of the business. The impact of the level of capital onshareholders’ return is also recognised and the Bank recognises the need to maintain a balance betweenthe higher returns that might be possible with greater gearing and the advantages and security affordedby a sound capital position.The Bank has adopted the standardised approach to credit and basic indicator approach for managementof operational risk under the CBB capital adequacy framework. The Bank on a conservative basis forcapital management does not claim any of the benefits for permissible credit risk mitigants against creditexposure.The Bank’s regulatory capital position at 31 December was as follows:31 December 2010 31 December 2009Total risk weighted assets416,941376,444Tier 1 capitalTier 2 capitalTotal regulatory capital118,041222118,263126,5442,148128,692Total regulatory capital expressed as a percentage oftotal risk weighted assets28.3634.19The Bank has complied with all externally imposed capital requirements throughout the year.Capital allocationThe allocation of capital between specific operations and activities is primarily driven by regulatoryrequirements. The Bank’s capital management policy seeks to maximise return on risk adjusted whilesatisfying all the regulatory requirements. The Bank’s policy on capital allocation is subject to regular reviewby the Board94

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2010BD 000’s33. Proposed appropriationsThe Board of Directors propose the following appropriations for 2010 which are subject to shareholders approval inthe ensuing Annual General Meeting:Directors’ remunerationProposed cash dividendProposed issue of bonus shares as dividendCharityZakah2010----2502009--10,4921501,94134. CommitmentsThe commitments contracted in the normal course of business of the Bank:Undrawn commitments to extend financeFinancial guaranteesCommitment to investments201013,9231,667-20097,4745,2583,61215,59016,344Performance obligationsDuring the ordinary course of business, the Group may enter into performance obligations in respect of certain ofits infrastructure development projects. It is the usual practice of the Group to pass these performance obligations,wherever possible, on to the companies that own the projects. In the opinion of the management, no liabilities areexpected to materialise on the Group at 31 December 2010 due to the performance of any of its projects.95

KHALEEJI COMMERCIAL BANK BSCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 201035. Social ResponsibilityThe Bank discharges its social responsibilities through donations to charitable causes and organisations.36. New standards and interpretations issued but not yet adoptedThe following accounting standards and interpretations have been issued by AAOIFI during 2010 and aremandatory for the Group’s accounting for annual periods beginning on or after 1 January 2011 and are expectedto be relevant to the Group:FAS 25 Investment in sukuk, shares and similar instrumentsFAS 25 was issued in July 2010 and replaced FAS 17 Investments for accounting of investments. FAS 25 retainsand simplifies the mixed measurement model and establishes two measurement categories for investments:amortised cost and fair value. The standard requires each investment to be first segregated as either debttypeor equity type instruments, and the basis of classification depends on the entity’s business model andthe contractual cash flow characteristics of the investment. For equity-type investments, an irrevocableelection can be made at initial recognition, to recognise unrealised fair value gains and losses throughequity rather than through the income statement. Reclassification between categories is not permitted. Theguidance in FAS 17 on ‘investment in real estate’ continues to apply. The new standard requires retroactiveapplication.The Group is currently in the process of evaluating the potential effect of this standard. Given the natureof the Group’s operations, this standard is expected to have a pervasive impact on the Group’s financialstatements.37. ComparitivesCertain prior period amounts have been regrouped to conform to current year’s presentation. Such regroupingdid not affect previously reported profit or equity.96

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresExecutive summaryThe Central Bank of Bahrain’s (CBB) Basel 2 guidelines outlining the capital adequacy framework for banksincorporated in the Kingdom of Bahrain became effective from 1 January 2008. These disclosures have beenprepared in accordance with the CBB requirements outlined in the Public Disclosure Module (“PD”), Section PD-1.3: Disclosures in Annual Reports of the CBB Rule Book, Volume II for Islamic Banks. Section PD-1.3 reflects therequirements of Basel 2 - Pillar 3 and the Islamic Financial Services Board’s (IFSB) recommended disclosures forIslamic banks.The disclosures in this report are in addition to or in some cases, serve to clarify the disclosures set out in theconsolidated financial statements for the year ended 31 December 2010, presented in accordance with the FinancialAccounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions(AAOIFI). To avoid any duplication, information required under PD module but already disclosed in other sectionsof Annual report has not been reproduced in these disclosures.All figures presented in this section are reported in BD thousands and are as of 31 December 2010 unless otherwisestated.Khaleeji Commercial Bank BSC (the “Bank / KHCB”) has adopted the Standardised Approach for Credit Risk andMarket Risk and the Basic Indicator Approach for Operational Risk to determine its capital requirements, details ofwhich is given in section 2. This section contains a description of the Bank’s risk management and capital adequacypolicies and practices including detailed quantitative information on risk components and capital adequacy.The Bank’s Tier I and total capital adequacy ratios comply with the minimum capital requirements under the CBB’sBasel 2 framework.The Banks total risk weighted assets as at 31 December 2010 amounted to BD 416,941. Credit risk accounted for 84.21per cent, operational risk 12.61 per cent, and market risk 3.18 per cent of the total risk weighted assets. Tier I andtotal regulatory capital were BD 118,041 and BD 118,263 respectively as at 31 December 2010.At 31 December 2010, Bank’s Tier I and total adequacy ratios were 28.31 per cent and 28.36 per cent respectively.98

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures1. Group structureThe Bank operates under a retail banking license granted by the Central Bank of Bahrain (“CBB”) on 20 October2003. The Bank does not have significant operating subsidiaries. The subsidiaries set-up are primarily special purposeentities with nominal capital to execute specific investment transactions. The subsidiaries qualify as commercialentities as per the CBB guidelines and are risk weighted as investments for capital adequacy computationpurposes.2. Introduction to Basel II & risk managementThe CBB has mandated that the Basel Committee on Banking Supervision’s (Basel Committee) Basel II capitaladequacy framework is applicable to all banks incorporated in the Kingdom of Bahrain from 1st January 2008.The Bank has accordingly taken steps to comply with these requirements. The Basel II framework is intended tostrengthen risk management practices and processes within the financial institutions.CBB’s capital adequacy framework is based on three pillars, consistent with the Basel II framework adopted by theBasel Committee, as follows:•Pillar I: calculation of the risk weighted assets (RWAs) and capital requirement.• Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment Process(ICAAP).• Pillar III: rules for disclosure of risk management and capital adequacy information.Pillar IPillar I defines the regulatory minimum capital requirements for each bank to cover the credit risk, market riskand operational risk inherent in its business model. It also defines the methodology for measurement of these risksand the various elements of qualifying capital. The capital adequacy ratio is calculated by dividing the regulatorycapital base by the total Risk Weighted Assets (RWAs). CBB has mandated that the ratio be maintained at a minimumof 12 % and has set a trigger ratio of 12.5%. If the capital adequacy ratio falls below 12.5 per cent, additionalprudential reporting requirements apply, and a formal action plan to restore the ratio above the trigger level is tobe formulated and submitted to the CBB.The table below summarizes the Pillar I risks and the approach used by the Bank to calculate the RWAs in each casein accordance with the CBB’s Basel II capital adequacy framework:Risk TypeCredit RiskMarket RiskOperational RiskApproach used by KHCBStandardised ApproachStandardised ApproachBasic Indicator Approach99

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresPillar IIPillar II defines the process of supervisory review of an institution’s risk management framework and, ultimately itscapital adequacy.Pillar II comprises two processes:••An Internal Capital Adequacy Assessment Process (ICAAP), andA supervisory review and evaluation process.The Bank has in place ICAAP procedures for computation of economic capital for all risks including those not coveredunder Pillar I. The Bank regularly monitors its internal capital adequacy ratio to ensure that there is adequate coverfor all risks faced by the Bank.Under the supervisory review and evaluation process each bank is individually assessed by the CBB and an individualminimum capital adequacy ratio is to be determined for each bank, depending on their overall risk profile. Forthis purpose we had at that instance appointed an external consultant to assess the risk profile of KHCB and theextent of its compliance with Basel II requirements. The consultant’s report was submitted to CBB and is under theirconsideration. In the meanwhile Bank’s in Bahrain are required to maintain minimum regulatory capital adequacyratio of 12 %.Pillar IIIPillar III complements the other two pillars and focuses on enhanced transparency in disclosure of information bythe Banks to promote better market discipline. The information to be disclosed covers all areas including businessperformance, capital adequacy, risk management etc. The disclosures are designed to enable stakeholders andmarket participants to assess an institution’s risk appetite and risk exposures and to encourage all banks, via marketpressures, to move toward more advanced forms of risk management.In April 2008, the Central Bank published a paper covering the detailed disclosure requirements to be followed bylicensed banks in Bahrain to be in compliance with Pillar III under the Basel II frame work. This document is preparedin accordance with these directives.100

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures2.1. The risk management functionThe Board of Directors has overall responsibility for risk management in the Bank. The Board lays down the riskmanagement policies of the Bank and quantifies its risk appetite through appropriate definitions of various risk limitsand tolerances. The Board discharges its risk management responsibilities through the Board Risk ManagementCommittee (BRMC).The Board has established an Executive Risk Management Committee (ERMC), which is responsible for developingand monitoring Bank risk management policies in the specified areas. The committee consists of heads of businessand other functional units in the Bank and reports regularly to the Board Risk Management Committee.The day to day risk management functions are performed by the Risk Management Department (RMD) of the Bank.RMD is responsible to ensure that the policies laid down by the Board are consistently implemented across the Bankand to review the adequacy of these policies periodically. It monitors all risk taking activities and ensures that therisk limits defined by the Board are complied with. The department has specialised personnel dealing with Credit,Market and Operational Risks. It is independent of all risk taking functions in the Bank and reports to the BRMCthrough the Executive Risk Management Committee (ERMC) chaired by the Chief Executive Officer (CEO).The Asset Liability Management Committee (ALCO) of the Bank acting through the Treasury department monitorsthe Bank’s liquidity position and recommends appropriate action to the Board where necessary. There is a highlevel of co-ordination between the RMD, ERMC and ALCO.The RMD prepares a risk overview report which covers in detail the various risks faced by the Bank and the same isdiscussed at the ERMC, BRMC and the Board on a quarterly basis.The Bank considers that its overall risk management strategies used have been effective throughout the reportingperiod.The RMD, together with the Internal Audit and Compliance departments, provides independent assurance that alltypes of risk are being measured and managed in accordance with the policies and guidelines set by the Board ofDirectors.3. Capital management and capital adequacy ratio3.1. Capital managementThe Bank’s policy is to maintain a strong capital base to develop and retain investor, creditor and market confidenceand to sustain business growth. The Bank recognises the impact of a high level of capital on shareholders’ returns,while not losing sight of the security and market confidence afforded by a sound capital base. The Bank aims tomaintain a minimum total capital adequacy ratio significantly in excess of that mandated by the CBB.101

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures3.2. Internal capital adequacy assessment process (“ICAAP”)The Bank has an established Internal Capital Adequacy Assessment Process (“ICAAP”) as per the requirementsunder Pillar II of Basel II. ICAAP prescribes procedures and measures designed to ensure appropriate identification,measurement, aggregation and monitoring of the Bank’s risks. It also defines an appropriate level of internalcapital in relation to the Bank’s overall risk profile and business plan.ICAAP framework at the BankCredit riskMarket riskOperatinal risk(including Shari’acompliance andLegal risk)Investment riskPresentcapitaladequacyReportingto seniormanagementProfit raterisk in thebanking bookLiquidity riskConcentrationriskCapitaladequacyunder ICAAPFuturecapitaladequacyCBBReportingPillar II risksand otherrisksStrategic andreputationalriskMiscellaneousriskBusinessplanStressTesting102

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s3.2.1. Risk addressed by the ICAAPRisk TypeCredit riskMarket riskInvestment riskOperational riskLiquidity riskProfit rate risk (banking book)Credit concentration riskFiduciary RiskReputational riskOther Risks (strategic, Shari’a/regulatory compliance,business cycle)Metrics based on which internal capital is allocatedRegulatory capital adequacy guidelines to be used as proxy for internal capitalfor Pillar I risksMaximum cumulative maturity gap, Liquidity ratio, Financing to deposit ratioRevaluation / sensitivity of the re-pricing gapsThresholds for counterparty, country, sector exposuresSize of off balance sheet vehicles (RIAs) & Large Investment ProductsInvestment ProductsCredit quality, Operational risk, Reputation related lossAdditional capital based on Pillar 1 risk weighted exposures3.3. Capital structure, minimum capital requirements and capital adequacyDuring the year, the paid up capital of the Bank increased from BD 104,924 thousand to BD 115,416 thousand asa result of issue of bonus shares (one share for every ten shares held) for 2010 amounting to BD 10,492 thousand.Following is the break-up of the capital structure as at 31 December 2010:31 December 2010Net available capitalIssued and fully paid ordinary sharesLess: Treasury sharesLess: ESOP sharesStatutory reserveShare premiumOther reservesRetained earningTier 1 capital115,416(6,018)-6,2981,213(613)1,745118,041Eligible portion of unrealised gains arising from fair valuing equitiesProfit equalisation reserveInvestment risk reserveTier 2 capital53169-222Net available capital118,263103

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s31 December 2010Risk weighted assetsCredit risk weight exposuresMarket risk weight exposuresOperational risk weight exposuresTotal risk weighted assets351,10713,25052,584416,941Capital adequacy ratio ( Tier 1 )Capital adequacy ratio ( Total capital)28.31%28.36%The above capital adequacy ratios are calculated by dividing the respective regulatory capital base by the total Risk Weighted Assets(RWAs).Regulatory capital componentsThe above components of Tier I and Tier II capital are as per the relevant CBB guidelines. According to these Tier IIcapital is restricted to 100 % of Tier I capital after all deductions of investments pursuant to PCD module of CBB rulebook. As at 31 December 2010, the Bank was not required to make any prudential deduction from its regulatorycapital base.Risk weighted assetsCredit riskFor regulatory reporting purposes the Bank calculates the capital requirements for credit risk based on thestandardised approach. Under this approach, the on and off-balance sheet credit exposures are assigned riskweights based on the type of counterparty, type of the exposure, and source of funding – URIA or own funds.The risk weights for types of counterparties and exposures are prescribed by CBB. Further for capital adequacycomputations 100% of the RWA’s is reckoned for self financed assets while only 30 % is considered for assets fundedthrough URIA.Market riskThe Bank uses the standardised approach to measure market risk. Market risk is primarily on account of the foreignexchange exposures that are considered as specific risks. As per the CBB guidelines, capital for foreign exchangerisk is computed at 8% of overall net open foreign currency positions of the Bank and this is multiplied by 12.5 toderive the market RWAs.104

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sOperational riskThe Bank adopts the Basic Indicator Approach to evaluate operational risk charge in accordance with the CBBcapital adequacy module for Islamic Banks. According to this approach, Bank’s average gross income for past threefinancial years is multiplied by a fixed coefficient alpha of 15% set by CBB to arrive at the capital required and amultiple of 12.5 is used to arrive at the risk weighted assets that are subject to capital charge.The Bank does not have a trading book and hence all exposures are part of the banking book for the purpose ofassessing the applicable capital treatment.Break-up of capital requirement in accordance with the Capital Adequacy Module of the CBB for the year ended 31December 2010 is as follows:ExposureclassificationExposureRisk weighted assets*Capital requirement @ 12%Self –FinancedURIATotalSelf –FinancedURIATotalSelf –FinancedURIATotalCash and collectionitems1,310-1,310------Sovereigns53811,01611,554------Banks2,10174,95977,0605086,7147,22261806867Corporates104,05597,175201,230104,05529,152133,20712,4873,49815,985Past due facilities14,359-14,35914,359-14,3591,723-1,723Investments inequities/sukuk8,84214,90123,74313,1266,70519,8311,5758052,380Holdings of real estate89,624-89,624172,534-172,53420,704-20,704Other assets3,954-3,9543,954-3,954474-474Credit Risk224,783198,051422,834308,53642,571351,10737,0245,10942,133Market Risk-----13,250--1,590Operational Risk-----52,584--6,310Total224,783198,051422,834308,53642,571416,94137,0245,10950,033*For capital adequacy computations, 100% of the RWAs is reckoned for self financed assets while only 30 % isconsidered for assets funded through URIA.105

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures4. Credit Risk4.1. Credit risk managementCredit Risk is the risk that a counterparty fails to meet its obligations in accordance with agreed terms and conditions.The major sources of credit risk in the Bank are under the following classes of assets:••••Placements with financial institutionsFinancing assetsAssets acquired for leasing (including lease rentals receivable)Investments in Sukuk.For the purpose of capital adequacy computation (as well as certain other tables below) the following have alsobeen considered as a part of credit risk:••••Investments in quoted and unquoted equityAssets-held-for-saleInvestment in associatesOther assets.The Bank has the necessary internal processes for assessing, monitoring and controlling credit risk both at theindividual credit and portfolio levels. Credit limits are approved after a thorough assessment which takes intoaccount the financial strength of the counterparty, the technical feasibility and economic viability of the businessbeing financed, the adequacy and quality of the cash flow available for repayment etc. in addition to availability ofcollateral security by way of physical assets or guarantees. The RMD reviews every credit proposal and incorporatesits remarks on the proposal before the same is considered by the appropriate authority as per delegated approvallevels granted by the Board of Directors.At the portfolio level, the Board has established risk concentration limits for single counterparties and relatedcounterparties forming a business group, geographical and economic sectors as well as exposures to counterpartiesrelated to the Bank and/or its major shareholders. The RMD regularly monitors compliance with these limits anddeviations if any are reported regularly to the Senior Management, Risk Management Committees and the Boardof Directors.106

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.2. Levels of ExposureThe year 2010 saw a modest growth in overall credit exposure levels. The table below shows gross credit exposurealong with average credit exposure broken down under different exposure classes as at 31 December 2010.Gross / Average Credit ExposuresAverage Exposure [1]Gross ExposureSelfURIATotalCash and bank balances [2]14,4043,9348,35612,290Placement with financial institutions79,746-74,95974,959Financing assets199,420106,03597,175203,210Investments in equity securities84,59882,718-82,718Investment in sukuks20,154-17,56117,561Assets acquired for leasing (includingijarah rental receivable)11,1187,980-7,980Investment in associates5,7954,113-4,113Asset held-for-sale4,769---Other assets12,48516,385-16,385Total On Balance Sheet Credit Exposure432,489221,165198,051419,216Undrawn financing facilities14,81113,923-13,923Guarantees1,5261,667-1,667Commitments to invest3,691---Total Off Balance Sheet Credit Exposure20,02815,590-15,590[1]Represents quarterly average balances for the year ended 31 December 2010.[2]Includes cash balance of BD 1,301 thousand.107

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.3.Concentration of credit risk4.3.1. Geographic distributionThe geographical exposure profile as at 31 December 2010 was as follows:2010GCCcountries Europe USA Asia Australia Africa TotalAssetsCash and bank balances10,6301,642--18-12,290Placement with financial institutions64,0267,540---3,39374,959Financing assets188,20211,1946513,163--203,210Investment securities64,6562,927-26,3334,6851,678100,279Assets acquired for leasing (includinglease rental receivable)7,980-----7,980Investment in associates4,113-----4,113Investment property3,943-----3,943Other assets2,341--135--2,476Property and equipment9,966-----9,966Total funded exposure355,85723,30365129,6314,7035,071419,216Undrawn financing facilities13,9212----13,923Guarantees1,667-----1,667Total unfunded exposures15,5882----15,590108

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.3.2 . Industry/ sector wise distribution of exposureThe Board of Directors has stipulated maximum exposures to various industry sectors. The industry/ sectorwise exposure as at 31 December 2010 was as follows:2010Banks and financialinstitutions Real estate Others TotalAssetsCash and bank balances12,290--12,290Placement with financial institutions74,959--74,959Financing assets (*)8,332121,06473,814203,210Investment securities20,98659,11320,180100,279Assets acquired for leasing (includinglease rental receivable)2,5044,0651,4117,980Investment in associates-4,113-4,113Investment property-3,943-3,943Other assets6739368672,476Property and equipment--9,9669,966Total funded exposure119,744193,234106,238419,216Undrawn financing facilities4,0005,2174,70613,923Guarantees-321,6351,667Total unfunded exposures4,0005,2496,34115,590* Financing asset exposures have been classified based on the purpose of financing.4.3.3. Transactions with related counterpartiesRelated counterparties are those entities which are related to the Bank through significant shareholdingor control or both. Wherever the Bank has entered into business transactions with such counterparties,such transactions have been done at an arm’s length basis and on commercial terms that bring nodisadvantage to the Bank. For the purpose of identification of related counterparties the Bank strictlyfollows the guidelines issued by Central Bank of Bahrain for the purpose. Detailed break up is presented innote no 24 in the notes to the consolidated financial statements for the year ended 31 December 2010.109

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.3.4. Exposures in excess of 15% of capital baseSingle exposures in excess of 15 % of the Bank’s capital base on individual counterparties require priorapproval of CBB except where exempted under para CM 4.5 of the rule book. The Bank does not have anysuch ‘large exposures’ that are not exempted and therefore warrants prior approval of CBB.Exposures exceeding single exposure limits as of 31 December 2010AmountBanksBank A23,623Total23,6234.3.5. Exposures in highly leveraged counterpartiesThe Bank has no exposure to highly leveraged and other high risk counterparties as per definition provided in theCBB rule book PD 1.3.24.4.3.6. Residual contractual maturity of the credit portfolio and investment in sukuksThe Bank’s policy allows exposures up to a maximum period of 7 years with any exceptions to be approved by theBoard of directors. However, most of the Bank’s exposures are limited to an original maturity of 5 years. The Bankconstantly monitors the residual maturity profile of its assets to ensure that any mismatch with the maturity of itsliabilities is kept within acceptable limits. The contractual residual maturity profile by type of financing contract ofthe Bank’s credit portfolio and investment in sukuks is given in the table below.Maturity Scale< 1 M1 - 3 M3 - 6 M6M - 1 Y1 - 3 Y>3 YTotalCredit Portfolio*Murabaha6,6388,07212,0762,88276,22241,625147,515Musharaka725(398)3,2491,90617,18711,63734,306Wakala3,5385,2302,673-1408,81020,391Istisna-----998998Ijarah-822-725796,3547,980Total10,90113,72617,9985,51393,62869,424211,190Investments in sukuks2,350310-3,4409,2932,16817,561Total2,350310-3,4409,2932,16817,561Grand Total13,25114,03617,9988,953102,92171,592228,751* Credit Portfolio includes financing assets, Assets acquired for leasing and lease rental receivable110

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.4. Equity risk in banking bookThe Bank does not have a trading book and hence all of its equity investments are classified in the banking bookand are subject to credit risk weighting under the capital adequacy framework. For regulatory capital computationpurposes, the Bank’s equity investments in the banking book include available-for-sale investments, and associateinvestments in non-financial entities.Please refer to the notes to the consolidated financial statements for policies covering the accounting of equityholdings, including the accounting policies and valuation methodologies used, key assumptions and practicesaffecting valuation.The RMD works alongside the Investment Department at all stages of the deal cycle, from pre-investmentdue diligence to exit, and provides an independent review of every transaction. An impairment assessment ofinvestments takes place every quarter with inputs from the Investment department and RMD. Quarterly updates ofinvestments are reviewed by the Board of Directors. Regular audits of business units and processes are undertakenby Internal Audit.The Bank’s equity investments are predominantly in its own projects, which include private equity and infrastructuredevelopment products. The intent of such investments is a later stage exit along with the investors, by means ofstrategic sell outs at the project level or through initial public offerings. The Bank also has a strategic investmentportfolio which is aligned with the long term investment objectives of the Bank.Information on equity investmentsPrivately heldQuoted in an active marketRealised gain / (loss) during the yearUnrealised gain / (loss) in equity (Tier 2)82,444274-53The following are the categories under which equity investments are included in the capital adequacy computationsas per the requirements of the CBB rules:Equity investments inbanking bookGross ExposureRisk weightedexposureCapital chargeSelf financed URIA Self financed URIA Self financed URIAQuoted equity investment274-274-33-Unquoted equity investment8,568-12,852-1,542-Investments in managed funds------Real estate investments73,876-147,752-17,730-Total82,718-160,878-19,305-111

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures4.5. Risk grading of exposuresThe Bank has an internal risk grading system for credit exposures based on a 10 point scale in which grades 8through 10 are non performing with grades 9 and 10 classified as impaired exposures. Each counterparty creditexposure is assigned a risk grade based on several quantitative and qualitative factors, including financial strength,past record and availability of collateral security. The grading is done at the time of assuming an exposure and oneach renewal of the same. The grading sheets are prepared by the Business Department and reviewed by the RMD.Grades are continuously monitored by the Bank’s credit administration department within RMD and exposures aredowngraded as and when the quality of the exposure is found to have deteriorated, based on clear criteria laid outin the Bank’s credit policy.For exposures or potential exposures on Banks and Financial Institutions, the Bank has established internal ratingswith a six point scale from A to F, in descending order of creditworthiness. These ratings are derived on the basisof the external credit ratings provided by Moody’s, Standard & Poor (S&P), Capital Intelligence (CI) & Fitch. Whenthe ratings of S&P and/or Moody’s are available, those ratings will be used. In case of differences in ratings of theseagencies, the more conservative rating has been used for classification. The ratings of these agencies have beenmapped to internal categories as follows:External RatingAgenciesInternal RatingsA B C D E FS & PMoody’sCIFitch>= AA->=aa3>= AA->= AA->=A->=A3>=A->=A->=BBB->=Baa3>=BBB->=BBB->=B->=B3>=B->=B-Below B-C & DC & DBelow B-UnratedPlease refer to note 32 in the notes to the consolidated financial statements for the year ended 31 December 2010,for details of the rating profile of exposures of the Bank.4.6. Past dues, impaired accounts, provisionsCustomers may occasionally fail to meet their obligations to the Bank on due dates. Any amount not paid when dueis classified as past due and the Bank initiates focused recovery efforts on such accounts. Any account which is pastdue for 30 days or more are classified as ‘remedial assets’/ Grade 7 and clearly defined procedures are in place forfollow up and monitoring of such accounts.However, if the account remains past due for a continuous period of 90 days it is considered as non-performingand classified as Grade 8. The Bank conducts a comprehensive review of all such accounts on a quarterly basisand where provisions are necessary; those exposures are classified as impaired (Grade 9/10). Provisions are createdthrough income statement where necessary. Such provisions are made on the basis of expected shortfall in presentvalue of projected future cash flows from the assets / securities and the estimates of such cash flows are done on aconservative basis.On each balance sheet date the Bank reviews all assets classified as Available-for-Sale for any objective evidence thatthe financial assets are impaired. In case of any such evidence the asset is revalued at lower of cost of acquisitionand its estimated recoverable amount and a provision is created for the difference amount through the Incomestatement.112

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sFor a detailed policy on impairment of financial assets, refer note 2 (n) in the notes to the consolidated financialstatements for the year ended 31 December 2010.For the quantitative disclosures relating to exposures which were past due or impaired as of 31 December 2010,please refer to note 32 in the notes to the consolidated financial statement for the year ended 31 December 2010.During the year 2010, the Bank has undertaken a detailed assessment of its credit portfolio and has considered specificimpairment allowances where necessary. In the view of the current market conditions, Bank has maintained thecollective provisions at a certain percentage based on the internal risk grades assigned to counterparties, resultingin an average of approximately 1 % of its financing assets, assets acquired for leasing, lease rental receivables andSukuk portfolios. The Bank is in the process of developing a detailed risk and ratings based model to identify andmaintain collective provision on portfolio basis going forward.For movement in provisions on financing assets and investment securities refer to notes 5 and 6 respectively in thenotes to the consolidated financial statement for the year ended 31 December 2010.4.6.1. Geographical and sector-wise break up of impairment allowances and impaired/past dueaccountsGCCcountries Europe USA Asia Australia Africa TotalImpaired21,950-6,598---28,548Allowance for impairment(8,243)-(5,946)---(14,189)Carrying amount13,707-652---14,359Past due but not impaired18,733-----18,733Collective impairment(2,206)(129)-(11)-(5)(2,351)Banks and financialinstitutions Real estate Others TotalImpaired-21,0197,52928,548Allowance for impairment-(9,786)(4,403)(14,189)Carrying amount-11,2333,12614,359Past due but not impaired:3,78611,1113,83618,7330-30 days-1,1437101,85330-60 days1,880-9522,83260-90 days1,906-1,8823,78890-180 days-1,6532921,945180 days +-8,315-8,315Collective impairment(151)(1,336)(864)(2,351)113

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s4.7. Renegotiated facilitiesFor disclosure of renegotiated loans refer note 32 in the notes to the consolidated financial statements for the yearended 31 December 2010.4.8. Legal Action and Write off of exposuresThe Bank has policies for initiation and prosecution of legal action when all amicable avenues for settlement of duesfrom a customer have been exhausted. As of date, there is one pending legal action against the Bank of BD 5,653thousand. The case is still under discussion and evaluation. The legal claims from cases filed by the Bank amountedto BD 20,704 thousand.The Bank has a policy that permits write off of exposures when there is no possibility of recovery of the dues throughlegal and other means. However the Bank has so far not written off any such dues or exposures.4.9. Penalties for Delayed PaymentsIn cases where customers delay the payments of dues to the Bank, the Bank has the right to collect penalties, subjectto the provisions of the agreement between the customer and the Bank. The Bank recovers such penalties fromcustomers when the amounts are significant. As per policy such penalties are maintained in a separate account andused for charity purposes approved by the Bank’s Shari’a Board.The Bank has a policy of creating a contribution for Zakah and Charity fund for any non-Islamic income earned.During the year ended 31 December 2010 BD 36 thousand of non-Islamic income was transferred to Zakah & Charityfund.For quantitative disclosures refer to consolidated statement of sources and uses of charity and Zakah fund in theconsolidated financial statements for the year ended 31 December 2010.4.10. Credit Risk MitigationThe Bank uses a variety of tools to mitigate its credit risk, the primary one being that of securing the exposureby suitable collateral security. While existence of collateral security is not a policy precondition for financing, inpractice a large part of existing exposures are at least partially collateralised. The Bank has clear policies on the typeof assets that can be accepted as collateral security and the mode of valuation of these assets. In general all assetsaccepted as collateral are valued at least once in a year. The legal validity and enforceability of the documents usedfor creating these collaterals have been established by external legal expertsThe position of collateral cover for all credit exposures categorised on the basis of the type of security as on 31December 2010 is given in the table below.Collateral TypeReal estateListed SecuritiesUnlisted SecuritiesBank GuaranteeCash CollateralUnsecuredOthersTotalMurabaha172,7787,2371,47421,5052,212-2,510207,716Musharaka41,7861,579----2,74346,108Wakala2,553---302-5,6398,494Istisna’a2,680-----2,680Ijara10,726-----10,18820,914Value ofCollateral [1]230,5238,8161,47421,5052,514-21,080285,912Total GrossExposure [2]127,4308,4374,33014,86211,90251,0599,658227,678% ofcover181%104%34%145%21%0%218%126%[1] (Represents the last valuation carried out based on the Bank’s valuation policy)[2] (The amounts are gross of collective impairment allowances of BD 2,299 thousand and specific impairment allowances of BD 14,189thousand)114% ofTotal80%3%1%8%1%0%7%100%

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sReal estate properties are reckoned at values certified by qualified valuators. Other physical assets like machineryare valued at book value, invoice value or as certified by an outside expert. Listed securities are valued at marketprice while unlisted ones are at book value. The Bank has an approved panel of valuators for real estate property.Valuation exercise is supervised by the Risk Management Department of the Bank, independent of the businessunits.Facilities are also often secured by personal/ corporate guarantees, assignment of contract proceeds, assignmentof insurance policies etc. However under the Bank’s credit policy these are not treated as tangible securities andthe value of such guarantees/ assignments though significant in many cases are taken as nil for the purpose of theabove analysis.Assets financed under Ijara Muntahia Bittamleek are considered at par with physical collateral and included underReal Estate or Others in the above calculations.The declared value of exposures in all cases is the gross exposure net of specific provision. The Bank does not carryout any on balance sheet or off balance sheet netting for the securities held. The Bank has not claimed any capitalrelief for Credit Risk Mitigation under Section CA 4 of the Capital Adequacy module of CBB rule book and hence allexposures are risk weighted at their gross values.The Bank has a policy of disposal of asset held as collateral not readily convertible into cash, after completion ofnecessary legal formalities. During the year ended 31 December 2010 there has been no such instance.4.11. Regulatory Capital Requirements by type of financing contractsFinancing contractsExposureCredit RiskWeighted AssetsCapitalrequirement @12%Self URIA Self URIA Self URIAMurabaha72,09076,01172,09022,8038,6512,736Ijarah assets (including lease rental receivables)7,980-7,980-958-Mudaraba------Musharaka33,945-33,945-4,073-Wakala-20,177-6,054-727Istisna’a-987-296-36Total114,01597,175114,01529,15313,6823,499115

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s5. Market Risk5.1. Market risk managementMarket risk is the risk that changes in market prices, such as foreign exchange rates, profit rates, equity prices, andcommodity prices will affect the Bank’s income or the value of its holdings of financial instruments. The objectiveof market risk management is to manage and control market risk exposures within acceptable parameters, whileoptimising the return on risk.The Bank separates its exposure to market risk between trading and non-trading portfolios. The Bank has notrading positions in equity or commodities and the main source of market risk for the Bank is its foreign exchangeexposure, although this is quite limited. There is also an extent of profit rate risk arising out of mismatches in its assetliability structure. The Bank has well defined policies approved by the Board with clear risk limits and thresholds toeffectively manage its market risk.Details on market risk management, net exposures and sensitivities are given as part of the note 32 in the notes tothe consolidated financial statements for the year ended 31 December 2010.5.2. Regulatory Capital Allocation against Market Rate RiskTable below shows the market risk position for each category of the market risk as at year end along with themaximum and minimum values during the period:As at 31 December Max MinEquity position risk---Market risk on trading positions in sukuk---Foreign exchange risk1,0601,060877Commodity risk---Total (A)1,0601,060877Risk weighted assets (A x 12.5)13,25013,25010,963Capital requirement @ 12%1,5901,5901,3166. Operational Risk6.1. Operational risk managementOperational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, systemsand/ or from external events which includes but is not limited to, legal risk and Shari’ a compliance risk. Operationalrisk is an inherent part of normal business operations. Whilst operational risk cannot be eliminated entirely, the Bankendeavors to minimise it by ensuring that a strong control infrastructure is in place throughout the organisation.Various procedures and processes used to manage operational risk include effective staff training, appropriatecontrols to safeguard assets and records, regular reconciliation of accounts and transactions, close monitoring ofrisk limits, segregation of duties, and financial management and reporting.Details on operational risk management are given as part of the note 32 in the notes to the consolidated financialstatements for the year ended 31 December 2010.116

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sThe Risk Management Department monitors all operational processes to ensure that the Board directives are fullyimplemented and also reports deviations if any to the Senior Management and the Board. The department hasspecialised personnel engaged in this process. The Bank has implemented an OR system which monitors Key RiskIndicators across all major areas of operation and generates appropriate triggers as and when predefined riskevents occur (through breach of triggers set) and also generates periodical reports for Management reporting.In addition, the Bank>s policy dictates that the operational functions of booking, recording and monitoring oftransactions are carried out by staff that are independent of the individuals initiating the transactions.The Bank’s operational risk management framework includes components such as Key Risk Indicators (KRIs),operational loss data and Risk & Control Self Assessment across the Bank. KRIs are monitored on an ongoing basisby the Risk Management Department through a specialised operational risk system, which generates KRI alerts andappropriate reports. This helps in quickly detecting and correcting deficiencies in processes and procedures formanaging operational risk. This process also assists the Bank in the long term to create a loss data base which willprovide the basis for introducing more advanced approaches for computation of capital for operational risk.6.2. LitigationAs on the reporting date, the Bank has no material legal contingencies including pending legal actions except asreported in para 4.8 above. The Bank has a dedicated legal team which provides legal advice and services to all unitsof the Bank.6.3. Shari’a complianceThe Shari’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activitiesof the Bank in order to ensure that they are in compliance with the rules and principles of Islamic Shari’a. The Bankalso has a dedicated internal shari’a reviewer, who performs an ongoing review of the compliance with the fatwasand rulings of the SSB on products and processes and also reviews compliance with the requirements of the Shari’astandards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching andoffering to the customers and also conducts periodic reviews of the transactions of the Bank. An annual auditreport is issued by the SSB confirming the Bank’s compliance with shari’a rules and principles.6.4. Regulatory Capital Allocation against Operational RiskThe Bank uses the Basic Indicator Approach (BIA) in calculating its regulatory capital requirement for operationalrisk.The risk weighted assets and capital requirement for operational risk as at 31 December 2010 is as given below:Average gross income for 3 years (A)Operational Risk Weighted Assets B = (A * 15%*12.5)Capital requirement (B * 12%)28,04552,5846,310117

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s7. Other risks7.1. Liquidity RiskLiquidity risk is the risk that the Bank will encounter difficulty in meeting its financial obligations on account of amaturity mismatch between assets and liabilities. The Bank’s approach to managing liquidity is to ensure, that itwill always have sufficient funds to meet its liabilities when due without incurring unacceptable losses or riskingdamage to the Bank’s reputation.The Bank has a liquidity risk policy in place, which describes the roles and responsibilities of the Asset LiabilityManagement Committee (ALCO), Treasury and other concerned departments in management of liquidity. It alsostipulates various liquidity ratios to be maintained by the bank, as well as gap limits under each time bucket ofthe maturity ladder. It is the Bank’s policy to keep adequate level of high quality liquid assets such as inter-bankplacements, CBB sukuks to ensure that funds are available to meet maturing deposits and other liabilities, as andwhen they fall due.The day to day management of liquidity risk is the responsibility of the Treasury Department, which monitors thesources and maturities of assets and liabilities closely, and ensures that limits stipulated by the ALCO are compliedwith. RMD & FCD monitors the liquidity position and any violations are reported to ALCO, ERMC and the Board ofDirectors.For maturity profile of assets and liabilities refer note 29 in the notes to the consolidated financial statements for theyear ended 31 December 2010.The following are the key liquidity ratios which reflect the liquidity position of the Bank:2010 2009 2008 2007 2006Interbank assets to interbank liabilitiesLiquid assets to total assetsLiquid assets to total depositsNet liquid assets to total deposits113.7220.8141.7210.50137.0230.0259.5622.00436.5037.0460.3949.79190.2431.6398.2250.33157.0137.53119.6850.397.2. Profit rate risk in the banking bookThe other principal risk to which the banking book is exposed is the risk of loss from fluctuations in the future cashflows or fair values of financial instrument because of a change in market profit rates. Profit rate risk is managedprincipally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. The ALCOis the monitoring body for compliance with these limits and is assisted by the Bank’s Risk Management Departmentin its day-to-day monitoring activities.The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivityof the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. Standardscenarios that are considered on a monthly basis include a 100 basis points (bps) parallel fall or rise across all yieldcurves and a 50 bps rise or fall of all yield curves. An analysis of the Bank’s sensitivity to an increase or decrease inmarket profit rates has been disclosed in note 32 in the notes to the consolidated financial statements for the yearended 31 December 2010.118

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s7.3. Counterparty credit riskCounterparty credit risk is the risk that a counterparty to a contract in the profit rate, foreign exchange, equity andcredit markets defaults prior to maturity of the contract. The Bank does not engage in proprietary trading of equity,foreign exchange or its derivatives. However, the Bank enters into shari’a compliant foreign exchange risk/ profitrate risk transactions to hedge its risks arising out of mismatch in its asset liability portfolios. Clear policies for suchtransactions are in place. For other credit markets transactions (primarily inter-bank placements), the Bank hasestablished a matrix of counterparty limits based on external credit rating of such counterparties. Such limits areconstantly monitored by the Banks Risk Management Department. As at 31 December 2010, the Bank did not haveopen position in foreign currency risk management instruments.7.4. Concentration riskConcentration risks arises when a number of obligors, counterparties or investees are engaged in similar businessactivities or activities in the same geographic region or have similar economic features that would cause their abilityto meet contractual obligations to be similarly affected by changes in economic, political or other conditions.Accordingly, such concentrations indicate the relative sensitivity of the Bank’s performance to developmentsaffecting a particular industry or region. The Bank has established exposure limits to various geographic regionsand industry sectors. For break-up of exposure geography and industry/sector wise refer points 4.3.1 and 4.3.2above.7.5. Reputational riskReputation risk is the risk that negative perception regarding the Bank’s business practices or internal controls,whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverseimpact on liquidity or capital of the Bank. Being an Islamic Bank, reputation is an important asset and among theissues that could affect the Bank’s reputation is the inability to exit from investments, lower than expected returnson investments and poor communication to investors. The Bank has a well developed and coherently implementedcommunication strategy to cover such contingencies. The Bank also allocates additional capital for such risks underits ICAAP.7.6. Displaced commercial riskDisplaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earnedon the assets financed by Unrestricted Investment Accounts. This can be due to the return on such assets beinglower than that of competitors. The Bank has adequate policies and procedures in place to identify, monitor andaddress all potential risks that may arise from such activities. Please refer to the section on URIA for further details.7.7. Other risksOther risks include strategic risk, fiduciary risks, regulatory risks etc. which are inherent in all business and are noteasily measurable or quantifiable. The Bank’s Board has overall responsibility for approving and reviewing the riskstrategies and amendments to the risk policies. The Bank senior management is responsible for implementing therisk strategy approved by the Board. The management also ensures that internal systems of corporate governanceand regulatory compliance for management of fiduciary and reputational risks are robust and effective. The Bankalso allocates additional capital for such risks under its ICAAP.119

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures8. Product disclosures8.1. Product descriptions & consumer awarenessThe Bank offers a comprehensive mix of Shari’a compliant commercial and investment banking products. Thisinclude, apart from traditional financing products, a range of innovative structured investment products likefunds, repackaged investments and restricted murabahas. The investment department of the Bank has expertisein creating innovative high end and value added products offering a wide range of structures, expected returns,tenors and risk profiles.Proposal for any new product is initiated by individual business lines within the Bank. The Executive Risk ManagementCommittee (ERMC) of the Bank reviews such proposal to ensure that the new product/ business is in line with theBank’s business and risk strategy. All new products will need the approval of the Board of Directors and the Shari’aSupervisory Board of the Bank.Information on new products or any change in existing products will be placed on the Bank’s website www.khcbonline.com and/or published in the media. Product details are also shared with customers and the generalpublic through brochures and/ or, advertisements.8.2. Complaint handlingThe Bank takes disputes and complaints from all customers very seriously. These have the potential for a breakdownin relationships and can adversely affect the Bank’s reputation. Left unattended these can also lead to litigationand possible censure by the regulatory authorities. The Bank has a comprehensive policy on handling of externalcomplaints, approved by the Board. All employees of the Bank are aware of and abide by this policy.The Bank has a designated nodal officer for handling of all external complaints and his contact details are displayedon the website and also at the Branch and in all printed publicity materials. Complaints are normally investigated bypersons not directly related to the subject matter of the complaint. The Bank endeavors to address all complaintswithin five working days. Wherever this is not possible, the customer is contacted directly and a time frame forrectification of his complaint advised. A periodical report on status of complaints is also submitted to the Board.8.3. Unrestricted Investment Accounts (URIAs)The Bank offers Unrestricted investment Accounts (URIAs) to both small investors and high net worth individuals.Unrestricted investment Accounts (URIAs) represents funds offered by customers to the Bank to be invested in aSharia compliant manner, at the Bank’s discretion as Mudarib. All URIA accounts are on profit sharing basis, but theBank does not guarantee any particular level of return. Any loss arising from the investment will be borne by thecustomer except in the case of the Bank’s negligence. The Bank charges a Mudarib fee as its share of profit.The Bank offers Unrestricted Investment Accounts in Bahraini Dinar, US Dollar and Euro for maturity periodsranging from 1 month to 18 months. The Bank completes its full range of KYC due diligence prior to acceptingany investment. The customer also signs a written agreement covering all terms and conditions of the investmentincluding tenor, basis of profit allocation, early withdrawal etc.In 2009, Bank has launched a savings account product called “Al Waffer” which entitles the investors to certain cashprizes, decided based on a raffle draws held on monthly, quarterly and annual basis apart from the normal share ofprofits declared and distributed after reducing the Mudarib fees.URIA is a significant funding source for the Bank. However, the failure to pay the expected return to URIA holdersexposes the Bank to Displaced Commercial Risk leading to loss of reputation and business. The Bank regularlymonitors rate of return offered by competitors to evaluate the expectations of its Investment Account Holders.Bank’s policy also provides for whole or partial waiver of the Mudarib share of income from investments due toit, to provide a reasonable return to its investors. Bank further mitigates this risk by setting up and maintaining anappropriate level of Profit Equalisation Reserve (PER) and Investment Risk Reserve (IRR) to smoothen return to URIAholders.120

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sThe Bank comingles its own funds and URIA funds which are invested together. The Bank has an identified pool ofassets where the URIA funds are invested and the income from which is allocated to such accounts. Out of the grossincome the investor’s share is computed after deducting the Mudarib share and contribution to PER and IRR. Theprofit allocation schedule signed by the customer prior to investment contains the scheme of allocation of theMudarib share and reserves. Administrative expenses incurred for management of the funds are borne directlyby the Bank and are not charged separately to investment accounts. Bank has allocated impairment losses on itscredit portfolio to the investors; (i.e. assets financed by URIA funds). During the year, such allocation was absorbedby utilisation of the. Investment Risk Reserve.URIAs are carried at their book values and include amounts retained towards PER and IRR. Creation of these reservesresults in an increase in the liability towards the pool of URIAs.Till date, the Bank has not made any withdrawals on PER or IRR. Any movements on these accounts are thereforeonly on account of additional reserves added.Subject to the provisions thereof, deposits held with the Bahrain office of Khaleeji Commercial Bank are covered bythe Deposit Protection Scheme established by the Central Bank of Bahrain regulation concerning the establishmentof a Deposit Protection Scheme and a Deposit Protection Board.The details of income distribution to URIA holders for the last five years is given below.2010 2009 2008 2007 2006Allocated Income to URIA8,25411,1038,9533,012917Distributed Profit [1]5,7859,3317,0502,446628Mudarib Fees2,4691,7721,903566289As at 31 DecURIA [2]192,439184,394128,81438,40512,803Profit Equalisation Reserve (PER)1691,20964920660Investment Risk Reserve (IRR)-92547313443Profit Equalisation Reserve-to-URIA0.09%0.66%0.50%0.54%0.50%Investment Risk Reserve-to-URIA-0.50%0.37%0.35%0.36%[1]Includes PER and IRR expense[2]Represents average balance121

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sRatio of profit distributed to PSIA by type of URIA (based on tenor)TenorRatio of profit paid as aProfit distribution amount in BD percentage of total2010 2009 2008 2007 2006 2010 2009 2008 2007 20061 Month Mudaraba [1]3,1074,2713,3461,57633553.745.847.564.453.43 Months Mudaraba1,8431,4431,3141487831.915.518.66.112.46 Months Mudaraba641736373712611.17.95.32.94.112 Months Mudaraba1,4521,1966901064525.112.89.84.37.1VIP Mudaraba7296735453096412.67.27.712.610.2PER and IRR expenses221,012782236800.410.811.19.712.8Utilisation of IRR(2,009)----(34.8)----Total5,7859,3317,0502,446628100.0100.0100.0100.0100.0[1]Includes saving account products.YearAvg. profit earnedfrom URIA assets(%age of asset)PER set asideas a %age ofURIA assetsIRR set asideas a %age ofURIA assetsMudharib feesas a %age ofURIA assetsProfit paidas a %age ofURIA assets20104.03(0.54)(0.49)1.284.0420096.090.300.240.964.5820087.070.340.261.604.8720077.840.380.241.475.7520067.590.380.292.394.53Market benchmark rates:The Bank refers to the group of commercial Islamic banks incorporated in the Kingdom of Bahrain so as tobenchmark the rate of return on URIA.122

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sFollowing are the profit rates declared and distributed to the investors by the Bank:2010 2009 20081 Month Mudaraba [1]3.66%4.00%4.80%3 Months Mudaraba4.13%4.94%5.25%6 Months Mudaraba3.38%5.30%5.13%12 Months Mudaraba4.94%5.79%5.40%VIP Mudaraba4.35%4.20%4.52%[1]Includes saving account products.URIA account by type of assetsThe following table summarises the movement in type of assets in which the URIA funds are invested and allocationamong various type of assets for the year ended 31 December 2010:ParticularsOpeningallocationMovementClosingallocationProportion oftotal assetCBB balances-8,3568,35668%Placements with Financial Institutions-74,95974,959100%Financing assetsMurabaha124,937(48,757)76,18051%Musharaka24,389(24,389)-0%Wakala23,505(3,328)20,177100%Istisna’a1,514(527)987100%Investment securitiesSukuk29,243(11,682)17,561100%Total203,588(5,368)198,220123

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures8.4. Restricted Investment Accounts (RIAs)The Bank offers Restricted Investment Accounts (“RIAs”) to both small investors and high net worth individuals inthe GCC. The Bank structures it’s RIA products to offer its customers an opportunity to choose from a wide range ofreturns, maturity periods, sectors, asset classes and risk levels.All RIA offering documents (“Offering Document”) are drafted and issued with input from the Bank’s InvestmentBanking, Shari’a, Financial Control, Legal and Risk Management Departments to ensure that the Investors havesufficient information to make an informed decision after considering all relevant risk factors.The Board of Directors is responsible for providing clear guidelines for the development, management and riskmitigation of its’ RIA investments and to ensure that there exist sound management and internal control systemsto ensure that the interests of the investment account holders are protected at all times. Wherever it is necessaryfor the Bank to establish Special Purpose Vehicles (SPV’s) for management of the investment, the Board ensuresthat the management of such SPV’s are conducted in a professional and transparent manner by a duly appointedBoard.The Bank is aware of its fiduciary responsibilities in management of the RIA investments and has clear policies ondischarge of these responsibilities. The Bank’s Policy regarding its’ fiduciary responsibilities to the RIA investors andtheir funds, includes the following:• Ensuring that the investment structure, Offering Documents and the investment itself are fully compliantwith Islamic Shari’a principles and the CBB regulations;• Appropriately advising Investors, as part of the RIA Offering Document, of all the relevant and knownrisk factors and making it clear that the investment risk is to be borne by the Investor before acceptingthe investment funds;• Completing all necessary legal and financial due diligence on investments undertaken on behalf of theInvestors with the same level of rigor as the Bank requires for its’ own investments;• Ensuring that the funds are invested strictly in accordance with the provisions outlined in the OfferingDocuments;• Putting in place suitable resources and systems to manage and administer the investment and anynecessary RIA SPV(s) and to proactively manage all risks;• Preparing and disseminating periodical investment updates to Investors on a regular basis during thetenor of the investment;• Distributing the capital and profits to the Investor in a just and equitable manner as Mudarib; and• In all matters related to the RIA, RIA SPV(s) and the investment, act with the same level of care, good faithand diligence as the Bank would apply in managing its own investments.Within the Bank, the abovementioned responsibilities and functions are provided, managed and monitored byqualified and experienced professionals from the Investment Banking, Shari’a, Financial Control, Legal, InvestmentAdministration and the Risk Management Departments.Investment update reports are prepared and disseminated by the Bank to the RIA Investors on a periodic (at leaston a half yearly) basis outlining any material contracts/decisions, investment performance, distribution (if any) orexit criteria/information.124

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’sRIA NameDetailsLaunchDateProjectedReturnsReturnFrequencyReturnsannualised2010 2009 2008 2007 2006Al Hareth FrenchProperty FundAn investment product designed todeliver attractive return from incomeproducing properties in France.Approximate capital redemption of30% was completed in April 2007 witha capital gain of 6% on the redeemedportion.2005 9% Annual -1.75% 9.5% 9.5% 9.5%RIA-1 SafanaRIA-2 Hajer TowerRIA-3 AramisRIA 4 JanayenRIA-5 North GateRIA-6 LocataAn investment structure designed toparticipate in the equity interest ofSafana Investment WLL. A companyestablished for the purpose ofacquiring reclaimed land to subdivideand sell.An investment structure designedto participate in a product with theprincipal purpose of acquiring the21st floor of Al-Hajer Tower in the HolyCity of Mecca. The exit of this productwas completed June 2008 as per theexpected return on investment of14.9%.Participation in Murabaha backed bya promissory issued by a guarantorSPV with BBB+ rating. KHCB offeredthis as a short-term investment toinvestors with 3 month term on arenewal option and successfully exitedall investors from this project duringquarter ended 31 March 2008.A restricted investment productdesigned to invest in growth andincome generating real estate assetsin the GCC and MENA regions. Itshould be noted that the distributionpercentage made to date exceeds theforecasted yield outlined under theoriginal Janayen Offering Documentsand the revised distribution calendarprovided in the first InvestmentUpdate.A restricted investment productwhich owns a 6.0% stake in ShadenReal Estate Investment WLL which inturn (through its subsidiaries), holdsa parcel of reclaimed land measuringapproximately 3.875 million sq. meters(located in Al Hidd, Muharraq). Themixed-use plot will be sold to enduserssubsequent to the completion ofinfrastructure works.A Restricted Mudharabah productwhich entitles the investors beneficialownership of %25 equity share capitalof Locata Corporation Pty Ltd., acompany incorporated in Australia.The Company has invented a newand patented wireless radiolocationtechnology and shall use this fundingto scale up its production capacity,sales/marketing channels and furtherproduct enhancement capabilities.200761.78%overproducttenor2007 14.90%20072007200820093 monthUSDLibor+187bps perquarter44.33%90.66%overproducttenor110.54%overproducttenorBulletpayment onmaturityBulletpayment onmaturityQuarterlyQuarterlyBulletreturn atmaturityBulletreturn atmaturity---0.27%------14.9%7.50%--7.72%9.62% 10.65% ---------6.34%---125

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures9. Corporate Governance & Other Disclosures9.1. Corporate governance structureThe Bank’s corporate governance framework focuses on Board responsibility, oversight and managementaccountability vis-à-vis governing regulations and better practices. The framework is in line with global bestpractices and regulatory requirements which seek to balance entrepreneurship, control and transparency, whilecreating value for all stakeholders.Corporate governance, the way the Board and Management is organised and how they operate in practiceultimately aims at leading the Bank towards successfully meeting its strategic objectives. The Board of Directors isaccountable to the Bank’s shareholders for the creation and delivery of strong sustainable financial performanceand long-term shareholder value. To achieve this, the Board approves and monitors the Bank’s strategy andfinancial performance, within a framework of sound corporate governance and effective risk management.The Bank is in compliance with the Corporate Governance Code (CGC), the Public Disclosure Module and the StockExchange Disclosure Standards set by the CBB. Corporate Governance Framework has been adopted in its pursuitsof excellence in Corporate Governance.The corporate governance philosophy of the Bank has been further strengthened with the adoption of the Bank’sCorporate Governance Framework, Director’s Conflict of Interest Policy, Insiders’ Trading Policy, and the Bank KeyPersons> Dealing Policy have been established. The Bank, through its Board and Committees, endeavours to strikeand deliver the highest governing standards for the benefit of its stakeholders.The Bank is committed to continuously reviewing and developing its corporate governance standards to ensurecompliance with the requirements of the revised corporate governance framework being implemented by theCentral Bank of Bahrain and other regulatory bodies, and also to keep abreast with international best practice.9.2. Board of DirectorsThe Board of Directors currently comprises of nine members. The Chairman of the Board of Directors is charged withregular supervision and assessment of executive management and is responsible for leading the Board, ensuringits effectiveness, monitoring the performance of the Chief Executive Officer (CEO) and maintaining a dialoguewith the Bank’s stakeholders. The Board has constituted certain committees with specific delegated authorities tooversee and guide the management in specific areas of the Bank’s operations and decision-making. The Board,either directly or through its various committees, will oversee the management of the Bank.The names, title, and other positions held by the Board of Directors are set out below.Dr. Fuad Abdulla Al-OmarChairmanDirector Since 2004 (Independent and Non-Executive)Over 30 years of experience in financial and commercialsectorChairman of MENA Real Estate Company, KuwaitVice Chairman of Gulf Real Estate Development Co.Director – Gulf North Africa Company Holding, DanaCapitalRashad Yousif Abdulla JanahiDirectorDirector Since February 2008 (Non-Executive)Over 18 years of experience in financial sectorNominated by Esam Yousif JanahiManaging Director, Board Member and founder ofAbu Dhabi Investment House (ADIH)Chairman- British School Bahrain Board of TrusteesBoard Member – Vision3Board Member - Balexco126

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresAbdulla Abdulkarim ShowaiterVice ChairmanDirector Since February 2008 (Independent & Non-Executive)Over 32 years of experience in the banking industryNominated by Emirates Islamic BankDeputy Chief Executive Officer – Emirates Islamic BankBoard Member – First Energy Bank, BahrainBoard Member – Ethmar Real Estate Company, DubaiBoard Member – Al Salam Bank, SudanBoard Member – Al Mahraab Real Estate Company,KuwaitBoard Member – Waqf Trust Service, Government ofDubai, DubaiBoard Member, Madaares, DubaiEbrahim Hussain EbrahimBoard Member & CEODirector Since February 2008 (Executive)Over 26 years of experience in financial sectorCEO - Khaleeji Commercial BankChairman - Capital Real Estate CompanyChairman - Janayen Holding CompanyChairman - Danat India investment CompanyChairman – Global Logistix Navi Mumbai, HoldingCompany.Chairman – Global Logistix Navi Mumbai, InvestmentCompany.Board member – First Energy BankBoard member – Eqarat Al KhaleejBoard member – First Gulf Real Estate Company SPCBoard member – Gulf German ResidencesBoard member – Amlak II BahrainBoard member – Amlak II WalkersBoard member – Surooh Bahrain SPCBoard member – Danat India Holding CompanyBoard member – Jawhara Greens CompanyMohammed Barrak Al-MutairBoard MemberDirector Since August 2010 (Non-Executive)Over 12 years of experience in Government and BusinessSector.Nominated by Al Imtiaz Investment Company K.S.C.Member of the Kuwaiti ParliamentChairman – Kuwait Real Estate Holding Company,KuwaitBoard Member – Gulf Real Esatate Development Co. ,KSABoard Member – Al Imtiaz Investment Company K.S.C., KuwaitYousif Saleh KhalafBoard MemberDirector Since February 2010 (Independent and Non-Executive)Over 30 years of experience in financial and commercialsectors.Managing Director – Vision Line Consulting, BahrainBoard Member – First Leasing Bank, BahrainBoard Member – ProCapital Associates, BahrainAbdul Latif Abdulla Al-MeerBoard MemberDirector Since 2004 (Non-Executive)Over 34 years of experience in the financial industry.Nominated by Gulf Finance House BSCManaging Director & Board Member - QInvestBoard member – Qatar Damman Islamic Insurance Co.(Bima), QatarBoard member – Arab Finance House, BeirutBoard member – European Finance House, LondonBoard member – Gulf Finance House, Bahrain127

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresHisham Abdul Latif H. Al-JabrDirectorDirector Since February 2008 (Non-Executive)Over 12 years of experience in commercial sectorNominated by Gulf Finance House BSCBoard Member - Al-Jabr Trading Company, KSABoard Member - United Gas Transmission Co, UAEBoard Member - Advanced Electronics Equipment, KSABoard Member - Golden Chip Company, KSABoard Member - Nattily Company, KSAKhalid Rashid Al ThaniDirectorDirector Since February 2009 (Independent and Non-Executive)Over 19 years of experience in financial and commercialsectorsDeputy General Secretary Awqaf and Minors AffairsFoundation, Dubai.Head of Finance Department Dubai land Departmentfrom 1999 to 2004Board of Directors Member Dubai International HolyQuran Award 1997 to 2004Note: The qualifying criteria for ‘Independent’ Directorsare as per the Corporate Governance guidelines of theCentral Bank of BahrainThe Chairman, the Board of Directors and the Board Committees have direct access to the heads of Internal Audit,Risk Management, Regulatory Compliance & Shari’a Compliance.9.3. Board of Directors’ interestsThe non-executive members of the Board collectively held 23,472,808 shares in the Bank as of the year ended 31December 2010 (2009: 107,859,801 shares).9.4. Code of conductThe Board has approved a code of conduct for all staff of the Bank and the Board members. The Code, whichincludes how to deal with areas of conflict of interest, binds the Directors, Executive Management and staff tohighest standard of professionalism and due diligence on discharging their duties. All Board members and seniormanagement of the Bank have affirmed compliance with the Code of Conduct. A declaration is made by the Boardmembers prior to each Board meeting confirming that they have disclosed all external appointments and notifiedthe Chairman if there have been any changes to their external appointments since the previous meeting. Boardmembers are excluded from dealing with all matters with an external entity where they hold external appointmentswith that entity.9.5. Compliance with RegulatorsThe Bank’s commitment to comply with the Regulations has been addressed through the adoption andmaintenance by the Bank of a Corporate Governance Framework, a Director’s Conflict of Interest Policy, anInsiders’ Trading Policy and Procedures, and a Key Persons’ Dealing Policy. The Bank, through its Board and BoardCommittees, endeavours to deliver the highest standards of governance for the benefit of its stakeholders. TheBank will dedicate an area on its new website www.khcbonline.com, wherein all Corporate Governance regulationsand policies will be made available.The Bank is committed to continuously reviewing and developing its corporate governance policies to ensurecompliance with the changing requirements of the Regulations and to ensure compliance with internationalcorporate governance best practice.128

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures9.6. Board committeesThe Board of Directors has constituted four Committees with specific delegated authorities.CommitteeMembersPrimary ResponsibilitiesBoard Nominations,Remunerations & GovernanceCommittee (BNRGC)Board Audit Committee (BAC)Board Investment & CreditCommittee (BICC)Board Risk ManagementCommittee (BRMC)Mr. Abdulla AbdulkarimShowaiterMr. Yousif Saleh KhalafMr. Mohammed Barrak Al-MutairMr. Yousif Saleh KhalafMr. Rashad Yousif JanahiMr. Khalid Rashid Al ThaniDr. Fuad Abdulla Al-OmarMr. Abdulla AbdulkarimShowaiterMr. Ebrahim Hussain EbrahimMr. Mohammed Barrak Al-MutairMr. Abdul Latif Abdulla Al-MeerMr. Hisham Abdul Latif Al-JabrMr. Khalid Rashid Al ThaniHuman Resources,Compensation and incentives,Administration, CorporateGovernanceInternal Audit, External Audit,Compliance,Anti Money LaunderingInvestment & credit approval,Setting limits, Investment policies,Asset Liability Management,Banking relationship, Oversight ofOff Balance Sheet VehiclesRisk management,Policies related to risk managementDuring 2010, The Board of Directors held 7 meetings, The Board Audit Committee (BAC) held 4 meetings, the BoardInvestment and Credit Committee (BICC) held 4 meetings, The Board Nominations, Remunerations and GovernanceCommittee (BNRGC) held 4 meetings and the Board Risk Management Committee (BRMC) held 4 meetings.The Board of Directors and its committees receive regular reports on various aspects of the Bank’s business fromsenior management as well as from Internal Audit, Risk Management, Operations and Finance Departments.129

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures9.7. Shari ‘a Supervisory BoardThe Bank’s Shari’a Supervisory Board consists of three Islamic scholars who review the Bank’s compliance withgeneral Shari’a principles and specific fatwas, rulings and guidelines issued. Their review includes examinationof evidence relating to the documentation and procedures adopted by the Bank to ensure that its activities areconducted in accordance with Islamic Shari’a principles.Dr. Fareed Yaqoob Al MiftahChairmanMember of the Supreme Council of Islamic AffairsUndersecretary of the Ministry of Islamic Affairs,Kingdom of BahrainFormer judge of the high Shari’ a CourtFormer Lecturer at the University of BahrainPhD from the University of Edinburgh, United KingdomDr. Fareed Mohammed HadiExecutive MemberAssistant Professor at the College of Arts, Department ofArabic and Islamic studies, University of BahrainMember of Shari’a Supervisory Boards of a number ofIslamic banksPhD in Ibn Hazm’s Methodology of Jahala, Edinburghuniversity, UKPhD in Al-Bukhari’s Methodology, University ofMohammed V, MoroccoShaikh Nizam Mohammed Saleh YaqoobiMemberExecutive Member of the Shari’a Supervisory Board ofAbu Dhabi Islamic BankExecutive Member of the Shari’a Supervisory Board ofBahrain Islamic BankExecutive Member of the Shari’a Supervisory Board ofShamil BankBoard Member of the Dow Jones Islamic indexMember of Shari’a Supervisory Boards of a number ofIslamic banks & insurance companies.Abdulnasser Al MahmoodHead of Shari’a Compliance - Regulatory Shari’a &Compliance9.8. Executive / Management committeeThe Board of Directors delegates the authority for day-to-day management of the business to the Chief ExecutiveOfficer (CEO) who is responsible for implementing the Bank’s strategic plan. The CEO manages the Bank throughthe following management committees:CommitteePrimary ResponsibilitiesManagement CommitteeAsset Liability Management CommitteeExecutive Credit & Investment CommitteeExecutive Risk Management CommitteeStrategy, Performance review, Budget, Human Resources,AdministrationBalance sheet management, Funding, Liquidity, BankingRelationshipsReview of investments, Exit and credit proposals, Monitoringof investmentsRisk Management policies, Risk review, Provisions andimpairmentExecutive Management & Other Senior Management130

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresThe names & title of each member of our Executive and other Senior Management are set out below:Mr. Ebrahim Hussain EbrahimChief Executive Officer & Board MemberExperience - Over 28 years of experience in both Islamicand conventional banks and financial institutions.Joined the Bank in 2004.Qualification – BSc in Economics, Master of BusinessAdministration with a concentration in Finance,Advanced Diploma in Islamic Banking.Mr. Silvan VargheseDeputy General Manager & COOExperience - 20 years’ experience in the bankingindustry in India and Middle East in several areas like Riskand Credit Management, compliance, Project Financeand Corporate Banking. Joined the Bank in 2007.Qualification - BS in Chemical Engineering from BITS,Pilani, India and is an MBA from the Indian Institute ofManagement (IIM), Lucknow. He completed the GeneralManagement Program (GMP) at the Harvard BusinessSchool and is also certified by Global Association of RiskProfessionals (GARP) as a Financial Risk Manager (FRM).Fuad Ali TaqiDeputy General Manager- Commercial BankingExperience – Over 29 years of banking experience inIslamic and conventional banks. Joined the Bank in2006.Qualification - Business Studies Diploma, MBA from theUniversity of Glamorgan, U.K.Dimitry BlasiDeputy General Manager- Investment BankingExperience – Over 14 years experience Islamic andconventional banking including in a number ofprominent international jurisdictions. Joined the Bankin 2005.Qualification - ACA (United Kingdom), qualified lawyer(NSW, Australia)Hussam SaifHead of TreasuryExperience – Over 21 years of experience in treasuryand Islamic banking. Joined the Bank in 2007.Qualification - Graduate of Western InternationalUniversity – London with a degree in BusinessAdministration & Management.T N RamesanHead of Risk & Credit ManagementExperience – Over 31 years of banking experience.Joined the Bank in 2007.Qualification - MSc in Physics from the Indian Instituteof Technology, Madras, India, Diploma in InternationalFinance & Investment from Hong Kong ManagementAssociation, Certified Associate of the Indian Institute ofBankersYaser MudhafarHead of Financial ControlExperience – 13 years extensive experience in the Islamicbanking industry and Audit. Joined the Bank in 2006.Qualification - CPA, CIPA, EMBA and a Bachelor ofScience in accounting from University of Bahrain.Fetooh Al MannaiHead of Human ResourcesExperience – 15 years of experience in human resources,training and administration Joined the Bank in 2007Qualification - MBA and a BA (Hons) in HumanResource Management, Member of Bahrain Society forTraining and Development (BSTD), Member of BahrainManagement Society (BMS), Fellow of the CharteredInstitute of Personnel & Development (CharteredFCIPD), Member of Society of Human ResourceManagement (SHRM)131

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresMahdi A. Nabi MohammedAssistant General Manager – Operations &AdministrationExperience - Over 30 years of banking experience.Joined the Bank in 2005. Prior to joining the Bank in2005.Qualification - Certified Diploma in Accounting &Finance from The Chartered Association of CertifiedAccountants (ACCA), MBA from the University ofStrathclyde, United Kingdom.Khalil ZaabiHead of Investment Placement- InvestmentBankingExperience - Over 26 years of banking experience inIslamic, conventional bank and financial institutions.Joined the Bank in 2006.Qualification – Diploma in Mathematics from Arthur KingCollage, Canada, Diploma in Computer Programmingfrom Computer Institute of Canada.Ahmed Ali BucheeryHead of Internal AuditExperience – 22 years of experience in both internaland external audit, mainly in banks. Joined the Bankin 2007.Qualification - Certified Internal Auditor (from theInstitute of Internal Audit, USA), B.S Accounting fromKing Fahad University of Petroleum and Minerals.Christopher WareHead of Legal- Legal DepartmentExperience – over 12 years’ experience, includingmore than 7 years as a qualified lawyer, gainedthrough roles with various institutions in the UK, Japan,Australia and Bahrain. Experience extends to capitalmarkets, structured finance, banking, Islamic finance,acquisitions, private equity and real estate work. Hasbeen with the Bank since December 2010.Qualification – LLB degree from King’s College,University of London (1996) and a Post-GraduateDiploma in Law (2001) from the College of Law, London.Admitted to practise law as solicitor of the SupremeCourt of England & Wales since 2003.Abdulnasser Al MahmoodHead of Shari’a Compliance - Regulatory Shari’a &ComplianceExperience – Over 20 years of experience in Shari’aAudit and Islamic banking. Joined the Bank in 2008.Qualification – BS in Shari’a and Islamic studies, Master’sin Business Administration with thesis in Shari’a Controland Review in Islamic Banks, Associate Diploma inShari’a Control, currently enrolled in MBA Program.Mohammed Abdulla Ebrahim,Corporate SecretaryExperience – Over 8 years of experience working atthe Office of the Asst. Undersecretary for Planningand Organisation, Ministry of Interior, Bahrain and atthe Secretariat General Office of the GCC in Riyadh asLiaison Officer for the Kingdom of Bahrain. Joined theBank in April 2009.Qualification - Masters in IT, Media and E-Commerce Lawfrom the University of Essex, UK, an Advanced Diplomain Islamic Finance by the Bahrain Institute of Bankingand Finance (BIBF), a Diploma in Business Managementfrom the University of Bahrain and a B.Sc. in Law fromDubai Police Academy.9.9. Executive and Senior Management interestsThe members of the executive and senior management team held 21,573,997 shares as at 31 December 2010 (2009:14,343,069 shares).132

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management Disclosures9.10. Organisation chartSet out below is the Bank’s organisation chart, which outlines the different committees and the lines of reporting.Board of DirectorShari’a CommitteeBoard CommitteesBoard Nomination, Remuneration& Governance CommitteeBoard Investment & CreditCommitteeBoard Audit CommitteeBoard Risk ManagementCommitteeChairmanChief Executive OfficerCorporate SecretaryInterna AuditShariah ComplianceRegulatoryComplianceSupport / CorporateServicesCommercial BankingInvestmentBankingOperations &AdministrationRisk & CreditManagementFinancial ControlInformationTechnologyHuman ResourcesCorporate BankingRetail BankingWealthManagementInvestmentPlacementInvestmentReal EstateDevelopmentTreasury & CapitalMarketLegalThere have been no major structural changes to the organisation structure from the previous year.9.11. Executive compensationThe Bank has both a short-term and long-term compensation structure for its executive management which hasbeen developed based on current market surveys and industry norms. The Bank also operates an incentive schemewhere in eligible employees are awarded a combination of shares and cash incentives on achievement of predeterminedperformance targets. For further details please refer note 21 in the notes to the consolidated financialstatements for the year ended 31 December 2010. The Board of Directors is entitled to sitting fees and their annualremuneration is subject to the approval of the shareholders at the end of each year.133

KHALEEJI COMMERCIAL BANK BSCRisk and Capital Management DisclosuresBD 000’s9.12. Shari’a compliance, regulatory compliance and anti-money launderingCompliance with Shari’a laws, regulatory and statutory requirements is an ongoing process and the Bank is consciousof its responsibilities in observing all applicable provisions and best international practices in its functioning. TheBank has established the Shari’a Compliance Function and the Regulatory Compliance Function in keeping withBasel and CBB guidelines. The respective units act as a focal point for all Shari’a and regulatory compliance and foradapting other best practice compliance principles.Anti-Money Laundering measures form an important area of the Compliance Function. The Bank has an Anti-MoneyLaundering and Combating Terrorist Financing Policy and Procedure approved by the Board, which contains soundCustomer due diligence measures, procedure for identifying and reporting suspicious transactions, a programmefor periodic awareness training to staff, record-keeping, and a designated Money Laundering Reporting Officer(MLRO). The Bank’s Anti-Money Laundering measures are audited by independent external auditors every yearand their report is submitted to the CBB. The Bank is committed to combating money laundering and, towards thisend, implements all ‘Prevention of Money Laundering Regulations’ and other guidelines issued by the CBB.10. Financial performanceFollowing are basic quantitative indicators of the financial performance:2010 2009 2008 2007 2006Return on average equityReturn on average assetsFinancing income to financing expense ratioCost-to-Income Ratio*(5.18)%(1.59)%240.21%83.79%2.47%0.65%155.66%48.30%20.00%7.40%154.11%30.59%23.50%11.50%187.97%30.46%20.89%9.54%144.59%38.67%* Cost has been considered excluding impairment allowances.For detailed discussion on the performance for the year, kindly refer Chairman’s report on the consolidatedfinancial statement for the year ended 31 December 2010.134